EEA-EEPRI Working Paper 3/2002

1. Introduction

The unexpected war between Ethiopia and Eritrea brokeout on May 6, 1998. This border conflict became full-fledged war until the Eritrean army was finally defeated and expelled from all occupied areas of Ethiopia (Habtemariam, 2000). With the concerted efforts made by the Organization of African Unity (OAU), the United Nations (UN) and the European Union (EU) as well as the governments of the United States of American and Rwanda, cessation of hostilities agreement was signed on June 18, 2000.

This war beyond doubt had impacts on the performance of the Ethiopian economy. Huge manpower, material and financial resources were mobilized to the war effort. Economic and social infrastructures were destroyed, properties were looted and normal human settlement and economic activities were disrupted with significant loss of human life. In this report effort is made to study in detail and measure the impacts of the border conflict on the performance of the Ethiopian economy using secondary data sources. To make the study complete there is a need for further analysis particularly by collecting primary data mainly in war affected areas.

1.1 Objectives of the Study

The over all objective of this study is to assess the impacts of the Ethio-Eritrean border conflict on the Performance of the Ethiopian Economy.

1.1.1 General Objectives

The general objectives of the study are:

· assess the socio-economic performance of Ethiopia during the conflict period;

· review the changes that have occurred on government expenditure; and

· assess the overall development cost Ethiopia has sustained as a result of the conflict.

1.1.2 Specific Objectives

The specific objectives of the study are:

· assessing Ethio-Eritrean economic relation before the conflict;

· assessing the inflow of external assistance during the conflict;

· assessing the level of investment during the conflict;

· assessing domestic resources mobilization for the war effort; and

· assessing the direct destructions made on socio-economic infrastructure.

1.2 Conceptual Issues

Any conflict between countries no doubt has damaging impacts on the performance of the economies of the countries engaged in the conflict. One of the first and fundamental impacts of a conflict is the displacement of people from their permanent residence and from their normal productive economic activities, making them dependent on other people. A conflict also leads to movement of young and working people away from their productive economic activities to join the army at least to replace those who die and/or become disabled as a result of the conflict.

When a country is engaged in a war, it is more likely the country would be engaged in a huge purchase of military equipment, with an increasing demand for logistics requirement. These requirements will increase military spending reducing thereby government spending on economic and social infrastructures, agriculture and other development endeavors. An increase in military spending and a reduction in development spending will finally bring a reduction in economic growth. On the other hand, an increase in military spending can lead to a budgetary deficit which further could lead to money printing. The money printing will increase inflation in the economy. The budgetary deficit could also lead to an increase in domestic borrowing which again further lead to an increase in interest rate, credit rationing and crowding out of private sector investment.

Because of its nature, tourism is very sensitive towards war and conflict. Thus, border conflict reduces the inflow of foreign tourists into the country and affects movement of domestic tourism which reduces foreign exchange earnings and results in loss of income to hotel owners, air transport, travel agents and tour operators. Whenever a country is in a conflict, foreign investors’ confidence is eroded. In other words it creates lack of security on the part of the investor which could lead to reduction in investment further leading to reduction in employment, opportunities, level of production and rates of economic growth.

For fear of indirectly financing the war bilateral and multi-lateral donors will also reduce the level of grants and loans they extend to the country. Donors adopt a wait and see attitude and use delaying mechanisms for withholding grants and loans. This can reduce the foreign exchange support such as balance of payment support and counter part funds. As a result, there would be postponement of project implementation particularly on health, education and road projects. Budgetary support by donors could also be shifted to project support, which affects sector development programs (SDPs). Generally all these conditions could lead to shortage of foreign exchange which will further constrain import. These conditions will further reduce government revenue and will increase budget deficit. In cases like the Ethio-Eritrean conflict, conflict also leads to closure of access to ports that could in turn result in re-routing of import and export commodity transportation which could probably be expensive and inefficient.

As a conflict situation persists, it distracts government attention from development and puts a strain on the government to change and reform policies to accommodate the on-going war. Different procedural mechanisms will be created which become too tight and time taking. Particularly foreign exchange allocation become too tight with different structures created for decision making to reduce foreign exchange availability to the private sector.

In case of a conflict between two countries, trade and economic relations with the conflicting countries will be disrupted. The countries’ over all trade and other economic relations, including in the case of Ethiopia use of port facilities and use of oil refinery facilitiy will be reduced. The advantages of exporting specific commodities which are part of the consumption habits of the countries in conflict (such as in the case of Ethiopians exporting teff and berberie to Eritrea itself) will be disrupted and will reduce the total volume of export.

The disruption of trade and economic relations will result in loss of advantages of large and easily accessible market and bring border trade to a complete stop. As stated by Dr. Haile Woldemikael (Haile 2001) peace like most precious and life sustaining things such as air, sunshine, water, the ecosystem, etc., is not only priceless, but also fragile. Blinded by daily preoccupations and the immediate demands of life, we tend to forget the very basis on which our own existence is rooted. Due to negligence, and perhaps also foolishness, we let the building blocks of peace (political, economic, social, cultural, and human rights) rot and fall apart. The weakening of such peace structures invites the forces of disruption, disorder, greed, operation, war and disintegration, etc. to take over and wreak disequilibrium on society. When such forces become the order of the day, more often than not, they beget social systems tailer made in their own images. What we see in many African countries demonstrates the truth of the matter. People in Africa and other developing countries ought to stop taking peace for granted and work seriously for its creation and maintenance. Generally any border conflict will bring social instability affecting the economic growth of the countries involved in the conflict.

1.3 Methodology

Towards actualizing this study, literatures and documents were reviewed and secondary data were collected from various relevant institutions. Meetings and discussions have been also held with relevant authorities. The major sources of the information collected are documents of which some are unpublished. Due to shortage of time, primary data were not collected, and the study, therefore, mainly relied upon the use of secondary data.

1.4 Limitations

This study is done within 30 days from the time of signing of the contract. Thus, the major limiting factor is shortage of time for the study. As a result of this limitation, some information such as the number of projects (if there are any) that are affected as a result of withholding external grants and loans are not studied in detail. How the availability of goods and services is reduced by interruptions made on properties which used to be owned by Eritreans is not analyzed. Although the study has some limitations, by and large it has covered wide ranging dimensions of the conflict and provides a lot of information on which one could safely conclude that the Ethio-Eritrean border conflict had serious impact on the performance of the Ethiopian economy. To make the study more complete however collection of primary data from areas directly affected by the conflict needs to be carried out.

2. The Ethio-Eritrean Economic Relation before the Conflict

2.1 Framework of Economic Agreement

Before the conflict the Federal Democratic Republic of Ethiopia and the State of Eritrea have signed different cooperation agreements since Eritrea’s defacto independence in 1993. The cooperation agreements were made on economic, social and political fields. On the economic field, the agreements signed focus on the following specific areas (MEDaC, 1997):

· Harmonization of Economic Policies;

· Agriculture, Natural Resources and Environmental Protection;

· Trade and Industry;

· Finance;

· Banking Services and the Use of Currency;

· Transport and Communication;

· Public Works and Urban Development;

· Mining and Energy;

· Tourism;

· Investment; and

· System of Port Utilization.

As stated by the position paper of the former Ministry of Economic Development and Cooperation (MEDaC) on Ethio-Eritrean Economic Cooperation Agreement (MEDaC, 1997), important achievements have been registered in the implementation of these agreements. The statement goes on to say that without these achievements, the two countries would not have had the kind of strong economic ties they were enjoying before the conflict. As a result of these achievements, about 80 per cent of Ethiopia's foreign trade used to pass through the two Eritrean ports. The oil refinery facilities at the port of Assab were commonly used by the two countries. We are unable to find the arrangement for this. The free movement of locally produced goods and other facts explain that there was special and close economic relationships between the two countries.

But there were also obstacles to the implementation of the agreements. These obstacles were addressed by the Joint Ministerial Committee Meetings. According to MEDaC's position paper, there were underlying causes for the obstacles or problems that surfaced during implementation and which needed to be addressed without delay. The obstacles revolved around the following points (MEDaC, 1997).

· inconsistency of some of the agreements with the prevailing economic policies and practices;

· the use of common currency;

· lack of clarity in some provisions of some of the agreements;

· lack of follow-up mechanisms;

· poorly developed commercial relationships in dealing with port and transit services; and

· poor dissemination of agreements and regulations.

On the other hand, a study report entitled Economic Analysis of the Ethio-Eritrean Conflict written by the socio-economic study team of the House of Representatives and House of Federation Councils states two conflicting views on Ethio-Eritrea relations. One of the views indicates that the economic relations between Ethiopia and Eritrea were based on mutual benefits to the two countries. The development of each country would not affect the other's development. The other view is opposite. It is based on the belief that due to the willingness or negligence of the Ethiopian government, Eritrea took unfair advantages over Ethiopia. In addition to this view, they suggest that the political decision making structure of the Ethiopian government was under the control of the Eritreans that made the economic relation agreement in favor of Eritrea (Socio-Economic Study Team, 1992 E.C.). On a number of occasions, Ethiopian higher officials have disclosed that the Eritrean government was absolutely selfish in the process of implementing the economic relation agreements signed following the Joint Ministerial Committee Meetings between the two countries.

2.2 Contents of Agreements and Problems Encountered

To create a free trade economic zone, the agreement on trade allows products of the two countries to enter into the other country without custom tax. But the commodities that are sources of foreign exchange earnings are not included in the agreement. This means that one cannot buy the commodities that are sources of foreign exchange earnings for the other country with the commonly used currency, Birr.

When imported commodities pass through each other's country, they are considered as commodities on transit and they will be free from custom taxes. The agreement on transport states that the Ethiopian Airline will pass through Asmara and take passengers to and from Asmara from other destinations. This agreement also allows the use of Massawa and Assab ports as free ports. Over and above these agreements, the Eritrean nationals residing in Ethiopia were allowed to participate in key economic activities and work in civil service jobs just like an Ethiopian without any discrimination (Economic Analysis Team, 2000).

According to government officials over time the Eritreans were abusing the good economic relations of the two countries by devaluing the Birr which was serving as common currency for the two countries. When one Dollar was exchanged at 6.25 Birr in Ethiopia, it was exchanged at 7.2 Birr in Eritrea. On top of that the Eritrean government, disregarding the trade agreement, took coffee and oil seeds that are sources of foreign exchange earnings from Ethiopia illegally for the purpose of re-export. In addition to that, using the trade agreement, which allows imported goods to pass through as a transit good without being taxed, the Eritreans were selling untaxed commodities in Ethiopia thus pushing Ethiopian traders out of the market.

Although as of now it is not explicitly confirmed nor substantiated by data, Eritrea was exporting coffee without growing coffee in its own country (MEDaC, 1997). On the other hand before the Eritrean referendum was held that legalized the Eritrean independence, the Ethiopian government was involved in the reconstruction and rehabilitation of the Eritrean economy. Surprisingly, just before Eritrean independence was announced, Ethiopia signed 18.1 million SDR loan agreement No. 51/1993 with the International Development Association for the reconstruction and rehabilitation of Eritrea (Negarit Gazeta, 1993). This money will be paid back by the Ethiopian people. In addition to the above mentioned problems there were three areas where basic differences have appeared.

