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Report No. 5301-ET
EthiopiaIndustrial Sector Review
December 16, 1985
Eastern and Southern Africa Projects DepartmentIndustrial Development and Finance DivisionFOR OFFICIAL USE ONLY
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CURRENCY EQUIVALENTS
Currency Unit
The Ethiopian Birr (Birr)
Exchange Rates
US$1.00 = Birr 2.07Birr 1.00 = US$0.48
Fiscal Year
July 8 - Jutly 7
FOR OFCiAL USE ONLY
PREFACE
This report was prepared on the basis of findings of a World BankMission which visited Ethiopia in September/October 1983. A draft of thisreport was discussed with the Ethiopian Government in May 1985. Followingthese discussions, the Ministry of Industry provided detailed written com-ments on the draft report, including some updating of the information usedin the report, corrections to factual errors appearing in the draft, aswell as comments on the conclusions and recommendations of the report, inthe light of the Ministry's strategy and objectives. Many of the pointsmade in the Ministry's comments have now been incorporated in the finalreport. Nevertheless, there remain substantial differences of opinion be-tween the Bank and the Government about appropriate and relevant approachesto industrial policy. The differences refer mainly to: (i) the appropri-ateness of border prices and domestic resource cost calculations to assessthe attractiveness of existing public industrial enterprises and newinvestment projects; (ii) the desirability of an increase in the role ofsmall-scale enterprises within the manufacturing sector; (iii) the appro-priate and/or feasible rate of growth of industrial investment and outputwithin the Ten Year Development Plan; and (iv) the desirability and feasi-bility of changes in the foreign exchange regime, foreign trade policy andpricing policy, and of greater reliance on decentralized mechanisms fordecision-making at the firm level. Attention has been drawn to these viewsat appropriate points in the text.
ThLs document bas a restkired distnbuton and may be wed by rpients only i the perfornance ofjeir ofrfic dutie.ts contents may nototherwisebe dicosed without Word Bank authorizati.
ETHIOPIA
INDUSTRIAL SECTOR REVIEW
Table of Contents
Page No.
SUMNARY AND CONCLUSIONS ....................... .. *.. in.... i-xviii
PART ONE: INTRODUCTION ......... .*.*.in.in*.in..................in. 1
I. INTRODUCTION ................. in........ 2...........*in.....*. 2
A. Preface ...................... ... a * .... ..*.... . 2B. Country Background .......... ......... 3C. Evolution of the Manufacturing Sector..................... 5
PART TWO: THE MANUFACTURING SECTOR: STRUCTURE AND PERFORMANCE .... 8
II. STRUCTURE AND PERFORMANCE OF MEDIUM- AND LARGE-SCALE INDUSTRY.. 9
A. Introduction ....... -. 00%.....0.0... ......................... 9B. Size and Growth of the Manufacturing Sector ............... 9C. Ownership Structure of Medium- and Large-Scale Enterprises. 10D. Geographical Distribution .. .......... ........... . . . .... 12E. Structure of Output and Trade............................... 13F. Investment ................................... ........... ... 17G. Employment .................................... ......... o..... 19H. Capital-Labor Ratio in Manufacturing ....................... 211. Performance and Efficiency of the Medium- and Large-Scale
Industrial Sector...... .................................... 23
III. SMALL-SCALE INDUSTRIES AND HANDICRAFTS ........................ 30
A. Introduction ......sr....... 004-0-0 ....... 0................ 30B. Small-Scale Industry ....o..............o.......o......o........ 30C. Handicrafts .......... .0....a............................. 35
IV. INDUSTRIAL PUBLIC ENTERPRISES ... ......... ...... 38
A. I-ntroduction ............................... 38B. Structure and Organization of Public Enterprises .......... 38C. IPE Performance .......... ...... ....... ....... ........... ....0 40D. Technical Efficiency of IPEs.....o ... ................ .... 42E. Investment and Project Evaluation.......o................ 44F. Prospects.o..... .. 000-0..... 44
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Page No.
PART THREE: THE POLICY FRAMEWORK ................................. . 46
V. THE POLICY FRAMEWORK: MAIN FEATURESU RE... 47
A. Trade Regime........ .......... ....... 0.0.. .. 9...- 47B. Policies Affecting the Private Sector and Foreign
Investment.... ...... .................. 51C. Price Controlso..... *............... .....0... 53D. Employment and Wage Policiesl...................... 53
VI. THE INFLUENCE OF POLICIES AND INSTITUTIONS ON THE PERFORMANCEAND EFFICIENCY OF THE SECTOR.E. CT.......4.. oo.............. 55
A. Policies and the Structure of Protection in Industry.... 55B. The Structure of Protection and the Efficiency
of the Sector....... *..**........................... ,. 59C. Exchange Rate Overvaluation and Trade Policy ... ee. 9.e ... 61
PART FOUR: STRATEGY AND POLICIES............. ........... .. 63
VII. OBJECTIVES AND STRATEGIES OF THE TEN-YEAR PERSPECTIVE PLAN(1984/85 - 939)...................................64
A. The Ten Year Perspective Plan ........................... 64B. Evaluation of Objectives and Strategies .................. 66
VIII. A STRATEGY OF INDUSTRIAL DEVELOPMENT AND PROPOSALS FORF6-L1CY MEFORM ............................................. 73
A. A Strategy for Improving the Efficiency ofthe Industrialization Process.. 9999949999999w.....o...... 73
B. Proposals for Policy Reform.......... .. ... ..... .. 77
STATISTICAL APPENDICES ......................................... 87
ANNEX 1: The Structure of Protection and Efficiency of IndustrialPublic Enterprises ........ .............................. 123
TEC'HNICAL APPENDIX ..................... ....................... 137
This report is based on the findings of a mission which visited Ethiopia inSeptember/October 1983. The mission comprised Messrs. C.P. Cacho (MissionChief), Alan Abouchar (Economist, Consultant), Philip Adoteye (PublicEnterprise Specialist), Hilarian M.A. Codippily (Macroeconomist), EdwardEspenhahn (Industrial Engineer, Consultant), Ms. Doris Jansen (TradeEconomist, Consultant) and Mrs. Nwanganga Shields (Manpower SP--ialist).The report was prepared by Mr. Daniel Kaufmann (Industrial Economist).
Text Tables
Number Title Page No.
1 Recent Economic Structure and Growth 42 Manufacturing Value Added in Selected African
Countries 113 Geographical Distribution of Medium/Large Scale
Manufacturing 124 Structure of Medium/Large Scale Manufacturing
Value Added Historical: 1962 - 1975 145 Structure of Medium/Large Scale Manufacturing
1967/77 - 1980/81 146 Import Structure 157 Import Content in Costs of Raw Materials and
Parts in Industry 168 Industrial Exports 179 Capital/Output Ratios in Manufacturing Industries
in Some Selected Countries 1810 Structure of Employment in MLSI Enterprises 21
11 Capital Per Person Employed in Manufacturing Industriesin Selected Countries
12 Capital/Labor Ratios in Medium and Large ScaleManufacturing, 1972 - 1981 22
13 Efficiency in Manufacturing: 1972 and 1983 2814 The Structure of Employment and Output in Small Scale
Manufacturing (1979/80) 3115 Capital/Labor Katios and Wage Rates for MLSIs and SSEs 3216 Labor Productivity in MLSIs and SSEs 3317 Capacity Utilization of MLSIs and SSEs 3418 Structure of Employment and Output in Rural Handicrafts
Activities, 1977/78 3619 Financial Profitability and Economic Efficiency 4220 Technical Efficiencies of IPEs 4321 Structure of Protection and Efficiency of IPEs: Part I 5722 Structure of Protection and Efficiency of IPEs: Part II 5823 Fixed Assets and New Capital Expenditure: Current and
Projected 6824 List of Project Documents Reviewed 6925 Regional Population Characteristics and Investment
Indicators 70
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SUMMARY AND CONCLUSIONS
Introduction
1. This study was undertaken at the end of the first decade ofEthiopia's revolution--a revolution that has brought about widespreadchanges in all aspects of the life of the country. The revolution hassought to transform the Ethiopian economy towards a centrally plannedsystem where the means of production are socialized. Ethiopia has by now amixed economy with substantial public ownership and central control.
2. Situated in the North-eastern part of Africa, Ethiopia is thecontinent's third most populous country after Nigeria and Egypt. Itspopulation, about 85 percent rural, is currently estimated to be around 42million. Its per capita income is estimated to be around US$140, meaningthat it is one of the poorest countries in the world. Agriculture is themainstay of the economy. Its share of GDP is around 50 percent and itgenerates some 90 percent of export earnings and 85 percent of employment.Coffee, the main export, accounts for over 60 percent of merchandise exportearnings, and Ethiopia's livestock population is the largest among Africancountries.
3. Manufacturing industry is a modest contributor to the economy,accounting for about 10 percent of GDP and about 5 percent of employment in1982/83. The sector's share in GDP was 6.1 percent in 1961 and 9.3 percentin 1974. Nearly 56 percent of value added in manufacturing originates inmedium/large-scale enterprises, and the rest in handicrafts, artisanal andother types of small-scale processing.
4. The main characteristics of the manufacturing sector inherited bythe revolution in 1974 were: (a) dual structure--a rudimentary small-scaleand handicraft subsector producing about half the manufacturing valueadded, and a protected modern medium/large-scale subsector contributing theother half; (b) predominance of private ownership; (c) predominance offoreign ownership, and foreign managerial, professional and technicalstaffing of the medium/large-scale subsector; (d) inward orientation andrelatively high tariffs (but without significant quantitative restrictionsor foreign exchange controls); (e) high capital intensity; (f) weakfinancial structures of the medium/large-scale enterprises; (g) under-utilized capacity; and (h) heavy geographical concentration.
Structure and Performance of the Manufacturing Sector
5. Size and Growth of the Sector. After experiencing an annualgrowth rate of 8.7 percent in the ten-year period ending in 1972/73, themanufacturing sector grew at the slower average annual rate of 3.9 percentfrom 1974 to 1982. Medium/large scale industry grew faster than theaverage (5.9 percent p.a.) whereas the rate of growth of handicrafts andsmall scale industry was only 1.4 percent p.a. During this post-revolutionperiod the average rate of growth of manufacturing exceeded the overallgrowth rate of the Ethiopian economy (2.3 percent), implying that the share
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of the manufacturing sector in GDP increased moderately to about 10 percentin 1982. Such a share is not significantly below the median contributionof manufacturiih in GDP for African countries. However, due to its low percapita income, Ethiopia's manufacturing value added per capita is among thelowest in Africa.
6. The growth performance of manufacturing since 1974 can be dividedinto three distinct phases: a period of slight decline through 1977/72, ahigh growth period averaging more than 10 percent p.a. between 1978 and1980, and a reduction of the growth rate to about 3.8 percent p.a. between19R0 and 1983. During the first period, the Government took over ownershipand operation of some 100 manufacturing enterprises while hostilities inEritrea and the Ogaden region caused plant closures and generally disruptedtransport and communications. The second period, comprising the two years1978/79 and 1979/80, was characterized by the production campaigns(Zemechas) which emphasized increases in production mainly by improving theuse of existing capacity. Capacity constraints, low investment levels andpoor agricultural performance resulted in a slowdown in manufacturingactivity after 1980. Throughout the period, the growth rates of medium-and large-scale enterprises have consistently exceeded those of thesmall-scale industry sector.
Structure of Medium and Large-Scale Industrial (MLSI) Enterprises
7. Production. The MLSI sector is dominated by the IndustrialPublic Enterprises (IPEs). Although they account for only one ha'f of thenumber of enterprises with 10 or more workers that utilize power-drivenmachines, IPEs contribute 96.5 percent of the overall value added, 95percent of the fixed assets and 90 percent of the employment in the MLSIsector. Medium/large-scale manufacturing is heavily concentrated in asmall number of locations. The provinces of Shoa and Eritrea, withslightly over one quarter of the country's population, account for morethan 80 percent of the sector in terms of number of establishments,employment and value added. Industrial concentration is also heavy withinregions, with a few regional capitals (Addis Ababa, Asmara, Dire Dawa,etc.,) having the highest concentration of plants.
8. The structure of production in Ethiopian medium/largemanufacturing has historically been dominated by consumer goodsenterprises. The share of food processing, beverages and textiles inmanufacturing value added was as high as 80 percent in 1962, dropped to 68percent by 1970, and it was still a high 58.5 percent in 1980/81.
9. Imports. Since the revolution, overall imports have increasedsignificantly, largely as a result of significant increases in the volumeof imported food and of the oil price increase, particularly after1977/78. The share of industrial imports in total imports increased from67.3 percent in 1974/75 to 75.2 percent in 1977/78, and decreasedthereafter, to 63.4 percent in 1921/82 as a result of the increasing shareof food and petroleum imports.
10. There has been substantial import substitution in the industrialsector. The share of industrial imports in the overall industrial supply
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increased until 1977/78, reaching 46.3 percent and diminished significantlythereafter to 33 percent in 1981/82. The decline, however, was limited tomanufactured imports for final consumption. On the other hand, the shareof imported raw materials and parts for industry in total industrial costshas been increasing over time, i.e., import substitution was negative inindustrial inputs and the import dependence of the industrial sectorincreased. Import dependence varies widely among subsectors. In the foodsubsector, it is as low as 8 percent, while in the metal works subsector itis as high as 80 percent. Import dependence tends to be high even in somedomestic resource based industries, as for example, meat products.
11. Exports. The overall export share in GDP has fluctuated withinthe 11.5-14.5 percent range, depending largely on the volume and price ofcoffee exports, which account for about two thirds of total merchandiseexports. Following a drop in the price of coffee and of raw hides andskins, the value of overall exports declined by 11 percent from 1979/80 to1981/82. During this period, there was a slight increase in industrialexports. As a result, the share of industrial exports in total exportsincreased from 6.9 percent to 8.4 percent. However, the increase inindustrial exports was less than the increase in the gross value ofindustrial production during these three years, resulting in a smalldecline in the share of industrial exports in gross industrial production,which was only 3.8 percent in 1981/82. Industrial exports are concentratedin two types of products. Leather and leather products account forapproximately 60 percent of industrial exports. Meat products and sugarand molasses comprise another 30 percent.
12. Investment. The available evidence suggests that investmentlevels in Ethiopian manufacturing declined sharply after the revolution.Gross investments in the sector have been low in recent years. Newinvestments have been particularly small in the private sector. Also,investments for replacement and rehabilitation have been very low. Amongpublic enterprises, increasing levels of investment during the last threeyears are due mainly to the construction of four sizeable projects: DireDawa Textiles, Combolcha Textiles, Harar Brewery and Muger Cement. Thecapital intensity of the MLSI sector, which was high by developingcountries' standards in the early 1970s, has been declining since 1977, theoutcome of low capital investment and higher capital utilization.
13. Employment. Medium and Large Scale Industry (MSLI) is not amajor employer of labor in Ethiopia and cannot be expected to absorb anysubstantial share of the growing labor force in the foreseeable future.Although its contribution to GDP has been over 5 percent, by 1981 it wasemploying only 79,400 workers, which amounts to 0.5 percent of thepopulation between 15 and 64 years old. This employment level should alsobe compared to the country's annual increase in the labor force, which isabout 400,000 new workers. Employment in MLSI stagnated during the firstthree years after the revolution, then rose by 5.3 percent in 1977/78 and13.4 percent in 1978/79 as a result of the Zemecha campaign. With theattainment of near full capacity utilization in many enterprises, and withthe relative lack of new investments, the rate of employment growth fellsignificantly after 1978.
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14. The structure of employment has stayed relatively unchanged overtime. The lack of significant structural change in the pattern of employ-ment after the revolution may be partly the result of the relativelyunchanged structure of production but also, to some extent, the reflectionof limited flexibility in the allocation (and reallocation) of labor.
15. There appear to be skill shortages in virtually every field, andmore particularly of engineers, accountants, managers, administrators ofindustry, economists and specialists in agriculture industries. In theskilled worker category, there are shortages of metal workers and electri-cians. There is also a scarcity of middle and senior level executives thatthe modern sector will increasingly need.
Performance and Efficiency of MLSIs
16. The recent performance of the MLSIs can be characterized by thefollowing: i) improved capacity utilization; ii) low levels of new invest-ments; iii) a slight increase in labor intensity; iv) increased importdependency; v) increasing import substitution of final consumer goods; vi)lack of export penetration; vii) relatively unchanged structure of produc-tion; and viii) relatively high growth rate (averaging 5.9 percent p.a.from 1974 to 1982).
17. Efficiency of the MLSI Sector. The available evidence on thesector's efficiency suggests that (i) there might have been a slightimprovement in the efficiency of the sector between 1972 and 1983, partlyas a result of increased capacity utilization; and (ii) the overall levelof efficiency continues to be low. The next paragraphs emphasi=e themethodology and findings on which these conclusions are based.
18. A quantitative approach to assess the degree of efficiency orinefficiency of resource allocation and use in an industry is the DomesticResource Cost (DRC) methodology. The DRC measures the cost (appropriatelyshadow priced) of domestic resources (factors) that are necessary to saveor earn one unit of foreign exchange. A DRC ratio higher than one willreflect that the costs for the economy (in the numerator) of producing agood that will save a unit of foreign exchange are higher than the netbenefit of saving such a unit (denominator).
19. A study carried out in 1972 estimated DRCs for various industrialactivities in Ethiopia. Similarly, DRCs were calculated for a sample ofpublic enterprises during the 1983 Industrial Sector Mission of the WorldBank. The main findings of these two studies are presented in this report(Chapters II and VI, and Annex 1). As the calculations used 1982/83 borderprices for tradeable inputs and outputs, the results measure the economicefficiency of the firms as of that time. Their social value includingother non-efficiency objectives of the Government could be measured bymaking appropriate adjustments to the border prices. Although the reliabi-lity of these findings is limited by the small size of the samples and byother data limitations which warrants some caution in the interpretation ofthe results, and has been questioned by the Ministry of Industry, theyconstitute the best available evidence on the level and time changes in the
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efficiency of Ethiopian enterprises. On the basis of the comparison overtlme it appears that, on the average, the efficlency of the sector did notdeteriorate and might have increased slightly between 1972 and 1983.
20. In spite of the slight improvement since 1972, the 1983 studysuggests that the overall level of efficiency of the firms In the sampleis low. Out of 19 firms surveyed in 1983, accounting for about 20 percentof the sector's value added, depending on the assumptions used, 10 to 14firms have a DRC higher than one, i.e., they are inefficient in the senisedlacussed above. Three of these firms were founid to have negative valueadded In world prices, i.e., they use tradeable inputs whose value (atworld price.) is higher than the value of the output they produce.
21. Another measure of the efficiency of the sector, in the shortrun, is the economic profitability of an activity taking the existinginvestments as sunk costs, i.e., calculating the DRCs without including thecosts of investments already incurred. If this DRC measure is higher thanone, the actlvity should be regarded as unprofitable Ini the short-run;unless major improvements can be made, the economy would benefit from itsshutdown. The estimates of the 1983 World Bauk mission suggest that In 8to 9 out of 19 industries the short-run' DRCs are higher than one (meatprocessing, some beverage firms, some textiles, woodworks, pulp and paper,and metalworks). In 1972, the results were fairly similar: in 12 out of23 industries the short-run DRCs were higher than one. Therefore, ou thebasis of the available evidence, which is admittedly limited, signitiiantinefficiencies appear to exist in the medium- atnd large-scale manufacturingsector, which would require urgent attention.
Small Scale Industries and Handicrafts
22. Small Scale Enterprises (SSEs) arid Handicrafts (Hs) continue toplay an Important role in the manufacturing sector. Manufacturitng SSEs aredefined as firms with fixed assets (excluding buildings) not exceeding Birr200,000 (about US$100,000) and handicrafts are defined as using manualskills and hand tools. Their value added in constant terms has increasedcontinuously since the early sixties, although at a slower rate thanmediut/large scale manufacturing. The SSE/H share ln the net output of thesector dropped from 69 percent in 1961 to 63 percent in 1973/74, and anestimated 45 percent by 1981/82. At the latter date, SSEs and handicraftshad a 4.6 percent contribution to GDP.
Small Scale Industry
23. Structure of Production. The structure of production is heavilydoiDnated by food products (63 percent of the total output of SSEs in19n0), which are mainly grain mllls and oil seed processors. Textiles,leather and footwear, wood products, paper and printing, and fabricatedmetals represent a much smaller share of output aud employment with 5 to 9percent in each subsector.
24. Capital Intensity. SSEs have a much lower capltal-labor ratiothan MLSIs. For the sector as a whole, the capital-labor ratio of SSEs isabout half the MLSIs ratio, yet there is a high variance among subsectors.
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The capital intensity for food products, printing and non-metallic mineralsis 3 to 3.5 times lower in SSEs than in MLSIs, whereas for beverages, woodand furnlture, and for steel, metals and eleetzical appliances it is only20 to 30 percent lower.
25. Labor Productlvity. For all subsectors iu manufacturing thelabor productivity (valued added per worker) in MLSIs is more than twicethat of SSEs. The amount: of capital per unit of labor in MLSIs is alsohlgher than in SSEs, but the difference is less than double. Therefore,the value added of a worker in MLSIs is higher than in SSEs even whencontrolling for differences in capital intensity. This implies that, underthe present conditions, both the productivity of labor and of capital arehigher in MLSIs.
26. Capacity Utilization. The lower productivity estimated for SSEs,which is not explained ln full by the lower capital-labor ratio, appears tobe partly determined by significantly lower rates of capacity utilization.A survey by HASIDA (the Handicraft aud Small Industry Development Agency)lndlcates that capacity utilization in 1980 was very low, with only 5 SSEfirms out of 72 showing capacity utilization exceeding 56 pereent, and only27 reaching rates of utilization of 40 percent or more. These figuressharply contrast with the capacity utilization of MLSIs at that time, whenvirtually all plants were producing at 70 to 100 percent capacity.
27. Wages. Wages are significantly higher in MLSIs than for SSEs inall subsectors. On the average, the higher the difference in thecapital-labor ratio, the higher the wage rate gap. These figures, however,also indicate that MLSIs workers get wages above their SSEs counterpartseven In industries with similar capital intensities. The analysis of laborproductivity shows that these wage differentials are associated withdifferences in the value added per worker between the two sectors. Thequestion still remains, however, as to what keeps wages -- ard the marginalproductivity of labor -- from being equalized across both sectors. Twofactors appear to be important: i) less regulation of employment andconsiderable employment of family members in SSEs; and ii) lower skills inSSEs.
28. Imports and Exports. SSEs appear to rely less on directlyimported inputs than MLSIs. Survey results Indicate that 58 percent of theestablishments use domestic raw materials only, 36 percent use bothdomestic and imported raw materials, and 6 percent use imported rawmaterials only. The evidence available suggests that exports from SSEs arevirtually non-existent.
Handicrafts
29. The handicraft sector is an important contributor to output andemployment in manufacturing. Urban handicrafts are dispersed throughoutEthiopian towns and urban eenters, exhibit a very labor intensive mode ofproduction, and utilize relatively unskilled labor, which on the averageearn two thirds the wages in SSEs, and one fourth the wages of MLSIs.
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Most of output and employment in rural handicrafts is concentrated intextiles, rope making, and tailoring. Rural handicrafts utilize verylittle capital per worker, and are geographically dispersed throughout thecountry. Less than one quarter of the number of establishments, output andemployment were in the Shoa province in 1972/73.
30. HASIDA has helped organize craftsmen into Handicraft ServiceCooperatives, where individuals join together in input procurement and useof marketing outlets, and Handicrafts Producer's Cooperatives, where meansof production are socialized. More than 90 percent of output, employmentand fixed assets in these cooperatives were concentrated in tailoring andweaving. The gross production of handicraft cooperatives was Birr 200m(about US$100 m.) in 1978/79. The gross output of MLSI for that year wasBirr 1,628 m., i.e., handicraft cooperatives alone (which is a fraction oftotal handicrafts) produce the equivalent of 12 percent of the output ofMLSIs.
31. The capital-labor ratio of service cooperatives - which comprise96 percent of output of all cooperatives - was estimated to be between 16and 31 times lower than in SSEs and in MLSIs, respectively. The valueadded per unit of labor was estimated at about one half and a quarter ofthe value added per worker in SSEs and MLSIs, respectively. Consequently,if we consider the very low capital endowments of tbe handicraftcooperatives, the productivity of these enterprises appears to be wellabove the average for manufacturing. In fact, the value added per unit ofcapital is more than 7 times higher for handicrafts than for SSEs or MLSIs.
Industrial Public Enterprises
32. Institutional Structure. Industrial Public Enterprises inEthiopia account for almost all of employment, output, export and valueadded in medium- and large-scale enterprises. Under the Ministry ofIndustry there are 12 corporations with 153 enterprises in the areas offood, meat, sugar, beverages, tobacco and matches, textiles, leather andshoes, woodwork, building materials, printing, chemicals, and metal works.
33. The Ministry of Industry, in coordinating the activities of itscorporations and IPEs, concentrates on broad guidelines and issues policieswith respect to operations planning and budgeting, plant rehabilitation,investments and manpower management. Through the relevant corporations, italso controls enterprise performance by setting aad guiding reportingprocedures and coordinating plant programs. The structure (Government-Ministry--Corporation-IPE) allows for close monitoring of all aspects ofIPE operations, particularly in the areas of investment, manpower (hiring,firing, promotions and transfers), finance (availability or otherwise offunds for continued operations) and operations (sales, production andexport). The Ministry of Industry has indicated that a gradualdecentralization of some of these activities is now taking place.
34. The Government, acting through the Ministry and the corporationscontrols: (i) prices of IPE inputs and outputs; (ii) the remuneration ofthe more senior (and also some junior) workers in the IPE; and (iii) the
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funds available to the IPE for its continued operations and forrehabilitation and expansion. During the last decade, this centralizedappr-oval system has had a major impact on both the outcome of policydecisions and the extent of flexibility possible in the Ethiopian publicenterprise system.
35. IPE Performance. As noted earlier (para. 16) the output of IPEshas increased substantially during the last decade. For the most recentyears, the index of production shows that the volume of output for all IPEsgrew by 32 percent from 1979/80 to 1982/83.
36. Industrial public enterprises in Ethiopia have been profitable,particularly compared with many African countries. IPEs have contributedsubstantially to Central Government revenues over the past four yearsthrough corporate taxation, capital charges and residual surpluses (thelast two items alone amounted to Birr 71.6 million in 1981). Thedebt/equity ratios vary significantly among enterprises in differentsectors and they have worsened over time for all sectors. This indicates aweakening of the financial structure of IPEs, partly due to the transfersof residual surpluses to the Treasury, which limits equity growth.
37. The satisfactory financial profitability of most IPEs is not,contrary to some views held in Ethiopia, a good indicator of theireconomic efficiency; in fact in the sample of 19 IPEs surveyed by themission, more than two thirds of the financially profitable enterpriseswere found to be economically inefficient in the sense discussed above(para. 18). The difference between financial and economic profitability ofthe IPEs is the result of the present policy framework affecting Ethiopia'sindustrial sector and of its impact on the structure of domestic prices,which are summarized below.
38. Technical Efficiency of IPEs. A review of the evidence ontechnical efficiency of the surveyed IPEs indicated that: i) from atechnical standpoint, the technology employed was regarded as relativelysatisfactory; ii) although the condition of plants and the caliber ofmanagement and operational skills were regarded as adequate in many firms,the standard of production management and operational skills and thestandard of maintenance and conditions of fixed assets are below par insome IPEs; and iii) there appears to be a positive correlation between theadequacy of management and operational skills, on the one hand and themaintenance and condition of fixed assets, on the other.
The Policy Framework and Its Impact
39. The main policy-related question in the analysis of the Ethiopianindustrial sector regards the type of interventions required to make themanufacturing sector more efficient, and allow it to be a more productivecontributor to the Ethiopian industrialization process and the economy inthe future. In order to address this question, it is first necessary toreview the policy framework as it affects the manufacturing sector, and itsincidence on the efficiency of the sector.
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40. Exchange Rate System. The currency of Ethiopia is the Birr("Ethiopian dollar- prior to September 1976), which is pegged to the U.S.dollar at the official rate of Birr 2.07 US$1. During the period January1975 to December 1982, Ethiopia's import-weighted real effective exchangerate appreciated by 37.5 percent against the currencies of its majortrading partners. (The appreciation was somewhat lower if we take a morerecent year as a base year). Insofar as the Ethiopian consumer price indexinadequately reflects costs pressures, the real appreciation may have beeneven larger. In addition, Ethiopia's international terms of trade havedeteriorated by 26 percent during the last three years. The resultingovervaluation of the exchange rate led to the need for import restrictionsand had several negative effects on the manufacturing sector, includingunderprotection of some industries, high import dependence, anti-exportbias, and high capital intensity.
41. Import Licenses and Export Permits. Import licenses andallocation of toreign exchange are the two main instruments of industrialprotection in Ethiopia. Import licenses for general product categories aregranted for one year by the Ministry of Foreign Trade. Import restrictionswere tightened after 1978, when foreign exchange was no longer granted forthe importation of some foodstuffs, alcoholic beverages, and other consumergoods. The Ministry of Industry annually submits the foreign exchangerequirements of the industrial public enterprises under its jurisdiction tothe National Committee for Central Planning (NCCP). All commodity exportsrequire permits from the Exchange Controller; some require, in addition,the approval of specialized government agencies. The strict control offoreign exchange allocation and use is made necessary by the exchange rateovervaluation discussed above and is partly responsible for the highdispersion of protection on specific industries (paras. 51 to 53).
42. Import and Export Duties. Import duties are an important sourceof Government revenues in Ethiopia, but are less important than importlicenses and foreign exchange allocation as a source of protection.Import duties have averaged around 3 to 4 percent of GDP, with a relativelyhigh import tax/import ratio of about 25 percent in the 1975/76- 1978/79period, decreasing to about 18 percent more recently. % i978, only threeof 19 African countries for which import tax/import ratios are availabie,had ratios greater than Ethiopia. Export taxes are a somewhat lessimportant revenue source than are import taxes or taxes on domestic sales,
and average 2 percent of GDP. Most export tax revenue comes from taxes oncoffee. Nearly all industrial exports are subject to a 2 percent exporttax.
43. Trade Promotion and Agreements. The Ministry of Foreign Tradehas particlpated in a number of trade fairs and exhibitions and has donesome market research in collaboration with multilateral agencies. It hasalso set up a number of overseas commercial offices in strategicallyimportant potential market areas. These efforts are, however, very recentand incipient.
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44. Private Entrepreneurship. During the last decade, significantlimitations have been introduced on individual and corporate privateentrepreneurship. Some industrial activities regarded as critical areexpressly limited to the public sector (e.g. petroleum, iron and steel) andothers are designated to be undertaken as joint Government/foreignenterprises (pulp and paper and plastics). Small-scale industrialactivities, in a,Nas like grain milling, oil seed processing, handicrafts,baking, weaving and tailoring are left to the private sector.
45. Private participation, other than by cooperatives and foreigninvestors in Government majority-owned joinit ventures, is limitedto small-scale activities by the general limitation that fixed assets inprivate firms should not exceed Birr 500,000. Further, a privateentrepreneur may participate in only one venture. The income tax law has aprogressive scale with high marginal and average rates for the privateentrepreneur. The allocation of foreign exchange and other inputs seems tohave favored the public sector, contributing to the capacityunderutilization in private enterprises. Conflicting public statementsabout private participation in investment ventures have created aperception of high risk among potential private investors, which partlyexplains the low level of investment in small-scale industry.
46. Foreign Investment. There has been no new foreign equityparticipation in manufacturing since the nationalizations in the mid-1970s,although shortly after the revolution the Government specified areas inwhich foreign enterprises could participate. This is consistent with theeconomic policy climate following the nationalizations and with theprotracted negotiations on compensation to foreign owners of nationalizedassets. The first significaut step to improve the foreign investmentenvironment was the adoption of the Joint Venture Proclamation in 1983.
47. Price Controls. Price controls have been a feature of Ethiopianeconomic policy for a long period of time. After the revolution, however,they have taken greater importance as they have been used to controlinflation and to influence income distributioan and welfare. The Governmentnow controls the prices of a wide range of products, particularly of basicconsumer goods that are in short supply, covering about 47 percent of thegross value of industrial output.
48. A fundamental feature of the current system of price controls isits reliance on cost-plus pricing. Enterprises are in most cases allowedan acceptable mark-up over costs. The present system often causes lengthydelays between an enterprise's request for a price increase and theGovernment's ruling on the request. More importantly, the application ofthe cost-plus pricing system for a lengthy period of time has resulted in astructure of domestic prices which is quite different from that of worldprices. Thus, the actual prices of inputs and outputs faced by theenterprises are often very different from the shadow or border prices thatmeasure the economic value of the respective goods for the society as awhole. These differences are a major source of the economic inefficienciesmentioned earlier. The Ministry of Industry acknowledges the weaknessesimplicit in the cost-plus pricing system but favors it because it issimpler to administer than other systems.
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49. Employment. Ethiopia's labor market is still highly regulatedalthough a gradual decentralization is taking place. Job seekers arerequested to register with the employment exchanges and all vacancies areto be filled from those registered, unless prior permission has beengranted for posts to be filled through transfer of staff. Until recently,first jobs for workers with post-secondary school training were allocatedcentrally by the CPSC. Promotions to jobs with salaries above Birr 700 amonth, or pay increments above 25 percent in any year, require the approvalof the Ministry of Industry. As a result of these regulations, labormobility is still limited and the Government is considering furtherdecentralization.
50. Wages. The industrial sector operates under the same wageguidelines as the rest of the public sector, with the twin objectives ofstemming increases in the wage bill in order to control inflationarypressures, and of compressing the skewed wage pay scale that Ethiopiainherited at the time of the revolution. Annual increments have been belowinflation, and until 1980 limited to earners with salaries below Birr 450per month. Real wages have dropped quite significantly for higher paidworkers earning above Birr 300-350 a month (in 1982 prices); the drop hasbeen particulariy severe for workers subject to the wage freeze (above Birr650 since 1981). The Government implemented some wage policy reforms in1979/80, linking wage increases to the firm's performance and replacing thepolicy in practice from 1975 of generalized increases for a large portionof the parastatal sector.
51. The Influence of Policies on the Performance and Efficiency ofthe Sector. The evidence gathered by the mission suggests that the averagelevels ot protection (both nominal and effective) provided by the differentpolicy measures are not very high, but the differences among firms arelarge. The gross Nominal Protection Coefficient (NPC) fluctuates between2.20 (implying a 120 percent of protection on the output) and 0.47(implying a 53 percent rate of negative protectlon). The net NPC (which isadjusted by a shadow exchange rate 30 percent higher than the officialrate) fluctuates between 1.69 and 0.36. Both the level and thefluctuations of protection are magnified when the protection on inputs isalso taken into account. The gross and net Effective ProtectionCoefficients become infinitely high for some firms (due to negative valueadded at world prices), and are as low as 0.03 for others (negativeprotection of 97 percent). The average gross effective protection for the18 enterprises surveyed is 36 percent, whereas the average net effectiveprotection is 1.05.
52. A comparison of the protection coefficients (which measure theimpact of policies) with the DRC ratios (a summary measure of efficiency)permits an exploration of the relationship between policies andefficiency. The comparison shows that the firms receiving high levels ofprotection are those which are less efficient, and that the protectedindustries in the manufacturing sector have not become more efficient overtime in Ethiopia.
53. The corollary of these findings is that protectionist policieshave encouraged the flow of resources to subsectors of Etlhiopian
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manufacturing where the net benefits have been low when compared to thecosts of diverting these resources from more productive uses. Thesepolicies have discouraged more resources flowing to other industries (or tosectors other than manufacturing) where the overall economic benefits wouldhave been higher. Furthermore, the current structure of protection withhigh levels for some firms and negative levels for others, may have alsoprecluded the entry of potentially efficient firms into certain activities,and it might have caused efficient firms to disappear due to their lack ofprotection.
Objectives and Strategies of the Ten-Year Perspective Plan
54. The main stated objectives of the Ten-Year Perspective Planinclude improving the material and cultural well-being of the population,effecting a structural transformation of the national economy by increasingthe share of industrial output in total product, and laying down a strongmaterial and technical foundation for the building of socialism. In orderto achieve these objectives, Ethiopia has given first priority to thedevelopment of agriculture, within which the cooperativization of thepeasants is given primary emphasis. The second priority area is theindustrialization of the country as well as the associated development ofthe power and mining sectors. According to the Plan's statements, sinceboth public enterprises and cooperatives have become principal tools ofeconomic management, the Government will attempt to make the organizationsmore viable. The Plan envisages large iavestments in industry and adecline in the share of agriculture in GDP.
55. The specific objectives for the industrial sector are: (i) tosatisfy domestic demand for basic commodities; (ii) to strengthen thehandicraft sector; (iii) to strengthen linkage with the agriculturalsector; (iv) to provide adequate quantities of construction materials;(v) to lay the groundwork for the establishment of heavy industry; (vi) tocontribute to the balance of payments position by earning and savingforeign exchange; (vii) to create employment opportunities; and (viii) tocontribute towards balanced regional development. This multiplicity ofobjectives may include potential conflicts (e.g., heavy industry vs.employment generation).
The Public Investment Program (PIP) in Industry
56. Work on the overall PIP was still at an initial stage at the timeof the mission. Its targets, namely a 6.3 percent yearly GDP growth rate,(lower than the 7.5 percent in the preliminary PLan documents) and a 19percent investment/GDP ratio by 1986/87, appear to be on the high side.The preliminary PIP allocates 21 percent of investment for mining, powerand water development, 20 percent for transport and communication(including rural roads), 19 percent for industry and 15 percent foragriculture. This indicates that the levels of investments planned for theagricultural sector may be relatively low. Agriculture had been receivinga significantly larger share between 1978/79 and 1982/83.
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57. The tentative industrial investment program reviewed by themission included 46 projects at different stages of preparation. 1/Public investment in industry during the three years 1983-85 is estimatedat Birr 912.7 million or Birr 304 million per annum (about US$152million). Also, the estimated annual investment for the remaining sevenyears of the plan period is Birr 430 million a year whereas recentinvestment levels have been about Birr 55 million a year. The achievementof such a large increase in investment levels seems doubtful, due to theshortages of skilled manpower and financial (domestic and foreign)constraints. Even if the targets were achievable, such large increases maynot be desirable from the standpoint of an appropriate intersectoralallocation of resources, in particular if investments in non-priorityindustrial projects come at the expense of productive agriculturalinvestments.
58. While the information available on the specific projects proposeddoes not allow a full review of the industrial investment pipeline, itappears that i) more attention needs to be paid to replacement investment,ii) project size, capital intensity and import dependency may be excessive,iii) geographical concentration is too high, and iv) there may be problemsregarding availability of markets and inputs for some proposed projects.
A Proposed Strategy for Improving the Efficiency of Industrialization.
59. The analysis of the industrial sector has suggested that theremay be serious inefficiencies in the use and allocation of resources inIPEs and SSEs. Both the misallocation of new resources and thesub-optimal utilization of the existing resources have significantimplications for the developmental goals of Ethiopia: i) industrial sectorgrowth is below its potential, slowing down GDP growth; ii) scarceresources are diverted from more productive uses to less productive ones,slowing down the development of other sectors (e.g., agriculture) andsubsectors where Ethiopia enjoys a comparative advantage; iii) employmentabsorption is less than It could be; and iv) the industrial sector does notcontribute to the balance of payments nearly as much as it could.
60. Historically, the share of industry in GDP has not been low,considering Ethiopia's extremely low per capita income. After experiencinga fast growth phase in the 60s, the share of manufacturing in GDP leveledoff, and has fluctuated between 9 and 10 percent of GDP since therevolution. Although the rate of growth of manufacturing output may beexpected to exceed GDP growth in the future, a significant acceleration inthe pace of growth of industry (and in industry's share in GDP) is unlikelyto take place without an increase in agricultural output which couldprovide the foreign exchange required for an expansion of industrial
1/ The Ministry of Industry subsequently indicated that a total of 200projects are envisaged for the Ten-Year Plan period.
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output. The limitations on resource availability are likely to constrainthe possibilities of fast industrialization below the levels expected bythe Government, even if efforts to promote exports and efficient importsubstitution activities relax the constraints on industrial growth. Thus,under the present circumstances, industrial growth should not be pursued atthe expense of agriculture. Instead agriculture will have to play aprominent role in economic growth, and industry should have a strongsupportive role. In order to attain the Government objectives of providinga higher standard of living for the population through a balancedindustrialization process, given the limited availability of current andfuture resources in Ethiopia, the Government's industrial sector strategyshould concentrate on (i) maximizing the efficiency with which existingresources are used; and (ii) maximizing the efficiency in the allocation ofnew resources. This strategy would require actions in four main areas:improving the process of public investment planning and reducing the burdenof centralized decision-making.
