Title of paper

Asymmetric Benefits: The de facto Economic Union between Eritrea and Ethiopia 1991-1998

Presenter information

Worku Aberra, Dawson CollegeFollow

Presenter's country

Canada

Start Date

27-5-2016 1:30 PM

End Date

27-5-2016 2:35 PM

Location

Hall I

Submission type

Presentation

Abstract

Economic relationships between two countries normally result in economy-wide mutual benefits, even when they create winners and losers in each country. Rare are economic relationships that benefit only one country. The de facto economic union between Eritrea and Ethiopia during the period 1991 to 1998 were such a rarity: the net gain for Eritrea was high as was the deadweight loss for Ethiopia. Although Eritrea became effectively independent in 1991 and formally declared its independence in 1993, it remained economically integrated with Ethiopia until 1998. But there has been no research on the consequences of the economic union for both countries. Some commentators, mostly Eritreans in the diaspora, have asserted that the union was mutually beneficial, without providing any statistical evidence. This paper, using data from the IMF and the World Bank, shows that the benefits of the economic union were highly asymmetrical in favour Eritrea. First, the paper highlights the mechanisms used to transfer resources from Ethiopia to Eritrea. It presents data on cash transfers from the Ethiopian banking system to the Eritrean banking system, Eritrea’s exports to and imports from Ethiopia, Eritrea’s terms of trade with Ethiopia, the distribution of petroleum products refined at the Assab Oil Refinery between Eritrea and Ethiopia, and the amount of service fees collected by the Eritrean authorities at the “free” ports of Assab and Massawa on Ethiopia’s foreign trade. Second, to assess the impact of these transfers on Eritrean economy, the paper uses trend models for key macroeconomic variables for which data are available. Based on the results of the trend models, the paper concludes that the transfer of financial and non-financial resources from Ethiopia to Eritrea between 1991 and 1998 had a significant impact on the Eritrean economy.


Keywords

economic union, asymmeric benefits, Eritrea, Ethiopia, exports, imports

Comments

The paper analyzes the effects of the de facto economic union that existed between Eritrea and Ethiopia during the period 1991 to 1998. Using data on trade and monetary flows, the distribution of petroleum products refined at the Assab Oil Refinery between Eritrea and Ethiopia, and the amount of service fees collected at the “free” ports of Assab and Massawa by Eritrean authorities, the paper shows that the economic benefits to Eritrea were significant. The benefits to Ethiopia, on the other hand, were insignificant.

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May 27th, 1:30 PM May 27th, 2:35 PM

Asymmetric Benefits: The de facto Economic Union between Eritrea and Ethiopia 1991-1998

Hall I

Economic relationships between two countries normally result in economy-wide mutual benefits, even when they create winners and losers in each country. Rare are economic relationships that benefit only one country. The de facto economic union between Eritrea and Ethiopia during the period 1991 to 1998 were such a rarity: the net gain for Eritrea was high as was the deadweight loss for Ethiopia. Although Eritrea became effectively independent in 1991 and formally declared its independence in 1993, it remained economically integrated with Ethiopia until 1998. But there has been no research on the consequences of the economic union for both countries. Some commentators, mostly Eritreans in the diaspora, have asserted that the union was mutually beneficial, without providing any statistical evidence. This paper, using data from the IMF and the World Bank, shows that the benefits of the economic union were highly asymmetrical in favour Eritrea. First, the paper highlights the mechanisms used to transfer resources from Ethiopia to Eritrea. It presents data on cash transfers from the Ethiopian banking system to the Eritrean banking system, Eritrea’s exports to and imports from Ethiopia, Eritrea’s terms of trade with Ethiopia, the distribution of petroleum products refined at the Assab Oil Refinery between Eritrea and Ethiopia, and the amount of service fees collected by the Eritrean authorities at the “free” ports of Assab and Massawa on Ethiopia’s foreign trade. Second, to assess the impact of these transfers on Eritrean economy, the paper uses trend models for key macroeconomic variables for which data are available. Based on the results of the trend models, the paper concludes that the transfer of financial and non-financial resources from Ethiopia to Eritrea between 1991 and 1998 had a significant impact on the Eritrean economy.