FINANCING RURAL
INDUSTRIALIZATION AND EMPLOYMENT CREATION:THE CASE OF ETHIOPIA
Aschalew Degoma Durie
Bahir Dar University, Ethiopia
E-mail: aschalewde@yahoo.com
Submission: 23/03/2018
Revision: 13/04/2018
Accept: 23/04/2018
ABSTRACT
The objective of the study was to examine financing rural
industrialization and employment creation practices and possibilities in
Ethiopia. In this context, rural industrialization refers to encouraging small
to large industries to be established in rural areas. As rural industrialization is a
new concept at a policy level let alone to the practice on the ground in
Ethiopia, a full-fledged data regarding the rural industrialization and the
rural financing practice is inadequate. However, attempts were made to see at
least the trends in agricultural commercialization, off farm practices, the
government’s policy, the financial institutions practices, and above all how
other countries approached rural industrialization and financing such
industries. Hence, relevant data were collected from CSA, NBE, DHS, World Bank,
and Ethiopian Investment Commission and the collected data were analyzed using
descriptive statistics. The major finding of the study indicates rural
industrialization process is at conception stage and financing the rural
strategy is still poorly developed despite the immense economic and social
implications. Hence, a combination of centralized financing rural
industrialization through commercial banks and a decentralized financing rural
industrialization through microfinance institutions is recommended for the
country to get better depth and breadth of rural industrialization.
Keywords: Rural financing, financing,
rural industrialization, industrialization
1. INTRODUCTION
According to ILO
(2002) estimate, about 97% of the world’s rural population lives in developing
countries and they are dependent on agriculture. Such dependency on only
agriculture leaves such people to poor living conditions as the agricultural
system is still traditional and the ever increasing population reduces rural
land proportion per person. Hence, poverty levels are higher in rural areas
than in urban areas and in some cases the differences are considerable, most
typically in the poorest countries (FUKUNISHI et al., 2006).
Because the extent and
severity of poverty are greater in rural than in urban areas, providing
opportunities for productive employment and decent work for rural workers is a
major development challenge for governments in those countries.
Like it is the case
for many developing countries, about 80% of the Ethiopian population lives in
rural areas and depends on agriculture. Cognizant to this, the government of
Ethiopia set Agricultural Development Led Industrialization (ADLI) as a central
pillar of economic policy in the recently completed Plan for Accelerated and
Sustained Development to End Poverty (PASDEP) and the two consecutive growth
and transformation plans (GTP I and GTP II).
Both GTPs intentions
and implementations indicate that the country has a comprehensive and consistent
set of policies and strategies in agriculture, which reflects the importance of
the sector in the nation’s development aspirations. The institutional capacity to implement these
emphasized on two major important strategies; enhancing agricultural productivity
and promoting agricultural commercialization. Such a strategy is legitimate and
crucial for the national development because the country’s development agenda
should focus on the rural people to significantly benefit the people from the
development.
The plan 2020 of
the country basically aims at overall development of an area as well as people
living in such areas by alleviating them from rural poverty and creating
employment opportunities in rural sphere. The focus of these schemes is either
to develop industries or to develop target group but not to promote rural
industrialization in an overt way.
The lack of
coordination among the various poverty alleviation programs contributed least
to the fight against poverty and unemployment in rural horizon. Furthermore,
such ill developed policy integration and poor infrastructure in the rural
areas significantly affected concerted action in the implementation of rural
industrialization program. The agro-based industry is one of the main
industries in rural areas of most low-income countries.
Agro-based
manufacturing, which is an essential non-farm rural sector, is regarded by some
scholars in development economics as a key sector for poverty reduction. Such a
claim is empirically supported by the fact that agro-based industry is likely
to satisfy the following two criteria that serve as driving forces of poverty
reduction (NAGLER; NAUDE, 2017; FUKUNISHI et al., 2006): (a) extensive
involvement of the poor in the production process; and (b) potential competitiveness
by utilization of low-cost inputs and upgrading the quality of products and
technology utilized for production.