61. Efficiency of Industrial Public Enterprises. IPEs will continueto comprise the bulk of the sector. The performance of IPEs will then becentral to the industrialization process. The analysis in this reportindicates that the performance and efficiency of IPEs varies significantlyacross firms, requiring different policy approaches depending on thepotential for productive contribution to the economy of each firm. Inparticular this requires actions to i) improve the performance of the goodIPEs; Li) restructure inefficient but salvageable firms, and iii) in thecase of extremely inefficient firms that cannot be restructured to achieveacceptable levels of efficiency, consider the possibility of closing downthe enterprises.
62. Productivity of Small Scale Enterprises. Small Scale Enterpriseshave always contributed significantly to industrial production inEthiopia. Policies, however, have not favored this sector since therevolution. Since the expected economic returns from channeling resourcesto this sector are likely to be very high, due to the significantunderutilization of capital and the relatively low import and capitalintensity of the sector, additional resources and encouragement should beprovided to this sector.
63. Public lnvestment Planning. Ethiopia's overall investmentprogram for the next 10 years require a significant resource mobilizationeffort, both domestically and abroad. The Government ought to allocate thescarce resources available among different sectors, providing a sufficientamount of resources to agriculture, which will continue to be the leadingsector in terms of contribution to output and employment growth in theforeseeable future. Within industry, resources should be allocated tothose subsectors which will optimally contribute to the economy in terms ofoutput, employment and the balance of payments. In the near future, theyare likely to include agro-industries and light consumer industries but areless likely to include heavy industries because of the limited domesticdemand, high import dependence, and large plant sizes required forefficient production. Finally, careful project appraisal using generallyaccepted methodology for economic analysis of projects (sucIx as is carriedout in some cases by DPSA) will continue to be of paramount importance.
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64. Reduction in the centralized decision-making burden. Thecentralized structure of decision-making (which affects even micro-leveldecisions) imposes an unnecessary administrative burden on the NCCP, theMinistry of Industry and the Corporations, and generates someinefficiencies due to Ethiopia's limited human capital resources andplanning capacity. Some additional decentralization of decision-making tothe firm level, within a policy framework established by the Government,may be important for allowing the firms to react quickly and effectively toeconomic, financial and market realities, and would result in higherproductivity of the IPEs.
65. The significant gains in social welfare that could result from ashift to a more decentralized system of decision-making would be realizedonly if enterprise managers work within an appropriate incentive structure.Significant priority should therefore be given to the setting of an overallprice structure which follows closely the economic (or border) prices ofthe different goods--modified, if necessary, to reflect explicit Governmentobjectives other than maximization of economic efficiency-and to providingenterprise managers with incentives to maximize the surplus value of theirfirm-. A system of adequate price signals could be generated, in a firstinstance, by the setting of appropriate accounting prices to be used in theprocess of allocating resources. These accounting prices could then beintroduced as transaction prices at a later stage.
66. The need to guide decisions through a price structure thatclosely reflects border prices is due to the fact that the Ethiopianeconomy, although centrally planned, is not insulated from the worldeconomy and continues to rely on domestic price signals. Also, theeconomic cost of explicit departures from border prices to reflect other-non-efficiency--Government objectives should be calculated in all cases.To set the correct price signals under the current system of centralizedplanning, this report argues that it would be appropriate to take action inseveral policy areas including: i) exchange rate policy, ii) importregime, iii) export incentives, iv) price controls, and v) employment andwage policies. The report's specific policy recommendations, which differfrom the Government's current views on some of these areas, are summarizedbelow.
Proposals for Policy Reform
Economic Efficiency of IPEs
67. As discussed in the strategy section, the policy actionsregarding public enterprises will depend on the current and potential levelof economic efficiency of the firm. We distinguish between threecategories of firms: 1) efficient and marginally inefficient IPEs; 2)inefficient but sal-ageable firms; and 3) inefficient firms that cannot berehabilitated at an acceptable cost. The analysis in this report is afirst step towards categorizing a sample of IPEs. A deeper analysis of
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these firms and an extension to all other IPEs would be desirable in thenear future. The most important step in scrutinizing existing IPEs is toascertain whether the firm should remain in operation or it should closedown (i.e. whether it belongs to the first two categories or to thethird). If the firm should remain in operation, the next step is toidentify the required measures to improve its performance. The distitnctionhas to be made between firms that would benefit sufficiently from somegeneral and specific improvements in the firm's operations (category 1)from firms that require a major restructuring to become efficientcontributors to the economy (category 2). As noted above, and given thecharacter of the preliminaray results discussed in this report which wasbased on an admittedly limited sample, it appears that one of the majortasks ahead is to make a detailed review of the economic and technicalefficiency of all Ethiopian IPEs. This review could be done with Bankassistance and would allow a classification of each enterprise in one ofthe three categories above. The review would require a more completecomputation of efficiency indicators, including the inputed value ofnon-effic-ency objectives of the Government, together with an assessment ofthe main rL;acons resulting in the specific efficiency levels.
68. Measures to Improve the Performance of IPEs. For the IPEs thatare assessed to be potential or actual net contributors to Ethiopiandevelopment (and therefore will continue in operation) the followingmeasures are recommended (and explained in more detail in the report): i)to establish targets and rewards based on productivity, not gross output;ii) to adopt measures to alleviate the financial squeeze facing many IPEs;and iii) to increase decision-making autonomy at the IPE level to accompanythe proposed reforms in the trade regime and the system of price controls.
69. Measures to Restructure Inefficient IPEs. The measures above,although necessary to improve the performance of all IPEs, are notsufficient to ensure transformation of more inefficient (yet salvageable)firms. Specific restructuring measures for these firms would benecessary. The nature and scope of these measures will include, in manycases, new investments to replace obsolete equipment, to eliminatebottlenecks in production, or to modify the input and output mix.Therefore, the restructuring and rehabilitation of IPEs might become amajor component of the PIP. As noted earlier, however, the PIP at thistime does not pay attention to this issue. The measures will-have to befirm-specific and should be identified within the context of a moredetailed analysis of the IPEs. In each case, particular attention ought tobe paid to the question of the appropriate mix between rehabilitation ofexisting equipment and replacement with new equipment.
Productivity of Small Scale Enterprises.
70. The potential contribution of SSEs to Ethiopian developmentargues for an equivalent of the Zemecha campaign for this sector in orderto increase capacity utilization, production and productivity levels in thesector. In fact, this appears to be an area where Ethiopia can achieve 'a
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lot for a little' particularly in terms of new resources allocated to thesector. The following specific recommendations, beyond the Government'scurrent and proposed measures for the sector, are discussed in the report:i) improved economic environment and greater encouragement of SSEs; ii)better access to foreign exchange; iii) better access to domestic inputs;iv) improved institutional and administrative mechanisms; v) reductions inthe tax burden, and vi) improvement in the knowledge of the SSE sector.
Public Investment Program in Industry
71. Given the centralized ownership of the means of production anddecision-making in Ethiopia's industrial sector, rigorous public investmentprogramming and project appraisal are crucial to ensure that the scarceresources available are utilized productively. The Government has alreadytaken a positive first step by having established in 1979 the DevelopmentProjects Study Agency (DPSA) within the NCCP, and subsequently, in 1983,the Industrial Projects Service (IPS), an autonomous project preparationbody under the Ministry of Industry. These steps already taken need to becomplemented through the following measures: i) institutional strengtheningof DPSA and IPS; and ii) technical improvement in public investmentprogramming and project appraisal, which would enable the Government toprepare PIPs that are consistent with macro and intersectoralconsiderations, and would ensure the rigorous evaluation of all new andrehabilitation investments.
Trade Policy
72. Exchange Rate. As noted earlier, a significant adjustment of theovervalued exchange rate will be required in light of the substantialappreciation in Ethiopia's real effective exchange rate since 1975, thedeterioration in terms of trade over the past three years, and theworsening balance of payments and foreign reserves situation.
73. The need for other trade policy measures and controls would besignificantly reduced if the appropriate adjustment in the exchange ratewere made. The role of import controls and high tariffs as tools in themanagement of the balance of payments situation would be reduced oreliminated as the level of imports would be kept under control by thecorrect exchange rate and lower tariffs would be adequate because thehigher price of imports would effectively protect domestic industry.Consequently, it is recommended that if the exchange rate is fully adjustedand the adjustment is passed through fully into domestic prices of tradablegoods, import controls are eliminated and tariffs are significantlyreduced.
74. A realistic exchange rate would also be the mDst powerful exportincentive available, eliminating the need for a vast array of other exportincentives. Even in this case, however, some incentives may still bewarranted. A duty drawback or a tariff exemption for exporters would stillbe required in order to avoid the detrimental effects on export
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production of taxing their intermediate inputs and capital. Furthermore,the Government may also wish to consider providing a uniform fiscalincentive to exports in order to offset the anti-export bias which wouldremain as long as any import restrictions and tariffs remain in place, andin order to provide encouragement to a genuine 'infant industry": theproduction of export goods.
75. If a significant adjustment in the exchange rate cannot beachieved in the near future, the role of other trade policy measuresbecomes particularly important in compensating for the misallocativeeffects of an overvalued exchange rate and in providing au adequateincentive structure for efficient industrialization. Reforms in the systemof import controls, tariffs, and export incentives would also be imperativeunder this scenario, and are discussed below.
76. Reduction in Import Controls. Import controls figure prominentlyin the structure of protection in Ethiopia. These controls impose asubstantial administrative burden on central agencies, and are an importantfactor in the high dispersion of protection levels among subsectors, whichin turn is associated with inefficiencies in the sector. Import controls,however, are utilized also as a tool in the management of the balance ofpayment situation, and could not be removed without addressing the balanceof payments problem. In the short-run, if the exchange rate adjustment isnot sufficient to eliminate the excess demand for foreign exchange, thecontrols should be replaced by temporary flat tariff surcharges. Aprerequisite for tariff surcharges to replace controls effectively,however, is the institution of an overall price structure that reflectsborder prices.
77. Reduction in the Dispersion of Tariffs. The high dispersion inthe tariff structure, although currently less important than the importcontrol, partly explains the high variability in the efficiency levels of
Industrial firms, and may be partly responsible for the severeinefficiencies in many IPEs. A reduction in the dispersion of tariffs, inorder to reduce the large range in effectie rates of protection to specificsubsectors (summarized in para. 51 above), should be an important policyobjective. As a first step, a minimum tariff should be established forgoods that are now subject to zero (and very low) duty. The next policy
step should be ro reduce the tariff levels on highly protected goods. Thisshould be done together with the replacement of import controls by tariffsurcharges as discussed above.
78. Export Inrentives. The current bias against manufactured exportsimplies that etective exiport promotion will require a workable and
substantial set of incentives to exporters. In the absence of a fulladjustment of the exchange rate, the following measures ought to beconsidered: i) an export retention scheme; ii) an export revolving fund;iii) duty drawback or tariff exemption for exporters; and iv) fiscal
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incentives in the form of tax rebates to new exports. As noted earlier,items (ili) and (iv) would continue to be required after the fulladjustment of the exchange rate is achieved.
Pricing Policy
79. The uain objectives of Ethiopia's pricing policy should be areduction in the ceutralized decision-making burden and, combined with amore open extermal trade policy, a more flexible mechanism for allgning thedomestic price structure with changes in world prices. Specific departuresfrom world prices should be justified in terms of other non-efficiencyGovernment objectives and the econiomic cost of such differenes should becalculated. The main proposed actions in this area include: I) settingappropriate price controls on essentital items by keeping efficieocy andproductivity considerations In mind, i.e. institutionalizing the use ofborder prices as accounting prices, and ii) gradual decontrol of prices forsome non-essential goods. In either case, it would be essential to ensurethat border price considerations (suitably adjusted for the need ofprotecting certain industries) guide price determlnation.
Employment and Wage Policies
80. Given the main issues facing Ethiopia's industrial labor market(paras. 13-15 and 49-50), the following measures are recommended: 1)further gradual decentralization of job placements, In particular for thejob categories where supply of skills is not very scarce; ii) additionalrelaxation of restrictions on labor mobility; iII) improvement of theemployment data base; iv) increasing the linkage between salary incremenltsand Increases in productivity per workers; v) remove salary ceilings toallow for salary increases in all salary ranges; and vi) provide higherincentives to scarce skill categories.
PART ONE - INTRODUCTION
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Chapter I. INTRODUCTION
A. Preface
1.0' This study is being undertaken at the end of the first decade ofEthiopia's revolution-a revolution that has brought about widespreadchanges in all aspects of the life of the country. The revolution hassought to transform the Ethiopian economy towards a centrally plannedsystem where the aeans of production are socialized. As of today, Ethiopiais a mixed economy with substantial public ownership and centralizedcontrol.
1.02 The steps taken towards improving human welfare and bringingabout a more egalita-ian society, which are two key Government objectives,include (i) a radical land reform; (ii) containing luxury consumption;(iii) delivering more education and health services; (iv) keeping incomesand wealth under control through taxation, pay floors and ceilings, and asystem of annual increments which favours the lower paid workers; (v) keep-ing prices of basic consumer goods low and stable through direct controlsand regulated distribution, while keeping the exchange rate fixed; and (vi)curtailing the ownership of private assets and thereby entrepreneurialincome in manufacturing industry. Considering the country's severeresource and skilled manpower constraints, and the burden imposed by seces-sionist movements and external armed conflict which have characterized muchof the first decade, significant social progress has been made since therevolution. This is reflected in the increases in literacy rates, schoolenrollment rates and life expectancy, and the narrowing of income differen-tials and differences in asset ownership.
1.03 The industrial sector has been a contributor to attaining thesocial objectives through increasing output and contributing to the publicrevenues. The sector was aided in this contribution by the availability ofunused capacity in the medium/large-scale enterprises after 1977. But idlecapacity has now been substantially absorbed by the near complete capacityutilization which many of the plants have attained. Among private small-scale 1/ enterprises unused capacity still prevails.
1/ The annual survey of manufacturing industries which is the source ofmuch of the data used in this Report, covers establishments with ten ormore employees and which use power-driven machines. About ninety fivepercent of the output of this group is produced by state owned firmsknow as Industrial Public Enterprise (IPEs). The rest is produced byprivate firms. For the purpose of this Report, these are categorisedas Medium and Large-Scale Enterprises (MLSEs). All othermanufacturing enterprises including handicrafts are categorised asSmall-Scale Enterprises, which are defined as those firms that havemoveable fixed assets not exceeding Birr 500,000.
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1.04 The Government is preparing a Ten Year Perspective Plan for theperiod 1984/85-1993/94 (TYPP). The TYPP's objectives for the sectorinclude the acceleration of the rate of growth of manufacturing output andof the sector's contributions to national income and the balance of pay-ments. This study is aimed at: (i) assessing the characteristics and per-formance of the sector and identifying the main policy influences on them;(ii) analysing the issues that are critical for achieving the objectives;and (iii) suggesting policy changes that could help to fulfill the sector'scontribution to the TYPP.
B. The Country Background
1.05 Situated in the North-Eastern part of Africa, Ethiopia is thecontinent's third most populous country after Nigeria and Egypt. Its popu-lation, about 85 percent rural, is currently estimated to be around 42million. The land area extends over 1.22 million square kilometers ofwhich less than half is suitable for agriculture. Ad'is Ababa, the capitalcity, is located in the central highlands and has a population of about oneand a half million. With a per capita income est.mated to be aroundUS$140, Ethiopia is among the world's poorest countries.
1.06 Agriculture is the mainstay of the economy. Its share of GDP isaround 50 percent and it generates some 90 percent of export earnings and85 percent of employment. Coffee, the main export, accounts for over 60percent of merchandise export earnings, and Ethiopia's livestock populationis the largest among African countries. While the country is endowed withdeposits of gold, platinum, copper and potash, none of these minerals hasas yet a substantive impact on the economy while the potential for largescale exploitation remains to be determined. Some petroleum explorationhas been undertaken and there are prospects for the exploitation of geo-thermal energy; but on the basis of current knowledge of its economicallyexploitable resources, Ethiopia's main potential at the present stage is inagriculture for which the natural conditions in several areas arefavorable.
1.07 Manufacturing industry is a modest contributor to the economy,accounting for about 10 percent of GDP in 1982/83 (see Table 1). Nearly56 percent of value added in manufacturing originates in medium/large-scaleenterprises. The remaining 44 percent comes from handicrafts and small-scale enterprises. 2/
1.08 Overall economic growth over the past decade has been uneven.The period 1974/75 through 1977/78 was marked by the impact of the revolu-tion, structural changes and armed conflicts which resulted in stagnationof the commodity producing sectors. The manufacturing sector recorded adecline during this period, partly because of the insecure conditions of
2/ These, like other references to total or sectoral GDP are based onconstant 1960/61 prices. At current factor cost manufacturing industryaccounted for 11 percent of GDP with the shares of medium/large-scaleand small-scale being 66 percent and 34 percent, respectively, of the11 percent.
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the Asmara region which has about one third of the national industrial
capacity. The improvement of the security situation by late 1978 and theannual production campaigns (Zemechas) 3/ instituted in 1978/79, togetherwith higher foreign exchange revenues fromi coffee, provided the impetus foreconomic growth. During 1978/79 and 1979/80, GDP grew in real terms byabout 5.2 percent and 5.5 percent respectively-
TabLe 1. Recent Econuic Strucure and Gasth.
74/75 75/76 76/77-77/78 78/79 79/80 80/81 81/82 8283 I/
Stucture of GDP (7%)
Agiculture (7.) 48.3 48.4 48.3 47.9 46.7 46.3 43.4 44.9 44.8M & L Scale Industry
(7.) 4.3 4.1 4.2 4.2 5.1 5.3 5.5 5.6 5.6Handcrafts & Sil
Ikxstry (7%) 4.8 4.7 4.6 4.2 4.7 4.5 4.5 4.5 4.5MNufacturing kxdstry
(7.) 9.1 8.8 8.8 8.4 9.8 9.8 10.0 10.1 10.1
Anasl Growth Rates (x)
(DP at Cost. Factor ost 0.6 2/ 5.2 5.5 3.0 1.5 4.1Agriculture 0.3 / 2.4 4.8 2.4 0.0 2.7M & L Scale iibstry 0. 0 27.3 10.5 5.6 4.1 4.3Handicrafts & Sm. ind. o.0/ 4.0 2.5 2.5 2.5 2.5
1/ Provisional.2/ Average for dtee-year period 1974/75 to 1977/78
SDurce: Edtiopia: Becent Econic Devoprent and Prospects, World Bak epormt No. 4683-ET.Extracted from varicus tables.
Contributions to growth came mainly from agriculture which benefitted fromgood weather, and from medium and large-scale manufacturing industry. Inlater years, the economy experienced a setback, from 1980/81 through1982/83, with GDP growth declining to around 2.9 percent p.a.; the declinemay have been more severe but for the moderate recovery in 1982/83. Thedecline was the result of the severe drought which adversely affected agri-culture, capacity constraints in manufacturing industry, the low levels ofinvestment in capacity expansion during recent years and the sharp deterio-ration in the terms of trade. Ethiopia's terms of trade declined by
3' For the Zemechas the Government set production targets and mobilized asignificant amount of resources in order to increase capacityutilization and production.
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about 27 percent during the three-year period ending 1982/83 reflecting adecline in coffee prices and increases in import prices. As a result, in1981/82 and 1982/83 the value of merchandise imports rose to mDre thandouble the value of merchandise exports and the current account deficitwidened to about 7 percent of GDP.
1.09 The decade ahead poses many problems for the Ethiopian economy.The rate of economic growth (2.2 percent p.a.) over the past 10 years hasbeen below the 2.5 percent (or higher) rate of growth of the population.Further, population growth may well accelerate on the basis of thecurrently high fertility rate. Thus, higher rates of economic growth willbe required in the future just to keep pace with population growth, andeven faster growth will be necessary to raise the low standards of livingof Ethiopians. Insofar as agriculture continues to be a lead sector, andits linkages with industry are strengthened within a balanced industriali-zation strategy, Ethiopia's industrial sector could play a greater role inthe country's development strategy of accelerated growth.
C. Evolution of the Manufacturing Sector
1.10 Ethiopia has had a centuries old tradition of handicrafts, arti-sanal and other types of small-scale processing. These have mainly beenconcerned with food processing such as flour milling and cooking oil pro-duction, weaving, leather making and the fashioning of simple tools andfixtures. The availability of electric power and the improvement ofcertain processes facilitated the introduction of simple machines and theenlargement of production units, but the scale of operations remainedsmall. Indeed, handicrafts and small scale manufactures contributed 50percent of manufacturing value added in 1977/78.
1.11 The gradual emergence of urban centers, increasing incomes andthe expansion of government administration led to increasing demand forindustrial products, particularly from about 1950. These features combinedto provide the origins of medium/large-scale manufacturing based on modernprocesses, and paved the way for the establishment of flour mills,bakeries, oil and soap plants, furniture factories, lather factories andprinting presses.
1.12 Ethiopia has been a politically independent country except forthe period of Italian occupation from 1935 to 1941. Yet while the small-scale operations were largely Ethiopian owned and managed, the medium/large-scale enterprises were mainly owned and operated by foreigners. Theexceptions in ownership were some joint ventures between the Government andforeigners and a few Government-owned enterprises. Even in these cases,the enterprises were mainly operated by foreigners (managers and skilledworkers), leaving the unskilled jobs to Ethiopians. The entrepreneursrelied heavily for the financing of these ventures on locally borrowedfunds, and the capital structure of many of the firms was weak. In anumber of enterprises, much of the equipment brought in was second hand.
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1. 13 The Government's five-year development plans initiated in the1950s gave the first significant boost to medium and large-scale manufac-turing development and attracted foreign entrepreneurs. Fiscal incentivesincluded income tax holidays and the remission of indirect taxes on capitalgoods and direct inputs, the provision of finance through the EthiopianInvestment Corporation and the Development Bank of Ethiopia, and tariffprotection given on an ad hoc industry by industry basis. The main deter-minant of the level of protection seemed to be the bargaining persuasive-ness of the particular entrepreneur. The smaller, predominantlyEthiopian-owned enterprises were not similarly favored when they did notproduce the same categories of goods. Thus the amdium/large-scale enter-prises were established behind high tariff walls and produced essentiallyconsumer goods such as foods and textiles, for the domestic major urbancenters--Addis Ababa, Asmara and Dire Dawa, located respectively in theShoa, Eritrea and Hararge Regions.
1.14 The medium/large-scale enterprise sector grew steadily, from alow base, during the 1950s and 1960s. In 1961, its contribution to GDP was1.9 percent; by 1972/73 it was 4.5 percent. Small scale industries grew ata lesser pace, contributing 4.2 percent of GDP in 1961 and 4.9 percent by1973/74. The overall share of manufacturing in GDP increased from 6.1percent in 1961 to 9.3 percent in 1974.
1.15 The main characteristics of the manufacturing sector inherited bythe revolution in 1974 were: (a) dual structure-a rudimentary small-scaleand handicraft subsector producing about half the manufacturing valueadded, and a protected modern medium/large-scale subsector contributing theother half; (b) predominance of private ownership; (c) predominance offoreign ownership, and foreign managerial, professional and technicalstaffing of the medium/large-scale subsector; (d) inward orientation andrelatively high tariffs (but without significant quantitative restrictionsor foreign exchange controls); (e) capital intensive 4/; (f) weak finan-cial structures of the medium/large-scale enterprises, (g) underutilizedcapacity 5/; and (h) heavy geographical concentration.
1.16 Following the revolution in 1974 a radical transformation inEthiopia's social and economic structure took place. From a predominantlymarket oriented capitalist economy the system evolved towards a socialistand more centrally directed society. In addition to establishing publicownership and control of medium/large-scale industrial enterprises, therehas been an extension of controls over many industrial factor and outputprices, wage ceilings and restriction of movement within the labor market.In recent years, the worsening balance of payments situation has led to
4/ Ethiopian manufacturing in the early 1970s was more capital intensivethan other LDCs at comparable levels of development (see Chapter IIfor details.)
5/ According to a 1969 study, capacity utilization in manufacturingfactories ranged between 10 and 60 percent.
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increased control of imports and of the allocation of foreign exchange. Atthe same time, however, with the exception of the increasing importance ofquantitative restrictions to imports, certain important aspects of thebasic policy framework, including the highly protective tariff structure,the system of taxation, the interest rate structure and the exchange ratepolicy, have so far remained largely unchanged.
1.17 As noted earlier, practically all medium/large-scale enterprisesincluding joint ventures were nationalized in 1974. This resulted in animmediate exodus of the foreigners who owned and operated the enterprises,leaving Government with the task of restarting many plants that had closeddown, with few experienced managers, professionals and technicians avail-able to do the job. The handicrafts/small-scale enterprises were notaffected by direct Government measures. More indirectly, however, small-scale entrepreneurs faced an environment significantly less conducive toprivate investment.
PART TWO - THE MANUFACTURING SECTOR: STRUCTURE AND PERFORMANCE
The second part of this report presents the current structure ofthe manufacturing sector and attempts an evaluation of its recent perfor-mance. Given the significant differences in the structural characteristicsand policy environment between Medium and Large Scale Industry and SmallScale Enterprises, in addition to the differences in the nature of the dataavailable, it is appropriate to describe both subsectors separately. How-ever, there is also some available information on the overall structure andperformance of the manufacturing sector, (i.e., covering both the MLSI andSSE). This information is presented and analyzed at the beginning ofChapter II. Small Scale Enterprises and Handicrafts are discussed indetail in Chapter III. The institutional aspects regarding IndustrialPublic Enterprises (IPEs) are presented in Chapter IV.
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Chapter II. STRUCTURE AND PERFORM'PICE OF MEDIUM AND LARGE SCALE INDUSTRY
A. Introduction
2.01 During the past decade the Government has faced the challenge ofmanaging a large share of the industrial sector. The difficulties of assu-ming ownership, control and management of medium/large-scale enterpriseswere compounded by the restructuring of the society in the wake of therevolution, and by the armed conflicts in the Eritrea and Ogaden regions.Human and financial resources Which would normally have been devoted todevelopment, were directed instead towards national security-and at a timewhen the increase in oil prices and the world recession were impactingnegatively on the economy. During this period, the Government's mainobjective for the manufacturing sector was confined to setting the basisfor the socialization of most of the medium and large scale enterprises,and to consolidating the nationalization process including the institutionof the various accompanying controls. Ir. brief, the main objective was tokeep the existing factories producing under the new system.
2.02 At the same time, the agrarian reform brought about by the revo-lution led to improved food consumption in rural areas and to a moreegali-tarian distribution of income. Filling the backlog of construction,whichcame to a virtual standstill during the early years of the revolution, alsocreated heavy demand for basic building materials. This situation ofexcess demand, coupled with the improvement of the security environment andeasing of the foreign exchange constraints due to the coffee boom of themid-1970s, created the need of, and the potential for, an increase inproduction associated with the employment of idle capacity and the removalof bottlenecks. During the late 1970s, the Government mobilized resourcesto increase capacity utilization in the medium- and large-scale industries,and achieved a significant increase in production until 1980. In the early1980s, however, the rate of growth in manufacturing output tapered off.
B. Size and Growth of the Manufacturing Sector
2.03. After experiencing an annual growth rate of 8.7 percent in theten-year period ending in 1972/73, the manufacturing sector grew at theslower average annual rate of 3.9 percent from 1974 to 1982. Medium/largescale industry grew faster than the average (5.9 percent p.a.) whereas therate of growth of handicrafts and small scale industry was only 1.4 percentp.a.
2.04. During the post-revolution period the average rate of growth ofmanufacturing exceeded the overall growth rate of the Ethiopian economy(2.3 percent), implying that the share of the manufacturing sector in GDPincreased moderately to about 10 percent in 1982. Such a share is notsignificantly below the median contribution of manufacturing in GDP forAfrican countries (Table 2). However, due to its low per capita income,Ethiopia's manufacturing value added per capita is among the lowest inAfrica.
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2.05. The growth performance of manufacturing since 1974 can be dividedinto three distinct phases: a period of slight decline through 1977/78, thevery high growth of 15 percent in 1978/79 and 6.5 percent in 1979/80,followed by a reduction of the growth rate to about 3.8 percent p.a.between 1980 and 1983 (Table 2).
2.06. During the first period, the Government was taking over ownershipand operation of some 100 manufacturing enterprises. In many instances,not only were there no experienced managers and skilled manpower, but norecords of plant capacity, plant maintenance schedules or sources ofspares. As importantly, hostilities in the Eritrea and Ogaden regionsduring this period caused plant closures and generally disrupted transportand comiunications. In the small-scale manufacturing subsector, theGovernment's ambivalent attitude towards private entrepreneurshipadversely affected performance.
2.07 The second period comprising the two years 1978/79 and 1979/80,was characterized by the production campaigns (Zemechas) which emphasizedincreases in production mainly by improving the use of existing capacity.This was accomplished by the resumption of operations in some idlefactories (helped in part by some improvement in the security situation ofthe Eritrean region), by the removal of some bottlenecks regarding avail-ability of raw materials and spare parts and by some increase in thenumbers of workers' shifts. The considerable mobilization, organizationand resource provision effort in these two years of Zemechas campaigns, ina setting where excess plant capacity was available, accounted for the highgrowth rates of 15 percent and 6.5 percent in 1979/80 and 1980/81 respec-tively. Capacity utilization in Ethiopian medium/large-scale industryreached very high levels for African standards. Based on three 8 hourshifts/day utilization, levels were estimated by the mission to be in therange of 70 percent-100 percent for various subsectors (food processing,beverages, tobacco and textiles); detailed figures and a comparison withSmall Scale Enterprises, are presented in Table I in Chapter III. There-after, capacity constraints, low investment levels and poor agriculturalperformance resulted in a slowdown in the growth rates of manufacturingactivity after 1980.
2.08 Throughout the period, the growth rates of medium- and large-scale enterprises have consistently exceeded those of the small-scaleindustry sector (see Table 1).
C. Ownership Structure of Medium- and Large-Scale Enterprises
2.09 The MLSI sector is dominated by the Industrial Public Enterprises(IPE). Among enterprises with 10 or more workers that utilize power-drivenmachines, 96.5 percent of the overall value added, 95 percent of the fixedassets and 90 percent of the employment was concentrated in publicly-ownedenterprises in 1980/81. Although about half of the 408 manufacturingenterprises surveyed by the Central Statistical Office during that yearwere privately owned, most of these enterprises are small and can be hardlyregarded as medium sized. On the average they have less than Birr 130,000
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Thhl 2. fariug Value Added in Selected African Coxtries1977, 1979 and 1981
Siane of Ma izW Maruifacturig Value AddedValu Added in GDP (Z) pr Caiita ($)
(tixent Us. m_ion)Cy
1977 1979 1981 1977 1979 1981 1977 1979 1981
Ethiopda 330 318 426 10 9 11 11 10 13
Zi7abe.e n.a. 9Y10 1,623 n.a. 25 27 n.a. 128 225Zaiia 312 518 617 18 16 18 61 93 106Ivory coast 752 1,096 1,040 12 12 12 100 134 122Smemag n.a. 471 350 n.a. 19 15 n.a. 86 59cmerom 430 480 502 13 9 8 54 59 38Kenya 539 686 905 12 13 13 37 45 52Nigerla 1,879 3,759 4,248 9 5 6 24 46 49lberia 35 56 74 5 6 8 21 31 39Reamaa n.a. 129 202 n.a. 15 16 n.a. 26 38Malawi 103 146 185 12 12 13 18 25 30Uganda 411 505 376 7 6 4 34 39 29Ni3er na. 171 137 n.a. 10 8 n.a. 33 24Srdan n.a. 458 452 n.a. 6 6 n.a. 26 24lhn n.a. 70 62 n.a. 7 7 n.a. 29 23BJrkida Faso n.a. 120 13U n.a. 14 12 n.a. 22 21Tanzania 354 372 392 10 9 9 22 17 21&zrwnxi n.a. 73 79 10 10 9 n.a. 18 19Sierra Leoe 51 40 62 6 5 6 16 12 17CAR n.a. 51 41 23 8 6 n.a. 2b 17Beoin 62 68 60 10 8 7 19 20 17Lesotbo n.e. 5 16 2 2 5 n.a. 4 11Mali n.a. 73 67 11 6 6 n.a. 11 10Zaire 362 241 161 8 4 3 14 9 5Gbana n.a. n.a. 1,488 n.a. n.a. 7 n.a. n.a. n.a.
Souroe: World Bank world Development Keport (1979 and 1981 figures); UN Statistical Year Bookand IMF Internatinal. Trade Statistics Year Bowk (1977 figures).
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(about US$65,000) in fixed assets and they employ about 40 workers perenterprise, as compared with Birr 2 million in fixed assets and 360 workersper firm for the publicly owned enterprises. The predominance of publicenterprises among firms with more than 50 employees and/or over Birr300,000 in fixed assets appears to be virtually complete. 6/
D. Geographical Distribution
2.10 Medium/large-scale manufacturing is heavily concentrated in asmall number of locations. The provinces of Shoa and Eritrea, withslightly over one quarter of the country's population account for more than80 percent of the sector in terms of number of establishments, employmentand value added (Table 3). Industrial concentration is also heavy withinregions, with a few regional capitals (Addis Ababa, Asmara, Dire Dawa,etc.,) having the highest concentration of plants.
Table 3: Geographical Distribution of Medium/Large-Scale Manufacturing(1980/81)
(In Percentages of Totals)
No of ValuePopulation Establishments Employment Added
Region Rural Urban TOTAL Z Z X
Shoa 16.8 42.5 20.5 60.0 63.6 67.8Eritrea 6.3 16.7 7.8 23.3 17.5 t7.2Hararghe 10.6 6.4 10.1 5.9 10.0 6.3Other
Regions 66.3 34.4 61.6 10.8 8.9 8.7
Total 100.0 100.0 100.0 100.0 100.0 100.0Z Ilm w- ,m
Source: Central Statistical Office, Statistical Bulletin 35 of June 1983.
2.11 This pattern of distribution has been largely determined by theconcentration of the market and the availability of infrastructure. Themain urban centers and concentrated sources of demand for the types ofgoods produced are located in Shoa which has Addis Ababa, the country'smajor urban area, and in Eritrea, where Asmara, which is a sizeable urbancenter, has developed as the industrial center for the region because ofhistorical reasons and poor communications with the rest of the country.
6, A detailed discussion of the institutional and policy-relatedaspects of IPEs is presented in Chapter IV.
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These two areas are better endowed with infrastructure, particularly elec-tricity, telecommunications and transport, than other parts of thecountry. In turn, these facilities have tended to attracc new enterprises.
E. Structure of Output and Trade
2.12 Output. The structure of production in Ethiopian medium/largemanufacturing has historically been dominated by consumer goods enter-prises. The share of food processing, beverages and textiles in manufac-turing value added was as high as 80 percent in 1962, dropped to 68 percentby 1970, and it was still a high 58.5 percent in 1980/81 (Tables 4 and 5).Although the dominance of consumer goods enterprises has diminished some-what overtime, the fact that its share is still so significant can beattributed in great measure to the Government's emphasis on meeting short-ages of consumer items in the domestic market through greater utilizationof existing capacity. Although some noticeable changes have taken place insome subsectors since 1970, like the increase in the share of chemicals,relatively low investment levels during the last decade have limited some-what the change in the structure of outpuL.
2.13 I .orts. 7/ Since the revolution, overall imports have increasedsignificantly. The-growth in import value has exceeded GDP srowth, (incurrent prices) implying a steady rise in the share of imports in theoverall supply of resources available in the Ethiopian economy from 13percent in 1974/75, to 15.5 percent in 1981/82. This increase in theimport share has been largely due to the significant increase in the volumeof imported food and to the oil price increase, particularly after 1977/78. The share of industrial imports in overall imports increased from 67.3percent to 75.2 percent between 74/75 and 77/78, and decreased thereafter,to 63.4 percent in 1981/82 as a result of the increasing share of food andpetroleum in imports (Table 6).
2. 14 The share of industrial imports in the overall industrial supplyincreased until 1977/78, reaching 46.3 percent and diminished significantlythereafter to 33 percent in 1981/82. The drop in the share of industrialimports since 1977/78 reflected a drop in manufactured imports for finalconsumption, i.e., there was import substitution in consumer goods in spiteof the higher import dependence of the economy. In 1974/75 the share ofimported final manufactured goods in overall industrial supply was 7.8percent; it increased to 10.6 percent by 1977/78 and it then fell to 5.6percent by 1980/81.
7/ Imports and exports data refer to the overall manufacturing sector.At any rate, the bulk of industrial imports and exports takes placein MLSI.
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Table 4. Structure of Medium/Large Scale Manufacturing Value AddedHistorical: 1962 - 1975
Industrial Group 1962 1965 1970 1975Share (2) Share (2) Share (Z) Share (X)
Food Processing 30 30 25 25Beverages 9 15 11 12Tobacco 3 3 3 5Textiles 41 29 32 29Leather & Leather Goods 4 5 4 6Wood & Wood Products 3 3 2 2Paper and Printing 2 2 2 4Chemicals 2 3 10 18Non-metallic Mineral Products 5 5 5 2Metal & Electricals 1 5 6 5
Source: Computed from CSO sources in E. Chole and T. Mulat"Pattern of Industrialization and Impact of Employment andIncomes in Ethiopia', September 1983.
Table 5: Structure of Medium/Large-Scale Manufacturing Value Added1976/77 - 1980/81
In Percentages
1976/77 1977/78 1978/79 1979/80 1980/81Industrial Group Share (Z) Share (M) (Share (Z) Share (X) Share (X)
Food Processing 18.5 18.9 32.9 22.4 26.5Beverages 13.6 13.5 10.6 8.5 9.5Tobacco 5.8 6.9 4.6 5.4 4.1Textiles 27.9 29.8 22.5 24.0 22.5Leather and Leather
Goods 6.4 5.0 4.8 5.5 4.0Wood and Wood Products 3.3 3.7 3.4 2.6 2.8Paper and Paper Products 2.4 3.9 3.3 2.4 0.8Printing and Publishing 2.8 2.8 2.9 2.5 2.8Chedicals Including
Petroleum Refinery 12.9 10.2 8.8 20.8 19.9Non-metallic Mineral
Products 2.5 1.8 1.9 2.5 2.2Metal Including
Electrical Machinery 3.9 3.5 4.3 3.4 4.3
Total 100.0 100.0 100.0 100.0 100.0
Value Added at FactorCost Birr Million 387.5 433.6 543.2 760.7 729.2
Source: Central Statistical Office, Statistical Bulletin 35, June 1983.
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Table 6: Import Structure
(Mill Birr, at current market prices)
74/75 77/78 80/81 81/82
Industrial Import Ratio a/ 38.7 46.3 33.6 33.0
Final Goods Imports Ratio b/ 7.8 10.6 5.6 N/AShare of Industrial ImportsOver Total Imports 67.3 75.2 67.6 63.4
Overall Ioport Ratioin Domestic Supply cI 13.0 14.2 14.9 15.5
/ Industrial Imports over Domestic Industrial SupplybI Final Manufactured Goods Imports over Domestic Industrial Supplyc/ Total Imports over GDP plus Imports.
Notes: Crude Petroleum excluded from industrial imports, but petroleumproducts are incluaed. Domestic production excludes manufacturingestablishments employing less than 10 persons.
Sources: National Accounts Division, National Revolutionary DevelopmentCampaign and Central Planning Supreme Council Secretariat
Central Statistical Office, based on annual Industrial SurveysCustoms OfficeYesrbook of International Trade and Statistics
2.15 In spite of the diminishing share of industrial imports, theshare of imported raw materials and parts for industry in tc.al ind'setrialcosts has been increasing over time, i.e., import substitution was ni-gativein industrial inputs. As seen in Table 7, the share of imported rawmaterials and parts in total industrial costs increased from 36.6 p.ercentin 1976/77, to 45.5 percent in 1980/81. 8/
8, Since the drop in the share of imported final manufacture goods is notsufficient to account for the drop in overall industrial imports, andsince there was no decrease in the share of parts and raw -::erials(to the contrary), it follows that the share of imported capital goodshas been dropping.
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Table 7: Import Content in Costs of Raw Materials and Parts inIndustry a/b/('000T BfrrT
76/77 77/78 78/79 79/80 80/81
Imported Cost ofRaw Materials and Parts 152,742 174,913 282,709 351,358 390,593
Total Cost of RawMaterials and Parts 417,078 395,552 606,617 779,270 858,874
Import Share 36.6 44.2 46.6 45.0 45.5
a/ The petroleum refining subsector has been excluded.b/ Energy costs and payments for services (industrial, non-industrial and
transport) are excluded.
Source: Survey of Manufacturing Industries, 1976/77-1980/81, CentralStatistical Office.
