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

39 Pages Posted: 17 Feb 2019

See all articles by Tewodros Gebrewolde

Tewodros Gebrewolde

University of Leicester

James Rockey

University of Birmingham - Department of Economics

Date Written: February 6, 2019

Abstract

Prioritizing the growth of particular sectors or regions is often part of a low income country's growth strategy. 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: in the best case scenario its benefits were around one tenth of its cost. Subsidised loans did not improve productivity, leading only to an increase in fungible assets not machinery. Tax-breaks improved productivity but reduced firms' capital levels. Further results suggest these both were the consequence of volatility and the lack of effective bankruptcy protection.

Keywords: Industrial Policy, Growth Strategy, Ethiopia, Manufacturing

JEL Classification: O25, H25, H81, O14

Suggested Citation

Gebrewolde, Tewodros and Rockey, James Charles, The Effectiveness of Industrial Policy in Developing Countries: Causal Evidence From Ethiopian Manufacturing Firms (February 6, 2019). Available at SSRN: https://ssrn.com/abstract=3329883 or http://dx.doi.org/10.2139/ssrn.3329883

Tewodros Gebrewolde

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

James Charles Rockey (Contact Author)

University of Birmingham - Department of Economics ( email )

University House
University of Birmingham
116 Edgbaston Park Rd, Birmingham B15 2TY
United Kingdom

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