Rural workers are
widely employed in the industry and poor farmers are also involved indirectly
as they supply the industry with the crops produced. Thus, the agro-based
industry is expected to contribute to poverty reduction significantly and is
potentially competitive.
A main challenge
deterring low-income countries from pursuing agro-based industrialization is
their inability to increase the competitiveness of the industries. The
competitiveness of the agro based industry can be strengthened through two
mechanisms (ZAMBIA, 2013): one is inter industry linkage, the other is
industrial upgrading.
The inter industry
linkage is especially important because agro-based industries have a strong
link to agriculture, which is the main activity the poor engage in. Close ties
with local agricultural activities lower the transaction costs for the use of
agricultural inputs. Moreover, if the local network for marketing the
agro-products works effectively, these unit costs become cheaper (LOENING et
al., 2008).
Similarly, if
agricultural products are part of the global value chain, they have better
chances of upgrading the quality of the products and also for upgrading the
technology for production through interaction with “lead firms” which govern
the chain. Thus, strong backward and forward linkage is a crucial means for
promoting competitiveness within the agro-based industries, subsequently lowering
the unit costs for final users.
This focus of
linkage between agriculture and industry is shared with another influential
notion of development strategy, that is, agricultural development-led
industrialization (AGÉNOR et al., 2004).
Finally, industrial
upgrading is important to further poverty reduction through the development of
agro-based industries. In order to increase production and employment, the
range of economic activities should be widened, and productivity of the
industry should be enhanced.
However, agriculture
cannot play this dynamic, wealth-creating role without an enabling policy
environment, adequate institutions, and sufficient, well-targeted public and
private investment. The experience of recent decades has been disappointing in this
regard in a number of countries, particularly the LDCs, where investment has
declined, rural poverty remains widespread and a very large share of the labor
force is engaged in low-return agricultural work (AGÉNOR et al., 2004).
Cuts in health and
education budgets and in other public services, as well as the dismantling of
publicly funded agricultural extension services during the structural
adjustment processes of the 1980s and 1990s, undermined the foundation for
bottom-up development for a generation (WORLD BANK, 2009).
The effects are
being felt today with a large number of poorly educated rural youth with few
skills and poor job prospects and a smallholder agricultural sector that cannot
thrive due to lack of support in terms of policy, infrastructure, inputs and
investment. Hence, creation of an alternative job than mere traditional
agriculture and improving the livelihood of these poor rural households remains
a significant challenge for developing countries these days.
In
the past decade, Ethiopia has recorded a very encouraging economic growth with
the highest growth rate in Sub-Saharan Africa (CSA, 2014/15). However, despite
the positive economic growth recorded, the growth has not been translated in to
significant job creation in the rural youth due to the decrease in land size
per rural population on the one hand and the rural development effort has been
confined to agricultural development on the other.
As
land remains virtually inelastic to fit to the ever increasing population
growth, alternative means of livelihood support becomes mandatory for the rural
youth which otherwise leads to underemployment and rural urban migration and
finally economic chaos.
The trend from the developed
countries indicate that as an economy grows, it is imperative that its
structure and location of its economic activity tends to change from a rural
agriculture-based economy to a more diversified economy demanding huge
investment for industrialization. But at relatively low income levels, individuals
spend a significant part of their income on food and will not have income left
for fulfilling other demands for investment.
This leads to the search for
financing which is of major issue because high quality and efficient financing
system is both enabler and driver to provide the impetus for realizing the
rural industrialization (where capital is extremely scarce). Therefore, this is
exactly where rural financing plays a significant role for rural
industrialization with an immense impact on the rate of industrialization or
structural change for rural livelihoods in particular and the country’s
development in general.
1.2.
Objective
and justification of the study
The
objective of this study is to examine financing rural industrialization and
employment creation practices in Ethiopia. In this context, rural
industrialization refers to encouraging small to large industries to be
established in rural areas. In this case, many rural people will find important
income sources through off-farm activities, including employment in large and
medium enterprises, self employment in small and micro enterprises, and
remittances from household members.
