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This Public Disclosure Authorized report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accurocy or completeness. The report may not be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

ECONOMIC GROWTH AND PROSPECTS

ETHIOPLA

(in five volumes)

Public Disclosure Authorized VOLUME II

Annex 1: The Agricultural Development of Ethiopia Annex 2: Manufacturing Industry Annex 3: Mining

September 22, 1970 Public Disclosure Authorized

Eastern Africa Department BQUIVALENTS

CURRENCY

Unit Ethiopian dollar (Eth.$) U.S.$1.00 Eth.$2.50 ETH.$1.00 u.s .$o04o

WEIGHTS

Unless otherwise stated, tons in this report refers to long tons.

1 metric 2,205 lb. 1,000 kg. 0.9844 long tons 1 long ton 2,24.0 lb. 1,016 kg.

MEASURS

1 meter (m) 39.37 inches 1 kilometer (km) - 0.62 miles 1 hectare (ha) 2.471 acres 1 square kilometer = 0.386 square miles

TIME

The Ethiopian calendar year (EC) runs from September 11 to September 10. There is a difference of about 7-3/4 years between the Gregorian and the Ethiopian era. For example 1963 EC runs from September 11, 1970 to September 10, 1971. Most of the Ethiopian statistics are converted to the Gregorian calendar. Throughout the report the Gregorian calendar is used.

The Ethiopian budget year runs from July 8 to July 7. For example, Ethiopian budget year 1963 runs from July 8, 1970 to July 7, 1971. In the report this year is referred to as budget year 1970/71. THE NISSION

This report is based on the findings of a mission in January - February, 1970 to Ethiopia composed of :

Lyle M. Hansen Chief of Mission

R. H. Khandker Chief Economi.st

C. P. Cacho General Economist

S. Please Fiscal Economist

L. Hewes * Agricultural Economist

I. Abu Sharr * Agronomist (FAO)

B. Decaux * Industrial Economist

D. H. F. Bickers Transport Economist

J. Bonnett ) ) Tourism Specialists A. El Maaroufi )

* Consultants

The 1-ssion received assistance from the UNDP Resident Representative in Ethiopia (M. R. Gachot) on pre-investment studies, Mr. George Mahoney on Transport and Mr 0. J. Markgren and Mr. G. Pennisi cn Education.

CONTENTS OF THE VOLUKES

VOLUME I Main Report Statistical Appendix Appendix A - Illustrative Growth and Investment Projection Appendix B - Pre-Investment Studies

VOLUME II Annex 1 - Agriculture Annex 2 - Manufacturing Industry Annex 3 - Mining

VOLUME III Annex 4 - Transport Annex 5 - Power Annex 6 - Telecommnications

VOLUME IV Annex 7 - Education Annex 8 - Tourism

VOLUME V Annex 9 - Domestic Resources

THE AGRICULTURAL DEVELOPMENT

OF ETHIOPIA

TABLE OF CONTENTS

Page No.

SUMMARY ANiD CONCLUSIONS...... i

I. AGRICULTURAL DEVELOPMENT STRATEGY...... 1

II. CONDITIONS OF AGRICULTURAL PRODUCTION...... 5

Physical Characteristics...... 5 The Agricultural Economy...... 7 Scope for Increased Production...... 8 Agricultural Planning...... 13 Private Investment...... 15 Land Tenure ...... 19

Ill. THE DEVELO.PMENT EFFORT ...... 21

Plan Projects...... 21 Minimum Package Programs...... 26 The Marketing of Grains, Pulses and Oilseeds...... 27 Agric-Iultural Credit ...... 28 Agricultural Research...... 29 Agric-ultural Extension...... 30 Veterinary Services ...... 32 Supply of Seeds, Fertilizer and Machinery...... 32 Organtization...... 33 Responding to Shor-t-Term Constraints...... 34

IV. _CoMMODITY PROSPECTS ...... 38

Coffee ...... 38 Cotton...... 40 Trobacco ...... 42 Sugar-cane ...... 44 Cereals, Pulses and Oil Seeds ...... 45 Fruits and Vegetables ...... 48 Livestock and Livestock Products...... 50 Fisheries ...... 54 Forestry...... 55

APPENDICES

1. Land Use and Crops by Province 2. Estimated Area; Yield and Production of Major Crops in 1967/68 3. Estimated Livestock Population by Kind, 1967/68 4. Estimated Financial Requirements for Agriculture, 1970-1975 5. Estimated Staff Requirements for Agriculture, 1970-75 6. Prospects for Cultivation of Government Lands 7. Estimated Output from Principal Agricultural Training Institutions 8. Minimum Package Programs 9i. The Veterinary Services

AGRICULTURE

SUMMARY AND CONCLUSION

Characteristic of Agriculture

1. Ethiopia is divided into a dissected mountainous highland central plateau at over 1500 meter elevation and hot semiarid lowlands. Differences in temperature, precipitation and elevation provide for a variety of climatic subregions with specific crop adaptability. Also soils vary widely in physical characteristics, but generally they are nitrogen and phospherous defi- cint; there is very little potassium deficiency.

2. Fifty four percent of the land area is used as pasture, mostly situated on the 500,000 sq km government-owned land in the lowland region; cultivated and fallow lands comprise 10.4 percent of the area; 21 percent is barren desert or swamp land and forests constitute over 4 percent of the total. Agricultural land including the fallow averages about 3 ha per family, though many holdings are much smaller. There are also some large commercial and mechanical farming enterprises which operate under Government concession.

3. The small scale farms of the highland regions produce crops valued at about Eth$ 1.0 billion, or about half of the national crop output; more than half of the cattle population is in the highlands. The lowlands produce mainly cotton, sorghum, sesame, and cattle; and support large nomadic livestock herds.

4. The all important coffee crop is a highland product. Long run agricultural improvement prospects favor highland agriculture. Opportuni- ties for lowland agriculture are in cotton - an important substitution crop, export crops of oilseeds particularly sesame, and livestock. There are good short: run prospects for relatively large scale mechanized agriculture in the lowlands.

5. Generally the technology of Ethiopian agriculture is still rudi- mentary. Income, skill, and literacy levels are low. Most farmers are at a subsistence level. In subsistence agriculture the planned economic growth rate, 1.8 percent annually, about equals the population increase. Technical inputs are scarce and land tenure is insecure and complex, and occupancy rights are cloudy. Lack of market facilities and credit, as well as remoteness and isolation, are major handicaps. Nevertheless, farmers produce 60 percent of the GDP. Agriculture is obviously the touchstone of Ethiopian economic development. Ninety percent of the national labor force is in rural areas. Agricultural products constitute almost the entire export trade, led by coffee which accounted for 59 percent in 1968. In time Ethiopian agriculture could substitute for almost all food imports. The Regional Pattern

6. Central Highlands. This large intensively cultivated subsistence farm area has perhaps the country's best long range agricultural potential. Portions are remote with difficult access. Soils are relatively stable and rainfall is favorable.

7. Northern Highlands. This densely populated region will be difficult to develop. Erosion is widespread, rainfall is erratic, and holdings are very small. The communal land tenure system is a barrier to modern agricultural technology. Extensive out-migration occurs as farm labor to Tessenei, Setit Humera and the Awash Valley.

8. The Eastern and Southern Highlands. In the Chercher highlands of Harrarge Province farm standards are high but rainfall limits development prospects to a narrow area. Coffee is the most important crop followed by sorghum, maize, and chat. Prospects in the Arussi highlands lie in extension of the so called Chilado (CADU) "package program" to a larger area. The area has above average highland production potential, good soils, and adequate rainfall. Prospects in the Bale highlands are poor. Northwest areas may be adaptable for sheep and cereals. Information about this area is poor.

9. Southern and Southwestern Highlands. These are the least developed highlands in Ethiopia but with favorable rainfall have a good agricultural potential. Many areas are remote and small grain farming is on the subsistence level. There are good prospects for washed coffee, maize, spices, and large dairy herds.

10. The Lowlands. Lack of knowledge of rainfall -- its amount and distribution -- limits the immediate development prospects. At present only about 200,000 ha out of a potential of 5 million ha is under cultivation. Half of this cultivated area is in the Humera development area, where a Bank financed project is underway, and the cultivated area may increase to 300,000 ha in six years. Commercial mechanized dryland agriculture is the prime mode of development. Some areas are uneconomic because of drought, remoteness and disease. Livestock production in the southern lowlands should have priority; a National Range Development Project has been initiated.

11. Some of the river valleys, e.g. Awash, Aboy, Wabi Shelele, Takeze and Omo, have distinct irrigation potentials. Over the next two decades 150,000 ha of irrigated land in the Awash Valley may develop.

Agricultural Development Strategy

12. The TFYP agricultural strategy concentrates inputs in areas of high potential response. Concurrently corporate and commercial agriculture is encouraged to anticipate large short run returns which in turn should increase public revenues to support agriculture. Various planned undertakings require large expenditures over the next few years. A key aspect of the strategy is to concentrate large resources of manpower and investment in limited areas, in the form of regional package programs. The major weakness is that - iii - large numbers of farmers in nonpackage areas are left with no government support. The current strategy also tends to overlook the development incentive in providing proper crop handling and marketing services. Major development projects underlying the development strategy are described briefly below.

:13. Chilalo (CADU), Wellomo-Soddu (WADU) and Ada District Agricul- tural Development Units. These are "package programs" th similar design and purpose. The CADU project is in two phases, the first just ended and the second just commencing. First phase cost including a Swedish grant of Eth$ 8 million was ETH$ 14 million; total second phase costs is estimated at ETH$ 19 million by the end of the TFYP. WADU, activated in 1970, is estimated to cost ETH$ 12.6 million including an IDA credit of ETH$ 8.17 million. The Ada District plan is still in formulation.

14. The Awasa Rural Extension Project, under jurisdiction of the Ministry of Community Development, is located in Shoa and Sidamo Provinces 220 km south of Addis Ababa. It is part of a scheme which includes operation of a State Farm and an industrial complex. The objective of the project :Ls to improve the maize production of 18,000 small farmers. It will have a five year term and will cost ETH$ 11 million.

15. The Setit-Humera project, in the Teyemdis - Simen Province 600 northwest of Addis Ababa, nw being activated, is directed at providing infrastructure support to large mechanized agriculture producing cotton, sorghum and sesame. The project is partly financed by an IBRD loan of ETH$ 8.7 million and will cost ETH$ 12 million. A proposed Shashamenne project, in Shoa and Sidamo provinces 250 km south of Addis Ababa, is directed at encouraging moderate sized (up to 200 ha) commercial farms chiefly producing cereal crops. It has been prepared by USAID, and will cost about ETH$ 11.1 million.

1.6. The Melka Sadi-Amibara Irrigation Project is in the middle Awash valley, 175 km east of Addis Ababa. The plan calls for irrigation of 14,000 ha at a cost of ETH$ 80 million. Most of this area would be in moderately large-scale commercial concessions. Potential crops are cotton, tobacco, wheat, beans, vegetables and citrus. Further investigation of this project is underway.

17. A project in support of the cotton-producing Tendaho Plantation Share Company is located in Welo Province 400 km northeast of Addis Ababa in the lower Awash Valley, in two units at Dubti and Dit Bahri. Plans are being developed to expand Dit Bahri under leadership of the British Mitchell Cotts Company; capital investment is estimated at Eth$ 10 million, and working caLpital at Eth$ 3.8 million.

18. The National Range Development Project covers a 10,000 square mile area in three units in Sidamo Province. The proposal was prepared by USAID. The area is used for grazing the herds of nomadic tribesmen and its purpose is to combine improved watering, range management, and animal disease control to improve the 25 million head of livestock. Five year costs are estimated at ETH'j 14.3 million. - iv -

19. Two projects are aimed at developing agroindustry. The Addis Ababa Dairy Project seeks to improve the quantity and quality of fluid milk for Addis Ababa, through dairy herd improvement, better feeding, cross breeding, market services, etc. Total cost will be about Eth$ 19.4 million. Coffee washing plants are proposed for Sidamo Province and Keffa Province, respectively, 300 km south and 200 km southwest of Addis Ababa. The project will include access roads and it will aim converting 18,000 tons of poor quality unwashed coffee into mild washed coffee. The total cost is estimated at Eth$ 31.4 milliLon.

Other Possible Approaches to Develonent Strategy

20. Three proposals are offered by the Mission as means of (a) modify- ing the present emphasis on agricultural production, and (b) utilizing the concept of the "paclcage" technique to reach a larger number of small farmers at moderate cost.

(i) Minimum Package Programs. The idea is to have programs aimed at relieving specific production constraints in a number of selected areas simultaneously. For example, a miminum package project could aim at improving the poor cereal yields of the highlands using immediately a,!2ilable resources of the Ministry of Agriculture and inputs limited to seeds, fertilizers, and the organization of credits and markets. A feasable target would be to double the yield of wheat and teff on 1 ha each of 1,500 small highland farms in each of, say, 10 locations. This would be equivalent to doubling the yield on 15,000 ha.

(ii) The Marketing of Grains, Pulses and Oilseeds. The imperfect market for grains, pulses and oilseeds prevents prices from perform- ing their role to allocate agricultural resources. A grain stabilization scheme, costing perhaps ETH$ 20 million over five years, could go far toward eliminating extreme price fluctuations. Given necessary authority and financing the Grain Corporation could considerably lessen fluctuation through providing storage and marketing facilities in the short run and ultimately supervising grading and trading, and licensing bonded warehouses.

(iii) Agricultural Credit. Ethiopia badly needs a sound specialized agricultural credit institution. Credit to the sector from institutional sources now amounts to about Eth$ 40 million a year, extended to larger preferred risk agricultural borrowers mostly on the security of urban real estate. Smaller borrowers have to rely on high-cost local money lenders. A specialized agricultural credit department could be created in the new Ethiopian Development Corporation, at a development cost of less than Eth$ 7.0 million over five years. Costs would cover training and expatriate assistance plus moderate capital funds for lending to smaller borrowers. -v -

Major Constraints

2:1. The Government is considering the possibility of implementing development projects which in aggregate would absorb Eth 231 million over the reamining years of the TFYP. The capital expenditures for 1970/71 was scheduled under the TFYP to be over Eth$ 44 million, but this has now been scaled down to about Eth$ 27 million in the proposed budget. The lower amount is still more than double the 1969/70 capital budget for agriculture. A considerable amount of external finance and technical assistance will be required, but these do not appear to be a basic constraint. How- ever, based on recent fluctuations in budgetary allotments, the orderly flow of domestic funds is an uncertain element -- though the recent firming of the coffee export prices may make more public funds available for agriculture. There is little likelihood, however, that the manpower necessary to implement a program of the size contemplated could be found. The question has become, not whether projects can be made reacly for implementing, but which projects and at what speed. However, it must be emphasized that Government action is needed to improve and regularize the entire process of budget preparation, and to release funds for agricultural development. An: emergency manpower plan, giving priority to agricultural is another short-term need.

Private Investment

22. Ethiopian agriculture has lagged behind other sectors in its ability to attract capital and initiative. The proposed organizational changes in credit institutions could do much to improve private investment. However, 80 percent or more of Ethiopian farms do not generate a capital surplus. For the farmers who are capable of entering the monetized sector, it is the uncertain, confused, and complex land tenure situation which may be the dominant deterrent to investment. The communal tenure institutions of the northern highlands are a barrier to investment in land; south of Addis Ababa landlord rightss are paramount and tenants can be evicted at will; in the lowlands, tribal rights prevail. On government lands boundaries are vague and patronage grants from these lands are subject to challenge.

23. In the traditional small farming highland areas, capital improvements should be labor rather than capital intensive because the latter would tend to cause tenant displacement. Capital formation should be in the form of long-term conservation measures. Investment opportunities exist in services to agriculture such as retail outlets, supply deposits, storage and institutional credit. An illustration is the cluster of enterprises at Debre Azit, a small farm center.

24. In contrast to small farmer investments is the scope for corporate investment in larger scale farming. A number of concessionaires are in operation, producing such commodities as cotton, sorghum, tobacco, sugar, and dairy products. There have been failures as well as successes. One index of the spread of commercial agriculture is the purchase in recent years of over 2,000 farm type tractors. Several d2velopment proposals are - vi -

aimed at expanding commercial type oE agriculture. Resolution of land tenure uncertainties is closely tied to continued expansion of this kind of investment.

25. The Government has already created favorable conditions to attract foreign and domestic capital to agriculture. However, efforts should be made to help investors by improving official facilities for dealing with them. Several state farms which are now unsuccessful might be turned over to concessionaires.

Government Services

26. Organization Prospects. There Is a distinct dispersion of agricultural functions among a number of Government agencies. Examples are: the semi-independent Institution of Agricultural Research, the Livestock and Meat Board, the Tobacco Monopoly, The Coffee Board. the Awash Valley Authority, the Ministry of Community Development and the Ministry of Land Reform and Administration. Most of titese operations should be vested in the Ministry of Agriculture. Th..cpr,-senu- ieeŽd to coordinate these bodies is symptomatic of the prcsent.admidiistra-ive weakness. The Rockefeller foundation is undertaking a review of the organization of agricultural services and is expected to report shortlv.

27. An important factor is the absence of basic knowledge and data about the economics of Ethiopian agriculture and farm management. The Plan- ning Unit of the Ministry of Agriculture could commence immediately to collect data from the ongoing regional programs. Also, it is noted that the traditional provincial lines of organization do not follow the regional pattern of agro-climatic and soil potentials.

28. Agricultural Research. Research activity covers livestock, irrigated crops, coffee, sorghum, cereal crops and cotton. Research activities should be nationally coordinated and the Institute of Agricultural Research has this responsibility. More research emphasis is needed on farm management, livestock, and grain legumes and oilseeds. Coordination with Extension Services is weak.

29. Agricultural Extension. The Extension Service is in a position to benefit from the results of limited but indicative research on a few crops. Its need for men and money should have priority. Coordination with research could be improved through National Crop Improvement subcommittees.

30. Veterinary Services. The veterinary services are spread very thinly among a large cattle population. Allocations of both men and money are inadequate but veterinary training is good. A mass cattle immunication program has started and needs to be strengthened. Fifteen percent annual increases in capital and recurrent Veterinary Department budgets plus a large scale fellowship program appear justified. - vii -

31. Supply of Seeds, Fertilizers, and Machinery. In 1969 only 1,000 cut of 500,000 tons of seed planted were of improved varieties; a substantial seed improvement and distribution system should be implemented to meet the expected increase in demand. The Plant Production and Protection Division of the Ministry of Agriculture has this responsibility but is unable to discharge it. Distribution could be initially handled through CADU, WADU and the minimum package programs as an extension Service operation. Fertilizer imports reached 7,000 tons in 1969, mostly for the large commercial operators. Fertilizer prices are high and credit is not available, but demand should increase as a result of the package programs. Farm machinery can be purchased through dealer credit; a tractor assembly plant and a small implement factory will soon be in operation.

32. Manpower. A serious shortage of professional and technical manpower confronts the IEG for the remaining three years of the TPYP and through 1974/75. Even with rephasing of the 1970/71 financing, and after counting as available for recruitment all 1970 graduates of agricultural training institutions, there is an irreducible 1970/71 shortage of some 94 man-years of professional service. Carrying forward the backlog burden to 1971/72, the shortage becomes over 600 man-years, and over 800 if minimum package, marketing, and credit proposals are activated -- although this latter figure might be smaller if staff already employed in these three programs is counted. During 1970/71 a specific manpower plan should be developed to make maximum utilization of manpower. This task should be delegated to the Planning Unit, Ministry of Agriculture.

Commodity Prospects

33. Coffee. The Government is taking steps to improve the quality oif coffee, to assess the coffee economy, to increase washed coffee production, to rationalize handling, and to increase research. Ethiopian coffee exports are expected to increase from 93,000 tons in 1970 to 110,000 tons by 1974.

34. Cotton. Irrigated cotton agreage will probably increase by 17,000 ha by 1975 and dry land cotton acreage by 25,000 ha, and increase of about 15,000 tons of lint cotton worth over Eth$ 23 million at current prices. The local market for cotton will continue to expand for another 10 years. Under irrigated conditions it may be possible to produce longer staple cotton for export.

35. Tobacco. The Tobacco Monopoly contracts in advance with about 40,000 small farmers, and supplies seed or seedlings, cultivation and plant protection services. National production is about 1,570 tons of all types; The Tobacco Monopoly's profits were Eth$ 6.5 million in 1969. It is trying to promote Virginia and to discourage production of oriental type tobacco. Experiments with burley tobacco for blending are encouraging. Substantial irrigated production increases of Virginia tobacco for export may be possible on the proposed Melka Sadi-Amibara irrigation project. This would require a substantial program of research, extension and technical advice orL handling, grading, curing and marketing operations. - viii -

36. Sugarcane. This commodity is produced by the Dutch concern, H.V.A., in the Awash Valley. Production in 1968/69 was 66,200 tons valued at Eth$ 40.6 million. Ultimate capacity is 135,000 tons; 1968/69 demand was 75,000 tons. Exports are problematical because sugar can be imported at Eth$ 230 per ton CIF Red Sea ports against a domestic wholesale price of Eth$ 613 per ton. HVA intends to limit output at its Metahara unit until domestic demand cataches up.

37. Cereals, Pulses and Oilseeds. Prices have recently been stable. Exports of pulses and oilseeds are valued at Eth$ 47.8 million in 1968. Shifts in domestic demand (urban) are toward wheat and teff and away from maize, sorghum, and barley. In exports, shifts are away from linseed and toward sesame, beans, chick peas and lentils. Development plans should be oriented accordingly.

38. Fruits and Vegetables. By 1975, exports should increase from the present 27,000 tons, worth Eth$ 9.1 million to 35,000 tons worth over Eth$ 12 million. Local consumption, principally of yams and potatoes grown in southern, western and southwestern regions, will likely parallel the population increase. The principal demand for fresh fruits and vegetables is for exports; local demand is small. Thus the future of fresh fruits and vegetables is closely related to transport costs. Demand is high for these products in Red Sea, Mediterranean and European countries, particularly for citrus. The chief suppliers will be the large operators. Small highland farmers can grow chillies and pepper to supply such concerns as the U.S. Spice Extraction Company.

39. Livestock and Livestock Prospects. The 55 million head of livestock represents a neglected resource. Given a number of supportive measures by government, increases in cattle production could become evident by 1974. Present rates of cattle slaughter are too high to maintain the present population, yet the six commercial meat processing plants, with a capacity of 270,000 carcasses, handled only 73,000 in 1968, probably because highland farmers keep livestock primarily for milk and draught purposes and distances are too great from the southern ranges. Death loss and disease rates are very high and nutrition, fertility and growth are low. Improvement of Government services should include:

1. Activation of National Range Development Project.

2. Reorganization and improvement of Livestock and Meat Board.

3. A widening of the scope of Governments livestock survey.

4. Intensification of activities of veterinary development.

5. Expansion of research.

6. Initiation of a highland pilot livestock project.

7. Implementation of a hides and skins improvement program. - ix -

Additional information about the livestock industry is anticipated from the report of the IBRD Livestock Review and Project Identification which visited Ethiopia in April and May 1970.

40. Fishery. Neither the Red Sea nor the inland fishery resource has been systematically developed. Fish meal and dried fish had an export value! of Eth$ 2.5 million in 1966/67, but this export trade was drastically affected by closure of the Suez Canal. Another impediment to expansion of fish production is lack of knowledge about the resource; still another is the lack of interest in fish as an item of diet. The Interna- tional Indian Ocean Fisheries Commission should be asked to investigate the Rted Sea fishery resource.

41. Forestry. Ethiopia has 4-5 million ha of natural forests; about 2 mi]Llion ha are state forests under the Administration of the Forest Depart- ment of the Ministry of Agriculture. An estimated 80 percent of the total forest resource is inaccessible. Forest resources have been abused and depleted for centuries with the result that Ethiopia will have to import wood products for a long time. Increased investment and a conservation program are necessary. The lack of professional foresters could be overcome by employing expatriate professionals as trainers and establishing the proposed Forest Ranger Training Centers.

I. AGRICULTURAL DEVELOPMENT STRATEGY

1. Agriculture contributed 60 percent to the GDP in 1969; the next largest sector, manufacturing, mining etc., contributed only about 14 percent. In terms of the national labor force, over 90 percent of the age group, 15-19 years, are classified as rural, and rural literacy rates are well below the estimated national average of 5-7 percent. These statistics point to the crucial role of agriculture in terms of employment, livelihood, and national well being.

2. Roughly 60-70 percent of the farm population is located on small farms in the highland regions. Conditions of subsistence farming are prim- itive; malnutrition is prevalent; localized starvation occurs in years of poor rainfall. Farming techniques are rational but inadequate; technical imputs almost totally absent. Large numbers of farms are in inaccessible locations and lack even good weather roads; those farmers able to produce a surplus have difficulty in marketing it because of poor transport and lack of market outlets. In addition, traditional and complex land tenure systems provide little security of tenure for large numbers of farm tenants.

3. The critical export trade, with a total value in 1968 of Eth.$ 258 million, is, with minor exception, composed almost entirely of agricultural products; coffee, the largest export item, accounted for 59 percent, followed by livestock products, 13 percent; oil seeds and oil c:akes, 10 percent; and pulses, 8 percent -- a total of 90 percent of all exports. A review of the Eth.$ 19 million 1968 food imports indicates that nearly all of the components of this item can be replaced in time from domestic production. Major items are cereals, pulses, flour, dairy products, fruits, vegetables, sugar and in additiona, the Eth.$ 7 million raw cotton import item can also be replaced in time.

4. Given the characteristics of the economy, short-run and even moderately long-run Ethiopian planning strategy must be based on the capacity of the rural agricultural sector to feed the nation, provide the major source of foreign exchange, national savings, and labor force at planned levels of population and economic growth.

5. The Five Year Plan sets goals of national economic growth rate of 6 percent annually, with a 3 percent rate of per capita income expansion. The planned assignment for agricultural production is a 3 percent annual growth rate, compounded of a 1.8 percent growth rate for small subsistence farm units, and a 5.7 percent growth rate for marketed agriculture. Plan goals were set in the context of an annual 2.2 percent overall population increase from an estimated 23.7 million total population in 1967 to 26.7 million in 1972. This task for agriculture implies a substantial increase in output, but not for the majority of subsistence farmers.

6. In terms of foreign trade, it is essential that the current dominance of exported coffee, Qow over half the value of aLl Ethiopian exports, - 2 - be supplemented by substantial exnort crop increases. The present dominance of coffee exports exposes foreign trade earnings to large and un,-edictable shifts in the world coffee market. The total cumulative decline in the value of Ethiopian coffee exports from 1965 to 1968 was Eth.$ 85 million, and total foreign exchange earnings declined by Eth.$ 83 million to Eth.$ 250 million in 1967.

7. A broader export base should be obtainable in the short term from pulses, oil seeds, cotton (raised for the export market) and in the medium to long term from grains and from livestock and livestock products. An increase in domestic short staple cotton production, currently in prospect in the northern lowlands and the Awash Valley, would provide foreign exchange savings in the form of import substLtution.

8. The broad nature of the problem is thus clear. The present agricultural development strategy of Ethiopia concentrates on the short-term potential: to concentrate men, materLals, and money in areas with high response potential and the concurrent development of commercial agriculture. This represents a shift in policy. Previously, the emphasis was on building infrastructure and, by implication, the spreading of slender resources over the entire country. Concentration of effort on selected objectives is likely to be much the more effective strategy. Furthermore, the present strategy is heavy on a "project" approach:

(a) Regional developments taking the form of so-called "package programs" in predominantly crop producing areas. Two such programs, e.g. Chilalo and Welamo-Soddu, have been initiated, and a third, in the Ada district near Addis Ababa, has been proposed.

(b) Regional development of livestock, e.g. the National Range Development Project and the Addis Ababa Dairy Scheme.

(c) Commercial agriculture chiefly related to larger farms and plantations, e.g. at Humera, Shashamenne, and irrigated agriculture.

(d) Agroindustry, e.g. coffee processing and the possible development of a tea industry.

9. The emphasis is on rapid expansion of the market economy, with the expectation that a portion of the returns could be captured for use in further agricultural developments. There is every reason to believe that substantial progress can be realized in the next few years. The anticipated re- vival in the economy and the implementation of proposed organizational and fiscal policy changes should enable the Government to end the recent disrup- tion of public expenditure in agriculture. The "project" approach offers the assurance that sources of external finance can be approached, bringing the twin advantages of foreign exchange finance and adequate economic appraisal. - 3 -

The country's policy which welcomes foreign private participation in the economy should also contribute to success.

10. The strategy for agriculture has three important limitations, however. First, the investment program is greater than can be implemented under the existing rnanpower constraint and some rephasing is thus in order. Second, the regional package approach leaves the greatest part of Ethiopian agriculture with onlv the admittedly deficient regular services of the Ministry of Agriculture. In addition, the package programs have not yet had time to de- monstrate either actual costs and benefits, or the rate which they can be expanded to larger areas; apart from their pioneering value, their national impact remains unknown. The third limitation arises from the almost exclusive input approach to securing increased agricultural output. While the package programs take into account marketing needs, in a broader sense there is little attention and little if any support or investment planned to facilitate crop handling,, assemblage, transport, storage, grading, marketing or pricing functions.

11. There is a conclusion, in brief, that the present strategy is being carried too far. Demand on the Government to start other full-scale package projects, similar to the ones already launched, is growing. The Government's ability to reproduce the Chilalo and Wolamo-Soddu Projects in other areas is limited. Furthermore, the more difficult problem of transforming subsistence farmers into surplus producers for the market cannot be indefinitely post- poned. The normal services have suffered from shortage of funds, absence of clear programs of work, lack of qualified experienced staff, of necessary inputs, and of credit and marketing facilities. A possible approach would be the mounting of what might be called Minimum Package Programs, the scope and cost of which could be such as to allow for a start to be made in a number of areas simultaneously. In this way, with only modest increase in staff and expenditures, the Government would be able to make better use of its existing staff, to utilize information on improved practices which already exists, and provide the increased inputs which are necessary to realize the benefits. More attention also needs to be paid to pricing policy and the operation of the market system as it affects farmers who are capable of surplus production. The basic need is for more effective incentives for the small-scale farmer. Indeed, the entire range of agricultural economic knowledge in relation to producers is practically unexplored in Ethiopia.

12. But despite handicaps, impediments and obstacles natural and man- made, it is conceded that Ethiopian agriculture has favorable future prospects. There is advance and there is improvement, but painfully and slow- ly. Unfortunately, extraneous and adventititous factors, such as the col- lapse of coffee prices and closure of the Suez Canal, tend to interrupt and obscure the underlying advance. Yet in the next 10 years, research and extension inputs should begin to pay off, as should the experience at Chilalo. The production climate and the ability to support agriculture are improving. Research should begin to pay off, the results of the "packing programs" will be available, a credit reorganization should increase the availability of credit and the improvement of extension will increase yields. The monetized - 4 - portion of agriculture could by the end of the decade be increasing at better than the rate assumed in the TFYP. But the indispensable element is an increased scope of knowledge as a basis for grasping opportunity. -5-

II. CONDITIONS OF AGRICULTURAL PRODUCTION

Physical Characteristics

13. Ethiopia, with an area of over 1.2 million Km2, has very distinct highlands and lowlands. Most of the farming is in the highland half of the country, a plateau of over 1,500 meters in height which is cut by deep gorges and towered over by mountains of over 3,000 meters in height. A large part of the lowland half is hot and dry with less than 600 mm of rain a year.

14. The climate and the kind of farming are in the main determined by the altitude. Temperatures, and to a considerable extent the rainfall, are directly related to elevation; over a large part of the country the amount and distribution of rain are the major factors determining crop and pasture production. In general, the rainfall increases from north to south and from east to west (Asmara 600 mm, Addis Ababa 1,100 mm, Dire Dawa 600 mm, Jimma 1,500 mm, Gore 2,400 mm).

15. The highlands form a pear-shaped central mass divided by the Rift Valley. Those northwest of the Rift are mostly over 2,000 meters elevation, and they provide the bulk of Ethiopia's agricultural production. They may be divided into the Northern Highlands of Eritrea, Tigre (Undependable rainfall), Begemdir and Welo (undependable in part), the Central Highlands of Gojam, Shoa and Welega (adequate rainfall), the Southern Highlands of Sidamo and Gemu-Gofa (good rainfall), and the Southwest Highlands of Kefa and Illubador (high rainfall). The highlands southeast of the Rift may be divided into the Chercher Highlands of Harar, and the Highlands of Arusi and Bale. The parts of these highlands that adjoin the Rift receive adequate rains for crop production similar to the Central Highlancds, but the larger part is in a low rainfall region.

16. The lowlands surround the highlands and the largest portion is in the east, which is also the driest (Eritrea lowlands receive less than 200 mm a year, Awash, Wabi Shebele and Genale lowlands less than 400 mm). In thke narrower western lowlands rainfall increases from north to south (Tessenei 330 mia, Humera 500-600 mm, the Baro and the Omo river basins over 600 mm).

17. The rivers of Ethiopia run a large part of their course in deep gorges. Surveys have been made by the Awash and Abay rivers and have indicated lowland irrigation areas suitable for agricultural development. At present, a survey of the Wabi Shebele river basin is being conducted. The other seven major rivers remain to be surveyed.

18. The soils of Ethiopia are very varied. The red and the dark soilst of the Central Highlands are derived from lava, mainly basalt and are clayey in texture. The color is often associated with the topography, the red, usually acidic soils occurring mainly on the slopes and the dark slightly alkaline soils in bottom land and valleys. Both soils erode but - 6 - are more stable than the limestone and sandstone soils of the northern and eastern highlands. Both the red and the dark soils are deficient in nitrogen and the amount of available phosphate is low; there is no widespread potassium deficiency. Fertilizer trials on these soils have given generally profitable returns to both nitrogen and phosphate application.

19. The soils of the Rift Valley include the lacustrine soils of the lakes area and the vertisolic soils of the Middle Awash Valley. The first are sandy, grey-brown to dark brown in color. Their texture suggests a low water holding capacity, and they give a marked response to phosphate application.

20. The soils of the Rift Valley include the lacustrine soils of the lakes area and the vertisolic soils of the Middle Awash Valley. The first are sandy, grey-brown to dark brown in color. Their texture suggests a low water holding capacity, and they give a marked response to phosphate application. In the Middle Awash the grey alluvial soils and the vertisolic dark brown soils are deep clay loams with a high content of available phosphate.

21. In the northwest lowlands the soils are black clay vertisoils. Chemical analyses indicate that they are probably deficient in available phosphate, but not in total nitrogen.

TAB'LE 2.1

PRESENT LAND USE /a Sq. KM! Percent

Annual Crops 96,800 8.0 Perennial crops (mainly coffee & enset) lb 10,000 0.8 Fallow 20,000 1.6 Pastures 662,400 54.2 Forests 87,800 4.2 Swamps 51,800 7.2 Barren land 172,100 14.1 Lakes and Rivers 120,900 9.9 TOTAL 1,221,900 100.0

/a Appendix 1 gives the estimated area, yield and production of the major crops and Appendix 3 the estimated livestock numbers. /b Enset is the false banana (Ensete ventricosum) cultivated in Ethiopia for food and fibre.

Source: Central Statistical Office. - 7 -

22. Present land use is given in Table 2.1. Land classified as Government-owned amounts to about 500,000 sq Km2 of which over 75 percent is in the lowlands, occupied by nomads, and with a grazing potential only.

23. The agricultural land at present in use, including fallow, totals an estimated 12,690,000 ha, i.e. just over 3 ha per rural family. The large majority of holdings, however, are a good deal smaller, particularly in the northern provinces. In Tigre 68 percent of the holdings are estimated at under one hectare, in Shoa 45 percent, in Gojam 51 percent and in Arusi 31 percent.

The Agricultural Economy

24. The larger proportion of the agricultural population of Ethiopia are concentrated in the highland regions. The population concentration appears densest above the 2,000 meter contour. Below the 1,000 meter contour population drops to less than five people per square kilometer. The number of farm families is estimated at 4 million.

25. The highland regions produce the greatest volume and value of crops. For example, in 1967, when the agricultural contribution to the Eth$ 3.5 billion GDP was Eth$ 2.1 billion, the combined value of the highland grain crops was more than Eth$ 631 million; the highlands also produced pulses and oil seeds valued at Eth$ 160, and coffee valued at Eth$ 225 million, making a combined total of over Eth$ 1 billion. In contrast, maize, typical of middle elevation crops, had a value of Eth$ 128.12 million and sorghum and sesame adapted to lowland conditions had a combined value of about Eth$ 157 million. Cotton, a lowland to middle elevation crop, had a 1967 value of Eth$ 12 million.

26. There are substantial numbers of cattle throughout Ethiopia. The large nomadic cattle, sheep, and goat herds of the nomadic tribes are in lowland areas. In the highlands, draught oxen and small milch herds are common. Livestock contributed approximately Eth$ 500 million to the GDP.

27. Highland agriculture is small scale. In the four highland provilnces, acreage cropped areas per holding in 1967 were (in hectares): 1/

Shoa 1.7 Arussi 1.9 Gojam 1.2 Tigre 1.3

Moreover, the holding is typically subdivided into smaller parcels. New settLers taking up land in the southeast highlands appear to be reproducing the same small scale pattern.

1/ Source: CSO as cited in The Economy of Ethiopia, Vol. II, Agriculture, May 17, 19157, s. 4. - 8 -

28. Main food commodities and their prices are given in Table 2.2.

TABLE 2.2

MAJOR FOOD CROPS

1967/68 1968

1000 1000 Price per Ha. Tons ton Highland Area Production (Eth$)

Teff 2154 1304 220 - 260

Wheat 1028 760 220 - 240

Barley 1693 1430 140

Middle Altitude and Lowland

Sorghum 1174 989 150

Maize 828 853 120

Source: Central Statistics Office, Grain Corporation.

29. Commercial farming and mechanized cultivation are recent in Ethiopia. The number of agricultural tractors registered with the Min- istry of Agriculture and receiving duty-free fuel rose from 62 in 1958 to 1,627 in 1969 (not including Eritrea which in 1969 had 415 tractors). For details on private investment in agriculture see later section in this chapter.

Scope for Increased Production

30. The prospects for the major crops and agricultural enterprises in the various regions are discussed in Chapter IV, and the present land use in the 14 provinces is tabulated in Appendix 1. The potential of the various regions is discussed below.

31. The Central Highlands. At present about half the total area under crops in Ethiopia is in the intensively cultivated Central Highlands (Gojam, Shewa, Southern pegemdir, Southern Welo, and Eastern Welega). These highlands represent Ethiopia's greatest agricultural potential and probably the one that will take the longest to exploit fully, as the area is vast and large parts are difficult of access. The soils for the most part are relatively stable, rainfall is adequate, and the standard of farming, considering the meager resources, is good. They are farmed in the main by subsistence farmers who lack an acquisitive outlook. The land tenure system (communal in parts of Begemdir and Welo, mostly tenancy in the others) coupled with isolation are serious disincentives. -9-

32. Over most of these highlands, the rainfall in July and August is such that waterlogging and lack of soil aeration hinders good crop establishment. Knowledge is required on how to handle these soils regarding: time of planting in relation to soil type, and methods (and cost) of drainage that do not contribute to erosion, but aids water retention for plant growth. There are now three research stations serving the highlands and already some information is available on better cereal varieties (the main crops), fertilizers and cultural practices; put into practice these would double the yields of teff and wheat now occupying some 2 million hectares of the Central Highlands. Varieties of malting barley will be available by 1972 and could meet Ethiopia's requirements if multiplied; impcorted barley for bottled beer is estimated to reach 15,000 tons by 1973.

33. Increasing production of oil crops and pulses, both of which preslently have an export market, will depend on the provision of technical knowledge.

34. Livestock numbers in the Central Highlands are high and oxen provide the maLn source of power. Apart from improving the relatively small fattening operations in the vicinity of Addis Ababa, a step that can be taken immediately is the improvement of milk supplies to the towns, by the establishment of milk collection schemes similar, though smaller, to the one operating successfully around the capital.

35. The potential of higher production from cattle, and increased production of sheep for export, is vast but veterinary services are still inadequate and investigations of methods and economics of improving cattle production, of the breeding of large sheep as required by neighboring countries, and of better management, better feeds and pastures, and the utilization of fallow land, have only recently started; their introduction will be a lengthy process.

36. The focus of the development effort in this region, as set forth in Chapter III, should be in selected areas near existing roads where some concentration of effort can be achieved.

37. The Northern Highlands. The highlands of Eritrea, Tigre, Northern Begemdir and Northern Welo have been intensively cultivated for centuries. Their potential now lies primarily in the ability to increase crop and animal yields as practically all arable land is already cultivated. The soils erode much more easily than those of the Central Highlands, and the: density of population has led to cultivation of steep slopes, destruction of the tree cover, and widespread erosion. Large parts are deficit areas due to erratic rainfall. Most of the region has a communal land tenure system and the majority of farmers cultivate plots too small to produce what they need. Large numbers migrate annually for seasonal work in Tessenai, the Humera area, the cotton and sugarcane plantations in the Awash Valley, and for coffee picking further south; permanent migration to towns continues to increase. This is now the most difficult region of the country for agricultural development and has so far received a low priority in the Government's development program. - 10 -

38. There is as yet little information about the possibility and methods of introducing modern agriculture under a communal system of land tenure; modest experiments could be an important and useful step in finding out. Perennial crops such as fruit trees, vines, olive, carobs and pistachios might be grown without irrigation if the tenure system allowed for their planting. A tradition of soil terracing exists and can be further encouraged, possibly by means of subsidies.

39. The main crops of the Northern Highlands are sorghum, barley, teff, wheat and oil seeds. Improved varieties of wheat and barley have been developed. Experimental results in Eritrea can serve as a basis for spreading improved varieties and practices. More work on oil seeds is required. Large parts of the region produce good quality wheat and its production can be encouraged; in the drier areas that are marginal for wheat, barley production could be encouraged. The formation of production and marketing cooperatives could be tried within the context of the communal holding system.

40. Water is a limiting factor in these highlands; its retention through terracing, and the better use of streams and underground water resources would widen the potential of these highlands substantially. The Government's present financial situation might not allow a start to be made within the present five year plan.

41. In the immediate future the contribution to the economy of the Northern Highlands will continue to come from the further development of commercial agriculture. The development of the subsistence sector is a long-term process that could start now; the valuable national resource of hard working people is already available.

42. The Eastern and Southeastern Highlands. In the Harrar highlands, the potential for crop production lies in the narrow region which normally received adequate rainfall. Soils erode easily but a tradition of terracing and contour cultivation exists; the standard of farming is higher than in the Central Highlands. The most important crop is coffee (over 10,000 tons a year) and Harrar coffee receives a premium over other Ethiopian parchment coffees. Sorghum, maize and chat are next in importance. The College of Agriculture at Alemaya has been conducting experiments mainly on sorghum and wheat, but no effective extension program has yet been executed. The scope for increased production lies in further improvement of the quality of parchment coffee (the lack of water precludes the production of washed coffee) and in the introduction of the higher yielding sorghums now available through a comprehensive extension, credit and marketing program and their extension to areas that are proving marginal for maize. Vegetables are being grown where water is available and small amounts are being marketed cooperatively in Djibouti, using the railway. Absence of markets and shortage of capital and experience is hindering expansion of this small pioneering effort. - 11 -

43. The experience that: exists on perennial suggest that experiments should be started now to study the possibilities of other perennial crops such as vines, olives, nut trees, carobs, etc., for the long-term development of this region.

