fbpx

Doing Business in Africa: Ethiopia

Doing Business in Africa: Ethiopia

Ethiopia is one of the oldest nation-states on Earth, its history dating back to Biblical times when ancient incarnations of the modern-day country traded with ancient Egypt, Israel, and other civilizations of the Levant and Mesopotamia.

An early convert to the Orthodox form of Christianity, Ethiopia remained a largely Christian society even as its neighbors to the north, east, and west succumbed to Muslim conquest and conversion during the Middle Ages.

Ethiopia’s modern history, however, begins in the 19th century when it was the only African country to successfully resist European conquest and colonization.

The reasons for this are various. Religious affinity with European powers and its strategic position along the Horn of Africa no doubt helped. In particular, Ethiopia was seen by Britain – the primary colonial power in its region and a colonizer that liked to rule indirectly when it could – as a useful counterweight to Ottoman, Arab, and Muslim power along its crucial Egypt-to-India maritime trade routes. I

Indeed, Ethiopia allied with Britain when Muslim rebels known as Madhists – who followed a religious figure known as the Mahdi – threatened British rule in the Sudan at the end nineteenth century.

Following Ethiopian participation in the war against Madhist Sudan, the country slowly opened up and by the early 20th century was beginning a slow transition to modernity under Emperor Haile Selassie I, who took power in 1916 and ruled as emperor regent or emperor until 1974 when he was overthrown by a Marxist revolution.


Are you interested in getting smart on Life Insurance?
No Doctor Visit Required, Get Policy for as low as $30 per Month
Click here to take the next step

In between, his country was conquered by Fascist Italy in 1936 when Italian armies resorted to the use of chemical weapons to subdue Ethiopia and occupied it as part of Mussolini’s bid to build a second Roman Empire.

Ethiopia remained under the Italian yoke until the outbreak of World War II in 1939 when Britain, the country’s former ally, invaded and occupied Italian-controlled Ethiopia in 1941. In 1943, with Haile Selassie back on the throne, the last remnants of Italian resistance in East Africa were eliminated. Ethiopia annexed the Italian colony of Eritrea – formally incorporating the coastal territory into the Ethiopian empire and finally giving landlocked Ethiopia access to the sea.

As decolonization swept much of Africa after World War II, Ethiopia remained relatively staid and stable under Emperor Selassie’s rule until the outbreak of a secessionist rebellion in Ethiopian-occupied Eritrea in 1961. The roots of the conflict stemmed from Ethiopia’s annexation of the territory in 1943, which attached a primarily Muslim country to Christian Ethiopia. Additionally, rising expectations stemming from economic growth and technological and societal modernization created by Selassie’s reform led to an increase in dissatisfaction with both the monarchy and Selassie’s autocratic rule. As a result, Ethiopian opposition to the monarchy emerged as a potent force by the late 1960s and early 70s.

In 1974 a full-fledged revolution broke out that culminated in the overthrow of Haile Selassie and the institution of a Marxist dictatorship by a group of military officers led by Lt. Col. Mengistu Haile Mariam. The revolution that Mengistu led not only radicalized the country and socialized its economy, but also created chaos in East African international relations, too.

As a result of the revolution Ethiopia, which had been aligned with the U.S. under Selassie, became allied with the Soviet Union while neighboring Somalia – a longtime rival of the much more powerful Ethiopia – forsook its relationship with Moscow and turned to Washington for assistance.

Combined with the ongoing rebellion against Ethiopian control of Eritrea and U.S.-supported anti-communist Ethiopian rebels in Ethiopia itself, war, both civil and interstate, quickly consumed the entire country. What followed was decades of slaughter and famine that only ended in 1991 with the collapse of the Soviet Union, upon which Mengistu and his Marxist regime were totally dependent.

Since then, Ethiopia has rebuilt itself despite the heavy costs imposed by decades of war and misrule. Shorn of Eritrea in 1991 – which finally won its independence when Mengistu was finally defeated – Ethiopia again lost access to the sea and continuing animosity with its one-time possession resulted in a bitter border war between the two countries that lasted for two years between 1998 and 2000.

The war, which killed tens-of-thousands people, cost hundreds-of-millions of dollars, and resulted in few changes to their still-disputed mutual border, remains a potent source of continuing mistrust between the two countries today.

As if that were not enough, yet another source of external conflict has surfaced of late. In 2001 the Al-Qaeda terror attacks on New York City and Washington, D.C. led Ethiopia to align itself with Washington. Money and military assistance has flowed in as a result.

Ethiopia, backed by Washington, invaded and occupied parts of Somalia in an effort to oust the Al-Qaeda-aligned Islamist Courts Union from Mogadishu in 2006. Ethiopian intervention ended, after facing increasingly stiff resistance from radicalized Somali Islamists, in 2009.