Combining
agriculture off farm activities leads to true plural activity, which is
particularly important in regions that are less conducive to agriculture. Such
activity gives many advantages to rural farmers; while individual household
members tend to be specialized in one activity, the households in a totality is
in diversified enterprise engaged in a portfolio of activities that match each
member’s skills while together providing risk diversification.
Thus,
vibrant rural financing strategies are crucial for rural industry expansion and
this study attempts to examine the practices of such issue in Ethiopia.
Rural
industrialization is a new concept at a policy level let alone to the practice
on the ground in Ethiopia. The rural industrial policy focuses on agricultural
productivity increment and rural commercialization (both are indications of
early stage of rural industrialization).
Hence,
a full fledged data regarding the rural industrialization and the rural
financing is inadequate. However, attempts were made to see at least the trends
in the rural off farm activity, the trend in commercialization, the government’s
policy, the financial institutions practices, and above all how other countries
approached rural industrialization and financing such industries. Hence,
relevant data were collected from CSA, NBE, DHS, World Bank, and Ethiopian
Investment Commission.
Besides,
in-depth interviews were held with NBE responsible person for policy issue and
Ministry of Agriculture to understand the government’s intention for rural
industrialization and the proposed approach for financing such a process.
Hence,
mixed research approach was used for the study. And the qualitative data were
analyzed using thematic analysis and the quantitative data were analyzed using
descriptive statistics. Finally, the report was composed by blending both data
to substantiate the finding from each other and make sense of context and
reason out what figures in the descriptive statistics convey and the reasons
thereof.
2.1.
Rural
industrialization processes
It can be learned from history that all nations begin rural at one
time. The need for labor division and fulfilling unlimited and diversified
human needs drive for gradual improvements in factors of production and later
gradual township development.
Hence, the pace of transformation and resiliencies to change
differentiates countries these days developed from under developed. For this
particular study, it was found important to see how other countries transformed
their traditional agricultural practices in to a more value adding enterprise
formation and the financing strategies of those enterprises.
In connection to
this, reviewing the practices of China and India practices of rural
industrialization and the role of finance in facilitating such process is
reviewed and presented. The reason for choosing such two countries for
discussion is that some four decades back both countries had similar
macroeconomic conditions with the current Ethiopia whereby agriculture was
their dominant economic base and most of their populations were engaged in such
activity alone.
However, both
countries agricultural growth has made both countries self-sufficient in food,
providing a residual surplus for export and capital for other sectors and
industries and services now form an integral part of the output and employment
of the rural sector (MUKHERJEE; ZHANG, 2007). As a result, the share of
agriculture to total GDP has declined to less than one-third in India and about
one-seventh in China.
Table
1: The practice of India and China (Best examples)
|
|
India |
China |
|
Industry policy |
-
Government placed primary investment
priority on heavy, urban-based manufacturing in an effort to substitute such
industries include large-scale
capital-intensive industries such as steel, petrochemicals, engineering,
machinery, etc., under the public sector umbrella. -
The small-scale industry was supposed
to supply the consumer goods needed by workers in the large-scale sector -
Through a system of direct licensing,
production controls in large manufacturers, deferential taxation, and direct
subsidies, they reserved over 800 items—including handlooms, pottery, match
making, and sericulture—for rural and small-scale producers -
Direct and indirect subsidy rates
reached as high as 70% of factory price -
Regulation of the small-scale sector
constitutes an important aspect of nonfarm development policy. -
In the initial stages, capital
investment restrictions were imposed to protect the small-scale sector,
especially in rural areas, from predation by large industries. |
-
Government placed primary investment
priority on heavy, urban-based manufacturing in an effort to substitute such
industries include large-scale
capital-intensive industries to catch up with the developed countries -
Promotion of rural industry began
during Mao’s Great Leap Forward in 1958 with the establishment of large
numbers of rural iron and steel foundries aimed at serving agriculture and
helping rural areas to ‘‘walk on two legs’’ (Ho, 1986) -
Major reforms since the late 1970s
enhanced priority for rural enterprises by providing tax concessions to
qualified enterprises and instructions. As such, 1982 the rural none farm
employment consists of manufacturing 45%, construction 9%, commercial
