Race to the Next Income Frontier
Chapter

Chapter 4. Macro-Structural Reforms and Emergence: Lessons for Senegal

Author(s):
Ali Mansoor, Salifou Issoufou, and Daouda Sembene
Published Date:
April 2018
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Author(s)
Alexei Klreyev

Introduction

Senegal’s new development strategy aims to bring the country into emerging market status as an explicit priority. The Plan Sénégal Émergent, adopted in early 2014, includes a number of critical public and private investments and ambitious reforms, all aimed at raising annual growth to between 7 and 8 percent in the medium term and making growth more inclusive by sharing the dividends widely among the population.

The Plan Sénégal Émergent rests on three pillars: (1) higher sustainable growth and structural transformation, with the ambition of making Senegal a regional hub for a number of activities through better infrastructure and private investment in key sectors (e.g., agriculture, agro-business, mining, and tourism); (2) human development, with a focus on a few social sectors and expanding the social safety net; and (3) better governance, peace, and security (Government of Senegal 2014).

The plan envisages making Senegal an emerging market economy by 2035. Although the plan does not specify the exact quantitative parameters of an emerging market economy, by any definition to achieve this goal, Senegal would need to accelerate its annual growth in the short term and sustain that higher growth over the medium term. The rate of growth needed to quadruple Senegal’s GDP per capita, raising it from its current level of about US$1,000 to above US$4,000, is 7 percent.1 These numerical metrics are used in this chapter for a quantitative evaluation of the macro-structural reforms needed to make Senegal a middle-income country within a 20-year horizon.

Senegal already enjoys some features of an emerging market economy. For example, like most emerging market economies, it has had access to international financial markets, through international issuance of sovereign bonds in 2009, 2011, and 2014. The country is classified as a “mature stabilizer” by the IMF, because it conducts sound macroeconomic policies supported by the IMF’s Policy Support Instrument. Senegal is classified as a lower-middle-income country by the World Bank, based on its per capita gross domestic income as calculated by the Atlas method. Many investors view Senegal as a stable democracy with reasonable macroeconomic policies and, therefore, as an investment opportunity in which they can foresee diversifying their portfolios and getting higher-than-average returns.

The purpose of this chapter is to identify those areas of macro-structural reform that may be critical for Senegal and other low-income countries to enact in order to achieve emerging middle-income status. To this end, the chapter revisits the definition of an emerging market economy, reviews the experience of a number of countries that have already become emerging market economies and could serve as comparators for Senegal, estimates the growth rate needed to achieve the desired level of steady-state GDP per capita consistent with middle-income emerging market economy status by 2035, and performs policy simulations on structural reform needed to increase the potential growth rate.

Emerging Market Comparators

Emerging Market Economy Definition

There is no generally accepted list of emerging market economies, because there is no internationally agreed-upon definition or set of criteria. The terms used may be similar—emerging market economies as international institutions and national development agencies call them and emerging markets as investment banks and credit agencies call them. But the underlying criteria for classifying countries this way vary broadly. Bloomberg, for example, classifies all countries that are not developed as emerging markets and includes more than 100 countries on its emerging market list.

Different investment banks have their own coverage, mainly for the purpose of investment indices. Among sub-Saharan African countries, Kenya, Mauritius, and Nigeria are typically included in almost all emerging market indices. The criteria these banks use to select countries include recent growth dynamics and perspectives, financial market development, general institutional conditions and evolution, natural resource richness, and political conditions and perspectives. The full list of sub-Saharan countries that show up on emerging markets lists includes Angola, Ghana, Kenya, Mauritius, Mozambique, Nigeria, Senegal, Tanzania, Uganda, Zambia, and Zimbabwe. Although some of these countries are not included in some investment bank indices, over the past five years there has been sufficient outside investor interest in all of them to warrant their consideration as countries in or close to emerging market economy status.

