Master Document - Ethiopia Trip Report - 5-sections

Sino-Ethiopian Special Economic Zones in Ethiopia:

Voices from Different Stakeholders


With approximately 110 million people, Ethiopia is Africa’s second-most populous country, however, it has historically been a least developed country with a per capita GDP among the continent’s lowest. Nevertheless, recent experiences of fast growth and state-led industrialization, including partnerships with Chinese stakeholders and the development of Special Economic Zones, have supported claims that Ethiopia’s fostering of Industrial Parks and adaptation of Chinese practices for export-led growth have transformed the economy. However, the reality is more nuanced. This report discusses Sino-Ethiopian economic relations, the cases of industrial parks, and Ethiopian stakeholder’s views of the country’s development, based on a research trip conducted by five Tsinghua-SAIS students in Ethiopia in January 2020. The report is structured in five sections. First, an introduction reviews the literature and provides an overview on Sino-Ethiopian relations and the Ethiopian economy to contextualize the relevance of our research. Second, we present different perspectives on the situation of Chinese Companies in Ethiopia based on interviews with firm managers in Addis Ababa and two Industrial Parks with Chinese firms. Third, we present the situation of Industrial Parks with views from management and specifically on their economic impacts. Fourth, interviews with Ethiopian government and ministry officials provide a perspective from the government and associated agencies and commissions, with a focus on the policies and challenges that they are currently facing. Finally, we conclude with policy implications from our trip.

Section 1 Introduction

(Introduction, including a brief literature review, a general view about Sino-Ethiopian relation and Ethiopian economy and the importance of our research.)

History of Sino-Ethiopian Relations

China and Ethiopia established trade relations in 1957. In February 1964, Zhou Enlai visited the country, and in November 1970, a joint Sino-Ethiopian communiqué announced the establishment of diplomatic relations on the basis of the five principles of peaceful coexistence. In October 1971, Ethiopia's Emperor Haile Selassie made a one-week visit to China, met Chairman Mao, and signed an economic co-operation agreement whereby China pledged to support Ethiopia’s agricultural development with a 30-year interest-free loan worth US$84 million, China’s second-largest single loan agreement at the time, after the TAZARA project. By 1976, both strengthening diplomatic ties and securing access to natural resources figured in Chinese aid allocation, which began the construction of roads in Ethiopia to assist the movement of cotton exports to China. In 1983, the Chinese Red Cross made donations to Ethiopia to combat drought, hunger and starvation. In 1984, China and Ethiopia signed MOUs for the construction of factories to produce thread, matches, and pencils , though there is no evidence that these were built. China and Ethiopia signed a bilateral investment treaty on May 11th, 1998, which entered into force on May 1st, 2000. Due to a prolonged period of political turbulence and an unfavorable investment environment, few Chinese companies operated in Ethiopia before 2004. Domestically, Ethiopia’s government has taken a ‘developmental state’ stance, since the installment of the EPRDF government in

1991, drawing on Chinese thinking about the role of the state. This originated in the influence of early Maoist teaching in the Tigrayan People’s Liberation Front and was reinforced over time by intensive training and study tour engagements with China at all levels of the bureaucracy and party. Consequently, the Ethiopian state developed a strategic focus on infrastructure and development, and China is involved in its construction of roads, dams, and other infrastructure. The next section introduces the role of Industrial Parks to promote the industrialization of the Ethiopian economy.

Industrial Parks and the Ethiopian Economy

Ethiopia has been registering robust economic growth since the turn of the 21st century. According to the IMF country report (2018), the service sector encompassing trade, tourism, transportation and telecommunication sectors has been driving this growth. However, over 80% of the country’s workforce is employed in the agricultural sector. Experiences from developed economies are highly indicative that industrialization is the optimal approach to attain sustainable economic development. To this end, Ethiopia has been establishing several Industrial Parks (IPs) to promote industrialization of the economy in recent years. These IPs are geared towards light manufacturing in the textiles and garment, leather products, pharmaceutical and agro-industries. Success and sustainability of these IPs is one of the government’s major priorities. The government and other stakeholders would therefore benefit from developing and managing IPs using sustainable strategies. Such strategies should have optimal economic, environmental and societal considerations to achieve successful outcomes.

In this regard, what are the actualities of stakeholder strategies of IP development and management in Ethiopia? To examine this question, in January 2020, a group of five students from the Department of International Affairs of Tsinghua University conducted research in Ethiopian. The research aims to highlight the recent economic progress and the growing activities of Chinese firms on IP development in Ethiopia. The study looks at stakeholder (i.e., government, firms and workers) strategies pertaining to the Eastern Industrial Zone (EIZ) in Dukem and the Adama Industrial Park (AIP) in Adama, Ethiopia. It empirically assesses stakeholder strategies and draws policy implications on sustainable frameworks from expert recommendations.