services 12%, transport and communications 6% and service 28%. -
1978 the house hold responsibility
system (HRS) came into force ‘township and village enterprises’’ or TVEs. -
By 1997, the rural TVE sector was
employing nearly 30% of the rural labor force, producing nearly 80% of the
gross rural output and nearly two-thirds of the total industrial output. |
|
Financing
the nonfarm sector |
-
The development of the rural sector in
India, including both agriculture and industry, has been mirrored by
government initiatives in the provision of organized credit from banks and other
financial institutions. -
The government instituted a policy of
‘‘directed credit’’ through the banking system in rural areas. Lending norms
were instituted for the priority sector, which in the nonfood component of
the total bank lending included mainly small-scale industry. Location of such
industries in semi-urban or rural areas was one factor that qualify them for
priority sector credit -
The ratio of priority sector lending
in the nonfarm sector has been remarkably stable at around 36% over the last
two decades. -
There is a growing critique about the
role of directed credit in the government policy from the efficiency angle,
both in terms of targeting as well delivery mechanisms |
-
In China, FDI plays a key role in
financing economic development and introducing new technologies. -
First, China has established many
special economic zones (SEZs) to grant preferential treatment so as to
attract FDIs. -
In addition to regional trade
integration, there is an increasing vertical production integration in global
value chains -
In addition to external finances, local
government and informal finances have also received considerable attention -
Under the innovative ownership
structure of the TVEs, local governments had complete control over their
finances, which provided incentives for promotion of the sector. Higher
profits meant higher revenues for investing in local public goods, which had
both economic and political pay offs. Economically, regions with better
infrastructure attracted more investment in the rural manufacturing sector,
leading to higher employment and revenues. -
China’s phenomenal nonfarm enterprise
growth through unconventional financing pattern provides a stark contrast to
that of the stability of directed credit policy in India. |
Source: Compiled from the works of Mukherjee
and Zhang (2007)
2.2.
Lessons
that can be drawn from both countries to Ethiopia
The
logical conclusion that can be drawn from the cases of India and China is that
rural industrialization is path dependent. The reform measures for the
industrialization process should arise from innovations on the existing
institutions. Hence, the objective of higher, regionally balanced growth in the
rural nonfarm sector will be fulfilled only when policies and institutions are
geared toward increasing competitiveness, efficiency, and innovation.
Such
a balanced policy and institution may also emerge from the philosophies of
governments whether local governments are responsible and able to finance and
manage their own industrialization process (as it is the case in China) or a
centralized commercial bank financing system administration (as it is the case
in India) is important to evenly distribute and manage financing of rural
industrialization process. Hence, the lessons that can be drawn to Ethiopia
should be understood from the strength of both approaches.
When
we see the current practices of the country in arranging industry zones in some
selected regions of the country, it seems that the government needs to treat
those zones better in order to attract foreign direct investment and even to
encourage local investors.
Besides,
the microfinance institutions are region specific and their major financing
duty is to satisfy region specific rural and urban people demand for credit and
deposit. Hence, such an approach resembles the path of China in rural
industrialization although the case in Ethiopia is far from being compared with
the China’s rural industrialization.
On
the other hand, commercial banks and even the development bank of Ethiopia
devised a system of credit access for the industrialization process in general
and the rural industrialization process in particular. The government gave
additional preferential advantage in the form of duty free and land
availability to further promote the rural industrialization process.
Hence,
such an approach resembles the path of India, using centralized and stable
commercial bank financing system for rural industrialization. However, the case
is different in this case from India because the investors are expected to come
from the non rural areas or from abroad instead of developing such investors
from the rural people themselves.
Thus,
from the lessons of both cases, it can be understood that an initial local
governments financing system (microfinance and other non formal financing
systems in the case of Ethiopia) financing system is advantageous for Ethiopia
to follow like it was the case in China. But later, when the industries mature
and the process of rural industrialization become common business, it is better
to shift the responsibilities to directed credit through commercial banks (the
India’s path).
