Eritrea: Got the Dutch Disease Yet?

The state of Eritrea, which became an independent nation more than 20 years ago; depended for its survival on the remittance money from the huge diaspora and foreign aid; until the rupture of relations and military conflict with Ethiopia in 1998. In order to survive the sudden de-coupling of its economy with the huge economy of its neighbor; and maintain the punishing cost of war; the state mobilized a large percentage of the adult bodied population, and resources of the country for war; war economy has therefore become a permanent feature.

However, a large amount of money from gold and other metals has since overtaken; the dwindling flow of remittance money from some of the disgruntled diaspora. Has Eritrea succumbed to the “Dutch Disease, or Resource Curse” phenomenon; as many countries of the Third World and particularly Africa had been? It probably didn’t; confounding many economists. Eritrea may likely remain immune from it for a longer period of time. What factors made it “escape” from it?

War economy   

Countries that succumb to the Dutch Disease suffer from the sudden availability of hard currency; which has a deleterious effect on the manufacturing and export sector. Awash with hard currency, the local currency will increase its value; putting many of the goods produced domestically in unfair competition with the rest of the world. Awash with hard currency, regimes often spend large amount of money on social services; which had been neglected for years. This policy often results in the indirect-diversion of labor to the sector; leading to massive inflation. Venezuela is an excellent example.

Eritrea, however, doesn’t seem to keep any significant amount of its mine-generating hard currency in the central bank. It depends on the informal economy with little transparency to its budget and debt accrued over the years. The recent scandal on the close to 700 million dollars stashed away in a Swiss bank is a good illustration. That may not be the entire amount money kept hidden in foreign institutions. Is this money a “sovereign wealth”; money kept for hard times and the future generations as Norway, Australia, Canada do? It’s most unlikely for the countries mentioned are democracies. In addition, Eritrea, is not a welfare state notwithstanding the jargon on justice.

Outsourcing welfare

Eritrea’s expenditure on social services is extremely small compared to its huge expenditure on its military; estimated by some in several hundred thousand. It has outsourced the upkeep of its significant percentage of its population to the huge diaspora; who hate as they may seem the regime, would not refrain from sending money to their relatives. The inflation that ensues is not from any major expenditure on social services by the regime, however. Unemployed people, including hundreds of thousands of people in the army, who earn only about 2 dollars a day; depend for their livelihood on this sector. The state of Eritrea has other important uncanny methods of keeping itself from the Dutch Disease.

The United Nations, human rights organization, and others have lately been reporting on the systemic use of thousands of people; graduates from the Eritrean National Service work for free or pittance for the government in the civil sector, the party owned farms and factories, and business entities run by army generals. Like a vacuum machine, the state sucks most of the able bodied people in the land into its war economy; leaving them little agency to manage their lives. Prior to their being corralled by the state; the large majority were teen age students; and the rest unemployed, underemployed people; subsisting on donations from people living abroad.

There was no manufacturing sector to begin with in Eritrea; having endured a thirty years the factories from the past were in ruins; with little chance for recovery. More alarmingly, the command economy had a stranglehold on the private sector leaving neither capital nor labor for its existence. In other words; a large majority of the people had no job or were partially employed for years. The regime’s panacea for this was a massive militarization; not even sparing the millions of poor farmers eking a poor existence.  The highly glorified “self-sufficient” economy of Eritrea is nothing but a thorough war economy.

In sum, the purpose of this article is to encourage economists and development experts to explore the lethal effect of revenues from precious commodities by a totalitarian state. In comparison with the ravages of the state such as Eritrea’s, the lot of millions of people living under a Dutch Disease, or Resource curse is much humane and tolerable. Arguably, humanitarian emergencies of the magnitude, which exists in Eritrea; rarely happens in countries afflicted with the Dutch Disease.