Abstract
Despite a relatively high GDP growth rate over the past decade (2000–10), economic growth in Mauritania has not been able to make a significant dent in poverty. Rapid and sustained poverty reduction requires inclusive growth that allows people to contribute to and benefit from expanding economic activity. Mauritania needs to make greater progress toward inclusive growth by enhancing the distributional impact of public spending and by improving the quality of pro-poor spending. The Executive Board recommends effective monetary policies to meet the challenges.
III. Spillovers From Europe into Mauritania1
As a small open economy, Mauritania is highly vulnerable to global shocks, but particularly to developments in Europe given its geographical location, its close historical ties, and the reform agenda of the past few years. A novel econometric approach shows that Mauritania’s interconnectedness with Europe has increased recently and manifests itself mostly through the trade channel. The vulnerability of Mauritania’s economy to a shock from Europe is higher than in the average low-income country, but lower than in other Maghreb economies. Diversification of both export products and markets are essential to help Mauritania become more resilient to external shocks.
A. Background: What are the key spillover channels?
1. Over the past decade, Mauritania has embarked on a rich reform agenda aimed at liberalizing its economy and encouraging foreign trade and investment. In that context, Mauritania’s trade regime has been revised and further simplified, leading to the elimination of trade barriers and to improved competitiveness of its exports. During that period, the country’s ties with Europe were reinforced through the signing of a preferential trade agreement with the EU (through the Cotonou initiative) and a fishing agreement that has been repeatedly renewed since 1987. In addition to trade linkages, Mauritania’s dependency upon Europe for foreign aid, large FDI inflows, and remittance flows is also important, reflecting the country’s geographical proximity to Europe and close historical ties.
Trade Channel
Exports from Mauritania to Europe have more than doubled over the 2000–10 period, and now represent 30 percent of GDP, the highest among low-income country (LICs).
Mining (iron ore, gold, and copper) and fishing products account for 74 percent and 23 percent, respectively, of all goods exported to Europe during the past decade. As a result, Mauritania lags behind its peers in export diversification, with higher metals prices making the economy even more dependent on developments in extractive industries. Moreover, the technological content of Mauritania’s export is low, which makes it lag behind many countries in the region, and keeps it dependent on the “extractive industries.”
Export destinations have also remained quite concentrated, despite recent attempts to expand toward Asia in the aftermath of the global crisis, which had seen Mauritania’s mining exports severely affected by clients facing “force majeure” events. Such diversification efforts were much less successful than those of other sub-Saharan countries, which had succeeded in keeping diversification high during the past decade. Additional diversification is needed to reduce the country’s exposure to both global and region-specific shocks2 (see da Costa Neto and Romeu, 2011, on how export diversification softened the impact of the 2008 global financial crisis).
Product Diversification of Exports
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: UNCTAD statistics; and IMF staff calculations.Product Diversification of Exports
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: UNCTAD statistics; and IMF staff calculations.Product Diversification of Exports
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: UNCTAD statistics; and IMF staff calculations.
Sophistication of Export Products
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: BACI database; and IMF staff computations following Hausmann et al. (2007).Sophistication of Export Products
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: BACI database; and IMF staff computations following Hausmann et al. (2007).Sophistication of Export Products
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: BACI database; and IMF staff computations following Hausmann et al. (2007).
Geographical Concentration of Export Markets: Herfindahl-Hirschman
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: IMF DOTS; and IMF Staff computations.Geographical Concentration of Export Markets: Herfindahl-Hirschman
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: IMF DOTS; and IMF Staff computations.Geographical Concentration of Export Markets: Herfindahl-Hirschman
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: IMF DOTS; and IMF Staff computations.Financial Channels
The Mauritanian banking system has limited links with international markets, including those in Europe. Banking activities are funded in large part with domestic deposits (78 percent of bank liabilities) and cross-border financing is small (7 percent of GDP in 2011). In 2011, liabilities of Mauritanian banks to external counterparts amounted to $124 million, of which 73 percent is from Europe (2 percent of GDP). Such exposure is much lower than the average.
Moreover, while the current account is fully open, there are several restrictions on the capital account as certain flows (including export receipts in foreign exchange) must be repatriated and are subject to prior approval of the Central Bank.
Foreign banks have only started operating in Mauritania over the past five years, and only represent 24 percent of banking assets in Mauritania. Of those, European banks represent a mere 7 percent, thus limiting the financial transmission channel from Europe. Nevertheless, the presence of foreign banks will increase banking competition and diversify funding sources.
