Guinea: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
25 Jan 2006
eISBN:
9781451815276
Language:
English
Keywords:
ISCR; CR; exchange rate; market; percentage of GDP; growth in Guinea; IMF staff estimate; primary sector; changes in the terms of trade; Terms of trade; Government debt management; Growth accounting; Total factor productivity; Inflation
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This Selected Issues paper examines the sources of real growth in Guinea. It identifies and quantifies the impact on real GDP growth of both the exogenous shocks and the policy changes that have occurred since 2000. The paper offers, first, some empirical evidence on real GDP growth in Guinea and then analyzes the sources of growth using the standard framework of growth accounting. The paper also analyzes and quantifies the effect that some exogenous shocks and policy changes have had on growth.

Abstract

This Selected Issues paper examines the sources of real growth in Guinea. It identifies and quantifies the impact on real GDP growth of both the exogenous shocks and the policy changes that have occurred since 2000. The paper offers, first, some empirical evidence on real GDP growth in Guinea and then analyzes the sources of growth using the standard framework of growth accounting. The paper also analyzes and quantifies the effect that some exogenous shocks and policy changes have had on growth.

I. Sources of Growth in Guinea1

A. Introduction

1. During the 1990s, Guinea’s economy grew steadily at an average annual rate of more than 4 percent, one of the highest rates in West Africa. Beginning in 2000, the pace of GDP growth slowed to 2.7 percent a year on average, and annual growth rates started to display a larger variability. In the period 2000–04, the macroeconomic scenario was exacerbated by a predominant state of insecurity in the region, a fall in the price of bauxite (Guinea’s main export commodity), and a sharp increase in the prices of imported goods. At the same time, whereas inflation and the fiscal deficit were under control during the 1990s, in 2000 the fiscal deficit started to increase as a percentage of GDP, the exchange rate to deteriorate, and inflation to rise.

2. This paper examines the sources of real growth in Guinea. The objective of the paper is to identify and quantify the impact on real GDP growth of both the exogenous shocks and the policy changes that have occurred since 2000. The paper offers, first, some empirical evidence on real GDP growth in Guinea and then analyzes the sources of growth using the standard framework of growth accounting. Finally, the paper analyzes and quantifies the effect that some exogenous shocks and policy changes have had on growth.

3. The paper reaches two conclusions. First, changes in the overall macroeconomic environment (both exogenous shocks and changes in policy) have hampered growth since 2000. Estimates indicate that these changes had a negative impact of 0.4 percentage points on average annual GDP growth, against a positive contribution of over 1 percentage point in the period 1995–99. The second conclusion is that changes in macroeconomic policies alone had a negative impact of about 0.6 percentage point on the average annual growth rate. Although there is evidence that some exogenous shocks negatively affected growth, their impact cannot be robustly quantified.

4. The paper is organized as follows. Section B studies the trends of GDP growth and the sectors that most contributed to it. Section C presents a growth accounting analysis and quantifies the contribution of production factors to growth. Section D describes and quantifies the impact that exogenous shocks and policy changes have had on growth since 2000. Section E concludes.

B. Trends and Sectoral Contribution to GDP Growth

5. During 1992–99, Guinea’s real GDP grew steadily at an average annual rate of 4.4 percent, against an average growth rate of 3.8 percent for the West African Economic and Monetary Union (WAEMU).2 In 1996–99 alone, Guinea achieved an average annual growth rate of 4.7 percent, against a WAEMU average of 3.5 percent. Growth was both robust and stable during this period, with the standard deviation of the annual growth rate being only 0.62 (see Figure I.1).

Figure I.1.
Figure I.1.

Guinea: Annual Real GDP Growth, 1992–2004

(In percent)

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and IMF staff estimates.

6. During 2000–04, the average annual growth rate in Guinea declined to 2.7 percent. After a weak performance in 2000, real GDP growth recovered in 2001 and then started to decline until it reached an 11–year–low of 1.4 percent in 2003. As Figure I.1 shows, not only was growth less strong, but it was also more volatile; the standard deviation of the annual growth rate increased to 1.04.

