African Industrial Policy in an Era of Expanding Global Value Chains: The Case of Ethiopia's Textile and Leather Industries

Description

Throughout the history of capitalism, the process of industrialisation has been recognised as the engine of economic development. No region in the world ‘suffers’ more acutely from a lack of industrialisation than Africa, clearly highlighting the need for industrial policy. However, the formulation of such policies is not straightforward in the current era of globalised production. In recent years, a debate has taken hold over whether the geographical expansion and increased fragmentation of production networks—often referred to as the expansion of global value chains (GVCs)—calls for new approaches to industrial policy in developing countries. By drawing on the case of Ethiopia, this dissertation demonstrates that industrial policy in developing countries needs no new ‘magic bullet’ in the era of expanding GVCs. The dissertation applies a funnelling technique, meaning that each chapter builds on information presented and arguments made in the preceding chapters. Chapter 2 contextualises the importance of manufacturing and industrial policy for economic development in Africa. The chapter argues that the manufacturing sector continues to play an integral role in the process of economic development, and discusses the role of the state in the process of industrialisation, arguing that there are strong justifications for intervention through industrial policy. Chapter 3 looks at how the expansion of GVCs affects the productive structures of developing countries, particularly those in Africa, and asks if industrial policy has to change in this new global production environment. I argue that the fundamental problems of participating in GVCs are the same as when countries like South Korea and Taiwan industrialised between 1960 and 1990, although on a different scale. Chapter 4 analyses Ethiopia’s industrialisation trajectory and GVC-oriented industrial policies in the textile and leather industries. This analysis is based on 6 months of fieldwork in Ethiopia, where I carried out several interviews with stakeholders in the private and public sector and collected and collated datasets on industrial performance in collaboration with government agencies. While the findings of this chapter make an original empirical contribution to explaining the specific case of Ethiopia, the insights provided by the analysis offer broader conceptual conclusions as well. Glossary .................................................................................................................................. 12 Acknowledgements ................................................................................................................ 15 Chapter 1: Introduction ........................................................................................................ 18 1.1 Background to the topic and chapter structure ..................................................................... 18 1.2 Methodological issues ............................................................................................................... 23 1.2.1 General choice of methodology: qualitative versus quantitative methods .......................... 23 1.2.2 The case study approach in the context of Ethiopia ............................................................ 27 1.2.2.1 Methodological challenges and choice of methods in the case study approach .......... 27 Chapter 2: 'Africa rising'—fact or myth? Contextualising the importance of manufacturing and industrial policy for economic development in Africa ...................... 33 2.1 Introduction .............................................................................................................................. 33 2.2 The ‘Africa rising’ narrative: the arguments and their fallacies ......................................... 35 2.2.1 The arguments ..................................................................................................................... 35 2.2.2 Their fallacies ...................................................................................................................... 36 2.2.2.1 The illusion and fragility of economic growth ............................................................ 36 2.2.2.2 Quality of growth: the negligible impact on employment and poverty ....................... 39 2.3 Explaining persistent underdevelopment in Africa: the importance of manufacturing for economic growth and development ............................................................................................... 41 2.3.1 Practically all countries that have transitioned from ‘poor to rich’ have done so through a process of industrialisation ........................................................................................................... 41 2.3.2 Theoretical underpinnings ................................................................................................... 43 2.3.3 Why a manufacturing development strategy is sensible particularly for Africa ................. 46 2.3.4 Manufacturing versus services: have we entered the post-industrial society? .................... 47 2.4 Africa’s manufacturing performance ..................................................................................... 51 2.4.1 Aggregate manufacturing performance ............................................................................... 51 2.4.2 Degree of homogeneity/heterogeneity in manufacturing performance within Africa ........ 53 2.5 The role of the state in achieving structural transformation: introducing industrial policy .......................................................................................................................................................... 56 8 2.5.1 What is industrial policy? .................................................................................................... 58 2.5.2 Why is industrial policy necessary? .................................................................................... 60 2.5.2.1 The infant industry argument: the most important justification for industrial policy in developing countries ................................................................................................................ 60 2.5.2.2 Market failures: industrial policy from the neoclassical perspective .......................... 67 2.5.2.3 Risk and uncertainty: the ‘deepest pocket’ argument .................................................. 68 2.5.2.4 Interdependence between industries ............................................................................ 70 2.6 Africa’s industrial policy experience ...................................................................................... 72 2.6.1 1960s and 1970s: industrial policy at the fore .................................................................... 72 2.6.2 1980s and 1990s: debt crises and neoliberal reforms by the Bretton Woods institutions ... 74 2.6.3 Mid-1990s – present: state intervention more prominent, but what about industrial policy? ...................................................................................................................................................... 75 2.7 Summary and conclusion ......................................................................................................... 77 Chapter 3: The expansion of global value chains: how do they affect the productive structures of developing countries—particularly those in Africa—and what are the implications for industrial policy? ........................................................................................ 