Flows of private capital to Mauritania reached close to 23 percent of GDP in 2011, led mostly by FDI and loans to the iron ore company. Most of this FDI was from the North American region, and targeted mainly at the mining and oil industries.
Aid and Remittances
Aid flows are important for Mauritania, averaging 13 percent of GDP, mostly from multilateral institutions. Of the bilateral flows, about 80 percent comes from Europe, which represents about 5 percent of GDP in recent years. This is important enough to make the country vulnerable to a drying-up of official development assistance, but still well below the LIC average of 10 percent of GDP.
Remittances averaged 2 percent of GDP in Mauritania over the past decade, 54 percent coming directly from Europe. The dependency of the country upon remittance flows appears particularly limited, though this is based only on official data, which somewhat underestimate the true size of remittance flows.
Sources of Direct Exposure to Europe in 2010
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: IMF DOTS; OECD-DAC; BIS; and World Bank.Sources of Direct Exposure to Europe in 2010
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: IMF DOTS; OECD-DAC; BIS; and World Bank.Sources of Direct Exposure to Europe in 2010
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: IMF DOTS; OECD-DAC; BIS; and World Bank.2. Against this background, trade and aid appear to be the most important transmission channels, although remittances become relevant after third-country exposures via Europe are accounted for. Indeed, accounting for indirect impacts (Box 1) increases the country’s exposure to spillovers from Europe through both trade and remittance channels. In terms of magnitude, 36 percent of Mauritanian migrants live in countries that are directly connected with Europe, and 10 percent of Mauritania’s exports are to economies that are well integrated with Europe.
Direct and Indirect Trade Exposure to Europe, Average over 2000–10
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF staff calculations based on IMF DOTS data.Direct and Indirect Trade Exposure to Europe, Average over 2000–10
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF staff calculations based on IMF DOTS data.Direct and Indirect Trade Exposure to Europe, Average over 2000–10
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF staff calculations based on IMF DOTS data.
Direct and Indirect Migration Links with Europe, Average over 2000–10
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF staff calculations based on Global Bilateral Migration Dataset (World Bank).Direct and Indirect Migration Links with Europe, Average over 2000–10
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF staff calculations based on Global Bilateral Migration Dataset (World Bank).Direct and Indirect Migration Links with Europe, Average over 2000–10
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF staff calculations based on Global Bilateral Migration Dataset (World Bank).How to Measure Indirect Channels
The trade and migration channels are retained to investigate the strength of the indirect linkages. More formally, the following calculations are used to compare the direct and indirect linkages for a given country i:
where de and ie stand for the direct and indirect exposures, respectively. νie denotes either exports or stock of migrants from country i (let’s say Mauritania) into Europe, Σjνij the country’s i total exports or migrants, νij the bilateral exports or migrants from i to a given country j,
The sample consists of bilateral data covering more than 200 countries (53,592 pairs of countries and about 1,179,024 observations) over the period 1990–2011. Such a large sample takes into account countries’ trade composition with all potential trading partners and then ensures multilateral consistency.
3. Putting all the pieces together suggests that Mauritania is more exposed to shocks from Europe than the average low-income country. Combining trade, migration and foreign aid channels into an index of exposure to shocks from Europe (constructed using principal component analysis) shows that Mauritania is 60 percent more exposed to shocks from Europe than the average low income country. This exposure is on par with neighboring countries such as Senegal and Mali, but still below countries with strong export, tourism, and remittance links Morocco and Tunisia.
Index of Exposure to Shocks from Europe, (1990–2010)
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF Staff estimates. The index exposure to shocks from Europe has been computed as the aggregation (using the principal component analysis) of bilateral exports, aid, and migration data between LIC and Europe.Index of Exposure to Shocks from Europe, (1990–2010)
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF Staff estimates. The index exposure to shocks from Europe has been computed as the aggregation (using the principal component analysis) of bilateral exports, aid, and migration data between LIC and Europe.Index of Exposure to Shocks from Europe, (1990–2010)
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Source: IMF Staff estimates. The index exposure to shocks from Europe has been computed as the aggregation (using the principal component analysis) of bilateral exports, aid, and migration data between LIC and Europe.B. Estimating the Spillover Effect Between Mauritania and Europe
4. This section proposes a new framework to identify and measure the response of Mauritanian activity to a slowdown in Europe. The analysis then measures the impact of the main determinants of economic spillovers.