7. The sectoral composition of GDP3 has remained almost stable since 1990 (see Figure I.2). The GDP share of the secondary sector has been growing at the expense of the tertiary sector, but these changes have been mild, and no structural change in GDP composition can be said to have occurred. In 2004, the value added in the primary sector amounted to roughly 20 percent of GDP, that in the secondary sector to 30 percent, and that in the tertiary sector to 50 percent.

Figure I.2.
Figure I.2.

Guinea: Compostion of GDP at Constant 1996 Prices, 1991–2004

(In percent)

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and IMF staff estimates.

8. Despite the stability of the sectoral composition of GDP, the sectoral contributions to annual GDP growth have varied considerably from year to year, reflecting unstable sectoral growth in each sector. As an example, compare the growth pattern of the tertiary sector with that of the secondary sector. Between 2000 and 2004, the tertiary sector grew steadily at an average annual rate of only 2 percent, against a steady average of 4 percent a year during 1992–99 (see Figure I.3). This translated into a reduction of its contribution to overall GDP growth (see Figure I.4) and into a slight reduction of its share of GDP (see Figure I.2). On the contrary, growth in the secondary sector has been very unstable over time. This implied that the contribution of the secondary sector to overall GDP has also been unstable, and that the share of the secondary sector to GDP has remained fairly stable. Similarly, between 2001 and 2004 the primary sector grew more strongly than the other two sectors. Despite this, its contribution to growth remained limited, owing to its size relative to GDP.

Figure I.3.
Figure I.3.

Guinea: Real Rate of Growth by Sector,1992–2004

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and IMF staff estimates
Figure I.4.
Figure I.4.

Guinea: Sectoral Contribution to Real GDP Growth, 1992–2004

(Percentage points)

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and IMF staff estimates.

9. The structure of GDP absorption changed after 2000. Data on the uses and sources of GDP reveal that, between 1991 and 1999, investment accounted for 22 percent of GDP, and consumption for 85 percent of GDP, with the trade deficit accounting for 7 percent. In 2000 (see Figure I.5) investment began to drop as a percentage of GDP, recording a 15–year low of 8.6 percent in 2003. After 2000, consumption absorbed, on average, 91 percent of GDP, investment 11 percent, and the trade deficit represented, on average, 2 percent of GDP. At the same time, savings decreased as a percentage of GDP, from an average of 15 percent during 1991–99 to 9 percent during 2000–04.

Figure I.5.
Figure I.5.

Guinea: Sources and Uses of GDP at 1996 Prices, 1991–2004

(Trillions of Guinean francs)

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and IMF staff estimates.

10. The overall picture that emerges from this analysis is that, after 2000, growth suffered from a decrease in investment, a large volatility in the growth of the secondary and primary sectors, and a decline of growth in the tertiary sector. In particular, a lack of diversification in the secondary sector, where mining plays a dominant role, has made the country vulnerable to volatility in the international prices of bauxite. Finally, the expansion of consumption against a decrease in investment and savings reduced capital accumulation and growth and created financing needs that further exposed the country to shocks. The next two sections discuss the factors behind these changes. First, a growth accounting exercise is conducted, so as to identify how capital accumulation and labor growth affected economic growth in Guinea. Second, some specific exogenous shocks and policy changes will be considered.

C. Growth Accounting Regression

11. Growth accounting is a widely used methodology to analyze the sources of growth in a country. It aims at separating the changes in output that can be attributed to changes in the stock of physical capital, increases in the workforce, and changes in total factor productivity (TFP). Because TFP is intended to capture how institutional and exogenous variables, as well as macroeconomic and structural policies, affect overall productivity, growth accounting still remains one of the tools that can most effectively describe the structure of an economy’s productive capacity and detect how changes in the macroeconomic scenario affect growth.

The basic framework

12. The most common building block of the growth accounting technique is the following aggregate production function:

Yt=AtKtαLtβ,(1)
A01sec3lev1

where Yt is output, Kt is physical capital, Lt is the labor force, and At is the level of TFP.

