INVESTING
IN A
THIRD WORLD COUNTRY

Michael P. Porter*

Faculty of Law
Addis Ababa University
Addis Ababa, Ethiopia

Cite as 1 ALSB INT'L BUS. L.J. 1

Introduction to Ethiopia | Investment Law of 1996 | Other Relevant Laws
Other Factors in the Investment Environment | Conclusion

Most of the countries of the world are variously called third world, lesser developed, underdeveloped or developing. However denominated, each of these countries is culturally and economically different, just as industrial and post-industrial countries are different from each other in those and many other aspects. But just as developed countries have some things in common, third world countries share many common characteristics. The advantages and pitfalls of investment in one of these countries may serve as an invitation or a warning to investors in others.

Introduction to Ethiopia

The example of investment laws and of the general investment climate used in this paper is Ethiopia. The purpose of the paper is to evaluate the investment law as one part of the investment climate of the country and to compare features of the investment law with other laws and attitudes which make up the investment climate of the country. This paper is not a comparison of the laws of Ethiopia with those of other African countries or third world countries elsewhere. It may be noted in passing, however, that the consensus of the foreign community in Ethiopia is that the Ethiopian investment climate is not as favorable as that of other African countries and lags far behind that of East and Southeast Asia. While the government structure (especially the bureaucracy), national culture and overall infrastructure are unattractive enough, Ethiopian laws relating to investment, labor and economic activity in general actually inhibit foreign investment.

After a brief introduction to the country and the structure of the government, I will discuss the laws and attitudes in the same sequence as an investor would encounter them in the course of making an investment, operating the business and selling the business and taking the proceeds out of the country.

Location; Previous Governments. Ethiopia is located in the Horn of Africa, the eastern-most part of Africa. Its neighbors are Kenya to the south, Sudan to the west, Eritrea (a former province of Ethiopia, independent de facto since 1991 and de jure since 1993) to the north and east, and Djibouti and Somalia to the east. Ethiopia is the only country in Africa other than Liberia which retained its independence during the colonial period. In fact, it expanded its traditional borders, conquering many tribes east, south and west of the territory of Abyssinia. Italy attacked Ethiopia in 1936, drove Emperor Haile Selassie I into exile and occupied the country until expelled by the British in 1941. Haile Selassie returned in 1941 and retained power until a coup in 1974 forced him to abdicate. From 1974 to 1991 the country was ruled by a communist military dictatorship called the Derg.

Extreme Poverty. Ethiopia exhibits all of the economic and social difficulties which afflict other underdeveloped countries to one degree or another. The country is very poor. Some agencies consider it the poorest country in the world. Average per capita income is about US$ 120 per annum, ¹ although statistics on income in a subsistence economy are of very little value other than to show the depth of poverty. The population is approximately 58 million, making it the third most populous country in Africa, after Nigeria and Egypt. Roughly 85 percent of the population are subsistence farmers who are essentially outside of the money economy. Estimates of literacy vary from 15 percent to 33 percent of the population. More than one-half of the population is under 18 years of age. Life expectancy is now 48 years.

Present Government. The present government of Ethiopia is controlled by a party of former communists. It acquired power in 1991 when it won a long civil war against the Derg. After a period of transitional government, a new Constitution was written in 1994, and elections were held in the spring of 1995, although they were boycotted by the main opposition parties. The new Constitution came into effect and the government assumed its new offices in August 1995. To its credit, the present government has said many things about creating a democratic society and a free market economy. It has enacted some well-conceived laws to promote that goal. It has carried into practice fewer policies and practices than are necessary for a democratic society and a free market economy to come into being. The ideology of the government, which requires the government to own all of the land and public utilities and limits investment in many activities to Ethiopian nationals or residents, constitutes a major impediment to the creation of economic conditions which would lift Ethiopia out of its poverty. While the federal government talks about a transition from a communist command economy to a market economy, it has not yet made the transition. The economy is not a market economy, let alone a free market economy. There are very few signs that the government is willing to relinquish the control which it must do if it is to permit businesspersons and others to create a free market economy.

The 1994 Constitution establishes a federal system composed of a national government and nine states. The capital is Addis Ababa; its administration is responsible to the federal government. This new federal structure has been imposed from the top down, that is, the existing central government devolved powers down to the states in contrast to the American experience in which the people and the states created the federal government and transferred certain powers up to it. The work of establishing sovereign states in Ethiopia, as opposed to mere administrative agencies of the federal government, is a continuing process and experiment. The dividing line between federal and state authority is not clearly set forth in the 1994 Constitution, just as it is not clear in our federal system. One area in which this causes difficulties for foreign investors is access to land. While land is owned by the "State and Peoples in Ethiopia", leases are granted by the states. The states are not following the procedures mandated by the federal investment law with respect to the grant of leases to investors.² The lack of competent federal and state administrations is also keenly felt everywhere. The public perception is that governmental appointments are made on the basis of the person's ethnicity and political affiliation instead of competence.

