In 1993 a relatively tiny sliver of land bordering the Red Sea, won its independence from Ethiopia. By many measures the modest country of Eritrea, should be one of Africa’s richest nations. Its strategic position on one of the world’s busiest shipping lanes, abundant natural resources, and central access to Saudi Arabia, Egypt, and the U.A.E. suggest that with moderately successful governance, this coastal state could be one of the region’s most prominent success stories. Instead, a combination of poor management, lack of fiscal transparency, stagnating growth and ongoing emigration have left Eritrea behind many of their developing peers. This paper examines the challenges facing Eritrea’s development, and argues that while a focus on FDI, economic diversification, and emigration are critical to its success, true reform begins with increased transparency.
Background
Eritrea is located on the horn of Africa, bordered by the Red Sea to the north, Sudan to the west, and Ethiopia and Djibouti to the south. The country is mineral-rich, with large reserves of copper, zinc, silver and gold. Its long coastline boasts a powerful fishery, and its strategic location provides ready access to the Indian Ocean and the Mediterranean. Yet for all these innate advantages, Eritrea remains not only among the world’s poorest nations, but near the bottom of their peer group (Kaplan, 2016). This combination of factors, their tremendous potential coupled with an inability to get out of their own way, makes Eritrea an intriguing case study.
The 2018 human development index ranked Eritrea 179th out of 189 countries in terms of total development, a fact representative of the country’s poor governance, lack of social spending, and non-existent participation in the global economy (United Nations Development Programme, 2018). However, this is only the best estimate based on the available data. Eritrea’s absence from both the MPI and Gini indexes, for example, illustrate a much broader issue with transparency and disclosure.
Though their lack of transparency and low HDI scores are powerful indicators of poor governance, Eritrea’s history has notable bright spots. To begin with, their separation from Ethiopia was both peaceful and democratic. Though a border dispute and twenty years of war would later follow, a stable peace was reached in 2018 and the two countries appear to be regional allies. On the other hand, Eritrea’s democratic aspirations seemed to have died at nearly the moment they were born. Their president, Isaias Afwerki has held office since 1993 and the country has yet to hold a single democratic presidential election.
Development Issues
While Eritrea supposedly has democratic intentions, it has failed to demonstrate liberal reform. Seth Kaplan, of Johns Hopkins University, writes that the anti-business ideology of government officials has resulted in an underdeveloped private sector, a lack of skilled labor, and a weak judicial system (Kaplan, 2016, p. 13). These are all broad symptoms of what economists like Paul Collier (2007) refer to as the bad governance development trap. Furthermore, Eritrea remains self-reliant and protectionist. These policies have resulted in stagnant growth and economic isolation. In 2014, for example, FDI per capita was among the lowest in Africa while imports were far from where they should be (Kaplan, 2016,pp. 7, 10). Strict, isolationist policies limit growth and discourage investment, while other opportunities, such as economic diversification, are lost.
These economic challenges are further complicated by Eritrea’s resource-rich geography. Collier calls this the natural resource curse and writes that developing nations with large natural resource booms often end up poorer than when they started (Collier, 2007, p. 23). Deakin University professor Damien Kingsbury echoes this sentiment, writing that income from natural resources should provide capital for investment and development, however it more often leads to corruption and violence (Kingsbury, 2019 p. 97). While it’s not fair to say that Eritrea has fallen victim to the natural resource curse, its preference to open mineral extraction to FDI, as it did with the Bisha Mine in lieu of other opportunities (Kaplan, 2016), bears watching. In other words, if Eritrea’s poor governance continues to preference natural resource development, the historical odds are not conducive to a prosperous long-term future. While the concepts of traps might seem academic and theoretical, they provide real value. Not only do they help frame the country’s economic and political landscape, but they also help define problems and frame solutions.
Policy Options
Despite its economic and social development concerns, Eritrea has options. The first of these is to increase financial transparency. While this should be technically straightforward, rooting out corruption is not so simple. It is impossible for foreign agencies to ensure zero corruption without internal cooperation. The simple case of identifying dishonesty was illustrated by Kingsbury (2019), who cited examples of Indonesian officials who questioned how agencies would know when one hundred miles of road were asked for, but only twenty were needed (p. 88). Transparency requires local action, either on the part of public officials or the public themselves. Collier (2007) cites an example in Uganda where one banking official decided to alert local media every time the central government released public education funding. The resulting public scrutiny incentivized officials to address corruption, and as a result, the amount of money reaching schools increased from 20% to 90% of allocation (p. 67). Transparency carries obvious risks, however. Death threats, political unrest, public shame, and removal from office are a few. That said, transparency followed by immediate action, such as the sustained delivery of funding to schools or hospitals, should mitigate the risk.
Given the amount of emigration that has occurred over the past two decades, Eritrea would likely need to revisit their position on staunch self-reliance and accept foreign technical assistance. International aid could also be used to build out infrastructure, roads, the electrical grid, and schools. Aid could also help existing infrastructure. For example, the U.S. Department of Agriculture has allocated over $6 million in technical assistance to help fight African Swine Fever in Latin America (U.S. Department of State, 2023). It’s difficult to imagine a developing country with poor education having the intellectual capacity, much less the budget to protect their existing infrastructure from such risks.
