Eritrean and Ethiopian State of Economic Relations A Nakfa/birr/LC Analysis

by
Professor Tekie Fessehazion


Part I

I have been itching to jump into the Nakfa exchange rate discussion for a while. Yet I could not. You see, some ten months ago
Saleh Younis prevailed on me to take a vow of silence for one month. I enjoyed the month so much so that I vowed to extend it
to another eleven months to make it year long. So here I am in my tenth month of my long sabbatical from "public" Dehai. I must
confess, however, that lately my determination has been weakening, in part because of the irresistible nature of the subject.
That's why I have been looking for an excuse to get back. Then Ghidewon gave me my chance. I said to myself, If Ghidewon, a
man of the black soil, can break his vow of silence from "public" Dehai on Taf, I, abzi nere abti nere, can break mine on the
Nakfa....

It has been several weeks since a flurry of articles in Addis Tribune generated a discussion on the introduction of the Nakfa, as
Eritrea's national currency, and the Brave New World of trade between Eritrea and Ethiopia. The Tribune has been
uncharacteristically quiet since its initial forays into the matter. Perhaps this explains the lull in Dehai. The lull, however, is
probably temporary. The Tribune will return with its usual mix of yellow journalism and xeno(ertro)phobia. People will be upset;
and probably respond in indignation. That's why I think we need to take advantage of the lull to see if we can revisit the issue to
make sense of things that don't seem to make sense. Vegetables and fruits are rotting, sacks of Taf are piled up in Burie outside
of the Eritrea-Ethiopia border on the way to Assab. Yet Asseb is being supplied by sea and air from the Eritrean hinterland,
reminiscent of the blockade of Berlin of 1945. The lowly egg is fetching 90 cents in Asmara, but a mere 10 cents in Makele.
Forget about Taf. It has skyrocketed in Asmara, yet it is being dumped at ridiculous prices in parts of Ethiopia. What is going
on ? Who benefits from this ? Who loses? In short, where are we heading ?

Many people have taken turns in exploring these vexing issues. Here's mine, as best as I have been able to reconstruct the
events of the last few weeks. I will then give my perspective on the various interlocking issues.

First some background information........

Twelve weeks ago Eritrea introduced the Nakfa as its national currency. About the same time an official delegation from
Ethiopia traveled to Asmara to meet with Eritrean officials to discuss the post Nakfa trade relations between Ethiopia and
Eritrea. During the two day meeting (April 18,19) both sides presented their positions. The crux of the issue was how payments
should be settled, and in which currencies. Outside of limited cross border trade, in any trade with Eritrea, Ethiopia did not want
to have anything to do with Birr or Nakfa: just hard currency. On the other hand, Eritrea wanted to see the two countries use a
combination of Birr, Nakfa, and hard currency--anything that deepens and broadens existing trade relations. Eritrea was
prepared to let market forces determine the value of the currencies relative to each other. Ethiopia thought this was too risky.
Equally important was the extent to which bilateral trade should be "free" and "open." Eritrea opted for fewer restriction,
Ethiopia for more.

According to the Ethiopian side trade between Eritrea and Ethiopia would be along the same lines as trade between Ethiopia
and a third country consistent with existing Ethiopian trade and monetary policy. All trade on goods should be on the basis of
hard currency based letter of credit (LC). Trades on services would be on hard currency only, without the requirements of LCs.
Cross border petty trade was exempt from the requirements of hard currency or LCs. Goods and services in the border areas
of not more than 2000 Birr could be transacted in Birr, Nakfa, or along barter terms. There would be restrictions on the export
of certain commodities to Eritrea. The movement of currencies in and out of the country would be controlled. The Ethiopians
justified their position by noting that the two countries were pursuing different policies on trade and investment, and development
orientation.

The Eritrean side felt that the Ethiopian position would not permit either country to take maximum benefits of the fruits of
economic cooperation and free trade. More trade was preferable to less trade. The Eritrean side argued that traders in both
countries should be left free to decide on the most convenient method of settling payments. They should be free to utilize the
commercial channel or banking systems of their choice. The Eritrean side felt strongly that free trade, unrestricted movement of
people and capital, and economic cooperation will promote the national interest of the two countries by enhancing peace,
stability and prosperity in the region. The existing economic ties and patterns of bilateral trade were viewed as building blocks
for deeper ties. In a world defined by economic interdependence, argued the Eritrean side, there was no way for Eritrea or
Ethiopia to prosper at the expense of the other. And anything that tampered with the traditional free trade between the two
countries was detrimental to the prosperity of each country.

It was clear from the two-day discussions that the two sides had fundamental differences on the nature of bilateral trade
relations in the post Nakfa era. On most of the issues they agreed to disagree. The only area of agreement was on the use of
hard currency to settle government to government obligations. The Ethiopian side expressed its intention to move forward with
the hard currency based LC requirement for trade goods and only hard currency for services trade. Eritrea said it would leave
the decision on the choice of payment mechanism or commercial and banking channels to the traders. Eritrea also stated that it
would not institute currency controls. Its opposition to LC based trade was based on the fact that both Ethiopia and Eritrea
lacked the institutional and infrastructural setting to use LCs efficiently. The Eritrean side had less faith than its counterparts on
the effectiveness of regulatory and administrative controls in enforcing currency and trade regulations. Controls were susceptible
to misuse and beaurocratic red tape. And given the length of the Ethiopia -Eritrea border, the Eritrean side felt that it would be
difficult to control contraband trade that both sides knew would be the result of the new controls. For Eritrea the objective was
more trade, not less; fewer government controls, not more. For Ethiopia , the priority was not the volume of trade per se, rather
the choice of the currency used for conducting trade. It was as if Ethiopia's position was... No Dollars, No Taf.......



Part II

At the end of the two-day meeting, the Eritrean side had reluctantly agreed to the use of hard currency as a way of settling
government to government obligations. On the other demand of Ethiopia-- hard currency based letter of credit as the principal
instrument for conducting trade, the Eritrean side declined to endorse the Ethiopian proposal. The Eritrean side proposed that
the selection of the instrument should be left to the traders themselves, and if they chose to go the LC route, that was fine, if not
, they should not be forced to do so. Unable to break the impasse, the two sides reached an "understanding" to agree to
disagree on the appropriateness of LCs for bilateral trade.

Nevertheless the Ethiopian side informed their counterparts that within three days ( November 22) the new payment
requirements would be enforced. The public and the business community had two days to adjust to the new arrangements.
Trucks carrying commodities and crossing the Ethiopian-Eritrean border were required to carry the necessary papers as
demanded by the Ethiopian government. For many, the new requirements were put in place when the trucks were already on
their way to their respective destinations, on either side of the border.

In two directives dated Hidar 8 and 15, 1990 (Ethiopian Calendar), the Ethiopian government issued two regulations governing
bilateral trade with Eritrea. The directive on the new Payment Scheme came from the Prime Minister's Office, while the one on
cross border petty trade was issued by the Ministry of Trade. The two directives were based on existing Ethiopian trade and
monetary policy. The directive on payments included the following points :

On Trade:

All trade on goods and services between Ethiopia and Eritrea would be conducted in convertible hard currency on the basis of
National Bank of Ethiopia policy.

All trade on goods and services between Ethiopia and Eritrea would be on the basis of an irrevocable letter of credit based hard
currency.

On Banking Services:

The National Bank of Ethiopia would authorize the establishment of banks in some of the key border towns. The banks would
be authorized to provide foreign banking services. Exchange control facilities would also be opened.

Petroleum for Eritrea:

On the basis of agreements between the two countries on the distribution of petroleum, Eritrea will continue to receive its share
from the Ethiopian Petroleum Depot. However, Eritrea will pay for its share in hard currency.

Payments on services:

Payments for services, including post and telecommunications, civil aviation, and air travel payments between Ethiopia and
Eritrea would be on the basis of internationally accepted procedures and mechanisms.

Payments for port services:

Ethiopian agencies would be authorized to open hard currency revolving accounts with Eritrean banks for port related services.