And
there might be a certain level for the firms to reach to shift the financing
responsibilities to shift from local financing system to directed commercial
banks and development bank financing system. Such an approach will enable
Ethiopia to take the advantage of stable and sustainable rural
industrialization financing system.
3. DATA ANALYSIS AND DISCUSSION
The financial sector
is central to industrial development because it enables a well functioning
capital and financial markets and the banking system. This is because capital
is a critical issue in enterprise and private sector growth, in addition to the
availability of appropriate institutional and macroeconomic environment. In
this regard, a well functioning financial sector can be thought of as necessary
infrastructure for enterprise formation because all but the political
environment is affected by its existence and function.
If at all it exists,
the financial sector development is not uniformly functioning in developing
countries like Ethiopia. About 35% of the banking and other financial
institutions in Ethiopia is concentrated around Addis Ababa (NBE, 2016)
implying the rural areas do not have adequate access to such services in the
country. In relation to this, poor people in rural areas typically face a
triple burden when it comes to finance (ILO, 2008).
First, an inability,
especially for women, to access credit on competitive terms to invest in their
agricultural and off-farm income-generating activities means that their incomes
and employment opportunities are constrained. A recent multi-country study
found that in most countries surveyed, no more than about one in ten
agricultural households had access to credit.
Secondly, the rural
poor are also likely to lack access to appropriate savings instruments,
implying that their investments are put into less productive or more risky
forms which may further reduce rural liquidity.
Thirdly, without
adequate access to risk reduction instruments (such as crop insurance) rural
households are likely to withhold on innovation, on adopting new activities or
expanding existing ones, even if they have adequate liquidity. Hence, the rural industrialization and
financing deserves a significant attention to minimize the social and economic
constraints mentioned.
In line with this,
the following sections will present and justify the financing the rural
industrialization in Ethiopia in line with the population growth and the
county’s agricultural policy.
3.2.
Rural
population growth and need for rural industrialization
Rural population in
Ethiopia grows faster than the national average and the initial rural dominant
people even slightly magnify over time. Such huge population growth brings both
an opportunity and a challenge to the country. As can be seen from Figure 1,
below, the rural population is about 80 million from the total population of
around 103 million (World Bank September 2017 prediction).
Such huge population
demands proportionate employment opportunity in the rural sector which farming
alone can’t do. Such huge population can be of huge potential for national
development and macroeconomic stability in general or do the opposite otherwise
if the necessary and sufficient infrastructures for such development in the
rural areas are not in place.
Figure 1: population growth of Ethiopia
Source: computed from World Bank 2017 data
Similarly the
demographic structure of the country is changed from the previous under working
age dominant to working age dominant population. Such huge potential for rural
development in particular and national development in general is however
hindered by the increased landlessness per person as off farm activities are
poorly developed. Such a situation necessitates the application of diversified
industrial policies to absorb this huge labor in the rural areas.
However due to ill
developed rural enterprise formations, the rural-urban migration which
ultimately cause swelling the urban population growth on the one hand and cause
to the accumulation of idle labor on the other characterize the fate of the
rural huge working ages these days. Rural villages can be developed in to
township in organic growth if the necessary institutional frameworks are
installed.
Hence, the argument
at this point doesn’t claim that rural areas remain rural all the time. It is
to mean that their unplanned and unemployment forced movement to the city in
search of work should be managed. Such a practical necessity demands enterprise
formation in the rural areas which may begin as micro or small and grow to
medium and large through time.
Figure 2: working age
growth
3.2.1. About
55.4 million (56.7% of the total population) in 2016 projection
This huge working
age population in the rural area needs employment but land is relatively
inelastic to fit to this ever increasing working age. Such a practical
challenge of the country demands alternative means of employment and income
generation which in effect calls for relevant rural industrialization policy in
addition to the usual agricultural practices.
The rural urban
wealth difference is another important factor which needs to be understood to
see the gap between rural urban wealth distributions. As can be seen in Table 2
below the rural urban wealth difference has become significant.
