2009 Index of Economic Freedom

Quick Facts

Population:

• 77.2 million

GDP (PPP):

• $49.1 billion
• 11.6% growth
• 6.2% 5-year compound annual growth
• $636 per capita

Unemployment:

• 5.0%

Inflation (CPI):

• 17.0%

FDI Inflow:

• $364.4 million

Ethiopia's economic freedom score is 53, making its economy the 135th freest in the 2009 Index. Its overall score rose 0.5 point, partly reflecting improvements in trade policy, including a reduction in the weighted average tariff rate. Ethiopia is ranked 26th out of 46 countries in the Sub-Saharan Africa region, and its overall score is almost the same as the regional average.

Ethiopia does not benefit from high levels of economic freedom in any category, but its fiscal freedom, government size, and labor freedom scores are near or above world averages. The overall tax burden as a percentage of GDP is low, and tax rates are moderate. Government expenditures are not high, and there has been privatization in a few key sectors. Ethiopia also demonstrated some progress in trade freedom; although still not competitive, its weighted average tariff was reduced to 10.7 percent.

Ethiopia scores especially low in investment freedom, financial freedom, property rights, and freedom from corruption. The government does not permit foreign participation in banking, which is subject to political pressure. Property rights cannot be guaranteed, and private ownership of land is not allowed. Pervasive corruption discourages investment and entrepreneurial activity.

Background Back to the top

Despite frequent drought and famine in the North, agriculture contributes over 45 percent of GDP, accounts for over 80 percent of exports, and employs over 80 percent of the population. Privatization of state enterprises has proceeded slowly, and the government remains involved in key sectors. Ethiopia is moving toward multi-party democracy, but obstacles are abundant, as demonstrated by the 2005 post-election crackdown on protestors. Since war with Eritrea in the late 1990s, a U.N. peacekeeping mission has straddled the border, and Ethiopia has depended heavily on Djibouti for access to the sea. Ethiopia invaded Somalia in support of Somalia's transitional federal government in December 2006 and still maintains a military presence there.

Business Freedom 62.6 Back to the top

The overall freedom to conduct a business remains constrained by Ethiopia's regulatory environment. Starting a business takes an average of 16 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures, but the minimum capital investment to start a business is high. Regulation is not always transparent.

Trade Freedom 68.6 Back to the top

Ethiopia's weighted average tariff rate was 10.7 percent in 2006. Some import taxes, restrictive foreign exchange controls, service market barriers, non-transparent government procurement, import restrictions, and inadequate infrastructure add to the cost of trade. Ten points were deducted from Ethiopia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 77.4 Back to the top

Ethiopia has burdensome tax rates. The top income tax rate is 35 percent, and the top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 11.6 percent.

Government Size 82.7 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 24 percent of GDP. Privatization has advanced in mining and tourism.

Monetary Freedom65.5 Back to the top

Inflation is very high, averaging 14.9 percent between 2005 and 2007. The government influences prices through its regulation of state-owned enterprises and utilities, subsidizes and controls the prices of petroleum products, and controls the prices of pharmaceuticals and fertilizers. Ten points were deducted from Ethiopia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom40.0 Back to the top

Ethiopia's revised investment code prohibits foreign participation in domestic banking, insurance and microcredit services, and several other activities reserved for domestic investors. A foreign investor intending to buy an existing enterprise or shares in an existing enterprise must obtain prior approval. All investments must be approved and certified by the government and may be subject to additional restrictions. The Ethiopian Investment Commission provides a one-stop service that significantly cuts the cost of obtaining licenses. Foreign exchange accounts, payments, and current transfers are subject to controls and restrictions, as are capital transactions. There is no right to private ownership of land. All land is owned by the state and can be leased for up to 99 years.

Financial Freedom20.0 Back to the top

Ethiopia's financial sector is small and underdeveloped. The government strongly influences lending, controls interest rates, and owns the largest bank (Commercial Bank of Ethiopia), which accounts for two-thirds of outstanding credit. In recent years, the state has allowed the local private sector to participate in banking, but foreign ownership and branch operations remain strictly barred. As of 2008, there were three government-owned banks, nine private banks, and nine insurance firms. Newly proposed legislation would further tighten the banking law, making the business environment for private banks even more difficult. The largest state-run bank faced collapse several years ago due to reckless lending to inefficient state-owned enterprises, but the percentage of non-performing loans has now been reduced from over 50 percent to just under 10 percent. There are about 30 microfinance institutions, which have become major sources of financial services to many businesses. Capital markets are poorly developed, and there is no stock market.

Property Rights30.0 Back to the top

Enforcement of property rights is weak. The judicial system is underdeveloped, poorly staffed, and inexperienced. Property and contractual rights are recognized, but judges lack an understanding of commercial issues. An international arbitration body's decision may not be fully accepted and implemented by Ethiopian authorities. A highly restrictive land-tenure policy makes it very difficult to register property. Private ownership of land is prohibited; land must be leased from the state.

Freedom From Corruption24.0 Back to the top

Corruption is perceived as pervasive. Ethiopia ranks 138th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Despite legal restrictions on corruption, officials have been accused of manipulating the privatization process, and state-owned and party-owned businesses receive preferential access to land leases and credit.

Labor Freedom59.4 Back to the top

Ethiopia's relatively rigid labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is very low, but the difficulty of firing unneeded or poorly performing employees is a significant disincentive to job creation. Restrictions on the number of work hours are inflexible.