1. Restrictions on Eritrea's Imports of Ethiopia's Exportable Products.

Since Ethiopia heavily depends on agricultural products for its foreign exchange earnings, Ethiopia put restrictions on the following items not to be exported to Eritrea as long as Birr continues to be used as a common currency;

· coffee,

· hides and skins,

· pulses and oil seed particularly haricot bean and sesame, and

· other agricultural products believed to be in short supply.

2. Prohibition of Franco-Valuta Goods.

Ethiopia has had regulations that prohibited Franco-Valuta import that have been applied to all countries. The implementation of this prohibition has made clear that Eritrea should not be an exception.

3. The Need to Control Re-exportation of Goods to a Third Country.

Since Ethiopia relies for its foreign exchange earnings on agricultural products, Ethiopia applied a controlling mechanism not to allow first grade coffee and other export products which are in short supply to be freely moved to Eritrea as long as Birr is used as a common currency. Since first grade coffee is not allowed for Ethiopians to buy it with Birr domestically , Eritreans were not also allowed to buy it with Birr.

On the above stated points, the two governments have had different and opposing positions. These positions were as follows, as presented by MEDaC position paper (MEDaC, 1997).

Problems and Proposed Measures

	Problems/ Issues	Ethiopian Side	Eritrean Side
1	Restrictions on Eritrea's imports of Ethiopia's exportable products	Article II: Sub Article 1 of the Trade Agreements signed on 27th Sept. 1993 states, "There shall be free movement of goods and services for local consumption in the respective countries of the counteracting parties, except for the goods in short supply, whose movement shall be determined by the competent authorities of the respective countries". The essence of this provision is that both parties have agreed on the free movement of goods and services for local consumption. The practice in Ethiopia is that domestic products which are not of export quality are freely consumed locally. Moreover, in the Memorandum of Understanding (MOU) signed on 7th October 1994 the issue of the free movement of goods and services without being distracted by short supply and exportable products had been adopted as an agenda item. However, after discussing the issue, an agreement was reached as follows:- "Both parties agree free movement of goods and services should not be distracted by short supply"	The Trade Agreement signed in September 1993 and the Memorandum of Understanding of October 1994 stipulate the free movement of all goods and services between the two countries. Moreover, Article II: 3 of the Trade Agreement implicitly states that exportable products of Ethiopia can be sold into Eritrea but restrict re-exportation to a third country. Therefore, the Eritrean side explained that the current practice of putting restrictions on Eritrean imports of Ethiopian exportable products is a violation of the Trade Agreement signed between the two countries. As shown above, the Agreement and the MOU have been interpreted differently by the two sides, and hence to avoid differences in interpretation a revision of the Agreement was recommended.
2	Prohibition of Franco-Valuta goods	It was indicated that the new regulation regarding the prohibition of Franco-Valuta imports is aimed at addressing problems of proliferation of the black market and unfair trade practices which are associated with the operation of such importing procedures. Furthermore it was noted that the new regulation is consistent with Article II.2 of the Trade Agreement signed between the two countries on September 1993. It is true that the prohibition of Franco-Valuta trade has created a unique problem to Eritrean re-export business because of the absence of the LC system between the two countries. An appropriate payment mechanism should be instituted to eliminate the problem.	It was stated that the prohibition of Franco-Valuta imports by Ethiopia is a measure which amounts to a total ban on Eritrea's re-exports to Ethiopia with considerable negative impact on the Eritrean economy. Since the Birr is a common currency of both countries and all trade transactions between the two countries are conducted in Birr the prohibition of Franco-Valuta imports means that Eritrea cannot have legal re-export trade with Ethiopia. This move by the Ethiopian side is a violation of article II.2 and article V of the 1993 Trade Agreement and also represents a reversal of the progress achieved so far in the expansion of trade between the two countries. Therefore, the trade and other relevant agreements should be revised to take account of this few development
3	The need to control re-exportation of goods to a third country	It was pointed out that owing to the use of a common currency (Birr), a mechanism should be devised to control the re-exportation of goods originating from one counteracting party to a third country as stipulated in Article II.3 of the Trade Agreement	It was maintained on the other hand, that since Eritrea wants to import Ethiopia's exportable and goods in short supply only for satisfying its domestic consumption, trying to put control mechanisms on the re-exportation of goods is unnecessary.

Source :- MEDaC, 1997.

The different measures undertaken by the Ethiopian side can be taken as concrete evidence for the re-export of Ethiopian coffee by Eritrea by illegal means. Since positions on the Ethiopian side were taken in 1997, the action outside the agreement by the Eritreans could probably have been encouraged by the irresponsiveness of the Ethiopian side. While the economic agreements were presumably based on mutual benefits, the implementation of the economic agreements was eroded by the illegal action on the Eritrean side. Finally, the Eritrean government established its own currency, Nakfa, in November 1997 which replaced the use of Birr as a common currency.

The Eritreans continued violating and abusing the economic agreements by illegal modalities, (Medhane Tadesse, 1999), and when the use of Nakfa became effected, the Ethiopian government took a position that made it clear that the economic relations with Eritrea will be treated like any other country in the world. Unlike the previous agreement, import and export activities with Eritrea started to pass through the National Bank of Ethiopia through the use of USD by opening letter of credit (L/C). This issue became one of the points of departure and probably one of the causes for the start of the conflict, which brought the closure of the first chapter, that is, the special economic ties.

According to the information obtained from the Commercial Bank of Ethiopia, a few L/C's were opened on the Ethiopian side to import salt from Eritrea. But since the Eritrean government took a position not to accept Ethiopia's position, there was no L/C opened on the Eritrean side. Thus so far trade between the two countries with the use of USD has not been practiced.

3. Socio-Economic Assessment

3.1 Pre-Ethio-Eritrea Border Conflict

3.1.1 Macro-Economic Situation

Following the end of the civil war and the fall of the Derge regime in May 1991, the transitional government formulated a new economic policy to stabilize the macro-economic condition and to enhance the replacement of the centrally planned economy by a free market economy. The major objectives of the new economic policy are to change the role of the state in the economy, promote private investment and involve regional administration in economic management under a federal system. To achieve these major objectives and to bring structural change in the economy, a new economic reform program started to be implemented since 1992.

The Agricultural Development Led Industrialization (ADLI) policy was also formulated and adopted. This strategy assumes that the growth of the agricultural sector will serve as an engine for the growth of the country's economy. As a result of the introduction of the new economic policy and the lifting of restrictions and regulations imposed on private sector, the economy recovered, assisted by good weather, during the first five years. GDP grew for example by 10.6 percent in 1995/96 and by 5.2 percent in 1996/97 and declined to negative 1.4 percent in 1997/98 (MEDaC, 1999).

To meet the growing food demand of the country, agriculture needs to grow by at least more than the rate of population growth. The Agricultural Extension Program is specially designed to meet this purpose. However, the total cultivated area in 1997/98 has decreased by 15.15 percent over the previous year (National Bank of Ethiopia, 2000). In fact the cultivated land in 1997/98 was less than the cultivated land in 1994/95, likewise crop production in 1997/98 has decreased by 22.83 million quintals or by 23.65 percent over the previous year. One of the major factors that contribute to such a decrease of production is the unfavorable weather but the reason for the decrease of the cultivated land is not clearly explained. Thus the share of agriculture in the total GDP showed a decrease from 51.5 percent in 1995/96 to 45.8 percent in 1997/98 without substantial increase of production of other sectors.

During the period 1992/93 - 1997/98 public administration and defense together, on average, grew by 8.9 percent. In the ending year of 1997/98 before the Ethio-Eritrean border conflict started, GDP registered a decline from the previous year by 0.5 percent, which brought GDP per capita level down from 253.10 in 1996/97 to 244.34 in 1997/98. In particular, agricultural GDP in 1997/98 declined by 0.2 percent over the 1996/97 and by 7.2 percent over the 1995/96 period.

As shown in table 1A and 1B, the growth of the industrial sector was only 5.4 percent in 1995/96 and 7.0 percent in 1996/97. In 1997/98, the year that ended just before the Ethio-Eritrean conflict, the growth of the industrial sector was only 0.9 percent. Within the industrial sector, the large and medium scale manufacturing industry registered a decreasing growth rate. In fact, in 1997/98, it registered a negative growth rate of 7.1 percent. Handicrafts and small scale industries which account for about 20 percent of the industrial GDP also registered a declining growth rate from 7.1 percent in 1995/96 to 4.5 percent in 1997/98. Since a negative growth rate of 1.4 percent of GDP has been registered in 1997/98, a distributive services GDP has also exhibited a declining growth rate from 9.0 percent in 1995/96 to 5.3 percent in 1997/98. From other services, public administration and defense GDP grew from 4.8 percent in 1995/96 to 24.6 percent in 1997/98.

Table 1a: Gross Domestic Product by Industrial Origin at Constant 1980/81 Factor Cost

Activity Year	1982	1983	1984	1985	1986	1987	1988	1989	1990
E.F.Y G.Y	1980/90	1990/91	1991/92	1992/93	1993/94	1994/95	1995/96	1996/97	199798
Agriculture & allied Activities
- Agriculture	5814.40	6114.89	5947.60	6308.32	6978.00	6284.00	7206.20	7453.90	6687.00
- Forestry	5043.22	5330.71	5147.39	5488.27	5271.85	-	-	-	-
- Fishing	4.44	4.70	5.01	5.28	5.58	-	-	-	-
Industry	1265.29	1024.13	951.41	1222.32	1307.32	1412.50	1488.90	1590.10	1691.00
- Mining & Quarrying	19.20	52.10	38.98	57.10	45.00	49.00	55.40	62.60	68.90
- Large & Medium Scale Manufacturing	556.65	336.40	306.09	456.39	514.15	562.50	606.20	640.90	681.90
- Electricity & Water	232.99	200.76	201.33	234.25	237.48	256.50	274.80	291.90	305.00
- Construction	174.60	179.90	186.86	197.80	207.90	219.30	203.20	215.10	223.10
Distributive Services	1705.85	1304.91	1272.14	1555.13	1650.98	1757.30	1914.70	2062.10	2171.10
- Trade, Hotels & Restaurants	1117.87	760.82	648.51	887.40	945.22	1027.70	1115.50	1208.90	1263.30
- Transport & Communications	587.96	544.09	623.63	667.73	705.76	729.60	799.20	853.20	907.80
Other Services	2564.06	2424.22	2300.42	2638.64	2874.14	3190.50	3377.30	3603.80	4081.90
- Banking, Insurance & Real Estate	701.17	656.58	623.19	681.06	747.42	810.30	879.70	954.50	999.20
- Public Administration & Defense	106.80	913.45	776.64	1017.84	1125.04	1327.80	1391.50	1483.40	1848.30
- Education	248.90	271.30	278.50	271.10	278.20	287.90	298.00	311.10	327.00
- Health	94.10	90.80	100.00	114.70	136.80	146.50	154.00	160.10	175.90
- Domestic & Other Services	458.09	492.11	522.09	553.94	586.68	618.00	654.10	694.70	731.50
Total	11349.58	10868.15	10471.57	11724.41	11910.32	12644.30	13987.10	14709.90	14631.00
Mid-Year Population (in Million)	47.64	49.15	50.76	52.40	53.48	54.65	56.37	58.12	59.88
Per Capita GDP (in Birr)	238.24	221.12	206.30	223.75	222.71	231.37	248.13	253.10	244.34

Source: MEDaC 2001.

