Command Economy as Failed Model of Development: Lessons Not Yet Learned The Case of Eritrea

Command Economy as Failed Model of Development: Lessons
Not Yet Learned
The Case of Eritrea

By
Desalegn Abraha, Ph.D.
University of Skövde
Department of Technology and Society
541 28 Skövde, SWEDEN
E-mail: desalegn.abraha@his.se

Paper presented at the Thirteenth World Business Congress, Maastricht School of
Management, Maastricht, The Netherlands, July 14-18, 2004
Abstract: The main aim of this article is to identify (find out) which economic model is applied in
Eritrea. The paper first recapitulates the various models of managing an economy as discussed in the
literature. The centrally planned (command) economy model was applied in Eastern and Central Europe
(ECE), considered to be an appropriate economic crises management model. However, the economic
growth of ECE was much slower relative to Western economies. Western countries applied the market
economy and the mixed economy models, which enabled them to manage and solve effectively their crises
economy better that the ECE countries. ECE countries abandoned the centrally planned economy model
and are making shifts towards the market and mixed economy models. Even the Chinese are making
adjustments of their model and are developing the socialist market economy which really suits their level of
development and the economic reality in the country. The Eritrean government promised and claimed to
follow the Western economic model(s), however if one closely watches the governments intervention in the
market and in the economic life of the country, the actual practice seems to be different and casts doubts on
the governments commitment to market economy. Against this background, i.e. to find out what Eritrea has
learned from the application of the above mentioned and other models of development and the thereby
achieved results, the author has examined Eritrea’s economic development model. Confirming his doubts,
the author has found out that the Eritrean government is following a similar dysfunctional model, i.e. a
militarist command economy model, however, in an improperly planned, poorly coordinated and
mismanaged approach, with its serious negative impacts on the economic development in general and the
private sector in particular, in the social as well as political conditions in the country.
The applied model helped the Eritrean government to build up a command economy network of
relationships. The state owned enterprises utilize and get the support of this network to dominate and
monopolize the various sectors of the market. Consequently, the Eritrean economy has been observed to
deteriorate continuously up till now. Instead of rectifying its mistakes and taking corrective measures, the
state continued the mismanagement of the mismanaged Eritrean economy by opening state owned staple
food shops and issuing a proclamation that prohibits keeping and transacting in hard currencies.

Introduction
Eritrea gained independence on May 28; 1993 after thirty years liberation war with
Ethiopia. The Mining Magazine (March, 1994, p.128) characterizes Eritrea’s location as
part of the very turbulent part of Africa. This turbulence is related to the political
situation in the three neighboring countries, i.e. Sudan, Djibouti and Ethiopia. Despite
Eritrea’s location in such an environment, the Mining Magazine argues that its resources
could make the country unique in Africa in terms of sustainable development.

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Achieving a sustainable development has to be accompanied by adopting realistic
approaches and openness to the local and international environment rather than isolation.
However, one of the prominent Eritrea lawyers and a legal adviser of the president is
quoted by the Multinational Monitor (01974637, July/August, 1996, P.2) to have said
“We stood alone for 30 years against the mighty. =//= Self-reliance has taught us a lot
and we strongly believe in it.” However, such an attitude and stand doesn’t seem to
contribute positively to the aim of achieving a sustainable development. Despite various
promising government policies in various fields, rigidity and reluctance to changes are
also implicated by a certain government official (1996) who indicated that “We cannot
just do away with attitudes.” Moreover, the governments’ approach to foreign aid also is
different from that of the donor organizations and that of the other African countries as
the below quotation clearly illustrates.
“The government’s rules covering foreign non-governmental organizations (NGOs) are strict, limiting the
NGOs to a single foreign staff person, and requiring the NGOs to work on projects only in collaboration
with government agencies. These restrictions, according to Eden Fassil, are, motivated by concerns about
inappropriate NGOs use of resources and especially by the government’s desire to promote self-reliance.”
Multinational Monitor, (01974637, July/August, 1996, P.3).
It is doubtful whether such an approach towards NGOs can contribute positively to the
development of a sustainable economic development.
In Africa Business (May, 1997, p.33) it is clearly stated that, Eritrea has introduced
private enterprise as the main dynamic means to achieve sustainable economic
development. This view seems to contradict the picture that the various government
officials portrayed in the above discussion. Africa Business, further claims that the
country was geared towards command economy during the liberation struggle.
Accordingly, the policies of the government stress self-reliance and private enterprise,
two seemingly irreconcilable approaches. Further the same source indicates that both the
public and private sectors have to be encouraged to confirm to the principles of the
market economy. However, this mode of development requires appropriate economic
model adoption and implementation. Considering this position, the main aim of this paper
is to discover or find out if an appropriate economic development model is being applied
in the Eritrean context.
In 1994 the party, i.e. the Peoples Front for Democracy and Justice (PFDJ) claims to have
demarcated clearly the border line among the party and the government (Economist,