Empirical approach
5. Spillovers from Europe into Mauritania are estimated by testing for business cycle synchronization using a time-varying approach. This regression-based approach is preferable to the vector autoregressive models often used for this type of analysis, high-because- frequency output data (monthly or quarterly) are not available for Mauritania. The methodology developed in this paper helps overcome this data limitation by measuring the strength and the significance of the business cycle co-movement at each point of time.1 It also controls for global shocks so as to remove the omitted variable bias when the coefficient measuring the business cycle co-movements is estimated. Data used for this analysis are annual for the 1985–2011 period. To allow for comparisons across countries, all Maghreb countries are covered (including Egypt). The econometric specification is as follows:
where
yit
From equation [3], the coefficient of interest is θit,4 which measures the correlation of business cycles between each country i and Europe after controlling for global shocks. In sum, this measures the “spillover effect” indicating the extent to which income shocks in Europe are affecting each country i and at each year t.
Effects of external shocks from Europe
6. Business cycles between Mauritania and Europe are increasingly synchronized across time. An analysis of the spillover effect during the past 25 years shows a clear dichotomy between business cycles. The pre-2000 period is characterized by no co-movement with Europe, with coefficients small and statistically insignificant. In the post-2000 period, spillovers are significant and rising, implying that a 1 percentage point decrease in Europe’s growth below its potential will on average decrease Mauritania’s growth by 1.5 percentage points below its potential. This increasing importance can mostly be explained by three main factors:
Coefficient of Business Cycle Synchronization Between Mauritania and Europe: Local Gaussian Ordinarily Least Squares Estimates 1/
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
1/ Bold line represents the time-varying coefficients of business cycle synchronization between Mauritania and Europe. Dashed lines denote the confidence interval at 95 percent.Coefficient of Business Cycle Synchronization Between Mauritania and Europe: Local Gaussian Ordinarily Least Squares Estimates 1/
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
1/ Bold line represents the time-varying coefficients of business cycle synchronization between Mauritania and Europe. Dashed lines denote the confidence interval at 95 percent.Coefficient of Business Cycle Synchronization Between Mauritania and Europe: Local Gaussian Ordinarily Least Squares Estimates 1/
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
1/ Bold line represents the time-varying coefficients of business cycle synchronization between Mauritania and Europe. Dashed lines denote the confidence interval at 95 percent.Larger trade pattern. The spillover effect is mostly linked to the high dependency of Mauritania’s main export receipts upon European markets. Regarding the remaining explanatory variables (foreign aid and remittance inflows), their marginal effects are disproportionally lower than for other countries (see Annex I).
Higher exports of demand-sensitive products. Over the past decade, the share of ores and metals exports to Europe has significantly increased, from 71 percent in 2000 to 83 percent in 2011. At the same time, fish export share (a potentially less demand-elastic product) to Europe has decreased from 27 percent in 2000 to 16 percent in 2011. Over the period, an estimation of a simple regression model shows that the demand for Mauritania’s exports is highly sensitive to Europe’s income shocks, with a semi-elasticity of demand of 3.2.5
Different structure of the economy. The Mauritanian economy was less exposed to the trade channel during the 1985–1999 period because its output depended more on agriculture, which was often volatile (affected by droughts), leading to higher aggregate output volatility. Also, as explained above, the country’s dependency on metals exports has increased sizably since then, with the global recession revealing Mauritania’s vulnerability to demand from Europe.
Structural Breaks and Sources of Aggregate Fluctuations in Mauritania
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: World Bank; and World Development Indicators.Structural Breaks and Sources of Aggregate Fluctuations in Mauritania
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: World Bank; and World Development Indicators.Structural Breaks and Sources of Aggregate Fluctuations in Mauritania
Citation: IMF Staff Country Reports 2012, 249; 10.5089/9781475506693.002.A003
Sources: World Bank; and World Development Indicators.C. Conclusion
Mauritania has become increasingly dependent on developments in Europe, mostly through the stronger impact of the trade channel. This increasing exposure to external shocks represents an important challenge that needs to be addressed through at least two sets of policies. First, the country should continue to increase its diversification of export products and markets, including the development of a domestic industrial base. Second, countercyclical policies that consist of building buffers in good times are appropriate to cope with global shocks.
