UNIT 9: DEVELOPMENT OF ENTREPRENEURSHIP IN ETHIOPIA

Contents
9.0 Aims and Objectives
9.1 Introduction
9.2 Entrepreneurship During the Feudal Period
9.3 Entrepreneurship During the Socialist Decades
9.4 The Present Challenges and Opportunities of Ethiopian Entrepreneurs
9.5 Summary
9.6 Answers to Check Your Progress

9.0 AIMS AND OBJECTIVES

The aim of this unit is to give a brief explanation on the historical development of
entrepreneurship in the Ethiopian business environment.

After reading this unit, you will be able to

 identify the major problems hindering the development of entrepreneurship during
the feudal, socialist and recent periods
 discuss the opportunities supporting entrepreneurial activities during the recent
period (EPRDF).

9.1 INTRODUCTION

Ethiopia is one of the ancient countries with over 300 years of history. The Ethiopian people
have survived all foreign aggressions and maintained their sovereignty and independence all
these years. When one observe this one would notice the derive for independence that the
Ethiopian people theirsh so much.

The derive for independence observed in the political sphere, however, is not, as one would
expect, visible in the economic sphere. For this a number of explanations could be forwarded.
For example, the lack of entrepreneurial drive is the price that the country has to pay for being
politically independent. The holders of this view argue that other countries have benefited a

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lot from colonialism in their pursuit for entrepreneurship development. This view, however, is
not the conclusion.

It is true that some skills might have been learned and imitated from the colonizers; there are
also cases where the colonizers virtually isolated the natives from substantive economic
operations and hence did not contribute for entrepreneurship development. Despite the
existence of a prominent place to the private sector and to some elements of entrepreneurship,
such as the concept of competition, the conditions for its development were not very
conducive both domestic and foreign investments.

9.2 ENTREPRENEURSHIP DURING THE FEUDAL PERIOD

The predominant mode of production during the reign of Haile Selassie was characterized
mainly by the feudal economic system in which land ownership was the individuals main
source of income or capital. The feudal system despises enterprising people and activities and
it is only those who do not belong to the nobility who were forced to join the crafts and
commerce. The value given to these crafts and commerce was too low. This low social value
is one of the major reasons that hindered the development of entrepreneurship during the
feudal period. Moreover, the absence of advanced science and technology and the ownership
of most trade sectors by foreign investors were another factors for low development of
entrepreneurship.

In the feudal economic system, the private sector was indeed, given a prominent place. The
issuance of the commercial code in 1960 was a vivid indication of the governments interest in
encouraging domestic and foreign entrepreneurs. Though, the private sector was encouraged,
the pace of its development had rigorously slackened; and the participation of the local
entrepreneurs was very low. The greater portion of the private investment was
overwhelmingly contributed by foreign investors.

9.3 ENTREPRENEURSHIP DURING THE SOCIALISTS DECADES

The military government which took power in the 1974 Revolution had dramatically reversed
the precedent socio-economic system. It introduced socialist orientation and new policies that

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encouraged not only the development but also the very existence of a private sector giving
emphasis to public ownership and cooperatives.

The government policies as well as some of the legislations and regulations such as the
regulations that limits capital to a maximum ceilings of 500,000 Br. for industrial production,
300,000 br for wholesale trade and 200,000 br for retail trade as well as the 10 hectares
ceiling of rural land holding, coupled with cumbersome bureaucratic processes, had stifled
private initiative and arrested the pace of the growth of entrepreneurship. The private sector
was thus limited to small and weak activities opening wide opportunities for illicit trade.

It must be clear that along with the adverse effects of the general policies to the private sector,
it had, paradoxically, helped local entrepreneurs to make more initiative and perseverance to
the changing situations. The non-remittance of more than one license, a better access to land
and house rents at low cost had helped some business people to grow fast, with no or little
skill of entrepreneurship in majority of the cases. The inaccessibility of the private sector to
foreign exchange for raw materials, spare parts or machinery, had also led few entrepreneurs,
mainly those who had technical background to be creative in developing their own machinery,
tools and designs. This is not of course, to give credit to the government for its restrictions
imposed on the private sector but it is to underscore the fact that the private sector that
withstood its problems, could remarkably progress if the necessary encouragement and
support had been provided for local initiative and indigenous technology with an appreciation
of the advanced ones.

Towards the verge of its demise the defunct government had adopted mixed economic policy
in March 1990. This new economic policy, a result of the pressure of the internal and external
factors was left unimplemented for the government had ended its life by May 1991.

The Post Derg Years

The transitional government of Ethiopia while replaced the socialist military government had
declared its economic policy direction to be market economy. The new economic policy
favoring free market economy states the need for public enterprise reforms and divestiture
whereby managerial autonomy would be introduced and privatization process to take place
simultaneously. The development of the private sector in Ethiopia sought to be revised

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through the privatization process of state owned enterprises and through the direct
involvement of individuals or collective entrepreneurs in agriculture, industry, tourism, and
other economic and social services.

The new economic policy and the proclamations have positive impact on the development of
entrepreneurship and the private sector in general. They encouraged both domestic and
foreign entrepreneurs to have a positive thinking and take initiative towards undertaking
private business. The measure so far taken apparently signify and indicate the departure from
the previous regime’s economic policy and underscore the paramount importance and
considerable attention given to market economy and in particular to the private sector.

It must be clear, however, that the formulation of favorable policies and issuance of
regulations alone would not suffice to surge private sector. The issue of an enabling
environment to business has a much greater horizon of considerations. The elimination of
adverse regulatory and bureaucratic tentacles, the easy access to resources, including land and
credit, the availability of information on business opportunities, the easy mobility of
entrepreneurs across the whole region, stability and business confidence are some of the
salient factors which deserve, significant considerations in the development of private
entrepreneurship.

