Cameroon
Selected Issues
Author: International Monetary Fund
Publication Date:
16 Aug 2007
eISBN:
9781451808230
Language:
English
Keywords:
ISCR; CR; Cameroon; growth acceleration; spending; nonoil GDP; business indicators in Cameroon; debt service; current status; main comparator; Income; capital to total spending ratio
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This Selected Issues paper on Cameroon identifies impediments to growth acceleration in the country. A two-step approach is followed: first, the characteristics of middle-income countries currently experiencing growth accelerations are examined; and, second, the extent to which Cameroon shares these characteristics is assessed. The focus of the analysis is a set of variables the literature has identified as helping to accelerate growth. This paper also presents a possible fiscal strategy for Cameroon based on the permanent income approach.

Abstract

This Selected Issues paper on Cameroon identifies impediments to growth acceleration in the country. A two-step approach is followed: first, the characteristics of middle-income countries currently experiencing growth accelerations are examined; and, second, the extent to which Cameroon shares these characteristics is assessed. The focus of the analysis is a set of variables the literature has identified as helping to accelerate growth. This paper also presents a possible fiscal strategy for Cameroon based on the permanent income approach.

I. Accelerating Growth in Cameroon—Learning from the Experience of Middle-Income Countries1

A. Introduction

1. Cameroon’s economic growth has picked up since 1994, though it remains too low to make a significant dent in poverty. The devaluation of the CFA franc in 1994 and complementary macroeconomic and structural reforms since then have contributed to output growth. Nonetheless, per capita real GDP has not grown as much as in comparator countries. In addition, the record in social development was mixed. The poverty rate declined by about 13 percentage points during 1994–2001. Education indicators improved, but performance in the health sector was mixed. On the current trajectory, Cameroon is unlikely to meet the MDGs, including the target to halve poverty by 2015.2

Figure I.1.
Figure I.1.

Cameroon and Comparator Groups: Per Capita GDP, 1970–2005

(2000 US dollars)

Citation: IMF Staff Country Reports 2007, 287; 10.5089/9781451808230.002.A001

Cameroon: Social Indicators, 1985–2004

(In units indicated; period average)

article image
Source: World Bank Social Indicators database.

Percent of people ages 15 and above.

Percent of the children of primary school age. Includes repeaters.

Percent of the children of secondary school age.

2. This chapter identifies impediments to growth acceleration in Cameroon. A two-step approach is followed: first, the characteristics of middle-income countries currently experiencing growth accelerations are examined and, second, the extent to which Cameroon shares these characteristics is assessed. The focus of the analysis is a set of variables the literature has identified as helping to accelerate growth. The main finding is that many of those variables, notably trade openness, adequate infrastructure, and strong institutions, are lacking in Cameroon.

B. Growth Accelerations: A Review of the Literature

3. Recent empirical literature on growth accelerations focuses on turning points in trend growth. Hausmann, Pritchett, and Rodrik (2004) suggest that the traditional focus of the literature on cross-section or panel econometrics could hide patterns that might explain growth transitions. Looking at jumps in countries’ medium-term growth trends might lead to insights into the sources of growth accelerations.3

4. Growth acceleration is defined in terms of the following criteria:4

  • Pick up in growth rate. The growth rate after an acceleration episode should exceed the pre-acceleration rate by a given threshold, typically 2 percentage points of real per capita GDP. To gain insights into growth accelerations, the literature focuses on episodes where the acceleration is sustained, comparing backward and forward looking growth rates over a moving window, typically five or seven years.

  • Rapid growth. The post-acceleration growth rate in real per capita GDP should exceed a minimum threshold, typically 2 or 3.5 percent.

  • Output exceeds the pre-episode peak. Output post-acceleration should be higher to rule out cases of post-crisis recoveries.

