The race to attract investors in Eastern Africa - Ethiopia's performance

By Tewedage Sintayehu & Tewodros Kebkab

Part III (final part)
Protecting investors
According to the Doing Business 2008 research, rich countries provide more protection against self dealing - the use of corporate assets for personal gain. They have stronger disclosure requirements for related-party transactions - those between a director or controlling shareholder and the company. Investors can also rely on private enforcement - hiring lawyers and going to court - to protect their money.
The research further notes that developing countries rely more on public regulators than private lawsuits to enforce investor rights. This is because court rules are often lacking and investors don't bother using them. Often government inspectors can obtain files - from tax offices, banks or business partners - that private lawyers cannot.
As East Africa is a developing region the above paragraph applies to the countries that comprise it. The index shows that Ethiopia's performance is way worse than most of the countries in the region. Its 107th ranking is much lower than Zambia's 64th, Tanzania's and Kenya's 83rd and Eritrea's 98th. Uganda (122nd), the Sudan (141st), and Djibouti (173rd) performed the least in the region.
As protection is one of the basic factors affecting the flow of investors in to a country, Ethiopia's poor performance in this section should be given the due attention it deserves - that means reforms towards that end in a fairly short time.
The doing business 2008 research recommends regulatory and institutional reforms with enforcement agencies, trainings company directors on their roles and responsibilities, providing stronger incentives like tax breaks and favorable publicity for companies with better investor protection, to make the situation better.
Paying taxes
Governments impose taxes to finance public services. The Doing Business research argues that high tax rates do not always lead to high tax revenues. To support is argument, the research notes that between 1982 and 1999 the average profit tax rate worldwide fell from 46% to 33%, while profit tax collection rose from 2.1% to 2.4% of national income.
Businesses are more willing to pay taxes if they see that the money is used to improve public service. Yet many developing countries with high tax rates fail to improve business infrastructure or education and training - two things that employers care about. Instead a lot of money goes into sustaining inefficient state-owned enterprises or simply disappears into personal bank accounts. Sound familiar?
Though all of the problems stated above are widely evident in Ethiopia, the country has done very well internationally let alone relative to its regional competitors. With a 29th rank in the index, Ethiopia is significantly better than most of its neighbors. Zambia is the main rival in this section as it is just one place down Ethiopia's ranking at 30th. Other relatively better performers in the region include Djibouti (51st), Uganda (55th), and the Sudan (60th). Eritrea (103rd), Tanzania (104th) and Kenya (154th) performed poorly.
Refining the present tax paying procedures that are met with various complaints from tax payers, especially late tax paying procedures and the expense identification criteria against the discretionary power of auditors, would prove to be a further complement to the country's reputation in this context.
Trading across borders
Trade costs - delays, documents and administrative fees - continue to slow business in many developing countries. But the good news is that as more products move internationally, so do new technologies that reduce trade costs. The Doing Business research claims that electronic filing of cargo documents has reduced delays in many ports. Regional trade agreements have brought with them simpler customs and transit forms, uniform across several countries.
According to the research, trade costs increase domestic prices and restrict businesses from exporting abroad. It sites one research as noting that each day a product is delayed in transit reduces trade by at least 1%. Another shows that reducing trade costs by 50% could increase global trade in manufacturing by up to $377 billion a year and triple the benefits for consumers from tariff reductions.
Ethiopia has done as bad as most of its regional counterparts as it has been ranked 150th. Djibouti is the best performer in the region at 66th position. Tanzania (100th), the Sudan (143rd), Uganda (141st) and Kenya (148th) have done some what better than Ethiopia. The two countries that did even worse are Eritrea (159th) and Zambia (160th).
As a land locked country, trading across borders might be understandably a long process for Ethiopia. However, that only entails that the country has to work extra-hard to provide efficient services in this regard.
The research recommends cutting the number of tariff bands as one of the best ways to become a favored destination for trade and reduce corruption in customs. With fewer tariff bands, it also takes less time for customs officials to complete inspections and paperwork. The second suggestion is the establishment of a set of performance indicators for how rapidly goods are processed at the border.
Enforcing contracts
According to the Doing Business research without efficient courts, less wealth is created; fewer transactions take place, and those that do generally involve a small group of people who are linked through kinship, ethnic origin or previous dealings. Businesses that have little or no access to courts must rely on social networks to decide whom to do business with.
Studies on the effects of reforms find that when contracts can be enforced quickly and cheaply, small businesses get better financial terms on loans. Other research finds that new technologies are adopted faster when courts are efficient. The reason is that most innovations take place in new businesses - which unlike large firms do not have the clout to resolve disputes outside the courts. And when contracts can be efficiently enforced, businesses expand their trade networks and employ more workers.
Enforcing contracts is evidently a very hard thing to do in Ethiopia. Seldom do employees in the private sector notify of their resignation formally and stay working for a specified time before they leave. The vise versa also works as most private companies fire their workers on the spot. This is all because of the difficulty one has to endure to see their contracts enforced. It will take a very long time and thus a lot of money to see justice done; so individuals and businesses tend to refrain as much as possible from getting involved in a legal case.
Such a condition has placed Ethiopia 77th in the index. Three of the countries in consideration for this article have performed better than Ethiopia with ranks 35th (Tanzania), 52nd (Eritrea) and 86th (Zambia). Kenya was ranked 107th with Uganda 119th, the Sudan 143rd and Djibouti in 159th position.
With relentless efforts in the justice sector, the hopes for Ethiopia to ensure the enforcement of contracts better than its neighbors are high.
Conclusion
Rankings on the ease of doing business do not tell the whole story. The indicator is limited in scope: it covers only business regulations. It does not account for a country's proximity to large markets, the quality of its infrastructure services (other than those related to trading across borders), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions or the underlying strength of institutions.
Still, a higher ranking on the ease of doing business does mean that the government has created a regulatory environment conducive to operating a business.
Accordingly, Ethiopia's 102nd overall rank in the index implies that it is definitely not easy to do business in Ethiopia. With mediocre performance relative to its regional competitors in most parameters used by the doing business research, it can be said that it is far from becoming a very notable investment drawing nation in the region. Kenya is by far the best performer with extra-ordinary results for an East African country in some of the parameters.
Just as a reminder, this is only about its business regulations. A further look at factors such as peace and stability and the quality of infrastructural services gives us an even gloomier image as the country's political skirmish with Eritrea and Somalia come into the scene with under performances in the energy and communication sectors.
However, the current trends to change things for the better need to be strengthened as they are the only means to lead the country in the direction required.