The methodology for our research consists of examining secondary and primary sources to ascertain the actualities of Sino-Ethiopian IP in Ethiopia. First, we examined secondary sources of relevant literature pertaining to theoretical and practical aspects of Sino-Ethiopian IPs in Ethiopia. On the practical side, we drew policy implications from a recent study conducted by UNDP China (2019) and formulates practical frameworks to promote “Sustainable Special Economic Zones” (SSEZs). Second, based on these theoretical and practical frameworks, we scrutinized our primary source findings from the comparative study we conducted. We made site visits to the EIZ and AIP and observed the operations of firms in the parks. Furthermore, we interviewed park and company managers as well as government officials from the Ministry of Trade and Industry of Ethiopia tasked with formulating legislation to administer these parks. Finally, based on our findings and using a section of the UNDP China practical framework for SSEZs we draw policy implications and recommendations for the Ethiopian government.

Our findings indicate that the establishment of these parks has provided gainful employment for the local work force and increased the country's export revenues. However, we have also learned that there are several problems in stakeholder strategies, causing inefficiencies. Challenges including administrative capacity and regulatory frameworks, coordination of stakeholders, provision of infrastructure and utility, finance and taxation issues, challenges with spillover effects, and inadequate forward and backward linkages with the local economy were observed. Guided by the UNDP China practical framework on economic sustainability, we make the following recommendations to the Ethiopia government. First, improve regulatory efficiency; Second, provide ample financing on foreign exchange, infrastructure and utility provision needs; Third, implement innovative strategies to promote absorption of spillover effects and backward and forward linkages with the local economy.

Section 2 The Situation of Chinese Companies in Ethiopia: Challenges, Opportunities,


With the rapid development of Sino-Ethiopia economic cooperation, more and more Chinese investors rush into Ethiopia. Chinese companies in Ethiopia can be generally divided into two types: the first are those provide products for local markets, the second are those export-oriented enterprises. Observation from our one-week’s field trip has shown that, a large part of these Chinese companies have behaved significantly well in their performance, some even have an overflow effect on the local communities. The problems are, however, equally significant, mainly reflected in the shortage of foreign exchange, the weak raw material market and the companies’ relations with their labors and local officers.

We generally interviewed the managers from several comparatively successful Chinese companies in Eastern Industrial Zone (EIZ) and Adama Industrial Zone. With the category we mentioned above, they can be divided as follows: Domestic-Oriented enterprises: the Lifan Motor Co. Ltd. & the Sunshine (Ethio) Pharmaceutical Plc.; Export-Oriented enterprises: the Linde Clothing Ltd., the Huajian Group and the ANTEX Group. All these companies have made achievements either during their long period practice in the Ethiopia market or during their entering process into the Industrial Park.

The main achievement for domestic sales enterprises is that they successfully utilize the great demand of local market and the relatively low cost of labor, mainly in the manufacture, pharmaceutical and textile industries, thus gaining large benefits and further expanding their production scale. A typical case is the Lifan Ltd. Focusing on motor manufacturing. Beginning their business early in 2009, Lifan has already built a huge factory with the production capacity of 10,000 motorcycles and 3,000 cars every year. Well leading 52 local labors, the factory manager deem their future development promising. Another case is the Sunshine Pharmaceutical plc. Being one of the largest companies in the EIZ, Sunshine has finished their phase III construction of factory. Facing their fourth year in EIZ, Sunshine has already gone fully into operation. The manager thought Ethiopia’s pharmaceutical market with great potential of developing. Since 80% of the medicine depend on importing.

However, even though the local demand is high and the sales is successful, the full load production may not be guaranteed for most of the domestic-sale companies, some manufacturing companies such as Lifan even face a long rest period for half a year. The main cause of the difficulties is the local shortage of exchange, especially US dollars. Generally speaking, that shortage is a result of Ethiopia’s long-term structural asymmetry between its

import and export. Since Ethiopia’s domestic industry is still quite weak, failing to provide enough products to export, while importing a lot during its modernization process, there is a huge trade deficit. With this unhealthy economic structure, it is normal that the government can take no measures to solve the exchange of shortage except for seeking liquidity loans. The problem is that, such shortage is getting worse these years. Before 2016, such shortage trouble can be solved by applying to the bank for the required amount three months in advance. But now the time scale has been increased to more than six months, causing great tensions for the capital chain. The effect of such shortage is mainly in two ways: On one hand, due to the poor local parts market, Chinese manufacture companies in Ethiopia cannot import their spare parts without US dollars; on the other hand, even though made a lot of money through domestic market, these companies cannot bring the benefits back to China. Facing worsening exchange shortage, Lifan can only produce 500 motorcycles a year, given its production capacity is 10,000. Also, it can only spend the money earned in investing and building new factories, although the firms is now suffering from overcapacity.

