In the last two decades and a half, the incumbents have implemented various measures to stabilize the nation’s macroeconomic imbalances. These measures include opening up the economy to the private sector, introducing laws to attract foreign investment, boosting exports, enhancing the nation’s foreign currency reserves, and tackling inflation, among others.
Solomon Zegeye, a long-serving economist and consultant for various firms, recently stated in an interview with local media that Ethiopia is an agrarian country where agriculture serves as the main source of livelihood for 85% of the population. Agriculture also contributes 78% of foreign currency earnings and supplies inputs to agro-industries and food markets.
However, the agricultural sector is vulnerable to extreme climate conditions, making it unrealistic to achieve sustainable development without bringing about structural changes that shift agricultural labor to the manufacturing and service sectors.
According to Solomon, the government recognized these challenges long ago and has dedicated time and budget towards the expansion of manufacturing as a means of achieving structural change. Industrial parks have been constructed in various parts of the country, providing infrastructure such as electricity, internet services, clean water, and affordable rent. The government has also simplified doing business in these parks by providing banking services.
These efforts have attracted foreign investors from countries such as Türkiye, India, China, and others, who have engaged in textile and garment manufacturing, pharmaceuticals, beverage and food production, floriculture, and the cultivation of vegetables and fruits. This influx of investment has created job opportunities for hundreds of thousands of people.
The strategic location of most industrial parks and flower farms adjacent to the Ethio-Djibouti railway has reduced transaction costs for exporting products and importing industrial inputs from abroad.
According to Solomon, the flourishing of the manufacturing sector has brought multiple benefits to the country. It has attracted both foreign and local investment, expanded the role of the private sector in the economy, created job opportunities, linked with the agricultural sector by utilizing raw materials from agriculture, encouraged innovation and entrepreneurship, boosted exports, and substituted imports.
The economic development of countries like Korea, Taiwan, Singapore, and Hong Kong, known as the Asian Tigers, illustrates how manufacturing played a pivotal role in achieving structural change and economic development. Forty years ago, these countries had predominantly agrarian economies, but through economic reforms and structural changes, they transformed into net exporters, significantly increasing their hard currency reserves and becoming manufacturing hubs.
Prior to their structural changes, these countries primarily exported agricultural products in their raw form, without value addition. This put them at a disadvantageous position in the global market. In contrast, their manufacturing products were produced at lower costs and exported with value addition, enhancing their market competitiveness and profitability. The expansion of manufacturing allowed them to shift surplus agricultural labor to the manufacturing sector, which operates year-round and significantly increases productivity.
Import substitution has helped these countries utilize more local resources in industrial production, creating market opportunities for farmers and raising their income. Currently, the four Asian Tigers are high-growth economies fueled by exports, rapid industrialization, and high levels of economic growth since the 1960s. They have become some of the world’s wealthiest nations, sharing common characteristics such as a sharp focus on exports, an educated workforce, and increased saving rates.
Recently, the Ministry of Industry (MoI) announced that Ethiopia’s import substitution strategy has started to bear fruit, with the nation substituting goods worth USD 2.26 billion in the last fiscal year alone. Although Ethiopia is endowed with abundant resources vital for the development of manufacturing industries, the country’s production capacity currently meets only 38% of its needs, with the remaining 62% imported, requiring a significant amount of foreign currency.
According to the State Minister of MoI, Tarekegn Bululta, despite the abundant natural resources and productive labor force, Ethiopia has not yet achieved production sovereignty and remains a “consumer nation.” However, the government has been working to reverse this reality by prioritizing the development of the industrial sector and enhancing import substitution.
As part of this strategy, Ethiopia has identified 96 product items, some of which have already been successfully accomplished. For example, the country has fully substituted imported military uniforms with domestic products. Additionally, 100% of the demand for beer barley seeds in Ethiopia is now covered by domestic production, with the surplus being exported.
Encouraged by these achievements, Ethiopia was able to substitute products worth USD 2.26 billion in the last fiscal year. The country has also been successful in domestic production of various foodstuffs, such as Plum, which is vital for the treatment of Moderate Acute Malnutrition. These efforts have enabled the nation to earn USD 1.36 billion through exports. Recently, the World Food Program purchased food products from Ethiopia, supporting the country in alleviating foreign currency shortages.
Tarekegn further highlighted that, Ethiopia has a huge demand for student uniforms and bags, with a total student population of around 30 million. The import substitution strategy also promotes strong domestic consumption, which alleviates foreign currency shortages and encourages local industries to expand and create more job opportunities.
The government’s import substitution strategy is not only focused on achieving self-sufficiency in certain product categories but also on enhancing the overall competitiveness of domestic industries. The goal is to create an enabling environment for local industries to flourish, attract investment, and increase their share in the domestic and international markets.
To support import substitution efforts, the government has implemented various measures such as providing access to finance and credit facilities for local manufacturers, improving infrastructure, reducing bureaucratic hurdles, promoting research and development, and providing training and capacity-building programs.
While import substitution is a crucial component of Ethiopia’s industrialization strategy, it is important to note that it is not meant to completely eliminate imports. Rather, it aims to reduce dependence on imports for goods that can be produced domestically and promote a more balanced trade relationship.
Import substitution can have several benefits for the economy, including reducing the trade deficit; creating employment opportunities; boosting domestic industries and fostering economic self-reliance. However, it is also important to ensure that import substitution efforts are implemented in a sustainable and strategic manner, taking into consideration factors such as cost-effectiveness, quality, and market demand.
In conclusion, Ethiopia’s import substitution strategy is part of a broader effort to achieve structural change and promote sustainable economic development. By focusing on the expansion of the manufacturing sector and reducing dependence on imports, the country aims to create a more self-reliant and competitive economy. While challenges remain, the progress made so far indicates the potential for import substitution to contribute significantly to Ethiopia’s economic transformation.
BY ABEBE WOLDEGIORGIS
THE ETHIOPIAN HERALD TUESDAY 24 OCTOBER 2023
