“We see China becoming expensive, but Africa being unready to take advantage, partly because the continent’s labour costs are expensive. But in Ethiopia,” says Prime Minister Hailemariam Desalegn, “to achieve our advantage in light manufacturing, we have kept such costs low. This,” he says, “starts with government wages. If you make government wages large, it impacts and inflates on the market.”
Ethiopia, confirms its leader, who takes home less than $400 a month, has “the least salaries for government officials in Africa. We also have productivity-based salary increases, not just simple increments.”
Photo: Floods of traffic on the road to the eastern industrial park. (Greg Mills)
More than a few African countries could learn from this. This is not the only useful lesson.
He was interviewed in the former royal palace in the centre of Addis Ababa. Security was thorough, if decidedly low-key. I walked alone from the guard hut, housing a single soldier, to his office where, again, I took the lift alone to his floor. The meeting started exactly on time, just the two of us in a pleasantly functional but hardly luxurious meeting room.
Photo: Informality is everywhere in the absence of jobs. (Greg Mills)
Hailemariam became prime minister in August 2012 at the age of 47 on the death of Meles Zenawi. As a young man he wanted to become a doctor, but was put off by a visit to hospital in Addis with his sick father. Instead he trained as a civil engineer, along the way acquiring a Masters in hydrology from Finland’s Tampere University.
On his return, at just 27, he became a Dean of the Water Technology Institute, a position he found “very challenging” given his age and experience. Making the step into politics, he was appointed Deputy Governor of the “Southern Nations, Nationalities, and People’s Region” at 35 and a year later ascended to the governorship, where he served for nearly five years until 2006. After a time as a special adviser on social issues to Meles, he was promoted to Deputy Prime Minister and Minister of Foreign Affairs in October 2010.
Without much in the way of natural resources, with its population rising fast towards the hundred-million mark, (at 94 million in 2016) and landlocked since the independence of Eritrea in May 1991, Ethiopia’s development options appear limited. With 55% of the population under 24, little wonder that Hailemariam’s government is seized with the need to create jobs.
So far the absence of natural resource-driven growth has proven an advantage, especially in the commodity downturn. Ethiopia has emerged as one of the fastest growing – perhaps the fastest growing – of Africa’s economies. Even though “double-digit” growth has become something of an official mantra, independent appraisals still put it at over 10% from 2003-13, against a sub-Saharan regional average of 5.3%. This has significantly positively affected national poverty levels, down from 45.5% in 1995 to under 30%, 15 years later.
The government’s strategy on growth and job creation is clear.
“First and foremost, we have to focus on our comparative and competitive advantages in a global setting,” says the Prime Minister. “Our first priority is agriculture, the need to mechanise it and get more out of it.” Farmers still make up 80% of Ethiopia’s population. “We have a strategy to support smallholder farming, and to increase the demand for agriculture. But this alone is not sustainable. We have to think about the next steps.”
In part these next steps are about increasing the value from agriculture in moving from subsistence to export crops.
This journey is already under way. Twenty years ago there was no commercial flower farming. Today Ethiopia has 1,850ha under cultivation, ranking among the top five global suppliers and second only to Kenya among African producers and exporters. Revenues were over $265-million in 2015, and the sector is responsible for 75,000 direct jobs. Addis Ababa offers low-interest loans to investors, a duty waiver on inputs and capital goods, and a five-year tax exemption for exporters.
The next step to Ethiopia’s economic transformation involves, stresses the Prime Minister, improving skills.
“We have to be focused on technical and vocational training. Otherwise we will have a young population which is not skilled, has the wrong attitude, and does not understand the market. This involves more than just technical skills. It is about preparing people, supporting entrepreneurs and small and medium size businesses.”
Hailemariam recognises that local sources of capital and labour can only supply so much. “We are intent on attracting more FDI, based on our competitive advantage, which is focused on labour-intensive light manufacturing.”
The figures bear this out. Annual FDI inflows into Ethiopia have increased tenfold from $200-million in 2005, equating to 3.6% of GDP, in the margins of Chinese ratios during the 1990s. US investment alone into Ethiopia, between 2013 and 2015, totalled $4-billion, including a $200-million investment in a flower exporting company, and a $250-million expansion by Coca-Cola.
The most important task for the government, however, from the Prime Minister’s vantage is to get investors into 20 industrial parks dotted around the country.
