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Justin Yifu Lin:On the verge of the third miracle


Hungry for economic growth, the best way many African nations found to do it was to seek the company of China. Ethiopia is one to be mentioned as best example for such a trending esprit de corps.

Hence, China is investing and extending funds for nations which in turn have visions to become industrialized. During the turn of the week, a conference, dubbed “Africa-China Poverty Reduction and Development: Industrial Development: cross-perspectives from Africa and China” was held at the African Union Commission (AUC) headquarters. Professor Justin Yifu Lin, the former chief economist and vice president of the World Bank was one of the big faces attending the conference. Professor Lin is currently honorary dean of the national school of development at Peking University. He said that he wishes to see in his lifetime that Ethiopia would become the third miraculous nation next to Taiwan and China. Birhanu Fikade of The Reporter sat down with Professor Lin to talk about issues of industrialization, the relocation of Chinese factories to Africa (Ethiopia) and contemporary development in the filed. Excerpts:

The Reporter: You are here to take part in a conference of experts which seeks to discuss poverty reduction and industrial development and investments in Africa. How perceptive were these nations?

Professor Justin Lin: There is a window of opportunity for developing countries to jump-start industrialization and transform their economies from a dominantly agrarian to a modern dynamic industrialized economies. In the post-WWII period, after so many destructions, Japan started its 20-year rapid economic growth in the 1960s . Labor-intensive industries like textiles and garment, simple electronics and those kinds of developments made Japan a very successful economy. The wage level had risen significantly. Then, they started to lose their competitive advantages in those labor-intensive sectors. This gave a window of opportunity to other lower income countries of that time to grasp the opportunities and the jump-start their industrialization. We know that Korea, Taiwan, Hong Kong, Singapore and to some extent Malaysia and Thailand grasped those opportunities and started industrializing. They transformed themselves from an agrarian base to nearly industrialized economies. By the 1980s they encountered similar challenges that Japan had encountered earlier. The wage rates went up there, and that made factories to relocate to other low income, labor-intensive economies. That time, China was opening up its economy. Doing so helped to grasp the opportunity to host the relocating factories. In the 1980s, China was poorer than Ethiopia. If you check the World Bank’s data, in the 1980s per capita GDP in Ethiopia was 200 dollars. In China, per capita GDP was 197 dollars. In the 1980s, 81 percent of the population in China was living in the rural parts of the country and was dependent on agriculture. 78 percent of the population was living below the international poverty line. Export was very small. 75 percent of the export was agricultural output. Later on, China was able to grasp that opportunity and became a very dynamic economy. GDP growth reached 9.8 percent while growth in trade was 16.3 percent. Hence, China has been transformed from a poor agrarian economy to a middle high income economy. But later on, China also started to face the same challenges that Japan faced in the 60s. China started to lose competitive advantages of those sectors which helped Japan. I think African counties will also benefit from such kinds of opportunities if they have the proper approach.

You told the conference that it took 35 years for China to become the second largest economy in the world next to the US. On the other hand, African nations are set to transform their economies after fifty years by 2063. How does that sound to you?

If you can grow, say nine or ten percent per year, that’s a similar situation with China, the transformation will come about in 35 years. I think, the window of opportunity is there to grab. If you look into the history of the early 19th century, except for a few oil-rich countries, the rest had transformed themselves from agrarian to a modern economy via the development of light manufacturing industry. In the UK, the industrial revolution was started with textiles. In other European countries like Belgium, France, Sweden, Denmark, Italy and Switzerland, light manufacturing started it all. If you go to the US, Boston, Baltimore and Pennsylvania used to be centers for light manufacturing including textiles, garment and shoes. When you look into East Asia, all of the successful countries stared with light manufacturing. Japan, Korea, China, Singapore are some of the countries to be mentioned here. This is because the majority of the population was dependent on agriculture. No matter how hard they work, they would end up very poor if they depend on agriculture. Therefore, you need to provide opportunity for the labor force to move from agriculture to the modern manufacturing sector. The best way to do that is to adopt the light manufacturing sector and that would allow you to become competitive. Here, we can mention the case of Huajian shoe factory in Ethiopia. In just one year, the company had become a success story. If you can have the right strategy and approach, the potential is there to transform.

