The ongoing Ethio-Eritrean thaw deserves to be commended for the economic and political advantages it will create. But the Ethiopian government needs to carefully gauge the economic and geopolitical implications of upcoming agreements, writes Alemayehu Geda (Prof.) (firstname.lastname@example.org), lecturer in Macro & International Economics Department of Economics at Addis Abeba University (AAU).
One of the greatest achievements of Prime Minister Abiy Ahmed (PhD) in his short time in office is the rapprochement he was able to secure with Eritrea. This is an excellent political and diplomatic success deserving of commendation.
But there are some major economic issues that need to be considered for lasting political and economic ties with Eritrea. This requires understanding the real cause and cost of the war, which will illuminate the policy direction that needs to be pursued instead of repeating previous mistakes.
In a study I carried out with colleagues in 2005 and has been widely reported ever since, the real cause of the war was not the possession of border towns but economic issues. The Eritrean government was accused of squeezing Ethiopia’s economy to a boiling point on the eve of the conflict, which then ignited the war. Although evidence has been hard to come by, it has been noted that the hegemonic aspirations of the incumbents in both countries contributed to the conflict.
Ethiopia and Eritrea signed cooperation agreements following Eritrea’s independence in 1993. Following this, two-thirds of Ethiopia’s foreign trade passed through Eritrean ports. Although they were termed “free ports,” how free they were was not defined in an explicit and transparent manner. Ethiopia was also a market for around four-fifths of Eritrea’s exports, and the two countries commonly used the Ethiopian currency, the Birr, as well as sharing the oil refinery at Assab port.
The estimated cost of destroyed infrastructure at the time was over 200 million dollars. While around 674,000 people were displaced, an estimated 70,000 lost their lives directly as a result of the conflict. The total volume of property in transit to Ethiopia but looted at Eritrean ports was valued at 133 million dollars. The trade embargo that followed the conflict also affected the cross-border trade, which used to support the livelihood of many Ethiopians and Eritreans living in the border areas.
Without accounting for the human loss and suffering, the total measurable cost of the war sustained by Ethiopia was estimated at the time to stand at three billion dollars, according to the Ethiopian Economic Association (EEA). This is excluding related costs such as un-recovered loans. It was equivalent to 18 months of the national budget or nearly half of the annual GDP of that time.
Following the end of the conflict, Ethiopia began reconstruction including the resettlement of Internally Displace People (IDPs) and the deportees from Eritre, and the rehabilitation of disabled people. This emergency recovery program was estimated by the World Bank to cost over half a billion dollars.
That brief war cost us resources equivalent to the price tag of the Grand Ethiopian Renaissance Dam (GERD).
The lesson is not to repeat such a conflict and work to realise durable peace. This requires going beyond the surface and addressing the cause of the war, which was economic rather than political. Furthermore, examining the historical and regional dimension of the conflict helps in resolving it amicably. The joy we witnessed during the state visit of President Issayas Afeworqi need not blind us from understanding the gravity of the issue and the complexity of the problem.
Based on the experience of regional integration in Africa, there are precautions our government should take when dealing with Eritrea.
Free movement of labour and capital should wait for the highest stages of integration. Over 800,000 polish migrants alone came to the United Kingdom following integration with the European Union. It changed the politics of the UK, including its decision to exit from the EU. In a developing country such as Ethiopia, this will have inflationary effects – on food prices and rent – and political consequences that may generate xenophobia and derail the peace process.
Likewise, until reaching an agreement in the coming years, Eritrean investors should be treated like any other business person from Kenya and come through the usual foreign direct investment (FDI) channels. Such talks will likely end up taking well over a year.
Individual Eritreans need to have work and resident permits to work or reside in Ethiopia. In the theory of regional integration, free movement of capital and labour is the last stage of union. The preconditions are macroeconomic convergence criteria such as similar deficit as a share of gross domestic product (GDP), inflation and exchange and interest rate target alignment and growth orientation alignment. Only when such convergence criteria as the COMESA and IGAD have been fulfilled, should the free movement of capital and labour between the two countries proceed.
There is also the port issue. We had a free port agreement with Eritrea before, but it was never clear how transparent it was. There should be clear guidelines set this time around.
From the perspective of our national interest, we need Eritrea and Djibouti to compete in the short run. For the medium run, we need to develop our own port near Assab or in Djibouti on a lease of three to five decades, as DP World is doing, where we do not pay a penny. In return, Ethiopia needs to offer an equivalent benefit package to Eritrea and Djibouti. This is crucial for a lasting peace.
The geopolitics in the area that includes the UAE’s presence – which according to reports has played a significant role in the rapprochement – in Eritrea and Somaliland, as well as Turkey in Sudan, cannot be overlooked either. In addition, the China’s interest in Djibouti’s port as part of its Belt & Road Initiative also needs to be considered in Ethiopia’s strategy.
China has in the past two years lent Djibouti an amount that is the equivalent of three-quarters of the national GDP. If Djibouti fails to pay, it might have to hand over its ports or a significant share of it to China, as did Sri Lanka last year. This has strategic implications for Ethiopia. On top of this, there are Western countries with naval bases in the tiny East African country, making Ethiopia strategically vulnerable.
It is notable that China is also Ethiopia’s biggest bilateral creditor. Such largesse has already caused us to lose a piece of our sovereignty with the recent decision to privatize assets in the aviation, logistics and telecom industries. This geopolitical trajectory needs to be the center of the negotiation with Eritrea as well as Djibouti.
Any agreement and decision need to be evaluated against the principle of mutual benefit and strategic security issues. It also needs to be given all the seriousness that it deserves by going beyond the casual peace accord and the current euphoria.
The Prime Minister and his team need not be hasty to implement any economic policies regarding Eritrea without a thorough analysis supported by a council of experts. These experts should be well-versed in the economic affairs of both countries, have a deep understanding of their history and need to be knowledgeable of the geopolitics and security issues in the region.
Such a council ought to come up with policy recommendations for the Prime Minister by approaching the issue from a multidisciplinary perspective. Otherwise, hasty decisions are bound to be captured by the same misunderstanding and tensions that led to the conflict in 1998. As the saying goes, those who do not learn from history are doomed to repeat it.
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