(CAP) Industrialization and Global Value Chains in Eritrea

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energy-electricity-developmentJuly 21, 2014
Industrialization and Global Value Chains in Eritrea
The Government of Eritrea considers global value chains as one of the main engines for reducing economic volatility and improving growth. Major activities within the value chain are currently performed in the provision of ancillary services, production of agricultural goods, processing, natural-resource extraction, and sales and marketing. The mining sector has been the biggest area of attraction with more than 14 mining and exploration firms from Australia, Bermuda, Canada, China, Libya, the United Arab Emirates and the UK involved.

In the agricultural sector, China-based firms are increasingly investing in the construction of cold food-storage facilities, an aluminium-tin manufacturing plant and a high-quality PVC agriculture drip-irrigation pipe-production line. The government is strongly encouraging companies and individuals to invest in building residential housing, roads, airports, ports and hospitals. In the housing sector, Gruppo Italiano Costruzioni, an Italian firm, is constructing 1 680 housing units in the capital city, Asmara, as well as several housing projects and a resort in Massawa. The main drivers of the development initiatives are embedded in the country’s commitment to development through a self-reliance policy.
The Eritrean Investment Centre has been reaching out to potential investors and has provided assurances of protection to investors in the country. The government also introduced a crash program for export take-off designed to penetrate the European and US markets (through the US Africa Growth and Opportunities Act, 2000). Eritrea was thus able to export textiles/garments to the United States free of duty and free of quota restrictions up to 2008.

Overall, the impact of the country’s participation in the value chain is noticeable, particularly in job creation, infrastructure and capacity development and in increased revenue inflows. Direct and indirect employment associated with the Bisha mine only is expected to amount to as many as 700 jobs when in full operation.

The growth potential of agriculture has not been fully exploited mainly due to low connectivity of the production locations, low levels of value addition and low productivity. The fishing value chains are relatively well-developed, but there is considerable room for improvement. Key investment opportunities in the fisheries subsector provide a potential of 90 000 km² of fishing grounds, with an estimated annual production potential of between 65 000 t and 70 000 t of fish and other marine produce. Demand for fish exceeds supply in urban areas and there is latitude for increased domestic consumption. In addition, the Eritrea fisheries sector has the potential to contribute significantly to Eritrean food security, foreign-exchange earnings and job creation.

The tourism sector has huge potential based on the scenic and topographic diversity of the country as well as on its history, in addition to a long coastal line of pristine sandy beaches, many islands and clear water with abundant marine life. There are also good investment opportunities in developing the historical and cultural heritage of the country.

Investment in exploration activities for reserves of oil, natural gas and other minerals provide a potential source for the expansion of export receipts. Offshore-oil and natural-gas exploration are specific areas of potential investment.
In spite of these investment opportunities, the country faces many challenges, amongst which low productivity in agriculture attributed to archaic farming practices and a land-tenure system that vests ownership of land to the government.

Exploitation of the existing economic opportunities in Eritrea will require not only the commitment of the Government of Eritrea and its people, but also regional integration and international trade. The country therefore needs to undertake effective policy reforms, including regional co-operation and integration policies, and develop a strong infrastructure base in addition to the provision of sufficient energy, transport, communication and physical marketing facilities, as well as adequate institutional and human-resource capacity and incentives. For example, with adequate policy reforms and investment, there is ample room for accelerated agricultural development. By using modern cultivation, fertilization, plant-protection and water conservation techniques, large quantities of food crops, exports and raw materials for industrial enterprises can be produced. The development of irrigated agriculture in the lowland river basins is highly promising.

In the medium-term, Eritrea should consider the following key measures:
Actions to deepen the value chain must be driven by market opportunities and demands. Here, the Government of Eritrea must address barriers such as high infrastructure costs, lack of access to finance (capital) and the limited availability of skilled workers and appropriate incentives. In particular, it must address barriers facing small and medium-sized firms, as these provide greater opportunities to deepen the value chain within the major economic sectors.

Policies aimed at supporting private-sector development in manufacturing and primary input processing are also useful. There is great potential for Eritrea in processing agro-food products for export.

The government’s forthcoming development plan emphasizes the move into higher value added activities. The government needs to consolidate these plans into one national plan and detail out synergies across sectors. It should further develop a business environment through the creation of supply-chain linkages between foreign and local firms in formal manufacturing in order to foster the emergence of local manufacturing firms capable of subcontracting tasks and subsequently competing with foreign firms.

This will encourage domestic firms to become more innovative and raise labor productivity in order to work with multinational enterprises.
To improve the country’s business climate, the government should make efforts to develop human skills further and provide appropriate incentives in order to respond to labor-market demands. The government, with assistance from the AfDB, is developing the required skills and technical expertise through a vocational and technical training program. The government has asked the AfDB to support the program continuously over the medium term in order to close the skills gap in the country.
Excerpt from Eritrea Country Note, African Economic Outlook 2014

Photo: TesfaNews

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