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DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL DEVELOPMENT ASSOCIATION
Not For Public Use
Report No. 9a-ET
RECENT ECONOMIC PERFORMANCE
AND
FUTURE PROSPECTS
IN
ETHIOPIA
(in four volumes)
VOLUME II
COTTAGE AND SMALL-SCALE INDUSTRY
IN ETHIOPIA
June 15, 1973
Country Programs Department IEastern Africa
This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.
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EQUIVALENTS
CURRENCY
Unit = Ethiopian dollar (Eth.$)U. S. $1.00 Eth. $2.070ETH. $1.00 U. S. $.4830
WEIGHTS
Unless otherwise stated, tons in this report refer to long tons.
1 metric 2,205 lb.= 1,000 kg.
0.9844 long tons1 long ton 2,240 lb.
1,016 kg.
MEASURES
1 meter (m) 39.37 inches1 kilometer (km) 0.62 miles1 hectare (ha) 2.471 acres1 square kilometer 0.386 square miles
TIME
The Ethiopian calendar year (EC) runs from September 11 toSeptember 10. There is a difference of about 7-3/A years between theGregorian and the Eth,opian era. For example 1963 EC runs from September11, 1970 to September 10, 1971. Most of the Ethiopian statistics areconverted to the Gregorian calendar. Throughout the report the-Gregorian calendar is used.
The Ethiopian budget year runs from July 8 to July 7. Forexample, Ethiopian budget year 1963 runs from July 8, 1970 to July 7, 1971.In the report, this year is referred to as budget year 1970/71.
THlE MISSION
This report is based on the findings of a nission which visitedEthiopia in May-June 1972. The mission comprised:
Lyle M. Hansen - Chief of Mlission
C. P. Cacho - Deputy Chief of Mission
G. E. Okurume - General Economist
M. A. Jalil - General Economist
V. P. Gandhi - Fiscal Economist
E. A. Anyanwu - Small Industries Specialist
This Annex was prepared by B. A.Anyanwu.
CONTENTS OF THE VOL.UMES
VOLUME I MAIN REPORTTechnical Appendix (Growth Model)Statistical Appendix
VOLUME II COTTAGE AND SMALL-SCALE INDUSTRYIN ETHIOPIA
VOLUMIE III FISCAL POLICY AND TIIE AGRICULTURALSECTOR
VOLUME IV INSTITUTIONAL ASPECTS OF PRIVATESECTOR SAVINGS MOBILIZATION
COTTAGE AND SMALL-SCALE INDUSTRY IN ETHIOPIA
Table of Contents
Page No.
SUMMARY AND CONCLUSIONS ....................................... i-iv
CHAPTER 1: INTRODUCTION ...................................... 1
CHAPTER 2: EXPANSION AND PROGRESS IN THE SMALL-SCALEINDUSTRIAL SECTOR.2
I. Characteristics of Cottage and Small ScaleIndustries.2
II. The Data Base and Size of the Sector .2III. Growth Trends.3IV. Organization.3V. Employment Opportunities ....................... 6
VI. Value Added .................................... 9VII. Foreign Exchange Saving and Earning .... ........ 10
VIII. Investment Prospects -- The Private Sector 10
CHAPTER 3: GOVERN.MENT POLICIES ............................... 13
I. The Objectives and Instruments of the ThirdFive Year Plan ................................. 13
II. AID Bank ....................................... 15III. Center for Entrepreneurship and Management ..... 16
CHAPTFR 4: PROBLEMS AND OBSTACLES TO DEVELOPMENT .... ......... 17
I. Weak Entrepreneuirial Skill and Management ...... 18IIa. Shortage of Supply of Fixed and Working Capital 19IIb. Lack of Skilled Labor .......................... 20
IIIa. Direct Effects of Government's DiscriminatoryPolicies and Mleasures .......................... 20
IlIb. Indirect Effects of the Imposition of ExciseDuties ......................................... 20
IV. The Case for Protection of Small-ScaleIndustries ..................................... 21
CHAPTER 5: POLICY RECOM4ENDATIONS ............................ 23
I. Getting the Priorities Right .... ............... 23II. Ending the Government Discrimination .... ....... 24
III. Provision of Institutional Support for GrantingCredit Facilities .............................. 24
IV. Residual Policy Actions ........................ 32
ANNEX: Small-Scale Industry in Ethiopia: Study of SelectedIndustrial Establishments.
List of Tables
Table No. Page No.
Cottage Industry: Breakdown of Employ-ment figures and Wages Paid According tothe Industrial Groups and Urban Towns .4/5
2 Cottage Industry: Number of Establishments,Persons Employed, Paid Workers and WagesPaid........ ..... ..... 7
3 Establishments, Employment and Wages &Salaries 8.................*8
4 Gross Domestic Product by Industrial Originat Current Factor Cost ......... 11
5 Gross Domestic Product by Industrial Originat Constant Factor Cost of 1961 . .. 12
6 Ethiopia: Changes in Excise and ImportDuties . .22
Chart 1 Formation of Cooperative Societies byCottage Industries .28
Chart 2 Institutional Support for Small-ScaleIndustries .29
Appendix to the Annex
Ethiopia: Some Data on Selected Small-ScaleIndustrial Establishments .39
SUMMARY AND CONCLUSIONS
1. It is difficult to state precisely and reliably the rate of ex-pansion in the cottage and small-scale industries in Ethiopia during thelast decade or two. The first census of cottage industries in urban areastook place very recently in September 1971. This is the only reliable sourceof data. The first btage of the census which covers the number of establish-ments in each industrial group, the employment in each establishment, andthe number of paid workers as well as the wages paid, has just been completed.The second stage which covers capital investment, type of product, volume ofproduction and tools and raw materials used, is still in progress. Severalindicators however already point towards expansion and progress in the sector.First, there was a considerable increase in the estimated value added to GDPby the cottage and small-scale industries between 1963 and 1969. The increaseamounted to about $74 million, a rate of increase of over $12 million peryear. 1/ A large proportion of this increase undoubtedly was due to physicalexpansion in the size and number of establishments. Second, about 40 percentof the 40 establishments interviewed by the Bank Mission were establishedduring the last 5 years, while over 62 percent had been established in the lastten years. Half of the establishments interviewed had been established forless than ten years. On the basis of this very minimal data, the rate ofexpansion in the sector was estimated to be about six percent per annum.
2. Until 1966 small-scale enterprises contributed more value added toGDP at current factor cost than large firms. More importantly, at constantfactor cost they continued to contribute more up to the beginning of the1970s. The small-scale sector is thus an important component of the Ethiopianeconomy. The contribution of the large manufacturing sector to GDP at currentfactor cost rose from Eth.$ 61.2 million in 1963 to Eth.$ 108.2 million in 1966,while that of the small-scale and handicraft industries rose from Eth.$ 103.5million to Eth.$ 136.8 million. By 1969 the contribution of the former in-creased to Eth.$ 211.5 million while that of the latter rose to onlyEth.$ 177.2 million. This overtaking was due to the boost given to largemanufacturing by the Government after 1966. However, value added in the largemanufacturing sector grew substantially less at constant factor cost after 1966than at current factor cost (see Tables 4 and 5 of the main text). Thisdifference suggests steeply rising prices behind the shelter of a tariff wall.On the other hand, in the small-scale sector the greater contribution to valueadded at constant cost indicates a tendency to produce at levels close tointernational prices.
3. Sole proprietorship is the dominant form of ownership in both cottageand small scale industrial sectors in Ethiopia. In India, Brazil and someother developing countries with long-standing commercial experience, thetypical small-scale entrepreneur tends to come from a commercial family whichhas decided to invest some of its resources and savings in manufacturing.
1/ Central Statistical Office, Ethiopia; Statistical Abstract 1970, p. 120.
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In contrast, in Ethiopia the majority of the small entrepreneurs come fromfamilies who were either members of the land-owning class, the Church, themilitary or the civil service. Most of the management problems whichEthiopia is experiencing are due to lack of background in business.
4. Small-scale enterprises are found throughout the country in diversi-fied lines of business activities. The decentralized nature of these enter-prises has a significant potential for benefiting other parts of the economy.In the September 1971 Census average employment per establishment in thecottage sector was 4.5. In the 15 cottage establishments interviewed by theBank Mission average employment was 3.0 and in small scale industries inter-viewed it was 31.0. These industries are major employers of labor outsidethe agricultural sector; and, being scattered over the country, they tendto minimize the disadvantages of the concentration of medium and largeindustries in Addis Ababa, Asmara and Nazareth. Thus they act as a counter-balance to the drift of people in search of employment from the provinces tothese cities. Furthermore, small enterprises are a training ground forentrepreneurship; many small businessmen in Ethiopia have prospered and growninto large-scale entrepreneurs.
5. In a country in which the GDP per head is low, even by the standardsof African countries, where savings are correspondingly low, and many alter-natives for investment exist, only a limited proportion of the savings islikely to be available for investment in small manufacturing enterprises.Since the small manufacturing enterprises are not able to provide adequatesecurity, they usually find it very difficult to obtain credit from commer-cial banks. Plough-back of profits therefore is the main source of expandinginvestment in the sector. Here again the absolute amount of profit is small,and, hence, so is investment. A typical metal workshop had a net-of-tax profitof only Eth.$ 1,650 (US$717) in 1970.
6. If small-scale industries are to develop rapidly, Governmentassistance is required. Although the Third Five Year Plan contains severalproposals for providing Government incentives to small enterprises, very littlehas been done to implement these proposals and thus encourage a fast rate ofgrowth. The establishment of the Center for Entrepreneurship and Managementwas the only practical step taken, but the Center as it turns out has concen-trated mainly on working with the larger manufacturing enterprises. Effectiveand sound arrangements for the supply of credit are also essential, but theestablishment of the AID Bank in 1970 did not improve the situation since itsloans do not reach small investors. Moreover, the Investment Code of 1966,by restricting incentives to large industries, has in practice established abias against small-scale enterprises.
7. One prompt and positive way in which the Government can renderassistance in promoting rapid development and expansion of the sector isby removing those bottlenecks and constraints which result from the directand indirect effects of policies and measures which discriminate againstsmall-scale industries. The financial incentives and inducements granted
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to large manufacturing industries in the form of import duty relief, exportduty and transaction tax relief, income tax relief, subsidized loan arrange-ments and availability of foreign exchange for remitting earnings, have directdiscriminatory effects on small scale industries. The imposition of exciseduties on raw material inputs and finished products also has adverse effectson the small-scale enterprises. This is explained in more detail in para-graphs 44 to 54.
8. The large and medium-scale industries are in a relatively strongerposition to raise working capital to pay off their production (excise) tax.Small-scale industries for their part find it difficult to raise enough work-ing capital to pay the production tax, and also make other essential paymentsbefore the products are sold. If the small enterpreneur is unable to obtainworking capital to pay the tax, he is forced to reduce the volume of outputto a level at which he can afford to pay the excise tax. In so doing hisbusiness expansion is affected. In this regard small enterprises suffer in-directly from the imposition of excise tax although the direct burden of thetax is borne by both large and small industries.
9. The problems caused by policies favouring large scale enterprisesare not the only ones facing cottage and small scale enterprises in Ethiopia.The major problems are lack of entrepreneurial ability, skilled labor, and ofmanagerial and particularly accounting skills. There is also a lack of trustamong businessmen and between businessmen and their managers. A more generalproblem is a poor communications network in the country, particularly in theprovincial villages. The problems enumerated are exacerbated by wrong choiceof business; little or inadequate planning and budgeting; inadequate methodsor absence of bookkeeping; ignorance of the market potential and the nature ofmarket trends; lack of effective production planning and control; poor pro-duct design, leading to low quality goods; lack of personnel developmentthrough training or otherwise; lack of specialized tools and machinery, andunderemployment of expensive machinery when available.
10. The third type of problem which confronts the small-scale sectorresults from lack of loans and credit facilities, including the inadequacyof financial advisory services. One remedy for this situation lies in insti-tutional support for small borrowers, via the commercial banks. Enablingsmall businessmen to have access to capital would, of course, involve someextra risk and servicing costs. Consequently a subsidy to the cost of fundsmight be considered. In addition, a special fund that would ensure commercialbanks against the risks of lending should be considered.