You are well-remembered for having a closer relationship with the late Prime Minister Meles Zenawi. You were in contact with the PM on issues of industrialization in Ethiopia. I am afraid Ethiopia didn’t achieve that or the more eluding transformation yet. So, what is your take on the speed of both industrialization and transformation here?

I think it’s a process. Once you had the right entry point, then you would expand fast. Before 2012, no one was really convinced that Africa can be a place for modern manufacturing, a continent for the global market. This was true especially for Ethiopia. With the right intervention of the late PM Meles, Huajian had become a successful venture in Ethiopia. That was only in 2012. Huajian had started with two production lines and with some 600 workers. Later on, the firm employed 2,000 workers and its exports doubled. That has convinced people that it’s possible to do manufacturing in Ethiopia. The government stepped in with the right approach to build up a new industrial park in Bole Lemi area. This is coming up in three phases. The first was financed by the government and was aimed at setting up 22 factory units which will accommodate foreign direct investments. In 2013, eight factory units were built and 14 others were realized. But, within three months, all those 22 units were leased out for export-oriented companies originating from Turkey, Korea, Taiwan, China and Bangladesh. Hence, one successful story was multiplied 22 times. Until 2012, international buyers never had the confidence to place orders in Ethiopia or in Africa, because, say for instance, in Europe or the US, they want to have a competitive price and consistent quality of products that they buy elsewhere. When quality is compromised, they would send you back for refunds. You have to deliver on time because prices are quite different before and after the Christmas, for instance. Hence, international buyers never had the confidence. But now, H&M, TESCO and others are setting up representative offices here to place orders and source products. Yes, you may say that it’s just beginning, but if you have the right approach there would be a snowballing effect. Because of the successes of the industrial park set by the government, the World Bank has provided 250 million dollars for the construction of the second and the third phases of Bole Lemi industrial parks. Having these industrial parks in place, I am sure you can attract some five thousand firms. In the Growth and Transformation Plan, you have targeted to create two million jobs out of the modern manufacturing sector. Let me give you some statistics of China. China has 85 million jobs in the labor-intensive industries. In shoes alone it has 19 million jobs. In textiles and garments 20 million; in electronics 12 million jobs have been created. If you have the right approach, though it is just starting here, I think there would be a snowballing effect. Sometimes, your success could exceed your expectations. When transformation started in China in 1979, the goal was to quadruple the GDP growth in 20 years. By that time, it was set to achieve annual average growth rate of 7.2 percent. However, no one believed China would achieve that because it was a very poor country with very poor infrastructure. Export was very tiny at that time. Most people were living in deep poverty. Many thought realizing a 7.2 percent annual growth rate for a straight 20 years was impossible. They took it as a political slogan. However, when we look back at the facts, the average growth rate was 9.8 percent, exceeding the 7.2 percent growth target by 2.6 percentage points. It happened not only for 20 years but for a consecutive 35 years. If you have the right policies and the right strategies, things can change in one’s life time. I always say that I am lucky that I was able to observe two miracles in my lifetime. I was born in Taiwan in 1952. At that time, Taiwan was the poorest of all; almost poorer than every country in Africa. But Taiwan now has become a high income economy. I witnessed the changes in my lifetime. I went to mainland China in 1979. As I had mentioned earlier, the per capita income was less than one third of the sub-Saharan countries. It was poorer than Ethiopia. Now China has become a middle-high income country. It is likely that it would become a high income country by 2020.

That may be possible and one way to go about it seems to be via transformation. Your contact with the officials here is about making that happen. You were advocating the relocation of Chinese factories here due to high labor cost and for the abundance of resources. But, we don’t see that happening much?

It is just at the starting point. Besides, people do not know much about Africa. If they knew, it’s via the media which portrays the continent unfavorably. We have to fill that gap and make ensure that it will be possible to do things in Africa. Everything starts small. The right approaches would guarantee quick changes. As I said in 2012, there was only one firm here. But later on 2013, there are 22 firms operating.