For the export-oriented companies, however, such exchange shortage is not a trouble. The business with Europe and North American market can bring plenty of US dollars. Also, since most of these companies are focusing on clothing industry, where the raw materials can be gained locally, they needn’t use much exchange to export the required materials. These export-oriented companies’ trying to start their business in Ethiopia is mainly in purpose of industrial transfer. Since trading in Ethiopia can enjoy the tariff free preference provided by Europe countries as well as the cheaper cost of labor comparing with that in China and other Southeast Asia countries. Huajian Group is one of those brilliantly behaving companies in EIZ, and maybe the most successful “going out” story of Chinese company in Ethiopia. Being the earliest company settling down in EIZ, Huajian has an eight-year struggle in doing

business in Ethiopia. It has already recruited 2000 local employees and established a comprehensive training system for new-comers, even having its own Ethiopian Canteen which can make authentic local food (Injera). With its successful experience in EIZ, Huajian is now thinking about building its own Industrial park in Addis, with full set of facilities including a light industry school used to train local workers.

The problem for these export-orienting companies is generally reflected in the labor-firm relations. Being regularly checked by European labor right protection organizations, most of these export-orienting companies have established better labor environment than the domestic-sale companies. They provided higher salaries, more reasonable work and rest time and set lunch break. The problem is that there is a difference in Ethiopia and Chinese labor culture. Those so-called “precious” characters (worked also as a requirement) for Chinese labors such as diligent and collectivism may not be so attractive to Ethiopia labors. Also, local labors are always devoted to protect their own rights, such as asking for milk in their lunch when seeing Chinese staffs drinking it, go striking when the taste of Injera in canteen is not delicious, and so on. Sometimes these labors political expressions during the election may also lead to a strike. That is what Chinese companies should learn to deal with. Some companies successfully adapt their managing mode to the local culture. ANTEX Group in Adama has developed a “Visiting” institution, asking the Chinese employees to go and visit the local community, trying to understand the need and thinking of their local colleagues. Huajian has also provide a performance award to trigger the competition between each working groups, enabling local labors to learn to fit with the new working culture step by step.

Other troubles for the Chinese companies are the frequent robbery and the vague tax policy. When holding large local cashes in exchange of US dollars for importing materials, some small Chinese Companies may easily be robbed by gangs in nearby communities on their way to Band. Because of the poor behavior of local police, such money can hardly be traced back. Also, the tax policy is frequent changed in Ethiopia, those who cannot keep up with the changes may face inconceivable fines, some even went bankrupt because of that. The solution to these two troubles is to hire reliable safeguard and tax team. The small companies also cooperate with each other in collectively hiring such teams. Logistic is not a significant problem for Chinese companies, some of them has their own fleet to transfer the exported goods from Djibouti.

Besides the Companies performance, Chinese companies also have some spillover effect on the local communities. Firstly, most these companies hire employees from the nearby neighborhoods, partially solve the employment problem there. Also, some companies are keen to help build schools and hospitals in the local communities, help release the pressure of the government. Moreover, the tax revenue of these Chinese companies can already benefit the local government a lot. The government’s hope of these companies that they may have some other spillover effect on driving local companies’ development in technology, however, may not be fulfilled in a short term. That is because the Sino Ethiopian joint ventures which are recommended by Ethiopia government may not be easy to establish. Since some local partners can utilize their familiarity of the situation to take advantage of Chinese Investors, making Chinese companies cautious in such kind of cooperation. But there are actually some other ways to promote local industrial development. Huajian’s choice to build light industrial school is a promising approach. For it not only trains the potential

employees for Huajian Company, but also provides a chance for local workers to improve their ability.

Although there are still some problems facing Chinese enterprises in Ethiopia, Chinese enterprises have already made considerable achievements since the establishment of Oriental Industrial Park in 2009, and the future is expected. Chinese companies are trying to balance their own production with local development. Whether these “going out” Chinese enterprises have formed a typical "China developing model" in Ethiopia is what we can wait and see.

