Development as if industry really mattered

Dani Rodrik describes economic self-discovery at work in Ethiopia–the process by which entrepreneurs discover what can and cannot be produced profitably in a country.

Some of the what I have been seeing in Ethiopia is a picture perfect illustration of this process at work. Most notable in this respect is the flower industry, which was started by some courageous entrepreneurs who had observed the success of the industry in nearby Kenya and wondered if it could be made to work in Ethiopia as well. Even though much of the technology is standard, local soil conditions make a lot of difference to the economics of growing flowers, and a whole range of other services–from daily cargo flights to high-quality cardboard packaging–has to be in place before the operation can succeed. To its credit, the Ethiopian government understood the need to subsidize these pioneer firms, through cheap land and tax holidays, and the industry took off. Exports have reached $100 million from zero in just a few years. There are now around 90 flower farms in the country, with latecomers the beneficiary of the tinkering that early investors have undertaken.

A somewhat similar story in an earlier stage of development is playing out in textiles. The largest investment here to date is being undertaken by a foreign firm–a Turkish one as it turns out. Once finished, the operation will be fully integrated from spinning to finished garments and will employ 10,000 workers. All the output will be exported. The Turkish investor is a bit of a risk-lover, by his own admission. He told me that there are many firms in Turkey waiting to see how he will do. If he succeeds, you can be sure a good many will follow in his footsteps.

This is true development at work.

What aid donors should be asking is not simply how we achieve the Millennium Development Goals, but how do we assist governments to improve their nation’s underlying cost structure for production and access to markets: roads, power, the cost of capital.

The MDGs may or may not help in this regard. Strangely enough, I’ve never even heard their advocates try to make the link.

For the same reason, I’m wary of suggestions that only free and responsible states deserve aid. This weekend, Bill Frist and other board members of the Millennium Challenge Corporation told us that U.S. aid should be earned–money should go to states that perform well “on 17 indicators of democratic government, anti-corruption efforts, investments in health and education (particularly for girls) and economic freedom.” (HT: Mauro)

Of course such countries should get more funds, and more of those funds should be channeled through the state itself. Incentives matter.

But can we not design aid and trade poicies that change the underlying cost structures and investment climates of nations with good and bad governments alike? Might that lead to higher standards of living and better governance? That is the case Frist and others must disprove before we steer the entire aid behemoth in their direction.

In the meantime, I take more hope and solace from the Ethiopian flower industry than any aid program has given me.