Can we say these firms had relocated, or that they just had branched out here?

Yes, they are opening factories. You can see some of the factories initiating operations in Bole Lemi. At the beginning, things will seem small but with suitable environments, they would multiply very quickly. China and other developing economies have faced similar challenges at the beginning. In labor-intensive economies, labor cost is the most important issue to consider. Currently, in Africa, the cost of labor is competitive to attract companies based even in counties like Bangladesh. The very reason for them to relocate here lies in the increase of wage rates. Following the relocation of Chinese factories to Bangladesh, the wage rate started to increase fast. Hence, firms in Bangladesh in turn needed to relocate to Ethiopia. Here you have a surplus labor in agriculture and need to provide jobs for them. At the beginning, the firms might originate from outside. Once the firms are fixed here in those sectors which you have competitive advantages in, your workers would be trained and some of them would be able to become managers. They are familiar with the technology and will be able to maintain consistent qualities in the production line. They would establish contacts with international buyers. The capital investment is not that big to kick-start such a firm. For instance, the success of Huajian is a big story, yet the investment was less than five million dollars. When I spoke to Prime Minister Hailemariam Dessalegn, he said that in the coming few years, the government will come up with a special program to help local entrepreneurs start their own businesses especially for those who are working for multinationals. With their managerial skills and ability, the government will set up industrial parks and provide initial capital to start their own work. It will be easy because they already have contacts with buyers on the other side of the market. In mainland China, the story was similar. They had started with foreign direct investments. Taiwan started in the footsteps of Korea. It was also similar in Bangladesh which followed the path of China. It started by training 160 workers. But two years later, those workers were able to set up their own shops. At present, the garment sector in Bangladesh employs three million workers. If you look at Mauritius, you can witness a similar story. In the 1970s they had set up industrial parks. What they did was to process textiles and garment for exports. The owners at the beginning were either Taiwanese or Hong-Kong people. But currently, more than 70 percent of the industries are owned by the local people. That is how and that’s the way you need to learn transformation. It’s a process and the best way to overcome the difficulties of the process is by providing on other job trainings. The foreign direct investment allows you to provide such trainings.

Even though Ethiopia is just starting from scratch, Chinese businesses operating here fear that the country might not be ready to handle/absorb what could come by way of relocating businesses. One thing they mention is the bureaucratic hurdle. What is your take in that regard?

We need to have a leadership innovation. As a low-income country, you may have some kind of backwardness. That’s the nature of a developing country. Certainly, there must be a desire to improve things every day. But, government resources are limited. The implementation capacities of the government is also limited. In such cases, it’s very important to identify sectors which could bring huge impact in job creation and competitiveness. To make those sectors vital, building up the infrastructure and creating an enabling environment is essential. I can give you a concrete example here. If you look into what I am trying to emphasize, Ethiopia is not attractive at all. In 2012, it was ranked 125 in the doing business rankings of the World Bank. In 2013, it further dropped to two more ranks to position itself at 127. But Ethiopia was the hottest place for foreign direct investment in 2013. How come? Because the government has used its discretionary power to set up industrial parks and provide infrastructures within these parks. That’s one of the ways to absorb investments. The business environment in China is not that good either. It has been ranked 96th in the global rankings, not that far from Ethiopia. China is ranked the worst in the whole world when it comes to the cross-border investment. But how come China was able to attract more FDI then? It’s because the government uses its limited resources and discretionary power to create a localized environment. At least infrastructure is somehow good enough to give some confidence for FDI.

China provides the necessary funding and credits for African countries to build infrastructure. By and large, Ethiopia is one major beneficiary. But, the recent report of the World Bank warns of a trend that is becoming riskier and the group advised the government to carefully watch for debt levels of public enterprises. What is your view on that?

Yes, that’s about the debt sustainability issue. The report failed to distinguish between the debt used for investment which can generate revenue, growth and jobs in the future and the debt used for consumption, a debt which is not used for productive and investment reasons. Certainly this kind of debt is a burden because you may not have a return to pay by the time you are required to settle the debts. But if you have invested the debt on productive enhancing activities, the GDP growth would increase fast and the government would have more revenues which will result in decreasing the risk. I would not say that accumulating debts is something good. But I would say that if worked out carefully, the computational effect will bring about the changes. Since China is a developing country the loan borrowed from China must be used for investments which mean to generate higher earnings in the future.

