Republic of Congo: Selected Issues and Statistical Appendix
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This Selected Issues and Statistical Appendix paper outlines the recent developments in the political and security situation in Congo. It reviews economic performance during 1970–2003, including in the context of IMF-supported programs. The paper also reviews recent developments in public finance management, and examines the constraints on growth and poverty reduction. The sources of economic growth during 1970–2003 are analyzed. The paper also discusses the feasibility of an oil fiscal rule, and notes some key lessons and challenges for the Congo.

Abstract

This Selected Issues and Statistical Appendix paper outlines the recent developments in the political and security situation in Congo. It reviews economic performance during 1970–2003, including in the context of IMF-supported programs. The paper also reviews recent developments in public finance management, and examines the constraints on growth and poverty reduction. The sources of economic growth during 1970–2003 are analyzed. The paper also discusses the feasibility of an oil fiscal rule, and notes some key lessons and challenges for the Congo.

V. Constraints to Economic Growth and Poverty Reduction 10

37. This section attempts to shed light on the constraints on growth by comparing economic and social performance of the Congo with that of comparable regions and countries. It uses results from the existing empirical literature on growth, conflicts, and poverty reduction to provide a perspective on the Congo’s performance. Following two decades of above-average performance, per capita real GDP growth declined in the 1990s, following the conflicts (Figures V.1 and V.2). In relation to other comparator groups of countries, the following characteristics appear to constitute the key constraints on growth and poverty reduction in the Congo (see also Tables IV.1 and IV.2 at the end of this Section):

Figure V.1.
Figure V.1.

Per Capital GDP: Republic of Congo and Comparator Groups, 1970-2001

(In constant 1995 U.S. dollars)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.
Figure V.2.
Figure V.2.

Per Capita Real GDP Growth: Republic of Congo and Comparator Groups, 1970-99

(In percent; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.

38. Higher dependence on natural resources (Figure V.3). The Congo’s dependence on oil rose over time and remained high, in contrast with the experience of Indonesia, where dependence on oil declined significantly in the 1990s and was accompanied by fairly robust per capita real GDP growth. It is now well documented in the empirical literature that abundant natural resources retard economic growth through political economy effects (e.g., Tornell and Lane, 1999) and increases corruption (Mauro, 1995; and Leite and Weidmann, 1999). It is commonly understood that a primary channel of transmission from natural resources to poor economic performance is the significant amount of time that policymakers spend on maximizing the associated rents from these resources for themselves and their associates. By implication, it also means that there may be intense competition by those close to power to access these scarce resources for personal and political gains. Collier and Hoeffler (2002) have shown that natural resources considerably increase the chances of civil conflict since the available rents can be used to finance rebellions. They estimate that countries with natural resources have a much larger probability of experiencing conflicts than those that do not. Furthermore, the paper by Ghura, Leite, and Tsangarides (2002) has shown that there exists a strong inverse relationship between dependence on natural resources and the income of the poor.

Figure V.3.
Figure V.3.

Natural Resource Dependence: Republic of Congo and Comparator Groups, 1970-99

(Fuel exports in percent of merchandise exports; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.

39. Larger government size (Figure V.4). The legacy of a centrally-planned economy during 1964-90 left the Congo with a larger-than-average government size (as measured by the government consumption-GDP ratio). The adverse impact of a large government on economic growth can occur through a number of channels, including the inefficient allocation of scare resources, the crowding out of the private sector, and the existence (or expectation by economic agents) of higher taxes. Empirical studies have shown that economic growth is inversely related to government size (see, for example, Barro, 1989, Grier and Tullock, 1989, and Ghura, 1995). In addition, the paper by Ghura, Leite, and Tsangarides (2002) has shown that there exists a strong negative relationship between government size and the income of the poor.

Figure V.4.
Figure V.4.

Government Size: Republic of Congo and Comparator Groups, 1970-99

(Government consumption in percent of GDP; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.