11. An alternative broader type of institutional support could be pro-vided by establishing a separate financial agency or corporation to providefacilities for credits and loans, as well as technical services for the smallscale sector. Since the Ethiopian Government is under a great deal of admin-istrative pressure, it is suggested that this institution be set up in stages,beginning with a Loan Fund Division whose main function would be to assist the
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small scale sector in obtaining capital. Such an institution would assistin project formulation, loan appraisal, post-loan supervision services andpossibly even assist in the purchase of equipment.
12. Further development is highly dependent on the overall (particu-larly agricultural) development of the country. Transport and infrastructuralimprovements are necessary to bring the small businessmen in remote villagesinto closer contact with the urban areas.
CHAPTER 1
INTRODUCTION
1. Ethiopia is largely an agricultural country where the small-scaleindustries are not yet fully developed. Their potential for contribution tothe overall growth of the economy, however, is considerable. There is greatneed to help small-scale industries through a shift in Government's emphasisfrom the medium-and large-scale manufacturing sector to the small sector.The case for helping the small-scale industries rests on the following needs.
2. Small-scale industries have little or no access to institutionalcredit and have to finance expansion mainly out of internally-generatedprofits. The commercial banks have found it a problem to extend loans toEthiopian enterprises because their loan applications are rarely accompaniedby balance sheets and income statements.
3. Commercial banks normally find small loans unprofitable. In addi-tion most small businessmen cannot meet the security requirements of thebanks. Thus, owing to these constraints, small enterprises have little accessto the commercial banks for capital. They also have no access to the AIDBank because of the limitations placed by this institution on the minimumsize of loans -- it does not consider applications for loans below Eth.$ 15,000.
4. There are still very few indigenous modern industrial entrepreneurscapable of managing the growing medium- and large-scale industries in Ethiopia.Consequently the bulk of these industries are initiated by foreigners incollaboration with the public sector, while their management remains largelyin the hands of foreigners. Even in the small-scale sector one stillfinds a good percentage of the proprietors of the enterprises to be Italians,Greeks, Lebanese and Indians. There is therefore a great need for the Govern-ment to help to train a large number of small entrepreneurs who, while man-aging the small-scale enterprises, would acquire sufficient experiencenecessary to take over the management of medium and large industries.
5. In the light of the points discussed above, it appears necessaryfor the Government to undertake certain promotional measures to stimulateand encourage the expansion of economic activities in the small-scale sector.Small-scale enterprises are not exempted from import duties on machinery asprovided under the Investment Code. There are also other financial incentiveswhich are not extended to them, such as income tax and transactions tax relief.The Government should grant these concessions to small-scale industries, asit continues to grant them to large industries. 1/
1/ Currently the financial inducements and incentives take the form of in-come tax relief for a period of years; import duty relief on agriculturaland industrial machines and raw materials; export duty and transactiontax relief on exported manufactured goods if the exemptions are necessaryto assure their competitive position in the export markets; and the avail-ability of foreign exchange for remitting the savings of foreign personnelemployed in the enterprises and profits of foreign enterprises.
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6. The granting of institutional support accompanied by the settingup of a guaranty or loan fund is another measure that can be envisaged.One of the main functions of the guaranty or loan fund would be to assumepart of the risks inherent in financing small businessmen, and hence tofacilitate the extension of loans and credits that are badly needed by them.
CHAPTER 2
EXPANSION AND PROGRESS IN THE SMALL-SCALE INDUSTRIAL SECTOR
I. Characteristics of Cottage and Small-Scale Industries
7. Cottage industries (including handicrafts) are defined as thoseestablishments in which small-scale manufacturing is carried on primarilyfor the market and very often to individual orders. Such industries areusually located in households or small workshops, and depend mostly on ownor family labor. TManual skills rather than machines play the major rolein these establishments and fixed capital investment is below Eth.$ 50,000.Small-scale industries are generally somewhat larger establishments withfixed capital investment up to Eth.$ 100,000, and they usually use power. Incontrast to large enterprises, however, small-scale industries are usuallyless mechanized and they lack specialization in management and organizationof the production process. In terms of employment, cottage (together withhandicraft) industries are defined as those establishments employing lessthan 10 people, while small-scale industries are those employing between10 and 50 people. 1/
8. Cottage industries can, and do, grow into small-scale enter-prises, and a small-scale plant can become medium or large-scale. TheNational Mills of Debre Zeit, (a flour mill) was a small-scale industry, butnow has employment of over a hundred persons, and fixed capital investment ofabout Eth.$ 2 million. Small-scale industries are in general dependent onlocal talents and resources.
II. The Data Base and Size of the Sector
9. Information on cottage and small-scale industries in Ethiopia isstill very weak. The Central Statistical Office, in trying to fill the gap,carried out a census of cottage industries in urban areas in September 1971.
1/ IEG: Central Statistical Office: Small-Scale Industry Survey, August1971, pp. 1-2. It is essential to note that these definitions applyonly to the industries in Ethiopia. What may be regarded as the employ-ment or fixed capital investment limit for small-scale industries inEthiopia may be inappropriate for another country. For instance, inIndia the small-scale sector includes industrial units with up to Rs.750,000 i.e. about US$103,000 compared with an amount of US$43,480 forthe Ethiopian small-scale sector. In the United States an industrial unitemploying about 500 or less is regarded as small-scale. Small scalesector includes both cottage and small industries.
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Information on the number of cottage establishments, the number of peopleengaged, and the wages paid is now available. The second stage of the census,now in progress and due for completion before the end of 1972, will supplyinformation on items such as amount of capital invested, type of product andvolume of production, type of tools and raw materials used.
10. In the absence of earlier data it is very difficult to estimatetrends in cottage and in small-scale industry output. In general, however,it appears that there has been substantial growth.
11. Table 1 indicates that Addis Ababa has the principal concentrationof cottage industries (13,071), with Asmara (1,851) being second in importance.The other important centres are: Nazareth, Metahara, Debre-Zeit, Hagerehiwot,Genet and Akaki. Table 1 shows also the breakdown of the establishments intoindustrial groups and into employment and wages paid by urban area.
12. Data on small-scale enterprises is more scanty. The Directory ofManufacturing Enterprises in Ethiopia, published in April 1971, indicatedthat out of a total of 585 manufacturing establishments; (1) about 230 estab-lishments employ between 10 and 50 workers (2) 106 establishments employ 10people or less and (3) the other 249 establishments were medium and large-scalewith fixed capital investment above $100,000 and employment of over 50 workers.
III. Growth Trends
13. For both the cottage and the small-scale industrial sector, thereis insufficient data to determine the rate of expansion in recent years,but all indications point to considerable growth. For instance, thecottage industries' census indicated that a substantial number of new enter-prises were established yearly in the last five or ten years; however, thereis little or no evidence of those that ceased to exist. The interviews with40 establishments conducted by the Bank Mission provide further evidence ofexpansion. About 25 (over 62 percent) of the 40 establishments were estab-lished in the last ten years and of these 25 about 16 were established in thelast five years. Thus, more than half of the establishments interviewed wereestablished as recently as during the last ten years. The interviews suggesta rate of expansion between 6 and 8 percent per year. The considerable in-crease in value added by the cottage and small-scale industries to GDP, fromEth$103.5 million in 1963 to Eth$177.2 million in 1969 also provides evidenceof an increase in the number of enterprises.
IV. Organization
14. In both the cottage and small-scale industries sole proprietor-ship is the dominant form of ownership. In the cottage industry it is theonly form of ownership, and in small-scale industries there are only a fewother forms of ownership. In small-scale industries 28 of the 40 estab-
Fags 1 of 2
Table 1: CIrTTAGL BlDUSTRY: BREAKDlC61 OF EMFICYICNT FIGURES AND WAGES PAID AIOPPOFING TO THE INDU2STRIAL GROUPS AND UNDAP TOWNS
ADDIS ABABA DEHRE-ZEIT HAZWlEY AifXI
Number Number Pluber Number Number Numbe Number Muter
Number of of wages Number of Of Waeo Number of of Wages Nuber Of Of WagesI.dustr of Pe-son Paid Paid of Person Paid Paid of Persas Pai d Paid Of Persons Paid PaidGrop Induotrial Group, isatabiAshent Engaged Workers E$ Establisohnt EBLMdg Workers o Ftablisheent Engaged Workers Ej Establieshnent Engaged WorkSa ..$
Food21G Casingof Meat, etc. - - - - - -- - P 7 6 -----
211 D-try Produots 2 a 6 9215 Grain Mill Preducto 200 4413 21.5 7,21.7 6 24. 19 185 lb 1.6 31 71.5 7 i6' 9 230
216 Pmeslngof O~I-Seeds 22 22 - - 2 7 4. 125 2 7 5 11.5
220 aBkery Prodcts 57 111. 5i 609 - - - - 6 7 - - 1 4. 4 117
221. .Jr Sj aMkling 91 95 - - 2 2 - -10 PG - - I I - -229 Other Food Itrs 4. 16 6 24.1 - - -
233 Soft Drinks - - - - 57 123 51 1,321 - - ------
231. Tj I,075 2,621 1.097 13,9h 1.31. 1.29 7 57 4.9 102 39 1,338 21 4.5 19 779
235 Tella 4.,666 5,p1.9 101 2,161 - - - - 976 P,o6P 15 230 191. 218 3 53239 OtherLocaliDrinke 357 1.4. - - 77 90 1 3 i6i 176 3 35 4. 6 - -
250 Spin-i,,g 15 1.2 - - - - - - - - - - - - -
251 das-g 4.,933 6,791. 3,91.0 25,161. 85 116 2 21.6 231. 379 66 1,321. 16 21 --253 knitUtsn 23 77 31 916 - - - - - - - - - - - -256 Tailoring of Textiles 1,172 1,6'6 3111 1,096 73 95 27 P147 11.2 187 hi 11.. 37 1.2 1. 259 Othr M-sfector-e - - - -I I - - - -- ----
Leather and F-r260 Tesserues asd Leather P-od-ote - - --- - - - - - 1 3 2 70
261 Pootu-a 16 703 156 5,8i6 4 5 - - 5 a 2 60262 Fur mid Fur Pr-ducts269 ('therPea.thr Prodaotr 9 20 16 P60 2 2 - --- - ----
Wood and Cork Pout
311 Wood and hark Products(exePt f--nture) 1. 1 120 - - - -9 17 9 18j 2 3--
312 Fu-ot-ar usd Fist-re(oxcopt prm rl f atal)I 61 11.1 II; 3,4.56 2 2 - -5 7 1 39 - ---
319 Other Wood P-od-eP. 17 2115 1 30 2 2 ----- --- -
Fr,instior330 Frsting sod Pblhiahag - - - - - ----- -----
Rubber.Chemlcal & Petroleum Products36,0 Rubber Producs - - - - 12 12-----
350 GAss as ls Products 6 18 3 144 -- - - - ----
351 Pottery, C11,o, un tcrthcssa- 181. 258 - - 4 -1 1. ---
Patb--atd ILetl Products372 0.tley and G-o.1ru Hurdouro 3k 50 211 4.511-- 6 19 PG 180- --
379 Oth. Mer Plo1 Products 4. i6 ih 628 -- - 1 P 1 26-- -
Other indastrbcz395 Other Products 263 659 276 7,915 1 2 - -14, 29 10 337----
Personal le-oacc986 Repair of Yotor Curs 83 223 12~7 1,-69 2 7 1. --- 2 19 6 1.149 -- -
Total Ua201. 21.507 6.1.1)6 IL,,J5 75569 fl(j 2.395 j.6L 2. 122 2.T7 6.58 32 I41 1.21.