Table 1b: Growth Rates of GDP and Various Sectors

(1995/96 - 1999/2000)

		Growth	Agriculture		Industry		Distribution Services		Other Services
No.	Year	Rate GDP	as % of GDP	Growth Rate	as % of GDP	Growth Rate	as % of GDP	Growth Rate	as % of GDP	Growth Rate
1	1995/96	10.6	51.5	14.7	10.6	5.4	13.7	9.0	24.1	5.9
2	1996/97	5.2	50.7	3.4	10.8	7.0	14.0	7.7	24.5	6.7
3	1997/98	-1.4	45.8	-10.8	11.1	0.9	15.0	5.3	28.1	13.4
4	1998/99	6.2	44.8	3.8	11.2	6.9	15.0	6.2	29.1	9.8
5	1999/2000	5.0	43.5	1.9	11.2	5.1	15.0	5.3	30.3	9.4

Source:- MEDaC 2001 (unpublished sources).

3.1.2 Domestic Resources Mobilized and Allocated

The over all objectives of the government development agenda are reduction of poverty and assurance of household food security in the country. To achieve these objectives, government resource allocation has increased over a period of time. As indicated in table 2, the budgetary allocation of the government, including subsidies to regional states, had reached 9.6 billion Birr in 1996/97 and 10.5 billion Birr in 1997/98. Out of these budgets 3.38 billion Birr and 3.65 billion Birr were allocated to subsidize regional states in the respective year.

As indicated above, one of the major objectives of the government policy is to involve regional administrations in economic management under a federal system. Ethiopia is now a Federal Democratic Republic that constitutes nine national regional states. Each regional state is sub-divided into other administration units: zones and woredas. Totally, there are 62 zones and 523 woredas in Ethiopia. Since 1992, significant autonomy and responsibilities have been transferred to regional state authorities. In light of the above rationale, the institutional arrangements to carry out development activities fall within the decentralized system of government. The institutional capacities to carry out development activities in each region vary reflecting the variations in the state of their development.

To narrow the gap in development, the subsidy at the beginning used to be divided among regional states based on the following criteria:

a) Size of population,

b) Distance - a statistical method that can identify differences in development among regions,

c) Comparison among regional income and expenditure,

d) Implementation capacity, and

e) Size of the region.

But the criteria have been revised since about four times. At the time of this report preparation, the formula is based in terms of weighting with only three criteria. These criteria are population given a weight of 60 percent, development index with a weight of 25 percent and the revenue collection effort variable with a weight of 15 percent (World Bank, 2000, p. 29). The inclusion of own revenue performance factor in the budget subsidy formula is designed to provide incentives for the regions for better revenue mobilization.

But the fact that a region has higher mobilization capacity means that it is more developed than the region which has less mobilization capacity. It also means that if a region has higher mobilization and implementation capacity it will develop faster than the other region which has less capacity. Thus, although some of these criteria are important, the possibility of narrowing the gap by using such criteria seems very unlikely. As to the sectoral budgetary allocation, the EPRDF Five Year Development Program states that since agriculture is the main stay of the Ethiopian economy (from which about 85 percent of the population earns their livelihood) it is natural for the country's development priority to focus on the agricultural and rural areas at large. To implement this priority into action, the government expenditure pattern should also reflect this development strategy. As we can see from table 2, the share of agriculture and natural resources from the general government expenditure was only 12.0 percent, 10,7 percent and 11.9 percent in 1995/96, 1996/97 and 1997/98 respectively showing a declining percentage share, whereas during these periods the share of defence in total expenditure was 8.4 and 8.3 percent in 1995/96 and 8.3 percent in 1996/97. Two months before the end of the 1997/98 fiscal year the Eritrean army invaded Ethiopia i.e., on May 6, 1998.

Table 2: Federal Government Budgetary Allocations by Sector

in '000

Sectors/Year	1996/97	1997/98	1998/99	199/2000
1. Recurrent Budget	3563755.5	3752370.7	4047647.1	8238615.9
· Administration & General Services	1192826.1	1305438.6	1514516.7	3208873.0
· Economic Services	245933.2	282075.3	257066.6	288919.6
· Social Services	272630.2	300344.1	332702.6	376186.8
· Others	1852365.9	1864512.7	1943361.2	4364636.5
· (Defense)	781600.4	873353.9	995302.6	2512148.4
2. Capital Budget	2633700.0	3047230.0	2905299.8	25158600.0
· Economic Development	2317884.9	2572622.6	2473210.7	2231302.1
· Social Development	195933.6	223951.4	244805.9	160734.6
· General Services	119881.5	250656.0	187283.2	123823.3
3. Subsidy to Regions	3379400.0	3652235.5	4163056.7	3142000.0
· Recurrent	1395503.3	-	-	-
· Capital	1983896.7	-	-	-
Total Budget	9576855.5	10451836.2	11116003.6	13896475.9

Source:- Federal Negarit Gazeta Proclamation No. 39/1996, 83/1997, 126/1998 and 175/1999.

At this juncture, one issue can be raised. Since the army of the Derge regime was out of service, one cannot conclude that the size of the Ethiopian army was at a level appropriate for a country with a large population. So, some of the increase in the size of the army and the related expenditure should be accounted for by raising the size of the army to a size that Ethiopia should have in normal conditions. But for our analysis here, we considered all incremental expenditures as the impact of the conflict.

Table 3: Share of Various Sectors on the Total Expenditure (in percent)

Sector/Year	1995/96 Actual	1996/97 Actual	1997/98 Actual	1998/99 Actual	1999/2000 Actual
General Services	23.7	21.5	32.2	39.8	49.9
(Defence)	8.4	8.3	19.5	29.0	39.8
Economic Sector	35.4	36.6	26.6	24.7	16.8
(Agricultural and Nat. Resources)	12.7	12.0	10.7	10.6	7.3
(Urban Development and Construction)	9.1	9.1	8.8	8.0	5.4
Social Services	23.3	23.3	25.2	19.5	16.4
(Education)	16.1	14.5	13.6	11.5	9.6
Other Sector	17.6	18.6	17.0	16.0	16.9
Total	100	100	100	100	100

Source:- Ministry of Finance.

Table 4: Sectoral Share of Government Expenditure in Percent

Sectors Year	1995/96	1996/97	1997/98	1998/99	1999/2000
Recurrent Expenditure
General Services	34.9	32.5	46.9	55.3	60.6
· Defence	13.8	14.6	30.9	42.7	49.8
Economic Services	11.1	11.6	9.3	7.7	5.8
· Agriculture and Natural Resources	6.8	7.1	6.7	5.2	3.9
· Trade and Industry	0.3	0.5	0.5	0.4	0.3
· Urban Dev’t & Construction	2.8	3.0	1.3	0.7	0.6
Social Services	25.5	26.0	24.1	18.3	15.3
· Education and Training	16.9	17.9	15.7	12.2	9.5
· Health	5.9	5.8	5.6	4.5	2.9
· Others	28.5	29.9	19.7	18.2	18.2
Total	100	100	100	100	100
Capital Expenditure
Economic Development	73.5	69.8	56.3	60.7	60.7
· Agriculture	10.0	6.4	10.2	13.0	14.2
· Industry	6.1	17.3	21.7	23.3	24.6
· Transport Construction	20.0	19.6	24.4	21.1	20.7
Social Development	12.4	9.8	10.5	9.8	10.2
· Education	12.4	9.8	10.5	9.8	10.2
· Health	4.3	5.9	6.7	4.6	3.5
· General Services	6.3	6.8	7.0	6.8	6.8
· Others	0.3	3.8	12.3	11.3	11.8
	100	100	100	100	100
Recurrent Total	5582.3	5717.1	7081.4	10126.3	13747.3
Capital total	3562.6	4299.9	4146.6	4790.1	3425.6
Grand Total	9144.9	10017.0	11228.0	14916.4	17172.9
Recurrent % share	61.0	57.1	63.1	67.9	80.1
Capital % share	39.0	42.9	36.9	32.1	19.9

Source:- Ministry of Finance.

3.1.3 Level of External Aid

The international community has been supportive and was significantly involved in the economic reform and in the poverty reduction program by providing development assistance both to the federal government and regional states. During 1991/92 - 1997/98, that is before the Ethio-Eritrea border conflict broke out, Ethiopia was receiving on average an annual commitment of USD 700 million from bilateral and multilateral sources interms of grants and concessionary loans (Gizachew, 2000). As indicated in Table 13, loan commitment increased from 367.16 million dollars in 1991/92 to 856.09 in 1997/98. Although there is little fluctuation in disbursement, loan and grant disbursement increased from 226.73 million dollars in 1991/92 to 506.61 million dollars in 1993/94, and to 443.57 million dollars in 1995/96, but in 1996/97 it slipped down to 230.55 million dollars.

3.2 During the Conflict

3.2.1 Government Resources Mobilized to the War Effort

After the fall of the Derge regime in May 1991, Ethiopia had the opportunity to benefit from peace by being fully engaged in development activities. As explained earlier, the defence budget dropped from 8.8 percent of the GDP to 2.0 percent upto 1996/97. But as the boarder conflict continued for two years and became a full flagged war, the resource requirement for the war effort became alarmingly huge. As was shown in table (2) for 1998/99 and 1999/2000, the government allocated for defence a total of 995 and 2512.1 million Birr respectively. But as the war continued in its intensity, a lot of budgetary revisions have been made and more resources were allocated for defence.

According to the new government fiscal expenditure policy, expenditures in the first month of the starting fiscal year can be considered as payment committed in the ending year. Defence expenditure in 1997/98, that is before the conflict, increased from 8.3 percent in 1996/97 to 19.5 percent in 1997/98 fiscal year. Out of the defence expenditure, non-wages and salaries accounted for only 46 and 44 percent in 1995/96 and 1996/97 fiscal year respectively. But in 1997/98 non-wages and salaries expenditure increased to 77 percent. Thus one can possibly conclude that preparations for the war during the last two months of the ending and the first one month of the coming fiscal year brought an increase in the total expenditure and a shift to non-wages and salaries expenditure. As a result, defence expenditure which was 8.4 and 8.3 percent in 1995/96 and 1996/97 respectively increased to 19.5 percent in 1997/98 whereas agriculture received 10.7 percent from the total expenditure and 10.2 percent from the capital expenditure during 1997/98 fiscal year.

