[Translated from ERMedia FB post]
Some political voices in Ethiopia continue to promote the false notion that “Eritrea is a country that seeks to develop within the Ethiopian economy.” During the EPRDF era, this baseless narrative led to nothing but a disastrous and costly war. Today, the Prosperity Party continues to echo the same argument.
Despite the fact that it is the Addis Ababa regime attempting to seize Eritrea’s resources and Red Sea coastline, the Prosperity Party, like with all the issues it invents to manipulate public opinion, is trying to portray Eritrea as a country seeking to benefit from the Ethiopian economy.
To provide context, we revisit an article published in Hidri Magazine in January 1998, which reflects the Eritrean government’s views on economic relations between Eritrea and Ethiopia. Here, we present the article and welcome your views.
The Economic Situation in Eritrea and Ethiopia: Open or Closed?
(Hidri Magazine, January 1998)
Over the past six years, relations between Eritrea and Ethiopia have been exemplary by any measure. After decades of bloody conflict spanning thirty years, the two countries achieved peace, signed a comprehensive cooperation agreement, and worked diligently to implement it. This arrangement allowed their peoples to move, live, and work freely across borders without the need for passports or visas.
This partnership helped both nations heal from the wounds of war more quickly, address shared challenges together, and revive their economies. Its benefits were evident to their peoples, their friends, and even their adversaries. While citizens took pride in the relationship and sought to strengthen it, and allies praised and supported it, enemies attempted to conceal disagreements and sow divisions, recognizing that this partnership stood as the main obstacle to their destructive plans.
The foundation of cooperation between Ethiopia and Eritrea is transparent. The two peoples are bound by shared history, culture, and collective struggle and sacrifice. Their common aspiration is to live in prosperity and human dignity, free from poverty and the legacies of war and oppression. Just as they united to defeat the Dergue, they understand that they can achieve their goals today if they join their efforts.
The governments of Ethiopia and Eritrea, born of this shared struggle and victory, do not differ in their vision or outlook on strategic matters. However, each country faces its own unique circumstances and therefore pursues policies it considers appropriate. For example, their approaches to nation-building are distinct, and their macro-economic policies are likewise tailored to their individual needs.
Ethiopian Economic Policy
Ethiopia’s development strategy is focused on rural development, where the majority of the population resides. It emphasizes agricultural development and industry based on agricultural products. To generate and properly utilize the foreign exchange required for implementing development programs and servicing Ethiopia’s debt, all foreign exchange transactions are permitted only through regulated banks. In trade, the government applies taxes and duties designed to protect domestic products, ensuring that they are not overwhelmed by imported goods. Regarding investment, certain sectors are reserved for the government and citizens, while other sectors are open to domestic and foreign investors.
Economic Policy of Eritrea
Eritrea’s development objective can be summarized as economic growth with social justice. Its development model involves the government taking an initiative, caretaker, and facilitator role within the realities of a market economy. Eritrea implements fiscal, monetary, and investment policies that promote productivity, competitiveness, and exports. The economy is open, allowing withdrawals and deposits in any currency. All sectors of investment are accessible to both local and foreign investors who make meaningful contributions. Even retail and wholesale trade, import trade, and commission agencies—which are traditionally reserved for nationals—are open to citizens of countries that grant reciprocal investment rights to Eritreans.
Economic Relations Between Eritrea and Ethiopia
Despite differences in macro-economic policy between Eritrea and Ethiopia, these differences have been diminishing over time and do not prevent close economic relations. Because their economies are interconnected and complementary, Ethiopia’s development benefits Eritrea, and Eritrea’s development benefits Ethiopia. Conversely, the backwardness of one weakens the other rather than strengthening it.
Even countries such as Eritrea and Ethiopia, which are historically, culturally, politically, and economically linked, are pursuing different initiatives in this era of globalization and intense competition. In our region, efforts are being made to dismantle trade barriers and promote economic integration through COMESA (the Common Market for Eastern and Southern Africa). The expanding fifteen-nation European Union provides another example. Similarly, the United States is tied to Canada and Mexico through the NAFTA (North American Free Trade Area) agreement. All three entered this arrangement because they believe convergence will benefit them, despite rigid macro-policies and differences in growth, population, and economic strength. At a time when even major countries are lowering tariff and non-tariff barriers and forming trade alliances to remain competitive, erecting new barriers and imposing additional restrictions is unlikely to be useful.