Section 3 - The situation of the Industrial Parks: Management, the economic impacts,


Despite the significant progress of Ethiopia’s economy, industrial manufacturing constitutes a small portion. In line with the government's economic strategy IPs could play a key role in spurring industrialization. Adequate government strategies to administer IPs are likely to increase FDI, local employment along with all the spillover effects and skill transfer, and export revenues. The development of IPs in a fairly new phenomenon in Ethiopia. As such, the economic strategies and policy frameworks needed to adjust to the challenges which may arise are not well developed. Lack of comprehensive regulatory framework is likely to hamper the development of successful IP. Furthermore, as this is novel undertaking there are some gaps in the process of development, management and governance of theses parks. The gaps surface in policy preferences, administration of the parks, and in prioritizing and incentivizing sectors and their subsequent linkages with the wider economy.

Ethiopia is the second most populous country in Africa. It has one of the fastest growing economies in the region but remains one of the poorest countries in the world. The GTP, now on its second phase, is an integral part of the country's economic strategy to promote the development of the IPs. In recent years the manufacturing sector share of the economy has been increasing. However, the lion share of growth is coming from the service sector. Mainly commerce, hospitality, transport and telecommunications.

Efforts to industrialize the Ethiopian economy date back to the 1960's. There were some limited successes, however, with the rise to power of the military junta, the Derge, and the subsequent nationalization of businesses stalled these efforts. In the early 90’s, Ethiopia began to actively promote industrialization yet again. This began with the Agricultural Development Led Industrialization (ADLI). The ADLI outlined a set of development strategies that promoted agro-industry, prioritized export sectors, encouraged labor intensive industries and promoted public private partnerships. Subsequently, the gov continued to promote industrialization through a series developmental oriented strategy. The current phase being the GTP I and II (GTP I 2010-2015, AND GTP II 2015-2020).

Ethiopia primarily exports agricultural products. The top three being Coffee, dried legumes and raw or semi processed hides. On the contrary, Ethiopia imports most of its manufactured good like automobiles, construction equipment, medical and chemical supplies. Notwithstanding, the country has been suffering from persistent shortage of foreign exchange reserve for several years. This remains one of the major problems facing businesses in the country. The shortage has wide reaching implications. Companies are allotted foreign exchange quotas by the central bank and often have to wait a couple of months to get it. Those firms who require inputs for production from abroad and then sell to the local market

face the brunt of the difficulties. Relatively speaking, those that primarily export to the international market are better off.

One of the advantages of IP is that they can increase the flow and stock of foreign exchange reserves for the government. However, as we saw from the previous section, firms in the EIZ that primarily sell to the local markets had to cease production for lack of foreign exchange. Ethiopia's economic policy for the past couple of decades can be characterized as one which aims to attract foreign investors. It aims to take advantage of the country’s comparative advantage in cheap and plentiful labor force and strong agricultural base. In doing so, it has prioritized light manufacturing sectors from textile and garments, leather products to pharmaceuticals

In 2014, the Ethiopian government passed legislation to streamline its strategies to develop and manage IPs with the creation of the Ethiopian Industrial Parks Development Corporation (IPDC). The IPDC has the mandate to develop and manage IPs. One of its main duties is to provide adequate public infrastructure like roads power and health care services within the park. It is also responsible for allotting land to foreign investors who want to develop their own IPs or build factories within established parks which IPDC manages. Moreover, it coordinates the provision of one-stop shop administrative services to investors operating in the parks. These services include banking, customs, visa and licensing services. In accordance with Industrial Parks proclamation 886/2015, parks can be developed by a public entity, a private or a public-private partnership. For instance, federal or regional governments, private firms both local and foreign, or private firms in partnership with IPDC could develop a park.

Apart from the IPs which can be developed in within the IPDC framework private there are other industrial parks which have been developed and are managed by foreign

companies. The Eastern Industrial Zone (EIZ) being the prominent example. The EIZ is a notable example of Chinese manufacturing FDI in Africa. It is entirely developed and managed by Jiangsu Qiyuan Group, a private investor from China. It is the first industrial park in Ethiopia and hosts an array of manufacturing plants from different sectors. Despite not being a stakeholder in EIZ, the Ethiopian government has provided ample political support for the zone. This can be observed from several of the ministerial level visits to the zone.