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1995, p.1). Accordingly, the ministry of defense took weapons and military vehicles, and
the PFDJ took the companies that were established during the armed struggle and all the
financial resources and establishing new firms with left-over boats and vehicles. The
main goal of this economic policy is to heal the economy destroyed during the war for
independence and to regulate market prices. In line with these developments, the party’s
director of finance has this to say:
“The mentality of traders here is to make a tremendous profit at one time. If the traders try to rip off the
public and get rich at the expense of everyone else, we make sure commodities are on the market at a
reasonable price.”
(Economist, 00130613, 5/6/95, Vol.335, Issue 7913, p.1)

In contrast to the picture painted in the Economist above, the government claims to be
committed to the private sector growth and development. In the Business America
(August, 1997), it is said that the government in collaboration with the World Bank, has
developed a liberal macro economic policy to help growth of its economic development
by investing in the private sector rather than depending on aid. However, the Eritrean
economy has deteriorated due to the costs of Eritrean war with Ethiopia (Africa Business,
2001). On top of other several other factors, mismanagement of the government has also
contributed to the shrinking of the economy. According to the afrol news (2003), macro
economic situation declined in 2002. Accordingly, gross international reserves shrunk,
actual GDP fell down and inflation was heightened. These developments are said to be
the consequences of the war, governance and political difficulties and serious drought.
According to the same source the main causes for the deterioration of the economy are
the mismanagement of the government and several other external shocks.
From the above it is difficult to clearly see the Eritrean government’s model of economic
development. This is because in the various sources indicated so far, contradictory and
irreconcilable views have been presented about the government’s commitment and
application of any clear and specific path (model) of economic development. Against this
vague picture or background information, this paper endeavors with the help of the
authors own knowledge and experience and both secondary and primary data to make an
assessment of the Eritrean government’s model of economic development. Before
presenting the data, it discusses five models of economic development which will be used

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as a base for the analysis of the empirical data and to make the final judgment of the
model of economic development applied.

The Various Economic Models for the Management of an Economy
All societies, irrespective of level of economic development at which they find
themselves, have faced, and are still facing fundamental economic problem of deciding
how to manage their economies, in a world of limited resources. The purpose of adopting
and implementing a certain economic system is the same. This is the well being of their
societies through economic development and prosperity. With this purpose in view,
different governments or societies have followed different paths and applied different
economic models relevant to their environment. The main differences in the economic
models adopted can be classified into two main categories, i.e. (1) ownership of resources
and (2) supremacy in the market. In other words, the two categories relate to who should
own resources, i.e., how resources should be allocated among the various forces
operating in the market and who should have decision making power about how the
market should operate. One of the two possible actors is the state and the second is the
various firms operating in the market, i.e. the business community. According to
Sorrensen (1993), the business community and the government are considered as social
actors within the private and the public sectors respectively. To differentiate among the
different economic models, is mainly an issue about the allocation of resources and the
division of labor among these two actors. According to Biersteker (1990), the
relationships between the government and the market have been described in various
varying forms in different periods of time. Five economic models have been developed
and applied in different economic systems during different periods of time. In discussing
each of these five models, the pattern of increased government intervention and
decreased market authority or business community (role) in economic systems will be
critically analyzed.
These models are:
1. The Laissez-Faire Economy Model (The Market Economy Model)
2. The Mixed Economy Model
3. The Partnership Model

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4. The Public Policy Supremacy Model
5. The Central Planning Model

1. The Laissez-Faire Economy Model (The Market Economy Model)
The laissez-faire economy is equivalent to the market economy model, where there is no
active government intervention in the market. In other words, this model is based on
private enterprises interaction without significant government intervention1. The structure
of the market economy is dynamic, applicable, adaptable and decentralized.
Eklunds (1993, pp. 101-109) defines a market economy as one that is decentralized and
coordinated through the interaction among the various actors operating in the market, i.e.
it is the various actors in the business community through interaction that determine as to
how resources should be allocated, owned and managed. There is no superior government
authority that can decide as to how resources should be utilized and the market should be
coordinated. Likewise in his work about government business relationships Sorenssen
(1993) recommended the least government intervention in the market operating
mechanisms. Such an approach is believed to achieve the best results in the market.
Smith (1776) & Hayek (1944) also stress that what can create prosperity and
development is if the coordination mechanism of resources allocation is left to the market
forces to take care of or to handle.
In some sectors of the economy, the laissez-faire model might not function properly and
can lead to market failures. These are the cases where the price mechanism can be
misleading, simply because it doesn’t function for certain goods (Eklund (1993). Another
related problem according to the same source is that, sometimes the price mechanism
does not reflect all production costs.
There are two market economies. One is the typical market economy discussed so far in
this section and the second is the “socialist market economy”. In both cases the market is
considered as a mechanism of resources allocation2. According to the same source, in the
market economy firms make their own decisions in a competitive market and shoulder
the responsibility of the results of their policies and actions. It is through the interaction
among the various market actors that prices are established and the state applies its