The Fitch rating agency explicitly classifies some countries as emerging markets and releases its list, though it does not publish a formal definition of an emerging market economy. In Fitch’s case, the universe of emerging markets comprises about 70 countries worldwide. This reflects the fact that the universe is inevitably somewhat dynamic (or at least evolutionary), and it is difficult to be explicitly prescriptive in setting criteria to determine when economies migrate through various stages of development. Fitch argues that the concept of emerging markets is something of an artificial construct created by the financial media, even though it uses the category in its published research. At the same time, Fitch considers certain key qualitative and quantitative factors when determining whether to include individual countries within the broad definition of emerging markets. These include the level of GDP per capita, the quality and transparency of institutions, and other governance indicators, such as the level of corruption and of voice and accountability.

Morgan Stanley has a more detailed description of an emerging market, which it uses primarily to measure combined performance in an index. The Morgan Stanley Capital International (MSCI) Emerging Market Index, which is designed to measure equity performance, is a float-adjusted market capitalization index that consists of indices covering more than 2,600 securities in individual emerging market economies. The index is regularly revised, and at the end of 2015 it consisted of 23 economies, including only one sub-Saharan African country (South Africa). The MSCI Market Classification Framework is based on these criteria: economic development, size and liquidity, and market accessibility. To be classified in a given investment universe, a country must meet all the criteria described in Box 4.1. (Morgan Stanley also has a broader category of frontier markets, which includes 25 economies, of which only three are in sub-Saharan Africa: Kenya, Mauritius, and Nigeria.)

A subset of emerging markets is often described as frontier markets, a category used by the IMF (2011). Frontier markets have small financial sectors or low annual turnover and liquidity, but nonetheless demonstrate relative openness and accessibility to foreign investors. They are generally in the early stages of financial market development. In most cases, the existence of market restrictions makes them unsuitable for inclusion in the larger emerging market indices, such as the MSCI Emerging Market Index. The main attraction of frontier equity markets for investors is that they may offer high, long-term returns and low correlations with other markets. At the same time, short- and medium-term securities typically have higher yields in frontier markets than they do in more developed emerging market economies. With a few exceptions, because of low liquidity and turnover, the main investors in frontier markets are typically dedicated funds and hedge (or “boutique”) funds.

Typically, frontier market economies have issued an international sovereign bond and are featured in investment bank reports. They are large enough in terms of liquidity and turnover to be featured in the MSCI Emerging Market Index. There may be differences in interpretation as to exactly which of the sub-Saharan African countries are frontier markets, but there is no debate about this concerning Ghana, Kenya, Mauritius, Nigeria, Tanzania, Uganda, and Zambia, with most market participants also including Angola, Rwanda, and Senegal.

BOX 4.1Morgan Stanley Capital International’s Criteria of Market Accessibility

  • Openness to foreign ownership is defined by the existence of qualifying conditions for international investors and a level playing field for all international investors, including sufficient foreign ownership limit level (or the proportion of the market being accessible to nondomestic investors), the proportion of shares still available for nondomestic investors, the existence of a foreign board where nondomestic investors can trade with one another, equal economic and voting rights and availability of information in English, and equal rights for minority shareholders.

  • Ease of capital inflows/outflows is defined by the level of restrictions on inflows and outflows of foreign capital to and from the local stock market (excluding foreign currency exchange restrictions) and the existence of a developed onshore and offshore foreign exchange market with sufficient liberalization.

  • Efficiency of the operational framework is defined by market entry (existence/level of complexity of registration requirements for international investors, such as tax IDs, and ease/complexity of setting up local accounts), market organization and regulations, and a competitive landscape; information flow, timely disclosure of complete stock market information, and the robustness and enforcement of accounting standards; the market infrastructure, the absence of prefunding requirements/practices and the possibility of using overdrafts, the availability of real omnibus structures, and the level of competition among custodian banks; and the existence of an efficient mechanism that prevents brokers from having unlimited access to investors’ accounts and guarantees the safekeeping of assets.

  • Stability of institutional framework is defined by basic institutional principles, such as the rule of law and its enforcement, the stability of the “free-market” economic system, and a track record of government intervention with regard to foreign investors.