40. Lower degree of financial depth (Figure V.5). The Congo’s broad money-GDP ratio has remained low relative to the average in comparator regions. The endogenous growth literature emphasizes the important role of financial intermediation in improving the efficiency of investment and stimulating growth (e.g., Greenwood and Jovanovic, 1990). The paper by King and Levine (1993) provides empirical evidence on the beneficial effects of financial deepening on growth. In addition, the paper by Ghura, Leite, and Tsangarides (2002) has shown that there exists a strong positive relationship between financial deepening and the income of the poor.

Figure V.5.
Figure V.5.

Financial Depth: Republic of Congo and Comparator Groups, 1970-99

(Broad money in percent of GDP; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.

41. Mixed record on human capital development (Figures V.6, V.7, and V.8). The Congo made significant progress in boosting human capital development during the 1970s and 1980s. The conflicts of the 1990s, however, took a severe toll on human capital indicators, several of which either deteriorated or stagnated. Recent endogenous growth models have shown that human capital accumulation, by enhancing labor productivity, can boost growth (Lucas, 1988; Romer, 1990; and Becker, Murphy, and Tamura, 1990). The paper by Ghura and Hadjimichael (1996) finds empirical evidence on the positive impact of human capital development on economic growth in sub-Saharan Africa. In addition, the paper by Ghura, Leite, and Tsangarides (2002) has shown that there exists a strong positive relationship between secondary school enrollment ratio and the income of the poor.

Figure V.6.
Figure V.6.

Adult Illiteracy Ratio: Republic of Congo and Comparator Groups, 1970-99

(In percent of people age 15 and above; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.
Figure V.7.
Figure V.7.

Secondary School Enrollment Ratio: Republic of Congo and Comparator Groups, 1970-99

(In percent of children of secondary school age; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.
Figure V.8.
Figure V.8.

Life Expectancy at Birth: Republic of Congo and Comparator Groups, 1970-99

(In years; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.

42. Higher external debt (Figure V.9). The Congo is one of the most highly indebted countries in the world, a situation made worse by the conflicts, which adversely affected the country’s capacity to service debt. Empirical analysis has demonstrated that the adverse effect of the external debt-GDP ratio on growth is registered through both capital accumulation and total factor productivity growth (Pattillo, Poirson, and Ricci, 2004). The adverse impact of high external debt-GDP ratios on private investment can stem from two main sources. First, the resources used for servicing foreign debt crowd out public investment, which, in turn, discourages private investment, given the complementarity between these two types of investments. Second, the external debt ratio could be indicative of a “debt overhang,” whereby the presence of high debt ratios leads economic agents to anticipate future tax liabilities for its servicing (Borensztein, 1990a and 1990b; and Eaton, 1987). An increasing external debt ratio could induce these agents to transfer funds abroad, thus raising the implicit domestic cost of capital. Empirical studies have found a negative relation between the external debt-GDP ratio and private investment. 11

Figure V.9.
Figure V.9.

External Debt: Republic of Congo and Comparator Groups, 1970-99

(In percent of GDP; period average)

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: World Development Indicators (World Bank) database; and Fund staff calculations.

43. The Congo’s institutions have also been generally weaker than in other regions. Bosworth and Collins (2003) argue that better institutions include those that deliver better law and order, better bureaucratic quality, less corruption, lower risks of expropriation, and lower probability of government repudiation of contracts. Rodrik, Subramanian, and Trebbi (2002) show empirically that economic development is positively influenced by high quality institutions. In the Congo, the legacy from past public management weaknesses and recurring bouts of civil conflict is manifested in its low governance ratings (including political stability and the rule of law).

44. Using a broad definition of governance as “the traditions and institutions by which authority in a country is exercised” and combining several individual measures into clusters, World Bank researchers have constructed aggregate indicators of six dimensions of governance (www.worldbank.org/wbi/governance/wp-governance.htm). The indicators are measured in units ranging from about -2.5 to 2.5, with higher values corresponding to better governance outcomes (Figure V.10). The Congo’s indicators generally is less favorable than comparator countries or regional averages.

Figure V.10.
Figure V.10.

