Development Blossoming: Industrial Policy and the Evolution of the Kenyan and Ethiopian Floriculture Export

The non-traditional agricultural exports (NTAE) sector offers African countries an opportunity to diversify export earnings away from the traditional agriculture exports (TAE) sector, further stimulating job creation for the low educated and asset-poor in rural areas, especially women. It is generally accepted that the private sector should take a lead in developing the NTAE sector, but there is less consensus over whether the state should actively support the sector. Industrial policy - for instance, the provision of subsidies and fiscal incentives – can affect both entry and productivity. It can help firms enter new markets and generates positive externalities such as knowledge spillovers, but may also weaken competitiveness by protecting inefficient firms from market judgements. The key policy question is whether a given package of incentives leads to a more or less efficient sector in the long run. In other words, do gains such as learning and clustering spillovers across firms outweigh the negative effects of subsidies? The floriculture sector in Ethiopia provides a useful case study. Following the success of Kenya, several sub-Saharan African governments have actively promoted the cut flower industry. Ethiopia has notable potential, and the government has adopted a radically more active floriculture sector industrial policy than the Kenyan government’s laissez faire approach. This IGC project develops an original methodology to evaluate the impact of the industrial policy pursued by the Ethiopian government. In particular, our policy evaluation will ask three questions. Do large incentive packages have a negative impact on firm selection? Does the rapid rise in the number of firms generate productivity spillovers that outweigh such impacts? And finally, because excessive initial entry can erode profits and sustainability, should policies focus on promoting horizontal differentiation rather than entry? =