By Daniel Teferra (PhD)*
December 18, 2015
Addis Ababa’s urban development process cannot be viewed in isolation. It is part and parcel of Ethiopia’s development process.
No development process in Ethiopia can succeed unless a land reform program that can privatize land ownership is implemented.
Addis Ababa’s urban development process pleases few; but has dissatisfied most. This is because both the land and housing markets are a government monopoly.
In a monopoly market, there is cost to society. The output produced is small and the price paid is high compared to a free market.
The government controls land in Addis Ababa, a key resource for housing construction. Therefore, it sets the highest rental price and reaps handsome profits.
Land is fixed in supply. Consequently, rental price is driven by the demand for land. Recently, land demand and rental prices in Addis Ababa have increased tremendously.
For instance, in 2014, the highest rental price was $15,500 per square meter. Addis Ababa was named the most expensive city in the world (ref. Capital, Dec. 15, 2014).
The government has been withdrawing use-rights from the people in and around Addis Ababa and leasing the land to developers. As a result, the people and the government are on a collision course.
At the same time, the real estate business is booming. The investors are local entrepreneurs and well-to-do Ethiopians, living abroad.
The influx of NGOs and other organizations has created demand for up-scale rental houses, apartments and office buildings. This in turn has increased investment in real estate.
Furthermore, the high inflation rate raises the value of real assets, making investment in urban property attractive. However, a high inflation rate has cost to society. It diverts resources from productive activities such as agriculture.
Rental apartments and houses are expensive in Addis Ababa. They are occupied by foreigners mainly. The government is selling condos to the people. But government condos are in short supply and their prices are expensive for most. Thus, the majority in Addis Ababa still lives in run-down houses, owned by the government.
The government says that its goal is to renew poor neighborhoods in Addis Ababa and improve the nearby rural towns by leasing the land to developers. This process is called gentrification.
Supporters of gentrification believe that it gives new life to poor areas. It brings middle class residents and money; attracts businesses; creates jobs for the unemployed; reduces crime; and provides more tax revenue.
Opponents, on the other hand, argue that the low income will be pushed out of their neighborhood they love; and property taxes will rise for those who choose to stay. They argue that it affects the history and culture of a particular community and people.
Gentrification, at any rate, is inevitable in an urban development process. There will always be winners and losers from the process. However, the gains and losses to the people have to be measured. One way is to look at the effects of the process on the amount of housing produced and the prices paid.
In Addis Ababa, the real estate industry produces mainly upscale houses and apartments. The majority of the people has low income and cannot afford to rent or buy these places. As a result, the demand for housing by ordinary citizens goes unmet. Thus, most of the people are the losers from the urban development process.
The winners are the government and a few developers, investors, “mortgage” lenders and foreign residents. The losses exceed the gains because the number of losers is much greater than the number of winners. Consequently, there is a net loss to society.
If the land and housing markets were free, people would be able to make their own independent decisions as owners of land and buyers of homes. Affordable houses would be built. The low income people would be able to buy homes. They would be able to invest in property and enrich themselves.
Ethiopia’s rulers talk about urban development; and yet, they control the land and enjoy monopoly profits.
Development is not about building high-rises, luxury homes or sophisticated infrastructure to benefit the few.
Development is about empowering the poor. There is nothing more empowering to the poor than having the right to own private property.
There can be no development when the poor are denied this right by their own government.
*Emeritus Professor of Economics at FSU; teferrad@uww.edu; UWW-Whitewater.