Frontier mentality

LONG benighted, Ethiopia is attracting attention for a better reason. It has become Africa's fastest-growing non-energy economy (see chart). Investors have noticed. South Africa's largest consumer-foods firm, Tiger Brands, expanded into Ethiopia last year with a big acquisition. Diageo and Heineken recently paid nearly $400m combined to acquire state breweries in the country.

The latest proof came on May 9th, when Schulze Global Investments, an American investment firm and family office, announced that it had launched a $100m Ethiopia fund, the first private-equity fund focused exclusively on the country. Anchored by at least $15m from Britain's CDC, a government-owned provider of development finance, and $10m of the family's own money, the fund will invest in sectors from agribusiness and cement to health care and natural resources.

Investing in Ethiopia is not for the faint-hearted, however. With a projected national income of $38.5 billion this year, its population of 85m still ranks among the world's poorest. The government's big spending carries risks, including high inflation (32.5% in March was near a nine-month low) and heavy state borrowing that has shrunk the credit available to private firms. Much more borrowing and spending is planned, and needed. The heart of the Ethiopian capital may be traversed by new concrete arteries and bridges, built by Italian and Chinese contractors with Chinese loans. But the rest of Addis Ababa is a patchwork of dirt paths lined by corrugated-tin dwellings that are the capital's shantytowns and slums.

Poverty is pervasive, raising questions over how fast a consumer class will emerge. Agriculture is still a big source of national income, accounting for more than 40% of GDP and more than 80% of employment. Almost all private businesses are small: family-owned vendors and repair shops, the kind whose customers cannot suffer inflation for long. Credit is hard to come by for the unconnected. Only licensed exporters consistently benefit from repeated devaluations of the currency. To invest in Ethiopia is to invest in the frontier.

That suits Gabriel Schulze, who runs SGI (as the firm is known in Addis Ababa). He is the scion of an American frontier family. His great-great-grandfather, William Boyce Thompson, flirted with bankruptcy in the Old West and founded Newmont Mining, now a $23 billion company. Mr Schulze operates smoothly in Ethiopia because of connections built through his family (three of his younger siblings are adopted Ethiopians). In 2008 he established a permanent office in the capital, staffed by members of Ethiopia's class of returning exiles, including two daughters of former officials under the late emperor, Haile Selassie.

Connections are crucial. Ethiopia's doors are not all swung wide open to foreign investment, but rather opened selectively. The regime of Meles Zanawi, the prime minister, is ideological and authoritarian: the ruling party and its allies won 99.6% of seats in parliament in the 2010 elections. Its labyrinthine bureaucracy is the bane of the smallest of private businesses. Mr Meles is working from a neo-Chinese blueprint, long on public investment and state enterprise (banking, telecoms and retailing are off-limits to foreign investors). Outsiders wanting to do business in Addis Ababa must forge good relations with Mr Meles and his ministers.

Similarly, the larger, existing SGI investments in Ethiopia—in a coffee-export business, a cement plant and an oil firm—are investments in the elite families who run them, with family and personal networks that extend back generations. The Bagersh brothers, owners of the coffee business in SGI's portfolio, represent a third generation of coffee exporters. Tewodros Ashenafi, the founder of SouthWest Energy, an oil firm, is the great-grandson of a former minister of war. Shonaid Jemmett-Page, chief operating officer of CDC, says that this is the nature of investible companies in places like Addis Ababa. “One of the problems in most frontier markets is there's generally a pretty small entrepreneurial class,” she says.

Some critics of Mr Meles nonetheless worry that he will give away the store to foreigners—including bits of the country itself, they grumble, in the form of land farmed for export, which has become a fast-growing business. At the Sheraton Addis (a luxury hotel owned by Mohammed al-Amoudi, a Saudi-Ethiopian sheikh), a returned exile who makes introductions and brokers deals dismisses this notion with a story. A 19th-century emperor once saw off foreign visitors who had perhaps overstayed their welcome. The emperor was said to have ordered the bottoms of their shoes to be checked carefully on the way out. Not a crumb of Ethiopia's soil was to go with them.

^{Correction: The original version of the chart above included Lebanon, which is not renowned for being an African country. It has now been removed, and the Gambia joins the top ten instead. This was corrected on May 11th 2012.}