16 Sept 2019
Section 2: Labour & Land Resources in Ethiopia
Fitch Solutions Labour Market Risk Index
- Ethiopia is placed in fourth position out of 11 East Africa states and in 140th position out of 201 states globally in Fitch Solutions’ Labour Market Risk Index.
- Ethiopia outperforms against the East Africa average in the Labour Risk Index, most notably for availability of labour and to a lesser extent for education. Ethiopia scores lower than the East African regional average for labour costs.
Labour Market Risk Index: Methodology and Components
- 100 = Lowest risk; 0 = Highest risk
- The overall Labour Market Risk score is calculated from the average of the Availability of Labour, Education and Labour Cost sub-component scores.
- Education: the education sub-component focuses on general and tertiary schooling. Scores are based on enrolment at each level of education and interest in technical subjects, such as science, manufacturing, construction and engineering. This gives an indication of the talent pool available in a country, and emphasises higher value technical skills.
- Availability of Labour: the availability of labour score takes into account the size of the workforce, the quality, age and health of the labour pool and its composition (both with regards to the nationality of workers, and their occupations).
- Labour Cost: this sub-component assesses worker flexibility and the cost of hiring in a particular country. It includes factors such as the minimum wage, severance pay and unemployment. The scores are calculated to reward the countries with the lowest cost of hire.
Labour Supply & Skills
Ethiopia has by far the largest working-age population in the region at around 60.7 million people, compared with 30.8 million in Tanzania (the second largest in East Africa), owing to its population size of more than 105 million people. This indicates significant potential for businesses that require low to semi-skilled labour. Nevertheless, low life expectancy owing to inadequate healthcare provision, a low urbanisation rate and a shortage of highly skilled labour due to poor educational attainment levels reduce the structural attractiveness of the country's labour market. Businesses will experience production disruptions as employees will seek frequent off-time and will exit the workforce early because of poor health, resulting in high labour turnover for businesses.
Ethiopia's Growth and Transformation Plan (GTP), which is in its second five-year phase, places emphasis on higher education to help accelerate economic growth and achieve the developmental goals of becoming a middle-income country by 2025. As such, the government is making progress in boosting education attainment levels. Government investment in vocational programmes and universities will improve the labour market over the long term.
Companies encounter few barriers in hiring expatriate workers. All foreigners wishing to engage in employment in Ethiopia are required to obtain a work permit, which will be granted if the employer can prove that the job cannot be performed by a local recruit.
Labour Costs & Regulations
Ethiopia has an attractive labour market profile from a direct labour cost perspective, owing to the absence of a statutory minimum wage, low tax contributions and inexpensive work permits for expatriates. Given that the majority of the domestic labour force is low to semi-skilled, it is unlikely that the minimum wage will be set at high levels even if it were to be implemented, because the government is aware that such a move would induce severe levels of unemployment.
Labour market laws are also highly flexible regarding employer obligations, giving businesses greater bargaining position in employment contracts. Though the severance pay for redundancy dismissal at 10.5 salary weeks is higher in Ethiopia than in other countries in the region, it is still not a major burden for businesses. The risk of disruption to firms caused by worker strikes is also limited, as there is weak unionisation of workers in the country compared to the rest of the region. Unionisation in Ethiopia is constrained by the largely agricultural and informal nature of the economy and industrial strikes are quite rare.
The potential risk for businesses regarding workers having weaker bargaining power, including the lack of a minimum wage in a low-skill labour market environment, is that this can create an incentive for underpaying workers, since the bargaining power is tipped in favour of employers. In turn, this raises exposure to reputational damage and legal risks in the long term. However, businesses can easily avoid these potential risks by ensuring reasonable wages and working conditions are implemented to support sustainable operations and avoid disruption further down the line.
Land Resources, Construction Permits & Registering Property
Private ownership of land does not exist in Ethiopia, given that all land belongs to the people and is administered by the government. The government has the right to expropriate land for the ‘common good’, raising land rights risks for businesses operating in the country. Furthermore, local community opposition to large-scale infrastructure projects is not uncommon in Ethiopia and presents a risk to project implementation across the power, transport and industrial construction sectors.
Obtaining construction permits is time-consuming and costly, proving a significant barrier to investors looking to construct new premises. The process involves 13 procedures and takes an average of 134 days. In terms of costs, obtaining a construction permit generally costs 14.4% of warehouse value, which is notably uncompetitive against the Sub-Saharan Africa (SSA) average of 8.8%. That said, the process has improved marginally over the last couple of years, as the time needed to obtain planning consent has fallen. Registering property in Ethiopia is roughly equal in cost to the regional average, at just under 6.0% of property value.
Industrial Real Estate
According to the Ethiopian Investment Commission (EIC), there are three types of leases and prices for industrial parks:
- Readymade sheds: Start at a price of US$2 per sq.m. per month.
- Readymade land: Investors to pay a single fee of US$0.04 per sq.m., as well as land development recovery costs (depends on location). The land includes road and utility infrastructure, but investors are expected to build their own factory sheds at own expense.
- Raw land: Investors to pay a single fee of US$0.04 per sq.m., plus all costs of land development and infrastructure.