5. Growth accelerations are common. Applying the criteria to all countries, developed and developing, Hausmann, Pritchett, and Rodrik (2004) identify more than 80 episodes of rapid accelerations that are sustained for at least eight years during the period 1957–92. Pattillo, Gupta, and Carey (2005) examine growth accelerations in African countries for 1983–1999 and found 34 growth acceleration episodes that were sustained for at least five years.

6. Growth accelerations are correlated with a number of variables.5 Explanatory variables thought to either trigger or sustain growth accelerations include:

  • Fiscal Policy. Pattillo, Gupta, and Carey (2005) note that growth accelerations do not come at the expense of fiscal sustainability. The budget deficit is either insignificantly different or better during rather than before an acceleration episode.

  • Trade openness. Hausmann, Pritchett, and Rodrik (2004) and Pattillo, Gupta, and Carey (2005) conclude that trade-related factors have the strongest and most robust association with growth acceleration. The literature tries to capture the effect of trade by trade partner growth, competitiveness indicators, and the terms of trade.

  • Investment and productivity. Hausmann, Pritchett, and Rodrik (2004) find that growth accelerations coincide with an increase in the investment ratio, a result confirmed by Pattillo, Gupta, and Carey (2005). Pattillo, Gupta, and Carey (2005) also find that productivity growth has a positive impact on growth acceleration.

  • Economic reforms. The important role of economic reforms in triggering and sustaining growth accelerations in African countries is confirmed by Patillo, Gupta, and Carey (2005). Hausmann, Pritchett, and Rodrik (2005) find a strong association between financial liberalization and growth acceleration, especially in developing countries. 6

  • Debt burden. Pattillo, Gupta, and Carey (2005) find that a low debt burden is positively associated with growth acceleration. In particular, debt concessionality is found to be an important factor explaining the lower debt service burden associated with recent growth acceleration episodes. The issue of concessionality is especially important because countries where growth is accelerating in general exhibit a rising debt-to-GDP ratio.

  • Governance and the quality of institutions. Pattillo, Gupta, and Carey (2005) show that the quality of institutions is correlated with growth accelerations. Growth is more likely to accelerate in countries that score high on the soundness of their institutions than in countries with weak institutions. This effect may also be captured by the productivity variable, which as a residual variable may pick up improvements in institutional quality in addition to other productivity gains.

C. Growth Accelerations in Middle-Income Countries: Lessons for Cameroon

7. Cameroon’s main comparator is the group of middle-income countries. The two studies cited relied on a sample that was either too broad (including developed countries) or too narrow (African countries only). Too broad a sample runs the risk that the conclusions may not be relevant for Cameroon. Focusing only on African countries may mask positive experiences of other countries that may be relevant for Cameroon. Balancing these considerations, and taking into account Cameroon’s current status as a middle-income country, this chapter examines growth accelerations in middle-income countries. The group was selected using the 2005 gross national income (GNI) per capita, calculated using the Atlas method.7 The sample consists of 98 countries, of which 58 are lower-middle-income countries (per capita GNI between $876 and $3,465) and 40 upper-middle-income (per capita GNI between $3,466 and $10,725). Nine countries (mostly small island states) were dropped from the sample due to lack of data. The 89 countries in the sample are listed in Table I.1.

Table I.1.

Sample of Middle-income Countries

article image

Stylized facts about growth acceleration in middle-income countries

8. Growth acceleration episodes in middle-income countries are identified based on the criteria specified earlier. Though in the literature assumptions used to identify growth acceleration episodes vary somewhat, this study identifies such episodes by comparing backward and forward-looking growth rates in per capita GDP over a five-year moving window.8 The growth rate over a given five year period is calculated by running the regression of the log of per capita GDP on a constant trend:

ln⁡(yt+i)=a+gt,t+n*t,i=0,…n=5(1)

where: yt+i = real per capita GDP at time t over the period t to t+n;

gt,t+n = the least squares growth rate over a horizon n

Specifically, a growth acceleration episode requires (i) a jump in the forward looking rate by at least 2 percentage points relative to the backward-looking rate; (ii) a post-jump per capita GDP growth rate of at least 2 percent,9 and (iii) a post-acceleration level of GDP that exceeds the pre-acceleration level. The data cover 1985–2006, making it possible to identify growth acceleration episodes between 1990 and 2001.10

