«Tilman Altenburg Bonn 2010 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN 1860-0441 Altenburg, Tilman: Industrial policy in ...»
Moreover, the Engineering Capacity Building Programme has been mandated to design and implement, in collaboration with the major partners and stakeholders, a leather value chain upgrading programme which addresses problems simultaneously and in a coordinated manner. The programme consists of ten work packages including an ecto-parasite control programme for livestock, investment promotion and matchmaking services to attract foreign buyers, support for international exposure of Ethiopian firms, firm level support for productivity improvement, introduction of quality management systems, and capacity building for ELIA and LLPTI, among others. The programme includes a twinning arrangement between LLPTI and German leather technology centres. In parallel, UNIDO is assisting the government in promoting synergies among the small footwear producers and traders in local clusters such as Mercato. All these activities taken together, the government offers a quite comprehensive and reasonably integrated sector strategy.
3.2 The emerging cut flower industry The cut flower industry has emerged much more recently, but is now one of Ethiopia’s main export sectors. With flat lands on altitudes between 1500 and 2500 metres, where days are warm and nights are cool, with fertile soils and sufficient water supply, Ethiopia offers very good agro-climatic conditions for the cultivation of flowers. Most farms produce roses, but some are diversifying into new products such as Hypericum, Gypsophilia, carnations, lilies, and freesias. In the case of roses, high altitude allows buds to grow larger, which is important to fetch premium prices. Moreover, wages in Ethiopia are low, and the suitable cultivation areas are close to Addis Ababa’s international airport. According to data from the Ethiopian Horticulture Producers and Exporters Association (EHPEA), the industry exported flowers worth US$ 120 million in 2008, up from almost zero in
2003. The area under cultivation was about 1,000 ha at the end of 2008, most of it under greenhouse cover. In 2008, 80–85 flower farms were operating, with some large companies operating more than 100 ha and many small companies with less than 10 ha. Flower production employed over 50,000 people, 80% of them women.23 The rapid growth of the industry fuelled hopes that flower exports might even overtake coffee as Ethiopia’s main export product in the near future. But recently, falling world market prices and increasing 23 All data from EHPEA, interviews with Ato Tsegaye Abebe (head of the association), 26 March 2009, and HortiHolland magazine, e.g. March 2009 edition.
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia freight costs forced several producers to close down, even before the current economic crisis. The crisis hit the sector quite hard as demand for flowers decreased in the main European markets, but the long-term impact on the sector is not yet clear. Long term perspectives may be good, as rising energy prices may affect European greenhouse production – which requires heating – more than Ethiopian production, despite the expected surge in airfreight tariffs.
During the 1980s and early 1990s, some initial efforts were undertaken to produce summer flowers for export, first under the Derg on state farms, then by two domestic private entrepreneurs.24 Success, however, came only with Indian and Dutch foreign investment in the late 1990s and early years of the new millennium. The first rose producer started operations in 1999. After 2001 several other companies entered the market, and take-off started in 2003. Until that year, exports were marginal.
The flower industry – and especially innovation in it – is largely driven by foreign investors. Ethiopian investors, however, have been able to emulate their business models.
Among the country’s 80−85 producers in 2008, about one quarter were Ethiopian firms.
The first successful large-scale producer of roses (Golden Rose) was an Indian investor who contracted specialists from Israel. Later leading Dutch producers entered the market.
Especially important was the entry of Sher-Ethiopia, a leading Dutch company and by far the largest developer of greenhouse production in Ethiopia. In contrast, the role of national agricultural research and extension services seems to have been quite insignificant for the development of the industry (Gebreeyesus / Iizuka 2009, 15 f.).
Flower production is a knowledge-intensive business. Growers need to know which varieties fetch good prices, and which ones are suitable for specific regions. For example, the size of rose buds is larger, and colours more intense, at higher altitudes, but production per m2 is considerably lower. Moreover, altitude, temperature, rainfall and moisture vary greatly among locations, resulting in highly differential disease risks. Success therefore depends on experimentation with different varieties, cultivation methods, and locations.
Particularly for the up-market qualities, control of diseases (Botrytis and downy mildew) is a crucial factor. Farms are therefore experimenting with integrated pest management techniques. Marketing is equally demanding. The easy way is to sell at Dutch auctions, but higher prices can be achieved through direct sales to final customers, although this places higher demands on producers in terms of production programming and logistics.
In sum, flower production is a very promising export activity for Ethiopia, but developing the right technology and marketing channels is a very risky and knowledge-intensive undertaking. Those pioneers who take the risk and discover viable business models pave the way for a whole industry to follow. In terms of economic theory, the pioneers generate informational externalities: Once they have developed a lucrative business, competitors may quickly copy it and thus dissipate the rents that can be obtained from the business innovation. Hausmann and Rodrik (2003, 4) argue that “there is great social value to discovering that cut flowers, soccer balls, or computer software can be produced at low cost, because this knowledge can orient the investments of other entrepreneurs. But the initial entrepreneur who makes the ‘discovery’ 24 For an excellent overview of the history of Ethiopia’s flower industry, see Gebreeyesus / Iizuka (2009).
can capture only a small part of the social value that this knowledge generates [… because] other entrepreneurs can quickly emulate such discoveries. Consequently, entrepreneurship of this type … will typically be undersupplied.” Due to this mismatch between private risks and social benefits, there is a case for governments to encourage the discovery of new business opportunities.
In fact, the Ethiopian government has recognised this and offers generous incentives for flower farms. At the beginning, the sector evolved without specific government support.