9.4 CHALLENGES AND OPPORTUNITIES OF ETHIOPIAN ENTREPRENEURS

(CURRENT PERIOD – EPRDF)

In the present, although the free market economic policy encourages the development of
entrepreneurship there are also many unfavorable factors. Some of these major problems are:
i) Access to Land: Land is a major source of capital in the Ethiopian economy. The
promulgation that has made the chance of micro, small and medium entrepreneurs and
startups in general to get land on aviation gloomy. It is then a major constraint to new
establishment and expansion of entrepreneurs.
ii) Financial Limitations: The very limited service of the public financial institution has
made it inaccessible to the great majority of the business community. The existing high
collateral requirements and the non-inclusion of machinery as a collateral, and in general
the absence of local financial credit system with a relate relaxed requirements have barred

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 the great majority of small entrepreneurs form access to credit. On the other side banks
currently provide only short-term finance. These and others problems of access to credit is
more acute at start-ups and the informal sectors at large with their very limited financial
capacity, too week to meet the requirements of the banks at any standard.
iii) Business Taxes
The present tax policy of the government discourages the entrepreneurs. The private
businesses are required to report and pay sales and excise taxes every thirty days. Under
the prevailing standard of the private sector’s working methods, the frequency seems very
problematic not only to payers but also to the receivers’

The discretionary tax assessment method and the procedures are also problematic. It is
also learnt that business experience such as worker’s training, research and development
and some marketing expenses are not yet routinely allowed to be subtracted from taxable
income. This practice would discourage entrepreneurs from investing in such areas which
are crucial factors in the development of entrepreneurship and the private sectors. A sales
tax of 12 percent is also considered too high by the private sector.
iv) Bureaucratic Procedures
A lengthily procedure is a common feature one word the growth of entrepreneurship and
the private sector. In this area, lack of clear coordination within and between departments
as well as intra organizations coupled with lengthy procedures frustrate private
entrepreneurs. Bureaucratic delays and administrative inefficiencies in process of
applications for registration of new business are also part of the problem.
v) Technology
Lack of domestic technology is also one serious problem. The absence of modern
indigenous technologies forces the businessmen in Ethiopia to depend on imported
technologies.
vi) Market Problem
The availability of market for the products produced by the local entrepreneurs is low due
to the negative attitude of the society towards domestic products. Moreover, both
Ethiopian and foreigners import variety of products in the name of the frequent
exhibitions, free of custom and other charges. The price of such products is usually less
that the price quoted by local producers producing similar products.

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vii) Poor infrastructure
The lack of or poor communication and transportation facilities, the absence or limited
water and electricity services, lack of information on business opportunities and the lack
of or little business advocacy ad up to the major hurdle the private sector faces,

To sum up, the most common problems of the Ethiopian entrepreneurs are absence of
technology, shortage of working capital, inadequacy and high price of raw materials, non
availability of qualified staff, managerial incapability, bureaucratic red tape, illegal
imports, weak market for domestic products, non-existence of strong institutional support
and inaccessibility to resources. Note also that some of these problems are getting
improvements or solutions.
Even though there are many problems which hindered the development of entrepreneurship
there are also some favorable factors for entrepreneurial activities in Ethiopia.

The private sector had been neglected for a long time and it is now given the opportunity to
manage its own destiny. As part of the economic reform programme necessary to revive the
economy the liberalization policies are considered positive move in the right direction. The
measures are welcomed particularly by the peasant who now have the right to sell their
produce at competitive price.

The package incentives which include exemption of investors /entrepreneurs from paying
import duties and various taxes are expected to attract and promote entrepreneurs.

The availability of untouched natural resources labor resource, and favorable physical
environments are additional opportunities for Ethiopian entrepreneurs.

Check Your Progress Questions

1. Which problems of the socialist decade have got solutions during the post Derg periods?
……………………………………………………………………………………………
……………………………………………………………………………………………

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 2. Give your argument regarding the improvement of the factors in the recent period which
were discouraging entrepreneurship during the early periods of EPRDF.
(N.B.
N.B. Give your comment/argument for each problems such as - access to land, business
taxes --- etc)
……………………………………………………………………………………………
……………………………………………………………………………..……………..
3. List the opportunities available for Ethiopian entrepreneurs. If you know some other
opportunities in your own region in the Ethiopian business environment discuss their
relevance for entrepreneurship development.
……………………………………………………………………………………………
……………………………………………………………………………………………

9.5 SUMMARY

The historical development of entrepreneurship was very slow in the Ethiopian business
environment. This is due to the fact that the Ethiopian entrepreneurs have been challenged by
so many problems starting from the past. In the past there was no favorable government
policy which supports the development of entrepreneurship, private sector had no access to
foreign exchange, there was restriction on private sectors, they suffered from shortage of
skilled labor and the private sector was not given support through training and apprenticeship
programmes.

In the present periods there are also some problems discouraging the development of
entrepreneurship. To mention some: access to land, limited financial institutions, business
taxes, lack of domestic technology and poor infrastructure. In spite of all

The above problems the incentive package, demand potential for all products and the
availability of different untouched resources are the major factors favoring entrepreneurial
activities during the recent periods (EPRDF).

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9.6 ANSWERS TO CHECK YOUR PROGRESS

1. Refer section 9.3

2. Give your answer based on 9.4 and discuss the improvements by identifying practical
examples
3. Refer part 9.4 list the opportunities and add some more from your own experience.

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