13. A convenient transformation of equation (1) consists in taking the natural logarithm of both sides to obtain

yt=αt+αkt+βlt,(2)
A01sec3lev1

where lower–case letters represent the natural logarithm of a variable. The convenience of this transformation is that, by taking first differences, one obtains

Δyt=Δat+αΔkt+βΔlt,(3)
A01sec3lev1

where Δ indicates the increase at time t of the natural logarithm of a variable and, thus, its rate of growth. Equation (3) implies that once α and β are determined, it is possible to separate the share of real GDP growth determined by an increase in the stock of capital from the share determined by an increase in the labor force, yielding the impact of TFP as a residual.

14. Our estimation of equation (2) is based on regression analysis. We assumed that the parameters α and β are constant and unknown and that at is a random error term (possibly with a non zero mean) intended to capture the effect on growth of all exogenous and policy variables. We used data on the level of physical capital and the size of the labor force to estimate the coefficients α and β.

Data description and preliminary tests

15. Equation (2) was estimated on the basis of data obtained from the World Economic Outlook for the years 1970–2004 (see Table I.1). For the output variable Y, we used the series of GDP at constant 2000 prices. The series for the stock of capital K was constructed using the perpetual inventory method, according to which

Kt=Kt-1(1-δ)+It,(4)
A01lev3sec2

where δ is the rate of physical depreciation of capital, and It is the level of gross investment. For lack of sufficiently long series, the series of gross investment was constructed from the series of gross national savings, exports, and imports of goods and services, according to the accounting identity

It=St-NXt.(5)
A01lev3sec2

All series were available only in current prices. To obtain a series of investment in constant prices, we deflated the series of savings by the consumer price index (CPI), the series of imports by the deflator for import prices, and the series of exports by the deflator for export prices. Years for which It results negative were dropped. As a result, the series of investment and capital starts in 1975. We obtained the level of capital in the first period, K0, by assuming a capital–output ratio of 1.5, which is in line with assumptions made in other studies on similar countries. The rate of physical depreciation of capital δ was assumed to be 12 percent. Because of a lack of data, we used the series of total population of ages 15–64 for labor, L, as an approximation of the size of the available labor force. The series of labor force was not adjusted to include accumulation of human capital. Finally, for each of the series, we took the natural logarithm to obtain series for the variables y, k, and l.

Table I.1.

Guinea: Data Sources

article image

16. Before estimating equation (2), we conducted a cointegration test to establish whether there exists any long–run stable relationship among the variables. A first necessary step is to determine whether each of the series y, k, and l is stable, either in values or in first differences. We conducted Dickey–Fuller tests on each of the three series, and we found that all three series are stationary only if expressed in first differences ( see Table I.2). This finding allowed us, as a second step, to use the Johansen methodology (or trace test) to determine the existence of a cointegration vector among the three variables. The existence of such a vector indicates the existence of a long–run stable relationship among the variables. The Johansen test leads us to accept the hypothesis that one cointegration vector exists ( see Table I.3), and this finally allowed us to estimate equation (2) with a simple OLS.

Table I.2.

Guinea: Dickey–Fuller Tests for Unit Root of y, k, and l

article image
Table I.3.

Guinea: Johansen Tests for Cointegration of y, k, and l

article image

Estimation results

17. The OLS estimation of equation (2) produced the following long–run relationship between real GDP, capital, and the work force:

y=-4.9+0.3k+0.7l+α.(6)
A01lev3sec3

All coefficients proved to be significantly different from zero ( see Table I.4). The hypothesis of constant returns to scale (i.e. α + β ═ 1) was tested and could not be rejected. A potential problem arising from how the series of capital was constructed could be that the estimator of α is biased. We conducted robustness checks by changing the initial capital/output ratio and the rate of depreciation of capital and by using total population instead of total population of ages 15–64. The estimates were found to be almost the same as those in equation (6) under all of these changes.

