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.

4 thoughts on “Development as if industry really mattered

  1. If you know anything about Bill Frist, and I’m sure you do, you know of his devotion to Africa and its people. I think that what he is arguing for with the Millenium Corporation makes sense. In the past, we have given billions of dollars in foreign aid to poor countries, only to find that none of it gets to the people we are trying to help, instead going in the pockets of corrupt leaders. Frist, and the other Board Members of the Millenium Corporation are simply saying a country that gets foreign aid must have a plan in place to show how that money will be used, and must be accountable for the use of the funds. In these uncertain economic times, that makes sense. America has a big heart, but we also have a right to make sure we help the people, not their corrupt leaders.

  2. I think an important point that Frist is forgetting about here is that, if countries were doing such a great job on 17 indicators, private capital would gladly move in. Why doesn’t the US government just help these nations get private loans?

    The answer is that development work often means working with the worst countries. That’s why development groups exist. Yes, nations need to be held to standards, but its ridiculous to think that simple index motivation is enough for nations.

    I think things like fairer trade policies, requiring good evidence of impact, and treating nations like equals, not simply tools of foreign policy, is a much better solution.

  3. Dani–Underlying cost structures and investment climate reform? I have been saying this for years! Enterprise survey data shows how much higher infrastructure-related costs are in Africa relative to elsewhere..without fixing the problems of roads and electricity, it will be difficult to sustain businesses that supply beyond their very immediate market. See my paper with Benn Eifer and Alan Gelb in the September 2008 issue of World Development! Regards Vijaya