Investment Law of 1996

Introduction. Most countries which wish to encourage investment, especially foreign investment, have a law or group of laws designed to provide certain inducements to investors. The industrial revenue bond and local tax holidays have long been means used by American communities to attract investment. Competition for the foreign investor's money is fierce. Many governments run advertisements in magazines circulated internationally, such as The Economist, to encourage investors simply to look at their country or area.³ The Ethiopian government does not advertise in the international press. It advertises in the in-flight magazine of the national airline and has a billboard outside of the Addis Ababa airport to advise new arrivals of its "one-stop shop" for investors. See Appendix I for an advertisement taken from Selamta, the in-flight magazine of Ethiopian Airlines.

In seeking investment, especially foreign investment, the government of Ethiopia places great emphasis upon its 1996 investment law and its "one-stop shop" investment approval process. Therefore, the investment law provides a logical starting point for an analysis of the legal environment for foreign investment in Ethiopia.

The transitional government of Ethiopia promulgated an investment law in 1992, which was widely viewed as providing inadequate incentives for either domestic or foreign investment. The new Investment Proclamation,⁴ enacted in 1996, was an attempt by the government to rectify deficiencies. I think that the new law makes no difference for a foreign investor.

The Investment Proclamation applies to both domestic and foreign investors. "Domestic investors" are Ethiopian nationals and foreign nationals residing permanently in Ethiopia. Ethiopian nationals and domestic investors need an investment permit only if they wish to obtain the incentives granted by the Investment Incentives Regulations⁵ or to form a joint venture with a foreigner.

The Investment Proclamation is discussed in greater detail below. Briefly stated, no foreigner may make any investment in Ethiopia without an investment permit. Foreigners are not permitted to make any investment smaller than certain minimum amounts, ranging from US$ 100,000 to US$ 20 million, depending on the activity in which the investment is made. Permits will not be issued to foreigners for certain investments, which are reserved to Ethiopian governments, Ethiopian nationals or domestic investors. The Investment Incentives Regulations provide for certain income tax and customs duties exemptions for holders of investment permits. Despite the "one-stop shop" motto, holders of investment permits enjoy no priority and are offered no formal assistance in obtaining land, utilities, roads or other services provided exclusively by the government.

Investment Information. The first step in making any new investment is finding information about the various places where the investment might be made. The due diligence investigation of the locale of an investment is not only the first step, it is often one of the most important steps in making any investment. Here the potential foreign investor runs into the first obstacle created by the economic policy of the Ethiopian government.

Foreigners are not permitted to conduct a banking business in Ethiopia or to own any shares in an Ethiopian bank.⁶ This is perhaps the most important and far-reaching of the restrictions imposed upon foreign investment by the Ethiopian government. By denying foreigners any role in the Ethiopian banking industry, the government has not only foreclosed an obvious source of foreign capital, it has also foreclosed an important source of impartial information to potential foreign investors. For most businesses operating in foreign countries, an important part of their due diligence before making an investment in a country in which they have not previously invested is an appraisal of the investment and general business climate by the local branch of their bank. Because of its contacts with the local business community, a local branch of a potential investor's bank can also perform a second valuable function by finding and evaluating particular investment opportunities.

If a potential investor is unable to get information from his bank, he must rely upon the government's investment promoters and information available from the foreign community in the country of the proposed investment. As the comments in Appendix II to the advertisement of the Ethiopian government in Appendix I show, the government may not necessarily be relied upon to present a true picture of the state of the economy or of the country in general.