According to the MoU signed between the Ethiopian government and Qiyuan Group, the government is obliged to provide the group with 30% of the construction cost, providing the land lease on concessional terms and one-stop shop services. world bank 2011 normally all offsite infrastructure is built by the government (6). There are some initial and persistent challenges faced by the developer. It was difficult to acquire initial funds for construction. Although the Ethiopian government agreed to reimburse the developer for 30% of the infrastructure cost after development and the Chinese government agreed to provide some subsidies, the developer found it difficult to secure the upfront cost requirements the governments set. The zone also faces persistent challenges with securing local suppliers for production input, although some have managed to solve the problems like the shoe manufacturer Huajian.

There is also the issue of labor. Despite the claims that many of the foreign firms in the parks bring employees from abroad, the reality is that over 80% of their workers are local. The government oversees this through the visa requests made by the companies to bring some employees from abroad. Then there is the issue of the forward and backward linkages. The theory is that having IPs will enhance business links between local firms and those foreign firms who have invested in the parks. In addition to integrating local firms into the global

supply chain thereby expanding the local economy, there is also the opportunity for technology transfer and diffusion of skills.

This, however, often happens far in between if ever in the case of the Ethiopian economy. The backward linkage aspects where firms in the parks attempt to sources input from local firms is met with scarcity and they have to source their input from abroad. There is also the issue of local firms having the capacity to internalize, integrate and apply the spillover effects from the firms in the IPs. Moreover, the forward linkage aspect is largely lacking as the country lacks the infrastructure and mature logistical capacity to efficiently

coordinate linkages upstream. However, Ethiopian Airlines, one of the country's flagship state owned enterprise has been mitigating these inefficiencies with its large footprint in Africa and the world. Furthermore, it has recently launched a joint venture with the logistics giant DHL to expand its logistics business.

All in all, due to the actualities of Ethiopia's mostly agricultural economy, its linkages to the global supply chain tend to be more towards the downstream.

In this regard, backward linkage potential for the Chinese companies in the EIZ is quite limited due to relatively advanced manufacturing in the park. These companies are forced to import the majority of their inputs from abroad. There is an opportunity, be it limited for potential local supplier to supply the demand. However, given the limited capacity of local firms the small-scale demand for these inputs, the potential for significant linkage with more sophisticated manufactures in the EIZ is low. It is worth mentioning that those firms engaged in relatively lighter manufacturing like textile and garments as well as leather goods are stimulating backward linkages. Some firms, like Huajian, are even going as far enhancing the capacity of local suppliers of hide.

China’s role in developing Ethiopia’s Special Economic Zones

Since 2006, as part of its ‘going global’ strategy, China has supported its companies relocating production overseas to special economic zones, reflecting China’s own model of attracting foreign investment and helping foreign industries to relocate to four Chinese special economic zones it set up in 1979. In 2006, the Chinese Ministry of Commerce (MOFCOM) announced official support for the establishment of overseas economic zones , with an initial ten, later 19 zones, planned. Ethiopia’s Eastern Industrial Zone in Dukem was one of seven African zones approved for MOFCOM funding . It was to be developed by the Jiangsu-based steelmaker Qiyuan Group. Eximbank provided loans to the developers and Jiangsu province and Suzhou municipality awarded the Zone more than RMB 100 million (US$14.6 million) in additional funds, with the latter becoming a technical advisor. Construction began in 2010 and as of 2016, the Zone hosted 27 companies. Jointly developed by the Chinese and Ethiopian governments, the Eastern Zone has a layered structure with a bilateral coordination committee between the two respective governments, an Ethiopian management and service agency of the industrial park that regulates the zone, and a wholly Chinese-owned Eastern Industrial Park Ltd. Co. that invests in and operates the park. Such zones provide a place to experiment with new approaches without needing to change national-level policies. They also provide a way to move mature industries with excess production capacity overseas. Last, these zones can provide added security and some managers state a preference for co-locating near other Chinese companies. In Ethiopia, export-oriented, multi-sector SEZs may be particularly developmental as a high concentration of exporters in the same location has been associated with a rise in the productivity of all firms in the cluster – including both exporters and non-exporters. Moreover, Ethiopian firms appear to benefit from being located near firms from other sectors, but may not benefit from

