CHAPTER SEVEN - LAW AND DEVELOPMENT IN ETHIOPIA
7.1 General Overview of Ethiopian Economic Development
Ethiopia is desperately poor. It contains one of the largest concentrations of poor people on the planet. Ethiopia ranks 170 out of 177 countries on the human development indicator and on present trends will fail to meet any of the MDGs by 2015, and this has implications for the extent to which the whole of Africa will meet them. GDP per capita has increased marginally from $102 to $113 between 2000 and 2004, but still remains at one of the lowest levels in the world. 31 million people live below the national poverty line (on less than half a dollar a day) and between 6 and 13 million people are at risk of starvation each year. Not only Ethiopia is poor but it is equally poor: 81% of the population of 77 million live below a poverty line of $2 a day. There has been little improvement in either income or consumption poverty in the last decade.
Livelihoods are predominantly based on agriculture, which accounts for 85% of employment, 45% of national income and over 90% of export earnings. But, Ethiopian agriculture remains low-input, low-value and subsistence-oriented, and subject to frequent climatic shocks. Labour productivity in agriculture is low and the country suffers increasingly from shocks of drought, which often lead to severe harvest failure and famine, and affect not only current but future levels of consumption. In the last major drought in 2002/03, over 13 million people in more than half of the districts of the country were affected.
The most pressing concern of rural communities is the continued pressure on limited land resources. High population growth, slow rural-urban transition and limited employment opportunities outside farming have combined to make a significant reduction in landholdings from 0.5 hectares per person in the 1960s to 0.11 in 1999. Intensive use of smaller plots of land is contributing to environmental degradation in turn feeding back into even lower levels of agricultural productivity, and effectively locking many into a poverty trap.
Patterns of social exclusion affecting particular social groups or segments of the population contribute to increasing vulnerability in Ethiopia. Women are especially disempowered. There have been gradual gains in gender equality in Ethiopia but there is also a deep conservatism that pervades gender roles, severely proscribing what women can and cannot do, especially in rural areas. The extent to which gender inequity in Ethiopia is deep-rooted is epitomised by the widespread acceptance, by women themselves, of violence against women.
Women’s poverty is characterized by their limited access to resources, services and employment, and inability to claim their rights: only 9% of women have access to agricultural extension services and 12% to agricultural credit; only 32% of permanent civil service posts are held by women, and only 10% of those are in professional cadres. The relatively high prevalence of harmful traditional practices, such as female genital mutilation, early marriage, and marriage by abduction significantly affects the vulnerability of women and girls, for example by increasing the risk of HIV infection, reducing their chances of finishing school, and violating their reproductive and sexual rights.
The overall health status of people in Ethiopia is extremely poor. Life expectancy is 54 years. Despite some improvements in recent years, the rates for maternal mortality, under-five mortality and infant mortality are high. High fertility is a major contributor to poverty. The main health problems are communicable diseases, due to poor personal hygiene, poor garbage and waste disposal practices, and lack of an adequate and safe water supply. The major causes of death are infectious diseases (TB, respiratory illnesses, malaria, gastrointestinal infections, meningitis, AIDS and leishmaniasis). Malaria is one of the country’s worst health problems. 68% of the population is at risk of infection and malaria accounts for 10-30% of the disease burden in all age groups. Ethiopia is one of the world’s 22 top countries for tuberculosis incidence.
In the past 40 years, the performance of the Ethiopian economy has been variable, with a very poor underlying trend of 0.2% annual growth in GDP per capita over the period 1961-2003. Due to the dependence of the economy on agriculture, growth has historically been affected by climatic variability, the terms of trade (eg the effects of volatility in international coffee prices), and conflict. Growth spurts have tended to be short-lived and associated with positive climatic shocks such as good rainfall. The main driver of growth in agriculture has been the expansion of land under cultivation rather than increased productivity, which is unsustainable in the medium to long term.
There is little in the way of export-led growth: Ethiopia is a landlocked country and trade (both internal and external) is constrained by the large distances and poor transport infrastructure. Growth rates increased in the 1990s, and since the war with Eritrea ended in 2000, the Ethiopian economy has performed relatively well, even despite the drought in 2002/03. Over the past five years the average growth rate has been 4-5% per annum, although this translates to only 2-2.5% growth in GDP per capita given rates of population increase, falling far short of what is needed to meet the $1 a day MDG.
