Ethiopia’s mythical manufacturing boom: The sector shrinks in importance despite heavy Chinese investment
(FT.com) — Ethiopia’s success in attracting foreign manufacturers is often held up as a beacon of hope that sub-Saharan Africa, by far the poorest region on the planet, can follow the well-trodden development model that has allowed the rest of the world to become richer.
Industrialisation has largely been the key to development elsewhere, allowing relatively unproductive subsistence agricultural workers to be absorbed by a rapidly growing manufacturing sector boasting far higher productivity.
With China now slewing off lower valued-added manufacturing jobs in sectors such as textiles and basic electronics as wages rise rapidly in the Middle Kingdom, low-wage Africa has long been seen as a potential rival to the likes of Bangladesh and Vietnam for such jobs, as suggested by the first chart.
While this has yet to happen on any meaningful scale — the continent accounts for just 1 per cent of global manufacturing output — Ethiopia has won plaudits for attracting Chinese, Turkish and US investment into garment and shoe factories, notably from Chinese shoemaker Huajian Group, which employs 4,000 people in an industrial park outside Addis Ababa, the capital.
This had led to the country being described as a regional manufacturing powerhouse. Yet the data show that manufacturing now accounts for a smaller slice of Ethiopia’s economy than at almost any point since the early 1980s.
In 2015, the sector accounted for just 4.1 per cent of Ethiopia’s gross value added, well below the peak of 7.8 per cent in 1997, according to data from the World Bank, as the second chart shows.
Moreover, manufacturing accounts for a smaller share of Ethiopia’s economy than that of virtually any other country in sub-Saharan Africa.
South Africa, Kenya, Ivory Coast, Cameroon, Benin, Malawi, Mozambique and even Zimbabwe all generate at least 10 per cent of their gross value-added from manufacturing, with the likes of Nigeria and Uganda not far behind, as the third chart shows.
Across sub-Saharan Africa as a whole, 10.6 per cent of continental GVA emanates from the sector, according to the World Bank, raising the question as to why Ethiopia is seen as one of the few African nations to have made a go of manufacturing.
“Ethiopia has the smallest manufacturing share of any of the African countries we look at,” says Charles Robertson, chief economist at Renaissance Capital, a Moscow-based investment bank with a focus on emerging markets. “There’s been a brilliant PR campaign on its part to sell a story that does not really exist.”
John Ashbourne, Africa economist at Capital Economics, a consultancy, adds: “Media coverage of Ethiopia’s manufacturing sector sometimes exaggerates its economic importance. A close look at the country’s economy shows that it is much more similar to its African peers than leaders in Addis Ababa would like to admit.”
Despite the hype, Ethiopia exported just $44m worth of shoes in 2015, for example, 0.25 per cent of those exported by Vietnam and less than the footwear exports of the cordwaining powerhouse that is El Salvador. The east African state’s entire exports of clothing and textiles are worth just a tenth of its coffee exports.
Slightly more charitably, Mr Ashbourne does suggest that part of the “Ethiopia story” is that it has been more successful than many of its regional peers in attracting investment from “big brand names” from overseas.
Moreover, while in some African states a fair chunk of manufacturing activity may be a byproduct of those countries’ primary sectors (eg oil refining in Nigeria, processing and packaging of agricultural products in Kenya), Ethiopia is instead producing “relatively high quality goods that are exported”.
“It’s being pulled into these global supply chains, which is not common across Africa and is impressive. Exports have risen sharply, [Ethiopian manufacturing] does employ more people than it used to,” Mr Ashbourne adds, even if job growth since the turn of the century has been faster in areas such as construction, mining, transport and the public sector.
Mr Robertson believes it is Ethiopia’s close links to China that has captured the world’s interest. This extends beyond investments such as that of Huajian and China’s funding of a $4.2bn, 470-mile rail line from Addis Ababa to the port of Djibouti, which opened this year.
More fundamentally, Ethiopia is following the state-led, investment-heavy development model so successfully blazed by China
“What has captured the interest is this comparison with China,” says Mr Robertson. Whereas most African countries are pursuing a private sector-led development model, “Ethiopia has adopted the five-year plan, top-down approach that we have seen in China,” which focuses on rolling out infrastructure such as electricity provision first, then developing light manufacturing, followed by heavy industry.
“People are saying China has grown for 30 years at a very fast pace with a top-down programme. Ethiopia has grown very fast for 10 years [around 11 per cent a year] with a top-down programme. [People] are jumping to the conclusion that Ethiopia is following [in terms of manufacturing growth] when it’s really not,” he adds.
Ethiopia’s rapid economic growth since 2004 does, though, raise the question as to whether other sub-Saharan states, with their private sector-led, bottom-up development models, could or should follow its lead.
Mr Robertson, for one, does not believe the likes of Nigeria would be well suited to the Ethiopian approach. Firstly, Ethiopia can manage a state-led process because it has a strong bureaucracy, something that is lacking in much of Africa but has developed in Ethiopia because the country “has a long history of relatively stable government dating back to 1270,” Mr Robertson says.
Secondly, Nigerians are wealthier than Ethiopians and are used to far more freedom than a government-led, top-down economic model would permit, he argues.
“It is being used as an example in Nigeria but I don’t think it will fit. [Nigerians] are too democratic, too free, too opinionated. Ethiopia has had this regime in place for 30 years and it’s working and they have shown a commitment to relatively low corruption.
“In Ethiopia nobody has anything. Nigerians are three times richer and I just can’t see them being put into the communist box. Ghana, Senegal and Kenya have all moved beyond that stage.”