proximity to firms of the same sector. Nonetheless, the number of Chinese-owned shoe factories and garment factories aiming to relocate their production base from China to Africa is limited; most relocate due to preferential treaties such as the African Growth Opportunity Act (AGOA) or the EU’s ‘Everything But Arms’ arrangement (EBA), and financial incentives from African countries. For instance, AGOA makes Ethiopian-origin women’s apparel sold in the United States up to 56 percent cheaper than in European markets, giving African exporters a price advantage over equivalent products imported from Asia. Despite this, challenges persist. One World Bank study finds that input costs in light manufacturing sectors such as apparel, agribusiness, leather, and wood and metal products in Ethiopia were at least 25 percent higher than in China, partly due to regulations, poor trade logistics and high electric power costs. The jointly developed SEZs also provide a mutual learning process between Chinese and Ethiopian stakeholders. On the Ethiopian side, the co-development typically involves three stages: first, learning SEZ concepts from Chinese SEZ developers; second, learning how to establish and reform the institutional and legal framework for SEZs; finally, learning to adapt SEZ policies according to the local context. SEZ development has also been a learning process for Chinese developers, which had no experience investing in Ethiopia. The 2008-9 global economic crisis led developers to alter their plans and to account for “such factors as the exchange rate, the need to plan for foreign exchange shortages, and, relatedly, risk diversification.” The zone thus broadened its focus from an initial view on construction materials and steel production, with the addition of nonferrous metal mining to generate foreign exchange and diversify risks. The Chinese developers are also learning from experience that, compared to their domestic environment in which the government supports zone development actively, in certain African countries such as Ethiopia,

“governments allocate land to developers and do little else” and “promises of services like

‘one-stop shops’ fail to materialize.”

Case Study: Advantages and Challenges in the Management of Eastern Industrial Zone

The Eastern Industrial Zone (EIZ) is located at Dukum which is 30 km away from the Ethiopian capital, Addis Ababa. Completely built and being managed by a Chinese investment firm, Jiangsu Yongyuan, EIZ is the only overseas economic & trade cooperative zone at national level in Ethiopia. With more than 80 manufacturing enterprises, mostly Chinese but also Indian and British, settled in, the industrial park created over 10,000 job opportunities for local people and the aggregate output is about 900 million.

Much importance has been attached to EIZ since its foundation by the Chinese and Ethiopian government. In 2014, Prime Ministers of China and Ethiopia, Keqiang Li and Hailemariam Desalegn visited EIZ, which was regarded as a good model of Sino-Ethiopian economic cooperation. Economically speaking, the presence of the industrial park is a boon to the local government and community. Large share of revenue would be transferred to the local government as taxation, which supports the public endeavors financially. Enterprises in the industrial park recruit lots of people from the nearby villages, greatly solving the unemployment problem. The huge demand for food and cloth from the park also promote the local economy, providing the local companies with a new market. Ethiopian capital is not directly involved in the industrial park since there is hardly a joint venture. Nevertheless, the retail or wholesale of the products from firms inside EIZ to Ethiopian consumers is taken by the local dealers according to the law. Therefore, the tension between the foreign capital and its domestic counterpart is mitigated by sharing the benefits.

Preferential treatments make EIZ promising for foreign investors. Enterprises inside can enjoy a tax exemption for 5 to 10 years and are allowed to retain 30% foreign currency as reserve. Given the strict regulation on capital flow in this country, the 30% quota is a generous concession. The EIZ per se also tries its best to offer the enterprises a convenient environment. Taxation and tariff are always troublesome for international enterprises given the complicated, regional-specific and sometimes everchanging codes. To minimize the transactional costs, a branch of the Ethiopian Custom entered EIZ. The office can deal with the daily procedures concerning tariff and exports so that businessmen in EIZ no longer need to go to Addis Ababa or the ports to get the legal permission. The security condition around EIZ has been also worried by Chinese firms since there have been people with currency rubbed on their way to Addis Ababa. Therefore, two local banks were opened inside the industrial park, which means Chinese staffs do not need to carry loads of currency to the nearby cities, exposed to the potential danger, any more. A professional training institute available for all firms in EIZ is under construction, which will improve the average labor quality. As an inland city, Addis Ababa and its nearby regions may not be an ideal place for exporters. Better infrastructure is the premise of a thriving industry. EIZ reached some agreement with the shipping companies in Ethiopia. The oversea commodities can be directly delivered between EIZ and the ports. Land transportation mainly relies on roads. Although the Addis Ababa-Djibouti Railway is completed, the way from EIZ to the railway is still difficult. Furthermore, the local government prefer road transportation to railway since the revenue of the former only belongs to Ethiopian government but revenue from the latter must be shared with China since China built the railway.

EIZ, unlike other industrial parks in Ethiopia, is not affiliated to the Industrial Park Development Cooperation (IPDC) in Ethiopia. Instead, the internal management is totally

undertaken by Chinese staffs. This granted the industrial park more autonomy and independence from the local government, making the management easier and smoother. However, immersed in the local society and culture, the Chinese management group must face the inevitable inconvenience caused by some inherent different. Firstly, communication. The language barrier and differentiated values often cause misunderstanding. Theft is another threat. Some employees in EIZ may collude with outsiders to steal from the factories.

