Growth, Structural Transformation, and Export Diversification
While Benin has delivered high economic growth over recent years, it faces critical challenges regarding export diversification and domestic production. Based on cross-country experiences, this note evaluates the type of structural reforms and economic diversification that could contribute to boost and sustain diversified growth in Benin, underscoring the need for improving infrastructure, trade networks, and market access, reducing barriers to entry for new products, deepening financial markets, and investing in human capital.
A. The Structure of the Beninese Economy
1. During the last decade, growth in Benin has been comparatively highly volatile. Per capita GDP growth however has been stagnating. Real economic growth rebounded to 4 percent in 2016 compared to 2015, where the growth rate slowed significantly to 2.1 percent due to weak agriculture output generated by unfavorable weather and negative spillovers from Nigeria. From 2006 to 2016, real GDP growth averaged 4.2 percent (with a maximum of 7.2 percent in 2013 and a minimum of 2.1 percent in 2010 and 2015), driven mainly by the services. Growth remains volatile, despite having strengthened in recent years. Per capita GDP growth has been stagnating and Benin has been lagging six fastest growing non-resource intensive SSA-economies. Inflation turned negative in 2016 after a moderate increase in 2015. The devaluation of the naira counterbalanced the fuel subsidies’ cut, which led to lower domestic fuel prices, a major component of the consumer price index. The fiscal deficit grew from −0.4 percent of GDP in 2012 to −6.2 percent of GDP in 2016, with a maximum of −8.0 percent of GDP in 2015. The fiscal deficit growth was essentially driven by a net increase in current transfers, especially subsidies to the cotton and electricity sectors, as well as a higher wage bill, while tax revenues weakened. The external current account deficit dropped by 1.5 percentage points of GDP in 2016 compared to 2015 mainly due to continued strong export performance.
2. In addition, economic growth was not inclusive. Notwithstanding recent progress, Benin remains a low-income country with 11 million people and a per capita income of US$790 in 2015. Agriculture accounts for a quarter of GDP and 51 percent of the country’s employment with cotton as its primary export commodity. The informal sector, including subsistence agriculture, contributes up to almost 60 percent of GDP and engages over 80 percent of the labor force.1 Re-export to Nigeria contributes up to a quarter of the government’s revenue. Nonetheless, rapid population growth—averaging 3.5 percent per year—led to a modest and unequal increase in household consumption. Poverty levels grew from 36.2 percent in 2011 to 40.1 percent in 2015. Due to its low productivity, growth was modest in agriculture, which employs almost half of the labor force. The economy remains poorly diversified and vulnerable to external shocks, underscoring the urgency to promote economic diversification. In particular:
- Poverty remains spread and it is characterized by significant regional disparities. Female-headed households have typically experienced lower poverty levels (Text Table 1), divested of economic opportunities.
- There is a dichotomy between economic growth and poverty reduction. During the last five years, higher growth was mainly driven by more capital-intensive sectors like banking, telecommunications and maritime activities at the port of Cotonou. In contrast, agriculture, which is a main driver of poverty reduction, have grown, mostly, from expansion of cultivated land and the associated labor rather than increase in productivity.
- Rapid population growth further limited the growth in per capita income and its impact on poverty reduction. Furthermore, regional trade had a negative spillover from the Nigeria’s economic slowdown and policy changes. There were diminished opportunities in both goods and services between Benin and Nigeria affecting the broader sector of informal trade, where gas flows informally from Nigeria to Benin, and in the broader consumer goods sector, where rice, chicken, edible oil, used cars, used clothing etc., flow from Benin to Nigeria. For instance, the suppression of subsidies in Nigeria’s oil sector affected negatively the informal Beninese gas trade in areas adjacent to Benin’s border with Nigeria, where poverty increased from 34.8 percent in 2011 to 50.4 percent in 2015.
3. Diversification slowly advances led by the agriculture and service sectors. There has been relatively little evidence of structural change in Benin over time (Figure 1). The sectoral composition of output has remained remarkably stable and the level of diversification low. During the period (2000-2012), the service sector contributed to the real GDP growth by 2.2 percent while the industry and agriculture sectors participated respectively by 0.4 and 1.1 percent. During the following decade, the contribution of the different sectors remained roughly the same. During the period (2010-2016), the primary sector contributed by 0.5 percent to the real GDP growth while the secondary and tertiary sectors agriculture accounted for around 1 percent and 2.2 percent respectively, shares that have changed little since 1990 for when data are first available. The level of output diversification—based on a Theil Index measure (Box 1)—is also low and has remained stagnant, in contrast to faster growing benchmark countries, which have witnessed sharp increases in diversification over time.
