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«Tilman Altenburg Bonn 2010 Discussion Paper / Deutsches Institut für Entwicklungspolitik ISSN 1860-0441 Altenburg, Tilman: Industrial policy in ...»

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In the cut flower industry, the partners are quite strong and innovative medium-sized and large firms. Their success depends on their ability to choose the right variety of flowers, to adapt available technology packages to local agro-climatic conditions, and to sell a perishable high-value product on the international market. This requires much tacit knowledge which only large specialised firms are able to accumulate. Here the government plays no role in intervening at the company level – the technology being far too complex, and the product too heterogeneous. The fact that state-owned farms failed miserably in the 1980s confirms this view.

The main tasks of public policy here are to remove specific obstacles that are beyond the reach of individual firms – e.g. to ensure free access to land, or competitive air freight tariffs; to subsidise pioneering firms on grounds of informational spillovers; to create opportunities for specialised capability building with regard to flower cultivation techniques; and to support the transfer of lessons learned from floriculture to other horticultural activities.

In the leather and leather products industry, the challenge is different. The main problem here is coordination failure. The sector is stuck in a “low-quality trap” in which problems at all levels of the value chain are mutually reinforcing: Inappropriate techniques at the stages of livestock management, tanning, and transport undermine competitiveness in high-value leather product markets, and low quality of final products translates into low prices and under-investment at all stages of the value chain. The sector can thrive only if all these aspects are tackled simultaneously. In other circumstances, this problem might be resolved by large private sector lead firms. Large footwear or other leather processing companies can, in principle, take care of upgrading their own supply chains, and they are usually much more efficient in doing so than governments. But there is no such firm in Ethiopia yet. Large firms may emerge when the local market has a certain critical size (as in the case of Bata in India) or when the country is attractive for large scale manufacturing for global value chains – this is how footwear production grew in Taiwan and Korea, and later on in China and Vietnam. In all these cases, large corporations played an important role in upgrading the quality and productivity of their respective supply chains – or, speaking in economist’s terms, to correct coordination failure. This is not the case in Ethiopia, and this is what justifies pro-active public engagement.

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia Creating a thriving leather products industry would generate substantial spillovers to the rural economy, both in terms of direct income effects (by increasing the demand for hides and skins) and in terms of technological learning (through incentives to improve production techniques in the tanning industry, in abattoirs and in animal husbandry).

Moreover, livestock management, leather tanning, and processing of leather products are mature technologies that call for less firm-specific tacit knowledge. Thus it is easier for governments to provide services for industrial upgrading, such as training courses for tanneries and footwear producers, or laboratories that test standardised quality parameters.

4 Conclusions

The Ethiopian government has demonstrated impressive dedication and ability to create the preconditions for a market-based and socially inclusive industrial transformation. It is strongly and credibly committed to investing in technological learning in order to build new competitive advantages and leave the history of feudalism and “rent-seeking” behind.

Improvements for the vast majority of the rural poor are at the centre of the government’s project for societal transformation. Overall, policy formulation and implementation is relatively effective, given the country’s level of per-capita-income, and the government has shown flexibility and pragmatism in choosing and adapting its industrial policies.

The main risk for Ethiopia’s future development stems from three interrelated characteristics of its industrial policy process:

− The government deliberately employs a carrot-and-stick approach that differentiates between economic activities and firms, up to the point where targets for individual firms are sometimes negotiated on a case-by-case basis in exchange for public support.

− Allocation of resources for industrial policy is not fully transparent, e.g. it is not clear when firms are eligible to get preferential treatment in term of access to licenses, land, credit and foreign exchange, on what condition ailing firms will be bailed out, and whether these conditions vary between state-owned, endowment-owned, and independent private firms.

− Business and politics are still strongly entwined in Ethiopia. SOEs still dominate many manufacturing industries and service sectors, and party-affiliated endowments have taken many of the business opportunities left for private engagement. It is not always clear to what extent political considerations reflect the business strategies of those firms, and vice versa.

The combination of these three characteristics involves risks. Discretionary allocation of public resources lends itself to political capture by interest groups, particularly in an environment where government, EPRDF, and the business elite are closely entwined via dense shareholding and political relationships that are not transparent for the public. There will always be a temptation to employ the current institutional setup to strengthen the ruling party coalition and to employ economic incentives in return for political support, e.g. to make the party-owned endowment funds a source of rent-seeking for its cadres and allies.

In any case, the independent private sector faces a considerable disadvantage, which is not a good starting point for a trustful relationship and collaborative policy process.

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 29 Tilman Altenburg To date Ethiopia is clearly anything but a predatory state whose government pillages the economy. There is no evidence of systematic abuses of political regulation and support programmes for illicit personal enrichment of political elites. Most SOEs and endowmentowned firms have to compete on a market basis, and public tenders seem to be fairly transparent and not to favour politically well-connected firms in any noticeably unfair way.25 The leadership is credibly committed to its national modernisation agenda and has thus far been able to contain rent-seeking by entrepreneurial groups connected with the ruling party.

