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The Effectiveness of Industrial Policy in Developing Countries: Causal Evidence from Ethiopian Manufacturing Firms

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  • Tewodros Makonnen Gebrewolde
  • James Rockey

Abstract

Prioritizing the growth of particular sectors or regions is often part of LDC growth strategies. We study a prototypical example of such policies in Ethiopia, exploiting geographic and sectoral variation in the form and scale of the policy for identification. Using product-level data on Ethiopian manufacturing firms we show that the policy was unsuccessful: There was no improvement in productivity, productive assets, or employment. The policy failed due to its negative effects on productivity of the entry of new firms and existing firms diversifying. Moreover, subsidised loans and tax-breaks led to an increase in capital but not in machinery.

Suggested Citation

  • Tewodros Makonnen Gebrewolde & James Rockey, 2016. "The Effectiveness of Industrial Policy in Developing Countries: Causal Evidence from Ethiopian Manufacturing Firms," Discussion Papers in Economics 16/07, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:16/07
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    Cited by:

    1. Kaku Attah Damoah & Giorgia Giovannetti & Marco Sanfilippo, 2021. "Markup Dispersion and Firm Entry: Evidence from Ethiopia," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(2), pages 299-327, April.
    2. Indranil Bose & Aamir Hussain, 2020. "How to Enter Ethiopian Market: A Strategic Case Study," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 9(1), pages 1-11, March.
    3. Krishnan, Pramila & Gebrewolde, Tewodros & Koelle, Michael & Mengistu, Andualem Telaye, 2020. "Currency Shocks and Firm Behaviour in Ethiopia and Uganda," CEPR Discussion Papers 15524, C.E.P.R. Discussion Papers.
    4. Alan Gelb & Vijaya Ramachandran & Christian J. Meyer & Divyanshi Wadhwa & Kyle Navis, 2020. "Can Sub-Saharan Africa Be a Manufacturing Destination? Labor Costs, Price Levels, and the Role of Industrial Policy," Journal of Industry, Competition and Trade, Springer, vol. 20(2), pages 335-357, June.

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    More about this item

    Keywords

    Industrial Policy; Ethiopia; Manufacturing;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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