“These parks,” he stresses, “are not just sheds, but comprehensive programmes from one-stop services to proper utilities, environmental management, and training and skills development provisions, all of these facilities and services appropriate to a modern city. To make these Parks work we need also to understand why they fail in Africa and elsewhere.”
Forty kilometres out of Addis is the eastern industrial park with, by 2016, more than 20 Chinese investors, attracted by low or zero tariffs on imported manufactured goods, and tax holidays of up to seven years. The centrepiece of the park is the Chinese Huajian Group’s “Shoe City”, employing 3,200 workers making 180,000 pairs a month for export.
“We are aiming at 50,000 jobs per park,” says the prime minister. This is where the issue labour costs makes a difference. Ethiopian workers cost on average one-tenth the price of those in China for example, Addis’s shoe factories paying between 700-800 Birr ($30-35) a month.
North-east from the capital through newly-constructed red-roofed public housing units is another park of Legetafo. While the road infrastructure is still under construction , little more than mud-tracks in part, factories are springing up everywhere, from food processing to packaging, soap and, again, shoes, and not only for the export market.
In Addis there are signs of building projects everywhere. (Greg Mills)
There “Top Shoes” has just installed five new Taiwanese-supplied machines alongside their existing four units to manufacture rubber sandals and flip-flops, which wholesale to domestic consumers at under a $1 a pair. However, whereas machines can stamp out 5,000 shoes a week each, the downturn has seen the company producing just 2,500 in total, with just two of the nine machines steaming and clunking away.
They are not alone in facing up to the challenges of running manufacturing businesses where virtually all component parts and materials are imported and electricity is unreliable, necessitating investment in back-up generators.
Yet the prime minister notes the need to source domestic capital as a fillip to foreign investment, “especially in textiles, garments, footwear, and agro-processing”. Ironically some domestic industrial sectors have battled, especially in competing against Chinese imports.
Ras Dashen, for example, is a family-run business that has been producing shoes since 1982. Over the next 20 years it grew from a cottage industry employing a few workers and producing 12 pairs of hand-cut and stitched shoes daily to a more mechanised operation with 120 employees and 800 pairs.
“Then,” recalls Yared Gezachew, son of the founder, “disaster struck us in the form of cheap Chinese imports. Although the quality was not there, it gave the poor something to afford. But the result was that around 50 local shoe factories closed.” Today only about five remain.
“The problem is,” Yared explains, “that China produces 70% of the world’s shoes. Our advantage is that we have the largest livestock herd in Africa. But we export the cream of the leather, and have in turn to import every other of the 60 components required to make shoes, from thread to soles, inners, eyelets, and, of course, the machines themselves.”
Photo: Down on their heels at Ras Dashen. (Greg Mills)
Ras Dashen’s factory is equipped with a mix of older Italian and newer Chinese machinery. “The lack,” he emphasises, “of foreign exchange makes all this difficult, as does the irregular electricity supply.” His father, Gezachew Negash, who started the business, adds “and the lack of working capital”. Their attempts to break into the volatile and vulnerable fashion export market have met with only limited success.
Today Ras Dashen’s 60 employees produce a hand-crafted 300 pairs a day, but true to Ethiopian entrepreneurial form, the father and son team are planning on a new production line for plimsolls while they wait for bank approval on a new loan.
Photo: Top Shoes, at less than $1 apiece (Greg Mills)
Ethiopia’s regular outages should all but be eliminated through the $4.8-billion, 6,000MW Grand Renaissance Dam destined to be commissioned by 2018. And as the cranes dotting the Addis skyline remind you, it’s hardly the only major infrastructure project under way. A new freeway and the 700km, $4-billion Djibouti rail link, due to be energised by the end of this year, cut across the eastern industrial park. For now the 40km route from the centre at Addis takes more than an hour over badly potholed and congested roads.
All of this will ease access to the richer, larger market outside.
This is desperately needed to soak up the number of young people coming onto Ethiopia’s job market, estimated at two-million every year, and exacerbated by growing migration to the cities and towns. The country’s urbanisation is very low, at just 19% of the population.
Ethiopia’s competitive advantage via the cost of labour is not the only issue about which the prime minister is disarmingly forthright.
The success of Ethiopia’s transition and its ability to create jobs en masse will hinge on encouraging an indigenous business class as a strong domestic base for growth. Two things stand in the way, including a shortage of capital, partly because the government soaks up so much of it for its infrastructure projects, and second, a related shortage of capital, partly because of the Ethiopian concern to maintain control and a corresponding failure to open up certain sectors to outsiders.
