PERFORMANCE OF THE INDUSTRIAL SECTOR
The industrial sector in Ethiopia has been characterized by a low level of development, even by the standards of many least developed countries. It accounts for 11% of the GDP, 9.5% of total employment and 21.2% of export earnings.
GROWTH TRENDS AND PATTERNS
The manufacturing sector registered significant rates of growth in the 1950s and the 1960s but declined during the second half of the 1970s. The sector's performance improved somewhat in the early 1980s with growth being characterized by erratic trends in terms of both of the gross value of production (GVP), the growth rate of which varied between a low of 0.01% and a high of 47%, and manufacturing value added(MVA).
Not only did the rate of growth of industry remain low but the pattern of growth also remained unchanged. The three major sub-sectors, namely food, textiles and beverages still account for over 50% of GVP, MVA and employment.On the other hand the basic metals and engineering industries, which constitute the backbone of the industrial sector, registered low rates of growth.
The prevailing pattern of industrialization led to the inability of the manufacturing sector to provide the necessary inputs for its own growth, thereby inhibiting the process of self -sustained industrialization. Manufacturing industry is characterized by poor inter-sectoral linkages; it remained dependent on foreign sources for machinery and equipment, spare parts and other inputs and constrained the development of the capital goods industry. Its contribution to rural development remained minimal and it has not generated the expected level of employment opportunities.
1.2 EFFICIENCY AND PRODUCT QUALITY
In the 1980s, the financial performance of the manufacturing sector had generally been favourable. The higher profit rate generated in the mid 1980s was the result mainly of the lower book value of assets which resulted in lower overall cost of production. In subsequent years, however, the financial performance of the sector began to take a downward trend with decline in labour productivity. Between 1984/85 an 1989/90, labour productiviy declined by just under 4%. Consequently the sector was unable to generate surplus capital for further investment.
Because of the prevailing high demand for manufacturedgoods, which was far in excess of supply, very little consideration was given to product quality and mix, especially in the public sector, the overriding objective being the fulfilment of imposed production targets.
1.3 CAPITAL INTENSITY
Many factories have been operating for over 20 years with most of the equipment being second hand at the time of installation. Consequently capital-labour ratios may not indicate the actual capital intensity of the sector. Therefore, it would be more appropriate to view changes in capital stock and employment over time.
Capital stock in manufacturing had been growing for much of the 1980s with growth averaging 16% between 1980/81 and 1987/88, the exception being 1987/88 when it dropped by 6%. On the other hand, the rate of growth of employment remained sluggish, with growth averaging a mere 4% per year between 1980/81 and 1987/88. The increase reflected over-manning rather than actual increasesin the demand for labour due, in part, to the capital intensive nature of new investments.
In theory, capital intensive technology is said to augment savings in the short run, implying faster growth and thus increased consumption in the long run. However, this argument cannot be plausible for a country like Ethiopia. In the first place, the economy is characterized by a high level of unemployment. Secondly, the process is bound to render the sector more foreign dependent and to lower consumption levels which in turn reduces the size of the domestic market required for economic expansion. Moreover, since the manufacturing sector is dependent on imported machinery and equipment, raw materials and other inputs, its ability to earn foreign exchange has been minimal.
1.4 TECHNOLOGY SELECTION, TRANSFER AND ADAPTATION
While the industrial sector is known to influence and be influenced by technological changes, the sector has remained weak and has had little influence on the economy as a whole. Since the sector is tied to foreign technology, the development of indigenous technological capability has received very little attention.
1.5 INPUT UTILIZATION
Many industrial establishments, both in the public and private sectors, producing consumer goods have strong potential backward linkages. However, Ethiopia has not yet exploited this opportunity and the sector continues to be dependent on imported inputs. The metal and chemical sectors are almost totally dependent on imported inputs while paper and printing, tobacco and the non-metals sector depend on imported raw materials for over 50% of their requirements. The share of imported inputs for agricultural based industries has also been significant.
1.6 PROJECT FINANCING AND INVESTMENT ALLOCATION
Out of the total capital invested between 1980/81 and 1989/90, government equity comprised 35% ,domestic bank loans 19%, foreign loans and grants 44% and 2%, respectively. While, in general terms, the debt equity ratio appears to be reasonable, the structure of financing has implications when one looks at the large stock of foreign debt and debt servicing. Since the sector is not a foreign exchange earner, dependence on foreign sources for financing investment projects is bound to deplete scarce foreign exchange and limit the capacity utilization of existing enterprises.
New investment projects absorbed the lion's share of available resources amounting to Birr 1,246 million, or more than 72% of the total. Expansion projects account for only 28% of the total invested capital. Given the old age of the existing equipment and the poor state of technical and managerial capabilities, it would have been more cost effective to increase output by expanding and renovating existing enterprises
1.7 SMALL AND MEDIUM SCALE INDUSTRIES
Small and medium scale industries as well as handicraft and cottage industries play vital roles in economic development by utilizing local resources, producing essential goods and services of mass consumption, generating employment opportunities and promoting balanced regional development.
According to a survey carried out in 1986/87, there were 7,600 private SMIs employing about 39,000 workers. The survey also indicates that 51% and 28% of the establishments were in the food and textiles sub-sectors, respectively. In terms of employment, the largest employers were food and textiles (71%), followed by fabricated metal products (18%), leather (5.4%) and wood works (5.1%).