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

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.