44. The highlands of Arusi adjoining the Rift Valley have adequate rainfall, good soils, and an agricultural potential above the average of the other highlands. Barley, wheat, linseed and pulses are the main crops. The region is the location of a concentrated development effort in the form of a so-called "package program" involving extension services, improved techniques, the provision of inputs and credit and marketing facilities provided by the Agricultural Development Unit (CADU) in the center of Chilalo Awraja. The expectation is for doubling of yields, particularly of wheat, from about 10 thousand hectares, over the next 10 years. Increases in the production of oil seeds and pulses will depend on finding better varieties. Steps to improve cattle and fodder and pasture production have started, but it is anticipated that their application will be slow.

45. Prospects in the rest of the Arusi highland lie in extension of the efforts of CADU beyond the present area. One of the major social difficulties is that the average holdings are larger than in the other highlands; owners often themselves farm part of their land, leasing the remAinder to tenants. A rapid increase in mechanized farming would mean the dislocation of small tenants, who in this case could not be given alternate farms, as the lower altitude areas are limited and their pastures heavily utilized.

46. The Bale highlands have in general a poor potential. They are cut by ravines and for the most part do not receive adequate rainfall. In the northwest part there are areas higher than 2,000 meters, now used for cattle, which might be suitable for cereal and sheep production. Much more information on these highlands is needed.

47. The Southern and Southwestern Highlands. The highlands of Ilubabor, Gemu Gofa, Kefa and Sidamo are the least developed in the country. More recently settled, the density of population, excepting parts of Sidamo, is lower than in the other highlands. The rainfall is high and well distributed, and they have a very good and as yet unexploited potential of becoming one of the most important surplus producing regions of Ethiopia.

48. The main crops are maize, coffee and enset. Sorghum, teff and barley are less important. Apart from coffee, farming is in the main subsistence and at present no surpluses of food grains are being produced. Most of the potentially arable areas are remote and there are very few internal roads. The opening of new areas is proceeding, however, and will accelerate as new roads are constructed. Large tracts belong to absentee owners who may start developing them if the present draft law on taxation of idle land is passed; greater incentives would be improved accessibility and credit. -- 12 -

49. In addition to increasing areas producing traditional food crops, good prospects exist for improving the quality of parchment coffee by expansion of the extension services, and by increasing the production of washed coffee (from the present level of 6,000 tons to about 20,000 tons a year by 1976) through the implementation of a coffee processing project now being discussed. There are also good prospects for increasing maize yields and the introduction of high value spices for which export markets exist. Large parts of these highlands are suitable for tea production, of which only 10 ha are now planted. Although portions of these highlands require drainage, the excellent rainfall distribution suggests that large dairy herds can be supported.

50. The Jima Station of the Institute of Agricultural Research has been working on coffee improvement and processing, and on maize and other crops since its establishment in 1967. The results of the Bako Research Station in Welega may also be applicable to parts of these highlands. Early in 1970 the Welamo Agricultural Development Unit (WADU) started a "package program" in Sidamo that should improve the production of 6,000 highland farmers and 2,000 lowland settlers in the coming six years.

51. One of the main problems at ,resent is inadequate information on the effects of forest clearing in the higher rainfall areas. The presently cultivated small farms growing enset and coffee are well maintained, but evidence suggests that large scale removal of the forest cover without adequate conservation measures will lead to severe erosion. A survey of these highlands probably could be combined with the survey presently planned by the Coffee Board, which includes the forest coffee regions.

52. The Lowlands. Until recently the lowland areas were used solely for grazing and were inhabited by nomadic pastoralists. Endemic malaria discouraged highland farmers.

53. Even should a third of the total area estimated as suitable for rainfed arable crop production in thie lowlands prove unsuitable, over 5 million ha would still be left for development. At present it is estimated that over 200,000 ha (4 percent) are under cultivation, about half of which is in the Humera area of the Northwest lowlands. The development of Humera has created an impetus both for private enterprise and Government. The Government has formed a technical group to identify similar areas in the near future. Areas northeast of Addis Ababa on the Dessie Road, the Rift Valley, the Shire area of Tigre, the Didessa Valley and Jigjiga have been suggested. Private farmers have moved into the Mieso and Jigjiga lowlands of Harrar province and to the Metema area of Begemdir. All these could be farmed profitably if cotton, sesame and sorghum prove suitable.

54. The amount and distribution of rainfall in most of the lowlands is not yet known, however. Where the rainfall limits production to sorghum, the remoteness of these areas and the high cost of transport may deter economic development. This might be true for large parts of the lowlands - 13 -

in the Southeast, East and Northeast. The rainfall in the West and Southwest lowlands is higher and more dependable but the problems of communications remain.

55. The development of commerical agriculture by private enterpreneurs deserves high priority. A concentration on the further development of the Humera region may bring the total area under cultivation within the next six years to 300,000 ha. The Ministry of Agriculture, which controls the issue of permits for duty free fuel, can encourage the development of mechanized large scale farming in suitable areas, and conversely discourage it in marginal ones. The availability of credit and the inclusion of identified promising areas in the Imperial Highway Authority program will act as added incen,tives. Rapid progress in many lowland areas will depend on the time required for resolving the land tenure situation and grazing rights.

56. The other two major potentials of the lowlands are livestock and irrigated crops. The dry conditions of the Eastern lowlands and the pre- valen,ce of trypanosomiasis in the Western lowlands suggest that development of the Southern lowland regions for livestock production should receive priority. This area has large herds of one of the better cattle breeds in Africa (Boran) and the management ability of the herdamen is good. The implementation of the National Range Development Project, with its emphasis on waiter supply1 , will be an excellent start. By 1978, it might be possible to start a similar one in the lowlands of Harar Province,

57. Where irrigation possibilities exist, for example suitable soils in the basins of Ethiopia's major rivers, a wide variety of crops including semitropical and tropical fruits and vegetables can be grown for local consumption, import substitution and for export. Surveys of the Awash and Abay rivers indicate the availability of about half a million hectares of such soils. A isurvey of the Wabi Shebele and some hydroLogical studies of the l'ekeze and omo rivers are now being carried out; other major rivers remain to be surveyed.

58. For the development of the Awash Valley, the Awash Valley Authority is being strengthened, transport facilities are being improved, foreign and local concessions are being encouraged, and organized research is being carried out. These should lead to the development of the full potential of the valley (150,000 irrigated ha) within the next 20 years.

Agricultural Planning

59. At the end of the second year of the Third Five-Year Plan, judgments of the progress of agricultural production are limited by lack of reliable data. Reported production figures are actually estimates; price data are weak exccept for export commodities. Available estimates for the relatively favorable years of 1968 and 1969, of doubtful reliability, show that the annual growth rate of agriculture was about 2 percent against - 14 -

the goal of 3.1 percent. It does not appear that Plan goals are being achieved. However, it is noted that, because of the corporate structure of cotton and sugar production, changes in output can be effected in part by management decision controlling large increments in output. However, in the case of cereals, oilseeds, and pulses, achievement of plan goals would require very substantial improvement in the next three years from producers who are predominantly small farmers who are hard to reach and to change.

60. The development effort needed to raise agricultural production is discussed in Chapter III. In this section, we wish to concentrate on certain matters which are of fundamental importance to planning: price incentives and programming and budgeting procedures.

61. In general, agricultural terms of trade are not favorable. For example: agricultural production performance was better in the period 1966-69 than in 1961-66. But this was obscured by sharp changes from a 25 percent increase in prices for the agricultural crop as a whole in 1961-66 to a fall of 2.5 percent in the 1966-69 period. For marketed agricultural commodities, the corresponding price changes were 37 percent and 4 percent, respectively. While 1961-66 increases were aggravated by the 1965/66 drought, nevertheless, there has been a deterioration in agricultural terms of trade since 1966. The significance of this is hard to judge, but it is a worrisome change of direction. bMore fundamentally the general position of farmers in the market place is still very weak. Smaller farmers with a surplus tend to sell crops at harvest when prices are at the year's low; moreover, they stand at the end of a long chain of processors, traders and merchants where the trading margins and transport costs discounted in the farmer-seller prices become successive increments in the farmer-purchaser prices. The terms of trade for agriculture raise important questions of policy in terms of real income and production incentives. Imporvements in the marketing process, both in physical and monetary terms, could have as great an influence on output as the provision of higher quality inputs. Formulation of development projects, identification of agricultural development opportunities, and the entire scheduling and programming of development activities form another basic aspect of the planning process. Measures are already being taken to improve planning. A policy to establish ministerial planning units has been implemented in the three principal Ministries concerned with agricultural development, i.e. Agriculture, Community Develop- ment and Land Reform. Also, the former Planning Ministry has been trans- formed into a Planning Commission headed by a Minister of State under the Prime Minister. The agricultural section of the Planning Commission has a small but competent staff.

62. It is currently proposed that agricultural development projects be identified at provincial levels and reviewed at the capital. Past practice has been to identify projects on a more or less ad hoc basis between individual ministries and donor groups for review by provincial authorities. The proposed procedure, together with the ministerial planning - 15 -

units, might make for more orderly flow of development proposals. At this stage, Ethiopia has a considerable stake in the formulation of projects for consideration by sources of external finance and technical assistance. It should be added that the several multilateral and bilateral groups have attempted to achieve more adequate coordination in generating smoother project-finding operations. Despite a somewhat chaotic past, the prospects for a more orderly future seem bright.

63. Allocation and disbursement procedures deserve special mention. Difficulty has been caused by arbitrary and often unanticipated changes in the release of approved funds. The amount of "allocations" to various projects often has little relation to the implementation capacity. Table 2.3 indicates changes from approved to implemented levels for 1968-1969.

64. The 'Planned" column represents the joint judgement of the Ministries of Agriculture and the Planning Commission as to budgetary levels required to meet Plan objectives. The "implemented" levels, indicating the levels of expenditure actually accomplished, were below "planned" and "approved" levels, sometimes substantially so. In the Ethiopia context, capital allocations provide for development projects and for the necessary materials and procurements other than personnel in the regular establishment. Disruptions can have serious consequences. In 1968/69, the Extension Service waited six months for release of capital funds. This meant that field workers were immobilized because of inability to purchase motor fuel and were unable to advise farmers about important farm operations. In the same period, the Plant Protection and Production Department received its capital funds in the eleventh month of the year. In seven months out of the year, the Forestry Department received no capital funds, with the result that nursery seedling and afforestation efforts were partially lost for an entire growing season.

65. More efficient budgetary procedures have become urgent because of the impact on Government revenues of the fall in coffee prices and the closing of the Suez Canal. Ad hoc reductions in planned expenditure levels are not conducive to the systematic development of agriculture. Absence of an audit function and of adequate communications makes possible unofficial reallocations within Ministries. The mission was informed that disbursements to Ministry field operations were made directly to Provincial offices without knowledge of the Ministry secretariat or the department involved. Funds were sometimes reallocated at the provincial level again, without notification to higher echelons. The USAID - assisted 800 square mile livestock development pilot project near Yabello in Sidamo Province has not turned a wheel since June 1969 because of inability to obtain motor fuel for heavy equipment already on the ground, while project staff are unable to carry on scheduled activities. It should be possible in such circumstances to redeploy staff to useful work, otherwise more energetic and capable individuals may seek other employment.

Private Investment

66. The Intention here is to point out some of the conditions which affect private investment, since it is the prime means of agricultural - 16 - development. Many of the institutional factors have already been discussed, but there are also special opportunities and dangers which deserve discussion.

67. The conditions of agriculture in the highlands, where an estimated 80 percent of farms do not generate a market surplus, severely restrict the opportunity to create new capital. While this present pattern of land holding prevails, investment should be primarily labor related: fertilizer, improved seeds, pesticides, better practices, and better tools. Longer term capital improvements should take the form of improved farm drainage, soil conserving structures, fencing, small eucalyptus plantations on steep slopes, small unit winnowing devices, and improved on-farm storage facilities. In some localities, it may be possible to experiment with custom-hire land preparation, using mechanized equipment owned collectively or provided by private enterprise; the Chilalo and Wollamo operations may provide significant experience in this respect. 1/ The dangers of introducing large unit mechanized agricultural equipment should be recognized. The small holder farming system would be threatened. The tendency would be toward consoli- dation of holdings to realize l:he efficiency of mechanized equipment. Areas with a high proportion of tenants would be most vulnerable e.g. Shoa, Arussi, Wallega, Gemu Goffa, and Wallo where 58 percent of the farmers are wholly or partly tenants, because it would be to a landlord's advantage to evict tenants and farm the land himself. iniformal reports from CADU officials say this has begun to happen in the CADU area.

68. On-farm investment is not the only form of private enterprise in agriculture. The development of service industries is the mark of a modernizing agriculture. The nucleus nature of this investment can be seen in the cluster of enterprises related to agriculture at Debre Zeit in the typically small farmer Ada district. Among the more notable are the Savajian cattle feed lot and stall feeding and dairy enterprise, the Tedla Desta system by which a land owner provides to tenants improved seed, a tractor hire service, fertilizer and pesticides; the Riddleberger hybrid maize enterprise, the Belladini plant and citrus nursery using modern technology, the establishment of a branch of the Commercial Bank of Ethiopia and the beginnings of fertilizer and pesticide distribution. While the proximity (45km) of Debre Zeit to the Addis Ababa market, making for a good communica-

1/ The Preliminary Report of the Appraisal Team on the Chilalo Agricultur- al Development Unit, (November, 1969, p. 13) makes the following point: "But in such over-crowded areas, with some underemployment of the labor force, too quick an introduction of the widespread use of tractors could be too costly, and will further increase underemployment. The same holds true where big landowners change from renting out their land as small tenants' holding to large scale commercial farming with tractors." TABLE 2.3

MI N IS T RY O F A G R IC U L T U R E

SHIMlS IN BUDGET ALLOCATIONS BY DEPARTMET, 1968/69 (Eth$ million)

DEPARTMENT PLANNED .1/ APPROVED 1/- IMPLEPENTED -/ Capital Recurrent Capital Recurrent Capital Recurrent

Animal Husbandry 2,178,000 500,187 2,044,200 500,187 401,720 337,129

Veterinary 1,083,000 2,409,993 1,083,000 2,756,222 453,391 1,909,351

Forestry 727,000 401,056 727,000 611,063 145,000 476,664

Plant Production & Protection 1,558,000 705,416 1,558,000 1,202,769 101,623 872,078

Fishery 132,000 138,547 138,547 --- 61)108 Head Office

Economics & Statistics 138,000 --_ 138,000 ___ 11,000 ---

Extension Service 145,000 927,690 145,000 988,510 75,300 514,075

Education 258,000 585,759 258,000 585,759 ___

1/ "Planned" and "approved" levels include foreign aid whereas "implemented"does not. However very little of foreign aid programs were implemented.

- 17 - tion linkage, is perhaps a key factor, the materialization of such a range of enterprises is a very important sign that where reasonable investment opportunities can be seen the private sector is a dynamic factor in rural development. In their geographic areas, both CADU and WADU should create a favorable climate for auxiliary enterprise to development.

69. As emphasized earlier, Ethiopia's development strategy places considerable short-term stress on realizing the opportunities for corporate and commercial agriculture. The pattern of such investment, which is necessarily primarily foreign at this point in Ethiopia's history, is already well established in the form of concession sites operating on Government owned land. Over the years substantial numbers of individual concessions have been granted. In contrast to Kenya and Tanzania, for example, most have failed. It is likely that failure was due to lack of capital and managerial skill. The record of failure has probably deterred the expansion of this form of enterprise. But there have been notable cases of success.l/

70. In Eritrea, for example, there are at least three examples of corporate initiative based on concessions. The famous Elaboret estate near Keren, established in 1908, managed by Luigi DeNadai, is an example of both horizontal and vertical integration in agriculture. Originally specializing in sisal its principal lines now include dairy, swine, citrus, and vegetables, some products are also processed, packaged and transported. The Societa Impress Africane (SIA) operates 16,000 ha. of irrigated cotton at Tessenei (Isooha estate and 2,000 share farmers). The Dumco Company, established in 1952, produces fibre from wild doom palms along the Barco river; it has a large labor force. In Welamo, Sidamo province, the Billate firm produces irrigated cotton and chillies. The concession plans to produce vegetables for dehydration.

71. Sugar is produced by the Dutch HVA concern on their Wonji-Shoa and Metahara plantations on the upper and middle reaches of the Awash drainage. The combined potential productive area approximates 12,000 ha; total capital investment is over ETH$ 60 million, about one sixth by Ethiopian shareholders. In 1968/69, after paying ETH$ 14.5 million as excise, transaction, and income tax, HVA paid its yearly dividend of ETH$ 5 per share; for the Metahara unit capital return is about 8 percent. This well managed corporation, in operation in Ethiopia since 1951, is an instance of profitable investment in specialized crop production under long term concessional privileges integrated with processing and sales functions.

72. The Tendaho Plantation Share Cordpany on the lower Awash, a partly British owned concern, commenced cotton production in 1962 and now meets

1/ This discussion of corporate and private foreign agricultural concessions is based on the 2 volume Burke-Thornly A Policy-Oriented Study of Land Settlement, December 1969, pages 30-38. - 18 - over 25 percent of the raw cotton requirements of domestic textile mills. Operations are expanding from an original 4,500 ha to 6,700 ha. After several initial poor years, the plantation is now in the black. Here too, good management and concentration on a single industrial crop has paid off under a long term government concession. An illustration of how a successful venture stimulates enterprise is the successful Dinko-Marko 5,000 ha operation at Setit Humera which apparently sparked a 100,000 ha development in dryland cotton, sorghum and sesame. Another possible illustration is the stimulation of dairy farming in and around Addis Ababa by several successful foreign owned mixed farming enterprises.

73. The one-man Montenari operation is cotton along with substantial acreage of tobacco, citrus and vegetables. Montenari produced 180 tons of flue-cured Virginia tobacco in 1969 and employed over 6,000 seasonal workers. The proposed Melka-Sadi-Amibara 14,000 ha irrigation project in this same general area may afford substantial opportunities for private initiative, both in large and moderate sized commercial agriculture. It is anticipated that land tenure will be in the form of 30-year negotiable leaseholds. Some 12,000 ha are proposed for commercial farmers or corpora- tions. 1/ This proposed project might provide a model of the effect of private enterprice in connection with irrigation development. The proposed Shashamane project is a prototype of possible tractor-based cultivation by larger operators.

74. The Government's attitude toward investors in generally favorable and liberal. The Investment Proclamation of 1966 provides benefits, priv- ilges and exemptions for encouraging and stimulating both foreign and domestic private capital investments; these apply to agriculture. The National Bank of Ethiopia is authorized to make available foreign exchange to assure repatriation of funds belonging to foreign investors. Moreover, government has assisted in the financing of some foreign agricultural ventures. The principal benefit which the country may receive from foreign investment is the rapid expansion of exporlt or import-substitution crops. Government policy viz-a-viz foreign investors should be insistent on this point. The Government should actively seek out prospective investors and help them through the preliminary steps for actually securing land. Such a service should be commenced immediately. A number of areas of public land have a crop potential. The 26,852 k2 area in Welega province with a cotton-maize potential, (Appendix 6) seems to be the only substantial area with good prospects for the immediate future, the highest priority in this area is 2,698 sq Km2 in Lekemt Awraja.

75. Increased opportunities for corporate scale agriculture might be made available by offering the existing state farms to private enterprise. These would include farms administered by the Ministry of Community Develop-

1/ Draft Appraisal Report, Melka-Sadi-Amibara Irrigation Project, Annex I, page 4. - 19 -

ment at Arba Minch in Gema Gofu province; the Awasa farm in Sidamo; the Min- iLstry of Agriculture operates the Aber Nosa ranch in Showa. There seems to be some doubt as to whether these farms will be successful as state enterprises. 1/ In general such enterprises have not been successful in East AfricEt.

;'6. An important hindrance to private agricultural investment is uncertain land tenure, which prevails in one form or another over much of Ethiopian agriculture. The problem relates to highland and lowland investment, as discussed below.

Land Tenure

77. In the heavily populated highlands, principal forms of land tenure are (a) the Communal system of the northern highlands, principally in Tigre, Blegmdir and Gojan provinces, where occupancy rights are based on inheritance through the extended family and (b) more conventional tenure forms found in the Central and Southern highlands, principally in Shoa, Arussi, and Wollega provinces. Under the former system, uncertainty is caused by the possibility that claimants may challenge an occupant at any time on grounds of familial inheritance. Under the latter form, tenants pay high rents and may be evicted at will. In the lowlands, tribal rights to grazing lands are subject to intertribal disputes. In these areas too, land disputes arise over occupancy due to uncertain or erroneous boundaries of government grants. Overall, disputes about land rights are prevalent, litigation is frequent and long drawn-out. Officials of the Ministry of Land Reform believe both are increasing. In addition insecurity has resulted from the politically agitated question of land reform. In 1966, a Ministry of Land Reform was established, and in addition, a three-part comprehensive land reform statute wTas drafted. Despite strenuous official efforts, no statute has been enacted. Three years of agitation have ensued. Landlords anxious to avoid possible expropriation have evicted tenants who might, through continued occupancy, become owners. The net effect overall may have been to increase tenant insecurity.

78. The uncertain nature of land tenure rights creates a cloudy situation which continues to be a major disincentive to land improvement and better farm practices along with the disincentive of physical isoloation and lack of market facilities.

1/ Ministry of Land Reform and Administration - A Policy Oriented Study of Land Settlement, December 1969, Volume I, page 30-35. - 20 -

79. These considerations point out the need for (a) passage of pending land reform legislation; (b) a recognition that permissive judicial attitudes toward an increasing volume of land litigation add to tenure insecurity; and (c) the enforcement of a substantial tax on privately owned unused lands and absentee landlords: (d) expediting cadastral surveys. - 21 -

III. THE DEVELOPMENT EFFORT

Plan Projects

80. Certain projects have been assigned a key role in the near-term development strategy. Thus there is good reason for leading off the discussion of the development effort with a brief look at the scope of these projects. Eleven projects are grouped loosely by category.

81. Package Programs. The objective of so-called "regional development package programs" is to achieve agricultural development and increase,d participation by local people through the "package" approach. This m,ethod forces intensive application of inputs, of extension service, credit and market services along with availability of improved seeds, fertilizer, pesticides, etc. in a carefully selected, restricted area.

82. The joint Swedish-Ethiopian Chilalo Agricultural Development Unit (CADU) and the joint IDA/Ethiopian Wellamo-Soddu Agricultural Devel- opment Unit (WADU) are both already under way. A third such project, known as the ADA District Project, has been proposed but not initiated. A more limited extension project in Awasa would be based on the same general approach, as in fact might be the Government's approach to servicing all large project areas.

83. CADU, located in Chilalo Awraja of Arusi province, 175 km south- southeast of Addis Ababa, was activated in 1967 as a three-year undertaking and has been completed. The second five-year phase is currently being negotiated. Phase I CADU costs were about Eth.$ 14 million; the Swedish grant contribution was over Eth.$ 8 million, estimated internal rate of return is about 20 percent, the estimated cost of Phase II is Eth.$ 19 millioni with the same rate of return.

84. WADU is located in Wellamo Awraja of Sidamo Province about 275 km south-southwest of Addis Ababa. Both purpose and methods of WADU are similar to CADU, but it also includes a substantial settlement operation in the adjoining Rift Valley. Project cost is Eth.$ 12.6 million, IDA credit is Eth.$ 8.7 million; the estimated economic rate of return is 13 percent. CADU and WADU are, so to speak, bell wether projects in that they must be looked to for evidence of how effective the "program approach" can be. Farm management studies have not yet been initiated in these projects, sio constraints to progress have not been identified in the order of their importance. Both technical agronomic and economic questions need to be answered. Aside from the internal problems connected with the projects themselves, broader issues are at stake:

(at) At what rate could development be expanded to surrounding areas outside the projects?

(b) Are such independent development units the best approach to management under Ethiopian conditions? - 22 -

(c) To what extent should the provincial and sub-province administrators be involved in the development effort, and what is the best way of achieving this?

(d) Do such projects make it easier to recruit, train and retain staff in the field? Chilalo's experience to date in this respect has not been encouraging.

(e) Finally, what are the prospects for development of agricultural settlements in dryland areas, a field in which the Government has had no experience?

85. The proposed Ada District Development Project, very similar in concept to the CADU and WADU projects, was prepared by USAID in May 1969 for Ada District, Shoa Province. The development would be centered around the town of Debre Zeit, 70 km southwest of Addis Ababa. The proposal is based on research by Stanford Research Institute (SRI). 1/ The project area comprises 16,000 farms; its named objectives include improving agricultural production, including speciality crops, livestock and dairy, and poultry. Other project objectives include research, marketing, cooperation and credit. The internal rate of return, as estimated by SRI, would be 32 percent. The total cost would be Eth.$ 16 million, of which Eth.$ 12 million is assumed to consist of external loans and grants.

86. A merit of the proposal is the location of the area close to the capital. This would assure good market opportunities for a variety of products including fruits and vegetables, poultry and livestock products, in addition to the standard highland teff and wheat production. Existing infrastructure in the area includes a veterinary college, a veterinary laboratory, a research station and several substantial commercial enterprises. Shoa province has twice the number of extension agents and supervisors of the other provinces. Intensive fertilizer demonstrations have been carried out in the area. However, the condition of farming is at the level of low productivity generally found among subsistence farmers. More detailed investigations are required to support the preliminary project design.

87. The Awasa Rural Extension Project, another possible "package type" project, is located in Shoa and Sidamo Provinces about 220 km due south of Addis Ababa, on the eastward slope of the highland adjoining the Rift Valley. The project cost is Eth.$ 1.5 million. Actually, it is one part of a complex which includes the Awasa State farm of 4,000 ha and a processing complex. The Extension Project was estimated to have a capital outlay/value added rate of 3.4 and an economic return of 30 per-

1/ Stanford Research Institute, Report No. 14: A Development Program for the Ada District. Based on a Socio-Economic Survey: March 1969. - 23 -

cent. 1/ The proposed project aims at improving the production mainly of maize of about 18,000 small farmers by the provision of extension and demonstration services. Increasing maize production is linked to the estab- lishinent of a starch plant in the industrial complex. Other possible crops include tobacco, peppers, and beans -- these have been encouraging results in experiments at the Ministry of Community Development Awasa Farm. The proposed project will involve the Ministry of Community Development in direct, full-time agricultural extension work which to date has been the domain of the Ministry of Agriculture. The area would overlap to some extent the area included in the Shashamenne Agricultural Development Proj- ect (see below), and it is not known how the question of jurisdication would be handled. The proposed project does not at present include the provision of inputs, and it is assumed that these, and the necessary Cred- it and Marketing facilities, will be developed.

88. The Northwest Lowlands Development Project and the Proposed Shashamenne Project. The Humera project, for which an IDA credit was recently signed, is located 600 km northwest of Addis Ababa. The total cost of the project is about Eth.$ 12 million. Basically designed to provide infrastructure (a road, bridge, water supply and a demonstration farm) to support the area's expanding commercial agriculture, the project also includes studies for a Phase II agricultural development of this area. The IDA loan was for Eth.$ 8.7 million (US$3.1 million), covering foreign exchange costs. The development of the Humera area provides a much needed stimulus to the development of commercial dryland farming; its development by private entrepreneurs has been the most significant success story of Ethiopian agriculture in recent years. Extreme care has to be taken in promoting its further development, particularly with regard to the maintenance of soil fertility, the marketing of the three principal crops (cotton, sesame and sorghum), and the potential for other crops. The permanent capital investment of the entrepreneurs is small, and the land tenure situation is vague, so continued spontaneous development cannot be takeni for granted.

89. The proposed Shashamenne project in Shoa and Sidamo provinces, 250 km south of Addis Ababa, is situated on the westward down-slope of the southeastern Rift escarpment and extends across the Rift floor. The estimated internal rate of return is 21.3 percent on an estimated Eth.$ 11 millLon investment, of which the donor's estimated share would be Eth.$ 10.2 milllion. It is under consideration by USAID. The basic aim is the promotion of moderate size commercial agricultural units mainly by the provision of supervised credit for machinery. Available information indicates that

1/ Societe d'Aide Technique et de Cooperation. Agricultural and Industrial Development of the Awasa area, Final Report, Summary and Conclusions, July-October, 1968, page 41. - 24 -

the collection and interpretation of data on such units and their likely numbers, the cost of production and the marketability of maize and other alternative crops, and on the water-holding capacity of the soils of the area is essential. An alternative approach which might be a less expen- sive way of achieving the desired results would be the provision of credit for the purchase of agricultural machinery and the appointment of a few specialized extension agents, one an expert in machinery.

90. The Melka Sadi-Amibara Irrigation Project and Expansion of Tendaho Plantation. The proposed Melka Sadi-Amibara Irrigation project lies in the Middle Awash river valley about 175 km east of Addis Ababa. The project has about 14,000 ha of net cultivable land. The public investment portion of the capital costs are estimated at Eth.$ 80 million, of which estimated external financing would be Eth.$ 50 million.

91. The inability to find foreign or national entrepreneurs with sufficient capital to carry out the farm works in the Melka Sadi Amibara Project to the required standards will mean that the degree of Government involvement in the provision of irrigation and supporting works and services would have to be large and costly. It would be under the management of the Awash Valley Authority, which apparently is to receive expected funds in the 1970/71 budget for strengthening its staff.

92. The concentration on export and import-substitution crops in this area is an essential policy decision for this sort of capital-intensive development of agriculture. Cotton grows well, but as requirements within the country are for relatively low to medium quality cotton, available from other areas, the area can specialize in whatever cotton is best for the export market. The production and economics of growing other crops such as tobacco, good quality wheat, confectionary groundnuts, haricot beans, citrus, vegetables, and the production of milk and meat from irrigated forage, are being investigated. It is essential that research work of the high order now being carried on should be continued.

93. The Tendaho Plantation Share Company, with a concession from the Government, operates in Wollo province, about 400 km northeast of Addis Ababa, in the lower Awash Valley. Two areas have been developed primarily for cotton production by the Concessioneer at Dubti and Dit Bahari, totaling approximately 8,000 ha. The yields of seed cotton in the past three years have been increased from 1.2 to 2.0 tons per hectare. A nucleus of able technicians now live on the project. Detailed plans are being developed to expand the Dit Bahari unit from 2,250 ha to 12,000 ha in two stages. It is expected that financing will be jointly arranged between the Govern- ment through the Ethiopian Development Corporation and British interests under the leadership of the British Mitchell Cotts concern. capital investment is estimated at Eth.$ 10 million with an additional Eth.$ 3.8 million of working capital from the Coffee Diversification fund. The final plan was due May 1, 1970. - 25 -

94. The National Range Development Project. This proposed USAID project is located in three units: Arrero - 4,800 square miles; Neghele - 3,200 square miles; and Darmetu, where the initially planned first unit of 2,000 square mniles may be later extended. This is all government-owned :Land. The purpose is the development of efficient-sized range management units initially involving improved cattle watering and controlled grazing; ultimately veterinary services and improved breeds are planned. The total five-year cost, 1970/71 to 1974/75, is estimated at Eth.$ 14.3 million, with total foreign exchange costs at Eth.$ 7.0 million, not including technical assistance and training for an 800-square mile pilot project llow financed by USAID. The cattle population is estimated at 8 million, sheep at 1.5 million. The estimated internal rate of return is 31-32 percent. The project approach to the improvement of livestock production in Ethiopia's lowlands is based on careful analysis of the factors involved. Unfortunately, the 800-square mile pilot project, located near Yabello in Sidamo Province, has been poorly supported and has not been able to produce adequate information on pasture production, the ecology of range regeneration, the water status in the ponds, the availability of ground- water and on the social and administrative feasibility of enforcing a rotational system of grazing. The project is now undergoing preliminary consideration. Work has been continuing since 1965 on the project.

95. The Proposed Addis Ababa Dairy Unit Scheme and the Coffee Proc- essing Pro-ject. The dairy scheme would improve the quantity and quality of miLk in the milk shed region surrounding Addis Ababa for fluid milk consumption and processing for the urban market. The scheme includes intensification of 400 small dairy farms, the development of 100 new larger inits and improvements on 20 Efxisting large units, establishment of a cross- breeding ranch, operation of the Holleta breeding farm, the import of 4,000 high-grade dairy stock, expansion of retail outlets, provision of additional market and transport service, intensification of veterinary supervision and research, and operation of an animal feed processing and supply unit. Proposed external financing would total Eth.$ 12.9 million of an estimated total cost of Eth.$ 19.4 million. The internal rate of return is estimated at 22 percent. The Government has presented this proposal to the Bank Group.

96. The Coffee Processing Project for the expansion of Ethiopian Coffees has been examined for feasibility by the Bank Group's Permanent Mission in Eastern Africa. Project locations would be Sidamo Province, 300 kn south of Addis Ababa, and in Kefa Province, about 300 km southwest of Addis Ababa. The proposal aims at converting 18,000 tons of hard unwashed coffee into mild washed coffee by installing 180 coffee pulping stations, constructing 750 km of access roads, and providing the necessary supporting services of extension, research, training, testing, and storage and marketing. The project's estimated total cost would be Eth.$ 31.4 million, the estimated external financing would be Eth.$ 16.9 million; the balance would be financed from Ethiopian public and private sources. D)epending on pric:e differentials for washed coffee, the internal rate of return would be from 21-35 percent. Both the Dairy and Coffee Washing - 26 - projects reflect the Government's wish to invest in quick income producing projects based on the premise that there is a growing demand and ready markets for both products: milk in the capital and washed coffee abroad.

Minimum Package Programs

97. Minimum package programs are proposed as a means of attacking a specific agricultural problem, e.g., the poor yields of cereals in the highlands, using the immediately available resources of the Ministry of Agriculture and a relatively modest amount of finance. The need for such programs arises from the inability of the Government either to undertake sufficiently large programs to reach most Ethiopian farmers or to support adequately the existing agricultural services. Apart from using existing staff, facilities and research data, they would include the provisions of some of the inputs required for increased production in these areas, e.g., improved seeds, fertilizers, and the organization of credits and markets. Because of the modest costs of these limited input programs, a number of them might be launched at the same time in selected areas.

98. The programs should start in easily accessible areas for which information on improved agricultural practices of immediate applicability is available and where present Ministry services and staff can be employed and strengthened; obvious sites would be in the vicinity of research stations, agricultural schools, the College of Agriculture, and in ecological- ly similar areas. The key personnel in these programs should be the staff of the extension service.

99. A successful precedent is the fertilizer demonstration work carried out by the Extension Department of the Ministry of Agriculture in conjunction with the FAO Freedom from Hunger Campaign Fertilizer Programme and the Institute of Agricultural Research. In 1969 over 900 demonstrations in 12 provinces were carried out, and results are listed below.

Yield in Kg./Hectare

Control 40 kg. N 47 Kg. P205 NP

Teff (305 observations) 820 1190 1250 1630

Wheat (135 observations) 900 1210 1290 1680

Barley (69 observations) 1110 1560 1610 2070

In a broad sense, the results can be regarded as the beginning of a fertilizer credit scheme for small farmers. Sixty half-hectare demonstration plots using both fertilizers and improved seeds were planted in 1969 in three provinces, and more than 300 farmers within the demonstration areas applied for and received credit for fertilizers. The morale of the extension staff increased markedly as a result of this work. TABLE 3.1

AGRICULTURAL RESEARCH IN ETHICPIA.

Stations

Commencement Sources Graduate Main Dates of Research Fields Assistance Staff of Work

Institute of Holetta Guenet, ) Ceareals, animal Agricultural Research Central Highlands ) a/ nutrition. 1966 ) U.N.D.P. 16- ) Melka Werer, ) Irrigated amnual Middle Awash Valley ) (Special and perennial 1965 ) 5 crops. ) Mund) Jimma, S.W.Highlands) Coffee agronomy 1967 ) 4 and processintg.

Bako, Western Central Federal Highlands Republic Maize, 1964 of Germany 4 oil crops.

College of Agriculture Alem Maya, Eastern Professors Sorghum, Highlands part-time horticulture. 1955

Debre Zeit, Central 4 Teff, wheat, 1961 poultry

Department of Asmara, Northern 2 Wheat, Agriculture - Eritrea Highlands barley. C. 1950

Ministry of National Awasa, Rift Valley France 2 Maize, oil crops. Community Development 1967

Chilalo Agricultural Asella, Arusi Highlands Swedish 4 Wheat, grain, Development Unit under Coll. of Agric. International legumes. C. 1963 Development under CADU Agency 1967 a/ lHoletta Guenet is the headquarters of the Institute of Agricultural Research and the number includes staff who also serve the other Institute's stations in soil fertility, biochemistry, pathology, entomology, economics and farm management studies, animal nutrition and pasture and fodder work.

- 27 -

100. A theoretical example of a minimum package program is set out in Appendix 8. It takes as its objective the doubling of yields per hectare of wheat (from 10 to 20 quintals) and teff (8 to 16 quintals) by the use of fertilizers, improved seeds and cultural practices. The tables give costs and benefits of the program if established in 10 locations (an arbitrary figure). The programs need not, of course, begin in 10 locations nor need they all begin in wheat and teff areas. Other areas can be included, provided research results prove equivalent yield increases by the use of the practices and inputs recommended. It is assumed that 1,500 farmers in each location could be reachecl by the sixth year after the start of demonstration work, and further that each farmer grows a half hectare each of wheat and teff.

101. It is assumed that one university graduate would be needed at each location, along with two Jirmma or Ambo Graduates and 8 Assistant Ex- tension Agents (plus appropriate clerical and wage labor and equipment). The headquarters complement at: Addis Ababa would require the assignment of perhaps five expatriate experts, two University Graduates and a couple of Jiimma or Ambo Graduates plus supportive personnel.

102. An order of magnitude of the costs involved, and the value of production increases, have been estimated. Assuming the cost of fertilizers and their transport to be Eth.$ 80 per hectare, the programs should provide an internal rate of return of about 15 percent. But recent experience in Ethiopia has indicated that bulk importation of fertilizers and the use of diammonium phosphate (instead of urea and triple superphosphate) can reduce the cost per hectare to Eth.$ 60. On this assumption the rate of return would be several points higher.

103. The Ministry of Agriculture is considering building agricultural centers in 50 locations by the end of the Third Five Year Plan, and increasing the number of extension staff stationed at these locations. The implementation of minimum package programs might not, therefore, require the building of additional offices nor the recruitment of eight assistant extension agents. The cost of the offices and the additional staff are included in the illustration to indicate maximum costs likely to be involved.

Thie Marke_ n of Grains, Pulses and Oilseeds

1(04. The Stanford Research Institute, in a recent study of the Ethi- opian mirket for grains, pulses and oilseeds, cited a number of weaknesses: capricious trading margins, insufficient, poorly located storage facilities, lack of grading standards, unsupervised weights and measures, inadequate and costly transport, lack of market regulation, an inability of government to intervene in markets, and loose articulation between markets. Losses sustained in handling and storing commodities are caused by adul- teration, lack of proper dehydration, spillage, exposure to rodents and insects. Price swings are large. - 28 -

105. Under these conditions prices do not sharply define market pre- ferences and do not serve as a guide in allocating agricultural resources. It is difficult for planners to identify comparative advantage among major food commodities. Lack of quality controls obviously hampers exploitation of foreign market opportunities and accounts for Ethiopia's poor reputa- tion in the trade. Furtlhermore, the commodities provide an important component of the national diet and consequently price changes significantly affect the real incomes of producers and consumers.

106. The Stanford study concludes that a grain price stabilization scheme could improve the pricing and marketing conditions in this trade. With the help of the UN/FAO World Food Program (WFP), a limited start was made about four years ago with a project to stabilize wheat prices. Man- agement and other problems have precluded the planned development of the project. The work could be performed by a reconstituted Ethiopian Grain Corporation if it were given broader powers and the original authority of the moribund Ethiopian Grain Board which was given responsibility in the grains, pulses and oilseeds trade for maintaining a national reserve and regulating the market system. The finance required for initiating a stabilization scheme could come from the new Ethiopian Development Corpora- tion (EDC) on a revolving fund basis by discounting storage receipts of the grain corporation as a means for maintaining its liquidity and lending levels. Organization planning could benefit from expatriate expertise, say one individual for a year and another for six months.

Agricultural Credit

107. Both the Chilalo and Wollamo-Soddo projects call for credit to be made available to farmers in the project areas. Apparently this credit will be limited to the.project area. Aside from this operation, institutional agricultural credit in Ethiopia is currently about Eth.$ 40 million, extended to larger preferred risk borrowers. The principal lending institutions have been larger banks plus the Ethiopian Investment Cor- poration and the Development Bank of Ethiopia. Borrowers from these institutions were frequently required to pledge urban real estate as colla- teral. Small farmers traditionally obtain credit from local money lenders, frequently for consumption purposes, at very high interest rates. Local money lenders often double in brass as landlords, traders and merchants. Recently farm machinery concerns have extended purchase-hire short term credit for a portion of the price of tractors to some commercial farmers.

108. Ethiopia needs a sound agricultu'ral credit institution. The most expeditious method would be to establish an agricultural credit department in the new Ethiopian Development Corporation (EDC). This institution, the result of work of the Financial Intermediaries Reorganization Commission of the Government, merges the former Ethiopian Investment Corporation and the Development Bank of Ethiopia. It will have as one of its objectives a General Credit Program for Agriculture, with a $10 million fund for agricultural loans outside approved and planned development projects. It will necessarily inherit agricultural loans made by predecessors. Hand- - 29 -

ling these loans could be made the initial taslc of the new Agricultural Credit Department: of the EDC. This procedure would be in keeping with the Commission's finding that like:Ly present volume and profit margins of institutional credit for agriculture would probably not now justify a separate agricultural credit institution.

109. There is a proposal in the Plan document that credit funds should be made available through multipurpose cooperatives which would be directly concerned with production and marketing matters. However, it would be pre- ferable for such cooperatives to serve as financial intermediaries responsible to the EDC. In addition, branches of commercial banks could become agents of the corporation, thus permitting fairly rapid expansion of agricultural credit operations to rural areas.

110. The Commission has already recognized the key concept of supervised credit, which means management of farm units in accordance with farm plans. This involves advisory functions of the Extension Service. Thus immediate tasks confront the EDC in developing an Agricultural Credit D)e- partment: (a) development of a specialized training program; (b) establishment of organizational linkage with the Extension Service and any other branchies of the Ministry of Agriculture which deal directly with primary producer.

111. The training program for Agricultural Credit specialists should include provisionls for overseas training of upper echelon personnel for periods of six months to a year and an in-country training program for middle echelon and junior specialists. Costs might be Eth.$ 75,000 and E:th.$ 100,000 spread over an 18-month period in addition to salary time.

1.12. The proposed Agricultuiral Credit Department of the EDC would have t:o take over supervision of the outstanding conventional loans of large borrowers and commercial farmers plus any additional applications from qjualified borrowers in this category. The minimum package program (described above) if adopted, would also have to be serviced. Loans of an aggregate amount of Eth.$ 1.5 million, over three years may be required, primarily for fertilizer and improved seed at the rate of Eth.$ 100 per hectare. Initia:Lly this kind of loan could be advanced in kind, not in cash, with arrangements for automatic liquidation at harvest. In addition, there should be some provision of credit for smaller farmers outside minimum and regional package program areas.