Source: www.msci.com.

Comparators for Senegal

The Plan Sénégal Émergent includes explicit benchmarks for emerging markets that will be used to assess Senegal’s own progress toward emerging market status. The plan includes three overlapping reference groups deemed to be relevant for Senegal:

  • Emerging market economies: Algeria, Angola, Botswana, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, the Dominican Republic, Gabon, Jordan, Malaysia, Mauritius, Mexico, South Africa, Thailand, Tunisia, and Turkey.

  • Middle-income countries: China, Côte d’Ivoire, Egypt, India, Indonesia, Jordan, Korea, Malaysia, Morocco, the Philippines, Sri Lanka, Syria, Thailand, Tunisia, and Vietnam.

  • Upper-middle-income countries: Brazil, China, Colombia, Costa Rica, Egypt, El Salvador, Guatemala, Malaysia, Morocco, Paraguay, Republic of Korea, Sri Lanka, Syria, Thailand, and Tunisia. (Government of Senegal 2014).

For the purposes of this chapter, the comparators for Senegal have been selected based on several criteria. For the period 1990–2014, all countries were ranked by the highest cumulative GDP per capita growth rate in purchasing power parity terms. The periods of the highest average growth rates were established, and the cumulative levels of debt accumulated by 2014 were also calculated.

Filtering consisted of several steps. First, all countries that had financed their growth with unsustainable debt accumulation were eliminated, since Senegal should not aim to finance its growth at the expense of unsustainable debt accumulation. Second, from the remaining list, all countries whose cumulative growth between 1990 and 2014 was less than three-fold were also removed, as this is the minimum growth rate needed for Senegal to reach middle-income status in 20 years. Third, to control for unequal starting conditions, all countries whose GDP per capita was below US$500 in 1990 and all those in which it was above US$2,000 were suppressed. Finally, to control for economic scale, China and India were also dropped from the list. As a result, only four countries made the comparator list: Cabo Verde, Cambodia, Lao P.D.R., and Vietnam.

Four more middle-income economies have been arbitrarily added to the comparator list: Mauritius, Morocco, Seychelles, and Tunisia. None of these four countries would have qualified for the list based on the above criteria, since in each case at least one criterion was not met. Rather, the selection of these last four was driven mainly by their historically tight economic links with Senegal, their peer-learning potential, and their common language (French). These comparators can be considered a group, where Senegal may wish to emulate the reforms that were the most instrumental for meeting some of the criteria for an emerging market economy (Table 4.1).

TABLE 4.1Growth Rates and GDP, High-Growth Episodes, Comparator Countries
High-Growth Episode (years)Growth (percent)GDP Per Capita (US dollars)
CountryBeginEndLengthAverageHighestCumulative199020142014/1990Ranking
Cabo Verde19912008187.211.15.61,6096,3433.91
Vietnam19912014245.46.65.21,5015,3703.62
Cambodia19912014245.48.95.21,0043,0933.13
Lao P.D.R.19912014245.06.14.51,6224,9253.04
Mauritius19912014243.64.63.57,56817,7312.35
Tunisia19952007133.64.32.85,50210,7682.06
Morocco20002009103.64.02.43,9017,0401.87
Seychelles20032013113.85.42.314,11625,0381.88
Source: IMF, World Economic Outlook database.
Source: IMF, World Economic Outlook database.

Simple Growth Framework

Model

Growth in a country’s GDP per capita can be viewed as a transition from its current to the steady-state level. Barro and Sala-i-Martin (1995) show that the time path of per capita GDP can be presented this way:

Following Sachs and Warner (1997), per capita GDP will be initially y0 and will reach the steady state ySS in the long term, as long as parameter β < 0. Growth will initially be faster but will decelerate gradually over time as it approaches the steady state. The larger the gap between the current level of GDP per capita and its steady-state level (ySSy0), the faster will be the growth rate of the country. This model insight points to an empirically observed trend: that on average, low-income countries tend to grow faster than high-income countries, because the former start from a very low base.

