Ethiopia’s Industrial Park Strategy: An Insight into the Political Economy of East African Developmental States
After nine years of construction, water has begun to fill a reservoir behind the Grand Ethiopian Renaissance Dam (GERD), a $4.5 billion hydropower project viewed as essential to Ethiopia’s future. While intending to provide electricity to the estimated 60% of households currently without access to power, the Dam is also seen as an important source of energy reliability for the country’s recently constructed industrial parks. The parks, home to international textile and apparel companies, are an important source of foreign direct investment in the growing industrial sector. However, the recent unrest following the shooting of Oromo singer and activist Hachalu Hundessa, with over 80 people dead, is one of many reminders of the fragility of the current political settlement amidst the state’s ambitious push towards industrialisation.
Utilizing research conducted for the author’s postgraduate dissertation between May and August 2019, this article seeks to interrogate the politics behind the Ethiopian government’s industrial park strategy. Interviews were conducted with officials from Addis Ababa University (AAU), the UK’s Department for International Development (DFID), Ethiopian Investment Commission (EIC), Ministry of Finance and Economic Development (MoFED) and Ministry of Industry (MoI). All identities of interviewees referenced here have been anonymised in line with signed consent forms.
In 2016, the Ethiopian government announced its intention to construct 30 industrial parks by 2024. Seeking to attract foreign investment in the manufacturing sector, Ethiopia’s industrial park strategy is viewed as vital to kickstarting the country’s industrial transformation. However, Ethiopia is a federal country plagued by inter-ethnic conflict and the legacies of resistance to centralised rule in the 20th century. As such, the industrial park strategy has been complicated by the government’s attempts to manage its fragile coalition and the diversity within the country. This article discusses the politicisation of Ethiopian industrial policy within its historic political economy. While specific to Ethiopia, it also offers valuable insights on the application of East Asian-inspired economic policies in an East African context.
Photo credit: flickr user Richard Stupard
State Formation and Politics in Ethiopia
Apart from a brief occupation by Fascist Italy during World War II, an independent ‘Ethiopian’ state has existed intermittently for roughly 2,000 years. Historically concentrated in the northern highlands along the modern-day Ethiopian-Eritrean border, the Ethiopian Empire expanded its territory significantly over the course of several hundred years, reaching roughly its present size by the early 20th century. This not only doubled the Ethiopian Empire’s size and population, but also incorporated territories characterised by completely dissimilar political, economic, religious and cultural systems. Managing these differences became a dominant aspect of Ethiopian politics in the 20th century.
Under Haile Selassie, the Imperial regime (1930-1974) attempted to unify the country through a brutal process of assimilation that marginalised or outlawed minority language and cultural expression. In 1974, a military junta, known as the Derg, overthrew the Emperor and attempted to resolve ethnic resentment through a rebranded ‘inclusive’ Ethiopian nationalism. Despite a rhetorical commitment to inclusivity, the Derg refused to concede any real political power.
Mandatory conscription and failed agricultural resettlement projects, combined with overwhelming political repression, led to the birth of armed liberation movements across the country and spawned the Ethiopian Civil War (1974-1991). In 1991, the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF), a coalition of various ethno-nationalist political parties, marched triumphantly into Addis Ababa, ending the Civil War and establishing a new era.
Photo credit: flickr user Simon Davis
EPRDF Political-Economic Reforms
In place of centralised military rule, the EPRDF and its coalition allies introduced ethno-linguistic identity as the basis of the country’s post-war political order. Under the new constitution, the country was decentralised and divided along ethno-linguistic lines into nine regional states, each represented by a satellite party of the ruling coalition. This system, referred to as ‘ethnic federalism’, was born of both political and practical necessity.
Although criticised for its territorialisation of ethnicity, ethnic federalism has allowed for greater devolution of power, as well as cultural and linguistic self-expression. While the introduction of federalism decentralised aspects of the administration, it has also served as a convenient tool to reinforce the hegemony of the EPRDF, particularly through the policy of ‘democratic centralism’. Democratic centralism, inherited from the Derg and Leninist political thought, is the process by which policy is formed through debate within the vanguard party/coalition and then cascaded down to lower-level party members, who implement said policies. This process has been particularly influential in the realm of economic policy and in the context of the developmental state model.
