Experimentation and co-ordination as industrial policy: examples from Ethiopia and Chile.

Author:Gebreeyesus, Mulu
Position:Report
 
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Industrial policy can be defined as the policies that stimulate specific economic activities and promote structural changes. It is not about industry per se but also includes non-traditional agriculture or service (Rodrik 2007). Pack and Saggi (2006) similarly defined industrial policy as any type of selective government intervention or policy that attempts to alter the structure of production in favour of sectors that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention. There is currently a revival of interest among scholars in identifying the right balance on the role of markets and the state and the debate on industrial policy is re-emerging; see for instance the articles by Adam Szirmai (WIDER Angle May 2009 ) and by Wim Naude and Ludovico Alcorta (WIDER Angle January 2010 ).

One emerging view on a 'new industrial policy' is that while industrialization implies that a country moves into the production and export of new or non-traditional goods and services, the success of such new activities is unknown ex ante. So as, for instance argued by Hausmann, Rodrik and others (see further reading below), it is not known for certain what a country will be good at producing. The implication is that the discovery process requires entrepreneurial experimentation. Experimentation is rife with information externalities which lead to undersupply of entrepreneurs of this type. Producing new products needs complementary services and inputs (i.e. markets, physical and human capital, norms and institutions). The required inputs for new activities may be totally absent, or not well developed, and thus require co-ordination.

In this article we discuss the discovery of two new activities--namely floriculture in Ethiopia and salmon farming in Chile. These are non-manufacturing activities but involve highly sophisticated technical and organizational skills and knowledge which some manufacturing industries may not require.

Floriculture in Ethiopia

Ethiopia is endowed with the major ingredients for a successful flower industry. It has flatlands on higher altitudes, cool climate, low cost labour, proximity to major markets, and an international airport near the production areas. There was a limited and unsuccessful effort during the 1980s through state farms, to produce and export summer flowers to Europe. Following the change of government in 1991, Ethiopia implemented extensive reforms to transform the previous command economy to a market-oriented one.

In the early 1990s two domestic private entrepreneurs started the experimentation by investing in the flower business (mainly summer flowers) with export target. A modern and large-scale floriculture industry, however, began to emerge in the early 2000s after a foreign-company, heralded the production of roses in steel greenhouse and exports. However, until 2003 no more than five farms were involved in producing and exporting flowers. The land cover of the greenhouse was small (not exceeding 40 ha.) and the volume of export was less than US$ 2 million.

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By the end of 2002, the government of Ethiopia became aware of the big opportunity the flower export sector could create. Then it decided to actively support the sector with multi-faceted incentive package and set a five-year target to scale-up the flower covered land to 1,000 ha. Following the government active involvement the sector started to take-off around 2004 and continued to grow fast. In 2008 the number of flower farms reached 81, a rise of about 16-fold in contrast to the number of farms in 2003. The land covered also reached about 1,200 ha, which is above the target set by the government. The industry generated permanent employment for about 50,000, of whom 70 per cent are women. Employment created is even larger when accounting for temporary employment such as construction and other related activities.

The industry became the fourth (following coffee, oilseeds and cereals) foreign currency generator for the country with about US$ 120 million, again a rise of about 240-fold...

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