Growth can be driven by multiple factors. In the most generic form, average growth can be explained by multiple parameters:

in which the dependent variable is the average real GDP per capita growth in country i, X on the equation’s right-hand side is a vector of country-specific variables that explain growth, and εi is a country-specific random error. The explanatory variables usually include capital, labor, taxes, the size of government, social capital, and many other variables that may be important for growth in a particular country. In a Solow-like model setup, the variables also include the level of GDP at the start of the estimation period. The average GDP growth is usually taken over a sufficiently long period of time, that is, five years, ten years, or more, and a regression of the real GDP growth on multiple independent variables is estimated over a cross-section of countries with available data.

Using equation (4.2), average growth was estimated for a panel that included 109 countries for which data were available for 1990–2012, using several variables found that may potentially explain the average per capita growth rate. Among them were population, World Bank Doing Business rank, real export growth, economic complexity, economic diversification, investment ratio, percentage of the population aged 15 and over with some secondary education, average years of schooling, adjusted net saving, under-five mortality rate, life expectancy at birth, log GDP per person in 1990, average annual growth in GDP per capita, percentage of GDP in natural resources, natural resource value added per person, costs of exports, and status of the nonmarket economy.

From this wide range, only a few variables are found to have the potential to explain the average growth rate. These are the initial level of per capita income in 1990, the environment for doing business as captured by the Doing Business rank, the investment ratio (total public and private investment in percent of GDP), and real export growth; the constant captures all other factors affecting growth (Table 4.2). The estimated parameters are statistically significant and have the expected sign. The coefficient on the initial condition has the expected negative sign, since higher initial GDP is associated with lower growth. Improvements in the business environment lead to a better rank, and reduced mortality leads to higher labor force and output. Therefore, the coefficients on both variables also have the expected negative sign. Both higher investment and higher export production and demand usually lead to higher growth, so the coefficients are positive, as expected.

TABLE 4.2Average Growth Factors, 1990–2012
CoefficientStandard ErrortP > |t|95% ConfidenceInterval
Constant9.0082.1494.1900.0004.73613.280
GDP per Capita in 1990−0.9780.215− 4.5500.000−1.405−0.551
Doing Business Rank−0.0110.003− 3.7400.000−0.017−0.005
Investment Ratio0.0460.0202.2900.0250.0060.087
(percent of GDP)
Real Export Growth0.2190.0425.1800.0000.1350.304
(percent)
Number of Observations109
R-squared0.661
Source: IMF staff estimates.Note: P = probability; t = Student t statistics.
Source: IMF staff estimates.Note: P = probability; t = Student t statistics.

This simple framework allows some important policy inferences. First, it allows one to estimate potential per capita growth rate conditional on the initial level of income and policy variables. Second, it can be used to project the growth rate needed to achieve the desired level of the steady-state GDP per capita, again conditional on initial income and policy variables. Finally, it permits one to perform policy simulations to identify the structural reforms that may increase the potential growth rate.

Empirical Results

Comparators have outperformed Senegal on most policy variables important for long-term growth. During the period 1990–2012, which is the time frame for the econometric assessment of the determinants of long-term growth, Senegal lagged behind all comparator countries. On the overall investment rate, it was behind all countries other than Cambodia. Senegal was treading behind on real export growth as well, and in the 2016 Doing Business ranking it was ranked lower than all its comparators (Table 4.3).

TABLE 4.3Policy Performance, Senegal and Comparator Countries
Doing Business 2016Investment (percent of GDP)Export Growth (percent)
Mauritius3225.23.7
Tunisia7424.04.1
Morocco7529.04.6
Vietnam9028.115.8
Seychelles95n.a.n.a.
Cabo Verde126n.a.n.a.
Cambodia12717.26.3
Lao P.D.R.134n.a.14.2
Senegal15319.52.2
Source: IMF staff estimates.Note: n.a. = not available.
Source: IMF staff estimates.Note: n.a. = not available.