Although it was difficult to get the information on the approved additional budgetary allocation, the expenditure side can explain that there was additional budget allocation. Thus the Federal Government recurrent expenditure cited in Table 5 shows that defence expenditure increased from 835 million to 2190.0 million, 4231.9 million and 6842.3 million Birr in 1997/98, 1998/99 and 1999/2000 respectively. Out of the total recurrent expenditure, defence expenditure was 30.92 percent in 1997/98, 41.8 percent in 1998/99 and 49.8 percent in 1999/2000. During 1998/99 and 1999/2000, agriculture and natural resources received 5.2 and 3.9 percent respectively. Economic services received only 7.7 and 5.8 percent while social services received only 18.7 and 15.3 percent. Thus, 49.8 percent of the recurrent government expenditure, or about half of the government recurrent expenditure was mobilized for defence alone.

Table 5: Functional Classification of General Government Recurrent Expenditure

(In million of Birr)

Sectors/Year	1995/96 Actual	1996/97 Pre Actual	1997/98 Pre Actual	1998/99 Pre Actual	1990/2000 Pre Projected
General Service	1949.6	1860.1	3323.8	5603.9	8334,9
Organ of the State	343.4	239.1	302.4	376.5	392.2
Justice	66.7	220.2	154.2	180.2	192.5
Defense	771.6	834.8	2189.5	4323.9	6842.2
Public order & security	347.4	185.2	318.1	385.5	377.5
General services	420.5	380.8	359.6	428.8	530.5
Economic Services	620.6	661.1	658.0	777.9	801.0
Agriculture & Natural Resource	378.6	408.1	473.3	529.8	533.3
Trade & Industry	17.8	30.5	38.1	40.8	44.6
Mines & Energy	24.1	17.8	23.6	28.5	30.0
Tourism	22.1	10.0	7.1	7.4	10.0
Transport & Communication	11.1	10.7	13.1	70.1	71.1
Urban Devt. & Construction	154.9	169.7	91.3	75.6	84.6
Economic Development Studies	12.0	14.4	11.5	25.8	27.4
Ethiopian Privatization Agency	1.5	0.0	0.0
Social Services	1421.9	1488.4	1707.6	1897.4	2104.4
Education & Training	941.0	1025.8	1115.0	1240.0	1301.0
Cultural & Sports	27.7	19.0	25.3	26.0	24.9
Public Health	328.1	331.5	394.3	455.8	396.0
Labor & Social Welfare	51.9	58.1	57.5	55.6	53.1
Rehabilitation	73.3	54.1	115.6	120.0	329.3
Pension Payments	290.6	303.2	304.6
Interest & Charges	922.5	918.7	835.6	956.8	1121.9
Internal debt	609.6	635.3	526.1	588.3	723.0
External debt	312.9	283.4	309.6	368.6	398.9
Miscellaneous	223.5	224.8	89.6	72.0	95.4
External assistance	141.5	256.5	160.0	812.6	1289.5
Social safety net	12.1	4.2	2.1	5.7	0.2
Total Expenditure	5582.3	5717.1	7081.4	10126.3	13747.3
In percent of total
Defense	13.8	14.6	30.9	42.7	49.8
Interest & Charges	16.5	16.1	11.8	9.4	8.2
Internal debt	10.9	11.1	7.4	5.8	5.3
External debt	5.6	5.0	4.4	3.6	2.9
Others	70.9	68.7	56.3	41.4	33.4
c/w. Education	16.9	17.9	15.7	12.2	9.5
Health	5.9	5.8	5.6	4.5	2.9
External assistance	2.5	4.5	2.3	8.0	9.4
(In percent of GDP)
Defense	2.0	2.0	4.9	8.7	13.2
Interest & Charges	2.4	2.2	1.9	2.0	2.2
Internal debt	1.6	1.5	1.2	1.2	1.4
External debt	0.8	0.7	0.7	0.8	0.8
Others	10.4	9.5	8.8	8.7	8.9
c/w. Education	2.5	2.5	2.5	2.6	2.5
Health	0.9	0.8	0.9	0.9	0.8
External assistance	0.4	0.6	0.4	1.7	2.5
Total Current Expenditure	14.7	13.8	15.7	20.9	26.6

Source :- Ministry of Finance

As stated by the Ministry of Finance, the increase in defence expenditure and the economic classification of the expenditure have changed substantially during the conflict period. As shown in Table 4, the share of the recurrent expenditure has increased from 63.1 percent in 1997/98 to 67.9 percent in 1998/99 and to 80.1 percent in 1999/2000. Capital expenditure decreased from 36.9 percent in 1997/98 to 19.9 percent in 1999/2000. This shift of capital expenditure to recurrent expenditure with a decrease in capital expenditure will have an effect on the development goal of the country.

3.2.2 Community Contribution

Since the government budgetary allocation alone could not sustain the war effort, it was found necessary to have community participation in resource mobilization. Resource mobilization by citizens includes material and financial. The material includes live animals, clothing, fresh and/or cooked food, as well as long lasting prepared foods. Since we are unable to get the value of the materials, the contributions that are listed here are only the financial part.

Immediately after the outbreak of the Ethio-Eritrean border conflict, the people who were living near the border started to be displaced and become dependent for food, clothing and shelter. The Ethiopian Disaster Prevention and Preparedness Commission (DPPC) immediately started to mobilize financial and material resources for the displaced people. Government institutions, private individuals, business communities, Ethiopians residing abroad and regional states as well as foreign governments mobilized and donated resources to the National Soliciting Committee organized under the chairmanship of the DPPC. As indicated in Table 8, a total of 274,145,042.76 Birr has been collected from different donors. Out of the total, 48,761,106.45 Birr came from Ethiopians residing abroad and 15,151,653.64 from private institutions and business communities. Using this money, the National Soliciting Committee has provided assistances to the displaced people including the deportees from Eritrea.

As presented in Table 6 below, out of this total amount of money collected from different donors, 218,178,178.94 Birr has been expended to the displaced people. From the total expenditure, 7,896,221.37 Birr is expended to displaced people by regional states for the same purpose. 55,966,863.82 Birr is at hand under the disposal of DPPC.

Table 6: Resources Mobilized from Community Contribution to support IDP from June 11, 1998 to January 1, 2001

in Birr

Contributors	Total Amount Collected	Amount Transferred to Central Committee	Amount Still Found in the Regions	Amount Expended
1. Government Institutions	24259892.47	24259892.47
2. Private Institutions and Business Community	15151653.64	15151653.64
3. Associations and Edir	2548768.15	2548768.15
4. Individuals	2338884.06	2338884.06
5. Ethiopians Residing Abroad	48761106.45	48761106.45
6. Foreign Governments	176000.00	176000.00
7. NGO's	2196161.01	2196161.01
8. Others	745496.20	745496.20
Sub-Total	106177961.98	101177691.98		210281957.57
9. Regional States
9.1 Tigray	9634484.26	9634484.26
9.2 Afar	3197336.80	3197336.81
9.3 Amara	31147236.63	26635864.63		4511372.00
9.4 Oromia	35056160.42	32359396.05		2696764.37
9.5 Somalie	16169005.02	12169005.02
9.6 Benshangul-Gumuz	4014334.93	4014334.93
9.7 SNNP	27797194.96	22797194.96	5000000.00
9.8 Gambela	8160336.82	8148336.82		12000.00
9.9 Harari	4124122.31	4107634.87	16487.44
9.10 Addis Ababa	25545782.76	25429246.16		116536.60
9.11 Dire Dawa	3121086.87	2435042.97	126495.50	559548.40
Sub-Total	167967080.78	154927876.47	5142982.94	7896221.37
Total	274145042.76	261105838.45	5142982.14	218178178.94

Source:- Disaster Prevention and Preparedness Commission (DPPC) Public Relation Office.

3.2.3 Review of Socio-Economic Development Performance

Despite the fact that private investment, foreign trade, level of external aid and gross domestic savings have declined, the economic development performance of the Ethiopian economy as measured by the growth rate of real GDP during the Ethio-Eritrean conflict has registered a reasonable growth rate of 6.2 percent in 1998/99 and 5.0 percent in 1999/2000. The agricultural GDP registered a growth rate of 3.8 percent and 1.9 percent in 1998/99 and 1999/2000 respectively. While agricultural GDP growth rate registered during the previous year was negative 10.8, both 1998/99 and 1999/2000 figures show a positive growth rate. If the 1998/99 and 1999/2000 agricultural GDP are compared with the 1996/97 period, they would have registered a negative growth rate of 7.4 percent in 1998/99 and 5.6 percent in 1999/2000. The 1998/99 and the 1999/2000 growth rate have not reached even the 1995/96 level.

In a country where agriculture is the main stay and where the population is growing at the rate of 3.0 percent per annum, 1.9 percent growth rate of agricultural GDP means that agricultural sector is not fulfilling its expected role. The decrease of agricultural GDP from 51.5 percent in 1995/96 to 43.5 percent in 1999/2000 does not mean that a substantial growth rate is achieved by the industrial sector. The share of the industrial GDP remained between 10.6 and 11.2 percent over the last five years and industrial GDP growth rate registered 6.9 and 5.1 percent in 1998/99 and in 1999/2000 respectively. During the period of conflict the gross domestic saving dropped from 4159.8 million Birr in the year ending before the conflict to 1156.1 million Birr in 1998/99 and 487.7 million Birr in 1999/2000.

At the same time, according to the National Bank of Ethiopia, the resource gap between exports and imports of goods has increased from -5196.67 million Birr in 1997/98 to -8066.99 and -9158.84 million Birr in 1998/99 and 1999/2000 respectively. During these periods domestic financing of the fiscal deficit is projected to increase from 2.2 percent of the GDP in 1998/99 to 4.2 percent of GDP in 1999/2000 (World Bank, 2000). With the rise of domestic borrowing, the government put an excise tax on some imported items which increased consumer prices. At the same time, with the decrease in foreign assistance, the balance of payment gap has increased from - 506.06 in 1997/98 to -3683.84 in 1998/99 and -2749.08 in 1999/2000. The country's foreign exchange reserve has declined from 9.2 months of import in 1995/99 to 6.4 in 1996/97 and 5.8 in 1997/98 during the conflict periods. It declined further to 5.0 months of import in 1998/99 to 2.1 months of import in 1999/2000 (National Bank of Ethiopia, 2001).

But during these periods, as indicated in Table 5, the share of defence in the GDP has increased from 4.9 percent in 1997 to 8.7 percent in 1998/99 and 13.2 percent in 1999/2000. This is 77.6 and 51.7 percent growth respectively. Because of an increase in the number of men employed in the army from 60 thousand to 350 thousand, the salaries and wages expenditure has increased, which brought an increase in defence GDP. Thus the defence GDP (which is calculated from the income of military personnel) in 1998/99 grew by 77.6 percent over the previous year and the 1999/2000 defence GDP grew by 51.7 percent over 1998/99 figure. Thus the growth of defence GDP has contributed to the growth of total GDP.

3.2.4 Private Investment and Saving

According to the Ethiopian Investment Authority (EIA), there were 217 investment projects owned by foreign companies and 13,700 projects owned by domestic companies which were approved 1995/96 - 1999/2000 by the EIA. But the total number of projects which have commenced operation are 47 foreign company projects and 1467 domestic company projects. As indicated in Table 7, there had been an upward trend up to 1997/98 of both approved and operational projects of foreign companies. Since then, there has been substantial decrease of total investment capital projects.

