BY GETACHEW MINAS
The private sector in Ethiopia is facing a range of constraints to its competitiveness. The sector remains promising, emerging and burgeoning. The state continues to play a supportive role through state-owned enterprises in key areas of the economy, including telecommunications, finance, energy, logistics and transport, and manufacturing.
Yet, there are ample opportunities for growth in the private sector to influence the country’s key sources of comparative advantage.
There are conditions that are conducive to working in Ethiopia that fully support private investment. These are low labor costs, relatively cheap power, preferential access to regional and global markets, and an ideal climate.
The creation and development of industrial parks and the provision of quality services such as infrastructure have been the main focus of the governmentfor attracting private sector investment.
It is pointed out that the government has also been investing heavily to improve infrastructure, including energy and transport that serve the private sector.
This approach and style of attracting the private sector remains a “key” element in achieving the country’s development objectives. It has played an important role in bringing attention to the constraints to private sector investment.
There are many opportunities for the private sector to become the driver of the economy that creates jobs. Extensive opportunities in the domestic and export markets can be realized if key constraints to investment and competition are addressed.
There is increasing evidence that a small number of high-growth firms typically accounts for a high proportion of job and output growth. They also drive spillovers to other firms and sectors.
Removing constraints to competition:
Efforts are made by policymakers to remove constraints to competition faced by firms that are often successful.
There is a tendency to promote firms with potential for growth. A strategy is applied to remove distortions in input and product markets. This ensures that resources are allocated to where they can be used most efficiently.
The strategy also provides a framework that encourages firm-to-firm sharing of experience. This includes finance, transport, and foreign direct investment.
This connects firms to export markets that can encourage learning and quality upgrading, and investments in industrial parks. Attention is given to improving the capacities of firms to enhance innovation and improve managerial practices.
Firms have access to technology and are assisted to acquire critical skills and management capacities. Support in terms of logistics, telecoms, finance and energy is provided to manufacturing and exporting firms to enhance their efficiency.
This support is guaranteed to avoid high cost and low-quality logistics that undermine the growth potential of export-led manufacturing sector.
The strategy also encourages diversification through the upgrading of the agriculture sector to produce for export. Ethiopia has invested heavily in transport infrastructure to promote the productive sectors of agriculture and industry. There is also a strategy to reduce the cost of shipping which is much higher than in other countries.
Focus is given to the logistics services that facilitate the supply chain in Ethiopia. It involves distribution, packaging, warehousing and inventory management, which are necessary to serve modern manufacturing and agricultural supply chains. If these services are inadequate, they are bound to undermine export competitiveness.
Logistics facilities, such as dry ports and container freight stations, are areas where value-chains intersect. If the facilities are not properly handled, inefficiencies tend to be compounded throughout the economy. The concentration of activities means that they can also become hotspots for job generation if properly serviced.
The participation of the private sector in both primary and downstream information and communication, ICT, services was very low in the past decade. Mobile penetration is now on the rise, though low compared with other countries.
The current aggressive efforts by the Ethio-Telecom in expanding its infrastructure would support other sectors of the economy. This has provided the base for improved connectivity and accessibility.
However, inherited inefficiencies from the now defunct regime in the operation of the Telecom and high costs for users have negatively impacted the development of ICT services, especially in rural areas.
This in turn has constrained the development of ICT applications in the private sector, thereby constraining its “capacity to compete” and generate employment.
Improved access to services
The government has improved access of various services to the private sector. Credit for the private sector in Ethiopia is an encouraging one. The private sector uses finance from banks for most of its activities. The share of the private sector credit in the GDP is on the rise, reflecting that itis blooming, to assume its role as an efficient economic agent.
Ethiopia has promoted its financial market services in the past years. Of course, the state-owned banks dominate the banking sector and the credit market is also serving the private firms.
Historically, there were constraints to private sector investment due to limits to borrow from these banks. With the expansion of private banks, local firms could develop linkages with incoming foreign investors.
The Ethiopian Diaspora could participate in local businesses and develop the capacity necessary to engage with export markets. Previously, this group of entrepreneurs faced serious hurdles to participating in economic activities within their country. It is presumed that the Diaspora investment in Ethiopia is on the rise once the impediments are removed.
They may engage in all sectors of the economy, thereby creating output with the consequent employment opportunities for the local employees. It is strongly believed that they would introduce technologies that promote economic development in all sectors of the economy. The role of the government in supporting the efforts of the Diaspora to participate in the development of the country is very encouraging.
Shared prosperity?:
Studies show that Ethiopia has rich renewable resources, with one of the largest power grid in Sub-Saharan Africa. But, there is no proven means of sharing these resources to the poor people of the country. Despite significant investments in power transfer capacity, the country, especially the poor, had been suffering from shortage of electricity.
This was due to the irresponsible regimes of the past who failed the country and its people. The household electrification rate has remained low and supply was unreliable.
Though government expenditure has been made in network expansion, the necessary investments have not yet been made. As a result, there is a wide disparity in access to electricityin all areas.
The urban electric network also requires upgrading, as do transmission and distribution assets. The sector is now starting to see strong interest in electric projects undertaken by private companies.
The government has recognized its weaknesses in the key enabling sectors and is developing strategies to increase competition and enhance efficiency. In this effort, greater private sector participation is encouraged, including a role for foreign partnerships in certain sectors.
These reforms are being supported by the WB group. Studiesof the performance ofthe Ethiopian economy suggest that reforms in the power sector would increase competitiveness and reduce poverty, but income “inequality” could be exacerbated.
Increased competition would contribute to declining prices for many goods and services. This leads to higher output and exports, increased efficiency, higher wage growth and poverty reduction. But, it would not reduce income inequality, necessitating complementary interventions to ensure “shared prosperity.”
These would improve connectivity, access to finance, and capacity building in all areas. All these measures ensure that the rural poor are able to benefit from the job opportunities that greater private sector participation in the economy will bring. Improved efficiency enables and facilitates private investment throughout the economy.
Conclusion:
A policy framework that determines economic incentives and prioritizes strategies that could unleash private investment is indicated here with. It is important to remove restrictive regulatory environment framework that is complex and costly. A key challenge is the excessive use of licenses, compounded by the frequent use of onerous or “unnecessary” competence certification requirements.
Taken together, these create a substantial barrier to business startups and expansion. The administrative burden for firms to “exit” in the case of failure, and the processes of tax administration and customs procedures, are also serious challenges for the private sector.
Regulatory impediments constrain access to foreign exchange. The priority allocation of foreign exchange by banks hampers the operations of some private enterprises. Barriers to entry constrain women entrepreneurs.
It is reported that female-owned/managed firms face more constraints in accessing finance than their male counterparts. All these negative factors constrain competitiveness in Ethiopia.
Thank you.
The Ethiopian Herald February 28/2021
