Why Is Ethiopia Not Producing Basic Goods at Home?
By Seble Teweldebirhan
August 11, 2019 (Ezega.com) -- The Ethiopian market has been flooded with imported goods for decades. The country imports almost everything these days, from construction materials, to fuel, to medicine, and to commodities like clothing and cosmetics. Most things processed or value-added are likely to be made outside the country. From the street vendors to supermarkets, large and small stores, all sell goods that are imported. Even those who manufacture things inside the country, they import many inputs or ingredients, and even as small as packaging labels. This has made foreign exchange needs for the country extremely high. The recent shortage of foreign currency has hit the markets hard that important goods like medicine and spareparts are slowly disappearing or getting very expensive, and factories are closing or reducing operations as they run out of inputs.
In 2016/17, Ethiopia exported $2.67 billion worth of goods, mainly agricultural products, while it imported $15.8 billion worth of goods for the same period. Since 2012, the trade deficit has been growing by an average of 12.5 percent. The shortage of foreign currency has been increasing accordingly. According to the national bank, recently, the nation had foreign currency reserves of $3.4 billion, enough to cover just three months’ worth of imports. As a result, private sector access to foreign exchange is severely limited, further increasing the long list of importers who opened letters of credit in the banks and waiting.
The underlying cause for Ethiopia’s high trade deficit varies, depending on who you ask. Among many reasons, often cited are the closed nature of the financial sector, systematic incentives for imports, and the absence of sound economic policy on the part of the government. According to economists, there are two possible options for Ethiopia if it wishes to narrow the prevailing trade deficit: Increasing exports of value-added manufactured products and substituting imports by increasing the competitiveness of locally-produced products.
Although possible, increasing exports of value-added products is not as simple as it sounds. Ethiopia still has the structural disadvantage of being land-locked. According to some analysts, the country spends around 10 percent of gross export revenue on sea access. This severely impacts its competitiveness, especially in export of manufactured goods. It must be noted that, in international trade, many nations rise and fall by margins of 10 percent or less. (Yes, loss of sea outlet has consequences. And this is one of them. After all, the seas are not 'gimel metecha' as some fraudulently claimed years ago.)
The second option, import-substitution, requires the government to essentially incentivize and encourage local production and discourage import of goods that can be made in Ethiopia with strong quality control, tariffs and consumer education standards. That will obviously save Ethiopia billions of dollars every year. The country (where more 60 percent of the population is less 25 years old) certainly has the manpower and the resources necessary to produce some of the commodities needed in the market.
However, in addition to governance issues, the problem has a lot to do with business culture and work-ethic in the country. The reality is that doing business in Ethiopia, for the most part, has taken a detour a long time ago. Hard work, creativity, and passion have long vanished from our concept of business and success. We now live in a nation where short-cuts are the preferred routes to success and even glorified. Often, success is solely defined by financial gains, and hard work and strive for excellence are to be left for ‘fools.’
For so long, importing goods has proved to be a relatively quick way to financial success. As a result, the business aspiration of many is to become an importer. In a nation where quality control is lenient, anything just sells without a question. Importing cheaply-made goods from Asia and the Middle East means quick and easy money.
Hanna (her name has been changed for privacy) is a 35 years old businesswoman who travels to Dubai, Bangkok, and Beijing to import women’s clothing, cosmetics, and mobile phone apparatus. With her three friends, they are major distributors of women’s clothing in Addis Ababa and some regional cities. “I have always wanted to do this,” she said. “When I was younger, our neighbor started going to Dubai and China, and he got rich very quickly. He bought an expensive car and owns houses in Addis Ababa. I decided to do the same,” she said. When she started the business 13 years ago, it was less crowded. “Now, many people have become importers. I see young people always joining us and asking for advice. The profit is not as it used to be, but I can’t complain,” she said.
Hanna and her friends are amused by the suggestion that they should try to make some of the goods they import in the country. “I have no idea how the things I import are made here. I go to Dubai and just buy whatever I think would be profitable. Shops in Ethiopia take things off my hand the same day I cleared the goods from customs,” she said.
Importing goods, whether its hairpins, cheap electronics, plastic shoe or cosmetics are all profitable that, many traders are joining the export business, just so they get some foreign exchange to import. That is because the shortage of forex is forcing banks to decline letters of credit. Importers with strong finance are joining the export of agricultural products with the sole purpose of getting dollars for their imports. As a result, Ethiopian products like coffee and pulses are sold cheaply in world market. “Shortage of forex has pushed us to become exporters,” said one shareholder in one of import-export companies in Addis Ababa. Exporters in this line of business do not care about the quality of exported commodities and the losses arising from, because they compensate the losses with whatever imports they sell in Ethiopia. This practice will not only affect the market competitiveness of Ethiopian goods like coffee, but also the country’s image.
But many still believe that the hassle and inconvenience of producing goods domestically are not worth it. In addition to the grinding bureaucracy common in most government offices, producing here has relatively much stricter regulations and follow-up from the government. “Why would anyone want to deal with the bureaucracy? If your investment is limited, the incentives for local production are too low. Land and capital are unavailable. Besides, the customer is willing to pay whatever price you put on imported items. Things made in Ethiopia sell cheap because people think it is of low quality,’’ said one importer. ‘Importing is a much smoother business model, compared to running a factory. I deal with fewer people, and the profit is guaranteed in most cases,” said the businessman.
However, the import-oriented market is silently destroying whatever is left from our work culture. In Ethiopia, most importers are not committed to certain line of items they import and fail to specialize or understand the details of what they import. They import whatever is profitable now. That is their business model. They are simply traders who would sell electronics today and cosmetics tomorrow. Therefore, the chances for copying and technology transfer are low and less likely to happen here.
“The solution is to transform our collective mindset,” said Dagem Alemayehu, an economist and a business consultant in Addis Ababa. “I believe there is a political will at the monument. However, this is a much bigger problem that requires a cultural change in our thinking and in business. We must redefine success, and value entrepreneurship, creativity, and discovery,” he said.
Seble Teweldebirhan is Addis Ababa-based contributor for Ezega.com. She can be reached through this form.