The investment paradox that is Ethiopia

This past week, a high-profile Kenyan business delegation visited Ethiopia to scout for private investment opportunities.

They will, like many other curious foreign investors, most likely have come away encouraged by the market potential and momentum in the country of 85 million.

Ethiopia is not your everyday African country. Laying claim to one of th
e richest histories, it is a curious mix of commercialism existing side by side with remnants of communism. Some would describe it as the quintessential modern Orwellian state.

Widespread poverty mirrors the opulence of an elite few and a fast-growing middle class. To change this, the current leadership is on a manic mission to haul the economy into the 21st century through massive infrastructural investment.

Anchored by its five-year Growth and Transformation Plan that runs until 2015, billions of dollars are being sunk into prestige projects, from thousands of kilometres of road and rail to its hugely controversial flagship project, the 6,000MW $4.7 billion Grand Renaissance Dam.

The funds for this $80 billion transformation plan are mainly internal, widely drawn from the public purse. This has had the unfortunate effect of crowding out the private sector: while investment in infrastructure is three times the African average, credit to private enterprise is half the regional average.

Indeed, Addis Ababa has ruled out privatising the cash-rich state-owned telephone monopoly, because it is funding rail construction.

While the public effort to create millions of jobs is certainly jaw-dropping, it is also widely known that the private sector creates jobs faster—and more efficiently—than the government.

Devoid of efficiency

There is a demonstrated huge appetite by foreign investors and by the extensive Ethiopian diaspora to invest in the country, but far too often the space does not exist, despite recent government rhetoric to the opposite.

Everyone from the IMF and the World Bank has begged Ethiopia to create room for private enterprise, including through the provision of credit, private investment as a share of GDP continues to decline, even as the big projects come up.

This failure to appreciate development outside of Big Government may not be Ethiopia's fault—the country has had little experience of private enterprise due to its Marxist history.

Investors sniffing around the potentially lucrative areas of the economy such as financial services and telecoms are gently, but firmly channelled into less-sensitive industries such as agriculture and hospitality.

Foreigners also often find themselves stumped by the country's business culture, which is largely devoid of efficiency and marked by passivity. It is often a shock to investors from countries with a strong history of private enterprise, such as neighbouring Kenya.

It also takes ages to get a licence, while setting up a business from scratch requires the employ of local middlemen, if it is to survive its formative days.

But the country's potential is undeniable, with growth rates of double digits now the norm. To boost this even further, the country’s authorities need to strike a balance between the huge projects and private enterprise—both domestic and foreign—if it is to make its great economic leap within or ahead of its envisaged timelines.
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