In 1997/98 before the Ethio-Eritrean border conflict started there were 4106.1 million Birr worth projects approved and 1698.4 million Birr operational projects. But due to the border conflict the volume of approved investment dropped to 1379.92 million Birr in 1998/99 and to 1626.83 million Birr in 1999/2000. In the case of operational projects the volume of investment projects dropped down from 1698.47 million Birr in 1997/98 to only 356.47 million Birr and 317.21 million in 1998/99 and 1999/2000 respectively. Thus investment by foreign companies during 1998/99 and 1999/2000 has dropped by 790.1 percent and 813.2 percent respectively.

As indicated in Table 8 the investment capital for operational projects by domestic companies has also dropped from 1172.93 million Birr in 1997/98 to 763.32 or dropped by 349.2 percent in 1998/99. But in 1999/2000 it showed an encouraging upward trend to 2899.20 million Birr which is an increase of 1471.8 percent from the 1997/98 level.

In spite of the government's effort to attract foreign investors, it seems that potential investors have adopted a wait and see attitude until the peace agreement between Ethiopia and Eritrea was fully operational. The operational projects which are assumed both by foreign and domestic companies are expected to generate a total of 194,439 employment opportunities of which 54,953 are permanent and 139,486 are temporary. As summarized in Table 9, had approved projects become operational, there could have been employment opportunity for a total of 123,597, of which 68,568 would have been permanent and 55,029 temporary.

The challenges of creating productive employment still remained as one of the basic socio-economic problems of the country. The registered unemployment was 29,491 in 1995/96 while registered vacancies were 3,714 or 12.6 percent. As shown in Table 10, the gap between the registered unemployment and reported vacancies remained very wide until 1997/98. In 1998/99 while the registered unemployment was 25,686, effected employment was only 4,142 excluding the employment opportunities created for military service.

Table 7: Number And Investment Capital Of Foreign Investment Projects

		Approved Projects				Commenced Operation
		Primary Sector	Secondary Sector	Territory Sector	Total	Primary Sector	Secondary Sector	Territory Sector	Total
1	1995/96	21.77	336.22	76.45	434.45	-	18.23	-	18.23
2	1996/97	1546.36	4447.26	274.08	2267.7	1162.50	31.85	-	1194.35
3	1997/98	200.51	1479.79	2426.01	4106.31	-	401.69	1296.78	1698.47
4	1998/99	75.32	636.40	668.20	1379.92	-	266.23	90.46	356.70
5	1999/2000	152.05	693.63	781.15	1626.83	80.15	223.62	13.46	317.21

Source :- Ethiopian Investment Authority.

Table 8: Investment Capital of Domestic Investment Projects

		Approved Projects				Commenced Operation
		Primary Sector	Secondary Sector	Territory Sector	Total	Primary Sector	Secondary Sector	Territory Sector	Total
1	1995/96	1036.32	1983.68	3030.17	6050.17	377.90	200.08	265.04	823.54
2	1996/97	840.99	1488.00	2117.92	4446.91	252.81	308.37	636.55	1206.22
3	1997/98	421.19	2,713.89	2683.78	5818..87	79.51	576.41	488.10	1,172.93
4	1998/99	486.44	1670.97	1607.50	3764.91	107.39	415.53	239.64	763.32
5	1999/2000	500.25	1917.41	4322.71	6740.37	325.83	2159.00	414.37	2899.20

Source :- Ethiopian Investment Authority.

Table 9: Expected Employment Creation by Investment Projects which have Commenced Operation

	Foreign		Domestic		Total
Year	Permanent	Temporary	Permanent	Temporary	Permanent	Temporary
1995/96	28	-	6392	61802	6420	61802
1996/97	1449	34546	10294	8679	11743	43225
1997/98	3365	79	10387	9419	13752	9498
1998/99	1251	-	5758	15214	7009	15214
1991/2000	941	32	15088	9715	16029	9747
	7034	34657	47919	104829	54953	139486
	7034	34657	47919	104829	54953	139486
					194,439

Source :- Ethiopian Investment Authority.

Table 10: Ethiopia: Registered Unemployment, Reported Vacancies and Placement Effected by Occupational Classification, 1995/96-1998/99 (in number of specified)

	1995/96			1996/97			1997/98			1998/99
Occupational Classification	Registered Unemployed	1995/96 Reported Vacancies	Placement Effected	Registered Unemployed	1996/97 Reported Vacancies	Placement Effected	Registered Unemployed	1997/98 Reported Vacancies	Placement Effected	Registered Unemployed	1997/98 Reported Vacancies	Placement Effected
Professional*	1090	262	213	809	249	186	528	131	93	694	488	422
Administrators and managers	345	21	5	64	32	17	102	20	16	37	45	34
Clerical workers	18675	322	320	25276	607	644	20847	409	369	17169	644	610
Sales workers	236	18	15	272	10	10	195	38	25	216	101	108
Service workers	3399	392	254	606	607	469	621	413	312	410	1029	851
Agricultural workers	572	291	247	508	422	2064	320	206	2710	962	1027
Production and related workers	5174	2396	1342	7009	3183	2778	5778	1082	636	6967	1888	1594
Skilled	1816	1121	1141	4624	2675	2356	3712	762	430	4257	928	567
Laborers	3358	1121	1144	4524	2575	2356	3712	762	430	4257	926	567
Not Stated		12	36		114	65	852	99	31	-	-	-
Total	294391	3714	2432	34544	5534	4777	29494	2347	1636	25686	4725	4142
Of which
Female total number	12406	307	300	13433	777	732	12862	486	379	11413	1370	1204
In percent of total	42.1	8.3	12.3	14.7	14.0	15.3	43.6	20.7	23.2	44.4	29.0	29.1

Source:- Ministry of Labor and Social Affairs as compiled by the National Bank of Ethiopia, Economic Research Department August 2000.

4. Assessment of the Direct Destructions

4.1 Displacement and Destructions Occurred

As one can imagine the volume of direct destruction in the conflict zone is very huge. More importantly, the direct destructions occurred in various socio-economic spheres including religious or holy places. The direct damage and destruction as a result of the border conflict affected seven woredas in Tigray and seven woredas in Afar that border with Eritrea. The federal government in cooperation with the regional states has coordinated the effort to assess the damage caused by the conflict. As stated in the World Bank document, the assessment made so far is not yet finalized, and Tigray National Regional State is undertaking a comprehensive assessment on the damages of individual households which would serve to update and refine the damage assessment figures (World Bank, 2000). According to the preliminary assessment, the damage and destruction as a result of the conflict is stated as:

The internally displaced people (IDP), in addition to their displacement, have lost their properties including livestock, stored grains, production tools, household utensils, etc. Their residential houses have either been destroyed by heavy artillery or set on fire. Estimate of the actual magnitude of losses incurred by the IDP require extensive survey and field visits which have not been possible due to the presence of land mines and UXO in many areas. Estimates in tables below are, therefore, based on preliminary assessments and certain assumptions. In addition, some social infrastructure such as education, health, water supply and animal health facilities have been destroyed or damaged. There has also been destruction and damage to commercial enterprises such as flour mills, flour factories, hotels, shops, bars, bakeries, poultry farms, cattle fattening centers, etc. Furthermore, government administrative buildings in certain areas as well as religious institutions have been destroyed or damaged by the conflict. Apart from the above, the border town of Zalambessa has been totally destroyed including houses, commercial enterprises, water pipelines, power and telecommunication facilities, and social infrastructure. Roads and bridges have been heavily destroyed or damaged both in the war-affected areas as well as certain other parts of the country due to additional heavy traffic movement to serve the war front. Power supply infrastructure has also been either destroyed or damaged in the war-affected areas. The estimated cost of destroyed public and social infrastructure is well over US$ 200 million.

With this preliminary estimate, the number of woredas affected by the war; the number of people displaced both in Tigray and Afar; and the infrastructure, economic and social facilities destroyed are listed. The lists are presented below in Tables 14 and 15. But it should be noted that this amount or list does not include the loss of production or that could have been produced during the years until normal production could start again.

According to the World Bank report the internally displaced people who were living in rural areas have lost not only their agricultural production but also lost their means of production. They lost their homes with their livestock and now they are unable to support themselves. Some of the displaced people who were living in urban areas were permanently employed. Others who were working as casual labor, although it was non-dependable have lost their source of income. Particularly people who were living in border areas were engaged in petty cross border trade have lost their access to the market. The internally displaced people who took temporary shelter have continued to put heavy burden on host communities as well as on the government. They have created problems on health, education, water supply and sanitation.

Table 14: Humanitarian Impact

No.		Number
1	Number of woredas where direct damage and destruction have occurred	14
2	Number of internally displaced people
	a) In Tigray	330,000
	b) In Afar	34,000
3	Persons of Ethiopian origin deported and that will be deported from Eritrea in future	110,000
4	Conflict-affected population as a result of civilian, including militia, war causalities who lost their bread winners with their families who are on the verge of destitution	200,000

Source:- World Bank Document 2000. Report No. T 7402-ET.

Table 15: Preliminary assessment of Damage Caused by the war

No.	Types of Facilities	Units	Size
1	Health facilities	No.	35
2	Education facilities	"	80
3	Water supply facilities	"	143
4	Water pipes	Km.	130
5	Animal Health facilities	No.	31
6	Warehouses	"	5
7	Government Administrative buildings	"	18
8	Commercial Enterprises	"	5,623
9	Religious institutions	"	52
10	Asphalt Roads (Heavily damaged)	Km.	431
11	Gravel Roads (Heavily damaged	"	1903
12	Asphalt roads (moderately damaged)	"	313
13	Gravel Roads (moderately damaged)	"	1,255
14	Bridges
15	Power supply infrastructure
16	Livestock	No.	38,420
17	Beehives (not including Afar)	"	5,262
18	poultry ( " " " )	"	21,269
19	Honey and butter (not including Afar)	Kg.	41,704
20	Stored Grains ( " " " )	Quintals	70,880
21	Farm implements
22	House hold goods
23	Rural Housing
24	Non-farm (urban housing)
25	Pastoral housing

4.2 Cost Incurred in Human Conditions in Terms of Death, Disability and Displacement

As presented in section 2.1 above, the total number of people displaced is about 674,000. But the number of army members and civilians who are injured or dead is not yet known. Effort was made and an informal estimate concerning the number of military men who have died during the conflict was obtained. For a number of possible reasons the Ministry of Defense has not yet disclosed the number and given that no substantive evidence is acquired, it was found unnecessary, therefore, to report the figure at this stage.

4.3 The Type and Level of Looting that Occurred in Eritrean Ports

The properties of the business community and private individuals are currently being registered by the Addis Ababa Chamber of Commerce. The data on the properties of the government and NGOs, as well as private companies are prepared by Maritime and Transit Service Enterprise. The compensation commission is organized under the Ministry of Foreign Affairs. But this office has not yet been internally well organized to compile all properties looted at Eritrean ports. In the absence of other alternatives we have used the data provided by the Maritime and Transit Service Enterprise.