Due Diligence in the American Community in Ethiopia. When potential American investors go to Ethiopia, they talk to Americans who are already there. I have been able to find no American company which has its own facilities, even a sales office, in Ethiopia.⁷ Sales and services by such companies as IBM, DHL, FedEx or Ford are handled by Ethiopian agents. Thus when talking to Americans in Ethiopia, the visitor talks primarily to embassy officials and to representatives of charities and other private aid agencies in the country. Most Americans in Ethiopia are frustrated by the rudeness, inefficiency, indifference and corruption which they see as the standard practice of the government. For example, the government instituted new re-registration procedures for private aid agencies and other charities in 1995. It has taken many long-established agencies over a year to re-register and to become legal. Many have yet to complete the process. The process is bureaucratic in the worst sense of the word (officials who do not know what to do, who mislead the charities, who are not in their offices, who take weeks or months to make the simplest decisions, and who are frequently personally unpleasant). The impression is wide-spread in the American expatriate community that the Ethiopian government is actually trying to drive these elements of civil society out of the country. If this is the way in which the Ethiopian government treats people who are in the country to give away money, food and skills, can you imagine the trials of a business person who wants to make money in a society where work and making money have always been looked down upon ⁸ and where most people formed their views about American business under a communist regime?

Infrastructure. An important consideration in any investment is the infrastructure of the area in which the investment may be made. I have already mentioned the very low literacy rate in Ethiopia. The infrastructure in most third world countries is poor. That is both a result and a cause of their poverty. Ethiopia is no exception. Telephones, electricity, water and sewerage services in Ethiopia are all government monopolies. The percentage of the population which is "served" by the telephone and electricity authorities is among the lowest of any country in the world.⁹ There are approximately 160,000 telephone lines in the entire country (population 58,000,000). The official waiting list is approximately 200,000 people in Addis Ababa alone. Most people simply do not bother to get on the waiting list. There are no cell phones. The prime minister recently promised that the number of lines would be tripled in the next three to five years. (Twenty months ago, the minister of communications made the same promise, with an 18 month deadline for completion of the expansion.) People who have telephones report that they are frequently out of service, for periods of a few hours to weeks. Electricity is completely unreliable. The current fluctuates radically, there are frequent scheduled blackouts (sometimes announced in advance) and even more frequent unscheduled interruptions.

Ethiopia is the "water tower" of Africa, the source of the Blue Nile, which carries the annual floods to the Sudan and Egypt, and the source of major tributaries of the White Nile. Yet fewer than twenty percent of the people have safe drinking water.¹⁰ Even in the capital, water is frequently off for hours or days at a time. I had no water in my university apartment for six straight days, in addition to the usual stoppages for a few hours, a day or a weekend. The American Embassy has a water tanker truck to take water from the Embassy's sources to the residences of its foreign service officers.

The road net in Ethiopia is one of the smallest per square kilometer of any country in the world. Most of the existing routes were laid out by the Italians during their occupation of the country more than fifty years ago. Any one familiar with Ethiopian topography realizes that the country faces some of the most formidable road building challenges of any country of the world. Much of the country is a high plateau dissected by canyons almost as deep and steep as, and longer than, the Grand Canyon. Nonetheless, the government offers no assistance to investors who build their projects outside of the corridor stretching from Addis Ababa to Nazaret, a city to the east of the capital on the road to Ethiopia's primary port on the Red Sea.¹¹

The poor or nonexistent quality of infrastructure is also a major deterrent to investment. There are few, or no, investments which do not require electricity, telephones and roads to be successful. The one-stop shop of the investment office does not assist an investor in overcoming these obstacles to a business.

Health care in Africa is almost universally a disgrace. Unfortunately, here, too, Ethiopia is at the bottom of the list.¹² In Addis Ababa, there are a private hospital and a government hospital, which is the teaching hospital for the University, which are adequate for treatment until medical evacuation can be arranged. Foreigners who become ill or injured try to arrange immediate medical evacuation to Israel or western Europe. High government officials do the same thing. Thus investors who decide to live in Ethiopia or send their employees there are properly very concerned about the health risks they incur.

Foreign Investment Exclusions and Prohibitions. After investigating the business opportunities and infrastructure, the next step in a proposed investment is to determine if the investment is permitted, prohibited or restricted by the laws of the country. In Ethiopia, as in every country, there are restrictions upon foreign investment. Five of the first eight articles of the Investment Proclamation deal with economic activities which are excluded from this law or for which there are prohibitions or restrictions upon investment by foreigners. There are, however, no geographical areas of the country in which the Investment Proclamation restricts foreign investment. The exclusions from the Investment Proclamation are in Article 3. They are investments in prospecting, exploration and development of minerals and petroleum resources. These activities are covered by other laws, which establish separate regimes governing licenses, exploration, production, customs exemptions and income taxes. These laws are not discussed in this paper.

Article 5 of the Investment Proclamation reserves five economic activities exclusively to federal or state governments. They are: defense industries; production and supply of electrical energy with an installed capacity above 25 megawatts; air transportation using planes with more than 20 passenger seats or a cargo capacity of more than 2,700 kilograms (5,940 pounds); railroad services; and telecommunication and postal services, except courier services.