Industrial Policy and the Developmental State
By the early 2000s, a body of literature on “developmental states” had emerged challenging the dominant narratives on economic development. Drawing on the experience of the four so-called East Asian Tiger economies (Hong Kong, Singapore, South Korea and Taiwan), authors such as Ha-Joon Chang and Alice Amsden argued that these developmental states achieved high rates of sustained growth through targeted and repeated state intervention in key sectors. Rather than allowing market forces to operate in isolation, late industrialisers had actively invested in strategically selected sectors (in which they did not necessarily have a comparative advantage), providing successful firms within these sectors with extensive subsidies tied to export targets. By utilising industrial policy, the East Asian tigers achieved structural transformation.
According to Dr. Arkebe Oqubay – the architect of much of Ethiopia’s economic policy – industrial policy is a “strategy that includes a range of implicit or explicit policy instruments selectively focused on specific industrial sectors for the purpose of structural change in line with a broader national vision and strategy.” Further, structural transformation is the process by which labour and economic activities continuously shift from low to higher-productivity industries. The popularisation of this narrative, supported by the rise of Chinese state-led development and simultaneous domestic political challenges, pushed the EPRDF to adopt a developmental state model.
Since its adoption in the early 2000s, the Ethiopian economy has registered unprecedented economic growth and significant human development. Consistently among the fastest-growing economies in the world, Ethiopia has averaged 10% annual GDP growth over the past 15 years. Outlined in the country’s five-year plans, the EPRDF has prioritised growth in manufacturing through its state-led strategy. A key component of this strategy is the construction of numerous industrial parks.
Photo credit: Nichole Sobecki for Bloomberg
The Political Economy of Ethiopia’s Industrial Parks
As defined by the Ethiopian government, an industrial park refers to a geographically delineated area with special incentives offered to firms. Outside the country, the term is used interchangeably with ‘special economic zones’ (SEZs), which are acknowledged to have played a vital role in China’s economic development. The Ethiopian government’s industrial park strategy originally envisaged 30 industrial parks by 2024, however, that number has been revised down to 20 – all of which are already at least partially operational, with 16 being publicly owned. The strategy relies on incentives to attract foreign investment, such as favourable infrastructure, tax exemptions and subsidised utilities. But by far the biggest draw for foreign investors is Ethiopia’s cheap labour, which offers the lowest base wage of any garment-producing country in the world at around $26 per month.
One of the consequences of the EPRDF’s industrial park strategy has been legal ambiguities regarding rights guaranteed to regional governments and conflict over the devolution of powers. On the one hand, Article 52(d) of the 1994 post-war Constitution guarantees the right to administer land to the state governments. On the other hand, Article 51(5) authorises the federal government to enact laws regarding the utilisation of land, and Article 40(3) of the Constitution explicitly states that ownership of both rural and urban land is vested in the state (federal government) and the peoples of Ethiopia, ultimately leaving this open for interpretation. In addition, the IPDC’s mandate is the management of a ‘land bank’ that clears settlers off the land and prepares it for development. The land which is ‘deposited’ in this bank is land that has been voluntarily transferred by the regional governments, despite there not being a constitutional precedent for the upward delegation of power.
As a result of regional interpretations of the law, the presence of industrial parks is viewed by some local populations as an extension of federal power at the expense of regional or ethno-national autonomy. As such, industrial parks are often targeted by protestors during times of political unrest, including during the 2016 protests in Oromia and 2019 protests in Hawassa. However, even amidst widespread protests, regional governments have refrained from criticising the process by which industrial parks are constructed because regional EPRDF affiliate parties are compelled to respect the decisions of the EPRDF national executive, and because the parks are also viewed positively as a source of jobs.
This relates to another broad consequence of industrial parks, which concerns the regional distribution of the parks themselves. Although the industrial park strategy is a federal government-led initiative, it is not isolated from the nature of regional politics. Because of the EPRDF coalition, the regional – and therefore by extension ethno-national – distribution of the parks has been taken into account. In fact, every region (apart from Harar and Gambela) currently has, or is slated to have, an industrial park.