.gricultural Research

113. The organization of agricultural research is listed in Table 3.1. In addition, the Institute of Agricultural Research carried out experimental work at three outstations (North West Lowlands, Rift Valley, and Sheno, an area over 3,000 metres in the Central Highlands) and co- operates with cotton and coffee growers in various parts of the country in the carrying out of uniform trials on varieties, fertilizers, cultural. pract:ices, etc. Some experimental work is done at the agricultural schools - 30 - at Jima (maize) and Ambo (cereals). The recently started Agricultural De- velopment Unit in Welamo will include some experimental work in its program. In the private sector experiments are being carried out at Wonji and Metahara by II.V.A. (sugarcane) and by the Tendaho Plantations Share Company (cotton and other cropsl). Demonstrations carried out by the Ex- tension Service through the Freedom from Hunger Campaign Fertilizer Pro- gramme continue to provide useful data on soil fertility in the country.

114. Coordination of applied research work on a national basis is the responsibility of The Institute of Agriculttural Research which is receiving good support in its coordinating role; in 1967, a National Crop Improvement Committee was formed, and was strengthened the next year by the formation of subcommittees cdrawn from the staffs of the institutions listed in the chart, to collect data and organize national trials on the major food crops. Work on these is proceeding, and the results have formed the basis of a demonstration program bv the Extension Service. So as not to dissipate efforts, future research work at new sites or for new projects should be channelled through the Institute.

115. Three major fields of work require more research emphasis: farm management, so that recommended practices can be evaluated in economic terms; livestock, one of Ethiopia's biggest potentials; grain legumes and oil crops, which suffer from low yields. Tea and pyrethrum adaptability also should be explored. Shortage of finance and specialist staff may present difficulties in coping adequately with these fields and consideration should be given to seeking assistance from outside agencies and founda- tions to strengthen research facilities at the Institute.

116. To further improve coordination between the Extension Service and the research institutions, permanent liaison offices should be appointed to take active part in all the National Crop Improvement Subcommittees. It is a good idea for research staff to involve themselves in survey work, particularly in areas around their stations, and to continue serving on general and specialist planning committees.;

Aricultural Extension

117. The growth of agricultural extension services in Ethiopia has been slow and their contribution to development poor. The Extension Serv- ice of the Ministry of Agriculture has 13 graduate supervisors in the field and 110 field extension agents, mostly from the Jima-and Ambo schools, many of whom have had a year's training at the American University of Beirut; plus five graduates in Addis Ababa. This thin spread over a large country -- together with lack of adequate finance for transport and materials, the relatively recent availability of research results (and even when results are available the varieties, fertilizers, veterinary medicines, or credit for them are not) -- have meant a very haphazard situation. Ac- complishments include a modest afforestation extension program in Shewa, Sidamo and Tigre, distribution of better breeds of poultry in a few areas, and formation of youth clubs. In the last three years the most important - 31 -

and most successful function of the service has been the executing of the fertilizer demonstration program, which in 1969 reached 900 farmers in 12 provinces.

11.8. The Ministry of Community Development's village workers, who receive some training in agriculture, carry out agricultural extension work in areas where the Ministry operates. Conflicts with the Ministry of Agriculture extension staff have arisen in some areas at field level.

119. Specialized and limited extension services are operated by the Coffee Board (about 50 men with mainly regulatory functions), the Tobacco Monopoly (about 90 instructors in tobacco growing villages), and the livestock and Meat Board (10 men working mainly on hides and skins improvement). The staff of the College of Agriculture conduct a limited exten- s-ion program in t.he area around the College in Hararge Province.

120. The difficulty of stretching limited extension resources over the country is one of the reasons why the Government decided to implement package programs in selected areas. The first CADU took seven extension agents and one supervisor from the Service and then recru:ited further staff. The Unit established its own center for training assistant extension a,gents in 1970 and hopes to have one agent per 1,800 farmers in the subprovince over the next few years. WADU will pursue a similar program.

1.21. The 1968 increase in the pay of Jima and Ambo graduates from Eth.$ 250 to $35(:) a month has meant that the Extension Service is able to hire fewer of them. Staffing increases are essential and the proposed establishment of three training centers to provide one year courses to fifty eigth-grade graduates who can become assistant extension agents should help greatly, particularly if minimum package programs are adopted as a means of raising the production of farmers not now in the market economy.

122. The increasing number of commercial farms and plantations will require specialists of the type now found only on research stations. Pend- ing the building up of a cadre of specialists within the Extension Service, commercial farmers will have to continue to seek advice from research sta- t:ions.. The improvement of coordination between extension and research is v7ital., and as stated above, an initial step should be the appointment of permanent extension liaison officers within the National Crop Improvement Subcommittees.

l23. An outstanding issue is whether the various extension services within the country should be unified. Although a unified service would talce longer to build up the end result might be superior enough to warrant the extra effort. - 32 -

Veterinary Services

124. The present situation of the veterinary services of the Ministry of Agriculture is illustrated in Appendix 9. It can be generalized that for many years to come large areas of Ethiopia will be deficient in veterinary services.

125. Over the past five years Government has realized the problems it faces in a geographically difficult country with a huge animal pouplation and has given priority to veterinary services in its plans, but has been unable to support them financially.

126. The quality of the present service is good and the training given at the Animal Health School is well suited to the country's needs. A large mass immunization campaign has been started, and the Veterinary Laboratories now produce 11 million doses of vaccine against five major diseases. The Government hopes to eradicate rinderpest and pleuropneumonia within the coming few years. The major problems of diseases transmitted by the tsetese fly and those of internal parasites are a long-term job for the future.

127. The Government should aim at a minimum of a 15 percent increase in the capital budget (for field and laboratory equipment and transport) and a similar increase in the recurrent budget of the Veterinary Depart- ment. A large scale fellowship program should be initiated as soon as possible to increase the number of Ethiopian veterinarians.

Supply of Seeds, Fertilizers and Machinery

128. It is estimated that 500,000 tons of seed of the major food crops are planted annually. In 1969, less than 1,000 tons of improved varieties of these crops (mainly wheat, teff, maize) were produced in the whole country.

129. As experimental results become available and demonstration work increases, demand for improved seeds especially in areas within package programs will be created. Seed of improved varieties will have to be multiplied and distributed and seed laws passed governing the issue of new varieties and their certification. The Plant Production and Protection Division of the Ministry of Agriculture is officially charged with these duties but to date has been unable to fulfill them. The Division ran a seed multiplication station at Kulumsa in Arusi Province until 1967 when it was handed over to the CADU project. The station produced 400 tons of improved seed in 1969. The Division has about 1,000 ha of suitable land in other parts of the country but lacks the necessary manpower and finance to use it. A modest program, initially in one or two locations, would be a useful start to activate their seed multiplication program. Technical assistance should be sought for this and for the drafting of seed laws and regulations as soon as possible. Contracts with progressive farmers could be included as part of the scheme. - 33 -

130. The distribution of improved seed could be done through the extension service as part of, for instance, the minimum package program suggested earlier. The regional development programs like CADU and WADU will produce their own seed for distribution, either on the Government farms within them or on contract. CADU plans to produce 1,000 tons in 1970 (over half on contract) and expects that demand for the improved wheat varieties will increase rapidly with the availabilty of credit and marketing facilities. In other areas demand is at present limited to hybrid maize (60 tons were imported from Kenya in 1969) and to cotton seed, now being bought mainly from the Tendaho Plantations Share Company and from Tessenai. The Institute of Agricultural Research hopes to produce black- arm resistant varieties of cotton by 1972. Their multiplication would not be a problem.

131. The demand for fertilizers is small but growing. In 1964, 2,600 tons were imported, in 1968, 4,000 tons, and in 1969, 7,000, mainly for use by Tendaho, HVA., and the fruit and vegetable farmers in Eritrea. The larger farmers in the highlands and in the Rift Valley have started to use fertilizers but the present price of fertilizers and the nonavailability of credit are not encouraging. Urea, 46% N costs Eth.$ 280 a ton, triple superphosphate, 47% P205 , costs Eth.$ 320 a ton; transport costs from Addis Ababa are about Eth.$ 10 a ton per 100 km. In the package programs demand is expected to increase steadily.

132. The Government, in its locust control operations, and the large cotton farmers, are the only users of plant protection chemical in the country on a large scale.

133. Dealers in farm machinery in Ethiopia are willing to sell on credit. A problem facing farmers wishing to mechanize is the shortage of spare parts and skilled operators and mechanics. The number of tractors in the country is expected to dotuble to 4,000 or more by 1978. Apart from its control over the issue of duty free fuel for agricultural machinery, the Gov- ernment has not yet taken action regarding the availability of spare parts and of maintenance facilities. A tractor assembly plant is being put up in Addis Ababa, and a factory producing small agricultural implements will starlt operation this year.

Organization

134. Officially, the responsibility for the development of agriculture falls most heavily on the Ministry of Agriculture. Its responsibility, however, is not fully implemented by jurisdictional authority. Sev- eral functions directly related to agricultural development are delegated to other ministries or to independent units. Important livestock and meat marketing functions are in the Livestock and Meat Board. Marketing of grain, tobacco, and coffee involve special agencies, and the Ministry of Commerce and Industry. Land Settlement, Administration and Survey are re- sponsibilities of the Ministry of Land Reform. Cooperative and extension functions overlap with the Ministry of Community Development. There are - 34 - other examples. In addition, administration of the two regional agricultural package programs, CADU and WADU, although primarily within the Ministry of Agriculture, are in fact largely independent. Moreover, as specific development emphasis evolves, there is a tendency to resolve resultant administrative problems by prosposing additional proliferation as in the case of forestry.

135. The Government recognizes that this fragmentation of responsibility and function should not continue, especially in a situation where both talent and finance are in short supply. Improvements have been proposed, including: establishment of planning units within Ministries, and of regional development groups; formation of an effective Agricultural Inter- Ministerial Committee; a detailed study of the functions and relationships between these various bodies; reorganization of state economic enterprises on a commercial basis; and the formulation of a unified policy regarding responsibility for Agricultural Settlement projects, Agricultural Coopera- tive, credit and extension which will involve the Ministry of Agriculture and the Ministry of Community Development in programming work at Shashamenne and Awasa. In the Middle Awash some arrangements will be necessary to coordinate the Awash Valley Authority with both Community Development and Agriculture Ministries.

136. The Rockefeller Foundation has agreed to a government request to send a four-man team to Ethiopia for the specific purpose of studying the organization of agricultural services. The report of this group and its recommendations will possibly be available in August or September 1970.

137. In the meantime, it should be possible to launch an effort to collect and analyze data on farm management problems. This would mean adding agricultural economics and farm planning to the existing respon- sibilities of the Planning Unit of the Miistry. A second step would be for the Institute of Agricultural Research to undertake a vigorous program of fact-finding to provide as much "backstop" data and statistical deriva- tives for use by the Ministry. Some of this work could commence immediately using current CADU data.

138. Also, it may be useful to point out that the geographical regions of Ethiopia differ from the political subdivisions. The regional demarca- tions are very distinct and agricultural patterns conform closely to them. It would seem logical to set up regional organizations for Eritrea, North- west Lowlands, Northern and Central Highlands, East,. South, and Southwest Lowlands and Southern Highlands. Similarly, subregions of similar characteristics might be defined with extension and other field staff deployed by area rather than political uni'ts.

Responding to Short-Term Constraints

139. The current five-year plan has three years to run, 1970/71-1972/73. The mission has attempted to assess the implications of the development effort over five years but with etmphasis on the remaining years of the plan. - 35 -

It was necessary to estimate some expenditure items because of a slightly different breakdown, i.e. in some cases project expenditures may be included in the Ministry listing or, in others, projects may not have been committed to cost estimates. Since our objectives is to assess the general burden of the development effort, rather than to make a detailed budgetary analysis, an ad hoc procedure should be adequate to our purposes. The five-year development effort is set out in Appendix 4. At a rather :Late stage in this exercise, the Government's budgetary proposal for 1970/ 71 was received, after it had been approved by the Council of Ministers and proposed to Parliament in April, 1970. Consequently, the proposed budget has been added to the tabulation for purposes of contrast and analysis of the current situation and short-term constraints.

140. Ignoring the proposed budget for 1970/71 for a moment, the com- pilatLon of Plan expenditures indicates that, for the remaining three years of the TFYP, a total of Eth.$ 231.2 million in expenditures would be required. The main demand for resources would come from the projects related to the development strategy in force (see Chapter I):

(1) Package programs based mainly on crop production: Chilalo, Wolamo-Soddo, Ada.

(2) Package programs based mainly on livestock production: the National Range Development Project and the Addis Ababa Dairy Unit.

(3) Large scale commercial farming based on crop production for local consumption and for export: the Northwest lowlands and the Shashamenne projects.

(4) Irrigated agricultural projects largely for the production of import substitution crops and export crops: Melka Sadi- Amibara and the expansion of Tendaho projects.

(5) Agroindustrial: coffee processing.

(6) Agricultural Infrastructure: the strengthening of the Awash Valley Authority, the expansion of agricultural research, agricultural education and extension services; and the establishment of a Land Reform and Training Institute and of a Forest Rangers School.

:141. The projects included in the program represent a basically sound approach to rapid expansion of the monetary sector of agriculture, though as mentioned earlier some require further study before a final decision can be made on execution. The main point, hawever, is that this agricultural program is much larger than the one the Government has in process of implementation. Indeed, in terms of the annual financial requirements, it represents a very rapid acceleration of expenditures on agriculture. The feasibility of this program turns on: (a) favorable economic and technical appraisal; (b) availability of external capital assistance; - 36 -

(c) manpower availability; (d) availability of technical assistance for the early phases of implementation; and (e) adequate domestic finance.

142. In general it can be said that the bulk of the program is now or soon will be ready. The program is well founded in terms of attracting external assistance and, in fact, the projects are already at some stage of preparation or negotiation with external donors. Hence, availability of external assistance does not appear to be a constraint.

143. Manpower availabilty is another matter. The manpower implications of the program are roughly estimated in Appendix 5, in terms of Man Years required. 1/ There is very clearly a very significant gap between the supply of indigenous agricultural staff and the requirements of the projects and regular agricultural services for the balance of the TFYP. The manpower gap is greatest in 1970-71 and 1971-72 under the illustrated phasing of the program. It is emphasized that this gap does not consider the mission's recommendations that minimum package programs, as well as increased manpower for marketing and credit, be implemented in the TFYP. While some of the manpower gap might somehow be bridged or bypassed (with increased technical assistance, for instance) the evidence suggests that the annual phasing of the capitaL program, as outlined in Appendix 4, would have to be adjusted to meet manpower availabilities.

144. Whether or not a sustained flow of domestic funds can be maintained is another question, but the assumption here is that domestic finance availabilty is not a determining factor as far as what could be achieved, given the high prioritv that agricultural development warrants. It must be recognized, however, that budgetary planning procedures need to be tightened.

145. The 1970/71 budget proposed by the Council of Ministers alters the phasing of the capital budget from original projections. While all the implications cannot be assessed yet, it seems reasonably clear that the manpower requirements have been reduced. Deletion of items for Meka- Sadi-Amibara, Shashamenne, Tendaho, Agricultural Extension and Education, as well as postponement of the item strengthening the Awash Valley Author- ity, reduces the estimated staffing requirements for capital items from 583 to 307 man years. On the supply side, in 1970/71 there would be available for recruitment 213 graduates of professional and technical training schools. While these are by no means comparable figures, it is clear that an irriducible shortage of manpower exists. Still, the proposed budget would require only two completely new starts that year -- the Addis Ababa Dairy and the Northwest Lowlands project, and only a part of the latter refers to agricultural staffing. In any event the 1970/ 71 rephased financing of the Northwest Lowlands project has been greatly

1/ The situation is being reviewed and may be less serious than the table indicates. - 37 -

reduced from original proposals. And the manpower constraint may be less significant for organizations which already exist. Taking a generous view of the situation -- and recognizing that a certain amount of slippage may occur -- it is possible that the staffing constraint may not create in- superable problems for 1970/71 capital budget. The recurrent budget would be less serious from a staffing standpoint.

146. The budget does not contain provision for the proposed minimum Package Program or marketing and credit projects. These requirements were estimated at about 175 (Appendix 8) assuming it would be possible to recruit for these progams during the 1970/71 year. There is some double counting, however. In the case of the Grain Corporation, about 25 professional workers are presently employed, leaving 35 to be recruited in 1970/ 71, as many as 50 of the 114 projected for the 1970/71 Staff of the Mini- mum Package Program are also "on board".

147. It is not possible at this time to say what should give, given a critical short-term manpower situation. A high priority should be extended to the proposed new programs, and they should be considered as possible alternatives to full-scale package programs. But whatever the short-term outcome, a continued rephasing of the developmient program in 1971/72 and in subsequent years will quite probably be necessary, even taking into account the return of some 60 individuals now in overseas training in agriculture and affiliated subjects. The grace period established by the 1970/71 rephasing should be utilized for plans to coordinate the inevitable manpower constraint for 1971/72 and later.

148. A specific plan should be developed in the Ministry of Agricul- ture for more efficient utilization of all staff skills. This would involve a survey and review of existing professional and technical staff and their assignments aimed at upgrading and making better use of professional staff. Emphasis should be placed on such well-known methods such as assigning routine or repetitive tasks to nonprofessional staff under supervision, a pragmatic emphasis on personal capabilities as opposed to formal professional training, more emphasis on increasing the mobility of field staff, in-service training, etc. In many countries farmers and community leaders are willing for remuneration to undertake limited semi- formal training to serve as part-time technical workers, assisting at demonstrations etc. More aggressive recruitment is also needed. Agri- cultural careers can be pursued by graduates from such disciplines as engineering, education, physical science, including botany and biology, and the social sciences particularly economics, as well as dropouts from various University degree disciplines.

149. A manpower plan for agricultural should be drawn up by the Plan- ning Unit of the Ministry of Agriculture. The critical agricultural manpower deficiency could be viewed on a government-wide basis, i.e. other ministries might economize in their recruitment of new staff or second staff to help meet the more urgent needs of agriculture. A high level coordinating council, chaired by the Minister of Agriculture and in cooperation with existing educational and training institutions, would seem to be called for. - 38 -

IV. COMMODITY PROSPECTS

150. The prospects for improved production from the various regions of Ethiopia and from a large variety of crops and agricultural enterprises are good, provided a steady and sizeable flow of investments in agriculture is assured. Concentration on the traditional areas and crops whose production can keep pace with population growth and produce surpluses for export, and on lowland areas suitable for production of export and import substitution crops, involves decisions on priorities among a large number of commodities. The problems and prospects of the major ones are discussed below.

Coffee

151. Production statistics for Ethiopian coffee are unreliable and vary according to sources. The National Coffee Board estimates the 1966/67 production at 161,000 tons and the 1967/68 and 1968/69 production at about 200,000 tons. The estimate by the CSO for 1966/67 is 155,000 tons. Produc- tion estimation is rendered difficult.-by the fact that most of Ethiopian coffee is grown wild in the forest, although there is a substantial amount of garden coffee; 1/ the amount of plantation coffee is very small. Information about domestic consumption and stocks is also poor. Ethiopia has sought the assistance of the International Coffee Organization to conduct a coffee survey which, inter alia, should give a basis to develop better coffee statistics. However, export statistics are fairly reliable. The following describes the growth of coffee exports in recent years:

1963 1964 1965 1966 1967 1968 1969

Volume ('000 tons) 66.1 70.2 87.6 73.6 73.6 80.3 88.3

Value (million Eth.$) 110.9 158.8 188.2 155.3 139.2 153.0 173.9

152. Because of the dominance of coffee in Ethiopia's exports, any set- back in price, marketing and production can have repercussions on the rest of the economy. Production and marketing are left to the private sector, while the National Coffee Board performs some regulatory functions.

153. The Government now plans to concentrate its efforts on:

1/ It is generally recognized that Ethiopia is the center of origin of Arabica coffee grown "wild" in the highland forests of the Southeast region. Garden coffee refers to trees planted around homes by small farmers, and to trees in small areas, within the coffee forest, that have been cleared and cultivated but otherwise receiving little care. - 39 -

(a) Assessing the full potential and structure of the coffe industry, as very little information is available on the extent of the coffee areas, yields and costs of production;

(b) Increasing production, not by more planting but by improving accessibility to the forest coffee areas, and the improvement of cultural practices and of methods of picking and drying. The National Coffee Board estimates that over 15 percent of the total marketable supply are spoiled beans unfit for sale or consumption. Also by exporting part of the coffee production as freeze dried coffee;

(c) Improving coffee quality in general, and washed coffee in particular. The quantity of washed coffee is to be increased substantially, especially in areas where the quality is more suitable for washed processing;

(d) Setting up of a coffee exchange and the introduction of a grading and an auction system;

(e) Encouraging the formation of cooperatives to control production, processing, transportation and payments to growers;

(f) Financing research on quality and yield improvement, and on crop diversification in the coffee-growing areas.

154. The Government hopes to obtain the agreement of the International Coffee Organization to use its contributions to the Coffee Diversification Fund to finance some of the above actions, as well as to finance other development projects that will contribute to Ethiopia's efforts for diversification.

155. The general approach to the industry appears sound, but any reform that would raise costs should be examined closely. Past experience indicates that coffee supply in Ethiopia is price-responsive and that larger amounts reach the market when prices are high. The commodity experts expect the current high prices to last for 3-5 years. Moreover, washed coffee production is rising and will rise much faster if the coffee processing project, which is being prepared by the Government, is implemented. The prospects will depend a good deal on the future of the coffee agreement, on the assessment of future market requirements, and on the fact that it is the low production cost of forest coffee that ensures its flow to markets; any improvements in its culture will mean sharp increases in cost of production which will have to be accompanied by more than an equivalent increase in yield.

156. The following export projections are based on the current assessment of coffee prices in the coming years, and on the asstuption that washed coffee exports, vwhich command an attractive price premium, will increase rapidly. The possiblity of opening new roads and of improving existing ones in Kefa, Sidamo, Welega and Ilubabor; the completion of the Bedelle-Metu road; increase in washed coffee production; the continuation of high prices; - 40 -

and finding markets outside quota area, suggest that Ethiopia could export about 110,000 tons by 1974.

TABLE 4.1

COFFEE EXPORT PROJECTION /1

1970 197t 1972

Thousand Value Eth.$ Thousand Value Eth.$ Thousand Value Eth.$ Tons millions Tons millions Tons millions

Washed 8 25 9 26 12 34

Parchment 85 210 89 211 90 203

Total 93 235 98 237 102 237

1973 1974

Washed 17 44 22 55

Parchment 89 186 88 174

Total 106 230 110 229

/1 Excludes possible exports of freeze dried coffee.

Cotton

157. Cotton has excellent development prospects. The demand for lint by textile factories is expected to rise to 30,000 tons in 1973 and to about 35,000 tons by 1975. In 1967/68, the factories used 15,000 tons of lint (out of a total of 25,000 tons of fibre); 5,500 tons were imported as well as over 2,000 tons of cotton yarn and piece goods. As shown in Table 4.2, the rise in production since 1966 has been mainly due to the rapid increase in irrigated areas under cotton in the Awash Valley, and in rain-fed areas in the Northwest Lowlands. - 41 -

TABLE 4.2

ESTIMATED AREAS OF COTTON /a

Area /b Output (thousand ha) (thousand tons) Seed Cotton Lint /c

1966/67 54.4 31.3 10.9

1967/68 50.2 32.6 11.4

1L968/69 66.9 40.1 14.0

11969/70 70.1 43.3 15.2

/a Figures do not include cotton grown by subsistence farmers for their own needs and to supply cottage industries, estimated to use 3,000 tons a year.

/b Of which approximately less than 1/4 is irrigated. ic At 35% of seed cotton.

158. Plans are now under consideration for extending the irrigated areas at both Tendaho and Tessenai which together might increase the area under irrigated cotton by 6,000 ha by 1975. The development of the Melka-Sadi Amibara plain in the Middle Awash might add another 5,000 ha or more, depending on the ratio of cotton Ln the planned rotation. Other irrigated areas might contribute an additional 2,000 ha. Increases in the production of rain-fed cotton will have to come from the lowlands in the Northwest, West and South, receiving over 600 mm of rain during the growing season. Increases in these areas might add 20,000 ha by 1975, including the Humera area and the lowlands of Welamo Awraja. Assuming yields of 1,500 kgs/ha of seed cotton from the irrigated areas andl 500 from the rain-fed ones:

20,000 additional irrigated ha 19,500 tons seed cotton

30,000 additional rain-fed ha 8,000 " I

27,500 if

equivalent to 9,800 tons lint worth over Eth.$ 5 million at present Addis Ababa prices.

159. It may be assumed, therefore, that even if more areas than the above come under cotton, and if higher yields are obtained, cotton will continue to have a ready local market during the coming 10 years at least. - 42 -

160. It si reported that the fiber length of the dry land cottons will meet the requirements of the mills during the foreseeable future. Recent studies at Tendaho and Tessenai indicate that under irrigated conditions longer-fiber better-quality cottons suitable for export can be produced. The relatively high local price of cotton is one reason why no attempt at exporting large amounts has yet been made. Further investigations of local and foreign markets are necessary before a decision can be taken regarding relying on the dry land areas for cotton production for the local market and on the irrigated ones for export quality cotton or alternatively, even while the local demand is not yet met, exporting the premium cottons and importing cheaper varieties.

161. The expansion of the irrigated areas will require large investments. The planned expansion at Tendaho is estimated to cost over 10 million dollars and the civil works, the drainage and levelling work part of the development of the Melka Sadi Amibara plain may cost over Eth.$ 3,000 a hectare. The lowland areas are for the most part thinly settled and far from the importing centers; their development, as in the Humera area, will require new roads, credit for machinery as well as the organization necessary for the introduction of new ways and techniques. The expansion will also require the continuation of research efforts on cultural practices, costs and returns of various methods of pest control, and on the production of varieties resistant to bacterial blight (Xanthomonus malvacearum), the one serious disease of cotton at present.

Tobacco

162. The tobacco industry in Ethiopia is controlled by a Government agency, the Tobacco Monopoly, which until recently has been dealing with oriental type tobacco bought from about 40,000 small farmers in the Awasa and Welamo Districts (1,150 tons in 1968).

163. In 1966, in preparation for the manufacture of new brands of cigarettes, the Monopoly started arrangements with larger farmers for the growing of Virginia tobacco under irrigation in areas below 1,400 meter elevation.

164. The production situation in 1969 is summarized in Table 4.3. In that year, only 550 tons of the 1,250 tons of oriental tobacco produced were required for local consumption, but the Tobacco Monopoly Charter requires it to announce the price for the various grades before the beginning of the planting season, and to buy the produce of the areas that have been planted. The Monopoly has also been supplying ploughing free of charge and free seed or seedlings, and plant protection services to the small farmers growing oriental tobacco. Because of the build up in stocks, the Monopoly is now trying to discourage further planting of oriental tobacco, starting in the villages that are considered marginal as far as quality is concerned. Ex- perimental work is being conducted at Awasa for the production of burley tobacco for blending. The promising results will eventually help in the further reduction of the areas producing oriental tobacco. - 43 -

TABLE 4.3

MONOPOLY CONTROLLED PRODUCTION

1969 /a

Staf f of Average No. of T.M. working Type Yield Production Price Location Farnmers in Area /b Tobacco (tons/ha) (tons) per ton (Eth.$)

Awasa 30,000 1 Graduate Oriental) 2 Agric. School ) 45 Instructors ) 0.6-0.8 1,250 750 ) Welaino 10,000 1 Graduate ) 3 Agric. School Oriental) 32 Instructors )

Robi 450 1 Graduate 120) 3 Agric. School Virginia) ) 10 Instructors ) ) Awara Melka) 1 Agric. School Virginia) 1.0-1.2 130) 1,600 ) one ) ) Nura Era ) 5 Instructors ) 50) ) ) Eritrea one - Virginia) 20)

/a In addition, a large number of farmers in Ethiopia grow tobacco for their own tuse and for sale. The Tobacco Monopoly does not have the organization that would allow it to exercise any control over them.

/b In addition the Monopoly employs two foreign experts, one for oriental tobacco and one for Virginia.

165. The demand for Virginia tobacco is increasing. In addition to the 320 tons produced locally in 1969, 257 tons were imported. The Monopoly plans on the production of 400 tons from the above four locations in 1970 and on developing 200 ha in the Blatte area in Welamo District by 1973. In addition, it plans to award concessions for Virginia tobacco production to farmers in the Melka Sadi-Amibara plain if the experiments planned for 1970 and 1971 prove tobacco growing successful.

166. In 1969, the Monopoly's profits amounted to Eth.$ 6.5 million of which Eth.$ 2.5 million were paid to the Treasury as tax. The Monopoly in addition pays an import tax of Eth.$ 15,000 per ton of imported Virginia. The Monopoly estimates that consumption will grow at about 10 percent a year until 1975 at least, and that the requirement of Virginia tobacco, estimated to be over 1,000 tons a year by then, can be met locally. Samples - 44 - of flu cured Virginia tobacco are being sent to a number of countries, and the Monopoly plans to further investigate export possibilities.

167. The proposed Virginia tobacco production in the Melka Sadi Amibara plain for export might depend on Ethiopia finding a "partner" among the countries importing flu cured tobacco, particularly one that can help in the technical problems involved, as the production will require skills that are not available in the country. At present, the general world market picture looks as if Ethiopia can enter the export market, provided its Virginia tobacco can meet the stringent export quality requirements. This will require a special research program,technical advise on growing, care, curing, control of quality and grading, and marketing arrangements either through a national organization, or through an importing "partner".

Sugarcane

168. Most of Ethiopia's sugar requirements is produced by the H.V.A. Ethiopia Share Company at its Wonji and Shoa estates in the Upper Awash Val- ley. In 1968/69, 66,200 tons valued at Eth.$ 40.6 million were produced. The H.V.A. Metahara Share Company, which is run under the same management as H.V.A. Ethiopia, started its factory operation, at the Metahara estate in the Middle Awash in November 1969.

TABLE 4.4

AREAS AND PRODUCTION OF SUGAR

Total Area Area Available Production Estimated Annual Planted for Cane (000 tons) Planned Production at -(ha) Production 68/69 69/70 70/71 Full Utilization

Wonji-Shoa 5,600 5,600 66.2 67 70 70

Metahara 3,600 5,000-6,000 - 29 /a 45 65

/a Produced from the 1,500 ha harvested out of the 3,600 planted.

169. The consumption of sugar in 1968/69 was 75,000 tons, and in recent years consumption has been growing at 5 percent per year. On this basis H.V.A. could have surplus production in 1970, which it would export. Until 1966, sugar consumption in Ethiopia had been rising at over 14 percent a year. The reasons for the decrease since then were the fall in the rate of growth of the monetary sector, and the increase in taxes on sugar, which now amount to Eth.$ 180 per ton. - 45 -

170. H.V.A. proposes to keep the volume of production at Metahara below capacity until local demand justifies expansion, and to intensify its sales campaigns. Although exports will benefit the country's foreign exchange situation, Ethiopia's sugar (which sells wholesale at Eth.$ 613 per ton within the country) will have to compete with sugar from Eastern Euro- pean countries, which costs approximately Eth.$ 230 per ton CIF Red Sea ports.

171. H.V.A. has investigated the possibility of producing industrial alcohol, the distillery uses of sugar, and the possibility of utilizing the molasses for animal feed, but none of these shiows promise for the near future. It is anticipated, however, that the recent improvement in the economic situation will result in an increase in sugar consumption well above the 5 percent rate of recent years.

Cereals, Pulses and Oil Seeds

172. Cereals and pulses contribute over 75 percent of the caloric in- take of the population. Reliable nationwide data on production and consumption are not yet available. In the last three years prices of food crops have remained relatively stable, and the drought and famine of the 1965/66 season have not been repeated. Supplies seem to have been growing along with demand, leaving in the case of pulses and oil crops, a margin for export.

TABLE 4.5

PRODUCTION AND EXPORTS 1968 /a

Estimated Exports Production Quantity Value (thousand torts) (thousand tons) (Eth.$ millions)

Cereals /b 5,487 1.5 0.4

Pulses 600 75 21.3

Oil Seeds 437 50 22.4

+ oiL seed cake - 26 3.7

/a D)etails of area and production for each crop are given in Appendix 1.

Jb In addition to cereals, false banana (Ensete ventricosum) is extensive- :ly grown in the South and Southwest where the stem is used as a source of flour. Annual production is estimated at 450,000 tons.

Source: CSO: Annual External Trade Statistics, 1968. - 46

173. A shift in the local consumption pattern of cereals appears to be taking place, mostly in urban areas, towards wheat and teff and away from maize, sorghum and barley. In 1968, Ethiopia imported 16,000 tons of wheat and wheat flour. In export crops the trend is towards a decrease in linseed and an increase in sesame, haricot beans. chick-peas, and lentils. The decrease is probably caused by a rise in local consumption with no equivalent increase in area or quality; also, export prices between 1963 and 1968 have shown a general downward trend.

TABLE 4.6

EXPORTS OF CEREALS, PULSES, OIL SEED

1963 1968 Quantity Value Quantity Value Crop (thousand tons) (Eth.$ millions) (thousand tons) (Eth.$ millions)

Sesame 8.6 4.3 27.1 14.0

Linseed 37.2 13.4 3.7 1.1

Lentils 16.2 3.9 22.1 7.5

Haricot Beans 9.7 3.5 19.3 6.9

Chick-Peas 8.5 1.6 13.9 3.0

Source: CSO: Annual External Trade Statistics.

174. Development plans should, therefore, promote increases in teff and wheat production for internal use, and of sesame, haricot beans, chick-peas and lentils for export. Wheat, teff, lentils and chick-peas are produced in the highlands by small, mainly subsistance farmers, while sesame and haricot beans are produced largely on commercial farms in lowlands and mid-altitude regions. Estimated values of production of these crops per hectare are given in Table 4.7. - 47 -

TABLE 4.7

PRODUCTION OF CEREAL, PULSES, OIL SEED

Yield/ha Price per Average' (quintals) (quintal) Value/ha (Eth.$) (Eth.$)

Wheat 7-10 20-24 187

Teff 5--8 24-28 169

Sesame 3-6 40-45 191

Chick-Peas 6-8 18-20 163

Haricot Beans 7-9 18-20 152

175. On the small chiefly subsistence farms of the highlands, the inputs required for wheat and the grain legumes are of a similar order; precise figures however are not vailable. Wheat and teff appear the most remunerative. On highland commercial farms in the main wheat growing areas, yields of 20-25 quintals per hectare are being obtained from wheat, but no large-scale teff growing has developed - probably because problems of mechanical harvesting have not been solved, and land preparation for it is more laborious. Wheat and teff do not yield well in areas over 2,700 meters elevation where barley is better adapted, nor in the rainfed lowlands where maize and sorghum do better. Increases in the production of wheat and teff should lead to meeting local requirements, and possibly in the case of wheat, oni land which could then be released from teff, eventually to exports.

176. Research on wheat and teff has advanced to a stage where the beginning of a seed industry on a national basis can be contemplated, along with the establishment of a credit and marketing system, and the provision of distribution centers for inputs such as improved seeds, fertilizers and plant protection chemicals. Minimum package programs were recommended in Chapter III.

177. Increases in the production of lentils, chick-peas and the other highland grain legumes (peas and broad beans) will require research as all the varieties now in use are low yielding. None of them do well in the lowlands, and their performance under irrigation has been poor. It is worth- while in the highlands trying to increase their yield and improve their quality as their prices have increased steadily and markets for them are assured.

178. The market for sesame will probably remain finn and prices are expected to remain at current levels. It is well suited to lowlands receiving adequate rainfa:Ll, similar to the Humera area, where increases in yield with - 48 - better cultural practices to over six quintals per hectare are thought prac- ticable. The main problem with. sesame in the large commercial farms of this area is the need for concentrated labor at harvest because of the short period between ripening and the shattering of the pod. This harvesting difficulty makes sesame suitable for small farms using family labor either under rain-fed or irrigated conditions in the lowlands. It is now successfully produced in the Lower Awash by small farmers in the Asseita area and might be a good crop in the rotation on small settler farms planned within the Melka Sadi-Amibara Development Project.

179. For the immediate future increases in sesame production will depend on the further development of the Humera region and of similar areas in the western lowlands; transport facilities are at present very limited in all these areas.

180. Research on improved varieties of haricot beans was started in 1966; varieties giving substantial increases under both rain-fed and irrigated conditions will have to be found before it can economically compete with other crops grown in the same ecological zones such as high-yielding varieties of maize, and peppers.

Fruits and Vegetables

181. Reliable data on exports of fruits and vegetables exist, but as in the case of grains, there are as yet no reliable data on production and local consumption. - 49 -

TABLE 4.8

PRODUCTION AND EXPORT OF FRUIT AND VEGETABLES 1968

Production Value Exports Value (thousand tons) (Eth $ millions) (thousand tons) (Eth.$ millions)

Yams 243 12.5 Bananas 15.7 4.4

Potatoes 151 18 Chillies and 2.3 1.9 Peppers Chillies and Peppers 96 28.7 Other Fruits 8.9 2.8 and Vegetables Other Vegetables 240 21.7

Fruits 70 14

Source: CSO: Annual External Trade Statistics 1968.

182. Increases in production for local consumption will probably parallel population growth, particularly of yarns and potatoes in the Southern, Western and Southwest Regions. The demand for other fresh vegetables and fruits in Ethiopia is limited, and apart from chillies, onions, tomatoes and a few greens, they hardly figure in the diet. The supply of fresh produce to Addis Ababa, from production to retailing, is in the hands of a business- minded ethnic group which can be expected to induce a steady supply as demand increases.

182. Increases in the exports of fruits and vegetables should occur in the next few years. Reopening of the Suez Canal would be a great encourage- ment to exporters. Reduction in air freight charges may have more relevance to the immediate future, if it can be achieved. The present cost of 90 Ethiopian cents per kilogram from Addis Ababa to Southern Europe is proving a disincentive to increasing exports, apart from speciality crops such as out-cf-season strawberries and fresh haricot beans.

184. The continuing expansion by the present exporters, in particular the De Nadai group in Eritrea, should result in substantial export increases. The latter's efficient organization permiits the finding and the supplying of new markets and the expansion of existing ones, despite the present transport difficulties. It is essential to increase production of vegetables during the Winter season when demand is high in the countries bordering the Red Sea and the Mediterranean and in Europe, and also to increase the planting of types and varieties of citrus that produce the major part of their cl'op outside the Mediterranean citrus season. - 50 -

185. From 1974 onwards there should be the development of irrigated fruit and vegetable production in the Middle Awash. The opening of the Awash-Assab road, now under const:ruction, will decrease considerably the time and cost of transport.

186. As far as small farmers are concerned, the Government should encourage concentration on crops with which small farmers are familiar and for which an export potential exists, such as peppers and chillies.

187. The Spice Extraction Company, which started operations in 1967, could be expanded, as it offers a ready market to producers of a certain quality of peppers for pigment extraction for export.

188. By 1975, exports of fresh fruits and vegetables should increase, from the present 27,000 tons worth Eth.$ 9.1 million to 35,000 tons worth over Eth.$ 12 million.

Livestock and Livestock Prospects

189. The livestock industry is one of the largest and one of the most neglected resources of Ethiopia. Estimates of animal numbers are: 25 million cattle, 12 million sheep, 11 million goats and 7 million horses, mules, donkeys, and camels; recent surveys suggest that the number of cattle might be less than 20 million. - 51 -

TABLE 4.9

EXPORTS OF LIVESTOCK AND PRODUCTS

5 Year 1963 1964 1965 1966 1967 1968 Average

Q /a V /b Q V Q V Q V Q V Q V Q

Meat 3.3 2.6 5.3 5.8 8.2 7.4 7.9 7.3 5.9 5.9 5.6 5.6 6.0

Live Animals 1.1 2.5 8.5 3.3 2.4 2.3 3.2 3.2 3.1 3.0 4.3

Total 3.6 8.3 16.7 10.7 10.3 9.6 9.1 9.7 8.7 8.6 11.2

Hides 6.7 6.8 4.4 4.1 5.3 4.4 9.4 9.4 5.8 5.8 3.5 2.8 5.8

Sheep Skins /c 3.9 9.9 4.3 11.5 4.0 11.1 4.8 13.7 4.6 13.6 4.6 13.0 4.7

Goat Skins /c 3.8 5.2 3.8 5.9 4.1 7.3 4.7 12.1 3.9 9.9 4.7 8.7 4.2

Total 21.9 21.5 22.8 35.2 29.1 24.5

/a Quantity (Q) in thousand tons.

/b Value (V) in million Ethiopian dollars.

/c Sheep and goat skins: thousand pieces.

190. The export of meat is mainly in the form of calned and processed products. The six commercial meat processing plants in the country have been operating below capacity since their establishment partly due to insufficient supplies and partly due to inadequate organization of supplies from the producers to the plants. In 1968, their combined capacity was about 270,000 animals but only 73,000 were slaughtered, mainly for export. The number of cattle slaughtered annually is estimated at 1.5 million, which suggests that unless the present animal production and animal health situation is rapidly improved, there will be a gradual reduction in the total cattle population.

191. Several factors are responsible for the present unsatisfactory state of this valuable resource. There is a tradition in Ethiopia that man grows human food and nature provides animal food. A large portion of the cattle that are in the highlands are used for draft purposes; milk and meat are considered as by-products. Furthermore, mortality rates are high, due to disease aggravated by poor nutrition; it is estimated that the mortality rate in cattle bietween 0 and 4 years old may be as high as 50 percent, and that in animaLs over 4 years old about 8 percent. Poor nutrition, low fertility, and slow growth are characteristics of both the highland and the lowland systems of management. - 52 -

192. In the past five years, Government planners have given high priority to this sector, but priority was not accompanied by increased budgetary funds. Only recently has the Veterinary Department been able to somewhat expand its activities. The Animal Production Division of the Ministry has been lacking in ideas, men and money for a decade; the Livestock and Meat Board, which was supposed to accomplish great changes in the industry's production and marketing methods, became moribund within months of its establishment in 1964; research in animal husbandry and animal nutrition is recent and personnel are few. The one pilot project that started as a precursor to the proposed National Range Development Project has received little support.

193. The lack of information on the various aspects of the industry has discouraged private investors. The few fattening operations near the capital are reported to be only marginally profitable. The one bright spot has been the increase in the supply of milk to Addis Ababa and Asmara from nearby commercial dairies, and in Addis Ababa from milk collection centers serving peasant farmers. The supply (at present 20,000 liters a day) is expected to more than double within the next five years. The Government has made no attempt to encourage the start of livestock oriented projects in the highlands, apart from the proposed dairy scheme; the one commercial sheep enterprise in the country is losing money because of unsuitable location and poor management.

194. Conditions affecting livestock could be improved by the following measures:

(1) The pilot range project in Sidamo should be activated to ensure that sufficient data ar-e available by 1972 on which to base the start of the National R'ange Development Project.

(2) Research activities should be expanded particularly with regard to:

(a) Study of the potential of the local breeds under different systems of management and possibilities and problems of their upgrading and crossing.

(b) Methods and economics of pasture and forage improvement in the lowlands and highlands including utilization of crop by-products, possibilities of haymaking, reseeding, undersowing in cereals, and the utilization of irrigated forages for milk and meat production. Preliminary results of experimental work in the Middle Awash suggest that growing alfalfa and Sudan grass for milk and meat production may prove more profitable than many of the cash crops envisaged.

(c) The work started at the sheep breeding station for the large sheep (40 kg carcass weight as opposed to the 20 kg average weight of the Ethiopian breeds) for which markets in neighboring countries are assured. - 53 -

(3) A hides a skins improvement program should be implemented, possibly as a UNDP-assisted project, or in conjunction with the establishment of a processing plant producing quality hides and skins for export. The prices of hides and skins in general have continued to rise, and Ethiopian goat skins in particular are highly valued in world markets.