None of the terms naming these exclusions from private investment are defined. The exclusion of defense industries could be interpreted broadly to permit the government to prohibit any private investment in almost any area of the economy. In addition to munitions and weapons, armies need canned food, clothing and computer programs. As we know, the American government maintains many subsidies and other programs in the name of national defense. It is impossible at this time to know how expansively the government will interpret the defense industries clause in the Investment Proclamation. There are, however, no current objections to privately owned canneries, clothing manufacturers and computer programming businesses in Ethiopia.

The restriction on the production of electricity is potentially very significant to a foreign investor. Because many areas of Ethiopia have no electricity at all and most of the rest have frequent power outages and greatly fluctuating current, all manufacturing and most other establishments will need to think seriously about producing their own electricity. The general counsel to the Investment Office confirmed to me that a foreign investor could not generate its own electricity.¹³ As discussed below, Ethiopian nationals have the right to generate up to 25 megawatts of electricity. So a foreign investor unwilling to entrust itself to the government's service could purchase electricity from a private Ethiopian investor, if it could find one who is willing and able to provide the service.

Article 6 of the Investment Proclamation reserves certain areas of private investment exclusively to "Ethiopian nationals", a term which is more restrictive than "domestic investors" as it excludes foreign nationals permanently residing in Ethiopia. These restricted areas include banking and insurance; production and supply of electrical energy with an installed capacity below 25 megawatts; and air transportation using aircraft of up to 20 seats and 2,700 kilograms of cargo capacity. In addition, Article 6 restricts to "domestic investors" 19 areas of activity listed in the schedule attached to the Investment Proclamation. The schedule is Appendix III to this paper. The schedule of exclusions includes most aspects of the tourist industry, transportation, the media, import trade, export of agricultural products, retail and wholesale businesses, construction, and many services.

The effect of the isolation of the Ethiopian banking system from the international banking community has already been commented upon. The restriction upon foreign insurance companies and upon foreign investment in Ethiopian insurance companies also deprives the country of capital which it badly needs. Another effect of these restrictions in the financial and other sectors of the economy is that foreign businesses do not establish branches or subsidiaries in Ethiopia in which Ethiopians will receive training in the latest techniques and procedures and thus develop the skills needed by the country. This increases the difficulty of every investor because it reduces the potential pool of skilled personnel.

Article 7 permits foreign investors to invest in certain activities only in partnership with domestic investors. Foreign investment is permitted in these activities only when the investment exceeds US$ 20 million. These areas include engineering and metallurgical industries, the pharmaceutical industry, basic chemical and petrochemical industries, and fertilizer industries. The domestic partner may be private or governmental. The domestic partner must own not less than 27 percent of the equity in the joint investment. It is not clear whether the foreign investor's share must exceed US$ 20 million or whether that figure applies to the entire investment, including the domestic investor's share.

Article 8 permits foreign investors to invest in all sectors of the economy except those reserved to Ethiopian governments, Ethiopian nationals or domestic investors. It also requires that all investments made jointly with Ethiopians, not just the large ones mentioned in Article 7, have at least a 27 percent equity interest owned by domestic investors. But, except for the investments listed in Article 7, there is nothing restricting foreigners from establishing wholly-owned businesses.

Minimum Capital Requirements. In addition to the minimum investment of US$ 20 million for an investment in the four industries named in Article 7 (which investment must be made jointly with domestic investors), the Investment Proclamation imposes other minimum capital requirements upon foreign investors. Fortunately, they are more reasonable. Article 11 requires that a foreign investor allocate a minimum capital of US$ 500,000 for a single investment project. That rule is subject to a number of exceptions which lower the minimum investment. An investment jointly with a domestic investor (in industries other than the four named in Article 7) requires the foreigner to contribute capital of only US$ 300,000. The minimum capital of a foreign investor in engineering or other technical consultancy services is US$ 100,000. A foreigner who reinvests profits or dividends from an existing project may also spend as little as US$ 100,000 or its equivalent in birr (the local currency) upon a new project. Capital is defined in Article 2 to mean money, machinery or equipment, buildings, property rights, patent rights or other business assets. Therefore, the minimum investment does not have to be made in money or physical assets. Intellectual property or other rights could be used instead.