Table 2: Relative wealth index
|
Type of place of residence |
Percent |
Valid
Percent |
||
|
Urban |
Valid |
Poorest |
2.4 |
2.4 |
|
Poorer |
.9 |
.9 |
||
|
Middle |
.9 |
.9 |
||
|
Richer |
2.3 |
2.3 |
||
|
Richest |
93.5 |
93.5 |
||
|
Total |
100.0 |
100.0 |
||
|
Rural |
Valid |
Poorest |
31.9 |
31.9 |
|
Poorer |
20.1 |
20.1 |
||
|
Middle |
19.3 |
19.3 |
||
|
Richer |
20.8 |
20.8 |
||
|
Richest |
7.9 |
7.9 |
||
|
Total |
100.0 |
100.0 |
||
Source: Computed from DHS 2016 data
Such significant
differences in wealth index implies a serious consideration in supporting the
rural side and come with policy intervention for better paying job and more
accommodating enterprises. Not only the intervention (rural industrialization)
does enhance the livelihood of the rural people but also serve as means of
stabilizing the macro economy stability through absorbing the rural youth in
their own locality and thereby facilitate organic development of township.
Furthermore, rural
industrialization can also enhance rural entrepreneurship which in turn opens
new opportunities for the youth for their farming innovation and improving the
agricultural value chain in general. Hence, in addition to forming alternative
means of employment rural entrepreneurship can also improve the traditional
agricultural system and transform it in to semi or full modernized farming as
the local knowhow can be utilized for such processes.
Besides, rural
industrialization can also enhance the rural wealth index in general and reduce
regional unbalanced growth regarding wealth and employment conditions which are
these days used as source of complain by the people in the country.
Figure 3: Wealth index of rural-urban differences
Source: World Bank Data
As a result, rural
industrialization is a significant exercise for the country beyond employment creation
and income generation. The above regional imbalances of wealth indexes figure
does not only indicate the regional differences in regard to wealth
accumulation but also creates a governance issue of creating access to
equivalent regional growth within the same country.
On the other hand,
such poor wealth index in the rural in general indicates that the rural people
don’t have cash in hand to establish enterprises in their rural areas implying
the urgency and significance of installing vibrant financing system for rural
industrialization.
Such an argument
does not necessarily mean that creating similar enterprises across all the
regions in equal number. It is to mean that by considering the agro ecological
conditions of the regions and the comparative advantages of each region,
suitable enterprises need to be established and such establishment requires
easy and accessible financing policies and implementations.
Furthermore, it can
be understood from Table 3 below that not only does the rural imbalance exist
among regions but also such a problem has created idle forces in the rural
working youth as most of them are engaged in seasonal works.
Table 3: Job types
|
Type of place of residence |
Percent |
Comparison |
||
|
Urban |
Valid |
All year |
76.0 |
|
|
Seasonal |
14.6 |
23.9% |
||
|
Occasional |
9.3 |
|||
|
Total |
100.0 |
|
||
|
Rural |
Valid |
All year |
46.6 |
|
|
Seasonal |
47.7 |
53.5% |
||
|
Occasional |
5.8 |
|||
|
Total |
100.0 |
|
||
Source: Author’s computation from DHS 2016 data
Creating employment
for such rural youth can contribute significantly to the national employment as
well. The table indicates that 53.5% are engaged in seasonal jobs implying huge
disguised unemployment in the rural populations in some seasons of the year.
Usually, their employment period is during the plough to harvest seasons (June to
end of December), and in the rest periods alternative employment should be
available for such youth or remain idle otherwise.
Data were also
analyzed from DHS data to see the alternative means of employment for the rural
youth. As can be
seen in the following table, agriculture is the dominant source of employment
for the rural youth (71%) followed by other miscellaneous works (5%) which
might include some handicrafts. Still, the significant portion claim of not
having work at all (10.3%). In this analysis work of the respondents include
both seasonal and unseasonal (at least working once in a year) and should not
be misunderstood as a decent work in the rural.
