BACK2KCAB: Some Notes on Eritrea’s Economy & Notes on Some Notes

Notes of “Some Notes on Eritrea’s Economy”: A response to Dr. Fikreyesus

On growth

In his recent article titled “Some Notes on Eritrea’s Economy” posted by madote.com, Dr. Fikrejesus Amahazion tried to convince his readers that there is a functioning economy in Eritrea. In doing so, he used gross domestic products (GDP) estimates and projections of the Global Economic Prospects of the World Bank Group report issued in January 2017. In his article he compares Eritrea’s real GDP growth estimates for 2016 with the averages of global/world GDP growth rate.  In his own words:

“For Eritrea, GDP growth was slightly above 4% in 2016, outpacing the global average, as well as GDP growth in the advanced economies, developing economies, and Africa [Figure 1]. As well, Eritrea’s projected growth for the next several years is expected to outpace global projections [Figure 2]. Importantly, such economic growth can be central to poverty reduction and the realization of broader development goals. Moving forward, Eritrea can address several areas in order to sustain positive economic momentum and enhance overall development.”

From his statements above, Fikreyesus didn’t able to distinguish between measured, estimated and projected real GDP growth rates. Not even between the nominal and real GDP growth rates. Otherwise, he could have informed his readers how double digit inflation is challenging the average Eritrean households. For that matter, global comparison masks the true economies of nations because compiling global data for GDP takes different methodologies from the national, sub-regional and regional ones. Another challenge of measuring GDP is that it is measured in national currency making it harder to compare GDPs of nations. In comparing the GDP of two countries, first you have to convert the national currencies into US dollar. In the case of Eritrea the official exchange rate and the market rates are irreconcilable and puts GDP calculations harder and irrelevant. Sometimes, the World Bank weighs the GDP purchasing power against US dollar by introducing purchasing power parity (PPP) of the dollar instead of its face value.

Because the global comparison is not completely dependable, the World Bank Group went further to compare real GDP growth rates of nations by sub-regions excluding some major economies of the sub-region (for example, excluding South Africa’s economy from the Sub-Saharan averages), by levels of income and other criteria.  In the case of Eritrea, the 4% real GDP growth rate for 2016 is estimated not measured. Not only that but also growth estimate for 2016 in Eritrea is driven by the good rain distribution and extractive natural resources (mining) and is not because there is/was any favorable climate for investment. In other words, even if estimated growth for 2016 looks positive it is not policy driven growth.

The World Bank Group projected Eritrea’s real growth for 2017, 2018, and 2019 to be 4.3% (linear projections). Why? Because (1) the economy as it stands now is narrow and (2) there is no prospects for diversifying the economy by allowing investment. For sure, in the Eritrean case, its real GDP growth rates estimates and projections must be based on the natural resource prospects not on prospective changes in investment policies to accelerate growth. Fikreyesus didn’t want to tell the true state of the economy based on historical and measured data and the specific sources of growth because his aim is to save the faces of the country’s leaders.

In his paragraph quoted above Fikreyesus underlined that “…such economic growth can be central to poverty reduction and the realization of broader development goals.” Well, I said those indicated as real GDP growth rates are not measured but estimates and projections. As to the centrality of growth for poverty reduction, I don’t think the good doctor understands economics let alone poverty reduction. Otherwise, he could have told his readers that growth is nothing to do with poverty reduction unless it is inclusive. In the first place, it is not how much growth was realized but the extent a period of economic growth generates benefits for the whole population through an equitable distributions of its benefits and a comprehensive participation of the working population in the labour markets in the process. The reality is though businesses are denied to invest in critical sectors but small shops. Besides, in Eritrea labour is not free to choose but forcefully engage in an unpaid and or nominally paid jobs for the party and government enterprises. In other words, citizens are not equally participating in the growth process (if any) and benefiting from the so called growth. So, Fikreyesus’ claim that growth will contribute to poverty reduction is simply nonsense.

