Via WikiStrat, a look at Djibouti’s economic potential:

Djibouti has served as the main port that connects Ethiopia’s economy with that of the rest of the world since the Ethiopia/Eritrea war eliminated Eritrea as a port for Ethiopian goods. At the start of the 21st century, the vast majority of Ethiopian exports traveling through Djibouti were coffee, salt and animals, but that changed with the maturation of the Ethiopian economy in the 2010s.

Chinese foreign direct investment (FDI) in Ethiopia had begun pouring in in the early 21st century, and by the 2010s, that aid began providing great dividends. In 2013, Ethio Telecom signed a major deal with Chinese mobile provider ZTE to upgrade the telecommunications infrastructure in Ethiopia. These advances in the telecommunications industry allow Ethiopia to become more active in the global economy, setting up web server hosting sites and call centers, taking advantage of cheap labor costs. This in turn brings about a strong middle class that demands imports of goods from around the world. Given Ethiopia’s landlocked position, these new imports/exports bring increased economic activity to the ports of Djibouti. Djibouti also begins constructing processing factories to prepare the largely unprocessed animal skins and hides coming out of Ethiopia, as well as factories to prepare the meat coming from Ethiopia so that it is ready for shipment.
South Sudan has plenty of oil that it is itching to get onto the world market after its independence in 2011. Since it cannot export the oil out of Sudan’s ports, it needs to find another port of connection to the world market. South Sudan’s government decides that it will send its oil through Ethiopia to solidify connections with a strong military power and out through Djibouti, for its cheap cost of export.

At the end of 2013, the three countries sign the deal. Djibouti not only benefits from increased economic activity, but its transportation infrastructure also gets a makeover from the South Sudanese government, which wants to make sure that its oil finds its way efficiently and safely to port. Djibouti also gets assistance from South Sudan to open oil refineries to take the place of those used in Sudan before South Sudan’s independence. This, in turn, creates more jobs for the people of Djibouti. This economic relationship will go beyond the realm of oil into all other products that South Sudan would like to export to the world market (Kenya’s export/import fees being higher than Djibouti’s and Somalia being much less of a secure shipping port).

Djibouti has managed to stay out of any intergovernmental trouble in Africa and, aside from a small border dispute with Eritrea, enjoys favorable relations with the surrounding states in the area. As a hosting site of French, U.S., Spanish and Japanese military bases, and the EU Atlante Operation, it does not have to worry about any threats to its sovereignty from outside powers. In addition to hosting military bases, it is the entry point for humanitarian aid operations for all of eastern Africa. Its own government is relatively stable and, aside from demonstrations surrounding the elections by disgruntled opposition candidates, it sees very little internal political struggle. The International Monetary Fund has called Djibouti’s financial sector healthy and notes that it has great liquidity. The government also stays on top of bank regulation and, in 2011, set out a slate of bank requirements, which it is faithful in monitoring. The government is not perfect, however, as some criticize it for its repressive policies in the media realm, and it has some work to do on its current account deficit. Overall, these governmental factors give Djibouti a solid base for its rise to international importance in trade in the 2020s and ’30s.

With Chinese FDI pouring into Ethiopia, China takes it upon itself to bolster its connections with Ethiopia in the form of building up the export/import capacity of Djibouti. In 2015, China begins a major investment program in trade infrastructure in Djibouti. This includes creating two new major ports in the Gulf of Tadjoura, as well as upgrading the roads that connect these ports to Addis Ababa. China also sets up a naval base in Djibouti in 2016 to protect its shipments from pirates in the nearby waters and to expand its influence on the African continent.

The Rise

Djibouti continues to keep great relations with major powers including the United States, EU, United Kingdom and China, ensuring its national security as well as its positive global economic ties. The government of Djibouti expands its trade development sector and is able to bring down the staggering near-60-percent unemployment rate with the creation of new jobs in the ports. Also, the government of Djibouti takes a strong stand and asserts that its domestic laborers will be involved in the construction projects funded by foreign FDI and tens of thousands of Djiboutians can find work in this area. The government receives help from the World Bank, as well as other global financial institutions, to cultivate its geothermal energy potential. This project will allow for a drastic decrease in the price of electricity from $0.24 kwh to $0.10 kwh, taking some budgetary strain off of businesses and citizens. This transition to geothermal power frees up $57 million, which does a great deal to ease the government’s budget deficit. Djibouti also continues to strengthen ties with Ethiopia and South Sudan, cementing its role as connection between their markets and the global economy.

