Cluster analysis for forest and wood-processing industry sector development in Ethiopia

The majority of the people in sub-Saharan Africa depend on natural and planted forests for subsistence use and income generation. Despite this, the status of forests and wood-processing industries and their multiple uses are poorly understood. In Ethiopia information on the status and contribution of the forest and wood-processing industries to economic development is scanty and fragmented. The study was designed to contribute to filling this gap by analysing the status of the forest resource, assessing the contribution of the forest and wood-processing industries to the national economy with emphasis on the cost structure, and identifying innovations in the wood-processing industries. The study was further developed scenarios to upgrade wood product supply in Ethiopia. The study focuses on the macro-level analysis complementing same with micro-level data that looks into wood-processing industries of the country. Cluster analysis and innovation systems are frameworks employed in collecting and analysing both primary and secondary data. Secondary data on forests in Ethiopia are generally lacking. The analysis was conducted using data from 2010 as the reference year. The year 2010 was chosen as it is the only year for which the most recent aggregated social accounting matrix table for Ethiopia was available. Primary data were collected from key informant interviews and by undertaking survey in selected wood processing industries. A consultation workshop was conducted with different stakeholders to develop alternative scenarios regarding options to meet national wood demands and to share and validate findings of the study. The quantitative data were analysed using descriptive statistics such as frequencies, means, and percentages. The qualitative information gathered was summarised, analysed, and interpreted in the form of narratives. The study covered the six major forest types in Ethiopia from which significant wood volume is collected. The volume of wood reported to be harvested from these forests exceeded the annual incremental yield, indicating widening of the gap between supply and demand over time. The estimated wood product gap was 39 million m³ in 2013. The expanding gap between supply and demand of wood products in Ethiopia led to rapid increment in the volume of wood products imported, from 17,750 m3 in 1997 to 128,914 m3 in 2017. The estimated economic contribution of the forest sector and wood-processing industries in 2010 to the GDP was 4.2% and 0.036%, respectively. Regarding labour composition, both forest and wood-processing industries are dependent on unskilled labour with the respective share of 44.6% and 40.4%. The results also show that the forest sector has a strong linkage with the domestic economy, with 99.95% share as the input source. Wood-processing industries are mainly dependent on imported raw materials with a share of 51.6% of inputs. If the multiplier effect of the forest sector is considered, its contribution to the GDP could increase by up to 72%. Thus, a unit increment in the forest and wood-processing industries will have a multiplier effect on household income by 1.35 and 0.43, respectively. It is the non-poor households in small urban settlements that would benefit more in both cases. The strong forward and backward linkages of the forest sector indicated the potential of forests to support the national economic development as compared to the wood processing industries that showed a weak backward linkage due to its dependency on imported raw material, high price of round wood from domestic markets, and underdevelopment of plantation forestry in Ethiopia. Production factors related and supporting sectors, and government supports were found to be the constraining factors that affect the competitiveness of studied wood processing industries. The demand for wood products has a positive influence on the competitiveness of wood processing industries. The cost structure analysis showed variations with the types of wood processing industries. Raw material was the main input cost for the Ethiopian Chip Wood and Furniture Company (43%), and Ethiopian Plywood Enterprise (51%), while the overhead cost was the main costs (76%) for the Arsi Negelle sawmill. Imported chemicals raised the cost of the studied panel industries. However, the Arsi Negelle sawmill incurs a relatively low cost for raw material. This is because the Arsi Negelle sawmill uses its own plantations nearby the industry, which reduces the transportation cost. The analysis of sectoral innovation system actors indicated weak implementation of the expected roles. They are also poorly networked with the wood-processing industries. The identified constraining factors for innovation activities also include out-dated machines, lack of incentives for the employees, limited skilled manpower, insufficient financial resources, and inadequacy in research and development. Innovation activities identified are processing and marketing innovations in Maichew particleboard and Mitike sawmill, respectively. The introduction of innovation contributed to increasing the number of customers, revenue generated, jobs created, and volume of products sold. More innovation activities were identified in privately owned than in state-owned factories. Three scenarios were developed in identifying and examining prevailing options to reduce the gap between supply and demand of wood products in the country. These are business-as-usual, the government plan, and the independent experts’ opinion scenarios. The business-as-usual scenario assumes that no major change will happen in the forest sector. This scenario assumed that the main problems remain the same and the supply-demand gap will widen using the current trend. The government plan scenario assumes that the country will build a climate-resilient green economy by 2030 as envisages in its CRGE strategy issued in 2011. In this scenario, significant investment is expected to reduce the gap. Official records show that between 2016 and 2019, the production of wood products increased and reached 8,703,439 m³ and revenue collection grew to 9,352,816 USD. Despite this, supply-demand gap continued to widen, resulting in increased importation of various wood products. The independent experts’ scenario was developed based on the assessment of the unsustainability of the first scenario and the ambitious and unrealistic goals of the second scenario. The scenario of experts considered factors that will improve or undermine production and productivity of forests and meet demands for biomass fuel, industrial wood, and small diameter poles. As per this scenario, sustainable wood product supply is expected to increase and imports to be reduced by 20% in the coming decade. Scenarios developed provided insights for policymakers and suggested the need for strategic planning for developing forest resources and wood industries in the country. Measures to transform the forest sector and wood processing industries of Ethiopia need to consider their contribution and multiplier effects to the national economy. Regarding theoretical aspects, the thesis demonstrated there are some limitations associated with Social Accounting Matrix data quality, which limits the ability to interpret the forward and backward linkages. Yet, the analysis revealed that there is weak cooperation among innovation systems actors to work together. The study hopes to form the basis for further studies and proposed areas for future research to improve the economic contribution of forests and wood processing industries to the national economy.:1 Introduction 2 Theoretical concepts and analytical framework 3 Methodological framework 4 Overview of the forestry sector and its contribution to the national economy 5 Competitiveness and cost structure analysis of wood-processing industries in Ethiopia 6 Innovation system and innovations in the wood-processing industries of Ethiopia 7 Scenario development to upgrade the wood product supply in Ethiopia 8 Synthesis and conclusion Reference