2. L6 Within medium/large-scale manufacturing, import dependence varieswidely. In the food subsector, it is as low as 8 percent, while in themetal works subsector it is as high as 80 percent. Import dependence tendsto be high even in some domestic resource based industries, as for example,meat products. (This is primarily due to the relatively high cost of metalcans and other packagirg materials.)
2.17 Exports. The overall export share in GDP has not f ollowed anydistinct trendsisnce the revolution; instead it has fluctuated within the11.5-14.5 percent range, depending largely on the volume and price ofcoffee exports, which account for about two thirds of total merchandiseexports. Following a drop in the price of cof fee and of raw hides andskins, the value of overall exports declined by 11 percent from 1979/80 to1981/82 (Table 8). During this period, there was a slight increase inindustrial exports. As a result, the share of industrial exports in totalexports increased f rom 6.9 percent to 8.4 percent 9/- However, theincrease in industrial exports was less than the increase in the grossvalue of industzial production during these three years, resulting in asmall decline in the share of industrial exports in gross industrial
9/ Petroleum products and hides and skins are not included in industrialexports. Petroleum products constitute about 5 percent of totalexports; hides and skins about 7 percent. However, their industrialvalue added is low.
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production, which was only 3.8 percent in 1981/82. In sum, industrialexports constitute a small fraction of overall exports and of industrialproduction in Ethiopia, and there is no evidence that any secular increasein the importance of industrial exports is taking place.
Table 8: Industrial Exports(Birr Million)
Product Group 1979780 1980781 1981/82
Oil Cakes and Lint 2.7 11.6 9.4Meat Products 7.7 13.7 12.Leather and Leather Products 53.6 46.4 54.1Sugar and Molasses 17.6 12.1 9.2Beverages - - 0.1Pepper Extract 1.2 1.3 2.9Textile Products - - 0.8Salt 0.9 0.6 0.5Building Materials - 0.4 0.4
Total Industrial Exports 83.7 86.1 90.2
Industrial Exports as Z of Total Exports 6.9 7.5 8.4
Exports as Z of GDP 14.2 13.0 11.7
Industrial Exports as Z of Gross 4.0 3.9 3.8Industrial Production
Sources: Ministry of Industry, Statistical Bulletin, April 1983.
* Estimated
2.18 The structure of industrial exports shows high concentration ontwo types of products. Leather and leather products account for approxi-mately 60 percent of industrial exports. Meat products aaLd sugar andmolasses comprise another 30 percent (Table 8).
F. Investment
2.19 During the First Five-Year Development Plan (1957-62), 10.7 per-cent of investable resources went to the manufacturing sector. That sharecontinued to rise, reaching a significant 18 percent during the ThirdFive-Year Development Plan (1968-73). Manufacturing output grew at aslower pace during the period (about 10 percent p.a. between 1960-73), andcontributed between 6 percent and 9 percent of GDP. Thuts, the ICOR and thecapital-output ratio in the manufacturing sector were rising and appear tohave been rather high in the early 1970s. The high capital-output ratiomay have been due to low capacity utilization. A comparison with Tanzania,
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India and Pakistan reveals that in 1970 Ethiopia had a significantly highercapital-output ratio (Table 9). It is particularly noteworthy to compareEthiopia with Tanzania, another Eastern Africa country that embarked in acapital intensive strategy of industrialization. Tanzania had a lowercapital output ratio than Ethiopia for the manufacturing sector, mainly asa result of a much smaller capital-output ratio in textiles.
Table 9. Capital Output Ratios in Manufacturing Industries inSome Selected Countries
Ethiopia Tanzania India PakistanManufacturing Industries 1970 1969 1963 1960
All Manufacturing 3.27 2.2 1.88 1.27Food 3.43 5.1 1.55 1.49Textiles 3.34 1.4 0.99 1.25Paper and Allied Products 11.72 -- 2.88 3.03Rubber Products 2.73 -- 1.07 -Chemicals 13.60 -- 2.00 1.25Non-Metallic Minerals 3.50 2.4 1.89 1.33Metal and Metal Products 4.70 -- 4.84 1.10Electric 4.70 -- 1.46 1.19
Sources: M.M. Mehta, Employment Aspects of Industrialization with SpecialSeMerence to Asia and the Far East, Unpublished memoreport, 1970, pp. 3-4 and 23-26.
J.F. Rweyamanu, The Structure of Tanzanian Industry, EconomicResearch Bureau, University of Dar Es Salaam,paper 71.2
2.20 The available evidence suggests that investment levels inEthiopian manufacturing declined sharply after the revolution. Grossinvestment in the sector has been rather low in recent years. (see Statis-tical Appendix Tables A3 for details). During the period 1977 to 1981 theshare of manufacturing in total investment ranged between 4.5 percent and8.9 percent, with a period average of 6.1 percent, i.e., well below theshare in total investment during the 1960s and early 1970s and below theshare of manufacturing value added in GDP. This result is explained by thehigh levels of investment in the previous years, the low capacity utiliza-
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tion which existed until 1977, 10/and the Zemecha campaigns after 1977that resulted in significant production increases due to higher capacityutilization (rather than high investment levels).
2.21 New investments have been particularly small in the privatesector. (Table A3.2 in Statistical Appendix). Among public enterprises,the higher figures in the last three years as compared with 1977/78 are duemainly to the construction of four sizeable projects: Dire Dawa Textiles,Comtolcha Textiles, Harar Brewery and Muger Cement. These are the firstgeneration of post revolution investment projects, and they are expected tocommence production in the near future.
2.22 The capital-output ratio in the MLSI sector has been decliningsince 1977, implying a higher productivity of capital. The decline of thecapital-output ratio has been the outcome of low capital investment andhigher capital utilization.
G. Employment.
2.23 Medium and Large '--ale Industry (MSLI) is not a major employer oflabor in Ethiopia. Althougn its contribution to GDP has been over 5 per-cent, by '981 it was employing only 79,400 workers, which amounts to 0.5percent of the population between 15 and 64 years old, or to less tl,an 20percent the annual increase in the labor force, which is estimated to beabout 400,000 workers.
2.24 Employment in MLSI stagnated during the first three years afterthe revolution, then rose by 5.3 percent in 1977/78 and 13.4 percent in1978/79 as a result of the Zemecha campaign. With the attainment of nearfull capacity utilization in many enterprises, and with the relative lackof new investments, the rate of employment growth fell after 1978 to 2.5percent in 1979/80 and 3.2 percent in 1980/81. The food products and tex-tiles subsectors accounted for a total of 61 percent of manufacturingemployment in 1981. The remaining 39 percent is evenly distributed amongthe other 9 subsectors (Table 10).
_0/ A study made in 1969 by the Battelle Advisory Group found thatcapacity utilization ranged between 40 and 60 percent for textiles; 40percent for the paint industry, 10 percent for the match factory, 27percent for the cardboard and wrapping paper plant, 23 percent for thetwo alcohol producing plants and 20 to 40 percent for the industrialgases plant. As a result of the disruptions following the revolution,overall capacity utilization levels may have fallen further.
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Table 10: Structure of Employment in MLSI Enterprises
19b2 1965 191U L9/I 19tu ILY 1
Food 35 39 17 20 22 20Beverages 4 5 6 6 6 8Tobacco 1 2 1 1 1 1Textiles 39 31 44 41 40 41Leather Footwear 4 4 4 6 5 6Wood and Furniture 8 4 7 7 7 5Non-metallic Mineral 4 7 8 4 7 4Printing 2 3 3 5 3 5Chemical 2 3 6 7 7 7Metals and Electricals 1 2 4 3 3 3
TOTALS 100 100 100 100 100 100
Total Employed 32,600 47,700 52,700a/ 60,100 76,600 79,400
Sources: Survey of Manufacture-various issues.
a/ Estimated.
2.25 The structure of employment has stayed relatively unchanged overtime. For example, the share of textiles in MLSI manufacturing employmentwas 39 percent in 1962, and 41 percent by 1980/81, although the share oftextiles in manufacturing value added declined from 41 percent to 22.5 per-cent during the same period. The share of employment in food products didexperience a significant decline from 35 percent in 1962 to 17 percent in1970. This trend, however, was partly reversed during the 1970s; by 1980/81 the share was 20 percent. The lack of structural change in the patternof employment in manufacturing after the revolution appears to be partlythe result of the relatively unchanged structure of production but also, tosome extent, the reflection of limited flexibility in the allocation (andreallocation) of labor.
2.26 Ethiopia has made progress in various areas of human resourcedevelopment-from improvements in literacy to increased delivery of basiceducation to the relevant age groups. However, it is far from generatingan adequate supply of professional and skilled manpower. In particular,one product that the current education system does not produce, either interms of satisfactory skill level or in quantity, is the middle and seniorlevel executive that the modern sector will increasingly need.
2.27 Compared to many Sub-Saharan African countries, Ethiopia has hada well-educated bureaucracy from pre-revolution times. There were also alarge number of expatriates in business and in the education system. Someof the highly-qualified and experienced Ethiopian manpower and most of theexpatriates in business left the country after the revolution. Althoughmany qualified Ethiopians remained in the country, and the positions
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vacated were filled by promotion or training of less experienced nationals,the quality gap has not yet been totally filled. Despite a fairly rapidgrowth of the higher education system, some special training programs, andtraining of new professional staff, there appear to be skill shortages invirtually every field, and more particularly of engineers, accountants,managers, administrators, economists and specialists in agriculture. Inthe skilled worker category, there are shortages of metal workers andelectricians.
2.28 One of the significant factors contributing to the inadequatesupply of skilled manpower is the high dropout rate in post-secondary educ-ation, which in turn is due to poor preparation at the secondary level, andpoor facilities at the post-secondary level. Furthermore, the training ofteaching staff at vocational and higher educational institutions is ofteninadequate. At the College of Technology only 19 percent of the staff havea Masters degree or above.
R. Capital-labor Ratio in Manufacturing
2.29 Until 1973 Ethiopia invested significantly in capital intensiveCt hnology, particularly in MLSIs. Interest rate, trade and foreignikivestment policies had an important impact on the choice of technology.The capital to labor ratio was quite high in the early 1970s, and muchhigher than in other developing countries such as India and PakistanTable 11).
Table 11. Capital Per Person Employed in Manufacturing Industries inSelected Countries(in US Dollars)
Ethiopia India PakistanManufacturing Industries 1970 1963 1960
All Manufacturing 3,640 1,453 917Food 6,480 925 1,186Textiles 1,360 624 716Paper and Allied Products 82,480 2,818 3,712Rubber Products 5,970 1,272 --
Chemicals 18,000 3,523 1,573Non-Metallic Minerals 3,280 1,220 1,456Metal and Metal Products 3,840 4,951 839Electric 3,840 1,483 924
Sources: 1.M. Mehta, Employment Aspects of Industrialization with SpecialReference to Asia and the Far East, Unpublished memoreport, Addis Ababa 1970, pp. 3-4 and 23-26.
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2.30 The decline in capital intensity over time, as a result of highercapital utilization, resulted in some labor absorption. The capital perworker in MLSI fell from an average of US$3,500 between 1970 and 1973/74 toUS$2,550 in 1980/81 (Table 12).
Table 12. Capital/Labor Ratios in hedium and Large Scale fcturing:1972 -19B1
72/73 73/74 74/75 75/76 76/77 77/78 78/79 79/80 80/81
Euploynent 54,965 57,456 60,131 59,409 62,807 66,123 74,987 76,895 79,370
Thed Capital 188,384 205,389 188,886 171,096 179,160 171,399 169,732 180,460 202,319Assets
('OOD US$)
capital to 3,427 3,575 3,141 2,880 2,853 2,592 2,264 2,348 2,550Labor Ratio(US$ ofCaitalper wcer)
Sources: Various wrvey Issues and nission calculatios.
2. 31 Notwithstanding the decline in the capital to labor ratio, i.tappears that the labor absorptive potential of MLSI has not augmented sig-nificantly because of the following reasons:
a) The implied elasticity of employment with respect to outputhas not been high in Ethiopia MLSIs. Although employment has been increas-ing at a rate of 4.7 percent p.a. from 1974/75 to 1980/81, output hasincreased faster, largely because of higher capacity utilization. 1/
b) The elasticity of substitution between capital and labor inEthiopian manufacturing is low. A study estimated that the elasticity ofsubstitution between factors of production for all manufacturing subsectorswas consistently below 1. The average for the manufacturing sector wasestimated at 0.5-0.6. 12/ These estimates compare unfavorably with
Il/ Clearly, a positive implication of these developments is that laborproductivity has been increasing during the period.
12/ Teshome Mulat -Capital-Labor Substitution in the EthiopianManufacturing Industries-, Developing Economies, Vo. XVIII, No. 3,September 1980.
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estimates from Bangladesh, Kenya, Nigeria, Philippines and Pakistan, aswell as for a sample of developing countries. These results suggest thatfactor substitution possibilities in production may have been technologi-cally constrained, and imply a limited impact of policies that affect therelative prices of capital and labor on the labor intensity of the existinginvestment in the MLSI sector. 13/
c) The medium- and large-scale manufacturing sector is small.Given the Ethiopian population and its rate of growth, over 400,000 newentrants to the labor force are expected every year during the mid-eighties. With total employment in the MLSI sector of 79,000 workers, evena very large annual increase in employment, say 15 percent, would absorbless than 3 percent of the new entrants in the labor force. Consequently,even under auspicious circumstances, the role of MLSIs in terms of laborabsorption would be limited. A high rate of growth in MLSI output wouldnot translate into very high numbers of new manufacturing jobs in themedium term.
I. Performance and Efficiency of the Medium and Large ScaleIndustrial Sector
2.32 Performance of MLSIs. Based on the description of the structureand evolution of the sector, the performance of the MLSI sector can becharacterized by the following:
a) Improved capacity utilization. High levels of capacity utili-zation were reached by 1980, as a result of i) the Zemecha campaign between1978 and 1980, ii) improved foreign exchange availability due to highcoffee prices during the mid-1970s, iii) higher demand for industrial out-put resulting from good agricultural performance and favorable terms oftrade, and iv) low levels of new investments. Some decline may have takenplace subsequently as a consequence of the slowdown in the economy and theadverse terms of trade, but the evidence strongly suggests that capacityutilization at the beginning of the eighties was significantly higher thanduring the post-revolutionary and transitional period of the mid-seventies.
b) Low levels of new investment. Investment in new plant andequipment came to a virtual standstill from 1974 to 1977, and from then onthe new investment levels have been low, being barely sufficient to replaceobsolete capital.
c) Increased labor intensity. As a result of the productionincreases that came about through improved capacity utilization - asopposed to significant new investments -, the labor intensity and laborabsorption in the sector increased somewhat. This increase, however,ought to be viewed only in relative terms, since a comparison with thepre-1974 period reveals that the capital intensity of Ethiopian MLSI hasbeen historically high, and by international standards it appears to
13/ New investments, however, may be quite responsive to relative factorprices.
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remain high today. Similarly, it was shown that notwithstanding someimprovements, the labor absorptive capacity of manufacturing remains lowwhen viewed against the needs of the overall economy.
d) Increased import dependency. In spite of the diminishingshare of industrial imports in total domestic supply of industrial goods,the share of imported raw materials and parts for industry has been increa-sing overtime, even after excluding petroleum costs.
e) Continuing inward looking industrialization: Increasingimport substitution of final consumer goods. Between 1977 and 1981 theshare of imported final manufactured goods in overall industrial supplydeclined from 10.6% to 5.6%, indicating the continuation of the process ofimport substitution for final consumer goods.
f) Lack of export penetration. Associated with the inward look-ing industrialization strategy, the significance of exports has notincreased. By 1982 the sLiare of industrial exports in overall industrialproduction was only 3.82, and declining. There has been no diversificationof industrial exports overtime; leather and leather products account for60% of exports; meat products and sugar and molasses comprise another 30%.
g) Relatively unchanged structure of production. The structureof production of MLSI has historically been dominated by consumer goodsenterprises. Such dominance has diminished only slightly between 1975 and1981.
h) Mixed performance in manufacturing output growth. Three dis-tinctive periods can be singled out from 1974 on: i) 1974-1977/78: aperiodof economic decline following the nationalization of MLSIs and due tointernal conflicts, ii) 1978-1980: a period of significant productionincreases following the Zemecha campaigns, and iii) 1981-1983: a period ofreduction in the growth rate of manufacturing, due to the near full utiliz-ation of capacity, low levels of new investment, and a general slowdown inthe economy.
2. 33 Efficiency of the MLSI Sector. In this report, we distinguishbetween different types of efficiency, which, to the extent possible, willbe analyzed separately from an empirical standpoint. In particular we willlook at (i) efficiency in resource mobilization; (ii) efficiency inresou-ce allocation; and (iii) efficiency in resource use.
2.34 Efficiency of resource mobilization (for increasing capacityutilization). During 1978-1980 the sector demonstrated that it couldincrease production and capacity utilization significantly through theeffective mobilization of resources. 14/ Although a complete assessment of
4J In other words, the sector demonstrated an ability to solveX-inefficiency problems regarding underutilization of existingcapital. (X-inefficiency arises when within a given allocation ofresources, a factor(s) of production is not utilized to its fullpotential).
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this process would require an appraisal of tie costs of resource mobiliz-ation, the significant benefits stemming from the Zemecha campaign suggestthat resources can be mobilized to increase capacity utilization in a rela-tively effective manner.
2.35 The assessment of efficiency of resource mobilization to increasecapacity utilization discussed above should be distinguished from (i) theoverall efficiency of resource allocation in the sector, and (ii) theeffectiveness with which the allocated resources are being utilized, assum-ing a certain capacity utilization as given. Under (i) we address theallocative efficiency question of whether scarce skilled labor, managerial,and capital resources have been assigned to the most productive use from asocial and economic standpoint. Under (ii) we address the followingquestion: assuming a certain allocation of resources as given, and assum-ing also a certain (high) capacity utilization as given, 15/ is the sectoras productive as it could be? In other words, are managerial skills andlabor resources being utilized near their full potential? 16/
2.36 The quantitative data available and the evidence presented so fardo not allow us to answer separately questions (i) and (ii). The informa-tion presented in following chapters on the institutional aspects of publicenterprise management and on wage and employment policies will, however,provide particular insights into question (ii). Here we will discuss bothefficiency issues together.
2.37 EfficiencSy of resource allocation and resource use. The avail-able evidence collected by the mission suggests that, even at full (orclose to full) capacity utilization there might be significant ineffi-ciencies in the manufacturing sector. If resources are not being allocatedto highly valued uses, and/or if those resources are being utilized at lessthan their full potential within that use, we would expect high cost ofproduction, low quality of manufactured goods, and/or low economic bene-fits. This would have the dual effect of i) diverting resources away frommore productive uses in both industry and other sectors, and iI) makingmanufactured goods uncompetitive internationally.
2.38 A quantitative approach to assess the degree of efficiency orinefficiency of resource allocation and use in an industry is the Domestic
L5/ Capacity utilization is to be assumed as given since the efficiencyof resource mobilization to increase capacity utilization wasaddressed already in para. 2.34.
L6/ As opposed to the X-inefficiency component (regarding underutilizationof capital) addressed previously, this component (ii) addresses theX-inefficiency issue of underutilization of managerial skills and oflabor resources.
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Resource Cost (DRC) methodology. 17/ The DRC measures the cost of domesticresources (factors) that are necessary to save or earn one unit of foreignexchange. If the economic value of the domestic factors required to pro-duce a unit of output is less than the net foreign exchange savings (orearnings) generated by domestic production of the product, the process iseconomically profitable. In that case the DRC ratio will be less than one,implying that the domestic costs (in the numerator) are less than the netbenefit of earning or saving the unit of foreign exchange (denominator).
2.39 A DRC ratio higher than one will reflect that the costs for theeconomy of producing a good that will save a unit of foreign exchange willbe higher than the net benefit of saving such a unit, which means that itis not profitable for the economy to produce such a good; it would be pre-ferable to import it and to us- the resources thus saved in the productionof other goods. 18/ Consequently, computing DRC's for different sub-sectors of manufactuiurng provides an indication of the relative efficiencywith which resources have been allocated and are being utilized.
2.40 An economically unprofitable activity (DRC higher than one) maybe the outcome of any of the following scenarios: i) excessive factors ofproduction are allocated to the activity, ii) too few factors of productionare allocated to it (in activities that have economies of scale), iii) anincorrect technological choice has been made (e.g., overly capitalinten-sive), iv) correct allocation of resources and correct technological choicehas been made, but the factors of production are not being utilized totheir full potential, i.e., capital, labor or managerial ability (or a com-bination of the three) are being underutilized, and v) any combination ofthe previous reasons. In sum, a DRC higher than one could be indicative ofany of the different types of inefficiency discussed previously and cannotbe used to distinguish between them. 19/
17/ A detailed discussion of the DRC methodology, and of the data base andspecific assumptions used in the application of the DRC methodology toa sample of Ethiopian industrial enterprises, is presented in Annex 1.
18/ Extreme (or absolute') economic unprofitability (or inefficiency)will occur when there is negative value added (at world prices) inthat process, meaning that the value of tradeable inputs exceeds theinternational value of the good produced. In this case the netbenefit of 'saving' a unit of foreign exchange is negative, i.e.,the DRC is infinitely large.
19/ This is particularly the case when the DRCs are measured at actualcapacity utilization, which is how they were measured in the studiesto be referred to here. In cases where DRCs are measured at fullcapacity, a DRC higher than one could not be attributable toX-inefficiency in the utilization of capital.
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2.41 A study carried out in 1972 estimated nRCs for various industrialactivities in Ethiopia. 20/ Similarly, DRCs were calculated for a sampleof 19 public enterprises during the 1983 industrial Sector Mission of theWorld Bank. The nature of the methodology, the limited data availability,and the small sample size argue for exercising caution in the use of theseresults. Nonetheless, both the absolute results, and the overtime compari-son of DRC's for equivalent subsectors is illustrative and offers someinsights on the level and changes of economic efficiency of the firms inthe sample. Table 13 presents a comparison for various subsectors between1972 and 1983.
2.42 The TRCs calculated here measure the economic efficiency of anenterprise or activity as of 1982/83. This is so because the prices usedto measure the economic value of tradeable inputs and outputs are their"border" prices at that time, i.e., the c.i.f. prices for imported (orimportable) items and the f.o.b. prices for exported items. Ideally, theseborder prices should be selected so that they reflect long-term trendsrather than cyclical peaks or troughs and they should be free of distor-tions. The DRCs could also be used to measure the social value of an acti-vity by introducing non-efficiency objectives of the Government. In thatcase the adequate shadow prices to be used might differ from the above asthe inputed value of the non-efficiency objectives should be explicitlyreflected in the shadow prices. The difference between border prices andthe modified shadow prices would provide a measure of the costs of non-efficiency objectives. Examples of such non- efficiency objectives can besecurity, self reliance, equity, employment, satisfaction of merit wantsand political expediency. It is clear that almost any project can be jus-tified through appeals to such con-efficiency objectives, thereby under-scoring the need for restraint in this area.
2.43 Of ten subsectors where comparisons between two points in timewere possible, four activities--textiles, leather, pulp and paper, and ironand steel-- experienced no efficiency change (i,e., the DRC remained withinthe same 'efficiency category') four subsectors experienced efficiency im-provements--shoes, soft drinks, sugar and cement--and in two activities--beer and glass bottle--there was a deterioration in economic efficiency.On the basis of this limited DRC comparison, it appears that, on the aver-age, the efficiency of the sector did not deteriorate and might even haveincreased slightly between 1972 and 1983. Since capacity utilizationincreased significantly over the period, it follows that inefficiencies inresource allocation and in the use of non-capital resources (lahor, manage-rial skills, etc.) still exist and may have increased overtime.
20/ S. Guisinger, "Tariffs and Trade Policies for the EthiopianManufacturing Sector", August 1972.
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Table 13. Efficiency in Manufacturing: 1972 and 1983 a/
1972 1983 Change b/(Guisinger) (World Bank)
Beer 2 5 - - -Textiles c/ 5 to 6 4 to 6 No changeLeather I I No changeShoe 6 3 + + +Soft Drinks 4 3 +Sugar 4 2 + +Glass Bottle 4 6 --Pulp and Paper 6 6 No changeCement 3 2 +Iron anid Steel 6 6 No change
a/ The efficiency categories are defined depending on DRC values:
1. Extremely Efficient (DRC from 0 - 0.402. Very Efficient 0.41 - 0.753. Efficient 0.76 - 1.004. Marginally Inefficient 1.01 - 1.505. Inefficient 1.51 - 2.506. Very inefficient 2.51 - Negative value added
b/ Each plus (+) sign indicates an improvement by one 'efficiencycategory'; the reverse is the case for each minus (-) sign.
c/ Four firms in the subsectoral sample.
2.44 The overall level of economic efficiency suggested by the sampleis low, in spite of the slight improvement since 1972. Out of 19 firmssurveyed in 1983, 14 have a DRC higher than one if calculations are doneusing the official exchange rate. If an exchange rate overvaluation of 30percent is assumed 21/, 10 firms continue to have a DRC higher than onei.e., they are ineFFmcient in the sense discussed above (para. 2.39).Three of these inefficient firms have negative value added in production,i.e., they are 'absolutely inefficient' in that they use tradeable inputswhose value (at world prices) is higher than the value of the output theyproduce.
2.45 Another measure of the efficiency of operations of the sector isthe economic profitability of an activity assuming the existing investmentsas sunk costs, i.e., calculating the DRCs without including the costs of
2i/ For details on the assumptions and calculations, see paras. 6.01 to6.13 below (and particularly Table 21), and Annex I.
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investments already incurred. 22/ If this DRC measure is higher than one,the activity should be regard-e as unprofitable in the short-run. Theestimates of the mission indicate that depending on the shadow exchangerate assumptions In 8 or 9 out of 19 industries the -short-run- DRCs arehigher than one (meat processing, some beverage firms, most textiles, wood-works, pulp and paper, and metalworks). In 1972, the results were fairlysimilar: in 12 out of 23 industries the short-run DRCs were higher thanone. Therefore, on the basis of the limited available evidence, it appearsthat significant inefficiencies exist nowadays in the manufacturingsector. Given the preliminary nature of these results, it would be desir-able to undertake a more detailed study of each of the major industrialenterprises to confirm the results and identify the main corrective actionsrequired.
22/ The previously utilized DRC measures did include the sunkeninvestment costs.
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Chapter III. SMALL SCALE INDUSTRIES AND HANDICRAFTS
A. Introduction
3.01 In contrast with the relatively comprehensive data base availablefor Medium and Large Scale Industries from the annual manufacturing sur-veys, the existing data on Small Scale Industries and Handicrafts is verylimited. In addition, problems with sample selection and coverage in thesestudies require a cautious approach to the analysis of the data. Nonethe-less, within these constraints, important insights can be obtained from theexisting information.
3.02 Small Scale Enterprises (SSEs) and Handicrafts (Hs)23/ haveplayed an important role in the manufacturing sector. Their value added inconstant terms has increased continuously since the eicly sixties, althoughat a slower rate than medium/large scale manufacturing. The SSE/H share inthe net output of the sector dropped from 69 percent in 1961 to 63 percentin 1973/74, and to an estimated 45 percent by 1981/82. At the latter date,SSEs and handicrafts had a 4.6 percent contribution to GDP. During thedecade 1960-70 the SSE/H sector grew at an estimated 7.8 percent p.a.,compared witb 17.4 percent of NLSI. During the decade 1970-80 SSE/H grewat the slower rate of 4.4 percent p.a., as compared with 11.8 percent forMLSI and 6.3 percent for the economy. Furthermore, it appears that thegrowth rate for SSE/H was much lower after the revolution: it is estimatedthat from 1975/76 to 1981'82 the growth rate has been only 1.8 percentp.a.
3.03 While slightly smaller than the medium- and large-scale firms interms of output and value added, the SSE/H sector is more significant interms of employment. An ILO Exploratory Mission to Ethiopia estimatedthat, in 1970, overall employment in SSE/H was about 400,000, some 3 per-cent of the 16 to 64 year-old population, or almost 6 times the employmentof the MLSI sector.
B. Small Scale Industry
Structure of Production.
3.04 Based on a ;ample survey in 23 towns, covering 82 percent of thesmall scale establishments in those towns, conducted by HASIDA in 1980, itappears that the structure of production is heavily dominated by food pro-ducts (63 percent of the total output of SSEs), which are msinly grainmills and oil seed processors. Textiles, leather and footwear, wood pro-ducts, paper and printing, and fabricated metals represent a much smallershare of output and employment with 5 to 9 percent in each subsector (Table14).
23/ HASIDA defines Small Scale Industry as "any industrial activity whichuses motor power and machines and which has fixed assets of a valuewhich does not exceed 200,000 Birr excluding buildings". A handicraftestablishment is defined as a manufacturing activity which predomi-nantly uses manual skills and hand-tools.
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Table 14. The Struc:ure of Employment and Output in Small ScaleManufacturing (1979/80)(Percentage Distribution)
_%Number of GrossIndustry Group Establishments Output Employment
Food 63.7 62.7 51.5Beverages 0.9 5.0 2.5Tobacco 0.2 0.4 0.7Textiles 6.5 3.9 9.4Leather and Footwear 2.3 6.3 5.9Wood & Cork Products LO.4 5.6 10.4Paper & Printing 1.8 4.9 4.9Chemicals 0.8 5.1 3.0Non-Metallic Mineral 1.7 1.7 4.8Fabricated Metal 11.4 3.7 6.6Unclassified 0.3 0.1 0.3
Source: HASIDA, Report on Snrvey of Small-Scale Industries inTwenty-Three Towns, 1980
Capital Intensity.
3.05 SSEs have a much lower capital labor ratio than MLSIs. For thesector as a whole, the capital-labor ratio of MLSIs ir almost twice theSSEs ratio, yet there is a high variance among subsectors (Table 15). Forfood products, printing and non-metallic minerals, the capital intensity is3 to 3.5 times lower for SSEs, whereas for beverages, wood and furniture,and for steel, metals and electrical appliances the capital intensity isonly 20 to 30 percent lower.
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Table 15. Capital-Labor Ratios and Wages Rates for MLSIs and SSEs(1979/80)
Wage Rate (Birr) Capital/Labour Ratios (Birr)*MLSI SSE MLSI SSE
Food 2221 705 6560 1829Beverages 2527 1354 8731 7450Textiles 1879 568 2523 1550Leather & Footwear 1878 1145 6636 3728Wood & Furniture 1931 1426 2075 1574Printing 2852 1020 3101 1170Chemical 3995 869 7347 4528Non-Metallic
Mineral 2454 340 5532 1831Steel, Metal, &
Electrical 3455 1013 5715 4603
All Manufacturing 2234 848 4876 2531
* per employee.
Source: E. Chole and T. Mulat: -Pattern of Industrialization and Impact onEmployment and Incomes in Ethiopia-. Sept. 1983.
Labor Productivity
3.06 An analysis of labor productivity reveals that there are signifi-cant differences in the value added per worker between the two sectors.Table 16 shows that for all subsectors in manufacturing the valued added
per worker in MLSI is more than twice the labor productivity in SSEs. 2 4 /Since each unit of labor in MLSIs has less than twice the amount of capitalper worker of SSEs, the value added of a worker in MLSIs is higher than inSSEs even when controlling for differences in capital intensity. Thisimplies that, at the present levels of capacity utilization, the totalfactor productivity is higher in MLSIs.
24/ Due to data limitations, the analysis of labor productivity isconducted in terms of nominal value added, although ideally suchanalysis should be done in terms of value added in border prices,particularly in a situation where distortions may result insignificant discrepancies between both value added measures.However, insofar as the distortions faced within each particularindustrial subsector do not vary significantly betwewen MLSIs andSSEs, the comparative analysis of productivity is still valid.
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Table 16. Labor Productivity in MLSIs and SSEs
MLSI SSEValue Added Value Added
Per Worker (Birr) Per Worker (Birr)(1979/80) (1980)
Food 9,890 4,300Beverage & Tobacco 14,638 6,518Textile & Leather 5,626 2,388Wood & Furniture 3,235 1,805Paper & Printing 7,917 3,309Chemical & Non-Metal 6,491 3,897Metal 10,458 1,582
All Manufacturing 7,402 3,551
Sources: Calculated from Central Statistical Office and HASIDAManufacturing Surveys.
Capacity Utilization
3.07 The lower productivity estimated for SSEs, which is not fullyexplained by the lower capital-labor ratio, appears to be partly determinedby significantly lower rates of capacity utilization in SSEs. The figureson value added per worker are based on data collected during 1979/80, at atime when the positive impact of the Zemecha campaign on production led tohigh capacity utilization in the MLSIs. However, capacity utilization andproduction levels in SSEs do not appear to have increased significantlyduring that period, sin:e a similar mobilization of human and capitalresources to remove bottlenecks and raise production did not take place forSSEs. The HAS IDA survey indicates that capacity utilization in 1980 wasvery low, with only five SSE firms out of 72 showing capacity utilizationexceeding 56 percent, and only 27 reaching rates of utilization of 40 per-cent or more. These figures sharply contrast with the capacity utilizationof MLSIs at that time, where virtually all plants were producing at 70 to100 percent capacity. (Table 17). The average level of capacity utiliza-tion in 1980 was estimated to be almost twice for MLSI than for SSEs.
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Table 17. Capacity Utilization of MLSIs and SSEs in 1980(percent)
MLSI SSE
Food Products 100 44Beverage 87 11Textiles 70-80 1iLeather 50-100 50Wood & Furniture 80 40Printing & Publishing 90-95 19Rubber, Chemical,Plastics and PetroleumProducts 70-80 50
Non-Metallic MineralProducts 70-95 5
Fabricated Metal Products 80-100 15
Sources: MLSI: Ministry of Industry, based on data for individualproduct groups.
SSE: HASIDA Report on Survey of SSEs in 12 towns, May 1980
Wages
3.08 Average wage rates are significantly higher in MLSIs than forSSEs in all subsectors (Table 15). On the average, the higher the differ-ence in the capital-labor ratio, the higher the wage rate gap. For foodproducts, printing, and non-metallic minerals, where the difference incapital intensity is the largest, wages in MLSIs are 3 to 7 times higherthan in SSEs. Conversely, for beverages, wood and furniture, and forsteel, metals and electrical appliances, wages in MLSIs are only 1.3 to 3.4times higher.
3.09 The figures, however, also indicate that the wage rate differen-tials are greater than the differences in the capital-labor ratios. Thisis due to the fact that the wage rate differentials are closely associatedwith differences in the value added per worker between the two sectors. Asnoted earlier (para. 3.06), the value added per worker in MLSI is higherthan in SSEs even for subsectors with similar capital intensity.
3. 10 The two main factors that may keep wages - and the marginal pro-ductivity of labor -- from being equalized across both sectors are labormarket segmentation and differences in skill composition. The SSE sectoris less regulated in terms of employment, and it is not subject to the samewage guidelines as MLSIs are. Furthermore, many small enterprises employfamily members. Consequently, underemployment of labor earning lower wageswould be expected at times of low capacity utilization in SSEs. Neitherthe absorption of underutilized SSE labor, nor the same flexibility for
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wage adjustments to output and capacity fluctuations would be possible inthe MLSI. Thus, wage differences between both sectors could persist.Also, the skill composition appears to differ between the MLSI sector andSSEs. Overall, SSEs require less skilled labor than MLSIs, which alsoexplains in part differences in labor productivity between both sectors.Wages would then be expected to be lower in SSEs even in the absence oflabor market segmentation.
Imports and Exports
3.11 SSEs appear to rely much less on directly imported inputs thanMLSIs. Results of the HASIDA survey indicate that 58 percent of thesurveyed establishments use domestic raw materials only, 36 percent useboth domestic and imported raw materials, and 6 percent use imported rawmaterials only. This result could be partly due to the limited availabi-lity of foreign exchange to SSEs. In practice, however, few SSE establish-ments indicated, among the reasons for their capacity under-utilization,lack of foreign exchange. Thus it appears that the import intensity ofSSEs in Ethiopia is relatively low, regardless of the foreign exchangesituation.
3. 12 The evidence available from the HASIDA survey suggests thatexports from SSEs are virtually non-existent. When questioned about thereasons for lack of exports, 69 percent answered that the domestic marketfully absorbs their production, 29 percent said that quality problems wasan important constraint and 43 percent answered "other problems-.
C. Handicrafts
3. 13 Although there is no reliable data regarding the overall produc-tion and employment in the handicraft sector, information based on surveysby HASIDA and the Central Statistical Office indicate that it is an impor-tant contributor to output and employment in manufacturing.
3.14 Urban handicrafts are dispersed throughout Ethiopian towns andurban centers, and exhibit a very labor intensive mode of production. Thesector utilizes relatively unskilled labor, which on the average earn twothirds the wages in SSEs, and one fourth the wages of MLSIs.
3.15 Based on a 1972/73 survey done by the Central Statistical Office,most of output and employment in rural handicrafts is concentrated in tex-tiles, rope making, and tailoring (see Table 18). Food products, whichconsist mostly of grain milling, comprise an important share of output (20percent), but absorb only 3 percent of rural handicraft employment. Ruralhandicrafts utilize very little capital per worker, and are geographicallydispersed throughout the country. Less than one quarter of the number ofestablishments, output and employment were in the Shoa province in 1972/73.
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Table 18. Structure of Employment and Output in Rural HandicraftsActivities, 1977/78
Industry Percentage PercentageGroup Employment Output
Food 3.0 20.0Beverages 1.0 1.0Textiles, rope making & tailoring 69.9 58.1Leather products 2.6 4.9Wood & Furniture 1.8 2.4Pottery, earthenware, china 8.7 4.4Cutlery, metal products, etc. 4.1 6.3Unclassified 8 2.9
Total 100.0 100.0
Source: CSO, Advance Report, 1972/73, Addis Ababa, 1975.
3.16 HASIDA's 1980 survey indicated that 22 percent of urban handi-crafts workshops were concentrated in spinning and weaving, 19 percent inreed mat making and basketry, 5 percent in knitting and, 3 percent in metalworks. The technology employed is relatively simple, yet it is moreadvanced than in rural handicrafts.
3.17 While the activities of HASIDA hardly reach rural enterprises,the agency has paid attention to the task of promoting urban based handi-craft industries. HASIDA has helped organize craftsmen into HandicraftService Cooperatives, where individuals join together in input procurementand use of marketing outlets, and Handicrafts Producer's Cooperatives,where means of production are socialized. Until 1980 a total of 666 handi-craft service cooperatives were established with memberships of 50,000persons; the number of producer cooperatives was only 26 with a membershipof 1,400. More than 90 percent of output, employment and fixed assets inthese cooperatives were concentrated in tailoring and weaving.
3.18 The gross production of handicraft cooperatives was Birr 200m(about US$100 m.) in 1978/79, which suggests the relative importance ofhandicrafts in overall manufacturing production. The gross output of MSLIfor that year was Birr 1,628m., i.e., handicraft cooperatives alone (whichis a fraction of total handicrafts) produces the equivalent of 12 percentof the output of MLSIs.
3.19 The capital-labor ratio of the handicraft service cooperatives -which produce 96 percent of the output of all cooperatives, was estimatedto be Bir- 156 per worker, i.e., between 16 and 31 times lower capital perworker than in SSEs and in MLSIs, respectively. However, its valued addedper unit of labor was estimated at Birr 1,863, which is only one half andone quarter of the value added per worker in SSEs and MLSIs, respectively.Consequently, if we consider the very low capital endowments of the handi-craft cooperatives, the productivity of these enterprises is not low. Infact, the value added per unit of capital is more than 7 times higher forhandicrafts than for SSEs or MLSIs.
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Summary
3.20 In spite of the limited data available on Small Scale Enterprisesand Handicrafts, the evidence presented above indicates that, from 1974 on,the performance of this important sector has been well below its poten-tial. Particularly in the case of SSEs, growth and productivity have beenlow, capital has been severely underutilized and investment levels appearto have been very small. The Zemecha campaigns, which had a significantimpact on the performance of MLSIs, do not seem to have had a similareffect on SSEs. Although rigorous analysis of the efficiency of the SSEsector would require additional data, on the basis of the available evi-dence it appears that, at the present levels of capacity utilization, laborand capital productivity are low. At the same time, the available evidencesuggests that the efficiency and productivity of the sector, and its con-tribution to the economy would be significantly higher if capacity utiliza-tion and investment levels were to be raised.
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Chapter IV. INDUSTRIAL PUBLIC ENTERPRISES
A. Introduction
4.01. Public Enterprises in Ethiopia have become an importantinstrument for the structural transformation of the economy. They accountfor almost all of employment, output, exports and value added in medium-andlarge-scale enterprises.
4.02. Before the 1974 revolution, public enterprises comprised a fewlong-standing publicly owned entities mainly in the utilities sector and intransportation. The Government also had minority holdings in a few indus-trial enterprises, notably in sugar and textiles. Following the announce-ment of the -Declaration of Socialist Economic Policy" in 1975, the govern-ment nationalized 72 foreign and locally-owned companies, most of themengaged in manufacturing, and acquired majority ownership of 29 others.
