Eight Business benefits of resuming economic relations between Ethiopia and Eritrea – By Tony Carrol

By IndepthAfrica
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Feb 1st, 2014
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Ethiopia and Eritrea ceased business relations upon the commencement of the border war in 1998. While a small amount of barter trade still exists, it is fair to say that trade relations between the two countries are non-existent – this is very much to the detriment of the private sectors in both countries (and across the region).

Since the closure of the border, the economic fortunes of Ethiopia and Eritrea could hardly have been more divergent. While both remain poor countries in terms of per capita wealth, Ethiopia has been among the fastest and growing countries in the world averaging a steady 10% per annum growth for the past nine years. Conversely, as per the chart below, Eritrea has suffered vast fluctuations in its economic growth from a low of – 9% in 2008 to the 2012 level of + 7.5%.

GDP Growth over the years (“Eritrea Country Report.” Global Finance).

Year Real GDP Growth in Percentage
2001 8.8
2002 3
2003 -2.7
2004 1.5
2005 2.6
2006 -1
2007 1.4
2008 -9.8
2009 3.9
2010 2.2
2011 8.7
2012 7.5

Ethiopia has also been a leader in Africa in terms of infrastructure development, especially in the construction of roads, power infrastructure and water supply. Eritrea has endeavoured to rebuild its transportation infrastructure after the border war but progress has been slowed by inaccessibility of finance.  In terms of education, Ethiopia has built dozens of institutions of higher education in the past 10 years and has begun to develop a work force that is increasingly in demand by manufacturers from Turkey, China and India. Despite promising signs of self reliance immediately after Independence, Eritrea continues to find its work force diminished due to emigration and military service.

Last, Ethiopia is rapidly modernizing its domestic and export agriculture whereas as Eritrea still relies on subsistence methods of production – albeit while eschewing food aid.

As a business consultant who has worked on investment in both countries, I am confident that a comprehensive settlement of disputes that underlie the 1998-2000 border war and normalization of economic relations will create myriad benefits, including:

  1. Increase in road, rail and port infrastructure in Eritrea. With assistance from the Chinese, Ethiopia has expended billions on building its transportation corridor to Djibouti. However, for many regions in Ethiopia, Eritrean ports are closer.
  1. Increase in power infrastructure and opening of export markets. By combining their respective sources of power, hydroelectric, wind and geothermal, Eritrean and Ethiopian consumers would benefit from lower costs and greater reliability of supply.
  1. Reduced power and transport costs would increase manufacturing investment in both Ethiopia and Eritrea. Although Ethiopia remains one of the world’s most expensive countries in terms of road transportation costs, there have been a swath of new manufacturing ventures in textiles, apparel and leather goods, driven by low labour costs and increased skill training.
  1. With its port access, Eritrea could also become a manufacturing hub, perhaps even adding strategic value to raw or semi-processed materials coming from Ethiopia.
  1. Renewed access to the US market under the Africa Growth and Opportunity Act (AGOA). In 2004, Eritrea was deemed ineligible for market access benefits offered and while the impact was minimal at the time, Ethiopia has been able to substantially grow its exports to the US in the past five years. The normalization of political and economic relations with its neighbour would not in itself restore AGOA eligibility, but it would demonstrate progress toward that end.
  1. Increased convertibility of currencies. Normalization of economic relations would allow the establishment of banking relations, now non-existent between the two countries. The Nakfa is among the world’s least convertible currencies and an open and transparent exchange with the Ethiopian birr could lower transaction costs for all businesses and consumers.
  1. Return of the commercial sector. As a result of the border war, Ethiopian businesses were expelled from Eritrea and vice versa. This bar has constrained companies from both countries to achieve scale. Moreover, among the most dynamic business communities in Ethiopia for generations were those of Eritrean origin.
  1. Fostering regional integration. Africa is striving to integrate its markets and Ethiopia has been leading in this process by establishing agreements with its neighbours for power and transportation corridors. There has been speculation that Ethiopia seeks membership of the East Africa Community. EAC membership would also provide benefits to Eritrea.

As reported by my friends Ambassadors Cohen, Shinn and Lyman, this appears to be a moment of inflection in the relationship between Eritrea and Ethiopia. Certainly the implementation of the border agreement and the resumption of commercial relations will not be an easy process. However, the economic benefits that would accrue to both countries could be substantial and should motivate leadership in both to expedite the process.

By Tony Carol, African Arguments

Tony Carroll is Vice President of Manchester Trade and Director of Acorus Capital.

 

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