Table 1 CWOtUE ThUSTRY ERlAKDIXYI OF EIPW LO FIB;URS AND WAGES PAID ACCORDING TO BDUSrRIkL GROUPS AND URBAN T113 Page 2 of 2
GENET METHARA_ ASMARA _ HARIWUT
Nu,ber Number Nt.eher Ihesber NInber Number Numtber Ntaber
Industry N,mber of of Wages Number of nf Wges Nober of of Wbges Numober of of Wages
Oroup of Persons Paid Paid nf Persons Paid Paid of Persons Paid Paid of Peraona Paid Paid
Code Indtrial Oroup Establishnent Envad Workers E$ Establishewnt Ekna,ed Workers El Est,blishoent EneaRed Workers E$ Establlsheent &XWd Workers E8
Food210 Cannirg of 1(eat, etc 31 51 4 __ 69 110 b1 718 11 18 9 79211 Dairy Prodoets - - - - - _ _ _ _ _ _ _ _ _ - _
215 Orai. MHil Products 18 41O 2a 374 - - - _ _ _ _ _ 18 55 48 1,076
216 Pressing of Oil-Seeds 7 4. 110 - 4 _ _ 1 4 3 115- 2 2 - -
220 Bakery Products 2 4 7 33 1b 14 - - - 7 18 22 246
22b InJera aking - - - - - - - - I b 1 36 20 22 - -
229 Other Food Itet 4 - - - - - - - b 12 4 240 - -
ibr,ergg233 Soft Drinks - - -
234 Tej 55 ll1 59 719 166 3b5 179 5,065 34 115 59 791 59 92 29 264
235 Pell. 110 132 - - Y) 1,063 - - 51b 775 207 3,212 251 264 - -
239 Other Locl Drinks 48 57 2 11 97 97 - - _ _ _ _ 136 145 2 7
Textiles250 Sptino - - - - - -251 Weaving 53 73 - - 41 1,1 _ _ 301 361 55 887 59 66 - -
253 Enitting - 30 178 110 3,375 - - - -
258 Tailoring of ?ectsleo 4 7 b 19)1 262 183 138 --- 112 217 87 3,795 79 86 7 31259 Other Man.factrg - -rg
Leather n~d For?60 Tanser.eo and Leather Prodact -261 Fo,t-nar - - - - 95 16S b6 1,b67
262 Pr ad Fur Prodcts - - - 9 - - - 1 2 1 120 _ _ _ _ .1769 Otler Leather Prod.ct. - - - - - - - - 12 40 20 796
Wood a,d Cork Products313 Itlil, - _ _ _ _ _ _ _ 22 53 13 911 2 7 4 66
311 Wood sod Cork P-ed-ct- - - - -_
(eoceV t feStit.ro)312 Furniture and FPtatres _ _ _ - - 11.3 267 80 3,223 - -
(e.cept priarily of setal)319 Other Wd Prodoctc - - _ _ _ 88 121 8 176 b 4 - -
Pronting330 Prtnting and Publlhing - - 2 3 - - - -_ 2
Rubber Cheilcal & Petroleum Products3140 Rubber Prod-cts - _ _ - _ _ _ - 32 108 64 1,588 - - _ _
Non-lletallic MInera Prodact,350 GI., and GlI.s Prodxlct, -351 Pottery, China, Earthen-are353 Ce-est - _ _ - _ _ _ _ 4 12 8 3.0 - -
Fabricated Metal Products370 Cutlery and OGoera1 Hard,are 11 1S - - - - - - 39 125 73 1,831 9 11
379 Other Metal Pr,'d-ot - _ _ 276 496 148 3,b72 - -
Other Industries399 Other Prtd.ct. 2 2 - - - - - - SS 126 34 1,902 - -
Peroonl Se-rices986 Repar of otor Cars - - _ _ _ _ 58 186 98 8,746 2 2 - -
ToA1L 006 52_ 95 i1.ki 1 629 2.25 12 5,793 1.851 3.407 1.1ll 37.026 659 72t 121 1.769
- tooi.
boures' operial Pttiopoa,, Goeerntest, Central Slatlot!cal OffIce, SmadlScaie Industry Survey 1Y71.
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lishments surveyed by the Bank Mission were sole proprietorships, 10 werepartnerships and 2 were limited liability companies with shares open to thepublic.
15. A large number of proprietors interviewed had been apprentices ortechnicians in the same or related industrial groups, who managed to savemoney to buy their own tools and start their own business. About 85 percentof the firms were started by those who are still managing them as sole pro-prietors or partners. The remaining 15 percent had changed hands from onemanagement to another. Only four out of the 10 partnerships surveyed werepartnerships from the beginning; the remaining six started as sole proprietor-ships and later became partnershins. Very few of the entrepreneurs came fromindustrial and commercial families. Their parents and grandparents wereeither members of the land-owning class, the church, the civil service or themilitarv. They were truly innovative entrepreneurs, breaking-off from theseprestigious occupational backgrounds to become proprietors of small scaleindustries which involved considerable risk taking. Four of the partnershipswere family owned: one partnership consisted of a father, mother and daughter,and the other partnerships were formed by brothers. The other six were formedby men who received technical education and had been in technical governmentdepartments. They resigned to set up their own establishments.
V. Employment Opportunities
16. A review of the Center for Entrepreneurship and Management recordsindicate that small enterprises account for about 90 percent of all forms ofentrepreneurial activities in all economic sectors, and provide about 80percent of the total employment in the business sector. 1/
17. The preliminary results of the 1971 Census indicate that therewere about 52,000 cottage and handicraft establishments in the urban areascovering the following broad industrial groups: food, beverages, textiles,leather and fur, tobacco, wood, printing, chemicals, non-metal mineral pro-ducts and fabricated metal products. The total number of persons engagedwas 233,060, and the number of paid workers was 15,400 with a total monthlywage bill of Eth$319,550. Average employment per establishment was about4.5. These figures indicate that a very low proportion -- less than 7percent -- of those engaged were paid. The majority were non-paid familylabor, and a great deal of such labor is part-time of course in one sense oranother, particularly in the primary processing industries. Wage earningsnevertheless usually represent a significant share of total income. Table 2shows the breakdown of employment figures, paid workers and wages paid, accord-ing to industrial groups and establishments, while Table 3 compares the expan-sion trend in the number of establishments, employment, and wages and salariesin the manufacturing sector during some selected years with that in the small-scale sector in 1971.
1/ See Asheber Aberra: Developing Ethiopian Small Business Managers ThroughManagement Training, a rnesis presented to the faculty of the Division ofBusiness and Bsuiness Education, Kansas State Teachers College, Emporia,1970, p. 76. These figures based on the late 1950s and early 1960s maybe somewhat on the high side for the late 1960s and early 1970s when medium-and large-scale manufacturing activities began to overshadow those in thecottage and small-scale sector.
Table 2: COTTAGE INDUSTRY: NUMBER OF ESTABLISHMENTS,PERSONS EMPLOYED, PAID WORKERS AND WAGES PAID
(1971 Number wumber SlagesNumber of of PaidIndustry of Persons Paid (E)Group
Code Industry Establishments Engaged Workers
Food -2 5756 045 3,621 93,221210 Canning of Meat, etc. 1 30 6 9,oS 7215 Grain Mill Products 1,253 3,637 2,796 69,970216 Pressing of Oil Seeds 45 96 48 1,463220 Bakery Products 299 708 385 11,302222 Sugar, Raw and Refined 1 3 3 45223 Cocoa and Sugar Confectionery 1 11 -1224 Injera Making 257 268 8229 Other Food Items 5 16 6 538
Beverage 28 663 35 472 3 680 60 209233 Soft 1n 29 ,200234 Te i 4,676 8,677 2,700 47,062235 Tella 18,041 20,673 944 11,798239 Other Local Drinks 5,945 6,102 17 149
Tobacco241 Tobacco Products 2 3 - -
Textiles .104 1868 630 89926250 Spinning ~59 6tJ- 251 Weaving 11,998 177,659 4,623 33,270252 Finishing Textiles 1 1 - -253 Knitting 71 344 186 5,256255 Cordage, Rope, etc. 2 2 - -256 Made-up Textile Goods 3 24 22 1,196258 Tailoring of Textiles 5,965 8,093 1,472 50,174259 Other Manufacturing 5 6 1 30
Leather and Fur 179 447 215 7 627260 Tanneries and Leather Products T8 -T -I1261 Footwear 50 270 173 6,391262 Fur and Fur Products 1 2 1 120269 Other Leather Products 115 157 37 976
Wood 53 1,275 641 25,497310 Mills 43 113 119 12,701311 Wood and Cork Products 55 71 16 356312 Furniture and Fixtures 316 662 294 12,167319 Other Wood Products 123 354 12 271
Print±ni330 Printign and Publishing 2 3 - -
Chemical 57 144 73 1,669340 Rubber Products 55 1 34 1349 A Other Chemdcal Products 2 10 6 -
Non-Metallic Mineral Products 355 485 39 3 796350 Glass and Glass Products -' A ~ ±T5351 Pottery, China, etc. 338 421 - -352 Clay Products 2 4 2 76353 Cemet 5 35 32 3,502
Fabricated Metal Products 648 1.186 38 13.214370 Cutlery and General Hardware 46 7 2 2,972371 Metal Furniture, etc. 24 84 54 2,700372 Non-Electrical Machinery 13 33 10 270375 Repair of Motor Vehicles 16 67 32 3,120379 Other Metal Products 299 533 167 4,152
Other Industries399 Other Products 623 1,298 343 8,130
Personal Services986 Repair of Motor Cars 214 590 301 16,262
MANUFACTURING 51 959 233,064 15,014 319,553
Source: Imperial Ethiopian Government, Central Statistical Office, Small Scale IndustrySurvey 1971.
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Table 3: ESTABLISHMNTS, EPLOYMENT AND WAGES & SALARIES
% Increase % Increasein 1967 in 1969
Medium and Large Scale 1965 1967 1969 over 1966 over 1967
No.of establishments 273 395 442 44.7 11.9No.of employees(permanent) 47,343 46,372 48,652 - 2.1 4.9
Fixed capital assets
(E$'000) 243,665 342,365 384,702 40.5 12.4
Gross value of production(E$'000) 269,822 357,110 467,039 32.4 30.8
Wages & salaries paid(E$'000) 41,567 50,976 61,936 22.6 21.5
Capital expenditure
(E$'ooo) 74,941 52,391 62,355 - 30.1 19.0
Average per Employee
Earnings (E$) 982 1,099 1,273 11.9 15.8
Output (E$) 6,372 7,700 9,560 21.2 24.2
Cottage and Handicraft IndustriesSeptember 1971
Number of establishments 52,000Number of employment 233,060Number of paid employment 15,400Wages paid (E$) 319,550
Average employment per establishment 4.5
Average wage per paid employment (E$) 20.75
SourceS: C.S.O. Addis Ababa: Statistical Abstract 1970, p.54C.S.O. Addis Ababa: 1971 Census of Cottage Industries.
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VI. Value Added
18. Value added by cottage and small-scale industries rose fromEthS103.5 million in 1963 to Eth$177.2 million in 1969, rising from 4.1percent to 4.6 percent of Gross Domestic Product. Until 1966 the sector'svalue added was more than that of the large-scale manufacturing sector.Indeed as late as 1963, value added by the small-scale manufacturing sector.twice as much as that added by the large-scale manufacturing sector, Eth$104million and Eth$61 million respectively. Up to 1966 only four sectors --agriculture, building construction, wholesale and retail trade, and publicadministration and defence -- surpassed the cottage and small-scale industriesin absolute contribution of value added to the economy. Furthermore, in termsof the whole industrial sector consisting of mining and quarrying, manufactur-ing, handicraft and small-scale industry, building and construction, the ratioof value added to GDP by handicraft and small-scale industry was the secondlargest up to the year 1966, being second only to building and construction.In 1963 its contribution to the whole industrial sector was 31.5 percentcompared with 45 percent by building and construction, but contrasting withless than 19 percent by medium and large scale manufacturing. Building andconstruction, and handicraft and small-scale industry between them contributedover 76 percent of the entire value added by the industrial sector. 1/
19. Tables 4 and 5 show the relative contribution of value added bymanufacturing, handicraft and small-scale industries to the GDP at bothcurrent and constant factor costs of 1961. Two conclusions may be drawnfrom these figures. First, the increase in value added by the handicraftand small-scale industrial sector from Eth$103.5 million in 1963 to Eth$177.2million in 1969 -- an increase of about 12 percent per annum -- indicates
expansion and growth. Second, in 1967 the large scale manufacturing over-took handicraft and small-scale industries in value added at current factorcost - being Eth$149.4 million for large scale and Eth$148.7 million forsmall scale. However, value added by the handicraft and small-scale indus-tries at constant factor cost was still higher than that of the large scalemanufacturing in 1969 -- being Eth$177.7 million for small scale and Eth$153.8million for large scale. Thus value added at constant factor cost figureshows that the handicraft and small-scale industries were still more importantto the economy than the large scale manufacturing industries. The value addedtrend in the handicraft and small scale industries at constant factor costsuggests competitive costs of production, roughly approximate to internationallevels, while the lower growth of value added at constant cost compared withcurrent cost in large scale manufacturing suggests rising costs and pricesbehind the shelter of protection. This suggests that import substitution bysmall-scale industries is more economic of resources, and less costly to con-sumers than large-scale production protected by made-to-measure tariffs.
