Answer

Developing Economies

In the featured article, Should the African lion learn from the Asian tigers? A comparison of FDI-oriented industrial policy in Ethiopia, South Korea and Taiwan published on August 20^th 2020 , the author, Jostein Hauge, compares the economy of Ethiopia vs. South Korea and Taiwan on the basis of FDI-oriented policy.Critics would argue that Ethiopia’s polices are advantageous owing to the associated short-term benefits, however, studies have indicated that the foreign direct investments (FDI)-oriented policy has significant long-term economic advantages to the host country. Therefore, Ethiopia should invest in the new strategy of forming backward linkages from foreign investors to local businesses.

According to the article, the ambition of foreign investors, since the 1960s, on exporting their productions to developing countries has remained relatively on the same level. The search for cheap energy, cheap land, and cheap labor has been the motivating factor behind this expedition. Nevertheless, the aspect off-shoring firms increased during the early 1990s annexed by lower trade as well as investment handles, communication technology, and advances in IT and falling transport. Hauge notes that between 1999s and 2016, FDI influx into developing nations grew from US$35 billion to US$646 billion. In other terms, FDI inflows increased by 20% from the initial 17%.

Hauge suggests that the rapid economical progress of South Korea should compel Ethiopia to learn on how to be proactive in pushing for foreign investors to transfer their technology into the local economy. Initially, both nations were relatively small and could not satisfy the international market by depending on agrarian or raw materials that they manufactured domestically. Both states intensively pushed for joint ventures with foreign investors. The joint venture proved to be effective following the easy facilitation managerial techniques, marketing skills, and transfer of technological knowledge.

In line with the article, the streaming in of foreign aid will pose both long-term and short-term advantages. The immediate benefits that the nation would enjoy include the development of infrastructure, integration into the global economy, increased foreign exchange as well as tax revenues, and a boost on employment. In the long run, Hauge insinuates that Ethiopia could benefit from assimilating advanced technology into their business operations to increase production and revenue. Nonetheless, the stated long-term advantages are challenging to achieve as compared to the short-term benefits. A majority would suggest that it depends on the implemented industrial policy and the activeness of the state in utilizing foreign aid. Ostensibly, developing nations have been able to achieve these advantages because of the hard-bargain with foreign firms.

However, the author notes that the current international economic environment does not allow for the development of such proactive industrial policies. In regions with cheap labor is abundant and easily available, foreign firms have various options to consider. According to Hauge, countries with these features but posses a variety of economical and socio-political challenges would hardly qualify for funding. Since Ethiopia has a non-liberal attitude towards foreign investors, it would be relatively hard to attract them. More so, the protectionist measures that existed during the 20th century in helping Taiwan and South Korea to gain economically are not compatible with the current state of developing countries. For instance, the local content requirements are not prohibited by the World Trade Organization (WTO). Therefore, Ethiopia’s mere attraction of foreign investors and confining them to the export sector only will not make any economical sense.

As a recommendation, the Ethiopian government should weigh between the benefits of foreign investors and the need for developing local firms before making a decision.