7.2 Brief Discussion on Ethiopian Government Plans for Poverty Reduction
In 2002, the Government produced its first PRSP, the Sustainable Development and Poverty Reduction Programme (SDPRP), setting poverty reduction as the core objective with economic growth as the principal means to achieve it. The SDPRP was built upon the following four pillars:
· agricultural development-led industrialization and food security;
· the justice system and civil service reform;
· governance decentralization and empowerment and
· capacity building
In the 3 years since its launch the Government made good progress in maintaining macr-oeconomic stability and in boosting the poverty focus of its expenditures. Economic growth was hit by the drought of 2002/3, but has since rebounded strongly. The Government took important initiatives in the launching of the Coalition for Food Security and its comprehensive programme for capacity building. During the SDPRP period, the Government's pro-budget allocation and progress in increasing domestic revenues have contributed to the upward trend in many social indicators. Progress in various areas was constrained, however, by the need for policy development to achieve the Government's objectives. These included:
- overcoming the policy and institutional constraints to the development of the private sector;
- re-thinking rural development strategies to foster employment generation, crop diversification and private sector involvement in rural areas;
- strengthening rural urban linkages and focusing on growing urban development issues;
- operationalising the national population policy;
- strengthening decentralized institutions to create the conditions for accountable and responsible local government and enhanced democratic participation and
- strengthening monitoring and evaluation systems, and taking forward partnership commitments.
Many of these points are addressed in the second PRSP, the Plan for Accelerated and Sustained Development to End Poverty (PASDEP), which the Government is in the process of finalizing. Like its predecessor, the PASDEP has very strong Government ownership. For the first time, it was debated and approved by the Parliament. It has been designed to accelerate the effort to reach the MDGs. It is build on the first poverty reduction strategy, and is innovative in several important respects.
The PASDEP reflects a consensus that pro-poor growth is a fundamental priority. The programme centers on a growth strategy for the next five years consisting of eight elements:
(i) Commercialization of agriculture and promoting much more rapid non-farm private sector growth;
(ii) Geographical differentiation, with a greater emphasis on urban development;
(iii) Population policy;
(iv) Addressing gender inequalities;
(v) Infrastructure development;
(vi) Risk management and vulnerability;
(vii) Scaling up service delivery to reach the MDGs; and
(viii) Generating employment.
The PASDEP advocates continuing to pursue the strategy of agricultural development-led industrialization, but with a more balanced approach to urban development and with important enhancements to capture the private initiative of farmers and encourage the shifts to diversification and commercialization of agriculture. It advocates a private sector push, especially on exports, to create jobs and reduce foreign exchange constraints.
There is a reinforced emphasis on good governance, with plans to accelerate local empowerment, and exploit regional differentiations. Decentralization, first to the regional, and then to the district (woreda) and sub-district (kebele) levels, remains a centerpiece of the Government’s strategy both to improve responsiveness and flexibility in service delivery, increase local participation, and democratize decision-making. Policy reforms are expected to be enacted in a number of key domains during the PASDEP programme, including revisions to civil and commercial law, human rights, sexual/gender harassment, and children’s and HIV/AIDS-affected persons’ rights. A justice sector capacity building programme will aim to train and support the judiciary. The Human Rights Commission and Ombudsman’s Office will both be strengthened as part of the PASDEP, with the establishment of systems and procedures, and capacity-building and increased gender sensitivity. The emphasis on civil service reform and capacity building will continue, with a focus on strengthening staffing and incentives, and setting service standards for responsiveness to the public. There is also an increased emphasis on training of Parliamentarians.
The PASDEP is a Government-driven plan for poverty reduction, with clear targets and indicators to measure progress annually which provide the framework for result-oriented policies and strategies. The PASDEP is a medium term plan consistent with meeting longer term development objectives. However, some of the PASDEP targets may be over-ambitious and are unlikely to be affordable within the resources, which currently appear to be available. In some areas, the linkages to the MDG targets could be more explicitly developed. There remains a need to make sure that the PASDEP and sector strategies are fully compatible and consistent, which will help in ensuring that the targets are met through linkages with the budget and with the policy and results matrix on which monitoring and evaluation will be based. Further work is needed on developing the linkages between various sectors; including how cross-cutting issues such as gender, HIV/AIDS, population, vulnerability, the environment and governance could be more effectively mainstreamed across the sectors.