4.03. At the time of the takeover many public enterprises were leftwithout any records that would assist the new managers. Also, since theprevious management of these enterprises was almost all foreign, andbecause a number of relatively qualified and experienced Ethiopians leftthe country in the aftermath of the revolution, many of the Ethiopians whowere appointed to manage the nationalized enterprises, had practically noexperience in managing industrial operations. Despite these difficulties,some effective management systems have been introduced in public enter-prises.
B. Structure and Organization of Public Enterprises.
4.04 Ethiopia has a total of about 180 public enterprises, of which153 manufacturing firms provide 95 percert of the output in large-scalemanufacturing output. They are also important in the marketing of agricul-tural products, particularly coffee, they provide a variety of servicesincluding transportation, co-mTmication, power and construction; and theyhave some involvement in agricultural production.
4.05 All public enterprises are under the jurisdiction of individualministries. Each ministry controls several sub-sectoral holding companies(called Corporations) that have the responsibilities of coordinating andcontrolling the operations of the public enterprises and plants under theirjurisdiction, directing and guiding them, and doing research in theirrespective fields.
4.06 The Ministry of Industry, which controls the majority of publicenterprises, is organized according to the 'Corporation model." Under thisMinistry there are 12 corporations with 153 enterprises in the areas offood, meat, sugar, beverages, tobacco and matches, textiles, leather andshoes, woodwork, building materials, printing, chemicals, and metal works.Textiles, food, and beverages are the largest corporations both in terms oftheir contribution to output and enployment and the number of plants they
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control. Corporations are headed by General Managers selected by theMinister and appointed by the Government; enterprises are headed. byManagers selected by the Corporations and apoointed by the Minister.
4.07 In addition to its 12 corporations, the Ministry of Industry isresponsible for 5 share companies. Share companies are medium- and large-scale industrial concerns which continue to operate as joint venturesbetween the Government and minority foreign interests. These enterprisesreport directly to the Ministry and are not supposed to remit "residualsurpluses to the Treasury (para. 4.19 below). Unlike full public enter-prises, share companies have Boards of Directors, may declare dividends andenjoy a greater degree of operating autonomy.
4.08 Each IPE has its own management team, comprising the Manager, afinancial manager/accountant, a personnel head, a plant/factory/operationsmanager and sometimes a quality control head. Unlike traditional indus-trial enterprises, however, IPEs have no Board of Directors.
4.09 The Ministry of Industry, in coordinating the activities of itscorporations and IPEs, concentrates on broad guidelines and issues policieswith respect to operations planning and budgeting, plant rehabilitation,investments and manpower management. Through the relevant Corporations, italso controls enterprise performance by setting and guiding reporting pro-cedures and coordinating plant programs.
4.10 The structure (Government--Ministry--Corporation--IPE) allows forclose monitoring of all aspects of IPE operations, particularly in theareas of investment, manpower (hiring, firing, promotions and transfers),finance (availability or otherwise of funds for continued operations) andoperations (sales, production and export). The Ministry of Industry indi-cated, during the discussion of the draft Report, that a gradual decentral-ization of some of these activities is now taking place.
4.11 IPEs are generally concentrated in a few locations with 93 per-cent of employment (and 94 percent of output) in the regions of Shoa,Eritrea and Harar. Five other regions make up the remaining 7 percent ofIPEs, and six regions have no industrial public enterprises.
4.12 Annual plas, (in the form of recurrent and capital budgets), areconceived and prepared at the IPE level. The annual plan is a comprehen-sive program of activities for the fiscal year, submitted to the Ministrythrough the Corporation, and covering the proposed investments, manpoweruse and development, financial program, and operations. The operationsplan includes a detailed sales plan, a production plan including monthlyoroduction targets, and an export plan where applicable. The annual plansaien eover plant rehabilitation and maintenance programs as well as pro-posed sources of finance. After extensive review at the Corporation andMinistry levels, the annual plans are submitted for Government approval.
4.13 Once the review process is completed, the Corporation and theMinistry ensure that plant management adheres t- the agreed plans. As aresult, the Government, acting through the Ministry and the Corporationeffective controls: (i) prices of IPE inputs and outputs; (ii) the remuner-ation of the more senior (and also some junior) workers in the IPE;
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and (iii) the funds available to the IPE for its continued operations.During the last decade, this centralized approval system has had a majorimpact on both the outcome of policy decisions and the extent of flexibi-lity possible in the Ethiopian public enterprise systeu.
C. IPE Performance.
4.14 The output of IPEs has increased substantially in recent years.The index of production shows that from 1979/80, the year in which produc-tion targets were first set, to 1982/83, the volume of output for all IPEsgrew by 32 percent.
4.15 Industrial public enterprises in Ethiopia have been profitable,particularly compared with many African countries. Consolidated incoTestatements for all public enterprises indicate that pretax profits wereBirr 323 million in 1979/80, Birr 439 million in 1980/81 and Birr 340million in 1981/82. Profits before tax were estimated to be Birr 567million in 1982/83.
4.16 Gross profit margins for the industrial sector have slightlyexceeded those for the public enterprise sector as a whole. Both return onsales and return on total net assets were consistently higher in food,tobacco and matches, chemicals, metal works and wood works than for publicenterprises as a whole. Returns have, however, been relatively low in tex-tiles, leather and shoes and printing. The building materials subsector isthe only one that recorded losses throughout the period. The figures alsosuggest that return on net worth has been high and increasing in the pro-fitable subsectors. This is, however, attributable in part to the very lowequity bases of most IPEs.
4.17 The debt/equity ratios vary significantly among enterprises indifferent sectors and they have worsened over time for all sectors. Thisindicates a weakening of the financial structure of IPEs, partly due tothe transfers of residual surpluses to the Treasury, which limit equitygrowth.
4.18 IPEs have contributed substantially to Central Governmentrevenues over the past four years. The contributions have taken threemain forms: capital charges, corporate taxation and residual surpluses.Each year, IPEs are legally required to charge, against pre-tax income, anamount equivalent to five percent of the state capital invested in them.This "capital charge' which is intended as a return on the government'sequity in each IPE, is paid to the Treasury. The corporate tax rate inEthiopia is 50 percent and is levied after the capital charge and all otherexpenses have been allowed for. Since IPEs (other than share companies)are fully Government owned, no dividend is paid out of after-tax profits.By Proclamation 163 of 1979 however, IPEs are allowed to keep 10 percent ofafter-tax profits as addition to general reserves, until such reservesreach 30 percent of the equity capital. The other 90 percent of profits,called residual surplus, is payable to the national treasury within sevenmonths after the end of the relevant fiscal year. The effect of all theselevies, coupled with the delay in some price adjustments by the authori-ties, is that some IPEs appear to be experiencing substantial cash-flow
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problems. The sample of 35 IPEs examined shows that IPEs are increasingtheir short term borrowings from the Commercial Banks and lengthening thedelay in paying their levies to the Treasury.
4.19 In 1981 total capital expenditures in existing IPEs amounted toBirr 55.1 million. Most of it was financed by bank loans (43 percent) andfunds generated from the corporations and their subsidiary plants (52 per-cent), leaving only 5 percent to be financed by others including theGovernment. By comparison, government revenue from the capital charge andthe residual surplus of IPEs alone amounted to Birr 71.6 million in thesame year. The major portion of the government's financial contribution topublic enterprises takes the form of financing the establishment of newplants.
4.20 The significant increases in IPE output since the first Zemechain 1978/79 have been achieved without sufficient regard to labor producti-vity levels. The production targets were set in physical units, and whileproductivity targets are now being discussed, they have not yet been imple-mented. Apart from a few enterprises which pay piece rates, productivity-type incentives are rare. The annual increments paid to factory workersare based mainly on production increases and only minimally on productivityand profitability. 25/
4.21 The mandate that IPEs have to simultaneously accomplish socialand economic objectives has led, in some instances, to inefficient ways ofachieving certain goals, and to a situation where the financial profitabi-lity of the firms is not a good indicator of their economic efficiency.Table 19 presents a matrix of financial profitability and economic effi-ciency (on the basis of the DRC calculations) for the sample of 19 IPEssurveyed by the mission. Insofar as the above sample is representative ofall IPEs, the results indicate that the structure of incentives, pricecontrols, and protection is such that many inefficient producers have agood chance of being financially profitable. The inverse relationshipbetween financial profitability and economic profitability suggests that,in more than half of the cases in the sample, firms that are net contri-butors to the Treasury were utilizing scarce resources inefficiently.
25/ The formula for wage increases after 1979 includes three elements:(i) 5 percent for enterprises that had any increase in physicaloutput; (ii) I percent for enterprises that had any increase inproductivity per worker; and (iii) 1 percent if the firm increased itsprofits over the previous year (see also Chapter VI). During thediscussion of the draft Report, the Ministry of Industry indicatedthat greater emphasis on productivity-related incentives, includingmore general use of piece rates, was under consideration.
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Table 19. Financial Profitability and Economic Efficic(Number of firms)
Financially FinanciallyProfitable Unprofitable Total
Relatively Efficient 4 2 6
Relatively Inefficient 10 3 13
Total 14 5 19
4.22 In the Ethiopian system, IPE managers have limited authority tomanage. Employee remineration is largely set outside the enterprises.Managers' ability to reward superior performance with material rewards islimited, as is their choice in procuring inputs. Sometimes corporationspurchase selected inputs for all plants as done in many other developingcountries. Plant requirements for skilled manpower are determined i- theannual plans, and the manpower is allocated by the Ministry; managers areallowed to select employees only below a certain level. While manymanagers appear to be doing a commendable job under the circumstances, anda gradual decentralization of decision-making has been taking place, itappears that further increases in the degree of managerial discretion,together with a realignment of incentives to eliminate the differencesbetween financial profitability and economic (or social) benefits, wouldresult in an improved performance of IPEs.
D. Technical Efficiency of IPEs.
4.23 The mission performed a preliminary review of the evidence ontechnical efficiency of 22 surveyed IPEs. In table 20 the IPEs have beenrated according to suitability of technology (column A), standard ofproduction management and operational skills (B), standard of mincenanceand condition of fixed assets (C), and external factors such as availabi-lity of materials and markets for the product (D). A rating scale was con-structed (5:Best; 1:Worst) on the basis of visits to the IPEs. A number ofobservations follow from the results:
a) From a technical standpoint, the technology employed wasregarded as relatively satisfactory.
b) Although the condition of plants and the caliber of managementand operational skills were regarded as adequate in many firms, particu-larly considering the upheaval that followed the 1973 revolution, the stan-dard of production management and operational skills and the standard ofmaintenance and conditions of fixed assets are below par in some firms.Technical experience in many firms is not yet adequate for attainment ofreasonable productive efficiency. Firms afflicted with these problems(columns B and C) are present in all subsectors. However, there is a highinter-firm variance within each subsector.
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Table 20
A. Suitability of technology employed and of site, buildings, plant andmachinery.
B. Standard of production management and operational skills.C. Standard of maintenance and condition of fixed assets.D. External factors: materials availability, markets.
Rating is based on a five point scale:5. A high standard conforming to modern industrial practice4. Good 3. Average 2. Poor 1. Unacceptably low standard
Plant Identifi- Rating ofSubsector cation No. A B C D
Food and Beverages 1 4 3 3 22 2 4 1 23 5 4 4 44 3 4 4 35 5 4 4 36 5 (under cons) 37 3 2 2 3
Textile Clothing 8 5 4 5 39 3 2 2 2
10 4 4 4 3
Leather and Footwear 11 4 4 4 412 3 2 1 2
Wood, Paper 13 3 4 4 414 4 4 4 3
Chemicals, Rubber, Plastics 15 3 2 3 316 3 4 4 3
Non-Metallic Mineral Products 17 2 4 2 318 2 2 3 319 5 (under cons) 420 3 3 2 2
Iron and Steel, Engineering 21 3 3 2 322 4 4 4 3
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c) There appears to be a positive correlation between the ade-quacy of management and operational skills, on the one hand, and the main-tenance and condition of fixed assets, on the other. Of 5 firms for whichstandards of management and operational skills are poor or low, 4 rate aspoor or low regarding maintenance and conditions of fixed assets, and onerates as average.
4.24 Under the present system, the plant manager's role appears to besomewhat llmited (para. 4.22) and, to some extent, conditioned by the back-ground and experience of individual managers. The main measure of perfor-mance is in terms of production targets and financial plans. While enter-prises are required at least to break even, there is no effective incentiveto lower costs. Although, as good professionals, IPE managers take pridein their overall performance, their limited autonomy, and the lack ofincentive to make efficient use of scarce resources, are likely to produceless than optimal results.
E. Investment and Project Evaluation
4.25 Recent investments have been mainly in large industrial projectssuch as the Muger Cement Plant (Birr 200 m), the Harrar Brewery (Birr 49 m)and the Kombolcha Textile Mill (Birr 222 m). Because of the urgent need toincrease plant capacity towards satisfying pent up demand for basic con-sumer goc4s and building materials, many of the first generation of post-revolution industrial investments were undertaken without full economicevaluation studies. At the time when these decisions were being taken,however, the Government established the Development Projects Study Agency(DPSA) within the Central Planning Supreme Council (CPSC) in 1979, which isan indication of the Government's awareness of the importance of using ade-quate economic criteria in investment choice.
4.26 The DPSA is charged with reviewing public sector investment pro-jects before submission for decision making, training of publlc sectorpersonnel in projects development and prescribing the methodology and stan-dards required for preinvestment work. In this connection the DPSA hasissued a manual "Guidelines to Project Planning in Ethiopia-, which isbased on the UNIDO project planning guidelines.
4.27 Another recent step taken to improve the investment decisionmaking process, is the establishment of the Industrial Projects Service(IPS). This is an autonomous body under the Ministry of Industry. Itsmain task is to undertake and assist in the preparation of industrial pro-jects in order to accelerate the growth of a pipeline of well preparedindustrial investment proposals. Like the DPSA, the IPS which has been inexistence only since February 1983, needs strengthening. The DPSA iscollaborating with more experienced consultants and consulting firmsabroad, until it gains enough strength to operate on its own.
F. Prospects
4.28 Industrial public enterprises in Ethiopia have contributed signi-ficantly to the increase in output in recent years and their operations
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operations have generally been profitable. However, there are signs ofimpending difficulties deserving the attention of policy makers. Existingcapacity is nearly fully utilized and many factories, including those intextiles, food, and cement, are working on three shifts. Moreover, machi-nery and equipment in many plants appear to be old, and the need for fre-quent repairs and alterations will affect productivity adversely in thecoming years.
4.29 The state of enterprise finances will also demand attention andcorrective action. Many enterprises are facing serious working capitalshortages. Transfers made to the Government in various forms leave somepublic enterprises with limited liquidity to finance their own operations.Some enterprises have already accumulated relatively large debts to thecommercial banks, servicing of which adds to their financial burden. Thereis strong pressure to revise some of the rules and regulations set forth inProclamation 163, particularly with respect to the financial obligations itimposes on public enterprises. In some cases, the tardiness of the autho-rities to approve price increases for enterprise products and services hascaused further deterioration in the financial position of enterprises, par-ticularly in those which face increased input prices.
4.30 Finally, as noted earlier, some IPEs are expected to continue tobe financially profitable in spite of the fact that they may not be econom-ically efficient. This is due to a structure of incentives (includingprices) that does not adequately reflect the economic costs and benefits ofsome activities and goods to the Ethiopian economy. These firms will notbe net contributors to Ethiopia's development, unless specific measures aretaken to improve the structure of incentives, resource allocaticn and pro-ductivity.
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PART THREE - THE POLICY FRAMEWORK
Part Two discussed the structure, evolution and performance ofthe manufacturing sector and raised issues concerning the productivity andthe efficiency performance of the sector. The main policy-related questionthat steus from the previous analysis regards the type of interventionsrequired to make the manufacturing sector more efficient, and allow it tobe a more productive contributor to the Ethiopian economic development inthe future. In order to address this question, however, it is first neces-sary to understand the policy framework as it affects the manufacturingsector, and its incidence on the efficiency of the sector. Chapter V sumrmarizes the present set of policies. Chapter VI explorce3 the relationshipbetween these policies, on the one hand, and the performance, problems andeconomic efficiency of the sector, on the ocher.
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Chapter V. THE POLICY FRAMEWORK: MAIN FEATURES
A. Trade Regime
5.01 Background* 26/ Ethiopia's external transactions between 1973and 1978 witnessed a decTine in the volume of major exports and high growthin imports (about 14 percent p.a. on average from 1971/72 to 1977/78),especially because of drought relief and military imports. Despite highercoffee prices in 1976/77, the resource balance in current prices has deter-iorated since 1973/74. Until 1976/77, this deterioration was financed byexternal assistance, either in the form of transfers, or net inflows ofpublic capital. Between 1973/74 and 1976/77, Ethiopia held foreign ex-change reserves equivalent to almost a year's supply of imports. In 1977/78, however, a sizeable deficit was incurred due to increased imports and areduced capital inflow, and by the end of the year, foreign exchange re-serves stood at about five months' imports.
5.02 In later years Ethiopia's current account deficit in the balanceof payments remained below 5 percent of GDP until 1980. This was mainlydue to an increase in the volume of coffee exports (which account for over60 percent of Ethiopia's export earnings) and to keeping imports under con-trol. The volume of coffee exports in both 1978/79 and 1979/80 was over 40percent above the 1977/78 level, and this compensated for the decline incoffee prices. The current account deficit increased to a level equivalentto 5.2 percent of GDP in 1980/81 and widened further to about 7.1 percentin 1981/82 and 1982/83, reflecting a steady decline in export earnings andincreased import expendituxes. Consequently, the value of merchandiseimports was more than double the value of merchandise exports.
5.03 A deterioration in the terms of trade also adversely affected thecountry's gross domestic income; during the three-year period ending in1982/83, the terms of trade declined by about 27 percent and the incomelosswas estimated at around 1 percent per year. The principal cause of thisunfavorable trend was the sharp decline in coffee export prices, which, in1980/81 dropped by some 25 percent below the 1979/80 level. The continuedhigh dependence on coffee exports is a main feature of Ethiopia's tradestructure. Rather than offsetting the decline in coffee earnings, non-coffee export earnings in 1981/82 were lower than those in 1979/80. Mean-while, after two years of fairly tight control, total imports rose by 10percent in value in 1981/82, reflecting mainly sharp increases in capitaland consumer goods imports. This trend appears to have continued in 1982/83; the value of imports rose by a further 10 percent owing to a majorincrease in consumer goods imports. The increase in consumer goods importsresulted from substantial inflows of food and other commodity grants,although actual cash imports of consumer goods declined.
5.04 After a steady decline from 1976/77 to 1980/81, Ethiopia's netreserves rose significantly to 2.7 months of imports in 1981/82 due to a
26/ This discussion draws from Ethiopia's Country Economic Memorandum,World Bank Report No. 4683a-ET, May 1984.
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doubling of private transfers and a significant increase in official trans-fers and in concessional loans. This unusually high level of externalresource inflow did not recur in 1982/83 resulting in a decline in netreserves to 1.5 months of imports. A further deterioration in reserves hastaken place during the past year.
5.05 Exchange rate system. The currency of Ethiopia is the Birr(-Ethiopian dollar- prior to September 1976), which is pegged to the U.S.dollar at the official rate of Birr 2.07 - US$1. During the period January1975 to December 1982, Ethiopia's import-weighted real effective exchangerate appreciated by 37.5% against the currencies of its major tradingpartners. 27/ Insofar as the Ethiopian consumer price index inadequatelyreflects costs pressures, the real appreciation is even larger.
5.06 All transactions in foreign exchange must be carried out throughauthorized dealers (such as authorized banks and major hotels) under thecontrol of the National Bank of Ethiopia (NBE). All payments abroadrequire licenses issued by the Exchange Controller to ensure the surrenderof foreign exchange proceeds, and shipments require permits issued by thatoffice. The Ministry of Foreign Trade has the statutory authority toapprove, and thereby regulate, foreign trade activities; this statutoryauthority does not extend, however, to the exportation of coffee (which isunder the purview of the Ministry of Coffee and Tea Development) or theimportation of crude oil (which is the responsibility of the EthiopianPetroleum Corporation).
5.07 Import Licences and Export Permits. Licenses for general productcategories are granted by the Ministry of Foreign Trade. The licenses aregranted for one year, once the Ministry is satisfied that (a) the importeris financially viable; (b) the product to be imported is consistent withEthiopia's import needs; and (c) the distribution of the product is notbeing hampered by unnecessary stockpiling. Payments abroad for importsrequire exchange licenses, which are obtainable upon presentation of avalid import license, approval of satisfactory information on costs andpayment terms, and the submission of evidence that adequate insurance hasbeen arranged.
5.08 Import prohibitions became increasingly important after 1978.The granting of foreign exchange was eliminated for the importation of somefoodstuffs, alcoholic beverages, and other consumer goods on January 9,1978. Within these categories of imports, on May 9, 1978 the granting offoreign exchange was also denied for an additional 16 imported goods.Although some relaxation of restrictions was later introduced with regardto the importation of basic consumer goods, the measures of January and May1978 remain in effect, and NBE retains the authority to withhold, forforeign exchange reasons, exchange licenses for which an import license haspreviously been granted. Furthermore, importation on suppliers' credit isdiscouraged, except for goods such as raw and intermediate materials, phar-maceuticals, and machinery and transport equipment, in which case priorapproval of the terms and conditions of the credit is usually required.
27/ See International Monetary Fund, Ethiopia - Recent EconomicDevelopments, Washington, D.C. (May 1983)
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5.09 The Ministry of Industry annually submits the foreign exchangerequirements of the industrial public enterprises under its jurisdiction tothe Central Planning Supreme Council (CPSC). Priority in foreign exchangeallocation is given to agriculture, industry and transport. Applicationsare not approved for many consumer goods nor for goods made locall 1y, unlesslocal production cannot meet domestic demand. Information is not availablefor a comparison of the amounts of foreign exchange requested and theamocnts approved for the Ministry of Industry. Some IPEs visited reportedthat their capital expenditure requests were frequently cut due to short-ages of foreign exchange. Shortages of foreign exchange may be more severefor private sector industrial enterprises; they appear to bave a lowerpriority in foreign exchange allocation than do Government enterprises.
5. 10 All commodity exports require permits from the Exchange Control-ler, and some require, in addition, the approval of specialized governmentagencies. When applying for a permit, an exporter must specify the goodsto be exported, the destination, and the value. The g8anting of a permitby the Exchange Controller enables the goods to pass through customs. Thelicensing system is used to ensure that foreign exchange receipts are sur-rendered to the NBE, generally within three months, and that exportproceeds are received in an appropriate currency.
5.11 Import Duties and Indirect Taxes. Ethiopia has a rather complexsystem of indirect taxes. Taxes on domestic sales include excise taxes atvarying rates (mainly on specific quantities rather than on price), a 2percent turnover tax and a 5-7 percent transaction tax. The excise taxes,levied on petroleum products, alcohol, tobacco, salt, sugar, textiles andyarn provide the greatest revenue. Altogether, taxes on domestic salesprovided revenue equal to 4 percent of GDP in 1981/82. This is slightlyabove the average for other countries in Africa. An IMF study of 32 Sub-Saharan African countries shows that 19 countries had domestic sales tax/GDP ratios less than 4 percent and only ten countries have a rate greaterthan 4 percent. 28/
5. 12 Import duties have also averaged around 3-4 percent of GDP, witha relatively high import tax/import ratio of about 25 percent in the1975/76 -1978/79 period decreasing to about 18 percent more recently. In1978, only three of 19 African countries for which import tax/import ratiosare available, had ratios greater than Ethiopia. 29/ The decrease in aver-age tariff collections is consistent with the process of import substitu-tion in Ethiopia, where imports of final consumer goods (which are subjectto higher duties) have diminished relative to intermediate and capitalgoods. In particular, capital goods are subject to much lower duties thanconsumer goods.
28/ Ibid, Table 7.
_9/ Ibid, Table 9.
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5.13 Of the three major taxes on imports -- customs duties, excisetaxes, and transaction tax - customs duties are the largest revenuesource. The rate of transactions tax is 18 percent for all items importedas opposed to 5-7 percent for domestic production, whereas customs dutiesrange from 0 percent for most capital goods to 200 percent for luxuryconsumer goods. Customs duties are designed to provide protection fordomestic producers and are quite high for some items made locally. Forexample, the customs duties on some paper products that compete with domes-tic production are 60 percent and imported glass bottles are subject to 40percent customs duties. In addition to customs duties, imports are subjectto the 18 percent transaction tax and 1 percent municipal tax.
5.14 Export taxes are a somewhat less important revenue source thanare import taxes or taxes on domestic sales, and average 2 percent of GDP.Most export tax revenue comes from taxes on coffee. Nearly all industrialexports are subject to a 2 percent rate.
5.15 With the exception of the noticeable decrease in the averageimport tax rate (para. 5.12), Ethiopia's indirect taxes have been quitestable over the last several years. The revenue/GDP ratios are fairlytypical for developing countries. Ethiopia's tax system is extremelycomplex: in addition to the large number of separate taxes, there are alsocomplicated provisions for exemptions and rebates. Industrial enterprisesare exempted from some taxes on imported or domestically purchased goodsused as inputs in the manufacturing process. There appears to be consider-able variation between industrial enterprises on the tax rate paid on localand imported inputs. This is partly due to the variable treatment of goodsunder the law-but also the result of different interpretations and knowl-edge of the law.
5.16 One source of variability in the tax rates on firms producingsimilar goods is the distinction, made in the legislation, between directand indirect purchase of inputs: purchase by one manufacturer of an inputdirectly from another domestic manufacturer, or imported by the enterprise,are exempt from many taxes. But if the same input is purchased from alocal distributor or importer, the tax paid by the distributor or importeris passed on to the manufacturer.
5.17 Some industrial enterprises are receiving subsidies to offsetfinancial losses that in some cases are the result of price control andexchange rate policies. Recently, export subsidies have been paid toenterprises that are exporting manufactured products at a loss. In bothcases, however, the amounts involved have been small.
5.18 Trade Promotion and Agreements. The Ministry of Foreign Tradehas participated in a number of trade fairs and exhibitions and has donesome market research in collaboration with multilateral agencies. It hasalso set up a number of overseas commercial offices in strategically impor-tant potential market areas 30/. These efforts are very recent and inci-pient.
3°/ Conmercial offices have been established in New York, Berlin, Milan,Tokyo, Aden, Djibouti and Moscow.
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5.19 Trade agreements are another policy instrument which can be usedto encourage industrial exports. Ethiopia has trade agreements with 14developing countries and eight socialist countries. 31/ A number of theseagreements, particularly those with socialist countrIis, provide for tradeprotocols which list goods each country will be willing to trade in abarter-type exchange. These agreements have not yet played a significantrole in expanding Ethiopia's industrial exports.
B. Policies Affecting the Private Sector and Foreign Investment.
5.20 During the last decade, significant limitations have been intro-duced on individual and corporate private entreneurship. Some industrialactivities regarded as critical are expressly limited to the public sector(e.g. petroleum, iron and steel) and others are designated to be undertakenas joint Government/foreign enterprises (pulp and paper and plastics).Small-scale industrial activlties, in areas like grain milling, oil seedprocessing, handicrafts, baking, weaving and tailoring are left to theprivate sector.
5.21 Private sector activity in manufacturing, other than by coopera-tives and foreign participants in Government majority-owned joint ventures,is limited to small-scale activities by the general limitation that move-able fixed assess in private firms should not exceed Birr 500,000. Fur-ther, a private entrepreneur may participate in only one venture. Privateenterprises must either be sole proprietorships or partnerships not exceed-ing five partners, all of whom must be working partners.
5.22 The income tax law has a progressive scale with high marginal andaverage rates for the private entrepreneur. Conflicting public statementsregarding the desirability of private participation in investment ventureshave created a perception of riskiness among potential private investorswhich partly explains the low level of investment in small-scale industry.32/ The lack of incentives and encouragement is particularly greater forPrivate manufacturing enterprises with moveable fixed assets of betweenBirr 2C0,000 and Birr 500,000, which find themselves in between the cooper-atives and small-scale enterprises (with up to Birr 200,000 of moveablefixed assets), which HASIDA is established to promote and assist, and the
31/ Developing Countries: Algeria, Angola, People's Democratic Republicof Yemen, Yemen Arab Republic, China, Sudan, Cuba, Egypt, Libya,Kenya, Djibouti, Nigeria and Zimbabwe.Socialist Countries: Czechoslavakia, German Democratic Republic,Poland, USSR, Romania, Yugoslavia, Hungary and Bulgaria.
L2, By contrast, comm :ce offers the private entrepreneur a moreattractive alternative to manufacturing (with some exceptions likegrain and coffee marketing). Relatively less investment isiomobilized, it is more accessible to traditional skills, and profitmargins are attractive-a combination which implies lower risks.
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medium/large-scale publicly-owned enterprises which Government supports.
5.23 There are no limitations on the size of cooperative industrialenterprises. The cooperatives are preferred to the sole proprietorship/partnership as a model of economic organization. Efforts are being made byHASIDA to promote industrial cooperatives, but it is a difficult task inthe Ethiopian context of shortages of managers and skilled personnel.
5.24 Although significant limitations to the development of small-scale enterprises still exist, the Go"ernment has taken the positive stepof creating HASIDA in 1977 not only to assist cooperatives, but also topromote the development of small-scale enterprises with moveable fixedassets of up to Birr 200,000. However, although RASIDA's budget has grownfrom Birr 670,000 in 1967/77 to Birr 3.9 million and a staff of 630 in1982/83, their main efforts have been directed to the cooperatives and itsachievements in promoting small-scale investment have been modest. In1981/82 and 1982/83 HASIDA issued 12 and 18 private small-scale industriallicenses, respectively.
5.25 Foreign Investment. There has been no new foreign equity parti-cipation in manufacturing since the nationalizations, although shortlyafter the revolution the Government specified areas in which foreign enter-prises could participate. This is largely due to the economic policyclimate following the nationalizations and to the protracted negotiationson compensation to foreign owners of nationalized assets. The first signi-ficant step to improve the foreign investment environment was the adoptionof the Joint Venture Proclamation in 1983. The Proclamation invites andencourages foreigners -- public and private -- to participate with theGovernment of Ethiopia in joint ventures in which the Government holds atleast 51 percent of the shares and "which introduce technology and know-howinto the country or which have positive foreign exchange impact or whichotherwise make positive contributions to -conomic and social developmentand which, in addition create employment opportunities in the country".Joint ventures are not permitted in precious metals, public utilities,banking, insurance, transport and domestic trade. Private Ethiopian entre-preneurs are excluded from participating in joint ventures.
5.26 The main incentives provided in the Proclamation are (a) exemp-tions from import duties and other import taxes on investment goods, and(at Government discretion), on raw materials; (b) exemption (at Governmentdiscretion) from customs duties and transactions tax on goods exported; (c)5 years exemption from income tax on the profits of new projects and 3years for wajor extens'on projects, on dividends which are reinvested inEthiopia, and on the salaries and allowances of expatriate employees of thejoint venture and (d) remittance of proceeds of the liquidation of theventure and of shares purchased by the Government from the foreign jointventure participant.
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C. Price Controls
5.27 Price controls have been a feature of Ethiopian economic policyfor a long period of time. After the revolution, however, they have takengreater importance and Government now controls the prices of a wide rangeof products, particularly of basic consumer goods that are in short supply,covering about 47% of the gross value of industrial output. The rationalefor the policy is the government's desire, considering the shortage of sup-plies, to keep prices within the reach of the population. The Price Con-trol Authority within the Ministry of Domestic Trade is responsible forenforcing these price controls. Limited staffing (800 persons for theentire couatry) and scarce transport resources, however, hamper theirefforts. The Price Study and Policy Department of the NCCP is responsiblefor formulating pricing policy and recommending price increases on thebasis of the requests forwarded to it by other government departments andby the industrial corporations through the Ministry of Industry. ThisDepartment is also inadequately staffed with just nine persons, only threeof whom work on the pricing of industrial products.
5.28 A fundamental feature of the current system of price controls isits reliance on cost-plus pricing. Enterprises are in most cases allowedan acceptable mark-up over costs. The present system often causes lengthydelays between an enterprise's request for a price increase and the Govern-ment's ruling on the request. In some cases, in order to get around pricecontrols, enterprises have switched production to a modified version of anexisting product which is then presented as a new product. Furthermore,black markets for various products exist at the retail level.
D. Employment and Wage Policies
5.29 Ethiopia's labor market is still highly regulated although a gra-dual decentralization is taking place. The Labor Proclamation Order of1975 required all job seekers to register with the employment exchanges andall vacancies to be filled from those registered, unless prior permissionhas been granted for posts to be filled through transfer of staff or if theprivate establishment has fewer than ten employees. Details of vacanciesare widely publicized. Applicants for vacant posts are allocated accordingto their order of registration as job seekers. Each employment exchangehas a recruitment committee which screens applicants for jobs and submitsnames for each vacant post to the establishment with the vacant post.Recruitment into the civil services is through the Central Personnel Agency(CPA). However, the CPA has delegated recruitment of individuals earningbelow Birr 285 per month to the Ministries.
5.30 Until recently, first jobs for workers with post-seconda:y schooltraining were allocated centrally by the NCCP. At present, managers mayrecruit workers with salaries of up to Birr 600 a month, through theMinistry of Labor and Social Affairs, and after obtaining the necessaryauthorizations from their respective corporations. Promotions to jobs withsalaries above Birr 700 a month, or pay increments above 25% in any year,require the approval of the Ministry of Industry.
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Furthermore, the labor exchanges themselves have a rule that no individualcan be submitted for two vacancies in a year. Very few managerial-and pro-fessional vacancies are registered through the employment exchanges. As aresult of existing regulations, labor mobility is still limited and theGovernment is considering further decentralization.
5.31 Wage Policy. At present, there is no uniform system of wages andother employment benefits for industry. However, the Wage Board of theMinistry of Labor is in the process of regrading and reclassifying all jobswithin the public sector and the state enterprises in order to ensure thatall jobs with the same classification and job content have the same remune-ration. Meanwhile, the industrial sector operates under the same wageguidelines as the rest of the public sector, with the twin objectives ofstemming increases in the wage bill in order to control inflationary pres-sures, and of compressing the skewed wage pay scale that Ethiopia inheritedat the time of the revolution.
5.32 Annual wage increments have been below inflation, and until 1980limited to earners with salaries below Birr 450 per mDnth. Below the cut-off point, the lower the salary, the higher the annual increment has been.As a result, a compression in the wage structure has indeed taken place.Overall, since 1974, there appears to have been some improvement in realwages for industrial workers in the lower to middle end of the scale, al-though the real wages of the lowest paid workers iight not have increased.Real wages have dropped quite significantly for higher paid workers earningabove Birr 300-350 a month (in 1982 prices); the drop has been particularlysevere for workers subject to the wage freeze (above Birr 650 since 1981).33/
5.33 The Government implemented some wage policy reforms in 1979/80,linking wage increases to the firm's performance and replacing the policyin practice from 1975 of generalized increases for a large portion of theparastatal sector. The permitted increases after 1979 were composed ofthree elements: (i) 5 percent increase for enterprises that had any In-crease in physical output; (ii) 1 percent increase for enterprises that badany increase in productivity per worker; and (iii) I percent if the enter-prise increased its profit over the previous year. 34/
33 The retail price index for Addis Ababa (excluding rent) experiencedthe following annual increases:
1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82
19.3% 21.9% 18.4% 13.0% 12.5% 2.0% 7.2%
34/ Exceptions -mre made for plants that demonstrated that could notincrease output, productivity or profits due to exogenous factors,such as lack of raw materials.
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Chapter VI. THE INFLUENCE OF POLICIES AND INSTITUTIONS ON THE PERFORMANCEAND EFFICIENCY OF THE SECTOR
A. Policies and the Structure of Protection in Industry
6.01 The main policies directly affecting the industrial sector weredescribed in the previous chapter. While each of the policy measures hasseparate, and sometimes contrary effects on each subsector and firm, it isuseful to measure their aggregate impact on the subsectors and on the sec-tor as a whole. One way to measure this aggregate impact is through thelevel and structure of industrial protection. Tariffs, indirect taxes,subsidies, quota restrictions (QRs), import prohibitions, price controlsand the exchange rate have a combined effect on the protection given to aparticular industry. The degree of protection received by a firm on itsoutput can be measured by the Nominal Protection Coefficient (NPC), whichindicates the extent by which the enterprise's output measured at domesticmarket prices exceeds the economic value of the output at border prices.As in the case of DRCs, the border prices could be replaced by other shadowprices reflecting non-efficiency objectives of the Government. A valuegreater than one for the NPC indicates that the firm is receiving positiveincentives--or protection-on output, whereas an NPC less than one indi-cates that the firm is faced with negative protection.
6.02 It is important, however, to account not only for the effects ofpolicy on the output (revenue) of the firm, but also on the inputs (costs)of the enterprise. The Effective Protection Coefficient (EPC) measures theeffects of policy on both the output and the inputs of the firm by theratio of value added (revenue from sales of tradeable outputs minus thecosts of tradeable inputs) in domestic market prices to value added in bor-der prices. A value for the EPC greater than one indicates that the firmis receiving positive protection as a result of the combination of policiesaffecting outputs and inputs. Conversely, a value of EPC less than oneindicates that the firm is receiving negative protection. An enterprisecan have nominal protection (NPC) greater than one and effective protection(EPC) less than one if the protection of inputs is sufficiently greater
than the protection to the outputs, and the opposite can also occur. 35/
6.03 In principle, a protected firm still has an incentive to keepcosts down and productivity high, thereby producing efficiently. Under
351 When the calculations are made at the official exchange rate, theratios are called gross Protection Coefficients. If an adjustment ismade in order to account for the estimated overvaluation of theofficial exchange rate, the ratios are called Net ProtectionCcefficients. For the purposes of the calculations in this report,two alternative 'base' cases were computed, one using the officialexchange rate (USSI - Birr 2.07), and the second assuming that theofficial exchange rate at the time of the survey was overvalued by 30percent, a figure roughly consistent with IMF estimates of theappreciation of the Birr by the time of the s-mvey. (For details, seeAnnex I).
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such circumstances, the protection will translate into higher profit levelsfor the firm. Alternatively, however, a high level of protection may allowa firm to pay for higher costs of production associated with low producti-vity levels. A third possibility is that a firm facing high costs of pro-duction during the initial stages of production, may becoue more efficientand lower its unit costs of production as it grows and exploits economiesof scale and benefits from the learning process. This protected infantindustry, at first will have to utilize the additional revenues accrulngfrom protection to pay for production costs, yet overtime the share of pro-fits will increase.
6.04 The three scenarios discussed above indicate that a protectedfirm can be efficient now, can eventually become efficlent, or it can beinefficient. It is important, therefore, to review the evidence on protec-tion levels afforded to firms in Ethiopia, the evidence on the efficiencylevel of these firms, and the empirical relationship between protection .ndefficiency.
6.05 In the Ethiopian case, the evidence gathered on 19 IndustrialPublic Enterprises suggests that the levels of protection (nominal andeffective, gross and net) provided by the different policy measures arehigh for some firms and low (indeed negative) for others. In Table 21, wesee that the NPC fluctuates between 2.20 (implying 120 percent of protec-tion on the output for Ethiopia Fibre Factory) and 0.47 (implying a 53 per-cent rate of negative protection for Addis Ababa Cement). For the net NPCthe fluctuations are between a high of 1.69 and a low of 0.36 (Table 22).
6.06 Both the level and the fluctuations of protection are magnifiedwhen the protection on inputs is also taken into account. 36/ The EPCbecomes infinitely high (due to negative value added at economIic or worldprices) for Ethiopia Fibre Factory, Ethiopian Pulp and Paper, and KaliteSteel. On the other extreme, it is as low as 0.03 (implying a 97 percentlevel of disprotection) for Addis Ababa Cement, and 0.29 for Dire DawaFlour Mill. 37/ Insofar as this sample of enterprises is representativeof IPEs in general, it appears that the various policies result in verylarge differences in the net protectionist effect on individual firm inthe medium/large scale manufacturing sector, ranging from high positive tohigh negative protection faced by particular industries. These results are
_6/ It should be noted that the EPC is not an all-inclusive measure ofincentives and disincentives provided to the firm, since it does notaccount for the effects of policies on costs of factors of production-labor, capital and land. As discussed previously, the EPC considersthe effects of protection on the outputs and (non-factor) inputs ofthe firm. (For details, see knnex I).
37/ For the net- calculations the S.E.R. utilized was US$1 - 2.69, i.e.,a 30 percent overvaluation of the Birr was assumed (Table 22).