Article 11 lends itself to many interpretive problems. What is a single investment project for which the minimum investment must be met? Is an assembly plant separate from the factories which make the parts which are assembled in it? Is a restaurant a separate project if it is in a separate building which has its own entrance from the street, but which is on the same lot as a hotel? What are technical consultancy services other than engineering? Computer consulting qualifies, and one American investor is engaged in computer consulting, but the practice of medicine or dentistry is not considered to be a technical consultancy, nor is accounting.¹⁴ What is a new project as opposed to an addition to an existing project? The proclamation gives no answers to these kinds of questions.

Form of Business Organization. Article 10 permits investments to be made in sole proprietorships, business organizations incorporated in Ethiopia or abroad, public enterprises and cooperative societies. ¹⁵ These categories encompass all of the business entities recognized by Ethiopian law. Questions of unlimited liability would militate against choosing a sole proprietorship or any of the four forms of partnerships recognized by the Ethiopian Commercial Code. Most foreign investors choose the private limited company. It requires a minimum of only two shareholders (unlike a share company which requires a minimum of five shareholders), offers limited liability to shareholders and permits managers to run the company themselves (without a board of directors). While a private limited company has the simplified management structure of a partnership, the shareholders and managers generally enjoy the limited liability of a corporation.

Investment Permit. As said before, every foreign investor, and any domestic investor or Ethiopian national who wants to obtain investment incentives, must obtain an investment permit. The Investment Proclamation sets forth the information required to be submitted. The information includes the project profile; a list of the machinery and equipment intended to be imported duty free; and if expatriate personnel are to be employed, a schedule of the time of their replacement by Ethiopians and the proposed training programs to assure that replacement. Copies of the memorandum of association (equivalent to American certificates or articles of incorporation) and articles of association (bylaws) must also be provided. ¹⁶ The Investment Proclamation requires that the investment permit be issued within ten days of receipt of the completed application.17

An investment permit is valid for one year, but may be renewed annually so long as progress is being made upon the implementation of the project. Progress reports must be made semi-annually.¹⁸ An investment permit may be revoked if it was fraudulently obtained, illegally transferred or not properly renewed.¹⁹

Technology Transfers. Much foreign investment involves the use in the place of the new investment of technology developed or used elsewhere by the investor. The Investment Proclamation requires technology transfer agreements to be registered and approved by the Investment Authority. This requirement may raise difficult issues of privacy if the technology involves proprietary secrets and know-how instead of patents, copyrights or trademarks. The regulation governing technology transfers requires, to the extent practicable, a detailed description of the technology, but also speaks of confidentiality, so it should be possible to protect trade secrets, formulas and other know-how.²⁰

One-Stop Shop Service. After a potential investor has decided to make an investment in Ethiopia, what assistance may the investor expect from the Investment Authority? The investor will receive a warm welcome at the Investment Authority. Information in the press suggests that that warmth does not extend to other governmental offices.²¹ Article 25 of the Investment Proclamation describes the one-stop shop services of the Investment Authority. In addition to investment permits and registration of technology transfer agreements, the authority will issue trade and operating licenses, work permits for expatriate employees, and the necessary registration of business organizations. These are useful services and can save days which would otherwise be spent in other offices. However, the Investment Authority offers does not issue land leases or obtain utilities or roads or train personnel for investors. All land in Ethiopia is owned by the government. Leases to use the land are granted by the state governments. While the Investment Proclamation requires states to deliver land to investment permit holders within 60 days from receipt of an application for the land, in practice states ignore the requirement. Land is very difficult to obtain. Once obtained, tenure upon the land is subject to the serious risks discussed below under the caption "Land". All utilities are government monopolies and all are in very short supply. For example, without use of pull from other government agencies (or before several top executives of the telephone authority were arrested for corruption, payment of bribes), it can take years to obtain a telephone.

Incentives for Investment. While, the Investment Proclamation itself offers no inducements to invest in Ethiopia, the Investment Incentives Regulations²² do. The incentives are not very extensive. They are of two kinds-income tax holidays and exemptions from customs duty for certain machinery and equipment. Both the income tax holidays and the duty free privileges vary with the nature of the activity and the part of the country in which it is undertaken. The income tax holiday varies from two to five years. Recognizing that it is the rare business which makes money in its initial years of operations, the regulations permit income tax losses may be carried forward. The period of the carry forward varies from three to five years, depending upon the activity and its location. Customs duty exemptions range from nil to a complete exemption, again depending upon the nature of the activity and its location in relatively more developed or completely undeveloped areas of the country. While the Investment Incentive Regulations provide for no customs exemption for imported parts or raw materials that are incorporated into finished products, even if the finished products are exported, the Investment Authority mentions this inducement in the advertisement which forms Appendix I. There are no free trade zones.