The Government of Ethiopia recognizes that good economic and social sector policies, if they are to be implemented successfully, depend on effective state capacity. Capacity building is central to the Government’s strategy for reducing poverty. The PASDEP identifies civil service reform and decentralization as priorities, particularly strengthening the capability of local government to formulate and implement development plans, manage resources and deliver services to citizens. It also demonstrates commitment towards making further progress on core aspects of public sector reform and democratic governance that the rights of all its citizens, as enshrined in the constitution. However, the PASDEP does not adequately identify the critical contribution that civil society could make to reinforce accountability to citizens, and in advancing empowerment and voice.
7.3 The Legal Framework of Ethiopia and Development
The discussion in this section of the material examines the laws and regulations that Ethiopia has in place and that serve as the basis for its ability to achieve sustainable development. The discussion enable students to analyze questions like : How closely do existing laws reflect emerging global standards? What inconsistencies or gaps are present in the legal framework? Often discovered through this review are opportunities to make relatively small changes that may result in significant openings for development and expansion.
7.3.1 Company Law and Corporate Governance
Company law is crucial in market economies; it sets the legal environment for the creation and continuing operation of privately owned businesses. Good company law is especially critical in transition-economy countries. It can encourage new investment and provide investor protection by setting forth clear a objective and rules for a company’s ongoing internal governance; it can encourage entrepreneurship by making it easy to start up and register a company; and it can encourage businesses to come out of the underground economy into the publicly registered, tax-paying economy.
Ethiopia’s current company law is part of its Commercial Code, which has remained unchanged since its enactment in Imperial times (1960). It is patterned after the French Commercial Code as it was in effect in 1960. The company law was effectively suspended during the Communist Derg period (1975–1991), when formation of new limited liability companies was not permitted. The company law was restored to full effect under the present Government. Although the current company law has been basically adequate for conditions to date, it needs to be updated. The present Government recognizes this and appointed a committee under the Department of Justice, which has been working on an updated version for more than 2 years .
One distinct issue involving company law is that of startup and registration of new companies. Although that has been a problem in the past, it is no longer so according to all persons who were interviewed, including practicing lawyers and accounting firm professionals, company officials, registry officials, and donors. That is due to implementation with donor help of revised and streamlined company registration procedures and forms in the Ministry of Trade and Industry.
B. Types of Companies.
The current company law provides for four forms of companies, as can also be expected in the forthcoming new company law:
• General partnership, in which the partners are personally liable for the partnership’s obligations (Commercial Code Articles 280-95);
• Limited partnership, in which one or more general partners are personally liable for the partnership’s obligations and one or more limited partners are liable only to the extent of their agreed contribution (Articles 296-303);
• Share company, which may offer shares publicly and has no upper limit on the number of shareholders, which roughly corresponds to a French SA, a German AG or an English PLC, and which is identified by the company’s name and the initials “SC” (Articles 302– 509); and
• Private limited company, which has fewer formalities than a share company; which may not offer shares publicly and may not have more than 50 members; which roughly corresponds to a French SARL, a German GmbH, an English private limited company, or a U.S. limited liability company; and which is identified by the company’s name and the initials “PrPC” or “PLC” (Articles 510-543).
Both share companies and private limited companies provide limited liability for their shareholders/ members, meaning those persons are not personally liable for the company’s debts and other obligations.
C. Corporate Governance
The current company law contains important provisions for corporate governance, although many of these would require revision to comport with governance provisions of other countries and current international best practice. Among the significant corporate governance provisions are a requirement in share companies that conflict-of interest dealings between a company and a director must receive prior approval of the board of directors
(Article 356); that state a company may not make loans to a director (Article 357); that state directors are personally liable to the company for failure to carry out their duties that include a duty of due care and diligence (Article 364); and that state a company may sue a misbehaving director upon approval of shareholders representing 20% of the capital (Article 365)—although currently the law does not provide for shareholder-derivative litigation as is the case in other countries.
At the same time, the current law contains provisions that are contrary to international best practices and facilitate insider minority control and hinder transparency in governance. Such provisions can seriously discourage new investment.
These include permitting a share company to issue bearer shares (Article 325—this is inadvisable because anonymous bearer shares can lead to hidden ownership and tax evasion); permitting a share company to impose restrictions on free transfer of its shares (Article 333—this is not appropriate, at least in widely held companies, because it prevents share liquidity), and permitting a share company to limit the number of votes which shareholders may exercise at shareholder meetings (Article 408—this is counter to the “one share one vote” principle which assures control in proportion to investment).
 It should be noted that although the company law covers registration generally (Commercial Code Articles 86– 123), most provisions for company registration are contained in other, more recent laws, namely, Proclamation 67/1997, Regulation 13/1997, Proclamation 376/2003, and Regulation 95/2003.