(4) Activities of the Veterinary Department should be intensified to enable it to expand its present vaccination campaigns against anthrax, rinderpest, pleuropneumonia, blackleg and septicernia, and to start tackling the hitherto untouched problems of diseases transmitted by the tse tse fly, and those of liverfluke and internal parasites. A reduction in mortality rates and the establishment and control of disease-free zones would enhance Ethiopia's production and export prospects.

(5) The scope of the Government livestock survey, started in 1970, should be widened. The mission should be strengthened so that it can gather reliable data by region on livestock numbers, pasture and fodder situation, animal health and vaccination requirements, the movement of animals, and their marketing. This may be an important step, not only in selecting promising areas for beef, milk, sheep for meat or wool, etc., but might also serve as a guide to preinvestment studies, and possibly as an inducement to investors.

(6) Preparations should be started now for the implementation in 1972 of a pilot livestock project in the highlands, utilizing the present facilities of the Animal Production Division, the Veterinary Department, the Livestock and Meat Board, the Ex- tension Service and the Institutes of Agricultural Research. The pilot project could be started in a limited area, prefer- ably around one of the government stations, for the evaluation, through a modest action program, to determine which improved practices now known could be applied by cattle or sheep owners in the highlands at what costs and benefits.

(7) The future of the Livestock and Meat Board and the Animal Pro- duction Division should be decided on soon. The alternatives appear to be massive strengthening or drastic changes to overcome the present stagnant situation.

195. The implementation of these measures will largely depend on government decision on a livestock policy and the degree of support it can give. As a minimum the government departments involved with livestock development should be assured of annual increases of about 15 percent in both capital and recurrent budgets. Possibilities exist for obtaining technical assistance for most of the above proposals. - 54 -

196. Increases in production, however, are unlikely to become evident before 1974, and thus exports of meat, live animals, hides, and skins over 1970-1974 will probably be maintained at about the average level of the past five years (Table 4.9).

197. A Bank Group Livestock Review and Project Identification Mission arrived in Ethiopia in the latter part of April 1970, to undertake an overall review of the country's livestock development strategy, policies and project proposals. The mission Till help to identify projects. The mission's report should prove most helpful in indicating the points of development which should be concentrated on, as well as the priorities, and the priorities indicated above may require modification.

Fisheries

198. Ethiopia has two principal fishery resources: (a) the Red Sea Marine fishery which has not been systematically developed; and (b) the fresh water fishery resources of the Rift Valley lakes, of which little is known. Commercial fishing is almost entirely concentrated in the coastal waters of the Red Sea.

199. The Plan called for a fourfold increase of annual fish production to Eth.$ 8.7 million by 1972/73, and a total expenditure of Eth.$ 5 million of which 80 percent would be capital expenditure. But only a minimum effort has been made. The only funds received in 1968/69 by the Department of Fish- eries (Ministry of Agriculture) was Eth.$ 61,108 for recurrent expenditure; the revised 1969/70 budget listed a Eth.$ 40,000 capital item for fisheries but this was deleted, 1/ however, a similar item is included in the 1970/71 proposed budget.

200. The Department of Fisheries is very small. As the above figures for recurrent expenditures (mostly salaries) indicate, resources are barely enough to provide for a department head and assistant at the capital, and two junior technicians and mechanic at Massawa and also at Assab. Facilities at Massawa and Assab for berthing, boat and engine repair, and for handling the catch are minimal. This means that supporting services are barely adequate for the small coastal fishing activity which produces enough to sa- tisfy the small fresh fish demand of Ethiopia, which may be as much as 1,000 tons annually, and shipments to the Israeli market of 700-800 tons.

201. The largest Red Sea catch, both in terms of volume and value, are sardines, anchovies and sharks for industrial processing for fish meal and dried fish largely for export. Fish meal and dried fish had a 1966/67 export value of about Eth.$ 2.5 million out of a total fish export value of Eth.$ 2.9 million. However, closing of the Suez Canal drastically reduced

1/ Source: 1968/69, Ministry of Agriculture; 1969/70 and 1970/71, Ministry of Finance. - 55 -

their export trade and spotlighted the industry's dependence of foreign markets. Unfortunately, the bulk of the Ethiopian population are not fish eaters and domestic demand cannot be expected to increase dramatically.

202. For the remaining years of the TFYP, the Fisheries Department within budget limitations will work on methods of improving catch, improve conditions of wage eaLrners in the fishing industry, seek to increase domestic demand, and perhaps most important, try to interest the International Indian Ocean, Fisheries Commission to undertake a Red Sea fishery resource investigation based on UNDP/FAO support.

203. A general lack of interest in commercial development of inland fisheries is probably due to lack of demand for fish as a food item. Some intetest has been expressed for stimulating foreign interest in processing tinned fish and frozen fish filets. Due to the limited domestic market, ex- ternaLl outlets for these products would have to be found and these may be limited because of the closure of the Suez Canal. In the meantime, the prospects for attracting capital for an expanded and improved fishing fleet and handling facilities would be enhanced if better information is secured about the basic fish resources.

Forestry

204. Ethiopia has 4-5 million ha of private and pubLicly owned natural forests. Of th:Ls about 2 million ha are State forests nominally under administrative control of the Forest Department (Ministry of Agriculture). Only 319,500 ha of State forests have been actually transferred to the Min- istry from public agencies formerly having jurisdiction. It is estimated that over 80 percent of the total forested area is now inaccessible. Ex- ploitation of this inaccessible area will depend on a substantial increase in access roads., Under the Second Five Year Plan, Eth.$ 1.6 million was to be the government's contribution to forestry expenditure, but only Eth.$ 280,000 was spent; overall only 10 percent of the planned expenditure for forestry was actually realized.

205. Ethiopia's forestry dilemma, between a growing demand for forest products and a remote and costly timber supply, will not soon be resolved. Ethiopia's forest resources have been abused and depleted over a long period;, substantial improvement cannot be quickly achieved. One result is that present prices for better quality forest products are 60-80 percent above world prices; consequently, imports of wood products, paper, and pulp -- which were Eth.$ 1.9 million and Eth.$ 9.2 million respectively in 1968 -- will continue to increase for several years. The prospects for paper manufacture from indigenous pulp is still uncertain. No substantial change is anticipated for domestic production for better quality wood products such as panels, parquetry, or even for more substantial structural items for several years. - 56 -

206. A partial solution to meet the growing demand for pole timber and fuel is already evidenced by the increased acreage of man-made plantations of fast-growing eucalyptus. By a rapid and judicious expansion of these man- made forests, a substantial suppLy of pole timber and fuel could be achieved in 7-10 years. It is possible too that part of the pulp demand could be provided from some of the eucalyptus varieties. While man-made plantations should be appropriately located near population centers, particularly Addis Ababa and Asmara, plantations near rural communities should also be encouraged. Wherever possible plantations should be located on steeper slopes as a soil protective meausre. According to one estimate, the 1967 consumption of pole timber was 1 million M3 and of fuelwood 23 million M3. 1/ By 1980 the combined demand for these products would require plantings of 1 million ha. Against this the five-year plan target of 120,000 ha and 120 million seedlings is inadequate.

207. Overall, the TFYP proposed for forestry a capital expenditure of Eth.$ 14 million and a recurrent expenditure of Eth.$ 3.6. 2/ Current data indicate a more probable total expenditure in the neighborhood of Eth.$ 3.5 million. 2/ The Forestry Departmient has estimated the cost per hectare of plantations at about Eth.$ 100 per ha. Thus to achieve the afforestation goal of 120,000 ha would require Eth.$ 12 million. This means that the planned goal for afforestation, although probably inadequate, will not be met unless farmers themselves finance the reafforestation.

208. The outlook for 1980 calls for an afforestation program of about 100,000 ha per year over the decade, commencing immediately. Two difficulties are presented: (a) the anticipated difficulty of securing land for afforestation purposes; and (b) the relatively low rate of seedling production. The first of these difficulties will require cooperation with the Ministry of Land Reform and Administration. The low rate of seedling production is in part the result of an irregular flow of capital funds in an insufficient amount during critical seasons of the year. The defect can be overcome with realistic budget estimates and timely release of capital funds. It will also be necessary to increase the capacity and number of nurseries.

209. The condition of Ethiopian forested areas is discouraging. Con- tinual abuse of forested areas by the rural population has been tolerated for years. The government has not had the means to protect against depre- dation of various kinds; more accessible areas are subject to theft of timber and unauthorized cutting is prevalent. Burning of forested areas by settlers seeking new farm-lands is a traditional practice which has exposed large areas to denudation of natural vegetation and consequent severe

1/ Extract from draft report of SIDA Forestry Team to Ethiopia April-May 1969, page 9.

2/ Ministry of Agriculture, Ministry of Finance, Planning Commission. - 57 -

erosion damage. In the northern part it is already too late for afforestation measures to be effective. The draft report of the SIDA forestry team estimates that, if the present misuse is allowed to continue, important natural forests will be destroyed before the turn of the century. The situation calls for concerted action; Ethiopian forest policy should emphasize, along with forest product supply, the great protective value of forested areas. This implies a need to increase forest protective efforts, even in inaccessible areas. If existing legal authority is inadequate, additional legislation should be provided along with the necessary staff increases to provide effective enforcement of good forestry practices. In addition, an effort should bet made to incorporate conservation subject matter in formal education curricula. One possibility is to provide employment in afforestation plantings for rural people who would thus be exposed to practical experience in Forest Preservation.

210. The present areas of natural forest, largely in the south and southwest, represent a remnant of the original large forest endowment and a major effort is now needed to develop proper management and exploitation practices for this remnant.

211. A somewhat conjectural balancing of production and consumption can be maLde. The Department of Forestry has considered the exploitation of several accessible State forests under the TFYP. One of these is the 13,000 ha JIBAI State Forest to be managed in conjunction with the JIBAT Project, which includes a new middle level school for forest rangers and a sawmill. This undertaking has been proposed for assistance from the UNDP(SF). In addition the Department proposes to exploit five State forests with a combined area of 23,500 ha with growing stock estimated at 3.2 million M3, the annual allowable cut would be 116,000 M3 and a total allowable cut of about 2.0 million M3. It is estimated that 80-85 percent of Ethiopian log production will come from private forests up to 1970; beyond that point, production from accessible State! forests will provide for the increased demand in 1970-85; by 1985 saw timber will be available from man-made forests. 1/

212. The management function must be improved. Out of a total of 491 employees in the Department of Forestry (1968/69) there were seven professional foresters; five of these were stationed at the Capital. There were three graduates of the Agricultural College, all stationed in Showa province. The field staff had 33 graduates of the Agricultural Training Schools, 27 high school graduates and 409 forest guards. The dilution of professional field staff and the low level of education in remaining field staff indicates the need for a much greater effort to improve the number of professionally trained personnel if forestry objectives are to be achieved.

213. It is perhaps the uncertain outlook of the future and lack of past achievement which has led the Department of Forestry to suggest creation of an autonomous Forestry Development Agency initially with a substantial expatriate staff. This argument, applied in other circumstances, has resulted

1/ SIDA Forestry Team p. 7, 8. - 58 - in creating in the Government a tiumber of independent specialized agencies. From the standpoint of efficient forestry organization, there appears to be no need for a separate agency. Moreover, the planting, culture, management, harvest and marketing functions of forestry parallel the general agricultural functions which are properly located in a Ministerial grouping. Likewise, there is no sound basis for creating an independent Forest Research Institute, a seed center, and a Mixed Government/Foreign Share Company, as has been proposed.

214. The need for much more professional training in forestry will be partly met by the proposed Forest Ranger Training Center. It is obvious that expatriate expertise would be of considerable assistance, both in training and administration capacities for an initial period. Appendix 1: LAND USE AND CROPS BY PROVINCE

Province Total Estimated % of total areas under % of total Estimated Main crops Other important Area Crops Fallow Forest Pasture area potential estimated % of total crops (000) and designated arable cropped area ha Wasteland as Govt. land land within Govt. land (000) ha

Arusi Z,350 20 2 4 74 4 70 Barley 44, wheat 21, Flax, teff, maize. pulses 8. Bale 12,460 <1 - 1 98 81 80 Cereals.

Begemdir 7,420 14 2 3 81 >300 Teff 32, sorghum 19, Barley, maize, pulses 18. oil seeds. Eritrea 11,760 3 1 25 71 * > 40 Sorghum 40, barley 11, Wheat, fruits, oil seeds 8. vegetables, cotton. Gemu Gofa 3,950 7 2 4 87 44 130 Maize 28, sorghum 18, Teff, coffee. enset 13. Gojam 6,160 20 2 4 74 21 1,300 Teff 36, barley 20, Pulses, wheat, sorghum 12. oil seeds. Hararge 25,980 4 1 1 94 79 130 Sorghum 45, maize 21, Chat, pulses, coffee 6. oil seeds. Ilubabor 4,740 6 1 19 74 58 2,700 Maize 20, teff 18, Coffee, pulses, sorghum 15. enset. Kefa 5,460 8 1 13 78 46 2,500 Maize 23, sorghum 20, Coffee, enset, teff 20. pulses. Shewa 8,520 17 3 4 76 2 150 Teff 24, wheat 17, Barley, maize, pulses 17. sorghum. Sidamo 11,730 5 1 4 90 75 180 Enset 22, maize 17, Barley, teff. coffee 14. Tigre 6,590 10 6 6 78 * No inform. Teff 24, sorghum 20, Wheat, pulses. barley 16. Welega 7,120 12 1 4 83 38 2,700 Maize 29, teff 28, Coffee, barley, sorghum 18. enset. Welo 7,940 13 1 4 82 4 Nil Teff 27, pulses 19, Sorghum, oilseeds, barley 17. wheat.

* Note: Tenure of potentially arable lowlands not yet determined.

Appendix 2: ESTIMATED AREA, YIELD, AND PRODUCTION OF MAJOR CROPS IN 1967/b5

Crop Area Yield Production ('00OOha) (qt7ha) ('000 tons)

Cereals Barley 1,693.2 8.5 1,L30.0 Maize 824.4 10.3 853.0 Sorghum 1,174.0 8.4 988.6 Teff 2,154.0 6.6 1,304.3 Uilea t 1,028.6 7.4 760.0 Other (Dagusa) 299.3 5.0 150.9

Ensete 190.8 24.0 458.0

Industrial Plants

Cotton Fiber 62.8 1.6 10.4 Ensete Fiber 190.8 1.0 12.6 Sisal 3.4 7.3 2.5 Sugar Cane 5.9 1,L54.0 858.0 Tobacco 3.2 5.1 1.6

Oil Seeds

Castor Beans 21.5 5.3 11.3 Cotton Seeds 62.8 3.3 20.9 Ground Nuts 37.9 5.2 19.6 Linseed 115.3 5.0 58.2 Neug 38L.2 6.3 240.8 Rape Seed 13.9 4.0 5.6 Safflower 58.5 5.1 30.0 Sesame 115.5 4.4 51.0

Pulses

Chick Peas 285.3 6.2 176.7 Field Peas 131.8 9.2 121.6 Haricot Beans 91.9 7.4 68.2 Horse Beans 136.0 9.3 125.9 Lentils 169.6 5.9 101.2 Fenuigreek 10.1 5.9 6.o

F'ridts and Stimulants

F'ru 1,ts 5.7 12.9 Gesho 96.1 10.0 89.7 ha.t, 9.2 6.2 Coffee 611.5 2.6 160.0

Vegetables

Berbere 233.2 4.1 95.6 Potatoes 29.1 52.3 152.2 Yam 57.lh 42.lh 2L43.3 Miscellaneous Vegetables 96.2 25.3 213.2

Source: Central Statistical Organization

Appendix 3: ESTIMATED LIVESTOCK POPULATION BY KIND - 1967/68

Kind and Age

Cattle Thousands

Calves under 1 yr. 3,933.1 Cattle, 1-2 yrs. 3,374.0 Heifers, 2-4 yrs. 2,359.3 Males, 2-4 yrs. 2,320.9 Cows over 4 yrs. 7,432.9 Males over 4 yrs. 6,54o.5

Total 25,960.7

Sheep

Lambs under 1 yr. 4,4ho.0 Ewes 7,030.0 Rams 863.2

Total L2,333.2

Goats

Kids uncler 1 yr. 4,241.5 Females 5,882.9 Males 1,027.4

Total 11,151.8

Other Livestock

Pigs 13.2 Horses 1,371.1 Mules 1,374.7 Donkeys 3,806.0 Camels 969.0 Poultry

Source: Central Statistical Organization

Appendix 4 ESTIMATED FINANCIAL REQUIREMENTS FOR AGRICULTURE, 1970/71 TO 1974/75 (Eth$ Millions)

Grand Proposed Total Total Budget Total by 1973/74 1970/71- FROM CAPITAL BUDGET Footnote 1970/71 1970/71 1971/72 1972/73 end of TFYP 1973/74 1974/75 1974/75 1974/75

Ministry of Agriculture 1 1.8 3.8 4.2 4.6 12.6 5.1 5.6 10.7 23.3 Ministry of Land Reform Admin. 2 0.6 0.5 0.8 1.0 2.3 1.2 1.5 2.7 5.0 Ministry of Comm. Development (Agric. Acty.) 3 1.5 1.0 1.0 1.0 3.0 ------3.0 Awash Valley Authority 4 (4.8) 1.0 1.0 1.0 3.0 1.0 1.0 2.0 5.0 Institute of Agricultural Research 5 2.5 2.7 3.0 3.0 8.7 3.2 3.4 6.6 15.3 National Parks 6 0.1 0.7 0.8 1.0 2.5 1.2 1.3 2.5 5.0 Contrib. to Coffee Diversifcn. Fund. 7 1.9 2.0 2.0 2.0 6.0 2.0 2.0 4.0 10.0

Development Projects Commenced

Chilalo Agricul. Development Unit 8 5.6 6.4 6.6 5.7 18.7 5.2 5.0 10.2 28.9 Welamo Soddu Agri. Development Unit 9 3.3 3.3 3.3 2.0 8.6 2.0 2.0 4.0 12.6 Awasa Project 10 0.3 0.3 0.3 0.4 1.0 0.4 0.4 0.8 1.8

Development Projects Under Preparation

Northwest Lowlands Project 11 1.3 5.8 3.0 2.1 10.9 10.9 Melka Sadi-Amibara Project 12 -- 3.1 15.1 16.1 34.3 18.3 19.2 37.5 71.8 Addis Ababa Dairy Unit 13 2.8 3.7 3.5 4.0 11.2 4.1 4.1 8.2 19.4 National Range Development Project 14 0.4 -- 5.4 2.7 8.1 3.0 3.2 6.2 14.3 Shashamenne Project 15 -- 3.1 3.1 3.5 (9.7) 0.9 0.5 1.4 11.1 Ada District Development Project 16 -- -- 1.1 1.5 2.6 1.5 3.6 5.1 7.7 Coffee Processing Project 17 __ __ 7.2 9.7 16.9 8.0 6.5 14.5 31.4 Tendaho Plantation Expansion 18 -- (3.0) (2.7) (2.7) (8.4) (2.7) (2.7) (5.4) 13.8 Agri. Extension & Agricultural Education 19 __ (2.2) (1.4) (1.2) (4.8) (4.8)

Proposed UNDP (SF) Assisted Projects (2.6) (8.2) Strengthening Awash Valley Authority 20 -- (2.0) (2.0) (1.4) (5.4) (1.4) (1.4) Land Reform and Training Institute 21 -- (0.5) (0.5) (1.0) (1.0) Forest Rangers School 22 -- 00 (1.5) (1.5) (3.0) (1.5) (1.5) (3.0) (6.0)

TOTAL CAPITAL 26.9 44.6 69.5 68.6 182.7 62.7 64.9 127.6 310.3

FROM RECURRENT BUDGET

Ministry of Agriculture 23 9.5 10.0 11.5 13.2 34.7 15.1 7.4 22.5 57.2 Ministry of Land Reform Administration 24 3.0 3.0 3.5 4.0 10.5 4.6 5.2 9.8 20.3 Awash Valley Authority 25 0.4 0.4 0.5 0.6 1.5 0.7 0.8 1.5 3.0 National Parks 26 0.5 0.5 0.6 0.7 1.8 0.8 0.9 1.7 3.5 TOTAL RECURRENT 13.4 13.9 16.1 18.5 48.5 21.2 14.3 35.5 84.0

GRAND TOTAL 40.3 58.5 85.6 87.1 231.2 83.9 79.2 163.1 394.3

Notes to Appendix 4

/1 Based on a 15% annual increase over a 1970/71 base of 3.8 million Eth$, which includes the capital expenditure of the Divisions of Plant Production & Protection, Animal Health, Forestry, and to which funds for extension were added.

/2 Land Reform: estimate does not take into consideration amount required if land reform legislation is enacted. A decision of goverment to start settlement schemes through the Ministry of Land Reform and Administration will necessitate further allocations.

/3 The Mission's estimate assumes continued allocation from capital funds largely for the Awassa and Arba Mench farms of the Ministry of Community Development. The former is now a share company and the government proposes to do the same with Arba Mench, but will hold the majority of shares until private enterprise can be made to take an interest.

/A Awash Val'lez Authority: estimated amounts requred by the Authority for continuing its studies of the tributaries of the Awash River, of the catch- ment area in general, and for the settlement schemes started at Dubti and at the Middle Awash. (See also footnotes 20 and 25). The proposed 1970/71 budget shows Eth $4,853 million for the Awash Valley Authority and does not show the item Strengthening the Awash Valley Authority.Although it is understood that the Eth $ 3 million is intended to cover both items.

/5 Figures include the Bako Research Station. It is anticipated that an agreement will be negotiated with UNDP for a five year Phase II project when the present one ends in February 1971, and will involve expansion of the Institute's activities before the end of the present TFYP.

/6 Based on an annual increase of approximately 15% over a 1970/71 base of 0.7 million, until the end of the TFYP. The rate of development of the tourist industry may require larger amounts to be spent.

/7 Contribution bo Coffee Diversification Fund: The Coffee Diversification Fund requires that producing countries pay the equivalent of 60 US cents for every- bag of coffee over 100,000 bags exported to quota countries. Although the export of coffee from Ethiopia will increase, an annual contribution of approximately 2 million is estimated for each year of the period 1970/71 to 1974/75. Phase I of the Fund ends in September 1973.

/8 Chilalo Development Unit: The costs of Phase 1 of this project (started 1966/67) were 114 million Eth $ of which 67% was a grant from the Swedish Government. Phase 2 (started 1970/71) will receive approximately a 19 million Eth $ grant from Sweden.

/9 Welamo Soddu Development Unit: The project became operational early in 1970. The total figure of 12.6 million includes the amount to be spent before July, 1970, e.e., in fiscal year 1969/70. Appendix 4 Notes con't. (2)

/10 Awassa Project: This is the rural extension program part of a Ministry of Community National Development proposed project to establish an agricultural and industrial complex in Awassa area. The complete project includes a maize processing unit, a sisal plant, a meat and milk unit, a pimento dehydration plant centered around the present Community Development Farm in Awassa.

/11 Northwest Lowlands: the project is expected to become operational at the beginning of the 1970/71 fiscal year. It is expected that, depending on the studies in Phase 1, a Phase 2 will be implemented in 1973/74. No estimates for Phase 2 have been prepared.

/12 Melka-Sadi Amibara Project: In addition to amounts shown 5.1 million are estimated to be spent in 1975/76 and 3.5 million in 1976/77. The appraisal report by IBRD is ready ,and it is expected that the project might become operational before the Eid of 1970.

/13 Addis Ababa Dairy Development Unit: The project will be appraised by IBRD and might become operational before the end of 1970.

/lb National Range Development Project: IEX3 intends to involve other external assistance sources in the project proposal drafted by USAID and based on USAID supported pilot project. The project might become operational during 1971/72 fiscal year. The plans anticipate an expenditure of 2.8 million Eth $ in the fifth year of the project. It is assumed that expenditures for the pilot project are included under capital and recurrent budget of the Ministry of Agriculture.

/15 Shashamenne Project: at present (March 1970) is under discussion between tISAID, who prepared it, and the Ethiopian governmerit.'

/16 ADA District Development Project: In addition to amounts shown, 4.0 million are planned for 1975/76 and 4.4 million in 1976/77. The mission had for review a preliminary draft copy of the proposal dated May 29, 1969. A good deal of change may occur between this draft and the final proposal. The' breakdown in the table is based on a total cost of Eth $16 million, of which Eth $12 million would be overseas loans and grants.

/17 Coffee Processing Project: A tentative proposal has just been prepared; it is expected to become operational in 1971/72 fiscal year.

/18 Expansion of Tendaho PLantation Share Company: Plans are underway to increase the area under cultivation in the Dit Bahri unit of TFSC on the lower Awash. Plans should be ready by mid 1970. It is estimated at the end of 1969 that the total cost of the proposal expansion will be Eth $13.8 million, of which Eth $3.8 million are expected to be required as working capital, and Eth $6 million in foreign exchange. It is understood that the plan when published will indicate proposed annual expenditures and possible sources of finance. The 1970/71 Proposed Budget makes no allowance for this item. It is possible that the intention is to finance the item through the new Ethiopian Development Corporation. Appendix 4 Notes con't (3)

/19 Proposal for Strengthening Agricultural Education & Extension: Increasing capacity of Ambo and Jimma Institutes, establishment of three agricultural training centers and associated technical assistance. The proposal has just been appraised by an IBRD mission.

/20 Strengthening the Awash Valley Authority: The amnounts listed represnt the estimates for Phase 3 proposal for assistance to the Awash Valley Authority (UNSF Project Ethiopia 25). The estimates are based on a two- year first period where the government contribution would be 1.0 million Eth$ and the UN Special Fund Eth 3 million ; followed by a three-year second period during which the government contribution would be also Eth $1.2 mi:Uion, and the UN Special Fund Eth $3 million; followed by a three- year second period during which the government contribution would be also Eth $1.2 million, and the UN Special Fund Eth $3 million. The 1970/71 Proposed Budget does not show this item,however the item Awash Valley Authority Eth $4.953 million may be intended to cover this item.

/21 Land Reform and Training Institute: It is expected that this UNDP (Special Fund) Project will become operational by 1971/72 fiscal year.

/22 Forest Rangers School: A project for a school and a Pilot Forest Administra- tion Unit is under consideration by I.E.G. It is estimated that the project might commence in 1971/72.

/23 MinistryT of Agriculture: Based on an annual increase of approximately 15% over the 1970/71 base of 10 million until the end of TFYP.

/24 Ministry of Land Reform Administration: Estimate does not take into consideration amount required if land reform legislation is enacted. A decision of governmernt to start settlement schemes through the Ministry of Land Reform and Admiinistration will necessitate a still further allocation.

/25 Awash Vallez Authority: Based on an annual increase of approximately 15% over the 197071 base of 0.4 million Eth$ until the end of TFYP.

/26 National Parks: Based on an annual increase of approximately 15% over the 1970/71 base of 0.5 million until the end of TFYP. The rate of development. of the tourist industry may require larger amounts to be spent.

Appendijx 9 ESTIMA'TED STA.4FF REQUIREEMNTS FOR AGRICULTUTRITE 1970-71 to 1974-75 (man years)*

Footnote 1970/71 1971/72 1972/73 1973/74 1974/75 Capital Budget

Development Projects Commenced

Chilalo Agricultural Development Unit 1 99 127 157 181 200 Wilamo-Soddu Agricultural Development Unit 2 182 322 296 172 149 Awasa Farm 3 30 30 30 30 30 Development Projects Under Preparation

Norchwest Lowlands Project 4 3 8 9 Melka Sadi-Amibara Project 5 125 150 175 180 190 Addis Ababa Dairy Unit 6 70 90 106 109 113 National Range Development Project 7 - 100 150 200 200 Shashamenne Project 8 12 25 25 25 25 ADA District Development Project 9 - 26 36 46 76 Coffee Processing Project 10 - 59 121 175 204 Tendaho Plantation Expansion 11 (20) (30) (40) (50) (60) Agricultural Extension & Agricultural Education 12 (116) (116) (116) Proposed UNDP(SF) Assisted Projects Strengthening Awash Valley Authority 13 (15) (20) (25) (20) (15) Land Reform and Training Institute 14 - (4) (4) Forest Rangers School 15 (10) (10) (10) (10) (10) Total Capital Account 682 1,117 1,300 1,198 1,272 Recurrent Budget Ministry of Agriculture 16 1,015 1,170 1,350 1,550 1, 780 Ministry of Land Reform Administration 17 445 455 465 475 485 Awash Valley Authority 18 34 40 50 (60) (70) National Parks 19 130 140 150 160 170 Total Recurrent 1,624 1,805 2,015 2,245 2,505 Estimates are for Ethiopian supervisory, technical, and sub-professional man-power in agriculture only, expatriates and skilled and unskilled labor and noni-agricultural staff (like irrigation engineers) are not included, Mission estimates in brackets. These estimates will increase if new projects not now visible are added in any one of these years.

Source: Most of the capital budget items are taken from estimates contained in project proposals, recurrent budget items were furnished to the mission by the agency involved, some verification of capital items involved use of Institute of Agricultural Research Publication, The National Coffee Plan of Ethiopia, December 1969.

Notes to Appendix 5

1. Chilalo: 123 man years of expatriate assistance excluded.

2. Wolamo Soddu: 52 man years of expatriate assistance excluded.

3. Awasa Farm: 30 man years of expatriate assistance excluded.

4. Northwest Lowlands: 20 man years of expatriate assistance excluded.

5. Melka Sadi-Amibara: Estimates are for agricultural requirements only it excludes irrigation engineers, etc.; 125 man years of expatriate assistance.

6. Addis Ababa Dairy: 45 years of expatriate assistance excluded.

7. National Rtange Development Project: Estimates assume all 3 units of the project are developed simultaneously, but that it would not be possible to fully stalt all units in the first year of development; 50 years of expatriate assistances excluded.

8. Shashaman,e Project: 45 years of expatriate assistance excluded. Estimates are based on judgment for services to be provided under contract as indicated in proposaLL.

9. ADA District Development Project: 45 years of expatriate assistance excluded.

10. Coffee Processing Project: 55 man years of expatriate assistance excluded.

11. Tendaho Plantation Expansion: These are Mission judgments of increased personnel required for settlement activities resulting from expansion at Dubti and Assayita. No estimates available for expatriate assistance.

12. Assumes lL0 teaching staff at 50 training centers and Ambo and Jimma agricultural schools, plus 6 administrators. 9 man years expatriate assistance excluded.

13. 65 man years of expatriate assistance excluded.

14. Estimate based on proposed Ministry of LandReform request to UNDP, February, 1970. 8 mnan years expatriate assistance excludea.

15. Estimate based on Department of Forestry Budget proposals for 1970/71 and recommendations of SIDA Forestry Team, 1969. 5 man years expatriate assistance excluded.

16. Based on TFYP and Ministry of Agriculture. 140 man years expatriate assistance excludea.

17. Ministry of Land Reform.

18. Projections are based on present professional and technical staff of 34 and staff increases proportional to budget increments of Etn. $100,000 per year. Also assuLnes substantial amount of staff increases in Melka Sadi-Amibara Project shown under that Project. Estimates do not include substantial expatriate services to be provided under contract with the Victoria State Rivers and Water Supply Commission of Australia.

19. Estimates based on present staff and proportional budget increases. 55 man years expatriate assistance excluded.

Appendix 6: FROSPEC TS FOR CULTIVATICO OF GOVERNMENT LNDS

Province Government Land-KM /2 Potential Crop Prospects-KM /2 Quality Bale 100,956 15 Sorghum/Sesame/Cotton scattered area (S9.5% grazing only) too small for development 146-h0% Wheat/Teff/Barley access fair to none Gemu Gofa 1?,542 1,265 low input/output (92% grazing only) Sorghum/Sesame/Cotton remote Harrarge 204,634 735 Sorghum/Sesame/Cotton fair (99,4% grazing only) Maize 1888 same good in litigation Ilulabor 27,276 100% Maize/Cotton Sorghum/Sesame/Cotton/Tea remote Kefa 24,96o 13,000 Cotton/Maize remote Sidamo 88 201 960 Sorghum/Sesame/Cotton future (98% grazing only) 86 Cotton/Maize development only 795 Teff/Wheat/Barley malarial Welega 26,852 100% Cotton/Maize 2698 Lekemt Awraja priority Gojam 13,000 50% Sorghum/Sesame malaria and 50% Cotton/Maize Tsetse - doubtful Welo 3200 (grazing only) malarial

Total 506,621 86,018 (17%) * * Note: A large area of land in Begemdir and Simen is being cultivated and more land is potentiallly The ownership available. is indeterminate although it is administered by public authority. Source: Ministry of Land Reform and Administration A Policy Oriented Study of Land Settlement; December 1969, Vol. II.

Appendi.x 7: RTTMATED OUTPT'>1' FROM PRINCIPAL AGRICULTURAL NST TTIL1TIONS /

Output

1970/71 1971/72 1972/73 1973/74 1974/75 TOTAL

Alemaya Agricultural College 35 40 45 45 45 /2 210

Institute of Agriculture - Jimma 80 92 105 115 125 517

Institute of Agriculture - Ambo 33 42 52 54 54 235

Veterinary Training Center - Debre Zeit 25 30 30 35 40 /3 160

Holetta Training Center - Shoa 40 40 40 40 40 200

Adwa Training Center - Tigre - 40 40 40 40 160

Alemaya Training Center - Harrarge - - 40 40 40 120

TOTAL 213 284 352 369 384 1,602

/1 Excludes training by CADU and WADU to the extent those have independent training programs

/2 This estimate assumes intensive effort to improve very high dropout from 1st to 4th year. In 1968 the difference between 1st and 4th year enrollment was 108.

/3 This estimate is for veterinarians only; it does not include an estimated 65 vaccinators.

Source: IBRD Education Mission to Ethiopia TFYP page 208.

Appendix 8

MINIMUM PACKAGE PROGRAMS

The purpose of this appendix is to illustrate the organizational implications, staffing, likely costs, and value of increased production of minimum package programs, as proposed in the main text. The illustration is based on the establishment of programs in 10 locations. Concentration of efforts would be on doubling the yield of wheat per hectare from 10 to 20 quintals, and that of teff from 8 to 16 quintals, by the use of fertilizers, improved seeds, and cultural practices. The programs need not, of course, begin in 10 locations, nor need they all begin in wheat and teff areas. Other areas could be included, provided research results prove equivalent yield increases by the use of the practices and inputs recommended.

It is assumed these improvements would reach 1,500 farmers in each location by the sixth year after the start of demonstration work. The illustration is based on each of the 1,500 farmers growing one-half hectare of wheat and one-half hectare teff.

Increases in the number of existing extension staff already working in these locations would be mainly through the appointment of one graduate in agriculture to be in charge of extension work in the area, and a number of assistant extension agents, of the type that will be produced by the Agricultural Training Centers now being established, or tenth graders from rural areas who receive intensive in-service training. The headquarters of Extension Service of the Ministry of Agriculture would be strengthened by assigning the execution of the program to it, and by assisting it with additional staff and facilities as detailed in Table A below. The only additions to staff would occur where personnel is not already hired and on the job.

The Ministry of Agriculture is considering building agricultural centers in 50 locations by the end of the Third Five Year Plan, and increasing the number of extension staff stationed at these locations. Therefore, the implementation of a minimum package program at each might not require the building of additional offices nor the recruitment of eight assistant extension agents. The cost of the offices and the additional staff are included in the illustra- tiorL to indicate maximum costs likely to be involved.

The order of magnitude of the cost of these programs, and the value of increased production, is given in Tables B and C. In the calculations Eth.$80 per hectare, the maximum cost of fertilizers and their transport, were used. On this assumption, the programs would have an internal rate of return of about 15 percent. However, recent experience in Ethiopia has indicated that by bulk impcrtation of fertilizers and by the use of diamonium phosphate instead of urea and triple superphosphate, the cost of fertilizers required for wheat and teff per hectare, including their transport can be reduced to Eth.$60. Using this figure the internal rate of return of the programs will be over 19 percent. Appendix 8-A

In Addis Ababa

1 Senior Extension Specialist (Foreign) 2 Extension Agents (Foreign) 1 Farm Management/Agricultural-Ekonomics Expert (Foreign) 2 National Graduate Counterparts 2 Jimma or Ambo Graduates 6 Accountants, Secretaries, Clerks 2 Drivers Office building and furniture Running and travel expenses 3 Vehicles In Each of Ten Locations

1 Graduate (Officer in Charge) 2 Jimma or Ambo Graduates 8 Assistant Extension Agents 1 Clerk 1 Storekeeper Daily Wage Laborers Office and Furniture Stores Seed Cleaning machinery Weighing machines and tools 3 Vehicles 1 Truck Running expenses, travel and operating costs Revolving fund for credit (to be administered by the Ethiopian Development Corporation) Revolving fund for seed production (to be administered by the Plant Production Department of the the Ministry of Agriculture with the help of the Institute of Agricultural Research in the initial stages) -en14< c,-B: ILLUSTRATIVE COSTS AND BENEFITS OF MINIMUIMPACKAGE PROGRAM IN 10 LOCATIONS (Eth.$ thousands)

Re fore Program Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Years 10-20

I. INVESTMENTS Staff: National 450 450 450 450 450 450 150 150 150 150 Foreign 180 180 180 120 30 - - - - - Total ~~~~~~~~~~~~~~~0 ~~~~~~0 _60 570 480 -450 -1750 150 150 150 Offices and stores 370------Vehicles 330 - - - 110 -- 20 Seed cleaning machinery 100 ------10 Weighing machine and tools 20 ------Trucks 150 - - - - - 150 - - 25 Revolving - Seed Production 16 32 48 64 80 16 32 48 64 40 Total Investment 1,616 662 678 634 560 466 442 198 214 245

II. OPERATING COSTS Viechicles and travels 500 500 500 500 500 500 170 170 170 170 Trucks 120 120 120 120 120 120 120 120 120 120 Seed Cleaning machinery 10 10 10 10 10 10 10 10 10 10 Office Rent 8 8 8 8 83 8 8 - - - Fertilizers 1,000 farms -0 80 80 80 80 80 80 2,000 farms- -D 160 160 160 160 160 3,000 farms- - -D 240 240 240 240 4,000 farms-- - -D 320 320 320 5,000 farms - - - - -D 400 400 Total Fertilizers 80 240 480 800 1,200 1,200 1,200 1,200 1,200 Seeds-Wheat - 16 32 48 64 80 16 32 48 40 Total Operating Costs 638 734 910 1,166 1,502 1,918 1,516 1,532 1,548 1,540

III. BENEFITS Wiheat Entry: 1,000 farmers 110 1100 220 220 220 220 220 220 2,000 farmers 220 220 2200 440 440 440 440 440 3,000 farmers 330 330 330 3300 660 660 660 660 4,000 farmers 440 440 440 440 440D 880 880 880 5,000 farmers 550 550 550 550 550 550D 1,100 1,100 Total Wheat 1,650 1,650 1,760 1,980 2,310 2,750 3,300 3,300 3,300 3,300 3,300 Teff Entry: 1,000 farmers 96 960 192 192 192 192 192 192 2,000 farmers 192 192 192D 384 384 384 384 384 3,000 farmers 288 288 288 2880D 7 5 76 576 57 6 4,000 farmers 384 384 384 384 384D 768 768 768 5,000 farmers 480 480 480 480 480 4800 960 960 Total Teff 1,440 1,440 1,536 1,728 2,216 2,400 2,880 2,880 2,880 2,880 2,880 Subtotal benefits 3,090 3,090 3,29 6 3,708 4,526 5,150 6,180 6,180 6,180 6,180 6,180 Incremental benefits - - 206 618 1,436 2,060 3,090 3,090 3,090 3,090 3,090 Farmers own seed not used -- 11 22 33 44 55 51 22 33 33 Total benefits 217 640 1,469 2,104 3,145 3,101 3,112 3,123 3.123

COSTS I.) Investments 1,616 662 678 634 560 466 442 198 214 245 II.) Operating costs 638 734 910 1,166 1,502 1,918 1,516 1,532 1,548 1,540

Total costs 2,254 1,396 1,588 1,800 2,062 2,384 1,958 1,730 1,762 1,785

Net benefits -2 ,254 -1,179 -948 -331 58 76 1 1,143 1,382 1,361 1,340 (IllI-Il1)

Source: Mission estimates; Also derived fron experience of Institute of Agricultural Research. Extension Service and TAO in conduct of Freedom From Hunger Campaign Fertilizer Program.

Appendix 8-C: TENTATIVE ESTIMATE OF COSTS OF MINIMUM PACKAGE - MARKET AND CREDIT PROJECT 1970-71 to 1974-75

Total by end Total Grand Total 70/71 71/72 72/73 TMYP 73/74 74/75 73-75 70/71 - 74/75

Minimum Package Program - (2.0) (2.0) (4.0) (2.0) (2.0) (4.0) (8.0)

Marketing Project /b (6.9) (3.3) (3.3) (13-5) (3.3) (3.3) (6.6) (20.1)

Credit Project /c (1.1) (1.2) (1.0) (3.3) (1.5) (2.0) (3.5) (6.8)

TOTAL (8.0) (6.5) (6-3) (20.8) (6.8) (7-3) (14-1) (34.9)

/a Plus another 2.0 million in 1975/76 and 2 million in 76/77

/b Plus another 3.3 million in 1975/76

/c Assuming 1 million for credit outside the MIPP and 300,000 Eth$ in 70/71 and 71/72 for training and organization with the amount increasing as the proposed Ethiopian Development Corporation gains experience and staff. Appendix 8-D: TENTATIVE ESTIMATES OF ETHIOPIAN ADMINISTRATIVE, PROFESSIONAL AND TECHNICAL STAFF REQUIREMENTS FOR MINIMUM PACKAGE, MARKET AND CREDIT PROJECTS 1970-71 to 1974-75

70/71 71/72 72/73 73/74 74/75

Minimum Package Program /a ---) (114) (114) (114) (114)

Marketing Project /b (60) (80) (100) (120) (160)

Credit Project - (15) (20) (25) (30) (35)

TOTAL (75) (214) (239) (264) (309)

Note: Brackets indicate mission estimates. Estimates include professional and technical staff of existing organizations. New hires in 1970/71 would be 35 for marketing and about 8 for credit. Possibly one half of minimum package program are already on board.

/a Excludes 19 man-years of expatriate assistance.

/b 1970/71 doubles existing grain corporation top level staff, excludes 20 man-years expatriate assistance.

/c Assumes creation of agricultural credit unit in Ethiopian Development Corporation, excludes 30 man-months expatriate assistance.

Source: All staff requirements are mission estimates based on analysis. In case of the marketing project initial estimates were expansion of present professional staff of the grain corporation. Appendix 9: THE VETERINARY SERVICES

Estimated Number of Veterinarians /a Nube lo Province Cattle Animal - Number of/ Population Health Vaccinators (Millions) Ethiopian Foreign Assistants

Arusi 0.8 1 2 9 26 Bale 2.5 1 - 9 28 Begemdir 2.0 - 2 7 26 Eritrea 1.4 3 _ 4 21 Gemu Gofa O.8 1 1 7 26 Gojam 2.5 1 2 7 28 Harrarge 3.0 - 2 9 30 Ilubabor 1.0 - - 4 21 Kefa 1.0 - 1 6 22 Shewa 1.5 4 - 15 50 Sidamo 2.2 - 2 12 32 Tigre 1-5 - 2 7 23 Welega 1.5 1 - 7 32 Welo 3.0 1 2 8 24

TOTAL 24.7 13 16 111 389

Addis Ababa 2 1 2 - Animal Health School 1 7 1 - Veterinary Laboratory 1 5 3 -

GRAND TUTAL 17 29 117 389

/a Graduates of the Animal Health School at Debre Zeit (2-year course).