Furthermore, in Eritrea the economy is closed for foreign direct investment except in the extractive sector (mining) and there is no prospect by the government to open up the economy. For that matter, the policy of closed economy is being implemented, essentially to protect party businesses and ensure party monopoly of the country’s economy. If citizens are denied to participate in the process of growth by their own government equitable distribution of benefits through investment and jobs is unthinkable. Moreover, the good doctor should understand that poverty and inclusive growth are not in the dictionary of the government. In Eritrea, there has been no report on the state of poverty except the 1993 incomplete assessment on national poverty.  Major economic activities be in processing, agriculture, wholesales, construction and other sectors are sole monopolies of the party businesses and their associates. So, how is it possible for growth to change life of the people while the whole economy is in the hand of a single party?

Therefore, I would like to tell the good doctor that GDP growth is about the average size of the economy not a measure of poverty. There could be growth without well-being and poverty reduction like in his example, Eritrea.  If he doesn’t know, growth is inclusive when citizens are allowed to participate in its process and equitably share its benefits through income and decent paid jobs in the labour market. In Eritrea, there is no labour market and decent pay or compensations for the laborers. To conclude this section, the good doctor said “[m]oving forward, Eritrea can address several areas in order to sustain positive economic momentum and enhance overall development.” Well, what ‘positive economic momentum’? If you are talking about the possible contributions of agriculture to GDP in 2016 the credit should go to God, the Almighty! If you are talking about the extractive sector (mining) again it is not something that deserves exaggeration because of its extractive nature.

On manufacturing and Skills

I mentioned above that if any economic growth is/was registered in Eritrea it is driven by rain fed agriculture and the extractive sector (mining). Also, I stated that growth in our country is not policy driven. Fikreyesus claims Eritrea’s economic is continuously growing and is being integrated into the regional and global economies. In his own words:

“As Eritrea continues to grow and integrate into the broader regional and global economy, it is vital to raise and vary exports, moving away from low-value added and potentially unstable primary products. Manufacturing is essential to growth, and with rapid technical change and global economic integration, it is becoming important as a means of modernizing and diversifying the economic base.”

He keeps saying “as Eritrea continues to grow…” but he uses World Bank’s estimated and projected real GDP growth figures. He could have used measured GDP growth rates by referring back on real measured GDP growth rates instead of using estimations and projections which may or may not be realized. He didn’t do that because it was a disaster and because his intention is to defend the indefensible state of Eritrea’s economy and bad governance out there.

Right now, is Eritrea engaged in any form of regional and global economic integration? Of course not. But, the good doctor is telling his readers for Eritrea to continue its economic integration at the regional and global levels while Eritrea’s economy is completely closed for domestic and foreign investors. Before asking the leaders “to raise and vary exports” and pursue value added activities in the economy, isn’t it appropriate to advise the leadership to revisit their economic policy and open up the economy for domestic and foreign investors? It seems the good doctor lacks understanding of regional and global trade integration when he says Eritrea should continue to integrate its economy into the region and beyond. What we have is a closed economy and we cannot think of regional and global integration before Eritrea opened its market for domestic and foreign investors. In short, the country is intolerant for private investments in agriculture, manufacturing, construction, wholesale, and tourism. So, what do you have to offer to the regional and global markets except raw mine products?

Fikreyesus normatively explains the skills needs and investment in skills building. But, an economist would not advise a policy maker to invest in skills building without telling him/her to equally invest in the labour market/economy. Nevertheless, Fikreyesus is obsessed in explaining the importance of skills. Besides, for him skills are just meant to feed the market skills needs. However, skills and capabilities of citizens are meaningless outside the human development context. In other words, citizens need skills to effectively participate in the growth process and equitably share its benefits. It is true that Eritrean workforces are contributing to the economy although unproductively but they are not benefiting out of the economy. Who is benefiting? Party businesses and their aide. Furthermore, labour and skills are commodities in the labour markets. If there is no demand for their labour and skills in the labour market why should, in the first place, Eritreans invest their time and energy in skills unless forced by the government to do so and serve in its enterprises for free? It is also wastage for the economy to invest its scarce resources in skills unless the skills are meant to payback to the economy and the worker in the form of decent pay.

Further, Fikreyesus included an important paragraph in his article. It reads as follows:

“To augment impact, the potential for enterprise-based training should be explored, while technical and vocational programs should be carefully assessed, diversified, and matched with the skills required by the labor market, possibly with the active participation of employers (Kanyenze, Mhone and Spareboom 2000; World Bank 2014). An illustrative example is the system of productivity councils that was a fundamental component of the rapid growth and success of the East Asian economies. Specifically, the system involved the specific skills profile required by the private sector being fed directly into the curricula of the educational and technical sector.”