Fuel for trucks crossing into Eritrea:

All trucks registered in Ethiopia, and on their way to Eritrea must purchase fuel and oil only on the Ethiopian side of the border.

Travel Allowance:

Drivers of trucks going to Eritrea are allowed US$40 in hard currency. Those traveling on buses or in private passenger vehicles
are allowed US$50. Foreign exchange bureaus will be established at the principal entry points.

As has been noted above, the Payment Mechanism directive was issued unilaterally by the Ethiopian government. The directive
was issued about the time the government of Ethiopia said it would enforce the new arrangement. For many truckers and
travelers, the first time they were informed about the contents of the new Payment Mechanism was when they reached the
Eritrea-Ethiopia border. Naturally they were stuck at the border. Commodities contracted and paid for in Birr a few days
before the payment directive was enforced on November 22 was left to languish at the border. Perishables rotted in the
unforgiving sun.

The Directive on Cross Border Petty Trade

Who Can Apply for License:

Ethiopian or legal residents of the border areas are eligible to apply for a license from the local branch of the Ethiopian Ministry
of Trade.

Goods covered by the license:

Except for coffee, oil seeds, tobacco, "re-exportables," and third country manufactured goods, all other agricultural
commodities and manufactured produced in Eritrea or Ethiopia are eligible.

Customs Inspection:

Customs officials are authorized to determine that the goods do not include from the restricted list and that the value is at or
below 2000 birr. After customs verification, goods can leave or cross into Ethiopia, free from custom duties and other taxes.
Values of commodities will be verified by customs officials from information collected by Ministry of Trade staff.

Entry Points:

Zalambesa Ramma, Humera, Shirarro, Burie

Exceptions:

Border area residents who travel across the border on business or to visit relatives and who wish to purchase items for their
consumption or as gifts to others, are exempt from declaring their purchases at the Customs office.

The Ethiopian Ministry of Trade presented the directive on border trade as a unique instrument that recognized the long
established trade relations between the border communities. By permitting local trade of goods and services of up to 2000 Birr
or its equivalent in Nakfa, or in barter, the instrument made it unnecessary to scurry for hard currency or LCs. The only problem
was by the time the directive was to take into effect nothing was in place for its proper implementation.

It is not clear why Ethiopian authorities were in a hurry to enforce directives without first setting up appropriate procedures,
offices or even trained personnel. Either they overestimated their institutional and administrative capacity to enforce the
unenforceable, or they were convinced that the ill effects would be minimal. In either case, events of the first few weeks
following the introduction of the new requirements demonstrated in the most unambiguous terms the degree to which Ethiopia
had misjudged the implications of implementing proposals without thinking through all the unintended consequences.



Part III

The last two installments have made the following points:

Ethiopia and Eritrea differ in their approaches to conducting bilateral trade and the associated payment mechanisms. For
Ethiopia the overriding issue is the accumulation and preservation of hard currency. Except for limited border trade, all trade
between Ethiopia and Eritrea must be conducted in dollars. No Birr, no Nakfa, just dollars. Only government agencies are
authorized to determine, within narrow limits, Birr to dollars exchange rates. Again , except for the limited border areas, the
Nakfa is a non negotiable currency throughout Ethiopia. For Eritrea, the emphasis is on broadening and deepening existing
trade, regardless of the payment mechanisms. Eritrea wants traders to decide how they wish to settle payments with each other.
Market forces will determine exchange rates between Nakfa and any other currency, including the dollar and birr. Currencies
would be freely bought and sold throughout Eritrea.

Ethiopia wants the bulk of trade in commodities to be on irrevocably guaranteed hard currency based letter of credit. While
both countries have signed a Free Trade Agreement, Ethiopia has reserved the right to limit the importation of certain
commodities by Eritrea. Eritrea, however, fully adheres to the terms of the Agreement. It has imposed no limitation of what
could be exported to Ethiopia. Eritrea believes that governments should establish broad policies, but actual trade transactions
and means of payments should be left to the private sector. Given the long established trade relationships between the two
countries, hard currency based letter of credit requirements will hinder and not expand trade.

Three days after the Asmara meeting the Ethiopian government issued two directives to enforce the payment mechanism of its
choice, the one Eritrea declined to endorse. The directives issued by the Prime Minister's Office and the Ministry of Trade
defined the terms under which trade between Ethiopia and Eritrea could be transacted. The directives were issued before
detailed planning of implementation were put in place. The results confirmed the worst fears of the Eritrean government.

In the following installment I shall detail the extent to which the two economies are intertwined. In subsequent pieces I shall
discuss why the new payment requirement and cross border petty trade regulations are unlikely to work. I shall conclude my
report by drawing a balance sheet of who gains, and who loses, and why.

Ethiopian officials have repeatedly defended their position on trade with trade with Eritrea as the type of position they have with
any other country, say, Kenya, for example. But Eritrea is not just another country, a neighboring country with whom Ethiopia
has trade ties. None of Ethiopia's trading partners have trading ties as integrated and as intertwined as Ethiopia's is with Eritrea.
History, location and happenstance have contributed to the creation of an economic region that traverse political boundaries, so
much so that economically northern Ethiopia and Eritrea are like two Siamese twins, joined at the back and naturally looking in
opposite directions. Their separation is technically possible as long as the nerve system that connects the two is not carelessly
severed.

By pretending that the connection can be easily loosened by government fiat, Ethiopia's bilateral trade policy with Eritrea has
jeopardized the continuing economic vitality of the region. The economic interdependence is real. It goes all the way back to the
last century and may be beyond. The interdependence was further cemented during the Italian colonialization in which the
Italians built extensive economic infrastructure for their planned forays into Ethiopia. The Gondar-Adwa-Massawa trade axis of
the middle of the last century was expanded to Gondar-Adwa-Asmara-Massawa during the Italian period. Trade caravans
moved commodities from Gojjam, Gonder, Eastern Sudan, and Adwa, to Asmara and from there to Massawa, the gateway to
the East. And from Massawa and the Danakili depressions merchants carried imports from the East and salt from the cost back
to the hinterland. The traders knew no political boundary. They moved where ever business took them. Economically, Gondar,
Gojjam, and Adwa were closer to the highlands of Eritrea and the cost than they were to the Ethiopian hinterland during the
Italian period and before.

Trade relations continued into the post war era. Eritrea's status as a protectorate of the British did not stop traders from moving
across the political boundaries, carrying commodities back and forth. Although under the Italians the industrial development of
Eritrea evolved separately, the traditional trade transactions remained intact. At the time Eritrea was federated with Ethiopia,
Eritrea's industrial base and infrastructure were much more developed than Ethiopia's. Immediately Ethiopia made the political
decision to enfeeble Eritrea's economic vitality, to discredit the then government of Eritrea and to convince people that outright
union with Ethiopia was preferable. Ethiopia's primary weapon was denying the government of Eritrea its share of customs
revenue to finance its operations and to provide basic services. Double taxation forced businesses to close or move to Addis
Ababa. Small workshops that repaired engines, travel and insurance agencies, import-export businesses, and sweater factories
were hit hardest. The only business that not only survived but also thrived were those associated with the unionist party.
Prominent Ethiopians in Eritrea in the forties were active in organizing the large community of casual workers from Ethiopia on
behalf of the unionist party. As a reward for their political activities in the forties and early fifties, well off Ethiopians in Eritrea
were allowed to move in quickly to consolidate their monopolistic power in commodities trade and government contracts.

The artificially induced economic crisis forced Eritrea's best and brightest to migrate to Ethiopia and the neighboring countries in
search of jobs. The employees and apprentices of the closed small engine workshops had no where to go but move to Addis
Ababa in search of jobs. The sweater factory owner who could not stay in business in Asmara moved his factory and his
workers to Ethiopia. It was the beginning of a massive skills drain whose after effects are still being felt in independent Eritrea.
Of course not all Eritreans who left the country headed south. Another group composed of mainly Moslems and highland
Christian women moved east and north to the Middle East. The long and painful process in which Eritrea emptied itself of its
sons and daughters was underway. In their place Ethiopian soldiers, civil servants, and entrepreneurs moved to Eritrea,
reinforcing the trade and economic interdependence of the two countries. The process of Eritreans leaving their country only to
be replaced by Ethiopians moving to Eritrea would be repeated again and again in the decades after the fifties.

