Dani Rodrik in Ethiopia

Dani Rodrik writes:

Self-discovery in practice

It is remarkable to see something in theory work so well in practice. Ricardo Hausmann and I wrote a paper several years ago called “Economic Development as Self-Discovery,” where the idea was that entrepreneurship in a developing country consists of discovering the underlying cost structure–what can and cannot be produced profitably. Initial investors in a new line of economic activity face a great amount of uncertainty, since foreign technology always needs some local adaptation. Plus, their cost discovery soon becomes public knowledge–everyone can observe whether their projects are successful or not–so the social value they generate exceeds their private costs. If they succeed, much of the gains are socialized through entry and emulation, whereas if they fail, they bear the full costs.

Some of the what I have been seeing in Ethiopia is a picture perfect illustration of this process at work. Most notable in this respect is the flower industry, which was started by some courageous entrepreneurs who had observed the success of the industry in nearby Kenya and wondered if it could be made to work in Ethiopia as well. Even though much of the technology is standard, local soil conditions make a lot of difference to the economics of growing flowers, and a whole range of other services–from daily cargo flights to high-quality cardboard packaging–has to be in place before the operation can succeed. To its credit, the Ethiopian government understood the need to subsidize these pioneer firms, through cheap land and tax holidays, and the industry took off. Exports have reached $100 million from zero in just a few years. There are now around 90 flower farms in the country, with latecomers the beneficiary of the tinkering that early investors have undertaken.

A somewhat similar story in an earlier stage of development is playing out in textiles. The largest investment here to date is being undertaken by a foreign firm–a Turkish one as it turns out. Once finished, the operation will be fully integrated from spinning to finished garments and will employ 10,000 workers. All the output will be exported. The Turkish investor is a bit of a risk-lover, by his own admission. He told me that there are many firms in Turkey waiting to see how he will do. If he succeeds, you can be sure a good many will follow in his footsteps.

These are the discovery efforts that have been going on. One must presume that there are many more that could be taking place, but which are not, because it is difficult for pioneers to capture a large enough part of the social surplus they generate, even with the subsidy programs in place.

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