80 3.1 Introduction .............................................................................................................................. 80 3.2 What are really GVCs? Understanding GVCs, measuring GVC participation and illustrating successful GVC-oriented industrial policies before the GVC era .......................... 84 3.2.1 Understanding GVCs from a developing country (read: African) perspective ................... 84 3.2.1.1 Offshoring and FDI ...................................................................................................... 85 3.2.1.2 Increasing power of TNCs ........................................................................................... 87 3.2.2 Measuring GVC participation ............................................................................................. 88 3.2.3 Successful GVC-oriented industrial policies before the GVC era: South Korea’s and Taiwan’s GVC-oriented industrial policies ................................................................................. 91 3.2.3.1 South Korea ................................................................................................................. 94 3.2.3.2 Taiwan ......................................................................................................................... 97 3.2.3.3 Additional trade – and GVC-related considerations important for South Korea’s and Taiwan’s acquisition of foreign technology and industrialisation ........................................... 99 3.3 How do GVCs manifest themselves in developing countries, particularly Africa? ......... 102 3.3.1 Opportunities with the expansion of GVCs ...................................................................... 103 3.3.1.1 FDI ............................................................................................................................. 103 3.3.1.2 Niche specialisation: joining the chain rather than building it .................................. 106 3.3.1.3 EPZs ........................................................................................................................... 108 3.3.2 Downsides with the expansion of GVCs .......................................................................... 111 9 3.3.2.1 Getting stuck in low-value added activities ............................................................... 111 3.3.2.2 GVC expansion and the profit squeeze for developing countries ............................. 117 3.4 Implications for industrial policy .......................................................................................... 122 3.4.1 General applicability of industrial policy and the importance of learning from history ... 122 3.4.2 GVC-oriented industrial policies ...................................................................................... 123 3.4.2.1 Vertically specialised industrialisation or developing fully integrated production structures? .............................................................................................................................. 124 3.4.2.2 Linking up to TNCs or challenging them? ................................................................ 127 3.5 Summary and conclusion ....................................................................................................... 131 Chapter 4: Ethiopia's industrialisation trajectory and GVC-oriented industrial policies: the case of the textile and leather industries ...................................................................... 135 4.1 Introduction ............................................................................................................................ 135 4.2 Economic growth, industrialisation and industrial policy in Ethiopia .............................. 138 4.2.1 What are the drivers of Ethiopia’s economic boom? ........................................................ 138 4.2.1.1 Manufacturing ............................................................................................................ 139 4.2.1.2 Infrastructure investments .......................................................................................... 140 4.2.1.3 Services and agriculture ............................................................................................. 142 4.2.2 A state committed to industrialisation ............................................................................... 144 4.2.2.1 The emergence of a developmental state? ................................................................. 144 4.2.2.2 Industrial policy in practice ....................................................................................... 149 4.3 Ethiopia’s GVC participation and industrial policies in the textile and leather industries ........................................................................................................................................................ 153 4.3.1 Why does the Ethiopian government want to develop the textile and leather industries? 154 4.3.2 The industry value chains and Ethiopia’s GVC oriented firms in these value chains ...... 157 4.3.2.1 The textile industry .................................................................................................... 158 4.3.2.2 The leather industry ................................................................................................... 161 4.3.3 Export performance ........................................................................................................... 164 4.3.3.1 The textile industry .................................................................................................... 164 4.3.3.2 The leather industry ................................................................................................... 165 4.3.4 Foreign firms’ motivation for investing in Ethiopia ......................................................... 168 4.3.5 Industrial policies (GVC oriented) to develop the textile and leather industries .............. 170 4.3.5.1 Establishment and revitalisation of government support agencies ............................ 170 4.3.5.2 Export (and investment) incentives ........................................................................... 174 4.3.5.3 Policies for technology transfer and linkages ............................................................ 180 4.3.6 Results achieved and future potential of technology transfer through attracting FDI ...... 183 10 4.3.6.1 Technology transfer through demonstration effect, competition effect, spillovers and backward linkages .................................................................................................................. 183 4.3.6.2 Technology transfer through skills development ....................................................... 187 4.3.7 Key challenges for growth of the industries through the GVC participation strategy ...... 190 4.3.7.1 The input problem ...................................................................................................... 191 4.3.7.2. Labour turnover ........................................................................................................ 194 4.4 Summary and conclusion ....................................................................................................... 196 Chapter 5: Conclusion ......................................................................................................... 201 5.1 Summary of the main chapters ............................................................................................. 201 5.2 Related directions of research ............................................................................................... 206 References ............................................................................................................................. 210