**-------------------------------Box 3.3:  Hawassa Industrial Park---------------------------------------**

The Hawassa Industrial Park (HIP) was inaugurated in July 2016 and is planned to create 60,000 direct jobs on $1bn export sales from the park. Its distinctive features have created optimism about prospects for success.

The project is based on close collaboration between Philips-van-Heusen (PVH) and the government of Ethiopia through its investment agency and the HIP agency. Areas of mutual interest were established – including building world-class factories with the highest environmental standards – and the government demonstrated commitment by raising capital and building facilities fast. PVH brings the advantage of scale (it is the world’s second largest apparel company) which mitigates the first-mover problem. It plans to develop its own production **_and_** a local supply chain. Its purchasing power means that (as of 2017) some 18 foreign and 5 domestic supplier companies have committed to follow it to HIP and further foreign and local suppliers are planned. Vertical integration extends to textile mills and will continue up through the value chain, with100k ha of land purchased for cotton growing.

What made PVH think that Ethiopia was the place where such a project could succeed? Access to international markets was essential, including the EBA agreement, the 10-year extension of AGOA, and streamlined customs procedures. The government is extending the new DjiboutiAddis Ababa rail line to reach Hawassa, and the town also lies on the improving Addis-Ababa to Kenya highway. Electric power is a major cost in the garment business, and Ethiopia’s recently expanded hydro-capacity enables the country to undercut other countries in the region both in price and reliability. Hawassa offers a large pool of local labor, and employee selection and training programs are being run by PVH jointly with the government and donors. Tax holidays are offered but are described as ‘icing on the cake’ rather than key elements of the decision.

A key element of the project is the role of two large and committed players. Government commitment was crucial to PVH’s decision and was manifest from the early stages of formulating objectives, demonstrably followed through with implementation, and thereby creating expectations of future cooperation. On the other side, PVH is a ‘large developer’, able to secure the movement of supplier firms and overcome the first-mover problem.

This box draws on Mihretu and Llobet (2017) and conversation with Martin Green.

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Finally, the costs of the policy depend on the set of instruments used. Tax breaks appear expensive but have to be compared with revenue that would have been earned absent the SEZ; compared to this counterfactual they are costly only if they divert tax-paying firms into the zone, rather than create new investment in the zone. Infrastructure investment is riskier, since costs are incurred at early stages of development while benefits depend on the success of the SEZ. Regulatory innovation and soft policy is a low-cost policy from which the government learns, even in the event of failure.

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