Table I.4.

Guinea: Estimate of Production Function

article image
Notes: Sources of data are described in Table I.1.

18. The interpretation of equation (6) is that an increase of 1 percent in the level of physical capital translates into an increase of 0.3 percent in real GDP, while a 1 percent increase in the labor force increases real GDP by 0.7 percent (notice that the constant term disappears when taking first differences). Discrepancies between actual growth rates and predicted growth rates are attributable to changes in TFP. The estimated elasticity of output to capital in equation (6) is lower than (but consistent with) that for other sub–Saharan countries, where estimates of α range around 0.4.4 It is worth noticing that the estimates presented in equation (6) are consistent with evidence presented in Section B about the composition of the Guinean economy, where the capital–intensive secondary sector contributes to around 30 percent of GDP, and where the labor–intensive secondary and tertiary sectors represent the remaining 70 percent.

19. On the basis of estimated equation (6), we obtain the decomposition of growth reported in Table I.5 From the decomposition, it appears that the average contribution to growth from increases in the stock of capital fell from 1.4 percentage points during 1995–99 to 0.65 percentage points during 2000–04. This result is consistent with the evidence presented in Section B that investment has declined as a share of GDP.

Table I.5.

Guinea: Contribution to Growth of Capital Accumulation and Labor Growth

article image

20. The most important point that emerges from Table I.5 is that the contribution to growth from TFP has dropped considerably over the past five years: from a positive contribution of 1.1 percentage points in 1995–99 to a negative contribution of -0.4 percentage point in 2000–04.5 During 1995–99, Guinea managed to reduce annual inflation from two digits to below 5 percent. In the same period, the fiscal deficit was reduced from above 5 percent of GDP, on average, to about 3 percent of GDP, and the terms of trade were improving. In contrast, between 2000 and 2004, inflation increased, the fiscal position deteriorated, and the country was exposed to numerous exogenous shocks. Because TFP captures how the overall macroeconomic environment affects productivity and growth, the results of Table I.5 indicate that a combination of exogenous shocks and changes in the policy environment has weakened growth since 2000. The next section discusses how the shocks and policy change affected growth.

D. Growth, Exogenous Shocks, and Policy Changes

21. As mentioned in the previous section, the Guinean economy has been exposed since 2000 to both exogenous shocks and a significant change in the stance of macroeconomic policy. Specifically, it can be hypothesized that three exogenous factors contributed the most to the slowdown in real GDP growth occurred since 2000:(i) insecurity in the region;(ii) a fall in the price of bauxite, Guinea’s main export commodity; and (iii) a sharp increase in the price of imported goods, in particular petroleum products. In addition, between 2000 and 2004, macroeconomic policies were relaxed, as fiscal policy was loosened and monetary policy became highly accommodative.

Growth and regional instability

22. To study the relationship between growth and regional insecurity we used the index of political stability elaborated by Daniel Kaufman of the World Bank. This index measures the likelihood of violent threats to, or changes in, government. We used data for Cote d’Ivoire, Sierra Leone, and Liberia for 1996–2004 (the period for which data is available) and, for each year, we took the average as a proxy of regional instability.

23. The deterioration in regional security has affected growth negatively for the past five years (see Figure I.6). The left–hand panel of Figure I.6 compares growth since 1996 with the regional instability index. Beginning in 1996, the index declines and, at the same time, growth is on an increasing trend. In 1998, regional security deteriorated and growth started to decline. In 2000, the security situation worsened even more and growth dropped and became less stable. The right–hand panel of Figure I.6 presents the relationship between growth and regional insecurity. Growth is measured on the vertical axis, insecurity on the horizontal axis. This scatter plot clearly reveals the existence of a negative and strong relationship between growth and regional insecurity.

Figure I.6.
Figure I.6.

Regional Instability and GDP Growth in Guinea, 1996 – 2004

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and WB and IMF staff estimates.