/b Normally receive six months training at the Animal Health School.

VOLUME II

ANNEX 2: MANUFACTURING INDUSTRY

MANUFACTURING INDUSTRY

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ......

I. EVOLUTION AND STRUCTURE OF ETHIOPIAN MANUFACTURING INDUSTRY 1

Industrial Output ...... 1 Industrial Investment ...... 2 Utilization of Capacity ...... 3 Employment and Productivity ...... 4 Foreign Management: and Ownership ...... 6 Government Role ...... 6 Financial Profitability ...... 7 Import Dependence ...... 7 Efficiency of Industries as Measured by "Value Added" and Prices ...... 8

II. TARIFF POLICY ...... 10

Customs Tariff ...... 10 Structure and Administration of the Existing Customs Tariff and Other Import Taxes ...... 10 Rates of Protection ...... 12 Setting Tariff on an Effective Protection Basis ...... 15 Other Anomalies on the Existing Customs Tariff ...... 17 Other Aspects ...... 18 The Customs Tariff in Relation to Other Forms of Indirect Taxation ...... 18 Problem of Special Duties to Countervail Dumping ...... 20 Temporary Import Regulations for Promoting Exports .... 21 Protection of Export Industries ...... 21

-tII. INCENTIVES FOR MANUFACTURING ...... 23

Existing System of Incentives ...... 23 Proposed New Investment Code ...... 26

IV. INDUSTRIAL FINANCE ...... 31

V. PROSPECTS FOR INDUSTRTAL OUTPUT AND INVESTMENT ...... 38 TABLE OF CONTENTS (Continued) Page No.

VI. ORGANIZATION FOR INDUSTRIAL DEVELOPMENT AND SERVICES ...... 42

Administration ...... 42 Plan Objectives in the Field of Administration and Industrial Services ...... 44 Reorganization of the Administrative Set-Up for Industrial Development ...... 45

TABLES

1. Manufacturing Industry, Value Added at Factor Cost (1961-1969)

2. Gross Value of Production (1967-1969)

3. Production of Major Manufactured Articles (1965-1969)

4. Investment in Manufacturing Industry (1963-1967)

5. Investment Cost and Employment in Selected Industrial Projects (1968-1969)

6. Profitability of Selected Ethiopian Industries (1967-1969)

7. Employment in Manufacturing (1962-1967 and Plan Target for 1973)

8. Classification of Establishments by Size of Employment (1966-1967)

9. Ethiopian Industry = Import Dependence

10. Comparison of Prices of Local. Products as a Percentage of CIF Costs of Comparable Imported Products and Rates of Protection

11. Comparison of Prices of Local. Products and CIF Costs of Comparable Imported Products

12. Relative Efficiency as measured by Value Added and Prices

13. Specific Duty Rates on Selected Imported Industrial Commodities

14. Nominal and Effective Protection on Selected Industrial Products

15. Development Bank of Ethiopia - Industrial Loans Commitments

16. Development Bank of Ethiopia - Equity Investments in the Industrial Sector (1965-1969) TABLES (Continued)

17. Ethiopian Investment Corporation - Disbursements of Industrial Loans (1963/64 - 1968/69)

18. Ethiopian Investment Corporation - Net Equity Investments in the Industrial Sector (1963/64 - 1968/69)

19. Major Shareholdings of the Ethiopian Government at End December 1969

20.. Shareholdings of the Ethiopian Government in Government Financial Intermediaries

21. Estimates of Production for Major Industrial Products

22. List of Identified Industrial Projects

23. Capital Expenditures (1969-1973) - Ministry of Industry and Other Governument Participations

24. Disbursements by EIC/DBE (1963-64 - 1968/69) and Projected Disburse- ments up to 1972/73).

Appendices

I. Calculation of Nominal and Effective Protection -- Eritrean Cement Company

II. Suggestions to Calculate Desirable Rates of Protection

MANUFACTURING INDUSTRY

Summary and Conclusions

1. The role of moderni manufacturing industry in the economy is small even by comparison with other African countries. It contributed 5% to GDP in 1969 - roughly equal to the share of GDP of handicrafts and cottage type industies.

2. Manufacturing consists overwhelmingly of producing import sub- stitutes behind frequently high protective tariff walls. It is highly dependent on imported human and material inputs. As a result the benefit to the economy from manufacturing is lower than it could be - frequently the value added is low, the employment content is small, the effects on the balance of payments are not significant, and the prices of most domestic manufactures are as high as 60% above the c.i.f. price of similar imported goods.

3. The Government has taken a number of measures to encourage the development of manufacturing industry. An Investment Code provides some relief from income taxation to concerns with capital exceeding Eth. $ 200,000. Government has provided some Eth. $ 281 million of capital for manufacturing concerns through the financial intermediaries -- the Ethiopian Investment Corporation and the Development Bank of Ethiopia - and by direct investment as whole owner, majority shareholder, and miniority shareholder. An important factor is tariff protection which is further reinforced by a 7 percentage points differential in favor of domestic production in the relative rates of transactions tax on imported goods and domestic products.

4. Tariff protection is given on an ad hoc industry-by-industry basis and the main determinant of the level of protection seems to be the bargaining persuasiveness of the particular entrepreneur. In the circumstances there are various levels of tariff on raw materials and finished goods and the levels of protection bear no relationship to the economic benefits in terms of value added, employment, and the balance of payments. The tariff policy should be geared to the development of industries in which the country has comparative advantage and which maximize benefits to the economy. The objective may be achieved by a uniform nominal tariff for all inputs and products so that all industries are on an equal competitive footing; making detailed studies of effective protection levels, and seek to have a uniform effective tariff; or seeking to simplify the tariff into at most two or three groups with a reasonable uniformity of nominal tariff rates for each group. These and other policy measures need systematic study, but the Ministry of Commerce and Industry is not adequately staffed to do this and other necessary work in the industrial development field. The staff should accordingly be strenghtened. i2

5. As a result of the Financial Intermediaries Reorganization Ccmmittee's work, Government's participation in the finance of industrial development, is likely to be made more effective through the establishment of a new development finance concern by the merger of the EIC and the DBE. It is hope that the new concern will be better equipped to mobilize domestic resources, to encourage industrial investment, and to influence the quality of direct government investment in manufacturing industry.

6. Value added in manufacturing is estimated to have grown at 16% per annum between 1961 and 1969. This was based on import substitution industries the further development of which is likely to be much slower than in the past. The scope for appreciable industrial expansion lies in the processing of indigenous raw materials - for example beef - for export. In addition the net benefit to the economy is likely to be greater from this type of industrial development. But special steps must be taken to promote manufacturing for export. The transections tax on non- traditional exports should be removed, aXd the arrangements for import duty drawbacks on the import contents of exports should be made more efficient. The manufacturer of exports does not get a concession similar to the protective tariff which the manufacturer for the domestic market enjoys. If exports are to be encouraged the export manufacturer should be no less preferred to the producer for the domestic market; in this connection consideration should be given i,o the i:icroduction of export subsidies.

7. A draft new investment code is now being considered. It provides income tax relief to export industries, considerably lowers the qualifying capital of the development concern to accord more with current Ethiopian conditions, and generally goes further than the present relatively liberal Investment Code. I. EVOLUTION AND STRIJCTURE OF ETHIOPIAN MANUFACTURING INDUSTRY

1. The level of industrial development in Ethiopia is still quite low as compared with some other African countries, and manufacturing in 1969 con- stituted only 5% of the GDP. It is limited to about 400 small, medium and a few large scale manufacturing enterprises engaged in food and beverage processing and the production of cement, petroleum products (from imported crude oil), textiles, shoes, cigarettes, soap, matches, leather goods, paper products, furniture, reinforcing bars and rods, galvanized sheets, aluminium and plastic consumer goods.

Industrial Output

2. The two single largest industrial sub-sectors are food processing and textiles. Within the food processing sector, sugar and wheat flour are the most important items. T'extiles include cotton goods, nylon fabrics, gunny bags and ready made cloths. In 1969, the food processing industry represented 28% of the gross value of industrial production 1/ and textiles 27%. The textile industry has been rapidly expanding in recent years. Other relatively significant industries are, in order of importance, beverages (beer and wine), metal products, leather products, oil refined products and non metallic minerals (mainly cement, bricks and tiles). Wood products, chemicals, paper and printing have contributed so far relatively little to the value of industrial output.

3. The handicraft and small scale industries production is said to be as Large as th,e medium and large scale manufacturing sector and may have represented about 5% of GDP in 1969. Little is known of the state and composi- tionl of small scale industries. Such industries are usually located in households or small workshops employing less than five people, and depend mositly on own or family labour. Maniual skills rather than machines play the preponderant role in these establishments.

4. There are no reliable statistics on value added by large scale manufacturing. The Central Statistical Office, on the basis of available data on gross value of output makes estimates for value added assumed to represent about 40% of the value of production. National Accounts statistics indicate an annual average growth rate of "estimated" value added of 16.2% from 1961 to :1969 (at conistant prices). 2/

5. There have been relatively wide fluctuations from year to year in the index of industrial production. For instance in 1967, value added (at constant prices) increased by 25.4% as against 16.3% in 1966. This is explained by the combined effect of the coming into production in 1967 of substantial new capacity in cotton textiles, nylon textiles, iron bars, corru-

1/ See Table 2. 2/ See Table 1. gated iron sheets. During the same year, production of sugar and wheac flour also increased significantly (see Table 3). In 1968 and 1969, growth of industrial output was substantially lower. 13.8% in 1968 and 10.9%o in 1969. In fact the increase of production was only 8% in 1968 if one excludes the exceptional production resu'ting from the coming on stream of the Assab oil refinery. Sugar production fell substantially in 1968 and 1969 below the exceptional high leve], reached in 1967, due to very good weather conditions during that year. Cotton textiles production continued to increase but at a reduced pace due to poor market demand. Production of cement also slackened as well as that of iron bars and corrugated sheets.

6. Almost all industrial growth has been domestic market oriented. Industries have been started in response to the already existing or anticipated demands in the internal market heretofore satisfied by imported products, such response being stimulated by Lhe generously extended incentives in the form of high tariff protection granted to facilitate the establishment of domestic production facilities. Export industries, which generally depend upon domestic raw materials, have grown much less rapidly than import substitution industries, which can freely import raw materials. For example, the Second Five Year Plan export target of Eth.$ 80 million for 1967 (in 1962 prices) is now estimated at Eth.$ 19 million only.

Industrial Investment

7. Investment in manufacturing industry, from both private and public sources, reached an estimated Eth.$ 276 million during the Second Plan (1963- 1967) 1/ as compared to an investment target of Eth.$ 318 million. The relatively close approach to the investment target was the result of private decision to meet market demands plus inducements given by the Government to private investors. For example, investment in the beverage, tobacco, textile, wood and printing and publishing industries was higher than planned. The food industry (including sugar) was close to the plan but the leather and shoe, chemical and metallic products industries received less than the planned investment.

8. There are no comprehensive data available for total investment in manufacturing in 1968 and 1969. However, a number of projects have been completed or undertaken during these two years. 2/ The most important expenditures have taken place on the HVA Metahara Sugar plant (Eth.$ 18.8 million in 1968 and Eth.$ 28.6 million in 1969) and on the paper plant (Eth.$ 12.0 million in 1968 and Eth.$ 6.0 million in 1969). Total cost of other projects shown in table 4 amount to Eth.$ 43.1 million. Most of these projects have been completed during the two last years. To this must be added expenditures for expansion in the textile industry (particularly by the Cotton Company of Ethiopia, Indo Ethiopian Textiles and the Fibre Bag Company of Ethiopia), by Tobacco Monopoly and by HVA Ethiopia SC. The Oil Refinery has also increased

1/ See Table 4.

2/ See Table 5. - 3 - its capacity in 1969. There are also other smaller projects for which no detailed information is available. Finally, fixed capital assets were valued at Eth.$ 342 million in 1967. Assuming depreciated equipment is replaced and depreciation is in ten years, replacement would have been Eth.$ 35 million in 1968 and Eth.$ 40 million in 1969. On that basis, investment may have reached Eth.$ 95 million in 1968 and Eth.$ 106 million in 1969.

Estimated Capital Expenditures in Manufacturing (Eth.$ million)

1968 1969

HVA Metahara 18.8 28.6

Paper Plant 12.0 6.0

Oil Refinery 1.5 5.0

Other new projects /1 21.5 21.6

Expansion of existing major companies /2 6.3 4.8

Sub-Total 60.1 66.0

Replacement 35.0 40.0

95.1 106.0

/1 See Table 5.

/2 See Table 6.

The volume of investment is evidently influenced by exceptionally large investments in sugar and paper but there had been also a number of other smaller projects completed and it can be said that on the whole industrial investment in 1968 and 1969 has been held up despite the recession in the economy.

Utilisation of Capacity

9. Production capacity is not always used fully. This is the case for the cotton textile industry,, where according to a study made in August 1969 by the Battelle Advisory Group in Ethiopia, textile factories in the northern region are working at 60% capacity. Also Indo-Ethiopian Textiles, the second largest mill in the country, has had to cut operations to about 50% of normal levels in part of 1969 due to poor sales. The paint industry has only 40% of its capacity utilised, the match factory 10%, the cardboard and wrapping paper plant 27%, the two alcohol producing plants 23%, the several plants making industrial gases (oxygen, ace'!lene, carbon dioxide) from 20 to 40%. Also only - 4 - part of the soap industry, cosmetics and glue capacity is utilised. A new paper plant recently installed will be able to operate only at a reduced percentage of its capacitv for some time due to lack of market. In the sugar industry the installation of a new unit will result in excess capacity, unless cane sugar can be exported. One cement plant in Eitrea is exporting to Saudi Arabia at prices below cost because otlherwise part of its capacity would remain idle, due to lack of market. There are obviously other reasons than the lack of demand to explain the low utilisation of capacity of a number of industries. They include inadequate ploject oreparation, inefficient operations and lack of experience by both managers a-d workers. Certain companies experience raw material difficulties (e.g. lack of cattle for the meat industry or of good quality hides for the lea::her industry) contributing to low operating levels. Other concerns, supply:Lug piotected markets, have become so profitable that a motivation toward efficiermcy may have been lacking. There is little doubt however that, due to the srnall market demand (the income per capita is low) and the fact that import substitution has made substantial progress in the sixties, it will take time before existing capacity can be more fully utilised in a number of industries.

Employment and Productivity

10. Total emplovment in manufacturing was estimated at 59,000 in 1967 1/ of which more than half in food industries (29,000) 2/ and in textiles (19,300). In 1957, employment was 18,700 and 27,600 in 1962. Most of the increase in emplovment has been in food and textiles. Of the total labor force, 19,000 persons are employed in Addis Ababa (including 6,000 in neighboring Akaki) and 12,000 in Asmara. Also about 10,000 workers are employed in Wonji and Metahara sugar estates and plants and at Dire Dawa (4,500). There are a few hundred workers employed at Assab (900), Massawa (460) and Nazareth (460), Harrar, Gondar and Jimma. More than half of the labor force is employed in 15 establishments with 500 workers and over, and less than 10% of the workers are in 248 enterprises with employees number- ing from 5 to 49. 3/

11. There are almost-no data on skills. Handicraft and later mechanical skills were traditionally regarded as a symbol of low status to those who possessed them. The vestige of this attitude, combined with widespread illiteracy and the scarcity of training programme, result in acute shortage of manual skills in all areas. These shortages have led to a dependence on foreigners. Over half the engineers employed in Ethiopia are foreigners. Only scattered statistics on labor productivity are available. In the cotton textile industry productivity has recently improved through the installation of new machinery, the establishment of regular procedures for the handling

1/ See Table 7.

2/ Including about 900 Sugar estate workers.

3/ See Table 8. of labor management disputes by unions and management, and by on-the job training and improvement programmes. However, some employers in this sector, which includes a large number of women, complain that the constant turnover in their work forces because of marriages and confinements renders their training efforts almost meaningless. Other employers have reported the lack of familiarity with modern practices and lack of training as the major causes of low productivity in Ethiopia. Other contributing factors include the pre- valence among the work force of debilitating diseases, the high altitude at which many activities are carried on, rigorous and frequent fasting required by the Ethiopian Orthodox and Muslim religions, and a lack of motivation to work hard stemming, apparently, from a general satisfaction with life as it is. One the whole, turnover of the labor foce is high for new workers who find it difficult to adjust to industrial environment and schedules but becomes later on low, for those who have been able to stay on the job. High labor turnover rates are not: always due to absenteism but also to erratic rates of output, provoked by poor management. Also, the present level of wages (which has not significantly increased in the sixties) should not be considered as excessive by itself (Eth.$ 114/month in Addis in 1968 for average employee in manufacturing) as poor management is at least as responsible for low productivity as in the inferior quality of skills. Overall, alt'hough some consideration was given to the productivity of labor during the sixties, labor productivity remained about constant. 1/

12. There were 915 employed foreigners in manufacturing in 1966/67 in Ethiopia. Foreign nationals seeking employment in Ethiopia are required to possess work permits, which can be granted if similar skills are not available in Ethiopia. It is reported that there is a tendency by prospective emp:Loyers to exaggerate the qualifications required for a particular job in order to circumvent this legal obligation. Although investigation of such practices continues, the regulation is difficult to enforce effectively. Because expatriate personnel, brings into Ethiopia the technical skills mis- sing, it might be a wise policy to analyse the qualifications and experience of the expatriates from the point of view of the needs of the country, and when expatriates are determined to be essential, to induce or oblige the employers to take Ethiopian counterparts. The problem, of course, could be solved to some extent if the government starts a more extensive programme of managerial and vocational training. Such a programme is in its inception in Ethiopia at the moment. The Center for Ethiopian Management (CEM) was recently established as well as the Center for Vocational Training. These two centers, which have the support of the UNDP, are expected to give some practical solutions to the prevailing dearth of nationals with management and vo- cat:Lonal training. It will be time, however, before these projects have any significant impact on the indtvstry. There are of course other technical and vocational schools in Ethiopia run by the Ministry of Education. The possibility to expand technical edtucation integrated with practical on-the-job tra:Lning should be investigated. Part of the cost could be subsidized by government and a programme set up in consultation with industry.

1/ The ratio of the labr! farce to vaile added was practically the same in 1962 and L967. Foreign Management and Cwnership

13. Most of the existing factories are owned and managed by expatriates, because the size of the Ethiopia's indigenous managerial and entrepreneurial force, although expanding is still, quite small. In 1967, the CSO surveyes a total of 489 commercial and industriial firms operating in Ethiopia with a paid up capital of at least Eth.$ 10,000. The survey revealed that only 104 of these firms were owned and managed by Ethiopians. The remaining 385 firms were owned or managed primarily by Italians, Greeks, Armenians and Indian nationals. However, in recent years, Fthiopians have Began to take middle management or supervisory functi,ns in factoiries. There has also been a raising trend in the upgrading of Ethiopian niddle managemenit, which has been working directly under expatriate supervisors, to the extent that the latter are being replaced increasingly by Ethiopians. However, this trend is very recent and more systematic efforts will have to be done as regards training (see paragraph 12 above).

14. Both the domestic and foreign private capital have participated in the industrialization process. During recent years increased efforts were made by the Ethiopian Government to attract private foreign investment. Pre- cise and recent data on the extent of foreign capital invested in manufacturing are lacking but we can cite relatively large foreign investments in textiles (Japanese and Indian), steel (Japanese), meat canning (Italian), sugar (Dutch), etc. Foreign capital has participated in several ventures in association with domestic enterprise and witlh public and semi-public agencies.

Government Role

15. The Government continues to exercise a major influence on investment decisions. Some projects, notably in petroleum refining, a tannery and a tyre plant, are government-owned. The government authorities to a large extent decide on the structure of output through the tariff policy and through licensing of new investment. An essential link in the relationships of the public and the private sector is the role played by the Ethiopian In- vestment Corporation (EIC) and the Development Bank of Ethiopia (DBE) and also by the Ministry of Finance as direct investor in projects in participation with private capital. The government-owned Banks have participated in the financing of a number of industrial projects in the last few years. The Government (partly through its tariff policy and other incentives) and the Development Banks are in a position to exercise strategic leadership in in- dustrialisation, while continuing to rely on private sources of savings and private management of industrial enterprises. 1/

1/ See Chapter 2 for an analysis of the tariff policy, Chapter 4 for a more detailed analysis of the Industrial Finance Institutions and Chapter 3 for an analysis of the incentives offered to manufacturing. -7-

Financial Profitability

16. An analysis of the accounts of 14 important companies surveyed by the mission shows wide discrepancies between firms as regards their financial profitability. 1/ Three companies are making losses: the Oil Refinery at Assab, Bahar Dahr Textiles and the Ethiopian Drug Co. The oil refinery does not have a balanced suoply/demand for its products and must export heavy fuel oil at a loss. rhis situation will improve progressively as demand for light products increases and makes up for the financial loss on fuel oil exports. The Bahr Dahr Textile mill suffers from a management problem and acute; competition. The Ethiopian Drug Company operates on a temporary basis. Difficulties arise on the management side, unavailability of skilled mechanics and of packaging materials at a reasonable price. 2/ On the other hand, the two largest cotton textiles companies have had a return of 16.8% on invested capital in the last three years. HVA Ethiopia (sugar) has had a profit of 10%. The cement industry (2 companies) also had a return of about 10%. Overall (excluding the refinery which is a major source of loss, distorting the results for all other companies) the average annual rate of return on investment has been 12.5% from 1967 to 1969, according to data available on companies surveyed. This result is confirmed by state- ments from manufacturers and bankers who often indicate that prospective entrepreneurs usually expect a financial return of around 15-20%, but usually earn about 10-15%. These financial rates seem to compare with those in the commercial agriculture sector but are thought to be rather low for potential investors. They indicate that despite high levels of protection (see Chapter 2), factors such as low utilization of capacity, low efficiency and poor management act as strong deterrents, preventing manufacturers to reap all benefits they had expected.

Import Dependence

17. The import dependence of the industry remains relatively high in som,e sectors. A compilation has been made by the mission of a list of products fairly representative of the present industrial structure of Ethiopia. The results are shown in Table 9. They indicate what is the percentage share of imported inputs in the value of output. The lower the number shown, the greater the proportion of total output that is attributable to domestic components of production. This will happen when either the industry is labor intensive, so that a large part of the total cost is accounted by the wage bill (e.g. garments) or when the inputs of raw materials and components are primarily of domestic origin (e.g. flour milling or cement).

1/ See Table 6.

2/ At present, plastic containers, for example, have to be bought from abroad although plastic. manufacturers are operating in Ethiopia; furthermore, prices of the metal tins assembled locally from imported pressed fLats are relatively high. - 8 -

18. At the present time, of the 31 industrial products listed in Table 9, for about half (17 products) the share of imported inputs is less than 30% of the value of output. Industries like iron sheets, plastic tubes and household articles aluminium ware, rubber footwear and printing have a high import dependence since they are based on imported materials. However, some industries which are normally based on local resources have also a relatively large import component. They include textiles (a substantial part of their raw cotton needs is imported as well as rayon), tobacco (still largely relying on imported raw tobacco), fibre bags (partly based on imported jute), matches (made out of imported wooclsticks). An industry like meat canning has a 40% import dependence due to import of tin cans. The beer industry has to rely on imported malt. Flour milling, sugar and cement are among the industries with the lower import dependence.

19. A comparison of prices of local products with CIF costs of imported products reveals that domestic prices are in some cases very high. Tables 10 and 11 give a list of 23 typical products and the percentage of local product price above (or under) the imported CIF price for the same commodities. About half of the products have domestic price in excess of 60% above CIF price. Only 6 items have an excess of domestic prices over CIF import prices of less than 35%. The higher price of locally made goods in relation to CIF import prices results sometimes from high domestic cost of production (cement is high cost due to the smal:I capacity of the plants; textiles are costly due to relatively low efficiency and high price,of cotton). One reason may also be the high amount of taxes or because of lack of demand (printing paper). Also industries are able to charge high prices as they are protected by substantial import duties such as 113% on textiles and 138% on sugar.

20. There is in fact little relation between the level of effective protection and the importance of value added. A number of industries which have a relatively high value added enjoy an effective protection lower than those industries relying on imported raw materials. 1/ The fact that an industry has a high or low value added does not seem to be a criterion for establishing the level of protection which is invariably high.

Efficiency of Industries as Measured by "Value Added" and Prices

21. Table 12 shows a ranking of industries indicating in a rough way the relative economic efficiency of selected industries. This is measured (a) by the "value added" 2/ which indicates each industry contribution to G.N.P. and (b) by the level of the excess of domestic prices over CIF prices.

1/ See Chapter 2 on tariff protection.

2/ Detailed value added in terms of payments to the factors of production, depreciation, and indirect business taxation are not available for all industries in Ethiopia. As explained in Chapter 2, to estimate "value added" it is necessary to seek data through an alternative route, namely sales less materials purchased. - 9 -

There are two major groups shown in Table 14: industries with a relatively high value added but also high prices and industries with a low value added and relatively high prices. On the contrary the group of industries which from the national economic viewpoint is the most profitable and yields a high value added and relatively low prices is small: it only includes tobacco, tanning, vegetables oils and cakes, tomato extract and spice extraction. The complication here is that domestic prices reflect not only production costs, but also protective custom duty rates. This complication prevents us from drawing too hard conclusions from the data. On the other hand, however, some industries, although well protected, are bound to be high cost due to their small size and the low competitive import price (e.g. currugated iron sheets, nylon fabrics, plastics, etc.) But some industries may also become more competitive if they can find local resources at low prices and good quality such as natural fibres and leather or if production units may be set up with a more economic size (cement). - 10 -

II. TARIFF POLICY

22. Incentives for manufacturing are important to determine and assist investors in establishing new industrial ventures. However, protective measures play in Ethiopia a central role in the industrial policy of the country. Such protective measures (e.g. the Customs tariff) are particularly important in influencing the level of profitability of Ethiopian industries. An analysis of the degree of protection afforded by the present tariff (and other taxes) will help to understand the extent to which the movement of domestic resources (land, labor and capital) is being induced into protected industries.

The Customs Tariff

Structure and Administration of the Existing Customs Tariff and 0 her Import Taxes

23. A review of the Ethiopian tariff shows that rates are most often set on an ad valorem basis, although there are numerous instances where a specific rate is set.l/ The Customs Department uses the UN Stand- ard International Trade Classification to classify the goods subject to tariff control, and the same heading is used in the compilation of its statistics. Of the over 900 headings, there are some 450 tariff categories. The range in ad valorem rates is from 0% to 100%. Items imported into Ethiopia not specifically listed in the tariff schedule bear an ad valorem duty of 35%. The Customs Department is in the process of adopting the Brussels Tariff Nomenclature (BTN), which is also used by the Economic European Community.

24. Besides the ordinary customs tariff, an argument is made that the transaction tax and the municipality tax are disguised tariffs - at least to the degree that the rate of the transaction tax on imports exceeds the transaction tax on domestic products, and to the degree that the municipality tax is collected only on imports. For example, the transaction tax on imports is set at 12% ad valorem, while the tax on domestic production is 5%. If a tariff is defined as a tax on international trade, there is an effective increase in the import tariff of 7%. Also the municipality tax of 1% is collectible on imports. If this argument is accepted, there is, in total, 8% added to the stated tariff rates.

25. Other additional taxes apply to imports (in particular cases) such as the Alcohol Excise Tax, Tobacco Monopoly taxes, and Salt tax.

1/ See Table 13 on specific rates. - 11 -

26. The export picture is less complicated but even here goods may be subject to two taxes, i.e. Customs Export duty and transaction tax on exports. However, manufactured goods destined for export may be exempted from export duties and transaction taxes on exports for a reasonable period of time if such exemption is found necessary to assure the competitive position of these goods on export markets. It will be shown below that in practice such exemption is not always easily obtained.

27. In 1968/69 Customs duties provided 21% of the total ordinary revenue of the Ethiopian Government. The transaction tax on imported goods yielded 8% while other excise taxes on imports provided 1%. The relative importance of such duties and tax receipts on imports indicates the extent to which emphasis is still placed upon the revenue rather than on the protective aspects of the tariff structure l/.

28. According to the Investment Proclamation of 1963, the industrial items subject to import duty relief to be granted by the Investment Com- mittee are: industrial machines, implements, appliances, spare parts 2/, building, structural, and other construction material. The conditions for relief are that they are for exclusive use in industrial enterprises and similar goods are not being produced within Ethiopia. The Invest- ment Proclamation lays out in language sufficiently accurate for most investors the nature of the above incentives to be granted to new enterprises and the mechanism for qualifying. The process for arranging for tariff protection for an infant industry is a much more subjective matter. When protection for the products of a new enterprise is sought, the Tariff Committee 3/ makes a recommendation but the decision and the degree of protection lie with the Minister of Finance, or the Council of Ministers.

1/ In 1963/64, customs duties provided 26% of ordinary revenues, transaction tax 10% and other excise taxes on imports 0.5%. The total amounted then to 36.5% against 30% in 1968/69.

2/ Spare parts may be imported duty free only at the time of the original importation of machinery. This negates some of the value of the incentive.

3/ The Tariff Committee has no legal basis. It is an ad hoc Committee to advise the Ministry of Finance. Members of the Committee include the Minister of Finance (Chairman), the Minister of Commerce and Industry, and such others as may be designated from time to time. Its purDose is to advi3e the M1inister of Finance on tariffs and to make recommendations when any investor asks for protection. The Ministry of Industry studies ill detail t.'.e proposed project and gives the necessary recommendations. which the Minister of Finance may or may not accept. The Committee., which meets whenever an application is to be considered has no author-,:y of its owl. - 12 -

29. In 1968, the Government formed a special committee whose role was to make proposals for setting new tariff rates on industrial products. It consisted of representatives from the Ministries of Finance, Commerce and Industry, Planning, Agriculture, Communications, Public Works, the Central Statistical Office, and the Customs Office. The Government strategy would apparently be to announce some new tariff rates when, as mentioned above, the present tariff schedule is converted from the Ethiopian classification system to the BTN nomenclature. Work on the conversion has been in progress for several years and is now nearing completion. It was thought at one time that the prospect of Ethiopia's joining the East African Common M1arket, under which it might have to accept the common external tariff of thiat grouping, could conceivably cause the work on a revised tariff to be futile. However, this prospect is miti- gated by two factors: (1) entry may be delayed by negotiations permitting Ethiopia to improve its tariff in the interim; and (2) the possibility may exist which would allow the external tariff to be negotiable in which case Ethiopia's bargaining position should begin from a more scientific and satisfactory set of tariff rates.

Rate of Protection

30. To evaluate the level of protection granted to Ethiopian industries, a distinction must be made between nominal and effective rates of protection. This is an approach to thinking about protection which economists have employed in recent years 1/.

31. Estimating the level of protection enables us to rank products according to the percentage excess of domestic over foreign prices which is taken to represent the nominal rate of protection (product protection). But the protection of individual industries is also affected by tariffs based on material inputs, such as industrial materials, fuels, parts, and components. These tariffs reduce the extent of protection accorded to a particular industry by raising the cost of material inputs, and can be regarded as a tax on the processing of such inputs.

32. The joint effects on individual industries of tariffs applied to inputs and outputs are indicated by the so-called effective rate of protection (margin of protection on value added rather than on the product price). This is defined as the excess of domestic value added, obtainable by reason of the imposition of tariffs and other protective measures, expressed as a percentage of world market value added. While the effective rate of protection is a relatively new conception in economic discussions, it has long been known to businessmen whose main concern is how tariffs on the product and its input affect the protection of their processing activity.

1/ See Bela Balassa, "Tariff Protection in the Industrial Countries: An Evaluation", The Journal of Political Economy (December, 1965). - 13 -

33. As an illustraticon, let us take the case of a product (e.g. clothing), the CIF import price of which is US$1.00. Converted at the current exchange rate of Eth.$ 2.50 to the US dollar, the price will be Eth.$ 2.50, of which the cost of material inputs (textile fabrics) on thes world market is equivalent to Eth.$ 1.50, and world market value addled in producing clothing Eth.$ 1.00. A 20% tariff on clothing will raise the domestic price of the product to Eth.$ 3.00 (i.e. by Eth.$ 0.50) while a 10% duty on textile fabrics increases material costs to the domestic producer to Eth.$ 1.65 (i.e. by Eth.$ 0.15). Protection will thus enable the firm to operate with a value added of Eth.$ 1.35 - the difference between the domestic price of clothing of Eth.$ 3.00 and the material cost of Eth.$ 1.65 - as against a value added of Eth.$ 1.00 abroad. The margin of Eth.$ 0.35 means that the effective rate of protection of the domestic processing activity - the percentage excess of domestic over world market value added - will be 35Z. Had the duty on textile fabrics been 20% (i.e. Eth.$ 0.30 instead of Eth.$ 0.15), the margin would have been only Eth.$ 0.20 and the effective rate of protection also 20%.

34.. Apart from tariffs on inputs and outputs, the effective rate of protection depends on the share of value added in the product price. Consider, for example, the case of pharmaceutical products which are imported in bulk into Ethiopia duty free but bear a 15% duty in packaged form. If bulk pharmaceuticals cost 90% of the packaged product on the world market -- i.e. foreign value added is 10% of the product price - ancl the import price is Eth.$ 100, domestic value added will be Eth.$ 25 (the difference between the domestic price of Eth.$ 115 and the Eth.$ 90 paid for bulk pharmaceuticals). By raising the price of the product by 15%,, protection thus enables domestic producers to operate with a domestic value added two and half times higher than value added in the world market, i.e. the effective rate of protection is 150%. Accordingly, the apparently low nominal protection corresponds to high effective protection cases when vaslue added is a small proportion of the product price. In the example, t:he effective rate of protection is greater on pharmaceuticals than on the mainufacturing of clothing although the latter had higher nominal protection 1/. It would seem consequently more appropriate to study the! protection- really afforded to industrial products, i.e. the effective prcitection, than to limit the analysis to nominal duties which may vary widely without giving a true picture of the existing situation. If there was a uniform nominal tariff rate on all products and inputs, then the effective tariff would be uniform for all products. However, as in Ethiopia, when variable nominal rates apply to different products and inputs, then t:here is a wide range of effective tariff rates depending upon the proportion of value added to output.

1/ Examples on clothing and pharmaceuticals taken from "Industrial Protection and Project Selection in Development Countries", Bela iialassa, August, 1969. -- 14 -

35. To calculate the level of nominal and effective tariff protection the Mission has visited a number of industries to obtain the relevant statistical data. As is clear from above, it was necessary to find the value added of the companies. This is the total payments to the factors of production, depreciation, and indirect business taxation. As this approach to the interview would have required to touch upon sensitive data, namely gross profit margins 1/, it was decided to seek the value added through an alternative route, namely sales less materials purchased 2/. In addition to sales and materials purchased, data were obtained on imports and domestic materials purchased separately. The question with respect to raw material imports were designed to reveal the duty rates on such imports. An illustration of the method employed will be found in Annex I. It shows the extent to which the effective rate of protections can differ from the nominal rate set in the Customs tariff. Table 14 gives nominal and effective tariff protections on selected industrial products. It speaks for itself. Ethiopian employs a large range of effective protection rate fo support local industry, and it provides very high protection in some instances. For some industries, there are even cases of "negative" effective protection which seems absurd. In reality, this means that the industry is so highly protected that the value of its output at CIF prices falls short of the materials it uses up when they are valued at CIF prices. In other words the industry reduces the gross domestic product. The figures between brackets shown on Table 14 gives the percentage by which the value of the materials used exceeds the value of the output, both at CIF prices.

36. To justify protection, it is sometimes argued that the expansion of manufacturing industries provides indirect benefits by increasing employment and improving the quality of the labor force through training. There is some merit in this argument (although modern agriculture can also have such effects) but the level of industrial development and the extent of employment in Ethiopian industry (even assuming a high rate of growth for the years ahead) does not seem to justify levels of effective protection of 100 to 300X or above. Also no correlation has been found between the effective rates of protection and the labor intensity of protected industries. A industry like cement which has relatively smaller labor cost per unit of sale has a much higher effective protection than the textile industry which is more labor intensive.

1/ Information on depreciation and profits was made available in some cases however.

2/ The same method was used by Mr. Wilson Schmidt, US A.I.D. Consultant in an analysis of tariff protection for industry in Ethiopia in 1967. - 15 -

Seeting Tariff on an Effective Protection Basis

37. Fromr what has been said above on the structure and anomalies encountered in the existing tariff, it can be easily concluded that it is time a new tariff policy be devised by Ethiopian authorities. The authorities have broadly three choices to achieve a tariff structure that would contribute to allocative efficiency. The first is to seek a uniform nominal tariff rate on all products and inputs which would result in a uniform effective tariff for all products except in cases where there is a substantial amount of domestic materials used in the process which are not otherwise taxed. If a uniform nominal tariff rate is not feasible, then the objective should be to achieve as much as possible uniform effective tariffs. The latter method would of course require detailed ancd complex investigations of each product, but does offer the possibility of variable nominal tariff rates provided there is a uniform effective rate on value added. A third solution to the tariff policy problem compared to achieving a uniform nominal tariff or basing it on uniform effective tariff levels would be to simplify the tariff structure. Thus, if it is accepted that the nominal tariffs are in some cases too high to achieve efficient allocation of resources, then the line should be held on further tariff increases. Moreover, it is probably desirable to reduce the average tariff over a period of years as revenue requirements permit. As an illustration, one could visualize a simple tariff structure with low revenue tariffs on capital goods and those intermediate goods for which Ethiopia does not have prospects of economic production in the near future, with moderate tariffs for consumer goods and those intermediate products for which there are possibilities of future economic production in Ethiopia. The tariffs should be arranged in broad hands by industry groups rather than by individual products with a uniform nominal tariff for each "band". The reduction in tariffs could be achieved by stepping down tariffs progressively over 5 years. This would give local manufacturers due warning and enable them to increase efficiency and look for foreign markets. The reduction in average nominal tariffs need not result in a commensurate reduction in customs revenue as the averaging of existing high and low items will balance each other, and to the extent that the new average nominal tariff for each industry group is judiciously chosen. If the authorities select the method of case by case achievement of effective tariffs, the following recommendations can be made:

(a) Specialized studies are urgently required of various "protective" situations in the Ethiopian tariff both for the purpose of adapting that tariff to the new BTN and of entering into negotiations with East Africa. Through arrangements with the Ministry of Commerce and Industry, industrial inquiry should be made so that from individual responses of companies it should be possible to calculate desirable nominal tariff rates of protection for local industry for the consideration of the Tariff Committee. Some preliminary investigation has been already made by the Mission through visits to a number of industrial companies but more detailed and accurate information has to be obtained on structures - 16 -

and costs if one wishes to exactlv calculate the effective protection now enjoyed by Ethiopian industry. I/ Only if such information is available, will it be possible to enable the tthliopian authorities to see clearly the problem for individual industries and to take appropriate action. It is understood that the Ethiopian authorities would very much appreciate having all possible relevant information available put at their disposal.

(b) No consistent rationale or criteria for the level of protection afforded the various industries and companies has been found by the Mission. It may be conjectured that the degree of protection obtained by the companies was more a result of the indivi(lual company bargaining strength and abilities than of any rational policy. Customs duties are the single largest revenue source of the Government. A customs policy needs to weigh satisfaction of revenue needs against such other policy objectives as allocative efficiency, equity in taxation, and investment incentives. Fortunately, elements of the Government are showing some awareness of the need for reshaping the Ethiopian structure in terms of revenue and allocative efficiency. Such reshaping should be made having in mind the need to provide protection not on the final cost of manufactures but on the value added (the effective rate of protection concept), taking into account (1) labor skills or cost above opportunity cost, (2) the need to give protection to infant industries and (3) revenue aspects.

(i) calculate the "true" value added by each major industry in Ethiopia 2/;

1/ The measurement of effective protection is far from easy and the possibilities of error are considerable. One difficulty arises from redundant protection that is associated with prohibitive tariffs on inputs (e.g. textiles and leather in Ethiopia) since this calls for direct price comparisons. However, the task is made much easier in Ethiopia since there are no quantitative restrictions, which makes it unnecessary to estimate "implicit tariffs" by comparing domestic and world market prices.

2/ It is to be recalled that there is no industrial census in Ethiopia giving detailed information on value added in industry. The relatively small number of large scale firms should enable to make such a census fairly rapidly and at low cost. - 17 -

(ii) apply a uniform rate of protection on the value added obtained;

(iii) adjust this rate of protection taking account (a) the excess cost of labor in manufacturing over the cost in agriculture and other sectors; and (b) the need to give temporary protection to infant industries;

(iv) derive the level of nominal tariff protection on the product from the level of protection on value added: while there would be an adjusted rate of protection on value added, the nominal rate of protection on the product would also vary in accordance with the relative importance of value added in the product, the employment factor, the foreign exchange savings and the degree of maturity of the existing industry 1/.

(d) Once the new possible tariff rates have been calculated, it will be necessary to evaluate the total volume of income accruing to Government as a result of the new set of rates. However, such a calculation should be dynamic, taking into account the change in the revenue caused by a change in the quantity demanded due to the increase or reduction in prices, as a result of the change in customs tariffs.

Other Anomalies in the Existing Customs Tariff

38. A study of the existing customs duty rate reveals several anomalies which, it is hoped, c:ould be remedied even in the absence of an immediate restructurating of the whole customs tariff. They are caused by differing rates of duty in the tariff for similar articles, or for articles having approximately the same use, and in some cases lower rates for the more elaborated-type articles. A few examples (there are many others) can be given:

Item 45

Oil seeds Free

It seems to have been accepted throughout the Tariff that the normal agricultural products of Ethiopian should be heavily protected, e.g. tomato products at 100% (item 54), onions at 30% (23(f)), etc. yet oilseeds-, being a major agricultural product, are encouraged as imports.

1/ For a detailed presentation of the method suggested, see Annex II. - 1-8 -

Items 47 and 17

Extracts for flavoring food 25% ad valorem Spices 40% ad valorem

The raw materials are dutied at a higher rate than the processed product.

Items 139 and 142

Woven textile fabrics $1.25 per aq. metre or 100% ad valorem Clothing 75% ad valorem

The processed and manufactured goods have a lower rate than the materials of which they are made.

Item 308

Dyes, chemicals, reagents and other articles imported by local tanneries, textile industries and refineries as processing or finishing materials. Exemption from the transaction tax paid on imported items is only granted to the above mentioned new materials, but is not granted in general for raw materials for other industries.

Items 345 and 349

Plywood 60% ad valorem Veneers for furniture 30% ad valorem

Since veneers form the decorative surface of plywood in the manufacture of furniture, it would seem reasonable that they should bear the same rate. The rate of plywood is protective, but veneers, which are polished strips, are produced by the same process.

39. Several reports have been made by the Ministry of Commerce and Industry asking removal of anomalies in the Tariff. For example, one report indicates that Ethiopia is importing Eth.$ 14 million of outer- garments and other sewn products per year. On the other hand, under present circumstances (lower duty on ready made cloth and higher duty on materials) it is difficult to further expand the garment industry. A decision to correct this anomaly has been awaited for some time.

Other Aspects

The Customs Tariff in Relation to Other Forms of Indirect Taxation

40. As regards the structure of indirect taxation in as much as it has a bearing on imports and exports of industrial products, the following observations and recommendations can be made: - 19 -

- Inefficiency

41.. A system whereby goods entering the country may be subject to 2, 3 or 4 duties, each of which has to be assessed, levied and accounted for individually must complicate the work of Customs officials, take more time and possibly divert their attention from more. important issues (e.g. proper valuation). It cannot be conducive to efficiency or to prompt clearance of goods.

