Senegal: Selected Issues
Author: International Monetary Fund. African Dept.
Publication Date:
14 Jan 2015
eISBN:
9781484348475
ISBN:
9781484348475
Language:
English
Keywords:
ISCR; CR; Senegal; PSE implementation; government; Plan Sénégal Emergent; export diversification; export Theil Index; export quality; product diversification; export partner diversification; Human capital; Exports; Total factor productivity; Sub-Saharan Africa
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In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Growth, Structural Transformation, and Export Diversification1

The Plan Sénégal Emergent (PSE) envisages boosting economic growth through a large scale-up of investment and structural transformation. This note examines these goals against the background of Senegal’s historical growth performance with respect to three main areas: (i) total factor productivity, (ii) export diversification and quality, and (iii) perceived constraints in the informal sector. It finds that, in order to yield growth gains, additional capital increases need to be accompanied by increases in total factor productivity, investment in human capital, and broader financial inclusion. Diversification would benefit growth and stability mainly through increases in the shares of the existing product base, which are complemented by increases in product quality.

1. Growth in Senegal has been modest with relatively high volatility compared to benchmark cases (Figure 1). Real GDP amounted to less than 4 percent per year on average over the last 20 years, far below a group of fast growing Sub-Saharan countries that succeeded in almost quadrupling real GDP over the same time horizon. Real GDP per capita has grown slowly, outperformed by several multiples by regional and non-regional benchmarks. The volatility of growth, however, was in line with the average of the Sub-Saharan experience, and mainly driven by large fluctuations in agricultural production, not sufficiently smoothed by other sectors.

Figure 1.
Figure 1.

Senegal: Growth and Volatility

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A005

Source: IMF World Economic Outlook April 2014 and staff estimates.

2. This section examines Senegal’s growth performance against the background of three areas of relevance for the PSE:

  • Growth decomposition. Total factor productivity (TFP) and human capital are highlighted as constraints from the production side, with manufacturing, wholesale and agriculture experiencing particular problems in this area. Capital’s relative size and contribution to growth is shown to be high compared to other countries, so that increases in investment volumes should be accompanied by efficiency increases to yield growth dividends.

  • Export diversification and quality. Senegal has made strong progress in the diversification of its export product and partner base over the last decades, but additional diversification could yield significant growth and stability gains, especially when complemented by improvements in export quality, which is still lagging far behind benchmark countries. Increasing the shares of production of product of comparatively high quality could boost growth but will require investments in human capital and institutions.

  • Informality. In addition to the constraints described above, a recent informal business survey points to limited access to finance and educational attainment as major structural problems in the informal sector.

A. Factor Inputs

3. Low factor productivity has moderated growth in several sectors (Figure 2). A growth decomposition exercise shows that growth was mainly driven by capital growth, while human capital development and TFP growth had a modest or even negative effect, respectively. A sectoral composition of TFP reveals that its unfavorable contribution has been driven mainly by wholesale and retail trade, manufacturing and agriculture; while mining, construction and service contributed positively to TFP growth. Similar conclusions can be drawn from a decomposition of labor productivity which benefited only modestly from increases in human capital and TFP increases over the last decade on average.

Figure 2.
Figure 2.

Productivity

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A005

Sources: Chart 1-4: Dabla-Norris et al. (2013), Chart 5: Dabla-Norris (2011), Chart 6: World Bank (2013).

4. With productivity being the main constraint, policies targeting higher growth levels should therefore focus on increasing efficiency and developing human capital. The results indicate that additional increases in investment volumes may not result in desired growth gains if they are not accompanied by gains in productivity. With low public investment management scores, improving the quality and of investment and efficiency of the public investment management system, for example through enhancing project evaluation through ex ante cost benefit analysis and an alignment of the project evaluation cycle with the annual budget process, will be important (Figure 2, chart 5). With 93 percent of public primary and secondary educational spending representing personnel costs (of which 28 percent are paid to non-teaching staff), improvements to the human resource management, including better systems and controls at the central level, will be necessary to leave more room for classroom supplies, textbooks and teacher training. Finally, improvements to the business environment could yield substantive gains, with the electricity sector currently constituting the main constraint.

B. Export Diversification

5. Senegal’s exports have been increasingly diversified, with convergence to benchmark countries (Figure 3). Standing out from the average WAEMU country, overall export diversification along export products (see Box 1) has been increasing over the last decades, mainly as a result of an increase in the intensive margin of product diversification. While diversification is still lower than that observed in some African and non-African benchmark countries, such as Vietnam and Tanzania, and main export categories are still dominant, some convergence to benchmark levels has been ongoing over the last two decades. The same trend has been observed for diversification across export partners, but through a diversification of both the extensive and intensive margin.

Figure 3.
Figure 3.

Senegal: Export Diversification

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A005

Senegal: Export Diversification and Quality

(IMF 2014a and Henn et al., 2013)

Export product diversification is captured by the Theil index which can be decomposed into a “between” and a “within” sub-index:

TheilIndex=1NΣiNExportValueiAverageExp.Value⋅ln⁡ExportValueiAverageExp.Value=Theilbetween+Theilwithin

in which i is the product index and N the total number of products. The “between” Theil index captures the extensive margin of diversification, i.e. the number of products, while the “within” Theil index captures the intensive margin (product shares).

Export partner diversification. The Theil index is also available across export partners. In this case, i and N in the above relationship represent the export partner index and number of export partners, respectively.