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Table 21. Structure of Protection and Efficieocy of IPEs(Calculations at official Exchange kate)
Gross Gross Short RunNominal Fffective Domestic Domestic
Protectlon Protection Resource ResourceCoefficient Coefflcient Cost Cost
NPC EPC DEC SR DECCORP/UETERPRISEI. ETHIOPIAN FOOD
Dirs Dave Flour Mill .89 .29 1.02 .83
II. ETHIOPIAN SUGAbWonji Sugar Factory .54 .69 .74 .60
III. ETHIOPIAN MEATDire Daws Meat 1.11 2.05 1.52 1.35
IV. ETHIOPIAN BEVERAGESBabllle Mineral 1.11 1.09 .89 .61Malottl Brewery 1.49 2.24 1.93 1.13wash Winery 1.88 3.11 1.20 .99
Addip Ababa Glass Works 1.50 5.64 4.37 1.83Subtotal a/ 1.55 2.52 1.70 1.0b
V. NATIONAL TEXTILES & FIIBEWORK.SDire Daws Textiles 1.14 1.84 1.37 .84Asmara Textiles 1.19 8.63 3.45 2.71Ethiopia Fibre Factory 2.20 -6.61 -2.94 -2.44
Subtotal */ 1.22 2.64 1.70 1.11
VI. NATIUNAL LEATHER & SHOEEthiopian Footwear 1.47 1,77 .84 .42Ava&h Tannery 1.00 1.16 .36 .31
Subtotal 8/ 1.06 1.27 .45 .33
VII. ETHIOPIAN WOODWORtSWarka Woodvorka 1.11 .64 2.07 1.97
VIII ETHIOPIAN PRINTINGEthiopian Pulp 6 Paper 1.49 -6.10 -4.34 -2.06
IX. NATIONAL CHEKICALAddis Tyre 1.16 1.25 1.16 .82Ethio Plastic 1.14 .97 83 .43
Subtotal a/ 1.16 1.19 1.08 .73
YL ETHIOPIA bUILDING MATERIALSAddis Ababa Cement .47 .03 .41 .23
XI. NATIONAL METALWORKSEthiopian Iron & Steel 1.11 .63 2.87 2.32Kalite Steel 2.00 -9.89 -2.68 -. 30
Subtotal a/ 1.41 9.45 7.53 5.86
TOTAL MANUFACTURING a/ 1.11 1.36 1.09 .74
Total excluding Wonji Sugar 1.20 1.96 1.39 .07
Source: Mission estimates bsed on sample of 19 IPC.a/ Averages are welghted according to output ebages.
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Table 22. Structure of Protection and Eficiency of IPRa(Calculations at Shadow ICxchange Rate)
S.E.R.S.E.R. Adjusted
Net Net Adjusted Short RunNominal Effective Domestf- Domestic
Protection Protection Resource ResourceCoefficient Coefficient Cost Cost
NPC EPC DRC SR DRCCORP/ENTERPRISEI. ETHIOPIAN FOOD
Dire Dawa Flour Mill .69 .22 .79 .63
II. ETHIOPIAN SUGARWonji Sugar Factory .65 .53 .57 .46
II. ETHIP?IAN NEATDire Daws Meat .85 1.58 1.17 1.04
IV. ETRIOPIAN BEVERAGESBabille Mineral .85 .84 .68 .47Melotti Brewery 1.15 1.72 1.49 .87Awash Winery 1.45 2.39 .92 .76Addis Ababa Class Works 1.15 4.34 3.36 1.41
Subtotal a/ 1.19 1.94 1.31 .82
V. NATIONAL TEXTILES & FIBREWORISDire Dava Textiles .88 1.42 1.05 .65Asmara Textiles .92 6.64 2.65 2.08Ethiopia Fibre Factory 1.69 -5.08 -2.26 -1.88
Subtotal a/ .94 2.03 1.31 .85
VI. NATIONAL LEATHER & SHOEEthiopian Footwear 1.13 1.36 .65 .32A.,ash Tannery .77 .89 .28 .24
Subtotal a/ .82 .98 .35 .25
VII. ETmIOPIAN HOODWORKSWarka Woodworks .85 .49 1.59 1.52
VIII.ETHIOPIAN PRINTINGEthiopian Pulp & Paper 1.15 -4.69 -3.34 -1.58
IX. NATIONAL CHEMICALAddis Tyre .89 .96 .89 .63Ethio Plastic .88 .75 .64 .33
Subtotal a/ .89 .92 .83 .56
X. ETHIOPIA BUILDING MATERIALSAddis Ababa Cesent .36 .02 .31 .18
XI. *ATIONAL METALWORKSEthiopian Iron & Steel .85 .48 2.21 1.78Ralite Steel 1.54 -7.61 -2.06 -. 23
Subtotal a/ 1.11 7.27 5.79 4.51
TOTAL MANUFACTURING a/ .85 1.05 .84 .59
Total excluding Wonji Sugar .92 1.51 1.07 .67
Source: Nission estimates based on sample of 19 IPEs.
a/ Averages are weighted according to output shares.
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similar to Guisinger's findings on the structure of protection in Ethiopiain 1972. 38/
B. The Structure of Protection and the Efficiency of the Sector
6.07 As discussed abov' (Chapter II), the Domestic Resource Cost (DRC)ratio can. be used as a summary measure of economic efficiency of industrialfirms and subsectors. Therefore, by comp;iring the protection coefficients(which measure the impact of policies) with the DRC ratios we can explore"he relationship between policies and economic efficiency.
6.08 The high dispersion in the protection rates afforded to indivi-dual industrial firms has a more serious impact on resource allocation inthe industrial sector than the average level itself. Infinitely high pro-tection levels for some firms imply that a significant amount of resourcesare being channelled to these firms at the expense of firms that face nega-tive protection. Unless the protected industry manages to maintain (orattain orer time) a bigh level of efficiency, it will utilize these addi-tional resources to pay for the high costs of production resulting from itslow productivity levels, while the unprotected firms will be producing lessoutput due to the drainage of resources. The economy therefore sustains awelfare loss on both ends, and the higher the differences in protection,the larger society's economic losses are bound to be.
6.09 Out of 19 firms in the sample, net effective protection was foundto be positive in 10 firms (Table 22). Out of these 10 firms, 8 were found
38 A conceptual question arises: whereas an efficient firm may be able tosurvive (and grow) overtime whether protected or unprotected, aninefficient firm will be expected to survive only if adequateprotection is given. Uence, how is it possible to find negativeprotection for 3 inefficient existing firms? Two main possibilitiesexist: (.a) Measurement of EPCs and DRCs are at a point in time.Insofar cas the DRCs and/or the EPCs are different in other years, thefirm can survive overtime (for instance, the measured DRC for the DireDawa Flour Mill suggests that the firm is only marginally inefficient,with a DRC of 1.02). (b) Hidden subsidies. Firms that run intofinancial difficulties in Ethiopia very frequently can delay debtrepayments, incur in debt rescheduling on easier terms or in debtwrite offs.. (c) Long vs. Short Run Efficiency. The DRC calculationsincluded in the table included investment costs, i.e., they assess theefficiency of the firm as if it were a new entrant to the industry.Insofar as the investment costs are substantial, a firm can beinefficient in the long run (meaning that it would not be a worthwhilenew investment), but it might still be efficient to continue theoperations on tee basis of the existing investment (which is taken asa sunk cost).
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to be economically inefficient (DRC greater than 1) 39/. At the sametime, among the 9 unprotected firs, 7 were found to be-economically effi-cient and 2 inefficient. Thus, there appears to be a strong negative corre-lation between the degree of protection granted to an industry and its eco-nomic efficiency. At a minimum it can be said that the structure of pro-tection has not encouraged efficiency.
6.10 The need for protectionist policies in developing countries isoften justified on grounds of potential (dynamic) comparative advantage inindustries where the learning process and/or the economies of scale in pro-duction are deemed important enough. This argument implies givingincen-tives to infant :ndustries which are expected to have a comparative advan-tage in the future. The evidence suggests, however, that the protectedindustries in the manufacturing sector have not become efficient inEthiopia. In 10 out of 19 firms that were more protected than the averagein 1983, 9 were still inefficient.
6.11 An overtime comparison of protection and efficiency among 10Ethiopian industries is made possible by the study done by Guisinger in1972. Out of the 10 subsectors, f:.ur exhibited an improvement in effi-ciency between 1972 and 1983. In chree of these four subsectors, protec-tion was considerably below the average in 1983, and the fourth case(shoes, with 77 percent effective protection) had experienced a decrease inprotection since 1972. In the two cases where there was significant deter-ioration in efficiency (DRCs increasing from 0.64 to 1.93 in beer, and from1.15 to 4.37 in glass bottles) the protection coefficient also increasedsignificantly during the period (0.37 to 2.24 in beer and 0.63 to 5.64 inglass bottle). Finally, in the four other subsectors that remained at asimilar level of efficiency (textiles, leather, pulp and paper, and ironand steel), the levels of protection appear to have remained at a ratherhigh and stable level. Thus, the available evidence for the past 10 yearsdoes not support the notion that protectionist policies have been effectivein exploiting the potential comparative advantage of manufacturing sub-sectors. If anything, the contrary migbt be the case: the subsectors withhigh protection levels have remained at high inefficiency levels, and more-over, increases in protection appear to be associated with increases ininefficiency, whereas decreases in protection appear to be associated withincreases in efficiency.
6.12 The corollary of the above discussion is that protectionist poli-cies have encouraged the flow of resources to subsectors of Ethiopian manu-facturing where the net benefits have been low when compared to the costsof diverting these resources from more productive uses. These policieshave discouraged more resources flowing to other industries (or to sectorsother than manufacturing) where the overall economic benefits would havebeen higher.
29/ The Protection and Domestic Resource Cost ratios were calculated byusing the official exchange rate in Table 21. In Table 22, thecalculations were made under the assumption that the official exchangerate was overvalued by 30 percent.
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6.13 Furthermore, the current structure of protection with high levelsfor some firms and negative levels for others, may have also precluded theentry of potentially efficient firms into certain activities, and it mighthave caused efficient firms to disappear due to their lack of protection.
C. Exchange Rate Overvaluation and Trade Policy
6.14 As discussed above (Chapter V), the Ethiopian Birr has beenpegged to the dollar since 1973. The fixed exchange rate policy, combinedwith the existence of a protectionist system has had a significant impacton the actual exchange rate faced by industrial imports and exports, withimplications for the structure and performance of the industrial sector.
6.15 The existence of a system of protection implies an equilibriumexchange rate which is likely to be higher than the equilibrium exchangerate that would exist under freer trade40/. Protectionist policies,through tariffs, QRs and import prohibitions restrict the demand for im-ports, implying that less exports are required to ensure a trade balance.A lower level of exports, in turn, is the result of the exporter receivinga lower price in domestic currency for its export goods thani under freetrade, i.e., the exchange rate is overvalued when compared with the ratethat would exist under free trade equilibrium. In the Ethiopian case, theactual exchange rate might have become overvalued even beyond the pointimplied by the protection system, as indicated by the excess demand forforeign exchange at the current exchange rate. As noted earlier, duringthe period January 1975 to December 1982, Ethiopia's real effectiveexchange rate (import-weighted) appreciated by 37.5 percent against thecurrencies of its major trading partners.
6.16 The main effects of the exchange rate overvaluation on the manu-facturing sector include (i) underprotection of some industries; industriesthat have low tariff and QR protection -- like intermediate goods -- willbe underprotected by an overvalued exchange rate because of greater compe-tition of cheaper imports; (ii) import dependency; indeed, as noted earlier(Chapter II), the share of imported raw materials and parts for industry intotal industrial costs has been increasing overtime; (iii) anti-exportbias; the exports of manufactured goods are discouraged by an overvaluedcurrency. Exporters buy their inputs at domestic prices, which in manycases are inflated due to the effects of protection, but have to sell theiroutput at the birr-equivalent of world prices, which is low due to theovervalued exchange rate. While some industries receive subsidies toencourage exports, these incentives are not necessarily given to activitieswhere Ethiopia has a comparative advantage. For instance, large subsi.diesare given to meat processing, where the cost of production exceeds theworld price by almost 100 percent; (iv) bias against the agriculturalsector; the combination of an overvalued exchange rate, price controls on
4°/ The opposite would be true only if the (disprotectionist) effects ofprice controls more than compensate for the protectionist effects oftariffs, QRs and import prohibitions.
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agricultural goods, and the system of protection on manv industrial goodsdiscriminates against the agricultural sector, which is compelled to payhigh prices for the goods consumed but receives low prices for the goodsproduced. The burden of industrialization is then partially shifted to theagricultural sector, slowing down its performance, with detrimental effectson the industrial sector via the forward and backward linkages between bothsectors; and (v) high capital intensity; an overvalued currency, coupledwith low protection on capital goods, encourages more capital-using activi-ties and technologies at the expense of more labor intensive activities.
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PART FOUR - STRATEGY AND POLICIES
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Chapter VII. OBJECTIVES AND STRATEGIES OF THE TEN-YEAR PERSPECTIVE PLAN(1984/85 - 1993/94)
7.01 The Government 's medium- and long-term objectives and strategyfor the industrial sector, and its role in the country's development, arereflected in the recently prepared Ten-Year Perspective Plan (TYPP). Atthe same time, one of the main instruments to achieve these objectives isthe public investment program (PIP) for the sector.
A. The Ten-Year Perspective Plan
7.02 Introduction. Before the revolution, Ethiopia had prepared three5-year Perspective Plans. After 1974, no plans were prepared until 1979,when the first of three annual development campaign programs (Zemecha) waslaunched, geared mainly to the alleviation of urgent problems such as shor-tages of food, other basic consumer goods, raw materials, foreign exchange,distribution difficulties and unemployment. These short-term plans wereessentially designed to attain limited and immediate objectives, and werenot expected to lay the foundation for accelerated economic development,since they lacked a long- and medium-term development plan and strategies.
7.03 Against this background the Government decided to launch thefirst Ten-Year Perspective Plan (TYPP). A document outlining a preliminaryPlan was prepared in March 1981. The final version of the Plan for theten-year period 1984/85-1993/94 had been finished recently, but was notavailable in English, at the time of the mission. The discussion here istheref ore based on previous preliminary documents.
7.04 General Objectives. The main stated obj ectives of the Ten-YearPerspective Pan include improving the material and cultural well-being ofthe population, effecting a structural transformation of the nationaleconomy by increasing the share of industrial output in total product, andlaying down a strong material and technical foundation for the building ofsocialism.
7.05 In order to achieve these objectives, Ethiopia has given firstpriority to the development of agriculture, with primary emphasis to thecooperativization of the peas-its. The second priority area is the indus-trialization of the country as well as the associated development of thepower and mining sectors. The training of manpower and the development ofscience and technology are the other most important priority areas of thePlan.
7.06 According to the Plan's statements, since both public enterprisesand people's organizations have become principal tools of economic manage-ment, the Government will attempt to make these types of organizations moreviable.
7.07 For the decade of the 1980's the preliminary Plan documents en-visaged a doubling of GDP in real terms, implying an annual growth rate of7.5 percent in GDP and of 4.5 percent in GDP per capita. To achieve the
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average growth rate of 7.5 percent in GDP, the average annual growth ratein agriculture was expected to reach 4.5 percent, that in industry (includ-ing manufacturing, mining, construction, electricity and water supplies)15.4 percent, and in services 9.5 percent.
7.08 The targets established for sectoral performance would imply aconsiderable structural transformation of the economy. While the share ofagriculture in the GDP would decline significantly, the industrial sectorshare would increase considerably. To attain both un acceleration of eco-nomic development and a radical transformation of the structure of theeconomy an enormous investment effort would be called for. Hesice, a signi-ficant increase in the investment's share in the GDP is envisaged. Of thetotal planned gross investment of Birr 27.4 billion, 20 percent would beallocated to agriculture, 15 percent to manufacturing, 18 percent tomining, energy, water supplies and construction, 26 percent to transportand comuinications and 15 percent to social services such as education,health and housing. The Plan acknowledges that the anticipated level oftotal gross investment will require an enormous e-fcrt at nmbilizing theresources necessary for investment financing- Domestic savings are pro-jected to grow much more rapidly tnan in the past.
The Industrial Sector: Objectives and Strategies
7.09 Industry is regarded by "he preliminary Plan documents as thedriving force for achieving rapid economic developuaent in Ethiopia, andthus it is expected to play an increasingly greater and leading role in thenational economy. Since industry in Ethiopia is now limited to simple pro-cessing of agricultural produce and the production of some consumer goods,capacity in industry has already been utilized in the First and SecondDevelopment Campaigns, new investment in manufacturing has been negligible,and much of the existing machinery and equiment is obsolete, the Plan con-siders imperative that much greater investments be made in this sector.
7.10 The sector specific objectives in their stated priority oredarare:
(i) to satisfy demand for basic commodities;(ii) to strengthen the handicraft sector;(iii) to strengthen linkage with the agricultural sector;(iv) to provide adequate quantities of consttaction materials;(v) to lay the groundwork for the establishmeut of heavy
industry;(vi) to contribute to the balance of payments position by
earning and saving foreign exchange;(Vii) L- create employment opportunities; and
(viii) to contribute towards balanced regional development.
7.1; Main Sector Strategies. The Government's strategies to satisfythese objectives are separately speslfied with respect to product mix,markets, technology, location and ownership structure:
(i) Product mix: (a) concentration on light consumer goods forthe domestic market; (b) attempt to diversify manufactured
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exports, sixty percent of which presently consist of pro-cessed hides and skins; (c) emphasis on inputs for the agri-cultural sector (fertilizers, pesticides, implements, irrig-ation pumps), construction materials and equipment (cement,roofing materials, sanitary ware), and basic engineeringproducts (light electrical equipment, electrical appliances,radios, spare parts, light transport equipnent, light con-struction equipment).
(ii) Markets: (a) emphasis on satisfying the demand for consumergoods from the domestic market, (urban and rural); (b) in-crease in the sector's share of the export market.
(iii) Technology: (a) emphasis on small and medium-scale industrywhich will contribute to employment generation; (b) prefer-ence for labor intensive technology.
(iv) Location: balanced regional development but balance to bebased on: (a) economies of scale; and (b) distributioneconomies. Regionally balanced development through. smallfactories throughout the country unless economies of scaleconsiderations dictate otherwise.
5v) Ownership structure: Five forms of ownership namely: (a)government; (b) mass organizations (peasant associations,urban dwellers, youth associations); (c) cooperatives; (d)private ownership (Ethiopian only); and (e) joint ventures(Government/foreigners).
Government ownership will continue to dominate, but its share is expectedto decline as the shares of the other forms of ownership increase.
7.12 Supporting Sector Strategies. These are:
(i) increased utilization of capacity where there is sparecapacity;
(ii) increased labor productivity through training and improvedworking conditions;
(iii) development of small scale industries;(iv) increased organization of the handicraft sector into
cooperatives; and(v) providing an appropriate institutional framework for
implementing the plan for industrial development.
B. Evaluation of Objectives and Strategies
7.13 The general objective of accelerating the pace of industrializa-tion in tha medium and longer run is appropriate for a country at the deve-lopment stage of Ethiopia, where industry has not been overemphasized inthe past and where the industrial sector is expected to contribute to over-all economic growth in the future.
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7.14 It is important, however, to recognize that the increase in thepace of industrialization should not come at the expense of growth in theother sectors of the economy (i.e., agriculture), but rather as a result ofit. The size and importance of the agricultural sector, and the dependencyof the industrial sector on agricultural sector growth, suggest that it isdifficult that the industrial sector could grow at over three times thegrowth rate of agriculture (15.4 vs. 4.5 percent, according to the prelimi-nary Plan document). The main limitations to the proposed industrialgrowth are likely to be the resources available for new investments and theforeign exchange, required to import raw materials and other industrial in-puts, which is generated by agricultural exports. Furthermore, consideringthat there has been considerable import substitution in consumer goods in-dustries in the past, industrial production growth will be very dependenton the growth of aggregate demand. Under these circumstances it may not befeasible for industrial growth to be twice as fast as GDP growth. Actualindustrial growth may also be lower due to lower than projected GDPgrowth. Considering the scarce resources expected to be available forinvestment over the next decade, and the importance that ought to beattached to balanced sectoral growth, it is important for Ethiopia toachieve the proper balance in the intersectoral allocation of invest-ments. 4 1/
7.15 On the whole, the sector specific objectives appear to be realis-tic and worth pursuing in the Ethiopian context. The priority ranking ofone item is worth reviewing, however, namely the laying of the groundworkfor the establishment of heavy industry. Scale economies are usually animportant determinant of plant size. Heavy industry generally involveslarge-scale operations, which may exceed the demand of the still limitedEthiopian market and in which Ethiopia is unlikely to have a comparative
advantage for some time to come. Also, given the low level and high con-centration of industrial exports, and their potential contribution to econ-omic development in the future, the objective of increasing and diversify-ing exports should be accorded high priority.
7.16 The emphasis on small and medium-scale enterprises seems appro-priate to the Ethiopian setting. As noted earlier (Chapter III)EthiopianSSEs tend to be more labor intensive, less impor:t dependent and more flex-ible with regard _o meeting localized market nee,±ds, than large scale enter-prises. Moreover capacity utilization is Etill low in the SSE sector. Itsperceived high potential for contributing to the efficient growth of themanufacturing sector ought to be tapped.
7.17 The achievement of the general and specific objectives of theTYPP will be crucially dependent on the overall policy framework and on thespecific measures to be taken to achieve the stated objectives. For exam-ple, if the overall set of exchange rate, r:ade, pricing and labor policiesdiscussed earlier remains unchanged, aad if no specific measures to promoteSSEs and exports are implemented, the expansion and diversificftion of ex-ports in efficient industries, and the higher contribution of the SSE
_11 Thi issue is discussed in some more detail in the review of the- Public Investment Program (paras. 7.18 to 7.27).
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sector may not be achieved. The preliminary Ten-Year Perspective Plandocuments reviewed by the Mission did not include a description of thepolicy framework and the specific measures required. Furthermore, theattainment of the goals set by the Government will depend on the selectioncriteria for choosing industrial subsectors to be expanded, where economicefficiency and cost considerations ought to be utilized.
The Public Investment Program (PIP) in Industry
7.18 Overview. At the time of Lhe mission, information on the pro-posed industrial investment program for the next ten years was limited to46 projects, listed in 'A compendium of profiles in industrial projects"compiled by the Ministry of Industry. (During discussions of the draftreport, the Ministry indicated that a total of 200 industrial projects areto be carried out'. The Ministry expects the composition of the list toc.aange as new projects are identified and more project development work isdone on those already listed. The 46 projects on which information was
available range in stages of preparation from one project "under F epara-tion for production" to twelve "under Identification" about which tnere islittle information.
7.19 The preparation of an overall PIP, including all sectors of theeconomy, was still in progress at the time of the mission. Consequently itwas not possible to carry out a full evaluation of the PIP and of th.'sectoral allocations. Nevertheless, a working paper on the PIP has pro-vided useful information. The working paper, however, did not includedetailed projections of GDP by subsector, balance of payments and govern-ment finance projections. Its targets, namely a 6.3 percent yearly GDPgrowth rate (lower than the 7.5 percent in the Plan document), and a 19
percent investment/GDP ratio by 1986/87, appear to be on the high side.Estimates in the re.:ent World Bank's Country Economic Memorandum indicatethat under a medium growth scenario, investment could be 13 percent ofGDP by 1986/87, and only 10.8 percent if a low growth scenario is regardedas more realistic.
7.;20 The preliminary PIP allocates 21 percant of investment fcormining, power and water devel,pment, 20 percent for transport and communi-
cation, 19 percent for industry and 15 percent for agriculture.42/ Thisindic,.tes a relatively low share of investments planned for the agricul-tural sector, which had been receiving a significantly larger share between1978/79 and 1982/83. Because of the high overall levels of planned invest-
ments, however, the absolute amounts planned for a-l sectors are higherthan the actual investment levels in recent years.
7.21 Recent investment in manufacturing enterprises has been around]3irr 55 million a year (Table 23). In 1980/81, the book value of the fixedaissets of these enterprises was Birr 913 million. By contrast, investmentin the three years 1983-85 is estimated at Birr 912.7 million (Birr 304million per annum) and the estimated annual investment for the remaining
421 These figures are different from those in the preliminary document ofthe TYDt (paira 7.08). Presumably the discrepancy is due to thepreliminary nature of both documents.
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seven years of the plan period is Birr 430 million a year. Even takinginto account the fact that industrial investment in recent times wasdepressed due to security and other reasons, the feasibility of such alarge increase in investment levels seems doubtful, due to the shortage ofskilled manpower and the severe financial (domestic and foreign) con-straints. If the targets were achievable, such large increases might notbe warranted from the standpoint of an appropriate intersectoral allocationof resources, in particular if excessive inveaLments in non-priority indus-trial projects were to proceed at the expense of agricultural investments.
Table 23
Fixed Assets and New Capital Expenditure: Current and Projected
--- iBirr Million----Industrial Project 3/
Pipeline-- 1980/81---- For Compl. For Compl.
Fixed Capital during in 1985Assets Expenditure 1983-85 Onwards
Subsectors1. Food, beverages 174.9 15.1 149.6 304.9
tobacco2. Textiles, leather 136.2 20.0 266.5 431.4
footwear3. Wood, paper 34.5 2.7 - 427.6
printing4. Chemicals, petroleum, 40.0 6.4 4.8 216.5
rubber, plastics5. Non-metallic 24.0 10.0 472.0 -
mineral products6. Metals, engineering, 12.2 1.3 19.8 1,661.2 4/
misc.TOTAL 1979/81 418.8 1/ 55.0 2/ 912.7 3,041.6
(Total 1979/80 373.6 42.8)
1/ For 198 public and 210 private establishments.T/ For 146 public and 38 private establishments.3/ Major public sector projects.?/ Includes expansion of tractor and machinery complex in 1993.
Source: Central Statistical Office, Survey of Manufacturing Industry1980/81. Ministry of Industry project profiles, July 1983.
7.22 Eighteen projects estimated to cost Birr 913 million-includingforeign exchange content of Birr 397 million--are scheduled for completionin 1983-85. Of these, nine are nearing completion, six are in the designstage and three are under tender. Another 16 projects estimated to -ostBirr 3,041 million are at the identification/promotion/feasibility study
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stages. At the time of the maision, of the 18 projects scheduled for coo-pletion by 1985, project documents were available only for the following 10projects. 43
Table 24: List of Project Documents Reviewed
Project Nature of Document
1. Combolcha Textile Mills Feasibility Study2. Asmara Flour Mill Feasibility Study3. Awassa Textile Mill Short sumary of
fessibility study4. Soyabean Processing Complex Feasibility Study5. Wonji/Shoa Sugar Factory Expansion Feasibility Study6. Pencil Manufacturing Plant DPSA review of
fessibility study7. Combined Sorghum/Wheat Flour Mill Feasibility study8. Match Factory Technical study of
properties ofof available woods.
9. School Uniforms Plant Feasibility study10. Ethiopian Enterprise (Plywood) Factory Feasibility study
Rehabilitation and Relocation
7.23 Replacement Investment. ihe review of thy -'ject pipelineraises questions about whether enough attention is being paid to replace-ment investment. A brief review conducted by the mission suggests thatthere is a backlog of plant replacement needs, yet the pipeline dealsalmost exclusively with investment in new factories. It is frequently thecase that replacement investment yields high returns in the short term.The Government is proposing spa..ial stud'es of a number of enterprises todetermine how best to deal q''th rehab,ilitation needs, including plantreplacement. These studies mlght produce proposals for investment in plcatreplacements and rehabilitation, which should dt least partially off-setthe pre&ent emphasis on investments in new plant and equipment.
7.24 Project Size, Capital Intensity and Import Dependency. Half ofthe proposed projects have investment costs of less than Birr 25 millioneach, a modest enough goal. But 10 projects have costs exceeding Birr 100million each, with the agricultural machinery plant costing cver Birr 1.5billion. Furthermore, nine projects which provide nearly 6,000 jobs at acost exceeding Birr 200,000 per job account for 67 percent of total in%est-ment and only 26 percent of employment. A high investment level, or a highcost per job, are not by themselves sufficient to render a project un-economic, since overall social costs and benefits ought to be considered
431 The observations in this section are based in part on these 10documents supplemented by knowledge of the current investmentdecision-making process.
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in a thorough evaliation. These high total investments and high costs perjob, however, indicate the need for a detailed review of the investmentprograo, since they suggest that, in a number of cases, the economic rateof returns may be low. Furthermore, in some cases the project's capitalIntensity is associated with high import dependency.
7.25 Geographical location. An important aspect of the Government'scurrent industrialization strategy Is to spread industrialization nation-ally to remove the present unbalanced growth of unly a few major industrialcenters. The pipeline of industrial projects, however, shows a strong ten-dency to industrial concentration in those regions which are mst urbanizedtoday. This concentration is seen in Table 25, which also provides inform-ation on the regional distribution of population and its urban characte-ristics. The geographical imbalance in future industrial location comesout clearly when the present population shares are compared to the pro-jected investment shares. The Shoa Administrative Region with only 20.5percent of the nation's population is to receive 72.5 percent of projectedinvestment.
Table 25: Regional Population Characteristics and Investment Indicators
IndustrialLicenses
Issued 1981/82Population 1979 a/ Planned Investment and 1982/#3
Z of No. of Birr Z of No.of Employ-(000.) Nation Z Urban Projects Millions Total Firms ment
Arussi 1,119.3 3.7 8.9 1 28.0 0.7 Bale 856.1 2.8 5.5 -- -- -- --
Eritrea 2,362.6 7.8 28.3 3 113.5 3.0 --
Gamo-Goffa 977.1 3.2 4.5 -- -- -- --
Gojjam 1,984.4 6.6 9.1 2 85.0 2.3 -- --
Gondar 1,999.6 6.6 7.7 -- -- --Hararge 3,043.2 10.1 8.5 3 355.2 9.4 3 57Illubabor 789.5 2.6 6.5 - -- -- -- --Keffa 1,573.0 5.2 8.0 - - -- -- --Showa 6,195.3 20.5 27.4 20 2,731.2 72.5 26 359Sidamo 2,734.7 9.0 7.4 2 230.1 6.1 - --Tlgrai 2,105.4 7.0 8.7 -- -- -- -- --
Wallega 1,966.3 6.5 5.7 - - - -- --
Wello 2,544.1 8.4 6.8 1 222.0 5.9 1 9
TOTAL 30,250.6 1UO.0 13.2 32 3,765.0 100.0 30 425
a/ Central Statistical Office, Statistical Abstract, 1980, page 25.
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7.26 Availability of markets and of inputs. The mission's limitedreview of only a few project feasibility studies, does not allow toappraise the technical features of most of the projects in the pipeline orto judge whether alternative technologies and equipment have been adequate-ly explored. It does appear, however, that adequate inputs or markets maynot be immediately available for some projects, as in the following cases:
(a) Barley for the 10,000 ton per year malting plant (Birr28 million).
(b) Cotton for the Awassa and Combolcha textile mills (Birr220 and 222 millions respectively).
(c) Power for the Dire Dawa Cement Plant (Birr 272 million)without denuding other mills of energy.
(d) There may be expertise and export market limitations atthe leather articles plant (Birr 8 million).
Ce) The timing of the proposed 600,000 TPY cement plant atDire Dawa (Birr 272 million) may also be affected bymarket reappraisal since design work was initiated in1979. Depending on the outcome of the market reap-praisal, it might be warranted to add another line tothe Huger Cement plant instead.
7.27 General observations. Pending a more in-depth project by projectanalysis, the following general observations arise regarding some of thelarge investments being considered: i) considering its large size and thevery high DRC of pulp and paper, the feasibility of the proposed Birr 417million pulp and paper investment at Wonji would require careful analysis;and ii) other proposed projects which need particularly careful analysisbefore investment decisions are made, are the caustic soda plant (Birr 107million), the significant expansion of the Nazareth tractor and machineryplant costing Birr 1,527 million for which the market may be inadequate,and the spare parts factory at Akaki (Birr 111 million) which may desirablybe developed over a longer period. The reservations regarding the economicviability of important investments, and the concerns raised on the availab-ility of markets and inputs on a sizeable portion of the proposed projectssuggest that an alternative scenario for utilizing these investable fundscould be considered, putting greater emphasis on smaller projects withlarger employment effects.
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Chapter VIII. A STRATEGY OF INDUSTRIAL DEVELOPMENT AND PROPOSALS FORPOLICY REFORM
8.01 This Chapter discusses the proposed industrial sector strategy,and the specific supporting policies proposed in this report, on the basisof the findings reported in the previous seven chapters. The first sectionpresents the main themes in the strategy of industrialization, focusing onimproving the efficiency of resource allocation and use in the industrialsector, The main elements in this strategy are: i) efficient utilizationof existing resources in the IPE and SSE sectors, ii) improved decision-making in the allocation of new investments, iii) reduction in the burdenof centralized decision-making, and iv) setting the correct price andincentive signals.
8.02 The recommended policies to support this industrialization stra-tegy are outlined in the second section of the chapter. They include pro-posed reforms in the following areas: i) public industrial enterprises; ii)public investment; iii) SSEs; iv) trade policy (exchange rate, structure ofprotection and export incentives); v) pricing policy; vi) employment andwage policies; and vii) foreign investment.
A. A Strategy for Improving the Efficiency of the IndustrializationProcess.
8.03 The analysis of the industrial sector has suggested the existenceof inefficiencies in the use and allocation of resources in IPEs and SSEs.Both the misallocation of new resources and the lack of productive utiliza-tion of the existing resources have significant implications for the deve-lopmental goals of Ethiopia: i) the industrial sector growth is below itspotential, slowing down GDP growth, ii) scarce resources are diverted frommore productive uses to less productive ones, slowing down the developmentof sectors and subsectors where Ethiopia enjoys a comparative advantage,iii) employment absorption is less than it could be, and iv) the industrialsector contribution to the balance of payments is significantly less thanit could be.
8.04 Historically, the share of industry in GDP has not been low, con-sid-oring Ethiopia's extremely low per capita income. After experiencing afast growth phase in the 60s, the share of manufacturing in GDP leveledoff, and has fluctuated between 9 and 10 per cent of GDP since the revolu-tion. Although the rate of growth of manufacturing output may be expectedto exceed GDP growth in the future, a significant acceleration in the paceof growth of industry (and in industry's share in GDP) is unlikely to takeplace in the absence of significant agricultural growth, for the reasonsdiscussed in para. 7.14 above. In particular, limitations on resourceavailability are likely to constrain the possibilities of fast industriali-zation, even if new efforts to promote exports, .^r improved policy environ-ment, and new efficient import substitution activities may relax to an ex-tent the constraints on industrial growth. In order to attain the Govern-ment objective of providing a higher standard of living for the population
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through a balanced industrialization process, and considering the limitedavailability of current and future resources in Ethiopia, the Government'sindustrial sector strategy should concentrate on (i) maximizing the effi-ciency with which existing resources are now used; and (ii) maximizing theefficiency in the allocation of new resources. This strategy would requireactions in four main areas including improving the economic efficiency ofIPEs, increasing the productivity of SSEs, improving the process of publicinvestment planning and reducing the burden of centralized decision makingthrough greater reliance in providing the adequate price and other incen-tive signals to the economy.
8.05 Efficiency of resource allocation. The overall amount ofresources available for new investments in Ethiopia is very limited inrelation to its needs, and the situation is not expected to change signifi-cantly in the near future. The importance of rigorous efficiencyanalysisin investment planning is thereby magnified. Efficiency considerationsought to be integrated at all levels of decision planning:
(a) Macroeconomic: Ethiopia's overall investment needs for thenext 10 years require a significant resource mobilization, both domesti-cally and from abroad. Failure to increase the domestic savings rate andto secure foreign exchange assistance in the required amounts will implylower aggregate investment, which in turn will affect the overall perfor-mance of the economy in general, and of industry in particular.
(b) Intersectoral allocation of resources: just as under-investment in the industrial sector relative to other sectors slows downthe industrialization process and reduces the role of industry in overalleconomic development, overinvestment in industry can have undesirableeffects on the economy as a whole and on the industrial sector as well. Inthe Ethiopian case particular attention ought to be given to securing asufficient amount of resources for the agriculture sector, which will con-tinue to be the largest sector in the Ethiopian economy and its vain earnerof foreign exchange in the foreseeable future. Hence, agriculture willaffect overall macroeconomic performance, and will be an important determi-nant of the pace of industrialization. Furthermore, the important backwardand forward linkages between agriculture and industry reinforce the need toavoid overinvestment in industry at the expense of agriculture. Last, butnot least, the industrialization process will have to depend for some timeon a large share of domestically generated savings, which will have to relymainly on a strong agricultural sector.
(c) Intrasectoral allocation of resources in industry:resources should be channeled to manufacturing subsectors and industrieswhich exhibit a comparative advantage and can therefore contribute to eco-nomic growth, czployment and the balance of payments.
(d) Project level: projects should be carefully appraised util-izing appropriate shadow prices in order to ensure the selection of pro-jects with high economic and social rates of return.
8.06 The Efficiency of Industrial Public Enterprises. IPEs will con-tinue to comprise the bulk of the industrial sector and their performance
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will be crucial to the industrialization process. Our analysis revealedthat the performance and economic efficiency of IPEs varies significantlyacross firms. To improve their performance requires a different approachin each case depending on the potential for productive contribution to theeconomy of each firm. The main actions in this subsector should be:
(a) Improve the performance of good IPEs. Many IPEs appear to beeconomically efficient or only marginally inefficient producers, and havethe potential of becoming more productive and increase their contributionto the sector. For instance, five out of the sample of 19 firms surveyedby the mission had DiCs lower than one (efficient producers), and an addi-tional number of firms exhibited DRCs not significantly above 1 (margi-nally inefficient). For these firms, the necessary interventions could belimited to improvements in operational procedures and incentives at thefirm level.
(b) Restructure economically inefficient but salvageablefirms. Some IPEs which are now inefficient producers (i.e., they exhibitvery high DRCs), could become efficient through a significant restruc-turing. It is unlikely that marginal changes will increase efficiency suf-ficiently, yet a significant restructuring or rehabilitation may bringabout enough improvements in productivity to transform these firms intoefficient producers.
(c) Phasing out extremely inefficient firms that cannot berestructured. Some IPEs operate at such high levels of inefficiency thattheir revenues do not cover the operational costs. The more extreme casesexhibit negative value added at world prices, meaning that the economicvalue (border price) of their output does not cover the economic costs ofthe tradeable inputs. Out of the 10 firms in the sample of 19 that arerather inefficient, three appear to have negative value added in produc-tion. The economy would benefit from closing down these plants and divert-ing resources to more productive uses unless a major restructuring can turnthem into efficient producers. Moreover, all firms that appear to be veryinefficient should be closely scrutinized: unless a restructuring can bringabout a significant cost reduction and productivity improvement, theyshould be phased out as well.
8.07 Productivity of Small Scale Enterprises. Small Scale Enterpriseshave always contributed signiticantly to industrial production inEthiopia. They have low import dependence, capital intensity and geogra-phical concentration, and have the potential of producing efficiently awide array of products. Unfortunately, however, capacity utilization, pro-ductivity, and investment levels have been low during the last decade. Thesector is producing well below its potential. The expected economic re-turns from channeling resources to this sector are likely to be very highdue to the significant underutilization of capital and the relatively lowimport and capital intensity of the sector. Government policies shouldencourage an increase in the flow of resources to this sector and measuresto improve the investment climate for SSEs ought to be implemented.
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8.08 Importance of Price and Incentive Signals. In theory, in a fullycentrally planned economy, where the State makes all investment and pro-duction decisions, the allocation of resources and productive structurethat will result is not sensitive to the structure of international anddomestic prices. Under such a system the actual exchange rate, prices andwages would not have any allocative influence, since the State as adecision-maker would utilize the appropriate shadow prices in every plann-ing and project evaluation exercise and ensure an optimal result.
8.09 In practice, however, even the more sophisticated and advancedcentrally planned economies deviate significantly from this theoreticalideal. First, the amount of information required, the analytical complex-ities of the necessary models, and the many unknowns regarding the enormousnumber of variables and their interrelationships would require an omni-scient planning institution with virtually unlimited skills, software andhardware computing availability. Second, even if optimal decisions couldbe taken centrally, implementation constraints would lead to non-optimalallocation due to i) the limits in the implementation capability of thecentral institutions, and ii) the existence of many small decision-makerswho make their own decisions. As a result of these constraints, even coun-tries with highly sophisticated central planning institutions, whereskills, software and hardware availabilities are less serious limitations,have implemented reforms towards greater reliance on price and incentivessignals, and more decentralized decision-making. Examples include Hungary,Yugoslavia, and China.
