| Summary: | Manufacturing output and employment losses due to underutilized equipment have been postulated as common in developing nations. This irrational use of existing capital and labour is examined with respect to Ethiopian industry. The basic hypothesis investigated is that capacity utilization is an important policy variable in its own right that can be used to manipulate (increase) output and employment levels. An, essentially, physical index of capacity utilization is derived and fitted to statistical information on output performance from the "larger" Ethiopian enterprises. The nature of the index requires separate consideration to be given to issues of profitability when a move to increased utilization is contemplated. Variations in input prices prevent the assertion that a fuller use of existing capital will automatically reduce unit costs or increase rates of return. Also, the nature of the index requires that economic factors contributing to underutilization receive detailed attention in their own right. The method of information collection, first hand visits to plants, to Industrial Corporations, and the use of a questionnaire, is described both purposefully and prospectively. Substantial underutilization is revealed. The principal causes relate to input supply deficiencies, particularly higher technical skill levels, and to aspects of demand deficiency. There is more scope for output gains than for employment gains since underutilization is often part and parcel of within production deficiencies that are not felt solely on utilization levels. More aggregate economic parameters that might be expected to influence utilization levels, such as export sales, imported material input-levels and capital intensities of production were statistically tested. The results were poor in terms of explained variation in utilization levels. The significance of the findings is better realised when viewed against a larger backcloth than normally associated with capacity utilization issues per se. Severe structural deficiencies characterise Ethiopian manufacturing and remedies proposed for underutilization cannot properly be envisaged without this larger backcloth. Generally, this requires acccunt be taken of rationalized production aims and the means to achieval. These are delineated and examined with important linkages across and within industrial groups being made. When thus considered, the importance of utilization as a policy variable, in its own right, is diminished in an Ethiopian context.
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