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Unido Publication 2019 14100685

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Supporting the improvement

of the development strategy and policy for

ETHIOPIA’S TECHNOLOGY-BASED
CHEMICAL INDUSTRY

INCLUSIVE AND SUSTAINABLE INDUSTRIAL DEVELOPMENT


Disclaimer

Copyright © 2019 United Nations Industrial Development Organization


The designations employed, descriptions and classifications of countries, and the presentation of this
document do not imply the expression of any opinion whatsoever on the part of the Secretariat of the
United Nations Industrial Development Organization (UNIDO) concerning the legal status of any coun-
try, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundar-
ies, or its economic system or degree of development.
The responsibility for opinions expressed rests solely with the authors, and publication does not con-
stitute an endorsement by UNIDO of the opinions expressed. Although great care has been taken to
maintain the accuracy of information herein, neither UNIDO nor its Member States assume any respon-
sibility for consequences which may arise from the use of the material.
Designations such as “developed”, “industrialized” and “developing” are intended for statistical con-
venience and do not necessarily express a judgement about the state reached by a particular country
or area in the development process.
The mention of firm names or commercial products does not imply endorsement by UNIDO.
Material in this publication may be freely quoted or reprinted, but acknowledgement is requested,
together with a copy of the publication containing the quotation or reprint.
Abbreviations

AACCSA Addis Ababa Chamber of Commerce and Sectoral Association


AfDB African Development Bank
CCIIDI Chemical and Construction Inputs Industry Development Institute
CIDD Chemical Industry Development Directorate
COMESA Common Market for Eastern and Southern Africa
CSA Central Statistics Agency
ETB Ethiopian Birr
FDI Foreign Direct Investment
GDP Gross Domestic Product
GTP Growth and Transformation Plan
ICT Information and Communication Technology
IDSP Industrial Development Strategic Plan
ILO International Labour Organization
IMF International Monetary Fund
ISO International Organization for Standardization
MOI Ministry of Industry
MOST Ministry of Science and Technology
MSMEs Ministry of Micro, Small and Medium Enterprises
NCS National Competency Standards
NTRM National Technology Roadmap
OECD Organization for Economic Co-operation and Development
R&D Research and Development
SDG Sustainable Development Goal
SMEs Small and Medium-sized Enterprises
STI Science Technology and Innovation
UN United Nations
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNESCO United Nations Educational, Scientific and Cultural Organization
UNIDO United Nations Industrial Development Organization
USD United States Dollars
WHO World Health Organization
WTO World Trade Organization
Contents

CHAPTER I: OVERVIEW OF ETHIOPIA’S CHEMICAL INDUSTRY 8

1. Introduction 9
  1.1 Demography & Human Development 10
  1.2 Infrastructure 11
  1.3 Economy 12
  1.4 Foreign Investments 15
  1.5 Manufacturing Sector 17

2. Chemical Industry 18
  2.1 Introduction & General Overview 19
  2.2 Chemical Industry in Ethiopia 21

3. Value Chain & Key Issues 29


  3.1 Value Chain: An Overview of the Chemical Industry 29
  3.2 SWOT Analysis 31
  3.3 Key Issues & Challenges 34
  3.4 Chemical Industry - Specific Issues 40

CHAPTER II: SECTOR SELECTION AND PRIORITIZATION IN ETHIOPIA’S


CHEMICAL INDUSTRY 44

1. Introduction 45

2. An Overview of Ethiopia’s Infrastructure 47

3. Industry & Sectoral Level Assessment 48


  3.1 Potential of Value Creation 49
  3.2 Potential of Employment Creation 51
  3.3 Potential for Exports of Ethiopia’s Chemical Products 53

4. Dynamism and Revealed Comparative Advantage Analysis 60

5. Assessment of Production Capacity and Export Competitiveness:


Chemical Sub-Sectors of Ethiopia 63

1
  5.1 Assessment of Basic Chemicals, Except Fertilizers 63
  5.2 Assessment of the soap, cleaning and cosmetic preparations sub-sector 67

6. General Assessment of the Potential of the Chemical Sub-Sector: Logical Matrix 69


  6.1 Soaps, Cleaning & Cosmetics Preparations 69
  6.2 Basic Chemicals (except fertilizers) 71
  6.3 Fertilizers & Agro-chemicals 73
  6.4 Cement 74
  6.5 Bio-Mass 75

CHAPTER III: R&D AND NATIONAL INNOVATION SYSTEM IN ETHIOPIA 78

1. Introduction 79

2. International Experience: National Innovation System 82


  2.1 Industry Alliances 83
  2.2 Industry-University/Research Institution Interactions 85
  2.3 Technology Diffusion 87

3. The Republic of Korea ‘Miracle’:


Helix of Industry-University-Research Institution 87

4. Ethiopia: Science Technology and Innovation (STI) Policy (2012) 92

5. National Innovation System for Ethiopia and the Chemical Industry 96


  5.1 Setting Up R&D Priorities and Capacities 97
  5.2 Public Expenditure on R&D Activities 98
  5.3 Institutional Arrangements for Public Research & Development 98
  5.4 Policy Instruments for Research & Development 99
  5.5 Technological Readiness and Innovation Capacity 100
  5.6 Technology Support and Regulatory Agencies 101
  5.7 Institutional Arrangements for Financing Technological Innovation 101
  5.8 Science, Technology and Innovation in Regional Economic Treaties 102
  5.9 African Development Bank (AfDB) 103
  5.10 Multilateral Agencies 104

6. Conclusion 104

2
CHAPTER IV: DEVELOPMENT STRATEGY FOR TECHNOLOGY-BASED
CHEMICAL INDUSTRY IN ETHIOPIA 108

1. Key Challenges 109


  1.1 Chemical Industry 110
  1.2 Government 111
2. Recommendations for a Development Strategy for Ethiopia’s Chemical Industry 113
  2.1 Substantive Measures for a Technology-based Chemical Industry 113
  2.2 Policy Recommendations 116

CHAPTER V: RECOMMENDATION FOR THE FEDERAL DEMOCRATIC REPUBLIC


OF ETHIOPIA’S CHEMICAL TECHNOLOGY ROADMAP 126

1. Background of Chemical National Technology Roadmap (NTRM) 127

2. Introduction 129
  2.1 Chemicals as a milestone of the manufacturing sector 129
  2.2 General Information on Ethiopia 130
  2.3 Chemical Industry of Ethiopia 131

3. Overall Review and Recommendations 133

4. Review and Recommendation of NTRM Deployment of Strategic Produts 138


  4.1 Review of Alkali Chemicals Group 138
  4.2 Chemical Products (Soap & Detergent Industry, Pulp and Paper Industry) 147
  4.3 Petrochemicals (PVC, PE, PP) 160

5. Annex 169

Bibliography 173

3
Figures

Figure 1 GDP Growth Rate 13


Figure 2 GDP Composition by Sector (2016) 13
Figure 3 Chemical industry & products 20
Figure 4 Occupation distribution in chemical sector (%) 22
Figure 5 Chemical industry & products 29
Figure 6 Rankings on Doing Business topics - Ethiopia 35
Figure 7 Quality of infrastructure: Comparison with selected comparators and income groups 47
Figure 8 The potential of value added creation across development stages 49
Figure 9 The potential of employment generation across development stages 51
Figure 10 Terms of trade (chemical sub-sectors of Ethiopia, 2010-2016) 58
Figure 11 Dynamism and revealed comparative advantage (RCA) in 2016 61
Figure 12 Capability of generating value added 64
Figure 13 Capability of generating manufacturing employment 64
Figure 14 Capability of manufacturing export 65
Figure 15 Unit Labour Costs (ULC) 65
Figure 16 Labour productivity, wages and competitiveness 66
Figure 17 Capability of generating value added 67
Figure 18 Capability of generating manufacturing employment 67
Figure 19 Capability of manufacturing export 68
Figure 20 Unit Labour Costs (ULC) 68
Figure 21 Labour productivity, wages an competitiveness 69
Figure 22 Chemical Process for Biomass Energy 77
Figure 23 Oil, Natural gas & Chemicals Cluster 118
Figure 24 Hierarchical diagram of work functions of the NCS programme 136
Figure 25 Production Process of Caustic Soda and Chlorine by Electrolysis 145
Figure 26 Schematic Diagram for Soap Manufacturing by Saponification 151
Figure 27 The continuous soap manufacturing process and glycerine refining system 152
Figure 28 Schematic Diagram for a Semi-boiled Soap Manufacturing System 153
Figure 29 Common transformations of vegetable oils in the production of surfactants 157

Tables

Table 1 Ethiopia: Health Profile 10


Table 2 Ethiopia: Demographic Profile 10
Table 3 Ethiopian Infrastructure Sector: Overview of Achievements & Challenges 11
Table 4 Business Setup Procedure: Doing Business in Ethiopia (2016) 15
Table 5 Foreign Direct investment in Ethiopia 16
Table 6 Status of Medium & Large Enterprises in Ethiopia (2012-13) 17
Table 7 Rev.3.1 Code 24: Manufacture of Chemicals and Chemical Products 19
Table 8 Public-sector Enterprises in the Chemical & Chemical Products Industries 23
Table 9 Major Chemical Imports in Ethiopia 24
Table 10 Income Tax Exemption for Chemical & Chemical Products 27
Table 11 Tax Regime 28

4
Table 12 SWOT Analysis of the Chemical Industry in Ethiopia 31
Table 13 Price, Interest Rate and Exchange Rate Pattern in Ethiopia (1998-2010) 38
Table 14 Ethiopia’s major import partners for trade (chemical sub-sectors in 2016) 53
Table 15 Ethiopia’s trade balance (chemical sub-sectors) 55
Table 16 The logical matrix 70
Table 17 Status of Imports of Basic Chemicals 71
Table 18 Basic Chemicals: Availability of Raw Materials & Application (2015) 72
Table 19 Fertilizers & Agro-chemicals Application in Agriculture in Ethiopia 73
Table 20 Total Consumption (2013-2011) (in MT/annum) 74
Table 21 Cement Production, Imports and Consumption in Ethiopia (in million tonnes) 75
Table 22 Biomass Potential and Reserve in Ethiopia 76
Table 23 General Characteristics of the Chemical Industry in industrialized Countries and Ethiopia 80
Table 24 Comprehensive laws for R&D collaboration and non-comprehensive laws 90
Table 25 Major R&D Collaboration Programs & Main Characteristics 91
Table 26 Composition of Ethiopia’s GDP (% value added) 128
Table 27 Chemical industry and related industries 129
Table 28 General information on Ethiopia 131
Table 29 Organizational Structure of MoI 132
Table 30 Major imported chemicals and chemical products (2005~2011) 132
Table 31 Import value of chemicals and chemical products (USD million) 133
Table 32 Value chain of petrochemical and development strategy 135
Table 33 Grouping of strategic chemicals and chemical products 138
Table 34 Europe Chlorine Application 140
Table 35 Europe Caustic Soda Application 140
Table 36 Supply Demand Chain of Caustic Soda in Ethiopia 141
Table 37 Global Application of Soda Ash 143
Table 38 Glass Factories in Ethiopia 144
Table 39 Increase in Demand for Alkali Chemicals and Related Chemicals 146
Table 40 Summary of Review of Alkali 147
Table 41 Market size of soap and detergents industry in Ethiopia 150
Table 42 Global prospects of the paper industry by segment and region 155
Table 43 The amount of pulp and paper commodities imports and costs 156
Table 44 Pulp and paper demand capacity in Ethiopia compare to world and Africa 156
Table 45 Recycling of Paper in the Republic of Korea 158
Table 46 Summary of review for the soap and detergents industry 159
Table 47 Summary of review for the paper and pulp industry 160
Table 48 European demand for plastics converters by polymer type (2016) 162
Table 49 Plastics in Flexible Packaging 162
Table 50 Plastics consumption in Ethiopia 163
Table 51 Per Capita Plastics Consumption 163
Table 52 Processes in the Plastics Industry 164
Table 53 Ethiopia’s imports of plastics in a primary form 164
Table 54 Global PVC Market Estimation 165
Table 55 Projected Demand for PVC Resin 165
Table 56 Cracking method and olefin ratio 166
Table 57 Summary of review for the petrochemical industry 167
Table 58 Biomass potential and reserve in Ethiopia 168

5
Preface

Ethiopia has become a fast-growing African country with high economic growth since 2007.
In light of its economic achievement, the Government of Ethiopia produced an Industrial De-
velopment Strategic Plan (IDSP) (2013-2025) to achieve structural change in the economy by
increasing the industrial sector share and transform Ethiopia into a middle-income country by
2025. Ethiopia is now in the third year of the 2nd Growth and Transformation Plan.

As the economy has grown, the chemical industry is increasing its importance in Ethiopia as
a core industry to provide inputs for other domestic industries like textile, leather, food and
agriculture, and accordingly strengthen inter-industrial linkages. However, even though Ethio-
pia has had some notable progress until now including the design of the current Chemical
Technology Roadmap, the chemical sector in Ethiopia is in still an infant stage suffering from
lack of finance, shortage of skilled labor force and out of date technology.

Ethiopia has formulated its development strategy and policy for the chemical sector along
with the development objectives and goals. It seems, however, not to be at an implementable
level and lacks clear linkages between objectives, strategies and project. In this regard, it is
required to improve their current chemical development strategy and policy in a more feasible
and future-oriented way to support the rapidly growing economy of the country.

Following the suggestions from the Ministry of Trade and Industry of Ethiopia, this report cov-
ers researches and policy recommendations for the improvement of the development strategy
for Ethiopia’s technology-based chemical industry; Analysis of the current development status
and policy framework in Ethiopia’s chemical industry, Research on sector selection and pri-
oritization in Ethiopia’s chemical industry, R&D policies with its international experience and
National Innovation System in Ethiopia, Development strategy for technology-based chemi-
cal industry of Ethiopia, and Recommendation for the Ethiopia’s Chemical National Technol-
ogy Roadmap. Our specialized chemical experts gathered the initial data and then collected
primary data by undertaking field-studies, interviews, and local market analysis in chemical
industry in Ethiopia. Our work was a combination of primary, secondary research data and co-
operation with the relevant government officials in Ethiopia. Nonetheless, it must be stressed
that there were limitations and difficulties due to the lack of available data in Ethiopia.

We hope that this report will contribute to Ethiopia chemical industry’s successful transformation
towards technology-oriented development to meet the domestic demands from the rapidly
growing economy and compete with the foreign products. UNIDO is pleased to accompany the
country in their future endeavour of designing detailed action plans to realize the recommen-
dations addressed in this report.

6
Acknowledgements

This report contains the results produced under the project of "Support to the Government
of Ethiopia on the improvement of its strategy and policy for the development of technolo-
gy-based chemical industry" of UNIDO (project ID 170052).

This report was prepared by UNIDO under the overall guidance of Cecilia Ugaz Estrada, Director
of the Department of Policy, Research and Statistics of UNIDO. Advice on technical and opera-
tional issues was provided by Michele Clara, UNIDO Senior Coordinator to ensure well-man-
aged project implementation during the whole process. The project was launched by Seung
Chul Oh, UNIDO Senior Industrial Policy Advisor and managed by Jaehwan Jung, UNIDO Senior
Industrial Policy Expert. Kyung Hyun Park, International Consultant and Yoonseung Choi, Team
Assistant from UNIDO provided support during the production of the report and this publica-
tion. Also from UNIDO Charles Fang Chin Cheng, Expert on Industrial Development provided
valuable data for comparative analysis, Camelia Soare, Research Assistant supported for ex-
tensive administrative process and Niki Rodousakis, Senior Research Assistant provided edi-
torial assistance in finalizing the report.

A team of distinguished experts from outside who consisted of Pradhumna Dutt Kaushik, Pro-
fessor of the Institute of Information Technology & Management, GGS Indraprastha University,
New Delhi and Do Hyun Nam, Professor of the Department of Chemistry, Sogang University,
Seoul greatly contributed to the production of this analysis by drafting each chapter with
strong passion and commitment.

We would like to take this opportunity to express our special thanks to the Ministry of Trade,
Industry and Energy of the Republic of Korea and Korea Research Institute of Chemical Technol-
ogy for their generous financial contribution. We are also grateful for the continued support
from the Embassy and Permanent Mission of the Republic of Korea in Vienna, Austria.

Our sincere gratitude also extends to the policymakers of the Ministry of Trade and Industry
and Ministry of Science and Technology of Federal Democratic Republic of Ethiopia and the ex-
perts of Chemical and Construction Inputs Industry Development Institute who have provided
support and inputs from the outset of this project.

7
CH A PTE R I

OVERVIEW OF ETHIOPIA’S CHEMICAL INDUSTRY

1. Introduction
2. Chemical Industry
3. Value Chain & Key Issues

8
1. Introduction

Ethiopia, which is officially known as the Federal Democratic Republic of Ethiopia, is located
in the Horn of Africa. It is the second most populous nation in Africa, with over 82 million
inhabitants, and the tenth largest African nation with a land area of 1,126,829 km2. It is the
world’s 27th largest country, comparable in size to Bolivia. The country lies between latitudes
3° and 15°N, and longitudes 33° and 48°E. Ethiopia, whose capital city is Addis Ababa, is a
landlocked nation bordering Eritrea in the north, Djibouti and Somalia in the east, Sudan and
South Sudan in the west, and Kenya in the south. It is thus also the most populous landlocked
nation in the world.

The governance system consists of a federal structure, comprising the federal government,
nine regional states and two chartered cities. It has a written constitution, with a bi-cameral
parliament composed of the House of People’s Representatives and the House of Federation.
The term of house members is five years.

Industry emerged as an economic activity in Ethiopia at the turn of the 20th century. The estab-
lishment of a strong central government, the expansion of cities associated with the installa-
tion of railways and the strengthening of foreign relations increased the demand for imported
manufacturing commodities. This provided stimulus to the establishment of import-substitut-
ing factories. As a result, modern manufacturing enterprises began to emerge in the 1920s1.
After a brief disruption in the Second World War period, Ethiopia’s manufacturing sector re-
gained momentum in the 1950s. During this period, a number of new industries contributed
significantly to the development of the national economy. In that period, a comprehensive
plan was developed to stimulate and guide the country’s industrial and economic develop-
ment.

Ethiopia has become a fast-growing, non-oil-dependent African economy since 2007. It has
experienced more than a decade of high economic growth with an average growth rate of 8.1
per cent in GDP per capita, and an average economic growth rate of 11 per cent over the last
decade, repositioning the country in the top five countries in the world in terms of GDP growth
rate. Driven by global competitiveness, the Government of Ethiopia prepared an Industrial
Development Strategic Plan (IDSP) (2013-2025). The IDSP’s overall goal is to accelerate the
country’s economic transformation by advancing industrialization. It aims to achieve structur-
al change in the economy by increasing the industrial sector share as a percentage of GDP from
currently 13 per cent to 27 per cent by 2025, as well as increasing the manufacturing sector’s
share from currently 4 per cent to 17 per cent by 2025. The Plan became the source for develop-
ing a national manufacturing strategy intended to increase the share of industrial output from
currently 33 per cent to 63 per cent, transforming Ethiopia into a middle-income country by
2025. It is now in the third year of the 2nd Growth and Transformation Plan. The industrial and
manufacturing sectors are expected to lead and underpin inclusive and sustainable economic

1
In 1927, about 25 factories for wood, clay, tanneries, soap, edible oil, ammunition, brewery, tobacco, cement, and grain
milling were set up in some major cities. Most of the factories were owned by foreigners. Between 1928 and 1941, over ten
new manufacturing plants were established in Ethiopia by Armenian and Greek settlers.

9
growth. The IDSP strategy of economic development can be summed up as a “two-pronged
strategy” based on export promotion and import substitution.

  1.1 Demography & Human Development

Ethiopia is a predominantly agricultural country. More than 80 per cent of the population lives
in rural areas, i.e. are in the early stages of a demographic transition. The infant, child and
maternal mortality rates have dropped sharply over the past decade, with the total fertility
rate declining more slowly and the population continuing to grow. The rising age of marriage
and the increasing proportion of women who are remaining single have contributed to the
reduction of the fertility rate. While the use of modern contraceptive methods among married
women increased significantly from 6 per cent in 2000 to 27 percent in 2012, the overall rate
is still quite low.

Table 1 Ethiopia: Health Profile


1 Population (2017) 105,350,020
2 Birth Rate (2017) 36.5 birth /1000 population
3 Death Rate (2017) 7.7 deaths/1000 population
4 Infant Mortality Rate (2016) 49.6 deaths/1000 live births
5 Maternal Mortality Rate (2015) 353 deaths/100,000 live births
6 Fertility Rate (2017) 4.99 births/woman
Source: CSA

Ethiopia’s rapid population growth is placing increasing pressure on land resources, intensify-
ing environmental degradation and vulnerability to food shortages. With over 40 per cent of
the population below the age of 15 and a fertility rate of over 5 children per woman (and even
higher in rural areas), Ethiopia must address its family planning needs if it is to achieve the
age structure necessary to reap a demographic dividend in coming decades.

Table 2 Ethiopia: Demographic Profile


1 Sex Ratio (2016) 0.99 men/women
2 Median Age (2017) 17.9 years
3 Population Growth Rate (2017) 2.5 per cent
4 Mother’s Mean Age at Birth (2016) 20 years
5 Literacy Rate (2017) 49.1 per cent
6 School Life Expectancy (2017) 8 years
7 Child Labour (between 5-14 years) (2005) 53 per cent
8 Net Migration Rate (2017) -0.2 migrants/1000 population
Source: CSA

10
  1.2 Infrastructure

While the Ethiopian government has been formulating policies to support specific industries,
the federal budget, for the better part of the past 20 years, has been framed around infrastruc-
ture policies that are more “horizontal” in nature. Infrastructure contributes nearly 0.6 per
cent to Ethiopia’s annual per capita GDP over the last decade. As already mentioned, Ethiopia
is a predominantly rural country. Addis Ababa is by far the largest urban centre in the country.
The population and agricultural activity are concentrated in the central and northern areas of
the country, and the far south and east are only sparsely inhabited. Ethiopia’s infrastructure
development is centred in Addis Ababa and spreads outward from there. The existing litera-
ture indicates that infrastructure constraints are responsible for an estimated 50 per cent of
the productivity barriers Ethiopian firms face.

Table 3 Ethiopian Infrastructure Sector: Overview of Achievements & Challenges


Sectors Achievements Challenges
Improving air traffic control at
One of the top three
Addis Ababa Bole Int. Airport.
Air Transport airline carriers in Africa.
Developing domestic air
Major regional hub.
transportation.
Modernize the regulatory
96% of rural Ethiopia
framework. Award a second
ICT is covered by the
mobile license. Rebalance
telecom network.
ICT tariffs in line with costs.
Launch large investment
Power programme. Address
under-pricing of power.
Major investment required
in trunk network. Improve rural connectivity.
Surface Transport
Sound road fund in place Concession railway.
for maintenance.
Develop additional water
Water Resources storage. Develop viable
area for irrigation.
Water & Sanitation Rapid expansion coverage. Address utilities inefficiencies.
Source: UNIDO elaboration based on information from various referred literature listed in the bibliography

The road network expanded from 26,550 km in 1997 to 53,997 km in 2011. Rural road acces-
sibility is still very low. According to a GIS-based analysis, only 10 per cent of Ethiopia’s rural
population lives within two kilometres of an all-weather road. As approximately 76 per cent of
Ethiopia’s population lives in rural areas, the degree of isolation is quite high.

11
Ethiopia is a landlocked country, and its rail corridor is at the same time its freight link with the
rest of the world, including its neighbours. Ethiopia depends on the Port of Djibouti to process
95 per cent of its trade. The total length of the country’s railway is 759 km, of which 754 km
run between the two terminal stations at Sebeta and the Port of Doraleh. The remaining five
kilometres are used for shunting operations. A total of 666 km of the railway line is in Ethio-
pia, while 93 km is in Djibouti. The rail corridor between Addis Ababa and the Port of Djibouti
has deteriorated and fallen into disuse due to better road connectivity and the cheaper cost
of transportation. Due to intense competition with the road sector and relatively low volumes
of freight traffic overall, the Ethiopian government has generally failed to raise adequate rev-
enues to finance major rail corridor development and rehabilitation programmes.

From a very low base, access to improved water and sanitation is rising rapidly. The majority
of Ethiopia’s population lacks access to clean water and sanitation. Close to 68 per cent use
surface water for drinking purposes and 62 per cent practice open defecation, representing
a major public health risk. The water deficit is largely explained by the very low reliance on
boreholes (10 per cent in Ethiopia compared with 38 per cent for the benchmark). The poor
sanitation is largely explained by the low coverage of traditional latrines (35 per cent in Ethio-
pia compared with 48 per cent for the benchmark).

The country is set to quadruple its power generation capacity once the Grand Ethiopian Re-
naissance Dam on the Nile becomes fully operational. As one of the largest hydroelectric pow-
er stations in the world, the dam will generate 6,000 MW. Ethiopia currently has one of the
most underdeveloped power systems in sub-Saharan Africa. Its installed generation capacity
is less than 10 MW per million population. Power consumption at 33 kWh per person per year
and access to electricity at 12 per cent is below the already low benchmark for LICs in Africa.
Urban access to electricity is actually exceptionally high at 86 per cent. Ethiopia ranks second
behind the Democratic Republic of Congo in terms of potential hydropower reserves, and has
the capacity to become Africa’s largest exporter of power.

  1.3 Economy

Despite fast growth in recent years, Ethiopia has a low GDP per capita worldwide, and the
economy is characterized by a number of serious structural problems. Ethiopia has the lowest
level of income inequality in Africa (and in fact, one of the lowest in the world), with a Gini coef-
ficient comparable to that of Scandinavian countries. Yet despite the progress that has been
made towards eliminating extreme poverty, Ethiopia remains one of the poorest countries in
the world, due both to rapid population growth and a low starting base. Changes in rainfall as-
sociated with worldwide weather patterns resulted in the worst drought in 30 years in 2015-16,
creating food insecurity for millions of Ethiopians.

Ethiopia’s economy experienced strong, broad-based growth averaging at 10.5 per cent per
annum from 2005/06 to 2015/16 compared to the regional average of 5.4 per cent. The expan-

2
The benchmark level for Low Income Countries in Africa
3
Ibid.

12
sion of services and agriculture accounted for most of this growth, with manufacturing growth
remaining modest. Private consumption and public investment explain demand-side growth
during this period, the latter assuming an increasingly important role. Due to the higher eco-
nomic growth, a positive trend in poverty reduction was visible in both urban and rural areas.

Figure 1 GDP Growth Rate

Source: UNIDO elaboration

The current GDP per capita is USD 830 (current prices) against USD 2071 (PPP). However, Ethio-
pia remains among the 20 poorest countries of the world. The country’s economic growth is
struggling to keep pace with the rising population; and the country spends more on importing
goods than it earns from exports. Inflation has caused rising costs of living. In 2000, 55.3 per
cent of Ethiopians lived in extreme poverty. By 2011, however, this Figure decreased to 33.5 per
cent. According to a World Health Organization (WHO) study, nearly 40 per cent of Ethiopia’s
population lived below the international poverty line, earning less than one dollar per day.
Recently, the economic growth rate has declined to about 8 per cent due to the contraction of
the global economy.
Figure 2 GDP Composition by Sector (2016)

Source: UNIDO elaboration

13
Agriculture accounted for nearly 36 per cent of GDP and almost 80 per cent of exports in 2016.
Eighty per cent of the population are employed in agriculture. Ethiopia is often ironically re-
ferred to as the "Water Tower" of Eastern Africa because of the many rivers (14 major rivers)
that run through the high tableland. It also has the largest water reserves in Africa, but only
few irrigation systems to make use of them exist. Only 1 per cent of the water is used for power
production and 1.5 per cent for irrigation purposes. Consequently, agricultural productivity
remains low, and frequent droughts continue to beset the country’s economy.

The 10 per cent annual economic growth in the last decade is indicative of the effectiveness of
the government’s policies. Despite these improvements in the economy, the social structure is
weak and the urban and rural population remains in abject poverty. Other economic activities
such as marketing, processing, and agricultural exports depend considerably on agricultural
output. The majority of agricultural production is carried out by small-scale farmers and small
enterprises. The large share of commodity exports can be attributed to the small agricultural
cash-crop sector. Principal crops include coffee, pulses (e.g. beans), oilseeds, cereals, pota-
toes, sugarcane and vegetables. Export shares are dominated by agricultural commodities,
and coffee is the largest source of foreign exchange earnings. Ethiopia is Africa’s second big-
gest maize producer and has the largest livestock population in Africa.

Ethiopia’s industrial sector accounted for 17 per cent of GDP. This growth can primarily be at-
tributed to the country’s construction boom. Manufacturing has also been crucial. Ethiopia
emerged as the third largest cement producer of Africa. This sector grew at 11 per cent annually
and manufacturing exports increased more than eleven-fold. This was largely due to the in-
creasing export earnings of the footwear and apparel industries. One reason for this increase
is the strong linkages of these industries with the agricultural sector as they use inputs from
livestock and cotton sectors. As both the footwear and apparel industries are labour intensive,
they have absorbed labour from the agricultural sector. They have significant export potential
and low entry barriers. Ethiopia’s industrial sector nonetheless ranks below the African aver-
age in terms of diversification, export competitiveness, productivity and technological upgrad-
ing.

Mining also contributes to the share of industrial exports. By 2015, Ethiopia had produced
9,000 kg of gold, equivalent to USD 343 million in export earnings. The government aims to
increase its gold production to 25,370 kg by 2019. The country only has one mine, Lega Dembi,
which is owned by Midroc Gold, a Saudi company. The Ethiopian subsoil furthermore contains
precious stones, copper, potash and tantalum. Tantalum is a rare earth metal used in the
production of electronic parts.

The government is currently implementing the second phase of its Growth and Transformation
Plan (GTP II). GTP II, which runs until 2019/20, aims to continue the development of the coun-
try’s physical infrastructure through public investment projects and to transform Ethiopia into
a manufacturing hub. The Plan’s targets include an annual average GDP growth rate of 11 per

14
cent and an average growth rate of the industrial sector by 20 per cent, thereby creating more
jobs in the sector.

Services accounted for 47 per cent of GDP. The major push in services came from the expanding
telecom industry. However, the telecom service is government controlled in the assumption
that the private sector has no incentive to expand these services to rural areas. Ethiopian
Airlines, a state-owned enterprise, is one of the few airlines in Africa to have contributed posi-
tively to the government budget. Tourism is another major industry, accounting for 33 per cent
of total export earnings. Other services include banking and investment.

Ethiopia’s foreign exchange earnings are dominated by the services sector. Ethiopian Airlines,
which is state-run, is one of the major sources of foreign exchange earnings. While coffee re-
mains the largest source of foreign exchange earnings, Ethiopia is diversifying its exports, and
commodities such as gold, sesame, khat, livestock and horticulture products have gained in
significance. Manufacturing represented less than 8 per cent of total exports in 2016, but this
Figure is expected to rise considerably in future years due to a growing international presence.

  1.4 Foreign Investments

The Ethiopian government has committed itself to a programme of economic reform and lib-
eralization. However, it continues to exercise full control over the services sector, with a state
monopoly on the telecommunications market, and virtually full control over the financial sec-
tor and local banks.

Table 4 Business Setup Procedure: Doing Business in Ethiopia (2016)

Setting up a Company Ethiopia Sub-Saharan Africa


Procedures (Numbers) 14.00 7.80
Time (Days) 35.00 27.30
Source: Doing Business

There are a number of constraints to foreign investment, including high state interference
in the economy, poor infrastructure, difficulties related to land acquisition, strict foreign ex-
change controls, very high transaction costs and weak institutions. The government’s inter-
ventionist policies, which do not focus on developing the private sector, have also proven to
be a major obstacle.

On the other hand, significant progress has been made in improving transport infrastructure
and electricity production to increase Ethiopia’s attractiveness. The FDI inflows to the country
have accelerated in recent years, amounting to USD 3.1 billion in 2016, up from USD 1.3 billion

15
just four years earlier (UNCTAD, World Investment Report, 2017). Ethiopia ranks 159th (out of
190 economies) in the World Bank’s 2017 Doing Business report, a similar position it held in
2016.

The banking, insurance, telecommunications and micro-credit industries are restricted to do-
mestic investors, but Ethiopia has attracted roughly USD 8.5 billion in foreign direct invest-
ment, mostly from China, Turkey, India and the EU. The US FDI is around USD 567 million.
Infrastructure, construction, agriculture, horticulture, agricultural processing, textiles, leather
and leather products have attracted foreign investments.

Table 5 Foreign Direct investment in Ethiopia


Foreign Direct Investment in Ethiopia 2014 2015 2016
FDI Inward Flow (million USD) 1,855 2,193 (2017) 3,196
FDI Stock (million USD) 8310.50 10503.20 13699.60
Number of Greenfield Investments 34.0 30.0 16.0
FDI Inward Flow (in % of GFCF) 8.8 30.0 11.4
FDI Stock (% of GDP) 15.0 16.2 18.9
Source: UNCTAD

Note: The UNCTAD Inward FDI Performance Index is based on a ratio of the country's share in glob-
al FDI inflows and its share in global GDP. The UNCTAD Inward FDI Potential Index is based on 12
economic and structural variables such as GDP, foreign trade, FDI, infrastructure, energy use, R&D,
education and country risk. Green field investments are a form of foreign direct investment where a
parent company starts a new venture in a foreign country by constructing new operational facilities
from the ground up. Gross fixed capital formation (GFCF) measures the value of additions to fixed
assets purchased by business, government and households less disposals of fixed assets sold off
or scrapped.

China has significantly increased its investment in the country over the past decade, notably
in the construction, textile, power generation and te lecommunications industries (significant
investments were made in the latter in 2013). Agriculture (particularly horticulture) and leath-
er goods attract the highest amount of FDI. Renting of agricultural land also attracts foreign
investors. Moreover, the country took advantage of the crisis that afflicted the Bangladeshi
textile industry (following a disastrous collapse of a factory building in 2013) to attract for-
eign companies to the textile industry. The main investors are Saudi Arabia, China, the United
States, India and Turkey.

16
  1.5 Manufacturing Sector

Manufacturing is a crucial sector and is probably the most important engine of long-term
growth and development. As a country’s economy transforms from a primary agricultural-
based economy to one of manufacturing, job creation and more sustainable revenue for
growth is secured. The manufacturing sector developed in the 1920s in Ethiopia with a simple
processing technology that produced agriculture-based goods. This sector remains at infancy
level, however, even by African standards. Several reinforcing elements have conspired to pre-
vent the emergence of a stronger manufacturing base in the country.

Ethiopia’s manufacturing sector, according to the IDSP, is among the most productive sec-
tors of the economy, which can stimulate economic growth and development because of its
immense potential for wealth creation, employment generation and poverty alleviation. The
manufacturing sector makes an important contribution to the economy in terms of value cre-
ation, and employed around 173,000 persons in 2012/2013. In that same year, the manufac-
turing sector consisted of approximately 2,610 manufacturing firms mainly operating in eight
broad industries: food and beverages, textile and apparel, leather and leather products, wood
and pulp products, chemical and chemical products, rubber and plastic products, other non-
metallic minerals and metals and engineering products.

The top two manufacturing industries, food and beverages and metals and engineering prod-
ucts accounted for 51 per cent of the manufacturing sector’s GDP. Food and beverages alone
accounted for 38 per cent of employment in the manufacturing sector in 2012/2013. Its total
contribution to GDP was around 4.8 per cent. The performance of the manufacturing sector
has, however, been adversely affected by low worker productivity and the use of obsolete
technologies, which is further compounded by poor infrastructure, limited access to finance,
limited research and development, poor institutional framework, and inadequate managerial
and technical skills.

Table 6 Status of Medium & Large Enterprises in Ethiopia (2012-13)


Sectors Numbers of Units Numbers Employed
Food & Beverages 670 67,000
Non-metallic Mineral Products 544 17,230
Metal & Engineering Products 433 13,238
Wood & Paper Products 196 14,064
Rubber & Plastics 154 10,984
Chemicals & Chemical Products 143 9,801
Leather & Leather Products 141 14,019
Textile & Textile Products 104 19,233
Source: CSA (2014)

17
Production and Value addition - According to the Addis Ababa Chamber of Commerce and
Sectoral Associations (AACCSA), the gross value of production by manufacturing industry was
valued at around ETB 113 billion in 2012/2013 and the value added generated in the same year
was estimated at ETB 32 billion, i.e. approximately 4 per cent of the net value addition to the
entire economy. The food and beverages industry had the highest value addition (ETB 8 bil-
lion), followed by the non-metallic mineral industry (ETB 4.3 billion) and metals and engineer-
ing (ETB 3.9 billion). The textile and apparel industry had the lowest value addition (ETB 396
million).

Sources of Finance - The total value of fixed capital assets in Ethiopia’s manufacturing sector
amounted to approximately ETB 40 billion in 2012/2013 and new investments in fixed capital
for the same fiscal year was around ETB 3.7 billion and investment in food and beverages was
highest at around ETB 1.6 billion. Annual wages and salary expenditures reached around ETB
10 billion that same year. Domestic banks were major sources of financing of most projects in
Ethiopia’s manufacturing sector. Additional sources of financing included own saving, foreign
investment/partners and the domestic capital market.

Market Structure and Export Trade Destinations - The majority of products produced by the
manufacturing sector were intended for domestic consumption. The manufacturing sector
also, however, exported some domestically produced goods to several African nations. Only
few joint ventures and large producers exported their products to North America, Western Eu-
rope and Asia. The major share of manufactured goods exports included leather, textile and
agro-processing products.

Material Inputs Availability - Raw materials and intermediate inputs utilization depended
primarily on the nature of manufacturing industries. Industries such as food and beverages,
textile and leather predominantly utilized domestic raw materials and manpower resources.
On the other hand, industries such as metals and engineering, chemicals and plastic main-
ly depended on imported material inputs for production. These industries are affected by a
shortage of supply of managerial and technical expertise in the labour market.

Ethiopia undoubtedly has the means to address these factors such as cheap labour, a well-
educated and trainable labour force and supply of utilities. Similarly, the policy framework
is conducive to manufacturing development – it proposes the promotion of manufacturing
growth based on vertical and horizontal links to the rich agricultural and mineral resource
base, both of which have solid growth prospects in their own right.

2. Chemical Industry

The chemical industry contributes to nearly all manufactured products. The chemical industry
converts petroleum and natural gas into intermediate materials, which are ultimately con-
verted into products that are used and consumed on a daily basis. With over 20 million peo-

18
ple employed and annual sales of USD 5 trillion, the global chemical industry serves as the
backbone of many end-market industries such as agriculture, automotive, construction and
pharmaceuticals. The chemical industry is considered the backbone of manufacturing and the
supplier of inputs to all major industries.

  2.1 Introduction & General Overview

The chemical industry creates a wide range of products that touched on virtually every aspect
of our lives. It is one of the most diversified of all industrial sectors. While many of the prod-
ucts, such as detergents, soaps and perfumes, are directly purchased by the consumer, but
70 per cent of manufactured chemicals are used as raw materials or intermediate goods to
make products by other industries. According to the UN’s “International Standard Industrial
Classification”, the chemical industry covers more than 140,000 product lines.

Table 7 Rev.3.1 Code 24: Manufacture of Chemicals and Chemical Products


241 Manufacture of basic chemicals
2411 Manufacture of basic chemicals, except fertilizers and nitrogen compounds
2412 Manufacture of fertilizers and nitrogen compounds
2413 Manufacture of plastics in primary forms and of synthetic rubber
242 Manufacture of other chemical products
2421 Manufacture of pesticides and other agrochemical products
2422 Manufacture of paints, varnishes and similar coatings, printing ink and mastics
2423 Manufacture of pharmaceuticals, medicinal chemicals and botanical products
Manufacture of soap and detergents,
2424
cleaning and polishing preparations, perfumes
2429 Manufacture of other chemical products n.e.c.
243 Manufacture of man-made fibres
2430 Manufacture of man-made fibres
Source: http://unstats.un.org/unsd/cr/registry/regcs.asp?Cl=17&Co=24&Lg=1

The diversified and multi-utility product lines of the chemical industry can be categorized as:

  a)  Basic Chemicals - Basic Inorganics, Polymers and Petrochemicals


  b)  Specialty Chemicals - Crop protection chemicals, Colorants and Paints
  c)  Consumer Chemicals - Soap, Detergents and Toiletries.

19
Basic chemicals are the most important and diversified category of the chemical industry.
These comprise chemicals derived from oil (petrochemicals, polymers and basic inorganics).
These chemicals are mainly inputs in the chemical and other industries before developing
into final products for the general consumer. Hydrocarbons, which are extracted from crude oil
and gas, are converted into alkanes and aromatic hydrocarbons. They are converted into a very
wide range of basic chemicals that are immediately useful (petrol, ethanol, ethane-1, 2-diol)
or are subjected to further reactions to produce useful end products like phenol to make res-
ins and ammonia to develop fertilizers. Another important variant of basic chemicals include
“inorganics”, which are relatively low cost chemicals, such as chlorine, sodium hydroxide,
sulfuric and nitric acids and chemicals for fertilizers.

Figure 3 Chemical industry & products

Source: http://web-material3.yokogawa.com

Specialty chemicals cover a wide variety of chemicals for crop protection, paints, inks and
colorants (dyes and pigments). They include chemicals used by industries as diverse as tex-
tiles, paper and engineering. An everyday example is household paints which have evolved
from being organic solvent-based to being water-based. Another example of specialty inks is
that developed for ink-jet printers.

Finally, consumer chemicals are directly sold to the public, which include detergents, soaps
and other toiletries. The search for more effective and environmentally safe detergents has
increased over time, particularly in terms of finding surfactants capable of cleaning anything
from sensitive skin to large industrial plants. Additionally, much effort has been put in produc-
ing a wider range of synthetic chemicals for toiletries, cosmetics and fragrances.

20
The chemical industry thus plays a dominant role in the economy’s overall development and
represents the backbone of industrial and agricultural development. The chemical life cycle
begins with the extraction of raw materials and includes mining, the extraction of oil and
natural gas and other activities. These raw materials are used in chemical manufacturing,
processing or refining. The manufactured bulk chemicals are then combined with one another
and used to make a wide variety of downstream chemical products. These chemical products
are, in turn, used as feedstock for chemical products further downstream for a variety of in-
dustrial activities and services, as individual chemicals, in preparations or used to make con-
sumer products. At the end of the life cycle, chemicals may be released into the environment,
recycled for continued use, disposed of in hazardous waste facilities or in other ways.

  2.2 Chemical Industry in Ethiopia

Ethiopia’s chemical industry is still at a nascent stage. There is strong demand to develop
the chemical industry to meet the requirements of the rapidly growing Ethiopian economy.
Currently, imports fulfil domestic demand for chemicals. As mentioned earlier, chemicals are
inputs to a wide variety of products like detergents, soaps, plastics, etc., which touch every
aspect of human life.