8. 10 Ethiopia's economy is only partially centrally planned, and isnot insulated from international and domestic price signals. For instance,many decisions are taken by private individuals and by the public enter-prises on the basis of domestic prices. An overvalued exchange rate and alow price of capital would allow the enterprise to prepare a relatively lowcost investment plan by choosing import and capital-intensive investments.Insofar as the planning agency does not correctly shadow price the exchangerate and the price of capital, the distorted prices will result in anincorrect investment decision from society's standpoint. Other similarexamples abound, like the negative role of an overvalued exchange rate andprice controls on agricultural production; the role of input prices on out-put prices (via cost-plus pricing), and the implications of these input andoutput prices for the financial profitability, capitalization and invest-ments of the firm. Therefore, it is important for Ethiopia to set thecorrect price signals within its system of centralized planning. Thistranslates into many policy areas where action is required: i) exchangerate policy; ii) import regime; iii) exports incentives; iv) pricingpolicy; v) employment and wage policies; and vi) capital costs. The secondpart of this chapter addresses the specific policy recommendations in thisarea.
8.11 Reduction in the centralized decision-making burden. The centra-lized structure of decision-making (which affects even micro-level deci-sions) imposes a high administrative burden on the NCCP, the Ministry ofIndustry and the Corporations, and results in inefficiencies due to insuf-ficient institutional planning capacity and to the loss of financial andoperational autonomy at the firm level. Decentralization to the firm
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level, together with adequate price and incentive signals, is essential forallowing the firu to react effectively to economic, financial and marketrealities, and would result in higher productivity of the IPEs.
8.12 Significant gains in social welfare could result from a shift toa more decentralized system of decision-making with an appropriate priceand incentive structure, i.e., a price structure consistent with borderprices and incentives to maximize the surplus value of the firms. A systemof adequate price signals could be generated either by the central plannerssetting a price structure guided by border prices (accounting for the needto protect certain infant industries, other externalities, etc.) or by aprice system more reliant on the market mechanisms. In the Ethiopian envi-ronment, if centralized price setting is deemed preferable to a movementtowards a more market oriented system, the use of border prices, modifiedwhen necessary to account for non-efficiency objectives in price setting(and in the evaluation of new investments and of enterprises' performance)would acquire particular importance.
B. Proposals for Policy Reform
I. Economic Efficiency of IPEs
8.13 As discussed in the strategy section, the policy actions regard-ing public enterprises will depend on the current and potential level ofeconomic efficiency of each firm. We distinguished between three catego-ries of firms: i) efficient and marginally inefficient IPEs; 2) ineffi-cient but salvageable firms; and 3) inefficient firms that cannot be reha-bilitated at an acceptable cost. The most important step in scrutinizingexisting IPEs is to ascertain whether the firm should remain in operationor it should close down (i.e. whether it belongs to the first two catego-ries or to the third). If the firm should remain in operation, the nextstep is to identify the required measures to improve its performance. Thedistinction has to be made then between firms that would benefit suffi-ciently from some general and specific improvements in the firm's opera-tions (category 1) from firms that require a major restructuring to becomeefficient contributors to the economy (category 2).
8.14 Given the preliminary results discussed above (Chapters II andIII), one of the major tasks ahead for the Government is to make a detailedreview of the economic and technical efficiency of each Ethiopian IPEs.This review would allow a classif'cation of each enterprise in one of thethree categories above, and would require a more complete computation ofgeneral efficiency indicators, an assessment of the main reasons resultingin the specific efficiency levels, and the establishment of an action pro-gram for solving the problems identified.
8.15 Firms whose DRCs are high would require closer scrutiny to ascer-tain the sources of their problems and the potential solutions; if the DRCsare significantly above one even when investment costs are excluded (i.e.short-run DRC), serious consideration ought to be given to closing down theplant unless the technical evaluation reveals that a major restructuring islikely to raise productivity levels sufficiently to make the firm efficient
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and/or there is a major non-economic objective which is accomplished bykeeping the firm open. If the firm exhibits negative value added in pro-duction, and the situation is not expected to change dramatically in thenear future, it should be closed down. If the (long-run) DRC is signifi-cantly above one but its (short-run) DRC excluding investment costs isbelow one, the firm should be kept in operation and measures should betaken to improve its performance, yet no new investments should be chan-neled to this type of firm, unless the new investments can be expected togenerate substantial efficiency improvements.
8.16 Measures to Improve the Performance of IPEs. For the IPEs thatare assessed to be potential or actual net contributors to Ethiopian deve-lopment (and therefore will continue leing in operation) the followingmeasures are recommended:
(i) Productivity Targetting. Annual production targets have notbeen conducive to high productivity and to cost effective-ness in Ethiopian industry. The contribution of publicenterprises to the count:y's development would be streng-thened by the establishment of a system of annual producti-vity targetting which should be accorded (at least) as muchimportance as the fulfillment of annual productiontargets. Productivity targets should aim at reducinggradually unit production costs (in economic or borderprices) until they are no higher than border prices for thegood. A quality component should also be an integral partof productivity targetting thereby providing an incentivefor consistent quality control at the firm level.
(ii) Measures to Alleviate tLe Financial Squeeze Facing manyIPEs. Although IPES have been financially profitable as agroup, many of them are facing financial difficulties of acash flow nature. This is partly the result of the highlevel of cash contributions required from IPES for domesticresource mobilization by the public sector, and in somecases, of delays in pricE! adjustments by the authorities.Some IPEs have faced a shortage of working capital, and hadto resort to short-term credits, which has added to theirfinancial obligations. The debt-equity ratio has increasedsignificantly indicating a weakening in the financial struc-ture of the enterprises. These problems require actions to:(i) alleviate the burden of the transfers to the Treasuryfor the affected enterprises; (ii) improve timeliness in theprice adjustments, and (:Lii) provide an adequate level ofcapital in order to avoid a further erosion of the equitybase in many enterprises. All these measures, however,should be subordinate to the achievement of economic effi-ciency discussed above.
(iii) Increased Decision-making Autonomy at the IPE Level. Theefficiency of operations of IPEs appears to be hampered bythe fact that many of the relevant decisions -egardinghiring, incentive rewards, authority to procure inputs, and
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investments are still taken outside the enterprise. While acertain amount of decentralization has already taken place,most enterprise managers are now qualified to exercisegreater responsibility. If done together with the adoptionof some reforms in the trade regime and the pricing policies(paras. 8.20 - 8.32 below) some additional decentralizationof decision-making, where managers would be givenincreased responsibility and would be held accountablefor the operations of their enterprise, would allowgreater flexibility and improved allocation of resources.Increased decision-making at the firm level would alsorelieve the pressure on higher levels of Government thatwould be able to increase its attention to strategicplanning and monitoring of performance. In order to achievethis objective, it would be useful to: (i) increase thelevel of internally generated financial resources that canbe used by the firms, e.g., to improve maintenance of faci-lities; (ii) recruit specialists with experience of produc-tion management and maintenance at the Ministry of Industry,at the corporation level, and in some enterprises with par-ticular weaknesses in the production and engineering depart-ment; and (iii) improve the training facilities for techni-cal managers and supervisors, involving local and externaltraining institutions.
8.17 Measures to Restructure Inefficient IPEs. The measures above,although necessary to improve the performance of all IPEs, are not suffi-cient to ensure the transformation of more inefficient (yet potentiallyefficient) firms. Specific restructuring measures for these firusarenecessary. The nature and scope of these measures will include, inmanycases, new investments to replace obsolete equipment, to eliminate bottle-necks in production, or to modify the input and output mix. Therefore, therestructuring of IPEs may become a large component of thePIP. The measureshave to be firm-specific and should be identified by the Government withinthe context of a more detailed study of IPEs. In each case, particularattention ought to be paid to the question of the appropriate mix betweenrehabilitation of existing equipment and replacement with new equipment.
II. Productivity of Small Scale Enterprises
8.18 The potential contribution of SSEs to Ethiopian developmentargues for an equivalent of the Zemecha campaign for this sector in orderto increase capacity utilization, production and productivity levels in thesector. Mobilizing resources to this sector is likely to have a high pay-off because of the current low levels of capacity utilization. IncreasingSSEs output could be achieved with very low levels of new investment andwould result in very low ICORs. This is particularly important in a situa-tion where resources (domestic and foreign) for new capital investment willcontinue to be extremely tight. The following specific measures are recom-mended:
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(a) Improved Economic Environment. The provision of clear posi-tive signals from the Government regarding the importance itattaches to this sector is essential for improving invest-ment confidence among the small entrepreneur. These signalscould come in the form of official declarations and repeatedsupportive statements about the role of SSEs, and be accom-panied by policy measures, as described below.
(b) Better Access to Foreign Exchange. The foreign exchangeallocation system appears to favor the IPEs at the expenseof small enterprises. SSEs should be given equal priorityas efficient IPEs in the access to foreign exchange.
(c) Better Access to Domestic Inputs. Access to domestic rawmaterials also appear to be a bottleneck for SSE productionin many instances. Just as the Zemecha campaign during thelate 1970s successfully mnobilized the required inputs to theunderutilized IPEs, a similar effort is now required forSSEs. Firms should also be provided with better access tocredit for working capital.
(d) Improved Institutional and Administrative Mechanisms. Othermeasures to stimulate the development of SSEs may include:
(i) Increase the ceiling of Birr 500,000 in moveable fixedassets;
(ii) lift the limitation to only one venture by the smallscale entrepreneur;
(iii) eliminate unnecessary regulations regarding licensingprocedures, which at present result in significantdelays and in few licenses being approved;
(iv) expedite the processing of credit applications;
(v) extend the promotional and technical assistancemeasures provided by HASIDA to firms that have overBirr 200,000 in moveable assets.
(e) Reduce the Tax Burden. Tax levels are extremely high, dis-couraging investments in the sector. The tax structureought to be reviewed, and both the average and marginal taxlevels should be reduced.
(f) Allow Participation in Joint Ventures. The joint venturecode on foreign investment, as presently formulated, has noprovision for the participation of local private industry injoint ventures. A suitable amendment to allow such partici-pation could provide a boost in acquisition of new andbetter technology and in gaining access to markets abroad.
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(g) Improve the Knowledge of the SSE Sector. Detailed informa-tion on the SSE sector is still very limited. Thus, it Isnecessary to enhance the understanding of the current situa-tion of the sector. This would allow the Government toadopt specific policies complementary to those just dis-cussed. The study ought to focus on the present extent andmain determinants of capacity underutilization for each sub-sector and consider the likely impact of the measures pro-posed above. Such a study could be done under the directionof the Ministry of Industry and HASIDA with the technicalcooperation of the World Bank.
III. Public Investment Program in Industry
8.19 Given the centralized ownership of the means of production anddecision-making in Ethiopia's economy, rigorous public investment program-ming and project appraisal are crucial to ensure that the scarce resourcesavailable are utilized productively. The Government has taken a positivefirst step by establishing in 1979 the Development Projects Study Agency(DPSA) within the CPSC, and subsequently, in 1983, the Industrial ProjectsService (IPS), an autonomous project preparation body under the Ministry ofIndustry. These steps already taken need to be complemented through thefollowing measures:
(a) Institutional Strengthening. Both DPSA and IPS requirestrengthening in terms of number of staff and experience.Technical assistance in investment planning and in develop-ing an appropriate information system for both institutionsis recommended.
(b) Technical Improvement in Public Investment Programming andProject Appraisal. A stronger institutional framework forinvestment planning will permit to address the followingtechnical areas that require particular attention in theplanning process:
(i) Macro and Intersectoral Consistency. Consistency ofIndustrial Public Investment Program with the overallinvestment program. The latter, in turn, ought to beconsistent with a realistic assessment of the expecteddomestic and foreign resources available. Emphasisshould be laid on the consistency of the Industrial PIPwith the balanced growth needs of the country, payingparticular attention to the dependency of the indus-trial sector on agricultural sector performance.Furthermore, the Industrial PIP should be consistentwith the national objectives and strategies, as spelledout in the TYPP. As noted earlier (Chapter VII) themission's assessment is that the overall level ofplanned industrial investment indicated in the prelimi-nary TYPP documents is well above the expected availa-bilit' of resources, and that the proposed sub-sectoral
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composition within industry may not be fully consistentwith the country's stated objectives.
(ii) Rigorous Project Evaluation of New and RehabilitatedInvestments. Economic project appraisal of all newpublic investments, where all benefits and costs areconsidered and appropriately shadow priced, would eli-minate the possibility of allocating resources toinefficient projects or to excessively capital andimport intensive projects. In addition, a major compo-nent of the public investment program in industryshould be based on improvement, rehabilitation andrestructuring of existing enterprises, reducing thecurrent bias towards new projects.
8.20 Rigorous project evaluation will be instrumental in channellingresources to industries where Ethiopia has comparative advantage, such asappears to be the case in leather products, agro-processing and certainfoods and beverages that are based on locally produced inputs. Decisionsbased on economic appraisal of projects are likely to resu'lt in lessresources flowing to industries where Ethiopia lacks comparative advantage,as in the metal products industry which is heavily import dependent andsuffers from diseconomies of scale.
IV. Trade Policy
8.21 As noted earlier (and as indicated in the Bank's recent CEM),a significant adjustment of the overvalued exchange rate would be requiredto compensate for the substantial appreciation in Ethiopia's real effectiveexchange rate since 1975, the deterioration in terms of trade over the pastthree years, and the worsening balance of payments and foreign reservessituation. The negative effects of the overvalued exchange rate on theindustrial sector performance and on the economy in general were discussedin Chapter VI and include: (i) underprotection of some subsectors in indus-try; (ii) excessive import dependency; (iii) anti-export bias; (iv) discri-mination against the agricultural sector, which affects the industrializa-tion process, and (v) encouragement of high capital intensity. The overallwelfare cost of the overvalued currency has been high for Ethiopia. It isimportant to avoid incurring additional losses of GDP growth, of industrialexports and of employment potential by making the appropriate adjustmentsin the exchange rate, and allowing the structure of domestic prices toreflect the exchange rate adjustments.
8.22 An additional advantage of making appropriate adjustments to theexchange rate would be that the need for other trade policy measures andcontrols would be significantly reduced. Neither import controls nor hightariffs would be required as tools in the management of the balance of pay-ments situation since the level of imports would be kept under control bythe correct exchange rate. Also exports would increase, and the higherprice of imports would effectively protect domestic industry, when combinedwith moderate import tariffs.
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8.23 A major benefit from these proposed policy changes would be thatthe bias against the agriculture sector would be eliminated by the reduc-tion of tariffs on industrial goods and the exchange rate adjustment.Thus, performance of the agricultural sector would improve, and would gene-rate higher industrial growth.
8.24 Although a realistic exchange rate is likely to be the mostpowerful export incentive available, some additional incentives may stillbe needed. A duty drawback or a tariff exemption for exporters would berequired in order to avoid the detrimental effects on export production oftaxing their intermediate inputs and capital. Furthermore, the Governmentmay also wish to consider providing a uniform fiscal incentive to exportsin order to offset the anti-export bias which would exist as long as anyimport restrictions and tariffs remain in place, and in order to provideencouragement to a genuine 'infant industry": the production of exportgoods.
8.25 If full adjustment in the exchange rate to eliminate the excessdemand for foreign exchange cannot be achieved in the near future, othertrade policies measures become particularly important in compensating forthe misallocative effects of an overvalued exchange rate and in providingan adequate incentive structure for efficient industrialization. Reformsin the system of import controls, tariffs, and export incentives wouldtherefore be needed under this scenario, and are discussed below.
8.26 Reduction in Import Controls. Import controls figure prominentlyin the structure of protection in Ethiopia. These controls are discretio-nary in nature, impose a substantial administrative burden on central agen-cies, and Are an important factor in the high variability of the structureof protection in industry, which in turn is associated with inefficienciesin the sector.
8.27 Controls are also utilized, however, as an important tool in themanagement of the balance of payment situation, and cannot be removedunless other, better, mechanisms are used to address the balance of pay-ments problem. Insofar as a full adjustment in the exchange rate is notpossible in the short run, import tariffs and tariff surcharges offer asecond best alternative. Given an adequate domestic pricing policy,tariffs are a more effective tool of economic policy than controls, becausethey provide a clearly defined level of protection that can be reducedgradually over time. It is recommended, therefore, that the Governmentconsider a reduction in import controls and their replacement by temporaryuniform tariff surcharges until sufficient adjustments in the exchange ratetake place.
8.28 Reduction in the Dispersion and Level of Tariffs. The high dis-persion in the tariff structure results in large differences in protectionto specific firms and may be partly responsible for the severe ineffi-ciencies in many IPEs. A reduction in the dispersion of tariffs should bean important policy objective. As a first step, a minimum tariff for goodsthat are now subject to zero (and very low) duty could be established.This measure would affect mainly intermediate and capital goods, reducingimport dependency and discouraging firms which utilize imported materials
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inefficiently. Then, the next policy step should be to reduce the tarifflevels on highly protected goods. The gradual change towards greater uni-formity in the tariff structure would help improve the efficiency ofresource allocation in the industrial sector for the reasons discussed inChapter VI.
8.29 In the medium term, as the exchange rate adjustment takes place,high tariffs should not be required for either balance of payment manage-ment or as an instrument of protection. Consequently, a reduction in thetariff levels on highly protected goods would be desirable.
8.30 Export Incentives. The current bias against, and the low levelof, manufactured exports ln Ethiopia implies that effective export promo-tion will require a workable set of incentives to exporters. The set ofexport incentives ought to be substantial enough to compensate for theovervaluation of the exchange rate, and to provide some positive net incen-tive to exports.
(i) Export Retention Scheme. Exporters of non-traditionalexport goods could be made eligible for retention of a fixedpercentage of the net foreign exchange earnings that wouldnot be subject to surrender to the National Bank ofEthiopia. The exporter could then use the retained foreignexchange to purchase inputs in addition to those authorizedby the Ministry of Foreign Trade under the normal alloca-tions. This would generate a basis for future exportearnings and to promote the growth of relatively efficientfirms that are able to export.
(i) Export Revolvins Fund. The export retention scheme couldusefully be supplemented by an export revolving fund thatwould provide guaranteed access to foreign exchange forimports needed in the production of exports. It would alsoserve to provide working capital for the production cycle.Loans would be repaid from gross export receipts. Since theproposed export retention scheme would be on net foreignexchange earnings, the two approaches are complementary andwould have similar documentation and enforcement require-ments.
(iii) Duty Drawback or Tariff Exemption for Exporting. Thesuggestions for short-run tariff reform, if adopted, wouldincrease the negative effective protection for exporters,since intermediate inputs and capital would be taxed whileexport production is not subsidized. Thus, a workable dutydrawback or exemption system would be needed to establish amore favorable trade regime for exporters.
(iv) Fiscal Incentives. The Government may also wish to considerproviding a uniform fiscal incentive to exports in order tooffset the current anti-export bias as a result of the
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overvalued exchange rate and of any iuport restrLctions andtarlf's that may remain, and to provide encouragement to agenuine iLnfant industry': the production of export goods.In combination with a workable duty drawback mechanism theincentive could be applied to export sales at a singlerate. This would be preferable to the current system ofllimted export subsidies to some entrepreneurs that areexporting at a loss.
V. PricIng Policies
8.31 An extensive system of prLce controls ls In place In Ethlopla.Price controls on some essential items fulflll certaln social objectivesand therefore can be justLfied. To the extent possible policy actionsshould distlnguish, therefore, between essential and non-essential items.At any rate, however, whether price controls are maintained (on essentialLtei ) or the market mechanism is encouraged (on some non-essential goods),it Is essential to ensure that border prlce conslderations (suitablyaccountlng for the need of protecting Lertain industries) provide a guidein the determinatLon of prLces. Othervl;c the signLficant benefitsexpected to accrue from exchange rate adjustment, reductlon ln quantitativerestrLctLonp, and decentrallzation of decision-making may be largely lostbecause of inadequate price signals to the economic decision-makers.
8.32 Setting Appropriate Price Controls on Essential Items. Pricecontrols for essential items should be determined by paying full attentionto efficiency and productivity considerations. The exilsting cost-pluspricing is an inefflcient approach to price setting since lt does notencourage low costs of production and may result in a prlce structure whlchdoed not reflect the costs and beneflts of the dLfferent goods to theeconomy as a whole. It is recommended to move away from cost-plus pricingtowards an efflciency-based prlcing approach, where prices would be set inrelatlon to border (lnternational) prices, modified when necessary toaccount for non-efficlency objectLves of the Government.
8.33 Gradual Decontrol of Prices for Non-Essentlal Goods. Prices fornon-essential goods can be aaequaCeiy determinea by a marKet mechanism,provLded that imported goods are allowed to compete with domesticallyproduced item to prevent the possibillty of monopoly situations harmful tothe consumers. For this reasons, and given the heavy administrative costsof a well-managed price control system, it is recommended that prices fornon-essential goods be decontrolled gradually, as import control's areelimlnated and the necessary adjustments in the exchange rate and tariffsurcharges take place.
VI. Manpower, Employment and Wage Policies
8.34 The shortage of skills and insufficient lncentives provided tothe lndustrial labor force constrains the efficiency of manufacturingenterprises in Ethiopia. For example, inadequate maintenance of plants dueto the shortage of skilled manpower causes more and longer down-times. Theshortages are to be found in the full range of skill requirements--frommanagers to shop floor technicians at the enterprises, Corporations and theMinistry. It would be desirable to provide a framework of incentives and
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regulations which would attract productive skilled manpower to the indus-trial sector. The likely sources of manpower are: (a) skilled Ethiopiansresiding abroad, (b) foreign personnel, (c) entrepreneurs and skilled per-sons engaged in distribution because it is now relatively more rewarding,and (d) the domestic labor force through education and training andupgrading of skills.
8.35 In the short run, the Government should adopt measures to main-tain and improve productivity of the skilled manpower on the job andrecruit technical assistance personnel and already skilled Ethiopiansabroad. Technical assistance personnel are costly even if financed throughforeign aid and should preferably be used selectively for designing, plann-ing and implementing systems and training local staff.
8.36 Manpower Development. There is a clear need to improve the out-put, in terms ot both quality and numbers, of the manpower developmenteffort. This would require aligning training programs mDre closely withneeds-for cost accountants and maintenance engineers for example. Thestaffing and equipment of the training institutions should be strengthenedand programs of in-service training attachments and apprenticeships insti-tuted. Some work has already been done in these directions. A UNDP/ILO/UNESCO/UNICEF Inter-Agency Programming Mission on Human Resources Develop-ment Sectors studied the vocational training situat40n in 1981. TheGovernment is considering a major overhaul of the functions of the NationalProductivity Center to make it more responsive to the needs of industry.It is important to emphasize, however, that while effective and adequatetraining is essential to fill the skilled manpower gap in Ethiopia, unlesssuitable incentives are provided within the manpower market system, thereturns to the investment in training may well fall short of expectations,thereby lengthening the time it will take to fill the gap.
8.37 Employment and Wage Policies. Given the main issues facing theEthiopian industrial labor situation, the following measures arerecommended:
(i) Gradual additional decentralization of job placements,in particular for the job categories where supply ofskills is not very scarce;
(ii) Further relaxation of restrictions on labor mobility;(iii) Improvement of employment data base;
(iv) Greater linkage between salary increments andincreases in productivity per workers;
(v) Delink salary increases from physical productiontargets;
(vi) Relax salary ceilings to allow for salary increase inall salary ranges;
(-ii) Provide higher incentives to scarce skill categories;(viii) Provide incentives for returning Ethiopians residing
abroad, like relaxation of import controls and housingassistance.
While several such measures are already being carried out, particularly(i), (ii) and (iv), further actions in this direction appear to bedesirable.
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STATISTICAL APPENDICES
Table No.
A.1 STRUCTURE OF PRODUCTION
A.l.l The Structure of Manufacturing Value AddedAn International Comparison Among Low Income Countries
A.1.2 Ethiopia: Recent Economic and Industrial Growth
A.1.3 Ethiopia: Gross Domestic Product by Industrial Origin,1974-75 - 1982/83, At Current Factor Cost, 1974/75 -1982/83
A.1.4 The Structure of Employment and Output in Small-ScaleManufacturing (1979/80)
A.1.5 Production of Major Manufacturing Articles,1971 - 1973 G.C.
JiA.1.6 Value Added in the National Account Concept (At Factor
Cost) By Industrial Group, Public and Private1969 - 1973 G.C.
A.2 STRUCTURE OF TRADE
A.2.1 Import Structure
A.2.2 Import Dependence of Medium/Large Scale Enterprises,1981/82
A.2.3 Industrial Exports
A.3 INVESTMENT AND CAPACITY UTILIZATION
A.3.1 Medium/Large Scale Enterprises,New Capital Expenditure and Fixed Assets by IndustrialGroups and Ownership, 1977/78 - 1980/81
A.3.2 Analysis of Fixed Assets and New Capital Expenditures
A.3.3 The Investment Pipeline (Ten Year Perspective Plan)
A. 3.4 Analysis of Pipeline Investment Classification
A.3.5 Regional Population Characteristics and InvestmentIndicators
A.3.6 Capacity Utilization of MLSIs and SSEs
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Table No.
A.4 INDUSTRIAL PUBLIC ENTERPRISES
A.4.1 Public Sector Share in Manufacturing Indus-ry, 1980/81
A.4.2 Selected Ratios in Public and Private SectorManufacturing Industry, 1980/81
A.4.3 Industrial Public Enterprises, Value of Production
A.4.4 No. of Operating Establishments Under Ministry ofIndustry by Corporation
A.4.5 Regional Distribution of Manufacturing Establishmentsunder Ministry of Industry, 1980/81
A.4.6 Selected Data on Sample of 35 IPEs
A.4.7 Export Value of Manufactured Products by Corporation
A.4.8 Government Contribution to IPE Establis1'.ments
A.4.9 Projects for Vompletion During 1983-85
A.4.i0 Public Enterprise Profits
A.4.11 Financial Ratios for Industrial Public Enterprises
A.4.12 Revenue Collections from Capital Charge and kesidual Surplus
A.5 STRUCTURE OF PROTECTION AND EFFICIENCY OF SAMPLE OF IPEs
A.5.1 Structure of Protection and Efficiency of IPEs
A.5.2 Matrix Elements: Costs and Benefits of Surveyed IPEs
A.5.3 Sample Coverage of Surveyed IPEs
A.5.4 Ethiopian Manufacturing: DRC Comparison, 1972 and 1983
A.6 INFLATION AND INTEREST RATES
A.6.1 Retail Price Index for Addis Ababa (Excluding Rent),1974/75 - 1981/82
A.6.2 Structure of Interest Rates as December 31, 1982
Table A.l.l The Structure of Manufacturing Value Added
An International Comparison Among Low Income Countriea
Distribution of Manufacturing Value Added in 1981 (percent) a/
Machinery Value added ManufacturingProcessing Textiles and in manufacturing Growth RateFood and and Transport Other (millions of (annual
Agriculture Clothing Equipment Chemicals b/ Manufacturing c/ 1975 dollars) eenta e)1970 1981 196G70 197082
Ethiopia 27 27 0 2 44 236 349 8.0 2.9
Chad 49 34 0 0 17 37 21 N/A -3.2Bangladesh 30 38 4 16 12 647 1,290 6.6 10.4Burma 31 14 1 4 50 287 456 3.4 4.7Halawi 54 10 0 0 36 44 81 N/A 5.4Upper Volta 74 7 0 11 8 67 96 3.4Uganda 54 25 0 0 21 222 87 -8.9India 13 18 20 14 -_35 10,232 16,190 4.7 4.5 '0Rwanda 58 0 0 2 40 0 106 N/A N/ACent. Afr. Rep 66 21 0 2 11 44 29 -4.3Madagascar 27 39 2 10 22 295 272 N/ASri Lanka 46 10 0 0 44 556 714 6.3 2.4Togo 50 28 0 0 22 30 14 N/A -10.0Ghana 28 0 0 0 72 591 505 -1.5Pakistan 46 14 7 16 17 1,492 2,496 9.4 5.0Kenya 24 10 33 6 27 167 531 N/A 9.0
Average d/: 42 18 4 5 30 934 1,452 6.4 1.4
a/ Computations based on 1975 constant prices.h/ Excludes Petroleum Refining.c/ Includes Petroleum Refining.d/ Unweighted.
Source: World Development Report 1984
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Table A.1.2 Ethiopia: Recent Economic and Industrial Growth(Birr Millions)
74/75 75176 76177 77/78 78/79 79/80 80/81 81/82 82/83 1/
aP at Crvie= 1nketPrices 5,524.5 6,04.0 6,826.3 7,265.3 7,985.5 8,498.8 8,854.4 9,18M.8 9,775.0
GM at Cut.Factoroet Z/ 3,939.5 4,031.2 4,048.6 4,009.3 4,219.2 4,451.6 4,586.2 4,653.8 4,844.6
4irc.Valim Akdd 1,902.6 1,953.7 1,945.8 1,922.2 1,968.4 2,062.2 2,112.7 2,115.1 2,173.2Mmrufact. Valu ~ 360.5 355.2 357.8 358.0 411.7 439.3 457.4 472.8 489.3L & K ?alep Valm Added 170.6 167.2 168.9 169.1 215.2 237.8 251.0 261.2 272.4Hw1bts & eU-6ca1a
Mbuzf.a at Fac.GCst 919.9 188.0 188.9 188.9 196.5 201.5 M6.4 211.6 216.9
Striceure of D (Z)
Sbae cf Epiuiltzme Z 48.3 48.4 r6.3 47.9 46.7 46.3 43.4 44.9 44.8S*m of L & M Scal4
Irdbstry Z 4.3 4-1 4.2 4.2 5.1 5.3 5.5 5.6 5.6-M of Hadicrafts &
-.OIT LI3hmtry % 4.8 4.7 4.6 4.2 4.7 4.5 4.5 4.5 4.5Sum of uifaccuing
Tridhstry Z 9.1 8.8 8.8 8.4 9.8 9.8 10.0 10.1 10.1
unual QG wh Rates (Z)
(M at Gesc_. Factor Cost 0.6 3/ 5.2 5.5 3.0 1.5 4.1Agriculture 0.3 3/ 2.4 4.8 2.4 0.0 2.7L & M Scale Itnustry - 0.03/ 27.3 10.5 5.6 4.1 4.3Hwdicrafts & S. Ind. 0.03/ 4.0 2.5 2.5 2.5 2.5
1/ Proviaasiol.7I At 1960/61 Constart prices.31 Aerap arumi grcwth for three-year peerod 1974/75 to 1977/78.
Sm,: Ethlpia Ract EctIc Deilopmat ai Prospects, World Bar Report No. 4683-a.Extracted fxam variO tabes.
Table A.1.3 Ethilopia Gross Domestic Product by Industrial Origin, 1974/75 - 1982/83At Current Factor Cost, 1974/75 - 1982/83
(Millions of Birr)
EIIIIOPIA: GRIIISS DIMESTIC P1Wfl2 UCI nY I NUSItRIAL ORIGIN. 1974/75-1982/83Al CURNINI tACIOR COST, 1074/76- I38a/03
IMIILIONS OF lIRR)
lNt 1974/75 1Ulb/76 1976/77 1977/78 1970/79 1979/80 1980/I1 1981/82 1902/13
AG6I64C T11IEl SECTIIR 21 2,423.4 2,730.0 3,192.5 3,467.5 3.056.4. 3,671.9 4,024.0 4,035.0 4,261.0.. .. *._.. ... ...... __....... .......... ... ........ ............. ........ .......... ....... .............. _ ............ ........
AGRICULTIIll 22 2,0116.4 2,61b.2 3,058.7 3.330.9 3.514.6 3,723.6 3,172.0 3,679.1 4,118.2F1I1191T1WV, fiS1I4iN a 6NJNI114 2:1 122.0 123.0 123.6 136.6 141.1 148.3 162.0 151.0 157.1
flntEn r.0t4u,mrlTY SEe;460S 21 lfb4.a 8ti3 a 019.2 094.2 1,040.4 1,189.5 1,245.5 1,312.9 1,365.5... ...... .. ._I.. .. ..... ...... ... ..... ... ..... _._. ........ ............. .... ...... ....... ...... .... ........_....._.__
t1MININ AM) IttlARAVINU 71 12.6 11.0 11.0 7.t 7.8 8.1 6.1 9.3 10.0RAMIFACTIIRINU 20 3t0).5 363.t 326.0 360.8 471.9 533.5 564.4 600.1 633.0HANIkg;AAPI I 514ALI-SCALE INO 20 200.6 26S.7 214.1 27fi.3 206.4 290.0 300.9 317.0 328.3OUlLUIrIV Ati) CIUIISTRIICrTOIW 30 232.3 221.0 230.7 211.0 229.4 295.9 300.1 325.9 333.8CI.ECThICITY AMN WAIkR 31 40.5 3813 39.1 39.3 C0.9 55.4 58.0 59.3 5q.6
IjIt.T1rlsiriti SLtIivi(;:S 3 195.6 db4.1 171.1 190.7 1,075.7 1,167.3 1,230.1 1,323.2 6,406.1----- ----- ----- ----- ----- ---- .-- --- .. . .. ._...... ... .. .... ......... ........... ... ..... _ ..... ....WIIlLUSAL& AM) IIETAIL rRAUE 3.1 -22.7 bbl.6 5-19.0 592.b 742.0 B12.2 953.4 659.2 931.7
IUASI'Otil AMP CE6NIMMINICA11nJ :14 272.9 302.5 299.1 290.2 332.8 356.1 376.7 434.0 474.4
lttilDil !4aVICI6S 3b 1,029.4 1,UIJ3.4 1,106.5 1,263.0t 1,332.2 1,425.2 1,540.6 1,627.1 1,771.7
IIAPIII/G 11N0IIEANCE £ REAL E56 3Ul 16.4 142.2 146.6 IG2.V 202.3 244.5 291.7 304.4 326.7I'IUIILI AI41NISTRANtilN A DIJF Z1 3.18.7 31ab.9 401.2 510.4 510.6 535.3 104.5 617.4 694.4OWfCIISHIIg OIF lwwtLLIlaeS 311 IUI. I 6IH11.4 193.1 103.4 196.3 200.2 206.3 212.0 217.9rOUCATIIINAI. SEfVICES 3J 6131.2 1:1.I 1560.1 143.7 I1'7.0 166.1 176.2 196.1 224.0I4EDICAL £ I4ALIII stilviCts 4.1 3t1.a :ii.5 45.7 40.8 44.7 48.1 52.1 54.4 58.3D0OSSTIC: %KRVICES 41 04.1 u14 7 00.3 05.9 66.6 67.3 63.0 68.1 69.4OiTHSR SCRVICES 4J 130.3 140 5 146.6 146.5 154.7 161.7 167.4 174.1 102.0
GPP AT FAClill CAlISr 4:1 5,603.2 b.b:10.0 6,146.3 6,516.0 7,110.7 7,653.1 1,048.2 8,298.2 8,924.2
INaIIIICcr rAX1% LLSS SIMS. 6 426.3 474.0 680.0 749.3 874.6 845.1 006.2 870.6 950.7
(All' AT 4ARI(FI PRIlCES 11 5,24.6 6,oW4.0 6,826.3 7,265.3 7,965.5 0,49S.9 1,054.4 9,160.6 9,175.0. ....... ............. ........ ........ .. ........ ........ .......
. .............. .... .. ....................... ............................................................... ....... ................ ..
b1011RCL. II6A1 IIOAI. ACCOtINIS DIVIS ItlN. A InIIUAL HtVIOLUTIONARY DEVELOPHFNTCAM41'AIW Ara) CLIIRAI. Pl.AHIIaG SIl'IUMI COUNCII SECREFARIAT.
IAUIIE tiI/214/2
- 92 -
Table A.1.4 The Structure of Employment and Outputin Small Scale Manufacturing (1979/80)
(Percentage Distribution)
Number of GrossIndustry Group Escablishmeats Output Emp1oyment
Food 63.7 62.7 51.5
Beverages 0.9 5.0 2.5
Tobacco 0.2 0.4 0.7
Textiles 6.5 3.9 9.4
Leather and Foocwear 2.3 6.3 5.9
Wood & Cork Produics 10.4 5.6 10.4
Paper & Printing 1.8 4.9 4.9
Chemicals 0.8 5.1 3.0
Non-Metallic M1ineral 1.7 1.7 4.d
Fabricated netal 11.4 3.7 6.6
Unclassified 0.3 0.1 u.3
Source: HASIUA, Report on Survey of Small-Scale Industries inTwenty-1hree Towns. L9bU
- 93 -
Table A.1.5 Production of Major Manufacturing Articles,1971 - 1973 G.C. (1978/79 - 1980/81)
manmofSfl-Sw gm-I 1978/79 1979/80 1981/8
. .. S. S5 1,235 2,695m . .77 4,04 5,205
aZ Ca I I W . .. 11,.12 4400 ,55 5UAG JllC* . . . . . . CUw 210,290 "a o _NARNahxm. . . . . . ... TaM 4O2m 2
m (m) CMI ...... . can epsi744 145 -t0ossoAM . .a.i.j.... . yuI a202 175
25N1 P hS3 . . O a0. XA. 79,21 122,027 114,073Dun A G .f.3.... . W40 1.217 476C5 3.. 0. . . . . .... * 50 26 140DOZEN alm.... .... .On . 9,fl ,44 9,141073, CAK5 . . . . . . . . . . 17S 74.24? ;7oaul
(vow) ........ 11414 174,401 tdo,49(a1omzs) *.£74 2,436i*i.s. rSrU,t, o ....... ....... * 3.605 t 5.061 9,909AIacauz -Pu.a * t40 91 53,60 24,193
3X3COX1S . . . . . . .0.. 71 182 92Caza"& . . . . . . . . . . . G- 5*.751 0,776as..........................4 2t, 20,175 24,434
moodGU ...... ...... - - ssss 155,J% 13.04 154,03} S I L * 53.755 57.600 56.749
. . . . . . . . . . . . 4.115 3.360 3.2*saus s) - _ 91 479sara Lana).* 107.433 117,923 140.482SaY (macurxx) 3,017 4f054 3.45anuLJ '.. 2,.15 63.032 12 069
,W a .. . ... . .... . . . . R.L. 495.52t 55252 604.270wxi . .* 71.444 76 7 1 74.144- . . . .. 155.5.996ALOU . . 5.s.m 7.409 7.552
Aw *. 264.]33 710.413 719.794;;U.L VA Y . 139.2"4 160.112 172,342
D Si n . . .. *.*.. .. *O * * ('ensc$.) 1.405.606 1.451.093 1,575.367- 3 R fO S:CD U1; _ 537 150
:SCIlO ' _203800 .- is.o 13,000
('coff .. . ... .(o U2) 385140 86.264 17.2925,611 5.504 5.930
Cap mA.'r0S 7,851 9.259 7.04037mW (woo'-) .PCs. 30700 549.337 404.570gLAN (vum COTNK) *. .. . 364131 606,71 442.00O
1A : .... . . . . . . . . A.IL 15.600 20.504 17.210cGOa i .. ('ace ics.) 1,38 12.176 14p0m7lO s.. . . Du. 4*00494 526.032 42y.227
IS-sta MGM mz x PAJS 1.491,416 1,456,721 1.466.559CANVAS AD 3 0 . * 2351)3519 2.96.G41 2.753,8?2Pl. C at Oc 'o u.* 1709. 076 2.161.209 2.694.35aLESR IP AN N .D'o
2 ) 754 797 90LAS SOLE.TM 29 860 )22SZN-PIOCESS ('.C .ia.) Ja651 5,323 4.635LAIma can= . ('coo st.n.) 12l 121 213
-f .. ) 41,10 39,363 21.171lwOua 2,416 2.416 2.565
PASlCLE u.- 2,164 20173 1 542
GAS oaLL .'IS 2064 23 145.039 193,S2ISMaR aNnLm. 60,092 75,144 4 ,341FM OIL. 2, . . 265 306,u20 O09.109DSa..L u -.1154 4,160 4,325&SPILL& 43a41 15.607 '5.000rA uE (S.('oo ma) 14,20 x4.g9 42.104sOAP .r . . . .. . ... . . . . .... ,777 14,24 I;.&I1
Source: Survey of c34 13-jd .. 1.4. . . . 2a7 124ocans .............. t 15:1.6d3 141.37 VAQ.410
Manufacturing PLAStC Ca,s .('000 .".) 10 5 45
FALM. .. . . . .. . 020 1,874 .aI 2,202 2.00.Industries, 1980/81 tSII' . i.3.2..) . 27 46 5°
L . ...S.. 17 50 74CanaLs or io . t. s,mos 95.923 1064434sA IS . . 32.755 414.574 MGM7
AhhhIIUCS or a33,4 53.409 %,2e9LUMPS . . ' . .. (GooD Lrm.) 8 102 10iOXSfl2.ff. .. 3 59 6 aS
nCoS 01 lOu 50,310 46,=0 34.645Mm PCs. 9.3997 90,724 U7,4t3TUNS- 64.250 45.701 57.226PLAIZC WS .('me urza) 5.329 6.263 7,260rw.ma Ma=hCS. 365 630 76tCSiS 600 375 36
etc gt "I - C 9
itca' W OVL ae. fav's lolir aoc4mso isomo a eff
A~~~~~~~~~~~~~~~~~~~~~~~~Soc't "MOn - do s'
*t *st~~~~~~~~L'i oz fwl-& w sgm * e
Clt-C6 UPC& goq a., 996';
ei"l - WI W-f "C. f az"er. woo SMI -- -
vc#' 6c-le L6t' C^'t tCs's , a,MM o
osull 66SI uN"o 6Sgz *'C
O&IOt gggS- 9t' tU*C
9;L160 Qil& W Ia -l b
tesC ~ ~ ~ ~~~~~reI $"'as -a-Vs ==aos youg _ _ott'f~ ~ ~ ~ ~~~~~~omwm onot see s*mKnS e
I~~~~~~~~~~~P 'Ct MORNME ,C<el AJIM 0 t. 1_
OK'st Wagz ITZ wa'rs "st ogw
ts^s~~~~~~~~~~~~~~~~a 2$RIWI 00 0f" 40r a etnM
mIt (PC.tt L tcO CCL` flu 6;
6LC'Ct eo2il "C@'! OgDsl tn$c eo
Celi Gvls v1s"p 6Z'tSS' &I'S v
ar'tc Amf" IV' PKU{ Ma olul'S
C918 Upt Oft" sta 7 t U9_
"Vet tic Zt Czt 16te 0"4-J - Was&e
Ml MI {"" @'t US' Ub" ] J'a
t1n't~~~~~~~~= m mt'* fobsff gm_ n
ggs*"* COI r gilF ;SS Ta_x Lalat Mae tgat acste,[*l &t_un
"Lodzl "Colos *S6tra IsK'tI 'S
-~~~~~~~~~~~~~n mmaot o sts^g am_146 Woz _c" tl WF m'p wM;
f. Of 061 lfg Wg is;wntmws
t * D * LOV61 6961) aiA dpelInd'doDllxnpI,q *aq(lSOD I°lDe >e) ZdanuoD zunooav leuopeN aql ux pappv anle a9'1 m I
More 9"11 I"O as 010was w
- 95 -
Table A.2.l Import Structure
(M11l Birr, at cjrrenc lrkec pcices)
1974/75 1977/78 1980/81 1981/82
CDP (curreac prices) 5,688.7 7,670.3 9,349.5 9,916.8
Total Imports 847.3 1,270.6 1,642.1 1,824.2
Induscrial Imports a/ 570.2 956.2 1,110.2 1,156.9
Final XMaaufaccured
Goods Imiorts 114.6 218.4 186.4 N/A
Gross Value of
Manufacturing Products b/ 902.7 1,107.9 2,194.7 2,348.3 W
Domestic Industrial Supply 1,472.9 2,064.1 3,304.9 3,505.2 *
L-tu3trial Import Ratio c/ 38.7 46.3 33.6 33.0
Fial Goods Imports Ratio d/ 7.8 10.6 5.6 N/A
Sha:e of I3dustr4 al Imports
Over Total Imports 67.3 75.2 67.6 63.4
Overall Import Ratto
!n Domestic Supply e/ 13.0 14.2 L4.9 15.5
Sources: 3a:'onal Accoe-ts Division, Nation.al Revolu:'or.a:y DevelopmetCampaign and Cencral Pla--.:.-g Sup:rem Council Secrecar4ac
Central Sca:4sc;cal Of ice, based on an=ual ridustrial SurveysCustoms OfficeYearbook of tncernation.al Trade and Scatcs;4cs
*: Estimated
a/ Crude Pecroleum excluded; petroleum products _acluded.Eb Excludes manufacturiag establishments employing less than 10 pecsons.
cl I-dustrial Imports over Domes tic Industrial Supplyi Fi±al Mazufaccured Goods Imports over Domestic Iadustrial Supply
e/ Total ImporUs over GDP plus Imports.