In the sixties Ethiopian investment capital moved to Eritrea to take advantage of the still serviceable infrastructure the Italians
had left behind. Agricultural estates were developed as well as industrial products. Fruits an vegetables found markets in the
Middle East and Europe. Yet the emerging service sector was unable to offer the attractive opportunities jobs in Addis Ababa
offered. The lure of higher education and better paying jobs sent Eritrea's best and brightest to Ethiopia. Eritrea's loss was
Ethiopia's gain, many times over. It is hard to imagine what the emerging modern sector in Ethiopia would have looked like
without the contribution of the talent and energy of the newly arrived Eritreans. The erosion of highly skilled manpower stunted
the growth of an indigenous professional and entrepreneurial class in Eritrea. The low paying jobs Eritreans left behind were
eagerly snatched by casual laborers from Ethiopia. Some of the casual laborers accumulated enough saving to open small stores
throughout the country.

In the seventies when the Derg came to power, nothing was done to modernize and expand the industrial sector except to
squeeze out any possible production to satisfy the needs of the Ethiopian market. The most conspicuous aspect of the Derg's
industrial policy in Eritrea was to squeeze out as much profit as possible to finance the war machine. Worn out equipment's
were rarely replaced. Emigration from Eritrea accelerated at a furious scale. Ethiopia soldiers moved to Eritrea in large numbers.
The Derg eagerly recruited Ethiopians to take over businesses left by Eritreans. Ethiopians in Eritrea continued the close
marketing and economic links with Ethiopians in Ethiopia proper for the most part to supply the hundreds of thousands of
Ethiopian troops stationed in Eritrea. Thus Assab received almost all of its foodstuffs from Ethiopia. Fruits and vegetables that
once were produced in Ghinda and Elabered for the domestic market and exports were insufficient. They had to be imported
from Ethiopia. The same was true for Taf, and other grains. In return Eritrean manufactured goods were sold in northern
Ethiopia. For all practical purposes, northern Ethiopia and Eritrea became each other's market.

Forty years of Ethiopian control of Eritrea has altered the demographic and cultural composition of Eritrea. Before 1991,
Ethiopian businesses were operating in every nook and cranny of the country. Wherever Ethiopian soldiers were stationed in
Eritrea, there were Ethiopian owned businesses in the vicinity, to look after their needs. The dietary practices of the urban
people of Eritrea became closer to Ethiopia's. Imports from Ethiopia were showing up more frequently. Ethiopian musical artists
and singers found a ready market in Eritrea. Ateweberhan's "Adey Adi jeganu" was replaced by Derbatchew Lakew's "Imye,
imye...."

Ethiopian -Eritrean trade relations is well established. Thousands of Ethiopians work productively to earn a living. Whole
communities in northern Ethiopia depend on remittances from their relatives in Eritrea. The labor market in Eritrea continues to
attract a continuing flow of job seekers from northern Ethiopia. The amount of the remittances and the magnitude of employment
opportunities have expanded significantly since independence. As the spending power of Eritreans' increased, so did their
demand for commodities from Ethiopia.

While in the past commodities were acquired from itinerant traders, this time wholesalers retailers from Ethiopia have settled in
the country. They have became the principal retailers of Taf, berbere, zuria, jewelry, etc. By utilizing their contacts across the
Mereb, and their favored position in Ethiopia controlled Eritrea, Ethiopian traders achieved a significant position in commodities
trade. Although their position has diminished since independence, they still wield considerable influence. There are regions in
Ethiopia for whom the market in Eritrea is vital. Without the Eritrean market producers of high end Taf, vegetables and fruits
from the Amhara Region will find it difficult to survive, at least in the short term. Poultry and eggs producers from Tigray will
have to find something else to make a living. That something else could well be migrating to Eritrea in search of jobs.

The interdependence between Ethiopia and Eritrea is real. The degree of economic integration between Eritrea and Northern
Ethiopia is not something that can be wished away. Any policy whose premise is that the two economies can be treated as
movable entities is courting disaster. Of the two Eritrea is in a much better position to absorb the loss of commodities from
Ethiopia. As a good friend of mine, a Professor of Marketing, never tires of reminding me, we live in a world in which the
consumer is king. Almost everything Eritrea buys from Ethiopia has a substitute either domestically, or elsewhere. Most of the
things Ethiopia needs from us, say, salt and port services, there are very few cost effective substitutes. Contrary to what Addis
Tribune may tell its readers, Eritrea we can probably survive the loss of the things it gets from Ethiopia, than Ethiopia can do
without Eritrea's. Yet in the long run, we all lose. We need a prosperous Ethiopia to keep our port facilities busy; and they need
a prosperous Eritrea to keep buying their agricultural commodities.

The benefits of free trade far out weighs its harmful effects. Ethiopia's bilateral trade policy has underestimated the degree to
which the two economies are intertwined. The policy's premise that trade with Eritrea can be conducted in the same manner as
trade say, with Kenya, may find support in text books. But the real world is different. Both countries have to deal with the
reality of two economies joined--willy neely-- that eventually may need to evolve separately. That day will surely come. And
must come. But in the mean time we should be careful not to carelessly severe the nerves that connect the two.

Next installment--why the payment system Ethiopia has championed will be harmful to both economies.



Part IV

My last installment showed the extent to which the two economies are intertwined. Cross border trade preceded the formation
of the Ethiopian and Eritrean states. When Eritrea became under Ethiopia's control beginning with 1951, the interdependence
deepened. Ethiopian governments sought to change Eritrea's demographic composition through a variety of means. Initially the
primary instrument was economic; later , sheer terror. The purpose was simple. To empty the land of its people, and fill it with
Ethiopians. Willingly or unwillingly, Eritreans obliged. On the eve of independence, Eritrea's dependence on commodities from
northern Ethiopia was complete. Thousands of Ethiopians made Eritrea their home, as did Eritreans in Ethiopia. Through
remittances (both directions) Eritreans and Ethiopians maintained their contact with their folks back home. The volume of trade
(both directions) expanded over time. Traders on both sides of the border established innumerable contacts with each other:
Formal contacts among the large volume traders, and informal ones among the thousands of petty traders. For many on both
sides of the political border, petty trade was the primary source of income. After independence the construction boom in Eritrea
attracted thousands of young Ethiopians to Eritrea. The usual pattern was repeated. Remittance from the Eritrea based workers
benefited communities in northern Ethiopia. An increase of disposable income among Eritreans was translated into demand for
high end Taf, vegetables, berbere, and the like, all from northern Ethiopia. Seven years after independence, Eritrea became a
principal market for Ethiopian commodities, as well as a place where thousands of Ethiopians found productive employment.

Such was the reality at the time the Ethiopian and Eritrean sides reached an "understanding" on the mechanism of conducting
bilateral trade. The Ethiopian side minimized the interdependence. It assumed that trade with Eritrea could proceed as with any
other trade Ethiopia has with a third country. The Eritrean side demurred. It said that the interdependence was real and any
radical proposal built on the assumption that the interdependence can be papered over was doomed to fail. The Eritrean side
took the interdependence as given and sought to find a way of how both countries could share the benefits of free and open
trade. The Ethiopian side was more interested in the accumulation and preservation of hard currency. It was skeptical whether
free and open trade with Eritrea was to Ethiopia's benefit, notwithstanding the fact that both sides had signed a Free Trade
Agreement.

In my previous reports I maintained that the Payment Scheme and the Cross Border Petty Trade are unlikely to work as
intended, and that unless modified, they are likely to injure the economies of the two countries. I shall start with the heart of the
Payment Scheme, the hard currency based letter of credit (LC) as a requirement for facilitating most of bilateral trade between
Eritrea and Ethiopia.

