2009 Index of Economic Freedom

Quick Facts

Population:

• 4.7 million

GDP (PPP):

• $3.2 billion
• -1.0% growth
• 0.7% 5-year compound annual growth
• $682 per capita

Unemployment:

Inflation (CPI):

• 9.3%

FDI Inflow:

• $4.0 million

Eritrea enters the Index for the first time with an economic freedom score of 38.5, making its economy the world's 175th freest. It scores far below the world average in eight of 10 economic freedoms and in its overall score. Eritrea is ranked 45th out of the 46 countries in the Sub-Saharan Africa region.

Eritrea scores abysmally in most areas of economic freedom, particularly government size, investment freedom, and property rights. Years of fighting and the blockage of maritime trade have left Eritrea with persistent fiscal deficits.

The government relies heavily on foreign assistance to feed its people and since 2005 has tried to lower the cost of food by selling subsidized staples through a network of state-owned stores. In general, government interference in the economy is high, breeding inefficiency and shutting out private-sector opportunities. The investment sector lacks structure, procedural consistency, and transparency.

Background Back to the top

Nearly 80 percent of Eritreans are employed in agriculture. Productivity is very low, and almost a third of national income is provided by remittances and aid from overseas. Eritrea’s political history has been one of conflict and turmoil. A 1993 referendum formally established Eritrea’s independence from Ethiopia, but conflict has persisted. A U.N. peacekeeping mission was put in place between the two countries following severe fighting from 1998–2000 that killed thousands and destroyed much of Eritrea’s infrastructure, housing, and livestock. President Isaias Afwerki has ruled since independence in increasingly autocratic fashion. A constitution ratified in 1997 has yet to be implemented, and elections have not been held. The judicial branch has limited independence. Several members of the ruling party who publicly criticized the government and campaigned for reform were arrested in 2001 and remain held without charges. Citizens enjoy almost no civil liberties, and there are no private radio or television stations.

Business Freedom 18.3 Back to the top

The overall freedom to start, operate, and close a business is seriously limited by Eritrea's burdensome regulatory environment. Starting a business takes an average of 84 days, compared to the world average of 38 days. Procedures for obtaining a business license are not formally established.

Trade Freedom 69.2 Back to the top

Eritrea's weighted average tariff rate was 5.4 percent in 2006. Import licensing for all private imports, inadequate infrastructure, inefficient and cumbersome customs administration, restrictions on foreign exchange, and limited export activity can delay trade and increase its costs. Twenty points were deducted from Eritrea's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 86.4 Back to the top

Eritrea's fiscal regime and tax administration lack transparency, and there are no available data on tax revenue collection as a percentage of GDP. The top income tax rate is 2 percent, and the top corporate tax rate is 30 percent.

Government Size 9.9 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 54.8 percent of GDP. Partial divestment of state-owned financial institutions has been part of a weak privatization effort in recent years.

Monetary Freedom59.0 Back to the top

Inflation is high, averaging 11.0 percent between 2005 and 2007. The government maintains a firm grip on Eritrea's command economy, using the military and party-owned businesses to implement its development agenda. The government strictly controls the use of foreign currency, limiting access and availability. Few private enterprises remain. Eritrea's economy is heavily dependent on taxes paid by members of the Diaspora. Twenty points were deducted from Eritrea's monetary freedom score to adjust for extreme monetary control measures.

Investment Freedom10.0 Back to the top

Eritrea remains a strict command economy, eliminating most private investment. Large-scale projects must be approved by the appropriate minister or by the Office of the President. The government has selectively and narrowly courted foreign investors to explore underutilized resources, primarily in mineral extraction, but also in energy, fisheries, and tourism. Eritrea also has no clearly organized regulatory system; procedures are haphazard and irregularly enforced. Additional impediments to both domestic and foreign private investment include severe limits on the possession and exchange of foreign currency, the lack of objective dispute settlement mechanisms, difficulty in obtaining licenses, large-scale use of conscripted labor, and expropriation of private assets.

Financial Freedom20.0 Back to the top

Eritrea's small financial system remains poorly developed, and the government's interference in the system is significant. High credit costs and scarce access to financing severely impede private investment and dynamic economic growth. All banks are majority-owned by the government, and the private sector's involvement in the financial system remains limited. As part of the government's privatization efforts, 60 percent of the National Insurance Corporation of Eritrea (NICE) was sold in 2004 to domestic investors. The Commercial Bank of Eritrea (CBE), the country's largest commercial bank, has been chartered by the government to provide a range of financial services to the public. However, very high collateral requirements for loans by the CBE prohibit many small entrepreneurs from establishing and expanding their businesses. No foreign financial institutions operate in Eritrea, and there is no formal capital market.

Property Rights10.0 Back to the top

The government of Eritrea exercises strict control of political, social, and economic systems, with almost no civil liberties allowed. In theory, women have the legal right to equal educational opportunities, equal pay for equal work, and equal property rights; in practice, men retain privileged access to education, employment, and control of economic resources, particularly in rural areas.

Freedom From Corruption28.0 Back to the top

Corruption is perceived as widespread. Eritrea ranks 111th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. The World Bank reports petty corruption within the executive branch, based largely on family connections, as well as unconfirmed reports of more serious corruption among military leaders involving illicit trade and the appropriation of houses. There were reports that individuals requesting exit visas or passports had to pay bribes.

Labor Freedom73.9 Back to the top

The labor market operates under flexible employment regulations that can enhance overall productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is relatively costly. The formal labor market remains underdeveloped.