Figure 1.Benin: Real GDP Per Capita and Output Structure
4. The agricultural sector in Benin is highly dependent on rainfall patterns and, mostly, on one major commodity (cotton). Despite its low productivity, agriculture remains one of the main sources of growth and employment in Benin. Nonetheless, to further contribute to economic growth and poverty reduction, the agriculture sector needs to buttress its productivity considerably. Specifically, agricultural production systems heavily rely on increases in cropped areas and family labor, with limited use of improved inputs, production methods, and farm equipment. Agricultural exports are concentrated on three groups of products: cotton, fruits (pineapple), and nuts (cashews) and oilseeds (soy and cottonseed). Nonetheless,
- to address the needs of a growing urban population, the country continues to import a large share of horticultural products from neighboring countries (mostly, Burkina Faso and Nigeria), rice from Asia, wheat, frozen meat and milk from Europe, and frozen poultry products from Brazil.
- the agricultural sector faces the triple challenges of diversifying exports (consolidating cotton exports and increasing export volume for pineapple and cashew nut), increasing food production, and sustainably increasing farm and post-harvest productivity—these challenges must be addressed by improving the structural vulnerability of the country’s agricultural production system to floods and occasional droughts; and
- access to financing is limited outside the cotton system. The country’s agricultural trade performance is generally weak, with a persistently negative agricultural trade balance.
5. Benin has experienced a modest de-industrialization, contrasting with a sharp industrial expansion in this sector among benchmark countries.2 The share of the manufacturing sector in output fell from 22 percent to 12 percent in Benin during the period going from 2000 to 2012 but increased from 10 percent to 16 percent in the Asian peer group between 1990 and 2012. Conversely, the share of the agricultural sector has declined across low-income countries over time but has remained elevated in Benin. During the decade 2000-2009, the share of the agricultural sector was estimated on average at 24 percent. It remained constant and has been valued at 22 percent during the period 2010-2016.
6. Benin has exhibited good performance regarding integration into value chains recently. The Regional Economic Study (2015) showed that integration into global value chains had indeed been accompanied by a pickup in income levels. To measure the depth of this integration, the REO relied on the extent of foreign value added in a country’s exports—traditionally referred to as backward integration. By this measure, rising depth of integration has been associated with rising income over time for developing and emerging market economies higher share of its exports enter as inputs for other countries’ exports, reflecting the still-predominant role of commodities in many countries’ exports in the region. By this metric, Benin is aligned with the rest of SSA (Figure 2).
Figure 2.Sub-Saharan Africa and Comparator Countries: Depth of Integration in Global Value Chains, Average 2008–13
Source: Regional Economic Outlook, African Department. IMF (April, 2015).
7. Against this backdrop, structural change and economic diversification become critical aspects of economic development. Export diversification is not only associated with lower output volatility but also with higher economic growth rates.3 At the same time, output diversification—including employment diversification—is associated with higher income per capita.4 Also, the type and quality of export products increases pari passu with the diversification of production.5 This note examines growth potential and benefits from diversification for Benin.
B. Growth and Factor Inputs
8. Low human capital accumulation and total factor productivity appear to have driven volatile growth. A growth decomposition exercise suggests that two thirds of growth over the past two decades can be attributed to labor accumulation, while capital accumulation accounts for almost a third. In contrast, human capital and productivity appear to have been the main drivers of the mediocre growth performance, and are the factors in Benin lags most relative to other countries. Basic education rates in Benin are significantly lower compared to SSA and Asian benchmark countries, and more unequally distributed across the population. Public investment efficiency remains relatively low, and a challenging business environment impedes productive private sector activity. These factor ‘gaps’ suggest that policies should target access and quality of education, public financial management (PFM) reforms to improve the efficiency of public investment, and key areas of the business environment, such as contract enforcement, access to credit and efficient electricity provision.
9. Benin’s competitiveness is impaired by structural bottlenecks and a challenging business climate. The 2016 Doing Business Indicators (DBI) report ranks Benin 155th (out of 189 countries), worse than most peer countries in the region. Indicators related to education, health, access to water, and infant mortality have improved in recent years but at a slow pace, making it unlikely that Benin will achieve none of the MDGs in 2015. Growth has been accompanied by a low level of job creation with widespread underemployment affecting especially women and the youth in urban areas. However, the participation of women in services has shown an improvement in the last decade. FDI is keeping its pace with SSA but more investment is needed.