Apart from communication and theft, striking is also a trouble. Wage may be an important issue. For example, some workers cannot understand why their salary varies in different months, which is actually because the salary is calculated daily. The differentiated treatment for Chinese and Ethiopian staff can also ignite anger. Some employees strike because Chinese people can enjoy cleaner water while they cannot. Some details, like the components of the lunch, also generated strikes. Lastly, compared with the Chinese labors that Chinese companies are used to deal with, locals are more aware of their labor rights. Violation against the labor laws will also be protested through strikes. To sum up, the Chinese management group must face labors who have different views about nearly everything with Chinese people.

Recently, the land recruitment issue has been a major trouble for EIZ. When the industrial park reached agreement with the local government, the government did not grant all the land promised in the original plan (about 5 at once. 2.33 of land were given firstly for the first phase of the construction of the industrial park. Now, land for the first phase is running out and EIZ tried to start the second phase. After paying the rent to the government, the local communities demand for more compensation for land recruitment. The tiring

negotiation with local communities is still unfinished, which means the expected second phase is delayed.

Section 4 - The voice from Ethiopian government: Policies, Challenges

Efforts to attract Chinese Firms and Investors

A key component of the Ethiopian Government’s Industrialization strategy has been to attract investments in its labor-intensive industries and its export-oriented manufacturing, such as shoe factories, in particular. To this end, Ethiopia harnessed its inexpensive yet relatively skilled labor force through proactive government efforts to court Chinese investors. For instance, Ethiopia built a bureaucracy capable of effectively engaging China, created special desks to manage cross-government initiatives related to China, and recruited Chinese-speaking liaison officers to facilitate investments from China. Ethiopia also waived customs duties for capital goods imports and set up a centralized structure to handle commercial registration and business licenses. Furthermore, Ethiopia posted strong diplomatic personnel to China and its official Ethiopian Investment Commission has regularly arranged investment promotion trips to China, from Beijing and Shanghai to provinces such as Guangdong and Shandong. At high-level, the Ethiopian Prime Minister Hailemariam Desalegn visited seven Chinese provinces during a May 2017 trip to promote investments. Lastly, the Ethiopian government has also made efforts to attract technology-heavy firms such as pharmaceutical manufacturers for its national pharmaceutical manufacturing hub. In addition, Chinese firms operating in Ethiopia bear four distinct characteristics from their counterparts in other African countries, according to McKinsey. First, a significantly low proportion – 2 percent – of estimated 689 Chinese firms in Ethiopia

as of 2016-2017 were traders. Second, a significantly high proportion – 62 percent – were manufacturers, double the proportion of manufacturing firms across seven other large sub-Saharan economies (Nigeria, Kenya, Tanzania, Zambia, South Africa, Angola and Côte d’Ivoire). Third, Chinese firms have made particularly long-term commitments in Ethiopia through a high number of capital-intensive investments in industries such as manufacturing, considerably more than in the seven other sub-Saharan economies. Fourth, around 90 percent of the estimated 689 Chinese firms in Ethiopia were privately owned, rather than state owned enterprises. The first two partly relate to the Ethiopian government’s prohibition on foreign firms setting up trading businesses, as well as most service businesses. Nevertheless, together, these characteristics suggest that the Ethiopian government’s strategy of attracting Chinese firms, directing Chinese investments, and enforcing trading regulations to develop the country’s manufacturing sector were broadly successful. By 2018, Chinese factories in Ethiopia were involved in diverse areas ranging from assembling automobiles to producing building materials such as cement, plate glass, gypsum board, and recycled steel; leather, shoes and garments; plastics and plastics recycling; air filters; wigs; and other consumer products. However, not all of these were export-oriented; some Chinese factories produced goods that substitute for imports. For instance, four Chinese companies concluded joint-venture agreements for factories producing building materials, and in plastic products, Chinese firms appeared to be taking advantage of Ethiopia’s 35% import duty and 15% VAT plus 10% surtax for importation of plastic bags and plastic footwear.