Land. No investment can proceed without land. Farms and factories require extensive land. Offices and hotels also require at least minimal amounts of land. As stated before, all land in Ethiopia is owned by the government. Article 36 of the Investment Proclamation requires state governments to "deliver the required land to the investor" within 60 days of the investor's application for it. The press reports that investors' applications are simply ignored.²³ One of my students, doing research for a senior thesis, reported to me that he was told by an official in the land bureau of Addis Ababa, who refused to be identified by name, that there were no procedures for granting land leases to holders of investment permits. If an investor cannot obtain land, or if, in the words of the World Bank representative in Ethiopia, the investor must "wait around for months before he gets access to land",²⁴ the investment permit procedure is something of an exercise in futility.

Land, once obtained, is not held with the security necessary to justify an investment. In 1996, foreign investors who were conducting a horticultural business, exporting fresh flowers, were summarily removed from their land by one of the state governments. According to press reports, their leases from farmers and their hiring of the farmers to work on the farm were viewed by the state government as exploitation of the peasants. There were no reports of any compensation to the investors. In 1997, Ethiopian farmers in another state were dispossessed by the state government. Apparently because they were prosperous, they were simply deprived of their land.²⁵ The constitutional guarantee that every Ethiopian farmer shall have land and be protected from eviction was of no protection to these farmers.²⁶

In August 1996, the government of Addis Ababa raised the rents on commercial properties by as much a 40,000%. There were protests, including street demonstrations, a closure of all business for half of a day and attempts by the Chamber of Commerce to negotiate more reasonable increases. None of these actions was successful. A further protest in May 1997 resulted in the summary eviction of merchants who disobeyed an order broadcast on the radio at noon on Monday, May 19th to open their shops by 3:00 P.M. on that day. The city council appeared to promulgate its rules and penalties as the situation developed, as well as summarily convict those who defied it.²⁷ Neither law nor contract protected the lessees. When a cabinet minister was shot and wounded in a restaurant in 1996, the restaurant was closed although there was no evidence of any involvement in the assassination attempt by the restaurant owners.

The state of Tigray, the northern-most state, prides itself on the amount of investment which it has been able to attract.²⁸ In March 1997, the state government announced that it was conducting a study aimed at raising land use contracts from only five to ten years.²⁹

Thus, if an investor obtains delivery of land as required by the Investment Proclamation, the period for which the land is available may be too short and the tenure too precarious to amortize, or even justify, an investment.

Remittances. No investor is willing to risk money in an investment in a foreign country without some assurance that the original capital, profits, interest received and proceeds from disposition of the investment (including payment for an expropriation by a government) can be taken out of the country in foreign exchange. The Investment Proclamation grants an unqualified right to convert and take out of the country all of these sums.³⁰ In contrast, expatriate employees may remit funds only in accordance with the foreign exchange regulations in effect from time to time. These regulations are currently not nearly as generous as the Investment Proclamation is for the investor's funds. Of course, as to salaries, bonuses and other payments from their foreign employer, expatriates can arrange for payment in their country of domicile or elsewhere of all funds in excess of those needed to live in Ethiopia.

Investment Protection. Article 21 of the Investment Proclamation states that an investment maybe expropriated or nationalized only when required for the public interest and in compliance with law. The Constitution offers the same right.³¹ While the Constitution requires payment in advance of the taking; the Investment Proclamation merely requires payment without delay.

Ethiopia is a signatory of the Convention of the Multilateral Investment Guarantees Agency. MIGA offers insurance against political and noncommercial risks relating to expropriation, nationalization, war, civil unrest, currency transfer and breach of contract. American investments in Ethiopia are also eligible for insurance against a broad range of risks, including expropriation, by Overseas Private Investment Corporation.³² OPIC is an agency of the United States government.

When the Derg confiscated all foreign owned property (and most Ethiopian owned property as well) in 1975, it promised payment in accordance with law.³³ Neither that government nor the current government has made payments,³⁴ although the current government has returned some of the properties its predecessor seized. The government has not returned land its predecessor confiscated because the 1994 Constitution, written by the present government, requires inalienable government ownership of land.

