According to the Index of Economic Freedom, Ethiopia under the Woyanne dictatorship ranks 116th in the world.
Source: The 2007 Index of Economic Freedom
Ethiopia’s economy is 54.4 percent free, according to our 2007 assessment, which makes it the world’s 116th freest economy. Its overall score is 1.1 percentage points higher than last year, partially reflecting new methodological detail. Ethiopia is ranked 21st out of 40 countries in the sub-Saharan Africa region, and its overall score is equal to the regional average.
Ethiopia does not rank strongly in any category but does score moderately well in fiscal freedom, freedom from government, and monetary freedom. The top income and corporate tax rates are moderate, and overall tax revenue is not large as a percentage of GDP. Government expenditures are not high, and the government receives only a small amount of its total revenues from state-owned businesses.
As a developing nation, Ethiopia faces typical and difficult challenges. It does not score well in trade freedom, investment freedom, financial freedom, property rights, and freedom from corruption. Commercial regulation and bureaucracy are burdensome, and business operations (except for closing a business) are significantly hampered by the government. Ethiopia’s average tariff rate is high, and there are significant non-tariff barriers as well. The banking system is subject to strong political pressure, as is the rule of law. Property rights cannot be guaranteed.
Background
Ethiopia is the second most populous country in sub-Saharan Africa and also one of the poorest. It is moving toward multi-party democracy, but obstacles to progress remain to be overcome, as demonstrated by the 2005 post-election crackdown on protestors. Over three-quarters of the population in rural areas is engaged in agriculture, and periodic drought can have severe consequences. The government remains involved in key sectors of the economy and reserves other sectors for Ethiopians. Landlocked Ethiopia has depended heavily on Djibouti for access to foreign goods ever since a border war with Eritrea.
Business Freedom – 59.4%
Starting a business takes an average of 16 days, compared to the world average of 48 days. Entrepreneurship should be easier for maximum job creation. Obtaining a business license is difficult, but closing a business is relatively easy. The regulatory system is generally considered to be fair but not always transparent. Cumbersome bureaucracy deters entrepreneurial activities. The overall freedom to start, operate, and close a business is restricted by the national regulatory environment.
Trade Freedom – 53.0%
Ethiopia’s weighted average tariff rate was 13.5 percent in 2002. Non-tariff barriers include foreign exchange controls, burdensome trade-related regulations and bureaucracy, and some import restrictions. Consequently, an additional 20 percent is deducted from Ethiopia’s trade freedom score to account for these non-tariff barriers.
Fiscal Freedom – 84.8%
Ethiopia has moderate 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 12.5 percent.
Freedom from Government – 83.0%
Total government expenditures in Ethiopia, including consumption and transfer payments, are low. In the most recent year, government spending equaled 25 percent of GDP, and the government received 7.2 percent of its total revenues from state-owned enterprises and government ownership of property. State ownership and management still guides many sectors of the economy.
Monetary Freedom – 69.9%
Inflation in Ethiopia is relatively high, averaging 10.1 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. The government influences prices through the regulation of state-owned enterprises and utilities and provides subsidies and price controls for petroleum products. Consequently, an additional 10 percent is deducted from Ethiopia’s monetary freedom score to adjust for measures that distort domestic prices.
Investment Freedom – 50.0%
Ethiopia has taken several steps to liberalize its foreign investment laws and streamline the registration process, but official and unofficial barriers still deter foreign investment. Certain sectors remain off-limits. The government has lowered the minimum capital investment for wholly and partially owned foreign investments. The Ethiopian Investment Commission, the main contact point for foreign investors, provides a highly expedited one-stop service that significantly cuts the cost of obtaining investment and business licenses. Foreign exchange accounts, payments, and current transfers are subject to controls and restrictions. There are significant controls on capital transactions. All investments must be approved and certified by the government.
Financial Freedom – 20.0%
Ethiopia’s small financial sector is subject to strong government influence. The central bank is not independent, and the government retains a strong influence over lending, including controlling interest rates and owning the country’s largest bank (Commercial Bank of Ethiopia), which accounts for three-quarters of total banking assets. However, the private banks have increased their share of total deposits, loans, and credit in recent years. Non-performing loans are a lower percentage of the total but still account for over 25 percent of all loans. Microfinance is well established. Foreign firms are prohibited from investing in the banking and insurance sectors. The insurance sector is small and composed of nine companies, including one state-owned company. Ethiopia does not have a stock market, but the private sale of shares is common.
Property Rights – 30.0%
The judicial system enforces property rights weakly. The system is underdeveloped, poorly staffed, and inexperienced, although efforts are underway to strengthen its capacity. Property and contractual rights are recognized, and there are written commercial and bankruptcy laws, but judges lack an understanding of commercial matters. There is no guarantee that the decision of an international arbitration body will be fully accepted and implemented by Ethiopian authorities.
Freedom from Corruption – 22.0%
Corruption is perceived as widespread. Ethiopia ranks 137th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
Labor Freedom – 72.3%
The labor market operates under relatively flexible employment regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is very low, but dismissing a redundant employee is relatively costly. There are rigid restrictions on increasing and contracting the number of working hours.