10. Benin has maintained a steady sectoral share in the last decade. Notwithstanding the increase in overall participation recently, Benin was lagging almost half of the SSA countries in terms of its manufacturing and services as a share of GDP. Structural changes that followed the country after 2004 gradually brought the country to a much more favorable position today. Comparing Benin to SSA countries presently, the share of manufacturing and services is ahead of most of the SSA countries, reaching 75 percent of GDP. While its exports per capita remain lower than for most SSA countries, they improved a lot during this ten-year period.
11. Structural transformation and diversification of output has the potential to boost growth and reduce volatility in Benin. While ‘between-sector’ structural transformation through the reallocation of resources from low productivity sectors such as agriculture to higher productivity sectors such as manufacturing, structural transformation can also happen through ‘within-sector’ generating productivity gains by implementing quality improvements to existing products and services or diversifying into new high value added products.
C. Export Diversification
12. Export diversification has not taken place. African benchmark countries diversified quite strongly after 1990 and have caught up to Asian benchmark countries whose diversification levels were already comparatively high before that time (Figure 3). The number of export partners has increased on average, but the shares of the main export partners remain dominant. Cross-country experiences show that policies need to build on a country’s endowments and existing strengths and be tailored to tackle specific challenges to yield successful diversification.6
Figure 3.Benin: Productivity Figure 4.Benin: DBI and FDI Figure 5.Benin: Employment by Sector and Gender
13. Product diversification could yield growth gains (Figure 3, last chart). Further increasing product variety similar to diversification could yield further growth gains. Based on the estimates in IMF (2014a), a one standard deviation increase in LIC’s export diversification raises the growth rate by about 0.8 percentage points.7 For Benin, this translates into estimated growth gains of 0.2 percentage point if export diversification was raised to levels observed in comparators like Vietnam.
Figure 6.Benin: Terms of Trade
14. Following IMF 2014a, the following specification for the growth volatility estimations is used:
Voli,t = αVoli,t−1+βDivi,t+δxi,t+ei,t
The data cover the time period from 1992-2015. Voli,t denotes growth volatility in country i at time t, which is calculated as the standard deviation of GDP growth using a five-year window. Divi,t denotes the diversification index. The first two indices, Total Theil and the Herfindahl index, capture the effect a country’s overall level of diversification has on volatility. The second two indices, the extensive and intensive margins, can be obtained from a decomposition of the overall Theil index. Extensive diversification occurs when a country exports new product lines, while intensive diversification occurs when a country exports a more balanced mix of existing products. Lower values for all four indices indicate a higher level of diversification. Also, openi,t denotes the trade openness level defined as total exports and imports as a share of GDP. Several regressions include interaction terms between the diversification index and a measure of trade openness xit denotes the interaction term); toti,t denotes other control variables such as terms of trade volatility, inflation volatility, and exchange rate volatility while ei,t is residual error. The data are five-year averages for each variable in order to exclude extreme values and business cycles; thus, t denotes each five-year period. The regressions are estimated using the two-step GMM model because of the dynamic nature of the regression equation. Since there is a lagged dependent variable in the estimation, fixed effects model estimates are biased. Following Arellano and Bond (1991), the GMM estimator thus is necessary to obtain consistent estimates.
Box 1.Benin Measuring Export Diversification
Following Henn et al. (2013), export product diversification is measured by the Theil index, which could be decomposed into “between” and “within” sub-indices:
where i represents the product index and N the total number of products. The “between” Theil index captures the extensive margin of diversification, i.e. the number of products, while the “within” Theil index captures the intensive margin (product shares).
Export partner diversification. The Theil index is also available across export partners. In this case, i and N in the above relationship represent the export partner index and number of export partners, respectively.
Export quality is measured by the export’s unit value adjusted for differences in production costs, relative distance to the trade partner, and the development of a country through the following relationship:
Trade PRICEmxt = α0 + α1 ln unobservable qualitymxt + α2 ln p c incomemxt + α3 ln DISTANCEmxt + errormxt where the sub-scripts m, x, and t denote importer, exporter and time period respectively
15. Export diversification helps to reduce growth volatility (Table 1). Following the methodology in IMF (2014a), Table 1 presents the results of a two-stage GMM regression to quantify the effect of diversification on the volatility of growth in a dynamic panel, focusing on Benin and extending the regressions to include the effects of the extensive margin of product diversification. Results show that decreases in volatility are more likely to be achieved through increasing the intensive margin of product diversification. Ceteris paribus, the estimates imply that increasing product diversification could decrease volatility by about one fifth and a third, respectively (Figure 9).