According to Maritime and Transit Service Enterprise, since the information will be used for court case, the information is very confidential. However, they provided us some information on the issue without any written document. Thus according to Maritime and Transit Service Enterprise, the total volume of properties looted at Eritrean ports is 137,509.12 tons excluding those properties that can not be explained in ton such as cars, containers, all properties of the office of the Enterprise, and 32 cars that belong to private companies. The total CIF value of these properties is 133,329,937.23 USD which is equivalent to 1,099,971,988.75 Birr at USD equals 8.25 Birr. This amount includes:

· 9,000,351.88 USD value of fuel;

· 6,183,220.80 USD money transferred to Assab for facilitation;

· 5,996,649.00 USD value of cars that belong to private companies;

· 171,780.14 USD value of properties that belong to private properties; and

· 1,315,552.58 USD value of properties that belong to private companies.

When the total CIF value of looted properties is compared with the total CIF value of 1996/97 and 1997/98 imports, it becomes 12.5 percent and 11.4 percent respectively.

4.4 Destruction Made on Import and Export Trade with Eritrea

The Eritrean market for Ethiopian export commodities can not be under estimated. Since Eritrea has consumption habits similar to that of Ethiopian consumption habits, commodities that cannot be exported to other countries such as teff and berberie (red pepper) can be exported to the Eritrean market. Due to proximity, Ethiopian imports from Eritrea could also be imported with lower prices. However, as a result of the border conflict, the trade/economic relation with Eritrea is disrupted. The trade disruption has also greatly affected the cross border petty trade which can give livelihood to many Ethiopians living in the border areas.

5. Data Analysis

The data collected are treated under the respective topic. In this section brief analysis on the data collected and the aggregate impacts and their implications beyond the figures are presented.

5.1 Over all Development Cost Ethiopia has sustained as a Result of the Conflict

As one can imagine the overall development cost that Ethiopia has sustained is definitely very alarming when it is compared with the level of development of the country. But to assess all types of costs (short and long term costs), it requires sufficient time and comprehensive study. However, with the given time, effort has been made to study the costs in different dimensions such as an increase in public expenditure, a decrease in private investment, a decline in tourist inflow, etc. Finally, attempt is made to analyze the aggregate impacts that the country has sustained as a result of the conflict on different dimensions, sectors and overall the economy.

As we indicated in section 3.2.3 and discussed earlier, the performance of the economy as measured by the growth rates of GDP during the Ethio-Eritrean conflict were 6.2 percent in 1998/99 and 5.0 percent in 1999/2000. During the same period defence GDP growth rate was 77.6 and 51.7 percent while agricultural GDP growth rates were 3.8 percent and 1.9 percent respectively. When we see the growth rate of agricultural GDP we notice that there is a big fluctuation. It registered 14.7 growth rate in 1995/96 and declined to 3.4 percent in 1996/97. It further declined to negative 10.8 percent in 1997/98 and registered 1.9 percent growth rate in 1999/2000 over the previous year. Such fluctuations in the rate of growth of agricultural GDP indicate the following conditions.

1^st. Agricultural growth is still affected by externalities.

2^nd. The agricultural sector is still uncontrollable by the government economic management system.

While agriculture was growing at 1.9 percent in 1999/2000 the population was growing at the rate of 3 percent per annum. The fact that agricultural growth rate declined from 3.8 percent to 1.9 percent while the population was growing at the rate of 3.0 percent has the following implications:

· agricultural per capita income declines;

· the level of food insecurity in the country increases;

· the level of poverty particularly rural poverty increases;.

· the economic linkages between agriculture and other sectors becomes very weak; and

· more importantly one could safely say that the implementation of the government’s Agricultural Development Led Industrialization strategy could not bring the expected result.

Table 16: Gross Domestic Product by Industrial Origin at Constant Factor Cost

Million Birr

Sector/Year	1988 1995/96	1989 1996/97	1990 1997/98	1991 1998/99	1992 1999/2000 Pre Estimate
A. Agriculture	7206.2	7453.9	6648.9	6904.2	7035.4
B. Industry	1488.9	1593.8	1607.9	1718.9	1806.1
· Mining and Quarrying	55.4	62.6	68.9	75.4	82.8
· Large and Medium Scale Manufacturing	608.2	644.8	598.8	647.3	679.7
· Handicrafts and Small Scale Industries	274.8	291.9	305.0	319.7	329.3
· Electricity and Water	203.2	215.1	223.1	233.9	243.3
· Construction	349.3	379.8	412.1	442.6	471.4
C. Distributive Services	1914.7	2062.1	2171.1	2304.0	2427.7
· Trade, Hotels and Restaurants	1115.5	1208.9	1263.3	1337.8	1396.0
· Transport and Communications	799.2	853.2	907.8	966.8	1029.6
D. Other Services
· Banking Insurance and Real Estate	3377.3	3603.8	4085.0	4485.8	4908.1
· Public Administration and Defence	879.7	954.5	1002.2	1047.0	1104.9
· Education	1391.5	1483.4	1843.3	2138.5	2448.6
· Health	154.0	160.1	175.9	187.6	188.5
· Domestic and Other Services	654.1	694.7	731.5	768.1	808.5
Total	13987.1	14713.6	14512.8	15413.5	18177.2

Source:- Ministry of Economic Development and Cooperation (MEDaC).

To achieve the expected output from ADLI, the economic and infrastructure programs must also be implemented as planned. But as we can see from the implementation of the general government expenditure during the conflict periods, military spending has increased which led to a reduction of government expenditure in social and economic development sector that do have linkages with agricultural sector. For example the capital expenditure in transport construction and in the industrial sector have declined. The same is true in health and education. The implementation of general government capital expenditure of transport construction went down by negative 6.1 percent from the 1997/1998 level. The capital expenditure in the industrial sector has also declined from 93.1 million Birr in 1997/98 to 40.6 and 53.2 million Birr in 1998/99 and in 1999/2000 respectively. So in the short term the direct impacts of the border conflict on the agricultural sector is mainly reflected through the fiscal performance of the government as well as through the lag in the implementation of the economic and infrastructure development programs. But on the other hand, the impacts of the conflict on the modern sector can be reflected in the short as well as in the long term. The use of the available foreign exchange for the purpose of military spending can immediately affect the purchase of raw materials for the industrial and service sectors. Because of an increase in military spending, the budgetary deficit has increased which led to an increase in domestic borrowing and led to a reduction in private investment.

Another area of damage as a result of the conflict was the Commercial Bank of Ethiopia (CBE). Eritreans who were living in Ethiopia had all the privileges and opportunities to borrow money from the Commercial Bank of Ethiopia and other public and private banks. According to the Credit Department of CBE, 393 Eritreans who are now deported took loans from the Bank (this excludes those who left the country on their own). Among these, 250 were living in Addis Ababa while 143 were living in the regions. As of June 30, 1990 E.C. the total amount of outstanding loan to the 393 Eritreans was 376,068,614.30 Birr (Commercial Bank of Ethiopia, 1993 E.C.). According to the Bank rules and regulations, interest will be calculated until all the remaining balance is fully settled. Based on the information obtained, from the Bank as of November 1993 E.C., out of 393 borrowers 226 or 57.5 percent of them have fully settled their loans, 112 or 28.5 percent of them have partially settled whereas 55 or 14 percent of them have not yet started to pay back their loans (CBE, 1993).

According to the Bank’s collection procedure, before the loan file is sent to Foreclosure Department, it will go to The Workout Loan Department to rehabilitate the loan if possible. The Bank uses three different methods for collection, based on the following priority order:

· Loan negotiation;

· Rehabilitation; and

· Foreclosure (as a last resort).

To find ways and means of collecting the loans easily with less cost, the Bank first negotiates with borrowers, most of whom are willing to pay back the loan. During the negotiation, if the Bank found some of the organization as a going concern with hope to pay the loan, the Bank either reschedules the loan or injects additional loan for working capital along with assignment of controlling staff as deemed necessary from the Bank and keeping the organizations operational with the assumption that it would create value added to increase payment capacity for the organization. Organizations such as Itamo, Mitchell Cotts, Addis Transport and Brale Agricultural Development Enterprise are cited as cases in point. For example, Brale Agricultural Development Enterprise was producing 25-28 quintals of cotton per hectare before additional loan was injected as working capital. After provision of additional loan and assignment of controlling staff and new manager, the production has increased to 37 quintal/ha. during the last two years, which in turn increased the repayment capacity of the enterprise.

On the other hand, there are some borrowers who are willful defaulters and could not amicably settle their case through negotiation. The properties of these willful borrowers which were held by the Bank as collateral are being sold on auction.

As of November 30, 1993 (E.C), by employing the above three loan recovery methods, the total amount of loan collected is turned out to be 414,331,341.20 Birr. The remaining balance that will be collected in future is 160.0 million Birr (CBE, 1993). Out of the 160.0 million, 48.0 million Birr is needed from four major companies such as Mitchell Cotts, Itamo, Brale Agricultural Development Enterprise and Addis Transport Company.

Collections made were:-

- 54,650,938.26 Birr through negotiation;

- 145,261,144.19 Birr through rehabilitation; and

- 214,419,255.30 Birr through sale of properties on auction.

For the uncollected loan, the Bank is sure that it has hold on properties valued at 190,348,956 Birr. But still the Bank feels that about 26.0 million Birr will not be collected. There are four major reasons why 134.0 million Birr out of the 160.0 Birr could not be collected so far.

· The properties including houses and vehicles that are on collateral could not be sold on auction.

· The value of the collateral properties collected could not cover the loan.

· The vehicles that were on collateral could not be found.

· The properties that were on collateral that were on the process of import for which L/C were opened were looted at Eritrean ports.

· Some vehicles were also looted at port of Assab.

At present, the total amount of loan that is not yet collected is 22 percent. On the other hand, from 26 borrowers the Bank has collected 12.4 million Birr over and above the loan through the sale of properties that were under collateral. This money is deposited in the Bank in blocked account under their respective names.

Outside the loan business, there is another damage that happened on the Commercial Bank of Ethiopia due to the conflict. When there was a trade relation between the two countries using Birr as a common currency, money used to be transferred between the two countries for payment for import and export activities. To pay for Ethiopia's imports from Eritrea money is transferred to Eritrea in an account called Correspondent Our Account. When Eritrea imports from Ethiopia, they transfer money in an account called Correspondent Their Account. As the trade relation was interrupted due to the conflict, Ethiopia claimed on Correspondent Our Account 2,369,695,311.36 Birr, whereas Eritrea claimed on Correspondent Their Account 1,137,221,585.63 Birr. Thus the Ethiopian claim is 1,232,473,725.73 Birr over the Eritrean claims. This is the amount Ethiopia has sustained as a result of the border conflict between the two countries that has disrupted trade relations between the two countries.

