̽��ֱ�� of Cambridge - Jostein Hauge

Value of manufacturing to UK economy significantly underestimated, report claims

sc604 — Tue, 11 Jun 2019 23:00:06 +0000

In the context of Brexit, the authors say it is vital that UK negotiators seeking new trade agreements are equipped with a solid understanding of manufacturing’s importance to the economy.

̽��ֱ��report, ‘Inside the Black Box of Manufacturing’ by Dr Jostein Hauge and Dr Eoin O’Sullivan from Cambridge’s Institute for Manufacturing, was carried out for the Department for Business, Energy and Industrial Strategy (BEIS). ̽��ֱ��authors say that the current value placed on manufacturing activity is based on outdated and inaccurate methods of counting and that the economic value of manufactured goods increasingly depends on activities that are officially categorised as belonging to other sectors of the economy.

“It is essential that policymakers have accurate information on the size of manufacturing sectors in order to develop internationally competitive industrial strategy,” said O’Sullivan. “In particular, policymakers need to be able to measure manufacturing in a way that better reflects how firms actually organise themselves into value networks.”

“An implication of our study is that if the way manufacturing-related activities are counted does not change, the UK could be missing significant opportunities to build world-leading industries,” said Hauge. “It is also critical that post-Brexit international trade negotiators are equipped with a more accurate understanding of the value of these industries and in particular the potential economic impact of companies moving manufacturing operations away from the UK.”

̽��ֱ��report discusses how manufacturing is defined, and what activities are currently included or excluded from how it is counted in the economy, highlighting why its value is being underestimated.

̽��ֱ��manufacturing sector plays a significant role in the UK economy. As measured in the national accounts, it provides over 2.7 million jobs, makes up 49% of UK exports, and contributes 66% of all UK R&D business expenditure. However, manufacturing’s contribution to the UK economy – about 9% of GDP – may seem dwarfed by services, which make up 70% of UK GDP.

But according to the report, this is misleading. Manufacturing may in fact be significantly higher in economic contribution and underestimating it could have serious implications for national decision-making.

“It is essential that we properly understand the size and nature of the UK manufacturing sector as well as the value of industries to the UK in order to develop an internationally competitive industrial strategy,” said Clare Porter, Head of Manufacturing the Department for Business, Energy and Industrial Strategy. “Official statistics do not provide the full picture of the role of UK manufacturing in supporting national economic competitiveness and growth. In particular, the official manufacturing statistics do not include the additional value added or jobs generated by services across manufacturing value chains. Many of these services would not thrive, or even exist, without UK-based manufacturing. In fact, many of these services, in particular, technical and professional ones, require deep knowledge and sophisticated capabilities related to the manufacturing activities they support.”

̽��ֱ��report explains that the current system of industry classification is out of date, and a range of manufacturing-related services are excluded from the manufacturing category. These are mostly technical services that require sector-specific technical knowhow, like R&D, industrial design, analysis, and testing. Additionally, there are professional service providers in areas such as intellectual property and consultancy that are increasingly tailoring their needs to specific manufacturing industries.

“This report is a clarion call for politicians of all parties to update their understanding and recognise the central importance of manufacturing not only to local regions but to the wider UK economy as well,” said Seamus Nevin, Chief Economist at Make UK. “An increasingly outdated understanding of what modern manufacturing actually is means policymakers have neglected the sector in the misguided belief that services, not manufacturing, is where the future potential for innovation and productivity growth lies. ̽��ֱ��Government has set out a modern industrial strategy which will be at the centre of the UK economy post-Brexit.

“It is now essential that there is cross-party support to deliver on this to ensure we meet the new technological challenges of digitisation, as well as the societal challenges to which manufacturing, science and engineering will be at the heart of solving.”

̽��ֱ��economic value of manufacturing to the UK is being underestimated in official statistics, potentially by as much as half, presenting significant issues for policymakers, according to a new report from the ̽��ֱ�� of Cambridge.

If the way manufacturing-related activities are counted does not change, the UK could be missing significant opportunities to build world-leading industries

Jostein Hauge

Photo by Louis Reed on Unsplash

Close up of production facility

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Opinion: Why Ethiopia is on track to become Africa’s industrial powerhouse

Anonymous — Thu, 23 Jun 2016 09:01:23 +0000

Ethiopia seems to be attracting the attention of economists interested in Africa, and for good reason. Except for Rwanda, Ethiopia is the only African country whose economic growth has been consistently high for more than a decade without relying on a natural resource boom.

Between 2004 and 2014, per capita growth in Ethiopia was 8% per year. This was the highest on the continent during this period, and is impressive by any standard.

̽��ֱ��growth has been attributed mainly to a construction boom and increased agricultural productivity. But manufacturing has also been vital. It has grown at 11% per year and manufacturing exports increased more than elevenfold. This was largely thanks to the increasing export earnings of the footwear and apparel industries. ̽��ֱ��growth represents more than a doubling of manufactured exports’ share in total merchandise exports, which itself more than quintupled during the period.

Nevertheless, manufacturing as a share of gross domestic product in Ethiopia remains 5%, well below the African average of 10%. ̽��ֱ��country also scores below the African average on diversification, export competitiveness, productivity and technological upgrading.

Despite this, it’s not a long-shot to predict that Ethiopia will catch up with countries like China and Vietnam in some low-tech manufacturing industries in the near future. These are industries for which labour costs are very important. And right now you’d be hard pressed to find a country in the world that has cheaper labour than Ethiopia. Even beyond these obvious industries, there are reasons to believe that Ethiopia might be on the right track to catch up with more advanced economies.

̽��ֱ��developmental state

First is the country’s developmental orientation. In many ways it resembles that of successful catch-up experiences in East Asia, such as Korea and Taiwan, with a relatively “authoritarian corporatist” structure and centralised economic planning.