- Inconsistency

42. The Ethiopian transaction tax discriminates against expenditures on imports to the extent that it is levied at 12% on imports against 5% on local production. As a tax on expenditure, some people believe that it should fall, equally on all consumers, i.e., it should be non-discriminatory between persons and products. Moreover, such discrimination may in fact amount either to a protective duty or simply a flat ad valorem addition to the customs duty. As such, some people argue that it should be imposed through the customs tariff. While this has merit if there is a uniform protective tariff, when, as in Ethiopia, there is no uniform tariff the differential transaction tax does introduce a degree of uniformity in the protection tariff. Hence, if there is to be no uniform nominal tariff, there is merit in retaining the transaction tax differential on imports. Indeed, one way of indirectly introducing a more uniform tariff would be to increase the differential transaction tax on imports.

- Conflict Between Tariff and Transaction Tax

43. Municipal tax on imports is bad policy. Permitting the city of Addis Ababa to levy taxes on imports does not seem right because given the fact that Addis Ababa is an entrepot for most of the trade of southern Ethiopia, to the extent that such products are consumed in rural areas, it amounts to imposing on the rural population a tax in favor of other people, i.e. the residents of the capital city (who are probably also in most cases better off than the rural population).

44. Some reform of the existing structure of indirect taxation would therefore seem most timely on grounds of efficiency and internal consist- ency. It is also essential to the restoration of the proper role of the Customs Tariff as a flexible instrument for government revenue and influencing the level of imports in those directions most conducive to industrial development and to national welfare. The main difficulty is likely to arise in the revenue field. In present circumstances the Gov- ernment cannot probably afford to forego any significant source of revenue. It should however be possible to meet both needs, i.e. for reform and the conservation of the revenue, along the following lines:

(a) Tran3action tax on industrial exports should be abolished (to avoid present difficulties in obtaining exemption for export of industrial products). - 20 -

(b) Municipal taxes should be abolished. The tax would be absorbed by the Customs Tariff or the excise or transaction tax system. In lieu the Central Government should make a monthly payment to the entitled authorities to give them the same sum as they would otherwise have obtained for themselves.

(c) The Customs Tariff should be restructured on the Brussels Nomenclature, to provide a more rational tariff from the economic point of view (see above). It would also achieve a system which would yield as high a revenue and be as income-elastic as the existing structure of indirect taxation and, if possible, even more so.

Problem of Special Duties to Countervail Dumping

45. It is often argued in Ethiopia that duties have to be imposed at a very high rate to protect industries from dumping. This reason is also given to advocate the imposition of specific duties. The allegation of dumping is so widespread that it seems to have been one essential argument for not changing anything in the present tariff system.

46. In consequence, if a revision of the Customs Tariff on the basis of either a uniform nominal tariff or the proposed equality of effective rates is to be made acceptable, ways and means have to be found to countervail dumpig or at least to convince industrialists that they can be protected against it.

47. The revised Draft Investment Code (article 53) makes some provision against dumping, which would be of significant help in preparing a new tariff. The proposed procedure is the following. First, the Board of Investment must receive representation from one particular enterprise which is adversely affected by dumping practices. Then, if the Board considers that there is a prima facie case for the imposition of an anti dumping duty, it shall refer the application to an "Anti Dumping Commit- tee". The Committee will investigate the case and report to the Board which, if appropriate, will recommend to the Minister of Finance to impose an Anti-Dumping duty or a Prohibition on Imports of the goods concerned. Finally, a countervailing duty or a prohibition on imports may be imposed for a limited period not exceeding 12 months, but which may be extended from time to time by the same procedure. Anti-dumping duties or prohibition on imports may be expressed to apply to all imports of goods or only to such goods when it appears to the Customs Authorities that they have been exported from or produced in particular countries.

48. If it appears that a threat of foreign dumping is of such an imminent character that substantial damage might be done to the national interests by waiting for the report of the Anti-Dumping Committee, the Board may request the Minister of Finance as a matter of urgency to impose a "provisional" anti-dumping duty or "provisional" prohibition on imports pending the receipt of such report and for a period not exceeding four months. - 21 -

Temporary Import Regulations for Promoting Exports

49. Several industries which suffer from excess capacity would be apparently willing to export part of their production. However, they are encountering a number of difficulties.

50. According to the Investment Proclamation, exports of manufactured goods may be exempted from the general 2% tax on exports. However, this exemption is not applied in many cases, because some smaller firms do not know the procedure to be followed, while others think the procedure is too complicated and time consuming.

51. Duties and taxes on raw and auxiliary materials are relatively high in Ethiopia. This puts Ethiopia's manufactured products in a more difficult position as far as export prices are concerned. It is in prin- ciple possible to import temporarily duty free materials for the purpose of being further processed or manufactured in Ethiopia into products which are to be exported within six months from the date of import. Normally this provisiorL should concern not only raw materials, but also chemicals, auxiliary materials, and packing materials to be incorporated in the finished product destined for export. Unfortunately this regulation does not seem to have been applied and manufacturers are complaining about difficulties faced by them whenever they request the benefits set by the law. The Ministry of Finance should instruct the Customs Officials to apply the regulation in the widest way possible inspite of some difficulties which may arise. This may perhaps open some possibilities to export plastic products (especially to Djibouti), more cement from Massawa, more salt, textile fabrics and thread, mosaic and wall tiles, meat, shoes, wooden products, matches, etc.

Protection of Export Industries

52. There are several industries which are now exporting or may be susceptible to enter export markets in the years to come. T'hese are meat and meat prodtucts, vegetable oil, oil cake, leather and shoes, cement, sugar, etc. It is consequently of interest to consicier possible additional incentives to these industries to encourage exports. In the Ethiopian market, industries can obtain the tdriff inclusive domestic price while, in the absence of export subsidies, they get the world market price on export sales. Yet, unless the industry is reimbursed for tariff paid on imported materials, it has to pay the same price on material inputs ir- respective of whether they are used in domestic production or in exports. CorLsequently the industry may have to operate with a sraller profit when it exports than when it produces for the home market. Discrimination agatinst exports in particular industries could be reduced if firms were reimbursed for tariffs levied on imported inputs. Thlis is legally possible in Ethiopia hut, as indicated above, not always practical. Even in the absence of import duty refunds, however, the same incentives would be provided to exports and to import substitution if export subsidies were apT lied at the same rate as tariff, si-ice the Ethiopian producer would get the iamn nrico whether he exnorts or produces for the highly protected - 22 -

home market. But this is not the case to day for Ethiopian industries. Yet exports of Ethiopian manufactured goods could play an important role in industrial development by increasing the size of the market and foreign exchange earnings and enabling firms to use large scale production methods. For instance, instead of production on a small scale for the domestic market, the vegetable oil industry (based on local seeds) could eventually expand if it were able to make a breakthrough into export markets with export subsidies.

53. Moreover, a distinction could be made between enterprises that are foreign market oriented (vegetables and canned or frozen meat, spices, vegetable oil cakes, etc.) and those that are domestic market oriented. The former industries should be entitled to benefit from a relatively better set of incentives so as to influence the direction of factors of production towards export. Additional incentives to exports of manufactured goods could also be justified by the cost involved in entering foreign markets.

54. Fortunately, the Revised Draft Investment Code (lst February 1970) includes provision to provide export rebates (article 27). "An export rebate shall be granted in any fiscal year in the same percentage ratio to the income tax which would otherwise be payable by the enterprise in the year, as the exports of the enterprise bear to its total sales in the same fiscal year." For example, should exports represent 50% of total sales, an export rebate equal to 50% of the payable income tax would be granted.

55. Also the Revised Draft Investment Code (article 55) envisages a waiver or refund of indirect taxes on exports which fall on such exports in the process of production or packaging. However, such refund will not be given automatically, being provided on an ad hoc basis when it will appear to the Investment Board that the promotion of export by a "developmental enterprise" is impeded by the incidence on an enterprise of indirect taxes. The final approval will be made by the Minister of Finance. - 23 -

III. INCENTIVES FOR MANUFACTURING

56. The investment climate of Ethiopia may generally be viewed as favorable in terms of those conditions of importance to potential investors. The Ethiopian Government considers increased investment of foreign and domestic private capital vital to the growth and development of the country's economy and welcomes foreign private investment. Its policy toward stimulating domestic and foreign investment is supported by liberal investment incentives. While investors find it sometimes difficult to understand clearly the goals and priorities of the Government in particular investment sectors and despite a tendency for unnecessary delays before making a decision on investment, the increased volume of investments in recent years is evidence to support the view that, in spite of the problems, the incentives now in force have been of value in assisting industrial development.

Existing System of Incentives

57. The Investment Proclamation of 1966 provides benefits, privileges, and exemptions for encouraging and stimulating private capital investments in Ethiopia. The provisions of the Proclamation apply not only to in,dustry but also to agricultural, mining, transport and tourist enterprises. The incentives include (1) income tax relief for a period of years; (2) import duty relief under certain conditions on agricultural and industrial machines; (3) export duty and transaction tax relief for a period of time on exported manufactured goods if the exemptions are necessary to assure their competitive position in export markets; and (4) the availability of foreign exchange for remitting the savings of foreign personnel employed in the enterprises and profits of foreign enterprises.

58. Income Tax Relief. In order to profit from income tax relief for Et period of five years in the case of a new establishment, or for a period of three years in the case of an extension or expansion, an enterprise must fulfill a number of conditions. These are: a minimum investment of Eth.$ 200,000, a favorable decision by the Investment Com- mittee (see below), operate as a separate technical unit in case of expansion or extension and keep separate accounts in such a case. One may wonder whether a minimum investment of Eth.$ 200,000 is justifiable under the present stage of economic activity. A number of reasons suggest that the anmount is too high, especially when taken in conjunction with the period of exemptions. The minimum investment set by the Proclamation seems to be beyond the bounds of potential capacity of the multitude of domestic investors. If the incentive threshold was lowered (if no threshold was set at all) savings could be more rapidly utilized. The setting of an arbitrary amount for all sectors and industries ignores the fact that they all differ in capital requirements. In industry optimum plant size varies widely, and the appropriate amount of capital for one industry is inappropriate for another. Also given the small size of the Ethiopian market, combined with the many examples of over-capacity in the existing - 24 --

industries of Ethiopia, the smaller investments may in many cases be the more economically viable. There is also much to be said for the encourage- ment of less capital intensive and more labor intensive investment.

59. Another aspect of income tax relief concerns the exemption period. The time limit of five years, or three years in case of expansion, irrespec- tive of the amount invested over the minimum, the type of activity, or the location of the activity, deserves reconsideration. Although the period of tax holiday in Ethiopia (i.e. five years) is to be found in many countries, there are some instances where longer periods are granted. Some differential in income tax exemptions in relation to the categories of enterprises, to their contribution to national economic profitability and to their location may be justifiable.

60. Import Duty Relief. 1/ The items subject to import duty relief are: agricultural and industrial machines, implements, appliances, or parts, and building, structural and other construction material. The conditions for relief in the case of the former are that they are for exclusive use in agricultural and industrial enterprises and similar goods are not being produced within Ethiopia. The Investment Proclamation does not cover raw materials used in industrial processing. While exemptions are granted in specific cases, such as the importation of crude petroleum to feed the refinery at Assab, there is no general exemption. However, in some cases import duty relief might be of particular benefit where such raw materials are not available. It may be appropriate to consider that, at the least, raw materials be granted duty free import where the material is a component of production for export. Also, if it is necessary to import a product as a component of a manufacturing process utilizina a substantial quantity of locally produced raw materials, import duty relief might be desirable.

61. Export Duty Relief. "Manufactured goods destinated for export may be exempted from export duties and transaction taxes on exports for a reasonable Deriod of time if such exemption is found necessary to assure the competitive position of those goods on export market." 2/ It may be desirable, if an industry is found to constitute a source of foreign exchange, to exempt its products nol: for a limited period but on a continuing basis. Moreover, for the same reason export industries should be entitled to benefit from a relatively better set of incentives than domestic market oriented industries (for instance in the form of a reduction of their payable income tax).

62. Remittance of Foreign Exchange. The National Bank of Ethiopia is authorized to make available foreign exchange necessary to assure:

1/ Including transaction tax and municipality tax.

2/ Investment Proclamation of 1966. - 25 -

(1) the remittance of profits of foreign investors to their countries of origin;

(2) the repatriation of the net proceeds belonging to a foreign investor upon partial or total sale of liquidation of his investment;

(3) the payment of interest and the repayment of foreign loans contracted by enterprises;

(4) the remittance of Savings of foreign personnel employed in enterprises to their countries of origin;

(5) the purchase of replacement and spare parts and other materials and goods required in connection wit:h operations.

63. Certain conditions must be met before the foreign exchange can be secured. 1/ However, there has not been a case when a foreign exchange requirement of an investor could not be met.

64. Acquisition of Land. "Foreign investors establishing industrial enterprises in Ethiopia shall be allowed to acquire lancl required for the establishment there of." The question of land ownership, particularly by non-Ethiopians, is extremely complex. In most cases an Imperial Order is required for such ownership. The Proclamation should set up a mechanism by which there would be no need to obtain such an Order.

65. The Investment Proclamation has established an Investment Commit- tee which studies and determines measures to be taken with respect to facilities, tax exemptions and other benefits to be accorded to investors. The Committee is composed of the Ministers of Industry, Finance, Agriculture, the Head of the Planning Commission and the Governor of the National Bank of Ethiopia. The Chairman is the Minister of Industry (the majority of requests are from industry). Past experience indicates that the Committee has been meeting on the average twice per month. The Committee is authorized to have a permanent staff, which is located in the Ministry of Industry. This staff numbers only two.

66. As regards investment assistance, there is no government agency in Ethiopia whcose purpose is to assist the investor in finding his way through the bureaucratic channels or to act as his advocate in presenting his case to the government. The foreign investor is left pretty much on his own to determine what opportunities exist, what incentives are available, and what procedural rules he must follow. There is no true investment promotion organization that supplies basic information to potential investors or publicizes Ethiopian investment opportunities and incentives. Efforts may be made to better organize assistance to investors (see Chap- ters 4 and 6).

1/ Authorization has to be obtained from the National Bank of Ethiopia. - 26 -

Proposed New Investment Code

67. The Third Five-Year Plan 1/ stated that "the level of inducements for investment, and the criteria for granting the inducements, will be reviewed and made known within Ethiopia and abroad, in the form of a revised Investment Law." A draft Investment Code has been prepared and is now being studied by the various administrations and other interested parties. 2/

68. The Draft Investment Code makes a distinction between (1) "Devel- opmental Enterprises', (2) "Preferred Enterprises" and (3) "Major Invest- ment of Outstanding National Importance."

69. Developmental Enterprises are enterprises engaged in agriculture, animal husbandry, fishing, manufacturing 3/, tourism and mining 4/. A list of Preferred Enterprlses will be included in a "Schedule of Pre- ferred Development Enterprises", the establishment of which is considered to be of "particular importance to national economic development". A suggested amendment to the Draft Investment Code notes that the impact upon national economic development may include the effects on (2) national economic productivity (i.e. net value added to the gross domestic product); (b) the balance of payments; (c) the prospects for employment of Ethiopian personnel particularly in technical, executive and supervisory positions, and (d) public revenues. 'Major investments of outstanding national importance" are those with a capital investment of Eth.$ 10 million or more and which are likely to be of outstanding economic importance.

70. Income Tax Relief. For each of these three above categories, the Draft Investment Code provides different sets of incentives.

71. (a) Developmental enterprises which "incur expenditure on eligible capital investment shall be entitled to claim in respect thereof a deduction for tax purposes called "Initial Allowance" equal to 50% of such expenditure (Article 15). Initial allowance shall be deducted for tax purposes from the net available gross income of the enterprise for the fiscal year in which the expenditure on the eligible capital investment was incurred, provided however that if the amount of the allowance exceeds such net available gross income any undeducted balance shall be carried forward to and deducted from net available gross income in the next and any subsequent fiscal year until it has been fully deducted. In the event

1/ Chapter XI, Manufacturing Industry.

2/ Draft Investment Code - Latest Revision dated February 1, 1970.

3/ "The manufacture from local or imported products of any industrial product."

4/ It is not certain whether transportation has been included or not. - 27 - that a developmental enterprise entitled to Initial Allowance is also concurrently entitled to a Tax Holiday (see below), the deduction of the Ini- tial Allowance may be deferred until after the conclusion of such tax holiday period.

72. When deductible costs have exceeded a company's gross income in any given year, a "tax loss" is assumed to have occurred and may be carried forward and deducted for tax purposes from net available gross income until it has been fully deducted. However, a limit of six years after that in which it was originally incurred is set for carry over of a loss. 'rhe tax loss shall always be deducted before any Initial Allowance to which the enterprise may be entitled in the same year.

73. Finally, every Developmental Enterprise shall be entitled to deduct for tax purposes expenditures occurred in respect of training programs, research and investigations.

74. (b) Preferred Enterprises. A "Schedule of Preferred Development Enterprises" will include a Part A which will consist: of a general descrip- tion of products and seri:Lces for which it is considered desirable to offer special incentives to private enterprise, and a Part B which will list the names and products of each enterprise for which a "Certificate of Status as a Preferred Enterprise" has been issued.

75. A Preferred Enterprise should be substantially a new enterprise and would have to make a net contribution to the national economy commensurate with the capital investment and cost involved.. It will receive the benefit of either a "Hligher Rate of Initial Allowance' or a "Tax Holi- day" 1/. The 'higher rate" will be equal to 100% of the eligible capital investment (50% for development enterprises) and be confined to eligible capital investment made prior to and during the fiscal year in which the enterprise first comes into regular commercial production and for five consecutive fiscal years thereafter. Thie tax holiday will take the form of an exemption from any liability to income tax during the fiscal year in which the enterprise first comes into regular commercial production and for five consecutive years. In addition, in exceptional cases, a "Selective Investment Allowance" may be granted and take the form of a deduction from net available income of a sum equal to a maximum of 30% of the capital expenditure. The deduction will be made in respect of the fiscal year in which the expenditure occurred but any balance undeducted may be carried forward until the whole has been deducted. 2/

1/ Such enterprise is free to choose one of the two incentives. If no election is made, the tax authority shall deem the enterprise to have elected in favor of the Tax Uoliday.

2/ The Investment Allowance will be deducted first and the Initial Allowarnce deferred Lutil the Investment Allowance has been deducted. 28

76. (c) Developmental Enterprises with a Capital Investment of Eth.$ 10 million or More. A special agreement may provide these enterprises, in addition to other incentives, for the remission of any other liabilities to taxes, beyond the tax holiday period. However, a condition is that the Government always receives not less than 51% of the net profits 1/ of the enterprise.

77. Import Duty Relief. A waiver of indirect taxes will be granted if an enterprise can prove that its activities are impeded or rendered unduly costly by indirect taxes on capital goods.

78. Any developmental enterprise which considers that its current or proposed production is threatened by foreign imports at rates of duty which provide an insufficient margin of protection may ask for the imposition of a new or higher rate of "protective duty". A Protective Duties Committee will be set up which, inter alia, will determine whether the applicant is or not likely to become or remain economically and technically efficient. The Minister of Finance may impose a protective duty for a period not exceeding seve_years (but this period may be extended from time to time). 2/

79. Incentives to Exports. "An Export rebate 3/ shall be granted in any fiscal year in the same percentage ratio to the income tax which would otherwise be payable by the enterprise in the year, as the exports of the enterprise bear to its total sales in the same fiscal year" (Arti- cle 27). However, a minimum of 5% of sales has to be exported to benefit from that incentive. The rebate shall apply for 10 years but may be extended for a further period not exceeding 10 years.

80. If it can be proved that the promotion of exports of any developmental enterprise is impeded by the incidence of indirect taxes 4/ falling on goods used up or incorporated in exported goods, such indirect taxes may be waived or refunded in respect of exports.

Development Area Rebate

81. A rebate equal to 25% of the income tax payable by a developmental enterprise may be granted to it if it is located wholly and exclu- sively within one or more Development Areas and is wholly engaged in types

1/ Gross income less deductible costs, tax losses carried forward and capital allowance.

2/ For anti-dumping measures, see Chapter 2.

3/ See Chapter 2.

4/ Including (a) import duties paid directly by the producer-exporter on imports of goods used by or incorporated in the production of the goods exported and (b) any indirect taxes other than import duty. - 29 -

of production which will be specified later. The Development Areas have also still to be defined. In no circuntstances shall the total amount of the export and the Development Area rebates exceed in one fiscal year 40% of the income tax otherwise payable. The Development Area rebate will apply for 10 years from the date of the notice establishing the Develop- ment area concerned.

Foreign Investment Capital

82. The National Bank may authorize the bringing into Ethiopia of investment capital and also the remission to the country of origin of such capital, any shaire in the distributable net profits of the eniterprise or any debt service obligations, due and payable in respect of suci capital. Remittance of part of salaries; earned by foreign employees is also allowed. No foreign investment capital shall be subject to expropriation except in accordance with the provisionis of a special law and upon payment of just compensation.

Land Ownershlp by Foreign Ente! pise

83. If an application for ownership made by an enterprise is approved by the Board of Investment, a "Property Certificate" will be issued and will serve as evidence to any Ministry or Agency of the right of the enterprise tc acquire title.

84. For the implementation of the new Investment Code and its provisions, a single authority, to which entrepreneurs and investors can resort for advice, assistance and support, will be established; a "National Invest- ment Board" which shall be an autonomous agency of the Govenmment. The permanent members of the Board wll consist of the Ministers of Industry, Finance, and Agriculture, the Chief Planning Commissioner, and the Governor of the National Bank of Ethiopia. The Minister of Industry shall be the Chairman and the Minister of Finance the Deputy Cliairman. The Board shall establish a Secretariat. In order to ensure effective consultation with and collaboration by private enterprise in the attainment of the objectives of the Code, a "Consultative Coz,iaittee for Private Investnent and Develop- ment" will be established. 1/ The National Investment Board will have very large powers. However, it will also work closely with the Minister of Finance (represented anyway in the Board), the National Bank and the Coun- cil of Ministers. For instance, the latter will have to approve incentives such as "Special Agreements" for investments of more than Eth.$ 10 million. As regards the waiver of indirect taxes in relation to developmental enterprises, the Board may only make recommendations to the Minister of Finance and sometimes also to the Council of Ministers. As concerns foreign investment capital, the National Bank of Ethiopia will continue to play a

1/ It will include representatives of the Board, other Ministries, LDepartmnerts, financial organizations, Chambers of Comnerce, banking institutions and developrental enterprises. central role in granting permissions. There is no doubt, however, that the new Investment Code would give the National Board much more weight and influence than the existing Investment Committee, and also that the proposed new set of incentives is more coherent and attractive than the existing regulations, thus meeting a number of the critical comments and suggestions made in Section 1 of this Chapter.

85. The proposed new Investment Code has been inspired by the desire of the Ethiopian authorities to offer potential investors a rational legislation. Tnere is a need to ensure that the actual intent and policy of the Government is accurately and clearly stated and that all related legislation is consistent with it. The new Investment Code goes a long way in achieving that aim. The spirit of change which inspires the proposed legislation must be stressed and it is to be hoped that the draft Code will be approved in the near future. However, while all the above described incentives have merits, care must be exercised to ensure that they are effectively implemented. Great flexibility in the actual administration and actual use of the incentive system will be required. The most generous Investment Code could prove a failure if there is no strong directive and control in the process of investment implementation. The National Investment Board with a strong supporting Secretariat could fulfill this role. - 31 -

IV. INDUSTRIAL FINANCE

87. There are at present four main institutions providing financial assistance to industry: the Development Bank of Ethiopia (DBE), the Ethiopian Investment Corporation (EIC), the National Resources Development Corporation SC (NRDC). In addition, the Commercial Batnk of Ethiopia (DBE) also participates in the financing of industrial activities.

88. The Development Bank of Ethiopia (DBE) is a chartered institution fully owned by the Ethiopian Government. It was created in 1951. The sub- scribed capital of the Bankc is Eth.$ 13 million, out of which Eth.$ 11 million is paid - in, all of which is owned directly or indirectly by the Ethio- pian Government. Since its inception, DBE has granted 358 indusrial loans amounting to Eth.$ 25.4 million. 1/ Of this total 167 loans amounting to Eth.$ 13.9 million were for the setting up of new enterprises and 191 loans amounting to Eth.$ 11.5 million were for the expansion of existing enterprises. The major sectors of lending have been textiles and vegetable oil milling. Most loans are below Eth.$ 50,000 (283 loans of a total value of Eth.$ 4.1 million), 38 loans from Eth.$ 50,000 to Eth.$ 250,000 have been granted for a total amount of Eth.$ 4.7 million and 37 loans of more than Eth.$ 250,000 have been made amounting to Eth.$ 16.6 million. Total disbursements on industrial loans amounted to Eth.$ 0.7 million in 1964 and Eth.$ 2.5 million in 1969, averaging Eth.$ 1.6 million during the period 1964 to 1969. The Bank grants loans for periods extending to up to ten years. Loans for periods of one to five years account for about 73% of industrial loans. The balance is for loans for periods of six to ten years. Industrial loans bear an interest rate of 8.5%. The geographical distribution of projects financed by DBE indicates that uneven regional development of the country. Nearly 60% of the industrial projects financed by the Bank, whLch account for about 50% of the total value of industrial loans, were located in or around Addis Ababa. DBE has also made some equity investments. The largest are in HVA Metahara (sugar) and in Sabean Metal Products Co. Thiey amounted to Eth.$ 1.39 million by December 31, 1969. 2/

89. In 1969, DBE net profit amounted to Eth.$ 166,000. Total provision for doubtful debts stood at Eth.$ 3.1 million on January 1, 1969.

90. The Ethiopian Investment Corporation (EIC), established in 1963, was designed to supplement the tasks of DBE. Specifically EIC objectives include investing funds in "profitable development projects by way of equity participation and medium and long term loans." 3/ To accomplish this, EIC is empowered to raise funds by such means as the sale of equity holdings and the acceptance of deposits.

1/ See Table 15.

2/ See Table 16.

3/ EIC, Report of the Directors, 1966-67, p. 21. - 32 -

91. Out of the authorized capital of Eth.$ 35 million, Eth.$ 25.9 million is fully paid. The Ministry of Finance is the major shareholder, holding more than 99% of the shares. In addition to this capital, EIC receives funds locally available by way of deposits and also uses funds temporarily left with it by new companies in anticipation of the time when capital expenditure is to be made. Further, EIC arranges for lines of credit and suppliers' credit. It has signed an agreement with US AID for a Eth.$ 20 million line of credit. In addition, EIC is used as a channel for the utilisation of funds set aside in the budget for investment in directly productive activities.

92. During the period 1963/64-1968/69, the total amount of industrial loans and credits disbursed by EIC amounted to Eth.$ 23.8 million. The most important sectors have been leather, metals, glass and cement. 1/ Equity holdings were valued at Eth.$ 15.2 million on July 1, 1969, the bulk being in textiles, rubber shoes, sugar and cement. 2/

93. The profit and loss statement for 1968/69 shows a net profit of Eth.$ 354,651. The provision made for doubtful debts exceeds Eth.$ 4 million and Eth.$ 0.4 million was transferred from general reserve to this provision in 1968/69 to cover an anticipated loss on a loan made to the National Meat Corporation.

94. The National Resources Development Corporation, SC (NRDC) was formed in 1966 to take over and administer the property previously owned by the former Ministry of State Domain. The initial capital was Eth.$ 4 million but has since been increased to Eth.$ 21 million. NRDC is a wholly owned company of the Ministry of Finance. Its functions are broadly to develop and utilize state property. It is authorized to operate in agriculture, hotels, real estate and manufacturing. In the latter field, it has only taken over from the Ministry of State Domains a mineral water factory. It is understood that NRDC is contemplating an investment in Ethiopian Meat Extract SC.

95. The Commercial Bank of Ethiopia (CBE) was formed in 1964 with a capital of Eth.$ 20 million, wholly owned by the Government. Loans and advances to industry amounted to Eth.$ 32.3 million in 1966, Eth.$ 38.8 million in 1967 and Eth.$ 42.1 million in 1968. About half has been granted to the textile industry. In addition to the usual commercial banking activities, CBE participates in equity investments. Thus, despite the existence of DBE and EIC, the volume of CBE's advances to industry have greatly exceeded those of the two specialized institutions.

1/ See Table 17.

2/ See Table 18. - 33 -

916. The Government is a very substantial investor in, and owner of, various enterprises throughout the economy. At the end of 1969, as is shown in Table 19, the Government, directly or indirectly, was an equity investor in forty-four enterprises with a total equity stake of Eth.$ 281 million, 73% of the total paid up share capital of these enterprises. In 27 out of the 44 enterprises (61%), Government, through its direct or indirect holdings, holds a majority of the shares, and hence, if it wishes, hbas a controlling interest. In addition to the enterprises shown in Table 19, Government had Eth.$ 91 million of shares in four financial and semi financial intermediaries (CBE, DBE, EIC and NRDC). The details are shown in Table 20 and they are shown separately from those in Table 19 s0 as to avoid double counting of the money invested by the financial intermediaries in the equity capital of other companies.

97. Tke Financial Intermediaries Review Committee, set up to review this area, issued a draft report recently. The report states that "In spite of the number and importance of these Government investments, the present institutional arrangements do not ensure that Government's scarce funds are allocated or used to best advantage. Operational efficiency is not as high as it should be, and Government is not getting good value for the money it has invested. The roles which the various organizations should be playing are unclear."

98. "The existence of several financial intermediaries operating in a sector has militated against concentrating within one institution the expert specialized staff necessary for the proper evaluation and subsequent supervision of projects. Frequently the Government holding in a single project is split between the Ministry of Finance and one or more of the financial intermediaries, and where this happens the Ministry of Finance, which is not g,eared to follow up this kind of investment, usually has the majority of the Government shares. In some cases, the holdings of the financial intermediaries have been taken up by them on the instructions of the Government, and without the management of the financial intermediaries being given the opportunity to comment on, or to modify, the projects in which they are to become inivestor. Under these conditions many projects have not been well evaluated, and do not receive the subsequent close attention from their shareholders that they require."

99. The shortage of investible local funds has led to an imbalance between the overhead costs of the financial intermediaries (particularly the D]iE) and the volume of new investments which they have been able to finance. But more especially the overall shortage has led to uncertainty about the availability to the financial intermediaries of fresh investible local resources. On a number of occasions budgeted Government contributions have not been paid to the intermediaries, while, on others, the contributions have been earmarked by Government for other purposes than those which the intermediaries would themselves have recommended. Uncertainty has dislo- cated forward planning and forward commitment by the financial intermediaries." 100. "The DBE has never been encouraged to raise new money from local non-government sources and has not been strong enough to attract such funds. Much of EIC's resources are in the form of shares transferred from Govern- ment's own portfolio. These shares give a certain appearance of strength to the balance sheet without generating commensurate income for investment. Neither of these institutions, alone, are yet strong enough to mobilize new resources on the scale required for the Third Five Year Plan."

101. Fully aware of these defects, thy Government appointed in April 1969 a Financial Intermediaries Reorganization Commission (FIRC). 1/ The Chairman was the Head of the Planning Commission and four members were representatives of the Ministries of Industry, Agriculture and Finance and of the Commercial Bank of Ethiopia. The Council of Ministers directed in September 1969 that there should be an amalgamation of DBE and EIC rather than a delimitation of their respective functions. In February 1970, the FIRC submitted its report to Government, having ascertained from the main creditors concerned (AID, KFW and the Bank) that the proposals in the report were broadly acceptable.

102. The FIRC report recommends that DBE and EIC be reorganized into a new corporation called the Ethiopian Development Corporation (EDC). The principal functions of the EDC shall be investment in the agricultural and industrial sectors and the raising of funds for these investments. The shares in EDC should be held by the Ministry of Finance and the National Bank.

103. The FIRC report also recommends the creation of a second new corporation, called the Ethiopian Tourism and Hotels Investment Corporation (ETHIC). The NRDC should in the future restrict its activities to financing the development of the real estate and of the mineral waters which it has inherited from the Ministry of State Domain. If the NRDC invests in the Meat Extraction S.C. these shares should be transferred to the EDC.

104. The future Government investment in projects of a commercial nature should be undertaken by the EDC, ETHIC and NRDC and not directly by Government ministries. In order to implement this policy certain shares now held by the Ministry of Finance would be transferred to EDC or ETHIC. The FIRC report recommends that the Government should adopt and publicize a statement of policy in respect of future investments of public funds. As stated in the FIRC report "the main features of this policy are:"

(1) "The Government will continute to invest in suitable enterprises where such investments are considered to be necessary and in accordance with the objectives of successive economic development plans."

1/ The Third Five Year Plan had also expressed the intention to appoint such a Commission to advise the Government. - 35 -

(2) "The Government will channel direct investments in projects falling within the proper spheres of the EDC, the ETHIC and the NRDC through these intermediary financial institutions."

(3) "Where the Government negotiates on behalf of, or makes commitments for financing through these financial institutions, it will do so aLt the specific request of their Boards. Where the Government wishes to direct any of the financial intermediaries to invest in any project, it will first make arrangements, satisfactory to the Board of the financial intermediary concerned, to provide the intermediary with special funds and/or to guarantee it against any losses which may be incurred by investment in that project."

(4) "rhe Government intends that each financial intermediary shall specialize in a particular sector and, in normal circumstances, only one intermediary will invest in any one sector."

1L05. It is anticipated that approval of the measures recommended by the FIRC report can be obtained, and legislation passed, in time for the recommendations to come into effect before the end of 1970.

1]06. The internal organization of EDC will be studied by the new banagement to be appointed. It would seem, however, that EDC will be in need of a strong technical and economic unit for project promotion, identification, evaluation, and implementation (see Chapter VI).

107. One important problem is the future size of the EDC's future operations. "Orer the last five years, the average annual value of industrial investment by the DBE and EIC combined has been Eth.$ 7.3 million with a maximum and minimum" of Eth.$ 13.7 uaillion and Eth.$ 4.3 million respectively. 1/ In addition the Ministry of Finance has invested in industrial projects which normally it will no longer do in the future (except for the currently built tannery and tyres projects and the expansion of the Assab Oil Refinery). "Average annual investment by the financLal intermediaries in industry during the course of the Third Five Year Plan was projected at Eth.$ 20 million." 1/ In addition the Plan assumed investment in the agri- c:ultural sector by the financial intermediaries of Eth.$ 14 million per annum and Eth.$ 2 million for the mining and handicraft sectors. The total in all four sectors assumed by the Plan is therefore Eth.$ 36 million per year on an average.

108. The FIRC report, assuming that the supply of justifiable projects will not be the limiting factor, has made two sets of projections on alternative hypotheses of the flows of funds and hence possible levels of future investment in the next five years by the EDC. "The crucial difference between the two sets of projections is in the size of the annual subvention

1/ FIRC report. 16 - from Government. In one alternative (A) an annual subvention of Eth.$ 6.1 million in cash has been assumed, in the other (B) the same level of average annual free cash subvention that has been made to DBE and EIC together over the last three years. (Eth.$ 2.05 million is assumed.) 'Past sub- ventions in the form of shares were excluded, because they do nothing to raise the level of new investments or of possible borrowing from abroad." 1/

109. "According to the projections, alternative A would lead to an average annual new investment by EDC over the period 1968/69-1972/73 of Eth.$ 22.2 million reaching Eth.$ 29.7 million in 1972/73." "By alternative B, average annual investment by EDC would amount to Eth.$ 16 million in the Plan period reaching an annual total of Eth.$ 17.5 million in 1972/73.' "Alternative B Therefore falls far short of the Plan proposals." 1/

110. The FIRC report does not give a breakdown of projected investment between industry and agriculture. However, in the last four years, industrial investment has represented 51% of total financing provided by EIC and DBE. Assuming that this proportion remains relatively constant in future years, the EDC would invest the following amounts in industry:

USES OF FUNDS FROM DBE/EIC AND EDC /1 (Eth.$ million)

Actuals for DBE and EIC combined Forecast 1966/67 1967/68 1968/69 1979/70 1970/71 1971/72 1972/73 (est.)

TOTAL 14.9 7.3 19.5 15.3 24.7 24.7 29.7 to to to 27.3 14.5 17.5 of which: INDUSTRY annual average of 7.3 12.6 12.6 15.1 to to to 13.9 7.6 8.8

/1 Source: FIRC Report.

111. According to the FIRC projections, and assuming that industrial investment represents about half of total investment by EDC, funds channeled to industry would average Eth.$ 8.9 million during the Plan period in alternative B and Eth.$ 11 million in alternative A. 2/ In both cases this would

1/ Source: FIRC Report.

2/ The annual average would be from Eth.$ 9.9 million to Eth.$ 13.4 million for the three years 1970/71 to 1972/73, i.e. an average of Eth.$ 11.7 million. - 37 -

be clearly below the Plan forecast of Eth.$ 20 million per annum. Whether enough resources can be found to meet alternative A requirements would depend, as indicated above, on the amount of cash contribution from Government to EDC. The FIRC report supports strongly alternative A and recommends such flow of funds to EDC. The report suggests that one such method might be to arrange that 40% of the National Bank's annual profit now credited to the account of the Ministry of Finance be transferred automatically to EDC each year to give to EDC resources necessary under alternative A. It is estimated that this arrangement would provide about Eth.$ 6 million per year. Such a transfer would terminate when EDC becomes financially self supporting as regards local resources.

112. It can be seen from the above that funds channeled to industry by DBE/EIC and the future EDC would total from Eth.$ 44.5 million to Eth.$ 55 million during the Third Five Year Plan period (1969/1973). These amounts would represent from 9.5% to 11.7% of the total industrial investment now estimated by the Mission to reach Eth.$ 470 million during the Plan period (see Chapter V). - 38 -

V. PROSPECTS FOR INDUSTRIAL OUTPUT AND INVESTMENT

113. The increase in industrial production during the Second Plan (1963-1967) was substantial, attaining approximately 16% per year, but was lower than the planned target of 27%. During the period 1961-1969, industrial production grew also by about 16% per year. The Third Five Year Plan forecasts a doubling of the gorss value of production from Eth.$ 350 million in 1968 to Eth.$ 700 million in 1973, i.e. a growth rate of 15.2% per aninum.

114. On the basis of provisional estimates available the gross value of output has increased by 8.4% inl 1969, i.e. substantially below the proposed Plan growth rate. This represents a slow down compared to increases registered in recent years. The gross value of output amounted to Eth.-$ 400 million in 1968 1/ and to Eth.$ 434 million in 1969. The Mission estimates that it could reach Eth.$ 640 million by 1973. 2/ Such an increase would correspond to an average annuaL growth rate of 1OZ from 1968 to 1973, i.e., below the growth rate projected by the Plan. The shortfall would be due to a lower volume of output projected for such important industrial products as sugar, cotton yarn sold by the mills, canned and frozen meat, edible oil, paper, tyres, galvanized iron sheets and assembly of trucks. It is expected that production of upper and lining leather, cement and oil products will be somewhat higher than estimated by the Plan. Cotton textiles may also be produced in somewhat larger quantities than assumed in the Plan, as new capacity has been installed and since there is still room for some import substitution. The growth of output now anticipated for the early seventies will be to cater for the expansion of the present internal market (textiles, beverages, petroleum products, cement, etc.). However, domestic demand is small, the ralge of local raw materials is at present limited, transportation costs are high and power is costly in some areas such as Eritrea. Therefore, there is a limit to the amount of import substitution that can be implemented. The mission forecast does not take in- to account for 1973 potential further increases in output which may be achieved later by export oriented industries such as meat processing and canning, spice extraction, tanned leather and vegetable oil and cake. Serious efforts would have to be made to supply these industries with raw materials in appropriate volume and quality and to give them maximum support in increasing their competitiveness and in finding export markets in particular in the Middle East and in Europe.

115. As regards investment, an analysis of projects completed since the beginning of the Plan as well as of identified new projects and expansion of existing industries reveals that their total investment cost

1/ On the basis of latest Ministry of Industry statistics, this total output is somewhat higher than Plan estimates which were based on provisional data for 1968 of Eth.$ 350 million.

2/ See Table 21. - 39 -

amounts to about Eth.$ 210 million. This compares with a forecast of Eth.$ 2:36 million in the Third Five Year Plan. 1/ The missLon estimates (see Table 22) show lower investment in the food, beverages, leather and metal goods sector. However, this is partly compensated by a Eth.$ 12 million investment for the expansion of the Assab Oil Refinery which had not been contemplated by the Plan. Other possible projects (including a Eth.$ 25 million soluble coffee plant and a Eth.$ 4 million solvent extraction plant) total Eth.$ 34 million, but other potential projects would probably be forthcoming, even assuming a very limited number of them. Finally, annual replacement and minor balancing and modernization of existing plants, assumed at 10% of existing fixed assets, may amount from Eth.$ 40 to Eth.$ 50 million in 1973. Taken together, total possible investment may reach Eth.$ 470 million during the Plan period as against Eth.$ 530 million assumed in the Plan.

INVESTMENT-EXPENDITURES (1969-1973) (Eth.$ million)

PLAN Mission Estimate

Identified projects 230 210 Non-identified projects 100 60 Replacement and minor expansion 200 200

530 /1 470

/1 Source: Draft Plan for manufacturing industry, November 1967.

116. In 1969, investment in manufacturing may have been more than Eth.$ 100 million (see Chapter I). This relatively high level was due to the achievement of large investments in the HVA/Metahara sugar plant, and in the paper plant. However, substantial expenditures are forthcoming in cement, tyres, leather processing, in oil refining and a number of smaller plants are being installed. It should however, be pointed out that in several cases investment costs have been higher than anticipated without an exactly corresponding increase in possible output. As a result the capital/output ratio for industry will be higher than previously thought. In fact, it is already high in some sectors where utilization of capacity is low due to lack of markets. During previous years, investment costs have been also relatively high when considering the increase in output. An analysis of industrial growth during the Second Five Year Plan shows that "manufacturing industry as a whole required a larger than expected capital investment, relative to the increase in gross production; this

I/ Based on Draft Plan for manufacturing, November 1967. - 40 -

was owed, among other causes, to the failure of markets to justify the capacity installed or to capital costs being higher than planned or, in other cases, to the failure of management to attain production goals." 1/

117. The estimated gross fixed capital requirement of Eth. $470 million will be supplied by private sources, by the earnings on the Government's previous investments in public and joint ventures companies and by the Govern- ment budget and by financial intermediaries. Table 23 shows Government capital expenditures in manufacturing from 1963/64 to 1969, and projections up to 1973. Expenditures occur for direct investment in industrial projects and for subscriptions and advances to EIC and DBE (and to the proposed Ethio- pian Development Corporation). They amounted to Eth.$ 106.2 million from 1964 to 1969 or an average of Eth.$ 17.7 million per annum. In 1970, capital expenditures would amount to Eth.$ 15.6 million, and Eth.$ 14.7 million in 1971. In 1972 they may reach up to Eth.$ 14.7 million and Eth.$ 10.6 million in 1973. Two major industrial projects are currently under construction (one tannery and tyre plant financed by government funds and loans from Czechos- lovakia). No firm decision has been reached yet as regards the total expenditure envisaged for the expansion of the Assab Oil Refinery from 630,000 tons to 1 million tons but, on the basis of bids presented by an Italian company, government expenditures would total Eth.$ 4.8 million in 1971 and 1972. 2/ Budgetary allocations have been made in past years to EIC and DBE, but according to the report of the Financial Intermediaries Reorganization Commission (FIRC), the creation of the new Ethiopian Development Corporation (EDC) with a source of income of its own may bring a reduction in direct government advances in the long run. However, an initial government expenditure of Eth.$ 5.3 million is still contemplated in the 1970/71 budget for DBE/EIC. Beyond 1971, the FIRC report envisages an annual level of advances to EDC from Eth.$ 2.1 milllon (alternative B) to Eth.$ 6.1 million (alternative A). Such transfers would terminate when EDC becomes financially self supporting as regards local resources.