20. The growth of the large scale sector after 1966 on current costbasis was largely made possible by the Government's generous incentives.The large scale sector tended to be more capital intensive, and where small-scale
1/ Estimates of the I.E.G. Central Statistical Office: Statistical Abstract1970, p. 120.
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producers with more labor intensive technologies were replaced, this probablymeant a loss of employment and a shift in income from low to high income groups.To some extent the shift meant greater reliance on foreign investment. Thisdoes not, of course, mean that in some industries large scale enterprises arenot more suitable to the economy, but rather that the impact of government in-centives on the cost of production and employment has to be carefullyweighed.
VII. Foreign Exchange Saving and Earning
21. The cottage and small-scale industrial sector is of importance toEthiopia's balance of payments. Although a quantitative estimate of exchangesavings and earnings cannot be made, it is evident that most small enterprisesuse a high proportion of locally produced materials, have a relatively highvalue added, and do not rely on protection to the same degree as the large-scale sector. That is, their products compare more favorably to internationalprices than those of the large scale firms. They also have a significantexport potential in terms of their overall output. Three of the establish-ments interviewed exported some of their Droducts. Two exported to neighbour-ing African countries such as Kenya, Sudan and Uganda, and the third exportedtanned leather to the United States. The former two earned about Eth$52,000annually from exports, while the third earned about Eth$1.66 million. Fiveof the 40 establishments wqere making serious preparations to enter the exportmarket by the end of 1972, and another four establishments were preparing todo so as soon as export licences are issued to them by the government.
VIII. Investment Prospects -- The Private Sector
22. Investment in small-scale industries has mainly been financed in-digenously, and only in about a quarter of the establishments surveyed wasthere foreign financing. However, this group formed, in financial terms,a substantial proportion -- up to 45 percent -- of the total value of in-vestment in the establishments surveyed.
23. For the indigenous proprietors and partners, the problems of fi-nance are considerable due to the difficulty of obtaining loans from commer-
cial banks. Most of the entrepreneurs are working with borrowed equipmentand in rented houses. Most cannot borrow from the banking institutions andother financial intermediaries because they do not have adequate assets tooffer as collateral. Banks require at least the same collateral as the sizeof the loan, and do not lend on the basis of future performance. Even trust-worthy and capable entrepreneurs have no entry to the banks. Self-financingaccounts for the bulk of investment, although they also take part in "Ekubu",a Idnd of mutual savings association of a close knit group of individuals whopledge themselves to contribute a certain sum of money per week or monthand may borrow the proceeds in turn.
Table 4: GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN AT CURRENT FACTOR COST(Eth $ Million)
Growth Rate1963 1964 1965 1966 1967 1968 1969 1963-1969
G.D.P. 2,500.3 2,811.5 3,188.0 3,369.7 3,375.3 3,606.0 3,860.7 7.5
Industry 329.0 369.7 410.7 458.7 545.7 574.1 633.8 11.5
Manufacturing 61.2 76.1 94.5 108.2 149.4 176.6 211.5 23.0
Handicraft and Small-Scale Industry 103.5 118.1 126.8 136.8 148.7 157.3 177.2 9.4
Industry as % of GDP 13.2 13.2 12.9 13.6 16.2 15.9 16.4
Manufacturing as % ofG.D.P. 2.5 2.7 3.0 3.2 4.4 4.9 5.5
Handicraft and Small-Scale Industry as %of G.D.P. 4.1 4.2 4. 0 4.1 4.4 4.4 4.6
Source: Central Statistical Office Addis Ababa: Statistical Abstract 1970, p. 120.
Table 5: GROSS DOMESTIC PRODUCT BY INDUSTRIAL ORIGIN AT CONSTANT FACTOR COST OF 1961(Eth. $ Million)
Growth Rate1963 1964 1965 1966 1967 1968 1969 1963-1969
1. G.D.P. 2516.4 2642.3 2822.1 2942.2 3105.5 3232.2 3369.5 5.0
2. Industry 327.3 365.3 401.0 449.4 519.6 554.5 587.7 10.2
3. Manufacturing 56.5 68.3 79.6 92.6 116.1 127.4 153.8 18.2
4. Handicrafts & Small-ScaleIndustries 103.5 118.1 126.8 136.8 149.4 176.6 177.7 9.4
Industry as % of G.D.P. 13.0 13.8 14.2 15.3 16.7 17.2 17.4
Manufacturing as % of G.D.P. 2.3 2.6 2.8 3.2 3.7 3.9 4.6
Handicrafts & Small-ScaleIndustries as % of G.D.P. 4.1 4.5 4.5 4.7 4.8 5.5 5.3
Source: Central Statistical Abstracts Addis Ababa: Statistical Abstract 1970, p . 125
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CHAPTER 3
GOVERNMENT POLICIES
24. The Third Five Year Plan (1968-73) included a 5.5 percent perannum production growth target for handicraft and small-scale indus-tries, but the proposed capital expenditure on industry by the Governmentand financial intermediaries has fallen short of the Plan largely owingto lack of institutional support. Although the Government indicated thatadequate financial inducement for investment would be extended to the small-scale industries by revising the Investment Code, which had previously beendirected towards the encouragement of medium and large industries, to bene-fit all classes of enterprises, nothing has yet been done. The InvestmentCode still provides income tax relief for 5 years for new investments,and 3 years for expansions, and import duty exemptions for industrial ma-chines and equipment, only for enterprises with a minimum investment ofEth$200,000.
I. The Objectives and Instruments of the Third Five-Year Plan
25. In the Third Plan the Government proposed to adopt measures toimplement the following objectives for small-scale industries:
(a) to improve productivity by introducing and making avail-able modern and appropriate tools and equipment, and byimproving skills through training and technical advice;
(b) to assist in the marketing of products domestically andabroad;
(c) to encourage linkages between these industries and themore modern and larger industrial establishments, fortheir mutual benefit;
(d) to promote decentralized growth of modern handicraftsand cottage industries in urban centres and in villages;
(e) to assist artisans and craftsmen in the organization ofindustrial cooperatives for their common benefit;
(f) to provide, in a package form, credit, equipment, tech-nical know-how, and other types of assistance to pros-pective entrepreneurs in order to expedite growth inthis sector; and
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(g) to assist this sector to increase gross production fromEth$212 million in 1968 to Eth$277 million in 1973through fixed capital investment of Eth$50 million. Interms of GDP this was to mean an increase from Eth$148million in 1968 to Eth$194 million in 1973, or 5.5% peryear. 1/
A number of instruments were planned to implement these programs.
(1) Loan Incentives
26. The Government proposed to place funds of approximately Eth$4 mil-lion at the disposal of the development finance institutions for loans tohandicrafts and cottage industries for purchasing tools, capital equipment,land and building, and for providing capital to industrial cooperatives. Theobject was to provide funds to persons interested in entering industrial pur-suits, and to enable the existing establishments to improve their technologi-cal status by acquiring improved equipment. However, this was not implemented.
(2) Organization of Cooperatives
27. The Government also planned to initiate schemes for organizingsome of the artisans engaged in handicrafts and cottage industries into in-dustrial cooperative societies in order to improve their production techniquesand business status, including their credit-worthiness. In order to assistthe establishment of industrial cooperatives, the Ministries of Commerce andIndustry and National Community Development and Social Affairs were to pro-vide initial managerial assistance. These two Ministries were also to issuemodel constitutions and by-laws for industrial cooperatives.
28. Very little has been done by the Government to imnlement these pro-posals. The only step taken was the setting up of a Weavers' Cooperative witha membership of about 15 in one of the suburbs of Addis Ababa. The equipmentand tools used by these weavers were very crude and the accommodations werepoor.
(3) Cluster Training Centres
29. The Government also planned to organize and open up a number ofcluster training centres in various rural areas to improve the skills ofrural artisans. The training was to be designed to suit the local condi-tions, and was to cover trades such as carpentry, metal work, hand-weaving,leather-tanning and village pottery. The purpose of strengthening and re-organizing the existing handicraft school in Addis Ababa was to enable itbetter to serve the training needs of artisans. The provision of Eth$1 mil-lion earmarked for expenditure on such centres has not occurred, the trainingcentres have not been established, and there has been little change in theAddis Ababa school.
1/ IEG: 3rd Five Year Development Plan 1968-73, Addis Ababa, p. 242.
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(4) Production-cum-demonstration Centres
30. The Government also proposed to set up production-cum-demonstrationcentres in order to introduce the manufacture of new products in differentareas of the country. The introduction of vegetable canning, improved handlooms, power looms, cotton blanket-making, etc. in various centres was consid-ered an immediate necessity, and provision for a capital investment of Eth$1million on these centres was made. No action has been taken.
(5) Design Development Centre
31. To help the artisans adopt new designs which might help them inmarketing their products and realizing better prices, it was proposed thatthe Ministry of Commerce and Industry would set up a design developmentcentre. The centre was to undertake design research on products such asfurniture, household items, hand-looms and some others. A capital expendi-ture of Eth$0.5m and current expenditure of Eth$0.5m was provided, but theseexpenditures have not been made.
(6) Marketing Assistance
32. One of the most important proposals was the setting up by the Ministryof Commerce and Industry of a marketing organization that would help to popu-larize the products of handicraft and cottage industries. A total capitalinvestment expenditure of Eth$1 million was envisaged, and this organizationwas to assume the important task of arranging sales depots and market emporiaat suitable places to help in marketing and popularizing the products ofhandicrafts and cottage industries. These steps have not been talcen.
II. Agricultural and Industrial Development Bank
33. An Agricultural and Industrial Development Bank S.C. was establishedon August 28, 1970 by Decree No. 55. It took over the liabilities and assetsof the Development Bank of Ethiopia and the shares of the Ethiopian InvestmentCorporation. An important objective of the AID Bank is to assist in the de-velopment of the country through the mobilization and investment of funds inprofitable development projects, by way of equity participation, loans and/orguarantees in compliance with successive development plans of the Government.Another important function of AID Bank is to act as the Government's princi-pal instrument for extending long and medium-term credits, and equity in-vestment in commercially justifiable projects in agricultural, industrial,mining and other sectors not reserved for other financial intermediaries,and for receiving and managing investment. 1/ The AID Bank is also to en-deavour to foster the growth of share ownership in the country, and to en-courage Ethiopian investors to participate in the capital projects in whichit has an interest.
1/ See Agricultural and Industrial Development Bank SC: Policies andOperations, p. 2.
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34. The AID Bank's investment policies, however, in general excludesmall-scale industries. Almost all of the 40 establishments interviewedby the Bank Mission expressed dissatisfaction with the investment and fi-nancial policies of the AID Bank which, they claimed, helped only the mediumand large-scale enterprises. The problem is that the AID Bank can only makeloans of a minimum size which excludes small-scale businesses. Furthermorethe AID Bank requires security worth 150-200 percent of the loan amount andthis is a condition which most of the small-scale sector entrepreneurs areunable to meet.
