Abstract

This study deals with industrial policy, an issue that has been hotly debated in economic development. It argues that strategic and proactive industrial policy is a key to unlock the potential and wade through industrialization for low-income countries such as Ethiopia where market failures are pervasive. More specifically, it argues that industrial policy should be tailored to factors endowment structure. In the case of Ethiopia, as its economic structure is yet to transform substantially from agriculture to manufacturing, the current policy focus should be on labor-intensive sectors. Using the analytical framework of new structural economics supported with the primary survey data covering 80 manufacturing firms and secondary data sources, a comprehensive analysis has been conducted to explore the potentials, latecomer’s advantages, and the binding constraints of labor-intensive manufacturing industries in Ethiopia. Accordingly, it proposes five policy domains to unlock the labor-intensive manufacturing potentials of Ethiopia: Facilitating the linkage between agriculture and manufacturing industry along the value chain; fostering industrial park and cluster-based industrial development; strengthening the cooperation between government and the private sector; improving doing business environment; enhancing the industrial upgrading and diversification along with the changing endowment structure.

Key words: Industrial policy, industrialization, labor-intensive manufacturing, structural transformation.