Table 4: job diversity
|
Type of
place of residence |
Percent |
||
|
Rural |
Valid |
Not working |
10.3 |
|
Professional/technical/managerial |
3.7 |
||
|
Clerical |
.2 |
||
|
Sales |
3.6 |
||
|
Agriculture - employee |
70.9 |
||
|
Services |
1.2 |
||
|
Skilled manual |
3.3 |
||
|
Unskilled manual |
1.9 |
||
|
Others |
5.0 |
||
|
Total |
100.0 |
||
Source: Author’s computation from DHS 2016 data
Thus,
the table above substantiates the claim that rural industrialization emerges
not as an alternative means but as a necessity to the country. Because in
addition to the aforementioned significances, rural industrialization is
important for macroeconomic stability in general and in particular to reducing
rural urban migration and promoting organic township development, and promoting
rural entrepreneurship all which are essential conditions for transforming the
agricultural sector and to enable the rural youth meaningfully contribute to
the national development.
3.3.
Ethiopian
context of rural industrialization
It
is presented earlier that agriculture is not only the leading base for
industrialization for the country; it is also base for the livelihood of about
80% the total population. However, its contribution to the GDP is as low as
36.7% in 2015/16 and this percentage as predicted from pervious trends is
declining. On the contrary, the service sector which is less inviting to the
rural population (as it presented in table 5 previously only 1.2% of the rural
youth are engaged in) contributes to more than 47% of the GDP in the same year.
Similarly,
the manufacturing sector begins to rise in the past five fiscal years and its
contribution to the GDP increased from 10.5 % in 2010/11 to 16.7% in 2015/16.
Such discrepancies of the industries to GDP contribution has important policy
implications in that more efforts of the government has been given to less
contributing industry (agriculture) in the past two decades and the current
investment focus to manufacturing industry is well justified because the
development of the agriculture itself is even enhanced by input absorbing
industry which in fact serves as driving factor for the farmers to produce
more.
Figure 4: GDP shares
of industries
Source: Computed from
NBE 2016 data
The
investments made to each sector are presented in figure 6 below. Accordingly,
about 38% of the capital investment has been made for real state followed by
manufacturing around 35%. Still considerable sum of capital has been invested
for construction (21%). However, the operational capital invested for
agriculture and mining sector is limited to 4% of the total average operational
investments made in the past three years. In fact, agriculture is less capital
intensive when compared to other sectors in this case but yet the operational
investment indicates investors’ focus of investment and requires policy
intervention by the government to make agriculture the preferred sector worth
investing ones capital. And one of which as it was presented in case countries’
experiences is clear rural industrialization policy and the accompanying means
of financing.
Table 5: Number and capital of operational investment
projects
|
Number and capital of operational
investment projects (capital in
millions birr) |
|||||||
|
Sector |
2013/14 |
2014/15 |
2015/16 |
Average %
Capital |
|||
|
No. Projects |
Capital |
No Projects |
Capital |
No.
Projects |
Capital |
||
|
Manufacturing |
38 |
516.8 |
39 |
2707.2 |
85 |
2539.5 |
34.97 |
|
Real state |
36 |
2135.3 |
197 |
563.4 |
637 |
3550.7 |
37.92 |
|
Construction |
58 |
2811.2 |
50 |
132.8 |
75 |
506.7 |
20.94 |
|
Agri& mining |
13 |
70.1 |
107 |
521.7 |
35 |
66 |
3.99 |
|
Others |
18 |
102.8 |
14 |
209.9 |
20 |
45.7 |
2.17 |
|
Total |
163 |
5636.2 |
407 |
4135 |
852 |
6708.6 |
100 |
Source: NBE, 2016
In addition to this, the NBE (2016) report indicates that the
average capital per project for domestic investors was Birr 7.1 million and
that of foreign investors Birr 15.6 million, signifying that foreign investment
projects were more of capital intensive nature than domestic ones. The report
further estimated that these investment projects have created job opportunities
for about 12,724 permanent and 12,710 casual workers which is far below than
the national expectation as the government is desperately in need of creating
as many job opportunities as possible for the ever increasing working age
groups.
3.4.
The
Developments of the Financial Sector
There are 16
private and 2 public commercial banks in Ethiopia with a total branch of 3187
(NBE, 2016). As a result,
bank branch to population ratio declined to
1:28,932 people in 2015/16. However, about 34.4 percent of bank branches were
situated in Addis Ababa and the total capital of the banking system rose to
Birr 43.0 billion by end June 2016.