9. Growth accelerations in middle-income countries are quite frequent. Consistent with the literature, the sample reveals a surprisingly large number (78) of growth acceleration episodes (Table 2). Nine countries had more than one acceleration episodes; 20 (including Cameroon) had none. Given the duration of a typical episode and the growth differential post and pre-acceleration, a typical growth acceleration episode implies a gain in output of more than 40 percent by the end of the acceleration.11 In line with the approach taken by Hausmann, Pritchett, and Rodrik (2004), the unconditional probability of growth acceleration is 15 percent.12 This means that a typical country would have about a 15 percent probability of experiencing growth acceleration at some point during the sample period. Most accelerations (27) took place in Europe and Central Asia, followed by Latin America and the Caribbean (23), the Middle East and North Africa (10), East Asian and the Pacific (9), sub-Saharan Africa (7) and South Asia (2).

Middle-income Countries: Growth Acceleration Episodes

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Table I.2.

Growth Acceleration Episodes in Middle Income Countries, 1990–2001

article image
Source: IMF staff estimates.

The duration of growth accelerations ending in 2006 can not be ascertained as it requires data beyond 2006 (currently not available).

10. Cameroon is among the few countries that has not experienced growth acceleration. For 1991–97 it did benefit from a pick up in growth that exceeded the 2 percent threshold, but the post acceleration growth rate was below the 2 percent threshold.13 As a result, it did not meet the criteria for growth acceleration.

Impediments to growth acceleration in Cameroon14

11. Cameroon’s fiscal balance compares favorably with that of other countries experiencing growth acceleration. With an average fiscal surplus of 1.4 percent for 2000– 05 (the period coinciding with the latest acceleration episode), the fiscal balance does not seem to represent a drag on growth acceleration. In fact, there may be some additional fiscal space that could be used to spur growth, so long as fiscal sustainability is maintained.15

12. Other aspects of fiscal policy, however, show potential weaknesses. Countries experiencing growth acceleration have on average a ratio of tax revenue-to-GDP of about 25 percent; Cameroon’s is 17 percent. This ratio is not affected by the level of development of a country; lower- and upper-middle-income countries have similar tax ratios. Middle-income countries with growth acceleration also have significantly higher expenditure-to-GDP ratios than Cameroon. It would thus appear that Cameroon should step up its efforts to mobilize nonoil tax revenues so that it can finance additional expenditure. Another lesson drawn from the experience of middle-income countries with growth acceleration is that Cameroon should reorient expenditure away from consumption. While total expenditure of middle-income countries experiencing growth acceleration is on average higher than that of Cameroon by more than 10 percentage points of GDP, real public consumption expenditure in such countries is higher only by 1 percentage point. Cameroon’s capital to total spending ratio therefore seems to be too low.

Figure I.2.
Figure I.2.

Fiscal Performance: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 287; 10.5089/9781451808230.002.A001

Source: World Development Indicators datatabase; WEO database (September 2006); and IMF staff estimates.1 Averages during 2000-05.

13. Cameroon’s trade is limited compared to that of other countries experiencing growth acceleration. Trade in countries experiencing growth acceleration is more than double Cameroon’s, with both exports and imports higher. The increased export activity is not related to the oil boom. In fact, the average value of fuel exports in this group of countries is about one-third of the corresponding value in Cameroon. Data on the volume of nonoil exports also show that countries experiencing growth acceleration export on average 20 times more than Cameroon.

