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

Tewodros Makonnen Gebrewolde () and James Rockey ()

No 16/07, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

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.

Keywords: Industrial Policy; Ethiopia; Manufacturing (search for similar items in EconPapers)
JEL-codes: H25 H81 O14 O25 (search for similar items in EconPapers)
Date: 2016-04
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