Growth and the terms of trade

24. Guinea’s terms of trade have been volatile since 1992. Whereas import prices have fluctuated around a constant trend for the past 15 years, export prices and the price of bauxite in particular seem to have fluctuated around a decreasing trend. This is reflected in significant fluctuations of the terms of trade (see Figure I.7).

Figure I.7.
Figure I.7.

Guinea: Terms of Trade and GDP Growth, 1992–2004

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and IMF staff estimates.

25. The terms of trade cannot robustly be imputable for the recent decline in growth. As left–hand panel of Figure 7 shows, during the past 13 years growth has been strong even when the terms of trade were deteriorating (that is, between 1992 and 1995 and in 1999). Specifically, as right–hand panel of Figure 7 shows, there is no strong relationship between growth and the terms of trade. Therefore, changes in the terms of trade cannot be robustly imputable for the slowdown in growth that started in 2000.

Growth and policy changes

26. Beginning in 2000, the stance of economic policy in Guinea was relaxed. Whereas the fiscal deficit on a cash basis averaged 3.2 percent of GDP during 1995–99, this figure increased to 4.8 percent during 2000–04. As a result, as shown in the previous section and consistent with standard macroeconomic frameworks, overall investment started to decrease and consumption to increase. At the same time, whereas Guinea managed to bring inflation down from double-digit levels at the beginning of the 1990s to as low as 2 percent in 1997, after 2000 the monetization of the deficit caused an increase in inflation. As a result, annual CPI inflation was 4 percent, on average, during the 1990s and 10 percent, on average, during 2000–04. Along with a rise of inflation, a deterioration in the exchange rate followed.

27. Growth in Guinea had been negatively affected by the high levels of the fiscal deficit. The left–hand panel of Figure 8 displays the series of growth and the deficit as percent of GDP. The figure shows that when the fiscal deficit was below 4 percent of GDP, growth was strong. After 2000, the fiscal deficit climbed to more than 5 percent of GDP and growth contracted. The right–hand panel of Figure 8 clearly shows that there exists a strong and negative relationship between growth and the fiscal deficit.

Figure I.8.
Figure I.8.

Guinea: GDP Growth and Fiscal Deficit, 1992–2004

(In percent)

Citation: IMF Staff Country Reports 2006, 025; 10.5089/9781451815276.002.A001

Sources: Guinean authorities; and IMF staff estimates.

Growth, exogenous shocks, and policy: regression analysis

28. To assess the impact of policy changes and exogenous shocks on growth we used the fiscal deficit as a proxy for the stance of macroeconomic policy, and changes in the terms of trade as a proxy for exogenous shocks.6 We then regressed growth over the fiscal deficit and the changes in the terms of trade

Δyt=c+αgt+βΔTTt+εt.(7)
A01lev3sec6

In equation (7), Δyt is the rate of growth of GDP at constant 2000 prices (expressed by the difference of the natural logarithm of real GDP), gt is the fiscal deficit as a percentage of GDP, and ΔTTt is the rate of change in the terms of trade (expressed by the difference of the natural logarithm of the terms of trade). The last term, εt, is an error that captures the effect of all the variables not included in the regression; assumptions on εt are standard. We estimated equation (7) with data for the period 1980 to 2000, before policies changed and exogenous shocks hit the economy (see Table I.1).

29. The estimated relationship between growth, the deficit, and changes in the terms of trade is

Δy=-0.02-0.4g-0.02ΔTT+ε.(8)
A01lev3sec6

The regression results and the details reported in Table I.6 suggest that, during 1980–04, there was a statistically significant and negative relationship between the fiscal deficit, our proxy for the stance of macroeconomic policy, and real GDP growth. According to these findings, the increase in the average fiscal deficit since 2000 (from 3.3 to 4.8 percent of GDP) might have reduced average annual GDP growth by 0.6 percentage point. The results instead suggest that, in the same period, changes in the terms of trade (our proxy for exogenous shocks) did not have any significant effect from real GDP growth.

Table I.6.

Guinea: Growth, Deficit, and Changes in the Terms of Trade

article image
Notes: Sources of data are described in Table I.1.