Relying fully on the wisdom and integrity of an enlightened leadership, however, is not without risks. Power constellations may change, those who have vested interests in SOEs and endowment-owned enterprises may gain political influence, and political power shifts may force political leaders to compromise on their development agenda. This is why it is important to build checks and balances into the political system, making policy decisions transparent and holding policymakers accountable. Discretionary carrot-and-stick policies may produce good results (as they did in Korea and Taiwan), but they may also open a Pandora’s Box. Deepening of the Civil Service Reform Programme, reducing the privileges of state-owned and endowment-owned enterprises, and exposing them fully to fair competition will help to draw a clear line between business interests and public policy.

Three additional observations arise from the previous analysis.

First, industrial policy should move away from predefining sectors and instead develop a system that encourages open-ended entrepreneurial search processes. Windows of opportunity often open up in quite unexpected areas. Private entrepreneurs are usually much better equipped to recognise trends and take advantage of new opportunities than government agencies. Government should help to create a learning environment that engenders entrepreneurs who observe market trends and are ready to take risks, and to support their business projects. An open approach of this kind would avoid biases – e.g. in favour of export industries – and help to find new opportunities. For example, the country’s current strong economic growth has greatly increased demand for basic manufactured products, but supply has hardly improved. Many local market opportunities are still untapped: bottled and packaged fruit juice is still mainly imported; many construction materials and agricultural inputs are brought in from abroad; until recently, even matches were not produced in Ethiopia. Encouraging local entrepreneurs to develop such markets may yield quick results, taking into account that entry barriers in the domestic market are low compared to export markets. The government may have an important role to play in improving framework conditions and nurturing local entrepreneurship with a focus on marketexpanding innovations.

Second, managing policy reform on so many fronts at one time requires good policy coordination and clearly defined responsibilities. The creation of the Ministry of Capacity Building as a new “super-ministry” seems to have been a bold move. However, there may now be a need to better define powers and responsibilities, e.g. vis-à-vis the Ministry of 25 The World Bank’s 2002 Country Procurement Assessment Report stated that “endowment-owned firms were reported to enjoy preferential treatment in bids for government contracts” (cited in World Bank 2009); but there is little hard evidence for this.

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Ethiopia Trade and Industry. The newly created Ministry of Science and Technology may add to the risk of overlapping powers and responsibilities, given that industrial and trade policy, technology development, and capacity building are nowadays strongly interrelated.

Third, the government may want to rethink its position with regard to private trade and services. The government often characterises middlemen as “rent-seekers”, and the overall thrust is to have public agencies provide services that are strategic for national development – from banking to agricultural extension and business development services for SMEs. While in certain cases it may be good to replace intermediaries who abuse of their market position and to maintain public service monopolies, in many other cases it may be counter-productive. As in manufacturing, private traders and service providers are often more innovative and have stronger incentives to provide value to their customers than bureaucrats. This calls for changes on two fronts: first, to create more space for private service providers to compete with existing public suppliers – the advantages and disadvantages of public vs. private service provision will then become evident, and policymakers can reward those who perform better; second, to proceed with the Civil Service Reform in order to make public service providers more flexible and accountable to their customers.

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) 31 Industrial policy in Ethiopia Bibliography Addis Ababa Chamber of Commerce (2008): The road to private sector led economic growth, Addis Ababa Altenburg, T. (2010): Industrial policy for low- and lower-middle income countries, Bonn: DIE (mimeo, also forthcoming as DIE Discussion Paper) Altenburg, T. et al. (2008): Industrial policy – a key element of the social and ecological market economy, in: GTZ (ed.), The social and ecological market economy – a model for Asian development?, Eschborn, 134−153 Amha, W. / G. Ageba (2006): Business Development Services (BDS) in Ethiopia: status, prospects and challenges in the micro and small enterprise sector, in: International Journal of Emerging Markets 1 (4), 305−328

Bigsten, A. / M. Gebreeyesus (2009): Productivity and exports: Evidence from Ethiopian manufacturing, in:

Journal of Development Studies 45 (10) 1594−1614 ecbp (Engineering Capacity Building Programme) (2009): Promoting leather based value chains in Ethiopia, Project document, Addis Ababa Ellis, K. / B. Baker / A. Lemma (2009): Policies for Low Carbon Growth, London: Overseas Development Institute Ethiopian Economic Association (2005): Industrialization and industrial policy in Ethiopia, Research report, Addis Ababa, Feb. 2005 European Union (2006): Joint EU country diagnostic – private sector, draft, Addis Ababa, 10 May 2006 (mimeo) – (2009): Note on the potential impacts of the financial and economic crisis on Ethiopia, Addis Ababa (mimeo) Evans, P. (1995): Embedded autonomy: States and industrial transformation, Princeton, NJ.: Princeton Univ.

Press Gebreeyesus, M. (2008): Firm turnover and productivity differentials in Ethiopian manufacturing, in: Journal of Productivity Analysis 29, 113–129

Gebreeyesus, M. / M. Iizuka (2009): Discovery of successful non-traditional exports in Ethiopia and Chile:

experimentation and coordination, first draft, paper presented at UNU-WIDER / UNU-MERIT / UNIDO Conference “Pathways to Industrialization”, Maastricht, 22 Oct.

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