GTP I: a plan of abandoning management systems

Since 2008, both Professor Kenichi Ohno and his spouse, Professor Izumi Ohno, have been in direct contact with the late Prime Minister Meles Zenawi and his successor, Prime Minister Hailemariam Desalegn. They were here even before the much- talked-about Growth and Transformation Plan (GTP) was formulated. Professor Ohno is perhaps one of the most highly celebrated scholars of Japan who is very close to the top leadership of the Ethiopian government. An economist by training, the professor lectures at the National Graduate Institute for Policy Studies (GRIPS) in Japan. He can be seen as one of those who speak their minds when it comes to the government’s five-year economic plan or Growth and Transformation (GTP). Nearly a year ago while he was in the capital for the biannual consultative meeting dubbed “Industrial Policy National Dialogue”, he expressed reservations that most targets stipulated in the GTP document were “imaginary numbers.” Even now, he stands by that statement. The government, seemingly crawling to introduce the details the second phase of GTP, is seen by the professor as a learning institution where many things are yet to be achieved in the plan. Birhanu Fikade of The Reporter caught up with the professor at the Africa-Japan business and investment forum held this week at the Sheraton and talked to him about the performances of GTP I and what is expected of GTP II in the next five years. Excerpts:

The Reporter: In your previous interview with The Reporter, we talked about GTP I. Most of the targets set have not been achieved even though the plan concludes this year. What is your overall impression of that?

Professor Kenichi Ohno:  We commented when GTP I was formulated that some of the numbers or targets, especially the industry sector targets, were too high. But people at the Ministry of Industry (MoI) said that they have investors queuing up and so, they said the targets were reasonable. As you know, investors don’t always invest. I think the extreme high targets were probably too ambitious. On the other hand, I am very impressed by the inflow of foreign direct investment (FDI), especially by the manufacturing FDI. For that one, I think the MoI and the Ethiopian Investment Commission and all the people working to attract FDI should be proud of it.  But some important numbers were missing as the targets were very high and, at the same time, I should say you don’t have to worry much. You are on the right track. You are attracting more FDIs; you are increasing and improving industry zones; and you are at least trying to remove barriers in logistics, customs and taxes, and accounting systems. I think the government is well-aware of these matters. Hence, I don’t want to be too harsh on the missed targets. From the beginning, we knew these targets were very difficult to achieve and they have missed some of them. I don’t want to sound like that’s okay.

I know you are taking part in the GTP II process. How well are you related to the case?

Yes. We have advised on what we think should be necessary ingredients which were missing in GTP I. We said that and the prime minister has agreed that the light manufacturing sector was missed. The target was to become a leading example of Africa in light manufacturing. It was a good target. So by 2025, the country would become a leading manufacturer in Africa. I don’t know how exactly that has been stated in GTP II. The other thing we proposed is that you should put lots of productivity and competitive components in the plan. GTP I didn’t mention the management systems. It didn’t mention Bench Marking or Kaizen or BPR although they had been exercising all these during the planning period. They didn’t mention any of these words in the previous plan. I did ask the late Prime Minister Meles Zenawi at one time why these were not there in the plan. But he was not in control of the detailed process of drafting the plan. But this time, I think the terms like Kaizen, productivity and competitiveness will be in GTP II.  In the final draft of the plan, I hope these are not only mentioned but highlighted as the next five-or ten-year plans.

In the previous interview, you boldly stated that it is in GTP II that things will start moving. Is that a reality given the circumstances of GTP I? You should consider the structure of the government, the governance issues or the way a skilled human resource production fits in the industry.