1 http://usinfo.state.gov/products/pubs/market/mktec1.htm

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macro-economic regulatory role in a way that facilitates the effective functioning of the
market instead of creating bottlenecks that block its operations. Whereas in the socialist
market economy the major portion of the market is owned by the public sector, and the
rest is owned by the private and individual sectors. However, both the public and the
private sector operate on equal footing, i.e. pure competition is the rule of the game.
Production and market coordination are brought into action for the purpose of meeting
the need of the entire population. Whereas in the capitalist market economy ownership is
private and the owners of capital are looking after surplus value. Pure competition is also
another typical feature of the market economy.

2. The Mixed Economy Model
Considering market failures that can occur in a pure market economy (laissez-faire
economy model), some economists such as Keynes (1936) claimed that government
intervention in some sectors of the market is necessary. Such an economic system, where
some sectors of the market will be left to operate freely, and some other sectors will be
regulated by the state, is usually called the mixed economy model. According to this
model, a border should be drawn or defined in order to determine the division of labor
between the state and the business community, regarding the issues of resources
allocation and coordination of the various activities in the market. Who should do what or
should be responsible for is determined by the efficiency and effectiveness with which
each of the two sectors can perform. Certain sectors of the economy can be managed
better by the state and certain other sectors can be managed better by the business
community is the main tenet of this model. Therefore, each sector should be assigned to
shoulder the responsibility of the sector it can perform better, for the well being of the
society and the development of the economy. One of the main criteria to be applied in the
allocation of resources and responsibilities is therefore the efficiency factor. Relative to
the laissez faire-economy, in this model the state gets an increased role and the business
community a decreased role.
Sorenssen (1993) introduces the MARKET/MANAGEMENT ratio to show the relative
power between the state and business community autonomy in the market regulation.

2 http://www.asiatradehub.comIchina/rwo.asp

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Accordingly, if the ration in one country is large, the business community will be
responsible for more functions. However, if the ratio is relatively small the opposite is the
case, i.e., the state performs more functions relative to the business community.
Eklund (1993) indicating the failures in the market economy model, posits that a pure
economy model is difficult to apply and some degree of market autonomy respective
government regulation is necessary. With this view he recommends that a mixed
economy model would do more service and can lead to better performance of an
economy. Accordingly, in the cases where market failures are typical in the market
economy model, government intervention and responsibility is required to manage those
sectors of the economy.

3. The Partnership Model
In the partnership model, a set of institutions which together – through interaction and
negotiations – find solutions which can bridge different interests, replace the sharply
defined division of labor between the state and the business community which is
recommended in the mixed economy model. One of the main tenets of this model is that
dialogue and negotiation as distinct from division of labor can lead to a better and higher
total efficiency. In the mixed economy, division of labor is stressed, whereas in the
partnership model, synergy is believed to yield better results. Cooperation between the
state and the business community is highly stressed in this model, to find a mutually
satisfactory mode of operations and results in the market. Joint planning, policies,
implementation, follow-up and evaluation techniques should be developed to make this
model successful in achieving the desired results.
In very many cases several pure public institutions deal with pure private institutions,
whereas in a considerable number of cases institutions are comprised of people from both
the private and public sector and they are formed in collaboration between the state and
the business community.

4. The Public Policy Supremacy Model
Both in the mixed economy and the partnership models, the relationships between the
state and the business community can be said to be horizontal although to a varying
degree. Whereas, in the public policy supremacy model the relationship among the state

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and the business community is hierarchical. In other words, the government is above the
private sector and the private sectors’ is subordinate too and is expected to operate based
on the decisions and instructions from the state. In this model the government has more
power than the business community and can direct the ownership structure and market
operations and coordination mechanisms. Giving more power to the government relative
to the business community is believed to lead to a more optimal utilization of resources
and efficiency in the market. In most of the cases, government policies and actions are
not at all or are to a minimum extent based on or integrated into existing business and
economics models and theories. The government acts and the private sector or business
community reacts. The private sector management and marketing principles and practices
are not well understood and they are not seriously taken into consideration in the market.

