Traditionally, agriculture was the norm in the plateau region and in the north and west where rainfall was sufficient. In the drier coastal plain and the arid regions of the north and west, farm animal raising precontrolled. Italian and British colonial policy in the 19th and early 20th centuries favored the production of raw materials for export. During this time, light industry was developed. By most accounts, Eritrea enjoyed a higher level of economic development than Ethiopia at the time of the 1952 federation. Ethiopia’s annexation of Eritrea caused industrial development to be curtailed, and many factories were closed and moved to Ethiopia. After 1974, the Marxist government of Ethiopia placed most Eritrean industry under state control.

The area of cultivation is limited by climate and the uneven surface of the plateau, so that, of the 8 million acres (3.2 million hectares) of land considered cultivable, only 5 % is being worked. There is room for development, particularly if the nation's considerable water resources are harnessed for irrigation.In normal times, farm animal is a valuable resource, and it has the potential to play a role in Eritrea's foreign trade. During the long war of freedom, farm animal was severely depleted. The fishing potential of the Red Sea is another underutilized resource.

With freedom from Ethiopia on 24 May 1993, Eritrea faced the economic problems of a small, desperately poor nation. The economy is largely based on subsistence agriculture, with 80% of the population involved in farming and herding. The small industrial area consists mainly of light industries with outmoded technologies. Domestic output (GDP) is substantially augmented by worker remittances from abroad. Government revenues come from custom duties and taxes on income and sales. Road construction is a top domestic priority. In the long term, Eritrea may benefit from the development of offshore oil, offshore fishing, and tourism. Eritrea's economic future depends on its ability to master fundamental social and economic problems, e.g., by reducing illiteracy, promoting job creation, expanding technical training, attracting foreign investment, and streamlining the bureaucracy. Eritrea's agriculture over the last two years was severely weakened by war and drought, and many farmlands must wait to be demined. Another major difficulty is the ports, which prior to the war were Ethiopia's preferred outlets but since have seen trade dry up.