«The Effectiveness of Industrial Policy in Developing Countries: Causal Evidence from Ethiopian Manufacturing Firms Tewodros Makonnen Gebrewolde, ...»
The beneﬁts, meanwhile, even taken at the 99% Conﬁdence Interval, are less than 10% of the costs. Given that the manufacturing sector only accounts for 5% of Ethiopian GDP and that these numbers are very much lower bounds on the costs and upper bounds on the beneﬁts, this is a substantial stimulus. This highlights the high-stakes nature of IP: whilst potentially transformative the costs are also substantial, both in ﬁscal terms, and also in terms of investments in health, education, and/or infrastructure forgone. Given this scale, it is hard to credit the lack of success of Ethiopia’s development strategy to a lack of ambition or insuﬃcient courage. Arguments to the contrary – that suggest that the push in the big push we study is insuﬃcient – are hard to sustain. Certainly, given that we have documented the Ethiopian manufacturing sector’s limited ability to absorb additional investment, spending substantially more on a bigger push premised on a belief that a larger stimulus would somehow be more easily absorbed would incarnate a substantial risk.
8 Conclusion Industrial policy is ubiquitous both in more and less developed countries. But its goal in rich countries, tacitly the redirection of economic activity to poorer populations and regions, is easier to achieve than those of accelerated or sustained growth in LDCs. One reason for this is that tax-breaks or subsidised loans, designed to encourage investment, will encourage entry by previously non-viable ﬁrms. On the other hand agglomeration externalities, for instance, may lead to a virtuous upwards spiral. To investigate this possibility, this paper analysed the causal eﬀects of a policy typical of modern IP in LDCs. Exploiting detailed ﬁrm-level data for the universe of Ethiopian manufacturing ﬁrms, we ﬁnd that the policy was ineﬀective in raising productivity.
Any gains in productivity due to the policy were more than oﬀset by the lower quality of entering ﬁrms.
It is often supposed that manufacturing ﬁrms in LDCs are capitalstarved, and thus reducing the cost of capital would see rapid improvements. This also is not the case in the context we study. We found that one key reason for this is that ﬁrms are reluctant to invest in additional machinery, preferring instead to invest in assets only likely to be indirectly productive, such as oﬃce-blocks or vehicles.
This would seem partly a response to rapid and variable inﬂation, which might make any given investment unproﬁtable. The lack of eﬀective bankruptcy protection, only informal ownership of land, and acute shortages of skilled labour are also likely to be impediments to investment. One conclusion is, therefore, that the design of better IP in the future might involve more precisely targeted policies. An alternative conclusion is that rigorous programme-evaluation of a pilot scheme may be appropriate before such a large-scale policy is introduced.
The challenges faced by policy-makers in designing IP for Ethiopia and elsewhere reveal why previous, aggregate-based, studies have been largely inconclusive. The application of the approach of this paper to similar policies in other LDCs, like the accumulation of knowledge for richer countries, would allow the identiﬁcation of what makes for successful IP in LDCs more generally, and which aspects of the policy’s failure are particular to Ethiopia.
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Table A1: Alternative Estimates of the Eﬀects of the Policy on Productivity
Country Description Botswana National: Policy aimed at enhancing productivity through highly skilled labour, export orientation and attraction of FDI. Trade: Customs Duty rebates on raw materials, tariﬀ protection of infant industries and concessional import duty rebate and low tax rates. Sectoral: Motor Industry prioritized.
Also textiles, foods and beverages beneﬁted from support. Other:
FDI attraction through tax incentives, human development, enterprise development and R&D support.
Cameroon National: Guided by 5 year plans from 1961-1991 that focus on both import substitution and export promotion. Trade: Free trade zones where 80 % of production is exported. Part of the Central African Economic and Monetary Community that guides the tariﬀ rates. Sectoral: Textiles, wood, energy, some cereals, cocoa, coﬀee, shipbuilding, ICT and pharmaceuticals received exemption from personal income tax. Other: FDI attraction through Investment promotion and infrastructure development.
Ethiopia National: Industrial Development Strategy in 2002 focussed on Agricultural development led industrialization. Trade: Customs duty rebates and Export promotion measures. Sectoral: Meat, Textile, Construction and Agro-industry beneﬁted from technology, ﬁnancial and human capital support. Other: Attraction of FDI through various incentives including tax exemptions.
Ghana National: Broad Growth and Poverty Reduction strategy aimed at competitiveness of private sector, human resource development and public sector reform. Trade: Higher tariﬀ rates for more processed goods like textile,
apparel, furniture and beverage. Part of ECOWAS customs union. Sectoral:
ICT is a big priority. Others include biotechnology, cassava, textiles, palm oil and salt. Other: Established Institute of Industrial Research, FDI attracting through tax holiday (also depending on location).
Kenya National: 1996 Policy: “Industrial Transformation to the Year 2020” focussing on export orientation. Trade: Export Processing Zones and Export promotion council, duty remission facility. Part of EAC FTA. Firms in these zones beneﬁt from tax holiday. Sectoral: Agro-industries, textile, coﬀee, tea, construction.
Other: Investment Authority to attract FDI through tax holiday, Industrial Research and Development Institute.
Rwanda National: Included in three programs, Growth for Jobs and Exports, Vision 2020 and Governance focussing on infrastructure, reducing cost of doing
business, promoting innovation and ﬁnancial sector development. Trade:
Higher Duty on more processed goods. Part of the EAC FTA that guides Duty rates. Sectoral: Information and Communication Technology supported through human capital, infrastructure. Coﬀee and tea also received support.
Other: Rwanda investment and export promotion agency, one of the most open FDI regimes through exemption of corporate income tax.
South Africa National: Included in the “Accelerated and Shared Growth Initiative” focusing on manufacturing exports. This is Complemented by National Industrial Policy Framework. Trade: Export marketing and investment assistance, export credit incentive, export credit insurance and customs duty refunds. Sectoral: Capital equipment, transport equipment, automotive assembly, chemicals, plastics and pharmaceuticals, textile and footwear received support. Other: Government supports science and technology research, assistance on global value chain, clusters and eﬃciency.
Uganda National: National industrial policy included in “Medium Term Competitiveness Strategies” with the objectives of improving business environment.
Trade: Fixed duty drawback scheme for exports. Member of EAC FTA that guides tariﬀ bands. Sectoral: Promotion of linkages between ICT, construction, textile, agro processing and energy. Other: Infrastructure, ﬁnancial sector, institutional and human development are part of the broader strategy. FDI attraction prioritized through tax exemptions.