35. If the financial needs of small-scale industries are to be met,either the policies of the AID Bank have to be changed to accommodate theirspecial problems or a different organization has to be established to handlethe special problems of the sector. The latter would seem to be the betteralternative. The possibilities of a loan fund specifically for the smallindustrial sector is discussed below. The difficulties which such a fund islikely to face however, should be noted. When the AID Bank took over theassets and liabilities of the Development Bank of Ethiopia and the EthiopianInvestment Corporation, it took over an overall default rate of 45 percent,while rates as high as 60 percent or even 70 percent were experienced inloans to small oil and flour mills. It is partly because of the problemsthe AID Bank now encounters in recovering these loans that it is reluctantto grant loans to small industries.
III. Center for Entrepreneurship and Management
(1) Organization and Objectives
36. The Centre for Entrepreneurship and Management (CEM) was estab-lished in August 1968 with assistance from the UNDP/ILO. Up to the end of1972 the Centre will continue to be financed by a contribution fund drawnfrom the Government and from the UNDP in the proportion of 40 percent and60 percent respectively. The objective of CEM is to foster industrial andeconomic development through (1) practical training and advisory servicesfor the proprietors and managers of small-scale enterprises; (2) advisoryservices to credit and development institutions that provide credit and otherservices to small enterprises; and (3) training for Ethiopian managerialstaff working in enterprises, public and private, including services andutilities.
37. The CEM is granted autonomous administrative, institutional andfinancial status. It is run by a tripartite body made up of the NationalCouncil, the Executive Board and the General Manager. The National Councilis responsible for evolving and determining the overall policy of the Centre;the Executive Board is responsible for the day-to-day operations of theCentre through the General Manager. The Minister for National CommunityDevelopment and Social Affairs is the Chairman of both the National Counciland the Executive Board. The General Manager is the Chief Executive Officerof the Centre who exercises such powers of the Board as are delegated to him.
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(2) Functions of CEM
38. The CEM undertakes various functions and activities which provideservices in'the fields of marketing and sales; management and financialaccounting; general management including the principles, practices and con-cepts of entrepreneurship and business management; production engineering;small enterprise development, entrepreneurship development; and personnelmanagement. In 1968 CEM commenced operations with five senior Ethiopianand four international experts provided by the United Nations DevelopmentProgramme and the International Labour Office. By April 1972, it had fiveILO and fourteen national experts.
39. The basic approach of the CEM is to give practical assistance toan individual or enterprise to solve management problems and to take advantageof business opportunities in accordance with sound practices of management asadapted to or developed for the Ethiopian environment. Courses have beenconducted in the following subjects:
(a) Business opportunities and technical requirements insemi-processing hides and skins;
(b) Maintenance management;
(c) Marketing research for Ethiopian enterprises;
(d) Introduction to material control procedure;
(e) Personnel course in job analysis and job description;
(f) Wage and salary administration;
(g) Starting or expanding a business;
(h) Selection and interviewing personnel.
These courses apparently have been quite useful in assisting entrepreneurs.
40. The CEM however is not really oriented towards the problems ofsmall-scale industries. The Centre was established to serve both the smalland large-scale enterprises, and, not surprisingly, the bulk of the atten-tion has gone to the larger businesses. The creation of a separate sectionfor small industries within the CEM is needed and is discussed below.
CHAPTER 4
PROBLEMS AND OBSTACLES TO DEVELOPMENT
41. Although the cottage and small-scale industrial sector experienceda reasonably rapid rate of expansion during the last two decades, it faces anumber of problems and obstacles which can be divided into three broad groups.
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The first group consists of those constraints associated with weak entrepre-neurial skill and management, e.g., lack of business experience over a longterm, lack of trust among the businessmen and between the businessmen andtheir managers, weakness and inability to withstand setbacks, failure toapply proper business accounting techniques, and some cultural and sociologi-cal attitudes which regard profit-making as socially undersirable practice.The second group is associated with inadequate supply of financial and tech-nical services such as shortage of credit facilities for obtaining fixed andworking capital; and lack of supply of skilled labor. The third group in-cludes all those constraints which are due to official policies and adminis-tration, such as lack of Government incentives and the adverse indirect effectsof excise duties.
I. Weak Entrepreneurial Skill and 4anagement
42. As in many other developing countries, the lack of skilled andable entrepreneurs is a bottleneck. Ethiopian entrepreneurs are still at thevery beginning of business development and thus far are less willing to takerisks than their Lebanese, Indian and Nigerian counterparts.
43. Out of the 40 establishments surveyed, a majority showedevidence of adequate entrepreneurial skill and ability, and the restdemonstrated some evidence of poor entrepreneurship. They suffer from ageneral weakness and inability to withstand setbacks and from their failureto employ their available resources effectively, particularly manpower.
44. In addition it is argued that particular Ethiopian cultural andsociological characteristics impede entrepreneurship. 1/ ConservativeEthiopians regard profit-making as a socially undesirable practice. Amongthe younger educated Ethiopians (many of them trained in Eastern Europe)socialist concepts often militate against private enterprise mores.
45. As in many other developing countries there is strong evidence ofa lack of trust between Ethiopian owners and their managers and amongthe businessmen themselves. This is an important factor that unfavourablyaffects the business spirit and performance. One cause of this lack of trustand confidence is the dearth of competent Ethiopians with experience in manag-ing small business. The high rate of illiteracy is also an important factor.An illiterate businessman fears going into partnership with one or two otherliterate businessmen because he believes that he will be cheated. The lackof records leads to suspicion, and legally binding contracts and documentswhich will prevent cheating and other unfair practices cannot be drawn upand readily understood.
46. It is this lack of trust that is largely responsible for the ex-istence of a large percentage of small-scale enterprises as sole proprietor-ships. The few cases of partnerships that exist are mostly among relatives.`lost of the businessmen interviewed pointed to the lack of trust and noted
1/ See Asheber Aberra: op. cit., p. 68.
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that this also prevented businessmen from employing efficient managers,especially where the managers have no shares in the business. These are prob-lems which do not lend themselves to quick solutions.
47. Only a minority of small businessmen -- only about 15 of the firmssurveyed -- keep proper accounts. Because of inadequate accounting proceduresmany of the businessmen could not tell what their gross sales in a particularyear were, how much they expected to make as profit, and the value of theirfixed and working capital. For an owner of a business worth about Eth$400,000,e.g., accounting consisted of two exercise books, one of which recorded salesand the other purchases, so that he did not have knowledge either of his cashor profits. 1/
II(a). Shortage of Supply of Fixed and Working Capital
48. A large percentage of small Ethiopian entrepreneurs do not haveaccess to adequate capital for equipment and for renting or building a goodworkshop, and to working capital for raw materials and labor. Some of thebusinessmen did not know that they could obtain loans from financial institu-tions such as the commercial banks and the AID Bank, provided that adequatesecurity could be offered. However, those who were aware of such institutionsconsidered the commercial banks as complicated and mysterious financial insti-tutions, too difficult for a small businessman to approach.
49. Eighteen of the 40 establishments surveyed had taken loans fromcommercial banks, only one had taken a loan from the AID Bank; one borrowedfrom a money lender, and the rest raised the entire capital from their ownresources or from friends and relatives. Of the 18 that borrowed from com-mercial banks, only 3 took second loans while the remaining 15 borrowedonly once. Twelve of the 20 that had never borrowed from commercial banks orAID were not aware of the possibilities of borrowing from these financialinstitutions; 6 of them had tried and failed; and the remaining 2 had enoughcapital resources to meet all their requirements.
50. most of the businessmen complained of a serious shortage of bothfixed and working capital. Thirteen said that they would have no workingcapital with which to continue buying raw materials, pay wage bills and carryon production until they sold the existing stocks. This results in closingdown production and laying off labor from time to time. But even those, whomanaged to maintain continuity in production by keeping up a sales flow,complained of not having enough working capital to buy raw materials especiallyto take advantage of price fluctuations. In 27 of the 40 cases surveyed,fixed capital requirements of individual establishments ranged from Eth$200for women engaged in pottery-making to Eth$300,000 for expansion of a liquorfactory. Working capital requirements ranged from Eth$60 for pottery-makingto Eth$80,000 for a sweater factory.
1/ To some extent, of course, the lack of accounting, or at least an apparentlack, is due to the fear of the tax inspector, and this, no doubt, in-fluenced the survey results.
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II(b). Lack of Skilled Labor
51. The lack of adequate skilled labor is another serious constraint.Out of a total labor force of 1,408 engaged in the 40 establishments surveyedby the Bank Mission, only about 20 percent had any skills. Most of the work-ers were either new recruits or apprentices. The ratio of skilled labor tonon-skilled was of the order of 1:5, and it took a fairly long time to trainthem because a high proportion of them were illiterate.
III(a). Direct Effects of Government's Discriminatory Policies and Measures
52. The financial inducements and incentives that have been providedfor large-scale industries, but which are denied to the small ones, discrimi-nate against the latter where they compete with medium-large industries, andraise their costs when they depand on them for inputs.
53. Second, no inducements, in the form of a repayment of the importduties paid on raw materials and components incorporated into products ex-ported, are given to small-scale industries to encourage them to initiateexport arrangements for their products or to increase exports where thesealready occur.
54. Third, Government procurement preferences are not extended tosmall-scale enterprises in order to encourage production. Whereas a pricepreference is given to domestic products of large-scale industries by thoseGovernment agencies having duty free import privileges, such a concession isnot extended to the products of small-scale ones.
55. Granting similar incentives to small-scale industries such asliquor, furniture, leather, soft drinks, paints and varnishes, cordage andropes, would stimulate and encourage them to initiate arrangements for entryinto the export market, or to expand their exports in the case of those al-ready in the export market.
III(b). Indirect Effects of the Imposition of Excise Duties
56. On July 7, 1971, the excise duty rates on some raw material inputsand finished products were increased. Soft drinks, liquor, furniture,knitting and sweater, steel and plastic bags industries were the ones af-fected irrespective of whether they were small-scale industries or large ones.
57. Excise duties -- being a production tax and not a sales tax -- hitthe small-scale industries more severely than the large industries. Whereasthe larger industries have greater access to working capital from either theGovernment agencies (e.g. the AID Bank) or private financial institutions topay off the excise duty before commencing to sell the products taxed, thesmall-scale businessmen have no such easy access. If a small businessman isunable to raise enough working capital to finance the production including thepayment of the excise duty, he then faces the alternative of reducing the scaleof his output. These are some of the indirect adverse effects that most of
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the small-scale industries claimed they experienced as a result of the impo-sition of excise duties on both raw material inputs and finished products.Furthermore, the increases in the duties after July 7, 1971, intensified theseadverse effects.
58. Table 6 shows the rates of excise duties together with importduties before and after July 1, 1971. It has to be made clear that this isnot a question of loss of competitive advantage on the part of the small-scaleindustries due to lack of tariff protection insofar as all industries wereprotected by tariff. Rather, it is a question of structural disadvantagesuffered by small-scale industries not having easy access to working capitalthrough loans and credit facilities.
59. There is the question of a loss of competitive advantage on thepart of small-scale industries resulting from the income tax relief and importduty relief provision for large industries, only, under the Investment Law.
60. Apart from the large industries having easier access to borrowingworking capital to pay off excise duties, the granting of these financialincentives strengthens their financial capacity and enhances their competitiveposition vis-a-vis the small-scale, and thus enables them to absorb the burdenof excise duties.
61. The solution to the first type of indirect adverse effects is togrant the small-scale industries various facilities which would enable themto have easy access to raising both fixed and working capital. This is dis-cussed in the next Chapter. The solution to the second type of indirectadverse effects is to grant the small-scale industries financial incentivesand inducements, as already discussed above in paragraphs 52-55.
62. Another complaint was that not all the small scale establishmentspay the excise duties on both the raw materials and on the finished goods.In a market that is highly competitive those that pay consider themselves ata great disadvantage when compared with many establishments that successfullyavoid payment of the excise duties. They argue that the appropriate authorityshould redouble its efforts to ensure that all establishments bear the burdenor stop the tax collection altogether.