Annex: Determinants of Spillover effects
To investigate the main drivers of business cycle co-movement between Mauritania and Europe, the time-varying coefficients of synchronicity are regressed on the bilateral trade variable while for other potential sources of contagion are controlled (aid, and remittance flows) for.6 The following econometric model is estimated using panel data of the following countries: Mauritania, Tunisia, Morocco, Egypt and Djibouti.
where
Γit, di, and ui, denote the indicators of economic linkages with Europe (trade, remittances, and foreign aid), a dummy variable identifying Mauritania, and the country fixed effects, respectively. σ1σ2 identifies the effect of globalization variables Γ on the synchronization of business cycles between Mauritania and Europe, whereas σ2 measures the average effect of these globalization variables in other countries.
The econometric estimations correct the biases arising from business cycle co-movement
Results (Table 1) indicate that the spillover effect due to trade is stronger for Mauritania than in other countries, with the index of exposure being more significant (Table 1, column 2).
Determinants of business cycle synchronization: The specificity of Mauritania. Standardized coefficients are reported.
Determinants of business cycle synchronization: The specificity of Mauritania. Standardized coefficients are reported.
| [1] | [2] | |
|---|---|---|
| Trade intensity with Europe | 0.0598 | |
| (0.513) | ||
| Remittance-to-GDP ratio | 0.312** | |
| (2.432) | ||
| Aid dependency upon Europe | 0.0830*** | |
| (3.130) | ||
| Trade intensity * Mauritania dummy | 0.655** | |
| (2.002) | ||
| Remittance ratio * Mauritania dummy | -0.302** | |
| (-2.291) | ||
| (-1.703) | ||
| Exposure index | 0.193*** | |
| (4.139) | ||
| Exposure index * Mauritania dummy | 1.353*** | |
| (9.647) | ||
| Intercept | 1.671** | 0.343*** |
| (2.363) | (6.070) | |
| Observations | 83 | 83 |
| R-squared | 0.94 | 0.34 |
| Total effect of trade in Mauritania | 0.71 | |
| Total effect of remittance flows in | ||
| Mauritania | 0.01 | |
| Total effect of foreign aid in Mauritania | -0.34 | |
| Total effect of vulnerability in Mauritania | 1.546 |
Determinants of business cycle synchronization: The specificity of Mauritania. Standardized coefficients are reported.
| [1] | [2] | |
|---|---|---|
| Trade intensity with Europe | 0.0598 | |
| (0.513) | ||
| Remittance-to-GDP ratio | 0.312** | |
| (2.432) | ||
| Aid dependency upon Europe | 0.0830*** | |
| (3.130) | ||
| Trade intensity * Mauritania dummy | 0.655** | |
| (2.002) | ||
| Remittance ratio * Mauritania dummy | -0.302** | |
| (-2.291) | ||
| (-1.703) | ||
| Exposure index | 0.193*** | |
| (4.139) | ||
| Exposure index * Mauritania dummy | 1.353*** | |
| (9.647) | ||
| Intercept | 1.671** | 0.343*** |
| (2.363) | (6.070) | |
| Observations | 83 | 83 |
| R-squared | 0.94 | 0.34 |
| Total effect of trade in Mauritania | 0.71 | |
| Total effect of remittance flows in | ||
| Mauritania | 0.01 | |
| Total effect of foreign aid in Mauritania | -0.34 | |
| Total effect of vulnerability in Mauritania | 1.546 |
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Prepared by Christian Ebeke (SPR).
In the aftermath of the 2008 global crisis, China has been the “client of last resort” of Mauritania’s main export product (iron ore). This has somewhat helped the country reduce its dependency upon Europe.
To allow for time-varying regression parameters, the paper follows the procedure discussed in Aghion and Marinescu (2008) and in Ebeke (2011).
More specifically, each indicator of the business cycle is derived as follows:
Global shocks are represented by the world real GDP business cycle. This approach allows controlling for world risk aversion and technological changes, which would affect both Europe and Mauritania business cycles. Results did not change after accounting for world oil prices as a global shock.
We implement a local Gaussian weighted ordinarily least squares method to estimate the time-varying spillover coefficients of spillovers for each country.
This suggests that a decrease in GDP growth in Europe by 1 percentage point would lead to a drop in Mauritania’s exports to Europe by 3.2 percent.
Due to lack of time-varying data on bilateral remittance data from Europe, the econometric model only controls for the total amount of remittance inflows for each country. In contrast, bilateral aid data which are available from the OECD-DAC database have been directly used.
