The main high-income activities in Djibouti are located in the services sector, in port and transportation services, government administration, and in providing services for the considerable contingent of French troops and their dependents.
The port and transportation services are, however, particularly vulnerable to political developments in the region. The French were aware of the strategic importance of Djibouti—located at the mouth of the Red Sea and in a position to control access to the Suez Canal— when they took possession of the territory in 1859. The importance of Djibouti to France was enhanced when a French company constructed the railway from Djibouti to Addis Ababa, the capital of Ethiopia. Ethiopia is a large country, both in terms of population and geographical area, and the railway through Djibouti was for many years the only practical link Ethiopia had with the coast. When the Italians occupied Ethiopia in 1935, they constructed a road from Asab in Eritrea (an Italian colony) to Addis Ababa, which ended Ethiopia's near total reliance on the railway. This road proved to be a sound strategic move on the part of the Italians since Italy and France found themselves on opposite sides during World War II. The existence of the road led to neglect of the railway, and, in turn, a stagnation of the services provided by the port and the railway. This slow down was exacerbated by the paralysis of the Ethiopian economy under the Marxist regime in the 1970s and 1980s. The demand for Djibouti's port services began to recover with the fall of the Ethiopian Marxist regime in 1991 and the resulting restoration of economic growth and external trading links. When Eritrea became independent in 1993, Ethiopia became landlocked and entirely dependent on surface transport links through either Djibouti or Eritrea. The outbreak of the border war between Eritrea and Ethiopia in 1998 led to a complete reliance of Ethiopia on Djibouti, and this business has been a big boost for the Djibouti port and railway sectors. There will undoubtedly be some reconciliation between Eritrea and Ethiopia at some stage in the future, so the task for Djibouti is to establish a level of efficiency in their port and railway services so that they can be competitive with the road link through Asab when Ethiopia eventually resumes use of this route.
Likewise, the income generated by the French troops and their families is dependent on how the French see their role as a world power and, particularly, the nature of their involvement in Africa. The reduction in French forces stationed in Djibouti is a reflection of the reduced emphasis that France is currently placing on its role in Africa.
Djibouti is effectively a city-state; there is little banking outside of the capital. A number of banks have been established in Djibouti, most of which are French-owned or backed. The central bank is the Banque National de Djibouti. The formal retail and wholesale sectors are in private hands, and the role of French companies in the economy is in decline. Since 1997 there has been an increase in Ethiopian business near the port. The potential for tourism in Djibouti has not been exploited.