Settlement of Disputes. The Investment Proclamation encourages amicable resolution of disputes through discussions. If that fails, the dispute may be submitted to Ethiopian courts or to international arbitration provided by multilateral or bilateral treaties to which Ethiopia and the investor's country are parties. There are no bilateral treaties between the United States and Ethiopia pursuant to which international arbitration would be available as a matter of right to an American investor.³⁵

In addition to disputes with the government concerning application of the investment law, all disputes arising out of contracts and other activities in Ethiopia would be governed by Ethiopian law and judged by Ethiopian courts. Recourse to the courts may be more illusory than practical. The courts are underfunded and understaffed. I was told by a manager of the Commercial Bank of Ethiopia, the largest bank in Ethiopia and owned by the government, that it takes six years to obtain a judgment against a borrower who defaults on payment of a loan. There are only about 600 to 700 persons trained as lawyers in the entire country and about 2,000 judges. So, most judges have no legal training and some in the trial courts are not even high school graduates. Because there are usually no clerks or reporters, judges must write by hand all of their notes about the proceedings. In rural areas, it is not unusual for them to have no paper or pens, so a trial does not begin until one of the parties goes to a stationery store and buys those items. Despite a constitutional guarantee of tenure during good behavior until the mandatory retirement age, the government asked for and received the resignations of all federal judges in 1996.³⁶ Many were re-appointed, but a precedent dangerous for judicial independence had been established. Newspaper reports routinely mention the removal of judges for mal-administration and corruption, the constitutional grounds for removal.³⁷ There is no way to tell from information which is made public if the charges were true or the judges were simply too independent to suit the taste of the government. Lack of an impartial judiciary causes difficulties at every level. Because Ethiopia has a civil law system, trials are conducted solely by judges. Therefore no juries, even in criminal felony cases, temper the actions of the judges and provide a counterweight to the power of the government.

Other Relevant Laws

Complete System of Codes. Unlike China, Russia and some other formerly communist countries, which have almost no laws governing contracts, business organizations, bankruptcy and other legal institutions, Ethiopia has a Civil Code and a Commercial Code.³⁸ Both are comprehensive bodies of law which became law in 1960. They incorporate many civil law concepts which were modern at that time. Both codes were drafted by French speaking professors and translated into English and Amharic, the language of the federal government. Neither code was amended or repealed by the Derg after the 1974 revolution, so Ethiopia has already on the books the laws and legal institutions necessary for a civil society and modern business transactions. If the laws and institutions they create played a significant role in the country, they should make investment in Ethiopia more attractive than in those countries which lack a modern, comprehensive body of law. But the advantage of having laws on the books is of little value if the courts do not apply them expeditiously or correctly and their advantages are outweighed by a bureaucracy which makes life so unpleasant that investment is actively discouraged.

Labor Laws. The labor law of Ethiopia is weighed heavily in favor of the employee. The law provides for a probationary period of not exceeding 45 consecutive days.³⁹ After that, it is theoretically possible to fire an employee for incompetence, absenteeism, theft or other faults.⁴⁰ But the administration of the law is such that employers feel that it is almost impossible to do so in practice. If a fired employee protests being fired, the employer is faced with long and expensive litigation. It is a rare business which can hope to train a new employee in only 45 days, especially in a country which has the extremely low level of skills which exist in Ethiopia. The Investment Proclamation neither makes an exception from the labor law for personnel being trained in a newly created business nor provides any governmental assistance in training.

Protection of Intellectual Property. Articles 1647 through 1674 of the Civil Code protect works of the mind. Only the author and his or her heirs may reproduce intellectual property for a period of 50 years from the date of initial publication.⁴¹ There is, however, no copyright office. Protection of works of the mind depends entirely upon lawsuits in ordinary courts. The situation is different with respect to patents. A 1995 law provides for the grant of patents for a period of 15 years and an extension for another five years, so long as an annual fee is paid.⁴²

Environmental Protection. Ethiopia has no environmental protection laws. However, the public is becoming increasingly aware of environmental damage. Whether that awareness will be translated into action is yet to be seen.

Other Factors in the Investment Environment

Administrative Hostility. Some of the rhetoric of the government of Ethiopia has changed from that of a command economy to that of a market economy. However, that change has yet to trickle down to the front-line bureaucrats or even in some cases to the ministers themselves. Under socialist or communist governments in Africa,

The private sector in most countries was regarded as a "necessary evil" which had to be controlled, directed, and regulated to the greatest extent possible.