5. The Central Planning Model (The Command Economy Model)
It is a central government which guides a command economy3. This economic system has
failed to achieve the expected results that were set up by those who developed and
applied this economic system as a model of development. Briefly, sustainable economic
growth, prosperity and even economic security of citizens could not be achieved in those
countries where command economy had been applied as a model of economic
development. It is in this model that the government plays the strongest role or manages
most just the opposite to how the market is said to function according to the laissez-faire
model. The centrally planned economy means that one should totally eliminate market
economy and the price mechanism and instead one should let the political and
administrative decisions to fully control the economy (Eklund; 1993). Accordingly, a
central planning body makes all decisions on how resources should be allocated and the
market operations should be coordinated. This body will collect and analyze all the
necessary information, about which products should be produced, in which quantities and
volumes, and with which investment materials and raw materials and finally prepare
production order to the companies. In this model one has to take into consideration both
the economic and technical factors on one side and political decisions and social
priorities on the other.

3 http://usinfo.state.gov/products/pubs/market/mktec1.htm

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The private sector is minimized in this model if at all it does exist. Most countries have
abandoned this old concept of central planning model (command economy model),
although some countries still maintain control of few sectors of the economy.

Management of Resources in Industrial Markets (Networks)
Industrial Networks see Ford ((ed.) 2002) and specifically industrial markets can be
described to be composed of three main variables, i.e. actors, activities and resources. By
actors, it is meant the various firms and organizations that operate in the market, which
can either be private or public. Activities are the performances of the various actors
operating in the market, such as purchasing, production, distribution, sales and marketing.
Resources are mainly of three different types, i.e. human, material and financial. In the
assessment and the analysis of which of the above models is being followed in Eritrea, a
strict attention will be given (i) To the main components (variables) of industrial markets,
i.e. actors, activities and resources, and (ii) On how the various resources, i.e. material,
financial and human resources are owned, allocated, coordinated and managed in the
market.

Methodology of the Study
Three different sources of information are used in this study. These are (i) The author’s
experience and knowledge of the Eritrean economy, (ii) Secondary data collected from
the internet and other sources, i.e., written materials such as books and articles and (iii)
primary data collected through interviews and used to write the two cases-studies4. In
presenting both the primary and secondary data, the author has also used his own
personal experience and knowledge. Actually, whenever the information from the
secondary data matches with the author’s knowledge and experience of how the market is
structured and functions, sources are intentionally omitted to avoid duplication. Thus,
whenever any source is missing in presenting the secondary data (information) about the
Eritrean market, it should be taken for granted that the author is the only source.

4 Two people are interviewed from Sgalet Clearing and Forwarding Enterprise, i.e. the manager and the
owner. Another two people are also interviewed from Hidri Swuat Share Company, which held medium
level management positions.

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The fact that my personal experience and knowledge about the Eritrean market has made
it possible to collect relevant information and to check the accuracy of the information
collected. This has increased both the validity and reliability of the data collected and the
conclusions drawn. In the discussion section, an attempt is done to make an assessment in
order to determine the linkage among the five models of economic development and the
empirical data of how the market in Eritrea is structured and functions. The discussion
has enabled the author to determine which model is being used in Eritrea and whether
this mode of economic development is appropriate or not.

The World Bank, the International Monetary Fund (IMF’s) and the
Eritrean Governments’ Approach to the Development of the Eritrean
Economy

The World Bank and the IMF recommendations to the management and development of
the Eritrean economy are more or less the same. Even the Eritrean government
theoretically claims to have followed/implemented the approach that these international
financial institutions recommend, contrary to what it does in practice, i.e. how it
interferes, controls and manages the market in particular and the economy in general.
In a project named as the Eritrean-Private Sector Reconstruction Credit with a Report No.
PID7016, Project ID ERPE50356, the Eritrean government’s position towards the private
sector seems to be positive. According to this source, the private sector development is
seen as a driving force for growth in investment, production, exports and employment.
Moreover, the government is said to have developed an appropriate incentive framework
for the growth of the private sector.
“A competitive exchange rate system had been introduced; tariff rates have been reduced; a pro-export
policy with full foreign exchange retention rights is in place; there are no export taxes; all sectors of the
economy are open to foreign and domestic private investors; and the government have a strong
commitment to privatizing state owned institutions.”
(The Infoshop: The World Bank, November 6, 1998, P.4).

This project description is prepared by the Eritrean government and supported and
approved by the World Bank of course with some modifications.

In another document the World Bank defines one of the objectives of the Emergency
Reconstruction program to be:

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