Photo: Shoes, like apparel, are labour-intensive, but under fierce Chinese competition. (Greg Mills)
“The government should link foreign investors with domestic manufacturers,” says Yared Gezachew. Certainly the prime minister agrees with the need to encourage domestic capital.
“We need to make the political economy more receptive,” he says. “If it is favourable for rent-seeking and if government officials are involved in patronage and in short-term looting, it discourages the local private sector to invest in productive areas. This demands that we stamp out corruption. But it also means,” he adds, “that we remove the deficits in infrastructure, rules and procedures, and finance to encourage private sector investment in productive, value-addition activities.”
While Ethiopia is looking to attract investors in textiles from Turkey and construction materials from India among other sectors, “we also need,” says Hailemiriam, “not only to have one foot on the ground, but also another looking for the next step, which means looking for areas to leapfrog, including in biotech and nanotech. This requires engaging in and spending on R&D to enable competitiveness.”
The civil war and a ruinous military dictatorship bequeathed a shattered economy in 1991. A quarter century on very different challenges face the country, which will have to be addressed by the next generation, including Hailemariam’s three daughters, one at university, her older siblings a doctor and, like her father, a civil engineer.
“The creation of quality jobs, will take 20 to 30 years at least. But we know where we have started from, and where and how we want to go to create jobs. First, we have to start with low-cost, labour intensive and low-technology solutions.”
The prime minister is equally forthright about the individual responsibility of Ethiopians.
“Our biggest constraint is the attitude, the outlook and the exposure of our people. We have a huge rural population. You need to create an understanding among them of the need for value creation in a way that requires everyone working very hard and working differently, for example in the change from subsistence to rural agriculture. You also have to convince people that white collar jobs are not everything, that agriculture can be a modern occupation.
“All this,” he pauses, “requires a good communications strategy, including of the threats if we don’t change our ways. In Korea, the threat used to motivate people was of the dangers of communism. Our danger is a danger of poverty and of the country’s disintegration if we don’t tackle these problems, and become active and hard working.”
For all of these challenges, there have been remarkable successes.
Ethiopian Airlines, now Africa’s largest carrier, is one example. The success of the airline, like the floriculture sector, has Meles’ fingerprints all over it. Tsegaye Abebe was Ethiopia’s first commercial flower producer, and set up the Ethiopian Horticulture Producer Exporters Association. In part the success of this sector is a rare instance where aid delivers development, where the European Union and Ethiopia’s Ministry of Trade and Industry collaborated with the involvement of a British consultancy, to promote commercial planting in the mid-1990s.
“Then, Prime Minister Meles visited the UK in 2002, where he met Clare Short [the UK’s International Development Secretary], and where DfID [the UK’s Department for International Development] support was assigned to establish the Exporters Association.”
Shoe City, too, came about as a result of a personal invitation to the company’s founder to open a plant by Meles during a 2011 trip to China.
Little surprise then that Prime Minister Hailemariam was shocked by Meles’s death.
“It was a traumatic moment. I did not think I could run the country in his absence, or how I would do so. But we were able to navigate it with the support of colleagues. When I realised that the ultimate decisions in this country are taken by myself, you can only imagine how stressful that is. This is why I opted for a more consultative and collective leadership process in politics and with the private sector.”
He meets the latter three times annually in strategy sessions, quarterly on competitiveness issues, and monthly to assess progress on exports.
Hailemariam acknowledges that “the most important things in leadership is to be trusted by the people. We have to show by example our zero tolerance towards corruption, to not use public money for personal enrichment, and to show sacrifice. If you cannot do this, you can’t expect others to do so.”
I asked the prime minister how he defined success. He replied, “It is about bringing meaningful change in the lives of our people. It’s not just about figures or growth, but about changing lives. Growth,” he adds, “has to be shared to be sustainable.” DM
Photo: Ethiopian Prime Minister Hailemariam Desalegn speaks during a joint press conference with Japanese Prime Minister Shinzo Abe (not seen) after their meeting at the Presidential Palace in Addis Ababa, Ethiopia, 13 January 2014. EPA/DAI KUROKAWA
Dr Mills heads the Brenthurst Foundation, and has been in Ethiopia.
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