Similar to Commercial Bank of Ethiopia, damage was suffered by Ethiopian Airline. As a result of the conflict, Ethiopian Airline had canceled flights to the North and North Western parts of the country. For a short period, the international flights were based in Nairobi. Since the Airline could not fly the Eritrean airspace, there is still re-routing which increases the cost to the Airline. In addition, because of flights to Asmara and Asab are canceled and tourist inflow in general has decreased, there is a loss of income. Thus as expressed by Ethiopian Airline officials as a result of the conflict the total estimated cost on Ethiopian Airline is very huge. We are not able to get the direct costs incurred by the Airline as the public relation office of the Airline was not willing to disclose the information.

Table 17: Ethiopia: General Government Capital expenditure 1995/96 - 1999/2000

Ethiopian fiscal Year Fiscal year ending July 7 24 Jan. 01	1988 1995/96	1989 1996/97	1990 1997/98 Pre act	1991 1998/99	1992 1999/2000 Pre act
Economic Development	2618.7	3000.5	2332.6	2909.9	2079.4
· Agriculture	357.7	277.2	422.2	623.8	487.3
· Natural resource	423.2	513.2	300.3	420.4	232.4
· Mining and energy	381.4	796.0	422.4	428.8	265.6
· Industry	356.3	286.1	93.1	40.6	53.2
· Trade and tourism	0.5	0.3	1.5	0.4	0.4
· Transport construction	676.6	742.1	898.3	1117.3	843.5
· Transport & communication	216.0	385.5	194.7	278.5	196.9
· Financial agencies	207.1	0.0	0.0	0.0	0.0
Social Development	712.0	843.5	1003.4	1009.2	708.0
· Education	441.9	421.9	436.7	468.9	351.1
· Health	153.9	251.8	276.9	222.5	118.4
· Urban development & housing	99.5	144.8	204.8	223.8	131.2
· Social welfare	10.2	12.7	81.3	85.4	96.8
· Culture and sport	6.6	12.3	13.7	8.6	10.5
General Services	218.7	293.1	291.6	327.6	233.5
Compensation Payment	13.1	12.8	14.0	12.4	0.0
External Assistance		150.0	495.0	531.0	404.7
Total Capital Expenditure	3562.6	4299.9	4146.6	4790.1	3425.6
· Central treasury	2693.0	3268.8	2614.4	2486.0	19900.8
· External assistance	142.8	150.0	495.0	531.0	404.7
· External loans	726.8	881.1	1037.2	1773.1	1120.0
	(In percent of Total
Economic Development	79.5	69.8	56.3	60.7	60.7
· Agriculture	10.0	6.4	10.2	13.0	14.2
· Natural resources	11.9	11.9	7.2	8.8	6.8
· Mining and energy	10.7	18.5	10.2	9.0	7.8
· Industry	10.0	6.7	2.2	0.8	1.6
· Transport construction	19.0	17.3	21.7	23.3	24.6
· Transport & communication	6.1	9.0	21.7	5.8	5.7
Social Development	20.0	19.6	24.4	21.1	20.7
· Education	12.4	9.8	10.5	9.8	10.2
· Public health	4.3	5.9	6.7	4.6	3.5
	(In Percent of GDP)
Economic Development	6.9	7.2	5.2	6.0	4.0
· Agriculture	0.9	0.7	0.9	1.3	0.9
· Natural resource	1.1	1.2	0.7	0.9	0.4
· Mining and energy	1.0	1.9	0.9	0.9	0.5
· Industry	0.9	0.7	0.2	0.1	0.1
· Transport construction	1.8	1.8	0.0	2.3	1.6
· Transport & communication	0.6	0.9	2.0	0.6	0.4
Social Development	1.9	2.0	2.3	2.1	1.4
· Education	1.2	1.0	1.0	1.0	0.7
· Public health	0.4	0.6	0.6	0.5	0.2
Total Capital Expenditure	9.4	10.4	9.2	9.9	6.6
· General treasury	7.1	7.9	5.8	5.1	3.7
· External assistance	0.4	0.4	1.1	1.1	0.8
· External loans	1.9	2.1	2.3	3.7	7.2

Source:- Ministry of Finance.

As a result of the border conflict socio-economic instability has been created. People who were living near the border with Eritrea have been displaced from their permanent residence and from their productive activities. Militias have been shifted to the war front away from their normal economic production activities leaving the management of their family to their wives alone. Industries and service giving institutions including transport facilities that were owned by Eritreans were closed for some time until they start normal operation.

Transport system and many other activities were disrupted for some time. These happenings which are the results of the border conflict have brought socio-economic instability in the country. Naturally, socio-economic instability negatively affects economic growth, with more pronounced effect in the long term than in the short term. Thus the effect or impacts of the Ethio-Eritrean border conflict on Ethiopian economic growth will be seen more in the years to come than we notice it today. This is because since agriculture is still the dominant sector which is very little controlled by government development programs the effect of the external shock on agriculture will come more in the long term than in the short term.

During the conflict periods, different directives and delaying mechanisms were created by the National Bank of Ethiopia in availing foreign exchange for materials import by industrial and service sectors. This is believed to have created lag in the implementation of development programs.

The lag in the implementation of social and economic infrastructures and reduction in private foreign and domestic investment in the short term affect employment creation opportunities and retard overall socio-economic development in the long term which consequently aggravates the poverty problems in the country.

As a result of slow agricultural development and a decrease in production, food security in Ethiopia is still at the bottom of the least developed countries. During the past years, one of the government's development agenda was to reduce poverty and achieve food security possibly at the household level. However, Ethiopia still suffers from both chronic and transitory food shortages. During 1992 Ethiopian calendar, the Disaster Prevention and Preparedness Commission (DPPC) has made a call to the international community for emergency food aid, most of it for war affected population. According to DPPC's estimates, over 8.0 million people were in need of emergency food aid in the year 2000, of which the total food requirement become 821.8 thousand metric tons. On the average, the number of people facing chronic food insecurity is estimated to be between 4 - 5 million.

Food insecurity seems to be a growing problem in the country. More area and increased size of population are increasingly becoming chronically food insecure. As stated in Abi Mansfield's study,

"those who are affected by food insecurity are suffering from land scarcity or shortage of draught animals and cash to buy inputs. More recently, in several areas of the country, the majority of the population are sliding from middle wealth status to the lowest categories of well-being. Per capita assets are declining. Emergency aid may ameliorate the symptoms of food insecurity but does little or nothing to address its root causes. Thus, poverty reduction does not seem to be taking place. In particular, diminishing farm size and lack of tenure security are singled out as serious structural constraints without the resolution of which one can't expect significant improvement in the sector in the foreseeable future."

Even though efforts were made to reduce poverty in the country, it still remains wide spread in the country, deeply affecting in particular the rural population. The absolute poverty measured in terms of minimum basic food and non-food requirement in Ethiopia is 45.5 percent (MEDaC, 1999). In a country with such huge poverty problem, the impacts of the border conflict in aggravating situations should not be underestimated.

5.3 Estimated Amount of Resources Required for Rehabilitation

The internally displaced people from the border areas and the deportees from Eritrea have created strain on the host families and the government besides losing their properties. It is very essential and urgent to rebuild their lives and resume productive economic activities. This necessitates the reconstruction and rehabilitation of the destroyed and damaged social and economic infrastructures. Thus, it is very essential to assist them materially to become independent or self-reliant in the future with the provision of basic social services to resettle them and start agricultural activities. Obviously, de-mining of the areas must be done in advance. For this emergency recovery program, it is assumed that a total of $555.0 million is required. The said amount is expected to be obtained from the World Bank on loan basis. See the following tables for details.

Table 20: Cost of Emergency Recovery Program In Millions

No	Cost Component	GOE's Total Program Requirement	IDA Financing from New Credit	IDA Financing from Reallocation of Existing Credits
1.	Rehabilitation of households and community infrastructure	280.0	110.0	17.5
2.	HIV/AIDS prevention	3.0	-	2.5
3.	De-mining	40.0	30.0	-
4.	Re-construction
	· Rehabilitation/improvement of road infrastructure	170.0	86.0	-
	· Reconstruction/Rehabilitation of power supply	55.0	-	10.0
5	Institutional strengthening	7.0	4.0	-
	Total	555.0	230.0	30.0

Source:- World Bank Report No. T7402 ET.

Table 21: Financing of the Emergency Recovery Program (ERP)

No	ERP Total Cost	US$ Million
1	Government of Ethiopia	13.1
2	IDA (new credit)	230.0
3	IDA (Reallocation from Existing credits	30.0
4	Total Financing	273.1
5	Financing Gap	281.9
	Total	555.0

Source:- World Bank Report No. T 7402.ET.

Among the four emergency programs, demobilization and reintegration of the 150,000 veterans is one that will be financed from IDA credit in addition to the above requirement. For this special program, IDA has allocated 170.0 million USD (World Bank, 2000).

5.4 Major Issues Concerning the Impact of the Conflict Both from the Short and Long Term Perspective

5.4.1 Short-Term Effect

5.4.1.1 Re-Routing Road Freight Via Djibouti

Immediately after the border conflict, all Ethiopian properties were looted at Assab and Massawa. As a result, all import and export activities are shifted to Djibouti port. So all road freight transportation is re-routed to Djibouti which is about 43 kms longer on a rough road. It is estimated that the road freight transport cost has increased by 31 percent. Vehicle turn around per month has decreased from 3.5 per month to 3 per month. According to the World Bank estimate, the additional transport cost of road freight transport is about 0.8 percent of the GDP in both years. More importantly, although the handling cost may neutralize each other, there is also what is called “users fee” of US$ 1.0 per ton at Djibouti which will ultimately increase the prices of commodities to consumers (World Bank, 2000).

5.4.1.2 Reconstruction of Destroyed Infrastructure and Re-settlement of Internally Displaced People

During the next few years, some of the development activities of Ethiopia will focus in the reconstruction of the directly damaged and destroyed social and economic infrastructures; resettlement of the internally displaced people and the deportees from Eritrea; and rehabilitation of the disabled people affected during the conflict. Since the budgetary requirements and the institutional arrangements for the construction and resettlement will become a burden to the current capacity of Ethiopia, there is an urgent need for the mobilization of external resources.

5.4.1.3 Budgetary Shift

During the conflict period, there was budgetary shift from capital budget to recurrent budget, which brought stagnation in some sectors. The reconstruction and rehabilitation will also bring budgetary shift from other sectors as shown in the IDA's loan program that will hamper or reduce the pace of development in other sectors. The reduction in the flow of external loan and assistance to the country, paying attention to the war, the psychological impact that has created on private domestic and foreign investment will be a standstill for sometime before full revival is achieved to enhance new investment the country.

5.4.1.4 Increase in Defence Expenditure

As a result of the border conflict, defence expenditure has increased from 850 million in 1996/97 to 6.84 billion Birr in 1999/2000. The allocation of 49.8 percent of the country's recurrent or 39.8 percent of the country's total expenditure to defence spending has increased the domestic financial deficit from 1.6 billion in 1997/98 to 3.7 billion in 1998/99 and to 5.4 billion in 1999/2000 and reduced the foreign exchange reserve to 2.1 months import.