Trade financing companies from around the world open offices in Djibouti to take advantage of the influx of shipments from around the world. This influx of money benefits Djibouti’s already-growing financial sector (brought about by free circulation of capital, an absence of exchange rate controls and a now-higher amount of Djiboutians who have money to put into banks). Private shipping companies spring up to manage the transportation of goods from the ports to Ethiopia. All of this increased economic activity means a lowering of the unemployment rate (especially when the population is so small) and a creation of a middle class in Djibouti. There is also a rise in activity in the private sector from the creation of “finished product” manufacturing in the form of factories to process livestock products like meat and skins coming from Ethiopia, lumber mills for South Sudan’s lumber and refineries for South Sudan’s oil (presumably this will be some form of public-private joint venture given the scale of project required).

With the creation of new infrastructure and the arrival of new businesses to the area, microfinance non-profits like Kiva and Accion start receiving requests from Djiboutians interested in starting their own businesses. The tide turns over from relief-based aid to microfinance, as the business environment is brought to life.

Spillover Effects in the Region

Djibouti’s rise will have a positive effect on South Sudan’s transition to a sovereign state. It provides a secure and relatively cheap way to get South Sudan’s oil and other commodities for export onto the world market. The rise of Djibouti will also increase the connection between South Sudan and Ethiopia, since South Sudanese goods will travel through Ethiopia and the two states will inevitably embark on co-managing infrastructure projects.

Djibouti’s rise will be most beneficial for Ethiopia. The more trade that moves through Djibouti’s ports, the more streamlined and cheap the process will become, greatly reducing the time/cost of Ethiopia’s exports onto the world market. The better the processing of goods and services become in Djibouti, the more FDI will flow into Ethiopia in the form of capital investitures for businesses, as well as foreign workers bringing with them the skills and expertise that Ethiopia needs to become more competitive economically. The one downside for Ethiopia will be that Djibouti, with the new ventures into geothermal energy, will no longer need to import much of Ethiopia’s hydroelectricity, but this slight downside pales in comparison to the positives.

Somalia will quickly become completely outmatched by Djibouti’s shipping industry and any shipping taking place from its ports will necessarily shift north. There will also be a major exodus of Somalis from Somalia, once the economies in Djibouti and Ethiopia start picking up. With better infrastructure, more jobs and a more secure living environment, the two countries to the north will offer undeniable opportunities for Somalis looking to better their situation. The one benefit for Somalia will be a drastic reduction in the number of pirates in Arabian Sea and Gulf of Aden shipping lanes, as countries with increasing investments in the region (China in particular) will step up their naval patrols to protect their ships.

Similar to the effect on Somalia, Djibouti and Ethiopia will likely draw large numbers of immigrants from Somaliland. With Somaliland’s relative closeness to Djibouti, it could benefit from positive externalities in the form of increased business activity in the area and better transportation infrastructure, bringing in more FDI to tap into the country’s mineral deposits. Djibouti will also serve as a role model for Somaliland, showing it the necessary steps to become a successful export country.

New Role in Africa

By the year 2030 Djibouti will have taken the undeniable position as the leading port in East Africa, surpassing Mombasa, Kenya. The presence of a modern and efficient port in the region will greatly increase economic participation of East African countries and, in particular, South Sudan and Ethiopia. The creation of a manufacturing sector for processing raw goods coming from Ethiopia and South Sudan will provide much needed jobs to Djibouti’s largely unskilled labor force. With such a small population, Djibouti will see its per capita GDP rise quickly and it will provide a model of economic openness for other small, coastal African countries. Countries investing in this area will see increasing return on investment as they tap into previously unavailable markets and resources in the region.

One thing the government of Djibouti must refrain from doing is forcing these new economic benefits to remain in the public sector with large, inefficient state-owned enterprises. Allowing private participation in this new marketplace will allow for a more widespread disbursement of economic benefits and will provide more room for job growth and a better management of investment funds. Also, the government should quickly remove any repressive appearance it may have because it does not want to let any sort of popular uprising ruin its ability to take full advantage of its perfect location and the economic benefits that come with it.