I would say that Ethiopia’s industrial policies are at the early stage. I have compared the quality of industrial policy with Singapore’s at the highest and to the lowest levels. For Singapore, I gave an A+. Taiwan is very good with industrial policies. Korea and Japan deserved A points. I give B to Malaysia, Thailand and Ethiopia. It just started in Ethiopia and the efforts of building industrial zones is a right direction. But details need to be fine-tuned. Setting up the Textile Industry Development Institute (TDI), the Leather Industry Development Institute (LIDI) and the Ethiopian Kaizen Institute (EKI) is very important for the future.  But there are missing elements. One is the business condition in the country. It is generally horrible. Shortage of foreign exchange, customs clearance and tax matters, and the accounting system is not of global standard. I have already mentioned these to the government, including the prime minister who already knows about the issues. They want to improve Ethiopian Revenues and Customs Authority and the logistics systems. They have good intentions. But if you ask them, if they would do all that in a short period of time, that is another question. Another missing element in Ethiopia is what we call domestic enterprise improvement or small and medium enterprises policy. For leather and textile, there are active institutes and that’s right. But for the general SMEs, there is nothing. If you go to Malaysia, Taiwan or Japan, you will find out what I mean by a good SMEs policy. There are so many things to do here in that regard, but the country is not in a good position in implementing an SMEs-friendly policy. You have to have that framework and definition of SMEs first. How SMEs should be treated and supported is policy framework, which is unclear to me yet in Ethiopia. In addition to that, you have to improve the human resource of these enterprises. There are many ways to do that. Providing incentives and subsidies and TVET schools will help improve the human capital. You have TVET schools here and that’s one good thing. But there are many things to be done to improve SMEs management and technology need to be considered. In light of that, we should consider financing SMEs as another important issue. I don’t think Ethiopia has got anything worth showing on SMEs financing. If you go to Malaysia, there are SMEs banks, both government and private, and SMEs funding organizations, which is not yet done in Ethiopia. The other missing point is to link SMEs with the global buyers or FDI companies. Matching, linking and leveling up of SMEs and industrial clusters all fall in the SMEs policies and the government has just started some of them. So that is why I said it’s a primitive stage and SMEs policy or domestic enterprise enhancement policy, to me, is a core of industrial policy. Having industrial zones and inviting more of FDIs is important. But if you don’t improve the domestic capability of human resources and enterprises, then it becomes very difficult to obtain the fullest advantages of the FDI or the industry zones.

Though we are talking about how the government is expanding the industrial zones, securing finances for such projects is something you should think of as something where the government is shorthanded, right?

Finance is always a problem and I don’t blame the government if they don’t have all the finances at the moment. I think the government is willing to invest from the public budget. They have debuted in the sovereign bond market and part of that is to be put aside for the industrial zone development projects. The World Bank has extended finances for the Bole-Lemi and Kilinto projects. The Japan International Cooperation Agency (JICA), if approached, will be positive to extend finances. Private companies also need to be approached to develop industrial zones such as the East Industry Zone and the others like George Shoe Company, where they are working on developing industrial zones in Ethiopia. It’s okay if you don’t have the finances, but you have to look for various sources. There are joint ventures, sometimes official development assistances could also be considered as sources for financing. If you just build up many industrial sheds, sometimes it would be risky to satisfy the needs of investors. They might find it too high or too narrow so they may not be attracted to leasing in. If that happens, then it becomes a waste of money. One-stop service must also be offered on the basis of high quality standards. You must understand well what the investors’ needs are. In general terms, the government is willing to learn. But they haven’t learned yet. We can help a little bit, but they have a long way to go. I think the direction and the frameworks are okay. They have created industrial zones and they made that as entry points. Your government says that they will improve customs, logistics, and human resources to make use of industrial zones. I think that is the right strategy, but not the only one, and I approve that kind of approach.

There are many points you want the government to consider in GTP II. Do you think debt sustainability is one of the issues to be looked at?

We have to look at the macroeconomic situation and the statistics.

Yes. According to the recent reports of the World Bank, the amount of debt to the GDP is at 40 percent or so. The bank projects that the amount will increase to 60 percent or so in the coming few years.

I haven’t analyzed the debt sustainability issue and I better leave it to the IMF and to the bank group, or the IFC analysts to do the task. But the debt sustainability critically depends on the success of your investments. If you are in a situation of making wasteful investment, then the debts will be debts. But if you invest in the right ways, say in human resources, industrial zones or infrastructures, the government may not benefit directly out of that, but the private sector will benefit a lot and more FDI will come and Ethiopia will become a more competitive player in the global market and that enables the country to pay off the debt. So you may not need to be worried much about the debt. As long as the GDP is growing, the level of debt will appear to be smaller when compared with the percentage of the GDP. But if the GDP does not grow and if you go on borrowing, then that is where you get into trouble. I am not worried about the 40 percent of debt to GDP ratio at this moment. I am more worried about the continuous growth of the economy. If the 10 percent growth continues, that is very nice, but I think there will be some slowdown. You should maintain near to a 10 percent growth until you become a middle-income country, even an upper middle-income country. But slowing down the growth will give birth to the social, political and other economic problems in addition to the debt issue.

I brought the debt issue to your attention because slowing down the economy is likely to happen as some aggressive investments of the government are anticipated to be halted. Don’t you think that will affect the upcoming GTP II because the government appears to be more ambitious than ever in terms of its targeting investment in power as it is in exporting earnings?