Investment on infrastructure, of course, is necessary and here the government is bold on that regard. On the other hand, the massive investment, fueled by the poor performance of the export sector, is causing shortages of hard currency. What about that?

There are two things to be considered. If you look at the case of China in 1993, which is fifty years after the reform, the country’s foreign reserve was about 10 billion dollars. It’s very limited. By now, China has four trillion dollars. I maintain that it’s a process. At the beginning, you pave the foundation, build infrastructure for the business to take off. But before the business takes off, certainly you would be constrained by the foreign reserve and capital. However, you need to prioritize the use of the reserves. I know regional integration is one vital pillar. If you look into Africa, you have 55 countries disintegrated. Even a given country, might have many parts which need to be connected. There is a recommendation which seeks the formation of regional integration bureaus to link national markets across Africa. But, I don’t buy such arrangements. Africa’s GDP today is hanging only at 1.9 percent from the globe. That means that Africa’s purchasing power is 1.9 percent of the global purchasing power. It also means that its share is only 1.9 percent of the global market. But, the US has a 21 percent of global GDP and which means 21 percent of the global market. Europe alone holds on to a 23 percent of global market share. The combined share, which is 44 percent, is 22 times higher than that of the entire Africa. If you want to raise your share at the global market, build industrial parks, roads which heads to Djibouti. That would be enough to tap the 44 percent of the global market. But if you want to attain regional integration, you have to incur a very high cost. How many roads would you need to construct across the borders? How much of the investment is to be retained? You have to use the limited resources in the best way. With a very poor infrastructure being poorer than Ethiopia and DRC today, China, however, was able to grow into the global markets via pragmatic approaches.

Are you telling us that you oppose African integration?

I don’t oppose. I just wanted to say that we need to be realistic. Let’s put our priorities right. One thing Africa needs is that it cannot wait for another fifty years to change. You may not be able to integrate even after fifty years. Things change very often. Unless you can create more jobs for the youth, they might react, they would not remain happy.

You advocate a fast and dynamic economic growth. But, countries like Japan from which the government buys advices prefer a slow but sustainable growth. How do you see that?

Slow growth many not be sustainable. If you go slowly you can’t create enough jobs. You can not meet the expectations of the people. You may leave them unhappy. A dynamic way of growth is the best way to achieve sustainability. We can compare China and India from the environmental sustainability perspective. Indian growth rates are lower than China’s but the environmental challenge there are at least as big as that of China.

GTP is coming to an end and the second five year-term or GTP II is on the preparation stages. The first one has remained as ambitious as it was. But what are your expectation for the second plan, which I am sure you have seen already?

I think during the first phase of the plan, the government wanted to articulate a vision. When China quadrupled its growth in twenty years, everybody was initially saying that it’s just an ambition. But there was a possibility for success especially if you have the right vision with a pragmatic approach and strategy; there are opportunities out there to be seized. Twenty or thirty years from now, the vision would be seen as conservative. Who knows? But I want to see Ethiopia become the third miracle that I see in my lifetime next to Taiwan and China. The success of Ethiopia will change the way of thinking. It will be seen as a model by other African nations. The success of Japan had inspired Asian countries. You have to have s successful country for the rest to follow. I see Ethiopia inspiring others.

China’s bold presence in Africa sometimes is scrutinized by the West as an approach of neo-imperialism. To the contrary, Africans want China to be by their side. Why is the West much interested to come and invest given the circumstances? What will be your professional opinion?

I think this question has to be answered by Africans. We are here for partnership. The rise of Africa is to our advantage. Because, for China the dynamic growth of Africa is a good condition to relocate some of its factories here. It’s equally important for Africa too. They can jump-start industrialization via the relocation. If there are transformed economies here, then it will allow China to have more market. The Chinese philosophy is also that we like to support and prosper together with our good friends. If you call that imperialism, I like that kind of imperialism.

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