Ordinarily an LC is an instrument issued by a bank allowing residents of country X to import from residents of country Y. The
bank's primary role is to guarantee payment. When the importer is from a developing country the medium of payment is often a
hard currency. The bank does not automatically guarantee the price the importer and the exporter have agreed. The bank
checks the price against a list of internationally tradable commodities. If the commodity in question is not on the list because it is
not internationally traded, the bank's decision will be subjective. It may accept the price quoted by the exporter; it may delay
decision indefinitely, or it may reject it outright. Ultimately regardless of the price the importer and the exporter have agreed on,
it's the bank official who has the final say. Even when an LC has been approved, it has an expiration date, after which another
application has to be filed.

There are several reasons when banks may fail to render a timely approval. The bank may seriously be understaffed. It may
lack the right facilities. Its staff may be inexperienced in international banking transactions. Institutional and administrative
banking infrastructure may be underdeveloped, and in some cases, lacking altogether. Sometimes a decision may be delayed or
held back because of red tape, bureaucratic mix up, or as is often the case, outright sabotage.

Governments insist on LC based trade for any reasons, including to restrict the flow of imports, to control the use of hard
currency and combat capital flight. The LC approval process gives some governments a cover for using bureaucratic methods
to frustrate imports, to protect local industries. Without actually being against free trade, some countries use endless red tape
and paper work to achieve protection from competition from overseas. Some countries with mercantilist leaning use the
approval process to accumulate and preserve hard currency. Some use it to combat capital flight to insure that importers don't
over invoice and exporters don't under invoice. It's a common practice among traders in most developing countries with
exchange controls to inflate import prices in which after the importer has taken his share the balance goes to the importers
overseas bank account. Exporters may also under report prices in hard currency for the purposes of sending the balance to a
foreign account.

As I wrote in Part III of the series, the economic and trade bond between Eritreans and Ethiopians go along way. They know
each other and they have done business each other even under the most trying of circumstances. they have transacted business
face to face or through trusted intermediaries. For most, the LC's requirement that they appear before a bank official to obtain
approval for their transaction is an unwarranted intrusion. There are enough Ethiopians in Eritrea, and Eritreans in Ethiopia to
frustrate the best laid government plans about making LCs prerequisites for conducting bilateral trade. There are several reasons
they will succeed in frustrating government intrusion in their business. Most of the traders are small. They have long term
suppliers. They have close associates or even relatives on both sides of the border with whom they have been doing business
for years. When they know they have a way of getting around the hard currency requirements, they will see no need to visit the
bank for approval.

Often the traders travel with their commodities, and with the proceeds purchase local commodities for sale on the other side of
the border. They have no need for hard currency. If they are in Asmara with 50 zurias from Axum, all they need is to use the
Nakfa proceeds to buy commodities in Asmara for sale in Axum. Nowadays the commodity of choice is salt. If the Zuria
peddler can get salt in Asmara he would know how to get to Axum without bothering with customs at Ramma. This is how they
have done business in the past; this is how they will do it in the future. The trader does not care a whiff if the Nakfa is negotiable
or not in Ethiopia. All he cares is selling his merchandise at profit in Axum. And with the proceeds he may be able to take 60
zurias to Asmara on his next trip. He will think as many like him probably do that the LC requirement is unnecessary, and
something to be ignored. And ignore he-they-will.

Even for traders who operate ten wheelers, there are two choices. They can do it the old fashioned way--bribe their way out,
and with a wink and a wave, they are on their way. Or if the trucker does not want to bribe, voiding customs is not particularly
difficult. All they need to do is to arrange with an entrepreneur with access to a pack of donkeys to wait a few kilometers south
of Ramma or Zalambesa. They will unload the truck with the help of local people who will be happy to make some money. The
donkeys will then carry the merchandise and take a circuitous route to a kilo meter or two north of the Ethiopia border. The
same ritual will be repeated by another truck coming from the Eritrean side of the border, only to unload a few kilometers south
of the border, out of reach of customs. It's possible that the same pack of donkeys will be used on the return trip. Obviously the
amount of Taf that can be transported on the back of the poor beast of burden is limited. But the process will be repeated so
many times that before long a supply of Taf would be available --at a price. Just as nature abhors vacuum in Physics, it abhors
shortages in Economics. As long as there are shortages, someone, somehow, will try to fill them.

On the surface the LC requirement is a simple process that a country with a trade surplus should not object. Unfortunately the
reality of Eritrea/Ethiopia trade relations is a bit complicated. Simple business decisions are colored by political considerations.
There are groups in Ethiopia for whom the war has not ended; it only has taken a different form--an economic guerrilla warfare.
The LC requirement, a perfectly legal tool, becomes lethal, when used improperly by groups with a political agenda. As
everybody knows there are still some Ethiopians who are finding it hard to come to terms with the reality of Eritrean
independence. Every time they get a chance, they try to get even. A perfect example is Ethiopia Airlines. Over the last few years
Eritreans traveling on Ethiopian Airlines have run into a myriad of problems; missed flights, lost luggages, delays on top delays
because some among the mostly but not exclusively Amhara staff make it their business to frustrate Eritreans. When I was in
Asmara a year ago I heard a story of instances in which the Airlines failed to pick up flowers meant for shipment to Europe. The
flowers, beautiful carnations from the new Adi Nefas farm with huge export potential, had to be dumped the next day, at a loss
of thousands of dollars.

The process of approving an LC request places an undue power in the hands of a bank official. If the official is anywhere like
some of the staff at the Airlines, then Eritreans can expect to see delays and out right rejection of their applications. But delays
add to the cost of doing business which in some cases the importer may be unable to pass to the consumer. The importer is then
tempted to go a different route to get his merchandise anyway he could. The point , However, is that the LC process has the
potential to become discriminatory against Eritreans. And as far as Eritrean traders are concerned all the reason to avoid using
it.

It is not only bank officials who have the potential to disrupt trade arrangements between a buyer and a seller. The LC
requirements also give custom officials and border guards undue power to affect timely trade flows. Just two days after the
Eritrean and Ethiopian delegations reached an "understanding" in Asmara, the Ethiopian side announced that it would enforce
the new method of bilateral trade, travels on buses to Eritrea were permitted to carry no more than US$50. Yet there were no
banks, and no Foreign Exchange Bureaus at any of the five designated check points. Customs officials asked traders to or from
Eritrea to produce LCs. When they couldn't because they were on the road when the announcement about the new
requirements were made, they left them stranded. By imposing the new requirements on a weak banking and administrative
infrastructure, the government of Ethiopia created, perhaps unwittingly problems for Eritreans crossing the border. Instead of
phasing it in over several months, if not years, the Ethiopian government , allowed overzealous customs officials to ran amok. It
is a mystery why the government of Ethiopia demanded compliance with the new requirements without the most cursory
preparation to prevent the hardship it should have known the new policy would cause.

Hard currency based LCs give a bank official the final say whether hard currency would be available to complete the
transaction. Ordinarily the officer would consult prices from a list, assuming the merchandise in question is an internationally
tradable commodity and that its going price can be determined. Some of the commodities Eritreans buy from Ethiopia, say Taf
and zuria, are not internationally tradable commodities. The bank official, and not the buyer and seller of the commodities
determine the price. Sometimes the bank official may postpone making a decision, knowing full well the importer and exporter
have no recourse but to wait. Through interminable delays and the proverbial "nege ke nege wedia" either the buyer or seller
would be forced to withdraw. There is nothing that would prevent a bank official from refusing to authorize the transfer of hard
currency to Eritrea if he feels the same product could be purchased from local sources.

Governments often use the LC system to provide protection to local industries or to maintain their competitive position in the
production of certain commodities. Say someone from Asmara, an importer of key raw materials applies for LC from bank
officials in Addis Ababa. If the importer produces commodities for the Ethiopian market it will not be unusual for the bank
official in Addis to drag out the decision making process to frustrate the importer, to give a competitive advantage to the local
producer make him less competitive. Even when the Birr was the common currency there were cases when production in the
beverages industries had to stop because key ingredients that used to be imported from Ethiopia, suddenly failed to appear. The
LC requirement has the potential of becoming a tool for restricting the export of key ingredients to Eritrea.