  2.2.1 Introduction & Overview

The chemical industry in Ethiopia produces basic chemicals based on local raw materials,
including PVC granules from ethyl alcohol, formaldehyde from methanol, the production of
caustic soda and chlorine-based chemicals, carbon black, activated carbon, precipitated cal-
cium carbonate, ball-point ink, the manufacturing of pharmaceuticals, and medicinal, chemi-
cal and botanical products in the form of tablets, capsules, syrups and injectables.

There are a total of 153 chemical and chemical-related product manufacturers according to
CSA’s raw data for the year 2014. These industries account for 5.7 per cent of total manufac-
turing industries in Ethiopia, most of which are concentrated around Addis Ababa (81 estab-
lishments) and Oromia (60 establishments). Although the number of firms in the chemical
industry dropped in 2010/11 (from 99 firms to 75), it has grown tremendously since 2012/13.

The domestic chemical industry provides essential inputs for economic and social growth in the
agricultural and health sectors. For example, fertilizers are an output of the chemical industry
used as inputs in the agricultural sector to increase farmers’ outputs. Similarly, the health sec-
tor as well as other economic sectors benefit from the chemical industry’s outputs. Estimates
show that Ethiopia’s chemical industry was worth around ETB 9.7 billion in 2012/2013, which
makes it the fourth largest industry in terms of total income generation compared to others.
The industry’s value added amounted to ETB 2.8 billion in 2012/13. The major share of produc-
tion is used by the fertilizer and pharmaceutical industries.

21
Figure 4 Occupation distribution in chemical sector (%)

Source: UNIDO elaboration based on AACCSA Report

The chemical industry’s total value of fixed capital assets was around ETB 1.9 billion and the
new investment in fixed capital for the 2012/2013 fiscal year was around ETB 253 million. Annu-
al wage and salary expenditures reached around ETB 434 million. There were 11,028 persons
employed in the chemical and chemical products industries in 2011/2012, dropping to 9,801
persons in 2012/2013 based on CSA’s raw data for the year 2014. In 2012/2013, the chemical
industry paid over ETB 434 million in wages and salaries.

The chemical and chemical products markets rely on outputs from local industries and derive
substantial volumes from imports. Exports from local industries to the rest of the world are
negligible. According to CSA data (2014), only ETB 68 million (only 0.7 per cent) from the total
amount of production (ETB 9.7 billion) was exported to foreign markets, implying that nearly all
production outputs from this industry were consumed by domestic industries and residents.

  2.2.2 Scenario for Ethiopia’s Chemical Industry: Demand & Availability

Both the government and individual investors have invested in Ethiopia’s chemical industry,
which is made up of firms in different sizes, using different levels of technology, production
systems and market strategies. Although the chemical industry is at a nascent stage, it cre-
ates variety very wide range of products. While many of the industry’s products such as deter-
gents, soaps, perfumes, etc. are directly purchased by the consumer, much of the chemicals
produced are used in the production of goods by other industries. Chemical products that are
locally produced can be divided into (i) basic chemicals and (ii) consumer chemicals. However,
the major share of chemical inputs and chemical products are still being imported for local
manufacturing and often for direct consumption.

Basic chemicals, produced in large quantities, are mainly sold within the chemical industry
and to other industries before being further developed into products for general consumption.

22
Formic acid, hydrochloric acid, nitric acid, etc., for example, are used as primary inputs for
all industrial and manufacturing processes. Likewise, consumer chemicals are produced as
consumer products sold directly for consumption purposes, for example, soaps, detergents
and cosmetics. Hot caustic alkali solutions, such as caustic soda, and natural fats or oils, such
as tallow or vegetable oil, are used to produce sodium fatty acid salt (soap) and glycerine (or
glycerol).

Both the public and private sectors coexist in the chemical and chemical products manufac-
turing sector. There are currently eight public enterprises and 43 firms in the private sector
operating in two major regions in Ethiopia, namely Addis Ababa and Oromia (AACCSA, 2015)4.
Most public sector enterprises are located in the Oromia region. All enterprises produce for
the domestic market, except the public sector company Natural Gum Processing & Marketing
Enterprise, which exports 80.6 per cent of its total production. Other public sector firms are
engaged in the production of paints, caustic soda, aluminium sulphate, soda ash, magnesium
oxide, pesticides and fertilizers. The private sector’s dominance in most product categories is
quite visible and it competes with the public sector in the domestic market on equal footing.

Table 8 Public-sector Enterprises in the Chemical & Chemical Products Industries


Annual
Prod. Cap.
S.No Company Region Product Employees
in
(ETB ‘000)
Awash Melkasa Aluminium
1 Oromia 226 17,682
Aluminium Sulphate Sulphate
2 Zeway Caustic Soda Oromia Caustic Soda 269 27,547
Abiyata Soda
3 Oromia Soda Ash 231 6,053
Ash Factory
Adola Magnesium Magnesium
4 Oromia 73 55,385
Oxide Factory Oxide
Adamitulu
5 Oromia Pesticides 212 136,192
Pesticide Factory
6 Nifas Silk Paints Addis Ababa Paints 162 74,693
Zemenawi
7 Oromia Paints 255 95,801
Building Industries
Natural Gum Processing
8 Amhara Gum 105 20,365
& Marketing Enterprise
Source: UNIDO elaboration based on AACCSA Report

4
The AACCSA & CIDD provided the details on type of enterprises, number of employees, annual production capacity and
capacity utilization; market and input imports are given in its Annex-I for reference purposes.

23
In terms of production capacity, the private sector dominates the Ethiopian market. For in-
stance, the private sector firm Rainbow Paint Factory has the highest production capacity with
a capacity utilization of 67.6 per cent. Only eight enterprises operate at 100 per cent capacity
utilization, highlighting the limitations of production processes and continuity in the supply
of inputs. Only six companies, all of which are private sector firms, operate at less than 50
per cent capacity utilization. The majority of enterprises operate at 60 per cent to 80 per cent
capacity utilization. Many firms claim that the main reason for their low capacity utilization is
inadequate availability and the poor quality of raw materials.

The public sector employs 1,533 employees (skilled and unskilled labour). The private sector
employs around 80 per cent of the total workforce (skilled and unskilled) in the chemical and
chemical products industries. The current IDSP identifies the poor human resource develop-
ment system and the shortage of highly qualified labour as one of the major challenges for the
manufacturing sector.

The imported inputs of most enterprises, both in the public and private sector, are quite high.
Of the 51 public and private sector enterprises that produce chemicals and chemical products,
21 have imported inputs of 100 per cent. Many of the other enterprises also have a significant
share of imported inputs of more than 50 per cent. Only four enterprises rely exclusively on
local inputs with no imported inputs.

The Government of Ethiopia has specifically focussed on the chemical industry for import sub-
stitution in the manufacturing sector to save precious foreign exchange. It formulated and
implemented a five-year Growth and Transformation Plan (GTP) from 2010/11-2014/15. The 2nd
GTP is currently underway and the chemical industry is identified as a priority industry. The
IDSP clearly stated that the private sector is considered to be the industry’s engine of growth.

Table 9 Major Chemical Imports in Ethiopia


Net Weight (Tonnes) CIF Value (Birr)
Sn Chemicals 2009 2010 2011 2009 2010 2011
1 Formic acid 81,490.76 471,197.31 290,733.02 908,916.42 5,587,002.51 6,777,327.45

2 Hydrochloric acid 649,571.91 1,243,592.22 1,344,964.97 2,618,803.46 6,634,421.91 7,842,102.25

3 Nitric acid 329,4 24.34 992,374.69 372,887.21 1,981,856.01 7,515,818.86 3,555,752.32

4 Potassium chloride 15,962.87 26,217.00 18,479.33 237,916.21 358,757.62 3,287,740.76

5 Potassium nitrate 175,549.63 28,478.00 576,792.44 1,985,808.24 469,121.34 7,807,292.14

6 Magnesium chloride 14.45 19.10 238.50 429,532.48 429,532.48 1,933,220.36

7 Polyethylene 4608.00 9750.00 8063.00 67,619.199 123,049.939 154,846.036

8 Calcium carbide 665,921.12 759,692.22 551,374.85 4,565,907.00 5,840,218.73 6,472,688.01

9 PET 5226.00 7271.00 5283.00 76,258.405 98,207.153 103,783.582

10 Talc 647,045.00 1,072,166.00 648,015.90 2,516,612.64 5,903,168.66 4,532,621.21

11 Titanium oxide 1002.878 838.03 1065.7 17,065,291.04 15,984,718.18 19,122,912.60

Source: Ethiopian Customs Authority

24
To support and facilitate investment flows in the chemical industry, the government estab-
lished the Chemical Industry Development Directorate under the Ministry of Industry.

The above table demonstrates that imports of basic chemicals have witnessed a significant
increase in quantity and value over time. Based on past experience, the CIDD has identified
the following major chemicals for import substitution:

  1. Formic acid
  2. Hydrochloric acid
  3. Nitric acid
  4. Potassium chloride
  5. Potassium nitrate
  6. Magnesium chloride
  7. Polyethylene
  8. Calcium carbide
  9. Polyethylene terephthalate (PET)
  10. Poly vinyl chloride (PVC)
  11. Talc, and
  12. Titanium dioxide.

The IDSP’s import substitution strategy is based on inviting foreign direct investments as
well as private investments into the production of the identified basic chemicals for building
domestic production capacities. It also defined opportunities in consumer chemicals, such
as calcium carbonate and lime, candle wax (artificial wax), car paint, carbon black, cellulose
acetate, detergent powder, disinfectants, essential oils, ethyl acetate, fatty acid, formalde-
hyde, gelatine, glucose, glycerine, herbicide and fungicide, industrial adhesive, lactic acid,
low density polyethylene (LDPE), liquid detergent, natural adhesive, polish (shoe and floor),
polyethylene resin (HDPE), PVC and resin.

This priority list is based on the demand for basic chemicals and the availability of raw materi-
als locally. For instance, Magnesium chloride brine, which is one of the raw materials needed
to produce hydrochloric acid, is available in unlimited quantities in the Afar region in north-
eastern Ethiopia. There is also a large deposit of magnesium oxide ore in the Adola area.
Hydrochloric acid is a strong inorganic acid used in nearly all parts of the industry, where the
quality of the hydrochloric acid is the decisive factor for the type of application.

Ethiopia has great potential to develop its chemical industry. The Government of Ethiopia
plans to support this industry by introducing radical changes and by increasing its competi-
tiveness in the international market. The development of the chemical industry will not only
foster the manufacturing sector on the whole, but import substitution also saves valuable for-
eign exchange. The government also aims to rationalize the country’s customs tariff structure
to support the competitiveness of locally manufactured materials.

25
  2.2.3 Investment Policies & Incentives

The Government of Ethiopia has now adopted the free market system to boost its manufactur-
ing sector by inviting foreign investments and allowing the private sector to become the driver
of economic growth. In this context, the IDSP aims to create an environment conducive to the
promotion of the private sector’s role in this regard. Today, trade and investment are inter-
linked and interconnected in many countries. The key objective is therefore to increase the
competitiveness of private entrepreneurs’ products and services in terms of price and quality,
as well as the timely supply of goods and services in order to maximize and benefit from the
global market.

To encourage the inflow of the latest technological knowledge, of capital resources and ad-
vanced managerial skills, the Government of Ethiopia has adopted a proactive foreign invest-
ment policy and announced fiscal incentives to attract private investments. These include:

Incentives for Foreign Investments

A foreign investor can make investments either as sole proprietors or jointly with domestic
investors.

(1) The capital requirement for foreign investors (as sole proprietors) is USD 200,000 for a
single and wholly foreign owned investment; USD 100,000 for projects involving engi-
neering, architecture, accounting and audit services, project studies and consultancy
services.
(2) The capital requirement for investments in partnership with domestic investors is USD
150,000 per project; USD 50,000 for projects involving engineering, architecture, ac-
counting and audit services, project studies and consultancy services.
(3) There is no capital requirement for investors who reinvest their profits or dividends gener-
ated from an existing enterprise.
(4)  Land is leased out by the government.
(5) Repatriation and remittances are granted to foreign investors to be transferred into con-
vertible foreign currency at the prevailing exchange rate on the date of remittance.

Guarantees

(1) The Constitution of Ethiopia and the Investment Proclamation and the legal system pro-
tect private property.
(2) Ethiopia is a member of the Multilateral Investment Guarantee Agency (MIGA) which
issues guarantees against risks to entrepreneurs who invest in signatory countries.
(3) Ethiopia has signed bilateral investment promotion and protection agreements as well
as avoidance of double taxation agreements with many countries.

26
Fiscal Incentives

(1) Customs duties incentives - 100 per cent exemption from payment of import customs
duties and other taxes levied on imports on all investment capital goods, such as plant
machinery and equipment, construction materials as well as spare parts up to 15 per
cent of the value of capital goods imported.
(2) Income tax incentives - Exemptions announced for the chemical and chemical products
industry:
(a) Any investor who invests in the establishment of a new enterprise in Gambela, Ben-
shangul/Gumz, Afar, Somali, Guji & Borena Zones (Oromia), and in certain zones in the
Southern Nations, Nationalities, and Peoples’ Region (SNNP) shall be entitled to an
income tax deduction of 30 per cent for three consecutive years after the expiry of the
income tax exemption period.
(b) The period of exemption for income tax shall commence from the date of production or
the provision of service by the investor.
(c) An investor who has incurred loss within the period of income tax exemption shall be
allowed to carry forward such loss for half of the income tax exemption period after the
expiry of that period.

Table 10 Income Tax Exemption for Chemical & Chemical Products

Special Zones
Investment Area Other Areas
of Addis Ababa & Oromia

Manufacture of basic chemicals


5 years 6 years
(including ethanol)

Manufacture of plastic and/or


synthetic rubber in primary forms
3 years 6 years
Manufacture of pesticides,
herbicides or fungicides

Manufacture of paints, varnishes


or similar coating, printing, writing 2 years 4 years
and painting inks and mastics

Manufacture of soap and detergents,


cleaning and polishing preparations, 2 years 4 years
perfumes and toilet preparations
Manufacture of man-made fibres 5 years 6 years
Source: Investment Opportunities in Chemical Sector (2015)

27
(3)  Export incentives

  • Duty drawback scheme: Duty paid at the port of entry and locally on raw materials
used in production commodities is refunded by 100 per cent, upon the exportation of
the commodity processed.
  • Voucher scheme: This printed document is to be used for recording the balance of duty
payable on raw materials imported for use in the production of goods for the external
market. The beneficiaries of the voucher scheme are also exporters.
  • Bonded manufacturing warehouse: Producers fully engaged in exporting their prod-
ucts who are not eligible to use the voucher scheme and who have a license that
enables them to operate such a warehouse.

 Land Lease

 In Ethiopia, land is public property. Both urban and rural land is available for investment
on a lease basis. Lease rights over land can be transferred, mortgaged or sub-leased to-
gether with on-build facilities. The period of lease may also be renewed. The rental value
and the lease period of rural land are determined and set by the land use regulations of
each regional state.

  Tax Regime

Table 11 Tax Regime


Type of Tax Rate (%)
Direct
Corporate income tax 30
Personal income tax 0 up to 35
Business income tax 0 up to 35
Custom duties 0 up to 35
Withholding tax 2
Export tax -
Royalty tax 5
Dividend tax 10
Interest income 5
Indirect Tax
Value added tax 15
Excise tax 10 up to 100
Turnover tax 2 and 10
Source: Investment Opportunities in Chemical Sector (2015)

28
3. Value Chain & Key Issues

A value chain “disaggregates a firm into its strategically relevant activities in order to under-
stand the behaviour of costs and the existing and potential sources of differentiation”5. The
value chain consists of a “set of activities that are performed to design, produce and market,
deliver and support its product” (ibid). Those activities can be distinguished as:

• Primary activities: Inbound logistics, operations, outbound logistics, marketing and


sales, service in the core value chain creating direct value; and
• Support activities: Procurement, technology development, human resource manage-
ment, firm infrastructure supporting value creation in the core value chain.

  3.1 Value Chain: An Overview of the Chemical Industry

The value chain of the chemical industry starts with “petrochemicals”, moves into “basic
chemicals”, advances to “polymers” and specializes in “specialties”. The products become
more complex and varied at each stage of the value chain, i.e. value is added to each step in
the chain.

Figure 5 Chemical industry & products

Source: http://web-material3.yokogawa.com

5
Porter (1985).

29
Value Chain: Stage 1: Raw Materials/Petrochemicals: The first stage of the value chain is raw
materials, which are used to produce basic chemicals. These raw materials primarily consist
of metallic or non-metallic minerals and ores, oils and natural gas extracted and benefici-
ated from mining. Value is added to these activities to produce basic chemicals. This step
primarily involves raw material procurement, R&D and patenting of new innovative chemi-
cals and chemical processes. The first step usually involves the refinement of oil and gas (or
some other type of raw mineral) into petrochemicals. Petrochemicals are derived from crude
oil, crude products or natural gas. Petrochemicals are used in the manufacture of numerous
products such as synthetic rubber, synthetic fibres (e.g. nylon and polyester), plastics, fertil-
izers, paints, detergents and pesticides. It is the basis for most organic chemicals. Products
manufactured in this stage include olefins, such as ethylene and propylene, polyolefins, such
as polyethylene and polypropylene and industrial gases.

Value Chain: Stage 2: Basic Chemicals: The second stage of the value chain produces basic
chemicals. Base/basic chemicals processing is the second step in the chemical industry’s val-
ue chain. In this stage, basic chemicals are produced from raw materials. These basic chemi-
cals are used as raw materials by many manufacturers from different industries to produce a
wide variety of commercial products such as dyes, detergents, chemicals for household clean-
ing, plastics materials, paints, drugs and fertilizers. Basic chemical processing includes syn-
thesis, distillation, thermal cracking and polymerization. Basic chemical processing is carried
out by chemical manufacturers and is closely tied to R&D activities. Products manufactured
during this stage include intermediates, such as tetrahydrofuran and hexamethylene diamine
and inorganics, such as ammonia.

Value Chain: Stage 3: Polymers: The third stage involves the manufacturing of polymers. Poly-
mers, which are primarily used to produce plastic goods, constitute about 80 per cent of the
chemical industry’s production output. They are the most widely used material per unit vol-
ume, used more than steel, copper and aluminum combined. Polymers are used by industry
(e.g. in the manufacturing of film and in aerospace, automotive and electronic equipment)
and by the general public (e.g. in milk and shampoo bottles). Polymers are used in products
from plastic bottles to plexiglass. Polymer manufacturing is a hybrid of batch and continuous
processing, and polymer manufacturing plants are typically very large, capital intensive, costly
to operate and dif ficult to change.

Raw materials for polymers, often referred to as ‘feedstock’, are by-products of petroleum or
natural gas production, such as ethylene and propylene, which is generally produced in stage
2 of the value chain. Polymer customers are typically manufacturers that process the polymer
into plastic products (e.g. plastic containers such as milk and shampoo bottles), which are
then sold to other manufacturers (e.g. consumer packaged goods companies), which in turn
are used for a consumer product (e.g. milk or shampoo) and sold to retailers. The final users
are thus fourth-tier customers. Other polymer customers produce parts that will be used in
electronics or aerospace equipment.

30
Value Chain: Stage 4: Specialties: The most complex chemicals are produced in the fourth
stage known as ‘specialties’. Specialty chemicals are used for a variety of purposes and in-
clude additives, coatings, pharmaceuticals and vitamins. Fine chemicals are complex, single,
pure chemical substances. They are produced in limited volumes and at relatively high prices,
mainly by traditional organic synthesis in multipurpose plants. Fine chemicals are used as
starting materials for specialty chemicals, particularly pharmaceuticals, biopharmaceuticals
and agrochemicals. The products are primarily used as building blocks for proprietary prod-
ucts.

Marketing, distribution and sales of final products is the next step in the value chain. This
includes the marketing, wholesale distribution and sales of the final chemical product and
related products to other manufacturers in agriculture, automotive, pharmaceuticals and tex-
tiles. Manufacturing firms from different industries go on to produce different consumer goods
and products using the final chemical products.

  3.2 SWOT Analysis

A SWOT analysis aims to identify the key internal and external factors that are deemed essen-
tial to achieving an objective. A SWOT analysis groups crucial pieces of information into two
main categories:

    Internal factors: the strengths and weaknesses internal to the organization;
   External factors: the opportunities and threats the environment external to the
   organization present.

The entire discussion on the chemical industry’s value chain analysis determines the base-
line for its SWOT analysis. The analysis may view the internal factors as strengths or as weak-
nesses, depending on their effect on the industry and the objective of import substitution. The
external factors may include macroeconomic issues, technological change, the global market,
international environment regime, sociocultural changes as well as changes in the market or
in competitive positions.

Table 12 SWOT Analysis of the Chemical Industry in Ethiopia


Strengths Weaknesses
  • Availability of easily trainable   •  Lack of joint planning, coordination
workforce at low cost and collaboration among different
public and private institutions
  •  The existence of an industry
development strategy and   •  Limited capacity of the existing
the selected priority in the industry institutions to implement policies
and strategies
  •  Improved export performance
of the manufacturing sector   •  Limited strategic linkage between
in recent years industry and agriculture

31
  •  Rising share of the manufacturing   •  Lack of strong marketing strategy
sector in the national economy at the national and sectoral level

  •  Creation of conducive   •  Limited quality service delivery


environment for investment of public institutions
by adopting proactive
investment policy   •  Limited FDI flow compared to
the need for industrialization
  •  Establishment of the
Chemical Industry   •  Limited working capital provision
Development Directorate
under the Ministry of Industry   •  Weak transport and logistics services
to act as a nodal agency
for the development   •  Limited capacity of the existing
of the chemical industry HEI,TVET and R&D institutes to train
qualified professionals
  •  Massive investments on
infrastructure (road,   •  Inadequate alignment of the training
communication and power system with the demands of
generation for industrial the manufacturing sector
development)
  •  Unavailability of effective industrial
  •  Availability of incentives zones and agro-processing parks
to attract local and foreign
investments, and increased   •  Lack of input/output quality control
trend of investment in the industries and standardization system

  •  Growing number of enterprises   •  Slow growth in the upgrading


of all sizes , and the potential of the existing SMEs
to link SMEs with medium to climb up the value chain
and large enterprises
  •  Absence of technological
  •  Improving the role innovation and application
of the private sector of indigenous technology

  •  Inadequate technology transfer


and low capacity utilization of the
manufacturing sector

  •  Lack of machinery maintenance,


rehabilitation, modification
and replacement

32
Opportunities Threats

  •  Existence of stable and peaceful   •  Inflation and global financial crises


socio-political environment
and supportive   •  Unavailability of FDI as needed
macroeconomic policies
  •  Weak university-industry linkages
  •  Sustainable industrial
development strategy   •  Inadequate rural infrastructure to
access agricultural inputs
  •  High government investment
in capital intensive industries   •  Increasing costs of import-export
transportation and logistics
  •  Transformation of the agricultural
economy to industry-led   •  Relatively slow development
economic development of social overhead capital (SoC)
compared to the urgency
  •  The shift of labour intensive for industrialization
manufacturing factories
from developed to   •  Lack of adequate supply and
developing countries value chain management

  •  Vast international and preferential   •  Global climate change


market access to the EU, USA
and regional markets

  •  Relatively large domestic


market expansion of
educational infrastructure

  •  Improvements in hydroelectric
power, wind and geothermal
electric power

  •  Railway and road projects across


the country as well as the building
of ICT infrastructure

  •  Improved relationship with


the private sector and international
development partners

33
  3.3 Key Issues & Challenges

The vision of the industrial development strategy is “building an industrial sector with the
highest manufacturing capability in Africa which is diversified, globally competitive, environ-
mentally-friendly, and capable of significantly improving the living standards of the Ethiopian
people by the year 2025”6. The overall goal of the industrial development strategy is to achieve
structural change in the economy through industrial development. Specifically, it aims at in-
creasing the share of the industry by a percentage of GDP from currently 13 per cent to 27 per
cent by 2025, and increase the manufacturing sector’s share as a percentage of GDP from cur-
rently 4 per cent to 17 per cent by 2025. Specific strategic objectives are set in accordance with
this overall goal.

The Government of Ethiopia has identified the following five strategic objectives that guide the
implementation strategies and programmes:

  •  To further expand and develop the existing priority industries;


  •  To diversify the manufacturing sector to include new industries;
  •  To enhance enterprise cultivation and entrepreneurship;
  •  To increase public, private and foreign investment; and
  •  To develop and operate industrial zones and cities.

A number of key strategies that need to be pursued to achieve the stated visions and objec-
tives are:

  •  Guaranteeing a conducive business environment;


  •  Acquiringcompetent human resource;
  •  Acquiring quality industrial inputs for value addition;
  •  Developing and diversifying local, regional, and global markets;
  •  Enhancing technology transfers; and
  •  Developing and providing institutional support.

The macroeconomic factors that are considered to be major constraints to harnessing Ethio-
pia’s potential to achieve the stated objectives and the implementation of key strategies are:

  1)  Inadequately developed business enabling environment

Ethiopia is one of the lowest ranked nations in the IMF’s assessment on “Doing Business”. It
tanks 161th among a total of 190 nations (Doing Buisness, 2018). “Doing Business” is an ob-
jective method of assessing a country’s business environment relative to the rest of the world.
The assessment captures several important dimensions, such as regulation for starting a busi-
ness, dealing with construction permits, access to electricity, registering property, obtaining
credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts

6
Ethiopian Industrial Development Strategic Plan (IDSP) (2013-2025) from the Federal Democratic Republic of Ethiopia
Ministry of Industry.

34
and resolving insolvency. Doing Business also measures features of labor market regulation.

Ethiopia’s business environment was assessed to be considerably lower than the regional
sub-Saharan average. Its southern neighbour Kenya is relatively better positioned in all as-
sessed parameters. However, Ethiopia achieved a relatively better score in terms of the overall
businesss environment than its northern neighbour Eriteria. With the exception of enforce-
ment of contracts, Ethiopia is ranked quite low in the various indicators compared to other
countries. For instance, Ethiopia ranks 174th out of 190 for starting a business.

Figure 6 Rankings on Doing Business topics - Ethiopia

Source: Ease of Doing Business (2018)

The Figure illustrates the fundamental restrictions, red-tapism and fiscal anomalies (particu-
larly as regards taxation and obtaining credit, etc.) that are characteristic of Ethiopia’s busi-
ness environment. However, the country’s legal system represents a silver lining and restores
potential investors’ confidence in Ethiopia’s business environment by maintaining higher
standards than other countries in the enforcement of contracts.

  2) Poor human resource development system and shortage of highly qualified human
resources

Human resources are the backbone of an industrialized society. The Human Development In-
dex (HDI) is an established measure of human development. Ethiopia ranks 174th among 188
nations (Human Development Report, 2016), highlighting the country’s relatively poor human
resource development. The adult literacy rate is 49.1 per cent, which means that over 50 per
cent of the economically active population does not have adequate reading and writing skills.
With a mean of 2.6 years of schooling, it is difficult to transform the agricultural economy into
an industrialized one. Manufacturing requires a continuous flow of scientific and technical
personnel.

35
Ethiopia’s higher education infrastructure has only developed over the last 15 years. One of
the principal outcomes of Ethiopia’s Agricultural Development Led Industrialization strategy
(ADLI) has been a rapid expansion of the country’s higher education system, yet without due
attention being paid to the quality of education and the labour market. In 2000, there were
only two universities, but since then, the country has established 29 private and public uni-
versities and more are being planned. These institutions have, however, experienced cuts
in funding, frequently have unqualified party-loyal lecturers, and shoddily built structures.
Technical and vocational education and training (TVET) provides an opportunity for youth to
acquire marketable and entrepreneurial skills. However, in Ethiopia, both public and private
TVETs have failed to link education and training with the skills and quality of skills required by
the labour market, and have failed to monitor graduates’ subsequent employment. In 2013,
9,185 engineering students graduated, but their training did not meet employer requirements.
A HERQA survey in 2010 revealed that employers viewed graduates in engineering, medicine
and management as not sufficiently qualified for the required work. Thus, the employability
gap has degenerated the potential to harness the only advantage of cheap qualified workers
in Ethiopia.

To achieve the objectives, the industrialization strategy must not only aim to develop light
and medium industries, but also establish high-tech industries, which calls for the country’s
higher education system to produce highly qualified engineers and specialists. It furthermore
requires the establishment of research and development centres and other support institu-
tions to promote high-tech industries and build technology transfer capabilities.

  3)  Insufficient industrial inputs and infrastructure development

The manufacturing sector’s dependence on imported raw materials been increasing. The de-
gree of dependence on imported raw materials differs by industry. It is relatively lower in agri-
industries such as food, beverages, textile, apparel, leather, tobacco and furniture, accounting
for a maximum of 50 per cent, i.e. below average. On the other hand, the chemical, plastic
and rubber, basic iron and engineering industries heavily depend on imported inputs, rang-
ing from 70 per cent to 99 per cent of total costs of raw materials. The apparel, leather and
non-metallic mineral products industries, which traditionally depended less on imported raw
materials, have shown increasing dependence on raw material imports in recent years. The
declining share of exports and simultaneous increase in import dependence implies that the
manufacturing sector’s export coverage of imported raw materials has fallen over time. The
total export coverage of imported raw materials in the medium- and large sized manufacturing
firms dropped from around 53 per cent in 2002/03 to 12 per cent in 2009/10. In other words,
there is a lack of domestic linkages, particularly between the manufactung and the agricul-
tural sectors.

The Ethiopian government currently spends 10 per cent of GDP (about USD 1.3 billion annually)
on infrastructure, which is by far the highest in Africa in terms of share of GDP 7. A ten-year Road
Sector Development Program (RSDP) was implemented in two phases from 1997 to 2007. The

36
programme was extended up to 2010 under a third phase. A substantial part of the projects
aimed at improving the connections with neighbouring countries and particularly seaports.
Huge investments were also made by the government for the development of the power and
telecommunication industry in the PASDEP period. The GTP (2010-15) introduced far more am-
bitious targets for the power and telecommunication industries. Despite huge and continued
investments in its infrastructure, Ethiopia, as a landlocked country, remained one of the most
difficult spots in the world from which to engage in the global economy due to the absence of a
competitive network of global logistics. According to the World Bank Trade Facilitation indica-
tors, Ethiopia ranked 123rd out of 155 countries in the world in the Logistics Performance Index
(LPI) in 20098. The country also ranks among the lowest in terms of use of information and
communication technology (ICT). For example, the number of mobile subscribers and internet
users per 100 inhabitants in Ethiopia was 16.7 and 1.10, respectively, which was especially
low compared to other countries in sub-Saharan Africa. The quality of telecommunication and
power services in Ethiopia is even more concerning and is often clamed for the absence of
competition. These indsutries have not yet been privatized and the government continues to
be the sole investor and service provider of both services.

  4)  Lack of well-established investment and technological development

To date, access to credit has been the Achilles heel of industrial development. The total value
of fixed capital assets in Ethiopia’s manufacturing sector was an estimated ETB 40 billion
in 2012, and new investments in fixed capital for the same fiscal year amounted to around
ETB 3.7 billion. Domestic banks were major sources of finance for the majority of projects in
Ethiopian manufacturing industries. Addis Ababa Chamber of Commerce and Sectoral Asso-
ciation (AACCSA) carried out a grassroot survey in 2015. The survey results revealed that of the
total 270 manufacturing firms interviewed, about 62 per cent reported that domestic banks
remained their main financier, followed by own saving (16.8 per cent), foreign investment/
partners (9.5 per cent) and domestic capital market (5.7 per cent).

The banking system operates under a tight monetary policy regime. The interest rate has de-
liberately been kept low over the last decade. With soaring inflation, the real interest rate was
virtually negative for most of the years since 2002. This indicates the huge sum of implicit
financial subsidies provided to investors who borrowed from the formal banking sector. After a
major devaluation in 1992, the exchange rate of the Birr was determined through an auction.
The rate was stable and the difference to the parallel market was relatively lower for a long
period. The government restricted the outflow of foreign exchange due to rising domestic infla-
tion. In response to the increasing overvaluation, the government devalued the Birr several
times, for example, by around 23 per cent in 2009 and 20 per cent in 2010. Lack of foreign
exchange and volatility of interest rates subdued the industrialization process.

7
http://www.africaportal.org/articles/2012/10/10/ethiopia-underestimatedregional-power
8
Trade logistics include the various processes and activities involved in getting goods to market: transportation, warehous-
ing, cargo consolidation, border clearance, distribution in the destination country and payments (WDI various years).

37
Table 13 Price, Interest Rate and Exchange Rate Pattern in Ethiopia (1998-2010)
Year Minimum Lending General Real Exchange rate Interbank Real effecive
deposit rate inflation interest parallel weighted exchange
rate min-max rate rate market market-rate rate

1998/99 6 10.5-13.0 4.3 7.69 8.12 115.3


1999/00 6 10.5-13.5 5.4 3.8 8.31 8.22 100.0
2000/01 6 10.5-15 -0.3 17.6 8.79 8.46 93.9
2001/02 3 8-10.5 -10.6 12.7 8.68 8.566 91.1
2002/03 3 8-10.5 10.9 -5.1 8.709 8.6 104.1

2003/04 3 7-10.5 7.3 3.0 8.675 8.63 105.8


2004/05 3 14 6.1 -2.6 8.71 8.66 100.4
2005/06 3 14 10.6 -4.1 9.026 8.69 109.9
2006/07 4 14 15.8 -8.3 8.96 9.03 129.6

2007/08 4 8-15 25.3 -17.1 9.56 9.61 145.6


2008/09 4 8-16.5 36.4 11.81 11.3 197.3
2009/10 4 8-16.5 2.8 13.68 13.53 151.8
2010/11 5 7.5-16.3 18.1 16.52 16.11
Source: 1 WDI (various years); others from National Bank Of Ethiopia Annual Reports 2009/10 and 2010/11.

One of the alternative ways of improving investments in industry is by inviting foreign direct
investment and attracting private investments. This will require a revitalization of competition
in the banking sector through a liberal monetary policy.

Technology is the key to attaining competitiveness. Lack of indigenous technology generators


(academic, research and development institutions and laboratories) is a major shortcoming
in technological development and adversely affects the competitiveness of Ethiopia’s mau-
facturing sector. Research and development institutes will need to be established and work
in collaboration with universities, industries and overseas benchmarked research and devel-
opment (R&D) institutions to enhance and play a pivotal role in adopting and disseminating
appropriate technologies that support the industrialization process.

38
One alternative to bridging the technology gap is a transfer of technology. The easiest way to
transfer technology is through the foreign direct investment route, which will require reforms
in investment policy. Since FDIs in Ethiopia have remained low, room for technology transfers
is very limited. Technology transfer and development require technology adoption and adapta-
tion, enhancement of local technology, establishment of technology parks, reverse engineer-
ing and setting innovation and technology transfer systems.

  5)  Inadequate market diversification and development

Ethiopia’s manufacturing sector currently mainly serves the domestic market. Inadequate
market diversification leaves the manufacturing sector free from pressures of global competi-
tion. To attain manufacturing prowess, Ethiopia should strive to become competitive at the
local, regional and global level. It is therefore important to devise an appropriate market-
ing strategy to further expand and enter new markets, particularly domestic, regional and
international markets. Not all industries can follow a similar strategy, which implies that each
industry must define its own markets, segment them, and position its products and services
to get higher returns.

Entering new markets within COMESA and the African continent represents a huge opportunity
for the development of Ethiopia’s manufacturing sector. However, appropriate timing and cau-
tion must be heeded to reap the benefits of entering COMESA’s free market without endanger-
ing the development and maturity of the manufacturing sector. The outputs of the manufac-
turing sector should by and large target demand and the required standards of the market at
different levels.

The success of industrial diversification and the development of high-tech industries is highly
dependent on the level of competitiveness of local products in local and international mar-
kets. In this regard, enhancing local and global competitiveness by developing a sound mar-
keting strategy, marketing research capabilities, creating local and global market access, and
diversifying the regional and international market are some of the key factors that will be ad-
dressed to improve the competitiveness of the manufacturing sector at large. To diversify local
and global market opportunities, the existing industries’ competitiveness must be enhanced
by establishing a computerized market information system; maintaining strong regulatory
systems that oversee the quality and standards of products before they reach the market;
improving local, regional and global market linkages with improved distribution outlets and
improved infrastructure; and reducing illegal business activities and transforming the infor-
mal sector into a formal sector.

  6)  Inadequately developed institutional support and enterprise cultivation

Currently, there are 18 government agencies that regulate the manufacturing sector in Ethio-
pia. The government has implemented a wide range of institutional reforms since the early
2000s, with the aim of addressing the bottlenecks for private sector development. One of the

39
well-known initiatives was the Civil Service Reform Program (CSRP) that was launched in 2001
under the broader National Capacity Building Program (NCBP). Service delivery was one of the
five key areas of CSRP and a ‘special programme’ of Performance and Service Delivery Improve-
ment Policy (PSIP) was introduced in priority ministries and agencies that directly collaborate
with the private sector. During this period, the government also implemented other reforms
such as business registration, substantial revision of the investment code, modernization of
the tax regime and introducing value added tax (VAT), establishment of competition policy and
partially reforming the customs administration9.

Civil service reforms, and particularly the BPR’s have led to a substantial restructuring of gov-
ernment bodies that deliver services to the private sector. Service delivery has improved as a
result. Ethiopia could not, however, retain this level of improvement, and its ranking has con-
sequently dropped in recent years. This deteriorating performance can be attributed to steps
taken by the government to introduce and enforce a number of erratic regulations to allegedly
curb ‘rent-seeking’ and discipline the ‘rogue’ private sector. With the onset of the financial
crisis in 2009, the government closed down 94 warehouses of coffee exporters and revoked
their license and accusing them of hoarding. In response to the soaring inflation, the govern-
ment made a failed attempt to control the price of some essential consumer goods in 2011 by
introducing price caps. It also issued new regulations for business registration to purportedly
reduce the monopoly of a few entrepreneurs, mainly importers, to ease the pressure of infla-
tion. This resulted in slow and lengthy periods of business registration and renewal. Similar
regulations were implemented for land administration (the real estate sector and the overall
lease system), customs administration and the private banks10. These actions are thought to
have eroded the confidence of the private sector and the predictability of policies.

There is a long-standing complaint by the private sector that the state-owned and party-affil-
iated enterprises (endowments) benefit from privilege access to policymakers. They are per-
ceived to have received preferential treatment, for example, in terms of credit, government
contracts and foreign exchange allocation, which the government however firmly denies. The
issue of the party-affiliated enterprises has been particularly sensitive politically. A survey
report of the World Bank, found that state-owned enterprises are more likely to have access to
public procurement and finance than their private counterpart, but that there is no strong evi-
dence of such favouritism towards party-affiliated firms. The report concluded that the issue
in large part (complaint about party-affiliated enterprises) is one perception of the credibility
of Ethiopia’s commitment to provide a level playing field.

  3.4 Chemical Industry - Specific Issues

This industry has the potential of providing a high degree of economic growth and drive
subsequent industries with locally available raw material inputs, coal being a strategic en-
ergy source that drives all other industries. There is great potential for growth in the chemi-

9
World Bank (2009)
10
For example, starting in 2011, private banks were forced to purchase National Bank of Ethiopia bonds at 27 per cent of
their lendable capital in an effort to finance massive public investments. It has been claimed that this was started to
crowd out the private sector from access to credit.

40
cal industry, with new licences being granted that are likely to see the growth of other val-
ue chains extending into the petrochemical, agricultural and other chemical value chains.
Ethiopia needs to develop new value chains in view of increasing consumer demand. These
industries have not been receiving support on the same scale as other industries in the min-
ing of raw and bulk mineral products. There has been little legislative policy and the capital
financing for the development of traders and processors to start or develop business.

Unreliable data on production yield levels, potential areas for increased production and fea-
sibility studies on establishing new value chain players or factories exacerbates the situation.
Lack of a clear government strategy or guidelines in the past have not helped the industry
attain a critical mass. The operations of most players in the industry is on a downward scale.
There is a lack of information among producers and traders about prices and potential mar-
kets, which creates uncertainty with regard to margin and profitability. In an atmosphere of
uncertainty, traders must include larger margins to cover potential risks observed in the sup-
ply chains not controlled by organizations.

  3.4.1 Issues Related to Fertilizers

Electricity and raw material costs have been the major cost drivers of fertilizer production in
Ethiopia. Increases in global prices of raw material inputs considerably erode the competi-
tiveness of local producers. Capacity utilization is another major issue. The transportation
network’s failure to consistently deliver and the low uptake of phosphate rock by fertilizer
producers has resulted in costs to skyrocket. Unreliable orders from the government have led
to firms scaling down their production operations. Fertilizer prices have increased on account
of a number of factors such as lack of raw materials, energy and labour costs.

  3.4.2 Issues Related to Industrial and Other Chemicals

The limited natural chemical resource base and small market explain why economic invest-
ment remains the main constraint for this industry. Other major constraints in this indus-
try include shortage of local raw materials, shortage and interrupted supply of imported raw
materials, weak domestic market demand, weak export market demand, heavy competition
abroad, breakdown of machinery, shortages of spare parts for machinery, cash flow difficulties
and labour disputes.

  3.4.3 Issues Related to Consumer Care Products

Overreliance on imports in this industry is attributable to the deterioration of the value chain
as evidenced by the closure or partial closure of some the key firms in the value creation pro-
cess. Some firms in the value chain have resorted to importing finished goods from import
markets and selling them locally. Another factor that has a negative impact on the value chain
is the decline in the quality of products made locally vis-à-vis imports from the developed
world. The quality of products has been affected by the obsolete plant and machinery that

41
requires replacement in light of new developments in the technological sphere. Another chal-
lenge firms in the value chain face is the low productivity of workers compared to that of other
companies abroad.

  3.4.4 Issues Related to Cement Producers

Cement and lime processes are highly energy intensive. In a typical cement factory, energy
accounts for 30 per cent of the cost of production, with coal comprising the largest share.
Increases in the cost of energy could be mitigated by optimizing operational efficiency and
through technology improvements. However, the estimated increases in energy costs in the
medium term are likely to outstrip the industry’s ability to adapt to market changes. The key
issue therefore is energy supply constraints. Supply constraints have considerably affected
capacity utilization and competitiveness. It is important to note that these supply constraints
are not limited to electrical energy, but also expand to coal and other liquid fuels. The only
appropriate response to these challenges is to address the issue of energy security as a macro-
economic issue.