I cannot stop governments from become aggressive and overambitious in their five-year plans. It’s not just Ethiopia but many governments have very big numbers. Even in Asia, I looked at Cambodia’s industrial targets. It looks very ambitious. People at the finance ministry of Cambodia said that all the targets must be big and higher to inspire people. That is a political and psychological motive there. I guess it seems you can’t have a five-year plan that is not very ambitious. There must be a balance in the knots of the elements. Yes, I agree plans need to be ambitious enough to inspire people and industries. But at the same time it should be judicious enough so that the macro balance will be maintained. Since it’s a political document, where to put the balance is up to the policymakers. We know that a five-year plan is a little bit of a fairytale. But at least some part should be reasonable and convincing. But I can’t stop the wild numbers and aggressive investment statements. I think the reality will catch up to them. But I think they make considerations when they draft plans.

In GTP I, as you said, the good sides seem to have attracted many FDI inflows, but what do you expect in GTP II? Do you think light manufacturing is likely to happen?

I want to see the light manufacturing FDI to continue and increase in the next five years. Related investments like textile machines, logistics support, consumer goods, and edible oil production increase are most welcome. The beverage investment seems big in recent times but I don’t know why. I don’t know whether Ethiopians have started to drink beer much. But if there is the demand, the business logic justifies investments. The private sector invests in where they think the money is. I want to see the continuation of robust investment, especially in light manufacturing in addition to others. I am sure the demand for construction will continue and for that you need investments in steel, cement and consumer demand will rise. Hence, medium to high-end quality products and a variety of goods will be produced and that is natural to happen.

Do you believe counties like Japan will be interested to come and invest in the next five years so that the FDI inflow would include more advanced nations too?

The Japanese are coming very slowly. But to me, I think it’s a matter of time. Japan was the last country that invested in China. It was the same in Vietnam, Cambodia and Myanmar. Japan was not the first in those countries to invest. They are very slow to come, but after 10 to 20 years, you will see the Japanese FDI dominates in Vietnam and Cambodia, at least in manufacturing. Japan is always a late-comer, but they are the largest manufacturers. This trend might follow the same track in Africa in the future. Currently, there are a few Japanese companies in Africa establishing a manufacturing base, but it’s sure to happen. I have many contacts with Japanese big and SME companies that are longing to come to Ethiopia. But they are worried about the situation of foreign exchange, and on the conditions of importing production materials, and if there are sufficient ways of water treatment in the country. Japanese investors worry almost about everything. They need to be sure everything is okay and that’s why it takes time for them to come. We are very different from the Koreans or Chinese. Both can take risk and, if successful, make a lot of money. If they fail, they just leave. They are big risk-takers, but we are not like that. But I have predicted that between five and 20 years, the same thing will happen in Ethiopia as in Cambodia and Vietnam. Japan will be very big in the manufacturing base in this country.

The Prime Minister commended you at the opening night of the Africa-Japan Business and Investment Forum.

Yes, he is my friend.

That’s nice, but how is he and the other officials receptive of your professional opinions?

I think Prime Minister Hailemariam is very serious about learning valuable knowledge from anyone. It was the same with Meles too. The PM goes miles to meet the right people and hear ideas. With PM Hailemariam, we have met almost 10 times. Sometimes, he requests for face-to-face meetings, even when he visits Japan. We converse for two hours or so in our meetings and we share a mutual knowledge-seeking atmosphere. He did read my book. I think he is a very serious student and a national leader. I have never seen a prime minister of such high caliber anywhere in the world except in Ethiopia. Both the late Meles and Hailemariam have those personalities you can’t find in other leaders. Sometimes, surprisingly, we learn ideas we have advised being adopted and implemented by Hailemariam and his team. I think he takes our advice seriously, of course not 100 percent but selectively. In some cases, we advise governments but we don’t see many things implemented. Therefore, working with such officials allows me to give the best of my service and I am working very hard for Ethiopia. It’s true that sometimes we don’t agree with the government’s view. Sometimes I might be wrong. But it’s based on a mutual trust and we will not hide any disagreements from each other. I think this is a very good intellectual relationship and it’s admirable when such a relation is happening at a high level leadership. In other countries, it’s very difficult to talk about economics for two hours with top officials. You should be proud of your government, though it’s still weak in the overall measures. The private sector is very weak here. In the implementation level, you are not very good yet, but I think your leaders have the right mindset. I wish Japan had such a prime minister so we could have switched Abe with Hailemariam.