118. As regards financing provided by the Development Banks, loans and equity disbursements to industry averaged Eth.$ 7.3 million per annum from 1964 to 1969. As indicated in Chapter IV, they may average Eth.$ 12 million per year up to 1973. Total disbursement would then amount to Eth.$ 62 million from 1969 to 1973. 3/

1/ Source: Third Five Year Plan -- Chapter XI. Manufacturing Industry.

2/ See Table 23.

3/ See Table 24. - 41 -

ESTIMATED SOURCES OF FINANCING FOR INDUSTRIAL INVESTMENT (1969-1973) (Eth.$ million)

Direct government financing /1 32.3

DBE/EIC and EDC 62.0

Private and other 375.7

TOTAL 470.0

/1 Excluding advances to DBE/EIC and EDC.

It can be seen from the above that the bulk of investment in manufacturing is to be financed from private sources, and also by the earnings on the Gov- erunent's previous investment in publicly owned plants and by joint ventures. - 42 -

VI. ORGANISATION FOR INDUSTRIAL DEVELOPMENT AND SERVICES

Administration

119. Tasks related to industrial development are divided, sometimes along rather unclear lines, among a large number of institutions. The main groups involved are the Ministry of Industry, the Ministry of Community De- velopment, 1/ the Planning Commission, the Technical Agency, 2/ the Ministry of Agriculture, 3/ the Ministry of Education, 4/ the various financial institutions such as DBE, EIC, NRDC and other autonomous bodies of which the Berhanenna Selam Printing Press and the Ethiopian Metal Tools Company are two examples. 5/ It can be seen from this enumeration that the responsibil- ities of the Ministry of Induistry are reduced since entire sections of the industrial sector are placed more or 'Less outside its supervision by substi- tuting other bodies in this role. In other cases, such as ownership by the Finance Ministry, the Ministry of Industry. often has minimal influence on the public sector enterprises because it is not always directly represented on the board of directors.

120. Subject to the limitations noted above the Ministry of Industry is charged with the tasks of fostering the development of industry in Ethio- pia, licensing and supervising the operations of business and trades, establishment of general rules and regulations to govern the licensing of specific businesses and trades, and to ensure compliance with these rules and regulations. In addition, the ministry is responsible for organizing exhi- bitions of trade, industry and handicrafts inside and outside of Ethiopia and to "be principally responsible together with other ministries and Public Authorities concerned, for representing and protecting the interests of the Government in commercial and industrial enterprises in which the Government has a financial interest."

1/ Including training activities in the field of handicrafts.

2/ This agency carries out the operational tasks involved in the building up of projects and also acts in preparing feasibility studies for specific proposals and in the carrying out of other types of economic studies and surveys.

3/ Dealing with rural cottage industries or handicrafts.

4/ Several technical and vocational institutes.

5/ One can also cite Bahar Dar Textile Mills Co., Ethiopian Cement Cor- poration, Eritrean Cement Company, Ethiopian Drug Manufacturing Co., Oil Seeds Development & Co., Rubber and Canvas Shoes Co., Ethiopian Petroleum Share Co., etc. - 43 -

121. Under the Minister of Industry, Commerce and Tourism, the Vice Minister for Industry is responsible for three sectors: (1) Manufacturing Industry, (2) Small-Scale Industry and (3) Industrial Licensing. In addition, he is Chairman of the Permanent Investment Committee which is composed of the Ministries of Agriculture, Industry and Finance, the Governor of the National Bank of Ethiopia, and the Head of the Planning Commission. The Secretariat of this Committee is composed of two administrative personnel and professional assistance is provided by the staff of the Industry Department of the Ministry.

122. At present, the Industry Department has only 4 senior officers (including one Yugoslav expert) 1/ who virtually attend to all the numerous activities of the department at both the policy making and operational levels. The activities include compilation of industrial statistics, provision of technical advice, checking compliance with health and safety regulations, handling applications for licenses and for incentives under the Investment Law, investigations and recommendations in connection with tariff protection, investigations and evaluation of projects for government investment and formulation of industrial policy. In addition, some attention is recently being paid to the problems of underutilization of capacity. This is not only a wide range of activities for the existing limited personnel of the department to handle efficiently, but they also constitute a mixture of the developmental and regulatory functions which have to be clearly demarcated for satisfactory execution. The Ministry is an active client of the Technical Agency and to that extent supplements its own limited stock of professional skills, which to a considerable degree and of necessity, get diverted to essential administrative tasks. Nonetheless the relationship between the two set-ups does not appear to be characterized by mutual feedback. Understaffing at the professional level and lack of specialization have meant that several important tasks (promotion of industrial possibilities; information about Ethio- pia's actual output, diffusion of information on industry in or out of Ethio- pia) have not been performed at all or rather inadequately. The absence of a planning unit in the Ministry has had the result of rendering the contact with the Planning Commission a discontinuous and limited operation. Even in early 1970, the industrial programme of the Plan had not been broken down into detailed component sub-sector programmes, let alone preparation of specific projects. There is no detailed formulation available of the extent to which the proposed industrial output targets can be related to new projects, extension to existing enterprises, extra shifts, or more extensive working of existing shifts. No implementation programme exists which corresponds to the targets of the Plan. Indeed the whole relationship between the Industry Department, the Technical Agency of the Planning Commission needs administrative re- structuring once the reorganization of the financial intermediaries takes c:Lear shape (see Chapter 4).

1/ Total professional staff numbers 8. - 44 -

Plan Objectives in the Field of Administration and Industrial Services

123. The Plan envisages a number of actions to improve the present administration set-up and to encourage industrial development. Hlowever, only a part of the measures have been undertaken.

(a) strengthening of the Ministry -- it has been possible to hire only one professional who will help in the establishment of a Design Development Center to help artisans. Budgeting re- straints prevent further increases in staff.

(b) expansion of the Ministry's representation in the provinces -- there are 11 Branch offices (Asmara, Nazareth, Jimma, Debre Markos, etc.). One or two branches have been recently opened but these offices seem to have relatively little coordination with the Ministry.

(c) gradual build-up of commercial representation in key foreign countries -- there is only one professional located in Geneva (also following UNCTAD mattetrs).

(d) establishment of a Center for Ethiopian Management and Indus- trial Services by combining the present Center for Ethiopian Management and the proposed Center for Industrial Services -- this project is unlikely to come through. The Center for En- trepreneurship and Management has been established independent- ly with the assistance of UNDP. It is an autonomous agency. It is too early to evaluate the effectiveness of the Center's work in relation to the objectives for which it was set up (training for entrepreneurs in the small scale sector, advisory services in management and management training for managerial staff in large enterprises). One may however mention that the Center's declared objective of reaching out to the "potential" entrepreneur has not become an operational reality, as of early 1970. In fact, since it will take time for the Center to become well established, one may wonder about the usefulness of creating a "Center for Industrial Services", which purpose is not clear, and then to merge it with the Management Center.

(e) opening of an Investment Promotion Office -- this Office to be called "Ethiopian Trade and Investment Center" is to be implemented with US financial and technical assistance supplemented by Ethiopian Services. 1/ The Center, to be set up in collaboration with the Addis Ababa Chamber of Commerce, aims at investment promotion and export expansion. The five year project

1/ The total cost of the project is US$1,825,000 of which US$1,145 is to be provided by US AID. - 45 -

(1969-1974) is expected to be finalized in the second half of 1970. The main items will include: summary and training courses, setting up of a modern international marketing library, operation of a Commodity Trade Inquiry Service, preparation of an export promotion programme and development of appropriate company export programmes with selected local companies and selection and financing of trainees in the United States. Such a Center may prove helpful in promoting new local and foreign investment, particularly until the new EDC promotional facilities have been established (see below).

(f) Institute of Standards and Quality Control -- One UNIDO expert is expected to join the Standardization division of the MirListry of Industry in May 1970. Efforts made by a previous UNIDO expert had not been successful. However new legislation on standards and quality control is now before Parlia- ment and when it is passed, budgetary funds may be available in 1971 for setting up an Institute. The task of setting appropriate standards for Ethiopian Industry is of high prior- i ty.

(g) Organization of cluster-training centers for artisans and setting up of production and demonstration centers -- Lack of financial resources and staff have prevented any action.

(h) Setting up of a inarketing organization for handicrafts and cottage industries -- no action taken for lack of budgetary funds.

(i) Establishment of an autonomous government agency to provide development land for industrial use -- the cost of land in cities such as Addis Ababa is relatively high. Private owners prefer renting land for housing. No public resources have been made available for the proposed agency to buy land from private owners and resell it or rent it to new industrial enterprises.

Reorganization of the Administrative Set Up for Industrial Development

124. Three major tasks have to be fulfilled:

(a) Industrial policy and regulatory functions.

(b) Industrial planning.

125. It would seem that the first task should be performed by the Min- istry of Industry, the second by the same Ministry (in liaison with the Planning Commission) and the third by the new Ethiopian Development Corpora- tion (in liaison with the Ethiopian Trade and Investment Center). - 46 -

126. The Ministry of Industry would have two main Divisions. The first would be an operative Division in charge of activities related to the development of the factory enterprises (public as well as private), to the development of the artisan sector and to the control, regulation and licensing of industrial enterprises. Besides its normal administrative and regulatory functions, the Division would be concerned with the formulation of industrial pMo icy, developing broad guidelines for the industrial sector. This is in fact the present set up of the Industry Department but, as already mentioned, one major problem is understaffing and lack of qualified personnel. The tasks which have to be carried out are numerous: maintaining of a current inventory of industrial activity and of new enterprises and expansions, recommendations for the grant of "preferred" status to enterprises for government investment, setting policies and criteria for providing loans to small scale industries, etc. Increased emphasis should be placed on the work of the Artisan Industry section. There is little hope that much can be done during the Third Plan but the first task would be to gather minimum information in the handicraft sector. The section should also strengthen the relationship with the Ministry of National Community Development with the immediate objective of establishing co-operative societies of traditional artisans, in introducing modern techno- logies and marketing systems and to ensure that loans are available to qualified cooperatives. To carry all these tasks, the Industry Department staff could be perhaps doubled (from 8 to 16) particularly by increasing the number of junior professionals, which could assist senior staff, now overburdened by detailed administration tasks. Present staff in the large scale industry section is only 4 and since it is obviously insufficient, 4 to 6 additional staff members may be provided.

127. The Second Division would be a brand new Division in charge of planning. Very little is really known about the Ethiopian manufacturing structure (ownership, profitability, productivity, utilization, costs). Surveys are urgently needed. Major tasks would also be to prepare sub-sectors plans within the industry sector, to prepare annual plans within the framework of the Plan targets and translate them into capital and current annual budgets and to prepare annual reports for the Ministry and for the Planning Commission and other appropriate Government Agencies. The staff could be composed of one senior industrial economist and one statistician. 1/

1/ As indicated in Chapter 2, the question of setting up appropriate tariff protection rates is of high priority to ensure sound industrial development. Pending the setting up of a Tariff Committee with permanent staff, one may visualize that the Planning Division includes additional personnel to study tariff rates structure and advise government on requests received from industries for obtaining tariff protection. Such additional staff may include one industrial economist expert in tariff matters and one cost accountant. - 47 -

128. It was mentionedl above that the third major task to assist in suc-- cessful industrial development is the promotion of new industries and the evaluation of projects on the basis of techno-economic studies. Such activities should be entrusted to the proposed new Ethiopian Development Corpor- ation (EDC). 1/ The internal organization of EDC will be studied by the New Management to be appointed. It should be said already however, that the new EDC should build up a strong technical and economic unit for project promotion, identification, evaluation, and implementation. 2/ Only the corporation itself could undertake the whole exercise starting with the promotion of projects until their most efficient execution because it will realize that it will be expected to finance these projects in the future. To avoid duplication with the techno-economic role of the Technical Agency, it would bes advisable to place with EDC the sections of the Agency now concerned with feaasibility studies. As regards private industry projects, when EDC is to have a major shareholding and in the case of so called government projects, EDC will need a small implementation unit (engineering works, test runs, etc.) to select the most economically and technically efficient processes. ED)C should also have some promotional service abroad to seek new investments and better marketing of industrial products. Small-scale industries could be looked after by a separate division of EDC, supported by the same technical expertise available for large- and medium-scale industries. To carry out its new activities, the management of the new FDC should be as strongly development-oriented as able to finance commercially sound projects.

1/ See Chapter 4.

2/ One important task of the EDC would be to carry out negotiations with the Planning Commission, the Ministry of Industry, the Investment Com- mittee, and other agencies on viable and feasible projects up to the time when the contract is signed for the implementation of projects.

Tabl.e 1: MANUFACTURING INDUSTRY - ETHIOPIA VALUE ADDED AT FACTOR COST

(in million ETH $)

Annual Percentage Current Prices At 1961 Prices Increase at 1961 Prices 1961 43.9 43.9 -

1962 55.6 50.7 15.5

1963 61.5 56.3 11.0

1964 76.1 68.3 21.3

1965 94.5 79.6 16.5

1966 108.2 92.6 16.3

1967 119.8 116.1 25.L

1968 1]9.h 132.1 (est.) 13.8

1969 169.9 1-6.5 (est.) 10.9

Source: Central Statistical Office Table 2: GHOSS VALUE OF I'RODUCTION

In thousand Eth.$ Percentage Growth (constant prices)

1967 1968 1969 1968/67 1969/68

Food 111,096 116,516 122,h65 4.9 5.2

Beverages 1h0,715 40,952 45,108 0.5 10.1

Tobacco 5,905 6,766 7,027 14.6 11.3

Textiles 96,201 107,515 118,721 ii.8 10.4

Leather 22,455 23,4i8 25,155 4.3 7.4

Wood products 9,057 9,811 10,952 8.3 11.6

Paper 3,160 3,228 3,2h7 2.2 o.6

Printing 7,995 8,500 9,600 6.3 5.9

Chemicals 6,510 8,223 9,8h2 26.3 19.7

Oil refining 4,043 23,500 23,750 481.7 1.1

Non-metallic minerals 17,702 18,715 20,776 5.7 11.0

Metal products 28,712 33,100 37,542 15.3 11.3

Total 353,551 Lh00,244 434,185 13.2 8.

(excluding oil refining) 3h9,508 376,744 410,435 7.8 8.9

Source: Ministry of Industry Table 3: PRODUCTION OF MAJOR MANUFACTURED ARTICLES

1968 1969 1965 1966 1967 (Estimate) (Estimate)

Food ITddustry (tons) Wheat Flour 40,358 142,030 58,952 60,000 62,000 Sugar 61,898 68,861 76,868 66,200 66,200 Meat frozen 6,543 8,000 2,920 3,000 3,200 Meat canned 4,000 t 5,035 6,000 6,500 Edible oil. 5,633 5,343 8,146 8,500 9,000 Oil cakes n/a n/a 19,098 20,000 21,000 Salt 205,310 220,150 202,035 235,000 300,000

Beverages Beer hectoliters) 157,395 184,600 215,500 227,000 230,000 Wine (hectoliters) 35,343 45,900 144,131 49,000 50,000

Tobacco Manufacture Cigarettes (O000units) 4,409,910 5,278,490 5,879,710 6,740,000 7,600,000

Textiles Cotton Yarn (tons) 5,620 7,459 9,221 10,000 11,000 Cotton Fabrics (000 sq. meters) 46,700 55,800 65,400 71,500 73,600 Readimnade Clothes (pieces) -- 13,783 12,092 20,000 25,000 Gunny Bags (000 pieces) 3,800 14,207 4,852 5,000 5,500

Leather & Shoes Industry Upper &- Lning Ieather (000 sq.mts.) 2,999 2,376 3,842 4,000 4,500 Leatler Shoes (pairs) 627,828 648,000 762,570 770,000 775,000 Canvas & Rubber Shoes (pairs) 8,896 521,043 938,789 950,000 960,000

Wood Industry Sawn Wood (cub. meter) 13,000 14,502 15,700 15,900 16,500 Plywood ( It if ) 1,752 1,851 2,183 2,200 2,300 Particle Board (cub. meter) -- 313 2,348 2,500 3,400

Chemical Industry Mathees (000 boxes) 17,000 16,800 22,752 22,800 22,500 Soap (tons) 2,625 2,7614 4,102 4,600 5,500

Refined Oil Products (tons) 80,949 470,000 475,000

Nlon-Meta-dl Mlineral Products Cement (tons) 72,o99 88,930 137,649 1140,000 150,000 Cement Floor Tiles (sq. mtr.) 103,116 170,412 215,000 216,000 220,000 Mosaics (sq. meters) 55,000 68,684 314,500 45,ooo 50.000 Glass Ware (000 units) 7,168 7,500 10,200 11,000 12,000 Glass Bottles (000 units) 15,721 18,000 1'5,100 18,000 20,000

M4etal Products (tons) R.oind. Iron Bars n,:a 8,800 12,000 12,500 12,700 Corrugated Iron Sheets ni/a 5,567 l1i,259 15,000 17,000 direG n/a 2,573 2,600 2,700 2,800 Iail n/a. 2,972 3,210 3,500 3,600

Source: Central Ftati tical Off ice .-; ' rr of Industry Table 4: EMPLOYMENT IN MANUFACTURING

Plan 1962 1965 1967 1973

Food Industry 10,200 16,189 22,170 33,600

Beverages 1,350 2,235 2,548 4,5oo

Tobacco Manufacturing 450 445 489 2,300

Textile Industry 10,100 14,854 19,271 29,500

Leather and shoe industry 960 1,859 2,100 8,000

Wood Industry 1,450 1,877 3,026 4,500

Building and non-metallic minerals 1,290 2,770 4,336 8,000

Printing and publishing 400 1,024 1,690 1,600

Chemicals, Petroleum - 1,414 2,227 8,000

Metal products - 778 1,028 7,500

Others 1,400 138 n.a. -

Total 27,600 43X583 58,885 107,500

Source: Ministry of Industry Table 5: CLASSIFICATION OF ESTABLISHMENTS BY SIZE OF EMPLOYMENT (1966/67)

Size of Number of Number of As percent Employment Establishments Employees of total

' _ 49 248 5,211 8.9

5C - 99 63 4,528 7.7

100 - 2149 h 6,889 11.7

25C - 499 25 8,547 14.6

500 & over 15 33,519 57.1

Total 395 58,694 100.0

Source: Survey of Manufacturing - June 1969. Central Statistical Office Tat)le 6: -NVESTM nT IN MAN'FACT1JiIN(;f INDUSTRY

EMli $ mil.ion

rotal Second Plan 1965 1966 1967 (-1963-67)

Food 60.9 12.8 20.3 1h.8

Beverages 27.5 5.5 8.5 5.3

Tobacco 2.1 0.4 0.1 0.6

Textile 69.h 19.5 14.L 1h.2

Leather and shoes 6.4 1.2 0.6 0.6

Wood 2h.0 I.h 2.h 1.2

Non-metallic minerals 7.L 8.0 0.7 2.7

Printing 7.3 4.4 0.7 0.2

Chemical 60.3 12.5 2h.h 11.3

Metal and electrical. 10.6 1.9 2.7 1.5

TOTAL 275.9 67.6 7h.8 52.4

Source: Central Statistical Office and Ministry of Industry

Note: Data include additions under new or second-hand assets, valued at purchase price. Besides purchase prices, they include custom duties, other taxes, transfer fees, delivery and installation costs. They include also value of work done by workers on the establishment (inclusive of' materials used), on buildings, other construction, manufacture or installation of machinery and equipment and capitalized alterations, improvements or rebuilding. Table 7: INVESTMENT COST AND EMPLOYMENT IN SELECTED INDUSTRIAL PROJECTS (1968-1969)

Investment, cost Employment (ETH $ thousands)

Food hVA Metahatra Sugar plant. 56,300 2,800 Ethiopian Spice extraction 1,600 LI Petratos oil mills (edible oil) 1,615 87 Flour mill (Debre Zeit) 802 8b Sopral Slaughterhouse (CambolchiA) 5L6 90

Beverares Bottling plant for mineral water 3,07L 120

Textiles Blanket factory 3,0)4 222 Gunny bags factory (Akaki) 3,000 813 Ethiori.qxn yarn, thread 3,000 IL8 Papassinos gunny bags factory (Addis) 1,85) 509 National Woolen Textile 1,590 138

Leather and shoes Crocodile skins tannery 477 I5

W4ood industry Soft and Hard board 1,600 165

Paper and p.aper products Ethiopian pulp and paper 23,000 300

Non-metallic mineral products Ethiopian cement. (Addis) m 125 Addis Shekla Bricks 2,225 70 Glass and Bottle Manufacturing 8,308 188 Chemicals Soap factory (Addis) 1,229 12b

Source: Ministry of Industry Table 8: PROFITABILITY OF SELECTED ETHIOPIAN INDUSTRIES

Equity and reserves Investment (Eth $ thousands) Savings

1967 1968 1969 1967 1968 1969 1967 1966 1969 Net Profit Depreciation Net Profit Depreciation Net Profit Depreciation

1. Ethiopian Refinery n.a. L8,500 n.a. 46,671 1,L59 n.a. -3,816 1,768 -5,433 3,673 n.a. n.a.

2. Bahar Dar Textiles 10,691 11,063 n.a. 7 170 n.a. -120 571 -88 606 n.a. n.a.

3. Cotton Company of Ethiopia 14,604 16,375 18,0l16 2,314 200 993 2,719 995 14,270 1,216 L,172 1,258

4. Indo Ethiopian Textiles 13,934 14,961 15,130 530 615 2,617 2,549 869 1,937 799 ?.IU 803

5. Fiber Company of Ethiopia 1,593 2,1L6 n.a. 517 2,86? n.a. 922) 77 173 29 n.a. n.a.

6. Ethiopian Cement Corporation 15,639 13,348 n.a. 705 -219 n.a. 2,079 760 1,2U0 3,794 r.a. r.a.

7 Eritrean Cement Company 14,582 4,582 n.a. 7 10 n.e. 69 7L5 155 167 n.a. n.a.

d. Tobacco Monopoly n.a. U,311 n.a. 595 Q42 n.e. 4,165 261 n.a. n.a.a,338 n.a.

9. Rubber and Canvas Shoes 4,212 4,212 4,212 20 300 66 247 200 70 203 90 208

10. Ethiopian Drug Mfg. n.a. 1,0L- n.a. 12 5 n.a. -233 42 -302 !13 n.a. n.a.

11, iNA Ethiopia 67,357 66,075 68,728 1,526 1,775 948 1C,031 1,765 5,254 1,796%,653 1,832

12. Ethiopian Chipwood 1,558 1,553 1,746 91 72 52 1C 78 32 92 1149 136 13. Match Company n.a. r.a. 1,227 n.a. n.a. 185 n.a. n.a. nae. n.a. * 51 b3

1L. National Oil (Asmara) n.e. a ; 1J250 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 126 12C

TC'TAL 134,170 192,351 110,337 52,995 7,305 L,795 17,940 31il 9,700 12 J 10,2, '

(lxcluding Refinery) (113,170XL1,3-iXllC,137)(6,12b(6,3Ti6)(h,795)(21,76ij) (6,313) (15,137 (5) (1D,3-' (4,?20)

Source: Mission estimates Table 9: ETHIOPIAN INDUSTRY: IMPORT DEPENDENCE

Share of Imported Inputs in Sales Value

I. Consumer Goods

A. Food products Flour milling negligible Meat packing 8 Meat canning 40 Tomato extract 9 Sugar 9

B. Beverages Wine 9 Beer 15 Soft drinks 15 - 25

C. Tobacco 38

D. Textiles

Cotton textiles 28 Woolen textiles 26 Nylon fabrics 39 Garments and hosiery 16

E. Footwear Leather footwear 25 - 30 Plastic footwear 25 Rubber footwear 45

F. Other Furniture and joinery 20 - 40 Glasses, bottles 13 .Household plastic articles 70 Matches 35 Alumirlum ware 75 Umbrellas 65 Printing 40

II. Intermediate Products

Plastic tubesE 60 Chipwood 30 Pa.per 35 Natural fibers (bags) 22

Ill. Capi.tal Goods

Cement 9 Mo-c.,._.s) bricks 10 Iron oars, .n-:i.I.s atli ;Ltr> :tliLctures 25 Corrugated iron sheets3 75

Source: selected industrial pIL.r:ts Table 10: COMJ'AR1:SON OS' PRICES OF LaOCA PPODU(TS WITH CIF CO,Sl OF COMPARABLE IMPORTED PROT)DUC'I AND QATMS OF PROTECTTON

% of Local Product Price Nominal Protect'onm Product Above(or Under) (,IF Price/l Over CIF Price/Z2

Wheat Flour 441.1 63

Tcnato Extract 41.0 113

Sugar 80.9 138

Vegetable Oil (27.5) 62.5

Tobacco 33.3 161

Dyed Twill 60.3 113

Dyed Poplin 50.0 113

Dyed Drill 31.7 113

Printed Satin 88.8 113

Nylon Taffeta Printed 88.4 113

Leather Shoes 150.0 263

Basketba-1 Shoes 33.9 156

Jute Bags 73.0 77

Woolen Blankets 167.8 214

Cotton Yarn 54.1 71

Exercise Books 20.0 23

Writing, Printing Paper 63.1 90

Wrapping Paper 86.6 127

Corrugated Boxes 31.6 50

Cement 71.2 113

Ceramic Tiles 75.0 73

Iron Bars 44.6 43.5

Corrugated Iron Sheets 52.6 53 Source: Mission estimates /1 CIF price includes transport cost to main market when appropriate. 72 Protection over CIF price at port of arrival--Protection including Customs Duty, 12% transaction tax on imported products and 1 municipal tax levied on imported products. Table 11: COMPARISON OF PRICES OF LOCAL PRODUCTS AND CIF COSTS OF COMPARABLE. IMPORTID PRODUCT¶S

(Ethiopian Dollars)

Product Unit CIF Duty Trans. Tax Total Local Product lWheat Flour quintal 27.0 13.5 3.5 44.0 39.0

Tonaato Exctract ton 780.0 780.0 101.4 1661.14 1100.0

Sugar quintal 34.0/1- 30.oL2 3.2 67.2 61.5

Vegetable Oil. (salad) Kg 2.00 1.00 0.25 3.25 1.1t5

Tobacco Kg 13.50 20.oL5 1.75 335.25 18.00 est.

EVed N:will (Cotton) 41/42"x 60 58.0 58.0 3.5 123.5 93.0 yd Dyed Poplin (Cotton) 36" x 30 yd 26.0 26.0 3.4 55.4 39.0

Dyed Broadcloth (Cotton) 36" x 30 yd 23.0 23.0 3.0 49.0 31.0

Dyed Drill (Cotton) 36"x 40 yd 41.0 41.0 5.3 87.3 54.0

Printed Satin (Cotton) 36" x 140 yd 36.0 36.0 14.7 76.7 68.0

Nylon Taffeta printed Yard 0.95 0.95 0.12 2.02 1.79

Leather Shoes Pair *'4. 10.0 0.52 14.52 10.0

Basketball Shoes Pair 2.80 4.00 0.36 7.16 3.75

Jute Bags Bag 0.78 0.50 0.10 1.38 1.35

Woolen Blankets Piece 5.60 11.25 0.73 17.58 15.00

Cotton Yarn Kg 2.40 1 . 3 5 /3 0.32 4.07 3.70

Exercise Books 16 pages 0.05 0.005 0.007 0.062 0.06

Writing, Printing Paper Ton 8 4 0.ok4554.0 914.0 1488.0 1370.0 Wrapping Paper Ton 675.o/4 633.0 72.0 1380.0 1260.0

Corrugated Boxes Ton 980.0k 318.0 112.0 1410.0 1290.0

Cement Ton 50.0 50.0 6.5 106.5 85.6

(3eramic Tile Sq. Meter 8.00 4.80 1.04 13.84 14.00

Iron Bars Ton 415.0/5 120.0 42.0 577.0 600.0

Corrugated Iron Sheets Ton 590.015 200.0 65.0 855.0 900.0

Source: Mission estimates

/1 Including $10 transport fran Djibouti to Addis Ababa 72 Including excise tax $10.0 ?3 Including '0.10 excise tax. 7C Including $120/ton for inland freight and handiling - Data based on project evaluatic for near paper plant. ,/5 Including $90/ton for inland frei.' and handling. Table 12: ETHIOPAN TINDUITRY: ECONOMIC PROFITABILITY RATING4(

A. High Domestic Component and Relatively Low Pri.ces

Meat packing Vegetable oils and cake Tomato extract Spice extraction

B. Low Value Added and Relative Low Prices

Meat carning /1 Tobacco /2 Rubber footwear Printing Matches /3

C. High Value Added and Relatively High Prices

Glasses, bottles Chipwood Natural fibers (bagging) Textiles Woolen blankets Leather shoes Cement Mosaics, bricks Beer Garments and hosiery Sugar /A Flour milling

D. Low Domestic Component and Relatively High Prices

Nylon fabrics Household plastic articles Aluminum ware Umbrellas Plastic tubes Corrugated iron sheets Steel pipes Paper _5

Source: Mission Estimates

/1 Low value added due to imports of tin cans. 75 Low value added due to imports of raw tobicco. 7T Low value added due to imports of wood sticks. 7 High prices partly due to large excise tax. 77 Low value added due to imports of pulp. Table 13: SPECIFIC DUTY RATES ON SELECTED IMPORTED INDUSTRIAL COM9IODITIES

Comnmodity Unit Duty

Sugar, all kinds 100 kgs. 20.00 Alcohol in bulk litre 10.00 Ale, beer, cider - bottle containing not more than 350 cc bottle 0.35 - bottles containing more than 350 cc but no more than 650 cc bottle 0.50

Cigars, cigarettes Kg. 10.00 Cotton, raw, for manufacturing purposes Kg. 0.10 Sweaters and similar knitted garments Piece 10.00 /1 Other hosiery, including knitted shirts and Dozen pieces 9.00 72 undergarments Cotton yarns Kg. 1.25 to 5.00 Gunny bags 100 kg. 50.00 Yarn of synthetic fabrics Kg. 0.20 Blankets Kg. 5.00 Aluminum--Ingots or Slabs 100 kg. 30.00 Alumiurm sheets and plates 100 kg. 40.00 Copper bars and rods 100 kg. 30.00 Iron and steel galvanized or ungalvanized 100 kg. 10.00 Iron and steel pipes and tubes 100 kg. 10.00 Iron and steel rods and bars 100 kg. 12.00 Cement Portland 100 kg. 5.00 Soap 100 kg. 20.00 Calciiun Carbide 100 kg. 7.00 Boots and shoes of leather per pair 10.00 /3 Other footwear, n.e. per pair 4.00 7; Tires (for cycles and motor passengar cars) per kg. 0.50 Matches Gross box 1.50 to 3.00 Umbrellas Piece 3.00 /A

7lTor ioo5 ad valorem,, whiichever is. the higher. 72 or 60% ad valorem, whichever is the higher. 75or 50% ad valorem, whichever is the higher.

__ or 80% ad valorem, whichever is the higher.

Source: Revised Customsi Import and Export Tariff, February 6, 1969. Table lh: NOMINAL AND EFF3RTIVE TARIFF FROTBCTION 01 SE.CTE) INDUTRIAL PR0DMT~S

(Import duties and protective amount included in transaction tax)

% Nominal % Effective Protection Protection

Food Products Wheat Flour 57 11.3 Sugar 158 318 Tomato extract 108 120

Beverages Wine 59 77 to 88 Beer 120 158 to 180 Soft drinks 38 41

Tobacco 78 149

Textiles Fibre bags & sacks 60 (11 to 17) Cotton textiles 108 275 to (15-30) Blankets (woolen) 15 Nylon fabrics 108 (18) Garments & Hosiery 68-83 428 to negative

Footwear Leather 83 101 to negative Rubber & Canvas 91 15687 Plastic footwear 91 12

Wood Products Furniture & joinery 33 46 to 103 Chipwood 68 180

Non-metallic Minerals Mosaics, bricks 30 149 Cement 108 2,200 Glass bottles 38 1,576

Printing 3 3

Chemicals Plastic Tubes 16.5 7 Household plastic 43 214 articles Matches 60 93

Metal Products Wires, nails & steel 45 143 structures Aluminum Ware 43 (7) Corrugated Iron Sheets 50 252

Miscellaneous Umibrellas 88 724

Source: Mission estimates Note: 1) Above figures are based on 1966/67 data. Since then nominal protection rates have sometimes been modified. (See Table) 2) Figures between brackets show the rate of negative effeetive protection; i.e., when protection is so high that the value of output at interna- t 4 mlqes Sl pzathe value of the materials employed when statd a-nterauon-L pice. Table 15: DEVELOPMENT BANK OF ETHIOPIA

Industrial Loan Commitments

Cumulative as at 31/12/68 1 9 6 7 1 9 6 8 (since inception)

No. E$000 % of Total No. E$000 % of Total No. E$000 % of Total

Transportation 1 4O 8.5 1 21 1.3 16 1,0h9 4.1

Bakery 1 55 11.7 1 26 1.6 17 877 3-4

Flour mill 3 68 1.5 3 11 0.7 103 1,187 h.6

Oil well 1 17 3.6 1 1h 0.8 31 2,196 8.7

Metal and Wool work - - - 1 50 3.0 20 255 1.0

Tannery and Shoe Factory ------6 865 3.L

Saw mill 2 100 21.3 1 45 2.7 32 1,289 5.4

Marble and stone cutting 1 85 18.2 1 250 15.1 - - -

Textiles (including fibre processing) 1 70 1h.9 1 1,090 65.8 22 8,385 33.0 - Brick factory - - - 1 150 9.0 - -

Power Plant 1 9 1.9 - - - - -

Cement factory 1 25 5.h - - - - -

Other industrial loans - - - - - 111 36.h

Total 12 h69 100.0 11 1,657 100.0 358 25,372 100.0

Source: Development Bank of Ethio:a - Annual Report 1968 Table 16: DEVELOPMENT BANK OF ETHIOPIA CUMIJLATIVE EQUITY INV1BMTMI;N TS TN T1E INDUSTRIAL SECTOR

Eth 1;

1965 1966 1967 1968 1969

H1,TA Metahara 792,000 792,000 792,000 792,000 792,000

--VA Ethiopia 61,8)0 100,091 131,152 138,353 138,353

Indo Ethiopiain Textiles - 5,300 27,795 20,545 20,5)45

Cotton Company of Ethiopia - 7,738 15,350 15,350 9,650

National Textiles - 30,000 30,000 30,000

Ethiopian Fabrics 10,000 10,000 10,000 10,000 10, 000

Bahar Dar Textiles 100 100 100 100 100

Rubber and Canvas Shoes - 15,250 27,300 20,300 20,300

Ethiopian Cement 100 100 100 100 100

Bottling Co. Ltd. 21,000 17,280 17,305 6,5(5 -

Paper Company 10,000 10,000 14,500 13,500 13,500

Sabean Metal Products 250,000 250,000 300,000 300,000 300,000

Suntu Coffee 60,9245 60,245 60,245 60,245 60,245 Total 1,204,585 1,268,144 1,425,847 1,406,998 1,394,793

Source: Development Bank of Ethiopia Table 17: ETHIOPIAN INVESUENT CORPORATION

Disbursements of Industrial Loans by Industry

(E$000)

(1963-4) (1964-5) (1965-6) (1966-7) (1967-8) (1968-9)

Inclustries

Textiles - 2,337.0 221.0 750.8 676.0 449.7

Flour mills, Bakery, etc. 25.8 3.0 - 423.9 70.8 7.0

Wood 152.0 8.2 430.5 43.4 0.3 52.2

Meat - - - 325.0 - _

Film - 39.3 0.1 - - _

Oil Extraction - - - 242.3 389.4 583.6 53.8 Bottling - 325.0 _- - 697.2 Spice - - - - 125.0

Paper - - - 1,013.8 - -

Boot -Shoe - - 201.0 104.6 28.2 62.5

Coffee Processing - 2,833.0 104.0 848.1 50.3 191.2

Metal - - 701.0 - 4.1 1,223.5

Cement Brick & Tile - - 1,000.0 117.0 1,475.1

Tannery - - - - 100.0 -

Glass - - - - 4,990.1

Matches & Candles - - - - - 67.2

Others - - - 208.2 - -

Total 177.8 5,545.5 2,657.6 3,960.1 1,561.1 9,853.1

Source: Financial Intermediaries Reorganization Commission (FIRC) Table 18: ETHIOPIAN INVESTMENT CORPORATION

Net Eouity Investments in the Industrial Sector

(Eth. $ OGO) 1963/64 1964/65 1965/66 1966/67 1967/68 1968/69

Meat - 9.0 2082.0 -

Oil seeds and spices 1().0 15.0 17.0 36.C

Sugar 99.0 185.8 181.6 2681.6

Textiles 300.0 1h74.C0, 6447.0 5715.7 5666.3 5264.2

Rubber & Shoes 1.0 24L1.0 3906.0 3933.2 3939.9 3958.1

Pa.per and matches 3.0 3.0 106.0 4186.c h8L.7 1:^'1.6

Beverages - 68.C 183.0 272.2 3(02.1 25S-

Cement & Lime - 1008.0 1052.7 1- 053 1202.8

Electricity - 2,3 2 231.8

Glass - - 183.0 ,c0.3

Metals _ _ 3.0 71.6 465.o 5o0.c,

Total 30L.0 1,L95.0 13,844.0 11,732.8 12,535.8 15,215.8

Source: Ethiopian Investment Corporation .~~~~~Hl-..._.... _§ Oz -IM.PP.YRIAL ETTOlOPTAN GOVEENMICN1 D!ET MS- 1 % 40EtiNT-JytdtED(N'' INSTILi'TIGNS ~.ATEND - DECEMBER1969

Total nior.-,ch oid oc fod tevWsaos EC holding oadp Mmi-st Eth. In-et. Oar.,,!,5V005t COSo-orita; an 7, of ,ercai- Ssprinan. or non_,or ther Total 110 paid-up 4:6. 0 ~~~~~~~~S.C.Eth-inpr Ethiopia .MEDISC IEEC hoidigs capital

CHARTERED BODIES

eorlMedical Store fcrporsio 1. 00,030 1,000,(000 1,000,000 Ethiopian filectrieLi;ght &Powe Aothori:r 55.000.000 55,000,000 100 - ---- 55,000.000 Ethiopian Grain Corporatio 9,2265,000 100 4,765,000 1,500,000 3,000,000-- 9,265,000 National Bank of Ethiopia 10,000,000 10,000,000--- 100 - - 10.000.000 -mprial oard si T- -~aoi-ainn.. 20.1000,000, 20.000,00 100 - - 20,000,000 Tohascc Monopoly 4.311,459 4,311,459 100 - ---- 4,311.459 100 SUB-TOTAL. CHARTERED BODIES 99,576,459 95,076,459 1,500,000 -3,000,000 -- 99,576,459 0090PANIESESTABLISHED UNDER C(fl(RELkL LAW Ahadir Ag,ninuletralDevelopment S.C. 200,000 - -- 99,800 - 99,800 50 African Matches and Paper Factory S.C. 1,000,000 - 550,000- - - 550,000 55 Awansa Agro-Onduastrial S.C. 4.000,000 3,999,700 - - - 3,999,700 100 Bahar Oar Textiles 'IOlsS.C. 9.292,200 4,291,800 5,000,000 - (i) 9,291,800 100 lerhar'ensaSeliuc P Polsress 0.0. 2,969,750 1,140,000 - -2,000 -251,500 1,393,500 47 Cossno Enebna For i.C. 350,000 - 150,00 Ceren - - - 150,000 43 Co. Ltd. 300,000 - - 300,000 -- 300,000 Che-ir Be Fer (Djibouti A-Adis Ahaaa) 4,325,000 100 2,162,500---- - 2.162.500 Tebre Berhan, Wonl Factoro S.0. 3,133,100 3,132,700-- 50 - - -(ii) 3,132,700 100 Duvelopment and Hotel S.C. (Hilton) 12,550,000 9,433,300 - 527,100 2,424,600- 1,165,000 12,550,000 100 Eritrean Ceme nt S.C. 4,582,000 1,535,400 6,053,800- - - - 2,589,200 57 Ethiopian Airlines S.C. 25,000,000 24,999,600 - - 24,999,600 100 Ethiopian Cement Corportion 10,000,000 9,999,600 - -- (iEil 9,999,600 100 Ethiopian Express S.C. 200,000 -- - - 199,600 199,600 Ethiopian Farm Development S.C. 1,100,000 889,600- 100 - - 899,600 81 Ethio-Japanene Sy thetic TextLien S.C. 3,333,333 1,188,500 -85,900 - 1,274,400 38 Ethin-Line Senkelle S.C. 350,000 - 149,700-- - 149,700 Ethiopian Petroleem S.C. 53,998,932 53,878,805--- 43 - - 53,878,805 100 Ethiopian Pulp and Paper S.C. 8,500,000 2,219,900 385,750 14,000 144,050-- 2,763,700 Ethiopian Shipping Lines S.C. 17,005,200 11,954,300 33 5,025,100- - - - 16,979,400 100 Glans and Bottle Making S.C. 1,262,500 - 560,250 - 257,500 - 817,750 CGinro Tea Plantations S.C. 400,000 65 -95,000 - -- - 95,000 24 BOVA. Ethiopia S.C. 50,400,000 - 409,800 113,940 l,a.41,040-- 2,364,780 H.V.A. Metahrar S.C. 32,000,000 5,667,000 5 2,300,200 792,000 990,500- 9,749,700 30 Imperial Insarance Ce anromS.C. 1,000,000 - - - 150,000 - 150,000 In,do-Ethiopiar.Tetls S.C. 6,750,000 15 -- 1,118,900 - 1,118,900 ES Maritime and Trannit Servicen S.C. 500,00 - - 397,000 -- 397,000 80 Mortgage Company of Ethiopia S.C. 3,000,000 --- 2,999,600-- 2,999,600 100 Mu~tualPond Management S.C. 100,000 - 30,900 5,000 - -- 35,900 36 Northern Ethiopian Railwmay,S.C. 4,000,200 3,999,600--- Sa. Hotels S.C. - - 3,999.600 100 3,344,000 2,081,800 1,011,900 - 174,700-- Rohher and Canvas Shoes S.C. 4,200,000 3,268,300 98 - 1,962,200 20,000 4,400-- 3,987,100 Sahean Metal Products S.C. 4,000,'000 95 - - 400,000 16,800- 416,800 Sabean Utility Earporati-r S.C. 3,000,000 10 -304,600 - 174.000 - - (iv) 478,600 Societe So.celieredu Tosrosme S.C. 16 (Ethiopia Hotel) 2,805,800 -- - 249,000 S-nta Coffee Processing S.C. 1,300,000 500,000 2,049,000 73 90,000 - 63,000- - Tendaho Plantations S.C. - - 63,000 70 6,180,000 1,600,000 464,000 1,000 154,200 Wanza S.C. - -(v) 2,299,200 37 383,830 - 1.'000) - SOS-TOTAL 1.000 53.900 41,000 96.900 25 COMPANiIESlOItDER COMMIERCIAL LAW 285,604,645 141,176.005 23,505,000 2.173.040 GD R AT N'0 T A85..Lj 10,927,690 1,711,200 2.157,100 181,740.735 - 3 252, 4 2505700 2173000 13 927,690 1,711,200 2,157,100 281,317,194 SCtens al The tahir -clodes all permanent holdengs held by the principal E.E.C. - ownd innti tiarisn(financial and otherwise), including the Ministry of Finance with the e'centi'-specens ld in,notes (5) and fe), (d) and 10). 6) The Mnist-; 0 Fssance's shareholdin,gsin the financiailintermediaries are esrliaded. rI Eve a ed a- r lirge in prisatn limited ..anpa-ies and holdings where thetotal goerr. ent, direct and eocep, isdsrot, holldicgis that company is less than $250,000 .,her- a6total go-r-nnt ho,ldingiv that enterprise is 152/,orme of total1paid op eapital. d, Also, r, a. rxr-ssl'ina sdsg f n inal share (to Oanplvalithl th oorn sOf the Consoocial rode.) a. for-aor' ssl: f -o-eso) "ove.Soorar,' is, o--registered eot-rpr!r: are ascioded. and also these in enterprise which appear to have operatiass or hnichare on the point of 1iqoidation. ceased active "i Si r macscaEon and Fin.,Arts i.thiopion ~ir Airline.sS.C. Eth.$1,054,200, Rac Hotel S.C. EIH.S110,dOC (iii) Ithiopias Airlines S.C. 'iv) ItlosiarirlinesS.C. FEci.105,OSC. Pos Ho.telsS.C. Ech.(400,000 (vi, Ethiopian Airlico- EcIs.S4H.OOG

TootnDr rA~t~- - A -er0::0' Table 20: SHAREHOLDINGS OF THE IMPERIAL ETHIOPIAN GOVERIENET IN GOVEMThMENT FINANCIAL IN1TE MEDIARIK;

Intermediary Paid-up Capital. Eth.s

Commercial Bank of Ethiopia S.C. 30,000,000 /1 Development Bank of Ethiopia 11,292,100

Ethiopian Investment Corporation S.C. 29,000,000

National Resources Development S.C. 21,000,000

TOTAL 91,292,100

/1 Except for Eth$1,000,000 of shares in the Development Bank of Ethiopia held by the National Bank, and token shareholdings in the others for the purposes of the Commercial Code, all shares in these intermediaries are held by the Ministry of Finance. Table 21: ESTIMATES OF PRODUCTION FOR MAJOR INTDISTRIAL PRODUCTS

1968 1973

Plan Bank Mission

Foo(d Sufgar (tons) 66,200 115,000 93,00( Wheat flour (tons) 60,000 70,000 70,000 Edible oil (tons) 8,500 18,000 15,000 Meat(canned and frozen) (tons) 9,000 22,000 -10, 000

Beverages Beer (hectoliters) 227,000 280,000 280,000

Tobacco CifTarettes (000 units) 6,740,000 1,188,000 1,100,000

Textiles Cotton yarn(sold) (tons) 10,000 11 000 9,000 Cotton textiles(rnillion sq. meters) 71.5 90 95 Nylon fabrics(OOOsq. meters) 3,870 6,300 6,150 Gunny bags(OOO units) 6,000 12,000 10,000

Leather and shoes Upper and lining leather(OOO sq. ft.) L,000 7,000 16,000 Leather shoes (000 pair) 770 1,100 1,000

Paper (tons) 1,800 7,250 7,000

Non-metallic minerals Cement (tons) 140,(00 170,000 240,000 GDlissware (million-pieces) 29 90 75 and bo-ttles

Chernicals Soap (tons) 4,6oo 12,50(0 12,000 Tyres (units) - '.8,0oc) 60,000 Refined oil, products (tons) 470,000 (30,000 780,000

S-teel prodlcts, chemic.-ille and others [ron sheets (tons) 1',,00() 1.0,0()0) 20),000 Triw-k ansembly (uinits) - .,O()0

TOTAJ., GROSS VALUE OF OUTPUT F'th $.mi.llion l,oo.? 7(00.? 0.°

Source: Ministry of Industry and Mission Estimates

Table 22: SUMMARY LIST OF IDENTIFIED INDUSTRIAL PROJECTS (Achieved Since the Beginning of the Plan or Under Construction)

(Cost in thousands of Eth $)

Bank Estimate Plan lorecast

Food 37,233 43,216 Beverages 5,224 15,870 Tobacco 3,000 3,000 Textiles 25,199 24,983 Leather 29,8h9 39,870 Wood 2,600 1,352 Paper 1,500 14,000 Non-metalic 37,833 39,382 Chemicals 34,353 29,060 Metals 19,567 25,356

TOTAL 209,358 236,089

Other Possible Projects (identified)

Oil/cake extraction 3,750 Feed meal plant 1,250 Hide pickling 750 Detergents 2,800 Soluble coffee 25,000 ?