  3.4.5 Issues Related to Glass Producers

Glass production is energy intensive and this industry therefore also suffers from energy sup-
ply constraints. This indusry requires new packaging and labelling technologies and has had
difficulties in identifying new market opportunities. Consequently, local producers lack com-
petitive edge over international ones. Working capital to finance operations would be required
at a far cheaper rate than currently being offered by the formal banking system. Ethiopia has
limited foreign exchange liquidity to provide recapitalization for the glass production industry
and to introduce the latest machinery and new innovations. Entry into external markets is one
opportunity that the industry needs to tap into.

  3.4.6 Issues Related to Specialty Chemicals (Plastics & Rubber)

Lack of technology and technological development makes it difficult to be competitive in this


industry. Another problem producers face is the lack of working capital. The formal banking
institutions charge high lending rates on working capital. Imports from the region provide stiff
competition. High operational costs and expensive input imports means lo cal production
cannot invest into modern quality management systems, thus further eroding the industry’s
competitiveness.

42
43
CH A PTE R I I

SECTOR SELECTION AND PRIORITIZATION IN ETHIOPIA’S CHEMICAL


INDUSTRY

1. Introduction
2. An Overview of Ethiopia’s Infrastructure
3. Industry & Sectoral Level Assessment
4. Dynamism and Revealed Comparative Advantage Analysis
5. Assessment of Production Capacity and Export Competitiveness:
Chemical Sub-Sectors of Ethiopia
6. General Assessment of the Potential of the Chemical Sub-Sector:
Logical Matrix

44
1. Introduction

There is ample empirical research demonstrating that the manufacturing sector plays a key
role in growth, particularly when countries are at a relatively low income level, as is the case of
Ethiopia. Manufacturing offers the possibility of higher levels of productivity, more rapid pro-
ductivity growth and greater technological change than agriculture, or below a certain income,
many parts of the services sector. In addition, it can generate jobs that offer higher wages due
to the higher level of productivity. Hence, there is usually an association between the growth
of an economy and the size and growth of its manufacturing sector11. Consequently, resources
could be optimally allocated to maximize the social welfare function.

The objective of developing an action plan for Ethiopia’s chemical industry was driven by the
need for inclusive industrial development so that all parts of society benefit from industrial
advancements. It should help reduce absolute poverty and inequality and provide dignified
employment to both women and men. The key issue in policy terms is to ensure that manu-
facturing activities grow more rapidly to create both direct and indirect jobs through linkage
effects. The globalization of production processes and consumption have accelerated the spe-
cialization of manufacturing tasks, and contributed to inequalities in the labour market in
terms of differences in wages and employment opportunities between skilled and unskilled
labour and between men and women. Whilst manufacturing alone cannot resolve all problems
of inclusion, an approximate negative correlation between the share of manufacturing in a
country’s GDP and the levels of both poverty and inequality does exist. Bringing more people
into formal employment is not a sufficient condition for inclusive development, it is also equal-
ly important for the spillovers of manufacturing to percolate down to the rest of the economy. A
country’s industrial structure is endogenously determined by its factor endowment structure
(i.e. structure of labour and capital)12.

Consequently, the initial endowment provides comparative advantage and optimal industrial
structure for some but not all industries. Among the high-tech industries, the chemical in-
dustry not only increases manufacturing value added rapidly through fast growth of labour
productivity—similar to machinery and equipment and electrical machinery and apparatus—
at late stages of industrial development, but may also emerge at an early stage of industrial
development due to the mixed characteristics of the chemical industry, which seem to reflect
the fact that it includes the production of a broad range of products with diverse technological
and value-added content (including basic chemical products for basic human needs). In this
sense, the chemical industry assumes a special role amongst manufacturing industries as it
not only caters to humans’ basic needs, but also contributes to the creation of formal manu-
facturing jobs with decent wages across development stages. Moreover, the chemical industry
serves as an incubator and accelerator of other manufacturing activities and manufacturing-
related services such as the biotech and pharmaceutical industries. For Ethiopia, sustainable
development also necessitates eliminating the remaining incidences of extreme poverty and
reducing regional disparities within the economy. For this reason, UNIDO promotes the con-

11
UNIDO (2015).
12
Lin (2012).

45
cept of Inclusive and Sustainable Industrial Development (ISID), which is closely related to the
United Nations Sustainable Development Goal 913. Growing labour productivity without accom-
panying higher market demand limits the spillovers of industrial development. This requires
Ethiopia to upscale the basic chemical industry to lay the foundation before diversifying its
chemical industry from low technological and value-added content into a dynamic and more
sophisticated structure.

There is no single path to development, but cross-country experiences reveal general pat-
terns and trends, which can be attributed to country-specific sectors. There is, however, one
consistent finding of normal development patterns, namely when an agro-based economy
transforms into a manufacturing-driven economy, its per capita income grows. Due to agglom-
eration effects, high levels of population density tend to be associated with relatively high
levels of manufacturing. On the other hand, countries with large levels of natural resources
have lower than expected levels of manufacturing for their income level. Available natural
resources impart advantages, but absolute advantages in manufacturing require both skills
and technology. Similarly, countries with high labour costs and poor governance have lower
levels of manufacturing than expected. Whilst there may be some developing countries that
have a significant potential in high productivity activities, such as tourism services or mineral
processing, a need will eventually arise in most countries to develop some form of manufactur-
ing. This requires that adequate support for manufacturing is available and that key aspects of
the investment climate, like high quality infrastructure, training activities and a stable macro-
economic environment, are in place.

Two low-income economies, the Republic of Korea and Malaysia, emerged as major chemical
producers in the 1960s by adopting a focused approach to support manufacturing. The ‘Mira-
cle on the Han River’ was marked by rapid industrialization, technological advancement, ur-
banization, democratization and globalization, which transformed the resource-poor Republic
of Korea from a nearly zero to a trillion dollar economy. Likewise, the oil-rich Malaysia also fol-
lowed a focused approach to emerge as a chemical manufacturing giant in less than a decade.
Their cross-country experience is a useful example of the allocation of resources, which could
help transform Ethiopia’s economy into a chemical manufacturing hub in the region. The as-
sessment of the industry’s production capacity is also an essential element that is considered
in the selection because the export of manufactured products to new destinations requires a
thorough analysis of production capability, market demand and cost competitiveness, along-
side robust testing and certification procedures to ensure product quality. As governments
always have limited resources to invest in hard and soft infrastructure, identification is neces-
sary because specialization, agglomeration, and clustering are vital for reducing transaction
costs in any given industry, including the chemical industry. Based on an export competitive
analysis, a country’s chemical industry’s cost competitiveness (i.e. competitive unit labour
costs and strong market demand) could be prioritized for upscaling.

13
UNSDG 9 is dedicated to building resilient infrastructure, promoting inclusive and sustainable industrialization and foster-
ing innovation.

46
2. An Overview of Ethiopia’s Infrastructure

According to the World Bank (2011), infrastructure has contributed 0.6 percentage points to
Ethiopia’s annual per capita GDP growth over the last decade. Raising the country’s infrastruc-
ture endowment to that of the region’s middle-income countries could add an additional 3 per
cent to infrastructure’s contribution to economic growth. The country’s greatest infrastructure
challenge lies in the power industry, where an additional 8,700 megawatts of power genera-
tion capacity are needed over the next decade, implying a doubling of the current amount.
The transport industry is afflicted by low levels of rural accessibility and inadequate road
maintenance. Ethiopia’s ICT industry currently suffers from a poor institutional and regula-
tory framework. Addressing Ethiopia's infrastructure deficit requires a sustained annual ex-
penditure of USD 5.1 billion over the next decade. The power industry alone requires USD
3.3 billion annually, with USD 1 billion needed to facilitate regional power trading. Improving
road maintenance, removing inefficiencies in power (notably under-pricing) and privatizing ICT
services could reduce the gap. A significant increase in Ethiopia’s already proportionally high
infrastructure funding is necessary and careful handling of public and private investments for
timely infrastructure development.
In addition to production factors, improved logistics and basic infrastructure could also facili-
tate industries’ development. Increased investments in infrastructure could lay a solid foun-
dation for the growth of manufacturing and other manufacturing related-service industries to
facilitate Ethiopia’s structural growth.

Figure 7 Quality of infrastructure: Comparison with selected comparators and income groups

Source: World Bank’s Logistics Performance Index (The World Bank, 2018)

47
The Logistics Performance Index (LPI) is an interactive benchmarking tool created by the World
Bank to help countries identify the challenges and opportunities they face in their performance
on trade logistics and what they can do to improve their performance. As highlighted in Figure
7, the performance of Ethiopia in hard infrastructure is almost at par with that of countries in
the low- to lower middle-income group.

  ° Ethiopia’s FDI inflow experienced an approximately three-fold increase between 2008


and 2016 (Ethiopian Investment Commission, 2018), particularly in those labour-inten-
sive industries that often emerge in the early stage of industrial development in which
the existence of quality infrastructure is key for competitiveness and integration into
global production networks.

  ° The Chinese Huajian group has stepped up investments in Ethiopia with the “Ethiopia-
Huajian International Light Industry City” which is a success story that it is expected to
generate annual revenues of USD 2 billion and create 50,000 to 60,000 local jobs (UNI-
DO, 2017).

Considerable progress has been made in the improvement of customs and international ship-
ments infrastructure in Ethiopia compared to neighbouring comparators and those in the
same income group, which has contributed to the recent increase in foreign direct investment
(FDI). Ethiopia, however, still lags far behind in terms of timeliness in comparison to other
landlocked comparators, i.e. Bolivia, Sudan and Djibouti.

3. Industry & Sectoral Level Assessment

This section examines the production and employment dimensions which are crucial to in-
clusive and sustainable industrial development. Sustaining industrial growth and generating
employment are crucial to UNIDO’s mandate on SDG 9 (build resilient infrastructure, promote
sustainable industrialization and foster innovation). This section provides information that
policymakers can use in support of evidence-based industrial strategies or policies, the slope
and turning points of the curves in Figure 8 and Figure 9 represent:

  ° The level of GDP per capita associated with the sunset or sunrise of the manufacturing
sector. Countries that are developing medium- to long-term strategies may find it useful
to understand and formulate the skills, infrastructure and interventions needed to up-
grade the performance of emerging industries.

  ° The speed of structural change is the time needed for a given industry to transition from
sunrise to sunset. The GDP per capita range characterizes the length, i.e. an industry’s
life cycle. The speed and length are useful information for the policymaker to understand
how long certain manufacturing industries will continue to provide the expected value
added and employment impact.

48
  ° Policymakers may be interested not only in industries with emerging potentials (the lev-
els of the curves), but also in the speed, length and tipping points of pattern lines. For ex-
ample, low-income, large countries that are developing labour-intensive industries may
want to know the extent of the potential range of income these industries can attain and
at which stage they will decline, and particularly whether such changes in the trend could
occur in a relatively short income range.

  3.1 Potential of Value Creation

A crucial indicator that highlights an industry’s prowess in the national economy is its poten-
tial value creation. Value addition in its most common understanding describes the value a
company adds to its product or service before offering the product to customers. On the other
hand, the contribution of a private industry or government to overall gross domestic product
(GDP) is an industry’s value addition. If all stages of production occurred within a country’s
borders, the total value added at all stages is counted towards the country’s GDP. The total
value added is the market price of the final product or service, and only counts production
within a specified time period. The value added of an industry is the difference between the to-
tal revenue of an industry and the total cost of inputs purchased from other businesses within
a reporting period. An industry’s total revenue or output consists of sales and other operating
income, commodity taxes, and inventory change. Inputs that were purchased from other firms
to produce a final product include raw materials, semi-finished goods, energy and services.

Figure 8 The potential of value added creation across development stages

1,000 Chemicals and chemical products


Electrical machinery and apparatus
400 Food and beverages
Machinery and equipment n.e.c.
Real value added per capita (US$ 2005)

Fabricated metal products


150 Motor vehicles, trailers, semi−trailers
Basic metals

55 Rubber and plastics products

Non−metallic mineral products


20
Textiles

8 Wearing apparel, fur

3 High−income threshold

1 Upper−middle−income threshold

Income level of Ethiopia


0 Lower−middle−income threshold

1,000 3,000 8,100 22,000 38,500 60,000


Real GDP per capita (PPP constant 2005)

Source: UNIDO elaboration based on UNIDO INDSTAT2 rev.3 (2018)

Figure 8 highlights that at low- to lower middle-income levels below USD 5,000 (constant 2005
PPP), there are commonly three industries that dominate the manufacturing sector: (i) Food

49
and beverages, (ii) Textile, and (iii) Wearing apparel. These industries achieve the highest level
of manufacturing value added per capita. They are closely related to basic human needs, and
usually exist before industrialization “takes off”. In this “early” stage of economic develop-
ment, labour-intensive industries14 clearly have higher levels of manufacturing value addition,
and their growth rates are also not much lower than those of emerging capital-intensive in-
dustries.

Countries at the income level of Ethiopia typically have comparative advantages in food and
beverages, textile, wearing apparel, non-metallic mineral and certain chemical industries.
Once countries have reached lower- to upper middle-income levels, their propensity to gradu-
ally lose out in terms of cost competitiveness in the textile and wearing apparel industries
and other labour-intensive economic activities increases due to rising labour costs. Due to
factor accumulation and broad categories of products with diverse technological content in
the chemical industry, it typically remains the biggest contributor next to food and beverages
until a fairly late stage of development.

The chemical industry is a broad manufacturing industry at a low- and lower middle-income
level, with basic chemicals sub-sectors emerging to supply household and agro-chemical
products and meet domestic demand including soaps, cleaning and cosmetic preparation
products and fertilizers, just to name a few. The chemical industry is contributes to a country’s
value added output and employment, especially in those countries that have undergone eco-
nomic structural transformation from an agrarian economy to sectors with higher productivity
and complexity. A certain level of demand for basic chemical products, i.e. agro-chemical and
fertilizers to modernize agricultural practices and colouring matters and tanning agents, serve
as primary materials to the textile and wearing apparel industries, both of which are major
contributors to value addition at early stages of industrial development.

  ° Large domestic markets nurture industries for which economies of scale are important. In
addition, multinational corporations tend to build manufacturing and refinery plants in
large countries and turn them into a regional hub to serve smaller countries in the region
through exports. For instance, neighbouring Eritrea, Djibouti, Somalia and South Sudan
are among the top-importers of Ethiopia’s chemical products.
  ° Ethiopia could also benefit from its geographical proximity to South Asia and Middle East
markets. As these countries gradually develop, they tend to lose comparative advantage
in certain labour-intensive chemical sub-sectors. This gives Ethiopia the opportunity to
enter international market spaces that are opening up due to loss of competitiveness
among comparators. Furthermore, there is potential for a relocation of firms from com-
parator countries to Ethiopia, together with their knowledge and access to international
markets15.

14
In order to determine labour intensity, employment per unit of value added was estimated at USD 5,000 and USD 20,000
GDP per capita (constant 2005 PPP) because labour intensity changes with income levels. If an industry’s labour intensity
was higher than the median for 18 manufacturing industries at both income levels, it was considered labour intensive.
Among the industries presented here, the food and beverages, textile and wearing apparel industries are labour intensive
while the others are relatively capital intensive.
15
The Chinese Huajian group has stepped up investment in Ethiopia with “shoe city” being one of the success stories in the
footwear industry.

50
It should be noted that in large countries with a population of about 100 million like Ethiopia,
depending also on geographic location and proximity to major markets, the chemical industry
(especially sub-sectors supplying domestic-oriented chemical products) has the potential to
become one of the largest industries in middle stages of development.

  3.2 Potential of Employment Creation

A significant body of research claims that earnings from employment are the most important
driver of poverty reduction16. The World Development Report 2013 argues that “jobs are the
most important determinant of living standards around the world”, serving to “boost living
standards, raise productivity, and foster social cohesion.” The importance of jobs for develop-
ment and poverty reduction is a critical argument in favour of sustainable economic develop-
ment. While the quantity of jobs created is an overwhelming priority for many governments,
including Ethiopia’s, the quality of those jobs is also an important issue. The ILO’s Decent
Work Agenda sets out to increase access to full and productive employment with rights at
work, social protection and social dialogue. The ILO estimates that 60 per cent of the workforce
in developing countries works in the informal sector, with 34 per cent earning below USD 2 per
day. This situation is even worse in the sub-Saharan region. In Ethiopia, agriculture continues
to be the major employer. Over half of Ethiopia’s population have vulnerable job conditions17.
This is a critical indicator for determining the contribution of the manufacturing sector in em-
ployment generation.

Figure 9 The potential of employment generation across development stages

1 High−income threshold
Manufacturing employment to population (percent)

Food and beverages


0 Upper−middle−income threshold

Fabricated metal products

Machinery and equipment n.e.c.


0
Chemicals and chemical products Rubber and plastics products

Electrical machinery and apparatus

Motor vehicles, trailers, semi−trailers

0 Lower−middle−income threshold Wearing apparel, fur

Basic metals

Textiles
0

1,000 3,000 8,100 22,000 38,500 60,000


Real GDP per capita (PPP constant 2005)

Source: UNIDO elaboration based on UNIDO INDSTAT2 rev.3 (2018)

16
Baulch (2011).
17
http://www.ilo.org/global/about-the-ilo/decent-work-agenda/lang--en/index.htm

51
As highlighted in Figure 9, manufacturing value added pattern lines are useful to detect the
comparative advantage of manufacturing industries and their growth prospects. Employment
pattern lines are useful to identify the most labour-intensive industries and the possible paths
of employment given a certain level of GDP per capita. Labour-intensive industries seem to be
crucial for the development of employment opportunities at low incomes and early stages of
industrial development. As the labour force moves from agriculture to formal paid employ-
ment, labour-intensive industries offer a pivotal opportunity by facilitating shifts in the labour
force and accommodating the productive absorption of excess labour. It is therefore important
for countries at Ethiopia’s income level to lay a solid foundation for the development of more
capital-intensive chemical sub-sectors to gradually diversify and upgrade their industrial
structure.

  ° Countries experiencing a transition from lower- to upper middle-income show a tendency


to experience declining value added and employment in labour-intensive industries, es-
pecially in the textile and wearing apparel industries and certain chemical sub-sectors
due to rising factor costs.

The employment pattern in Figure 9 indicates that the food and beverages, textile and wearing
apparel industries are the three major sources of formal manufacturing employment, at least
up to a middle stage of economic development. Typically, the chemical industry is relatively
domestic-oriented at the early stages of industrial development with a large share of a coun-
try’s final output consumed in the domestic market.

During the early stage of industrial development, there is opportunity for factor accumulation,
especially human capital. This is particularly true in the case of the chemical industry, which
includes the production of a broad range of products with diverse technological content. As
emphasized earlier, such structural transformation does not happen overnight; only continu-
ous improvements in factor endowment, such as skilled labour, will make a difference at a
later stage of industrial development.

In other words, the chemical industry’s competitiveness (in particular, the labour-intensive
chemical sub-sectors at early stages of industrial development) is an indicator for successful
early stage industrialization and reflects the fact that the creation of formal manufacturing
employment can sustain long-run growth in employment, whereas both textiles and wearing
apparel face rapid declines in employment at middle stages of economic development. Ethio-
pia’s chemical industry has already achieved a certain critical mass in the labour-intensive
chemical sub-sectors like soap, detergents, paints, etc. However, a competitive wage struc-
ture and a young labour force could be assets for achieving cost competitiveness. Being labour
intensive, cost competitiveness in these industries would be a decisive factor for success.
Ethiopia’s competitive wage level and abundant trainable labour force already provide the
country with a distinct advantage, which is not available in many countries, especially in small
sub-Saharan African countries.

52
  3.3 Potential for Exports of Ethiopia’s Chemical Products

Traditionally, Ethiopia has a strong agricultural base and, consequently, its exports are domi-
nated by agro-based industries. The vegetables industry alone accounts for an export value of
USD 2.3 billion, accounting for nearly 75 per cent of total exports. Coffee, sesame seeds, cut
flowers and pulses rank high among Ethiopia’s agro-exports and markets for these products
can be found around the world. However, these industries have failed to raise the share of
exports in GDP to 22.5 per cent as targeted by the GTP I plan. Currently, the economy is strongly
focused on agricultural commodities that are subject to price fluctuations. Only 14 per cent of
Ethiopia’s exports are semi- or fully processed. Due to the narrow export basket and the lack
of manufactured exports, price fluctuations cannot be adequately compensated. Accordingly,
the GTP II plan highlights “improving production capacity, utilizing the opportunities in the
international market and encouraging the manufacturing sector to engage in the production
of manufactured exports”.

The top-three market destinations for Ethiopia’s chemical sub-sectors are presented in Table
14. As this analysis shows, Ethiopia’s major trading partners are neighbouring countries and
those in the region with whom Ethiopia maintains strong trade connections in several key
chemical sub-sectors, such as basic chemicals, agro-chemical, soap and cleaning products.

Table 14 Ethiopia’s major import partners for trade (chemical sub-sectors in 2016)

Share of Rank
Export Share of
Ethiopian exports of Ethiopia
Country values resp. sector
in imports among
(US$) exports
of trading partner importers

Basic chemicals except fertilizers


Israel 750,482 0.044180% 0.05946% 42
Malaysia 136,046 0.008010% 0.00306% 54
Sudan 39,765 0.002340% 0.04473% 31
Plastics in primary forms; synthetic rubber
Djibouti 63,454 0.003740% 0.06788% 21
Turkey 18,047 0.001060% 0.00025% 65
Vietnam 1,374 0.000081% 0.00003 61
Pesticides and other agro-chemical products
Turkey 75,415 0.004440% 0.02127% 38
Djibouti 16,124 0.000949% 0.13544% 14
Oman 29 0.000002% 0.00012% 35

53
Paints; varnishes; printing ink and mastics
Somalia 73,422 0.004320% 0.68426% 7
Djibouti 9,468 0.000557% 0.09466% 21
Germany 12 0.000001% 0.00000% 80
Pharmaceuticals; medicinal chemicals; etc.
Niger 550,586 0.032410% 0.71831% 11
Senegal 356,559 0.020990% 0.13590% 19
Angola 200,322 0.011790% 0.08771% 20
Soap; cleaning & cosmetic preparations
Sudan 364,518 0.021460% 0.36480% 22
United Kingdom 123,828 0.007290% 0.00179% 65
Saudi Arabia 107,401 0.006320% 0.00879% 56
Other chemical products n.e.c.
Hong Kong, SAR 375,566 0.022110% 0.00799% 43
Zambia 269,266 0.015850% 0.25498% 20
India 238,055 0.014010% 0.00673% 66
Man-made fibres
Portugal 221,384 0.013030% 0.09655% 30
Morocco 70,054 0.004120% 0.06225% 24
Algeria 61,755 0.003640% 0.11700% 22
Source: UNIDO calculations based on UN Comtrade (2018))

The results of the analysis in Table 14 are indicative of the fact that Ethiopia still belongs to
the top-50 ranked exporters in the three largest markets for Ethiopia’s chemical sub-sectors.

  - The soap, cleaning & cosmetic preparations industry has particularly strong trade con-
nections with Sudan.
  - Similar observations can be made for the chemical sub-sectors of (i) Paints, varnishes,
printing ink and mastics (ii) Pharmaceuticals; medicinal chemicals; etc. (iii) Ethiopia
ranks among the top-30 exporters of man-made fibres to Somalia, Djibouti, Niger, Sen-
egal, Angola, Portugal, Morocco and Algeria.

54
  - On the other hand, when looking at the export shares and rankings in the top-three mar-
kets, Ethiopia is still not a major exporter in those sub-sectors promoted by the country’s
Tech Roadmap, i.e. the basic chemicals sub-sector.
  - Performing at 0.06 per cent of total imports in Israel’s basic chemical products market
brought revenues of USD 750,500 to Ethiopia. By contrast, 0.06 per cent of total imports in
Morocco’s man-made fibres products market brought revenues of USD 70,000 to Ethiopia.

In terms of trade size, there is still untapped potential in the international market of basic
chemical products for Ethiopia to further develop under the Tech Roadmap. Malaysia and Su-
dan are the second and third largest markets after Israel.

Ethiopia’s trade balance suggests that the chemical sub-sectors (i) Basic chemicals, (ii) Fer-
tilizers and nitrogenous compounds, (iii) Plastics in primary forms and synthetic rubber, (iv)
Pharmaceuticals, medicinal chemicals, etc., are among the sub-sectors with the highest trade
balance deficit in 2015, which amounted to USD 2.3 billion and accounted for 74 per cent of the
trade deficit in Ethiopia’s chemical industry alone. In other words, domestic demand in all cat-
egories outstrips the potential need for exports. Table 15 highlights the improved performance
of the chemical industry in terms of exports. The export Figures are negligible compared to
imports in each category. With the exception of for fertilizers, the exports under each category
in value terms have experienced an increasing trend.

Table 15 Ethiopia’s trade balance (chemical sub-sectors)

Year Total gross exports Total gross imports (US$) Trade balance
(US$) (US$)

Basic chemicals except fertilizers


2014 270,303 437,000,000 -
2015 54,368 408,000,000 (408,000,000)
2016 958,053 215,000,000 (214,000,000)
Fertilizers and nitrogen compounds
2014 - 478,000,000 -
2015 56 429,000,000 (429,000,000)
2016 - 546,000,000 -
Plastics in primary forms; synthetic rubber
2014 278,647 532,000,000 (532,000,000)
2015 39,626 699,000,000 (699,000,000)
2016 84,389 382,000,000 (382,000,000)

55
Pesticides and other agro-chemical products
2014 44,939 90,700,000 (90,700,000)
2015 1,521 102,000,000 (102,000,000)
2016 91,568 116,000,000 (116,000,000)
Paints; varnishes; printing ink and mastics
2014 3,430 41,100,000 (41,100,000)
2015 13,689 48,900,000 (48,800,000)
2016 82,903 40,400,000 (40,400,000)
Pharmaceuticals; medicinal chemicals; etc.
2014 977,633 468,000,000 (467,000,000)
2015 998,262 746,000,000 (745,000,000)
2016 1,743,594 822,000,000 (821,000,000)
Soap; cleaning & cosmetic preparations
2014 1,775,347 219,000,000 (217,000,000)
2015 1,701,859 227,000,000 (226,000,000)
2016 982,398 145,000,000 (144,000,000)
Other chemical products n.e.c.
2014 425,705 290,000,000 (289,000,000)
2015 412,683 368,000,000 (368,000,000)
2016 1,117,846 638,000,000 (637,000,000)
Man-made fibres
2014 1,134,377 50,600,000 (49,500,000)
2015 995,693 58,500,000 (57,500,000)
2016 452,807 41,700,000 (41,200,000)
Source: UNIDO calculations based on UN Comtrade (2018)

  - Macro conditions, such as the exchange rate, credit challenges and price volatility of chem-
ical products may have an impact on the chemical industry’s terms of trade which have
deteriorated considerably over the course of three years (2014-2016).

56
  - For low-income countries in particular, export variety is a crucial growth determinant, how-
ever, this is not the case for Ethiopia. In Table 15, five of nine chemical sub-sectors, namely
(i) Basic chemicals, (ii) Fertilizers and nitrogen compounds, (iii) Plastics in primary forms;
synthetic rubber, (iv) Pesticides and other agro-chemical products, and (v) Paints; varnish-
es; printing ink and mastics registered export values less than USD 100,000 on average.
  - Sub-sectoral heterogeneity may also play a role in the variation of trade values, for in-
stance, the structure of production among sub-sectors varies, and higher technological
content and capital goods are often attributable to higher gross value per unit. The trade
balance captures the aggregated gross value of trade, but not the country’s industrial spe-
cialization.

  °  This heterogeneity can be further studied by examining the terms of trade (product unit
price aggregated at sub-sectoral level using a weighting method), the sectoral decompo-
sition of relative prices of exports can capture the quality of chemical exports.
  °  International trade theory shows that relative prices determine industrial specialization
and welfare gains resulting from trade openness. Export and import price indices are use-
ful instruments for assessing trade performance in terms of quality and volume within
Ethiopia and among comparators.

However, it is not just the variety of products that countries export that plays a role – technical
change and upgrading are also necessary. Upgrading the existing production structure may
prove a better strategy once the developing country has attained higher quality levels in the
products it already exports. It can then diversify into more sophisticated and technologically
intense varieties (typically exported by industrialized economies) by entering these product
classes on the low quality, low price-end of the quality ladder.

It is generally believed that an improvement in the terms of trade increases a country’s eco-
nomic welfare. The terms of trade represent the extent to which exports of locally produced
goods at higher export prices and the purchase of foreign produced goods at lower prices is
expected to increase welfare. This has a certain caveat, however18.

  ° 
The terms of trade are an important indicator of aggerate trade and its measure helps
global imbalances at the world level. It can also be applied to sub-sectoral analyses
(Gaulier, Martin, Mejean & Aignago, 2008).
  ° 
The terms of trade ( ) are represented by the ratio of the weighted export price index
( ) to the weighted import price index ( ):

  °

  °  The export and import weighted price indices are calculated based on the Paasche meth-
od using Ethiopia’s external trade unit values from UN Comtrade (2018). In this formula,

18
Volume and price effects are lined and must be analysed together, as changes in export volumes are related to changes in
prices and vice versa. For instance, if a sub-sector that produces homogeneous products expands its export volumes, this is
likely due to a decrease in price, which implies a decline in the terms of trade. If the export price per unit increases simul-
taneously with export volume, technical change and product upgrading (higher value added per product) play a pivotal role.

57
an increase in the price ratio reflects an improvement in the sub-sector’s terms of trade.
  °  The terms of trade explain the aggregated and sectoral trade price indices of Ethiopia’s
chemical sub-sectors. These indices are computed using unit values derived from UN
Comtrade (2018) at the HS 4-digit level. The product unit values are aggregated based on
the trade value weight at time with 2010 as the base year.
  °  The Paasche index aggregates the price changes of products using current period weights.
It thus better captures changes in the structure of trade. It is an harmonic average of el-
ementary indices weighted by the share of each product in the current traded value for
the export price index and import price index:

  ° 


  ° 

To assess the terms of trade of Ethiopia’s chemical sub-sectors, Figure 10 illustrates the devel-
opment of relative trade prices of eight sub-sectors of Ethiopia’s chemical industry.

Figure 10 Terms of trade (chemical sub-sectors of Ethiopia, 2010-2016)

Pesticides and other agro−chemical products


3
Terms of trade

Pharmaceuticals; medicinal chemicals; etc.


2 Other chemical products n.e.c.
Basic chemicals; except fertilizers

Fertilizers and nitrogen compounds


1
Soap; cleaning & cosmetic preparations
Paints; varnishes; printing ink and mastics

0 Plastics in primary forms; synthetic rubber

2010 2011 2012 2013 2014 2015 2016


Year

Source: UNIDO elaboration based on UN Comtrade (2018)

Despite the deterioration of the trade balance deficit of the chemical sub-sectors, four chemi-
cal sub-sectors, namely (i) Basic chemicals, (ii) Fertilizers and nitrogen compounds, (iii) Soap;
cleaning & cosmetic preparations, (iv) Paints; varnishes; printing ink and mastics show in-
creasing terms of trade in the period of 2013-2016. This heterogeneity can be studied further
by examining the components from which the changes in the terms of trade are calculated.

58
The four chemical sub-sectors with improving terms of trade largely benefited from increasing
weighted export price, with the exception of the soap; cleaning & cosmetic preparations sub-
sector, which experienced a decreasing weighted import price.

The terms of trade of other chemical sub-sectors regressed sharply after 2012, mainly due
to the increase in weighted import price. Increasing terms of trade could signal the latency
potential of the chemical sub-sectors in the international market due to the increasing quality
of exports. Nonetheless, the trade balance deficit of on average USD 400 million suggests a
substantial shortfall in supplying domestic demand.

It is evident that there is much untapped potential for Ethiopia’s chemical sub-sectors to
further upscale and upgrade production, considering its abundant and competitive labour
resources. A higher technological content of exports runs alongside the gains in the barter
terms of trade in manufacturing; failure to upgrade the quality of exports is accompanied by a
deterioration of the barter terms of trade in manufacturing19.

  ° 
Upscaling and upgrading of chemical sub-sectors should go hand-in-hand to ensure not
only that the volume of production increases but also that the quality of production im-
proves. The quality of production translates into value added and technological content
in products and the adoption of best practices.
  ° 
Countries should consider quality differences within specific product categories or indus-
tries (vertical differentiation), and that developing countries can increase their economic
performance by improving the quality of their manufacturing exports.

To reiterate the terms of trade and associated requirements to upscale and upgrade, the ex-
perience of two major exporters of chemicals, namely Malaysia and the Republic of Korea,
highlights that the increase in the terms of trade is often the outcome of technological change
and upgrading (see Annex). Sound export structures are crucial for growth and development,
with high-tech products generating the greatest benefits for exporters in terms of spillover ef-
fects, dynamically increasing returns (learning curve effects) and dynamism in world trade20.

  - The terms of trade of Malaysia and of the Republic of Korea underwent different develop-
ments. A sectoral analysis allows us to understand the determinants of these differences.
  - It is worthwhile to reiterate that Malaysia experienced an appreciation of its terms of
trade in other chemical product sub-sectors due to the strong foreign demand for specific
chemical products. The five products listed below have the highest export value in the
chemical industry, and make up an important share (80 per cent) of Malaysia’s chemical
exports.
  °  Chemical elements for use in electronics in the form of discs
  °  Reaction initiators, reaction accelerators and catalytic preparations
  °  Prepared glues and adhesives
  °  Activated carbon

19 UNIDO (2018).
20 Lall (2011).

59
  °  Mixtures of odoriferous substances.
  - The Republic of Korea experienced an appreciation of its terms of trade in the soap, clean-
ing and cosmetic preparations sub-sector due to strong foreign demand for skin care
products. Beauty, make up and skincare products alone account for 66.5 per cent of the
country’s chemical exports.

Thus, the quality of exports is a key determinant of economic growth. Developing countries
should therefore strive to produce the goods that industrialized economies make21. At a later
stage of development, diversification towards dynamic products is extremely important, as
it limits the risk that the export market will become rapidly saturated and that prices will
decrease, while increasing the chances of exploiting the potential of long-term productivity
growth associated with export-oriented industrialization. To be able to produce such products
competitively, however, firms need to meet minimum productivity thresholds. Their capacity to
do so depends on economic and social framework conditions and government policy (UNIDO,
2018). As discussed in the first section, infrastructure and logistics are also key determinants
of industrial development as reflected in cost competitiveness. Therefore, Ethiopia should
strive not only to upscale its existing product portfolio, but also to generate quality, higher
value-added products as other low-income countries enter these markets.

4. Dynamism and Revealed Comparative Advantage Analysis

Comparative advantage is an economic term that refers to an economy’s ability to produce


goods and services at a lower opportunity cost than its trading partners. A comparative advan-
tage gives a company the ability to sell goods and services at a lower price than its competitors
and realize stronger sales margins. The law of comparative advantage is popularly attributed
to English political economist David Ricardo and his book “Principles of Political Economy and
Taxation”.

The concept of comparative advantage analysis pertains to the relative trade performance of
individual countries in particular commodities. Under the assumption that the commodity pat-
tern of trade reflects inter-country differences in relative costs as well as in non-price factors,
the comparative advantage of the trading countries is “revealed”. The factors that contribute
to shifts in RCA are economic: structural change, improved world demand and trade special-
ization.

  - It is of particular interest to learn about the export performance of sub-sectors in which
Ethiopia has relative comparative advantages (RCAs) compared to other world econo-
mies. This allows identification of sub-sectors that could enter the world market as highly
competitive participants. Identifying and unlocking the full growth potential of highly
competitive sub-sectors could result in an extensive growth boost to Ethiopian manufac-
turing growth.

21
Hausmann, Hwang & Ridrik (2007)

60
Figure 11 Dynamism and revealed comparative advantage (RCA) in 2016

10

9
Pesticides and other agro−chemical products Made−up textile articles; except apparel
8 Textile fibre preparation; textile weaving
Wearing apparel; except fur apparel Footwear

7 Paints; varnishes; printing ink and mastics Bakery products


Knitted and crocheted fabrics and articles
Pharmaceuticals; medicinal chemicals; etc. Cement; lime and plaster
Other chemical products n.e.c.
Dynamism index

6
Measuring/testing/navigating appliances;etc.
Basic chemicals; except fertilizers Tanks; reservoirs and containers of metal
Processing/preserving of meat
5 Man−made fibres Processing/preserving of fruit & vegetables
Basic precious and non−ferrous metals

0 0 0 0 0 1 3 7 20
National revealed comparative advantage
Note: Size of bubble represents size of industry based on export share (Ethiopia, 2016)
Blue−bubble represents industry with positive cumulative annual growth rate (Ethiopia, 2011−2016)
Red−bubble represents industry with negative cumulative annual growth rate (Ethiopia, 2011−2016)

Source: UN Comtrade (2018)

  - This assessment presented in Figure 11 not only allows identification of industries with a
comparative advantage based on export performance relative to world performance, but
also illustrates how dynamic these sub-sectors are:

  ° The y-axis of Figure 11 presents the dynamism index. It indicates the dynamism of
a sub-sector (based on a group of comparators). The dynamism index denotes the
normalized average export growth rate of each sub-sector (2011-2016) of the group of
comparator countries (large countries with an income per capita higher than Ethiopia).
  ° The x-axis of Figure 11 represents the revealed comparative advantage measures (RCAs)
of Ethiopia in 2016. The concept of comparative advantage based on Balassa (1965) is
derived by calculating the export share of product relative to all exports from
country 𝑖 to the rest of the world 𝑗 in proportion to the global export share of exports
of the respective good :



• A country is said to have a comparative advantage if the relative export
share for country 𝑖 exceeds the aggregated export share, in other words, if
( )

61
  ° The bubble size represents the export share of the sub-sector in Ethiopia’s total ex-
ports in 2016.
  ° The blue (red) bubbles represent sub-sectors with positive (negative) cumulative an-
nual growth rates in Ethiopia between 2011 and 2016.

  - This basic tool allows us to group sub-sectors based on their position in the two-dimen-
sional layout.

  ° There are several sub-sectors in Ethiopia that have a comparative advantage and are
attractive from a trade perspective (shown in the upper right panel), such as process-
ing/preserving meat, cement, footwear, textile fibre and made-up textile articles and
wearing apparel.

• It is not surprising that these are labour-intensive sub-sectors in which


countries at a similar level of income as Ethiopia’s (low- to lower middle-
income countries) manifest their comparative advantage. These countries
benefit from the abundant labour with relative low factor costs to develop
such labour-intensive industries (UNIDO, 2013). Due to these sub-sector’s
labour-intensive production processes, they employ much more labour
(and female employment) as they develop than other industries, contribut-
ing to the generation of formal manufacturing jobs with decent wages.
• It is promising that Ethiopia has comparative advantages in these fast-
growing sub-sectors and that they have become the country’s major ex-
ports as indicated by their bubble sizes.

  - Most of the chemical sub-sectors (upper left panel of Figure 11) display high dynamism,
but Ethiopia has yet to reveal its comparative advantage in the sub-sectors.

  ° The trade balance deficit as presented in Table 14 also confirmed the underperfor-
mance of these chemical sub-sectors.
  ° Although the chemical industry belongs to the high-tech group, on a positive note, cer-
tain chemical sub-sectors often emerge at an earlier stage of a country’s development
as discussed in an earlier section (see Figure 8).
  ° It is still important to analyse the feasibility of developing such domestic-oriented
chemical sub-sectors within the country to fully exploit Ethiopia’s comparative advan-
tage at the current and future stages of development.
  ° The development of these chemical sub-sectors is crucial to generate forward linkages
from the supply chain and increase domestic value added.

Figure 11 shows the success of exports in certain dynamic sub-sectors such as bakery prod-
ucts, footwear, knitted and crocheted fabrics, which is encouraging. In the face of declines in
textile and wearing apparel exports, the growth of basic chemical exports is in line with the
type of structural transformation that Ethiopia has to follow in the future.

62
5. Assessment of Production Capacity and Export Competitiveness:
Chemical Sub-Sectors of Ethiopia

As discussed earlier, the chemical industry is the only candidate among the high-tech indus-
tries that can sustain value-added growth as countries develop from the early stage of in-
dustrial development. This section provides an in-depth analysis of key chemical sub-sectors
identified by the Ethiopia Tech Roadmap and which have particularly noteworthy performance
patterns. These sub-sectors are analysed based on a set of parameters with the purpose of
assessing their performance at different stages of complexity.

The comparative advantage of a country is often represented by its ability to generate value
added and transform goods in the production process at lower factor costs than other players.
In a rapidly globalized economy, capital, goods and services move increasingly freely around
the world. Production is more often than not carried out along international value chains, with
components of finished goods being produced wherever this can be done most efficiently22.
For this, an international orientation is essential. From this perspective, we focus on the fol-
lowing assessment of the production capacity of two chemical sub-sectors (i) Basic chemicals
except fertilizers (ii) Soap, cleaning and cosmetic preparations:

  °  Value added generation
  °  Employment creation
  °  Export performance
  °  Unit labour costs, labour produvtivity and wages.

The assessment results indicate that well-performing comparators whose chemical sub-sec-
tors have been extremely successful are typically characterized by above-average labour pro-
ductivity and directly associated with an equally exceeding relative value-added generation.

  5.1 Assessment of Basic Chemicals, Except Fertilizers

The following section discusses the various aspects of competitiveness in basic chemicals
except fertilizers in Ethiopia in comparison with the comparator countries and the rest of the
world.

As Figure 12 illustrates, the chemical sub-sector basic chemicals except fertilizers in Ethiopia
in comparison to the Republic of Korea and Malaysia’s, performs notably below average in
terms of manufacturing value added generation. However, there are significant signs of im-
provement in the performance of Ethiopia overtime.

In Figure 12 and 13, the coherent shift of value added creation and employment in the period
1991-2013 reflects the fact that the main contribution to the expansion of the basic chemicals
sub-sector draws on an expanding scale of production without much improvement in labour

22
UNIDO (2015)

63
Figure 12 Capability of generating value added

productivity as the unit labour costs remains one of the highest among countries a with simi-
lar level of income as Ethiopia’s. In Figure 13, it is evident that an increase in employment is
important, considering the social aspect of bringing more people into formal employment, but
without increasing labour productivity, their wages are likely to remain low. Moreover, the rela-
tive export unit price of the basic chemicals sub-sector has declined in the past five years due
to losing international cost competitiveness in exports from this sub-sector. In other words, it
is relatively costly to innovate and upgrade in Ethiopia.

