Industrial policy is not dead: Shoemaking in Ethiopia

1000 or more factories are producing leather shoes in Addis Ababa. Most of them employ only 10 workers or fewer, but several factories have hundreds of workers.

In the early 2000s, China-made leather shoes flooded into the Ethiopian market plunging the local industry into a slump. Remarkably, however, the industry soon resumed vigorous growth, not only taking the market back but even finding its way into the international market.

While the majority of Ethiopian factories sell their product to domestic markets, some are exporting shoes in bulk to Italy and other developed countries as well as neighboring African countries.

I had lunch with Kei Otsuka this week. He and coauthors have taken their study of industrial clusters in East Asia to Sub-Saharan Africa. And they are hopeful about what they see. The above quote comes from a paper on Ethiopia.

What happened in Ethiopia?

A major finding is that the growth ofthis industry was driven initially by the massive entry of new enterprises established byformer employees of the existing shoe factories but more recently by the growth in enterprise sizes due to improvements in the quality of products, marketing, and management.

Such improvements were first made by highly educated entrepreneurs and subsequently followed by other enterprises. While the followers have grown in size, the leading enterprises have grown faster.

Such a development pattern appears similar to the experience of successful cluster-based industrial development in China,Taiwan, and Japan.

So what’s the secret to African industrial development?

An industry ceases to grow when the profitability of producing low-quality products falls as their market supply increases relative to marke tdemand. This is typically the case if the increase in market supply is not accompanied by improvements in product quality. By contrast, those clusters where product quality was successfully improved have continued to grow

Two things, they say, are crucial here: the absorption of technological and management knowledge from abroad, and better marketing.

This leads to at least three roles for government. First, support for investment in the managerial skills. Basically, more MBAs for Africa. Second, incentives for industrial clusters (which promote knowledge spillovers)  through infrastructure, industrial zone, and marketplace construction. Third, more access to credit for innovative enterprises for growth.

They have other examples, like the tailoring sector in Kenya. A book is due later this year, on the similarities between Asian and African industrial development.