|Export Diversification||Export Diversification and Openness||Export Diversification and Control Variables||Export Diversification, Control and Trade Interaction|
|Theil Index within export||−0.731||−1.011||−2.109|
|Theil Index between export||0.975||2.107||2.668||2.703|
|Interaction from within index and Openness||0.002|
|Interaction of between export and Openness||−0.006|
|Terms of Trade||−0.005||0.003||−0.006||0.005|
|Observations||47||47||47||47||47||47||47||47|Figure 7.Benin: Export, Output Diversification
Source: IMF (2014a).
Figure 8.Economic Diversification: Benin vs. SSA countries, 2014 Figure 9.Export Diversification
16. The quality of exports in Benin keeps up with the average rating in SSA. The export diversification index produced by IMF covers 187 countries including most low-income countries and provides information on export product diversification and quality from 200-2010. Since higher values of the index indicate higher quality levels, we observe that the product quality for Benin exports have remained relatively mediocre overtime.
Figure 10.Export Diversification and Quality Index
Source: IMF, WEO
17. Benin’s competitiveness is impaired by structural bottlenecks. A challenging business climate, low productivity, and weak human capital. Low and stagnant productivity in the agriculture sector is perhaps a primary cause of the limited poverty reduction in rural areas.8
18. Policies to promote structural transformation and diversification should focus on addressing weaknesses that hinder entry into new lines of economic activity. Further progress on strengthening the business climate, addressing electricity shortages, and increasing human capital could provide significant benefits.
19. In particular, measures that could help improve productivity in the short run includes: (i) the support the promotion of large-scale adoption of improved technologies (production, post-harvest, processing and storage), including climate-smart production systems, reduce vulnerability of farming activities to climate change and weather vagaries of farming activities; (ii) development of production and market infrastructure to enhance productivity through efficient water management, reduction of post-harvest losses and better access to market through warehouses and other facilities; (iii) support to value chain coordination and access to finance through sustainable use of the financial management instruments set up under the original project; (iv) institutional support to the Ministry of Agriculture and other stakeholders in the sector (civil society and producers’ organizations) with a particular focus on capacity building. Furthermore, measures to improve education and productivity could render significant impacts on the informal economy, which is estimated to be at more than half of GDP. Product diversification could yield higher growth rates.
Figure 11.Benin: Informality and Governance
Dabla-NorrisEraGiangHoKalpanaKochharAnnetteKyobe and RobertTchaidze2013 “Anchoring Growth: The Importance of Productivity-Enhancing Reforms in Emerging Market and Developing Economies”. IMF SDN/13/08.
Dabla-NorrisEraJimBrumbyAnnetteKyobeZacMills and ChrisPapageorgiou2011 “Investing in Public Investment Efficiency”. IMF Working Paper 11/97.
Dominguez-TorresCarolina and VivienFoster2011Benin’s Infrastructure—A Continental Perspective. Policy Research Working Paper 5689. The World Bank. June
HennChristianChrisPapageorgiou and NikolaSpatafora2013 “Export Quality in Developing Countries” IMF Working Paper 13/108.
IMF2014a “Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries—The Role of Structural Transformation and Diversification.” IMF Policy PaperMarch.
ImbsJean and RomainWacziarg. 2003. “Stages of Diversification.” American Economic Review93(1): 63–86.
MedinaLeandro; Andrew WJonelis and MehmetCangul2017 “The Informal Economy in Sub-Saharan Africa: Size and Determinants” Working Paper No. 17/156
PapageorgiouChrisFidelPerez-Sebastian and NicolaSpatafora2013Structural Change through Diversication: A Conceptual Framework. International Monetary Fund. March.
Imbs and Wacziarg (2012).
REO 2017, October.
IMF (2014a) finds that output diversification has a decisive impact on growth for LICs. The standard deviation of output diversification in low income countries is 0.078, resulting in a predicted increase in the growth rate of LICs by 100 x (−0.078) x (−0.176) = 1.373 percentage points.
In particular, growth has been the result of expanded acreages and increased labor effort rather than increases in productivity. With nearly half of the labor force involved in agriculture, a lack of productivity increases in the sector would serve as a primary explanation for the lack of robust poverty reduction. Although workers who have gradually moved out of low-productivity informal agriculture, they have settled in similarly low-productivity informal commerce and other services.