What is the potential per capita GDP of Senegal conditional on the initial level of its income? Senegal’s initial level of GDP per capita in the 1990s was on the order of US$630. Under the assumption of unchanged policies—that is, the Doing Business rank remaining at 153, the investment ratio remaining at 19.5 percent, and the annual real export growth at 2.2 percent—the Solow-like model previously described suggests that Senegal’s average annual per capita growth rate would not exceed 0.4 percent. This growth would allow the country to achieve a per capita GDP steady-state level of about US$1,470 over the very long term.2 However, it is not at all sufficient for making Senegal a middle-income emerging market economy, as most such economies already have an average per capita income exceeding US$4,000.

Therefore, unchanged policies are not an option if the aspiration of becoming an emerging market economy is to be fulfilled. Reforms are indispensable.

What annual growth rate is needed to advance the Senegalese economy to emerging market middle-income status within the next 20 years? The Solow model suggests that to reach the long-term steady state of US$4,000 per capita from its current level of US$980, and assuming everything else including the exchange rates remains unchanged, Senegal needs to follow a concave growth trajectory (Figure 4.1). The growth rate should be very high during the early period and may decline gradually the closer Senegal approaches the steady state. In 2016–25, the growth rate should be on average 7.5 percent a year, gradually descending to 6.5 percent on average for 2026–35.

Figure 4.1.Per Capita Growth Needed to Reach Middle-Income Status

Source: IMF staff estimates.

What Policy Reforms Would be Most Effective?

What policy reforms are needed to achieve the growth rate that would make Senegal a middle-income economy by 2035? In the Solow-like model used in this simulation, the steady state is a function only of policy variables, whereas the growth rate is a function of both the initial condition and the policy variables. The 1990 level of per capita GDP in Senegal is relatively low, suggesting that a high growth rate should be reasonably expected as the country converges to its desirable steady-state level. To reach this growth rate, the authorities should focus on macro-structural policies, which most affect growth in Senegal. Based on the average growth factors identified in Table 4.4, there are three broad policy areas that affect growth in any country, including Senegal: its business environment, its investment, and its exports. Although the mortality rate is also found to be important, it is more an indicator of growth outcomes than a precondition for growth.

TABLE 4.4Productivity Gains from Macro-Structural Reforms
ReformsProductivity Gains by Country GroupProductivity Growth Gain after Breaks
Advanced EconomiesEmerging MarketsLow-Income Developing CountriesAdvanced EconomiesEmerging MarketsLow-Income Developing Countries
Financial Sector Reform
Banking System Reform
Interest Controls
Credit Controls
Privatization
Supervision
Capital Market Development
Trade Liberalization
Tariff
Institutional Reform
Legal System and Property Rights
Infrastructure
Public Capital Stock
Market Deregulation
Agriculture
Policy Environment for Foreign Investment
Promotion of Competition
Hiring and Firing Regulations
Collective Bargaining
Energy/Transport/Communications
Innovation
Research and Development Spending
Source: IMF 2015.Note: In the columns under “Productivity Gains by Country Group,” comparisons are across reforms within each country group. Darker shades imply greater gains from reforms. In the columns under “Productivity Growth Gain after Breaks” the color scale shows the range of the average total factor productivity growth difference (in percentage points) between five years before and five years after breaks. The darker blue indicates a growth gain of 2 percentage points or more, the lighter blue a growth gain between 1 and 2 percentage points, and the white a growth gain of less than 1 percentage point.
Source: IMF 2015.Note: In the columns under “Productivity Gains by Country Group,” comparisons are across reforms within each country group. Darker shades imply greater gains from reforms. In the columns under “Productivity Growth Gain after Breaks” the color scale shows the range of the average total factor productivity growth difference (in percentage points) between five years before and five years after breaks. The darker blue indicates a growth gain of 2 percentage points or more, the lighter blue a growth gain between 1 and 2 percentage points, and the white a growth gain of less than 1 percentage point.