- 96 -
Table A.2.2 Impor DXpeenderce of Med4um/Large-Scale Encerpr'ses, 1981/82
Value of Impor:ed lapucs as Z
Corporac-ion of Tocal tnputs
1. Ech'op4an Food Corporac'on 7.8
2. Echiopiac Meat Corporation. 43.1
3. Ethiopian Sugar Corporac4on 16.2
4. Ethiopi.an Beverage Corpora:ton 65.5
5. National Tobacco and Macches Corporation 59.2
6. Natiocal TextiLes Corporation 25.0
7. National Fiber Works Corporacion 64.9
8. National Lea:her and Shoe Corpora:4on 29.4
9. Echiopian Woodworks Corporac4on 23.4
10. Ethiopian ?rinti=Z Corpora.'on 56.6
11. National Chemical Corporac'o. 48.2
12. Eth4op4ac Building .tacer!.als Corpo.a:'on. 42.6
13. N±ac±onal Netal Works Corpora:ion 80.4
Source: Miniscry of Industry
- 97 -
Table A.2.3 Industrial Exports(Birr Million)
Product Group 1979/dU 1960181 M96L/82
Oil Cakes and Linc 2.7 11.6 9.4Heat Products 7.7 13.7 12.8Sugar and Molasses 17.6 12.1 9.2Beverages - - 0.1Pepper Excracc l.2 1.3 2.9Textile Produccs - - 0.8Leacter and Leather Products 53.6 46.4 54.1Salt 0.9 U.6 U.5Building .Zaterials - 0.4 0.*
Total Induscrial Exp-orts 83.7 i6.L 90.2
Tocal Exports 1,209.3 1,148.4 1,076.5
Industrial Exports as Z of Tocal Exports 6.9 7.5 d.4
GDP 8.498.8 d,854.4 9,168.l
Gross Value of .Manufaccuring Produccion 2,092.4 2,194.7 2,346.3
Exports as X of GIJP 14.2 13.U 11.7
InduscrtaL Exporcs as Z of Gross 4.0 3.9 3.8Industrial Production
Sources: .Yiniscry of Industry, Statistical Bullecin, April 19bJ.National Accounts Division; Nacional Revolutionary DevelopmentCampaign
* Estimaced
- 98 -
Table A.3.1 Ked1m/LagG Scale EnterPrU**NWi Cwi3zaL bawcLwzu md FSYI= Amas by Tmohtga1 GtuMi I/
O hztdp L19/"7 - L1gU/LR1zC OW)
1.977/7 1978/79 1979/D0 1MM0/81NWbk P dtvaI PubI±c Prlvaca R-hb1ic Privata Pubic Priva.
Food 3,82A4 432 11,573 1,26 8,717 118 8,051 49
UA9p 4,853 56 22,055 74 7,199 2 6,112 19
Tabst= 749 - 7Ll - 122 - 870 -
bcW*m 5,789 69 11,155 D7 8,30 4 18,216 95
ZaatUr a 692 - 3,605 23 2,639 36 1.6810 -
W 6Ao& 326 89 667 277 976 225 623 24PZDLWEE
Pdicig 6 439 77 3,747 255 L.640 130 1,531 bOI~r
QdcaL 6,0C0 L92 2,554 1,020 d,B75 5.1 14.872 Is
aib-inCal 365 8 1,487 61 2,221 147 1,082 34
caL 753 3b 1.247 72 73L 17 1.273 37
Lm 23,872 979 59,I1d 3,123 41,43 1.421 54,305 739
O- 1ui 321.0 224.4 466.0 232.9 6t7.6 226.4 674.5 283.5Gzma
(in duands
Sim of 7.4 0.01 12.7 0.01 6.6 0.01 8.O 0.0trExal
'r O'MLL
Avw mhm 4.5 5.9 5.0 6.Lfor ?jbLic &Privace saccacOf TndustzLaIZrt
I/ = 10 Or MM 1M WA LSig pMMc-dh =CtnM.
Saj-I: % I Smws of Infa i y CAxaL Scac1sd'J. Off 1.
- 99 -
Table A-3.2 Analysis of Fixed Assets and Nev Capital Expenditures
Urr Villou -lotustrial Project 3/
--- 1980/81- - For Compl. For Compl.Fixed Capital durzig la 1985
Subsectors Assets Expenditure 1983-85 Onwards
1. Food, beverages, 174.9 15.1 149.6 304.9tobacco
2. Textiles, leather, 136.2 20.0 266.5 431.4footwear
3. Wood, paper, 34.5 2.7 - 427.6printing
4. Chemicals, petroleum, 40.0 6.4 4.8 216.5rubber, plastics
5. on-octallic 24.0 10.0 472.0 -mineral products
6. hecals, engineering, 12.2 1.3 19.8 1,661.2 4/misc.
TOTAL 1979/81 418.8 1/ 55.0 2/ 912.7 4,041.6
(Total 1979180 373.6 42.8)
-I For 198 public and 210 private escablishments.2I For 146 publlc and 38 private establishments.I major public sector projects.4/ Includes expansion of tractor and machinery complex in 1993.
Source: Central Statistical Office, Survey of .'snufacturing Industry1980181. ministry of Industry project profiles, July 1983.
- 100 -
Table A.3-3 The Ivestvmt Pipeline (Ten Year PerspectLve Plan)
P 4t me"Geta tiV_4 (SLT-M) s (3w '000)
Tusa lo a .a
COMMI&O UC-4 cetta cloth 2 5.31ig oav1 O_S Uws (sap'aia) -. 2 50 15.3
A..t UI3-1 Cloth 22.0 3.000 73.3U.. Dar ¢AO-1 cb a0.0 1.000 00.0vadmtds .es14 clock 140. 1.910 73.5Addis AbaS P3-S Tam 10.0 to 132.5
mm" "I.6 9.54 n.
.ddr ow ac I utiLe ou1. cake 25.0 45 .aar 0C02 3Ne 49.0 G00 31.7
Asnne C-3 allt 23.0 7T 400.0"DJ* 90l CKitM . cake 17.2 130 114.7A Uo-2 nr.. 10.1 too 101.0Adds Aaba =c-I Pulse dal-s.i (wz'u) 4.0 W50 5.7Ihisaeis uP-I SW &WszVOS 4.6. 24 114.111sei 01.1 S&Gr 207.7 3.025 57.3sqjt U5-3 Alcohol. yeas: 66.0 151 321.6
Toal& 45. .4-9' MY
TAMtbm? Prodxmcta
:dis Ababa UC-4 taach.r pod 5.1 Ig0 43.0Ibie OTt-3 Sadthr gloves 1.1 sO 22.0
TOl 9.2 230
Meal products and 5aaIl Coa utructcim !4amufsctues
ddSs AbabS L1-C 31-s &.L o1.2Akah CF1-3 %kcal par-s 110.9 590 18.0Addis Ababa UPS-1 WIt wsa..blr lO.2 233 40.3Mi:s Ababa MPS-i LLftt sabs !1.. 170 24.7
Total 139. -1.013 L.. Z
Kraat UC-7 Tractor Saaa:blv 15.7 60 :61.7%a-zacc UaS-I1 AirX . e =scl t.5_=.c 3.727 :.09.
total *.J 5:
Cemn:
"Nor UC-3 coamt 200.0 400 !40.0vire Das 0-! Ca-. 272.0 no0 69.
ToSal -72.0 9#0 ZI.6e
Paper Products
VIb'i UPF-2 Pulplpaper !17.2 £3 169.:C6031 L1-9 Paper Gx-I 4.5 33 1.
Total 421. ;5 16.3
Coseicasi
Assab OTt-2 SaLt *.2 1t 436.'Ass4b UrS-7 F.rtl:l_r mx 97.1 323 133.27azret 11154 Caustic od :07.3 we 211.0ASahi S-10 Slacw=c 11.2 Z3 7 7.
'OcAl ZZ1.3 1.J;0 jgg.-
Aidis iba_ .F-u ?s*nc±.s 3.9 69 63.5
G2IO mOrTAL 395.3- ! .3fl I.5
Source: PravIme!aa .iL:drv Zoveam-c it 3ta sc fta-&ota. %L=, : tlIatrsy. A Co:ur'w o of Praftle. Os o ncuscrIAL MCCsU; ;Li10504 .wCU Vk.4.
- 101 -
Table A.3.4 Analysis of Pipeline Investment Classification by(A) Product Type(B) End-Use(C) Inves`Ment Cost(D) Cipital/Labor Ratio
Total Captal Total EnployumentNumber of z of Total Z of TotalProjects (Birr Nil) Investment Persons Employment
A. Classificationby Product
Textiles A Yarn 6 687.6 17.4 9,596 42.1Food & Beverages 11 454.4 11.5 5,494 24.0Leather Products 2 9.2 0.2 230 1.0Metal Products & 4 139.5 3.5 1,093 9.8Small Contr.Manuf.Heavy Equipment 2 1,542.7 39.0 3,757 16.5Cement 2 472.0 11.9 980 4.2Paper Products 2 421.7 10.7 515 2.2Chemicals 4 2,1.3 5.6 1,110 4.8Pencils 1 5.9 0.1 69 0.3
TOTAL 34 3,954.4 100.0 22,924 100.0
B. Classificationby End-UseConsumer Goods 23 1,285.8 32.5 15,992 69.8latermediate 7 653.9 16.5 2,165 9.4InputsCapital Inputs 4 2,014.7 50.9 4,767 20.8
TOTAL 34 3,954.4 100.0 22,924 100.0
C. Classification bvInvescment CostFrom To (Bir.Xil)
0 10 8 37.8 1.0 650 2.810 25 9 125.3 3.2 1,185 5.225 50 5 208.4 5.3 1,335 5.850 100 2 157.8 4.0 1,528 6.7100 250 7 1,208.9 30.6 13,439 58.6250 500 2 689.2 17.4 1,060 4.6500 1 1,527.0 38.6 3,727 16.2
34 3,954.4 100.0 22,924 100.0
D. Classification byCapital Labor RatioFrom To (Bir.'000)
0 25 1 1.1 (0.0) 50 0.225 50 3 22.3 0.6 583 2.650 75 8 870.8 22.0 13,260 57.875 100 3 69.3 1.8 .839 3.6100 200 10 370.1 9.4 2,205 9.6200 400 4 199.8 5.0 789 3.4400 5 2,421.0 61.2 5.198 22.7
34 3,954.4 100.d 22,924 100.3
- 102 -
T.able A.3,5 Regional Population Characteristics and Investment Indicators
Licwsoesrmad L981/82
1opan1ti 1979 1/ Piared I esimnt (MMP) sad 1982/83zof NO. of EL=r ZOf NO. of 8ipoy-
(000) Natlw Zkbw 1 lUiu Ibta FIz
ArNsI 1,119.3 3.7 8.9 1 28.0 0.7 - -
Bale 856.1 2.8 5.5 - - - - -
Ericce" 2,362.6 7.8 28.3 3 113.5 3.0 - -
G-Goffa 977.1 3.2 4.5 - - -
GDJJm 1,984.1 6.6 9.1 2 85.0 23 - -
Gdar 1,999.6 6.6 7.7 - - - - -
waqZe 3,(43.2 10.1 8.5 3 355.2 9.4 3 57ILUubbor 789.5 2.6 6.5 - - - - -
Kiffa 1,573.0 5.2 8.0 - - - - -
Sbam 6,195.3 2D.5 27.4 23 2,731.2 72.5 26 359Sin 2,734.7 9.0 7.4 2 230.1 6.1 - -Tigral. 2,105.4 7.0 8.7 - - - - -
WaLlega 1,966.3 6.5 5.7 - - - _We'o 2,544.1 8.4 6.8 1 222.0 5.9 1 9
zIvML 30,250.6 100.0 13.2 32 3,756.0 100.0 30 425
iCe=al Stat2stical offlce Statistical AstMat, 1980. pae 25.
- 103 -
Table A.3.6 Capacity Utilization of MLSIs and SSEs
MLSI SSE
Food Products 100X 44ZBeverage 87Z 111Textiles 70-80% 11ZLeather 50-100I 50%Wood & Furniture 80Z 40ZPrinting & Publishing 90-95% 19%Rubber, Chemical,
Plascics and PetroleumProducts 70-80% 50%
Non-Metallic MineralProducts 70-95% 5%
Fabricated Metal Products 80-100% 15%
Sources: KLSI: Mir4stry of Industry, based on data for irdlvidualproduct groups.
SSE: HASIDTL Report or. Survey of SSEs i- 12 towrts, May 1980
- 104 -
Table A.4.1 Public Sector Share in Manufacturing Industry, 1980/81
"io o f Value AddedEstabLish- Gross Value at Factor rmoloy-
Industry ments of Production Cost ment
Food Xanufacturing 46 95 96 86
Beverages 64 98 96 95
Tobacco 100 100 100 100
Textiles g9 98 98 34
-earin3 Apparel 50 90 90 91
Leathec ?roducrs 60 97 96 93
'-ood and Cork and Products 41 68 65 59
.urniture and Fixtures 27 74 75 60
Paper and Paper Products 50 98 94 91
Printing and Publishing 41 85 97 90
Chemiicals 78 92 92 93
?ecraleum L00 !00 100 L00
.ubber ?roducts 67 97 92 93
Plastics 4! 88 89 .36
Glass and Glass Products 100 100 100 100
Non Metallic Minerals 48 93 79 81
Basic Metals 100 OO !o00 LOO
N:etal Products 23 81 79 68
Electrical Machinery 33 51 7' 56
-TAL 5 4 96 96 90
Source: Central Statistical Office, Statistical Bulletin, April 1983
- 105 -
bl A.4.2. Selected Ratios n PBblic anx Private Sector Maufacturixigindstry 1/, 1980/81
ValUe Added A'erap Plied Assets Fied Assets/ Operatitgper Employee Labor Cost per Fnployee Value Added surplus/
Fixed Assets- -Bi. - Ratios
Foodstuffs 10,340.6 2,154.5 10,830.8 1.05 0.76
Pblic 11,491.6 2,223.7 12,275.2 1.07 0.76Private 2,998.5 1,713.4 1,618.2 0.54 0.79
Beverad & 1bacco 12,040.3 2,612.5 8,632.6 0.72 1.09
Public 12,227.3 2,596.8 8,873.7 0.73 1.09Private 7,894.7 2,960.5 3,289.4 0.42 1.50
Textiles 4,550.3 1,937.7 3,417.4 0.75 0.76
Public 4,610.1 1,945.1 3,464.8 0.75 0.77Private 2,767.1 1,717.5 2,003.8 0.72 0.52
Leather & Footwear 5,510.2 2,071.8 5,66405 1.03 0.61
Public 5,638.1 2,099.5 5,921.2 I.05 0.60Private 3,691.2 1,677.8 2,013.4 0.54 1.00
wood 3,093.3 2,253.1 2,616.0 0.85 0.32
ablic 3,526.3 2,555.8 3,591.0 L02 0.27Private 2,469.7 1,817.3 1,211.5 0.49 0.54
Paper & Prirting 5,799.7 2,462.9 4,661.0 0.80 0.72
Public 6,076.8 2,298.4 4,754.4 0.78 0.79Private 4,333.3 3,333.3 4,166.6 0.96 0.24
Chegtcals -8,550.9 3,720.9 7, 155.6 -0.83 -1.72
Plblic -9,554.3 3,756.5 6,992.8 -0.73 -1.90Private 4,511.2 3,258.1 9,273.1 2.05 0.14
Nonmetallic Minerals 233.8 2,972.6 8,016.0 -34.29 -3.42
Public -480.0 3,120.0 9,080.0 -18.92 -0.40Private 3,846.1 2,226.7 2,631.5 0.68 0.62
Metals 12,672.0 3,417.1 5,790.2 0.46 1.60
Pbblic 14,398.5 3,219.9 5,103.2 0.35 2.19Private 6,507.5 4,121.4 8,242.9 I.D27 0.29
TOWai. 5,497.4 2,298.6 5,971.6 1.09 0.53
Public 5,720.1 2,313.3 6,334.9 1.11 0.54Private 3,477.2 2,165.3 2,674.8 0.77 0.49
/ IncJludes muwfactairng establisiments enplyirg 10 or aDte persons.Sture: Central Statistical Office
- 106 -
Table A.4.3. Industrial Public Enterprises, Value of Production
(Millions of Birr at Constant 1978/79 Prices)
AnnualCompound
GrowthRate
Corworation FY1978 1979 1980 1981 1982 1978-82
Food 78.6 117.4 154.9 170.1 177.1 23M1eat 50.8 81.3 71.1 79.6 86.6 1.4Stutar 103.1 110.4 112.3 110.7 102.9Beverages 110.3 139.6 156.2 173.5 191.4 15Tobacco and Matches 30.3 40.3 44.4 45.6 53.5 15Tex:ttles 166.2 225.3 261.9 280.5 289.7 15-iree,or ks 15.7 21.' 2 -".6 27.0 28.9 ;D
Leather & Shoe 59.7 85.3 107.2 108.3 113.1 17Woodworks 13.3 17.1 17.9 2n.2 20.6 12?rrinting 19.0 27.1 33.5 36.0 I0.6 21Chemical 22.8 49.3 53.0 63.3 °5.! 39Building :!aterials L6.5 16.9 21.4 23.3 24.1 L0:!etal .;o:cs 5i.0 74.6 82.7 87.9 90.8 !6Share Coacanies 5 0.6 61.5 71.5 75 61.7 5
TOTAL 787.9 1,067.3 1,212.7 L,O1.' 1,363.1 15
Sour_e: Ministr7 of indusstry, Statistical Bulletin, Aaril i983.
- 107 -
Table A.4.4 No. of Operating Establishments Under Ministry of Industryby 'orporation
Corporation 75/76 76/77 77/78 78/79 79/80 80/81 81/82
Ethiopian Food 18 18 21 24 25 29 29
Ethiopian Meat /a 1 2 5 7 7 7 6
Ethiopi=n Sugar 3 3 3 3 3 3 3
Ethiopian Beverage 20 20 20 21 21 21 22
Nat's Tobacco S Matches 3 3 3 3 3 3 3
,''ational Texttles 13 13 13 13 13 13 1i
National Fireworks /b 3 3 3 3 3 3 3
Leacher and Shoes 12 13 13 15 14 1.4 L
Woodworks 7 7 7 7 7 7 7
Ethiopian Printing 7 7 7 7 10 10 10
Nat ionaL Che-ticals 8 8 10 11 13 13 13
Building !aterials 9 L0 9 LO 1i 1i U.
National Metal Works 7 7 8 8 8 8 8
S;bare Co3mnonies 7 7 6 7 7
:C-C.AL L17 i21 129 137 145 149 148
/a Transferred to Minietry of State Farms 1982/8;.IF Merged with National Textiles Corporation.
Source: Ministry of Industry, Statistical Bulletin, April 1983.
- 108 -
Table A.4.5 Regional Distribution of Manufacturing Establishmentsunder Ministrv of Industrv (1980181)
Region Gross Value of(No. of Establlshmeats ProductionProvinces) No. z Birr Mill. Z
Shoa (ll) 101 67.8 917.1 70.5
Eritrea (9) 29 19.5 209.0 16.1
Harage (13) 9 6.0 102.0 7.8
WoLLo (12) 3 2.0 16.2 1.2
Coidar (7) 3 2.0 3.1 0.3
Tigray (8) 2 1.3 2.7 0.2
Gojjam (7) 1 0.7 37.8 2.9
Sidamo (6) 1 0.7 13.5 1.0
.Six Othereg ions (29)
mOTL 149 LOO.0 1.301.4 100.0
Source: Min±sc3.vY of raduszry, Stacistical 3ulletiL, April 9;3
- 109 -
Table A.4.6 Selected Data on Sample of 35 IPEs 1/
Fiscal Year 1977 1978 1979 1980 1981 1982
Tocal Ases (Birr Mil.) 495.3 530.0 632.4 728.6 730.8 746.2
ozm,ory/TI Asss X 36 41 42 39 44 45Owrat Asmts/lbtal Assts Z 63 67 70 76 77 79DInbc/Eqiy Z 96 96 170 223 343 270
S.T. bn* to" Oustm (Birr 'a.) 32.4 41.9 34.9 28.7 38.1 48.3Residua Surplus Payable (Birr Mil.) - 17.6 51.3 67.2 91.5 91.6U=MC TAX PRYEWe (Bmrr MI.) Z% 28.7 28.6 66.7 92.4 86.6 72.7Tax PaumTazlid Eps2 s 60 67 L33 L8L 190 191
Not Sol" (Bfrr XI.) 436.2 425.1 625.2 731.6 757.4 761.6
row argi/Suas 2 27 26 24 26 22 21Met Profit/Sules Z 11 10 8 7 6 5
1/ TIbs sampl represents otie qarcte of the number, 3C% of 'outp6 and 44% of enplo)mmr. hral qpratia eterprises uder the :inistry of Irdustry as of Jszie 30, 19S3.
Source: 1. %nirscry of Lrdustry2. 3ack staff calmdatlios
- 110 -
Table A.4.7 Export Value of Manufactured Products by Corporation
(Birr '000)
1979/80 (X) 1980/31 (,) 1981/82 (%)
Ethiopian Food 2,710 (3) 11,648 (13) 9,396 (11)
Ethiopian Heat 7,704 (9) 13,678 (16) 12,787 (14)
Ethiopian Sugar 19,993 (23) L3,946 (16) 9,170 (10)
Ethiopian Beverage -- - 41 - 124--
National Textiles - -- - - 822 (L)
Nat'l Leather & Shoe 53,643 (62) 46,380 (53) 54,08S (60)
F.thionian l'.-oad 'ar';s -- -- -- - --
National Chemical 857 (1) 559 (1) 513 (1)
Eth. 31d;. Materials - - 369 -- 350 --
Share Companies L,187 (2) 1.313 (L) 2.933 (3)
TOTAL 86,096 ;100) 87,987 (100) 90,183 (100)S es o eS- -
Source: M4nis:r:,r oc Iadus:r,r, Star:scLcal. Bu11ec'", Ap:ril .993.
- ill -
Table A.4.8 Government Contribution to IPE Establishments(Dirr Millions)
PY80 FY81 FY82 TOTAL
Total Capital Investment 427.0 362.5 582.3 1,371.8Of which Government 55.7 9.5 76.8 142.0Z (13.0) (12.6) (13.2) (10.2)
Source: Ministry of Finance
Table A.4.9 Projects for Completion During 1983-85
GOE BudgetNo. of Projects £nvestment Contribution
-- Birr MilLion---
Undter Preparacion ofProduction 1 1.0
Under Construction 8 582.1 320.9Under Design 6 319.8 16.1Under Tender 3 9.9 -Under Appraisal L 60.0 17.0
TOTAL 19 972.8 354.0
Source: Ministry of Industry Project Profiles
- 112 -
Table A.4.10 Publlc Enterprise Profits
(Birr Millions)
1979/80 1980/81 1981/82 1982/83
(Actual) (Actual) (Provi.) (Project.)
Sales and Other Income 3,780 4,785 5,483 6,304
Cost of Sales 2,710 3,313 3,994 4,737
Gross Profit 1,070 1,472 1,489 1,567
Net Profit Before Tax 323 439 340 567
e*t Profit before Tax/Sales 8.5% 9.2' 6.2% 9.0%
Source: Ministry of Fiiance.
- 113 -
Page 1 of 2
Table A.4.11 Financial Ratios for Industrial Public Enterprises
(In Percentages)
1976177 L977/78 1978/79 1979/80 1980/81
and BeveragesProfits/sales- 10.9 6.9 8.6 8.7 6.0Return on total net asset 15.6 8.4 10.3 10.9 7.4Return on net vorth 26.3 L6.7 35.2 45.& 30.7Debt/Equity 68.6 97.4 2.' .3 322.2 318.5Net worth/Total net asset 59.3 50.6 29.2 23.7 23.8
SugarProfits/Sales (8.9) 10.7 27.5 35.8 22.0Return on total net asset (3.4) 3.2 ;4.4 17.6 9.5Return on net worth (4.1) 3.8 20.4 23.4 18.8Debt/Equity 20.3 17.9 41.7 32.8 97.1Net worth/Total net asset 83.1 85.3 70.6 75.3 50.7
Tobacco and hatchesProfits/Sales 24.8 24.0 17.7 25.4 11.6Return on total net asset 26.5 25.0 19.3 24.5 11.0Return on net vorth 34.5 34.6 27.3 45.8 22.6Debt/Equity 30.9 38.1 41.8 95.1 105.3Net worth/Total azet asset 76.7 72.4 70.5 51.3 4' 7
Textile and FiberProfits,'Sal:li 10.5 0.8 G3.L! 11.5 9.4leturn on :acl .ae: jset 9.5 0.6 (11.3, 11.4 9.2Recurn on net worth 17.7 1.2 (30.2) 33.3 26-9Debt/EquLty 87.2 105.7 168.2 192.6 191.9Net worth/Total net assec 53.4 48.6 37.3 34.2 34.3
Leather and Shoes?ro.±tsS;3ales 5.4 (1.2) 6.9 6.7 1.2Return on cocl :e.et asset 4.0 (0.8) 6.2 7.0 1.2Return on net worth 14.6 36.0) '3.6 137.3 500.0Debc/EquLiy 261.6 380.7 767.9 186.1 414.3Net worth/Total ne: asset 27.7 20.8 11.5 5.1 0.2
PrintingProfits/Sales 162.- (83.3) ,25.9) 30.2 26.SReturn an total aet asset :3.8 (71.4) (21.9) -26.5 24.0Retura on net wo::t 26.3 (152.8) (60.2) 8,.4 75.6Cebc!Zqui:7 '..2 113.) 173.2 229.7 120.7Nec wor=h,Toti. set asec 52.3 46.8 36.3 30.3 3t.2
- 114 -
Table A.4.11Page 2 of 2
Financial Ratios for Industrial PubliL Enterprises
(In Percentages)
1976/77 1977/78 1978/79 1979/80 1980/81
ChemicalsProfits/Sales 9.9 3.5 17.6 14.9 14.3Return on total net asset 12.5 2.9 22.3 L5.5 14.2Return on net worth 2.0 4.8 56.0 45.7 51.6Debt/Equity 60.0 62.7 151.4 194.7 - 263.2Nqet worth/Total net asset 62.5 6L.5 39.8 33.9 27.5
-Zetal WorksProfits/Sales 11.4 7.8 9.4 11.2 10.1Return on total net asset 1L.0 10.7 10.4 16.3 10.4Return on net worth 22.5 31.9 41.4 70.7 40.4Debt/Equity 105.0 199.5 298.5 334.1 290.0Met worth/Total net asset 48.8 33.4 25.1 23.0 25.6
Building HaterialsProfits/Sales. 0.5 (13.7) (04.0) (7.6) (33-1)Return on total net asset 0.3 (8.4) (2.4) (5.1) (22.8)Return on net worth 0.4 (14.4) (5.7) (17.4) (132.4)Debt/Equity 38.8 72.7 136.9 241.3 480.9Net worth/Total net asset 72.0 57.9 42.2 29.3 17.2
Wood WorksProfits/Sales 11.8 3.0 11.3 12.9 11.5lecurp on total aet asset LL.0 2.6 IZ.4 13.0 12.8Recarn an nez worth 25.4 7.0 31.4 30.2 50.9Debt/Equity 132.2 166.7 152.9 132.3 313.21Net Wbrth/total net asset 43.1 37.5 39.5 43.0 24.2
All Manufacturing _nteror±sesProfits/Sales 9.4 3.2 5.0 13.3 8.9Return on tctsl aec isse: 8.3 . 4.6 13.2 8.2Return on net worch 13.T 4.7 11.3 36.0 26.0Debt/Equity 67'4 85.4 L47.7 173.8 218.5Net 1orth/Total net assec 60.0 54.0 40.4 36.5 31.4
Source: Consolidated Income Statements of }?Es. M(inistry of Industry
- 115 -
Table A.4.12 Revenue Collections from Capital Charge and Residual Surplu.s(Birr millions)
Ff9B FYl981 FY1982 FY1983Capital Mtsduin1 Cqdtal DBtdim1 Cap-I~ H~m1Am Capital Nesidul /a
St=aFsns - - 2.5 6.0 1.5 2-U 0.0 3.0FmuaL Ky - %6.O 5.9 138.2 1.2 171., 6.3 12L.
Mims WA E=- - - - 13.5 1.5 - 33.9Bowland 1nlm - - - - - -- -
lhlth - - 3.0 5.9 0.4 0.9 1h 2.8bm le - - 01 1.9 0.2 1.8 - . 1.0
DNcfCfra - - 2.S 5 4.5 0.3 10.9 11.0 25.8MUfdstry of Agpi-
zitzu - - - 0.1 - 0.1 -CbfEee ad aIhali - - 1.5 4.5 - 5.5 03 4.0
.1ainluito4 - - 0.0 0.0 0.0 0.2 0.0 0.1Uztn Deveop=w
zand sfzg - 8.5 - 13.6 - 17.4 - 13.0vALstcy of Fhuim - 5.0 - 7.1 - 8.9 - 11.8
1mczpoz= andr.<r icadms 1.8 14.1 1.4 . 23.4 0.2 14.4 14.0 Z.1
r't'y 14.4 37.0 16.9 54.7 13.2 52.9 33.5 1C8.3
mm 16.2 12D.6 33.8 259.9 30.5 289.3 66.5 353.9
oIa Et see
;ca Im,s~ if aIr..
- 116 -
Table A.5.1 Structure of Protection and Eff2ciency of IYEe
Nominal Ef fctive Dos ticPr-tecdion Protection ResourceCoefficient Coefficient Cost
(NIC) (EPC) (DRC)COP/ENURPISE
Dire Dava Flour Kill .89 .29 1.02
11. TRIOPAW SUGAR
Vonji Sugar Factory .84 .69 .74
III. ETRIOPIAN bEKTDire Dava Meat 1.11 2.05 1.52
IV. ETHIOPIN BEVERAGESBabille Hineral 1.11 1.09 .89Melotti Brewery 1.49 2.24 1.93Avash Winery 1.88 3.11 1.20Addis Ababa Glass Work.s 1.50 5.64 4.37
Sabtotal 1.55 2.52 1.70
V. NATICMAL TEXTILES & FIBREWORKSDire Dava Textiles 1.14 1.84 1.37Asmara Textiles 1.19 8.63 3.45Ethiopia Fibre Factory 2.20 -6.61 -2.94
Subtotal 1.22 2.64 1.70
VI. NATICNAL LEATHER & SHOEEthiopian Footwear 1.47 1.77 .84Awash Tannery 1.00 1.16 .36
Subtotal 1.06 1.27 .45
VII. ETMIOPIAN WOODWORKSWarka Woodworks 1.11 .64 2.07
VLII. ETK1OPLAN PRI4TINGEthiopiar. Pulp & Paper 1.49 -6.10 -4.34
tI. NATICKAL CHEMICALAddis Tyre 1.16 1.25 1.16Ethio Plastic 1.14 .97 .83
Subtotal 1.16 1.19 1.08
X. ETHIOPIA BUILDING MATERIALSAddis Ababa Cemer.t .47 .03 .41
XI. NATICHAL HETALWORKSEth_opian Iron & Sreel 1.11 .63 2.87Ealite Steel 2.00 -9.89 -2.68
Subtotal 1.41 9.45 7.53
TOTA.L MANUFACTURINfG 1.11 1.36 1.09
(Excluding Wonji Sugar) 1.20 1.96 1.39
Source: Mission estimates based on sample of 19 IPEs.
Table A.5.2 Matrix Elements: Costs and Benefits of Surveyed IPRa
lmsp.uL Fat~.~us Isai.uL bactuc Imapuz r.cLgg haluML:VIfuai Caimig tuMtU rguL&ib SLJViiIII CuaIm CubL* FrU(i.a. Vras,at T.CUsa& Tr.eabt Trbs..a
CuIIPIflbivEmisL A S I: Lo 6 V 1. It I I t L
I. *LTIIIUVIAII FIJUUOlgeOaub YIuuar bill 4.102 3J¶19 lib2 -SU'h 44.22 'albI WI5 -I -220 III -1S -2*10
11I *ETIIIUVI'AI SIUI.AB-Oulaji Sugum FIa.Lury 5'.u1u 32J'.W I -1515 111.49 3551.2 MllI Ii125' -12211 -151 1 114. -13125
Diue liJauu hlgil 14511 121i¶1 21U5 512 12351. 12022 204b -69Ib 114117 -52 -56 1351
IV. LUSUIUfA1 "1*A.tbL1IdIlsilla lia.aar.ii 1121 1¶.U 751 210 1255 1.1.0 WIV 10 113 -VO 25 109hIidlUiLi huaWLarY 13593 5l.'1 giuutl Ilia 9122 64094 521.0 -hIll1 0W -554. 11 4122AV..bht lanurLY 51.02 3IMu 2145 3511 4519 271'i 2150 -322 4022 -222 -5 3753-Ajd1d Ababauj uIaai Wuaki 5132 4.15J I4 29 21.1 4049 11410 14120 -Joys ZUSO -403 21 16521
5guj-yagaI ~~~~30322 I'.2uL IU'eu'D 2Jb0 1245 132M1 IOb2v -5362 10101 -1202 220 9122
VI ifiATiliAAL I KTIIxt0 1. VIIKKIAiNKsOhiga U.aWga TwbI4lud 1112:11 51&IU 2Lju2 1M.iu 11551 5122U1 24.512 -11552 97s69 2411 -ilii 14023AbWiarm TLa.*& ilk 22911b 1312u '.'J2 41115 193112 18210 26*8o -2525 3296 4~52 -124 14446L1.iuipae Vibgu faaaLat 141.10 IWJ'. IM1 I*1 65221 1411 2625 -2219 NubI -1OIS -531 5303
IduI.-TuluoI 111245 59911 13604' 14910 913941. 191Mb 21195 -I31 bloj 21IS1 9031 -24011 21111
VI. IIXIIlISUAL LIATIMk:. 6 lIl1liLtiiu&iiJii Vuu&La..u 5502 2446 . bIlh *j54 29J') 1551 93'a III 1500 -$Sli -bb 11.2AW410i1 Tdiaa..a9y 2051 15 152 lU. THO 121 MA4/ £2224 tool1 3155 Ia 31* -194 212i-
Iub-&uggl ~~~~2061F. 11201 aU¶I)9u 41.11 234(.U 11511 2135 3322 1501 211 -252 1227--- ~~~~~~~... ... ... --- .... --- -- - --... - - ..
u..rki Uguau.Iuua 21.31 212 902 -&U5. 210Ji liul SI.) -376 144 -415 -122 -301
Lhi. all&., I'ailp u I'u.ar 25m01d 20291. 552* MU2 1151.9 11.119 41.22 2549 1629 -1311 IV?1 129
AdahoTya 254M2 23 2 il 62il) 241 24ls. 141119 (019I -b14 31.14 -2499 1 I.aI&LLI.aa. IIdala~~~~~~ 161343 6111 1141 2523 911 1412 lIsa. 21* lZss -1.311 All j
suu-ti-lAl 31*311 2'2912s 404U 115 3111 26511 1521 291 210 -3534 13 flit
. LTIIIIIWIAII IUILUAIIKJ NATERIAIM Addas Au.a..I. 1*..w.na 1.21 5309 31.11 -224) 1414k 2410 2582 2J%5 -122 -121.2 -13 -5902
1l. IIATIOIAIM. ILA./*Wdulipsum. lauis 4 SguuI 151*52 IAu.2 'thd t -2261 12II116 12221. 2713 -051 II.a.4 -IsIb -11.5 -4vbLalila, Sisul 1 3395 9hUt fill 3111. (.1.9 l111 111*2 -1291 1.1.9) -19/0 -14 4711
Muli-luLil MU31 2311.2 45'12 1* 151172 19321 2695 -32k0 8111 -3155 5516 4215
TUTAI. h'AhU1ACTUIRIlI4. 32'J1%( 2IM20, Iul'iuJ 231*2 371165. 22110. 'J0i~b -SE.' 21.1.31 -iSIS -21.' 311521M.I... .... *.. ......b..a bbf& *n S. S * scm .... ..
