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Ethiopia Industrial Development Policy
Between l950 and l960, the imperial government enacted
legislation and implemented a new policy to encourage
foreign investment. This new policy provided investor
benefits in the form of tax exemptions, remittances of
foreign exchange, import and export duty relief, tax
exemptions on dividends, and the provision of financing
through the Ethiopian Investment Corporation and the
Development Bank of Ethiopia. In addition, the government
guaranteed protection to industrial enterprises by
instituting high tariffs and by banning the importation of
commodities that might adversely affect production of
domestic goods. Protected items included sugar, textiles,
furniture, and metal. The government also participated
through direct investment in enterprises that had high
capital costs, such as oil refineries and the paper and
pulp, glass and bottle, tire, and cement industries. In
l963, with the Second Five-Year Plan under way, the
government enacted Proclamation No. 5l. The proclamation's
objective was to consolidate other investment policies
enacted up to that period, to extend benefits to Ethiopian
investors (previous legislation had limited the benefits to
foreigners only), and to create an Investment Committee that
would oversee investment programs. In l966 Addis Ababa
enacted Proclamation No. 242, which elevated the Investment
Committee's status as an advisory council to that of an
authorized body empowered to make independent investment
decisions. Thus, by the early l970s, Ethiopia's
industrialization policy included a range of fiscal
incentives, direct government investment, and equity
participation in private enterprises.
The government's policy attracted considerable foreign
investment to the industrial sector. For instance, in
1971/72 the share of foreign capital in manufacturing
industries amounted to 4l percent of the total paid-up
capital. Many foreign enterprises operated as private
limited companies, usually as a branch or subsidiary of
multinational corporations. The Dutch had a major investment
(close to 80 percent) in the sugar industry. Italian and
Japanese investors participated in textiles; and Greeks
maintained an interest in shoes and beverages. Italian
investors also worked in building, construction, and
agricultural industries.
In l975 the PMAC nationalized most industries and
subsequently reorganized them into state-owned corporations.
On February 7, l975, the government released a document
outlining socialist Ethiopia's economic policy. The policy
identified three manufacturing areas slated for state
involvement: basic industries that produced goods serving
other industries and that had the capacity to create
linkages in the economy; industries that produced essential
goods for the general population; and industries that made
drugs, medicine, tobacco, and beverages. The policy also
grouped areas of the public and private sectors into
activities reserved for the state, activities where state
and private capital could operate jointly, and activities
left to the private sector.
The l975 nationalization of major industries scared off
foreign private investment. Private direct investment,
according to the National Bank of Ethiopia, declined from 65
million birr in l974 to l2 million birr in l977. As
compensation negotiations between the Ethiopian government
and foreign nationals dragged on, foreign investment
virtually ceased. The United States Congress invoked the
Hickenlooper Amendment, which had the effect of prohibiting
the use of United States funds for development purposes
until Ethiopia had settled compensation issues with United
States nationals. During l982 and l983, the Mengistu regime
settled claims made by Italian, Dutch, Japanese, and British
nationals. Negotiation to settle compensation claims by
United States nationals continued until l985, when Ethiopia
agreed to pay about US$7 million in installments to
compensate United States companies.
Issued in l983, the PMAC's Proclamation No. 235 (the Joint
Venture Proclamation) signaled Ethiopia's renewed interest
in attracting foreign capital. The proclamation offered
incentives such as a five-year period of income tax relief
for new projects, import and export duty relief, tariff
protection, and repatriation of profits and capital. It
limited foreign holdings to a maximum of 49 percent and the
duration of any joint venture to twenty-five years. Although
the proclamation protected investors' interests from
expropriation, the government reserved the right to purchase
all shares in a joint venture "for reasons of national
interest." The proclamation failed to attract foreign
investment, largely because foreign businesses were hesitant
to invest in a country whose government recently had
nationalized foreign industries without a level of
compensation these businesses considered satisfactory.
In l989 the government issued Special Decree No. ll, a
revision of the l983 proclamation. The decree allowed
majority foreign ownership in many sectors, except in those
related to public utilities, banking and finance, trade,
transportation, and communications, where joint ventures
were not allowed. The decree also removed all restrictions
on profit repatriation and attempted to provide more
extensive legal protection of investors than had the l983
proclamation.
President Mengistu's March 1990 speech to the Central
Committee of the WPE was a turning point in Ethiopia's
recent economic history. Acknowledging that socialism had
failed, Mengistu proposed implementing a mixed economy.
Under the new system, the private sector would be able to
participate in all parts of the economy with no limit on
capital investment (Ethiopia had a US$250,000 ceiling on
private investment); developers would be allowed to build
houses, apartments, and office buildings for rent or sale;
and commercial enterprises would be permitted to develop
industries, hotels, and a range of other enterprises on
government-owned land to be leased on a concessionary basis.
Additionally, state-owned industries and businesses would be
required to operate on a profit basis, with those continuing
to lose money to be sold or closed. Farmers would receive
legal ownership of land they tilled and the right to sell
their produce in a free market. Whereas there were many
areas yet to be addressed, such as privatization of state
enterprises and compensation for citizens whose land and
property had been confiscated, these proposals generated
optimism among some economists about Ethiopia's economic
future. However, some observers pointed out that Mengistu's
proposals only amounted to recognition of existing practices
in the underground economy.
Data as of 1991
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