Photo credit: flickr user UNIDO
The even distribution of industrial parks throughout the country may have negative effects on Ethiopia’s attempts to industrialise. In order to promote exports, developmental states require bureaucracies that implement ‘reciprocal control mechanisms’, which refers to the disbursement of subsidies to firms in exchange for meeting performance standards. Development scholar Alice Amsden viewed this as one of the keys to South Korea’s economic transformation. However, while South Korea has a largely ethnically homogenous population, making it easier to concentrate ‘intermediate assets’ amongst the best performing firms without political risks, Ethiopia has historic sensitivities regarding inequality between ethnic groups. Thus it is more difficult for Ethiopia to focus on industrial clustering, strengthened by sector-specific performance standards. Additionally, Ethiopia is the second largest country in Africa – and is also landlocked. The distribution of parks throughout the territory arguably fails to account for proximity to Djibouti’s port, which serves as the country’s primary access to the sea.
Perhaps the most egregious case of political influence overriding long-term economic viability is the planned construction of industrial parks in Asosa, Aysha and Semera. As a signatory to the Comprehensive Refugee Response Framework (CRRF), Ethiopia agreed to provide greater opportunities for refugees in exchange for concessional loans totalling $500 million from the World Bank, EU and UK. While some government officials stressed that these locations were chosen because of proximity to refugee populations and the availability of land, critics highlighted issues regarding infrastructure, access to water, labour and local services availability. According to my source at AAU, the industrial parks were originally slated to be constructed in different areas but were moved by the Abiy administration because “[he] wanted to appear more distributive than previous governments […] it was simply ‘candy’ to give to the regional elite.”
Further complications can arise when a federal government project contradicts established norms regarding state-level responsibilities under the federal system. These complications are best exemplified by the case of the Hawassa Industrial Park, in the capital of the Southern Nations, Nationalities and Peoples’ Region (SNNPR), which is considered the country’s flagship industrial park. Despite dramatically increasing the city’s GDP, the park is not without its problems. High employee turnover rates, primarily due to low wages, have been well documented and have resulted in lower company profits due to higher training costs and lower productivity.
The sourcing of labour has until recently aggravated this problem. Whenever a park was constructed, the regional administration recruited medium- and low-skilled labour from within its own territory. Labour sourcing stretched 200km within the SNNP region from Hawassa, but recruitment efforts did not extend across the border to towns in Oromia even though Hawassa is located on its border.
This distorted the labour supply and led to a number of externalities. Thousands of migrants from within SNNPR have headed to Hawassa to work in the industrial park, placing tremendous strain on the city’s services, including housing, local food supply, sanitation and health services. According to one source, most new arrivals live in shacks beyond the edge of the city, and there are personal safety issues and difficulties with transport.
An agreement between regional administrations and the federal government was reached whereby anyone, regardless of where they reside, can register at a screening centre and have access to jobs within the parks. Nonetheless, several sources have reported that, within the parks themselves, a system of job reservations based on ethnic affiliation exists. One source stated “it’s less about making economic or geographic sense and is more about entitlements. [They say] ‘you’re part of this region, you’re politically represented here, so you’ll get the jobs’.”
Photo credit: Nichole Sobecki for Bloomberg
Despite some negative externalities and idiosyncrasies, Ethiopia’s industrial policy has largely been effectively adapted to its local context given the country’s rigid political economy constraints. While a number of my interviewees and PM Abiy himself have stated that the parks “should have been built closer to ports for exports,” recent investments in infrastructure have cut down on transportation costs. Additionally, my source at DFID acknowledged that regional distribution meant industrial parks were not in the most economically efficient locations per se, but argued that it “has not been a massive problem because all of them have been constructed in relatively sensible places.” Further, there is evidence that the investment is paying off. Ethiopia’s industrial parks alone exported products worth $122 million within the last fiscal year, a 32% increase compared to the previous year.
However, perhaps the real test is yet to come. Since the inauguration of the Hawassa Industrial Park last year, further complications have arisen. The number of internally displaced peoples has dramatically increased, the EPRDF was dissolved and replaced with a new coalition amidst inter-party fighting and COVID-19 reached the country in March. While the government has taken initiative, providing a number of subsidies to exporting firms as part of a wider agreement between the government, industry and labour, the manufacturing industry has been hit by a sharp decline in demand. The longer the pandemic lasts, the greater the strain on the economy. Maintaining export revenues, employment levels and investor satisfaction will likely continue to be a significant challenge for the foreseeable future.
Feature image: flickr user Jasmine Halki
Connor Trumpold is a recent graduate of the London School of Economics' Development Management master's progamme. He also holds a B.A. from SOAS, University of London. Alongside his education, he has worked with nonprofits and international organisations in the UK, Germany and Lebanon. Following his MSc research, he has a keen interest in economic development, trade, and industrial policy issues in East Africa.