Domestically, Ethiopia operates under a federal constitution that was put in place in 1994. Ostensibly democratic, in reality the country is ruled in an increasingly undemocratic manner by the Ethiopian People’s Revolutionary Democratic Front or EPRDF – a cobbled-together, catch-all party that united the victorious rebel factions that overthrew Mengistu in 1991 into a successful post-civil war ruling coalition.

Despite ruling democratically between 1994 and 2005, the Ethiopian People’s Revolutionary Democratic Front has been responsible for election irregularities. Facing a more strident group of opposition parties, it has been ruling more autocratically.

Ethiopia is politically stable for the moment, but conflict surrounds it, is within it, and it has yet to establish the stable, democratic system needed to ensure that corruption and misrule do not continue to drown the country in misery. Still, the collapse of Ethiopia’s socialist regime, high-demand for its agricultural products, and continuing economic reforms mean there is lot going on economically in Ethiopia. How does all this translate into business conditions on the ground?

Ease of Doing Business

According to the World Bank, Ethiopia currently ranks 104th out of 183 countries on its Ease of Doing Business Index – a measure created by the Bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the U.S. ranks fourth on ease of doing business, right after Singapore, Hong Kong, and New Zealand.

What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business. The bank defines business-creation costs as the time and money involved in the legal steps an entrepreneur must take to establish an in-country firm. Using this framework, the bank tasks researchers to go through this process to establish in-country averages.

Ethiopia ranks 89th out of 183 countries globally in ease of starting a business, making it a somewhat difficult place to start a commercial enterprise, but not so hard as many other countries. To start a business in Ethiopia, one has to complete five bureaucratic procedures that take a total of nine days at a cost of less than $50, with a minimum capital requirement of $1,211 imposed by the government for the start-up. This is, relatively inexpensive for non-Ethiopians, but given the poverty of most in the country the minimal capital requirement is a steep obstacle to overcome.

Figure 1:

How the World Bank Measures Ease of Starting a Business

Fig 1 Ease of Business Graphic WB

Using similar metrics for other aspects of business operations, the bank ranked Ethiopia in other areas. To obtain a construction permit, for instance, Ethiopia is ranked 53rd out of 183. It takes the completion of 12 procedures, an average 128 days at a cost of $1,386 – around 4.2 times the average national income.  Clearly, this is a huge problem for average Ethiopians, but less of a problem for foreigners seeking to start a business.

Continuing in its assessment, the World Bank has determined that to obtain and register property, Ethiopia ranks 109th out of 183 countries measured. To register property in Ethiopia requires the completion of 10 bureaucratic procedures taking 41 days and costing 2.1-percent of the property’s financial value in fees.  Not insurmountable for foreigners, but, again, a steep price to pay for most Ethiopians.

Ethiopia does much worse when it comes to obtaining credit. It ranks 128th out of 183. The bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. Unfortunately, in Ethiopia creditor rights are lacking and there is next to no information available on most borrowers – thus making credit something hard to obtain in Ethiopia.

Figure 2:

How the World Banks Conceptualizes Credit Acquisition

Fig 2 Ease of Business Graphic WB

When it comes to protecting investors and minority shareholders, Ethiopia is only a marginally better place to do business. It ranks 120th out of 183 countries. It received this score because Ethiopia requires some conflict-of-interest disclosures by corporate board members while also holding directors somewhat legally liable for performance. Ethiopia is also middling when it comes to ease of mounting a minority-shareholder lawsuit against a corporate board.

Ethiopia does much better in the area of taxation, ranking among countries with the lightest tax burden in the world. The World Bank estimates that pleasing the tax man in Ethiopia requires a total of 19 payments over the course of a year which take up to 198 hours to complete and can consume up to 31.1-percent of a company’s profits. Accordingly, Ethiopia’s tax burden is ranked 47th out of 183 nations.

When it comes to engaging in cross-border trade, Ethiopia’s favorability rating plummets. It is one of the worst countries in the world in this area. In Ethiopia, to import goods into the country one must have eight documents for customs officials to inspect. On average, it takes 45 days to import goods into Ethiopia at a cost of $2,993 (excluding tariffs) per container shipped into the country.

The cost to export goods is somewhat lower. Ethiopia requires eight documents to be inspected by customs officials, while the total cost (excluding tariffs) is $1,890 per container with delivery taking up to 44 days from point of origin. Compared to global averages this nets Ethiopia a ranking of 157th out of 183 on ease of engaging in cross-border trade.

Ethiopia is generally a good place to do business when it comes to contract enforcement. It ranks 57th out of 183 countries. On average, World Bank analysts report it takes 37 legal procedures to take a contract from dispute to resolution, over the course of about 620 days – or a little under two years – spent in court or otherwise attending to legal issues. The financial cost of pursing a contract claim typically amounts to 15.2 percent of the value of the claim.

Finally, in terms of closing or liquidating a business Ethiopia ranks 82nd out of 183 countries. It takes nearly three years to close an estate at a cost of 15 percent of the value of the estate, for a recovery rate of 31.3 cents on the dollar.

