Development as if industry really mattered (continued)

Last week I pointed to Dani Rodrik’s praise for industrial policy and economic self discovery in the Ethiopian flower industry. In his words,

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.

A senior staffer at one of the big development institutions in East Africa writes to add some thoughtful points:

Dani misses a much more important factor that gave a leg up to the sector: infrastructure. Roads to the regions expected to be good at producing flowers were among the first to be rehabilitated, sharply reducing transportation costs. A cold storage terminal was also built at the airport, and Ethiopian Airlines was “encouraged” to maintain low cargo prices for the sector. Cheap credit, land, and low taxes came later and may not have been as important.

The question, though, is how best can government alter underlying cost structures? To my mind, infrastructure is a sine qua non. I would also not be averse to active industrial policy a la Ethiopia, but probably not in Uganda. State capacity here is very weak compared to, say, Ethiopia or Rwanda. And what interventions there are tend to get very, very messy–think of Uganda as India and Ethiopia and Rwanda as China: Roads, bridges, dams, (more or less) get built on time in the latter.

In contrast, Uganda is a much more pluralistic society, with significant constraints on the Executive. The absence of agencies of restraint in Ethiopia and Rwanda is, however, likely to prove costly in the long run. In Ethiopia, a train wreck is in the offing.

Update: I’m reminded that Vijaya Ramachandran has been saying the same for years.

4 thoughts on “Development as if industry really mattered (continued)

  1. Yes, but the flowers get flown by plane to Europe burning gazillions of fossil fuel and then – after being distributed by cars and purchased – thrown into rubbish bins within 3 days.

  2. Sachs has been making the point about infrastructure for years as well. Kind of surprised that Dani’s remarks didn’t reflect that.

  3. The underlying problem for Ethiopia is not whether it can come up with policies that encourage investors. The PM is wise enough to know what is needed to ecourage private investment. What is more worrying is lack of political legitimacy by the ruling party and the risk it carries for stability. And if you can’t have a political system insuring sustainable peace, there is no guarantee for losing everything in a short time. More work and government goodwill is needed to creat political cosencus.

  4. I think that industry-specific aid is tricky if the process of picking which sectors to aid is not very transparent. Why flowers? (For that matter, why Detroit?) I suspect that everyone feels more comfortable when the sector that is being supported has a significant number of more or less competitive firms, or at least low barriers to entry. But how are the private gains from public expenditures being shared?