14. Cameroon has the lowest competitiveness ranking of all countries in the sample. Data from the Global Competitiveness Index indicate that countries experiencing growth acceleration had a significantly lower percentile ranking than Cameroon. Weak competitiveness could therefore account for Cameroon’s limited trade activity. In addition to competitiveness, countries experiencing growth acceleration benefited from favorable terms of trade. A positive exogenous shock, however, does not seem to explain trade buoyancy. The average terms of trade shock among middle-income countries experiencing growth acceleration was 3 percent—not enough to account for the large trade openness gap between countries with growth acceleration and Cameroon.

Figure I.3.
Figure I.3.

Trade Performance: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

Citation: IMF Staff Country Reports 2007, 287; 10.5089/9781451808230.002.A001

Source: World Development Indicators datatabase; WEO database (September 2006); and IMF staff estimates.1 Averages during 2000-05.

15. Infrastructure development is an area where Cameroon lags behind all countries in the sample. Several indicators were examined, including agricultural machinery (tractors) per arable land, the number of personal computers per 1,000 people, and number of mobile and landline telephones per 1,000 people.16 Differences in infrastructure development can be partly accounted for by differences in foreign investment flows. Countries experiencing growth acceleration had net investment flows about 5 times larger than Cameroon’s.

16. Middle-income countries experiencing growth acceleration may have been more committed to reform than Cameroon. Financial intermediation (measured as the ratio of bank credit to GDP), a proxy for financial sector reform, was considerably larger in middle-income countries experiencing growth acceleration than in Cameroon. Among the countries sampled, only three did worse in this area. Cameroon may therefore have to reform its financial system to facilitate infrastructure improvements.

Figure I.4.
Figure I.4.

Infrastructure Development: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

(Percent of GDP)

Citation: IMF Staff Country Reports 2007, 287; 10.5089/9781451808230.002.A001

Source: World Development Indicators datatabase; WEO database (September 2006); and IMF staff estimates.1 Averages during 2000-05.

17. Cameroon’s public debt and foreign aid compare favorably to that of other middle-income countries experiencing growth acceleration. Although countries experiencing growth acceleration had moderate levels of public debt, Cameroon’s is considerably lower, especially after the HIPC completion point. Nevertheless, prudent fiscal and debt management policies should be maintained to ensure that public debt does not rise rapidly. A key attribute of countries experiencing growth acceleration is that they have relatively low debt service. This would suggest that Cameroon should continue to rely on concessional financing over the medium term. Countries experiencing growth acceleration had about one-third as much foreign aid as Cameroon. Most of the countries experiencing the fastest growth acceleration had negligible amounts of foreign aid.

18. The quality of institutions in Cameroon is weak compared with that in middle-income countries experiencing growth acceleration. Cameroon ranks very low on most dimensions of governance, especially in the areas of control of corruption and the rule of law. Improving the business environment should also be a priority: business indicators in Cameroon, especially contract enforcement, lag behind those in comparator countries with growth acceleration.17

Figure I.5.
Figure I.5.

Debt Service and Foreign Aid: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration

(Percent of GNI)

Citation: IMF Staff Country Reports 2007, 287; 10.5089/9781451808230.002.A001

Source: World Development Indicators database; Cameroonian authorities: and IMF staff estimates1 Averages during 2000-05.
Figure I.6.
Figure I.6.

Governance and Institutions: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration

Citation: IMF Staff Country Reports 2007, 287; 10.5089/9781451808230.002.A001

Source: World Development Indicators database; Cameroonian authorities; and IMF staff estimates.1 Averages during 2000-05.

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1

Prepared by Iacovos Ioannou.

2

The above assumes a population growth of 2.5 percent per annum. According to the IMF’s sub-Saharan Africa Regional Economic Outlook (2005), a real GDP growth of about 7.5 percent would be required for sub-Saharan Africa to meet the Millennium Development Goal of halving income poverty by 2015.

3

The literature on growth acceleration differs from that on the determinants of long-term growth. A country may experience very high growth rates without experiencing growth acceleration, and it may experience growth acceleration without necessarily experiencing a very high growth rate.

