Background

Eritrea won its independence from Ethiopia in 1993, but relations with Ethiopia remain tense. A U.N. peacekeeping mission ended in 2008, and Eritrea has ignored a U.N. resolution instructing it to remove troops from a disputed region on the border with Djibouti. President Isaias Afwerki has ruled without elections since 1993, and elections are unlikely due to the ongoing conflict with Ethiopia. Judicial independence is limited, and journalists and others have been held without trial for speaking against the government. Roughly three-quarters of Eritreans depend on small-scale agriculture and fishing, and two-thirds of the population receives food aid. Productivity is very low, and the International Monetary Fund estimates that remittances from Eritreans living overseas were equivalent to 23 percent of GDP in 2007.

Rule of Law

The rule of law remains fragile and uneven, severely undermined by a weak and inefficient judicial system. Protection of property rights is not strongly maintained. The government has a history of expropriating houses, businesses, and other private property without notice, explanation, or compensation. Pervasive corruption and cronyism continue to erode the foundations of economic freedom.

Limited Government

The top income and corporate tax rates are 30 percent. The overall tax burden is estimated to be quite high, although taxation is erratic and poorly administered. Government spending is equivalent to 42.1 percent of total domestic output. The deficit has been chronically high at over 15 percent of GDP, with public debt amounting to 144.8 percent of total domestic income.

Regulatory Efficiency

Procedures for establishing and running a business are opaque and costly. Regulations are severely outdated and not conducive to entrepreneurial activity. The required minimum capital for launching a business is equivalent to over twice the annual average income. Existing labor regulations are not enforced effectively in the absence of a well-functioning labor market. Monetary stability has been weak, and inflationary pressures continue.

Open Markets

Eritrea’s trade freedom remains severely restricted by prohibitive tariff and non-tariff barriers. The government-controlled economy leaves little room for private investment. Large-scale projects must be approved by the appropriate Office of the President. The financial system remains very much underdeveloped. All banks are majority-owned by the state, and private-sector involvement in the system remains limited.

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