Exporters were granted substantial benefits – including a five-year tax holiday and dutyfree import of capital goods – but no sector-specific support was available. Ethiopia’s export promotion strategy, ratified in 1998, does not mention the cut flower industry (Gebreeyesus / Iizuka 2009, 13).
When the success of pioneering firms became evident and EHPEA was formed to lobby the government, additional incentives were made available. The Prime Minister took personal interest in the growth of the industry. He meets growers regularly to discuss and take care of their problems, and in urgent cases the head of EHPEA is able to access him directly. One key problem faced by the pioneers was access to large plots of suitable land at a reasonable distance from the airport. At the outset, producers had to lease small plots of land from individual farmers (Gebreeyesus / Iizuka 2009, 14). The government then started assisting investors in obtaining appropriate and accessible farmland at a lease price of only US$ 18 per hectare. The second major problem was uncompetitive airfreight rates.
The government helped to arrange an agreement with Ethiopian Airlines and currently subsidises the freight rates. Furthermore, producers were eligible for subsidised credit, but this has recently been discontinued.
A new Ethiopian Horticulture Development Agency was established in 2008 with the aim of providing faster and more coherent services for horticulture exporters. Although the new agency is under the Ministry of Agriculture and Rural Development, it has its own budget and freedom to hire staff without being bound by the general rules of the civil service. The idea of creating such a semi-autonomous unit was to offer one-stop services for investors in order to avoid cumbersome transactions with several layers of bureaucracy.
The Horticulture Development Agency reports directly to the Export Committee headed by the Prime Minister.
One important success factor is the flower industry’s very active business association.
Several interviewees considered EHPEA the most effective business association in Ethiopia. On top of its successful lobbying, the association provides important services to flower producers. It organises a biannual International Trade Exhibition. Moreover, EHPEA took the lead in establishing a Code of Practices for the flower industry. The Code documents compliance with Ethiopian laws on labour and environmental issues, as well as compliance with good agricultural practice. It is supported by many stakeholders, including the competent ministries and several non-governmental organisations, and it is audited internationally. Such standards are increasingly demanded by international buyers and help to preserve the image of Ethiopian producers.
In sum, promotion of the newly emerging cut flower industry has benefited considerably from export incentives and the good relationships between firms, the sector association, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia and public authorities, which have helped to remove obstacles. Still, some challenges for
industrial policy remain:
First, technological progress is largely driven by FDI. Ethiopian nationals – both private investors and public research institutions – have not yet been able to adopt international best practice know-how and to adapt technologies to their local environments. Achieving technological competence in this regard may become a major competitive advantage for Ethiopia vis-à-vis its main competitors, Kenya and Ecuador. Greater investment in dedicated research and agricultural extension services is needed to achieve this. A new industry-led capacity building programme at Jimma University, in collaboration with the Horticulture Development Agency, EHPEA and the Dutch University of Wageningen, is a promising step in this direction.
Second, the competitiveness of the flower industry may be enhanced by increasing capabilities to provide complementary assets. While some basic inputs (like packaging materials) are locally available, producers are heavily dependent on imported inputs, including fertilisers, irrigation equipment, and construction material for greenhouses.
Third, the generous incentives offered to flower exporters come at a considerable cost. In addition to foregone taxes, the lease rate for fertile irrigated land implies an extraordinary hidden subsidy. How long investors will continue to receive such subsidies is an open question. In principle, such subsidies are justified as long as the investors help to discover new business opportunities that can be emulated by others. During a recent visit to Ethiopia, Harvard economist Dani Rodrik raised the question whether it makes sense to continue subsidising new investors in the flower business when more than 50 are already established. This is a difficult question, because it is impossible to establish when an investor generates informational externalities whose social value exceeds the amount of subsidies received. A lot of experimentation is still needed to test new varieties, new cultivation techniques and marketing channels, all of which add to the stock of knowledge available to follow investors. Transparent guidelines are therefore needed as to what type of investment deserves subsidies, and for how long.
Fourth, the cut flower industry holds important lessons for other horticultural crops. The Ethiopian highland offers appropriate climatic conditions for a range of fruits and vegetables, including strawberries, pineapples, passion fruit, papayas, mango, guavas, avocados, green beans, cabbage, asparagus, baby corn, snow peas, and chilli. Many of these crops can be produced all year round, and they thus offer opportunities to export at times when prices in Europe are high. The challenge is to replicate technological and policy learning from the cut flower industry and encourage similar innovations in fruit and vegetable production. To develop large scale production, major infrastructure investments are needed, including cold storage facilities. This will require an active role on the part of the Ethiopian government, as a nation-wide cold chain with regional procurement centres requires simultaneous investments that individual private investors would be practically unable to handle.
3.3 Lessons from the case studies The two case studies exemplify two different ‘policy styles’, or government approaches towards private sector development. In both cases intervention is justified, because the
two sectors would arguably not have been able to expand high-quality production and exports without public support. Both seem to have been quite successful in forming the basis for activities that may take off in the future as major drivers of growth, although, in both cases, the scale of the operations and the spillovers to the economy are still modest.
However, the rationale for intervention is different in both cases, calling for different approaches. In fact, this is what the government did: It opted for a more responsive stance in the case of cut flowers, leaving the strategic decisions to firms and their highly professional organisation; and it adopted a more pro-active ‘nurturing’ approach in the case of the leather and footwear industry, where the main challenge is to absorb already existing standard technological knowledge, to disseminate it in a sub-sector consisting of many small and medium-sized firms, and – in the absence of a private value chain lead firm – to ensure coordination of upgrading activities throughout the value chain.