E. Conclusion

30. After recording strong and stable growth in the 1990s, Guinea’s economy has grown at a slower and less stable pace over the past five years. This slowdown came at a time when policy changes and exogenous shocks—such as a decrease in the price of bauxite and increasing regional insecurity—significantly altered the macroeconomic environment. The paper argues that these factors negatively affected growth in the last five years. Indeed, a growth accounting analysis suggests that changes in the macroeconomic environment subtracted 0.4 percentage point to annual real GDP growth.

31. The paper also argues that the Guinean economy was weakened primarily by changes in the stance of macroeconomic policies. The impact on real GDP growth of exogenous shocks is difficult to quantify. Indeed, factual and empirical analysis suggests that whereas shocks to the terms of trade has had limited impact on growth, growth is negatively correlated to both regional insecurity and policy variables such as the fiscal deficit to a significant degree. In particular, using the fiscal deficit as a proxy for policy, there is evidence that inappropriate macroeconomic policies might have been responsible, since 2000, for a decrease in the real rate of growth of 0.6 percentage points.

References

  • Barro, Robert and Xavier J. Sala-i-Martin, 1995, Economic Growth, New York: Mc Graw–Hill.

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  • Nsegiyumva, Fabien, 2003, “Source of Economic Growth in Benin,” Benin: Selected Issues and Statistical Appendix, Washington: International Monetary Fund.

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  • Senhadji, Abdelhak, 2000, “Sources of Economic Growth: An Extensive Growth Accounting Exercise,” IMF Staff Papers, Vol. 47 No. 1, pp. 129–57.

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1

Prepared by Paolo Dudine.

2

Although Guinea is not a member of WAEMU, it provides a useful set of comparator countries.

3

GDP is measured at factor costs in constant 1996 prices.

5

We obtained a qualitatively (but not quantitatively) similar result from using a different value for the coefficient, specifically, a more common 0.4 instead of the estimated 0.3. With this modification, TFP contributed to 1.05 percentage points of average annual GDP growth in the period 1995–99, and –0.22 a year after 2000.

6

We did not include the index of instability in the region because there are not enough observations to ensure significant estimates.

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Cover IMF Staff Country Reports
Guinea: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Volume/Issue:
Volume 2006: Issue 025
Publisher:
International Monetary Fund
ISBN:
9781451815276
ISSN:
1934-7685
Pages:
95
DOI:
https://doi.org/10.5089/9781451815276.002
  • View in gallery

    Guinea: Annual Real GDP Growth, 1992–2004

    (In percent)

  • View in gallery

    Guinea: Compostion of GDP at Constant 1996 Prices, 1991–2004

    (In percent)

  • View in gallery

    Guinea: Real Rate of Growth by Sector,1992–2004

  • View in gallery

    Guinea: Sectoral Contribution to Real GDP Growth, 1992–2004

    (Percentage points)

  • View in gallery

    Guinea: Sources and Uses of GDP at 1996 Prices, 1991–2004

    (Trillions of Guinean francs)

  • View in gallery

    Regional Instability and GDP Growth in Guinea, 1996 – 2004

  • View in gallery

    Guinea: Terms of Trade and GDP Growth, 1992–2004

  • View in gallery

    Guinea: GDP Growth and Fiscal Deficit, 1992–2004

    (In percent)

Guinea: Annual Real GDP Growth, 1992–2004

(In percent)

Guinea: Compostion of GDP at Constant 1996 Prices, 1991–2004

(In percent)

Guinea: Real Rate of Growth by Sector,1992–2004

Guinea: Sectoral Contribution to Real GDP Growth, 1992–2004

(Percentage points)

Guinea: Sources and Uses of GDP at 1996 Prices, 1991–2004

(Trillions of Guinean francs)

Regional Instability and GDP Growth in Guinea, 1996 – 2004

Guinea: Terms of Trade and GDP Growth, 1992–2004

Guinea: GDP Growth and Fiscal Deficit, 1992–2004

(In percent)