Ethiopia

Sustainable Development Zones to address urbanization, migration, and informality

Date: October 2018 - Present
Client: UN Habitat
Role: Project Co-Promoter and Legal & Policy Technical Design Team

Like other developing countries, Ethiopia faces tremendous pressures. Internal migration, fueled by conflict, poverty, and climate change, is driving tens of millions of people to the cities. Regulations make it very difficult for these new arrivals to start businesses legally or to build homes. On average, it costs somewhere between 70% and 443% of annual GDP per capita just to get a business license, making it virtually impossible for the average entrepreneur or small business to operate legally. Because the legal framework slows the pace of development, the only new homes available are government-sponsored condominium housing and homes for the wealthy. Only a small percentage of average Ethiopians win the lottery for condominium housing, and almost none can afford luxury homes.

What happens when the realities of urbanization and regulatory barriers collide? A rapidly-booming informal economy where low-income and even middle-income Ethiopians find ways to earn money and build homes “illegally.”

While informality is an organic, necessary, and even dynamic response to these challenges, it still means no access to finance, limited potential for growth, no protection of the law, and the fear that someone could take away everything you own at any time. Ethiopia isn’t unique; most developing countries are seeing the same informal-economy boom, driven by internal migration to cities combined with inefficient regulations.

The Politas team is working with partners at the SDZ Alliance, UN-Habitat, the Ethiopian Government, and European stakeholders to respond to these challenges through a “Sustainable Development Zone” (SDZ). An SDZ is a place where much of the positive activity happening in the informal economy – especially business formation and housing development – can happen legally.

This SDZ lowers the barriers to development by forming a social-enterprise company (the “developer”) – co-owned with low-income residents – that subdivides land, subleases parcels, provides basic infrastructure and services, and allows development by low-income residents themselves. The residents own the structures they build and get a lease for the parcel of land, which gives them formal rights to property. The developer – including the low-income residents who are co-owners – collects revenue derived from land rent. If the developer serves the community well, the company’s revenue rises, and it can then re-invest in the residents and their community. Thus the developer uses land value to help fund public services, humanitarian assistance, and potentially a basic minimum income.

The SDZ would also lower the barriers to business formation. The zone would carry out administrative functions like business registration and licensing, property registration, and tax administration on behalf of other governments in the country for a limited concession period. During this time, the SDZ could adopt best practices and new technology that greatly improves the business environment, especially for local entrepreneurs and SMEs. It would also greatly increase tax revenue for governments through economic growth, improved administration, and bringing businesses into the formal economy.

The SDZs directly advance the UN Sustainable Development Goals and Ethiopia’s Growth and Transformation Plan. We believe they are an transformative vehicle for social-impact investment that is replicable in countless places in the world.

We are currently seeking private and public stakeholders, including investors, to join us in the project in Ethiopia as well as other developing countries. Contact us today for more information or to get involved.