33,550 100,000

Cost of Projects in Uiich Government Participates Directly or Projects Financed by Major Government-owned Plants

Tarmery 29.9 Tire plant 16.5 Actual Investment Expenditure during Oil refinery 15.3 2nd Plan (1963-67) - includes expansion Tobacco monopoly 3.0 and replacement = $276 million Ethiopian cement 25.0 Investments completed in 1963-67 - $ million 89.7 excludes replacement = $202 million

Source: Ministry of Industry, TFYP, and Mission Estimates Table 22: LIST OF IDENTIFIED IhDUSTRIAL PROJECTS Page 2

Year of Plan Food Industry Commencement Project Cost Forecast

Macaroni plant (Addis) 1969 820 ft it (Addis) 1969 600 Oil Mill (Nazareth) 1970 500 Oil Mill (Addis) Patriots 1971 1 ,615 Ethiopian Spice 1970 1,732 Extraction (Addis) (+100 in 67/68) (602) Lidade (Asmara) 1971 200 National Oil (Asmara) 1970n 766 (expansion) Oil Mill (Addis) 1970 600 Flour Mill (Debrezeit) 1969 200 (+600 before 1969) Salinas Assab (expansion) 1971 450 HVA Metahara 1970 28,600 (+27,700 before 68/69) (19,000) ECE Mills (Asmara) 1970 350 Macaroni Santi (Decamare) 1971 400 Ethiopian Fisheries (Assab) 1969 400

Sub-total 37,233 43,216 Beverages

Bottling Mineral Water (Ambo) 1970 3,074 Alexandrakis wine(Addis) 1969 800 Mata Abo Brewery(Sabata) 1969 1,200 (+3,000 in 67/68) Fenili (Asmara) 1969 150

Sub-total 5,224 15,870 Tobacoo

Tobacco monopoly (Addis) 1969+ (expansion) 1971 3,000 3,000

leIndustr

Blankets Lazarides (Addis) 1970 350 Fiber Company of Ethiopia (Addis) 1969 2,979 Fiber Bags Factory (Addis) 1969 200 (+1,400 before 68/69) Manufacture Sacchi (Asmara) 197C) 1,070 Baratollo ginning (Asmara) 1971 3,500 Ethio-Japanese (Mojo) 1970 7,000(expansion) Cotton Company of Ethiopia(Addis) 1970-71 6,600(expansion) Yeret (Ginning) (Kaliti) 1970 500 Ethiofil (Yarn thread) (Asmara) 1969 3,000

Sub-total 25,199 24,983 Table 22: LIST OF IDENTIFIED INDUSTRIAL PROJECTS page 3

Year of PL.n Commencement Project Cost Forecast

Leather and Shoe Industry

Tannery (Addis) 1972 29,849 202200

Sub-total 29,849 39,870

Wood Industry

Chipwood (Jimma) 1969 500 Hardboard and Softboard (Addis) 1969 1,600 Furniture (Riva) (Addis) 1971 500

Sub-total 2,600 1,352 iaper and Products Ethiopian Pulp and Paper (Nazareth) 1970 14,000 (+9)000 14,000 before 68/69) Toilet paper (Addis) 1970 500

Sub-total 1)4,500 14,000

Building and Non-Metallic

Ceramical bricks factory (Addis) 1970 800 Shekla bricks (Addis) 1970 2,225 Ethio bricks (Addis) 1970 800 Industria ceramica (Asmara) 1970 4oo Cemenit expansion (Addis) 1972 25,000 14,000 GLass and bottle (Addis) 1972 8,308 3,224 Gypsun works (Addis) 1971 300

Sub-total 37,833 39,382

Chemicals

Paint; factory (Addis) 1970 500 Tire plant (Addis) 1971 16,500 Thermo-plastic (Asmara) 1970 770 Sava glass (Asmnara) 1971 1,000 Plastic tip top floors (Asmara) 1970 240 African marble expansion (Asmara) 1969 93 Assab refi.nery (Assab) 1969 3,250 1970/71 12,000

Sub-total 314,353 29,060 Table 22: LIST OF IDENT:IFIED INDUSTRIAL PROJECTS page I

Year of Plan Commencement Project Cost Forecast

Steel and Metal Products

Metal tools (Addis ) 1970 3,212 Fiat vehicle (Addis) 1972 4,155 3,100 Dry cell batteries (Addis) 1973 5,250 500 Crown cork (Addis) :1971 400 Croce container (Kaliti) 1969 800 Tin containers (Akaki) 1971 250 Steel Company Ethiopia (Asmara) 1969 1,600 Francesco Magnati (Asmara) 1970 900

Steel Pipe (Addis) 1971 3,000

19,567 25,356 Table 23: CAPITAL EXPENDITURES - MINISTRY OF INDUSTRY AND OTHER GOVERNMENT PARTICIPATIONS (in millions of $Eth)

196a-//3 1965 1966 1967 1968 1969 1970 1971 1972 1973

Vehicle Tire Plant - - - - - 0.4 2.1 3.7 1.3 - Tannery - - - - - 0.1 0.5 .5 6.0 4.5 Oil Refinery 4.1 4.2 20.5 9.2 7.3 4.2 - 3.5 1.3 - Cement Plant 6.4 ------Textile Bahr Dar 1.5 _ - 1.5 1.0 - _ _ _ _ Woolen Factory 1.5 0.5 0.5 1.3 - _ _ _ _ _ Paper Mill - - 2.2 ------Meat Corporation 0.2 1.2 - 0.4 - 0.2 - - - - Oil Seeds Processing - - 1.0 ------Drug Manufacturing Corp. - - - 0.5 0.2 - - - - - Sisal Factory - - - 0.1 ------Printing Press - - - - 0.1 - - - - - Rubber and Canvas Shoes - 0.5 _ - 1.3 -

Total 16.4 8.5 24.2 13.0 9.9 4.9 2.6 11.7- 8.6- 14.5

Subscription to Capital

EIC 3.8 2.3 1.7 9.6 2.0 3.0 11.0 . - - DBE - - - - 3.0 1.0 2.0 - - - EDC (new) ------3.0 2.1 to 6.1 2.1 to 6.1 To t-a 1 6.1~~~~~~~~~~~~~~~~~~~~2/2 Total 3.8 2.3 1.7 9.6 5.0 4.0 13.0 3.0 2.1 to 6.1- 2.1 to 6.1-

/1 Assuming no funds channeled through EDC for direct investment. 75 Higher figure assumes funding from National Bank, funds now collected by Government. 73 Calendar years.

Source: Annual Reports and Mission Estimates. Table 24: DISBURSEMENTS BY EIC AND DBE FOR INDUSTRIAL PROJECTS (in thousands of Eth$)

1963/4 1964/5 1965/6 1966/7 1967/8 1968/9 1969/70 1970/1 1971/2 1972/

Equity (net)

EIC 304 1,191 12,349 (2,112) 1,604 1,880

DBE 63 991 _ 63 150 (18) (12)

367 2,182 12,412 2,062 1,586 1,868

Loans

EIC 178 5,546 2,658 3,960 1,561 9,853

DBE 724 2,212 913 531 1,1h3 2,507

902 7,758 3,571 4,491 2,704 i2,360

TOTAL 1,269 9,9L0 15,983 6,553 ,290 14,228 Annual average of 12,000"

End of Financial Year: EIC - July 7 Note: Major disburseiients in 1968/69 (First Year of Plan) was DBE - December 31 DBE = loans = aDer and textiles

EIC = ecuity = sugar loans glass, bricks and cement, metal

/1 Source FIRC Report. Annual average l963/4 to 1968/9 was 8,710 thousa!lds o-f dollars. Appendix I - CALCULATION OF NOMINAL AND EFECTIVE PROTECTION

ERITREAN CEME!1T CCMPANY (Massawa)

1. BASIC DATA:

Location: Massawa (Eritrea)

Ownership: Ethiopian Government (60%), Krupp AG (Germany), Ethiopian private shareholders.

Output: (1969) - 62800 tons (of which 23195 tons exported) (1968) - 56104 tons (of which 20500 tons exported)

Percent of inland market (Eritrea)s 100% Value of sales (1969): 4,092,000 Eth. dollars (1968): 3,714,087 " "

Original cost of plant (1965): 8,600,000 Eth. dollars Net profit (1969): 930,000 Eth. dollars (1968): 154,000 n 11 Personnel employed: 180 (including one German technical manager)

2. RAW ?4ATERIALS /1

A. ImPorted Eth. Dollars Paper bags 203,543 Explosives (quarry) 70,651 Fire bricks 30,747 Grinding balls 18,170 Sub-total 323,111 B. Local

Limestone h14,310 Clay 12,610 Gypsum 12,120 Sub-total 439,040 UTILITIES

Electricity 521,048 Fuel 495,O73 Water _3,777

Total 1,019,898

WAGE; AND SALARES /1 706,839

/1 Data are for 1968. Appendix I - Page 2

3. PRICES

A. I e? ment: from Japan and/or Pakistan, cif prices would be at Massawa $50/ton - Previous Israeli prices (before Suez Canal closure) was $42/ton - Duty is $50/ton (since end 1967; used to be $25/ton previously). Transaction tax is 13% on $50/ton cif, i.e., $6.50 - landed cost for imported cement is then $106.5/ton before dealers margin. B. Local cement: Ex factory cost before profit is $42/ton. Cement is exported to Saudi Arabia at dumping price of $40/ton or less and selling price ex factory $80/ton to which must be added 5% tax paid by consumer fl . 4. DUTIES AND TRANSACTION TAX - EFFECTIVE PROTECTION

1. Duties on imported materials: 10% on $323,11 $32,311$ 8% differential tax /2 25,849 Total $58,160

2. Calculated cif value of imported materials: $323,1ll - 58 160 $264, 951

3. Nominal duties on imported cement: $56.5/ton on $50/ton cif price - 113%

4. Total cif value of materials

a. imported $ 264,951 b. local 439,040 (materials) 1,019,898 (utilities)

Total $1,703,889

5. Nominal Protection on total materials (cif): 58,160 3.41% 1,,703.,889

6. Total value (after duties) of materials: .$1,762,049

/1 To which must be added another 2% tax. 75 8% difference between tax on imports -13% and tax paid on local products = 5%. Appendix I - Pag_ 3

7. Value added: Sales $ 3,714,089 - materials = 1,762,0L4 9 Value added= $ 1,952,040

8. Effective Protection (on value added):

L,952,040 - 1 2300% 3,71h,059 - 1,762,049 2 .08 1.0341

Append!x II - SUGGESSTIONS TO CALCULATE DESIRABLE RATES OF PROTECTION

The first prerequisite of a tariff policy formulation is the knowledge of the existing situation, the structure of protection and its effects on resource allocation and economic growth. Such studies have been undertaken by Pr. W. Schmidt in 1967 and 1968 and the Ethiopian Government has favored research on the structure of protection. The Bank mission has also obtained additional and more up-to-date information, although much more work needs to be done to gather data in a more systematic way. However, assuming such data can be obtained (which should not be very difficult) the question remains what are reasonable rates of tariff and subsidies and whether all manufactured goods should receive equal treatment.

It has been suggested that a more economic approach in calculating tariff protection would be to apply a given level of protection to the value added effectively obtained by Ethiopian industries than to apply such protection to the price of the product. But what should be the level of protection offered to local value added?

Three factors need to be taken into account:

a) the general advantages of manufacturing in Ethiopia;

b) infant industry considerations;

c) balance of payments considerations.

a) General advantages of manufacturing

One may argue that manufacturing offers some advantages through external economies in the form of lator training and in encouraging the expansion of other industries which cb not enter into the profit calculations of the firm yet benefit the rational economy. Moreover, manufacturing activities can contribute to the full utilization of the labor force although there may be a trade off between economic growth and full employment. An O.E.C.D. Development Center study suggests a rough approxi- mation of 10-15 percent as a rate of protection for any advantages manu- facturirng can offer over primary activities. The World Bank presently provides a flat 15 percent preference to domestic sources of procurement for industrial equipment to be used in domestic projects financed by the Bank. But Ethiopia does not produce such equipment and the question of the choice of a realistic rate for Ethiopian industry needs further study.

Another possibility may be to study the excess cost paid by Ethiopian manufacturers to their workers as compared to labor cost in other sectors. It has been estimated that in developing countries, real wages in the industrial sector are two or three times those in the agricultural sector/l. If in Ethiopia, the wages of the industrial worker were twice that of his

/1 Fred Dziadek - Unemployment in the less-developed countries - June 1967. Appendix II: - Page 2 next best alternative, it would be possible to justify an effective tariff equal to 50 percent of the contribution of labor to the value added in a given industry. The rationale is quite simple: if the private employer must pay twice as much for his labor as the true cost to society, i.e., what the labor should produce in alternative employment, then a tariff equal to the excess cost offsets the incorrect wage. According to latest Ethiopian statistics, the average wage bill for manufacturing was Eth. $114 a month /1 per person employed. No statistical evidence has been found for earnings by agricultural workers but it is widely held that the latter, many are seasonal workers, are paid substantially less. More research will have to be done in that field of labor costs but, for the present purpose, it may be provisionally estimated that industrial workers are paid twice the alternative or opportunity cost of labor /2. For a more detai'led study, one should also mantion that the wage adjustment in each industry should differ according to the skill levels required. b) Infant industry considerations

The traditional infant industry argument is that some degree of protection can be accepted on the grounds that firms need assistance at an early stage of their operations to compensate for lack of experience and uncertainty with respect to future prospects. Again there is little information on the level of protection that could be justified on infant industry grounds since there is little empirical evidence on the learning process in individual firms. It does not appear likely, however, that a rate of effective protection much mcre than 20 peoernt could be warranted. The infant industry argumont for protection is essentially an argunent for investment; the nation pays out funds to cover excess costs during the infancy of an industry and reaps rewards in terms of lower costs when it grows up. l'hat must be compared is the present value of future permanent savings over import costs through domestic production with the present value of the excess cost of domestic production over imports which occurs until the infant industry matures. It can be calculated that to justify a 20 percent protection one has to obtain a 30 percent permanent reduction

/1 Chamber of Commerce - Statistical Digest - October 1969 - Data on for December 1968.

/2 The tariff solution only solves the problsm of unemployment by giving a better break to those industries which are labor intensive. It does not change the relative prices of capital and labor, indacing, the employer to hire more of the latter and less of the former. This could be achieved by a subsidy to wages or a tax on capital. But either one of these might have adverse effects on the level of private investment. Thus the subsidy to wages requires additional taxes which might affect private investment. The tax on capital would reduce capital formation unless the proceeds of the tax were returned to the private sector investors as for example through a tax cut on profits. Appoiidix II - Page 3

in domestic costs compared to the price of imDorts after ten years /1 Since 30 percent is already a high percentare of savings, clearly the infant industry arg-ument does not support very high rates of protection /2 . Obviously if for practical reasons an across-the-board rate of protection for infant industries had to be applied (it is extremely difficult to forecast which prospective industries are likely to provide future savings), the conmon tariff rate should be the effective rate and not the nominal rate because a coicron nominal rate will provide a wide range of effective rates, depending upon the proportion of value - added to gross output.

c) Balance of payments conisiderations

If Ethiopia were to remove all duties and if the monetary authorities rofused to adjust the exchange rate as part of their monetary and fiscal policies, it is possible that Ethiopia would run a balance of payments deficit. To estimate net effective protection in this type of situation, it is necessary to adjust for the evaluation of the exchange rate as compared to the free trade situation. It is conceivable that in the event, theoretically, of the removal of all duties, the Ethiopian dollar would have to be dGpreciated by more than 30 percent,that is the percentage on average by which duties on imports raise the cif prices and the

amount by which devaluation would have '-JO increase the price of imports if they are to be kept in check in the absenco of duties. In fact, it seems reasonable to assume that the degree of devaluation would be smaller inasmuch as an increase in export earnings is likely, increasing the supply of foreign exchange to Ethiopia /3. Naturally detailed calculations would have to ba made to permit an est3imate of the equilibrium exchange rate.

T1. at a 10 discount rate.

/2 cf. also Dr. Bela Belassa's study on industrial protection (August 1969) suggesting 20 to 30% protection.

/3 Suppose that a proposed local industry requiras Eth. $100 of imported raw materials to produce Eth. $200 worth of finished products, assuming no duties on imports on raw materials and on the finished product, the value added in intornational prices (and domestic prices) is Eth. $100, at the prevailing exchange rate. However, for instance assuming that the Ethiopian dollar is over- valued by 30 percent, the true international value added would be Eth. $13() based on a value of Eth. $260 for the finished product and Eth. $330 for the raw material. Hences a 30% effective tariff on the activity would be justified to offset the over valuation of the Ethiopian dollar. Appandix II - Pae4

Application to a specific Ethiopian Industry

Eth. $

Wages 20,000

Finished Product sales 900,000

Imported materials 200,000

Local raw materials and other imports 250,000

Duties and transaction tax on imported materials 4 0,000 (20%) Duties payable on similar finished product imported 270,000 (30% protection)

The actual effective rate of protection is 57% in this example /1. To calculate a desirable rate of protection by applying the above described criteria, one would need to use the following formula: a) Desirable rate of effective protection (on value added)

50% wages+20% infant industry+30% (value product cif--value of imports cif) excharjne rate adjustment value added cif which gives in our example a rate of 80% on value added cif. b) Desirable rate of nominal protection on the final product

This rate is given by the formula: rate of effective protection x value added cif + total value of imputs cif _/2 Value of finished product cif which gives in our example 31% of nominal duty on the finished product.

/1 See Appendix I on example for calculation of effective rate of protection.

/2 Defined as value of finished product cif - value of total imputs (local and imported) cif. VOLUME II

ANNEX 3: MINING

MINING

TABLE OF CONTENTS

Page No.

Output ......

Investment ......

Gold and Platinum Mining ...... 1

Nickel, Copper and Sulphur ...... 2

Oil and Gas Exploration ...... 3

Potash Mining ...... 3

Surveys ...... 4

Administration and Legislation ...... 5

Prospects for Output and Investment ...... 5

TABLES

1. Mining - Value Added

2. Gross Value of Selected Mineral Products

3. Volume of Mineral Production

4. Investment in Mining

5. Sources and Allocation of Investment Funds

6. Capital Expenditures - Ministry of Mines

7. Estimated Annual Public and Private Investment in Mining (1968-1973)

MINING

Output

1. Mining output is very small amounting to 0.3 percent of total GDP. From 1961 to 1969 value added in the mining sector increased at a 16.9 percent annual rate or from Eth.$ 3.3 million to Eth.$ 11.5 million.

2. Mining and quarrying is confined at present to alluvial gold, platinum, salt, clay, gypsum, limestone. In addition, small quantities of such minerals as baryte and mica are produced. Gold is the most important and in 1969 represented 91.3 percent of the value of mineral products listed in Table 2. Salt and anlydrite are the next most important minerals in value of production.. Salt is relatively important, and is produced both by evap- oration on the Red Sea at Assab and Massawa and in the Danakil depression. Of the 240,000 tons produced at Assab and Massawa, 20 to 30 percent is sold locally and the balance exported. Total capacity at Assab and Massawa may inc:rease to 340,000 tons by 1973.

Investment

3. Public and private investment in mining rose from Eth.$ 9.6 million in 1964 to Eth.$ 15.9 million in 1969 (see Table 4). During the period 1964-19693, about one-third of expenditures have been for the development of existing mines (principally the Adola gold mine and the Dallol pilot potash mine) and two-thirds on prospecting and exploration (petroleum and geological mapping). Total investment in potash exploration and mining (Eth.$ 15.4 million) and oil prospecting (Eth.$ 56.8 million) represented 80 percent of total investment in mining between 1964 and 1969. During this period investment in the public sector (Eth.$ 15.8 million) was 17.6 percent of total investment in mining. Public investment was on gold and platinum mines and since 1968 on geological survey, such invest- men,t rose front Eth.$ 2.5 million in 1964 to Eth.$ 5.1 million in 1969.

Gold and Platinum Mining

4. The Adola gold mine is at present operated by the Ministry of Mines. A recent proposal to hand over the operations t:o a wholly owned commercial company was not accepted. The mine consists of placer deposits in the southern province of Sidamo where large deposits are worked by draglines and small deposits by hand workers. Known reserves suitable for clraglining amount to 16 million cubic meters averaging 0.44 grams of gold per cubic meter.

5. The present situation of the mine is not satisfactory. There are no proper commercial accounts from which an accurate financial picture of the mine can be judged; equipment is worn out and supply of spares is inter- mittent; and development prospecting is not regularly carried out. Current budgetary cost is about Eth.$ 200,000 per month, and over the past five years actual expenditures have exceeded the value of output (estimated at Eth.$ 11.9 million between 1965 and 1969) by Eth.$ 2.0 to Eth.$ 2.5 million. This is a cash estimate and makes no allowance for depreciation. The mine pays no rents, royalties or taxes, since it hands over its output to the Treasury at a price of US$32 per ounce unrefined.

6. Output has fluctuated. Improvements in management in recent years raised it from 660 kg. in 1967 to 1,222 kg. in 1969. However, production is falling due to the dilapidated state of the equipment, for which insufficient budgetary provision has been made. Moreover, given present trends, the entire production would soon come from "hand workers" as reserves for draglining are being exhausted. Production would then decline to perhaps 800 kg. per year. About Eth.$ 300,000 is needed immediately for the most urgent repairs to the equipment.

7. In order to more efficiently develop and manage the mine, the Min- istry of Mines proposes to establish a "National Ethiopian Corporation" whose function will be to establish the Adola Gold Mine as a self-sufficient project run on business principles. The Corporation would take over the existing facilities and assets for a term of 30 years. It was hoped that by reorganizing management, repairing existing equipment and purchasing modern equipment, the Adola mine could operate on a profitable basis. Output is planned to increase from 1,222 kg. in 1969 to 1,800 kg. in 1972. On the basis of presently known reserves, output would fall thereafter unless an extensive exploration program confirms the existence of new reserves sufficient to sustain or increase output. Exploration prospects based on geological survey results are encouraging. The Corporation would require about Eth.$ 2.4 million of capital to implement the new plan, and the Corporation would be granted a tax holiday. Acceptance of the reorganization of the Adola Mine would avoid a drastic reduction in gold production and enhance the prospects for profitable operations. However, the proposal has not been favourably received.

8. A small amount of platinum is recovered each year at the Yubdo Plat inum Mine in the province of Wollega. The U.N. mineral survey conducted investigations of the platinum deposit in 1968/69, and the Duval Corporation undertook prospecting from June 1969. However, the company recently abandoned its concession.

Nickel, Copper and Sulphur

9. There are nickel occurrences in the Adola area and in Wellega and the UNDP is presently drilling to establish the nature and extent of the reserves. The Duval Corporation was granted in June 1969 exclusive prospect-' ing rights for copper in an area of 2,800 sq. km. near Asmara. Ethiopian- Canadian Exploration Co., Inc., a subsidiary of Eltra Corporation of New York, has applied for mining concessions adjacent to those granted to Duval Corporation. Sulphur deposits occur in the Danakil depression and the British Canadian Mining Corporation applied for a concession in early 1970. -3-

OiL and Gas Exploration

10.. Expenditures by the oil companies have ranged from Eth.$ 6 million to Eth.$ 13 million per year between 1964 and 1969. Six companies have been or are prospecting for oil. The Gewerkschaft Elwerath Oil Company had a concession in the Ogaden district from 1959, but abandoned the concession after drilling two dry wildcat wells. The Gulf Oil Company of Ethiopia has a concession from 1963 in the offshore area of the Red Sea coast. They drilled two holes with no success. The Mobil Petroleum Ethiopia, Inc., also obtained a concession in 1963 in the offshore area of the Red Sea coast, north of the Gulf Oil concession (see attached map). Mobil drilled two holes in 1969, and struck gas in one of them. The gas strike was plugged as it was of little economic value. The Baruch-Foster Corporation has a concession in the southern portion of the Red Sea coast since 1966, but no well was drilled and the concession has been terninated. The Oil Organization, Ltd. has carried out geological activities in its concession in the Assab area. Finally, the Tenneco Ethiopia, Inc. was granted a concession in 1969 in southern Ethiopia covering an area of 266,640 sq. km.

Potash Mining

11. Possibly the most important mining possibility over the medium term is potash. The potash deposits in the Danakil depression are located 450 miles northeast of Addis Ababa and 125 miles southeast of Asmara, up to 75 miles from potential port facilities on the Red Sea. From 1965 to 1969, Ralph M. Parsons Company carried out exploration and drilling in the Dallol area in the northwest part of the Danakil depression. While the company proved a large body of ore, a pilot mine at Musley was flooded in 1967. The company gave up the concession in 1968 after spending an estimated US$9 million.

12. Concessions were then taken out to the south of Dallol by Salzdetfurth Aktiengesellschaft and to the north by Ethiopian Potash Private Company, Ltd. (EPCO), a Kaiser-Seatankers joint venture. Salzdetfurth Aktiengesellschaft carried out geological surveys and drilling before surren- dering the concessions in 1969. The EPCO concession area is within the boundaries of the old Parsons concession, but generally north of the Musley mine sunk by Parsons.

13. A principal condition of the EPCO 50-year concession is that the company must conduct various stages of exploration, pilot mining, feasibility, financing and commencement of operations within defined time limits and with a minimum investment of at least Eth.$ 8 million. The concession calls for a one million ton mine which would pay a rent of Eth.$ 2.50 per sq. km. held at the beginning of each year and royalties per ton shipped of Eth.$ 1.00 on potash or Eth.$ 0.25 on salt. In return, benefits are granted to lIPCO in the form of tax exemption and import duty re:lief.

14. The phase I exploration was to be completed in 1970; phase II pilot mining and feasibility study by 1972; and, if initiated, construction - 4 -

of mining and infrastructure over the next 26 to 36 months. Thus, if all went according to schedule, the mine might be operational by 1974/75 at the earliest.

15. Cost and markets are the key interrelated aspects governing the outlook for potash mining. On the cost side, EPCO had hoped to find shallow ore bodies suitable for strip mining as well as being close to the coast to minimize transport costs. However, the ore bodies found thus far are too deep for strip mining which raises the issue of technical and financially feasible mining methods. A second cost element is transport which involves a road, railroad or a slurry pipeline. It is believed that competitive costs at Vancouver, Canada, are US$26 to US$29 per ton f.o.b.

16. Besides cost, a major problem is marketability. At present potash prices are depressed and the outlook is for firmer prices by the mid-1970's. By that time, the major markets for Ethiopian potash would be the Indian aub- continent, East Africa, and possibly Japan and Oceana. These markets are expected to absorb one million tons or more by 1975, and Ethiopia has a transport price advantage to them compared to potash from Canada. Naturally, if competitors lowered prices on potash, this would affect the viability of Ethiopian potash.

17. Combining considerations of mine development logistics and world market outlook, it would appear that Ethiopian potash exports, if feasibility issues are resolved successfully, would be unlikely to commence before 1975. But assuming one million tons and an f.o.b. price of US$28 per ton, potash exports would be Eth.$ 70 million per annum or, roughly, 20 percent of total 1969 exports. However, since EPCO recently sought the suspension of the concessions for 5 years, the prospects of production by 1975 are beginning to look remote. A more realistic target year might be 1979.

Surveys

18. Geological prospecting and surveys were unsystematic until 1968 when the Geological Survey of Ethiopia was established. Since then systematic survey work has begun incorporating modern survey techniques. The Geological Survey is a department of the Ministry of Mines. It was established initially without substantial external aid, but now such assitance comes from Israel, U.S. AID, Canada, and the UNDP. The Geological Survey has started work in four lines of concentration: (1) regional mapping of the northern provinces of Tigre, Beghunder and Eritrea; (2) detailed investigations of gold reserves at the Adola mine, of high grade copper near Asmara, and any geochemical anomalies found in the areas mapped in the northern provinces; (3) geothermal exploration of the potential for geothermal energy sources in the Rift valley; and (4) hydrogeology surveys as part of the geothermal project and to support agriculture.

19. A UNDP four-year mineral survey was launched in 1967 encompassing 100,000 sq. km. in the provinces of Sidamo, Wollega and Gojjam. Approxi- mately 75 percent of Wollega/Gojjam and 60 percent of Sidamo areas have been covered by geochemical drainage reconnaissance surveys. The overall cost of the program is Eth.$ 5.5 million divided between the Government and the UNDP. The survey is expected to end in 1971. The UNDP recently started providing assistance for the geothermal exploration of the Rift Valley.

20. Regarding future surveys, priority is given to completing the ongoing program. Tentative planning attaches priority to more work on hydro- logy,regional geology, and mineral exploration in the areas shown on the attached map. The Government is also seeking Canadian assistance for a geological survey of a large sub-region.

Administration and Legislation

21. The Ministry of Mines has established a division of its activities between the Geological Survey Division and the Mineral Resources Division. Following the work of the Geological Survey, the Division will be concerned with bringing mineral occurrences to the point where private enterprises are attracted and are willing to exploit economic deposits. This will require the preparation and evaluation of feasibility studies, negotiations and approval of concessions, and general supervision of operations under the Mining Code. Consultants will be engaged from time to time (in particular for oil exploration questions). The coordination between the two departments will be achieved through the Vice Minister.

22. A Mining Code is now in the final stage of consideration by the Le- gislature. The Code details the rights enjoyed in and limitations to be imposed on, prospecting, exploration and mining activities, including such matters as employment; safety, etc. Concerning the issue of concessions, the Code will enable the Minister of Mines to enforce the Government's rights, if regulations are broken or developments not proceeded with; conversely, a concession holder complying with the Code may count on the full protection of the law for unhindered development of his area.

Prospects For Output and Investment

23. The Third Five-Year Plan was extremely ambitious as regards mining output. It assumed in particular that 750,000 tons of potash would be produced in 1973 for a total value of Eth.$ 45 million (US$24 per ton). As indicated above, potash may not be produced, if at all, before 1975. The Plan also envisaged some increase in gold output but at present prospects are very uncertain and it is not even clear whether the present level of production can be sustained. The only increase now envisaged would be for marine salt, which has a competitive advantage in the export market. Overall, there will be a considerable shortfall in mining output as compared with the targets.

24. As regards investment, the Plan might also be optimistic. It envisaged Eth.$ 10 million annual expenditures on oil exploration. It is true that oil companies invested an average of Eth.$ 9.5 million per annum from 1964 to 1969. The Tenneco Oil Company will invest Eth.$ 6.3 million in 1970 - 6 - and 1971. But uncertainty looms very large over further investment by Mobil Oil Company after its results in the Red Sea. It is not possible at present to give any indication on the future level of expenditures in oil exploration in the years ahead. As regards potash, the Plan underestimated costs by assuming a total investment of Eth.$ 75 million excluding the transportation facilities. Other estimates range from Eth.$ 130 million to Eth.$ 143 million. At any rate, construction work would not start before 1973, this considerably later than envisaged by the Plan. The total investment target envisaged by the Plan of Eth.$ 179.4 million (see Table 7) during the period 1969 to 1973 will certainly not be achieved.

25. Capital expenditures by the Ministry of Mines are estimated to reach Eth.$ 2.9 million in 1971/72 but would decrease thereafter upon completion of the UNDP mineral survey and geothermal investigations (see Table 6). Capital expenditures are provisionally budgeted at Eth.$ 2.9 million for 1970-71. Table 1: MINING - VALUE ADDED

(Eth $ million)

At current prices At 1961 prices Annual growth rate (percentage) 15961 3.3 3.3

1 9t'2 3.71 3.6 9.1.

1963 L.0 11.1

19(1 5-h 4.7 17.5

196'7 9-h 7,.? 61.7

1966rf la.6 9.1 . 19.7

1967 12.1 8.9 (2.?)

1.9('8 13.7 10.1 13. a

1-969 15.3 11.5 13.8

)otir-re: Centr,al Statistical Office Table 2: GROSS VALUE OF SELECTED MINERAL PFRODUCTS (Eth. thousands)

1965 1966 1967 1968 1969

Gold 1,720.1 1,829.0 1,686.2 2,904.6 3,710.6

Platinum 57.3 46.7 48.4 56.9 38.8

Quarry salt 130.0 130.0 130.0 130.0 130.0

Quartz sand 40.0 40.0 40.0 40.0 40.0

Clay 10.0 10.0 10.0 20.7 16.7

Anlydrite 100.0 120.0 120.0 120.0 120.0

Talc 2.0 2.0 2.0 - -

Manganese ore 85.0 170.0 170.0 -

Iron ore 10.0 10.0 10.0 -

TOTAL 2,154.4 2,357.7 2,216.6 3,722.2 4,o56.1

Source: Statistical Abstract 1967-1968 and Ministry of Mines.

Notes: In addition to the commodities listed, Ethiopia has produced small qualtities of bayte, copper ore, lead ore, iron ore, urica, pumice, sulphur, kaolin, white sand for glass and various construction materials but quantitative data are not available. Table 3: VOLIME OF MTNERAL PRODUCTION

1965 1966 1967 1968 1969

Gold (kg) 683 726 669 958 1,2224 i'latinum (kg) 10.4 8.5 8.8 10.3 10.7

Quarry salt (tons 10,000 10,000 10,000 10,000 10,000

Quartz sand (tons) 2,000 2,000 2,000 2,000 2,000

Clay (tons) 500 500 500 3,529 2,943

Anlydrite (tons) 5,000 6,000 6,000 6,000 6,000

Talc (tons) 100 100 100 - -

Manganese ore (tons) 1,000 2,000 2,000 /2

Source: Statistical Abstract 1967-1968 and Ministry of Mines

/1 During 1969 65% of gold produced was by hand workers and 35% by mechanical mining. In 1970, production would be entirely by hand workers.

/2 No mention of manganese production made by the Mines Department for 1968 and 1969.

Above data do not include marine salt from salinas at Assab and Massawa. Salt production amounted to 205,310 tons in 1965, 202,035 tons in 1967 and ab)ut 235,000 tons in 1968. Table 4: TNVESTMEN'r IN MINING (Eth $ 000)

1. Investment in existing mines

1964 1965 l966 1967 1968 1969 1]96b-1969

Gold 1,6OO.O 1,500.0 500.0 90.3 2,070.2 2,197.4 7,9<7.9

Platinum _- - 7.2 L7.3 1,1.9 99.1J

Potash - 9,282.0 - 5,505.( 296.1 Y0.0 I 5,h33 .

Other 98.0 100.0 100.0 2h2.0 n.a. n.a. 5110.0

TOTAL i,698.0 10,882.0 600.0 5,844.5 2,h13.6 2,592.3 2h,030.U

2. Prospecting and exploration investment

Petroleum 6,918.0 11,980.0 13,,0().0 8,352.5 5,993.8 10,158.8 56,813.1

Platinum 95.0 b2.0 20.0 23.4 7h.2 94.1; 349.0

Mineral Survey - - 75.0 34.0 - - 109.0

Geological mapping - 85.1 - 19.3 2,376.9 2,77L.5, 5,255.8

Other-- 893.0 996.7 234.0 488.1 195.0 300.0 32106.8

TOTAL 7,906.o 13,103.8 13,829.0 8,917.3 8,639.9 13,327.7 (r,633.6

3. TOTAL investment

( 1 + 2) 9,60h.0 23,985.8 14,h29.0 1h,761.8 1,053.5 15,920.0 89,66h.o

/1 Iron, copper, nickel, barite,etc.

Source: Statistical Abstract 1967-1968 and Ministry of Mines Table 5: SOURCES AND ALLOCATION OF INVESTMENT FUIDS

Total 1964 1965 1966 1967 1968 1969 1964-1969

Government Sector

Development of existing mines 1,600.0 1,500.0 500.0 239.5 2,144.3 2,291.8 8,275.6 Prospecting and exploration 868.o 654.0 329.0 564.8 2,376.9 2,774.5 7,567.2

-TOTL 2,468.0 2, 5140 829.0 84.3 4,521.2 5,066.3 15,842.8

Private Sector

Development of potash mines - 9,282.0 - 5,505.0 296.1 350.0 15,433.1 DeveloDment of other mines 98.0 100.0 100.0 100.0 n.a. n.a. 398.0 Prospecting of petroleum 6,918.0 11,890.0 13,500.0 8,352.5 5,993.8 10,158.8 56,813.1 Prospection and exploration of other products 120.0 469.7 - - 242.4 344.9 1,177.0

TOTAL 7,136.0 21,741.7 13,600.0 13,957.5 6,532.3 10,853.7 73,821.2

Total Investment 9,604.0 23,895.8 14,429.0 14,761.8 11,053.5 15,920.0 89,644.0

Source: Statistical Abstract 1967-68 and Iinistry of Mines Table 6: CAPITAL EXPENDITURES - MINISTRY OF MINES

(Eth $ 000)

1969 1970 1971 1972 1973 (Actual) (Budgeted) (Budgeted) (Projected) (Projected)

Sidamo Wolega mineral survey 1,226.0 1,144.2 1,187.1 -

Ceothermal Investigation - 373.8 413.8 - -

Geological mapping 357.2 535.h 499.4 300. 0 300.0

Mining operations 100.0 - - - _

Preparation of mining legisl. 14.0 - - -

Omo River Basin min. survey - - 385.6 420.0 -

Miscellaneous investigations 10.0 352.3 422.3 450.o 500.0

1,707.2-/ 2,h05.7- 2,90o.2- 900.0 800.0

1/ The Revised Capital Budget amounted to Eth. $2,392,611 of which Eth. $949,00 would come from UNDP for Sidamo and Wollega Mineral Survey. Therefore, only Eth. $758,218 were actually paid from domestic sources.

2/ Of the Budgeted amount of Eth. $2,405,700, Eth. $1,179,500 were expected to come from UNDP for Sidamo-Wollega Mineral Survey and for Preliminary Geothermal Investigations (Eth. $946,500 for Sidamo-Wollega; Eth. $233,000 for Geothermal Investigation.)

3/ Of this amount Eth. $1,745,800 from foreign sources (UNDP, Canada, U.K., France).

4/ Of which Eth. $300,000 from foreign sources (U.K. and Canada).

Source: Planning Commission Table 7: ESTIMATED ANNUAL PUBLIC AND PRIVATE IVETMENT IN MINIG (1968-1973)

(Eth $ million)

Actual Plan Forecast 'I m 1968 1969 ' ' 1969 1970 1971 1972 1973 Total Plan

Prosnection and exploration 8.6 13.3 11.9 12.2 12.6 12.6 12.2 6i6

Mineral Development and mining 2.4 2.6 8.8 12.6 50o. 45.6 0.5 117.9 TOTAL 11.0 15.9 19.7 2h.8 63.0 58.2 12.7 179.4/1 /2

/1 Including $75 million as expenditure on potash mine buildings, plant, equipment and $25 million for potash transportation facilities.

/2 Including $50 million for expenditure on petroleum and gas.

Source: Ministry of Mines and Third Five Year Plan

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