Prior to 1957, when Ethiopia initiated a series of fiveyear development plans, cottage and handicraft industries met most of the population's needs for manufactured goods such as clothes, ceramics, machine tools, and leather goods. Various factors--including the lack of basic infrastructure, the dearth of private and public investment, and the lack of any consistent public policy aimed at promoting industrial development--contributed to the insignificance of manufacturing. Throughout much of the 1960s and early 1970s, manufacturing activity increased as the government's fiveyear plans diversified the economy by encouraging agroindustrial activity and by substituting domestically produced goods for imported items. Thus, according to the World Bank, manufacturing production increased at an annual rate of 6.l percent between l965 and l973. During the same period, agriculture grew at an annual 2.1 percent rate, and services grew at an annual 6.7 percent rate. Despite this favorable growth rate, manufacturing in l975 accounted for less than 5 percent of GDP and employed only about 60,000 people. Handicrafts, such as weaving, pottery, blacksmithing, leather working, and jewelry making, along with other small-scale industries, accounted for another 5 percent of GDP. In 1984/85 manufacturing and handicrafts together accounted for 11.4 percent of GDP.
In l975 the PMAC nationalized more than l00 industries and took partial control of some of them. The main characteristics of the manufacturing sector inherited by the revolution included a predominance of foreign ownership and foreign managerial, professional, and technical staffing; heavy emphasis on light industries; inward orientation and relatively high tariffs; capital-intensiveness; underutilized capacity; minimal linkage among the different sectors; and excessive geographical concentration of industries in Addis Ababa.
After nationalization, there was an exodus of foreigners who had owned and operated the industrial enterprises. The war in Eritrea and labor strikes and demonstrations also closed the approximately 30 percent of the country's plants that had been located in that region.
The economic dislocation that followed the revolution had a significant impact on the manufacturing sector. Privatesector capital investment ceased, and labor's marginal productivity began to decline. In performance terms, the manufacturing sector's output after l975 grew haltingly. Manufacturing had grown at an average annual rate of 6.l percent between l965 and 1973. A period of decline from l974/75 to l977/78 and an average annual growth rate of l8.9 percent for l978/79 and l979/80 were followed by a reduction of the growth rate to about 3.1 percent per annum between l980/81 and l984/85 and 3.8 percent per annum from 1985/86 to 1988/89.
The manufacturing sector's performance paralleled developments in other parts of the country. In the revolution's early days, the dislocation caused by nationalization, the flight of managers, the wars in Eritrea and the Ogaden, and local strife in many areas disrupted production and hurt productivity. Zemecha production campaigns, which focused on increasing capacity utilization, characterized the late 1970s. As a result of these campaigns, Ethiopia achieved growth rates of 27.3 and 10.5 percent, respectively, in 1978/79 and 1979/80. By l985 capacity utilization estimates of many industries ranged between 70 and l00 percent, and many plants operated in three shifts. These figures were high by African standards.
Manufacturing productivity began to decline by l980 because of a downturn in agricultural production and a shortage of foreign exchange to import raw materials. Analysts expected the manufacturing sector's productivity to decline further in the 1990s as equipment aged and spare-parts shortages grew. In response to the downward trend, in l987/88 the government planned to invest 342 million birr in industrial enterprises to increase production capacity. In l989 the government issued Proclamation No. ll, which enunciated policies intended to attract foreign investment. Finally, in March l990 Mengistu announced the replacement of Ethiopia's socialist economic system with a mixed economy. Among the proposed changes were that private investors would by permitted to participate in all parts of the economy with no limit on the amount of capital invested.
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