The role of the obstructionist bank official is sometimes replicated by the custom official or border guard. On occasions both
will use the slightest pretext to harass traders from the other side of the border. It is not unreasonable to assume that there was a
method to the over zealousness of customs officials and border guards during the first few weeks the requirements were
enforced. It appeared they were determined to keep Eritrean products out of Ethiopia. Berhe's observation of a few weeks ago
about the disappearance of Asmara beer from Adi Grat was not an isolated incident. Why the officials were obstructing the flow
of goods is not clear. And whether they were doing it on their own, or they were instructed to do so by local officials is hard to
say. The fact is they used their power to inspect LCs to restrict legal and normal flow of merchandise in both directions of the
border.

Eritrea's objection to depending solely on hard currency based LC as an instrument of bilateral trade is justifiable. The system is
unenforceable. It will give rise to a thriving contraband business. If Ethiopia is unable to monitor the much smaller Djibouti
border, what hope does it have in controlling the much larger border with Eritrea ? LCs impose a burden on small traders who
have been doing business on trust for a long time. It will restrict and not expand trade. Instead of creating more trade, the new
system will divert trade. Ethiopia's fixation with the accumulation of hard currency and the policy to enforce it will pit some
regions of Ethiopia against others. Regions that produce agricultural commodities for the Eritrea market will not be pleased with
the actions of others who see their regional interest best served through autarky--the false elixir that any region can thrive by
blocking imports from Eritrea. If Eritreans are to continue purchasing Gojam's Taf, and Wollo's vegetables, Asmara Beer should
have free and unimpeded access anywhere in Ethiopia.



Part V

(If you have been following the series I advise you to skip the first three paragraphs. They are intended for readers who are
coming to the series for the first time and who might need background information. Even for you regular readers, the piece is
very. It is probably three issues rolled into two. You may need to take a coffee beak before you finish reading the entire piece.
Or even take strolls between bites. The reason it's long is because I have attempted to incorporate into my soliloquy some of
the issues people raised through private email and over the phone since the series first appeared a few days ago)

_______________

In the series I have made several points . The "understanding" Ethiopia and Eritrea reached at the time of the introduction of the
Nakfa and the termination of the Birr as legal tenders in Eritrea did not go beyond an agreement on the use hard currency for
settling government to government obligations. Ethiopia proposed the bulk of merchandise trade should be on the basis of hard
currency based letter of credit only. Eritrea suggested the choice should be left to traders. If they wanted to use LCs, that was
fine. If they wanted to use a combination of hard currency, Birr and or Nakfa, they should be permitted to do so. Ethiopia said,
no. Only hard currency; no Birr, no Nakfa. For Ethiopia, in any trade with Eritrea the accumulation and preservation of hard
currency became an end by itself. For Eritrea the emphasis was on expanding and broadening trade flows. The Eritrean side
believed that the two economies were so intertwined that any restriction on the traditional flow of free trade would be
detrimental to both countries.

The Ethiopian government announced that the new requirements would take effect three days after the Asmara meeting of
November 18 and 19. Two directives were issued outlining the new procedures. The Payment Scheme issued by the Prime
Minister's Office addressed the need for hard currency based irrevocable letter of credit for all trade with Eritrea , except for
some petty trade across the border. The directive also covered the regulations of the National Bank with respect to hard
currency transfers. Travelers on bus to Eritrea were allowed not more than US$5o to carry with them on their trip. Similar
amount was permitted for long distance truck drivers crossing the border. It was never made clear why the National Bank said
that US$50 should be the limit for travelers to Eritrea other than making the observation that travel to Eritrea was considered
like travel to any third country. The explanation was part of the general rationale given for the restrictive policy. As far as
Ethiopian trade and monetary policy was concerned Eritrea was treated like any other trading partner. The policy that applies to
a third country would also apply to Eritrea. But Eritrea is not just any other country. Eritrea is the only country with whom
Ethiopia has a Free Trade Agreement including an agreement on the free movement of labor.

The second directive came out of the Ministry of Trade's Office. It was on Cross Border Petty Trade. The directive was most
notable for its vagueness. It said trade with value of up to 2000Birr could be transacted near the border areas at anyone time
without the requirements of hard currency or LC. The directive said any agricultural or manufactured commodity produced in
Eritrea was eligible under the rule. Later explanations by Ethiopian officials seem to indicate the "allowables" were only those
agricultural products common to the border areas. The directive did not define border areas in terms of distance from the
border line. There was no list of the agricultural products covered under the directive. The only unambiguously clear item in the
directive was that certain commodities-- "exportables" were not allowed. The "exportables" are those commodities such as
coffee, oilseeds, livestock, etc. that they are considered "hard currency" crops, and as such could only be exported by Ethiopia.
The directive authorized the local customs officials with the power to evaluate whether the value declared is consistent with the
market values of the commodities in Ethiopia and Eritrea, or whether the commodities are allowed under the 2000 birr rule.

Yet when the regulations became effective, neither the customs officials , the traders nor the public in the border area had any
ideas how to interpret the 2000 birr rule. If the experience of the first few weeks is any guide, this rule is much more
troublesome, much more intrusive for travelers by bus as well as people of the border areas than the LC policy. On one hand
the 2000 birr rule appears to meet the needs of the cross border community who have been doing business with each other for
a very long time. Yet its lack of specificity, its provision of wide discretion to local officials known for their over zealousness and
arbitrary administrative practices, are most troublesome. Unless it is carefully rethought and modified and its implementers are
trained, the rule will bring a lot of grief to the traveling public and the community around. For generations petty cross border
trade sustained families on both sides of the border. Many successful big time traders started as petty traders, gaining valuable
experience ferrying commodities back and forth. The complications of obtaining an LC permit where there are no banks, and
the vagueness of what's allowable under the 2000 birr rule means a lot of petty traders will either quit, or they will move
underground. While the effects of the LC trade may not last, the arbitrariness with which the 2000 birr is implemented raises the
specter of ill feelings with unknown consequences.

To understand the impact of the LC trade policy on both countries it is important to identify what commodities and services
each sells to the other and in what magnitude. It is also important to determine whether these commodities are luxuries or
necessities and the degree to which they have cost effective substitutes. Eritrea's export to Ethiopia include manufactured
merchandise, salt and services, broadly defined but one that includes port services. Ethiopia's chief exports are agricultural
commodities and industrial raw materials. The most recent data shows that eighty percent of Eritrea's export go to Ethiopia. It
will be the first sector to feel the full impact of the new policy. From Ethiopia's side it will be commodities. Which side will get
hurt more depends on many factors. Still our analysis will be constrained by at least three limitations: the lack of complete and
reliable data, the shortness of time elapsed, and the degree to which the economies of northern Ethiopia and Eritrea have been
intertwined as to make desegregation of cost and benefits difficult. Yet if one has a feel for the place and some understanding of
the economic history of the area, it's possible to come up with certain conclusions. My own observation is that contrary to the
bleak picture Addis Tribune had painted, the harm to Eritrea from the loss of Ethiopian commodities would not be as great as
the Tribune had hoped, still stands. Kidane's reaction that I had underestimated the impact of the loss of markets for Eritrea's
manufactured goods as a result of "trade friction," deserves a response and an elaboration. Of course I was dealing with
commodities, but Kidane wants me to address the totality of trade relations. That's fair.

If we take standard economic analysis based on certain assumptions, Eritrea's exports would be hurt in the short to medium run
because having a much larger market, Ethiopia may be able to divert its trade towards the local market, while Eritrea's options
appear to be limited. Furthermore, the National Bank of Ethiopia would discourage local importers demand for hard currency.
They would be directed to purchase merchandise from local sources which will allow local producers to expand. The corollary
of this is that the factories in Eritrea, unable to sell in the Ethiopian market would be forced to slash production, and hence
employment. This is how, according to conventional economic wisdom, Eritrea may be hurt more than Ethiopia, in the short run.