Figure 13 Capability of generating manufacturing employment

3
South Africa Republic of Korea
1
Employment share to population (%)

Malaysia
0 Iraq Russian Federation Taiwan
Germany
0 China Iran (Islamic Republic of) Saudi Arabia
Canada
Ethiopia 2013 Ukraine
0 Argentina United States
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0 U.R. of Tanzania: Mainland Brazil
0
Ethiopia 1991
0

400 1,000 3,000 8,100 22,000 38,500 60,000


Real GDP per capita (PPP 2011 constant)

64
Figure 14 Capability of manufacturing export

Thailand Japan United Kingdom


Germany Saudi Arabia
660 Republic of Korea
400 Indonesia
Iran (Islamic Republic of)
Spain Canada
150 Algeria Chile
Poland United States
Angola Morocco China Malaysia
Mexico France
55 India
Ghana
Philippines Ukraine Italy
20 South Africa
Gross export per capita (US$)

Russian Federation
Cameroon Peru
8 Mozambique
VietBolivia
Nam
Egypt
(Plurinational State of) Brazil Argentina Kazakhstan
Australia

3 U.R. of Tanzania: Mainland Ecuador ColombiaVenezuela (Bolivarian Republic of) Romania


Syrian Arab Republic
Kenya
1 Mali Iraq Turkey
Guatemala
Côte d'Ivoire Sudan
0 Ethiopia 1997 Pakistan Sri Lanka
0 Madagascar Zimbabwe Nepal
Cambodia Nigeria

0 � Uganda

0 Burkina Faso
Djibouti
Bangladesh Yemen

0 Ethiopia 2014 Myanmar


� �
0 � � �
� �
0 � �

0 �
� �
Niger
0
0
0

400 1,000 3,000 8,100 22,000 38,500 60,000


Real GDP per capita (PPP 2011 constant)

As Figure 14 illustrates, Ethiopia’s chemical sub-sector basic chemicals except fertilizers per-
forms notably below average in terms of export performance in comparison to Malaysia and
the Republic of Korea. In other words, the export performance of the chemical sub-sector failed
to follow the trajectory of value added and employment performance. It is not surprising that
the sub-sector’s export competitiveness is beset by low productivity.
Figure 15 shows that Ethiopia’s unit labour costs are higher than the average unit labour costs.

Figure 15 Unit Labour Costs (ULC)

1
2012 Ethiopia 0.28 2012 Malaysia 0.1 2012 Republic of Korea 0.08
Unit labour costs (US$)

0
Ethiopia

U.R. of Tanzania: Mainland

India

Viet Nam

Indonesia

Egypt

Ukraine

Colombia

Algeria

Brazil

Iran (Islamic Republic of)

Mexico

Turkey

Romania

Malaysia

Kazakhstan

Poland

Spain

Republic of Korea

Italy

United Kingdom

France

Taiwan

Canada

Germany

Saudi Arabia

65
To some extent, Ethiopia’s unit labour costs are as high as those in some industrialized coun-
tries like Spain and Taiwan ROC, which makes Ethiopian firms less cost competitive, especially
considering that their production focus is on basic chemical products, except fertilizers. On
the contrary, the unit labour costs of both Malaysia and the Republic of Korea are almost less
than half of Ethiopia’s, demonstrating their competitive prowess in basic chemicals except
fertilizers.

The export volume of the respective sub-sector is closely related to the degree of competitive-
ness of factor costs. As Figure 15 highlights, the basic chemicals sub-sector is a counter-image
of the sectoral characteristics found for the more successful soap, cleaning & cosmetic prepa-
rations chemical sub-sector in Ethiopia, whose unit labour costs are notably less competitive
(i.e. higher unit labour costs) compared to its market competitors in the region, i.e. Tanzania.
In other words, at the given wage level in Ethiopia, the labour productivity of the basic chemi-

Figure 16 Labour productivity, wages and competitiveness

160,000 Mexico France

Taiwan Italy
Colombia
Ecuador Brazil

60,000 Kazakhstan Poland


Labour productivity (US$)

38,500 Egypt Iraq


Philippines
Romania
U.R. of Tanzania: Mainland
22,000 India
Ethiopia 2013
Ukraine
Viet Nam
Sri Lanka

8,100

3,000

1,000 3,000 8,100 22,000 38,500 60,000 160,000


Wages per employee (US$)

Source: UNIDO elaboration based on UNIDO INDSTAT (2018)

cals sub-sector should be much higher in order to keep unit labour costs at competitive levels.
The Figure 16 elaborates Ethiopia’s labour productivity in 2013 was USD 6,300. Sri Lanka as
one of competitors of Ethiopia, of which it attained one-fold higher in labour productivity (USD
13,460) than Ethiopia at the given similar wage level (USD 1,780). Based on the relationship
between wages and labour productivity in low- to lower middle-income countries, Ethiopia’s
labour productivity should be in the proximity of USD 8,000 to be considered competitive at
the same given wage rate.

Ethiopia’s labour productivity is lower than in comparator countries and its wages are too
high. Given the conditions in Ethiopia, the country should build capabilities for processing
rather than for product innovation to improve labour productivity by ensuring workers receive
the necessary amount of training, including vocational training.

66
  5.2 Assessment of the soap, cleaning and cosmetic preparations sub-sector

The following section examines various aspects of competitiveness in Ethiopia’s soap, clean-
ing and cosmetic preparations sub-sector in comparison with comparator countries and the
rest of the world. The soap, cleaning and cosmetic preparations sub-sector is an interesting
case, with the performance of Ethiopia’s sub-sector being on par with the average in terms of
manufacturing value added per capita, employment generation and even export performance.

Figure 17 Capability of generating value added


400 Republic of Korea
United States
South Africa
MalaysiaJapan
France
150 Spain
Mexico Italy Germany
55 Colombia Poland
United Kingdom
Value added (US$) per capita

Peru
20 Argentina
Iran (Islamic Republic of) Saudi Arabia
Ukraine
Philippines China Ecuador
8 Canada Australia
Ghana
Ethiopia 2013 Thailand
Viet Nam
Turkey Netherlands
3 Egypt
U.R. of Tanzania: Mainland India Romania Russian Federation
Indonesia
1 Pakistan
Nepal
�� Morocco
Uganda
0 �� Bangladesh
Sri Lanka
� �
0 � ��
��� �
�� � � ���

0 �

0 Ethiopia 1991

400 1,000 3,000 8,100 22,000 38,500 60,000


Real GDP per capita (PPP 2011 constant)

As Figure 17 and 18 show, unlike in the basic chemicals sub-sector, the value-added increase
of the soap, cleaning and cosmetic preparations sub-sector derives from above expected per-
formance in both employment and labour productivity. The unit labour cost of the sub-sector
is one of the most competitive ones in the income range of Ethiopia.

Figure 18 Capability of generating manufacturing employment

3
South Africa Malaysia Republic of Korea
1
France
Employment share to population (%)

0 Colombia
Poland Spain United Kingdom
Ethiopia 2013
Nigeria China Thailand
0 Iran (Islamic Republic of) Italy Germany
Indonesia Argentina
0 Viet Nam Australia
Sri Lanka Turkey
Ghana Peru
0 Bangladesh
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U.R. of Tanzania: Mainland


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0
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Ukraine Russian Federation Canada Netherlands


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��

Romania Saudi Arabia


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Egypt

� �

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Philippines

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0 Angola

Myanmar
0 Iraq
Ethiopia 1991
0
0
Kazakhstan
0

400 1,000 3,000 8,100 22,000 38,500 60,000


Real GDP per capita (PPP 2011 constant)

67
The coherence between satisfactory performance in exports and competitive unit labour costs
is highlighted in Figure 19 and 20, which indicates that Ethiopia has the potential to penetrate
international markets. Moreover, it indicates the capability of firms to upgrade the quality and
increase the value added content of the products in the export basket. This is also evident
when discussing the sub-sector’s increasing terms of trade (see Figure 10).

Figure 19 Capability of manufacturing export

Netherlands Germany
660 Romania France
400 United Kingdom
Mexico Spain Italy
150 Republic of Korea
Thailand United States
Poland
55 Syrian Arab Republic Guatemala
Colombia Malaysia Canada
20 Côte d'Ivoire
Gross export per capita (US$)

Philippines Ukraine Brazil Turkey Saudi Arabia


8 Ghana Kenya
Japan
Uganda Cameroon South Africa
Indonesia
Chile Australia
3 Viet Nam
Argentina
U.R. of Tanzania: Mainland India Egypt
1 Peru China Kazakhstan Russian Federation
Djibouti
Nepal Yemen
0 Burkina Faso
Morocco
Ecuador Iran (Islamic Republic of)
0 Madagascar Pakistan Bolivia (Plurinational
Sri Lanka State of)
Venezuela (Bolivarian Republic of)
0 Niger � � Ethiopia 2014 Nigeria
� � Mali Zimbabwe Algeria
0 �Mozambique �
� �
0 � Bangladesh
Myanmar
0 � Sudan

Cambodia
0 �
� �
0
0 � �
0 �
0 Ethiopia 1995

400 1,000 3,000 8,100 22,000 38,500 60,000


Real GDP per capita (PPP 2011 constant)

Figure 20 Unit Labour Costs (ULC)

2012 Ethiopia 0.08 2012 Malaysia 0.34 2012 Republic of Korea 0.11
1
Unit labour costs (US$)

0
Ethiopia

U.R. of Tanzania: Mainland

India

Indonesia

Egypt

Ukraine

Colombia

Iran (Islamic Republic of)

Mexico

Turkey

Malaysia

Russian Federation

Poland

Spain

Republic of Korea

Italy

United Kingdom

France

Canada

Germany

United States

Saudi Arabia

68
In Figure 21, Ethiopia lies on the black curve, the labour productivity of Ethiopia’s sub-sector
(USD9,800) is in line with the level expected for the given wage level (USD 1,240).

Figure 21 Labour productivity, wages an competitiveness


160,000
Italy France
Australia
Mexico Spain
Colombia
Germany
United Kingdom
60,000 Indonesia Iran (Islamic Republic of) Poland
Labour productivity (US$)

Egypt Philippines
38,500 Turkey
Ukraine
Ethiopia 2013
India Viet Nam Russian Federation
22,000 Romania
Sri Lanka
U.R. of Tanzania: Mainland


8,100

3,000

1,000 3,000 8,100 22,000 38,500 60,000 160,000


Wages per employee (US$)

Source: UNIDO elaboration based on UNIDO INDSTAT (2018)

For products produced in the same sub-sector which have strong market demand but are
less price competitive, appropriate trade facilitation and intervention by the government (i.e.
through infrastructure services in certain locations or incentives for first movers in certain in-
dustries) could help firms survive and gain a competitive edge in international markets.

6. General Assessment of the Potential of the Chemical Sub-Sector:


Logical Matrix

Table 16 provides an assessment of the results for the set of key sub-sectors of the chemical
industry based on the previously described comparators. It summarizes the results of the gen-
eral assessment of the chemical industry based on the previously described assessment tool.
The results indicate that successful chemical sub-sectors in countries with an above average
performance of value added generation and competitive unit labour costs tend to do very well
in the global market and report gross export rates that are well above average. The opposite
can be observed for the set of underperforming chemical sub-sectors.

  6.1 Soaps, Cleaning & Cosmetics Preparations

The unit labour costs indicator put the overall output of economic activity, labour productiv-
ity and wages connected with the workforce into context. It provides a general picture of the

69
competitiveness of the soaps, cleaning and cosmetics preparation sub-sector. The unit labour
costs indicator is expressed as the rate of involvement of labour production factors (compen-
sations per worker) in the value of output created in the current period (value added created
by each worker).

Table 16 The logical matrix

Ethiopia Malaysia Republic Ethiopia Malaysia Republic


of Korea of Korea

Industry Basic Basic Basic Soap; Soap; Soap;


chemicals chemicals chemicals cleaning & cleaning & cleaning &
except except except cosmetic cosmetic cosmetic
fertilizers fertilizers fertilizers prepara- prepara- prepara-
tions tions tions

Value Below Above Above Above Below Above


added expected expected expected expected expected expected
performance performance performance performance performance performance performance

Gross Below Above Above Above Below Above


export expected expected expected expected expected expected
performance performance performance performance performance performance performance

Labour Below Above Above Above Below Above


productivity expected expected expected expected expected expected
to wages performance performance performance performance performance performance
ratio

Unit labour
costs

As the subsequent analysis shows, the increase in labour productivity and the reduction of
unit labour costs can be translated into a stronger international cost competitiveness of Ethio-
pia’s chemical sub-sectors and increased demand for their manufactured products. These
have positive spillovers for the terms of trade. Hence, the soap, cleaning and cosmetic prepa-
rations sub-sector hasa high potential for value-added performance and export.

70
  6.2 Basic Chemicals (except fertilizers)

Basic chemicals except fertilizers serve the local manufacturing sector before being trans-
formed into finished products. Formic acid, hydrochloric acid, nitric acid, sulphuric acid, etc.,
for example, are used as primary inputs for virtually all industrial and manufacturing process-
es. Therefore, the ripple effect of this sub-sector for the Ethiopian economy is far broader than
that of any other sub-sector. Past experiences of imports of basic chemicals have experienced
an increasing trend over time because of the growing manufacturing sector in Ethiopia (Table
17).

Table 17 Status of Imports of Basic Chemicals


Major Chemical Imports in Ethiopia
Net Weight (Tonnes) CIF Value (Birr)
Sn Chemicals 2009 2010 2011 2009 2010 2011

1 Formic acid 81,490.76 471,197.31 290,733.02 908,916.42 5,587,002.51 6,777,327.45

2 Hydrochloric acid 649,571.91 1,243,592.22 1,344,964.97 2,618,803.46 6,634,421.91 7,842,102.25

3 Nitric acid 329,424.34 992,374.69 372,887.21 1,981,856.01 7,515,818.86 3,555,752.32

4 Potassium chloride 15,962.87 26,217.00 18,479.33 237,916.21 358,757.62 3,287,740.76

5 Potassium nitrate 175,549.63 28,478.00 576,792.44 1,985,808.24 469,121.34 7,807 ,292.14

6 Magnesium chloride 14.45 19.10 238.50 429,532.48 429,532.48 1,933,220.36

7 Polyethylene 4608.00 9750.00 8063.00 67,619.199 123,049.939 154,846.036

8 Calcium carbide 665,921.12 759,692.22 551,374.85 4,565,907.00 5,840,218.73 6,472,688.01

9 PET 5226.00 7271.00 5283.00 76,258.405 98,207.153 103,783.582

10 Talc 647,045.00 1,072,166.00 648,015.90 2,516,612.64 5,903,168.66 4,532,621.21

11 Titanium oxide 1002.878 838.03 1065.7 17,065,291.04 15,984,718.18 19,122,912.60

Source: Ethiopian Customs Authority

This sub-sector underperformed in terms of value addition and labour productivity according
to the analysis, thus revealing relatively little scope for exports. However, the development of
the last three years has shown that imports of basic chemicals have experienced a downward
trend and that their export performance in diverse international markets has improved con-
siderably (see Tables 14 and 15). During this period, the share of the manufacturing sector in
Ethiopia’s national economy has grown. It can thereby be concluded that the local production
of basic chemicals has compensated the dwindling imports. This sub-sector has considerable
potential for import substitution because of its wide variety of industrial applications.

Table 18 presents the availability of respective raw materials for basic chemicals in Ethiopia
and there is thus high potential for growth in basic chemicals production. Ethiopia is endowed
with natural resources but considerably lacks critical factor endowments, such as skills and

71
technology. The current analysis also reveals that basic chemicals is an underperforming sub-
sector in terms of competitiveness and export potential. The main reason for this according to
the analysis is the poor labour productivity in this sub-sector. A concerted policy approach for
this sub-sector could transform it into a major industrial activity in the entire region by induct-
ing modern technology and operational process know-how. This would secure its competitive-
ness and turn it into a potential export performer. Since this sub-sector has relatively higher
ripple effects on the overall manufacturing sector due to its wide industrial application, its
better performance and enhanced competitiveness will also certainly boost the overall domes-
tic manufacturing sector considerably.

Table 18 Basic Chemicals: Availability of Raw Materials & Application (2015)


S.No. Basic Chemicals Raw Material Availability Application

1 Potassium chloride Danakil Depression Agriculture, Food


near Dallol Processing, Fertilizers,
Pesticides, Medicines,
Substitute for Table
Salt, etc.

2 Potassium nitrate Danakil Depression Agriculture, Solar Power


near Dallol Plants, Fertilizers,
Pesticides, Medicines
and Food Processing

3 Magnesium chloride Afdera Lake, Afar region Basic Chemicals,


and the Adola area, Textile, Paper
in Oromia region

4 Calcium carbide Calcium deposits in Ambo, Chemicals, Iron


Addis Ababa region, Tigray and Steel, Fertilizers
region and abundant deposits and Power
in southern Ethiopia.
There are more than
10 identified sites for coal
deposits across Ethiopia

5 Talc Tigray region, Western Wollega, Paper, Plastics,


Sidamo and Moyale greenstone Pharmaceuticals,
belts Cosmetics, Paint,
Rubber and Ceramics

6 Titanium dioxide Northern Ethiopian Plateau Paints, Cosmetics, Food


egion in Lalibela, north-west- Processing, and wide
ern and south-eastern regions application as white
powder pigment

72
  6.3 Fertilizers & Agro-chemicals

Fertilizers and agro-chemicals are the two basic ingredients for improving agricultural produc-
tivity. Ethiopia is an agriculture-based economy. The agriculture sector is of great economic
importance for Ethiopia. With approximately 51.3 million ha of arable land, Ethiopia has tre-
mendous potential for agricultural development; however, not all of this land is suited for
cultivation23. Ethiopia has the potential to irrigate about 4.3 million ha of land, of which only an
estimated 6 per cent is currently being utilized. Ethiopia’s agriculture sector is characterized
by low productivity and prevalence of the highest nutrition depletion in the region.

Since the early 1990s, Ethiopia has achieved significant improvements in agricultural output.
Irrigation and improved seed coverage of areas under crop have nearly doubled, growing 6-7
per cent per annum. Fertilizer application has grown at 3 per cent per annum, which has led to
considerable yield improvements. A number of independent studies highlights the significant-
ly increased crop yield potential due to interactions between combined inputs and practices.
However, additional cultivable land in the highlands has become scarce, therefore, Ethiopia
must increase future output by improving crop yields.

Table 19 Fertilizers & Agro-chemicals Application in Agriculture in Ethiopia


Input use on cereal crops 1997-8 to 2007-8 (NA - Data not available)
2007/8 2001/2 1997/8
Fertilizer applied area (% total area cultivated) 39.0 42.8 32.3
Fertilizer application (kg/ha, total cultivated area) 45.0 30.0 37.0
Fertilizer application (kg/ha, feritilizer applied area) 116 100 115
Improved seed coverage (% of crop area) 4.7 3.5 2.4
Pesticide coverage (% of crop area) 20.8 10.8 12.0
Irrigated crop area (% of crop area) 1.1 1.3 0.6
Extension package coverage (% of crop area) 14.5 NA NA
Source: Dercon and Hill (2009)

Ethiopia’s agriculture involves a variety of crops, with grains representing 78 per cent of to-
tal agricultural production. Among grains, cereal production is at the core of Ethiopia’s agri-
culture sector. Other important grain crops include pulses (horse beans, chickpeas, haricot
beans, field peas, lentils, soybeans and vetch) and oilseeds (linseed, neug, fenugreek, noug,
rapeseed, sesame, sunflower, castor bean, groundnuts, etc.). The nutrient requirements cor-
responding to the GTP-1 targets were 612,000 MT, which translates into approximately 1.22
million MT, including urea, DAP and MOP, but for all crops, this Figure increases to around 1.48
million MT/annum.

23
Taffesse et al. (2011).

73
Table 20 Total Consumption (2013-2011) (in MT/annum)
2003 2004 2005 2006 2007 2008 2009 2010 2011 Average

DAP 157995 210837 224819 251156 259020 265768 278239 352309 350209 261146
Urea 106394 112105 121735 124561 120121 131998 148437 201576 200321 142582
Source: Ministry of Agriculture (2012)

Studies show that the use of chemical fertilizers and agro-chemicals in Ethiopia has made
significant contributions to crop yield growth. However, Ethiopia remains a net importer of
fertilizers and agro-chemicals. Over the last decade, total fertilizer imports have increased by
more than 50 per cent, from less than 370,000 MT in 2002 to nearly 570,000 MT in 2011. In
2016, Ethiopia imported fertilizers and agro-chemicals worth USD 546 million. This Figure has
exponentially grown over time (see Table 15). High agro-chemical demand and local availability
of nitrogenous and phosphates inputs make agro-chemical production in Ethiopia an attrac-
tive investment destination in the region.

With the discovery of natural gas in Ethiopia, the development of these two sectors is imminent
not only for import substitution but also to strengthen the agriculture sector in Ethiopia. The
rough estimates of gas reserves in the Ethiopia-Somali region are approximately 6-8 trillion
cubic feet. Likewise, it is estimated that Ethiopia has oil reserves of around 2.7 billion barrels.
Both resources will boost the hydrocarbon industry. In addition, the abundant deposits of po-
tassium chloride and potassium nitrate will be an additional advantage for the development
of the fertilizer and agro-chemicals manufacturing base in Ethiopia. These two sub-sectors will
remain critical to Ethiopia’s overall economic development strategy.

  6.4 Cement

Ethiopia earned USD 17.3 million from cement exports of 0.2 MT in 2017. According to the Chem-
ical and Construction Input Industry Development Institute, the country’s cement industry is
planning to reach a production capacity of 27MT/yr by the end of the Second Growth and Trans-
formation Plan (GTP-II) in 2019-20. Ethiopia currently has 16 integrated cement plants and
three grinding plants, which cater to local demand and export. With nearly 16.5 million tonnes
of cement capacity and almost 10 per cent average growth in annual consumption, Ethiopia
is among the top cement producers in sub-Saharan Africa, behind Nigeria and South Africa.
This sub-sector’s growth is attributed to the increase in public investments in infrastructure
projects, the transportation sector and rural housing projects.

This sub-sector is the core sub-sector for transforming Ethiopia’s economy. However, it is deal-
ing with a wide variety of policy-related issues. Safety and security were major concerns for the
cement sub-sector in the Oromia region. Fiscal issues have long troubled Ethiopia’s cement
manufacturers. For instance, major foreign collaborations in cement production are confront-
ed with taxation issues when dealing with complex regulatory regimes in Ethiopia because

74
of their different types of international operations. Sometimes unfairly, sometimes not, large
companies are also accused of tax evasion. Likewise, the foreign exchange shortages and
excessive government controls over the sub-sector have pushed the manufacturing capacities
to underperform in the last fiscal year.

Table 21 Cement Production, Imports and Consumption in Ethiopia (in million tonnes)

Domestic Total
Change Import Change Change
Year production consumption
(%) (Mta) (%) (%)
(Mta) (Mta)

2003/04 1.42 0.00 1.42


2004/05 1.25 -12.0 0.06 6000.0 1.31 -7.7
2005/06 2.75 120 0.89 1365.6 3.64 178.0
2006/07 1.72 -37.5 0.85 -4.7 2.57 -29.4
2007/08 1.66 -3.5 1.24 45.1 2.90 12.6
2008/09 1.69 1.8 0.10 -91.7 1.79 -38.1
2009/10 1.62 -4.1 0.49 379.4 2.11 17.7
2010/11 2.72 67.8 0.29 -41.1 3.01 42.6
2011/12 3.77 38.5 0.01 -98.3 3.77 24.4
2012/EYE 4.73 25.6 0.00 -60.0 4.73 25.5
2013/14 F 5.47 15.7 0.00 -50.0 5.48 15.7

This sub-sector holds a lot of promise in the future on account of the GSTP-II. However, the
sub-sector requires serious and concerted policy initiatives to implement structural reforms in
the overall regulatory environment.

  6.5 Bio-Mass

Fossil fuels are finite resource and unevenly distributed with high price and negative impact
on environment. Alternatively, biomass has emerged as a potential source for thermal energy
for Ethiopia. Currently, traditional fuels contribute 99.9 per cent of the rural energy consump-
tion, with fuel wood being by far the most important source (81.8%), followed by dung (9.4%),
crop residues (8.4%) and small amount of charcoal wood. Agricultural residues, animal waste
and human wastes are considered as major biomass resources. The total energy that can be
derived annually from these resources is estimated to be about 101,656.77 Tcal. Out of this,
the share of the woody biomass is estimated to be 79 per cent, followed by animal waste 11 per
cent, crop residue 8 per cent and human waste 2 per cent.

75
Agro-industry in recent years have expanded considerably in the last decade in Ethiopia,
which has magnified economic significance of this sector and shifted the focus on biomass as
a potential source of energy. There are encouraging initiatives at Messabo to use sesame husk
as alternative energy source. Likewise, coffee husk, cotton, saw dust, khat, bamboo, Jatropha,
castor, molasses and floriculture also provide remarkable option for developing alternative
energy source in Ethiopia.
Table 22 Biomass Potential and Reserve in Ethiopia
No Biomass Area (province) Name of Deposits Biomass
residue residue
(Ton/year)
1 Dry SNNPR Coffee Residue24 49,496
processed Oromiya Coffee Residue 132,911
Coffee
Gambela Coffee Residue 1,458
Other Coffee Residue 158
2 Wet SNNPR Coffee Residue 16533
processed Oromiya Coffee Residue 6959
Coffee
Gambela Coffee Residue 1519
Other Coffee Residue 9
3 Cotton Tigray Cotton Residue25 42,822
Afar Cotton Residue5 46,100
Others Cotton Residue 150,000
4 Saw dust SNNPR & Oromia Sawmill residues 25,000626
5 Khat Addis Ababa Chat residue 7,094
Harrage &Dire Dawa Chat residue 105,000
6 Bamboo Tree All Regions 1,000,000
7 JATROPHA All Regions Jatropha Husk 0.4/127
8 Castor SNNPR, Oromiya and others Castor Husk
9 Molasses Currently 8 factories are pro- 202,856.28
ducing molasses, and other 5 tone/annum
factories under construction
10 Floriculture Amhara, oromiya and SNNP Floriculture 300,000
residue residue tone/annum,
estimation
Source: UNIDO, Ministry of Mining, and EREDPC
24
90 % of the residue is coffee husk
25
Residue to product ratio is 2.755 at 12 % moisture content
26
Estimation from Ethiopian Rural Energy Development and Promotion Center (EREDPC)
27
The Jatropha fruit is 40 % pulp, 30 % kernel and 30 oil. About 0.4 tonnes of pulp will be available from 1 tonne of seed
processed

76
Ethiopia has 122 billion cubic meter surface water, 2.6 billion cubic meter ground water, 12 riv-
er basins, 18 natural lakes including the rift valley lakes and a potential of 3.7 million hectares
irrigable land, which is favourable for agriculture, horticulture and floriculture development.
Already, government initiatives have given impetus to foreign investments in the agriculture,
horticulture and floriculture sectors. Most agricultural, horticulture and floriculture wastes
and residues are ideal candidates for anaerobic digestion because they contain high levels of
easily biodegradable materials, which can be easily converted into energy.

Figure 22 Chemical Process for Biomass Energy

As an output of growing agro-industry, solid biomass, such as wood and agriculture waste, can
be burned directly to produce heat. Biomass can also be converted into a gas called biogas or
into liquid biofuels such as ethanol and biodiesel. Such fuels can then be burned for fulfilling
energy needs. Biogas forms when agriculture residue and waste decompose in landfills, which
can be produced by processing sewage and animal manure in special vessels called digesters.
Likewise, Ethanol is made from crops such as corn and sugar cane that are fermented to pro-
duce fuel ethanol for use in vehicles. Biodiesel is produced from vegetable oils and animal fats
and can be used in vehicles and as heating oil. A large-scale expansion of the use of biomass
for energy is likely to have a substantial positive impact on socio-economic conditions in rural
Ethiopia. It will assist in employment generation, increased energy security, improved living
standards and health conditions. Thus, biomass potential needs to be exploited in order to
fulfil the growing energy needs of Ethiopian economy.

77
CH A PTE R I I I

R&D AND NATIONAL INNOVATION SYSTEM IN ETHIOPIA

1. Introduction
2. International Experience: National Innovation System
3. The Republic of Korea ‘Miracle’:
Helix of Industry-University-Research Institution
4. Ethiopia: Science Technology and Innovation (STI) Policy (2012)
5. National Innovation System for Ethiopia and the Chemical Industry
6. Conclusion

78
1. Introduction

Innovation has been considered a key driver of economic growth, enhancing competitive ad-
vantage and stimulating productivity in both developed and developing countries alike. There-
fore, technological innovation is the key to turning scientific and technological knowledge into
goods and services that boost economic development. A vast body of literature shows that
the application of scientific and technological knowledge has led to growing disparities be-
tween the developed and developing world. The impact, structure and outcomes of science,
technology and innovation differ across countries and within regions. However, the overall
consequence is that knowledge has become increasingly recognized as a powerful driver of
economic competitiveness, growth and sustainable development28. There is thus growing rec-
ognition in developing countries of the role innovation and research plays in overall economic
and human development. Innovation and R&D are essential for upgrading technologies, mov-
ing up the development ladder and catching up with developed countries. The experience
of newly industrialized countries and their emergence as manufacturing giants can be solely
attributed to their technological and innovative prowess.

The chemical industry is science-based on account of the central role played by research and
development29.Technology and innovation have been considered a cornerstone of the chemi-
cal industry’s growth and profitability, and a prerequisite for its long-term sustainable perfor-
mance. Ethiopia has abundant deposits of primary input resources for the chemical industry
and recently discovered large deposits of natural gas, which in itself is a competitive advan-
tage for chemical production. Presently, technology in the chemical industry is quite complex.
One way to differentiate within the industry is to distinguish a more traditional industrial sec-
tor, linking basic chemical ‘commodities’ to products directly dependent upon them and to
a second sector that relies upon the finished products with high value added, and to satisfy
demand for differentiated products. The chemical sciences and engineering are undergoing
far-reaching changes to address future challenges: (a) new synthesis techniques for combin-
ing molecules; (b) new catalysers and reactive systems that allow for shorter lifecycle prod-
ucts, more efficient and environmentally friendly processes; (c) alternative uses of traditional
raw materials; (d) new materials with better performances and shorter production routes, or
routes that allow new combinations of materials in the process; (e) introduction of biopro-
cesses in traditional chemical sub-sectors. However, global chemical manufacturing seems to
be experiencing a paradigm shift in terms of (a) increased market globalization; (b) growing
importance of ‘clean’ products or environmentally friendly products and processes; and (c) in-
novative and specialty chemical products. This implies strong pressure towards efficient qual-
ity programmes and efficient production as a competitive advantage for chemical producers.
Thus, extensive R&D in production processing is essential, along with continuous upgrading
of product knowledge.

28
OECD (199); World Bank (2007).
29
Patel & Pavitt (1994).

79
Ethiopia is exposed to a wide range of technological opportunities to address its overall devel-
opment challenges. Technologies can be harnessed and applied to increase food production,
attain manufacturing prowess, fight diseases and increase economic competitiveness.
However, Ethiopia’s ability to tap such opportunities is undermined by relatively weak nation-
al innovation systems. This not only adversely affects its chemical manufacturing prowess but
its manufacturing sector as a whole. In fact, most African countries lack the requisite scientific
and technological capabilities to effectively engage in the application of science, technology
and innovation for sustainable development. While commendable efforts are being made,
more needs to be done to enable Ethiopia in general to seize the tremendous opportunities
that currently exist. There are a number of regional institutions with programmes that focus
on helping Ethiopia advance in the areas of science, technology and innovation, such as the
African Union (AU), East African Community (EAC), the New Partnership for Africa’s Develop-
ment (NEPAD), the African Development Bank (AfDB). However, these institutions are not well
coordinated as to add value to the building of national and regional systems of innovation.

Table 23 General Characteristics of the Chemical Industry in industrialized Countries and Ethiopia
Characteristics Industrialized Countries Ethiopia

Firms Large firms dominate the market; Small firms with only few large
Large number of SMEs specialized state-owned companies
in specific products in high-tech
‘niche’ markets

Production High scale of production; Low scale of production,


High diversification of products; single-product enterprises;
Multiproduct companies;
High costs of inputs, mainly
petrochemicals;
Vertical integration from basic
petrochemicals to final finished
consumer market and
semi-finished products
(industrial markets)

Strategies Continuous introduction No specific strategy of firms


of innovative products; to meet future production
Technological alliances and marketing challenge
through mergers and JVs; manufacturing sector
Concentration on core activities;
Efficient and flexible
production process;
Strong incentive for pollution
prevention and environmentally
safe processing

80
Characteristics Industrialized Countries Ethiopia

R&D Development of environmentally Non-existent


safe technology dominates R&D;
High basic research intensity
in firms;
Strong links with academic science
and numerous independent R&D
institutions and consulting firm

Innovation Highly intensive innovation Low innovation, mainly oriented


process in both products towards adaptation of products
and processes to local market needs

Markets Large commodities markets, Small domestic market;


strong competition in ‘global’ Extremely small markets
markets; for specialities due to small size
Well-diversified markets for a of manufacturing sector
large variety of specific types of
products with high value-added
performance specialty products

Currently, chemical manufacturing has only shifted its base from the developed region to de-
veloping countries for the purpose of global competitiveness. The leadership in the manu-
facturing of chemicals has shifted from developed countries like the U.S. and Europe to the
developing regions of Asia. There are examples of resource-poor countries and inadequately
sized markets that have emerged as major chemical manufacturing hubs such as Japan, Sin-
gapore and the Republic of Korea because of their reliance on science, technology and innova-
tion. Resource-poor countries with large domestic markets, like China and India, have attained
leadership positions in chemical manufacturing mainly because of their diversified manufac-
turing sector and strong science and technological base. Late starters, like oil-rich Malaysia,
also attained chemical manufacturing prowess in speciality chemicals by attracting foreign
investments in the chemical industry. It is thus evident from past experiences that economi-
cally less developed nations have adopted different approaches to emerge as global chemical
manufacturing giants. Perhaps some of their developmental experiences can be emulated by
Ethiopia in terms policymaking and suitable policy interventions for setting up a robust R&D
infrastructure to harness its potential and transform it into a major chemicals manufacturing
and exporting nation.

81
2. International Experience: National Innovation System

The experience of the Asian Tigers in the 1990s reveals their key to success which stemmed
primarily from their respective national innovation systems. The collaboration between univer-
sities, institutions and dynamic firms led to an enhancement of skills able to commercialize
new forms of knowledge. New knowledge and new skills are an essential prerequisite for inte-
grating the local value chain in the global value chain. The new paradigm of production points
towards information, R&D and innovation-intensive production technologies, with operating
models and organizational structures based on flexible specialization and inter-firm network-
ing. Organizations are becoming increasingly dependent on the complementary resources of
other companies, with a view to strengthening collective response to competitive pressures.
The effectiveness of the new paradigm of production depends on how quickly companies, the
basic structures and institutions of society adapt.

 Experience of the Republic of Korea


 In the 1960s, the Republic of Korea was no more than barren land. There were only two
public institutions for scientific research and technological development with less than
5,000 research scientists and engineers. In 1963, R&D expenditures remained stagnant
at USD 9.5 million. However, the country had a well-educated workforce which played
a key role in harnessing its potential. As the Republic of Korea lacked technological ca-
pability, it had to almost entirely rely on foreign sources for technology. The Republic of
Korea’s science and technology (S&T) policy strategy was geared towards promoting the
inward transfer of foreign technologies, while at the same time developing domestic ab-
sorptive capacity to digest, assimilate and improve upon the transferred technologies.
The government established a sound National Innovation System which enhanced the
absorptive capacity of the local industry capabilities. The Government of the Republic
of Korea allowed massive importation of foreign capital goods and turn-key plants in
selected areas. Local industry later reverse-engineered imported capital goods for the
purpose of acquiring necessary technologies. It started with ‘imitation’ and later trans-
formed into ‘innovation’.

The concept of national innovation systems rests on the premise that understanding the link-
ages among the actors involved in innovation is key to improving technology performance.
Innovation and technological progress are the result of a complex set of relationships among
actors producing, distributing and applying various kinds of knowledge. The innovative per-
formance of a country depends to a large extent on how these actors relate to each other as
elements of a collective system of knowledge creation and use as well as the technologies they
use. These actors are primarily private enterprises, universities and public research institutes
and the people within them. The linkages can take the form of joint research, personnel ex-
changes, cross-patenting, purchase of equipment and a variety of other channels.

82
The national systems for technology development and innovation demonstrate that innova-
tion and technology development stem from a complex set of relationships among actors in
the system, where knowledge and skills constitute factors of production. The actors include
universities, research institutions and enterprises. Technology diffusion and skill-formation
go hand-in-hand with industrial transitions. The technology diffusion process depends on
the skill formation level and capability; as an enterprise moves up the production capabili-
ties spectrum, the workforce’s and community’s skills progressively advance. The diffusion of
technological knowledge takes place in multi-fold ways as individuals tackle common prob-
lems, share new methods, advance their skills and move from firm to firm. For policymaking
and decision-makers, understanding the national innovation system can help identify lever-
age points for enhancing the innovative performance of local firms and competitiveness of
local products.

  OECD Interactive Framework for Technology Development


  Industry Alliances
  -  Inter-firm research cooperation
  Industry/University Interactions
  -  Cooperative industry/university R&D
  -  Industry/university co-patents
  -  Industry/university co-publications
  -  Industry use of university patents
  -  Industry/university information-sharing
  Industry/Research Institutions Interactions
  -  Cooperative industry/institute R&D
  -  Industry/institute co-patents
  -  Industry/institute co-publications
  -  Industry use of institute patents
  -  Industry/institute information-sharing
  Technology Diffusion
  -  Technology use by industry
  -  Embodied technology diffusion
  Personnel Mobility
  -  Movement of technical personnel among industry, universities and research institutes

  2.1 Industry Alliances

Industry alliance is a ‘strategy’ dominated by companies from the world’s most developed
economies. Companies from developed economies participate in 99 per cent of R&D partner-
ships, of which 93 per cent consist between companies from North America, Europe, Japan and

83
the Republic of Korea. In this context, the dominance of North America, particularly the U.S.,
also reflects the leading role in R&D and production in major high-tech industries such as the
information technology and chemical industries.

  Taiwan ROC’s R&D Consortia


 When IBM introduced a new PC based on its PowerPC microprocessor in June 1995, firms
in Taiwan ROC exhibited a range of computing products based on the same processor
only one day later. This achievement rested on a carefully nurtured R&D consortium
involving both IBM and Motorola, joint developers of the PowerPC, as external parties.
These successes were followed by many more such R&D alliances in digital commu-
nications and multimedia. Taiwan ROC emerged as a strong player in the automotive
industry, particularly in the expansion of China’s market, driven by its development of
a 1.2 litre 4-valve engine; again, this was the product of a public-private collaborative
research endeavour involving three companies, which jointly created the Taiwan Engine
Company to produce the product. Thus, the R&D consortium is an inter-organizational
form that Taiwan ROC adapted for its own purposes as a vehicle to catch up in terms of
industry creation and technological upgradation.
Source: UNIDO (2003)

Taiwan ROC’s success in climbing the ladder of technology upgrading rests on a capacity to
leverage resources and pursue a strategy of rapid catch up. Its firms tapped into advanced
markets through various forms of contract manufacturing and were able to leverage new de-
grees of technological capability from these arrangements. This was an advanced form of
“technological learning”, in which the most significant players were not the giant firms (as in
the case of Japan or the Republic of Korea), but small- and medium-sized enterprises whose
entrepreneurial flexibility and adaptability were the key to their success in reducing the dis-
tance to technological frontiers.

The ‘alliance’ strategy has so far been relatively successful in high- and medium-technology
areas, namely aerospace, information technology, chemicals-pharmaceuticals, automobiles,
etc. Even though some alliances have not been so successful, all partners seem to have
learned organizational lessons from the early cases when the government contributed all the
funds and research tasks were formulated in generic and overly ambitious terms for the com-
panies to take advantage of them. More recent R&D alliances have been more focused, more
tightly organized and managed, and have involved participant firms much more directly in co-
developing a core technology or new technological standard which can be easily incorporated
by local companies through adoption and adaptation in their respective product categories.

30
OECD (1996).
31
Kline & Rosenberg (1986).

84
  2.2 Industry-University/Research Institution Interactions

The “linear model of innovation” has been very influential in shaping national research and
development policy. In this model, innovation is recognized as a fixed, sequential process
starting with scientific discovery in academia and passing it on to industry through stages
of product development and marketing, ending with the successful sale of a new product in
the market30. This model has paved the way for the establishment of basic infrastructure for
research and development. The well-known “chain-linked model of innovation” illustrates in-
novation as a non-linear, problem-solving activity within an organization31. In other words,
modern innovation theory focuses on including other activities in addition to basic research.

The innovation system approach is based on the interactive learning model of innovation,
but takes this model one step further by emphasizing the institutional framework as a factor
influencing innovation. Public and private universities/research institutions are recognized as
“the knowledge infrastructure” in national systems of innovation32. The nature and intensity of
the interactions between this knowledge infrastructure and industry is considered one of the
factors influencing industry’s ability to innovate and sustain competition. Such interactions
involve both formal and informal forms of collaboration as well as student and researcher
mobility and other types of interactions. Technology is viewed as something more than the
mere application of basic research. Scientific and technological developments are perceived
as intertwined processes. University research or basic science is thought to contribute to tech-
nological innovation in more indirect ways, e.g. through instrumentation, methodologies and
skilled scientists. Moreover, the relationship between science and technology is not seen as a
process of one-way knowledge transfer, but rather as a two-way exchange of knowledge with
potential for mutual learning.

As the knowledge economy underscores the critical role in technological innovation, collabo-
ration between universities/public research institutes and enterprises has become increas-
ingly important in the globalized world. As entrepreneurs are often not scientists, likewise
scientists often are not dynamic entrepreneurs. To promote technology and the commercial-
ization of new knowledge, one cannot overlook this fact. It is therefore important to establish
effective interfaces between scientists and entrepreneurs to commercialize research findings.
For example, the Medicinal and Aromatic Plant Research Centre in Khartoum, Sudan, has col-
lected a wealth of information on the medicinal uses of rare plants from isolated villages in
Sudan that are worthy of patent rights. But related research findings of the Centre turned out
to be a dead investment due to the complete absence of commercialization of those findings.
Such examples are far too many, especially in developing and less developed countries. Most
of the traditional knowledge in developing countries that is available in communities of prac-
tice is likely to be lost if the national innovation system fails to convert them into patents and
commercialize existing research findings.

If the respective national innovation system fails to convert traditional knowledge and the
use of bio-products into intellectual property, the country will be deprived of many potential

32
OECD (1997).

85
opportunities. What is therefore needed is an interactive institutional framework in which re-
search laboratories, firms and universities network with the aim of commercializing traditional
knowledge and uses of products. A long-term vision is needed to achieve such an endeavour. It
is crucial for developing countries to identify promising resource-based products, benchmark
best practices in the processing, design and marketing of those products, and to identify viable
avenues of replicating best practices to make optimal use of natural resource endowments.

