Addis Abeba — Ethiopia is changing--fast, visibly, and in ways that deserve recognition. Digitalization is spreading across everyday life, and Addis Abeba is undergoing one of the most ambitious urban transformations in its history.
One of the most encouraging developments is the expansion of digital payments. When a shoeshine boy recently told me I could pay him using Telebirr after I said I had no cash, it was a powerful reminder of how deeply digital tools have penetrated daily economic activity. Digital payments lower transaction costs, reduce friction, improve transparency, and make participation in the formal economy easier for millions. This is a genuine and important success.
The physical transformation of Addis Abeba is equally striking. New corridors, cleaner streets, and high-rise buildings across the city have reshaped its landscape. Entire neighborhoods look unrecognizable compared to just two years ago. This level of ambition and execution reflects confidence in the future and a clear desire to build a modern capital city.
Ambition alone is not enough
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Studies reveal that roughly 70% of Ethiopia's urban population is employed in small and medium enterprises (SMEs). Any major urban development initiative--whether corridor construction, tax reform, or business relocation--should clearly state how it affects this majority or, at the very least, demonstrate how it avoids harming them. Too often, that connection is missing.
Recent reports point to growing strain. Tens of thousands of businesses have applied to cancel their licenses, and some owners report being told to wait up to two years before their cancellation requests are approved--while still being required to pay taxes. The net number of active business licenses--new applications minus cancellations--is one of the clearest indicators of urban economic health, and all signs suggest it is moving in the wrong direction.
Many business owners cite new and excessive taxes as a primary reason for shutting down. Some observers dismiss this explanation and attribute the trend to a lack of tax awareness among Ethiopian entrepreneurs. That view is too simplistic. It is increasingly likely that the overall cost of doing business has risen so high that what once appeared as noncompliance was simply the margin that allowed firms to survive. Once that margin disappeared, profitability vanished.
Many business owners cite new and excessive taxes as a primary reason for shutting down."
These costs go far beyond formal taxation. They include bribes, informal payments, and frequent requests to contribute funds for public goods and services outside the official tax system. They also include lost revenue due to foot-traffic diversion and forced relocation caused by corridor projects. Many small businesses depend heavily on location and daily customer flow. When development projects divert foot traffic or relocate firms to low-traffic areas, sales often decline immediately--and sometimes permanently. Even efficient, well-managed businesses cannot withstand sustained revenue shocks of this kind.
What should change?
First, Ethiopia needs a better decision-making framework. Every major policy or development initiative should define two sets of metrics before launch. The first are success metrics, measuring whether a project achieves its intended goals--modernization, efficiency, growth, or the number of permanent jobs created. The second is guardrail metrics, tracking whether the project causes unacceptable harm, particularly to SMEs. Wherever possible, initiatives should be tested at a smaller scale--such as in secondary towns--before being rolled out nationally, with both sets of metrics closely monitored.
Second, when guardrail metrics deteriorate, policymakers must pause and understand why before scaling further. In many cases, the problem is not the development goal itself but the surrounding cost of doing business. Before expanding large urban projects, all contributors to excessive costs must be addressed. For example, local administrative units--kebeles, woredas, and subcities--have been a persistent sources of friction. Rather than facilitating business activity, they often complicate license renewal, tax payment, loan applications, and other routine processes. Their role should be limited to the provision of social services--such as support for retirees and rehabilitation for individuals struggling with addiction--and they should be withdrawn entirely from business-related decisions.
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Third, the cost of ignoring SME distress is ultimately borne by the state itself. Widespread business closures and unemployment force governments to divert tax revenue toward crime prevention, social control, and emergency support rather than productive investment. Preventing economic dislocation upfront is far more efficient--and far less costly--than paying later to manage its consequences.
Ethiopia's progress in digitalization and urban development is real and commendable. But development without guardrails risks becoming extractive rather than enabling. If the 70% of the urban population employed by SMEs loses its livelihood, digital payment systems will lose relevance, high-rise buildings will struggle to find occupants, and ownership of economic activity will increasingly shift away from Ethiopians. True progress is not measured only by skylines and payment apps, but by whether ordinary Ethiopians can continue to work, run businesses, and build their futures within the economy being created around them. AS
Editor's Note: Abraham Abebe Asfaw is a senior economist at Amazon Inc. He can be reached at abrishaerc@gmail.com