The analysis, however, is based on two assumptions--both untenable ones. One: Ethiopia would be able to exercise tight
controls over its borders, to discourage contraband activities. In reality, if it can not control the much smaller Djibouti border,
one wanders how it will fare with the much longer border with Eritrea. Given the fact that Ethiopia and Eritrea have agreed on
free movement of people, it's hard to see how the government of Ethiopia can stop people from transporting in commodities
purchased with Nakfa in Eritrea. Also there are thousands of Ethiopians who work in Eritrea part of the year and who are
always moving back and forth. If the Ethiopian governments maintains its quarantine of the Nakfa, these people have three
choices. Lacking information they will try to change their Nakfa earning at the border. They will be forced to sell it cheap. Next
time they may decide it's better, instead, to buy merchandise locally, then sneak it across the border. One way or another and
depending on the exchange rate, Eritrean products will still reach Ethiopian consumers. Two: the assumption that Ethiopian
importers will continue to depend on Eritrean producers, even in the face of free trade and no exchange controls, is doubtful.
The fact is Eritrea is "renting" the Ethiopian market. It does not own it. As soon as Ethiopia's import substitution program ( being
established in large numbers across the border from Eritrea) succeeds, demand for Eritrea made goods will decline unless
Eritrean products have substantial edge in price and quality, which does not seem to be the case. It was never a question
whether we will lose the Ethiopian market given the current product and quality mix. It was always a matter of time. All the new
policy would do is to accelerate the process. Any loss of the Ethiopian market can not legitimately be blamed on the new policy.
Ethiopia sells Taf, berbere, vegetables, and industrial raw materials. Of all the commodities Eritrea buys from Ethiopia the
impact of the new LC system would be most severely felt in those industries that depend on raw materials from Ethiopia. The
dollar based prices would be high. Luckily, however, other than hides and skin there are very few materials we buy from
Ethiopia. Still availability may be a problem because of problems associated with the processing of applications for LCs . There
will always be an incentive to delay the granting of LCs to give local producers an opportunity to compete. However the total
damage to Eritrean industries will depend on the availability of other sources and their cost. Most of the commodities come from
specific regions of Ethiopia, for whom Eritrea is an important market. The new LC requirement will shrink the demand for the
commodities in the Eritrean market. Either they will be replaced by local substitutes ( meshella for taf ) or they can be produced
locally (vegetables, tomatoes and onions) or could be obtained from outside sources (berbere). The principal consumer of
Ethiopian commodities is the urban population. Given the way the new policy was implemented and the virtual economic
blockade it created at the border, people in the urban area will have few qualms about switching to combinations of grain that
make very little use of Taf. The Taf's initial astronomical prices will make it easier for people to avoid it. The impact will be felt
by the Taf farmer in the Amhara region. He has to find substitute markets locally. Because the government announced the new
restrictions on sale to the Eritrea market without advance notice, the farmer will be forced to dump his Taf at low prices. Not all
Ethiopians eat Taf, either because it's not their normal diet, or they can't afford it. Still the population in Addis will benefit from
low prices. But their benefit is the farmers' loss. Ethiopia is a large market, and there must be people who can afford the Taf, but
the farmer would not have the information, and would not know how to contact them. He will be forced to sell it to a broker,
perhaps at basement prices. The broker will sell it to a wholesaler who would either sell it to retailers in Ethiopian cities (where
the Taf eaters are !) or sell it to a broker who will try to get it to Asmara because that's where the prices for Taf are the highest.
And we can bet the broker would not go through customs. The many layers of transactions will keep Taf's Asmara price high.
The broker would not mind getting paid in Nakfa, thus frustrating the Ethiopian government's policy of dollars for Taf. the
broker would use his Nakfa to buy commodities, including salt, if he can find it, on his way back to Ethiopia where he would
probably exchange it for more Taf. The process would be repeated again and again. More brokers would soon join the
underground trade for Taf. Profits attract suppliers the way honey attracts bees ! Eventually brokers will step on each other and
the price of Taf will come down. Most Ethiopian commodities that were sold in the Eritrea market in the past will face a similar
fate. I doubt if Assab is as blocked as it was the period immediately after November 22. Vegetable producers and wholesalers
will do all they can to evade the LC requirements to supply the port city. They would not like to see their share of the market
shrink as it surely will because of supplies coming in by ship from the Eritrean hinterland. Selling is their business, not the politics
of trade. Let the politicians in Addis Ababa and the State capitals talk all they want about hard currency. These traders want
and need the Assab market. If they can get salt for their vegetables. For them it's much better. They can get a lot of Birr for it,
which would by more vegetables for their illicit next trip to Assab. In all the big and brave talk about how it was in the "national
interest" to impose hard currency based LC trade, no one seems to have paid attention to the needs of farmers and small
traders.

While Taf's price was going in gyrations, the Eritrean government's quick move to making substitutes available will stabilize
prices. Wisely the government did not allow market forces take its toll on the public. By moving quickly and decisively, the
government spared the public much of the brunt of the price increase by providing affordable substitutes. Surely there will still be
demand for Taf, even at the astronomical prices. Much to the detriment of the Ethiopian farmer Taf has become a niche
product, purchased by the very few who can afford it. Local production of other substitute grains, and vegetables will
accelerate. People will discover like they never did before that they can make money growing vegetables, tomatoes, and raising
poultry. Sawa graduates who live off remittances from their sisters in Denver, Stuttgart, Rome... may discover the allures of
entrepreneurship. At least the opportunities would be there.

No discussion of the benefits and losses to each country on account of the new policy would be complete without considering
trade in services and other invisible transfers. Here the balance is clear on one; and problematic on the other. Ethiopia will pay in
dollars payment for port services. It will also pay Eritrean pensioners in hard currency. The combined total of the two is bound
to be large, and growing, depending on the pace of economic growth in Ethiopia as well as cost effective port services
substitutes. It is instructive that at the same time the Ethiopian government instituted the LC system, a de facto trade barrier, the
Eritrean government reduced tariffs at both ports while introducing necessary reforms to make the ports cost effective.

The question of capital transfers ( remittances) is problematic since Ethiopia's exchange control system will prevent Eritreans in
Ethiopia from repatriating their profits to Eritrea in hard currency while Eritrea's liberal system will allow Ethiopians in Eritrea to
go to the exchange market for dollars and repatriate it legally. For Eritrea, this is Catch-22. It does not want to institute
exchange controls for that will discourage foreign investment and remittances, and ultimately will translate in lower economic
growth. Yet the hemorrhaging of hard currency will continue. As one of my correspondents put it, regardless of Ethiopia's
beggar your neighbor approach, Eritrea is better off staying the course, maintaining a liberal currency exchange system and
avoiding the temptation of following Ethiopia's. But if the hemorrhaging cannot be stanched, Eritrea would have to raise the issue
of reciprocity with the Ethiopian government, and if that fails, the only alternative would be to take a measured and targeted
corrective step to stem the flow. Ideological consistency is one thing, bleeding to death is another.

No one doubts the right of the government of Ethiopia to institute a policy that it deems to be in its national interest. No one
should question the right of the government to define the essence of its national interest as long as it is willing to live with the
consequences of the policy. The argument given so far by Ethiopian officials is that since Eritrea is an independent state with its
economic and monetary policies, it would be to Ethiopia's interest to treat Eritrea as any other country with whom Ethiopia
conducts trade. This is an ingenious rationalization for it forgets a few factors: Eritrea is not just another country. Eritrea is the
only country with whom Ethiopia has signed a Free Trade Agreement and where both subscribe to free movement of people.
Then there is the matter of Ethiopia's forty years of manipulation of Eritrea's economy to make it responsive to Ethiopia's needs.
A market that once produced for the East African Market, the Middle East and Europe, became an appendage of Ethiopia's
economy. It was reduced to supplying manufactured goods made with vintage forties technology to northern Ethiopia while
making Eritrea dependent on commodities from the same region. The Derg conveniently used Eritrea to produce "pots and
pans" for farmers across northern Ethiopia, while buying Taf and commodities from there to feed his huge army in Eritrea. The
supply lines the Derg had left were operating until November 22, 1997 when the new policy was introduced. An economy that
once was sustained by superb craftsmanship and whose products were sold in boutiques in Europe and the Middle East was
reduced to producing cheap uniforms for peasant soldiers.