A mere increase in R&D expenditure over the years may not have a significant impact on per
capita GDP. In fact, there is evidence of a negative correlation between R&D expenditure and
industrial productivity in a number of countries. However, when the source of R&D finance is
gradually shifted from the public to the private sector, industrial productivity is significantly
enhanced. The U.S., Republic of Korea and Finland are some of the successful examples of
such transformations.


  USA: Technological Leadership
 The emergence of the U.S. as a global leader in technology is mostly attributed to the
strong interface between academia and industry. Academia not only provided scientific
solutions but also an adequately skilled workforce. On the other hand, industry readily
converted these into marketable products. When it comes to university-industry linkage,
American universities have been involved in entrepreneurship dating back to the Bayh-
Dole Act of 1980, which allowed ownership of patents generated by the use of Federal
Research Funds33. The goal of the Bayh-Dole Act was to facilitate the commercialization
of university technology34. It is quite evident that a policy instrument like the Bayh-Dole
Act spurred American universities to pursue more collaborative research projects with
industry and to push for more commercialization. This development allowed universities
to directly earn revenues using their own resources, such as patents, technology licens-
ing and facilities as well as research and development collaborations.

In fact, such examples are the tenets and contours of proven best practices on the design of
research grant programmes to help public and private research institutions forge partnerships
in collaborative research and the commercialization of technologies. Without doubt, the U.S.
is the most important source of technology for all OECD countries. With an investment of USD
91 billion (2016) in R&D, the chemical industry is one of the largest manufacturing industries
in the U.S. Strong enforcement of intellectual property rights has resulted in the highest num-
ber of patents in the U.S.’ chemical industry. It serves both the sizable domestic market and
the expanding global market. It is also one of the top chemical exporters in the world, account-
ing for nearly 15 per cent of global chemical shipments. The U.S. is a world leader in overall
chemical production and exports. This is the result of a highly educated workforce, world class
research, protection of intellectual property and a robust regulatory system.

33
Rothaermal, Agung and Jiang (2007).
34
Shane (2004).
35
Papaconstantinou, Sakurai and Wyckoff (1996).

86
  2.3 Technology Diffusion

Technology diffusion is the process of adoption, adaptation, absorption and diffusion of pro-
cured technologies. An empirical analysis of embodied technology diffusion revealed that the
flow of technology across industries and nations is achieved through the purchase of inter-
mediate and capital goods. Though innovations were mainly developed in clusters of high-
technology manufacturing industries, different clusters of industries were acquirers of tech-
nologically sophisticated machinery and equipment35. These findings also bear testimony to
the fact that less than 50 per cent of the total acquired technology for every OECD country is
channelled through capital investment. Imports of capital equipment were also an important
method of technology acquisition.

The U.S. is the most important source of process technologies in the chemical industry. It has
been persistently proven that the embodied technological prowess of R&D is a major source of
productivity growth in the chemical industry. Therefore, an open trade and investment regime
are important elements in technology catch up, reducing the distance to technological frontiers.

3. The Republic of Korea ‘Miracle’:


Helix of Industry-University-Research Institution

The ‘Korean Miracle’ built on the Republic of Korea’s innovation capabilities. The role of the
government was as facilitator in implementing a competent national innovation system com-
parable to that of the most advanced countries. In the 1960s, the government focused its
resources on promoting selected industries, namely automobile production, ship building,
mechanical engineering and electronics. To realize its policy effectively, an institutional sci-
ence and technology framework was established by setting up the Korean Institute of Science
and Technology (KIST), which carried out R&D activities, particularly in the areas identified.
Academia focused solely on producing scientists and engineers. This was a decade of absorp-
tion and imitation of imported technologies. By the next decade, the government placed em-
phasis on the establishment and expansion of chemical, heavy industries and export-oriented
industries. To expand the scope of R&D, the government established 13 major public research
institutions in key technological areas. The role of academia remained limited to producing
engineers and scientists. Throughout this period, there were strong industry-public research
institution interactions as part of the national innovation system.

During the next two decades, the government recognized the significance of science, technol-
ogy and innovation and increased its national R&D expenditure by 2 per cent of GDP. This move
by the government pushed industry to carry out R&D activities which had previously been
carried out by public research institutions. The government also strongly promoted the R&D
and innovation capabilities of universities. In the late 1990s, a new policy direction evolved
in the national innovation policy, with the government initiating a regional innovation policy.

87
During this period, the central government played the leading role in innovation policy. The
R&D budget of all regional governments represented less than 7 per cent of the national sci-
ence and technology budget. By 2000, eight of the 16 regional governments had established
independent organizations to promote technological innovation capabilities in their respec-
tive regional administrations.

In the 1970s, national R&D expenditure was predominantly financed by the public sector. But
by the 1980’s, the role of the public sector diminished considerably, with around 50 per cent
of national R&D expenditure still being financed by the government. In the next decade, the
ratio of public to private financing was about 16 to 84, thus implying that industry gave more
importance to technological innovation and in-house R&D.

By the next decade, the Brain Korea-21 (BK-21) and the New University for Regional Innova-
tion (NURI) Programme spurred R&D collaborations and interactions between academia and
industry. Due to continuous efforts to develop technological and innovation capabilities, ma-
jor industries (Chaebols) were transformed into globally competitive world class producers
of frontier products. This cannot be attributed solely to their strategic decisions, but also to
the active support provided by the government to enhance technological innovation capabili-
ties and build effective collaboration between academia, public and private research institu-
tions. The Chaebols have become globally competitive in several key industrial sectors, such
as chemicals, semiconductors, electronics, steel and bio-technology.

The strong university system complemented the growing need of the expanding economy of
the Republic of Korea in all stages of development. The annual turnout of scientists and engi-
neers formed the integral part of the national innovation system. Before the early 1980s, the
national innovation system was equipped with only 18,434 researchers. However, this num-
ber rapidly increased to 70,503 by the end of the decade. The strong university infrastructure
played a predominant role in this development and academia rather than industry emerged
as the largest employer of researchers.

The decade of the 1990s was the watershed moment in the rapid industrialization of the Re-
public of Korea. It represented the decade of transforming the economy from imitation into
innovation. The number of researchers more than doubled during this decade. The national
innovation system began to play a dominant role in domestic manufacturing. By the early 21st
century, private industry became the largest employer of researchers. In other words, domes-
tic industry had come to recognize the importance of science, technology and innovation in
overcoming recession and enhancing competitiveness. With the increase in R&D investments,
private firms boosted their number of well-qualified researchers.

It is imperative to establish a legal framework for R&D activities and collaboration conducive
to the development of enterprises’ technological capabilities as well as those of the nation as
a whole. As S&T and R&D have the characteristics of common goods, the government needs
to assume a proactive role in policymaking and implement various policy instruments, includ-

88
ing legislation. With a legal framework and a set of financial incentives, the government can
set directions for technological and economic development, mobilize resources and motivate
innovation actors to pursue their R&D and innovation activities efficiently. Based on these
lines, the government established relevant research institutions, initiated national R&D pro-
grammes and motivated technology transfers from academia to industrial enterprises. These
efforts were complemented by policy instruments and appropriate legislation. The Patent Law
(1946) was enacted to establish a comprehensive industrial property legal regime. The govern-
ment initiated a series of national R&D programmes over the next three decades. The Ministry
of Science and Technology activated industry-university-public research collaborations within
the scope of their own national R&D programmes. The aim was to mobilize all R&D resources
during that period.

  Republic of Korea: Industry-University Collaboration Law (2003)


 Promoting industry-university collaboration is a major policy priority in the Republic of
Korea. The motivation behind such a policy initiative is to make the nation’s system of
innovation as well as the financial reward conditions for the universities more dynamic.
The industry-university collaboration has various facets, namely product knowledge,
technology innovation and financial rewards. Most universities in the Republic of Ko-
rea have set up Industry-University Cooperation Foundations (IUCFs) since the introduc-
tion of the Industry-University Collaboration (IUC) law of 2003. Subsequently, promoting
industry-university collaboration activities has become a major public policy in the Re-
public of Korea, as demonstrated by a series of legislative actions. The revised IUC law
in 2008 permits universities to establish a holding company. The IUC law dramatically
changed the incentive system for universities. Prior to the promulgation of the IUC law,
universities in the Republic of Korea were not only inactive in the pursuit of own revenues
but also did not have the status of legal persons in charge of those revenues and could
therefore not claim direct income. Under the IUC law, universities have thus been able
to generate financial revenues. The IUC law is similar to the Bayh-Dole Act in the United
States. The conducive environment for industry-university collaboration in the Republic
of Korea has allowed the POSCO steel company to set up the Pohang University of Sci-
ence and Technology, which is currently a top-ranked university in the Republic of Korea.
Likewise, Sungkyunkwan University has developed a close relationship with Samsung.
Universities in the Republic of Korea publishing in collaboration with Samsung domi-
nate a separate group of universities publishing the highest share of their total research
outputs in collaboration with a single industrial partner. Such collaborations represent
seven of the top-14 universities in terms of links with individual companies, respon-
sible for nearly 5 per cent of those universities’ total research outputs. The fact that the
Republic of Korea was a poor, agriculture-based economy until the early 1960s and has
since experienced an industrial miracle may be one of the explanations for its strength
in university-industry collaboration.

89
Prior to industrialization, there were no laws addressing R&D activities and collaborations in
the Republic of Korea. After the initial industrial base was set up, the government decided to
establish an operational legal framework for R&D and technological development, thereby es-
tablishing the national innovation system. Since the beginning of the 21st century, the govern-
ment has shifted its focus to promote innovation at the regional level. However, it had to deal
with unequal economic and technological development between different regions, which rep-
resented a major bottleneck. To overcome this problem, the government enacted the Special
Law for Balanced National Development in 2004. This law created an environment for regional
innovation systems composed of industrial enterprises, universities and research institutions.

Most legislation governing R&D cane classified into two categories, namely comprehensive
laws for R&D collaboration and non-comprehensive laws. The comprehensive laws aim at
promoting R&D collaboration only and spell out the procedural matters and stipulate various
aspects of R&D collaboration, e.g. the Law for the Acceleration of Collaborative R&D. The non-
comprehensive laws deal with different issues, but only few provisions relate to S&T and R&D
collaboration, e.g. the Patent Law.

Table 24 Comprehensive laws for R&D collaboration and non-comprehensive laws


Enacted Law Characteritics Responsible
year ministry
1946 Patent Law Non-comprehensive KIPO
Law for the Activation of Technology
1972 Non-comprehensive MOST
Department
Law for the Promotion of Industrial
1986 Comprehensive MOST
Technology Research Consortia
Law for the Acceleration
1994 Comprehensive MOCIE
of Collaborative R&D
Law for the Establishment of an
1995 Non-comprehensive MOCIE
Industrial Technology Infrastructure
Law for the Acceleration
2000 Comprehensive MOST
of Technology Transfer
2001 Science and Technology Basic Law Non-comprehensive MOST
Law for the Promotion of Industrial
2003 Education and Industry-Academy Comprehensive MOE-HRD
Collaboration
Special Law for Balanced National
2004 Non-comprehensive MOCIE
Development
Source: Chung S. (2011)

90
While the government gradually established alegal framework for collaboration between aca-
demia and industry, it launched several programmes to promote R&D capabilities and collabo-
ration between innovation actors. Some of these programmes include the Excellent Research
Centre, the Regional Research Centre, the Technology Innovation Centre, the Technology Busi-
ness Incubator, etc.

Table 25 Major R&D Collaboration Programs & Main Characteristics


Programme Ministry Major Programme Major Evaluation
targets scope characteristics
ERC MOST Research Nation-wide Joint research 
universities
RRC MOST Research Region Joint research 
universities
Comprehensive
TIC MOCIE Cluster Region 
ellabboration
TBI MOCIE Start-ups Nation-wide Incubation 

BI SMBA Start-ups Nation-wide Incubation 

Comprehensive
Techopark MOCIE Cluster Region 
ellabboration
I-I-I Consortium SMBA SME-s Nation-wide Joint research 
: Successful, : Very Successful
ERC: Excellent Research Center; RRC: Regional Research Center; TIC: Technology Innovation Center;
TBI: Technology Business Incubator; BI: Business Incubator; I-U-I: Industry-University-Institutes.

Source: Chung S. (2011)

To date, the government has established around 30 ERCs at the major research-intensive uni-
versities and 112 RRCs in 15 regions to conduct research in strategic technology areas. These
programmes have significantly contributed to the development of academic research and in-
novation in the Republic of Korea. The TIC programme aims to develop region-specific tech-
nologies by aggregating the technological resources of regional universities, enterprises and
research institutions. By the end of 2003, 39 TICs operated in region-specific technology areas.
Under this programme, the government provided KRW 1 billion per year for five years to estab-
lish and support the centres. Operating costs and space were supplied by the regional govern-
ment and participating industrial firms. This programme was merged with RRC and renamed
Regional Innovation Centre in July 2005.

The TBI programme aimed to encourage the creation of business start-ups by providing a
series of services from start-up to the commercialization of research results. Participants re-
ceived about KRW 100 million to commercialize their R&D results. If the start-up became suc-

91
cessful, the participant would reimburse half of the funding initially received within five years.
Likewise, the BI programme supported SME start-ups. The BI supplied a series of incubation
services, such as management, technology, finance and marketing to potential or new en-
trepreneurs that lacked knowledge in commercialization. So far, 166 TBIs and 283 BIs have
become part of the national innovation system of the Republic of Korea.

The Republic of Korea’s efforts to enhance its innovation capabilities are characterized by very
close cooperation between major actors, namely industry, universities and research institu-
tions. The government undoubtedly played an important role in this transformation. Its inno-
vation policy made significant contributions to the development and expansion of the national
economy. The Republic of Korea adopted the concept of the national innovation system and
developed both suitable policy programmes and a legal framework conducive to providing
mechanisms for implementation. The resultant impact of the national innovation system on
various industry segments has been far-reaching.

Presently, the Republic of Korea has emerged as a brand name at the global level for quality
excellence and innovation. It has become a global leader in diverse manufacturing industries,
ranging from high-tech industries like electronics to process industries like chemicals and
steel. Currently, it is the fifth largest producer of petrochemicals in the world. The 25 largest
global chemical manufacturers have at least one manufacturing base in the Republic of Korea.
Global leaders, such as Dow and BASF have relocated their regional HQ for their respective
electronics businesses to the Republic of Korea, and both companies operate substantial re-
search facilities in Seoul. The Belgian specialty chemical producer Solvay has recently opened
a state-of-the-art research centre in collaboration with Seoul’s Ewha Women’s University. The
Republic of Korea’s experience is a true success story for developing economies to strengthen
their national innovation systems.

4. Ethiopia: Science Technology and Innovation (STI) Policy (2012)

Recent developments and initiatives in the education and development policy landscape sug-
gest a clear trajectory towards greater emphasis on knowledge-based development as op-
posed to the traditional preoccupation with higher education for manpower development. This
new development dispensation is firmly anchored in knowledge produced through research
and innovation activities and constructed broadly as Science Technology and Innovation (STI).
The launch of Africa’s Science Technology Innovation Consolidated Action Plan (2006–2010)
envisions capacity building for knowledge-based development and policymaking in African
countries. The Consolidated Action Plan articulates Africa’s overall vision for harnessing and
applying science and technology to eradicate poverty, promote sustainable growth and devel-
opment and to strengthen Africa’s fuller integration into the global knowledge and economic
system. The plan demonstrates the increasing focus on building capacity and mainstreaming
of knowledge (science-technology-innovation) into Africa’s development. In this context, the
Ethiopian government announced its Science, Technology and Innovation Policy (STI) in 2012.

36
OECD (1997)

92
The STI Policy (2012) attempts to adopt the national vision of ‘alleviating poverty and joining
mid-level income earning countries’ as expressed in the GTP. It envisages the creation of a
national framework that defines and supports how Ethiopia will search for, select, adapt and
utilize appropriate and effective foreign technologies in the future and addresses the estab-
lishment of a national innovation system. A national innovation system is a network of institu-
tions organized through linkages “to relate to each other as elements of a collective system of
knowledge creation and use as well as the technologies they use”.36

  Objectives of STI Policy (2012)


  - Establish and implement a coordinated and integrated general governance framework
for building STI capacity;
  - Establish and implement an appropriate national Technology Capability Accumulation
and Transfer (TeCAT) system;
  - Promote research that is geared towards technology learning and adaptation;
  - Develop, promote and commercialize useful local knowledge and technologies;
  - Define the national science and technology landscape and strengthen linkages among
the different actors in the national innovation system;
  - Ensure implementation of STI activities in coordination with other economic and social
development programmes and actions;
  - Create an environment conducive to strengthening the role of the private sector in tech-
nology transfer activities sustainably.

The STI Policy (2012) is an enabling framework for the establishment of a national innovation
system in Ethiopia by promoting interactive activities between and among institutions to gen-
erate and use new products, processes and organizational practices. It identifies 11 critical
policy issues, namely technology transfer, human resource development, manufacturing and
service, providing enterprises, research, financing and incentive schemes, national quality
infrastructure development, universities, research institutes, TVET institutions and industry
linkages, intellectual property systems, science and technology information, environmental
development and protection and international cooperation.

Technology Transfer
The issue of technology transfer is considered a critical policy issue. The STI (2012) focuses on
devising a system of learning, adapting and utilizing as well as disposing of imported technol-
ogies to meet national demand. However, most technology transfer activities currently being
carried out in Ethiopia are not in line with the envisaged technology demands of the develop-
ment programmes. In general, the national capability to learn, adapt and utilize foreign tech-
nology is still at a very low stage. The STI (2012) attempts to channel the transfer of technology
into Ethiopia by setting up a system to search, select, adapt, utilize as well as dispose of
imported technologies.

93
Human Resource Development
Lack of adequate manpower is a major shortcoming for the implementation of the STI Plan
(2012). The level of qualified manpower capable of transferring foreign technology is low, and
certainly inadequate to facilitate an effective transfer of technology. Thus, the Plan places
emphasis on producing engineers and scientists qualified in understanding and utilizing ap-
propriate technologies. The Plan envisages the development of science and technology in-
stitutions for producing highly qualified technicians, engineers and scientists to meet future
demands of the economy. The TVET institutions are a priority area along with adequate female
representation in science and engineering courses.

Manufacturing & Service Enterprises


The SIT Plan (2012) emphasizes the development of a well-diversified SME sector by support-
ing them to play a pivotal role in technology transfer. However, such enterprises have no clear
value-adding linkages between them and their role in advancing the STI is not well-defined
in Ethiopia. The strategy outlines the building of linkages between medium-sized and large
firms, especially as focal points for researching, learning, transferring and adapting foreign
technologies. It also places emphasis on strengthening TVETs’ contribution to building capaci-
ties for the SME sector.

Research
An effective national research system is of significant strategic importance for successful
learning, transfer, adaptation and utilization of technology. In Ethiopia, research is needed
to address the resolution of major social and economic problems; contribute to the achieve-
ment of national development objectives and to meet technology demand. However, there is
a gap between the research activities and focus of higher education and research institutions
and national development needs. Hence, the national research system should be strength-
ened and orientated towards focusing on national technological demands to search for, learn
about, adapt and utilize effective foreign technologies.

Finance and Incentives Schemes


An effective transfer of foreign technologies requires availability of sufficient financing. Ethio-
pia does not yet have a well-developed and systematized finance and incentive mechanism to
support technology transfers in manufacturing and service-providing enterprises. Therefore,
financing and incentives schemes need to be established to support activities to search for,
learn about, adapt and utilize effective foreign technologies in line with national development
needs.

National Quality Infrastructure


A national quality infrastructure landscape significantly contributes to the delivery of quality
and standardized products and services to local and international markets. Failure to meet
quality standards is one of the major problems that prevail in most of local manufacturing
and service-providing enterprises in Ethiopia. This is mainly due to a lack of implementing
standards at the national level. To resolve problems related to productivity and quality, creat-

94
ing competitive manufacturing and service-providing enterprises, enabling standardization,
metrology, conformity assessment service providers and accreditation bodies is of paramount
importance.

Universities, Research Institutes, TVET Institutions and Industry Linkage


Universities, research institutes, TVET institutions and industry are key actors in the national
innovation system. The strength as well as effectiveness of the established linkages among
these institutions largely depends on their inclination and capability to be involved in ac-
tivities related to technology transfer. As far as technology learning is concerned, the current
situation in Ethiopia confirms that universities are not taking the lead and are lagging behind
industry. The linkages that exist between these actors should therefore focus on contribut-
ing to capacitating the productivity of manufacturing and service-providing enterprises. The
shared effort should also focus on identifying appropriate technologies and their sources, un-
derstanding the technologies through learning-by-doing and adaptation as well as effective
utilization. Thus, joint cooperation and support systems among the actors should be estab-
lished with the aim of supporting and facilitating the search, selection, importation, adapta-
tion and utilization of effective foreign technologies.

Intellectual Property System


The intellectual property system is said to play a valuable role if it contributes to technology
transfer as well as technology capability building through FDI and technology licensing. Ethio-
pia’s intellectual property system as a whole does not play a substantial role in accelerating
technology transfers and the expansion of local innovation activities. Hence, the Ethiopian IP
system needs to be designed in such a way as to support the endeavour of technology learning
and adaptation as well as to protect the rights of inventors and innovators and support the
augmentation and application of local knowledge.

Science & Technology Information


Information related to science and technology is of significant importance for successful
technology transfer. There is no well-organized science and technology information source or
system in Ethiopia as required by manufacturing and service-providing enterprises, higher
education, research institutes and other entities. Despite the fact that there are certain types
of information that are prepared and kept in the form of statistics, databases, indicators and
literature, there are no mechanisms to publish and update them regularly. Therefore, it is im-
perative to develop and establish a national science and technology information system to fill
the gaps and publish expected results as well as accelerate technology transfer.
Establishing and strengthening such a system will create a capacity to accelerate technology
transfer by identifying, gathering, organizing, analysing, disseminating and properly utilizing
science and technology information.

Environmental Protection & Development


Environmental protection and development are crucial to maintaining continual and sustain-
able economic growth. The major environmental issues in Ethiopia are desertification, defor-

95
estation and soil erosion. Large cities lack solid waste disposal and sewerage systems, which
are critical environmental challenges. To address these and other environmental problems
that prevail in the country, appropriate technologies need to be applied in the course of natu-
ral resource utilization and implementation of various development activities.

International Cooperation
International cooperation in the areas of science and technology is crucial for information
sourcing, manpower training, expert assistance, scientific visits, collaborative research, joint
ventures in technology transfer and funding of scientific and technological projects. However,
the current cooperation practice in Ethiopia lacks focus, particularly on STI information sourc-
ing and exchange of scientists and engineers, thereby highlighting specific needs for coopera-
tion to strengthen national technological capabilities. Therefore, the primary focus of interna-
tional relations should be encouraging cooperation with developed and developing countries
as well as with various international and regional organizations, the objective being to build
national technological capabilities.

5. National Innovation System for Ethiopia and the Chemical Industry

The National Science Technology and Innovation Policy (2012) is an exhaustive statement on
the status and strategy for development of the science and technology base and the promotion
of innovation in Ethiopia. The national innovation system is an open system. It is characterized
by seamless inflows and outflows of information, skills and technology. The main activity in
the system is learning. This entails interactions between people and institutions. The learn-
ing is interactive, characterized by feedback. The feedback takes place between economic
firms and consumers, between R&D institutions and industry, between R&D institutions and
financial bodies, between policymaking bodies and R&D institutions, between policymaking
institutions and private firms, and between education and training institutions and industrial
firms. In the light of this, the policy document falls short of a few critical issues, namely iden-
tification of priority sectors, interface of the main actors and integration of strategies for an
overall impact on innovation and on industrial development.

Identification of priority industries has been exhaustively dealt with in GTP-II. GTP-II acknowl-
edges the lack of physical infrastructure as one of the major shortcomings for Ethiopia’s
economic development. The physical infrastructure at present includes surface transport,
electricity, telecommunications and internet connectivity. However, other aspects of physical
infrastructure for innovation systems include institutional actors like universities, public R&D
institutions, private enterprises, financial institutions, technology supporting agencies, etc.
These are also critical infrastructure for industrial firms to be able to design and develop new
products and processes, or even to use existing technologies. The state of this type of physical
infrastructure impacts institutions’ ability to produce and apply knowledge. The World Eco-
nomic Forum has identified this type of physical infrastructure as one of the pillars of eco-

37
World Economic Forum (2008).
38
SARUA (2008), UNESCO (2005).

96
nomic competitiveness of a country37.
Some of the literature on national innovation systems emphasizes physical infrastructure as a
major weakness of most African countries38. Some of the important findings in the literature,
which are also common to Ethiopia, are:

a)  Science and technology is too narrowly defined to actually represent R&D;
b) There is little emphasis on innovation aspects, such as technology prospecting,
procurement and diffusion;
c)  No explicit innovation policy;
d)  Few but very weak institutional linkages and collaboration;
e) Weak engineering and entrepreneurship capabilities;
f)  Limited financial resources for technological innovation;
g)  Low levels of technological readiness and innovation capacities, and
h)  R&D infrastructure is generally poor and neglected.

While commendable efforts are being made, more needs to be done to enable Ethiopia to
seize the opportunities that currently exist. The government must also recognize other deter-
minants of innovation systems, namely research and innovation priorities; policies for R&D
and innovation; quality of scientific research institutions; public and private sector investment
in R&D; protection of intellectual property rights; institutional linkages, particularly university-
industry collaborations; availability and utilization of skills in science, engineering and en-
trepreneurship; existence and use of technology standards and regulatory agencies and the
participation of Ethiopia in regional and international programmes.

  5.1 Setting Up R&D Priorities and Capacities

Various policy statements and news reports indicate that Ethiopia applies many approaches
to set up R&D priorities. There are no organized national R&D priority setting processes. R&D
priorities seem to emerge from political statements. It is common in most African countries for
R&D priorities to be determined by individual research institutions based on available funds
from national governments or international donors. R&D priorities are also determined within
sectors such as agriculture and health, and at the level of individual departments or minis-
tries. As a result, the direction of research and funding decisions remains unclear.

Indubitably, Ethiopia has identified multiple priorities in the GTP-II, but limited resources are
available. The chemical industry is one of the many areas identified in the GTP-II with the po-
tential to influence economic growth and strengthen the domestic manufacturing base. There-
fore, there is a need for clear priority setting and allocation of funds for R&D in the chemical
industry. The assessment identifies four potential areas in the chemical industry, namely (a)
soaps, cleaning and cosmetics preparation, (b) basic chemicals (except fertilizers), (c) fertil-
izers and agrochemicals, and (d) cement. The government must select these sub-sectors of the
chemical industry as priorities for R&D activities.

97
  5.2 Public Expenditure on R&D Activities

Statistics or data on public expenditure on R&D in Ethiopia is scanty. Absence of such infor-
mation makes this task more difficult for policymakers. The national statistics office does not
seem to survey or collect statistics on R&D expenditure. The STI Policy (2012) spells out the
importance of information on S&T for successful transfers of technology. This once again high-
lights the weakness of the national innovation system mentioned earlier. R&D needs must be
understood and defined more broadly than merely S&T for technology transfer. Lack of infor-
mation makes it impossible to estimate Ethiopia’s R&D intensity. Therefore, we have to de-
pend on regional databases published by multilateral agencies. According to UNESCO (2004),
Africa as a whole accounted for less than 1 per cent of the world’s expenditure on R&D. Asia
accounted for 30.5 per cent, North America for 37.2 per cent, Europe for 27.2 per cent and Latin
America and the Caribbean for 2.9 per cent of total world expenditure on R&D. Sub-Saharan
Africa’s public R&D expenditure has been estimated at 0.3 per cent. It is important to note that
for most African countries, data on public expenditure on R&D is too aggregated to determine
how resources are allocated across R&D areas and there is little information about their rel-
evance, quality and effectiveness of the research projects and activities that get funded. What
is clear, however, is that the limited expenditure on R&D is to a great extent spent on small
research projects and salaries of staff in institutions. Therefore, the government will need to
establish institutions and programmes that undertake R&D surveys and collect data on R&D
expenditure. Once a priority sector has been identified, the Ethiopian government needs to
commit at least 1 per cent of GDP on public expenditure on R&D in the beginning and raise it to
2 per cent over the next five years. The role of public expenditure on R&D was one of the most
important factors in the ‘Korean Miracle’.

Once the government commits public funds for R&D, the main actors of innovation in the
chemical industry will need to identify the technological gaps in the four sub-sectors with po-
tential and commit their resources to filling those gaps. In fact, public expenditure on R&D will
act as a prime mover for them to innovate and commercialize their R&D efforts.

  5.3 Institutional Arrangements for Public Research & Development

Ethiopia has a broad network of universities and institutions of higher learning. However, only
a small number of its population are engaged in this network. Some of these institutions also
conduct R&D in addition to their core business of education and training. By 2012, the number
of public universities was 34. In addition, there were 64 accredited non-government universi-
ties/colleges awarding degrees. In the absence of government statistics on R&D infrastructure,
the UNESCO Report (2004) paints a bleak picture of the state of R&D infrastructure in African
institutions of science and technology training. The report states that only a few universities in
Africa are in a position to have quality scientific journals in their libraries; few university staff
have access to computers in their offices (even in computer science departments); and many
of the libraries in African universities do not have computers and are not computerized. The re-
port finds that engineering schools or university institutes lack equipment more than those for

98
basic sciences. The report concludes that the reported average age of laboratory equipment is
too high (11.6 years for basic sciences and 15.8 years for engineering sciences). Hence, African
institutions are clearly lagging behind in the areas of experimental science.

Chemical engineering is the nucleus of R&D of chemical process industries. R&D in chemi-
cal engineering encompasses product and process development of various chemicals, petro-
chemicals, plastics, pharmaceuticals and other medicines, agrochemicals, processed foods,
energy (fuels, nuclear energy, others), pulp and paper, beverages, cement, ceramics and many
others. There have been significant technological changes in the processing industry over time.
New molecular compounds, chemical reagents, manufacturing processes, testing methods
and equipment, etc., are the hallmark of the modern chemical industry. Technology is evolving
rapidly in this industry, primarily to reduce costs and improve quality. New speciality materials
are fast emerging and replacing old materials. To deal with modern chemical manufacturing
processes, adequately trained, high-skilled manpower is necessary. Of the 34 public universi-
ties and 64 unaccredited colleges and universities, there are only a few universities that offer
chemical engineering-related courses. Likewise, the graduate and post graduate course cur-
riculums, laboratories and training equipment require immediate review and upgrading to
boost R&D in the chemical industry.

  5.4 Policy Instruments for Research & Development

The experience of the Republic of Korea is an example of how government can use policy in-
struments to motivate universities and industry to pursue R&D and innovation activities in pri-
ority industries. A growing number of countries have taken the lead by emulating the Republic
of Korea’s experience and use specific policy and legal frameworks to govern R&D activities.

Currently, Ethiopia does not have a science and technology-specific policy framework but has
explicit policies scattered in sectoral policy documents such as national plans for agriculture,
a national health policy, energy plans and strategies, ICT plans, etc. However, the Ethiopian
government needs to prepare a 10-year Innovation Plan as part of its STI Policy (2012), in addi-
tion to a white paper reviewing the status of the priority industries. The Innovation Plan must
emphasize the strengthening of national public R&D institutions by improving infrastructure,
improving the coordination of institutions, building and strengthening collaboration between
public R&D institutions with private companies, increasing investments in R&D, promoting
science and technology education and raising public awareness as well as increasing and
retaining scientists and engineers. The Plan should be integrated into the trade and indus-
trial policy, annual national budget statements, investment policies and legislation and intel-
lectual property protection legislation. The government should also adopt appropriate fiscal
measures to promote R&D, including tax regulations, customs and excise duties, immigration
laws, fiscal policies, foreign affairs policies, industrial policies, health regulations, environ-
mental impact regulations and import and export regulations.

Lack of information is a major constraint. There has thus far not been a systematic review or

39
WEF (2008).

99
assessment of how well Ethiopia uses implicit policies to promote R&D. It is therefore impera-
tive that the government carries out a review of the use of implicit policies in the chemical
industry, which may be useful to inform efforts aimed at integrating science and technology
considerations into national economic policy frameworks. It may also be helpful in inform-
ing the reform or development of innovation-related policies and the legal framework for the
chemical industry.

  5.5 Technological Readiness and Innovation Capacity

Several indices have been developed to measure and provide some assessment of countries’
technological status and performance. These include the Technology Achievement Index (TAI)
used in the United Nations Development Program’s (UNDP) Human Development Report, the
Industrial-Cum-Technological Advance Index (ITA) used by UNIDO’s Industrial Development
Report and the Technological Readiness (TR) used by the World Economic Forum in the Global
Competitiveness Report. The TAI focuses on countries’ innovative capacity. It is used to mea-
sure a country’s ability to create new products and processes through R&D, and use new and
old technologies to increase productivity. In fact, it is a well-researched conclusion that OECD
countries account for 86 per cent of patent applications and 85 per cent of scientific and tech-
nical journal articles published worldwide. African countries are not significant sources of
technological innovations. They are not really engaged in the creation of technology but are
merely adopters. Except for a few countries, all are technologically marginalized.

TR “measures the ability with which an economy adopts existing technologies to enhance the
productivity of its industries.”39 It is an assessment of a country’s preparedness to procure,
absorb and use technology. Technological readiness is determined based on factors such as
firm-level technology absorption, laws relating to information and communication technolo-
gies, FDI and technology transfer, personal computers per 100 inhabitants, and internet us-
ers and mobile phone subscribers. It is separate from innovation capacity, which entails a
country’s ability to expand the frontiers of knowledge and create new technology. Technologi-
cal innovation is important for countries with diminishing possibilities of adopting and using
existing technologies. Under these circumstances, firms cannot increase their productivity by
relying on or using existing technologies or by merely undertaking incremental innovations.
They must push the frontiers of knowledge and create cutting edge products and processes in
order to be competitive. This will require a proactive role of the government.

Ethiopian firms are exposed to a wide range of foreign technologies in the chemical indus-
try. These technologies are embedded in foreign products available in the domestic market.
Malaysia followed a definitive path to adopt, adapt and successfully apply chemical sector
technologies in its economy and emerged as a major chemical manufacturing hub. Ethiopia
could use this strategy to improve its technological readiness and innovative capabilities in
the chemical industry. The major constraints to adopting this strategy are low levels of edu-
cation, lack of policies that deliberately promote technology diffusion and adaptation, and
above all, poor S&T infrastructure.

100
  5.6 Technology Support and Regulatory Agencies

Standards, quality and metrology institutions are an important part of national systems of
innovation. They are part of the technological infrastructure. These institutions support R&D
and technological innovation. It has been observed that most metrology, quality and Ethiopian
standards institution is under-resourced. Firms rely on revenue from the sale of services such
as calibration and metrology. The STI Policy (2012) identifies this shortcoming and developed
multiple strategies to address the issue of technology support mechanisms but silent on how
it plans to put these in place. It also falls short on specific regulators and associated legisla-
tion. Also, the policy does not outline the role of industry and industry associations/councils
in strengthening technology support mechanisms. After all, it is industry that will ultimately be
responsible for compliance with standards and quality level.

In addition to technology support institutions, Ethiopia has regulatory agencies that deal with
FDI, technology procurement and licensing, environmental impact assessment, registration of
new companies, safety and trials, registration of drugs and medicines and export processing
zones, among many other aspects of economic activity. Regulatory agencies are an important
part of national systems of innovation as many of them to some extent determine the inflow
of technology. These agencies can promote or obstruct the procurement and diffusion of new
technologies. There is therefore a need to examine the role of regulatory agencies in building
a national innovation system. In times of globalization, government regulatory bodies should
act as facilitators and enablers. Their mandates should be redefined to explicitly include the
promotion of technological innovation.

A clear distinction must be made between technology procurement which is the sole preroga-
tive of the firm while the regulator’s sole responsibility is to oversee compliance. The role of the
market is therefore crucial when it comes to standards and quality. The chemical industry is a
highly regulated industry internationally. It also operates in a highly standardized operational
environment. Therefore, standards, quality and metrology institutions become an integral fea-
ture of this industry. In such cases, the industry council’s role in the identification of standards
and quality levels become imperative. There is a need for a strong interface between the major
actors of the national innovation system in setting up of the technology support mechanisms
and regulatory bodies for the chemical industry.

  5.7 Institutional Arrangements for Financing Technological Innovation

Finance is critical in the promotion of technological innovation. It is important in the develop-


ment of firms, particularly start-ups, which are the locus of innovation. Research and training
institutions also require financial resources to be able to test their ideas, work with firms
to commercialize research results, and generally turn their ideas into products and services.
Finance is one of the main barriers to technological innovation in developing countries, in-
cluding Ethiopia. The majority of firms in Ethiopia disregard R&D and innovation due to lack of
finance, as most businesses are self-financed business.

101
Funding instruments such as venture capital are either underdeveloped or non-existent. There-
fore, commercialization of research findings, technology prospecting and diffusion, or even
funding activities aimed at testing technologies are close to non-existent in Ethiopia. Besides,
there is no evidence of monetary or fiscal incentives available for innovation or commercializa-
tion of technologies developed by universities, small and medium-sized enterprises (SMEs)
or R&D institutions. Even formal financing institutions are not engaged in providing financial
assistance for technological innovation. A poor balance of payment position is already a ma-
jor impediment for Ethiopia’s industry in accessing foreign exchange. The government must
intervene and provide financial assistance to industry to innovate and commercialize research
results. Proactive policy should be made in favour of venture capitalists to promote start-ups.

  5.8 Science, Technology and Innovation in Regional Economic Treaties

There are over 25 regional agreements on cooperation and economic integration at the sub-
regional and continental level in Africa. These agreements range from promoting limited coop-
eration among neighbouring countries in specific areas of political and economic development
to the creation of African Common Market. A common feature of these agreements is their
explicit recognition of the role of STI in regional economic integration and development. Some
agreements recognize that regional integration is being driven by advances in transport, ICTs
as well as in policy and politics. This is evident in the increasing transboundary movement of
information, skills, finance and products across regions.

At the African level, measures for promoting science and technology cooperation can be found
in the 2000 Constitutive Act of the AU. Article 13(i) of the Constitutive Act provides, inter alia,
that the Executive Council of the African Union (AU) shall coordinate and make decisions on
policies in the areas of science and technology that are of common interest to the member
states. Article 14(d) establishes a specialized committee (i.e. the Committee on Industry, Sci-
ence and Technology, Energy, Natural Resources and Environment) to deal with science and
technology-related issues, among others. The Committee’s functions include preparing AU
projects and programmes dedicated to science, technology and innovation.

Similar provisions are found in the treaty creating the Common Market for Eastern and South-
ern African (COMESA). Article 100(d) calls on member states to cooperate to promote “indus-
trial research and development, the transfer, adaptation and development of technology,
training, management and consultancy services through the establishment of joint industrial
support institutions and other infrastructural facilities.” The treaty also aims at promoting
cooperation in the creation of an enabling environment for foreign, cross-border and domestic
investment, including the joint promotion of research and adaptation of science, technology
and innovation for development.

In summary, African regional economic and trade treaties recognize the importance of STI in
promoting regional integration and development. The integration of these considerations

40
AfDB (2007).

102
into regional agreements is informed by the understanding that individual African countries’
economies are small and unable to marshal scientific and technological resources for develop-
ment. Many countries, including Ethiopia, are poorly endowed with the human, physical and
financial resources necessary to develop and harness knowledge and innovation for economic
change and growth. Cooperation in STI is thus necessary to enable countries to pool and share
their scarce resources such as R&D infrastructure and skilled human resources.

In light of the above, the Ethiopian government should utilize this opportunity for establishing
a strong base for science, technology and innovation with the help of neighbouring countries
like Kenya and North Sudan. The chemical industry has tremendous potential for regional co-
operation. Kenya and North Sudan are rich in terms of oil and gas reserves. Regional coopera-
tion in this regard will pave the way for establishing a petrochemical complex that will have a
positive impact on the entire eastern region. Economic rationality must be given priority over
political expediency to share the fruits of joint cooperation. Kenya’s education infrastructure
is better placed than that of its neighbours, however, R&D and innovation require a strong
and well-diversified industrial base. Each country has a comparative advantage over its neigh-
bours in certain chemical product categories. Regional cooperation between the three coun-
tries has a lot of potential for attaining technological readiness and technological capabilities
in certain areas of the chemical industry by each country.

 5.9 African Development Bank (AfDB)

The AfDB is one of the main sources of financial capital for African development. In 2007, the
AfDB adopted a strategic plan to invest in higher education, science and technology40. The
strategy focused on three aspects of institutional capacity building, namely (a) strengthening
national and regional centres of excellence in science and technology; (b) building and reha-
bilitating science and technology infrastructure in tertiary and higher education institutions;
and (c) linking higher education and science institutions with the private sector. It also aims at
assisting African countries to retain scientists and engineers to stem brain drain and promote
the cross-border exchange of expertise.

The AfDB has collaborated with regional centres of excellence and national governments to
identify and develop projects or programmes to be funded through loans or non-loan arrange-
ments. It established a Division of Tertiary Education, Science and Technical Implementation
of the strategy. The AfDB is already working with a number of African countries to design proj-
ects based on its strategy. For example, in 2008, it approved funding for Rwanda to develop
the Kigali Institute of Science and Technology (KIST) into a centre of excellence in science and
technology.

41
FAO, UNDP, UNICEF, UNESCO, WHO, UNIDO, UNCTAD, UNEP, etc., among many others.
42
Council of European Union (2007).

103
  5.10 Multilateral Agencies

At the multilateral level, the United Nations (UN) has a number of initiatives aimed at promot-
ing science, technology and innovation in Africa. UN agencies41 have launched a number of
programmes to promote STI activities in Africa. These activities and programmes range from
agricultural research to promotion of space technologies. The main activities of UN agencies
can be grouped as: (a) spreading or promoting the diffusion of existing agricultural, health
and energy technologies; (b) provision of policy information and statistics on science, tech-
nology and innovation to decision-makers; (c) strengthening national quality standards and
metrology institutions; (d) support to countries to strengthen intellectual property protection
legislation and offices; (e) environmental technology assessments and generation of scientific
information on climate change, trends in biological diversity, land degradation and depletion
of the ozone layer; and (f ) strengthening educational and training institutions.

