Like others, I have been skeptical about industrial policy in Africa, where the government selects certain industries for support in order to trigger a process of structural transformation. It’s been tried before—with disastrous results.
The selected industries were captured by political elites who continued to receive subsidies without generating anything close to labor-intensive growth (the Morogoro shoe factory in Tanzania never exported a single pair of shoes). Furthermore, most of the constraints to industrial growth in Africa are man-made: policies or regulations that stand in the way of poor workers’ employment prospects.
Africa’s high transport prices are not the result of poor-quality roads, but mainly due to monopoly prices charged by trucking companies, who benefit from regulations that prohibit entry into the trucking industry—and block any attempt at deregulation. By targeting certain industries for assistance, industrial policy doesn’t address these government failures and may even divert attention from them.
A recent study by my colleagues Hinh Dinh and Vincent Palmade on light manufacturing in Ethiopia confirms the point that the constraints to the apparel and leather goods industries are largely existing policies and regulations—trade policies that inflate input costs by creating local monopolies, and land and financial regulations that favor large firms. But they also show that, should Ethiopia remove these constraints, it could expand employment in these industries by two orders of magnitude.
Whereas Ethiopia has 9,000 workers in apparel and 8,000 in leather goods, the comparable figures for Vietnam—a country the same size as Ethiopia—are 1 million and 600,000 respectively.
This is the best case for industrial policy that I have seen. By focusing on particular sectors and showing the employment benefits of addressing some of the government failures, there is a better chance that the government will undertake these reforms.
When the same reforms are presented as “good things to do” because they are “removing distortions”, governments often resist—partly because they are not sure of the potential benefits of implementing politically-sensitive reforms. But when presented with hard evidence of concrete benefits in specific sectors, it is easier to make the case for the reforms.
Note that this case for industrial policy is almost the opposite of the traditional case, where people identify a “market failure” and then advocate government intervention to correct it. Most of the problems in Africa have to do with government failure. But these are much harder to correct, because politically powerful interests may benefit from keeping the distortion in place. The light manufacturing study provides a possible way of out of this difficulty.