Part II: Growth and Inclusiveness
- Alexei Kireyev
- Published Date:
- April 2016
Economic performance in most West African Economic and Monetary Union (WAEMU) countries has strengthened over the past two decades. Most WAEMU countries have weathered well the impact of the global financial crisis, the earlier oil and food price shocks, and later security shocks in the region. Improvements in economic fundamentals, together with focused policy responses to the crises, limited global financial integration, and the relatively fast economic recovery in the largest countries helped to cushion the impact of external shocks at the regional level.
However, despite improvements in fundamentals, the long-term growth in WAEMU countries has been lower than that in sub-Saharan Africa’s top-performing countries. Despite higher growth since the mid-1990s, the average per capita income level in the WAEMU remains still broadly at its 1980 level. The divergence with faster-growing sub-Saharan countries became more pronounced in the past two decades, the period dubbed “the great African takeoff.”
Why has growth in the WAEMU been lower than growth in the rest of Africa and what can be done about it? This part of the book seeks to answer this pertinent question.
In the last two decades per capita growth has increased only moderately on average in the WAEMU, while it has more than doubled in faster-growing sub-Saharan countries. Chapter 4, Quest for Higher Growth, suggests that the reasons for the growth divergence between the WAEMU and the fastest-growing countries in Africa are complex, and no single factor or simple story emerges. The divergence can be explained by political instability in some WAEMU countries, weak business and legal environments, infrastructural deficiencies, and weak institutional and public investment management capacity relative to other countries in sub-Saharan Africa. These factors may have affected both the level of investment and even more its efficiency, and prevented most WAEMU countries from achieving sustainably high growth. On average, high-growth sub-Saharan African countries fared somewhat better on a range of determinants of per capita growth, pointing to the need for further broad-based reforms in the WAEMU.
One of the reasons for growth underperformance is that the region has been negatively affected by macroeconomic shocks. Chapter 5, Shocks to Growth, explores this reason in more detail. Such shocks can be symmetric, affecting similarly all countries of the Union simultaneously, or asymmetric, affecting just some of the countries in the WAEMU. Asymmetric shocks prevail in the region and their smoothing is limited. Therefore, coordinated fiscal policy has an important role to play in addressing both symmetric and asymmetric shocks. Further integration and strengthening of market-based smoothing mechanisms (for example, developing and improving access to the financial system) would also likely reduce the occurrence and economic impact of asymmetric shocks. A symmetric shock can, in principle, be addressed by a common monetary policy or a coordinated fiscal policy response. For asymmetric shocks, a national fiscal policy response, supported by structural reforms, remains the main available instrument.
Slow structural transformation and export diversification may be yet another reason for the relatively slow growth in the WAEMU. Chapter 6, Structural Transformation and Diversification, takes stock of the WAEMU’s progress in this important area. It concludes that slow structural transformation and diversification may explain the relative growth underperformance, as the majority of the population is employed in low-productivity agriculture, which is prone to climatic shocks, while the manufacturing sector remains underdeveloped. Further structural transformation of output and diversification of exports could yield significant growth dividends. Achieving transformation and diversification will be challenging in the context of a rapid projected increase in the workforce over coming decades, much of which would need to be absorbed by the agricultural sector. Policies should focus on easing the constraints to structural transformation in key areas such as education and the business climate, as well as devising a clear strategy for tackling the challenges posed by rapid population growth.
Insufficient inclusiveness across income and gender groups has been an additional constraint to growth in the WAEMU. Chapter 7, Growth Inclusiveness and Equality, demonstrates that growth performance depends heavily on its distributional characteristics. The fundamental question is equality, that is, whether the benefits of growth are shared equally across different income groups and whether all income groups and both genders have an equal opportunity to contribute their fair share to growth. While poverty has fallen in the last two decades in most WAEMU countries, poverty reduction has slowed in recent years. Although available indicators sometimes give conflicting signals on distributional shifts, two case studies—one on Senegal and one on Mali—suggest that people in the middle of the income distribution usually received the most benefit of growth, and mainly in urban areas. Further progress in poverty reduction and inclusiveness would require sustained high growth and exploration of growth opportunities in the sectors with high earning potential for the poor. Better-targeted social policies and more attention to the regional distribution of spending would also help reduce poverty and improve inclusiveness.
To increase growth, WAEMU countries need to mobilize financial resources, including in the regional financial market. Chapter 8, Financing Growth, looks in detail at the regional financial market as an important source for resource mobilization. This market has grown substantially in the past decade but still remains relatively shallow and falls short of supplying sufficient long-term financing for growth-enhancing public and private investment projects. Although the institutional structure for financing mobilization is broadly in place, the undiversified issuer and narrow investor bases, banks’ preferences for short-term securities, the limited set of maturities offered by sovereigns, the underdeveloped secondary market for bills and bonds, organizational issues, and limited access to information increase financing costs and hinder market efficiency. Interest rates have been largely driven by country ratings, market liquidity conditions, and bidders’ appetites at the time of issuances. The volumes of issuance also mattered for the level of interest rates, with seasonality, issuance procedures, and the frequency and predictability of issues also playing their roles. Further reforms could help the region reap the full benefits of a more dynamic securities market to finance growth-enhancing projects.