Likewise, the Council of the European Union adopted “The Africa-EU Strategic Partnership: A
Joint Africa-EU Strategy”, which identifies STI as a priority in EU-Africa cooperation. Paragraph
84 of the joint strategy states: “Africa and the EU will strengthen their cooperation in building
knowledge-based societies and economies. Both sides recognise that the development of STI
is one of the essential engines of socio-economic growth and sustainable development in Af-
rica; that competitiveness in the global economy is increasingly dependent on knowledge and
innovative ways of applying modern technology, especially ICT; and that meeting the MDGs
requires a special global effort to build scientific and technological capacities in Africa. Thus,
partnerships and investments advancing access to ICT infrastructure, access to quality educa-
tion, and the development of STI systems in Africa are crucial for attaining all other develop-
ment goals.” 42

Undoubtedly, most development bodies have shown commitment in improving science, tech-
nology and innovation infrastructure in Africa. The impact of these efforts on Ethiopia is still
evolving. It requires close engagement with multilateral agencies to exploit these opportuni-
ties to strengthen their national innovation system.

6. Conclusion

Ethiopia has already made commendable progress in recent years. However, to sharpen the
national focus on innovation, Ethiopia needs a policy regime that will guide it to make strate-
gic choices for R&D; take a long-term anticipatory approach to technology development; invest
in technology foresights, prospecting and procurement; and create appropriate incentives for
private sector in-house R&D. Good national innovation policy also entails specific measures
to promote long-term capacity building in industrial firms and larger parts of society. It should
encompass “a wide range of policies including social policy, labour market policy, educational

43
Lundval et al. (2002).

104
policy, industrial policy, energy policy, environmental policy and science and technology.”43 A
policy regime must be developed for the chemical industry as a priority industry, which would
enable the government to make strategic choices for R&D and innovation. This industry not
only has the capabilities of broadening the manufacturing sector, but can also substitute im-
ports and improve export competitiveness.

The coordination of science, technology and innovation regime, its design and implementation
require high-level executive authority. It cannot be left to ministries or departments of science
and technology. For innovation policies to be effective, leadership for their coordination and
implementation should be vested with the Presidents’ office. For instance, the President of the
Republic of Korea appointed the Science and Technology Minister as the Deputy Prime Minister
to ensure effective leadership and monitoring of the national innovation system. Likewise, the
Science and Technology Ministry also needs to develop and use clear multi-year (e.g. 10 years)
rolling implementation strategies to ensure that national innovation policy is implemented.
The strategies for the chemical industry should be formulated by all major actors of innovation
with clear benchmarks and articulation of institutional responsibilities.

Ethiopia’s education and training institutions do not produce sufficiently skilled manpower
to meet market demands for skills in science and engineering. The situation of chemical engi-
neering is even worse. There is a shortage of adequately skilled chemists and chemical engi-
neers. This is a major barrier to improving the chemical industry’s technological performance
and to enhancing the national innovation system. It should undertake immediate reforms in
its education and training systems in the chemical industry. It should improve the curricu-
lum of chemical sciences and engineering, double the number of academics and trainers and
equip the chemistry laboratories in schools and colleges. It must also create a fund dedicated
to training at PhD level in chemical engineering. This can also be achieved by creating research
chairs at universities. Chemical firms should be provided with fiscal incentives to create chairs
and departments in promising universities. In fact, increasing enrolment in chemistry and
chemical engineering courses requires a wide range of measures, including increasing uni-
versities’ capacities by building more and better laboratories, increasing lecturers and techni-
cians and encouraging private universities to develop and offer such courses.

It is necessary to take a holistic approach to building chemistry and chemical engineering


skills. Single, short-term interventions will be inadequate. For example, placing emphasis on
increasing student enrolment without an adequate focus on creating employment opportu-
nities in businesses is unlikely to succeed, at least in the long run. Increasing investments
in chemical sciences training should go hand-in-hand with concerted efforts to develop the
private sector, improve physical infrastructure, create more jobs and grow the economy as
a whole. Thus, Ethiopia should avoid single isolated interventions in its efforts to improve
chemical sciences and engineering skills.

After field visits and industry interactions, we observed that there is a weak entrepreneurial
culture among graduates as one of the barriers to increased business development and job

105
creation in Ethiopia. Many graduates enter the labour market unprepared and ill-equipped to
manage businesses and take risks. Universities, polytechnics and other institutions of higher
learning need to introduce courses in entrepreneurship in their curricula. Technical colleges
could team up with businesses and business schools to design and offer entrepreneurial
courses as part of their standard teaching curriculum.

Despite commendable efforts, Ethiopia’s national innovation system is still relatively weak.
The innovation system in the chemical industry is even weaker. The industry cannot, there-
fore, adequately take advantage of new opportunities that are arising with the rapid scientific
and technological development, intensifying regionalization and globalization, increased FDI
flows, political stability and better macroeconomic conditions. If taken on and effectively im-
plemented, the strategic interventions proposed for the national innovation system and spe-
cifically for the chemical industry, Ethiopia can go a long way in fostering STI in the economic
transformation of its economy.

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107
CH A PTE R I V

DEVELOPMENT STRATEGY FOR TECHNOLOGY-BASED CHEMICAL


INDUSTRY IN ETHIOPIA

1. Key Challenges
2. R ecommendations for a Development Strategy
for Ethiopia’s Chemical Industry

108
Ethiopia has the potential to develop a technology-based large-scale chemical and petro-
chemical industry. The Ethiopian Industrial Development Strategic Plan (2013-2025) envisions
“building an industrial sector with the highest manufacturing capability in Africa which is di-
versified, globally competitive, environmentally-friendly, and capable of significantly improv-
ing the living standards of the Ethiopian people by the year 2025.” The 2nd GTP set an ambi-
tious plan for developing a technology-based chemical industry in Ethiopia. The IDSP also
identified seven strategic issues that need to be addressed in order to achieve the desired
objectives. Those strategic issues are:

  1. Inadequately developed business-enabling environment


  2.P oor human resource development system and shortage of highly qualified human re
sources
  3. Insufficient industrial inputs and infrastructure development
  4. Lack of well-established investment and technology development
   5. Inadequate market diversification and development
   6. Inadequately developed institutional support and enterprise cultivation
   7. Weak strategic sector development and diversification.

Therefore, the development strategy for a technology-based chemical industry must address
these issues. However, these are issues that are common to all sectors of the economy. More-
over, the chemical industry in Ethiopia is seriously constrained by numerous structural ob-
stacles. For instance, the government failed to boost infrastructural capacities against the set
targets of GTP-I. Likewise, the investment policy for this industry is still quite restrictive, espe-
cially with respect to petroleum and natural gas, the primary feedstock of the chemical indus-
try. As a result, foreign investments in this sector are not forthcoming. The chemical industry is
heavily dependent on imports, but severe restrictions on imports have adversely affected the
chemical production facilities. Disrupting chemicals supply lines wreaks havoc in the related
downstream industries. For instance, the garment and leather industry requires dyes, ink and
bleaching chemicals, the food processing industry needs chemical preservatives, and fertil-
izers and agro-chemicals are essential inputs for the agriculture sector. There are thus scores
of cross-sectoral policy issues along with chemical industry-specific issues, which act as an
impediment to the overall industrial development efforts.

1. Key Challenges

All good plans fail because of poor implementation, but even bad plans sometimes provide
better than expected results because of effective and efficient implementation. Existing pro-
cessing enterprises are engaged in small-scale operations. Even public sector firms operating
in the chemical industry operate at sub-optimal levels of capacity utilization. A large part of
current industrial production is comprised of limited but simple variants of the chemical in-
dustry. Productivity is low and quality standards are poor. The chemical industry exhibits a
strange paradox, i.e. the upstream supply chain is largely untapped. The mid-stream is domi-
nated by the inefficient public sector. The downstream linkages are nearly non-existent. Do-

109
mestic chemical producers remain perennially dependent on raw material imports. The chemi-
cal industry is still in its infancy in Ethiopia. Therefore, the key challenges for the development
of a technology-based chemical industry lie at two levels.

  1.1 Chemical Industry

The key challenge for the chemical industry is to become competitive in the marketplace. Do-
mestic players must focus on specializing in their areas of expertise in line with the global
trend. Innovation is gaining importance as it enables firms to focus on core competencies and
to lead in specialty products. The idea is to focus on one’s core competency and select busi-
ness segments that have a competitive advantage. Likewise, a chemical producing organiza-
tion that wants to successfully compete in the marketplace must focus on customer demand.
These demands can be numerous, even for a narrow customer segment. Domestic chemical
producers must translate customer demands into objectives for operations known as com-
petitive priorities, such as low cost, consistent quality and on-time delivery. The industry must
focus on improving its product and production processes by investing in technology develop-
ment and building R&D capabilities. Such steps will enable the industry to not only build its
expertise in chosen fields, but will also lead to reductions in production costs. Adherence to
environmental and public safety norms and the promotion of safe management of substances
are also pivotal areas that need to be focused on from design, end use, to the final disposal
(hazardous waste) of products.

a) The chemical industry must ensure full competitiveness, i.e. the competitiveness
of firms at the upstream to the downstream level through backward and forward
linkages. If the upstream units produce quality products at competitive prices, the
output of mid-stream are good quality products at competitive prices. This output
is input for downstream units, which in turn produce quality outputs at competitive
prices. Thus, attaining economies of scale at each level is currently a major chal-
lenge for the chemical industry.

b) Import substitution represents another challenge for this industry. The govern-
ment will not be able to adopt a regressive policy of mandating local content re-
quirements. The chemical industry must position itself for value addition instead
of importing finished goods. For instance, rather than buying finished goods to
represent a part of the assembly line, the industry may adopt a combination of
made to order and assemble to order products. In other words, the challenge for
the chemical industry is to ensure reduction of excessive import dependency.

c) Innovation is the key to success in a highly competitive business environment. En-


terprises must invest in technology to improve their products and production pro-
cesses. With the current state of R&D infrastructure, technology transfer is the only
way to meet the requirements of a technology-based chemical industry. However,
the scope of technology transfer should not be limited to merely import technology,

110
but the enterprises need to make a concerted effort to adapt and absorb the newly
acquired technologies and thereafter undertake efforts to develop technologies.
This requires a strong interface with universities and research institutions.

d) The industry chambers’ role in times of globalization has changed. Instead of act-
ing as a lobbying group with the government seeking concessions, industry cham-
bers are required to network with their members to create a strong information
base on producers, products and markets. For instance, protection against exces-
sive imports in the form of anti-dumping, countervailing duties and safeguard
measures requires a proactive role of industry chambers. Thus, industry chambers
are necessary to continuously educate their members about the changing interna-
tional business environment and potential emerging markets.

e) Chemicals companies largely operate on the basis of a business-to-business mod-


el, selling products that are used by their customers as inputs to create another set
of products. The rapid introduction of IT in the chemical industry is strongly influ-
encing the way companies operate by digitally integrating physical assets across
different stages of their value chain. The challenge lies in the digital integration of
the chemical industry across the entire value chain in the light of an existing weak
info-communication infrastructure.

f) The chemical industry is one of the most regulated industries globally. Therefore,
the chemical industry must comply with the international safety norms, good man-
ufacturing practices and international standards. Initially, this represents a chal-
lenge for the chemical industry, but in the long run, it is advantageous for chemical
manufacturing units to integrate with global production networks. In other words,
the industry must ensure the integration of vertical value chains.

  1.2 Government

The domestic chemical industry is endowed with availability of low-cost labour. Agriculture
along with associated industries such as leather, plastics, food processing, rubber and textiles
offer tremendous growth opportunities for the chemical industry in the long term. However,
weak infrastructure continues to plague the development of the chemical industry despite the
availability of abundant natural resources. Porous borders and weak regulatory mechanisms
have allowed excessive imports of cheap and low-quality chemicals. Thus, logistical bottle-
necks, cheap unchecked imports and poor regulatory mechanisms pose a threat to the chemi-
cal industry as a whole. Therefore, attracting technology transfer and technology upgrading,
access to skilled manpower and the availability of funds at a reasonable cost, adequate in-
frastructure support and economical input costs are essential for the sustained growth and
development of the chemical industry in Ethiopia. The major challenge for the government
is to develop basic infrastructure to foster the growth of the domestic industry. Thus, the key
challenges for the government are:

111
(a) The infrastructure industry has gained significant importance in the transforma-
tion of Ethiopia. It is one of the government’s priority focus points. The chemical
industry is energy intensive. However, the industrial policy and energy policy have
no common denominator in thought and expression. Likewise, Ethiopia is a land-
locked country and requires multimodal transport linkages to gain access to in-
ternational markets. Thus, the key policy challenge is to synthesize the industrial
policy with various policies that are relevant for infrastructure development, like
energy policy, multi-modal transport policy, etc.

(b) Public sector enterprises are inefficient and under-utilized. How to improve the
performance of such enterprises remains a major challenge for the government.
The public sector suffers from acute low productivity, outdated technology, weak
R&D and sub-optimal operations. The challenge is to turn around these public
sector enterprises by immediate infusion of new technology and capital for ad-
ditional capacities.

(c) The challenge for the government is to attract large-scale foreign direct investment
in the chemical industry. Unfortunately, the extracting industries have not been
able to attract the attention of big players in the petroleum business. Even the
gas discovery has not been able to attract the attention of petrochemical majors
in Ethiopia. FDI brings in technology, access to international markets and produc-
tivity along with a strong impact on economic activity. A review of the current FDI
policy and FDI policies of Ethiopia’s neighbours is urgently required. The objective
of Ethiopia’s FDI policy should be made more attractive in order to draw attention
of international giants in the chemical industry.

(d) Cheap and low-quality imports from neighbouring countries is one of the reasons
for the narrow manufacturing capabilities in the chemical industry. Porous borders
and poor regulatory mechanisms have adversely affected Ethiopia’s industrializa-
tion prospects. It is a challenge for the government to ensure that the trade policy
is not protectionist in its approach but must also safeguard the interests of local
manufacturing. The chemical industry experiences an inverted tariff structure in
certain categories of goods, for instance, tariffs are higher on raw materials/in-
termediate goods (petrochemical variants) as compared to tariffs on imports of
finished goods (packaging material).

(e) There is a shortage of trained technical workforce, qualified chemical engineers,


researchers and managers. Expatriates comprise a large majority of the technical
workforce employed in Ethiopia. In general, the government faces the challenge
of preparing an adequately trained workforce to become an integral part of the
transformation from an agriculture to an industrial economy. Human resource de-
velopment at all levels is a major challenge.

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(f) Absence of market extension support systems for the chemical industry. This is an
integral feature of any manufacturing sector, but plays a vital role in the chemical
industry. Market extension systems usually comprise testing laboratories, quality
certification agencies, pre-shipment inspection agencies, technical standards bu-
reaus, tool rooms and technology generators. It is a challenge for the government
to ascertain a nationwide network of market extension and support services for the
chemical industry.

2. R
 ecommendations for a Development Strategy for Ethiopia’s
Chemical Industry

It is clear that Ethiopia’s chemical industry has thus far not even attained a critical mass to
influence supply side or demand side linkages. Almost 90 per cent of domestic demand for
chemicals, such as raw materials, intermediate or finished goods, is serviced by imports. The
balance of 10 per cent domestic demand for chemicals is serviced by local manufacturing.
Local manufacturing of chemicals is plagued by low productivity and operational mismanage-
ment, resulting in the non-competitiveness both in terms of quality and price against imports.
The one-third rule of economic growth is often used to denote the critical mass on a variety
of economic issues. To make any significant impact on the chemical industry’s manufacturing
capabilities, local production must attain a critical mass of 33 per cent. Once the domestic pro-
ducers have successfully met 33 per cent of the local market requirements, it is believed that
the industry has attained a critical mass at which it can successfully compete against imports
and influence the local market as well. In other words, the upstream supply side producers
like refineries, cracker plants and petrochemical plants, must be in a position to provide raw
material and feedstock at competitive prices to service 33 per cent of downstream demand in
order to influence the domestic market. The chemical industry’s development target should
be to become cost competitive in the short term, emerge as a strategic substitute for chemical
imports in the medium term and finally, become a net exporter of chemicals in the long run.

Therefore, the development strategy for the technology-based chemical sector should be a
double-pronged strategy comprising of substantive measures for the chemical industry and
policy recommendations for the government.

  2.1 Substantive Measures for a Technology-based Chemical Industry

 a)  Changing mindset from ‘Look Local, Think Local’ to ‘Think Global, Act Local’
At the global level, the presence of Ethiopia’s chemical industry is nearly non-existent. The
production capacities and product mix are designed for the domestic market. The mindset of
local producers is inward looking, which results in a lack of interest in quality consciousness,
innovation and achieving economies of scale. Chemical producers are limited in number and
production capacity, but domestic demand for chemicals has increased over time, which has
resulted in largely skewed competition in favour of cheap imports.

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Ethiopia is awaiting accession to the WTO. After becoming part of the multi-trading regime,
fierce competition in the domestic market is expected, which will also be visible in the chemi-
cal industry. Excessive cheap imports have already begun to hurt local producers financially.
Increased competition will force local producers to change their mindset and review their op-
erations. They must realize that a protectionist regime is a thing of the past and they will have
to become globally competitive to remain competitive domestically. Therefore, the mindset of
local producers must undergo a change from inward looking to ‘think global, act local’. Com-
petition will shift their focus from small domestic markets to large global markets to achieve
economies of scale. Price competitiveness will force them to become quality conscious, in-
novative and technology-driven. As a result, the changed mindset will force local chemical
producers to review and realign their production operations, product offerings, etc.

  b)  Change in the product mix


Domestic chemical producers have a sizeable presence in downstream industries. However,
the upstream and mid-stream production of chemicals is almost non-existent in the private
sector. To a limited extent, the public sector is present in the mid-stream chemical industry.
However, the product mix in chemical production is limited at all levels. The analysis identified
potential areas of chemical production in Ethiopia, namely soap, cleaning and cosmetics, ba-
sic chemicals (except fertilizers), fertilizers and agro-chemicals and cement. Each sub-sector
depends on the variants of hydro-carbons and the output of upstream and mid-stream in-
dustries. For instance, gas is cracked in the upstream petrochemical plant and fertilizer plant
to provide outputs for multifarious usage in mid-stream industries like agro-chemicals and
downstream industries like paints, cosmetics, etc. To achieve economies of scale, chemical
manufacturers will not only have to add capacities but also broaden product offerings. The ba-
sic chemical sub-sector (except fertilizers) has a wide range of product offerings which include
acids, alkalis and other chemicals in different concentrations for downstream industries.

Likewise, chemical products are also experiencing a change in the preferences of buyers. De-
mand for special chemicals is growing at the global level. Environmental concerns are also
putting pressure on chemical producers to innovate and produce products that have minimal
impacts on the environment. For example, the chemical industry has been pushed into pro-
ducing alternative refrigerants to air conditioning and refrigeration. Thus, domestic produc-
ers will have to now work on different variants of chemicals to address global market issues.
As income levels rise, demand for better and environmentally friendly products increases.
Therefore, domestic demand will also shift to higher quality and environment-friendly chemi-
cal products. This, however, will require R&D investments. Chemical producers who seek to
participate in the global market will tend to develop an appropriate product mix to cater to
different markets and market segments. Such producers will consider R&D investments as an
integral part of their operational costs.

  c)  Compliance with the international quality regime


The chemical industry follows a very stringent quality standards regime at the international
level due to its hazardous impact on animal and plant life. Despite the existing quality regu-

114
latory mechanism, domestic producers and consumers have little interest in complying with
international quality standards. Their knowledge on subjects like ISO 9001:2015, ISO 14001,
ISO 18001 (OHSAS) and ISO 27001:2013 is quite low or absent altogether. International qual-
ity norms for the chemical industry as catalogues in the ISO standards catalogue 71.100 are
relatively high, both in terms of quality standards and compliance requirements. Domestic
chemical producers, both in the public and private sectors, have limited capabilities to comply
with these standards. However, the changing business environment will force local chemical
producers to recalibrate their production lines and upgrade their quality standards. This will
be a major challenge for all stakeholders in the chemical industry.

  d)  Backward integration


The mid-stream and downstream chemical industries in Ethiopia face a major challenge in
the form of continuous supply of inputs. Existing capabilities to exploit natural resources are
poor and force the local chemical industry to import primary chemical inputs, which makes the
production process perennially dependent on imports. Frequent disruption in primary input
supply lines results in under-capacity plant utilization and diseconomies of scale. To overcome
this shortcoming, chemical producers at mid-stream and downstream level should try to inte-
grate their production with the source of primary inputs. Backward integration is a well-tested
strategy adopted by most resource-based industries. For instance, a large capacity hydrochlo-
ric acid plant can make investment in magnesium chloride brine fields in the Afar region for
continuous supply of primary inputs. Such types of backward integration are most common for
resource-based industries. Another strategy often used by resource-based industries is to en-
ter into alliances with primary input suppliers. For example, a petrochemical plant or fertilizer
plant entering into an alliance with a gas exploration company to ensure continuous supply of
gas. Backward integration allows a firm to exercise control over the supply of raw materials.

  e)  Upgrading of skills and training


Human resources are an important resource for the chemical industry. High-skilled workers
are required by the industry, hence it must continuously invest in human resource develop-
ment. There is a short supply of technically competent and skilled workers in Ethiopia. Most
technology-intensive industries, including the chemical industry, thus depend on expatriates.
The chemical industry should improve its interface with the local universities to enable them
to understand their current and future requirements. Close interfaces can be achieved by in-
stituting fellowships and scholarships at the tertiary level of education to popularize chemical
sciences and chemical engineering among students. The chemical industry can institute a
Chair at the university for technology development and promote research in chemical scienc-
es. In times of globalization, it is imperative for the chemical industry to improve its interaction
with universities and research institutions for continuous upgrading of skills and training of
locally available human resources.

  f)  Attaining competitiveness through lean management


To be competitive in chemical production, the ‘lean’ philosophy supports all kinds of waste
minimization through value stream mapping. Lean management cuts off non-value adding ac-

115
tivities and overall operations cost by 35 per cent in processing activities. Undoubtedly, there
are challenges of implementation in an already established industrial set-up. However, the
Ethiopian chemical industry is in its infancy and it will be easier to establish lean management
norms at the initial stages of the industry’s development. The chemical industry should follow
Standardized Work Instructions (SWIs) that allow processes to be completed in a consistent,
timely and repeatable manner. The SWIs will increase production, improve quality and provide
for a safer, predictable working environment. Value Stream Mapping (VSM) is also used to
illustrate the flow and relationships between work processes. Reducing or eliminating non-
value adding activities is of paramount importance and a principle goal of lean manufacturing.

“Poka Yoke” is one of the powerful tools used for ensuring error free processing or zero-de-
fect operations. Frequent voluntary customer-vendor interactions improve area effectiveness
in chemical processing industries. “Heijunka,” provides a system for advanced scheduling
of production activities. This lean tool allows for a reduction in inventories, decreased lead
times, and the production of variants to suit market requirements. The establishment of Single
Minute Exchange of Die (SMED) to create swift changeovers and set-ups to reduce machine
downtime and increase throughput should be considered. Inventory and lead time reduction
lower excess inventory, spoilage and pilferage, storage requirements, tied-in funds for inven-
tories, etc. The “KanBan” system indicates to the workforce what tasks need to be completed
and when through signal boards and colour codes. Such tools control wastages of resources in
chemical enterprises and make the processing operation efficient and cost effective.

  2.2 Policy Recommendations

To achieve the objective of developing a technology-based chemical industry in Ethiopia, the


government will have to adopt a multi-pronged strategy based on (1) Consolidation of the pub-
lic sector on the supply side and attracting foreign investment, (2) Set up a chemical industry
agglomeration as a pilot project, and (3) Incentivize the demand side for import substitution.
This multi-pronged strategy will enable the local chemical industry to attain a critical mass to
influence the overall chemical industry in Ethiopia. However, this strategy must be comple-
mented by (a) improvement of infrastructure, (b) strengthening of public institutions, (c) hu-
man resource development, (d) Improving access to finance, and (e) promoting entrepreneur-
ship development.

Recommendation-1: Consolidation of Upstream Public Sector Enterprises


The role of public sector enterprises in Ethiopia is manifested in the quantum of capital they
control and the magnitude of the economy’s dependence on such enterprises. The upstream
chemical industry is dominated by public sector enterprises and suffers from operational inef-
ficiencies. Consolidation is a business strategy to enhance competitiveness by way of draw-
ing strategic alliances. Strategic alliances essentially are non-equity and equity based. Non-
equity-based strategic alliances are licensing and franchising, while equity-based alliances
are essentially joint ventures and other strategic means of consolidation including mergers,
acquisitions and takeovers.

44
Selvan (2008).

116
To improve the performance of public sector enterprises, the government carried out two
phases of privatization, the first wave occurred from 1991 to 1994 and the second wave lasted
from 1999 to 2004. During these two periods, a total of 224 public sector enterprises existed
in Ethiopia. Industry had the highest number of PSEs (113) followed by the agriculture sector
(37). Around 40 loss-making PSEs in industry were privatized, of which 13 were in the chemical
industry. However, the production levels declined by nearly 14.21 per cent after privatization
due to depleted machinery and a shortage of raw materials44.

Upstream operational PSEs, for example, the Calub Gas Share Co., control the entire supply
of gas for domestic consumption. Slow development of gas fields has hampered mid-stream
and downstream industrial production. Likewise, domestic production of fertilizers and pet-
rochemicals has also decelerated. The government recently announced that it would privatize
its 95 per cent stake in public sector companies, but the actual privatization of PSEs has not
yet occurred. Internationally, major public oil and gas companies have been seeking to sell off
their downstream operations and focus on potentially more lucrative upstream operations.
Market demographics are encouraging downstream investment, thus highlighting the range of
strategic options available in just one area of the value chain. The impact of technologies has
so far been greatest on downstream enterprises like petrochemicals and petroleum products.
This secures a competitive advantage by introducing new technologies. The use of technology
becomes more widespread to broaden the product mix in the chemical industry.

Major players in the chemical industry, like China, the Republic of Korea, Japan and India
are looking for new opportunities. The prospects of strategic alliances with PSEs should be
beneficial for developing capacities of manufacturing specialty chemicals in Ethiopia. These
chemicals are usually at the higher end of the chemical value chain, which have a wide utility
in a variety of downstream industries, including waste water treatment, textiles, agriculture,
oil and gas, electronics and consumer goods. In general, demand from end-user industries
will result in increased growth prospects for several manufacturing segments, most notably
for mining chemicals, specialty polymers and electronic chemicals.

Recommendation 2: Set-up of a Chemical Industry Agglomeration


Involving the private sector for value addition and exploring export markets is crucial. The
strategy for development of a technology-based chemical industry centres on cluster forma-
tion on a pilot basis (with reference to the homogeneity of a chemical industrial complex or
chemical cluster/agglomeration). A cluster approach accelerates the transition of an infant
manufacturing sector into a mature competitive one by synergizing strengths and adopting
state of the art technologies. Clusterization results in total factor productivity and compara-
tive advantage through continuous innovation. Rather than distributing scarce resources to
multiple regions, the government benefits from concentrating on a particular region to build
infrastructure and develop market extension services. Focused development attracts private
investment and technology in the cluster. Lessons learnt from such focused initial efforts could
then be transferred and replicated across other producing regions of the country by spreading
investments sequentially.

117
To set up a cluster, the government needs to enact a Special Purpose Vehicle (SPV) to estab-
lish the basic operational framework for developing a chemical cluster zone. The SPV is not a
new subject. Existing chemical producing locations are concentrated in Addis Ababa and the
Oromia region. However, with the discovery of gas in the south-western region, the strategy
would aim to develop a cluster in that region to achieve complementarities and overall com-
petitiveness. In fact, this SPV could be developed as a centre for regional cooperation with
neighbouring oil and gas rich Kenya and North Sudan. The cluster approach recognizes that
all stakeholders in the chemical value chain are often pushed to be more innovative and suc-
cessful when they interact with supporting institutions and other actors in the supply chain.
By promoting vertical and horizontal linkages between feedstock suppliers at the upstream
level to supply inputs at the downstream level, as well as supporting relationships between
them and facilitating organizations (e.g. local governments, research institutes and universi-
ties), cluster policies promote the diffusion of innovation, as well as the use and generation of
important local externalities. Chemical clusters enhance access to markets and information.

Figure 23 Oil, Natural gas & Chemicals Cluster

Cluster policies are crucial for MSMEs and market linkages, as they enable them to engage in
higher productivity and more market-oriented and higher value-added production. Therefore,
the SPV for the chemical cluster must elaborate the role and responsibility, expression of in-
terest, identification of land, eligibility criteria, etc. The most common SPV mode of cluster
development are Public Private Partnerships (PPPs).

45
Goldin and Reinert (2007).

118
The global experience of the chemical industry shows the advantages of clustering and ag-
glomeration as it enhances supply chain responsiveness and provides easier access to mar-
kets, talent and substantially lowers logistics costs. Although the government has been imple-
menting schemes to promote industrial zones in Ethiopia, their full benefits of agglomeration
have yet to be realized. A chemical cluster will catalyse the growth of the processing industry
and will emerge as a first chemical industrial agglomeration in East Africa, benchmarked with
the best manufacturing practices in the chemical industry. A chemical cluster will help meet
the increasing demand for creating a world class chemical production hub, while it will also
absorb surplus labour by providing gainful employment opportunities in the entire region. The
chemical industrial agglomeration will address the infrastructural bottleneck which has been
cited as a constraining factor for the growth of industrial development.

Recommendation 3: Review of the Foreign Direct Investment Policy


FDI plays a critical role in enhancing the manufacturing sector’s efficiencies and competitive-
ness. Under appropriate conditions, FDI can generate direct and indirect employment, pro-
mote competition, improve efficiency and provide access to newer and appropriate technolo-
gies45. FDI is usually associated with new job opportunities and enhancement of technology
transfers, and it boosts overall economic growth through exports. Investment, without doubt,
is one of the primary engines of growth in all economies. However, its effectiveness rests on
strong complementarities with other elements in the growth process, most notably techno-
logical progress, skills acquisition and the development of innovative capability. These ele-
ments make investment a natural point of departure for governments seeking to formulate a
robust development strategy. The link between investment and these other determinants of
growth, however, is not an automatic process. It requires, among other things, a favourable
macro-policy environment and specific policies and institutions aimed at encouraging savings
and attracting and directing investment to key sectors in the economy, thereby enhancing the
contributions of investment to skills formation, technological change, competitiveness and
economic growth.

FDI policy is undoubtedly a cross-sectoral policy, but the chemical industry also has a consid-
erable impact on multiple sub-sectors of the economy. It was observed that the current provi-
sions in Ethiopia’s FDI policy include certain provisions for the oil and gas industry, which look
relatively restrictive and discretionary from an international point of view. Oil and gas are the
primary feedstock of the chemical industry and it is therefore recommended for the FDI policy
to be reviewed in order to accommodate the concerns of the chemical industry. World lead-
ers in the chemical industry are some of the most welcomed entities in all nations because
of their technological prowess, market dominance and commitment to sustainable develop-
ment. Chemical MNCs prefer a liberal policy and transparent regime. Therefore, the domestic
FDI policy must be made more attractive than that of other countries, especially of those in the
region, to attract foreign inflows in the chemical industry.

Singapore is an example of pursuing a proactive FDI policy for the chemical industry. The avail-
able FDI incentives include tax and other fiscal inducements, financial subsidies and deroga-

46
Tamrat W. (2018).

119
tions from regulations offered to foreign-owned enterprises with the purpose of making them
invest. The incentives may include duty-free privileges; concessionary tax rates, breaks and
exemptions; preferential fees for land or facility use; favourable arrangements on project du-
ration, size, sector invested in, location and type of ownership; flexible treatment regarding
business management, employment and wage schemes; etc. The aim of policies to attract FDI
must necessarily be to provide investors with an environment in which they can conduct their
business profitably and without incurring unnecessary risks. A sound foreign investment law
addresses foreign investment in the context of general investment laws, basically granting
foreign investors “national treatment”, which is a global best practice.

Recommendation-4: Human Resource Development Policy


The global economy is increasingly becoming ‘knowledge based’. As technological change oc-
curs at unprecedented speeds, it becomes increasingly important for developing countries to
create institutional mechanisms that can foster skills formation at both the national and firm
level to become globally competitive and to promote economic development. One develop-
ment observed on a global basis is a growth in demand for products with a high level of skill
content, flexibility and multi-tasking. This calls for a high level of skills, which in turn push
the national government to expand allocation of finance for tertiary education. Besides, the
quality of a country’s national education system is increasingly being compared internation-
ally, placing high premium in mathematics, science, English and communication skills. Digital
mediums are being introduced in education systems, partly to expand the quality of education
at lower costs through distance learning, and partly to deliver higher quality education (at a
higher cost) through computer-assisted instructions and the use of the internet. These issues
are the fundamental guiding force to developing any human resource development policy.

Ethiopia has major shortcomings in nearly all levels of education, i.e. primary, secondary and
tertiary education. Given resource constraints, the government’s priority is primary education.
Therefore, government funds for tertiary education have decreases considerably. It is evident
that public universities in Ethiopia are exercising new forms of privatization within their realms
of operation. Strenuous efforts are being undertaken to increase former sources of revenue
through different income generation schemes and to outsource non-academic activities. The
failure of Higher Education Relevance and Quality Agency (HERQA) in monitoring quality lev-
els has resulted in poor infrastructural facilities for imparting university education. University
education in Ethiopia, especially technical education, is suffering the most46. As discussed
earlier, laboratories and workshops in technical colleges in Ethiopia are poorly equipped with
a lack of journals and laboratory and workshop equipment and machinery. The government’s
R&D investment is miniscule. Thus, there is a severe shortage of technically competent skilled
manpower in Ethiopia. However, university graduates are mostly unemployable due to a lack
of updated skills as required by industry. Ethiopia’s human resource development policy is
undoubtedly a cross-sectoral policy, but high-technology industries such as the chemical in-
dustry are affected most. The majority of high-technology industries rely on expatriates. There-
fore, the following recommendations are chemical industry-centric.

120
1) The government should increase allocation for tertiary education. This recommendation
may be sector neutral, but the government will have to conduct a mapping exercise of the
existing turnout and the requirements of chemical engineers, chemists, pharmacists and
technicians with a focus on the expansion of the chemical industry. The mapping exercise
will channel financial allocation for interfaces between research and training institutes,
such as chambers of commerce and industry, universities, colleges and vocational schools,
and disseminate information on available training courses on business and management
as well as chemical technology and chemical engineering to develop local managerial and
technical skills.

2) Often, higher education needs are related to employment opportunities. Chemical engi-
neering is not popular among the technical disciplines offered in Ethiopia because of lack of
employment opportunities. For instance, there are a total of 60 students in the undergradu-
ate chemical engineering programme at Addis Ababa University. This number of chemical
engineers cannot even support MSMEs in the chemical industry. Therefore, the government
needs to establish public-private partnerships to incentivize students to pursue chemical
engineering courses through scholarships, fellowships, waiver of fees, etc.

3) Labour Proclamation No. 377/2003 provides provisions on apprenticeship contracts. The


government should make apprenticeship training mandatory for all students pursuing tech-
nical courses. They should spend at least 45 working days in a factory as part of the cur-
riculum requirements. This is a sector neutral policy recommendation. However, high-tech
industries require hands-on experience to complete their educational training. The chemi-
cal industry is one such industry where education is incomplete without gaining hands-
on experience in the industry. For instance, to teach chemistry, a fully equipped chemistry
laboratory is necessary. This will strengthen and improve the interface between industry
and technical universities.

4) Technical and Vocational Education and Training (TVET) are an integral part of education
systems across the world, contributing to the competitiveness of SMEs. The Ministry of La-
bour is the nodal ministry to implement technical and vocational training on a nationwide
basis. The chemical industry requires large numbers of trained chemists, pharmacists and
lab technicians. At present, the Ministry of Labour has not yet identified chemical trade for
developing the training and education module. The ministry must first identify it as a prior-
ity and expedite preparation and training modules on chemical trade.

Recommendation-5: S&T Policy and Strengthening of the IPR Regime


It has been established that firm-, industry- and national competitiveness are closely inte-
grated with one another. This outlines the need for an appropriate Science & Technology policy
that boosts the innovative edge of smaller firms as they improve their own nation’s capacity
to compete in global markets. However, small firms find it more difficult than larger ones to
secure sufficient knowledge, human resources and funds to develop and protect their inno-
vation, particularly through intellectual property rights (IPRs). Moreover, Ethiopia is lagging

121
behind its neighbouring countries in terms of R&D spending and technology capacity building.
In order to help domestic MSMEs create new businesses with the potential to generate innova-
tions, active support will continue to be provided for initiatives undertaken by MSMEs, such
as the development of new products and services. There is an urgent need for a holistic policy
approach that facilitates the development of human resources, business incubators, science
parks and ICT applications. The following policy actions are proposed:

1) The Ministry of Science & Technology (MOST) needs to design a simplified and streamlined
institutional framework for the development of science and technology at both the national
and the sub-national levels and develop national and sub-national innovation systems
through institutional networking and coordination, capacity building and infrastructure de-
velopment (e.g. science and technology parks);

2) The government should launch an initiative for the promotion of innovation by developing a
legal framework to allow public-private partnerships in tertiary education to adapt technical
education to the requirements of industry. For instance, it could provide fiscal incentives for
joint R&D, technology transfers and technology commercialization in the chemical industry
through various financial and non-financial measures, including special tax schemes; de-
velopment of the patent office and its portal site; and subsidize patent, design and trade-
mark applications made by manufacturers.

3) The government must foster business and technology incubators in priority industries, i.e.
the chemical industry, and develop tools for technology-based MSME development. The in-
dustry chambers, in association with MOST, need to conduct studies on patent application
trends and selected technological themes, assist in the development of R&D and intellec-
tual property (IP) strategies and make the results available to the public. The number of pat-
ented technologies in the chemical industry shall soon be in the public domain for usage.
The MOST and industry chambers must keep close track of these technologies to be used by
the chemical industry, especially MSMEs.

4) Raise awareness on IPRs among MSMEs by organizing information sessions and training
courses on innovation and IP systems; ICT applications for business management, produc-
tivity improvement and new product/service development; subsidize MSME investment in
ICTs in cooperation with financial institutions; and provide a regulatory and policy frame-
work to reduce the cost of communications for business.

Recommendation-6: Incentivizing Local Value Addition & Import Substitution


Start-ups in chemical industry range from billion dollar refining facilities to small packaging
units in MSMEs. Industrial policy must therefore be coherent and flexible. The monetary and
fiscal incentives for start-ups in the chemical industry shall include:

(i) 100 per cent exemption from stamp duty and registration fees during the pre-production
phase for chemical start-ups;

122
(ii) Capital subsidy for industrial units and incentives to the existing units for captive power
generation/diesel generating sets;
(iii) Subsidy on the use of renewable sources of energy;
(iv) Reimbursement of expenses incurred on project reports, technical know-how fees; quality
certification, ISO certification; and
(vi) Customs duty relief on machinery, tools, parts and spare parts.

The government may also grant fiscal incentives like reimbursement of tax for import substitu-
tion. This type of reimbursement will be valid for a fixed period so that the chemical industry
attains a critical mass.

An import substitution strategy is an attempt to replace commodities that are being import-
ed—usually manufactured goods—with domestic sources of production and supply. Typically,
tariff barriers or quotas on certain imported commodities are first introduced by the strategy.
Subsequently, a local industry to produce these goods is set up. Although the initial costs
of production may be higher than the former costs for imports, the government should cre-
ate a tariff wall to eliminate the price differential. The economic rationale put forward for the
establishment of import substituting manufacturing operations is either that the industry will
eventually be able to reap the benefits of large-scale production and lower costs or that the
balance of payments will improve due to imports of fewer consumer goods. Eventually, the in-
fant industry will hopefully grow and be able to compete in world markets. It will then be able
to generate net foreign exchange earnings once it has lowered its average cost of production.
Besides, import substitution is often considered a regressive policy. Alternatively, instead of
enforcing local content requirement, any manufacturing unit sourcing chemicals from domes-
tic producers can be induced with an employment incentive by the government for generating
direct employment in the chemical industry. This incentive can come in the form of partial
sharing of the EPF amount paid by such manufacturing units.

The chemical industry has a wide variety of import substitution applications. For example,
despite the supply side constraints, it is useful to import LDPE and HDPE granules (an output
of petrochemical plants) and convert them into polythene films for packaging material. This
form of import substitution will allow domestic value addition. Likewise, inorganic chemicals
and gases can be produced as by-products for various industries like pulp and paper, petro-
chemicals, fertilizers, etc.

Recommendation-7: Compliance with International Quality Standards, GMP and Safety


Norms for the Chemical Industry
The chemical industry is highly regulated internationally. The erstwhile American Society for
Testing and Materials, currently known as ASTM international, is the sole agency to issue stan-
dards for the chemical industry. The industrial chemical standards are instrumental in the
testing and evaluation of the physical and chemical properties of substances used or pro-
duced primarily in industrial applications. These chemicals, both organic and inorganic, are
manufactured and employed for a variety of consumer goods including engine coolants, rub-

123
bers and plastics and petroleum. These industrial chemical standards allow chemical indus-
trial plants, material processing companies, product manufacturers, and other producers and
users of such chemicals in their proper fabrication and treatment processes to ensure quality
in safe production and utilization.

In the absence of any mandatory or voluntary compliance of national standards for the domes-
tic chemical industry, the manufacturing sector has yet to inculcate a robust culture of quality
standards, adequate safety norms and good manufacturing practices. The U.S. experience of
setting industry level standardization serves to integrate company standards and unify them
in the interest of the industry as a whole. Industry level standards also serve as a basis for
overall integration at the national level. When the manufacturing sector is at infancy level,
it has the potential to adopt international standards on a voluntary basis. Even though the
chemical industry is poised to serve local demand, it should voluntarily comply with interna-
tional standards. In this regard, the chemical industry association has a greater role to play
in setting industry standards. The government may also incentivize voluntary compliance with
international quality standards.

The government’s role is more important in setting the safety norms for the chemical industry.
The Bhopal gas tragedy is an example of poor regulatory norms for safety standards in the
chemical industry. The government should adopt international norms of safety. It should also
enact stringent regulation for adopting good manufacturing practices and compliance with
international norms on safety. This is possible by way of levying heavy penalties and vicarious
liability on defaulters.

Thus, voluntary compliance with international quality standards and the regulatory framework
for the adoption of good manufacturing practices and stringent safety norms shall enable
the local chemical manufacturing industry to explore export markets after attaining a critical
mass. Besides, there are other benefits of standardization:

Manufacturers: (a) Rationalize the manufacturing process, (b) Eliminate or reduce wasteful
material or labour, (c) Reduce inventories of both raw material and finished products and re-
duce the cost of manufacture.

Customers: (a) Assurance of the quality of goods purchased and services received, (b) Provide
better value for money, and (c) Convenience of settling disputes, if any, with suppliers.