5

The predictive power of these models is limited. Explanatory variables account for only a small part of the probability of growth acceleration. Growth can accelerate when growth correlates are not present; conversely, growth accelerations do not always occur when the correlates are present. This conclusion is drawn both by Hausmann, Pritchett, and Rodrik (2004) and Pattillo, Gupta, and Carey (2005).

6

Hausmann, Pritchett, and Rodrik (2004) found fundamental economic reforms to be correlated with “sustained” growth accelerations. Sustained accelerations are those where the jump in the growth rate of per capita GDP is sustained beyond the time period defined as a growth acceleration (i.e., five to eight years).

7

This classification remains in effect until July 1, 2007.

8

Hausmann, Pritchett, and Rodrik (2004) use an eight-year window. Reducing the size of the window to five years makes it possible to identify acceleration episodes as recent as 2001.

9

A high post jump rate would make it possible to capture countries growing strongly after the acceleration episode, rather than countries experiencing acceleration from a low growth rate.

10

In contrast, Hausmann, Pritchett, and Rodrik (2004) use data that enable them to identify growth acceleration episodes during 1957–92; Pattillo Gupta, and Carey (2005) identify growth acceleration episodes in 1983–1999.

11

Hausmann, Pritchett, and Rodrik (2004) also report output gains of almost 40 percent relative to the pre-acceleration period.

12

This probability is estimated by dividing the number of episodes by the number of years in which growth accelerates.

13

In effect, the pick up in Cameroon’s growth rate was the result of either less rapid decline in output or modestly higher output, which when compared to the previous negative growth rates, resulted in a jump in the growth rate.

14

The analysis below only indicates possible obstacles to growth acceleration in Cameroon. It does not establish any causal relationship between the variables considered in this chapter and growth acceleration. The source of the data is the World Bank’s Development Indicators. Since data for the associated variables were not available for 2006, all country data are based on 2000–05.

15

Although there is evidence that middle-income countries experiencing growth acceleration have modestly higher fiscal deficits, concluding that Cameroon should also run higher deficits should be based on a careful assessment of fiscal sustainability rather than on a mechanistic adoption of a fiscal deficit target based on the experience of other countries. In essence, the appropriate fiscal balance conducive to growth acceleration would be one that is consistent with fiscal sustainability.

16

Except for mobile phone lines, the gap between Cameroon and middle-income countries experiencing growth acceleration is large.

17

The widespread misconception that companies in Cameroon are overtaxed is not supported by the data. While the tax system is indeed complex and in need of simplification to reduce the cost of compliance, the amount of taxes as a percent of gross profits is similar to that of other middle-income countries experiencing growth acceleration.

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Cover IMF Staff Country Reports
Cameroon: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2007: Issue 287
Publisher:
International Monetary Fund
ISBN:
9781451808230
ISSN:
1934-7685
Pages:
43
DOI:
https://doi.org/10.5089/9781451808230.002
  • View in gallery

    Cameroon and Comparator Groups: Per Capita GDP, 1970–2005

    (2000 US dollars)

  • View in gallery

    Fiscal Performance: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

    (Percent of GDP)

  • View in gallery

    Trade Performance: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

  • View in gallery

    Infrastructure Development: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

    (Percent of GDP)

  • View in gallery

    Debt Service and Foreign Aid: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration

    (Percent of GNI)

  • View in gallery

    Governance and Institutions: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration

Cameroon and Comparator Groups: Per Capita GDP, 1970–2005

(2000 US dollars)

Fiscal Performance: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

(Percent of GDP)

Trade Performance: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

Infrastructure Development: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration1

(Percent of GDP)

Debt Service and Foreign Aid: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration

(Percent of GNI)

Governance and Institutions: Cameroon Versus Middle—Income Countries (MICs) with Growth Acceleration