IV. The Case for Protection of Small-Scale Industries
63. In economic theory there are about four reasons for granting pro-tection to an industry or the entire industrial sector of the economy. Thefirst is the "infant industry argument"; the second is the "externalitiesargument"; the third is based on the "economies of scale argument'; whilethe fourth is for revenue purposes. All of these reasons are valid argumentsfor Government assistance to the small-scale sector. In addition we wouldlike to note an additional reason for such assistance.
- 22 -
Table 6: ETHIOPIA: CHANGES IN EXCISE AND DIPORT DUTIES
Exccise Duties Import Duties(zth-,P)r ~ - (Eth$3)
Before After Before AfterJuly July % July July %
Description of Item 1971 1971 Change 1971 1971 ChangeTxRates
1. Beer and Stout: perbottle of 350 c.c.or less 0.12 0.15 25 0.35 0.35 none
2. Alcohol per litre orbottle up to 1 litre 7.0 8.0 14 10.00 10.00 none
3. Fabric woven or knittedof natural silk, rayon,nylon - 2.00 /a /d 1.25 to 1.25/a
nylon 5.00/a to 5.00 none4. Iron and Steel rods and
bars - 1.00/a /d 12.00/b free /c
5. Iron and Steel Galvanized 0.10 /a /d 10.00 lb 10.00 /b none
6. Footwear - per pair - 1.00 /d 4.0o 4.00 none
7. Soft drinks - per bottleof more than 350 c.c.and up to one litre - 0.05 -
/a Per kg. net.7 Per 100 kg.7F This meant an increase in the competitive advantagefor the imports concerned.7T The percentage change for these products is infinity; but relative to imported
goods the competitive position of the local products has been effectivelyreduced.
Source: Ministry of Finance: Research and Planning Department, March 1972.Revised Customs Import and Export Tariff, February 1969.Customs Tariff and Regulations: Negarit Gazette, Ethiopia, 9/12.
- 23 -
64. The small-scale enterprises provide the Ethiopian economy an import-ant training ground for the production of entrepreneurs who would move on fromthere to produce a competent class of businessmen that would ultimately managethe medium- and large-scale manufacturing sector of the Ethiopian economy.It is by encouraging the growth and expansion of the small-scale industriesthat this competent class of indigenous entrepreneurs could be produced.
CHAPTER 5
POLICY RECOMMENDATIONS
I. Getting the Priorities Right
65. It has been shown above that the Government did not fulfil manyof the proposals made in the Third Five Year Plan. This is due to a) lackof executive capacity, b) what the Government termed "lack of institutionalsupport" from the financial intermediaries, and c) lack of finance availableto the Government in the form of loans, credit and grants which were antici-pated when the proposals were made. There is now a great need for a prac-tical plan to deal with the numerous obstacles and bottlenecks discussed inChapter 4. Taking into account factors such as the limited executive capacityof the Government to implement many new proposals within a certain time in-terval, the scarcity of capital resources and the limited ability of thesmall-scale entrepreneurs to accept, and cooperate with new institutionalarrangements, we suggest the following as the order of priorities for dealingwith the above-mentioned constraints.
66. First, the Government should, as a matter of urgency, remove thosediscriminatory measures which at present work against the interests of small-scale enterprises. Second, it should try to provide institutional support,through commercial banks particularly, to tackle the problem of providingcredit facilities for the small-scale businessmen. Thirdly, if the provi-sion of institutional support through commercial banks is not feasible dueto the nature of the economy and the attitude of the small businessmen to-wards commercial banks, then consideration should be given to the provisionof institutional support through the establishment of a separate institutionby stages, beginning with a Loan Ftnd to provide credit facilities andother essential services.
II. Ending the Government Discrimination
67. In the interest of promoting rapid development and expansion ofsmall-scale enterprises it is desirable that the Government should giveserious consideration to the following proposals:
- 24 -
(a) If the Government decides to continue to grant the medium andlarge industries financial inducements and incentives as at present, thenit should provide the small industries with similar advantages.
(b) When reviewing the possibility of rationalizing import tariffs thegovernment should ensure that the rate and the coverage are uniform for smallas well as large scale industries.
(c) Those Government agencies having duty free import privileges oughtto grant a price preference to the products of small industries, the same asis given to those of large firms.
The ending of these discriminatory measures would greatly assist the small-scale enterprises to regain their importance in the economy. After all, theylearned to live with the other problems discussed above, and at the same timecontributed substantially to the GDP until the year 1966 when the enactmentof the Investment Laws and the promulgation of the Investment Proclamationstarted to discriminate heavily against them in favour of the large industries.
III. Provision of Institutional Support for Granting Credit Facilities
a. The Commercial Banks
68. After ending the government discrimination, the next problem tobe tackled in order of priority is the provision of institutional supportfor making credit facilities available to small-scale industries. About 34of the 40 establishments interviewed by the Bank Mission expressed the needfor both working and fixed capital.
69. To make loans and credit facilities available to small-scale enter-prises, one suggestion is that institutional support be provided throughcommercial banks. Since the commercial banks are reluctant to lend to smallenterprises, the banks would need Government support and guaranty to encouragethem to grant loans and credit facilities to the small businessmen. Govern-ment backing and support could take the form of special funds establishedto insure the commercial banks and/or other financial institutions againstthe risks of lending.
70. The Government and the financial institutions involved could deter-mine what the appropriate ratio of the guaranty fund to total insured lendingby the financial institutions should be in light of the expected percentageof defaults on loans. To cover adequately the financial needs of the small-scalebusinessmen, it is essential that both working capital and investment loansbe covered by insurance irrespective of whether they are for short-term,medium-term or long-term.
b.(1) Another Type of Institutional Support
71. An alternative approach to the provision of institutional supportthrough the commercial banks would be the establishment of a separate insti-tution or corporation that would be devoted entirely to providing loans and
- 25 -
credit facilities to small-scale enterprises. This institution would do forsmall-scale industries what the AID Bank does for the medium and large-scaleindustries. Due to the shortage of executive capacity and resources, it issuggested that this institution be set up in stages in order of priority.
72. The first priority is the establishment of a Loan Fund Divisionthat would be responsible for handling all the loans to the cottage and small-scale enterprises. It would have a project appraisal section to carry outall of the feasibility studies necessary before loans are awarded, and apost-loan supervision section that would undertake the supervision of loanexpenditure together with all the other extension services necessary to ensurethat the loans given have been most efficiently spent for the purpose forwhich they are awarded.
73. As in the case of institutional support through the commercialbanks, the Government would also set up a special fund for the Loan FundDivision which would enable it to grant adequate loans and credits facilitiesto the small-scale businessmen. The amount earmarked for the fund would bedependent not only on the resources available, but also on the amount of in-terest shown in the scheme by both the Government and other internationaldonors.
74. As soon as the Loan Fund Division is established, arrangements couldbe made to establish another important division -- entitled Management andEntrepreneurship Division -- that would provide considerable support to theLoan Fund Division. At present there is the Centre for Entrepreneurship andManagement which undertakes the training of management and entrepreneurshipfor all enterprises both large and small. The present CGE should be re-organized into two separate sections -- one for cottage and small-scaleindustries and the other for large industries.
75. The section for the cottage and small-scale industries (known asManagement and Entrepreneurship Division) would pay special attention to themanagement and entrepreneurial problems, of the small-scale sector that, byand large, differ from those of the large scale industries. The objectionto the present organization of the CEM is that the same courses and trainingfacilities are provided both for the small-scale sector and the large sectorwithout any modification to suit the special needs and developmental back-ground of each sector.
76. The Division would provide all the facilities for management andvocational training including adult education courses with special attentionto simple accounting procedures. The main emphasis in this division shouldbe to improve managerial skills and ability which are still lacking in theEthiopian businessmen. The expert personnel who would conduct the managementtraining courses, should have a thorough understanding of local conditionsand problems surrounding the entrepreneurs, and should plan the course tosuit these special conditions.
- 26 -
77. The Division would provide practical training courses in workshopswith a view to improving the skill and technical know-how. There is animmense lack of skilled labour available to entrepreneurs, and this sectioncould endeavour to increase the number of trained labour available to thesector. Technical assistance could also take the form of advisory servicesin marketing procedures and technique, product design and quality control.
(2) Industrial Estates Division
78. So far we have been neutral in our recommendations for eliminatingthe problems of the cottage and small industrial sector, but in actual factthe problems of the cottage industries differ from those of the small-scaleindustries in some respects. Although the Loan Fund Division as well as theManagement and Entrepreneurship Division discussed above can together pro-vide essential services to both sub-sectors, there are other special serviceswhich have to be provided to each sub-sector separately by a separate divi-sion. It is therefore suggested that the Industrial Estates Division beestablished to supplement the services given to small scale industries bythe Loan Fund and the Management and Entrepreneurship Divisions.
79. The principal function of this Division would be to promote the es-tablishment of industrial estates for small-scale industries, first startingin Addis Ababa where there is the largest number of such enterprises, and thenspreading out to the provincial towns such as Asmara and Dire Dawa, as soonas funds, technical experts and advisors become available. There are noindustrial estates in Ethiopia for small-scale industries. In 1971 a UNIDOadviser on small industries prepared a report, "Pilot Industrial Estate, AddisAbaba", in which he recommended the establishment of a pilot industrial estateat Addis Ababa with more industrial estates in other areas at a later date.
80. The main attraction for the establishment of industrial estatesfor small scale industries is that they would assist in providing factoryaccommodation for the industries and at the same time lead to the provisionof such important facilities as water, steam, electricity, toolshop, trans-port, banks, post office and dispensaries for first aid. The provision ofsuch facilities would tend to create an atmosphere that would bring themanagers and entrepreneurs of small-scale industries into contact with mod-ern conditions which are conducive to industrial thinking and development.By bringing together in an industrial estate different industrial establishmentswith common facilities and amenities provided for them, it becomes easier tointroduce and quickly spread modern techniques of production and marketingon both an individual and a collective basis. Close contacts among the indus-trial units could also lead to the formation of partnerships, limited liabilitycompanies and all other forms of organizations which are superior to sole-proprietorships in facilitating rapid industrial development through thepooling of financial and manpower resources. Furthermore, by being closelylocated near one another in an industrial estate, the various establishmentsstand in a better position to use each others goods and services, and thusto some extent become inter-dependent and complementary to one another.
- 27 -
(3) Cooperative Division
81. The establishment of an Industrial Estates Division should be fol-lowed by the establishment of a Co-operative Division which would providespecial services to cottage industries: the services would also be supple-mentary to those being provided by the Loan Fund Division and the Managementand Entrepreneurship Division. In each town or large village, each indus-trial group could be organized to form a cooperative society unit or branch.For example, the tailors in Nazareth can form a cooperative society oftailors, Nazareth branch, and similar branches can be established at AddisAbaba, Asmara and other towns. Likewise the pottery makers can form a co-operative society of pottery makers, Debre-Zeit branch and so on. Then thecooperative society branches in each industrial group can federate on anational level. Likewise the various federal cooperative societies canform themselves into a Union of Federal Cooperative Societies in Ethiopia.Chart 1 shows what the cooperative societies formation or hierarchy couldlook like.
82. The formation of cooperative societies for small enterprises wouldhelp the entrepreneurs and managers to improve their management skills throughexchange of ideas. The formation of the cooperative societies could facili-tate the holding of seminars and discussions on common current problems andmanagement practices. Coming together in cooperative societies may stimulateand improve attendance at the center for management training through informaldiscussion on the usefulness of the training center with those who have al-ready been to it. The Union of Federal Cooperative Societies can arrangeto hold industrial fairs annually or within any convenient time interval withthe object of exhibiting the products of various Federal Cooperative Societiesor Branch Cooperative Societies. This would facilitate considerable exchangeof knowledge among the proprietors. Each cooperative society can discuss andsurvey various ways of raising money to help themselves financially. Insome industrial groups the cooperative societies can arrange the marketingof their goods with a view to do away with the middlemen and get the bestprice for their products. As in the case of industrial estates, the forma-tion of cooperative societies for cottage industries could create a forumwhere actual and potential small entrepreneurs would exchange views andobtain information on common problems affecting new investment opportunities.