Meles Zenawi, Ethiopia’s recently deceased prime minister who ruled from 1995 to 2012 and whose legacy remains strong in today’s ruling political coalition, repeatedly expressed admiration for the East Asian experience. He stressed that its success was based on a prudent combination of market forces and state intervention. ̽��ֱ��state not only provided basic infrastructure and services but also a conducive environment for the private sector.

̽��ֱ��second reason to be optimistic about Ethiopia’s prospects is the impressive industrial policymaking capability it has accumulated since the Ethiopian People’s Revolutionary Democratic Front government came to power in 1991.

̽��ֱ��quality of this capability becomes clear if you read the Growth and Transformation Plan covering 2010-2015. According to economist Kenichi Ohno the plan is unusual in its brevity, coherence and strategic direction. Priority manufacturing industries were designated based on resource availability, labour intensity, linkages to agriculture, export potential and relatively low technological entry barriers. They include apparel and textiles, agro-processing, meat processing, leather and leather products, and construction.

Supporting institutes have been set up for each industry to coordinate the value chains effectively, for example by ensuring efficient supply of inputs to manufacturers and to assist firms with technological upgrading.

Two state-owned banks, the Commercial Bank of Ethiopia and the Development Bank of Ethiopia, provide most credit to firms in these industries. Foreign banks are simply not allowed to operate in Ethiopia. ̽��ֱ��understanding is that they will be allowed in only when domestic banks have developed the capacity to compete.

Education and infrastructure

While the Ethiopian government is formulating policies to support specific industrial sectors, for most of the past 20 years the federal budget has been devoted to policies that are more “horizontal” in nature, like education and infrastructure. Results so far are impressive.

Enrolment in primary schools has increased from below 20% in the early 1990s to about 94% in 2012. ̽��ֱ��number of universities has increased from one in 1990 to more than 30.

And the government has invested massively in infrastructure development, focusing on transport and power generation. ̽��ֱ��road network expanded from 26,550km to 53,997km between 1997 and 2011. ̽��ֱ��country is set to quadruple its power generation capacity when the Grand Ethiopian Renaissance Dam on the Nile is finished in 2017/18. One of the largest hydroelectric power stations in the world, the dam will generate 6,000MW.

Cement and floriculture

Feeding on the boom in construction, cement production has grown dramatically since 1999. ̽��ֱ��average annual growth of cement production has been more than twice the world average. As a result, Ethiopia is now the third largest cement producer in Africa.

State support has been both direct and indirect. Direct measures include entry incentives for domestic firms, like long-term loans for capital investments, easy access to mining resources and the allocation of foreign currency on a preferential basis.

Additionally, government provision of transport and energy has been crucial.

Like the cement industry, the Ethiopian floriculture sector has made important contributions to overall economic development.

Cut flower exports increased from three tons in 2003/04 to more than 50,000 tons in 2011/12, substantially raising export earnings. From 2007 to 2012, the sector’s employment doubled from 25,000 to 50,484. ̽��ֱ��industry grew from a single firm in 2000 to about 100 in 2014.

̽��ֱ��industry has also created indirect jobs through the expansion of horticulture. Related activities, such as packaging production, cold chain logistics and air transport have all benefited.

While Ethiopian firms initially kicked off the floriculture industry, foreign firms have increased their investment. In 2012 they accounted for 63% of all firms operating in the sector.

This foreign investment has contributed to technological development and improved market access.

Foreign investors say Ethiopia has become an attractive investment location because of natural endowments such as land and altitude, cheap labour and government incentives. These incentives include tax holidays on profits for up to five years, duty free privileges on all capital goods and the provision of construction material.

Subsidised loans have been the prime source of long-term investment financing for firms in the floriculture industry. Almost two-thirds of firms in the industry have relied on loans from the Development Bank of Ethiopia. And private banks, seeing the success of these loans, have also started lending to the industry.

Sectors destined for future success

Both the leather products and the textile and apparel sectors have been designated as top priority manufacturing industries in the recently released five-year development plan (2015 to 2020). One reason for this is because they have strong linkages with the agricultural sector as they use inputs from the livestock and cotton sectors. They are also both labour intensive, thus absorbing labour from the agricultural sector, and have major export potential and low entry barriers.

To become internationally competitive, the Ethiopian government has invited foreign investors to provide much-needed investment capital and technological capabilities. A slew of incentives has been created to induce these firms – as well as domestic ones that can meet international standards – to export. These include:

subsidised land rent in industrial zones;
generous credit schemes;
100% exemption from the payment of duties on imported capital goods and raw materials for the production of exports; and
five-year tax holidays on profits.

Export figures from the past two years indicate positive trends for both industries. But the results are not yet near where they need to be to make a significant contribution to structural change.

However, considering all the positive signs, Ethiopia might very well be on its way to become Africa’s industrial powerhouse.

This article is an edited extract from Transformative Industrial Policy for Africa, a report produced by Ha-Joon Chang, Jostein Løhr Hauge and Muhammad Irfan on behalf of the United Nations Economic Commission for Africa.

Jostein Hauge, PhD candidate, ̽��ֱ�� of Cambridge and Muhammad Irfan, PhD student, A Political Economy of Subsidies and Countervailing Measure in International Trade and Development - Issues of Policy Space and the WTO's SCM Agreement, ̽��ֱ�� of Cambridge

This article was originally published on ̽��ֱ��Conversation. Read the original article.

̽��ֱ��opinions expressed in this article are those of the individual author(s) and do not represent the views of the ̽��ֱ�� of Cambridge.

Jostein Hauge and Muhammad Irfan (Centre of Development Studies) discuss Ethiopia's economics growth over the last decade.

DFID - UK Department for International Development

Cementing Ethiopia's progress

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