The race to attract investors in Eastern Africa – Ethiopia’s performance

Continued from last week
By Tewedage Sintayehu & tewodros kebkab

Dealing with licenses
A major emphasis in this section is given to licensing in the construction industry as the sector is among the largest in every economy and there is a clear rationale for regulating it. There is a tradeoff between the safety that licenses create and their cost - both to entrepreneurs and to the government. In 70 countries obtaining a construction permit takes much longer than the actual construction. Many of these are in Africa, which accounts for 5 of the 10 countries where it is most difficult to build legally. Where procedures are complicated and the time and cost to get licenses are great, few formal projects get started. Besides creating more jobs, cutting red tape can provide the resources to improve public services.
Dealing with licenses is an activity Ethiopia has done relatively better than most of its neighbors. With the exception of Kenya, which has performed remarkably to assume the 9th rank in the index, Ethiopia is in a far better position than the rest of its East African competitors. Djibouti performed better than the rest of our immediate neighbors with a 92nd position on the index while the Sudan assumed the 131st position and Eritrea made the foot of the index with the least 178th rank. Other East African countries did not do as well as Kenya and Ethiopia with Uganda positioned 81st, Zambia 148th and Tanzania 170th.
In Kenya the government has carried out a review of 1,347 business licenses and permit requirements in all sectors since 2005. So far, hundreds of licenses have been proposed for elimination. By the end of 2007 another 700 are to be simplified and 320 abolished. Though Ethiopia has evidently performed well in this section of activities than most of its competitors in the region, its very notable gap with Kenya still shows that the competition is even harder for it to become the easiest place to deal with licenses in the region.
To this end, the Doing Business 2008 research recommends the simplification and elimination of business licenses, statutory time limits for issuing licenses, single office for processing applications, private sector involvement in reforming licenses and adjusting licenses and inspections to the size and nature of projects which entails less scrutiny for smaller projects.
Employing workers
Employment regulations are designed to protect workers from arbitrary, unfair or discriminatory actions by their employers. These regulations - from mandatory minimum wage, to premiums for overtime work, to grounds for dismissal, to severance pay - have been introduced to remedy apparent market failures. In addition, the International Labour Organization has established a set of fundamental principles and rights at collective bargaining, the elimination of forced labor, the abolition of child labor and the elimination of discrimination in hiring and work practices.
The Doing Business 2008 research states that beyond these regulations and principles, governments struggle to reach the right balance between labor market flexibility and job stability. Most developing countries err on the side of excessive rigidity, to the detriment of businesses and workers alike. But businesses find ways around rigid employment regulations. The less flexible the regulations, the more businesses hire workers informally, pay them lower wages and avoid providing health insurance and social benefits. Those whom employment regulation is supposed to protect are hurt the most. Women are three times as likely as men to be hired informally and where parents fail to find decent employment, children often turn up in the workplace.
Labour regulations in Ethiopia do not seem to be that flexible as the country has been ranked 89th in the index. An Ethiopian business person complained that the labour proclamation unfairly favors workers and commented that worker-employer cases in court usually end up in favor of the former. The business person further argued that there seems to be a double standard in applying the law as government opts to hire a whole new staff in place of those who don't get back to their jobs on a specified deadline in case of strikes while an attempt to take such a measure by private firms would be considered distractive and illegal.
Such conditions seem to have contributed to the country's worse standing in the index as compared to its regional competitors like Eritrea (58th), Kenya (66th) and Uganda (11th). Others in the region did not so good with Djibouti ranking 130th, the Sudan 140th, Zambia 121st, and Tanzania 151st.
Although employee protection regulations should be in place to ensure mistreatment and abuse, there should also be a balance between the right of employers and employees. There are complaints from employees in some private lucrative businesses in Ethiopia that the safety standards for various jobs are not met. Such conditions give the impression that attracting investment has been given the priority. However, opposing views from employers that the labour proclamation in Ethiopia unduly favors employees imply the opposite. Such conceptions pose a hurdle in the country's effort to draw more investors. Therefore, a balance should be established to reconcile these opposing views.
Registering property
The Doing Business 2008 research argues that the more difficult property registration is, the more assets stay in the informal sector. But informal titles cannot be used as security in obtaining loans. And without formal title, property values are lower and property owners invest less. It also notes that studies back higher investment when properties are formally registered.
Land registry, obtaining property titles and property transfer make up a big part of the activities included in this part.
Though there have been improvements in property registration activities in
in recent years, they do not seem to match the pace of reforms in making things easier elsewhere as it has been ranked 147th in the index. That is much worse than most of the standings of its regional competitors. The Sudan performed very well in this section with a 32nd position while Kenya (114th), Djibouti (131st) and Zambia (125th) did relatively better than Ethiopia. Eritrea (158th), Uganda (163rd) and Tanzania (160th), on the other part, performed even worse.
Expanding the scope of property registration in a country, cutting overall costs by lowering taxes, fees, etc; and making administrative improvements at registries that reduce time - such as simplifying registration through the use of the internet - have been recommended by the Doing Business 2008 research.
Given the high demand for land from investors, the rate of land allocation is clearly very slow taking years in most cases. Considering the limited access and the hardship someone in Ethiopia has to endure to legally own land, it is evident that the country has to improve much in this section.
Getting Credit
A more effective way to improve access to credit is to increase information about potential borrowers' credit worthiness and make it easy to create and enforce collateral agreements. Lenders look at the borrower's credit history and collateral when extending loans. Where credit registries and effective collateral laws are lacking - as in most poor countries - banks make fewer loans. Improving credit information and laws to create and enforce collateral - both in and out of bankruptcy - is not just about strengthening the rights of creditors. It benefits deserving borrowers just as much, by increasing their chances of getting credit. And it boosts productivity and growth, by shifting capital to the best business ventures.
Borrowers in Ethiopia complain that the types of assets that can be used as collateral are few, restricting their access to loans. The wide use of houses and buildings as the main collateral has, as claimed by some business people, kept businesses operating in rented offices away from access to bigger loan schemes provided by banks. The absence of loan arrangements using project documents and future viability of business activities is also said to block the realization of potentially lucrative projects. Such conditions have made loans accessible only to big businesses and keep those not so big from growing much.
The Doing Business 2008 index ranked Ethiopia 97th in its ease of getting credit. That is a light year away from Kenya's position at 13th and equivalent to Zambia's (97th). Though Ethiopia has done relatively better than the rest of its regional competitors that have been ranked 115th (Tanzania), 135th (Djibouti and the Sudan) and 158th (Uganda and Eritrea), it is once again not the easiest place to do business.
To be continued next week
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