Diaspora Investments,

Motivations and Challenges:

The Case of Ethiopia

Elizabeth Chacko 1 & Peter Gebre 2

1 Associate Professor

Geography & International Affairs

The George Washington University

2 Senior Associate

Lark-Horton Global Consulting

Washington, D.C.

World Bank International Conference on Diaspora and Development

July 13-14, 2009

Diasporas and Development

Diaspora –”…groups of migrant origins residing and acting in host countries but maintaining strong sentimental and material links with their countries of origin …”

Development - The improvement in the standard of living in a country through increased opportunities for its citizens as well as a more equitable distribution of income and wealth.

The Ethiopian Diaspora:

Context and CharacteristicsContext of Diaspora: Conditions under which migration took place, who left and when, where diaspora settled.

Initially, well educated persons of a high SES ( 1970s, early 1980s)Settled mostly in North America, Europe, Africa and AustraliaLabor migration (20,000) of unskilled workers to Middle Eastern countries

Group characteristics: Socio-cultural and economic factors.Gross income of Ethiopian Diaspora estimated at 10-20 billion USD per annum, roughly equal to the home country’s GDP of 13 billion USD in 2006Diaspora investment in last decade has been about 10% of total “domestic” investment in Ethiopia2007-2008: Remittances of USD 1.8 billion from Ethiopians abroad to home countryEthiopian Diaspora Business Conferences held since 2007 in Addis Ababa and Washington, DC.>50% of diaspora investment in Ethiopia originates in the USA and Canada.

Fostering Transnationalism

Enabling institutions: The state and its institutions, bi- and multilateral agencies, NGOs, corporations etc. The Ethiopian State Encourages Diasporic Consciousness

2002 –Person of Ethiopian Origin Identity Card (Yellow Card) 2002 – Creation of General Directorate in charge of Ethiopian Expatriate Affairs within the Ministry of Foreign Affairs 2004 -National Bank of Ethiopia allows Yellow Card holders to open foreign currency bank accounts in Ethiopia, raising the limit to $US 50,000 in 2006Diasporas with Yellow Card allowed to bring in personal goods free of duty until 2006

Enabling environment: Legal framework, provide easy access to institutions and information, political environment and political stability.

Fostering Transnationalism and

facilitating investmentAllow EASIER MOVEMENT OF CAPITAL AND GOODS

100% duty exemption on importation of machinery and equipment for investment projects.100% customs exemption on spare parts whose value does not exceed 15% of total value of capital goods imported Ethiopians in the diaspora with Yellow Cards can also engage in investment ventures below US$ 100,000 (normally reserved for domestic investors only)

Residential Housing Associations (RHAs) The Ethiopian government encouraged the diaspora to form RHAs, that were given land for housing (average 24 units, at least 12 individuals). Maximum from N. America (430), Europe (291), Asia/M.East (261), Africa (52), Australia (2). This program no longer exists.Transportation linkages: Ethiopian Airlines is a global airline; flights to Washington, D.C. 6 days a week.EFFECT: Diaspora members become increasingly involved in businesses, professional networks and volunteer activities.

Ethiopia’s GDP Growth Rate by Sector

(1999- 2008) Ethiopia's GDP Growth Rate By Sector (1999-2008)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Years

Gro

wth

Rate

Agriculture

Manufacturing

Electricity and Water

Construction

Real Estate

GDP

Total Investment Flows

Ethiopia, 1992-2008

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

Domestic Capital Diaspora Investment Foreign Capital Public Investment

Diaspora Investments in Ethiopia

1992 to mid-2009: Ethiopian Investment Agency issued 1,805 investment licenses, mostly (~40%) to residents of the USA, with about half that number to Canadian residents.Mostly small business venturesBut big business also exists: MIDROC companies – biggest investor after the government, with large capital investments in hotels and tourism, manufacturing, mining and energy, agriculture, education, construction and health.

SECTOR

Capital Invested in million Ethiopian Birr

% of total capital invested

Total projects

% of total projects

Real estate 11,027 68 % 1059 59 %

Manufacturing 1,963 12 % 326 18 %

Hotels and restaurants

697 4 % 93 5 %

Construction 530 3 % 76 4 %

Health/ social work

415 3 % 70 4 %

Education 394 2 % 64 4 %

Agriculture 386 2 % 62 3 %

INVESTMENTS BY MAJOR SECTOR.

1992 – 2008.

Source: Ethiopian Investment Agency, Addis Ababa

0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

16000000

18000000

Agriculture Manufacturing Real Estate, Others Total Capital.

Implementation

Operation

Pre-Implementation

Grand Total

0

200

400

600

800

1000

1200

1400

1600

Agriculture Manufacturing Others Real Estate Total No of Proj.

Implementation

Operation

Pre-Implementation

Implementation by

# of Projects

Implementation by

amount of capital

Diaspora Investment by Region

(Addis Ababa, 1992-2008)

69.8%

18.2%

3.3%2.8% 2.4% 1.8% 1.8%

Real Estate and Construction Manufacturing Health Education Trade Agiculture Hotel

ADDIS ABABA

REAL ESTATE

& CONSTRUCTION

MANUFACTURING

90.2% of diaspora

investments are in

Addis Ababa

INVESTMENTS BY GEOGRAPHIC REGION2000 – 2008

42%

26%

23%

3% 6%

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

OROMIA (61)

AMHARA (66)TIGRAY (21)

1

2

3

4

5

6

SNNPR (16)

1

2

3

4

5

DIRE DIWA (8)

HARARI (2)

(2)

AMHARA

Agriculture (51%),

Real estate (20%),

Hotels (14%)

OROMIA

Agriculture (41%),

RE (26%), Mfg (21%)

TIGRAY Real

Estate (33%)

SNNPR Hotels

(31%)

DIRE DIWA

Manufacturing (40%)

MOTIVESEconomic

Growing economy, good business opportunity, Availability of land – the main component of real estate costs in Ethiopia. Land initially provided at no cost or below fair market price (now restricted or stopped)400 real estate agents currently licensed in Addis Ababa aloneExemption from duty, customs, other privileges for diaspora (initially)

FamiliarityAddis Ababa prime destination because of acquaintance and awareness, security, relative ease of conducting business

Social incentivesDesire to help country, community, social remittances and investment of personal skills, human capital

Possibility of return

CHALLENGESChallenges for the Diaspora

Delays, bureaucratic red tape

Land no longer easily available, particularly in Addis Ababa

Duty exemption privileges have been suspended

Access to finance is difficult in most sectors (particularly agriculture)

Downturn in the economy – many construction projects are stalled

Frequent changes in government policies with regard to access to land, finance, duty exemption and sectoral priorities

Lack of information on how to do business in Ethiopia

CHALLENGES

Challenges for Development

Concentration in Addis Ababa

Concentration on real estate & construction

Lack of diversification – could make better use of natural resources

Diaspora’s political activism is a major concern of Ethiopian government (drop in investment after contested 2005 elections)

CONCLUSIONSEthiopians have strong connections with their homeland, the Diaspora is keen to engage in business ventures and development.Diasporas can contribute to the country’s future developmentCreating a business environment conducive to diaspora investment is importantNeed to consider the impacts of policies that may not be sustainableMost diasporans will not return permanently. Policies should facilitate and promote circulation – of diaspora business partners, of knowledge circulation through input from professionals and expertsNeed to help investors setting up businesses in Ethiopia, navigate bureaucracyPromote natural resource clusters for expansion of exportsEncourage partnerships: public-private, diaspora-local, govt-NGO