Monday, February 27, 2012

Ethiopia Not Ready to Join Free Trade Area after Decade

Local industrial competitiveness remains weak, according to COMESA study

The Ethiopian manufacturing industry is neither internationally competitive nor shows improvement, a recent study conducted for the Common Market of Eastern and Southern Africa (COMESA) revealed.

Paid for by the secretariat of COMESA and commissioned by the Ministry of Finance & Economic Development (MoFED), the study was undertaken by a team of experts lead by Daniel Endelila, a representative from Zim Consult, an independent economic and planning consultant based in Zimbabwe, while Bekri Yesuf (PhD), from Bactec Consulting Firm; Tadele Ferede (PhD), economics lecturer at Addis Abeba University (AAU); and Werko Gebeyehu (PhD) also took part in the research.

The findings came at a time when the federal government is keen to steer the industrial sector, whose share of the GDP lags behind at 13.4pc, to take the lead from the agricultural sector as a growth stimulator for the national economy. Although there has been marginal improvement in recent years from 11pc, it, nonetheless, remains one of the least competitive in the world, considering its total factor productivity, technical efficiency, and unit cost indicators.

In a meeting attended by officials from the MoFED, Ministry of Trade (MoT), Ministry of Industry (MoI), the Ethiopian Revenues & Customs Authority (ERCA), Ethiopian Chambers of Commerce & Sectoral Associations(ECCSA), and Ethiopian Standards Agency (ESA), the researchers laid out hosts of problems that the industrial sector confronts.

Lack of finances, high production costs, and slow productivity were identified as major constraints, while shortages and the low quality of raw materials, low skill base, acute shortage in foreign exchange, and frequent power interruptions added to the list of items that characterise the local manufacturing sector.

As a result, over half of the manufacturing industry’s activities are either not competitive or are on the margin even under the protection of the domestic market, the study discovered.

“Much of Ethiopia’s manufacturing industry does not fare well, even with current tariff barriers imposed on competitive imported products,” the study asserted.

Indeed, the share of the manufacturing sector accounts for 3.7pc of the GDP while the share of manufactured exports is as insignificant as 0.5pc, far below the average for low income countries at 9.1pc and Sub-Saharan Africa at 8.6pc. The manufacturing sector contributes less than 10pc of the total value of merchandise exports, while the proportion of persons engaged in industry and related activities accounts for less than five per cent of the workforce, the study also discovers.

The study was conducted in order to help policymakers decide whether it is time for Ethiopia join the free trade area (FTA) that COMESA member countries created two decades ago. Ethiopia, a founding member of the COMESA since 1993, is one of eight countries that has declined to join the free trade area when launched in 2000. The decision was made by the administration of Prime Minister Meles Zenawi, after similar research was conducted to determine whether Ethiopia’s industrial sector could survive competition from regional economic powers such as Egypt and Kenya. It did, nevertheless, give a preferential 10pc discount on its tariffs to other COMESA member countries.

The fear of losses in revenue due to the reduction or removal of tariffs on trade outweighed the benefits, while the fear of losses to domestic producers and, hence, increased unemployment, from the reduction of tariffs and higher levels of competition between regional firms were among the factors that held Ethiopia back.

“What the first study and the latest study both concluded was that the industrial sector was uncompetitive,” said an industrial expert involved in conducting the first study. “Although we had recommended preparations be made in setting up industrial zones after our suggestion of establishing the Akaki Industrial Zone as a pilot project was accepted, not much has been achieved since then. Not even Akaki functions as well as we thought it would.”

The cost of Ethiopia joining FTA, then, was risky, as far as losing the fragile industrial sector of the country, according to the industrial expert.

But, the fear was invalidated in a study conducted by the World Bank, in 2007.

“Full implementation of the COMESA-FTA and removing all tariffs against all members, will lead to a loss of revenues of around one per cent of the GDP in Ethiopia,” it said.

“That Ethiopia would lose substantial tariff revenues by joining the FTA and lowering its tariffs is not supported by facts,” argued Bryn Saxe, a trade expert at the WTO Accession Plus Project Office, an operation launched at the Ministry of Trade with the support of the USAID.

Authors of the latest study urged policymakers to take “a lot of actions in acceding to the FTA and other multilateral trading institutions.”

“Only a handful of activities can withstand pressure from international competition under the current environment,” the second study, released last week, concluded.

Despite the existence of a few industrial groups, such as sugar, sugar confectionary, cement, lime, and plaster, within the manufacturing sector, which could bear the competition from outside, there is a need for significant safeguards in terms of stimulating the domestic manufacturing sector if Ethiopia accedes to the COMESA-FTA, the study says.

Ethiopia’s manufacturing industry is essentially light industry engaged in the production of food, beverages, textiles, and non-metallic mineral products, accounting for over two-thirds of the gross value of production, according to an expert who commented on the draft final report of the study.

This is largely due to the lack of an integrated strategy by the administration to translate its wish lists of growth into the reality on the ground, according to an economics professor at AAU. He, for instance, singled out the textile and leather industries, two sectors whose constraints in financing and raw material supplies were identified a decade ago.

“In the absence of an integrated strategy on how to solve these, they are talking about the same set of problems today, while it could have [already] been worked out [by now],” said the economist.

Although the economy has expanded over the past decade, the share of the manufacturing industry shrunk by two percentage points from 5.7pc a decade ago, according to the economist.

“This clearly shows where the priority has been in the past,” he told Fortune.

The industrial expert, on the other hand, foresees that policymakers will find themselves back at square one in deciding to postpone the day that Ethiopia joins the FTA, just as they did 10 years ago.


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