Returning to Eritrea and Ethiopia, their economic ties are deeper than those of many other neighboring states, and the movement of people between the two countries is so extensive that implementing a rigid or binding economic separation would be extremely difficult, even if it were desired. Given the existing challenges and the lack of adequate financial institutions and facilities, measures taken to enforce such arrangements would likely result in increased consumption costs and economic losses. There is little doubt that various informal mechanisms would emerge to mitigate these constraints, leading to widespread exchange of the Naqfa and the Birr outside official channels.
The majority of the people in Eritrea and Ethiopia seek good relations and friendship. They understand that closer economic ties, expanded trade, and fewer barriers and restrictions are in their best interests. On the other hand, there are a few individuals in both countries, particularly in Ethiopia, who distort the bilateral relationship as if it benefits one country more than the other. Some of these have accused Eritrea living at the expense of Ethiopians. They portray Ethiopia as great and powerful, possessing wealth and fortune and producing foreign exchange–earning products, while depicting Eritrea as poor, unable to feed itself, reliant on nothing but stones, and incapable of surviving independently.
Yet Eritrea and Ethiopia are currently at the same stage of development. Indeed, Ethiopia is a large country with abundant natural resources and potential. While population size contributes to market growth, other factors such as lifestyle, purchasing power, and the size and structure of the domestic market are equally important. The government is striving to expand exports of higher-value processed and industrial goods, recognizing that relying on foreign exchange generated from raw materials and semi-processed goods is insufficient for sustainable development. Ethiopia’s wealth and development, however, benefit not only Eritrea but all its neighbours.
As for Eritrea, it is a small country with a limited domestic market. Although it possesses natural resources capable of supporting development, it does not take pride solely in these resources. Its focus is on developing human resources and increasing the productivity of its enterprises, which are currently underperforming, and on operating successfully in broader markets.
Eritrea possessed the foundation and potential for such development 30 to 40 years ago. Until the 1960s, it was the country with the strongest industrial base in the region. Its range of products was competitive and in demand both within neighboring countries and beyond. This progress, however, was weakened during the reign of Haile Selassie and further crushed during his seventeen years of the Dergue rule. The legacy of that period has not entirely disappeared, and it continued to affect the EPLF during the revolutionary years. Yet, because efforts have been made to nurture this potential, reviving it—though difficult and requiring hard work—is not impossible, and can be achieved in a manner consistent with the realities of our time. The government and people of Eritrea are actively working toward this goal.
Just as Ethiopia’s development benefits Eritrea, the success of Eritrea’s efforts also benefits Ethiopia rather than being a loss. Already, peace between the two countries, balanced economic development, and the freedom of movement for their citizens are creating broader employment opportunities. Moreover, the growing number of citizens from one country living and working in the other serves as a clear indication of the strengthening bond between Eritrea and Ethiopia.
New Challenges, New Opportunities
The current changes in economic relations between Eritrea and Ethiopia will affect both countries. Trade and services are now to be conducted in foreign exchange, primarily through the banking system. A directive has also been issued to regulate cross-border trade in terms of type, pricing, and form. In the context of countries that lack efficient institutional facilities, the cost of this approach—in terms of money, time, and consumption—is significant. Perhaps more concerning is its impact on the social interaction between the two peoples.
This new economic and trade approach is not without its benefits, even though it is not the preferred framework for Eritrea–Ethiopia relations. It will help Eritrea identify and address weaknesses that may have been obscured by operating with Ethiopia under a shared currency. It will also test whether Eritrea has the capacity to manage its fiscal and monetary policies independently, steer the course of its economy, and determine whether its institutions are adequate for that task. At the same time, it will give Ethiopia the opportunity to move forward along its chosen path without concern for the economic implications of its special arrangements with Eritrea.
In short, although this shift will cause temporary setbacks, it will undoubtedly contribute to building relations between the two countries on a more realistic and stronger foundation. In this sense, it is a blessing rather than a curse.