- 118 -
Page 1 of 2
Table A.5.3 Sample Coverage of Surveyed IPEs
GROSS NUMBER OFCORPORATION OUTPUT* EMPLOYEES
I. ETRIOPIAN FOOD 278255 4684Dirs Daws Flour Mill 4102 119
Sample Percent 1 3
11. ETMIOPIAN SUGAR 172561 14463Wonji Sugar 64878 1986
Sample Percent 38 14
III. ETHIOPIAN MEAT 85643 4781Dirs Dava Meat 14871 612
Sample percent 17 13
IV. ErHIOPIAN BEVERAGES (INCL. GLASS PROD.) 272237 7074Babille Mineral 1727 183Melotti Brewery 13893 645Awash Winery 8602 306Addis Ababa Glass Warks 6133 230
Sub-total 30355 1364Sample percent 11 19
V. NATIONAL TOBACCO & YATCHES 111900. 2229Sample percent 0 0
VI. NATIONAL TEXTLES & FIBREWORKS 426990 29342Dira Dava Textiles 81237 5768Asmara Textiles 22978 2920Ethiopia Fibre Fac:ory 14330 1781
Sub-cotal 118545 10469Sample percent 28 36
VII. NATIONAL LEATHER & SHOE 113710 6471Ethiopian Footwear 4402 279Awash Tannery 20474 621
Sub-total Z4876 900Sample percent 22 14
VIII. ETHIOPIAh WOODWORKS 3:637 4425Warka Woodvorks 2437 205
Sample percent 7 5
IX. ETHIOPIAN PRINTIICG 65778 2953Ethiopian Pulp & Paper :6698 550
Sample percent 41 19
X. IATIONAL CHEMICAL (ZXC'. OIL REFINERY) 135635 :35Addis lyre 28034 644E:hia ?Iasc-: 10343 :5-
Sub-totaL 38377 396SampLe iercant :9 38
XI. ETHIOPIAN BUILDING MATERIALS 37883 305AAaami Abaoa 4±nemc io_' j33
Sample percent 17 i8
- 119 -
Table A.5.3Page 2 of 2
XII. NATIONL NETA&LWORKS. 110500 2227Ethiopian Iron & Steel 14642 392Kalite Steel 13394 211
Sub-total 28036 603SampLe percent 25 27
TOTAL PUBLIC SECTOR (excl. oil ref.) 1843719 86288TotaL Sample 359796 18247SaupLe percent 20 21
NOTES:
*Gross Output figures for the corporations are estimaces. They are derivedfrom Census of Production figures of gross value of production by Lndustrialbranch by the public sector for the year 1980/81.
Source: Central Statistical Office.Results of the Surnufacturing Industries,1973 E.C.(1980/81) June 1983.
- 120 -
Table A.5.4 Ethiopian Manufacturing: DRC Comparison. 1972 and 1983
1972 1983 Change b/Guisinger World Bank
Beer 0.64 1.93 - - -
Textiles a/ Neg. V.A; Neg. V.A.; So change9.65; 3.45
2.26; 2.00 1.70; L.37
Leather 0.24 0.36 .No change
Shoe 3.63 0.84 + + +
Soft Drinks 1.16 0.89 4
Sugar 1.44 0.74 + +
Glass Bocele 1.15 4.37 - -
Pulp and Paper :eg. V.A. Neg. V.A. No cnange
Cement 0.96 0.41 +
Iron and Steel a/ Neg. V.A.; Neg. V.A.; No changeNeg. V.A. Z.87
a/ Various firms in the subsectoral Category DRC range:sanple.
1. Extremely EifiiaCen 0 - U.402. Very Efficienc 0.41 - U.753. Efficient 0.76 - 1.004. .Xrginally Enefficient 1.01 - 1.305. Inefficient L.51 - 2.506. Ver, inerficient 2.51 - *Nega-
cive valueadded
(Neg. V.A.)
b/ Each plus (+) sign indicates an improvement by one 'efficiencycategory'; che reverse is the case for each minus (-) sign. Forinstance, beer production erficiency deterioraced trom 'very efficient'(category 2) to 'inegficienat (cacegory 5), thus chree minus b±gns areshown.
Table A.6.1 Retail Price Index for Addis Ababa (Excluding Rent), 1974/75 - 1981/82(1963 - 100)
(Zml Gices (Withl wilglica lIn arcwnt) y7P.edig Odur
(jffiumjrla IkIuM!hd . bdlcal Noruoml and Good mljimbxx ri IkmI ClotlgMM Traport care care tcreatim wsvlm
Usluitu In pcrmtt (65.4) (43.0) (l4.6) (6.7) (4.5) (I.8) (0.8) (2.6) (5.4)
I'J14/15 161.6 166.4 16I.4 104.5 103.7 165.8 183.6 151.2 131.6i'JIV)lb 192.2 207.1 19'J34 i99.8 1(6.4 192.0 201.2 159.7 129.5191h/71 214.2 21).0 225.3 210.2 1U7.5 199.2 198.2 173.2 134.11J91/78 2)1.7 3111.6 312.6 234.6 120.0 222.4 199.6 176.0 lSO.0I'U1/79 313.7 X10.9 2A'.0 257.2 126.6 254.1 238.2 179.5 175.3b"9I9/ui 352.9 42').1 327.7 267.5 132.5 312.9 350.6 183.5 212.7llJ41Ul 3jJ.7 423.7 326.2 211.2 .134. 30B.l 3bA.5 185.1 215.01911/82 315.9 4Si0.3 316.9 212.2 110.5 305.2 4213 192.6 241.4
I¶42: Jan.-4h. 115.2 447.6 0)1.0 281.7 149.5 300.1 415.1 191.1 241.3A3ar.-Jiai 3.4 463.5 310.0 34.9 155.0 290.8 437.6 196.7 256.4.holy-&!pt. 4D,.7 473.9 I1¶i.9 278.9 154.7 297.1 430.0 197.8 278.5WIb.-Kc. 404.6 48S.4 3v4..1 211.8 154.7 301.0 439.5 194.3 237.7
19113v .Iisuwry :D8.5 473.5 1 S.0 277.4 154.7 .102.7 434.6 198.2 36.4Fuluaury :17.1 4713.3 NJ.2 272.1 154.7 303.4 431.4 198.2 285.7
i.AiLc.Cg lILImui StdIliticaI OffICe; al,ai HILIuMMl li W c of Ethliopi, lOimrtarly luUotin.
I/ 11w wlj itu 1wtemMital retlecl tiva co ul)jU.i pattemn of lvsdkold dith muatl4y ln of Br 410 or I.. Jo1'ib3. 11my do swi bkW tui 1(uI bwam rs t t lw euludoLd fromu Llt Iulex. Ilia statlatical wight In tla t bh mimk-x Ansi 1i fouil by eapruudim tims grotp wulciti as a percentage of 85.4.
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Table A.6.2 Structure of Interest Rates as December 31, 1982
(In percent)
A. Deposit Rates7 i k of Ethiopia
1. Tim deposits - 30-day notice 4- 3 months to less than 6 months 4- 6 months to less than 12 months 5- Over 12 months 6
2. Savings depositsReplar passbook savings 6
3. inw rates. Cmrcial Bank of Ethiopia
Loans against deposit (110 percent deposit) 8Export loans 8S1Personal Loans 10Loans under litigation 12Other loans (term and overdraft loans) %
2. Bousing and Savings BankLoans for the purchase of housing 10Loans for the construction of housing 9
3. AgriculturaL and Industrial Development BankLoans for working capital 9Loans for fixed Lavesc:ent 9' - 11Loans for fareil'zer 10
4. National 8ank of EthiopiaDirect advances :o the Gover nenc 3Gavernment bonds 7Loans co banks againsz :aeasur7 bil's SLoans :t3 bank against *%?or= doc:znecs 5Loans to banks against all other documents 6Loans to A 3ank 6
Source: National 3ank of _thiopia
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Annex IPage 1 of 14
The Structure of Protection and Efficiency of Industrial Public Enterprises
Introduction
1. The main objective of this pilot study, undertaken during theSeptember/October 1983 World Bank mission, was to begin an assessment ofthe efficiency, degree of protection, and the net incentives ordisincentives provided by current government policies on a sample ofEthiopian industrial enterprises.
The Framework for Analysis
2. The framework for the analysis of economic efficiency utilizedhere can be explained by use of a simple diagram. Table 1 presents asimple accounting matrix that consists of four columns and three rows. Twobasic accounting identities underlie this matrix. The first identity isthat profits are measured as the difference between revenue and costs,shown by comparing the columns in Table 1.
3. Private profitability is calculated as the residual remainingwhen all actual market costs of inputs--materials and factors-aresubtracted from the market value of outputs. Calculation of privateprofitability for some base year is the first step in the analysis becauseit shows the net impact of government policies on the financial performanceof individual enterprises. In Table 1, the calculation of the privateprofitability (entered as D) is presented in the top row; revenues (A) lessinput costs (B) less factor costs (C) yield profits (D), with all entriesgiven in private (actual market) prices (D - A - B - C).
Table 1COSTS
Tradeable DomesticRevenue inputs factors Profits
Private Prices A B C D
Social Prices E F G H
Effects of policyand market imperfections I J K L
Where:D - private profitability, A - B - C - DH - social profitability, E - F - G - HI - transfers, A - E - IJ - input transfers, F - B - JK - factor transfers G - C - KL - net transfers, D - H - L, as well as I + J + K L
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4. The second fundamental accounting identity in the efficiencyanalysis is that the difference between the value of revenues, costs, orprofits in private prices and in social prices measures the effects ofpolicy (and of market imperfectionc). The key to this second relationshiplies in the definitions of social prices and of social profitability.
5. Evaluations in social terms measure outputs and inputs (and henceprofits) by assigning them prices that reflect their underlying scarcityvalues or social opportunity costs. These social prices are those that, ifintroduced, would result in optimal allocation of scarce resources andthereby generate the highest attainable level of national income. The maintask in the efficiency analysis, therefore, is to find reasonably accurateapproximations for the social prices of outputs and inputs in the system.
6. For goods that are traded internationally, the appropriate socialprices are the world (or border) prices of the respective goods, i.e., thec.i.f. import prices for imports and the f.o.b. prices for exports, sincethey measure the costs to the economy of importing an additional unit or ofnot exporting an additional unit. The c.i.f. import price is a correctmeasure of the social return for each unit of output produced by animport-substituting activity. The social valua to Ethiopia of oneadditional ton of domestic production of cement is given by the import costthat the country would otherwise incur if it instead had to import that tonof cement.
7. Two other kinds of inputs require different treatment, however,because no world price is available to serve as a benchmark for socialvaluation. Finally, the social price of domestic factors ofproduction--land, labor, and capital--for a given activity is measured bythe amount of output that a unit of that factor would generate in its nextbest alternative activity. The idea is that scarce factors providevaluable services in production; the social opportunity cost of each factoris a measure of that scarcity because it shows the cost to society ofutilizing the factor in one activity at the expense of not utilizing it inanother. Secondly, the so-called nontradeable goods and services, such asgovernment and many other services, local transportation, and commoditieswith very high international transportation costs, cannot be evaluated bymaking world price comparisons, since by definition they cannot enter intointernational commerce. For efficiency analysis, the costs of nontradeablegoods and services are disaggregated into their underlying tradeable inputand domestic factor costs, the two cost categories in Table 1.
8. The calculation of social profitability follows easily, once therevenues and costs have been evaluated in social prices. With reference tothe symbols of Table 1, the social prices of output (E) and of tradeableinputs (F) are given by c.i.f import or f.o.b export prices, the socialvaluations of factors (G) are their social opportunity costs, and socialprofitability (H) is the difference between revenues and costs in socialprices (H - E - F - G). If social profits are positive, the activity isan efficient user of scarce resources and a positive contributor tonational income.
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9. An economic activity can only save or earn foreign exchange if itis socially profitable, because this measure is an indicator of the abilityof the activity to use domestic resources (G) to generate foreign exchange(E-F). So long as domestic factors are scarce, their costs need to beincluded in evaluating foreign exchange effects. Therefore, actual foreignexchange saving is (E-F-G), which is identical to social profitability. Itis thus incorrect to ascribe extra benefits to foreign exchange savings orearnings. If an activity is efficient, it will save or earn foreignexchange; if it is inefficient, its operation cannot have beneficialforeign exchange impacts.
Effects of the Policy Environment
10. There is a close relationship between the calculation of socialprofitability and the measurement of the effects of policy, as shown in thethird row in Table 1. In the absence of market imperfections, onlygovernment policy can cause a divergence between private and socialprices. Unless the government enacts a protection policy, for example,each importable output and input will be available at its c.i.f. importprice, which will in turn become the domestic price, so that A will equal Eand B will be the same as F in Table 1. Consequently, any differencebetween A and E or between B and F is caused by some combination of traderestrictions, price control, tax/subsidy, or exchange rate policies. If Aexceeds E, either domestic consumers are forced to pay higher than worldprices or the government treasury is directly subsidizing production,causing an output transfer (I) equal to (A-E). Similarly, if B is lessthan F, tradeable inputs are subsidized, resulting in an input transfer (J)of (F-B). For domestic factors, the transfer (K) amounts to (G-C).
11. The social prices of tradeable outputs (E) and of tradeableinputs (F) are established internationally, since Ethiopia has little or nomarket power with respect to manufactured commodities. Neither commoditynor macroeconomic policies in Ethiopia, therefore, have significant effectson world prices and hence on social valuations of tradeable commodities.Exchange rate policy can, however, cause the private prices of tradeables(A and B) to be either higher or lower than efficiency levels (E and F) ina manner that is directly analogous to use of a trade restrictive policyfor a given output or input. This result is achieved if the governmentemploys a fixed exchange rate policy, and/or chooses fiscal and monetarypolicies that permit a rate of inflation higher than the average rateexperienced in its main trading partner countries, and then does not changethe exchange rate (devalue its currency) sufficiently to offset the loss ofinternational competitiveness caused by the differential inflation.
12. An overvalued exchange rate depresses the prices of tradeablesrelative to those of nontradeables and thus acts as a tax on all tradeable(exporting or import-substituting) activities, and as a subsidy onimports. For example, if the exchange rate were overvalued by 30 percent,imports of petroleum would be 30 percent cheaper in domestic currency thantheir social opportunity cost, and exporters of shoes would receive 30
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Annex IPage 4 of 14
percent less than their value In social prices. This taxing effect ofovervaluation on output would be partially offset by a subsidizing effecton tradeable inputs. The shoe manufacturer would receive his tradeableinputs at 30 percent less than what they would be if the exchange rate werein equilibrium.
13. The social prices of domestic factors (G) reflect the underlyingsupply and demand conditions for these factors and, in the short run, arenot affected by economic policies. The government can, however, enact taxor subsidy policies on one or more of the factors (capital, labor, or lani)which create a divergence between private costs (C) and social costs (G),resulting in a subsidy to the user of the factor if C - C is positive or atax if the difference is negative.
Efficiency Analysis
14. Collection of data for private and social revenues and costs (A,B, C, E, F, and G) permits calculation of private profitabillty (D), socialprofitably (H), net transfers (L), and output, input, and factor transfers(I, J, and K) for a given activlty. The net transfer (L) sumarizes theincentive effects of economic pollcies on private profitability.
15. As the social values of tradeable inputs and outputs (E and F)are unaffected by Ethiopian policy, and the social costs of domesticfactors (C) are influenced by macroeconomic decisions only over an extendedperiod of time, social profitability (H - E - F - G) is not affected bypolicy choices except in the long run when relative efficiency costs offactors can shift with economic growth.
16. In a single year or over time, the combination of economic policymeasures can cause actual market prices (private prices) of tradeableoutputs and inputs to iiverge from world prices (social prices) in eitherdirection. Factor price policy, including credit subsidies or rationing,and minimum wage or wage freeze laws can cause private factor costs toexceed or fall short of comparable social opportunity costs. Consequently,privato profitability can be greater than, less than, or equal to socialprofitability depending on whether the net effects of commodity andmacroeconomic policy are subsidizing (i.e., protective), taxing orneutral.
Ratios
17. The relationships illustrated in Table 1 are sufficient toanalyze a single manufacturing enterprise or to compare two or moreenterprises that produce the same commodity. But no precise meaning can beattached to a comparison between enterprises producing different outputs;for example, no clear choice can be made between a firm that yields socialprofits of Birr 20 per 100 meters of cloth and one that generates socialprofits of Birr 30 per ton of cement. The calculation of certain ratios isnecessary to standardize the comparisons.
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18. Three especially useful ratios are listed in the followingtabulation (where symbols are drawn from Table 1). They are brieflydescribed in the following paragraphs and will be used to analyze theindividual enterprises covered by the sample survey.
1. Nominal Protection Coefficient - NPC - A/E
2. Effective Protection Coefficient - EPC - (A-B)/(E-F)
3. Domestic Resource Cost Ratio - DRC - G/(E-F)
19. The Nominal Protection Coefficient (NPC) is the ratio of therevenue in private (market) prlces to social prices. The NPC reflects thedegree of protection received by a firm on its output. For example, theBirr 100 domestic price of .a good is compared to the social price (thec.i.f. price for an importable or the f.o.b. price of an exportable good)for a comparable good. If this price is Birr 80, the resulting NPC is 1.25(100/80). Revenue accruing to the firm from sales of this good will be 25percent greater than if it were freely traded. A value greater than onefor the NPC lndicates that the firm is receiving positive incentives--orprotection--on output, whereas an NPC less than one indicates the firm isfaced with negative incentives.
20. The second ratio, the Effective Protection Coefficient (EPC)takes Into account not only the effects of policy on revenue frou sales,but also the effects of policy on inputs to production. It is representedby the ratio of value addetd (revenue from sales of tradeable outputs minusthe costs of tradeable lnputs) In private prices to value added in socialprices. Divergences between private and social costs of tradeable inputsoccur when government policies, such as taxes, customs duties, pricecontrol or a requirement to purchase a good locally, affect the price tothe firm of an input. A value for the EPC greater than one indicates thatthe firm is receiving a net positive incentive on the combination ofpolicies influencing material inputs and sales. Likewise, an EPC valueless than one indicates that the flrm is receiving a net disincentive. Anenterprise can have an NPC greater than one and an EPC less than one if thedisincentives on inputs to production are greater than the incentives orprotection on sales. In the absence of government policy (and marketlmperfections) private prices would be equal to social prices and both ofthe above ratios would equal one. The EPC is a limited indicator ofincentives because it does nit account for the effects of policies on costsof factors (labor, capi.al and land).
21. The Domestic Resource Cost (DRC) ratio is the ratio of domesticfactor costs in social prices (G) to value added (revenue minus tradeableInputs, (E-F), in social prices. Because the DRC ratio includes domesticfactor costs, it measures not only policy effects on tradeable inputs andoutputs, but the opportunity costs of using domestic factors in productionand can therefore serve as a measure of economlc efficlency. The costs of
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domestic factors are essential in determining social profitability, asshown in the accounting matrix presented above. As a ratio, the DRCmeasurement allows social profitability (H in the matrix) to be comparedacross products or firms. A DRC less than one indicates the particularactivity is socially profitable; in the absence of government policy thisactivity would produce more than enough value added to remunerate labor andreimburse capital owners. 1/ In other words, it indicates that Ethiopia isan efficient producer of the product because the domestic factor costs (G)incurred in its production are less than the direct foreign exchangeearnings or savings (E-F).
22. In the sample survey of Ethiopian industrial enterprisesconducted by the mission, two other DRC-type measures were calculated todemonstrate the sensitivity of the measure to varying assumptions. One wasa DRC calculation assuming an overvaluation of 30 percent in the Ethiopiancurrency. In this case, all prices of tradeable inputs and outputs wereconverted to the appropriate f.o.b. price or c.i.f. price plus 30 percent.The second additional measure was the so-called short-run DRC (DRC SR),which provides a DRC measurement for the enterprise assuming that allcapital costs are sunk because there is no alternative use for capitalinvested in a particular enterprise. This measure indicates when a firmthat is socially unprofitable may be profitable enough to operatetemporarily, until its fixed capital is fully depreciated.
Data Base
23. In order to calculate the measures discussed above it wasnec- ssary to collect data on an individual enterprise basis. Revenues,co,rts of both tradeable and nontradeable inputs, and labor and capitalcosts were collected from 19 enterprises that provided this information.In addition, appropriate social prices were obtained for goods produced byfirms in the sample and for goods used in production by the sample firms.The main source for this enterprise level data was a five pagequestionnaire completed by the firms and interviews with company managersand accountants.
24. The questionnaire distributed to sample firms requestedinformation on sales, purceases of input materials and services, laborcosts, and taxes paid. Quantity and value data were gathered for bothdomestic and export sales on a product basis. The costs of material inputswere also obtained and a breakdown requested between directly importedinputs and purchases made with domestic currency. The number of employeesand wages and salaries were requested on a disaggregated basis of threecategories--working proprietors, administrative, and production workers.Capital asset data were obtained on both book value and current marketvalue basis in order to facilitate estimates of annual capital costs.
For a more detailed and technical derivation of the DRC ratio, seeappendix at the end of this Annex.
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25. The questionnaire was designed to minimize the data demands onthe enterprises. It duplicated to the extent possible the questionnairefilled out annually by the enterprises for the Central Statistical Office'sSurvey of Manufacturing Industries. The principal additional informationrequired was the data on the c.i.f. price of outputs and inputs, breakdownof imported costs between c.i.f., internal transportation and taxcomponents, and estimates of the current market value of fixed assets. Thelatter data was the most difficult to obtain since many enterprises werenationalized in 1975 and records left by the former owners were Inadequateto determine the market or replacement value of fixed assets.
Estimation of Social Prices
26. Social price estimates of tradeable outputs and inputs requirethe use of an exchange rate for converting the f.o.b. and c.i.f. price fromforeign currency into domestic currency. The appropriate exchange rate isthat rate which would result in an overall balance of the external accountsif all restrictions on trade and capital movements were removed. In aneconomy such ae Ethiopia's, where severe controls have been in effect for anumber of years, the equilibrium exchange rate is extremely difficult toestimate. Both the World Bank and the IMF have estimated that, at thecurrent official exchange rate, the Birr is overvalued, primarily as theresult of the pegging of the Birr to the U.S. dollar during a period whenEthiopian inflation exceeded that of the country's main trading partners.The IMF estimated that the Birr appreciated in nominal terms by 22.5percent in the last two years. Between 1975 and December 1982, and basedon changes in the consumer price index, Ethiopia's import-weighted realeffective exchange rate appreciated against the currencies of its majorindustrialized trading partners by 37.5 percent.
27. Two alternative sets of estimates were made of the social pricesof tradeable inputs and tradeable -utputs. One set is based on theexisting exchange rate; the alternative set is based on an exchange ratethat assunes the Ethiopian Birr is overvalued by 30 percent. The estimatesbased on the assumption that the Ethiopian Birr is overvalued by 30 percentare presented in Table 4 under the heading DRC DV.
28. Estimating social prices (shadow prices) for nontradeables andfor domestic factors in Ethiopia is considerably more difficult than fortradeables. The Development Projects Study Agency has produced a documententitled 'National Parameters' dated January 1981. It points both the needfor and lack of data required to estimate shadow wage rates. Based on thebest aggregate data available, however, and relying primarily on a seriesof simple assumptions, the agency concludes that the social price to beused in costing hired unskilled labor should be 50 percent of the marketwage. This assumption has been used in the present study, along with afairly simplistic breakdown of labor by skill level. The social price ofskilled labor is treated as equivalent to the market wage-or labor cost inprivate prices.
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29. To estimate annual capital costs in social prices, it is firstnecessary to obtain the current market of value of assets. A social rateof return is then applied to these asset values in order to obtainestimates of annual capital costs. This rate of return indicates theopportunity cost of the use of these assets by the enterprise. Prnfitsthen are only the residual after these costs have also been deducted as acost of production. The capital stock of a firm includes both fixed assets-land, buildings, plant, machinery, motor vehicles, and office equipmentas well as current assets--stock, inventories, and working capital.
30. Estimates of current market values were extremely difficult toobtain, and the estimates must be treated with caution. For five of the 19eaterprises in the sample, no estimates of current market value wereobtained from the enterprise management. For these five, estimates werederived by reflating the book value of assets at the beginning of theperiod by the increase in the consumer price index (CPI) over the period1970-1980/81 (40 percent), since all enterprises had been in productionprior to 1970. Sensitivity analysis was carried out, basing current marketvalues alternatively on management estimates of current market value, bookvalue and on reflated book value estimates. The incentive and comparativeadvantage indicators for wost enterprises were not very sensitive to theseresults.
31. The return on capital assets in private prices was calculated tobe nine percent, reflecting a three percent real rate. That is, it wasassumed that an annual return of nine percent on capital is necessary foran enterprise in Ethiopia to maintain its investment and to considerexpansion. This annual rate of return also reflects the average banklending rate. The social rate of return was assumed not to have divergedgreatly from the private rate of return and was estimated to be 10percent. This is also consistent with the 'traditional' shadow priceestimate for the return on capital used by the government (and the WorldBank) in their economic analyses of investments in Ethiopia.
32. Social prices estimates were also made for the major nontradeabIoinputs--road transport and electricity. The derivation of the social priceestimates for road transport is presented in Table 2 and averages 80percent of the market price. That ts, market prices are multiplied by aroad transport conversion factor or .8 to obtain the value in socialprices.
33. The social price estimate for electricity use is based on thework of a recent World Bank energy assessment team and differs by region.For the North, for consumers of the ERESA system, the social price estimateis approximately 45 cents per kilowatt hour. Most large-scale industrialusers were paying only 9 cents in 1980/81. Thus for enterprises located inAsmara and paying this low market rate, the conversion factor use inconverting electricity cost from market prices to social prices is 5. Forenterprises in the Addis Ababa and Dire Dawa areas serviced by EELPA ICS,the social price, based on marginal price considerations, is estimated to
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Annex 1Page 9 of 14
be 10 cents. This is not significantly different from the average price of9 cents paid by large-scale industry in these areas during the surveyperiod.
Table 2: Transport Cost Conversion Factor
Financial Conversion EconomicItem Cost Percent Factor Cost Type
Salaries & Wages 175,758 16 .91 159,940 CapitolPension Contributions 6,020 1 1 6,020 LaborPersonnel Insurance 4,793 0 1 4,793 LaborPer diem & traveling
expenses 2,877 0 1 2,877 LaborUniforms & clothing 2,694 0 .964 2,597 TICAnnual Leave 9,732 1 1 9,732 LaborSick Leave 1,571 0 1 1,571 LaborCarburant & lubricants 49,368 0 .98 48,381 FuelGas oil 249,127 23 .53 132,037 FuelConsummable tools & 980 0 .964 945 TIC
materialsTyres & tubes 59,278 6 .86 50,979 TyresRepair & maintenance 404,083 38 .86 347,511 Capital
of vehiclesMaintenance of 52 0 .86 45 Capital
building & roadMaintenance of others 43 0 .86 37 CapitalDepreciation expense 65,595 6 .86 56,412 CapitalInsurance 29,367 3 1 29,367 NTTax & license 6,214 1 0 0 -
Sundry expenses 1,687 0 .964 1,626 NTCompensation payment 4,028 0 .86 3,464 CapitalWorkshop expense 3,601 0 .964 3,471 TIC
TOTAL 1,076,868 100.00 861,805
ROAD TRANSPORT CDNVERSION FACTOR: .8002885
SOURCES:
Addis Ababa Cement Factory, 1980/81 accountsDraft, World Bank Road Transport StudyWorld Bank, Ethiopia, Issues & Options in the Energy SectorSeptember, 1983
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Annex IPage 10 of 14
Sample Characteristics
34. The 19 enterprises in the sample account for 20 percent of thegross output and 21 percent of the employees of all public sector mediumand large-scale enterprises (defined as establishments having 10 or moreemployees and using power driven machines). Table 3 presents the coveragecharacteristics of the sample in terms of gross output and employment foreach of the 11 public sector industrial corporations.
Table 3: Sample Coverage
Gross Number ofCorporation Out put* Employees
I. ETHIOPIAN FOOD 278,255 4,684Dire Dawa Flour Mill 4,102 119
Sample Percent 1 3
II. ETHIOPIAN SUGAR 172,561 14,463Wonji Sugar 64,878 1,986
Sample Percent 38 14
III. ETHIOPIAN MEAT 85,643 4,781Dire Dawa Meat 14,871 612
Sample Percent 17 13
IV. ETHIOPIAN BEVERAGES 272,237 7,074(Incl. Glass Products)Babille Mineral 1,727 183Melotti Brewery 13,893 645Awash Winery 8,602 306Addis Ababa Glass Works 6,133 230
Subtotal 30,355 1,364Sample Percent 11 19
V. NATIONAL TOBACCO & MATCHES 111,900 2,229Sample Percent 0 0
VI. NATIONAL TEXTILES &FIBREWORKS 426,990 29,342
Dire Dawa Textiles 81,237 5,768Asmara Textiles 22,978 2,920Ethiopia Fibre Factory 14,330 1,781
Subt-tal 118,545 10,469Samp-.. Percent 28 36
VII. NATIONAL LEATHER & SHOE 113,710 6,471Ethiopian Footwear 4,402 279Awash Tannery 20,474 621
Subtotal 24,876 900Sample Percent 22 14
VIII. ETHIOPIAN WOODWORKS 32,637 4,426Warka Woodworks 2,437 205
Sample Percent 7 5
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Annex IPage II of 14
Table 3: Sample Coverage (continued)
IX. ETHIOPIAN PRINTING 65,778 2,958Ethiopian Pulp & Paper 26,698 550
Sample Percent 41 19
X. NATIONAL CHEMICAL(Excl. Oil Refinery) 135,635 2,345Addis Tyre 28,034 644Ethio Plastic 10,343 252
Subtotal 38,377 896Sample Percent 28 38
XI. ETHIOPIAN BUILDINGMATERIALS 37,883 3,054Addis Ababa Cement 6,621 543
Sample Percent 17 18
XII. NATIONAL METALWORKS 110,500 2,227Ethiopian Iron & Steel 14,642 392Xalite Steel 13,394 211
Subtotal 28,036 603Sample Percent 25 27
TOTAL PUBLIC SECTOR(excluding oil refinery) 1,843,719 86,288Total Sample 359,796 18,247
Sample Percent 20 21
NOTES:
* Gross Output figures for the corporations are estimates. They arederived from Census of Production figures of gross value of productionby industrial branch of the public sector for the year 1980/81.
Source: Central Statistical Office. Results of the ManufacturingIndus:ries, 1973 E.C. (1980/81), June 1983.
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Annex 1Page 12 of 14
Sample Results
35. The incentive and efficiency indicators for each for the nineteenenterprises in the sample are presented in Table 4. The weights used tocombine the results of individual enterprises to obtain the average for themanufacturing sector are shown in Column 1 of Table 4 and are based on theenterprise's value added in private prices. The second column showswhether the output of the firms was socially priced using the f.o.b. exportprice (exportable) or at the c.i.f. import price (importable). An "MWindicates the products were regarded as importables and an "X" indicatesthat the products were classified as exportables. Six enterprises hadexportable output, 12 importables and one had some products which wereregarded as importables and some products classified as exportables.
36. The main conclusion arising from these sample results is that theeconomic efficiency of Ethiopia's industrial enterprises differs verysignificantly between sectors. As Table 4 shows, the incentive andefficiency indicators differ considerably betwen corporations and evenbetween enterprises within the same corporation. Enterprisas which appearto be efficient include sugar, mineral water, footwear, leather products,plastic products and cement. Products for which Ethiopia appears to be aninefficient producer, include glass bottles, jute sacks, paper and steelproducts. One would expect Ethiopia to be an efficient producer of leatherproducts, considering its livestock resources, of cement (as long as it isconsidered an import substitute), because of its low value to weight ratio,and of food and beverages that are also based on locally produced inputs.On the other hand, developing countries are rarely efficient producers ofmetal or paper products due to diseconomies of scale and low world marketprices for these products.
37. Table 5 presents estimates of the matrix elements A through Lintroduced in Table 1 for each enterprise in the sample. The estimates inTable 5 indicate that in a number of cases, the effect of government policywas not consistent with the objective of economic efficiency. For 10enterprises, H is negative, indicating inefficiency, but L is positive,indicating policy incentives. On the other hand, for 3 enterprises inwhich H is positive, indicating efficiency, L is negative, indicatingpolicy disincentives.
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Annex 1Page 13 of 14
Table 4. Structure of Protection and Efficiency of IPEs
COUIZENTERKISS VA SHARE X/M 1PC EPC DRC DRC DV DRC SR
2. ETIIOPIAN FOODDire Dava Flour Kill 0 M .59 .29 1.02 .79 .83
I1. ErHIOPIA SUtARVouji Sugar Factory 25 M .84 .69 .74 .60
III. ETIOPIAN HEATDire Dava Meat 2 X 1.11 2.05 1.52 1.17 1
rv. EMTHOPIAN JEVEAGESSabille Mineral 1 X 1.11 1.09 .89 .68 .61Melotti Brevery 5 X 1.49 2.24 1.93 1.49 1.13Avash Winery 4 X 1.88 3.11 1.20 .92 .99Addis Ababa Clsss Works 3 m 1.50 5.64 4.37 3.36 1.83
Sub-Total 13 1.55 2.52 1.70 1.31 1.06
'7 NATIONAL TEXTILES & FIBREWORKSDire Dawv Textiles 25 M 1.14 1.84 1.37 1.05 .84As-ara Textiles 6,m/X 1.19 8.63 3.45 2.65 2.71Ethiopia Fibre Factory 4 M 2.20 -6.61 -2.94 -2.26 -2.44
Sub-Total 36 1.22 2.64 1.70 1.31 1.11
VI. NATIONAL LEATHER SHOEEthiopian Footwear 2 X 1.47 1.77 .84 .65 .42Awash tannery 4 X 1.00 1.16 .36 .28 .31
Sub-total 6 1.06 1.27 .45 .35 .33
VII. ETHIOPIAN VOODWORKSWarka Woodvcrks 1 M 1.11 .64 2.07 1.59 1.97
VIII. ETHlOPIAN PRISTINGEthiopian Pulp & Paper 5 M 1.49 -6.10 -4.34 -3.34 -2.06
IX. NATIONAL CCEDICALAddis Tyre 5 M 1.16. 1.25 1.16 .89 .82Ethio Plastic 4 M 1.14 .97 .83 .64 .43
Sub-total 9 1.16 1.19 1.08 .83 .73
X. ETHIOPIAN BUILDL14 YMATEIALSAddis Ababa Cezent 1 M .47 .03 .41 .31 .23
Xi. NATIONAL X4LWo-sSEthiopian Iron 6 Steel 1 M 1.11 _63 2.87 2.21 2.32Xslite Steel 4 M 2.00 -9.89 -2.68 -_21 -.3
Sub-total 4 1.41 9.45 7.53 5.79 .86
TGTA.L Y'PKFACTrRINC 100 1.11 1.36 1.09 0.84 0.74
(EXCLUDINC WCN:l SCAt.) 1.20 1.96 1.39 1.07 0.d7N4otes:VA SHARE - Value added in private pricts for the enterprise or corporation
dtvt,ez bv vsaue adden in private ?ries .a3r tota-l zanufacturing.X - Ex-Drtab2e X - lrzorrab!e
u-I
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Technical Appendix
Economic Profitability and the Domestic Resource Cost Criterion 1/
1. An industrial activity is competitive at economic prices if theeconomic value of its output exceeds the opportunity costs of thecommodities and factors of production employed in producing it. If thefull time profile of inputs and outputs is known and a suitable timediscount rate is applied to costs and benefits occuring at different pointsin time, the net present value of any project (actual or proposed) ateconomic prices provides the correct measure of its net contribution tosocial welfare. In that sense, economic activities with positive netpresent values are efficient.
2. Since the data on Ethioplan industry is not well adapted to theapplication of the present value criterlon, it is warranted to employ asingle period efficiency measure based on the annual economic profitabilityof an industrial activity:
n m
B _ ~p _ a?P - f P (1)i i ij I S sjs
Unit Economic Economic EconomicEconomic - Price per - Value of - Value ofProfit Unit of Intermediate Primary
output Inputs Inputs
The P , P and P are the shadow prices of output, material inputs andJ i s
factor inputs used in the production of J, and the a and f are the
input-output coefficients for material inputs and factors of production.The activity is judged efficient if the level of unit economic profit isnon-negative.
3. If the investment to be evaluated is in the public sector and allproduced inputs and outputs are assumed to be tradeable, the interpretationof the unit economic profit criterion is straightforward. The first twoterms in expression (1) give the annual -value added at world prices perunit of output generated by the particular subsector or industrialactivity:
mVA - PJ - a P (2)
J .1 i-i ij i
where VAJ represents the annual net addition to national income, evaluatedat the opportunity costs established by world prices. The third term in(1) above represents the opportunity cost of factor inputs evaluated at
This appendix is based on an annex to the Bank Report No. 4436-ZA,.Zambia: Industrial Policy and Performance".
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economic prices. When the opportunity cost of factor inputs exceeds thenet addition to national income, unit economic profits are negative, andthe resources employed could be more efficiently employed in their bestalternative use.
4. In evaluating past investments and the success of previouspolicies, it is useful to have a measure of the relative efficiency ofactivities producing different outputs. The unit economic profitcriterion is unsuited to this purpose because its value varies with themeasure of output of each activity. Although it is possible to compare thelevel of unit economic profits between two activities producing cottoncloth, it is not possible to compare the relative efficiency of clothproduction with the manufacture of automobiles. Where policy questionsfocus on the allocation of resources among several industries or sectors,the efficiency criterion chosen must be independent of the type of output.
5. In general, rules for choosing among projects which are to beexecuted with a limited amount of national resources prescribe calculatingthe net benefits which they generate per unit of a budgeted factor. For aproject using traded inputs and primary factors to produce traded output,the addition from the project to national income, measured at economicprices, is given by the level of value added at world prices, which alsorepresents the net (direct and indirect) addition to foreign exchangearising from the investment. If domestically-supplied factors ofproduction are evaluated at their opportunity costs, criterion (1) may berewritten as the ratio of domestic factor costs evaluated at economicprices to value added at world prices:
tfl
f P Economic Value ofs sj s Primary lnputs (3)
DRC =
nP - s P Value Added ati i ij i International Prices
The resulting 'Domestic Resource Cost ratio" (DRC) measures the amount of"net" foreign exchange that domestic resources can generate for the firm inquestion. If this rate of transformation exceeds one, the opportunity costof domestic factors of production (in terms of foreign exchange) exceedsthe addition of value added at world prices by these factors, and the netbenefit criterion would turn negative. 2/
6. Minimizing the domestic resource cost ratio in activitiesproducing tradeable goods is equivalent to maximizing value added at worldprices per unit of domestic resources employed. Thus, evaluating firms interms of their resource cost ratio provides a measure of relative economic
2/ Often the DRC criterion is written as the ratio of domestic resourcecosts in terms of domestic currency to value added at world prices interms of foreign currency. There is no difference in substance betweenour measure of the D1C and the alternative. We have simply chosen toexpress the opportunity cost of domestic factors in terms of borderprices and to compare the resulting ratio with one.
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efficiency. Firms with DRC less than or equal to one may be classified asefficient in the sense that the domestic resources which the employ produceas much or more value added at world prices as they would in the activitiesfrom which they are drawn. Activities with resource cost ratios greaterthan unit are termed inefficient in the sense tha. the resources they usewould be more productive in alternative activities. To the extent that thegovernment is able to allocate resources among competing activities, theyshould be distriblted to projects with low resource cost ratios.
7. Ranking of firms hy the domestic resource cost ratio provides anindex of efficiency among activities that produce tradeable goods. Firmswith the lowest DRC ratios are more efficient at transforming domesticfactor inputs into foreign exchange than those with ratios close to orexceeding unity. High DRCs may arise either from low levels of value addedat world prices, as for example when an import-substituting activity usesinputs with low or zero protection to produce a highly protected output, orfrom high domestic resource costs per unit of value added at world prices,deriving perhaps from low levels of technical efficiency production.Unlike the unit social profit criterion, the DRC ratio may be used eitherto compare the performance of firms within a single industry or to comparethe performance of several different industries. Within industries, theintra-marginal ranking of firms provides substantial information concerningthe relative levels of economic costs of production across firms.
8. Relative rankings under the DRC criterion are not unambiguous,however. The ordering of firms may shift in response to a change inrelative factor or commodity prices. Unless all firms have very similarinput-output coefficients, alterations in economic prices will affect uniteconomic costs differently for each firm. If differences in the level ofaverage economic costs and hence in CRC ratios are small, changes ineconomic prices may resjlt in substantial shifts in the rank ordering. Butwhere there is substantial variation in DRCs, both across i.tdustries andwithin sectors, the relative rankings provide a sound empirical guide torelative efficiency.
9. Considerable attention in many countries has been focussed on thedomestic resource cost ratio as a measure of comparative advantage.Comparative advantage exists if the economic Opportunity cost of producinga commodity is less than its border price. Hence, activities with positiveunit economic profits or DRCs less than one are those activities in whichthe economic has a conparatLve advantage. In addition, the smaller the DRCof an individual activity within an economv, the greater the scope forefficient expansion of exports or import substitutes.
10. It is important to remember that DRC estimates for existingindustries are best thought of as a guide to the consequences of smallchanges from the existing structure of production. Major policy changesor significant expansion of one or more industrial sectors will probablyresult in substantial changes in input-output coefficients or in shadowprices, and hence DRCs. For example, an industry which appears to have anacceptable DRC as an import substitute may not be competitive as an exportif there is a wide margin between FOB and CIF prices for its output. Thus,some care should be exercised in the interpretation of DRC ratios asindicators of comparative advantage; they provide a snapshot of potentiallines for export expansion or efficient import substitution, buz thepicture may change with the passage of time and with increases in output.