No. Ethiopian officials can not claim ignorance of forty years of economic abuse of a country that was much industrialized than
theirs only to fall into hard times in the hands of their predecessors. Over a short period of only six years, Eritrea has managed
to rise from the ashes, clearing most of the debris left by forty years of economic ill use. The sudden introduction of an LC
system and vague Cross Border Trade rule will temporarily complicate but not derail the march towards economic development
and sustained growth. What is at issue is not Ethiopia's right to adopt a policy it deem is reflective of its interest, what is at issue
is the suddenness and the lack of preparation with which the new system was introduced. It is not for outsiders to judge a
nation's definition of its interest. The issue only comes to the picture when that definition encroaches on the well being of others.

Why was the government of Ethiopia in a hurry to enforce radical regulations without adequate planning ? There are probably as
many answers as the multiple sides in a Rubic's Cube. There are several possible hypothesis, including the following: Ethiopian
officials feared that Eritreans would use their Nakfa to buy up Ethiopia's commodities such as Taf and berbere. From the
perspective of these officials, Ethiopia would be stuck with huge amounts of Nakfa it would not know what to do with. After all,
the perception that Eritrea had very little to offer is not limited to opposition groups. People seem to be immune to easily
available facts. When eighty percent or more of Ethiopia's external trade passes through Assab and Massawa that necessitates a
not inconsiderable payment for services, it's hard to follow their rationale. The Eritrean side had repeatedly suggested that the
two countries go for partial convertibility of the two currencies. Every quarter or so the banks would settle the balance in hard
currency. Another fear had to do with the perennial question of Eritreans in Ethiopia and their alleged divided loyalties. The fear
was unless the Ethiopian government acted soon in implementing the new policy, Eritreans in Ethiopia would buy up
commodities with their Birr for export to Eritrea. The third possible explanation probably relates to Ethiopia's decision to settle
port services in hard currency, effective November 22. If Ethiopia did not take immediate action by charging hard currency for
Eritrea's imports, then surplus in Eritrea's favor would build up. There may be other reasons, but these three appear the most
plausible. Regardless which hypothesis is the most plausible, the accumulation and preservation of hard currency to fund an
import substitution program at the State level became an end in itself.

Why wasn't any thought given to the possible ramifications of a set of rules that unless implemented carefully had the potential to
do a lot of harm to a lot of people ? Who was responsible for implementing the new regulations? Federal personnel, or the
border area administrators ? The absence of any machinery to administer the new LC system, the currency transfer regulations,
the absence of foreign exchange bureaus, and the 2000 birr rule brought chaos and disarray at the border. Overzealous officials
took it upon themselves to enforce the rules any way they pleased. Merchandise destined from and to Eritrea was piled up at
the border. Truckers were ordered to unload to allow officials to conduct leisurely inspection. Truckers were asked to produce
LCs although the requirement was announced only three days earlier. Vegetables, fruits, and eggs were left to rot for lack of
documentation that they were paid for, or had secured guarantee to be paid for in hard currency. Travelers on buses were
forced to walk a kilometer to change buses in either direction. At the five check points it appeared that an economic blockade
was in place. Not that an economic blockade was the intention of the new policy, but for people trying to get foodstuffs, it
appeared it was a blockade. The Eritrean public saw it as such. People felt it was either an underhanded attack on the Nakfa,
or it was a plot by people still dreaming of undermining Eritrea's sovereignty. It is not surprising that people instinctively rallied
around the Nakfa and the flag and encouraged the government to stay the course. The problem at the border was heartily
applauded by the anti Eritrea press in Ethiopia and outside. To understand the press's glee one has to divine the mind set of a
large number of the opponents of the Ethiopian government and their obsession with the presence of Eritreans in Ethiopia. They
think Eritreans in Ethiopia had during the last six years surreptitiously transferred hundreds of millions of Birr to keep the young
State afloat. They have repeatedly accused the government of Prime Minister Meles of favoring Eritrea's interest over
Ethiopia's. They detest the Free Trade Agreement and the agreement on the free movement of labor. They have been agitating
to get the two abolished. They didn't think Eritrea could survive without Ethiopia's "largess." For them free trade meant free ride
for Eritrea. There was nothing Ethiopians needed from Eritrea except , may be, salt, and definitely access to the sea. The salt,
they believed, could be purchased elsewhere. As for the ports, all Addis Tribune could say was "it was unfair for a country of 4
million people to have two ports, when a country of 60 million was landlocked." The magazine never said how it planned to deal
with the "unfairness" issue. It seemed to suggest, however, that economic blackmail could be used to force Eritrea to "give"
Assab to Ethiopia. And until the time comes when the "unfairness" issue will be settled through economic blackmail if not
militarily, make it hard for Eritrea to survive economically. Therefore, if Eritreans wanted to purchase foodstuffs from Ethiopia,
fine, let them pay in hard currency. No Birr, and definitely no Nakfa. For them this was the siege of Nakfa II. The first siege
didn't get anywhere. They figured they may have better luck against "paper" Nakfa. As a starter, exchange control was fine. Just
make it difficult for Eritreans in Ethiopia to transfer Birr to Eritrea to purchase foodstuffs from Ethiopia. They figured the
government of Ethiopia was, finally, on the same page with them. Was it ?

The question is a complex one that lacks clear cut answers. If we go by the totality of the evidence of the last six years, Addis
Tribune's optimism is probably misplaced. There's , however, a remarkable convergence in the choice of common vocabulary
to rationalize the new policy towards Eritrea. The government's rationale that its policy with Eritrea was consistent with any
policy with other countries was warmly received by the opponents of the government. And whatever steps the government was
taking in its dealing with Eritrea was done in the pursuit of national interest was music to their ears. The pursuit of national
interest and the argument that Eritrea is just another country become a convenient cover, a "gulbab" as it is called in tigrinya, for
advancing inherently conflicting objectives.

What the Federal government wants to get out of the bilateral trade policy may have been different from what Addis Tribune
wanted. But the outcomes have been close to what the Tribune had been hoping : the closest thing to an economic blockade of
Eritrea. That's not what the Federal government of Ethiopia had intended; but that's what its policy reaped during the first weeks
of implementation. The Federal government's objective may have been the accumulation and preservation of hard currency, but
its opponents wanted to kick Eritreans out of Ethiopia and hope for the unraveling of relations. In the policies, they saw the
seeds of future conflict; the Federal government saw the articulation of a bona fide economic interest. Economic interest itself
meant different things to the different States in the Federation. For some it meant free trade with Eritrea which would enable
them to maintain their market for commodities there. For others, it didn't go beyond a strategy of import substitution. The
Federal government had already renewed the Free Trade Agreement with Eritrea it signed six years ago. The pursuit of national
interest meant different things to the States and the government's opposition. The term became a politically correct veneer,
flashed at every opportunity to justify their political stand on trade with Eritrea without acknowledging that there were some
serious cracks under the veneer.

We would be less than truthful if we did not admit the inherent conflict between the import substitution industrial policy followed
by some of the States and the Federal government's commitment to the Free Trade Agreement the country had signed with
Eritrea. The Agreement stipulated that all goods produced in either country could cross the borders of the other, tax free.
Article 51 (12) of the Constitution of the Federal Democratic Republic of Ethiopia gave the Federal government the power to
regulate foreign commerce. Yet the experience of the last six years has demonstrated that the Federal government may
"propose, but it cannot dispose." Implementation is left to State governments who may have a different agenda, a different
development program based on import substitution and the monopolization of trade through state owned or affiliated
companies. Bringing development to their long neglected regions is most commendable. It's their tactics that's most
questionable, and ultimately, counterproductive. The economies of Eritrea and that of the northern states are so intertwined and
integrated that they cannot prosper at Eritrea's expense. They simply cannot.