However, he didn’t want to admit that there is no functioning labour market and private sector in Eritrea let alone to talk about skills gaps and mismatches.  Do we have real enterprises in Eritrea? No, we don’t! I call it a normative explanation of non-exiting situation outside calling his article’s title “some notes on Eritrea’s economy”.  Because, under no private sector and no functioning labour market we cannot talk about skills needs, gaps, and mismatches. Many countries including in Asia instituted productivity into their mainstream economic management because there are competitive private sectors and functioning labour markets. If you don’t have the two why do you need to have an institution to spy labour productivity and excellence?

Here comes Fikreyesus’ misconceptions of campaigning. Fikreyesus seems out of touch from the Eritrean value towards skills and technical knowhow when he advises the government and stakeholders to launch “awareness campaigns illustrating that technical and vocational programs are an important means of empowering individuals to fully develop their capabilities and tangibly improve their lives.” According to him “campaigns” about the importance of technical education “will help garner greater attention and participation, while counteracting potential obstacles related to perceptions of the alleged low prestige of technical and vocational programs.” My good friend, I know that many countries experience that challenges of under participation in technical and vocational educations but that is not the problem in Eritrea. Eritrean youth and their families value technical education unlike in many countries and populations. Your perception is not the perception of an Eritrean teenager and household. So, your global knowhow doesn’t fit to facts in Eritrea and its people. Friend, let’s meet in Edaga Hamus and ask a teenager and his/her parents and listen what they have to say about the importance of technical education. I am sure they will disapprove your misconception.

On Fisheries and Tourism

We have been dictated about the richness of our sea and the potential of the tourism industry for the last 25 years and even before. Did the people and the country benefited from these sectors? Absolutely not. Everything you tried to explain under these two sectors is simply a cadre’s tune. May be good also for the files and folders of a desk top computer. You could have told your readers the 25 years lost opportunities of not investing in these sectors and the resulting sufferings by the people and the economy.

Notes of “Some Notes on Eritrea’s Economy”

In Eritrea there is no publicly and readily compiled economic data. Because of this lending banks such as the African Development Bank (ADB) and the World Bank have to sit with authorities and work on guess based estimates. At the moment the ADB is a major lender to the Eritrean government and the Bank closely monitors the economy. For Eritrea to access the Bank’s money it has to provide the bank officials access to the state of its economy. So, I prefer using data of the ADB provided by the domestic authorities rather than the Word Bank officials data from Nairobi. As in the following, I prefer putting the macro indicators of our economy and will not delve into explaining each point because they are self-explanatory and because the figures speak for themselves.

Source: ADB base on data from domestic authorities; estimates (e) and projections (p) based on authors’ calculations.

Note from the above table that inflation is too high bringing real GDP growth rates down to where they are.

Source: ADB

Note that 2011 and 2012 periods were of bonanza years from the Bisha mine. Whenever we see slight move in real GDP check with Heaven.

Source: ADB, based on estimates by domestic authorities

Note that major mechanized agriculture, manufacturing, construction, wholesales and at times retail trade, transport, storage, and communication, finance, and electricity and gas and water all are monopolized either by the party or the government. In other words, nothing is left for domestic investors. Don’t forget labour is a private ownership of either the party or the government.

Source: ADB, based on government authorities; estimates; projection (p) based on ADB’s calculations

Note that tax revenue is extremely low indicating the tax base is narrow and tax revenue depends on the expansion or contraction of the 2% diaspora tax. Also, note that party businesses do not pay tax but use state offered free laborers in the name of nation building or national development.

Conclusion

Under this situation I urge the government of Eritrea to change its course and lead the economy in a conventional way. Past and current policies didn’t work. It is time to change your policy completely for the interest of the Eritrean people and the country as a whole. Self-serving people cannot serve you and these people make more harm than good for you let alone for the nation. In fact, unintentionally people such as Fikreyesus destroys your face completely than otherwise.

Let me conclude by an old Eritrean adage፡ “እቲ ዝገንሓኒ የለብመኒ።” Unfortunately, our government loves people who keep praising its policies and curses those who speak the truth.