By Daniel Teferra
March 20, 2014
A high-rise building under construction in Addis Ababa. Is it a sign of an economic boom? Daniel argues otherwiseUp until the fall of the Imperial Regime of Haile Selassie in 1975, there was a free market for real estate in Addis Ababa that performed quite well. People were able to buy land and build their dream homes. They were able to own rental property and earn income. The low-income were able to sublet some of their rooms and supplement their meager resources. The supply of housing was fairly adequate and rental prices were reasonable. People maintained their property relatively well.
Homelessness was not widespread. The homeless did not have to sleep on sidewalks–a common practice nowadays–exposed to the brutal cold of the night. They were at least able to shelter themselves inside store verandas and places of worship.
Upon taking state power, the Stalinist Regime of Mengistu Hailemariam abolished private property and expropriated all urban land and rental property without compensation. Tenants were accorded possessory rights over the houses they currently rented without paying any compensation to the landlords. Each household was allowed a single dwelling house and a possessory right (not private property right) over land, not exceeding 500 square meters.
The government had the power to retract a possessory right if the land was not utilized for building a house within a specified time period. The government would give only in-kind compensation if it needed a particular land for its own use. The government collected rent on all rental property and use rights over land. Those who had already owned land or business units paid property taxes.
The government took over the construction of all office buildings and apartments. The real estate industry became a government monopoly and a separate ministry was created to manage the industry. A policy of low rent accommodation was put in place.
Soon demand for housing outstripped supply. A critical shortage of housing ensued. At the same time, inflation raised the cost of constructing new housing and maintaining existing ones. The construction business alone took over 50 percent of the government’s total capital outlay.
The rental income, collected by the government, went mostly for the huge housing bureaucracy. There was no money left for maintenance and the rental property turned out to be run-down and hazardous as the government continued to consume both the rental income and the capital. Homelessness became a serious problem and urban decay consumed the city.
If there were a free market for housing, the imbalance between demand and supply would be reconciled. For example, as the increase in demand for housing raises rental prices, existing tenants will economize housing and some tenants and owners will find it profitable to rent out rooms. More importantly, potential entrepreneurs will have an incentive to invest in real estate and increase the supply of housing. Such increases in supply will in turn force rental prices down until the shortage disappears.
In 1991, when the Regime of Meles Zenawi took state power, it did not privatize land nor did it take itself out of the real estate industry. It did not return the illegally expropriated property to their original owners nor did it pay appropriate compensation. Instead, it auctioned off shopping malls, increased rental prices on storeowners, imposed the value added tax (VAT) and introduced a land-lease policy. While all these generated much needed revenue for the government to pay its soldiers and the rest of the bureaucracy, it created a problem of its own.
Because of the government’s growing appetite for revenue, entire neighborhoods are being cleared and use right over the land is being auctioned off. The government says that it is transforming Addis Ababa, but residents of the city are not given priority. Instead, they are moved to the outskirts of the city. The government boasts about building condominiums for the displaced people, but the majority cannot afford them.
In Addis Ababa, there is an unprecedented demand for construction and the government is reaping the benefit of a booming lease market. At the same time, the people are being displaced and forced into homelessness. This inequity is a direct result of a selfish land law that abolished private property and gave the government land monopoly. Winston Churchill, in one of his rare speeches once said, “Land is a necessity of human existence, which is the original source of all wealth. It differs from all other sources of property. Land monopoly is a perpetual monopoly. It is the mother of all other monopolies. Where land monopoly prevails, the greater is the injury to society the greater the reward to the monopolist. The State would be blameworthy if it were not to endeavor to reform the law and correct the practice.”
Why Ethiopia Needs To Privatize Land
The writer, Daniel Teferra, is Emeritus Professor of Economics at FSU, presently at UW-Whitewater.