While socialist economic philosophy has largely been discarded in Africa, past government structures have remained in place. Consequently, governments which now espouse market-led policies continue to feature bureaucracies that have been structured to control and regulate - rather than assist and encourage - the private sector.⁴³

While this report was written about Africa generally, the local press in Ethiopia is full of complaints about the hostile and counterproductive attitudes of the Ethiopian government bureaucracy.⁴⁴

A personal experience with a governmental bureaucracy, that of Addis Ababa University, well illustrates this negative aspect of governmental bureaucracy in Ethiopia. Ethiopia requires its nationals and resident aliens to obtain an exit visa before they can leave the country. The immigration service will only issue the visa to a foreigner if his employer requests it. The first time that I asked the University to prepare the necessary letter, the University took two weeks to type and sign the letter. The second time I made such a request, it took a month to type and sign the letter. My third request took 52 days and almost daily visits to one office or another. Governmental bureaucracies are not unique: I have a friend whose husband died as the result of a heart attack when his employer (a private Ethiopian church bureaucracy) took four days to prepare the necessary request for an exit visa for an emergency medical evacuation.

Corrupt and Inefficient Administration. The inducements provided by the incentives regulation are not particularly generous exemptions from taxation and customs duty. The value of these exemptions becomes more questionable when one becomes familiar with the administration of the income tax laws and the customs laws. The income tax collectors have an apparently well deserved reputation for arbitrarily determining tax liability without reference to accounting records or the revenues or income of the taxpayer.⁴⁵ This is not a new phenomenon. The same procedures were followed during the reign of Emperor Haile Selassie.⁴⁶

The customs administration is even worse. Being duty free does not include being free of inefficiency and corruption. Everyone who has tried to bring in duty free goods, even goods donated to a government agency such as a hospital or Addis Ababa University, can tell of numerous visits to obscure offices, often for no other purpose than to move a paper from one desk to another desk in the same room. One hydrology professor spent six months in clearing through customs a duty-free water testing field-kit that he had arranged to have donated to the University.⁴⁷ I have seen books which I gave to the University spend months in customs (incurring storage fees) while the University struggled with the customs service. In one case I was solicited for a bribe to clear through customs at the main post office a small package addressed to me.

Not only is clearing duty-free items difficult, clearing dutiable items can take longer. I was told by a man who owns two tanneries that it takes most of a year to get chemicals and dyes through customs. In addition, the customs authorities have their own concept of price. On a trip to the United States, I paid $40 each for two volumes of the Tulane Law Review and mailed them to myself in Addis Ababa. They were valued for customs purposes at $147, which was $67 more than their subscription price. A compact disk player for which I paid $166 was valued at $320 for duty purposes and the duty was computed at 101 percent, although the official rate was sixty percent. Importers of components or raw materials can expect to face similar delays and similar difficulties in pricing them.

The problem of corruption and inefficiency is not limited to the tax and customs services. The Ethiopian government as a whole is one of "egregious inefficiency and corruption".⁴⁸ The former deputy prime minister is now being tried for amassing $ 9 million in bribes in five years in office.⁴⁹

Having described how horrible the Ethiopian bureaucracy can be, I should point out a shining exception. The immigration service can receive and process an employer's request and issue an exit visa in less than two hours on a busy day. That happened to me after my 52-day delay at the University. Normally the immigration service acts in 24 hours.

Securities Markets. There are no securities markets of any kind in Ethiopia. There have been discussions about establishing a stock market, but the government has taken no action. While I am of the opinion that current law permits an over-the-counter market, no one has attempted to establish one. As a result, the public sale in Ethiopia of the shares of a business is not a viable exit strategy for a foreign investor.

Conclusion

In April 1997, the Corporate Council for Africa, an American entity, awarded a "Good Governance Award" to Prime Minister Meles of Ethiopia. The members of the Council have not put their money where their award is. The Investment Authority reports that only eight investment permits have been issued to a person or entity identified as American.⁵⁰

Other countries are not as underrepresented in Ethiopia as is the United States. Nonetheless, the amount of foreign investment in Ethiopia is low, even when compared to that in other African countries. Part of this is because of the unfavorable general image of the country-the communist government from 1974 to 1991, the severe famine in 1984 and the lesser one in 1994. But much of the low investment is attributable to the situation which is created now by the Ethiopians themselves. Potential investors, whether individuals or groups of business persons, arrive from America. Initially they may be favorably impressed by the advertisements of the investment authority. But as they see the economic activities from which they are excluded and begin dealing with the governmental bureaucracy outside of the Investment Authority, they realize that the odds of a successful investment are very low. They then decide to invest their money where the welcome is warmer and the probability of success is higher. That is unfortunate for Ethiopia, but the solution rests with Ethiopia. No foreigner or foreign government can make the Ethiopian government change; the desire for change has to come from within Ethiopia.