Table 1 presents a summary of these rankings as well as Ethiopia’s overall ease-of-doing business rating. As one can see, Ethiopia does better in the areas of taxation, construction permits, and enforcing contracts, and not as well when it comes to engaging in international trade, obtaining credit, or protecting investors.

Table 1:

World Bank Ease of Doing Business

Assessment and Rankings: Ethiopia

 Table 1 Ethiopia Ease of Business

Prospects

Going forward, it should be understood that despite all the hype about East African growth or the African growth story in general, Ethiopia remains a tragically poor, underdeveloped, backwards place. Its tiny economy, approximately $103 billion in 2013, is overwhelmingly dependent on agriculture – which makes up 46 percent of the economy and creates 85 percent of all employment. Its infrastructure remains roughshod, creaking, and nowhere near adequate.

It is also exceedingly corrupt. Transparency International, an anti-corruption group, ranks Ethiopia 111th out of 177 countries in terms of honesty in government, openness, and other such hallmarks of good governance. While corruption is not as bad as in some countries, it is a big factor in the life of the country. Those connected with the ruling regime always seem well-placed to receive contracts, government support, and license to ignore rules, regulations, and taxes that trip up the unconnected.

On top of this, Ethiopian development lags far behind its neighbors to the south. Literacy, measured by the World Bank in 2008, touches a third of the population while life expectancy in 2009 was 58.7 years. Infant mortality is an appallingly high 68.7 deaths per 1,000 live births. Half the country’s population is below the age of 18. Given this, one should of course expect that good roads, electricity, and all the other signs of a modern economy, Instead these are few and far between outside the capital.

Reforms and institutions that most take for granted in a vibrant, growing, capitalist economy are lacking Land ownership, for instance, is retained by the state and while individuals and companies can get long-term leases that can last up to 99 years, individuals nonetheless remains technically unable to buy, sell, or mortgage land. This obviously creates significant bottlenecks in the country’s property system, and remains a huge weight dragging down growth – especially for those wishing to use de facto land ownership as capital for business formation.

In other areas, too, the transition from a socialist to a market economy remains in limbo. The Ethiopian state, for instance, continues to control or otherwise heavily regulate several sectors of the economy including telecommunications, finance, insurance, air and land transport, and retailing. The ruling party – the EPRDF – is in theory committed to market-based reforms, but one should expect that commitment to be tempered by political reality on the ground, where significant resistance to liberalizing reforms remains strong.

 

Figure 3:

Ethiopian Economic Growth,

Percent Increase, 2003 – 2012

 Ethiopian GDP Growth

    

All this said, Ethiopia is nonetheless growing strong, albeit from a very tiny base. It exports a significant amount of agricultural products and minerals to the neighboring Arab world – particularly Saudi Arabia – and is a growing source of foodstuffs for China. Furthermore, while it has so far missed out on the oil boom playing out in East Africa, the country is rich in undeveloped hydroelectric resources and plans are afoot to dam the country’s many rivers.

What’s more, foreign investors – mainly Chinese with an eye towards the future – have seen the country’s huge youth population and rank poverty as an ideal source for low-wage labor, and today adventurous Chinese are setting up shop in the country with the goal of eventually using Ethiopia’s huge pool of young, poor laborers for their own export-orientated, manufacturing enterprises. Given Ethiopia’s location next to the rich countries of the Middle East and its relatively short distance from Europe, these entrepreneurs may be right to believe that Ethiopia is destined to become a low-wage manufacturing hub.

The country’s vast agricultural potential has drawn special interest from rich, populous countries that are short of arable land. Huge land-development schemes that aim to turn Ethiopian peasant land into cash crop-producing plantations owned and operated by foreign investors have become increasingly common if not, unfortunately, politically acceptable to many. Indeed, resistance to foreign ownership is one of the factors behind continued popular Ethiopian resistance to the outright legalization of land ownership and trading, although the paradoxical result of this is to actually strengthen the hand of foreign investors vis-à-vis peasant smallholders. It is they, not Ethiopia’s impoverished peasants, who can afford the bribes and legal costs associated with leasing land from the government.

So, what does the future hold for Ethiopia? At best, one can say that there is great potential for growth premised on agriculture and low-wage manufacturing if, that is, political instability and external conflict – particularly with Eritrea – can be avoided and infrastructure developed. Also important is the degree to which external macroeconomic conditions remains favorable, too. So long as growing Chinese and Indian economies need low-cost agricultural goods, Ethiopia should, in theory, be well-placed to serve them.

But these willbtake some time to pay off.

For the risk-acceptant investor looking to pounce on virgin territory,

Ethiopia may be a good bet. After all, that’s where the Chinese and

Indians are going. On the other hand, the country’s weak democratic

institutions and history of bitter, devastating internal and external

conflict highlight Ethiopia’s significant potent risks.