Institutions and Governance: Republic of Congo and Comparator Groups, 2002

Citation: IMF Staff Country Reports 2004, 231; 10.5089/9781451808520.002.A005

Source: www.worldbank.org/wbi/governance/wp-governance.htm

45. The implications of governance for economic agents are effectively captured by assessments of the business environment carried out by COFACE (French export credit agency). According to these rankings, available at www.coface.fr, the Congo is rated as “very uncertain with a poor payment record” (the second-lowest grade on a scale of 7 points) for short-term deals, and as “very high risk” (the lowest grade on a scale of 4 points) for longterm investments.

46. In response, the Congo has recently established the formal institutions required by the Constitution (for example, the Court of Accounts and the Constitutional Court) and launched a process that should culminate in the preparation of a national anticorruption program. In 2003, with assistance from the United Nations Development Program, the government:(i) carried out a corruption survey, (ii) commissioned a study, and (iii) organized a seminar with the participation of officials, experts, and representatives from civil society and the international donor community. The survey established the widespread nature of corruption in the Congo: half of the 6,144 respondents reported having paid bribes to government officials. The survey also identified poverty, a lack of adequate controls, and an ineffective judicial system as the most important causes of corruption.

47. Finally, it needs to be noted that in relation to comparator regions or countries, the Congo had (see Table V.1): higher telephone costs (a proxy for the costs of public utilities); lower agricultural productivity (as measured by cereal yield); less infrastructure; lower access by the population to information; higher degree of urbanization; and generally higher inefficiency in capital use (as captured by the incremental capital output ratio).

Table V.1.

Cross-Section Comparative Economic and Social Performance, 1970-99

(Period averages; in units indicated)

article image
Sources: World Bank Social Indicators database; Congolese authorities; and staff estimates.

In percent of the number of children of primary school age.

In percent of the number of children of secondary school age.

In percent of the number of children under 12 months for immunization against diphtheria, tetanus, and polio.

Data available for 2000.

Table V.2.

Cross Section and Time Series Comparative Economic and Social Performance, 1970-99

(Period averages in units indicated)

article image
Source: World Bank Social Indicators database; Congolese authorities; and staff estimates.

In percent of the number of children of primary school age.

In percent of the number of children of secondary school age.

In percent of the number of children under 12 months for immunization against diphtheria, tetanus, and polio.

Data available for 2000.

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10

This section was prepared by Dhaneshwar Ghura and Carlos Leite.

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Republic of Congo: Selected Issues and Statistical Appendix
Author:
International Monetary Fund
  • View in gallery
    Figure V.1.

    Per Capital GDP: Republic of Congo and Comparator Groups, 1970-2001

    (In constant 1995 U.S. dollars)

  • View in gallery
    Figure V.2.

    Per Capita Real GDP Growth: Republic of Congo and Comparator Groups, 1970-99

    (In percent; period average)

  • View in gallery
    Figure V.3.

    Natural Resource Dependence: Republic of Congo and Comparator Groups, 1970-99

    (Fuel exports in percent of merchandise exports; period average)

  • View in gallery
    Figure V.4.

    Government Size: Republic of Congo and Comparator Groups, 1970-99

    (Government consumption in percent of GDP; period average)

  • View in gallery
    Figure V.5.

    Financial Depth: Republic of Congo and Comparator Groups, 1970-99

    (Broad money in percent of GDP; period average)

  • View in gallery
    Figure V.6.

    Adult Illiteracy Ratio: Republic of Congo and Comparator Groups, 1970-99

    (In percent of people age 15 and above; period average)

  • View in gallery
    Figure V.7.

    Secondary School Enrollment Ratio: Republic of Congo and Comparator Groups, 1970-99

    (In percent of children of secondary school age; period average)

  • View in gallery
    Figure V.8.

    Life Expectancy at Birth: Republic of Congo and Comparator Groups, 1970-99

    (In years; period average)

  • View in gallery
    Figure V.9.

    External Debt: Republic of Congo and Comparator Groups, 1970-99

    (In percent of GDP; period average)

  • View in gallery
    Figure V.10.

    Institutions and Governance: Republic of Congo and Comparator Groups, 2002