5.4.2 Long - Term Impacts

5.4.2.1 Size of the Army

Due to internal conflicts with different political groups and due to border conflicts with Somali, the size of the Ethiopian Army during the Derge regime reached almost half a million. But with the fall of the Derge, the army was completely dismissed and the EPRDF army was made a national army. Although it is difficult to get the accurate size of the army before the Ethio-Eritrean conflict, it is estimated about 60 thousand. By the end of the conflict, again in the absence of the actual figure, a reliable source estimates that the size of the army has reached 350 thousand before the army was reduced in line with the peace agreement between Ethiopia and Eritrea. Although peace agreement has been reached between Ethiopia and Eritrea, it can not be imagined that the peaceful situation will bring down the size of the army to the pre-conflict level. So, in the long run, Ethiopia will have a larger army that will use an increased proportion of the government expenditure. A large army requires continuous logistical support and training. This also requires construction of military barracks and equipment that goes along with the current technological change.

Based on the agreement reached, about 150.0 thousand veterans will be demobilized and reintegrated with the civil society. This will bring down the size of the army to about 200 thousand without considering those who have died and became disabled.

6. Concluding Summary and Recommendations

During the past years, the government’s development agenda included poverty reduction and achievement of food security possibly at the household level. The international community has been supportive and was significantly involved in the economic reform and in the poverty reduction program by providing development assistance. Economic cooperation agreements were also signed with Eritrea, which eventually were faced with obstacles as stated under section 2.

As the border conflict broke out on May 6, 1998, the Ethiopian government started to mobilize manpower, material and financial resources to the war effort with the participation of the people. To defend the nation the size of the army has increased from 60.0 thousand to 350.0 thousand over two years period. The increase in the size of the army has increased the defense expenditure from 834.8 million Birr in 1996/97 to 2189.5; 4323.9 and 6842.2 million Birr in 1997/98, 1998/99 and 1999/2000 respectively. The military expenditure finally claimed 49.8 percent of the country's total recurrent expenditure. Thus the actual direct cost over and above 8.2 percent annual growth rate in defense expenditure is 10326.7 million Birr. In summary the following major conclusions can be drawn:

a) The high growth rate and the increase in the military expenditure has led to:

· an increase in budgetary deficit;

· an increase in domestic borrowing;

· an increased gap of balance of payment;

· a constraint in foreign exchange allocation for import; and

· a reduction in spending in other sectors.

b) As the border conflict continued, Ethiopian properties which have an over all value of 133.3 million USD have been looted at Eritrean ports. Destruction has been made on social and economic infrastructure. Trade relations with Eritrea were disrupted and, more importantly, people from 14 woredas were displaced from their permanent residence and normal productive economic activities. Thus, the conflict has brought social instability, which slowed down the economic development of the country.

c) The rehabilitation of war damaged social and economic infrastructures including IDP and cost of demobilization of 150.0 thousand army members is 5843.0 million Birr, which added another burden to the development of the country.

d) The international communities that were development partners have either frozen on going projects or suspended new loans and grants. Foreign as well as domestic investment projects and tourist inflow have declined because of the conflict. The rerouting of Ethiopian import and export to other ports have increased the cost of transportation and port handling to about 252.7 million Birr in two years. By very simple calculation, the overall development cost that Ethiopia has sustained reaches 27.5 billion Birr (3.4 billion USD) excluding the unrecovered loans given by Banks to the deported Eritreans. If production losses in war affected and other areas are added, the costs incurred will no doubt will increase the over all costs that Ethiopian has sustained as a result of Ethio-Eritrean border conflict. Evidence shows that the Ethio-Eritrean conflict has brought social instability, which slowed down the economic development of the country. To make this study complete and to see the impact of the conflict from different perspectives, it is recommended that additional secondary data and primary data be collected and other information that are relevant and missing should be gathered mainly from areas directly affected by the conflict.

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______, 1999. Poverty Situation in Ethiopia. Welfare Monitoring Unit.

Medhane Tadesse 1999:- The Eritrean-Ethiopian war: Retrospect and Prospect.

Middlebrook, Peter, 2000:- Integrated Micro Watershed Development for Enhanced Food Security in Tigray: Paper Presented at the Food Security Symposium Organized by Forum for Social Studies.

Ministry of Finance 2001:- Summary of Government Finance and Expenditure.

National Bank of Ethiopia, 2000:- Data on GDP, Prices, Monetary Aggregates, Public Finance and Balance of Payments.

Negarit Gazeta:- 1996, 197, 1998 & 1999:- Proclamation No. 39/1996, 83/1997, 126/1998 and 175/1999. budget proclamation for Federal Government Undertakings.

________:- International Development Association Credit Agreement for Partly Financing the Restablition and Reconstruction Project of Eritrea Ratification Proclamation No. 51/1993.

The Ethiopian Economic Association, 1991/2000:- Annual Report on the Ethiopian Economy, Volume 1, Edited by Befekadu Degefe and Berhanu Nega.

World Bank 1999 & 2000:- Ethiopian Public Expenditure Review Volume 1 & 2, Report No. 20283 ET and 20810-ET.

_________, 2000:- Report No. T7402-ET on Technical Annex for a Credit of SDR 180.2 Million to this Federal Democratic Republic of Ethiopia for an Emergency Recovery Project.

Year	Value of Exports	Value of imports	Resource	% Share of Value of Imports Volume						Growth Rates of Value of Export			Share of Coffee in
	As % of GDP (1)	as % of GDP (2)	Gap (1-2)	Raw mater	Semi-Finished Goods	Fuel	Capital Goods	Consumption Goods	Miscellaneous	Coffee	non-coffee	Total	the Volume of Total of Export
1995/96	13.10	22.99	-9.89	2.38	1.68	12.37	34.35	32.28	1.91	--			57.27
1996/97	16.23	23.71	-7.48	2.04	19.14	18.42	38.80	20.61	0.99	26.2	22.91	24.74	57.90
1997/98	15.85	23.69	-7.84	2.05	16.35	24.45	29.78	19.70	7.68	-2.6	46.86	18.23	47.70
19998/99	14.17	31.32	-17.15	1.74	16.80	11.36	33.71	28.10	8.28	-15.7	-7.0	-11.13	45.26
1999/2000	15.61	31.44	-15.83	1.23	12.72	15.54	29.21	26.82	14.49	15.2	17.65	16.55	44.79

	Year	1983 EFY	1984 EFY	1985 EFY	1986 EFY	1987 EFY	1988 EFY	1989 EFY
Month		(1990/91)	(1991/92)	(1992/93)	(1993/94)	(1994/95)	(1995/96)	(1996/97)	1998	1999
July		7528	8634	8815	9028	9513	10024	10562	6683	8910
August		7604	7468	7618	9234	9730	10253	10804	6591	7766
September		6779	6764	6895	7604	8012	8442	8895	6337	7843
October		5970	6416	6547	7228	7616	8025	8456	6725	8983
November		6121	6230	6357	10603	11172	11772	12404	6650	8939
December		7610	8186	6346	9814	10341	108996	11481	9184	9920
January		6933	7070	6770	7134	7517	7921	8346	9585	7927
February		5864	5991	5417	6235	6570	6923	7295	8102	4072
March		6173	6294	7157	7541	7946	8373	8823	8770	5809
April		6205	6324	6758	7121	7505	7906	8331	9393	6762
May		5464	5565	6600	6954	7327	7720	8135	7003	6847
June		7244	7391	6359	6701	7061	7440	7839	5824	8081
Total		79495	82333	84139	95197	100308	105695	111371	90847	91859

Year	Defence Expenditure Over 8.2% Growth Rate	Properties Looted at Eritrean Ports	Community Contribution	Extra Costs by Re-Routing to Djibouti Port 0.8T of GDP	Estimated Losses of Private Investment	Const of Demobilization	Cost of Rehabilitation of Displaced Peoples	International Loan and Grant with held	Ethio. Loss in trade with Eritrea	Total
1997/98	1286.3	1066.6	-	-	-	-	-	-	-	2352.9
1998/99	3255.6	-	137.0	123.3	563.0	-	-	-	1232.5	5311.4
1999/2000	5784.8	-	137.1	129.4	673.0	1403.0	4440.0	5484.0	-	18051.3
Total	10326.7	1066.6	274.1	252.7	1236.0	1403.0	4440.0	5484.0	1232.5	25715.6

Year	GDP Growth Rate	Government Capital Expenditure	Defence Exp. as % of total Expending	Defence Expenditure millions	Defence Expending Over 8.2 % Growth Rate	Private Investment in Million	Growth Rates of Value of Exports Coffee	Import Export Gap as % of GDP	Foreign Exchange Reserve by Months of Import	Overall Deficit Including Grants in Million	Total Revenue and Grants in Million
1995/96	10.6	3562.6	8.4	771.6	-	841.7	-	-9.9	9.2	-2131.4	8062.7
1996/97	5.2	4299.9	8.3	834.8	-	2400.6	26.2	7.6	6.4	-635.6	9381.4
1997/98	-1.4	4146.6	19.5	2189.5	1286.3	2871.4	-2.6	-7.8	5.8	-1641.8	9686.2
1998/99	6.2	4790.1	29.0	4232.9	3255.6	1120.0	-15.7	-17.2	5.0	-3701.2	11215.2
1999/2000	5.0	3425.6	39.8	6842.2	5784.8	3216.4	15.2	-15.8	2.1	-5364.8	11808.1
Total	-	-	-	-	10326.7	-	-	-	-	-	-


Table 1a:	Gross Domestic Product by Industrial Origin at Constant 1980/81 Factor Cost
Table 1b:	Growth Rates of GDP and Various Sectors (1995/96 - 1999/2000)
Table 2:	Federal Government Budgetary Allocations by Sector
Table 3:	Share of Various Sectors on the Total Expenditure (in Percent)
Table 4:	Sectoral Share of Government Expenditure
Table 5	Functional Classification of General, Government Expenditure
Table 6:	Resources Mobilized from Community Contribution to support IDP from June 11, 1998 to January 1, 2001
Table 7:	Number and Investment Capital of Foreign Investment Projects
Table 8:	Investment Capital of Domestic Investment Projects
Table 9:	Expected Employment Creation by Investment Projects which Have Commenced Operation
Table 10:	Ethiopia: Registered Unemployment, Reported Vacancies and Placement Effected by Occupational Classification, 1995/96-1998/99
Table 11:	Value of Exports and Imports (as % of GDP)
Table 12:	International Tourists Arrivals by Month and Year (1980 - 1989 EFY)
Table 13:	Loan and Grant Commitment and Disbursement for the Period 1984-1993 in E.C
Table 14:	Humanitarian Impact
Table 15:	Preliminary Assessment of Damage Caused by the War
Table 16:	Gross Domestic Product by Industrial Origin at Constant Factor Cost
Table 17:	Ethiopia: General Government Capital expenditure 1995/96 - 999/2000
Table 18:	Summary of Costs Associated with the Conflict
Table 19:	Summary of Selected Indicators
Table 20:	Cost of Emergency Recovery Program
Table 21:	Financing of the Emergency Recovery Program (ERP)

Multilateral