What would be the level of Senegal’s potential GDP if the authorities implemented policies to reach levels for the three policy variables comparable to those reached in the comparator countries? The experience of comparators suggests that the Senegalese authorities have several policy options for increasing growth to reach US$4,000 per capita by 2035 (Table 4.5).3 If Senegal improves its Doing Business ranking to the level that Mauritius held in 2016 (that is, rising from 153 to 32), this in itself would be almost sufficient to make Senegal a middle-income economy.

TABLE 4.5Per Capita GDP Associated with Various Policy Options, Senegal and Comparator Countries
Doing BusinessInvestmentExportsDoing Business + InvestmentDoing Business + ExportsInvestment + ExportsDoing Business + Investment + Exports
Mauritius3,8971,2821,0525,0974,1821,3765,470
Tunisia2,4131,2131,0722,9862,6391,3263,266
Morocco2,3861,5341,1013,7352,6811,7244,197
Vietnam2,0111,4751,8733,0263,8422,8195,783
Seychelles1,899n.a.n.a.n.a.n.a.n.a.n.a.
Cabo Verde1,333n.a.n.a.n.a.n.a.n.a.n.a.
Cambodia1,3188761,1901,1791,6011,0641,432
Lao P.D.R.1,217n.a.1,735n.a.n.a.n.a.n.a.
Senegal980980980980980980980
Source: IMF staff estimates.Note: n.a. = not available.
Source: IMF staff estimates.Note: n.a. = not available.

However, if Senegal reached the current ranks on Doing Business of other comparator countries, that alone would bring it, at most, halfway to the desired level of per capita income in 2035. Similarly, other policies are not sufficient if implemented individually. For example, if Senegal increased its investment ratio to the level of Morocco (the highest among all comparator countries), by raising it from 19.5 to 29 percent of GDP, the level of GDP per capita it would reach would only slightly exceed US$1,500. If the Senegalese authorities improved export potential and reached the export growth rate of Vietnam (with that rate rising from 2.2 to 15.8 percent real export growth), the country could count only on achieving real GDP per capita of slightly below US$1,900.

Therefore, what is needed is a combination of policies simultaneously affecting all key drivers of growth. For example, achieving the Doing Business rank of Mauritius, in combination with that country’s investment rate, would allow Senegal to reach almost US$5,100 per capita. Other plausible policy combinations include reaching the Doing Business level of Mauritius along with its export growth rate, which would lead to a GDP per capita in Senegal of almost US$4,200. A combination of the Doing Business rank of Vietnam and Vietnam’s export growth rate would also put Senegal relatively close to the needed per capita income. In sum, if Senegal could achieve a Doing Business rank equal to that of Vietnam, Morocco, or Mauritius in combination with the investment ratio and export growth rates of those countries, this would put Senegal solidly in the group of middle-income countries. Note that an emphasis on investment and exports alone, without tackling the business environment constraints, would not help much. Therefore, it is clear that in the case of Senegal, emphasis should be on macro-structural reforms that would allow the business climate to improve.

Macro-Structural Reforms in the Business Environment

Growth Factors for Emergence

Differences in productivity have become the key determinant of cross-country variations in GDP per capita in developing countries. While capital accumulation and labor resources are still important for growth, a number of studies have found that total factor productivity has become a major unexplained factor of growth (Hall and Jones 1999; Duval and de la Maisonneuve 2010). Low total factor productivity is a clear impediment for Senegal’s growth as well (Kireyev and Mpatswe 2013).

A growth-accounting exercise suggests that growth in Senegal has been mostly explained by factor accumulation, while total factor productivity was actually declining before the mid-1990s and has been again since 2006, growing only modestly during the country’s decade of robust growth (1995–2005). The decline in total factor productivity in 2011–16 coincides with the deterioration of Senegal’s Doing Business and governance indicators, which in turn could have affected the productivity of both public and private investment.