A successful import substitution program requires the establishment of visible and invisible trade barriers. The barriers take
several forms: the levying of tariffs, and bureaucratic chicanery. Eritrean goods going through some of the States have been
taxed, and distributors of Eritrean products have been hassled. Yet the same States would claim privileges under the Agreement
either when sending their products to Eritrea or when they need to use the port facilities. For their import substitution to succeed
and their alphabet soup trading companies to maintain their monopoly, they believe they have to violate the Agreement, and
violate they do. The LC system and the Cross Border Petty Trade rule have become important tools for advancing the import
substitution strategy. It will allow domestic trading monopolies to operate without fear of competition from outside. What we
have here is the metamorphosis of regional interest into national interest, notwithstanding the fact that some of the States that
produce commodities for the Eritrean market will pay the price.

We cannot say the folks at Addis Tribune and leaders of the States pursuing import substitution strategy are on the same page
on Eritrea. It is just that at some juncture their interests have fleetingly coalesced. It's an alliance of convenience that cannot last.
Tribune dreams of weakening Eritrea; the States just want to capture the Ethiopian market without having to compete with
Eritrean products. What we have here is a congruence of interest between those who want to see a permanent rapture of
relations between the two countries, and those that simply want protection for their fledgling industries and trading monopolies.
From the perspective of the Tribune and its allies the Free Trade Agreement is a dangerous weapon that could cement good
relations between the two countries for years to come, obviating the use of economic blackmail to "get" Assab. For the States
the Agreement is a convenient one way street that permits them to reap benefits without having to open their borders for
competition. How long can this asymmetrical relation last ? Not forever. Something has to give.

I agree with the many people who felt that the introduction of the LC system was a blessing in disguise. Nothing concentrates
the mind of Eritreans as when we feel our national sovereignty has been threatened. It matters little that the threat is real or
imagined. In this case there was no threat at all. There couldn't nave been any threat. It is just that we felt blind sided. Perhaps ill
used. The first few weeks' blockade of foodstuffs from entering Assab, the chaos at all of the official crossing points to Ethiopia,
exposed our vulnerability to economic black mail. If we didn't know before where we could be vulnerable, now we do. We will
know how to make sure we are no longer vulnerable.

In our determination to build an export led economy, we strove to specialize, to take advantage of our natural endowments, our
drive, and our geography. We thought we could buy what we need by selling what we could make better than anybody else.
Some where along the line we became less self sufficient in food production. A robust rate of economic growth since liberation
and a continuous flow of remittances have improved our people's standard of living, and concomitantly, deepened our
dependence on imports of food commodities from the south. Thanks to the jolt, now we know we have to give self sufficiency
in food production the highest priority.

The government has taken several steps to raise agricultural productivity and to improve the distribution and marketing of
foodstuffs. The key bottlenecks have been identified. And with the completion of the massive east/west road construction
system, producers will find it easier to take their products to where the consumers are. There will be a continuing need for
massive investment to raise productivity. More than ever before, remittances will be more important than before. It would be
nice to get foreign investment, but it probably wont come in the volume we need it. So the responsibility is ours, those of us who
reside in hard currency countries.

Remittances are important, but the form we send it is probably as important. We cannot be oblivious to the insidious influence of
remittance on work habits. Too many of our youth rather wait for remittance from a relative than seek work that can remotely
be associated with manual labor. Collectively we are responsible for encouraging First World spending habits in a country that
earns less than the average for the Third World. We have to take responsibility for de-linking earning from spending. Each
family should take full responsibility that the money it gets is not squandered on conspicuous consumption. We need to find a
way of increasing of public saving. We could, for example, open interest bearing hard currency accounts. It is not particularly
difficult to open accounts. I think the embassy has the required forms. Imagine if 150 of the readers of these series were to open
an account with one hundred dollars, we are talking about 100,000 Nakfa, real money that could finance an ongoing
development project.

There may be a role for government here. Perhaps the government could target some of the state owned enterprises and make
them available for sale to the public through subscription of shares dominated in hard currency. It would be nice to start with the
government's 55 percent stake in Coca Cola. The law on security exchange probably is not in place yet, but it wont be long
before the Commercial Code of Eritrea is out. Now wouldn't it be nice to present your nephew with three shares of Coca
Cola's stock ( at, say, US$100 each) than two pairs of Nike Air Jordan! Who knows the kid may probably liquidate the shares
to buy Air Jordan, but, hey, at least you tried.

Academics will continue to debate the impact of the LC trade system on Eritrea and Ethiopia. Most probably it will be a battle
of conjectures and hypotheses for data collection will take time. Furthermore the impact of forty years of Ethiopia's economy
and the degree to which successive Ethiopian governments had integrated highland Eritrea with northern Ethiopia will remain
unappreciated. After forty years, the Ethiopians left without building an east/west highway system to link Massawa with
Tessenei, to open the most fertile part of the country for development. That was not their interest. The north /south was. It
allowed them to ship Eritrea's manufactured goods to the bordering regions, while bringing foodstuffs from there. This is how we
got linked economically with Ethiopia. The ongoing huge Massawa/Tessenei road project is a recognition that our future was in
developing the lowlands and making it easier to transport the produce not only to the hinterland but also to the port city. This
was the basis for our export led economy. We knew if we wanted to grow we had to look beyond the Ethiopian market.
Actually we have come a long way since 1991. Still we were jolted by the events of November 22, 1997.

For too long we have been lulled by the ready accessibility of the Ethiopian market. Since the States closest to us are embarked
on import substitution, the first target for substitution is whatever the rest of Ethiopia buys from us. As noted above we have
been "renting" it from them courtesy of the Derg. We have to forget Ethiopia as a primary market. We have to seek new
markets and to do that we have to produce goods at prices few can match, and whose quality few can touch. Luckily for us the
economic policy in place is the correct one. It may need fine tuning here and there as an acknowledgment that the world around
us may not believe in free trade as we do. The thought the we could specialize in what we can do best and buy the rest from our
neighbors may not apply to food commodities. It could very well be that regardless of the efficacy of specialization based free
trade we have now come to learn that there is absolutely no substitute for self sufficiency in food. We should continue to believe
in free trade, but we ought to be careful we are not left alone, all by ourselves, like the man in the old Maytag commercial.

Finally we can not talk about the Nakfa without taking note of the flawless manner it was introduced just a few months ago.
National Bank of Eritrea officials have written a primer on how to engender faith and confidence in a new currency in a society
with a high rate of illiteracy. It's hard to think of any country in the world that had gone through a similar experience as ours,
picking itself up in a short six years from the ashes of economic devastation, to accumulate hard currency on its own, and to
launch with near perfection, its first currency as an independent state. Its only when we see how far we have come that we begin
to realize that the complications of the LC system have to be placed in the proper perspective, as a "small bump" on the road to
prosperity.

ezi wedeHan kum

Tekie Fessehazion


I want you to read the series as ruminations of a private citizen, a gebar if you will, on the state of economic relations with our
most important neighbor. I have combined my knowledge of economics and history with my indescribable feel for the place to
put together these notes. They are more like long rumbling notes on what's in my mind and how I see things developing. What
you have here is not an academic treatise, and I hope you don't approach it as such.


Acknowledgments:
Ever since the Nakfa was introduced several weeks ago, I have been following the story with a lot of professional and personal
interest. I have been talking to a lot of people about it. People with varied backgrounds and professional outlooks. I have
gained immeasurably from the discussions. I cannot list everyone I talked to. But I can list four with whom I had the most
extensive discussion. Some filled gaps in my memory, others in my understanding. Some gave me first hand report. Others
patiently listened to me when I was expounding my thesis. They may not agree with everything I am saying here, but each will
recognize his contribution to my enlightenment. I say thank you to Menghis Samuel (wedi'smera), Yoseph Woldemikael,
Tesfai Kflu, and Berhe Habteghiorgis.