Ethiopia Industrial Policies Part 2: Importance of Private Entrepreneurship in Export-Oriented Strategies
In part 1 of our discussion, we talked about how import-substituting strategies have their unique and crucial contributions to the progress of a developing country, like Ethiopia. Domestic control over far-reaching input capital goods, such as cement, metal, natural resources, etc. provides robust support to virtually all other industries. Contrary to import-substituting policies, export-oriented ones provide fast rides to advanced technologies, mature management, and a larger market, though at a high cost of local control and path certainty.
We have covered local control in part 1. In part 2, we want to shift our focus to path certainty, which incorporates two main questions - “What makes an export strategy succeed?” and “How do we identify such an opportunity?”. We will continue to use the leather sector, horticulture sector, and cement sector in Ethiopia for our examination. A major comparison between the two export-oriented sectors, leather and horticulture, will be made to illustrate the importance of private entrepreneurship in export-oriented strategies.
Comparative advantage theory was first developed in the 19th century by British economist David Ricardo. It attributes the incentives and benefits of international trade to the differences in the relative opportunity costs of producing the same types of products among different countries. Successful export-oriented policy should, besides all other complexities, pinpoint a country’s comparative advantages which are very often more elusive than expected. Opportunity costs in a huge, interlinked economic system can be hard to measure at a macro level. Arguably, practical trial and error is the best source for eliciting information about the composition, magnitude, and balance of costs as its corresponding judgement would then be based on ex-post facts rather than ex-ante projections. In other words, the national statistics bureau never ensures a blue-printed success in the free market, but business owners can certainly elaborate much more about the details in the survival of a business. Information from the private entrepreneurs should be seriously valued and considered in a country's export policy design.
In Ethiopia, the plan for the leather sector was to export US $500 million worth of leather products during the period from June 2005 to October 2009 but only US $73.3 million has been completed (Gebreeyesus 2016). In contrast, the horticulture sector, especially its floriculture component, has achieved extraordinary success. The flower industry had earned more than US$ 100 million in foreign exchange and became the second largest flower exporter from Africa by the end of 2007. (Gebreeyesus 2016). Interestingly, the leather sector was on the top of the government’s priority list ever since the inception of export-oriented industrial policies while the horticulture sector was not even on the list until 2007 (Gebreeyesus 2016).
The under-appreciated industry has taken over the well-recognized one. What can this misjudgement be attributed to? Natural endowment and generous government incentives have created favorable conditions for both sectors, compared to Ethiopia’s neighbors (Gebreeyesus and Lizuka 2012). The most pronounced difference: horticulture in Ethiopia began with indigenous, bottom-up efforts of local businesses. Whereas the leather industry was planned out by the government - a top-down direction. Private entrepreneurs in Ethiopia recognized the country’s potential in horticulture and started their experiment. When they were facing difficulties in logistics, land, and finance, they formed an association in 2002 and initiated a public-private interaction for government support, which had received timely and positive feedback by the end of 2002 (Gebreeyesus 2016).
Besides its critical role in the discovery stage, private entrepreneurship also brings two other valuable byproducts for the sector’s further development. First, the early entrants, with their diligent market research, had greatly brought down the uncertainty for their fellow investors - namely positive externality in the industry (Gebreeyesus and Lizuka 2012). As a result, foreign investment arrives in Ethiopia on a much greater scale, at a much faster pace than expected. After roughly 4 years, there were six European companies established in Ethiopia, providing complementary activities for the sector (Gebreeyesus and Lizuka 2012). Secondly, the association becomes a powerful tool for conversation. The Ethiopian Horticulture Producers and Exporters Association (EHPEA), starting with 5 members, now has more than 86 members (Gebreeyesus and Lizuka 2012). It acts as a “pathfinder”, which is especially effective in addressing needs and raising government awareness about opportunities and issues. For example, the Chairman of EHPEA was actively involved in the first five-year sector plan (Gebreeyesus and Lizuka 2012).
On the other hand, the government selection of the leather sector was not a decision that stems from private information. It is not an indigenous emergence. The judgment was mainly based on its long history, huge livestock population, and labor intensity of the sector (Oqubay 2019). These three characteristics are indeed signals of a promising future but not necessarily a guarantee of success. Surely from the look outside the market, they appear to be attractive enough. In Rodrik’s “21st century industrial policy”, industrial policy is stated to be “more about eliciting information from the private sector to determine a country’s comparative advantage” (Rodrik 2004). This task cannot be done better by people other than private entrepreneurs.
Arguably, export-oriented industrial policies, compared to import-substituting ones, are even more dependent on cooperation between private and public parties. Sticking with sectors that produce strategic capital goods allows a much larger margin of error. Nevertheless, real knowledge about the export market may only come from practice, which makes the private experiments extremely precious. Therefore, private entrepreneurship should be greatly encouraged and appreciated on the export-oriented path.
Works Cited
Gebreeyesus, M. (2016). Industrial policy and development in Ethiopia. Manufacturing Transformation, 27-49. doi:10.1093/acprof:oso/9780198776987.003.0002
Gebreeyesus, M., & Iizuka, M. (2012). Discovery of flower industry in Ethiopia: Experimentation and coordination. Journal of Globalization and Development, 2(2). doi:10.1515/1948-1837.1103
Rodrik, D. (2004). Industrial Policy for the Twenty-First Century. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.617544
Krueger, A. (1997). Trade policy and economic development: How we learn. doi:10.3386/w5896
Oqubay, A. (2018). Industrial policy and LATE industrialization in Ethiopia. The Oxford Handbook of the Ethiopian Economy, 604-629. doi:10.1093/oxfordhb/9780198814986.013.31