International experience also suggests that productivity can be improved by targeted macro-structural reforms. Empirical analysis finds a broadly positive relationship between structural reforms and productivity, implying that structural reforms matter for growth. Importantly, the potential payoff from different types of structural reforms varies across income groups (IMF 2015). These results also suggest that the benefits of reform for growth tend to become more pronounced when they are tailored to the level of economic development of a specific country. For instance, reforms to the legal system and property rights show a positive association with productivity growth in low-income countries and emerging markets but not in advanced economies. In contrast, labor reforms, such as those related to hiring and firing and collective bargaining, are found to improve growth in advanced economies.

Macro-structural reforms in several areas can spearhead higher growth in Senegal. Based on international experience, low-income developing countries like Senegal most likely can get substantial gains in their growth performance if they focus reform efforts on a few key macro-structural areas. Among them are public infrastructure, agriculture, legal system and property rights, trade liberalization, and the financial system, including banking and capital market reforms (Table 4.4, first three columns).

On the other hand, productivity growth can also be achieved through large-scale reforms. International experience shows that with a few exceptions, deep reform episodes are typically associated with a significant pickup in postreform productivity growth rates (Table 4.4, last three columns). The reforms that have driven growth across low-income countries have been broadly in the same areas, such as agriculture, legal systems and property rights, and capital market development. Remarkably, infrastructure development is not the area in which large-scale reform can bring faster growth; to the contrary, privatization is an important reform area for increasing growth. Some asymmetry between the areas of potentially high productivity gains and large-scale reforms suggests that the pace and the magnitude of reforms could have implications for potential growth, although not all large-scale reforms can reasonably be expected to have large impacts on productivity.

The differences in the postreform pickup in productivity growth underscore the need to calibrate the pace of reform. For some reforms, more gradual implementation may be likely to yield more benefits, whereas rushed large-scale spending could yield little or no benefit or even have negative consequences. In the case of infrastructure, for example, in developing countries large public investments financed by natural resource booms can even undermine investment efficiency. Other reforms, though, may show a positive relationship with productivity growth when implemented through a “big bang” approach, rather than in a more gradual manner.

When several reform episodes occur sequentially, larger productivity payoffs can be expected. In practice, reforms in different areas are often undertaken simultaneously or in waves. On average, a substantial uptick in five-year average productivity growth rates can be expected after waves of reform. Among low-income countries, such upticks have historically exceeded 5 percentage points. The magnitude of these productivity growth differentials suggests that different reforms can have complementary effects on growth. For example, financial sector reforms have most often taken place in waves, reflecting the central role that the financial sector plays in efficiently allocating resources. Legal and trade sector reforms also usually take place in waves, since episodes of capital market reforms are often accompanied by strengthening the broader legal system and property rights.

Current and Suggested Business Reforms

Senegal has been gradually improving its business environment, the critical driver of its growth, and has been evolving toward becoming an emerging market economy. Between 2014 and 2016, it moved from 171st to 161st and then 153rd place out of 189 ranked countries on the Doing Business index (Table 4.6). In particular, Senegal has made starting a business easier by reducing the minimum capital requirement and has made acquiring construction permits less time consuming by reducing the processing time required.