As commercial
banks expanded their branch network, their deposit liabilities increased to Birr
438.1 billion showing a 19.3 percent annual growth. Saving deposits grew by
24.2 percent followed by time deposits (18.6 percent), and demand deposits
(13.7 percent). Saving deposits accounted for 49.5 percent of the total
deposits distantly followed by demand deposits (39.0 percent) and time deposit
(11.4 percent). The share of private banks in deposit mobilization increased to
33.6 percent from 32.2 percent last year due to the opening of 363 new
branches. CBE alone mobilized 66.1 percent of the total rose by 15.5 percent to Birr 25.2 billion.
Similar to the
commercial banks, the development of microfinance institutions in the country
is encouraging. Such institutions can play significant role in financing rural
industrialization for their respective regions since these institutions are
region specific. Such institutions are relatively near to the rural people and
mainly targeting those in either deposit mobilization or loan disbursements.
According to the NBE 2016, the two consecutive years’ performances of the
microfinance institution are presented below.
Table 5: Two years Microfinance Institutions Performances
|
Microfinance
Institutions Performances |
||
|
2014/15 |
2015/16 |
|
|
Total Capital |
7,187,259.50 |
8,875,780.60 |
|
Saving |
14,832,747.40 |
18,432,836.70 |
|
Credit |
21,827,337.30 |
25,203,763 |
|
Total Assets |
30,562,012.20 |
36,668,011.60 |
However, NBE 2016 estimates
that Oromiya, Omo and Addis Credit and Savings institutions, accounted for 83.6
percent of the total capital, 92.9 percent of the savings, 88.3 percent of the
credit and 89.2 percent of the total assets of MFIs at the end of 2015/16. Such
uneven distribution of capital in microfinance institutions implies that some
regions are more favorable than others either in financing the micro industrialization
strategy or even deposit mobilization. Hence, the rural industrialization
process should be supported by the direct credit accessibility of the
commercial banks which unfortunately are more concentrated in an around Addis
Ababa.
4. CONCLUSIONS AND IMPLICATIONS
Generally,
as it was clearly indicated in the case countries (India and China), there are
two different paths of rural industrialization financing. The two countries
follow different paths; where China follows decentralized financial institutions
which are like the current microfinance institutions of Ethiopia, and India
follows centralized financial system through the central commercial banks like
the commercial banks of Ethiopia these days and resulted in different outcomes
to a certain stage.
Based
on critically evaluating the two paths explained and clearly examining the
current Ethiopian macro environment, this research proposes the third option
which emerges from the strong side of both (which is an integrated rural
financing of commercial banks and microfinance institutions) for better result.
In this context, the commercial banks can provide relatively larger funds for
larger rural enterprises for both domestic and foreign investors and at the
same time supporting the knowledge and skill development of farmers.
And
microfinance institutions can support the SMEs and probably the medium
enterprises by formulating and implementing flexible and accessible lending
policies to the rural people. However, the development of rural enterprises and
attitudinal change for industrialists should be supported by clear government
policy and dedicated implementations frameworks.
Besides,
the necessary infrastructure for rural industrialization such as road, power,
and market should be in place as they are the preconditions for any
industrialization process. Furthermore;
·
Priority
can be set and given significant weight for lending (rural industrialization
the top priority)
·
Think-tank
group consisting of scholars, farmers, banks, the government and other stakeholders
can be established for better decision regarding support and implementations to
be made
·
The
proposed industry parks (specialized industry zones as China call them) is good
start to give special attention to support and thereby to attract FDI, as China
has done. And the specialized zones can be vertically integrated back to the
rural enterprises for their own strategic advantages of getting reliable inputs
and such a process will naturally create a healthy agricultural business value
chain
·
And
above all, alternative destructive markets for land transaction and any
government system malfunctions such as corruption and rent seeking practices
should be minimized to the lowest level possible for the rural enterprises to
appear viable portfolio for the potential investors.
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