Back in July 2015, construction started on the Hawassa Industrial Park (HIP) (pictured) about 280 miles south of Ethiopia’s capital, Addis Ababa. Now the largest textile industrial park in Africa, the $250m project is widely seen as symbolic of the Ethiopian government’s attempts to spark the country’s industrialisation, encourage foreign direct investment (FDI), and boost economic growth.
Ethiopia’s industrial parks are modeled on the “special economic zones” which China established in the 1980s as it began to open up its economy to the outside world. The idea was to create designated areas – the most famous example being Shenzhen, which grew to become a global manufacturing and electronics hub – where investors could benefit from tax breaks, lower land costs, and lighter-touch regulation.
These zones also involved devolving power from Beijing to local governments in cities like Shenzhen, so they could make quicker economic decisions and build critical infrastructure without having to wait for approval from the central government.
Ethiopia now has 22 industrial parks, which operate on a similar basis to China’s special economic zones. Academics at Peking University have noted that the industrial parks are designed to be “geographically delimited zones equipped with serviced land, power, regulatory incentives, and streamlined administration, designed to create localised pockets of competitiveness that attract firms, especially foreign investors.”
Growing Ethiopia’s textile sector
One of the aims of this strategy is to promote the growth of Ethiopia’s textiles sector, particularly cotton – a resource which Ethiopia has in abundance but has traditionally underexploited.
The country is estimated to have more than three million hectares of land suitable for cotton cultivation, but less than 3% of this potential has been used: making Ethiopia one of the largest sources of untapped cotton anywhere in the world.
For this reason, several of the country’s major industrial parks – including in Hawassa, Bahir Dar, and Mekelle – were set up to focus on leveraging this potential to establish Ethiopia as a major exporter of cotton-based products. According to the United Nations Development Program (UNDP), 85% of Ethiopia’s industrial park production is in textile and garments.
Tsegaye Abebe, executive director of the Ethiopian Cotton Association in Addis Ababa, tells African Business that the industrial parks have made a strong start in attracting investors and boosting exports. “The investment in industrial parks like Hawassa and Bole Lemi was the right strategic decision and has laid a critical foundation,” he says.
“Ethiopia now has state-of-the-art infrastructure that has attracted over 300 investors. The parks have created significant employment: tens of thousands of jobs, predominately young women entering formal employment for the first time. Hawassa Industrial Park alone employed over 35,000 workers at its peak,” Abebe adds.
Opportunities for women
The Peking University study similarly points out that the industrial parks have been particularly beneficial for female employment.
“Because Ethiopia’s parks concentrate in labour-intensive sectors that traditionally employ women, the arrival of a park sharply raises female non-agricultural employment, while leaving male employment largely unchanged,” the authors write. “In effect, industrial parks substantially expand off-farm work for women and narrow the pre-existing gender gap in non-agricultural employment within local labour markets.”
The UNDP notes that, in 2019, 86% of workers in Hawassa, 89% in Bole-Lemi, and 96% in Adama were women.
War undermines industrial park potential
However, the Ethiopian economy has suffered a series of major shocks in recent years that have limited the ability of industrial parks to reach their full potential. For one, the Covid-19 pandemic had a significant impact on demand for apparel and textile production, with buyers at the time reducing their orders by an average of 20%. Local demand within Ethiopia also dropped as consumers were forced to redirect their income for essential goods.
The outbreak of Ethiopia’s civil war in Tigray, which took place between November 2020 and November 2022, also had a negative impact on the performance of industrial parks. For one, the industrial park in Mekelle had its operations heavily disrupted and ultimately halted due to the regional conflict, with the site remaining non-operational to this day.
More broadly, the civil war led US President Joe Biden to suspend Ethiopia from the African Growth and Opportunity Act (AGOA), which offered exporters access to the US market tariff-free. The UNDP points out that “the conflict led to AGOA suspension which used to benefit FDI export firms in Ethiopia.”
“This has led to production and export constraint for FDI firms in the industry parks, including exiling of firms to other markets,” the organisation adds.
“Yet the FDI firms in the parks are mainly dominated by Asian factories [so] the effect of AGOA suspension on the majority of firms is not magnified.”
The conflict in Ukraine, which began after Russia’s invasion in February 2022, intensified these pressures by disrupting supply chains further and increasing the cost of imported raw materials – something that, more recently, the US-Israeli war in Iran has also driven back up the agenda.
A nuanced picture
Tsegaye tells African Business that “the results of Ethiopia’s industrial parks present a nuanced picture.”
“The parks achieved notable milestones – exports from government-run parks grew at over 50% annually for more than five years pre-Covid – and by 2021, industrial parks represented 40% of manufactured,” he explains.
“However, we must be honest that the journey has been uneven. The global textile market is fiercely competitive, and we have faced significant headwinds,” Tsegaye says.
“Global supply chain disruptions from Covid-19 to Red Sea shipping challenges have further strained a model dependent on imported inputs and export to distant markets. It also made it difficult for manufacturers to import raw materials and spare parts, necessitating production adjustments across the industry,” he adds.
Beyond overcoming the impact of global shocks, which of course is not entirely within Ethiopia’s control, there are several measures the government could take to enhance the performance of its industrial parks.
Tsegaye argues that, because Ethiopia currently exploits very little of its own cotton resources, garment producers still have to rely heavily on imported thread and other essential goods from international suppliers. Furthermore, the quality and type of cotton found in Ethiopia are not suited to the machines imported from foreign markets.
“Local cotton varieties can slow machines and cause losses of €144,000 ($164,000) for every 100 tonnes processed,” Tsegaye says. “We must urgently address the upstream constraints. Investing in our cotton value chain through improved seeds, irrigation, and farmer training is not optional but existential. We cannot build a textile industry on imported fibre and years.”
“More widely, we must also improve the business environment. This means tackling logistical bottlenecks, streamlining customs, ensuring reliable utilities, and providing a stable macroeconomic environment,” Tsegaye says.
“This also needs to include a focus on skills and productivity. Low wages are not a sustainable competitive advantage if they come with low productivity. We must invest in training our workforce to operate modern machinery and meet international quality and compliance standards.”
Building on potential
Despite the challenges faced, Ethiopia’s industrial parks have the potential to contribute to the growth of the country’s exports. A World Bank report in 2022 noted that “net exports from Ethiopia’s industrial parks grew rapidly pre-Covid, reaching $163m in 2019/20 and approaching half of Ethiopia’s total manufactured exports.”
“Ethiopia’s public industrial parks have attracted 66 investors and an estimated $740m in inward investment since 2014/15.10 Since 2014/15, net exports from publicly owned industrial parks sustained an impressive average growth rate of 50% a year.”
Tsegaye says the next step is enhancing Ethiopia’s supply chains.
“The experiment has demonstrated that building world-class factories is only half the battle – we must now focus with equal vigour on building a world-class, integrated value chain to support them,” he says.
This article is from a new series, from Cotton to Cloth, which explores Africa’s cotton opportunity and its potential to drive industrialisation.