TABLE 4.6Doing Business Summary, Senegal
Ease of doing business rank (1–189)153Overall distance to frontier (DTF) score (0–100)49Population (millions)15
Starting a business (rank)85Getting credit (rank)133Trading across borders (rank)113
DTF score for starting a business (0–100)86DTF score for getting credit (0–100)30DTF score for trading across borders (0–100)62
Procedures (number)4Strength of legal rights index (0–12)6Time to export
Time (days)6Depth of credit information index (0–8)0Documentary compliance (hours)26
Cost (percent of income per capita)64Credit bureau coverage (percent of adults)0Border compliance (hours)41
Minimum capital (percent of income per capita)5Credit registry coverage (percent of adults)1Domestic transport (hours)2
Cost to export
Dealing with construction permits (rank)148Protecting minority investors (rank)155Documentary compliance (US dollars)96
DTF score for dealing with construction permits (0–100)60DTF score for protecting minority investors (0–100)38Border compliance (US dollars)486
Procedures (number)13Extent of conflict of interest regulation index (0–10)5Domestic transport (US dollars)122
Time (days)200Extent of shareholder governance index (0–10)3Time to import
Cost (percent of warehouse value)8Strength of minority investor protection index (0–10)4Documentary compliance (hours)54
Building quality control index (0–15)9Border compliance (hours)56
Paying taxes (rank)183Domestic transport (hours)2
Getting electricity (rank)170DTF score for paying taxes (0–100)30Cost to import
DTF score for getting electricity (0–100)40Payments (number per year)58Documentary compliance (US dollars)545
Procedures (number)7Time (hours per year)620Border compliance (US dollars)885
Time (days)81Total tax rate (percent of profit)47Domestic transport (US dollars)147
Cost (percent of income per capita)5,689
Reliability of supply and transparency of tariffs index (0–8)2Enforcing contracts (rank)145Resolving insolvency (rank)88
DTF score for enforcing contracts (0–100)48DTF score for resolving insolvency (0–100)44
Registering property (rank)152Time (days)740Time (years)3
DTF score for registering property (0–100)47Cost (percent of claim)36Cost (percent of estate)20
Procedures (number)5Quality of judicial processes index (0–18)7Recovery rate (cents on the dollar)29
Time (days)71Strength of insolvency framework index (0–16)9
Cost (percent of property value)10
Quality of land administration index (0–30)8

Senegal also has made transferring property easier by replacing the requirement for authorization from the tax authority with a notification requirement and by creating a single step for the property transfer at the land registry. In addition, the country has improved its credit information system by introducing regulations developed by the West African Economic and Monetary Union governing the licensing and operation of credit bureaus. Moreover, the government has strengthened minority investor protections by introducing greater requirements for disclosure of related-party transactions to the board of directors. Finally, it has made paying taxes easier for companies by abolishing the vehicle tax and making it possible to download the declaration forms for value-added tax online.

Nevertheless, progress toward upgrading Senegal’s business environment should be accelerated to assist the country in achieving emerging market economy status by 2035. Critical for growth are those areas in which Senegal underperforms even relative to its own average rank. Macro-structural reforms should also be stepped up in the electrical power sector, since Senegal still ranks 170th in the world in the Doing Business subranking in terms of access to reliable power; in this area improvements are needed in both reliability of supply and reduction in electricity costs. The taxation system is another obvious macro-critical area in which Senegal needs reforms to achieve a decisive breakthrough, including by simplifying procedures and optimizing the tax rates. Finally, protecting investors and registering property are important areas for targeted macro-critical reforms to help unlock the country’s high growth potential.

References

The views expressed here are those of the author alone and do not necessarily represent those of the IMF or IMF policy. The author is grateful to Salifou Issoufou, Irina Ivaschenko, Philip English, and Ali Mansoor and to participants in the January 2016 book sprint for their useful comments. Research assistance from Yanmin Ye is gratefully acknowledged. Any remaining errors are the author’s.

To reach upper-middle-income status in 20 years, Senegal would need to quadruple its current GDP per capita of US$1,000. To achieve this goal, a 7 percent average annual growth is needed, combined with no more than 3 percent in annual population growth. It should be noted that in the World Bank’s income classification, the lower bound for upper-middle-income countries increased by about 30 percent between 1995 and 2015, which means that Senegal’s current $1,000 gross national income per capita may need to reach about US$5,320 in 2035 in order for the country to reach upper-middle-income status, implying that growth rates higher than 7 percent may be required.

The predicted steady state is calculated by solving the implicit differential equation underlying the regression equation: because the estimated coefficient on 1990 per capita GDP is negative, GDP traces out a concave path that asymptotes at the steady state.

For these calculations, the coefficients in Table 4.2 need to be adjusted to linearize the nonlinear solution of the growth differential equation; they also need to assume that the structural changes would not affect the estimated parameters (Sachs and Warner 1997).

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