(4) Small Industries Development Corporation
83. At the end of, say, 4 years the suggestions (given in paragraphs71-82 above) concerning the provision of an alternative for institutional sup-port for the small scale sector in stages, would look like the situationshown in Chart 2. The four divisions - Loan Fund Division, Management andEntrepreneurship Division, Industrial Estates Division and Cooperative Divi-sion - may be merged into one institution or corporation entitled "SmallIndustries Development Corporation". One important merit of this program isthat by phasing the establishment of the Divisions over a five-year period,the problems of the shortage of executive capacity and financial resourcesare eased.
Chart I
Formation of Co-operative Societies by Cottage Industries
o~~~~~~~~~~~~~~~~~~~~~~~'oI
U.F.C.S. - Union of Federal Co-operative SocietiesF.C.S.T. = Federal Co-operative Society of TailorsF.C.S.P.M. = Federal Co-operative Society of Pottery MakersF.C.S.S. Federal Co-operative Society of ShoemakersF.C.S.F.M. - Federal Co-operative Society of Furniture MakersF.C.S.W. 3 Federal Co-operative Society of Weavers
Chart 2: Institutional Support for Small-Scale Industries
sIDC
0
CDAy~~~~~~~~~~~~~~~~t
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84. It would be advantageous to have one corporation (SIDC), sub-dividedinto various divisions that devote their attention to giving the cottage andsmall-scale industries all the necessary support they have been seeking. Thepresent organization in Ethiopia is such that you have various ministries anddepartments providing services to small-scale industries. For example, inthe Ministry of Commerce, Industry and Tourism there is a small-scale industriessection that looks after the registration of small enterprises. The CEMundertakes the training in management and entrepreneurship for all enterprisesboth large and small. Also there is a section of the Ministry for NationalCommunity Development and Social Affairs that looks after the cooperativesociety aspects of these enterprises.
85. The result of this kind of loose administrative arrangement isthat there is a serious lack of coordination of the activities assist thecottage and small-scale industries. Sometimes there is an overlapping of thework of the small-scale industries sections of the IMinistry of Commerce Indus-try and Tourism, CEM and CSO. Sometimes there are certain important omissions,such as failing to arrange and provide loan facilities for the small-scaleenterprises. The suggested new corporation (SIDC) would take over andcoordinate the various functions being performed already by CEM and theMinistries of Commerce, Industry and Tourism and National Community Develop-ment and Social Affairs in the field of small-scale enterprises.
86. The overall collective functions of the SIDC can be outlined asfollows:
(a) to stimulate and promote the desire of Ethiopians to becomeentrepreneurs in businesses that will contribute to economicdevelopment.
(b) to assist existing and prospective entrepreneurs -
(i) to prepare studies that can help determine whethertheir efforts are likely to be profitable andfeasible,
(ii) to prepare detailed plans for the effective runningof their businesses,
(iii) to determine what the financial commitments will beand what financial assistance may be required incertain cases.
(c) to advise existing and prospective entrepreneurs -
(i) on suitable training courses for themselves ortheir staff,
(ii) on means for ensuring that the most suitable plantand equipment are purchased,
- 31 -
(iii) on the suitable type and size of building and theinterior layout to obtain economy and efficiency,
(iv) on steps to raise and maintain the efficient use ofplant, equipment and employees,
(v) on establishing and maintaining a satisfactory per-sonnel policy,
(vi) on effective management and financial controlprocedures.
(d) to provide the necessary assistance to ensure as far aspossible new business development and expansion.
(5) Choice of One Institutional Support or the Other
87. We have outlined above two types of institutional support for small
scale industries: one type is through the commercial banks and the other is
through a separate institution (SIDC) set up by the Government. No matterwhat the choice, it is essential to bear in mind that before any loan is
granted the quality of the borrower and his proposed investment must be
investigated.
88. The rate of interest paid by the small scale businessmen for theloans and credits given to them by the commercial banks and guaranteed bythe Government or by the special financial institution (SIDC) should be thesame as that paid by medium and large industries.
89. Therefore lending to them at the same rate as is paid by the mediumand large industries implies granting a subsidy: however, small businessmenneed this subsidy in order to encourage the growth of an indigenous entrepre-neurial class that would ultimately control Ethiopia's manufacturing sector.A major problem of the small-scale industries is lack of access to capital.They are not able to borrow from the financial institutions at the existingrate (9-10 percent) of interest at which the large industries borrow from
commercial banks or the AID Bank. Whenever the small-scale industrialistsare able to obtain capital at present they usually pay higher rates than the
official 9-10 percent rate.
90. Although it has been recommended that the small-scale industria-
lists pay the same rate of interest as is paid by the medium and large in-dustrialists, it seems appropriate that they would also bear a small commissioncharge that would provide the guaranty fund with some income to cover a portion
of administration costs and losses arising from defaults. It is important toemphasize that prompt attention should be paid to devising an effective andadequate machinery for collection of debts. Experience in the AID Bank and inother countries has shown that debt repayment depends mainly upon the effec-tiveness of collection machinery rather than the ability and willingness of
- 32 -
debtors to pay. For instance, through the determined effort of the AID Bank,a total of $40.8 million of outstanding loan principal which it took over fromthe previous institutions was quickly reduced to only $9.2 million which was re-garded either as inactive or subject to court proceedings. This was anexcellent performance in debt collection. The success of either of the twotypes of institutional supports discussed above in organizing and stimulat-ing subsequent expansion of small industries depends very much on its debtrepayments collection efforts.
IV. Residual Policy Actions
91. In addition to the policy proposals discussed above that aim atproviding immediate and quick solutions to the problems, there are long-termpolicy actions to be taken. First, there is a great need to expedite theestablishment of the cluster training centers which the Government hadproposed in the Third Five-Year Plan to facilitate an increased supply ofskilled labor available to small-scale enterprises. Second, the Govern-ment could assist in setting up a marketing board under the control and super-vision of SIDC to make arrangements for the sale of products of small enter-prises in both the local and export markets.
92. Third, transport and infrastructural improvements will be neces-sary to enable the cottage and small scale industries located in the villageareas to have easy access to the markets in the urban areas, and to transformtheir production techniques from the slow manual method to the fast and auto-matic process and control.
93. Fourth, after the Loan Fund Division has assisted the small scalebusinessmen to develop and expand those projects which they have identifiedthemselves, then it should move on to the identification of new projects.That is to say, the Fund would act as a kind of industrial promotion boardwhich would identify new projects for small-scale businessmen, and then en-courage and assist them to develop the projects either on a sole proprietor-ship basis or on a partnership basis. The Division should maintain a listof suitable projects for the small scale sector.
94. Finally, the Central Statistical Office should move ahead with thecompletion of the second stage of the 1971 Census of Cottage Industries soas to provide information on capital investment, type and volume of produc-tion, type of tools and raw materials used. Similar surveys should also beconducted for the small-scale industries employing between 10 and 50.
- 33 -
APPENDIX TO THE ANNEX
SMALL-SCALE INDUSTRY IN ETHIOPIA:STUDY OF SELECTED INDUSTRIAL ESTABLISHMENTS
I. This study focuses attention on the economics of operation in 40small enterprises selected from 24 industrial groups. In 1971 these enter-prises:
- employed 875 persons
- had a productive capital (fixed and working) of Eth.$11.0 million.
- had fixed assets worth Eth$5.6 million.
- generated an output (exfactory) valued at Eth$15.3 million.
- contributed value added amounting to Eth$7.9 million, about 51percent of output.
- 89 percent of the output was sold locally and 11 percent sold asexports.
- consumed raw materials worth Eth$7.4 million.
- incurred wage and salary payments amounting to Eth$1.5 million.
- return to capital amounted to Eth$6.4 million.
- estimated depreciation costs (10 years of life assumed) wasEth$0.5 million.
- estimated operating profit (pretax) was Eth$5.9 million about38 percent of output.
II. For an Ethiopian dollar invested in productive capital there was:
- a return in output of Eth$1.30
- a net value added of Eth$0.51
- a pretax return of Eth$0.38.
III. Investment of a dollar in fixed assets resulted in:
- a gross output of Eth$2.73
- a net value added of Eth$1.41
- 34 -
IV. In the 40 establishments interviewed, an employed person:
- received a total payment of Eth$1,750
- required a productive capital investment of Eth$12,571
- utilized an investment of Eth$6,400 in fixed assets
- generated an output of Eth$17,486
- contributed Eth$9,028 to the value added.
V. It should be noted that the findings of this study relate to the
40 sample units. Although these were randomly chosen, the resultsneed to be interpreted with caution, particularly if comparison with other
sectors is to be made on matters such as capital intensity or labor produc-tivity. The figures given above are averages for all industry groups studied.In many cases these were found to contain wide inter- and intra-industryvariations which could be attributable to several factors, important amongwhich were differences in the efficiency of operation of various enterprises,differences in the product-mix and, in some cases, advantages or disadvant-
ages of location.
VI. Gross output per dollar invested in productive capital (fixed and
working capital) varied from a low of Eth$0.03 in mineral waters to a highof Eth$55.00 in a tailoring workshop. Tella (local) drinks ($30.27), andBerhane liquor factory ($5.36) are the other establishments which recorded
relatively high output per unit of capital invested.
VII. Value added per dollar invested in productive capital ranged from
Eth$0.02 in Filwoha mineral waters to Eth$27.50 in Tsedede Tailoring Work-
shop with Tella (local) drinks (Eth$18.16) reporting relatively higher addedvalue of manufacture per dollar invested in productive capital.
VIII. Furniture factory, shoe factory, motor vehicle garages and battery
industry reported relatively high contribution of labor in the value added
by manufacture.
IX. Many of the establishments in this study operated on a level well
below capacity. In not more than one-fifth of the establishments studied
was utilization of capacity over 70 percent. Underutilization of capacity
in most of the establishments was the result of bottlenecks in both produc-
tion and marketing.
X. The problems facing production were largely those of inadequate
finance (fixed and working capital), shortage of raw materials, imposition
of excise duties on inputs without adequate tariff protection, lack ofgovernment incentives, inexperienced entrepreneurship, and organization.The intensity of each input's scarcity varied from establishment to estab-
lishment.
- 35 -
XI. The problem with raw materials springs partly from the productionof domestic substitutes which are of low quality and not up to the standardof imported ones. The alternatives are to pay a high premium to acquire theimported materials, or to be satisfied with domestic substitutes or else sacri-fice the trade opportunities, depending on the market situation. Shortageof raw materials due to long delivery times resulting from the closure ofthe Suez Canal constitutes a second set of problems affecting raw materials.
XII. There was no institution to which the establishments in need ofcapital could go to obtain fixed and working capital loans or credits onshort- or long-term basis. The AID Bank paid attention only to medium- andlarge-scale enterprises. The commercial banks were not in a position togive loans and credit unless adequate collateral securities were offered -a condition which these enterprises found difficult to satisfy.
XIII. The selected establishments estimated their requirements of fundsfor expansion and continuation of production at Eth$11.0 million. The for-eign exchange component of this estimate totalled about Eth$1.8 million most-ly for capital equipment and for raw materials in a few cases.
XIV. The problems of marketing as distinct from that of production wouldbe attributed to such factors as limited size of operation, practically littleor no attention to the quality, no control over price, and a weak financialbase that restricts the scope for engaging in sustained sales promotion.
XV. The potential for exports had not been fully exploited due to thedeficiencies arising from inadequate knowledge of foreign markets and lackof Government export promotion measures for the sector.
- 36 -
APPENDIX TO THE ANNEX
SMALL-SCALE INDUSTRY IN ETHIOPIA:STUDY OF SELECTED INDUSTRIAL ESTABLISHMENTS
I. This study focuses attention on the economics of operation in 40small enterprises selected from 24 industrial groups. In 1971 these enter-prises:
- employed 875 persons
- had a productive capital (fixed and working) of Eth.$11.0 million.
- had fixed assets worth Eth$5.6 million.
- generated an output (exfactory) valued at Eth$15.3 million.
