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Eritrea Wary of Resource Curse

In the flurry of interviews surrounding Eritrea’s Independence Day with the Eritrean President, Issayas Afewerki, the specifics have not yet been deeply parsed. Of particular import is his comments regarding mining in Eritrea. Many in the Diaspora are hoping that mining in Eritrea will bring an immediate, long-lasting improvement in the lives of Eritreans.

Although the introduction of new jobs and local improvements in the employment situation will certainly bring some immediate benefits, the President has been working hard to reduce peoples’ expectations, “…let’s not be misled that this gold is going to change everything … Anticipating to heavily rely on this resource may be crippling”1 Clearly, although it could be a political boon, he is imploring all interested parties to recognize that there is a significant risk. What he is talking about is an economic problem known as the “resource curse.”
This “curse” in short can be described by an over-reliance on a particular resource. An example of this would be Saudi Arabia’s reliance on oil exports. As your pocketbook has surely noticed, there have been huge fluctuations in the price of oil even in the past year, this has caused the State to have unreliable revenue flows which makes planning difficult and debt levels increase. For Eritrea, without proper foresight, this could be calamitous. This is likely the reason that the President is hoping that he can reduce expectations, if Eritrea is forced to take revenue from this investment and plough it into, say long-term social programs, it is unlikely that this will be sustainable as the revenue is volatile.
In particular, with the Nevsun site, the value of the mined ore will be far greater in the first two years and then reduce significantly thereafter2. Furthermore, if the revenue is brought into the country immediately it could appreciate the value of the nakfa too quickly and lead to tremendous inflation, a concern that is likely the cause of the Government subsidization of currency already. Many economists believe that this problem could be minimized by creating a sovereign fund in a foreign country and using this to sterilize the capital flow slowly back into the country.
The only concern with this approach in the particular case of Eritrea is that its foreign assets could be at risk of takeover by other governments. Few countries are well known for not doing this, one of these is Switzerland. Furthermore, long term development in the education sector would help combat the effects of the “resource curse” and its affiliate “Dutch disease” by increasing the competitiveness of other sectors of the Eritrean economy. This diversification, in the long run, in partiuclar for Eritrea whose real asset is its people, will help create a sustainable foundation for broad based development.

In the flurry of interviews surrounding Eritrea’s Independence Day with the Eritrean President, Issayas Afewerki, the specifics have not yet been deeply parsed. Of particular import is his comments regarding mining in Eritrea. Many in the Diaspora are hoping that mining in Eritrea will bring an immediate, long-lasting improvement in the lives of Eritreans.

Although the introduction of new jobs and local improvements in the employment situation will certainly bring some immediate benefits, the President has been working hard to reduce peoples’ expectations, “…let’s not be misled that this gold is going to change everything … Anticipating to heavily rely on this resource may be crippling”3 Clearly, although it could be a political boon, he is imploring all interested parties to recognize that there is a significant risk. What he is talking about is an economic problem known as the “resource curse.”

This “curse” in short can be described by an over-reliance on a particular resource. An example of this would be Saudi Arabia’s reliance on oil exports. As your pocketbook has surely noticed, there have been huge fluctuations in the price of oil even in the past year, this has caused the State to have unreliable revenue flows which makes planning difficult and debt levels increase. For Eritrea, without proper foresight, this could be calamitous. This is likely the reason that the President is hoping that he can reduce expectations, if Eritrea is forced to take revenue from this investment and plough it into, say long-term social programs, it is unlikely that this will be sustainable as the revenue is volatile.

In particular, with the Nevsun site, the value of the mined ore will be far greater in the first two years and then reduce significantly thereafter.4 Furthermore, if the revenue is brought into the country immediately it could appreciate the value of the nakfa too quickly and lead to tremendous inflation, a concern that is likely the cause of the Government subsidization of currency already. Many economists believe that this problem could be minimized by creating a sovereign fund in a foreign country and using this to sterilize the capital flow slowly back into the country.

The only concern with this approach in the particular case of Eritrea is that its foreign assets could be at risk of takeover by other governments. Few countries are well known for not doing this, one of these is Switzerland. Furthermore, long term development in the education sector would help combat the effects of the “resource curse” and its affiliate “Dutch disease” by increasing the competitiveness of other sectors of the Eritrean economy. This diversification, in the long run, in particular for Eritrea whose real asset is its people, will help create a sustainable foundation for broad based development.


  1. http://www.forbes.com/feeds/afx/2009/05/21/afx6450084.html 

  2. http://nevsun.com/Reports/BishaTechReport15Nov06.pdf 

  3. http://www.forbes.com/feeds/afx/2009/05/21/afx6450084.html 

  4. http://nevsun.com/Reports/BishaTechReport15Nov06.pdf 

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