Eritrea could also consider increasing imports, particularly those that support existing businesses or develop infrastructure. Free trade carries risks, however, as was demonstrated in Cameroon where cheap onion imports devastated local farmers. However, non-competitive imports or flexible tariffs are options the government could consider (Achtnich, 2018). Ultimately, engaging with the world economy and protecting local interests are not mutually exclusive, but do require careful planning.
Alternatively, Eritrea could take steps to encourage more foreign direct investment by improving transparency and disclosure. That said, there are no silver bullets. As Kingsbury (2019) writes, FDI often involves a foreign company extracting resources and amassing offshore profits that provide little benefit to the local economy (p. 71). FDI is also subject to market conditions and competition from more attractive opportunities abroad. The IMF reported, for example, that recent trends in FDI show a clear preference for geopolitical alignment and reduced risks (Ahn et al., 2023). The recent pullback from China and Taiwan are examples of how quickly FDI can change directions. That said, these risks don’t preclude FDI but they are important policy considerations.
Finally, economic diversification is another area of opportunity. Kingsbury (2019) cites the explosive growth of China, Japan, India, and Brazil as examples of countries who became factories for the West, though he cautions that such approaches don’t always work and carry unintended consequences (p. 66). Another risk of service diversification is that services are inherently dependent upon the health of one’s customers. Much of the Middle East and Africa’s futures, for example, lie in their ability to diversify away from fossil fuels. Regardless, similar opportunities exist for Eritrea to serve its wealthier regional neighbors, just as Brazil and India served the West.
Policy Recommendations
Long-term success for Eritrea can be summarized in three objectives: encourage foreign direct investment, stop the flow of emigration, and incentivize the diaspora to return home. These goals contribute to the sustained success of Eritrea by diversifying the economy, growing GDP, increasing tax revenue, and retaining Eritrea’s human intellect; however, none of these objectives can be met without first increasing transparency.
Transparency might be a footnote in other developing countries, however in Eritrea, a lack of disclosure is a fundamental and well recognized problem. This is evident in such basic terms as its absence from the MPI and Gini indexes, as well as its poor international perception (Kaplan, 2016). In fact, Eritrea’s reputation and lack of access earned it a near last place finish on the World Bank’s assessment of government effectiveness (p. 13). It’s difficult to argue for increased foreign investment, international aid, and economic diversification, when the country’s government can’t be trusted.
Transparency carries both international and domestic goals. For example, domestic transparency includes publishing government finances in local papers. It may also include a degree of freedom of the press to print such data without narrative. Conversely, recipients should publish what they received versus what the government supposedly allocated. Third party regional audits would be another option. As the Uganda case cited by Collier (2007) showed, such disclosure not only reduces corruption, but it increases public trust. Furthermore, transparency helps effectively distribute aid by directing it to where it’s needed most.
Internationally, transparency can make the difference between development and remaining in the bottom billion. Kingsbury (2019) points to Botswana as a country that has greatly improved its anti-corruption controls particularly around natural resource extraction (p. 77). Such controls encourage foreign investment and aid by reducing ambiguity and risk. Open contracts and bidding are one example of such transparency. More importantly, the financial incentives that come with disclosure result in increased tax revenue. This is money the government can use to reinvest in infrastructure, education, economic development, and to pay the salaries of employees.
Certainly, transparency carries risks, particularly for the government officials charged with reforming. However, public outrage, unrest, death threats and violence can be mitigated by open public dialogue and immediate transparent action. If Eritrean officials are skeptical of these reforms, the increased national wealth and personal prestige that come with a healthy and diversified economy ought to provide reasonable motivation.
Conclusion
Eritrea’s natural resources and geography place it in a strong position to succeed, however, its insular self-reliance and economic isolation have resulted in a stagnant economy, lack of opportunity, and rampant emigration. These issues are exacerbated by a lack of transparency that discourages foreign investment and international aid. These factors make it highly unlikely that Eritrea will be able to self-arrest and climb out poverty without decisive reform. It is critical therefore that Eritrea commit to a policy of transparency, at home and abroad. From these reforms can flow increased economic prosperity, social spending, and national wealth.
References
Achtnich, T. [DW Documentary]. (2018, June 6). The deceptive promise of free trade. [Video].
YouTube. https://www.youtube.com/watch?v=DnW9ZQtI1_E
Ahn, J., Habib, A., Malacrino, D., & Presbitero, A.F. (2023). Fragmenting foreign direct investment
hits emerging economies hardest. The International Monetary Fund. https://www.imf.org/en/Blogs/Articles/2023/04/05/fragmenting-foreign-direct-investment-hits-emerging-economies-hardest
Collier, P. (2007). The Bottom Billion: Why the poorest countries are failing and what can be done about
it. Oxford University Press Academic US. https://bookshelf.vitalsource.com/books/9780199740949
Kaplan, S. (2016). Eritrea’s economy. Atlantic Council. http://www.jstor.com/stable/resrep03690.7
Kingsbury, D. (2019). Politics in Developing Countries. Taylor & Francis.
https://bookshelf.vitalsource.com/books/9781351583145
U.S. Department of State. (2023). Foreign Assistance. https://www.foreignassistance.gov