In our interviews, Ethiopian government officials reaffirmed the industrial development strategy launched in 2002 as the basis of the government’s strategy for prioritizing eight labor-intensive economic sectors with global market opportunity to match Ethiopia’s populous factor endowments with the sectors exhibiting the most suitable

employment and growth potential, such as textiles and garments, leather, food and beverages, chemicals, electronics and agribusiness. These match land and labor over capital-intensive industries. Clustering industries with one-stop shows helps to attract global investors and corporations. The locations of industrial parks to foster these were based on locations, access to infrastructure, roads, railway, electricity, telecom and access to labor. Ethiopia’s Industrial Park Development Proclamation brings together three parties for the development and provision of Industrial Parks. First, developers who build and manage the required infrastructure of parks, primarily the Industrial Park Development Commission (IPDC), which begin at the feasibility study to ensuring that everything committed to the industrial park is provided to the final step of completing the infrastructure. Next, the second aspect is the Ethiopian Investment Commission (EIC), which attracts foreign direct investment using tailored criteria to convince investors and secure distribution of services, permits and customs, as well as any other requirements that investors need before making an investment. Third, the Ministry of Trade and Industry, which is responsible for providing the training for employees and ongoing support for existing investors, including facilitation to solve the problems and help from a policy side, such as import and export or labor issues, as well as increasing productivity and technology transfer.

The Ministry, EIC and IPDC have projects to source labor, resourcing, training and provision of skill upgrades. This is conducted with common training projects, a center for excellence and continued cooperation with management and supervisors to help with and in providing labor. Next, regular, common inter-stakeholder platforms bring together government, investors’ associations and relevant agencies to address foreign exchange, infrastructure or other issues with government agencies. A separate common platform exists with foreign buyers and companies to address issues from the international buyer’s

perspective. Chinese, European, American and other investor associations collect questions and organize dialogue platforms to streamline meetings, for instance on technology delivery or labor strikes. One trilateral platform is being developed on sustainability issues with the Chinese and German governments, to provide environmental standards for the parks, to be launched in February 2020. Germany provides experts for standards assessment of companies and China brings knowhow from China, including from the university UIBE in Beijing.

Nevertheless, they remarked that challenges remain in fostering sustained mutual understanding and cooperation of Ethiopian government stakeholders and both foreign and domestic private ones. First, policy issues, communication and transparency. Second, under current reforms to improve the Ethiopian investment climate, investors want faster responses and more information from the government. Third, language barriers can complicate smooth communication and “most of the time, there are misunderstandings.” Fourth, some foreign investors expect the same equipment, know-how, infrastructure, services and working culture at the same speed, cost and quality as at home. However, in many cases, Ethiopian and Chinese people exhibit some differences. For instance, some developing countries may have a more disciplined working culture and expect to find the same immediately in Ethiopia. This overlooks that some agricultural workers coming to the city have never seen a computer before, but investors expect them to immediately operate with the equipment that is new to them. Regular dialogue and common meeting platforms are a central pillar to share and address these and other issues.

Section 5 - Conclusion and Policy Implication

Today, Ethiopia is a large African economy pursuing an internationally-advised industrialization strategy and exhibiting a strong and strategically defined relationship with China. These engender benefits on both government-to-government and private-sector levels. In particular, Ethiopia has demonstrated a clear strategic stance toward the complete provision of on-site services to address foreign investors and firms’ needs, and maintains a high level of economic engagement with foreign investment, trade, loans, and aid. This allows the Ethiopian government to be more robust, reliably engaged and a strategic partner for foreign economic and political actors entering the region, which enables opportunities that result in large, mutual and impactful benefits across various kinds of stakeholders and that contributes to Ethiopia’s industrialization and development. Nevertheless, our field research has shown that Chinese companies operating in Ethiopia, managers of Industrial Parks, the Ethiopian government and associated commissions continue to face challenges. For instance, the lack of access to foreign exchange continues to impede firms’ ability to source foreign inputs for production, particularly if they produce for the domestic market, rather than for export. In addition, sustained and clear communication channels between Ethiopian government policymakers and Chinese and other foreign firms, relating to, for instance, changes in taxation rates, must be better communicated in advance. Further, although the physical and soft infrastructure for foreign investment and operations in Ethiopia seems to have improved considerably, persistent issues in power supply shortages, intercultural misunderstandings, labor difficulties and differing expectations regarding decision-making processes and culture pose a challenge for both Ethiopian and foreign counterparts. Notwithstanding, Chinese-Ethiopian relations, private sector engagement in Ethiopia and the development and industrialization of Ethiopia’s economy can continue through an active approach to two-way dialogue, setting up task forces to understand and address one another’s

needs, and continuing to develop and provide key economic inputs ranging from physical infrastructure to worker training, one-stop shops for all services, SEZ joint development and reliable power and telecommunication networks.