Traders & exporters: (a) Provide a workable basis for acceptance or rejection of goods or conse-
quential disputes, (b) Minimize delays from inaccurate or incomplete specification of materi-
als or products, (c) Provide starting points for research and development for further improve-
ment of goods and services.

124
Recommendation-8: Review the Tariff Policy to Eliminate Any Inverted Tariff Structure in the
Chemical Industry
1) Review the chemical industry’s trade policy and tariff structures, especially at the 8-digit
level for chemicals. The government needs to raise tariffs selectively on basic chemicals,
agrochemicals and industrial chemicals to remove any price advantage enjoyed by imported
chemicals. There are too many instances where the tariff structure is currently inverted, i.e.
the tariff on finished products is lower than on the raw material. For instance, the tariff on
LDPE and HDPE is higher or equal to the tariffs on polythene films used as packaging mate-
rial.
2) It has been observed that porous borders allow large quantities of illegal imports. The Min-
istry of Commerce should ensure proper border control measures to check the inflow of il-
legal imports. Weak border control measures not only distort the domestic market, but also
hurt the national budget through the evasion of duties.

3) As a pilot project, the government should wave custom duties on inputs, machines and
other equipment imported inside the chemical cluster. This will foster the development of
local manufacturing capabilities into mature and competitive production facilities.

4) Import substitution will spur innovation and quality consciousness in the chemical industry.

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CH A PTE R V

RECOMMENDATION FOR THE FEDERAL DEMOCRATIC REPUBLIC OF


ETHIOPIA’S CHEMICAL TECHNOLOGY ROADMAP

1. Background of Chemical National Technology Roadmap (NTRM)


2. Introduction
3. Overall Review and Recommendations
4. Review and Recommendation of NTRM Deployment of Strategic Produts
5. Annex

126
1. Background of Chemical National Technology Roadmap (NTRM)

To realize Ethiopia’s vision of becoming a lower middle-income country by 2025, the Govern-
ment of Ethiopia has been actively promoting the transition of its nation from an agriculture-
led economy into an industry-led economy.

For decades, Ethiopia has faced difficulties and has often been portrayed through images of
famine and conflict. Ethiopia is now emerging from troubled times, and the latest Internation-
al Monetary Fund (IMF) forecast states that Ethiopia is, in fact, the fastest-growing economy
in sub-Saharan Africa in 2018. How was the government able to change the country around so
drastically? The Government of Ethiopia is trying to transform the country from an agriculture-
dominated economy to an industry-dominated one. From 2004 onwards, the Ethiopian econo-
my has grown at 11 per cent annually. This growth has primarily been attributable to favourable
agro-climate conditions, high coffee prices, inflows of aid, and a boom in construction. Not
only does it not reflect an increase in competitiveness, but significant change in the economic
structure has also not yet been prompted by this growth. The share of manufacturing in GDP
has stagnated at 5 per cent for a long time.

The first Growth and Transformation Plan (GTP I, 2010/11~2014/15) entailed four objectives: (i)
maintaining an average real GDP growth rate of at least 11 per cent per annum; (ii) expanding
access and ensuring the quality of education and health services in the social sectors; (iii)
creating a stable democratic and developed state; (iv) ensuring sustainability of growth by
maintaining macroeconomic stability.

During this period, the share of agriculture, service and industry in GDP averaged 41.5 per
cent, 45.6 per cent and 12.9 per cent, respectively, in 2009/2010, and 38.5 percent, 46.3 per
cent and 15.1 per cent, respectively, by 2014/15. Within industry, the share of the manufactur-
ing sector in total GDP remained below 5 per cent in 2014/15. The share of the construction
industry in GDP increased from 4 per cent in 2009/10 to 8.5 per cent by 2014/15. This indicates
that during 2010/11-2014/15, the construction industry has been the major driver of industry
both in terms of growth and structural change.

In general, a structural transformation from the agriculture sector to the service sector has
been observed. During the Plan’s period, priority was given to the manufacturing sector. How-
ever, the manufacturing sector fell short of the GTP I target both in terms of growth perfor-
mance and structural change. The share of the manufacturing sector’s value added in GDP
remained low compared to the average for sub Saharan African (SSA) countries (see Table 26).

There has been a significant degree of economic development in Ethiopia; however, the de-
velopment of industry, particularly the manufacturing sector, did not meet the expectations.
Accordingly, the key strategy of GTP II became the promotion of the development of the manu-
facturing sector, while also maintaining the successful policies that brought about the coun-
try’s economic development.

127
Table 26 Composition of Ethiopia’s GDP (% value added)
1999 2000 2014
GDP USD 12.6 billion USD 8.2 billion USD 54.8 billion
Agriculture 52.4 % 47.8 % 42.3 %
Industry 4.9 % 6.2 % 11.3 %
Manufacturing 4.9 % 6.0 % 4.2 %
Service 38.2 % 40.0 % 42.3 %
Source: World Bank, 2015

After the success of GTPI, GTPII followed. The major objective of GTP II was (like that of GTPI) to
serve as a milestone towards realizing the national vision of becoming a low middle-income
country by 2025.

To this end, GTP II set out the following specific objectives:


1)  Achieving a real average annual GDP growth rate of 11 per cent.
2) Developing the domestic engineering and fabrication capacity and improve pro-
ductivity, quality and competitiveness of the productive sectors (agriculture and
manufacturing industries) to speed up structural transformation;
Based on the major objectives and following pillar strategies, the main strategies of the manu-
facturing sector were:
-  Improving productivity
-  Improving quality and competitiveness of products
-  Building labour-intensive light industry
-  Expanding metal and engineering and chemical and pharmaceutical industries
-  Substituting strategic imported items with locally produced goods.

Consequently, the following strategic industries were established to develop the country’s in-
dustry: textile and garment industry, leather and leather products industry, sugar and sugar-
related industries, cement industry, metal and engineering industry, chemical industry, phar-
maceutical industry and agro-processing industry.
Among these strategic industries, the chemical industry has been found to play an important
role in supplying input materials to other industries. Focusing on the selection and promotion
of strategic chemicals and chemical products is considered a priority in order to develop the
chemical industry. Therefore, a roadmap was developed, the reviews and recommendations
of which are included here.

128
2. Introduction

  2.1 Chemicals as a milestone of the manufacturing sector

Chemistry has contributed significantly to the advancement of human civilization and our dai-
ly life. Chemical technologies transfer natural resources to functional chemicals which are key
materials for many other industries. The chemical industry produces 70,000 different types of
products that are used by individuals as well as other industries. It is of strategic importance
to the sustainable development of national economies and plays a vital role in the economic
development of any country.

The chemical industry can be classified into basic chemicals, intermediates, specialty chemi-
cals and consumer chemicals. There is no theoretical classification of all these chemicals,
so the above classification was also used in Table 27. Industries that use chemical inputs
are also presented in Table 27, exemplifying the case of the U.S.’ chemical industry. Table 27
shows that many industries are connected to the chemical industry, and its importance for the
national economic development cannot be denied.

Table 27 Chemical industry and related industries


Category
Specialty chemicals Intra-industry chemistry sales - US$ 409.2 bil*
Consumer chemicals Sales to consuming sector - US$ 391.3 bil*

Rubber & plastics ($75,6) Transportation equipment ($13.5)


(Intermediates) Health care ($68.6) Fabricated metals ($11.5)
Other manufacturing ($31.6) Electrical equipment ($ 9.5)
Agriculture ($29.6) Construction ($ 9.0)
Paper & printing ($26.5) Oil & gas ($ 7.6)
Textile & apparel ($23.1) Machinery ($ 5.1)
Computer & electronic ($22.2) Other industry ($42.7)
Food & beverages ($15.2)
Basic chemicals Inorganic chemicals Petrochemicals
Chlor-alkali, sulfuric acid, PE, PP, PVC, PS, PU, PET, BTX,
hydrochloric acid etc. Other organic chemicals
*Total market of U.S. chemical industry: US$ 800.5 billion Source: ACC analysis based on data from
the Bureau of the Census, and the IMPLAN
model, and modified reviewer

129
Historically developed countries like Germany, the UK and the U.S. started from basic chemi-
cals to consumer chemicals, but latecomers like the Republic of Korea and Taiwan ROC start-
ed from consumer chemicals to basic chemicals. Usually, developing countries do not have
enough money to invest in basic chemical factories and do not have a sufficient local market
for basic chemicals.
The chemical industry’s development strategy for developing countries is crucial for the na-
tional economy.

Recently, over 80 per cent of the chemical industry has been concentrated on producing poly-
mers and plastics. These chemicals are not only used in packaging, but also in numerous
other product, like wiring, furniture, clothing, home decoration, prosthesis and electronics.
PVC piping, water tanks and huge storage containers are made of plastics. Because of their
convenience, easy operation and the relative price of plastics, their applications are expand-
ing rapidly.

  2.2 General Information on Ethiopia

Ethiopia, the second most populous country in Africa, is a one-party state with a planned
economy. Ethiopia grew at a rate of between 8 per cent and 11 per cent annually over the last
10 years – one of the fastest growing states among the 188 IMF member countries. This growth
was driven by government investment in infrastructure, as well as sustained progress in the
agriculture and service sectors.

Over 70 per cent of Ethiopia’s population is still employed in the agriculture sector, but the
service sector has surpassed agriculture as the principal source of GDP. Despite progress to-
wards eliminating extreme poverty, Ethiopia remains one of the poorest countries in the world
due both to rapid population growth and a low starting base.

While coffee remains the largest foreign exchange earner, Ethiopia is diversifying its exports
and commodities such as gold, sesame, vegetables, livestock and horticulture products,
which are becoming increasingly important for its economy.
Manufacturing represented less than 8 per cent of total exports in 2016, but manufacturing
exports should increase in future years due to a growing international presence. Ethiopia has
attracted roughly USD 8.5 billion in foreign direct investment, mostly from China, Turkey, India
and the EU. Investments have focused primarily on infrastructure, construction, agriculture,
agricultural processing, textiles, leather and leather products. In the fall of 2015, the govern-
ment published the current 2016-20 five-year plan, known as GTP II, which emphasizes the
development of manufacturing. To support industrialization, Ethiopia plans to increase its
installed power generation capacity by 8,320 MW, up from a capacity of 2,000 MW. The gov-
ernment devalued the birr by 15 per cent to increase exports and alleviate a chronic foreign
currency shortage in the country.

130
Table 28 General information on Ethiopia
2015 (est) 2016 (est) 2017 (est)
Population 96,633,000 99,467,000 105,350,000

GDP purchasing power parity US$ 167.2 billion US$ 180.5 billion US$ 195.8 billion
GDP real growth 10.4% 8% 8.5%
GDP per capita US$ 1,900 US$ 2,000 US$ 2,100
GDP composition Agriculture 41.4% Agriculture 4% Agriculture 35.8%
Industry 15.6% Industry 1% Industry 22.3%
Service 43.0% Service 4% Service 42.0%
Industrial production 8.5% 9.0% 10.5%
growth rate

Major industries Food processing, beverages, textiles, leather, garments,


chemicals, meats processing, cement
Exports US$ 3.76 billion US$ 2.81 billion US$ 3.08 billion
Exports commodities Coffee (27%), oil seeds (17%), vegetables (17%), gold (13%),
(value, 2017) flowers (7%), live animals (7%), raw leather products (3%),
meat products (3%)
Imports US$ 10.69 billion US$ 16.03 billion US$ 16.76 billion
Imports commodities Machinery/aircraft (14%), metals/metal products (14%),
(value, 2017) electrical materials (13%), petroleum products (12%),
motor vehicles (10%), chemicals/fertilizers (4%)

Source: CIA Factbook, 2018r

Ethiopia’s goal is to transform the country into an industrialized economy and increase the
per capita income of its citizens to middle-income levels by 2025. To achieve this goal, the
government must address the obstacles and challenges to achieve a flourishing manufactur-
ing sector that would expand benefits to more Ethiopians. The NTRM examines the challenges
for building a strong chemical industry, which supports a diversified manufacturing sector by
supplying raw materials to increase competitiveness of manufacturing products.

  2.3 Chemical Industry of Ethiopia

The chemical industry in Ethiopia is still in its infancy and needs to be developed to support
the country’s rapidly growing economy. Many chemical inputs and chemical products are still

131
imported with a huge sum of foreign currency from abroad for national manufacturing pro-
cesses and direct consumption.

The Ministry of Industry (MoI) aims to develop the chemical industry with agro-processing,
textile, leather and metal. MoI has assigned state ministers to promote the development of
the chemical industry (Table 29).

Table 29 Organizational Structure of MoI


Textile & Leather Sector State Minister
The Ministry of Industry Metal & Chemical Sector State Minister
Agro Processing Sector State Minister

The country’s demand for chemical products is primarily met through imports. There is an
increasing amount of chemicals and chemical products that is being imported every year for
which a considerably high amount of foreign exchange is being spent. Basic chemicals rep-
resented the largest share of imports, followed by pharmaceuticals (Table 30). Those two in-
dustries accounted for the major share of imports, namely 80 per cent of the top-5 importing
industries. Chemical consumption will increase considerably as Ethiopia’s economy is rapidly
growing. Import substitution of basic chemicals and pharmaceuticals should be the top prior-
ity in the development of Ethiopia’s chemical industry.
Chemical imports of Ethiopia in line with other countries: The share of Ethiopia’s chemical

Table 30 Major imported chemicals and chemical products (2005~2011)


No Types of chemicals imported Average CIF value Average percentage
in million USD growth
1 Basic chemicals 337.5 20%

2 Pharmaceuticals 203 22%


3 Other chemical products 66 14%
4 Soap, surface active agents 48 15%
5 Tanning and dyeing extracts 23 15%
Total 675 -

imports compared to the world, Africa and COMESA is presented in Table 31. The table reveals
that the global import of chemicals and chemical products increased during the period 2004-
2011, with an average rate of 10.64 per cent to reach USD 1.65 trillion. During the same period,
imports of chemicals and chemical products in Africa rose at an average rate of 16.68 per cent

132
to reach USD 42.51 billion, while imports by COMESA and Ethiopia grew at an average rate of
25.91 per cent and 15.74 per cent, respectively, to reach USD 12.84 billion and USD 0.83 billion,
respectively. Compared with the global share of chemicals and chemical products imports,
Ethiopia’s share of 0.05 per cent is negligible. If the import of chemical and chemical products
to Ethiopia continues with the same average rate of 15.74 per cent until 2025, the country will
spend USD 3.33 billion and USD 6.99 billion on imported Chemicals and chemical products
by 2020 and 2025, respectively. It is therefore important to promote import substitution of
these products in Ethiopia’s chemical industry. Moreover, the Common Market for Eastern
and Southern Africa (COMESA) represents a large market for chemical and chemical products
exports. The average import value of COMESA member states during 2004-2011 was USD 7.73
billion, a Figure which is expected to grow at an average growth rate of 25.91 per cent. In other
words, the development of Ethiopia’s chemical industry comes at the right time as it is pre-
sented with a great opportunity for economic growth.

Table 31 Import value of chemicals and chemical products (USD million)


2004 2005 2006 2007 2008 2009 2010 2011 Aver. % % share
growth Ethiopia
World 838 940 1044 1232 1429 1243 1432 1649 1226 10.64 0.05%

Africa 15.11 16.85 20.97 25.18 35.06 32.44 37.32 42.51 28.18 16.68 2.3%

COMESA 3.54 3.85 4.41 4.49 10.61 10.60 11.62 12.84 7.73 25.91 8.4%

Ethiopia 0.32 0.40 0.48 0.57 0.80 0.97 0.83 0.83 0.83 15.74

3. Overall Review and Recommendations

Ethiopia’s chemical industry looks very promising. Even though the development of the chemi-
cal industry in Ethiopia is in its infancy as industrialization does not yet account for a size-
able share of GDP, the country’s large population of about 100 million and its rapid economic
growth over the last 10 years will be driving forces in the development of Ethiopia’s chemical
industry. However, compared to the agriculture and service sector, the development of the
chemical industry is very sluggish. The question is why is the development of the chemical
industry so slow?

The reason for this is that: 1) the current Ethiopian chemical market is small, 2) the amount
of basic chemicals being manufactured in the country does not suffice to supply other indus-
tries, 3) outdated technologies are being used, 4) there is a lack of skilled manpower, and 5)
the poor quality of raw materials being used for production. To overcome these challenges,
government policy plans and their implementation are crucial.
After reviewing the NTRM, the followings recommendations are proposed:

133
Proposal 1: Full support for the development of small and medium-sized firms in the plastic
industry

Develop products that improve the quality of life such as consumer products or housing fur-
niture, and start with exports to Africa and gradually extend to global exportation. This will
lead to an increase in exports, while local demand for chemicals and petrochemicals will also
increase. With the establishment of petrochemical factories of an economically competitive
size, the chemical industry could play a considerable part in achieving Ethiopia’s vision of
becoming a lower middle-income country by 2025.

  Case 1: The Experience of the Republic of Korea’s Chemical Industry; Developing down-
stream industry as an initial strategy

The Republic of Korea's petrochemical industry started as a latecomer, and experienced strong
government-led growth and privatization, and is now ranked among the world’s best.
Privatization policy: in the early stages of industrialization of the Republic of Korea (1960s
and 1970s), only few private companies with the capacity to enter new businesses requiring
large amounts of capital, technology and experienced experts existed. NCC (Naphtha Cracking
Center), which is a relatively sizeable facility with a large amount of financial investment, was
managed by government-owned enterprises, such as the Korea National Petroleum Corpora-
tion (KOC) and Chungju Fertilizer. Government-owned enterprises in the new petrochemical
industry rapidly expanded in size and capabilities alongside the economy’s rapid growth.
Once the capacity of private sector firms had sufficiently increased in the following decades,
government-owned enterprises were eventually privatized.

In developing countries with weak domestic demand, it is recommended to first develop a


downstream industry such as textiles and plastics, rather than build a naphtha cracking in-
dustry or ethane cracking industry first, which require a large amount of financing, but is quite
risky for commercialization. One example of the development of the Republic of Korea’s petro-
chemical industry is the process of developing the clothing industry  textile industry pet-
rochemical industry. The Republic of Korea first earned foreign currency by using cheap labour
and exporting clothing, and later expanded local demand for petrochemicals. In a nutshell,
after the expansion of clothing exportation, the localization of textiles was promoted. In the
second stage, synthetic fibre factories were established to localize yarn, which is an intermedi-
ate material of the fabric. In the third stage, petrochemical plants that provide raw materials
such as synthetic fibre, synthetic resins and synthetic rubber, which are used in almost all
industries, were established.

The Republic of Korea has experienced ‘backward industrialization’ rather than ‘forward in-

134
Table 32 Value chain of petrochemical and development strategy
Textile & Garment Korean Development Strategy Timeline of
Industry Development
Petrochemicals: Basic Chemicals 4th
PET, TPA resins & chips
Synthetic Fibres Intermediate chemicals 3rd
Fabrics Intermediate products 2nd
Garment, Clothes Final products & competitiveness to export 1st

dustrialization’ as Table 32 indicates. This was inevitable because unlike most developed
countries, industrialization in the Republic of Korea was not achieved gradually over a long
period of time, but underwent compressed growth within a short period without sufficient
capital and technology. This backward industrialization is a unique industrial model, and has
not been replicated by any other developed country.

It is crucial to expand local demand. In such a narrow domestic market, business is risky
because it is extremely difficult to secure demand. It is therefore necessary to first develop de-
mand for chemicals and chemical products and to then expand domestic demand for products
from the petrochemical industry, for example.

Proposal 2: Introduction of standardized technical, vocational education and training (TVET)


in all parts of the chemical industry - vocational education with standard processes for opera-
tion, material handling and training programmes (referred to as NCS in the Republic of Korea).
One of the key issues of Ethiopia’s chemical industry is the quality of local chemical products.
The quality of chemical products and the consistency of that quality are crucial for the market
and for sales. To ensure the quality of products, it is recommended for the government to
adopt NCS (national competency standards) and standardized education.

  Case 1: Introduction of the Republic of Korea’s NCS Programme as a Reference

The Human Resources Development Service of Korea (HRD Korea) was responsible for the es-
tablishment of the Republic of Korea’s NCS programme. The NCS curricula were partly devel-
oped by various NCS committee members who represent individual work areas. Committee
members are selected from three categories: highly experienced industry workers, HRD Korea
officers, and vocational college or university faculty. Industry representatives were included in
the NCS programme to develop the curricula to reflect industry’s training needs (Alsheri et al.,
2016; Burke, 1989). The structure of the Republic of Korea’s NCS system is illustrated in Figure
24.
Four hierarchical classifications are used in the NCS system: category, group, set and key work

135
Figure 24 Hierarchical diagram of work functions of the NCS programme

functions as illustrated in Figure 8. The top classification represents 24 work categories in the
NCS system of the Republic of Korea. There are two categories in the chemical industry: chem-
istry (17) and environment and energy (23). Each category has several groups of work functions.
Sub-units of groups are sets of work functions. Finally, each set has several key work functions.

The hierarchical configuration of the chemistry work category can be found in the Annex. The
category chemistry consists of four different groups of work functions: chemicals and chemical
process management (1701), petroleum, commodity chemicals production (1702), fine chemi-
cal production (1703), and plastic production (1704). Each group is composed of several sets.
Finally, each set consists of several key work functions. Each key work function is defined for
each competency of the core workforce. Over 890 key work functions (or competencies) out of
24 work categories are generated by HRD Korea. The category chemical industry is extended
and updated in accordance with industrial requirements.
One of the benefits of the NCS programme is that trainees can acquire standard skills and the
contents of the work.

Proposal 3: Plan for Foreign Expert Resource Pool

Increasing productivity and capacity utilization in the chemical industry is one of the urgent
issues that needs to be addressed in Ethiopia. This is possible to some extent without new
investments in productive capacity, but requires an improvement in labour skills and manage-
ment know-how.
There are only few skilled and experienced experts in Ethiopia’s chemical industry, and work-
ing with foreign experts and technicians in the initial phases of the development of the chemi-
cal industry is therefore highly recommended.
   Case 1: China - Initial development strategy of China’s pulp industry

136
Chinese human resource supporting strategy: at the beginning of China’s industrial develop-
ment, there were not enough skilled and experienced experts in the paper industry. Chinese
workers were hired for simple tasks (manual labour) and technicians from the Republic of
Korea and Taiwan ROC were hired for management and quality maintenance, resulting in the
rapid development of the paper industry in China.

   Case 2: Proposal for Ethiopia’s Cosmetic Industry Development

By hiring foreign experts who possess in-depth knowledge and practical experience in the
latest soap manufacturing technology, the government can thereby provide comprehensive
training to all local soap manufacturing companies and provide customized technology advice
or guidance for individual companies at their production facilities. The high quality soap pro-
duced by domestic soap companies can replace the imported soap products. Soap products
can be exported to neighbouring countries, leading to the profitable and sustainable growth
of the domestic soap production industry

   Case 3: Introduction of Ulsan NCN

To resolve the problem of field technology development and operation, it is essential to have
a workforce with field experience. Ulsan was the first location in the Republic of Korea’s his-
tory at which a petrochemical complex was built, and many types of chemical industries have
developed around that region. Many field engineers from this region have recently retired,
and Ulsan TP (Techno-Park) has organized a NCN (New Challenge Network) to encourage these
engineers to advise SMEs in the Ulsan region and educate students with support from Ulsan
City. In cooperation with the Republic of Korea’s Ministry of Industry and Ulsan City, it is rec-
ommended to identify the pressing technological development problems Ethiopia needs to
address and to promote technological development centred on field work.

Proposal 4: Industry R&D and Education R&D should run separately in the field and urgent
industrial target-oriented problems related to the R&D system need to be addressed.

National science and technology policy plays a very important role in the initial stages of in-
dustrial development. In addition, productivity improvements and the expansion of factory
capacity are crucial to resolving any problems related to the field. These issues might not nec-
essarily be major science and technology targets, but a number of technologies and experts
will be necessary to resolve the lack of skilled labour in Ethiopia quickly. It is recommended to
separate on-site R&D from basic S&T issues. The basic S&T programme needs to be supported
by different government organizations, including MoI.

In the case of the Republic of Korea’s R&D in industry, research institutions, schools and cor-
porations were formed to resolve the urgent problems of enterprises. Numerous firms are co-
operating today to pursue a rapid spread of technology in the private sector.

137
4. R
 eview and Recommendation of NTRM Deployment of Strategic
Produts

Chemical products were evaluated based on the following impact criteria; economic impact,
strategic importance, potential for success, availability of raw materials, involvement of high-
skilled labour force, as input for a large number of industries and market opportunities/de-
mand. Seven chemical strategic products were selected, with chlor-alkali determined as being
the top priority strategic product based on the aforementioned selection criteria.

Seven strategic chemicals and chemical products were reviewed in three separate groups; 4.1
alkali chemicals, 4.2 chemical products, and 4.3 petrochemicals.

Table 33 Grouping of strategic chemicals and chemical products


Groups for discussion Chemical products
Chlor-alkali
Alkali chemicals
Soda ash
Soap and detergents
Strategic Chemical &
Chemical products
Chemical Product Pulp and paper
Polyethylene (PE)

Petrochemicals Polypropylene (PP)


Polyvinyl chloride (PVC)

The key reasons for selecting these strategic chemicals and chemical products have already
been discussed in detail. NTRM is a phased action plan that addresses the acquisition, appli-
cation and dissemination of core technologies. As such, the results of the measures presented
and their impact on related infrastructure and industries need to be analysed and quantified.
It is furthermore necessary to explore how the phased growth of domestic industries can be
achieved in connection with the supply value chain.

As the key technologies for the strategic chemicals and chemical products have already been
described, other factors for NTRM development, a gap analysis, R&D strategy, key infrastruc-
ture, etc., will be reviewed for the seven strategic chemicals and chemical products.

  4.1 Review of Alkali Chemicals Group

Chlor-alkali and soda ash were grouped together under the heading alkali chemicals. In the
draft of the roadmap, the process technologies of chlor-alkali were discussed in detail in Sec-
tion 2.4.2 Process Technology of Chlor-alkali & PVC”, including the lime soda process, which is

138
currently being used in Ethiopia in addition to other electrolysis methods. The core technolo-
gies of chlor-alkali & PVC were also discussed in detail, and a priority technology selection was
carried out, which was further developed for the next stage of the roadmap, MACRO TRMS for
STRATEGIC PRODUCTS.

  4.1.1 Chlor-alkali Industry

   4.1.1.1 Global trends of the chlor-alkali industry

The chlor-alkali industry produces chlorine (Cl2) and alkali, sodium hydroxide (NaOH). Cur-
rently, 95 per cent of world chlorine production is obtained through the chlor-alkali process.

The geographic distribution of chlor-alkali processes worldwide differs considerably (produc-


tion capacity of chlorine):
- Western Europe, predominance of mercury cell process (June 2000): 55 per cent
- United States, predominance of diaphragm cell process: 75 per cent
- Japan, predominance of membrane cell process: >90 per cent.

The global production capacity of chlorine in 1995 was about 44 million tonnes, the EU ac-
counting for around 24 per cent of that capacity. In June 2000, the chlorine production capac-
ity in western Europe was 11.3 million tonnes. Of world chlor-alkali capacity, 65 per cent is
concentrated in three regions: North America, western Europe and Japan. After a decline at the
beginning of the 1990s, production in western Europe now seems to have stabilized at around
9 million tonnes per year.

EDC/PVC accounted for over one-third of global chlorine demand. Demand is rapidly growing in
the emerging economies of the Middle East, Africa and Asia-Pacific. With the market for pack-
aged and processed foods increasing, demand for soda ash in the food processing industry is
also growing at a rapid rate.

The Middle East and Africa have already witnessed heavy investments in downstream chemi-
cals. The low costs of production and the abundant labour make the region a favourable loca-
tion for the establishment of production facilities. The region is also strategically positioned to
export to neighbouring regions.

The inevitable co-production of chlorine and sodium hydroxide in almost equal amounts has
always been a problem for the chlor-alkali industry. Both products are used for very different
end uses, with differing market dynamics, and only rarely does demand for the two coincide.

139
   4.1.1.2 European Application of the Chlor-alkali industry

Table 34 Europe Chlorine Application


European Chlorine Application kilotonnes Share
Polymer PVC 2,965 32.5 %
Isocyanates & oxygenates 2,901 31.8 %
Subtotal 5,866 64.3 %
Organics Solvent & ECH 788 8.6 %
Chloromethane 414 4.5 %
Other organics 933 10.2 %
Subtotal 2,135 23.3 %
Inorganics 1,134 12.4 %
Total 9,135 100 %
Production ratio: 1,000 kg chlorine, 1,100 kg Caustic soda, 28 kg hydrogen
Source: www.eurochlo.org (Euro Chlor)

Chlorine is largely used in the synthesis of chlorinated organic compounds. VCM, which is
used for the synthesis of PVC, remains the driver of chlor-alkali production in most European
countries. Chlorine is difficult to store and transport economically and it is therefore generally
produced close to consumers. Over 85 per cent of the chlorine produced in the EU is used on
the same or adjacent sites for other chemical processes.

Table 35 Europe Caustic Soda Application


European Caustic Soda Application kilotonnes Share
Organics 3,011 32.1 %
Miscellaneous 1,567 16.7 %
Pulp & Paper Cellulose 1,242 13.2 %
Other Inorganics 1,132 12.1 %
Food Industry 513 5.5 %
Aluminium & Other Metals 408 4.3 %
Water treatment 445 4.7 %
Bleach 356 3.8 %
Soap and detergent 329 3.5 %
Mineral oils 167 1.8 %
Rayon 125 1.3 %
Phosphate 90 1.0 %
Total 9,385 100 %
Source: www.eurochlo.org (Euro Chlor)

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Sodium hydroxide is usually supplied as a 50 per cent aqueous solution and can be stored
for long periods and readily transported (rail, road and ship). The main areas of application of
sodium hydroxide today vary (see Table 35).

  4.1.1.3 Caustic soda industries in Ethiopia

There is only one company in Ethiopia, Caustic Soda Shae Company, which produces caustic
soda. It was established by the government in 1987, and uses the chemical process based on
soda ash and limestone/lime. The major product is liquid caustic soda (45.5 per cent concen-
tration).
The caustic soda factory in Ziway produces 22,000 tonnes of caustic soda per year (45.5 per
cent concentration).
The main raw materials for caustic soda are soda ash and lime. Soda ash is supplied by Abi-
jata Soda Ash S.C. and lime is provided by cement industries such as Dire Dawa, Derba and
Muger quarre.

Table 36 Supply Demand Chain of Caustic Soda in Ethiopia


Strategic Chemical Raw Material Supply End Product Demand
Awasa Textile
Lime from cement industries
such as Dire Dawa, Derba, Guele Soap
Muger quarre
Caustic Soda East Africa Soap
Abijata Soda Ash S.C. Moha Soft Drinks
Ambo Mineral Water
Source: Roadmap

The industry is currently not meeting market demand. For example, 703,525 tonnes of sodium
hydroxide (caustic soda) were imported for a total CIF value of ETB 195.1 billion in 2013. This
has been the most widely imported inorganic chemical in the last few years.
The quality of Ethiopia’s caustic soda is low; its purity level is 48 per cent, well below the
standard purity level of 98 per cent. Hence, the new factories should be designed to process
caustic soda with the required purity level.

   4.1.1.4 Issues of the Caustic Soda Industry: Global Issues of Chlor-alkali

Euro chlor-alkali industry-wide strategy


Key sustainability concerns:
  ∙ Include environmental, social and economic factors in all strategic business decisions;
  ∙ Optimize energy efficiency in chlorine production;
  ∙ Reduce water usage through recycling;
  ∙ Continuously reduce polluting emissions to water, air and land;

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  ∙ Use more hydrogen generated by the industry as a raw material or fuel;
  ∙ Give high priority to safe transportation of chlorine.

   4.1.1.5 Issues of Chlor-alkali in Ethiopia

Capacity Issue: The local industry does not meet the demand for caustic soda in Ethiopia.
The current capacity of caustic soda is 10,000 tonnes per year (Ziway Caustic Soda Share Co.).
This capacity is far below the current demand of the local market; therefore, the Ministry of
Industry aims to establish a factory that can produce 50,000 tonnes of caustic soda. The ca-
pacity expansion was not accomplished under GTP I (2015), and imports of caustic soda are
increasing. For example, 703,525 tonnes of caustic soda were imported for a total value of ETB
195.1 billion in 2013, making caustic soda the most widely imported inorganic chemical in the
last few years.

Raw Material Issue: One key raw material for producing caustic soda is soda ash, which is in
short supply. The Caustic Soda Share Company uses a chemical process to produce caustic
soda, using limestone/lime and soda ash. Limestone/lime is supplied by the cement industry,
and the available resources and level of production suffice to produce caustic soda. Another
raw material required for caustic soda production is soda ash, which is supplied by Abijata-
Shalla Soda Ash Share Co. The capacity of soda ash is about 20,000 tonnes per year and for
which demand is low.

Quality Issue: The quality of the local caustic soda is not high enough for the requirements of
local demand.
Despite the local production of caustic soda, the high demand is met by imports. The low qual-
ity of sodium ash, poor facilities and process technology are the main problems that need to
be addressed.
The electrolysis process to produce caustic soda and chlorine gas in Ethiopia is not viable,
mainly due to the high initial investment and production costs as well as very low local de-
mand for chlorine gas in Ethiopia. The balance of caustic soda and chlorine gas demand in
Ethiopia has been difficult to deal with so far.

  4.1.2 Soda Ash Industry

Soda ash is the commercial name of sodium carbonate, which is known to occur naturally as
carbonate of sodium trona (Na2CO3.NaHCO3.2H2O) and natron (Na2CO3.10H2O).
Sodium carbonate is marketed as soda ash or anhydrous soda, (Na2CO3) as well as crystal
soda or washing soda (Na2CO3.10H2O).

   4.1.2.1 Global Trends of Soda Ash

The global consumption of soda ash is projected to grow from 56,787 kt in 2014 to 67,120 kt
(about USD 22 billion) by 2019, at a CAGR of 3.4 per cent.

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The number of producers in the global soda ash industry has declined following the closure
of many synthetic soda ash plants in Europe, South America, and Asia, including the Republic
of Korea, from the 1990s onwards. Three dominant enterprises have survived to become the
world leaders in soda ash – Solvay S.A. of Belgium, ANSAC of the United States, and China’s
soda ash industry. These three soda ash suppliers produce and export soda ash to many cus-
tomers around the world. Because the glass container industry is the largest soda ash pro-
cessing industry, demand for soda ash for glass container production may decline as food and
beverages are gradually being packaged in newer PET containers. However, the outlook for
soda ash over the next five years is favourable. Asia and South America remain the likeliest
areas for increased soda ash consumption in the near future.

 ANSAC (American Natural Soda Ash Corporation, www.ansac.com), Green River Basin,
Wyoming
 The Green River Basin is currently estimated to contain 134 billion tonnes of mineable
trona ore, which is exceptionally pure. This is enough to supply the global demand for
soda ash for the next several hundred years. ANSAC exports about 4 million tonnes of
soda ash, and the enterprise is growing fast due to its profits in mining.

Table 37 Global Application of Soda Ash


Application Industry Share %
Glass Industry 50 %
Chemical Industry 26 %
Soap & Detergent 10 %
Pulp & Paper 2%
Water Treatment 1%
Others 11 %
Source: European alkali association (www,eurochlo.org)

  4.1.2.2 Current Status of Ethiopia’s Soda Ash Industry (Raw Materials, Soda Ash Pro-
duction, Demand)

Abijata-Shalla Soda Ash Share Co. (National Mining Corp. (NMiC)) (62 per cent), and the gov-
ernment (38 per cent) produces and distributes approximately 20,000 tonnes of soda ash
annually, which is used in the manufacturing of detergents, bottles and glass.
In Ethiopia, soda ash (Na2CO3) is found in the sodic lake brine of Lake Abiyata and Lake Shala
in the central Ethiopian Rift (Oromia region). Currently, a pilot plant is mining 20,000 tonnes/
year of soda ash from Lake Abiyata, which is used as a raw material to manufacture caustic
soda in Ziway.

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Soda ash has several important uses, chiefly in chemicals, glass, soap and other detergent
industries. The processing of soda ash in Ethiopia may differ slightly from its uses at the global
level (in terms of share). The majority of soda ash is supplied to the glass industry. There
are two glass factories in Ethiopia, Ethiopia Hansom International Glass plc and Addis Ababa
Bottle and Glass Share Co (Table 38).

Table 38 Glass Factories in Ethiopia


Industry Enterprise Location Capacity*
Glass Ethiopia Hansom International Glass plc Addis Ababa 42,000 tonnes
(CGCOC and China-Africa Development Fund)
Glass Addis Ababa Bottle and Glass Share Co. Addis Ababa 8,000 tonnes
*Capacity/year

Ethiopia Hansom International Glass was established in 2007, the only manufacturer of glass
in East Africa at the time. It produces clear sheet glass products to meet domestic demand, but
also exports glass to other neighbouring countries.
The enterprise’s annual production capacity is 42,000 tonnes, triple the demand of the do-
mestic market in Ethiopia. The firm exports some of its products to Sudan, Djibouti and Ye-
men, and there are other potential export markets like Kenya.
Supply and marketing chain: The material requirements are met locally. The main raw materi-
als are silicon sand, limestone, feldspar and dolomite, which are all produced locally. The
available soda ash in Ethiopia does not meet the firm’s demand and it therefore imports soda
ash from China, leaving it with a cost disadvantage.
The case of Ethiopia Hansom International Glass proves that soda ash is important to the
competitiveness of the Ethiopia’s glass industry. The quality of Ethiopia’s soda ash needs to
be improved in collaboration with glass producers and soda ash suppliers.

   4.1.2.3 Review & GAP analysis

Chlor-alkali products are basic chemicals. Demand for chlor-alkali will increase rapidly as Ethi-
opia’s economy grows. This basic chemical can be locally produced in bulk and at a relatively
low price. When such a basic chemical is imported, the transportation costs increase the over-
all costs of chlor-alkali, which affects the competitiveness of not only the chlor-alkali industry,
but also those industries that process it, such as the glass and soap industries.
Import substitution for chlor-alkali is a very urgent issue, because it involves Ethiopia’s main
manufacturing industry, including soap, paper, leather and textiles.

Key Infrastructure of the Chlori-alkali Industry: The key infrastructure for the chlor-alkali indus-
try are electric power supply, water system, competitive raw material availability, distribution
channel of chlorine gas and hydrogen gas (Figure 25).

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Figure 25 Production Process of Caustic Soda and Chlorine by Electrolysis

Source: Japan Alkali Association)

  4.1.3 Recommendation for Alkali Chemicals

(1) The problems the alkali industry in Ethiopia faces are that the country’s factory scale is
insufficient and the quality of products and raw materials do not meet local requirements. The
factory scale issue can be resolved by adjusting the quality and price to meet local require-
ments, considering that demand will increase rapidly with economic growth. Two recommen-
dations are proposed to improve the quality of alkali products and the raw materials used.

(i) Application of R&D strategy based on user test


Quality as such is not a straightforward issue. Different types of problems may be associated
with the quality of a product and the necessary quality of an input may differ by industry and
purpose. In other words, an impurity may be extremely problematic for the glass industry but
may not pose a problem for the water treatment industry. Therefore, a user test-involving the
supplier and the user needs to be developed by a public institute or university to better under-
stand the areas of application of local alkali products.

145
(ii) Develop a market sharing strategy with neighbouring countries for caustic soda and chlo-
rine gas.
With the economic development of Ethiopia and social progress such as improvements in the
quality of life, introducing an electrolysis processing industry will become necessary. As men-
tioned above, demand for products from the electrolysis processing industry, such as caustic
soda and chlorine gas, are not met. Chlorine gas is a hazardous material that is difficult to
store, so it is processed for nearby use. If local demand cannot be met, developing market
sharing with neighbouring countries is recommended.

(iii) Ethiopia’s construction industry is growing fast. In 2014, the construction industry ac-
counted for 9.4 per cent of nominal GDP (manufacturing share 4.2 per cent). The construction
industry grew by 36.5 per cent in 2014, a trend that will continue for some time to come. Due
to the rapid growth of the construction industry, local demand for PVC will increase fast. PVC is
the driver of the chlorine market.

(2) Polyethylene, chlorine, PVC, caustic soda, etc. are highly interconnected. Polyethylene and
chlorine are used to produce PVC, and chlorine and caustic soda are simultaneously produced
through electrolysis in nearly similar amounts. Table 39 indicates that a large gap exists be-
tween chlorine and PVC availability. The future production of polyethylene, chlorine, caustic
soda and PVC should be planned jointly. Local demand should be projected based on Table
39, taking the reasons and interconnections between the chemicals into consideration.

Table 39 Increase in Demand for Alkali Chemicals and Related Chemicals


2018 2025 GAP
Chlorine 0.45 kt 1.20 kt 0.75 kt
Hydrochloric acid 2.38 kt 6.33 kt 3.95 kt

PVC 24.78 kt 66.19 kt 41.41 kt

Polyethylene 43.65 kt 116 kt 72.35 kt

Soda ash 9.44 kt 25.98 kt 15.64 kt

Caustic soda 13.12 kt 34.86 kt 21.74 kt


Source: Roadmap 1.5.1 Demand/Supply Trend, Present Effective Local Demand, Projected Local Demand

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Table 40 Summary of Review of Alkali
Market Applications, global trends, Ethiopia status (supply/demand)
° Local demand of chlorine needs to be estimated including
future PVC demand
Major Player Initially, development in the public sector,
later transfer to private sector
° Public enterprises initially, then transfer to private enterprises
Technology Licensing package and process development
° Licensor’s package is required for chlor-alkali
(electrolysis method)
° Local quality of alkali products should be developed to meet
local requirements
R&D Process and manufacturing development, purification technology
R&D targets and strategy
° Application of R&D strategy based on user test
° Market study for chlorine gas in Ethiopia, including PVC
Human Resources Engineers/technicians
Finance Facility-oriented, economic scale
Connective Technology ° Application companies of chlorine and caustic soda
should be balanced
° Chlorine-PVC(VCM)-ethylene are connected
° Pulp & paper, food processing, soap and detergents and
water treatment are connected to all alkali industries

  4.2 Chemical Products (Soap & Detergent Industry, Pulp and Paper Industry)

  4.2.1 Soap and Detergent Industry

   4.2.1.1 Global Trends of the Soap and Detergents Industry

The soap and detergent industry produces household detergents, industrial soaps and de-
tergents, household soaps and other detergents. The size of the global soap and detergent
market was estimated at USD 97.26 billion in 2016 and is expected to reach USD 207.56 billion
by 2025, with a CAGR of 8.83 per cent for the period 2016-2025.
Rising disposable income, the development of the textile industry and rising penetration of
washing machines in developing economies is expected to boost the industry’s market growth
in the forecast period. Increasing health awareness, coupled with the rise in disposable in-
come, has resulted in soaps and detergents being deemed an essential consumable in the
developed as well as in developing countries.