- contributed value added amounting to Eth$7.9 million, about 51percent of output.
- 89 percent of the output was sold locally and 11 percent sold asexports.
- consumed raw materials worth Eth$7.4 million.
- incurred wage and salary payments amounting to Eth$1.5 million.
- return to capital amounted to Eth$6.4 million.
- estimated depreciation costs (10 years of life assumed) wasEth$0.5 million.
- estimated operating profit (pretax) was Eth$5.9 million about33 percent of output.
II. For an Ethiopian dollar invested in productive capital there was:
- a return in output of Eth$1.30
- a net value added of Eth$0.51
- a pretax return of Eth$0.38
III. Investment of a dollar in fixed assets resulted in:
- a gross output of Eth$2.73
- a net value added of Eth$1.41
- 37 -
IV. In the 40 establishments interviewed, an employed person:
- received a total payment of Eth$1,750
- required a productive capital investment of Eth$12,571
- utilized an investment of Eth$6,400 in fixed assets
- generated an output of Eth$17,486
- contributed Eth$9,028 to the value added.
V. It should be noted that the findings of this study relate to the40 sample units. Although these were randomly chosen, the resultsneed to be interpreted with caution, particularly if comparison with othersectors is to be made on matters such as capital intensity or labor produc-tivity. The figures given above are averages for all industry groups studied.In many cases these were found to contain wide inter- and intra-industryvariations which could be attributable to several factors, important amongwhich were differences in the efficiency of operation of various enterprises,differences in the product-mix and, in some cases, advantages or disadvant-ages of location.
VI. Gross output per dollar invested in productive capital (fixed andworking capital) varied from a low of Eth$0.03 in mineral waters to a highof Eth$55.00 in a tailoring workshop. Tella (local) drinks ($30.27), andBerhane liquor factory ($5.36) are the other establishments which recordedrelatively high output per unit of capital invested.
VII. Value added per dollar invested in productive capital ranged fromEth$0.02 in Filwoha mineral waters to Eth$27.50 in Tsedede Tailoring Work-shop with Tella (local) drinks (Eth$18.16) reporting relatively higher addedvalue of manufacture per dollar invested in productive capital.
VIII. Furniture factory, shoe factory, motor vehicle garages and batteryindustry reported relatively high contribution of labor in the value addedby manufacture.
IX. Many of the establishments in this study operated on a level wellbelow capacity. In not more than one-fifth of the establishments studiedwas utilization of capacity over 70 percent. Underutilization of capacityin most of the establishments was the result of bottlenecks in both produc-tion and marketing.
X. The problems facing production were largely those of inadequatefinance (fixed and working capital), shortage of raw materials, impositionof excise duties on inputs without adequate tariff protection, lack ofgovernment incentives, inexperienced entrepreneurship, and organization.The intensity of each input's scarcity varied from establishment to estab-lishment.
- 38 -
XI. The problem with raw materials springs partly from the productionof domestic substitutes wqhich are of low quality and not up to the standardof imported ones. The alternatives are to pay a high premium to acquire theimported materials, or to be satisfied with domestic substitutes or else sacri-fice the trade opportunities, depending on the market situation. Shortageof raw materials due to long delivery times resulting from the closure ofthe Suez Canal constitutes a second set of problems affecting raw materials.
XII. There was no institution to which the establishments in need ofcapital could go to obtain fixed and working capital loans or credits onshort- or long-term basis. The AID Bank paid attention only to medium- andlarge-scale enterp,rises. The commercial banks were not in a position togive loans and credit unless adequate collateral securities were offered -a condition which these enterprises found difficult to satisfy.
XIII. The selected establishments estimated their requirements of fundsfor expansion and continuation of production at Eth$11.0 million. The for-eign exchange component of this estimate totalled about Eth$1.8 million most-ly for capital equipment and for raw materials in a few cases.
XIV. The problems of marketing as distinct from that of production wouldbe attributed to such factors as limited size of operation, practically littleor no attention to the quality, no control over price, and a weak financialbase that restricts the scope for engaging in sustained sales promotion.
XV. The potential for exports had not been fully exploited due to thedeficiencies arising from inadequate knowledge of foreign markets and lackof Government export promotion measures for the sector.
- 39 -
Cl) Cs) ~~~ ~~(3) (4) CS) (6) (fl (5) (9) CIia) (11) (12) (13)vo.ed yox56t Valse botor to Dopreods- PhAe-e I 11
In6aatrtal. Cottel o1teJa &ktpt Lout Adde Labor bltal tis Profit (l) * (2) (11207 112
120 2,09uKN 'w 3 000 7,SW5 00 3,W ,500 1,500 3,00OD 370 2,63D 5.000 1.50 0.90o 0.33esfulel Loos 35,000 15.0W 108.000 1.1,20 61,.88 2.600 60,1,00 3,1,20 58,980 50,000 2.16 1.29 0.03
i6i rcsaem .yft2D D 720 288 1,3 120 312 17 295 1,001.-80 1.08 0.2?
211 DU rdalDay Keena 31,000 5,000 21,0ODD 9.600 1 h. ,00 2,41CC 12,000 3,080 8,920 36,030O 0.66 0.1,0 0.16
215 1nNoLm , 0W 10,000 1,200 1,8 72D 300 4,20 380 Lo 11,,000 0.06 0.05 0.41i
Afrims Grain Kinl 1,000 1,500 2,61,0 1,056 1,58k 960 628, 380 2441 5,500 o.i,5 0.Ž8 0.60
Oil xRSt37 90,000 5,0D0 10,560 1,,221 6,336 720 5,6i6 91s 4,,676 15,00o 0.7 0 a4a 0.11Teashas Seokote 20,000 7,000 11,560 1,,624 6,936 1,1,40 5,2606 1,71,0 3,756 27,0O0D0.1,2 0.25 0.20
230 opio Liqur5 Factw 1,000,000, 200,000 I,O0W,000 500,0W0 500,0W0 42,OOD 458, oo0 85,330 372,670 1,2003000 0.83 0,41 0).06lbroaw. Liquor F&actry 217,000 200,000 2,1o,00,0o 1.200,00W 1.200,0WD 57,600 1,14,2,4,00 22,58 1,119,820 41,1,100 5.36 2.68 0.01,Is. Ltquoritclio hAre 250,00W 60,0OO0 300,0010 150,00W 10OOD 2i,,0W 1 26,000o 21,2,3 106,570 31 0,0O0 0.96 0.1.8 o.i6
23 ft&ebaNnerlW.s? 800,000 60,000 30,0. 2000 i S,o 1,0Wa 1,500 16,200 67,270 -51,070 560,0O0 0.03 0.0D2 0.10Liaoners Sot Drink. 300,000 S50,0W 50,000 20,0W0 30,00W 16,800 13,200 25,500 -12,300 350,0W0 0.11, 0. 08 0.56
235 ha,aJknaLoa.l Dik*Woe Folks Rich so 30 3,330 1,133 1,996 555 1,11, 7 1,4,36 itO 3,027 ta. 16 0.27
251 esnWoer o-operstivo
society 1,0W0 3.60 6,000 2,1,00 3,600 1,0W0 2,600 123 2,1,7 1,,600 1.30 0.28 0.27Iagsoein Wav-Ing FacWTor 6,0Wo 2,0W0 12,503 5,000 7,50D 41,320 3,180 530 2,650 8,ow I1.56 0.93 0.57
252 Uio500 300 i,0WG 800 1,200 600 600 1,2 558 800 2.50 1.50 0.50
25 flilad a heter Factryw 75,00W 360,000 2.00,00D 200,00W 200,0W 21,800 118,200 7,250 170,550 4,35,0W0 0.91 0.1,5 0.10Theodrce Knitting lodutry 300,0W 150,0OW 200,000 80,000 120,OOD 24,,ODO 96,0W0 26,500 69,50 W 450,000 0.14L 0.26 0.20lleh,s Ashab.btottInitlg 50,0W0 19,000 120,O0W 18,0W0 72,000 11,,1,0 57,600 4,,3510 53,50 69,0OW 1.73 1.01, 0.20
25 Ass6aRm Factory 50,0W 5D0,0W 150,O0D 60,030 90,0W 11,6,00 2.3200 1,670 38,530 103,000 i.50 0.90 0.52
sake Tailor2,0W0 2,00W 220,00W 110,0W0 110,0WD 12,000 68,0WD 370 67,630 4,0O0 55.00 27.50 0.j8Gosaco blohs Tailornog 13,0W0 36.0W 5,0W0 3,200 4,,S0o 1,330 3,1,7 I,1,0, 2,03) 49,9000 0.i6 0.05 0.?7
260 Ta,,ecte & teth PoStLftoie annin4 IS Psot Acty 31,0,00 275,000 1,750,0W0 875,0W0 875,000 67,3910 807,6,0 31,080 776,530 615,000 2.00 1.420 0.07
JoesicasShe Factory 35,000, 10,000 10,0W L,O0W 6,030 41,,00 1,203 3,020 -1,820 19,50,00 0.22 0.13 0.60fleets Shc. Factory 15,000 1,,800 31,68 12,670 19,010 1,03 18,6io 1, 303 17,310 15,800 i.60 0.96 0.C."
Frores Woo arts.NC 250,0OW 35,0DW 265,00W 16,000 159,DO 90,0OO 69,0OW 21,180 4.1,820 285,03u 0.92 0.55 0.56
C1 .% lteurffit,,r?Psnt7r 1,50D 900 3,600 .,000 2, 600 2,1,00 203 135 65 2,L,0O 1.50 1.06 0.5?pP-.rS.y Furnit,,reactory 500 500 3,600 1,1,10 2,1i60 1,800 360 52 308 1,00W 3.60 2.16 1. 63..ils WoUk, furoltare 150 100 35 140 210 60 150 I) 137 250 1.10 0.1 .25
330 hnILOgLtnited riatere250,00W 500,000 5O00,0W 250,00W 250,00W 19,800 230,800 25,830 206,570 750,030 0.66 0.33 0.1L.
Ai ~~~~~~~~6o,0 3o 00,000 100,0W0 W1,000 60,O0W 16,1,00G 1,3,600 6,0WU 37,600 360,O0W 0.27 0.16 -. '7?Tmwla Polish Factory 9,0W 3,000 25,0W0 5,0W 17,000 9,600 7,1,00 780 6,620 12,ODO 2.08 1.1,1 0'Q
3 e,Shanti-f t idc%BUD 21 0,ODO 50,000 150,0W0 60,000 90,0W0 13,200 76,500 18,0WO 58,800 060,000 0.57 0.j4 U..
350 ft-. M ', m-.F b1,0,0W 1O00,0 18D,ODD 72,0W0 108,0W0 36,500 71,500 3,830 67,620D 1,0.OD0 1.28 0.77 .3
bedsALbtL rkVVEW8 100,0W0 300,000 300,000 120,0W 180,0W0 25,500 154,,500 9,530 11,1,670 1.00.030 0.75 0.1, 0.11,Steel Cmpmy of Ktbiopie 600,0W0 2,oo,w6000,0W 6 3,000,000 3,W0 ,U0W,0W W29,= 2,171,0W0 51,0W0 2.120,0W0 2,600,00W 2.30 1,15 0.277
37h = Lh'-9,M-Lw - 460,000 200,OOD 118,0W0 1?,7,10 70,520 1,1,56 25,960 38,500 -12,51,0 650,030 cii8 0.10 0.63Tire fitreadlolg IMiatry 35,000 300,000 793,000 317,200 4,75,800 27,1,00 1,18,1LOD 3,520 4,1,4,880 335,00, 2.36 1.1,2 0.05
375 kn r l fLhers Akejuse Sortie 1,~0,000 26,000 1,1,600 100 41,150 32,280 9,2210 3,570 5,650 66,000 o.65 01.61, 0.77
TOMi 5L63a93 5i342a83 I5.339.8W 7.371,.234, 7.965.606 1,529,335 6.,436,271 495L35 5.91,0,9$2 10.979.56 0 571 2±19
3l,r, Obtained fro. direct interviews ..dS In June 1972.