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Soaps and detergents are crucial consumer goods and their use is widespread. Vendors are
expanding their business by building manufacturing facilities in developing economies such
as China and India, which have a high potential in terms of revenue. In addition, the rising
penetration of washing machines in developing countries is projected to drive market growth
further. The bulk of demand for washing machines is still concentrated in urban areas, how-
ever, demand is also rising in rural areas. Thus, the consumption of powder and liquid deter-
gents will continue to grow.
Product innovation and the launching of new products is another major factor expected to
drive market growth. Moreover, the steady penetration of powder detergents in both rural and
urban areas of developing countries is expected to be the key catalyst for market growth.
The soap and detergents industry is becoming increasingly globalized, with a higher number
of global vendors branching out into the market to increase their market share. With rising
globalization, vendors will face new challenges in sustaining their growth and compliance with
the laws and regulations issued by various government agencies. The potential opportunities
opening in developing countries are expected to ensure ample demand for soaps and deter-
gents in the future.

   4.2.1.2 Key Market Drivers of the Soap & Detergents Industry

Since soaps and detergents are generally not considered high-technology products, enter-
prises are always searching for a breakthrough product to increase sales, as new and high
value products represent the path to improving profitability. Since most of the largest soap
manufacturers in the world have divested much of their chemicals, strengths and capabilities,
they are turning to suppliers of raw materials to provide chemical expertise.
Beyond simply searching for efficient suppliers, soap manufacturers and their raw material
suppliers are expected to establish closer technology alliances over the next few years. This
requires soap manufacturers to develop a new culture in which they share information with
their suppliers.

Key market drivers of this industry include:


  (1) Product Innovation: Product innovation allows all firms, large and small, to participate
in an industry in which customer needs are evolving and in which opportunities are in-
creasing for both the mass market as well as niche markets to satisfy diverse lifestyles
and uses. Major developments, innovations and technological breakthroughs can occur
at the formulation level, product level, or packaging level.
  (2) Sustainable Consumption: Sustainable consumption means modifying people’s habits
to minimize their impact on the environment. This principle has been applied with the
advent of concentrated products. These products did not, however, attain their intend-
ed economic and environmental effect, because not all were convinced that a lower dos-
age of concentrated products was necessary. Consequently, the soap and detergents
industry has recently introduced the concept of unit dosing in capsules or tablets for
dishwashers and washing machines. Unit dosing is convenient and simple, anticipat-

148
ing consumer demand for easy to use and safer products. Unit dosing has also had
various positive environmental effects, due to a reduction in transport, among others.
  (4) New Product Development: Developing and introducing new products to the market
spans the complete product lifecycle, which starts from primary identification of a mar-
ket opportunity, to conception, design and development, production, product launch,
support, enhancement ends with retirement. The process entails the conversion of a
product concept into an actual reality.
  (5) Regulations: The soaps and detergent industry is one of the most regulated industries
and is subject to several requirements that aim at reducing the release of chemical
substances into the environment during the manufacturing process. Such requirements
generally include limitations (through regulations) on the quantity of a substance that
can be released into the environment.

   4.2.1.3 Soap and Detergents Industry in Ethiopia

General Status of Soap and Detergents in Ethiopia:


Since the number of firms in Ethiopia’s soap and detergents industry is low (22-24 firms), they
are unable to meet local demand, even though they comprise the highest share in the number
of total chemical manufacturing firms in Ethiopia.
Ethiopia imported 705,364 tonnes of soap and detergents at a CIF value of ETB 199.2 billion in
2013.
These industries require less intensive technology and capital. Hence, the capacity utiliza-
tion of existing establishments is planned to increase from 32 per cent to 90 per cent; the
underutilization of this industry may be attributed to unnecessary waste in the manufacturing
environment, lack of integration in the supply chain and poor quality of products; hence, the
implementation of quality improvement principles could greatly enhance capacity utilization
and productivity.

Market Size of Soap and Detergents in Ethiopia:


No detailed data on the market size of Ethiopia’s soap and detergents industry is currently
available. A report did, however, publish Figures of market demand for laundry detergent for
the period 1989-2002 (Table 41) and the projected demand for the period 2005-2015 (Table 41).
Assuming that supply was driven by demand, the average annual supply of laundry detergent
for the reference period, which includes domestic production and imports, reflects the effec-
tive demand for the product in the year 2002. Since the consumption of laundry detergent is
associated with the rise of the urban population, demand for the product was assumed to
grow by 4 per cent, corresponding to the annual growth rate of the urban population. Demand
for laundry detergent for the year 2004 was thus estimated at 29,520 tonnes. This Figure was
projected based on the 4 per cent annual growth rate of the urban population, who are the
main users of the product.

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Table 41 Market size of soap and detergents industry in Ethiopia
Market Share (%)
Domestic Projected
Year Import Total Supply Domestic Year
Production Imports Demand
Production
1989 9529 15661 25190 37.8 62.2 2005 30701.0
1990 7753 14706 22449 34.5 65.5 2006 31929.0
1991 3729 12537 16266 22.9 77.1 2007 33206.2
1992 4947 19592 24539 20.2 79.8 2008 34534.4
1993 15546 8856 24402 63.7 36.3 2009 35915.8
1994 13495 14149 64644 48.8 51.2 2010 37352.5
1995 13641 7838 21479 63.5 36.5 2011 38846.6
1996 16547 15229 31776 52.1 47.9 2012 40400.4
1997 12908 13766 26674 48.4 51.6 2013 42016.4
1998 9787 12910 22697 43.1 56.9 2014 43697.1
1999 13135 17504 30639 42.9 57.1 2015 45445.0
2000 17194 14200 31394 54.8 45.2 2016 47262.8
2001 14766 19792 34558 42.7 57.3 2017 49153.3
2002 19249 23147 42396 45.4 54.6 2018 51119.4
Average 12301 14992 64293 44 56 2019 53164.2
Sources: Customs Authority, External Trade Statistics, 2020 55290.8
various years CSA, Statistical Abstract, 1990-2002.
2021 57502.4
2022 59802.5
2023 62194.6
2024 64682.4
2025 67269.7

   4.2.1.4 Recommendation

Recommendation 1: Continuous Process for Soap Manufacturing: TRM draft page 87~88
The proposed continuous process in TRM can be summarized in more detailed steps as fol-
lows: Fats and Oils  Splitting by High Temperature and Pressure with Water and Catalyst 
Glycerine and Fatty Acids  Glycerine removal  Distillation of Fatty Acids  Neutralization
of Purified Fatty Acid with NaOH Solution  Neat Soap (30% water)  Drying  Soap Pellet
(10% Water)  Mixing with Additives  Extruding  Cutting and Stamping  Packing.

150
Figure 26 Schematic Diagram for Soap Manufacturing by Saponification

Whether soap production is based on the saponification process, fatty acid neutralization
process, or a semi-boiled process, continuous methods of production have proven to be ad-
vantageous over older batch processes. Continuous systems improve yields, reduce energy
consumption, require less in-process inventory, reduce production cycle times, improve fin-
ished product quality/consistency, increase flexibility and require smaller plant layouts. This
continuous process can ensure a consistent and good quality of soap products, while the qual-
ity is not consistent and good when using the batch process. Moreover, this process produces
glycerine as a by-product. Glycerine is an important industrial chemical for various applica-
tions, particularly when crude glycerine is properly purified and refined. The process of soap
manufacturing based on fats and oils usually yields glycerol of about 10 per cent of the value
of the soap produced. Due to the many uses of glycerine, its recovery is an important factor
for reducing costs in soap manufacturing. It is also an important ingredient in cosmetics and
adhesives. It therefore makes sense to focus on developing the refining technology of crude
glycerine.

Figure 27 illustrates another continuous soap manufacturing process which includes the pro-
cess of glycerine refinement. Sweet water from wash column and lye from the static separator
containing glycerol is processed to produce glycerine. The first step in glycerine recovery is pre-
treatment of lye to remove traces of soluble soap in the lye. Ferric chloride is added to the lye to
precipitate the soluble soap as ferric soap, which is separated by filtration. The acidic filtrate
after the removal of soap is acidic and contains excess ferric chloride. This is treated with caus-
tic soda, and ferric chloride is separated as ferric hydroxide precipitates, which is separated
by filtration. The filtrate after the removal of soap is then processed in the evaporator. In the

151
multiple effect evaporator, glycerine is diluted with a concentration of 52 per cent glycerine.
Some salt is separated at this stage. The concentrated liquid after the separation of the salt
is centrifuged and the concentrated glycerine is processed by another single effect evaporator
to achieve a concentration of about 84 per cent glycerine. This is referred to as crude glycerine
which is further refined in a special distillation column at 140 oC and 755 mmHg. The distilla-
tion column contains three condensers in a series from which different fractions of glycerines
are recovered and which are further treated with activated carbon to finalize the production of
glycerine.

Figure 27 The continuous soap manufacturing process and glycerine refining system

Recommendation 2: Semi-Boiled Soap Manufacturing Process


The semi-boiled saponification process is a glycerine removal-free process that produces “neat
soap” with all the glycerine that is contained in the initial fats and oils used. Semi-boiled sa-
ponification does not require the washing and fitting steps of the traditional full-boiled kettle
soap process or the washing and neutralization of the continuous saponification systems that
produce neat soap with only a small amount of glycerine.
The traditional market for semi-boiled soaps mainly targeted different laundry detergents.
Currently, semi-boiled soap manufacturing is also gaining in importance for toilet/cosmetic
soaps due to:
  (1) the fluctuating cost of refined glycerine
  (2) the increasing cost of many raw materials, especially those for spent-lye treatment
  (3) the availability of complete glycerine processing plants.

152
Semi-boiled soap making is a simple, single-step process which offers the following advan-
tages:

  (1) savings in energy consumption


  (2) reduced capital investment compared to other systems
  (3) lower environmental impact (no by-products)
  (4) requirement of less-skilled personnel due to process simplicity.

The high glycerine content of semi-boiled soap alters the soap’s appearance, and results in a
harder finished product at a given moisture content due to the increased viscosity of the liquid
phase of the soap. To account for this, semi-boiled soaps are usually produced with a 58~60
per cent total fatty matter (TFM) content. Figure 28 illustrates the continuous process diagram
for semi-boiled soap manufacturing systems.

Figure 28 Schematic Diagram for a Semi-boiled Soap Manufacturing System

Recommendation 3: Toilet or Cosmetic Soap Manufacturing


The above-mentioned continuous soap manufacturing processes c an produce the quality
soap pellets, which can be used to produce toilet or cosmetic soaps to cleanse the body or
face. Without any additional equipment or facilities, it is possible to manufacture good quality
soap products by producing high quality soap pellets and by subsequently mixing these pel-
lets with any skin care ingredients and fragrances. Since cleaning soap can be sold at a higher
price than laundry soap, it would be possible to improve the economic efficiency of the soap
manufacturing process.

153
Recommendation 4: Batch-type Soap Manufacturing
Since batch-type soap manufacturing processes, which are mainly operated by small com-
panies, lag far behind imported products in terms of product quality and productivity, it is
recommended that the government provide technical guidance or any appropriate assistance
to domestic enterprises to meet consumer needs for higher quality.
By utilizing overseas experts who possess in-depth knowledge and practical experience in the
latest soap manufacturing technology, the government can provide comprehensive education
for all local soap manufacturing firms and customized technology advice or guidance for indi-
vidual companies at their production facilities. The high quality soap produced by domestic
soap companies can replace import soap products and be exported to neighbouring countries,
leading to the profitable and sustainable growth of the domestic soap production industry.

  4.2.2 Pulp and Paper Industry

The pulp and paper industry comprises companies that use wood as a raw material and pro-
duce pulp, paper, paperboard and other cellulose-based products.

   4.2.2.1 Characteristics of the Pulp and Paper Industry

The pulp and paper manufacturing industry is energy- and raw material-intensive, with high
capital costs and long investment cycles. The following characteristics apply to the industry:

  - local business due to high transportation costs;


  - paper industry is growing in similar patterns as GDP development;
  - raw materials and recycled paper are very important in the pulp and paper industry;
  - energy and waste control is important in terms of the environment and costs.

Paper for recycling represents a major source of the paper industry’s raw material, which is
why the industry is heavily advocating recycling. The recycling rate of paper in Europe reached
71.5 per cent in 2015. The total amount of paper collected and recycled in paper mills in 2015
amounted to nearly 56 million tonnes, an increase of 28.1 per cent since 2000. 18.2 per cent
was exported for recycling in third countries. (Confederation of European Paper Industries,
Homepage).

The recycling of paper is also a major source of raw material for the Republic of Korea’s paper
industry, with recycled paper accounting for 78 per cent and pulp for 22 per cent (of which
about 83 per cent is imported). The quality of waste paper is an important factor in the recy-
cling process.
Continuous technological improvements can further reduce environmental impacts and opti-
mize the use of resources such as raw materials, water and energy.

154
   4.2.2.2 Global Trends of the Pulp and Paper Industry

The pulp and paper industry as a whole is growing, albeit at a slower pace than before, as
other products are filling the gap left by the shrinking graphic-paper and newsprint market.
Packaging is increasing all over the world, along with tissue papers and pulp for hygiene prod-
ucts. Although it is still a relatively small market, pulp for textile applications is growing. A
broad search for new applications and uses of wood and its components is underway in nu-
merous labs and development centres. The pulp and paper industry is not disappearing, but
it is changing, morphing and developing.

Table 42 Global prospects of the paper industry by segment and region


2016 ~ Product Japan Western North China Other Eastern Latin
2021 Group Europe America Asia Europe America
Tissue Tissue
Graphic Mechanical
Paper Newsprint
Carton
Packaging board
Paper Container
board
  CAGR > 2%,    CAGR 0~2%,    CAGR < 0% Source: Paper & Forest Products, May 2017

Various paper products segments of the pulp and paper industry are growing, but the growth
is very slow or even negative in developed countries. The newsprint paper market shows a
negative growth in all areas (Table 42).

Global Trends of Raw Materials & R&D


The pulp and paper industry is highly advanced in terms of automation of production facilities.
Availability of wood resources is crucial for the paper industry’s competitiveness. The auto-
mated production scale would need to reach at least 250~300 kt to be considered competitive.

As the production scale increases, energy efficiency and waste control problems emerge along
with environmental issues; hence, numerous efforts are being undertaken to resolve them. 
In addition, countries that lack forests, like the Republic of Korea, are focusing on developing
paper recycling technologies such as de-inking. Meanwhile, countries with abundant forest
resources like China, Indonesia and Canada are continuing to expand their forest resources.

155
   4.2.2.3 Pulp and Paper Industry in Ethiopia

Ethiopia does not produce its own pulp. There is one paper producing factory in Ethiopia,
located in Wenji. The paper mill uses imported pulp and waste paper as raw material inputs.
The mills produce 12,490 tonnes of paper of different qualities per year and 10,241 tonnes of
corrugated paper. However, local production cannot meet local demand for paper in Ethiopia.
Therefore, Ethiopia imports pulp and paper products. According to the Central Statistics Au-
thority in Ethiopia, pulp wood is imported at an annual cost of ETB 148 million, and about ETB
2.2 billion annually is spent on imports of finished paper products (Table 43).

Table 43 The amount of pulp and paper commodities imports and costs

Commodity 2010/11 2011/12 2012/13


imported Tonnes Birr(‘000) Tonnes Birr(‘000) Tonnes Birr(‘000)
Pulp wood 5,583 44,850 10,346 119,193 12,673 147,082
Paper & paper board 73,345 1,221,765 83,188 1,785,735 99,642 2,128,721

Pulp and paper consumption per capita of Ethiopia is less than 1 kg which is far behind world
average (56 kg) and Africa (7.7 kg) (see Table 44). This result implies that the pulp and paper
industry in Ethiopia has great potential for development.

Table 44 Pulp and paper demand capacity in Ethiopia compare to world and Africa

Population Consumption Consumption** Net Import Production


(‘000)* per Capita* 2015 2016 2015 2016 2015 2016

Ethiopia 102,374 0.9 kg 86 93 67 74 19 19

Africa 1,178,741 7.7 kg 8,958 9,119 4,347 4,335 4,611 4,784

World 7,323,187 56.5 kg 409,677 413,582 2,971 2,699 406,706 410,883

*(2016, est) **(1,000 tonnes) Source: Addis Ababa University Addis Ababa Institute of Technology
School of Chemical and Bio Engineering, 2015

Demand for pulp and paper products is related to the country’s overall economic develop-
ment. Growth in the manufacturing sector and agro-industries will result in more demand for
suitable packaging.

156
  4.2.3 Recommendations for Chemical Products

Recommendation of Soap and Detergents Industry:


Recommendation 1: Cosmetics Industry
The ‘clean life’ that started with the use of laundry and toilet soap has led to the improvement
of the quality of life. With the standard of living improving, it is therefore normal that demand
for shampoo, skin care cosmetics and colour cosmetics increases among consumers. Begin-
ning with the production and sale of soap, entry into the cosmetics industry should be con-
sidered if consumer needs can be better understood and ways to meet these can be devised.
Global cosmetics firms in the U.S., France and Japan, such as Procter and Gamble, also started
manufacturing and selling laundry detergent and cosmetic soap at very early business stages,
and at a later stage, entered the cosmetics industry to meet the demands of the ever-growing
cosmetics market.

Recommendation 2: Surfactant Industry


The surfactant referred to here is a surfactant that is superior in performance to soap and is
manufactured using sulfation and neutralization with fatty acids or fatty alcohol. These surfac-
tants are important chemicals used in various sub-sectors such as shampoo, laundry deter-
gent, dishwashing detergent and other industrial detergents. The broad application of surfac-
tant is attributable to its excellent physical chemical properties, such as foaming, detergency,
emulsifying, dispersing, wetting, anti-static effect and antimicrobial effects. In recent years,
various plant-derived surfactants prepared from fatty acids derived from vegetable oils and
fatty alcohols as basic raw materials have been used for many personal care and industrial
products in place of petroleum-derived surfactants. [Figure 29]

Figure 29 Common transformations of vegetable oils in the production of surfactants

157
Recommendations for the Pulp and Paper Industry:

The pulp and paper industry in Ethiopia is expected to grow steadily along with the country’s
economic development due to an improvement in living standards and the development of the
local packaging industry. However, there is currently no pulp factory in Ethiopia, meaning in-
vestment in this industry is urgent. Since the paper industry developed without a pulp factory
in Ethiopia, investments in paper recycling and the installation of collection systems for waste
paper are recommended. The quality of waste paper is crucial. Training of workforce in waste
paper collection systems is time consuming. 

   Case 1: The Government of the Republic of Korea’s Policy: Saving and Recycling of Re-
sources

The Government of the Republic of Korea implemented the ‘Act on the promotion of saving and
recycling of resources’ in 2004. The purpose of this act was to contribute to the preservation
of the environment and foster the sound development of the national economy by facilitating
use of recycled resources and controlling the generation of waste.

Paper and newsprint created a large amount of waste; paper (41 per cent), plastics (24 per
cent), metals (3 per cent) and glass (2 per cent). The recycling of paper increased between 2005
and 2009 by an average of 4.7 per cent. Not only the amount of paper but also the quality of
recycled paper improved significantly following the promulgation of the act, which saved the
processing costs to use recycled paper as a raw material input for paper products.

Table 45 Recycling of Paper in the Republic of Korea


Year 2003 2004 2005 2006 2007 2008 2009
Paper Production 10,999 11,182 11,279 11,279 11,602 10,642 10,481
Paper Consumption(A) 9,965 9,909 9,868 9,889 9,893 8,690 8,439
Total 10,897 11,479 11,436 11,599 12,275 12,023 11,703
(%) (100) (100) (100) (100) (100) (100) (100)
Pulp 2,988 3,082 2,935 2,983 3,129 2,910 2,768
Raw (%) (27.1) (26.8) (25.7) (25.3) (25.5) (24.2) (23.7)
Mate- Re- Total 7,942 8,397 8,501 8,667 9,146 9,113 8,935
rials cycling (72.9) (73.2) (74.3) (74.7) (74.5) (75.8) (76.3)
Paper
Local(B) 6,611 6,875 7,086 7,455 7,998 7,901 7,851
Import 1,331 1,522 1,415 1,212 1,148 1,211 1,084

Local Recycling (B/A, %) 66.3 69.4 71.8 75.4 80.8 90.0 93.0

(Unit: 1,000 tonnes/year)

158
Summary of Review for Strategic Chemical Products: Soap & Detergents, Pulp & Paper

Table 46 Summary of review for the soap and detergents industry


Market 1. Domestic laundry soap market
2. Domestic toilet/cosmetic soap market
3. Foreign laundry detergent market
4. Foreign toilet/cosmetic soap market

Major Players 1. Public /government development for continuous soap process


2. Private/ local development for batch soap process (quality
improvement)

Technology 1. Process design and production equipment for continuous soap


production should be provided by foreign soap equipment
manufacturers in Italy, India or China.
2. Production or operating technology should be provided by
equipment manufactures along with supplying their equip-
ment.
3. Key technologies: hydrolysis, saponification, glycerine removal
and refining, drying, formulation.
4. Key technologies could be acquired from soap equipment
suppliers and foreign experts.
R&D 1. Engineers and researchers should be involved and educated
from the initial stage of process design.
2. Technical experts or consultants should be involved from the
initial stage of process design to provide critical reviews on
process design and project progress.
3. Engineers will be in charge of operation supervision and re-
searchers are in charge of quality control and improvement.
4. Collaboration between researchers from universities and soap
producers is highly recommended.
Human Resources 1. Engineers and researchers; university-educated with some
experience in soap industry.
2. Technicians: well-educated and trained, with some experience
in the soap industry
3. Some foreign experts and consultants could be hired to stabi-
lize soap production and the establishment of new facilities.

Finance 1. Fair amount of capital investment is required for production


facilities.
2. Estimated capital can be provided by soap equipment manu-
facturers after determining production capacity.
Connective Technology 1. Cosmetics industry.
2. Surfactant industry.
Alkali chemicals.

159
Table 47 Summary of review for the paper and pulp industry

Market Applications, global trends, Ethiopia status (supply/demand)


  ° Developed countries:
   1) Newspaper, printing paper demand is decreasing due to ICT
developments,
   2) Container board, etc.: Packaging demands are increasing

Major Players Initially, development in the public sector, later transfer to


private sector

Technology Licensing package and process development


  ° Licensor’s package is required
  ° Local quality development

R&D Process and manufacturing development, purification technology


R&D targets and strategy
  ° Recycling paper R&D
  - Development of neutral pH paper
  - Coating technology development
  - De-inking technology development

Human Resources Engineers/technicians


  ° International collaboration in R&D and in early stages of
production*

Finance Facility-oriented, economic scale

Connective Technology   ° Cosmetics industry, packaging industry


  ° Surfactant industry, caustic soda, soda ash

* Chinese human resources supporting strategy: In the beginning of China’s industrial develop-
ment, there were not enough skilled and experienced experts in the paper industry. Accordingly,
they hired Chinese workers for simple manual labour and employed technicians for management
and quality maintenance from the Republic of Korea and Taiwan ROC, resulting in a rapid develop-
ment of China’s paper industry.

  4.3 Petrochemicals (PVC, PE, PP)

As a basic chemical, alkali chemicals are used to modify the physical properties of materials
based on chemical reactions like acid/base reactions or oxidation-reduction reactions. These
changed materials can be used in many applications. For example, caustic soda is used to
change wood particles to pulp materials, which is a raw material input for paper.

160
On the other hand, petrochemicals and polymers, as a typical example, play an important role
in 21st century lifestyles and the national economy because they are utilized in various end
products across a range of industries. Based on their beneficial properties like light weight,
durability, from transparent to various colours, easy transformation into various forms and
competitive prices, they substitute paper, glass and steel, and their application is expanding.
Ethiopia has a high population and thus faces tremendous challenges in terms of providing
sufficient food, medicines and adequate housing to its population. The development of the
petrochemical industry is crucial and could contribute to Ethiopia’s transformation from an
agriculture-led to an industry-led economy.
Polyolefin (PE, PP, PVC) is a strategic chemical in the NTRM, and details for local information
and implementation plans are necessary, including a feedstock strategy.
The petrochemical industry is predominantly based on feedstock derived from crude oil and
natural gas. Naphtha and kerosene (linear alkyl benzene) are derived from crude oil. Steam
cracking/ catalytic reforming of low and high aromatic naphtha in oil refineries provide olefins
(ethylene, propylene and butadiene) and aromatics (benzene, toluene and xylenes). Natural
gas contains methane (CH4), ethane (C2H6), propane (C3H8) and butane (C4H10). Rich natural
gas, which contains C2 and C3 in extractable quantity, is used in the production of ethylene
and propylene. Methane can be converted into synthesis gas and other C1 derivatives.
The possibilities of Ethiopia’s natural gas and its components and crude oil should be consid-
ered and various scenarios evaluated.
Developing the chemical sub-sectors proposed is complex and very challenging. It involves
developing project ideas, feasibility studies and engineering designs and construction, opera-
tion and marketing (input/output balance) and financing, among others.

  4.3.1 Polyethylene and Polypropylene (PE and PP)

   4.3.1.1 Global Trends of PE and PP

The global market research company, IHS, reports that the global market of polyethylene
reached around 100 million tonnes, which represents the largest part of the global olefin mar-
ket (260 million tonnes). It is expected to grow steadily at a CAGR 4.2 per cent.
The packaging industry is the main driver of petrochemical market growth together with other
end-use industries such as automotive, construction, electrical and consumer goods.
The results of market research have shown that the main market segments for plastics con-
verters are packaging (39.9 per cent), building and construction (19.7 per cent), automobile
(10 per cent), electrical and electronics (6.2 per cent), household, leisure and sports (4.2 per
cent), agriculture (3.3 per cent) and others (16.7 per cent).
The packaging and construction industry are two of Ethiopia’s fastest growing industries and
source extensively from the plastics industry. These results imply that the plastics market will
continue to grow rapidly in Ethiopia.
Polypropylene and polyethylene are key raw material inputs for food packaging, and PVC (poly-
vinyl chloride) is a major source for housing materials like window frames (Table 48).

161
Table 48 European demand for plastics converters by polymer type (2016)
Polymer Share (%) Application
PP 19.3% Food packaging, sweets and snacks wrappers, hinged caps,
microwave-proof containers, pipes, automotive parts, bank
notes, etc.
PE-LD, PE-LLD 17.5% Reusable bags, trays and containers, agricultural film
(PE-LD), food packaging film (PE-LLD), etc.
PE-HD, PE-MD 17.5% Toys (PE-HD, PE-MD), milk bottles, shampoo bottles, pipes,
houseware (PE-HD), etc.
PVC 10% Window frames, profiles, floor and wall covering, pipes,
cable insulation, garden hoses, inflatable pools, etc.

Global PE and PP demand is expected to increase, owing to rising demand for packaged goods
and the changing lifestyle of consumers. Additionally, easy availability and affordable PE pric-
es are likely to contribute to market growth. PE is used in various applications, including pack-
aging and toys, cable coverings, buckets, lid, containers bottle, film and membrane manufac-
ture. The penetration of plastics in flexible packaging has advanced quickly and steadily. PE
and PP film, in particular, accounted for 37 per cent and 25 per cent in the packaging industry
(Table 49).

Table 49 Plastics in Flexible Packaging


Packaging materials Share (%)
Polyethylene 37 %
Polypropylene 25 %
Plastics
Polyvinylchloride (OVC) 3%
Polyethyleneterephthalate (PET) 3%
Paper 20 %
Aluminium foil 5%
Others 7%
Source: PIRA, “The Future of Global Markets for Flexible Packaging 2205, www.intertechpira.com

   4.3.1.2 Current Status of Petrochemicals in Ethiopia

Ethiopia’s plastics industry is growing fast. The Country Cluster of EUROMAP (European Plas-
tics and Rubber Machinery) confirms a significant growth of Ethiopia’s plastics industry.

162
EUROMAP also expect Ethiopia’s consumption of plastics to increase considerably and steadi-
ly (Table 50). Ethiopia’s plastics consumption has risen 17.5 per cent annually over the past ten
years, from 44 kt in 2007 to 220 kt in 2017, and is estimated to reach 308 kt in 2020.

Table 50 Plastics consumption in Ethiopia


Consumption ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘18 ‘20 CAGR
Plastic* 44 51 57 55 57 81 94 114 172 195 248 308 16.2%
Plastic per 0.6 0.6 0.7 0.7 0.7 0.9 1.1 1.3 1.9 2.1 2.6 3.2 13.7%
Capita**
2016~2020: estimated
Plastic*- kilotonnes, Plastic per capita** - kg

The per capita consumption of plastics in Ethiopia has increased by about 15 per cent annually
over the last ten years, from 0.6 kg in 2007 to 2.4 kg in 2017, and is estimated to reach 3.2 kg
in 2020.

Plastics will gradually become the material of choice for extensive usage due to their unique
and diverse set of properties. Additionally, easy availability and affordable PE prices will pro-
mote the growth of the plastics industry. Government policies and initiatives fostering plastics
manufacturing in the country and competitive rivalry in the industry is bound to grow signifi-
cantly.
Due to low penetration levels of plastic products in Ethiopia’s market, especially in rural areas,
the per capita consumption of plastics is low compared to other countries (Table 51).

Table 51 Per Capita Plastics Consumption


Country Plastics Consumption
USA 109 kg/person
Europe 65 kg/person
China 38 kg/person
Brazil 32 kg/person
India 11 kg/person
Ethiopia* 2.5 kg/person
World 28 kg/person
*EUROMAP, estimated Source: AIPMA and Plastic India, TATA Strategic Analysis

To manufacture finished products, polymers are processed through various types, namely ex-
trusion, injection moulding, blow moulding and roto moulding. The extrusion process is the
most commonly used process in Ethiopia and accounts for 50.3 per cent of total consumption

163
by downstream plastics processing industries. Various products manufactured through these
processes are presented in Table 52.

Table 52 Processes in the Plastics Industry


Process Share Applications
Extrusion 50.3% Films & sheets, fibres & filaments pipe, conduits &
profiles, other applications
Injection Moulding 24.9% Industrial household, thermo-ware, luggage
Blow Moulding 18.4% Bottles, containers, toys and housewares
Others 6.3% Water tanks

Ethiopia is the second largest importer of plastics in their primary forms in eastern and central
Africa. As Ethiopia does not process any plastics or raw material inputs to plastics at all, 100
per cent of raw material inputs and resins are imported, mainly from the Middle East, Europe
and Asia. Imports of raw material inputs to plastics grew by 19.4 per cent annually between
2007 and 2015, from 43 kt to 178 kt (Table 53).

Table 53 Ethiopia’s imports of plastics in a primary form


2007 2008 2009 2010 2011 2012 2013 2014 2015 CAGR
43 50 59 56 58 80 96 113 178 19.9%
Unit: kilotonnes Source: Ethiopian Revenue & Customs Authority

Ethiopia’s plastics and packaging industry has become increasingly sophisticated with new
technologies being introduced in the market. The plastics and packaging industry consists
of different sub-sectors, including plastics, plastics flexible packaging and polythene bags.
Ethiopia’s plastics industry is an emerging industry with the potential of driving growth within
the country’s manufacturing industry.

  4.3.2 Polyvinyl Chloride (PVC)

Polyvinyl chloride (PVC) is the third-most widely produced polymer, after polyethylene and
polypropylene. PVC is one the most widely used plastics and is produced by polymerization
of the monomer vinyl chloride. PVC has an amorphous structure with polar chlorine atoms
and has fire retardant properties and oil/chemical resistance. PVC is widely used in construc-
tion, packaging, automotive and electrical industries due to its many properties such as light
weight, good mechanical strength, abrasion resistance and toughness. PVC has two basic
forms: rigid and flexible. The rigid form of PVC can be used in the manufacturing of pipes,
doors and windows and plastic bottles. The flexible form of PVC can be used in plumbing,
electrical cable insulation, imitation leather, signage and medical tubes.

164
   4.3.2.1 Global Trends of PVC

The global polyvinyl chloride (PVC) market is growing steadily at a CAGR 5~6 per cent in the
next five years. Construction and infrastructure spending in emerging markets will be a major
contributor to the PVC market’s growth.

Table 54 Global PVC Market Estimation


2013 2015 2017 2018 2020
38.5 Mt 42.17 Mt 46.49 Mt 48.81 Mt 53.81 Mt
MT: million tonnes Source: statista (www.statsta.com)

Asia-Pacific is the largest market for PVC, accounting for over 50 per cent of the global PVC
market. The Asia-Pacific region is expected to continue growing over a forecasted period due
to the high growth potential of the building and construction industry. China represents the
largest market for PVC in the Asia-Pacific region. Europe is the second largest market for PVC,
followed by North America.
Some of the major drivers contributing to the overall growth of the PVC market include high
growth in the building and construction industry, automobile industry and medical devices.
Some of the major restraints for the PVC market include increasing competition from steel and
concrete pipes and prohibited use of PVC in the construction of green buildings.
The automotive industry is one of the most dynamic industries and belongs to the major con-
sumers of plastics. On average, 150.0 kg of plastics is used in the manufacturing of a vehicle,
of which nearly 10.0 per cent is PVC-based plastics.
Future major growth opportunities for PVC include the manufacturing of high efficiency pumps,
growing demand for electric vehicles, the emerging wood plastics composites market, and
renewable PVC developments.

   4.3.2.2 Current Status of PVC in Ethiopia

There are a total of 350 plastics manufacturing firms in Ethiopia, which produce 12 catego-
ries of goods including automotive tires, wood & plastic home partitions, PVC tiles and small
household furniture. The total volume of plastic products is around ETB 12 billion (over USD
0.5 billion). There is no resin manufacturer in Ethiopia, and about 90 per cent of inputs are
imported (about 170 kt of resin including PVC and PE).

Table 55 Projected Demand for PVC Resin


2013 2015 2017 2019 2021 2023 2025
11,121 13,456 16,282 19,701 23,838 28,844 34,901
Unit: tonnes Source: Ethiopian Chemical & Construction Input Industries Development Institute

47
Thomas Wynes & Matilda Alexon, The Final Frontier-Decarbonising Europe’s energy intensive industries, 25 May 2016,
Institute for European Studies, Vrije Universiteit Brussel

165
The government is trying to reduce the import of raw materials to reduce costs. A quarter bil-
lion dollar investment is underway to set up a PVC factory in the Mekele City area. It is expected
to be operational at the end of 2020. The leading markets for plastics/ PVC in Ethiopia are the
packaging, building and construction and automotive/transport industries.

   4.3.3 Review and Recommendation for Petrochemicals

Current and future local demand for polyolefin is a very important starting point for Ethiopia’s
roadmap. Ethiopia’s plastic per capita use is likely to increase to at least 4 kg. If we consider
Ethiopia’s total population of 100 million, about 400 kt of polyolefin will be required by 2025.
Based on the PVC demand in Table 30, we can deduce some estimates. Demand for PVC resin
will be around 35,000 tonnes. The global average share of PVC in PE is around 9 per cent,
which means PE demand in 2025 will be about 350,000 tonnes, implying that far more than
400 kt of polyolefin will be needed by 2025.
-In the Roadmap, polyolefin demand was projected at about 300 kt in 2025.

Many projects are being considered involving the production of natural gas and crude oil pro-
duction in Ethiopia. These study results will have a profound impact on the development of
the chemical industry. Key technology discussions will involve NCC (naphtha cracking) and ECC
(ethane cracking).
Most chemical and plastic (C&P) products are derivatives of oil and natural gas. In terms of
pricing, most of these follow the oil price, even if the product can be produced using natural
gas. Aside from price, there are other issues involving oil or gas and the diversity of products.
The ethane cracking process (ECC) produces mostly ethylene (about 75 per cent), while the
naphtha cracking (NCC) process produces diverse outputs such as ethylene, propylene, buta-
diene, and BTXs (Table 56).
A decision to establish an ECC or NCC facility in Ethiopia is beyond this review and is a decision
the government will have to take.

R&D
Training for process technology and safe operations are included in the licensor’s package.
Special R&D projects could be prepared and implemented, like solid handling and piping
work.

Table 56 Cracking method and olefin ratio


Olefin Non-olefin
Process etc
ethylene propylene butadiene BTX
NCC 31 % 15 % 11 % 24 % 19 %
CTO 100 % none none
ECC 75 % 2% 3% 5% 15 %
Source: Hana Economic Research Center, Deloitte reorganized

166
Table 57 Summary of review for the petrochemical industry
Market Applications, global trends, Ethiopia status (supply/demand)
  ° The estimation of polyolefin demand in Ethiopia needs to be
defined and ready for various scenarios
Major Players Initially, development in the public sector, later transfer to private
sector
  ° Public sector; requirement of large investments and high risk
Technology Licensing package and process development
  ° Licensor’s package is required
R&D Process and manufacturing development, purification technology
R&D targets and strategy
  ° T echnology for manufacturing needs to collaborate with licensor.
  ° Operation training and typical safety study, R&D
Human Resources Engineers/technicians
  ° Training for operation
Finance Facility-oriented, economic scale
  ° S tudy of PVC factory using imported VCM scale of 15,000 tonnes
per annum, estimated total investment ETB 539 million and
production costs per year of ETB 247 million
Connective   ° Chlorine industry for PVC
Technology   ° Plastics industry, construction industry, packaging industry
  ° C ompanies using chlorine and caustic soda should be balanced
  ° Chlorine-PVC(VCM)-ethylene are connected
  ° P ulp and paper, food processing, soap and detergents, and water
treatment are connected to the alkali industry

Potential for plant-based Chemical Industry in Ethiopia

Feedstock is one of key factors in petrochemical industry. In fact, most of the current feedstock
are from crude oil and natural gas. However, there is a rising concern on recent climate chang-
es; therefore, using biomass through decarbonization is actively being studied for a continu-
ous growth. Since petrochemical industry is especially a typical energy intensive industry, the
expectations for biomass-based chemical industry is growing. According to a study conducted
by EU, with the current technology, 10% of the current EU ethylene production can be replaced
by the ethanols extracted from sugar cane, corn starch and sugar beets pulp (a residue after
sugar extraction).47

For the analysis of deep mitigation in the production of petrochemicals, two main options
could be considered; Firstly, replacing the  fossil fuel based feedstock with biomass-based
alternatives, and secondly, reducing the production volumes of some important petrochemical
products through enhanced recycling. Among these options, Ethiopia should consider using

167
biomass as a feedstock because the fact that agro-industry, the most important industry in
Ethiopia, creates a lot of biomass, as shown in Table 58, makes this choice very convenient.

Table 58 Biomass potential and reserve in Ethiopia


No Biomass Area (province) Name of Deposits Biomass residue
residue (Ton/year)
1 Dry processed SNNPR Coffee Residue1 49,496
Coffee
Oromiya Coffee Residue 132,911
Gambela Coffee Residue 1,458
other Coffee Residue 158
2 Wet processed SNNPR Coffee Residue 16533
Coffee
Oromiya Coffee Residue 6959
Gambela Coffee Residue 1519
other Coffee Residue 9
3 Cotton Tigray Cotton Residue2 42,822
Afar Cotton Residue 46,100
others Cotton Residue 150,000
4 Saw dust SNNPR & Oromia Sawmill residues 25,00063
5 Khat Addis Ababa Chat residue 7,094
Harrage &Dire Dawa Chat residue 105,000
6 Bamboo Tree All regions 1,000,000
7 JATROPHA All regions Jatropha Husk 0.4/14
8 Castor SNNPR,Oromiya and others Castor hask
9 Molasses Currently 8 factory are 202,856.28
producing molasses, other tone/annum
5factory under construction
10 Floriculture Amhara, oromiya and SNNP Floriculture 300,000
residue residue tone/annum,
estimation
1
90 % of the residue is coffee husk Source: UNIDO, Ministry of mining, and EREDPC
2
Residue to product ratio is 2.755 at 12 % moisture content
3
Estimation from Ethiopian rural energy Development and
promotion center (EREDPC)
4
The Jatropha fruit is 40 % pulp, 30 % kernel and 30 oil. About 0.4
tones of pulp will be available from 1 tone of seed processed

168
These new alternatives and attempts are very challenging and time-consuming. They will also
require a combination of new process technologies, innovative products and business model
revolutions. Therefore, these bio-transformation developments should proceed in the long
term.

5. Annex

[Appendix 1] Flow Chart of Polyolefin


Source: www.chiyodacorp.com

Ethylene and its derivatives

169
Propylene and its derivatives

[Appendix 2] Competency hierarchy and its identification of chemistry

Source: Kyeongseok Oh, “Challenge of Korean National Competency standards for chemical engineers,The journal of Com-
petency-based Education, vol 2, (#3), Sept., 2017

170
Group of work function Set of work function Key work function Competency
(competency) ID

01 Chemical analysis 17010101


Chemical Chemical assay
02 17010102
01 material and evaluation
management
Chemical storage
03 17010103
management
Chemicals and
Chemical
01 chemical process 01 17010201
process design
management
Chemical
Operation of
02 process 02 17010202
chemical process
management
Maintenance of
03 17010203
chemical process
03 Chemicals R&D 01 Chemical R&D 17010301
Petroleum, Petroleum
01 natural gas 01 production 17020101
production
Petrochemicals
01 17020201
production
Synthetic resin
02 17020202
production
Synthetic
03 intermediate 17020203
Organic production
Petroleum, 02 chemicals
commodity production Synthetic rubber
02 04 17020204
chemicals production
production Polymer
05 composites 17020205
production
Reactive polymer
06 17020206
production
Inorganic fertilizer
01 17020301
production
Inorganic
03 chemicals Acidic and basic
production 02 chemicals 17020302
production

171
Group of work function Set of work function Key work function Competency
(competency) ID
Medicine
01 17030101
production
Agricultural
Traditional
02 chemicals 17030102
01 fine chemicals
production
production
Cosmetic
03 chemicals 17030103
production
Surfactant
01 17030201
production
Additive
02 17030202
production
Function-added
Dye and coloring
02 chemicals 03 17030203
Fine chemical agent production
03 production
production Painting agent
04 17030204
production
Adhesives
05 17030205
production
Bioprocessed Bioprocessed
03 medicine 01 medicine 17030301
production production
Bulk biochemicals
01 17030401
production
Bioprocessed Bioplastics
02 17030402
04 chemicals production
production
Specialty
03 biochemical 17030403
production
Injection molding
01 17040101
and extrusion
02 Plastic coating 17040102
Plastics Plastics
04 01 Blow molding and
production production 03 17040103
Injection molding
Plastic
04 17040104
compounding

172
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