Export quality is measured by the export’s unit value adjusted for differences in production costs, relative distance to the trade partner, and the development of a country through the following relationship:

Trade⁢Pricemxt=α0+α1ln⁡unobservablequalitymxt+α2ln⁡p.c.incomemxt+α3ln⁡Distance+Errormxt

in which the sub-scripts m, x, and t denote importer, exporter and time period respectively

6. Further product diversification could yield growth gains (Figure 3, last chart). While Senegal’s economy is already relatively diversified, further increasing product variety similar to diversification success stories could yield further growth gains. Based on the estimates in IMF (2014a), a one standard deviation increase in LIC’s export diversification raises the growth rate by about 0.8 percentage points. For Senegal, this translates into estimated growth gains of ¼ percentage point if export diversification was raised to levels observed in, e.g., Tanzania.

7. Further diversification across products and partners could also help restrain the volatility of growth (Table 1 and 2). This note follows the methodology in IMF (2014a) in estimating a two-stage GMM regression to quantify the effect of diversification on the volatility of growth in a dynamic panel, but focuses on Sub-Saharan African countries and extends the regressions by examining the effects of the extensive margin of product diversification and the effect of a diversification in export partners. The results show that decreases in volatility are more likely to be achieved through increasing the intensive margin of product or export partner diversification, and that the gains are economically significant. All other things equal, the estimates imply that increasing product diversification to levels in Vietnam or Tanzania could decrease volatility by about one sixth and a quarter, respectively, with similar magnitudes implied by boosts in export partner diversification.

Table 1.

Senegal: Output Volatility and Product Diversification in Sub-Saharan Africa

(Higher Theil Index = Less Diversification)

article image
Notes: Robust standard errors in parentheses. Period dummies were included, but are not reported. *** p<0.01, ** p<0.05, *p>0.1.
Table 2.

Senegal: Output Volatility and Trade Partner Diversification in Sub-Saharan Africa

(Higher Theil Index = Less Diversification)

article image
Notes: Robust standard errors in parentheses. Period dummies were included, but are not reported. *** p<0.01, ** p<0.05, *p<0.1.

C. Product Quality

8. There is a large scope for both agricultural and manufacturing upgrading. Export quality (see box 1) has not caught up to benchmark countries. Agricultural export quality has been outperformed even by the WAEMU, the immediate regional reference group, and manufacturing quality has been hovering far below fast quality upgrading countries, such as Vietnam. As an increase in the agricultural and manufacturing quality indices by 0.1 is associated with additional annual GDP per capita growth rates of ½ and 1 percentage points (IMF, 2014a), respectively, the growth losses from this limited convergence could be large.

Figure 4.
Figure 4.

Senegal: Agricultural and Manufacturing Quality

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A005

Source: IMF (2014a), Henn et al. (2013).

9. Export concentration appears to be highest in low-quality sectors, while higher quality exports bear a comparatively lower weight. Figure 5 illustrates the dilemma in quality upgrading compared to three benchmark countries with 2 digit SITC level disaggregated industries. In Senegal, sectors for which the quality of exported products is comparatively low, such as food and live animals, constitute a large share of exported products. In comparison, the largest export shares are devoted to product categories with relatively higher quality in Vietnam. With Senegal’s labor force concentrated in agriculture, policies fostering agricultural quality may be the first priority.

Figure 5.
Figure 5.

Senegal: Export Concentration and Quality

(Size of Bubbles Proportional to Product Share)

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A005

Source: IMF (2014a), Henn et al. (2013).

D. Informality

10. An informal business survey confirms a gap in human capital and highlights financing as another constraint to growth. Figure 5 highlights the main results of a survey covering Senegal’s non-agricultural informal sector enterprises. This sector employs about 2.2 million people and contributes about two fifths to Senegal’s total GDP (ANSD, 2013). It therefore represents Senegal’s economy well. In line with the constraints to education highlighted above, the results of the survey show that the majority of actors in the informal market do not possess education exceeding the primary level. The constraint to the business environment perceived among the severest is access to finance, with the majority of participants relying on their personal saving as their main source of financing.

E. Conclusions

11. Policies should target increases in TFP productivity, and further export diversification should be complemented with improvements in product quality. With TFP and human capital being the main constraints from the production side, and the relative level of capital already high compared to other countries, any investment scale-up should be accompanied by efficiency increases and investments in human capital to yield growth dividends. Sectors that could benefit the most from increased productivity are manufacturing, wholesale and agriculture. Senegal has made strong progress in the diversification of its export product and partner base over the last decades, but export quality is lagging behind benchmark countries. Increasing the shares of production of product of comparatively high quality could boost growth but will require investments in human capital and institutions as well. Increasing access to finance and educational attainment could be priority structural reforms from the informal sector’s perspective.

Figure 6.
Figure 6.

Senegal The Informal Non-Agricultural Sector

Citation: IMF Staff Country Reports 2015, 015; 10.5089/9781484348475.002.A005

Source: ANSD (2013).

References

  • ANSD (2013): Enquête Nationale Sur le Secteur Informel au Sénégal (ENSIS 2011).

  • Dabla-Norris, Era, Giang Ho, Kalpana Kochhar, Annette Kyobe, and Robert Tchaidze, 2013, “Anchoring Growth: The Importance of Productivity-Enhancing Reforms in Emerging Market and Developing Economies”. IMF SDN/13/08.

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  • Dabla-Norris, Era, Jim Brumby, Annette Kyobe, Zac Mills, and Chris Papageorgiou, 2011, “Investing in Public investment Efficiency”. IMF Working Paper 11/97.

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    • Export Citation

  • Henn, Christian, Chris Papageorgiou, and Nikola Spatafora, 2013, “Export Quality in Developing Countries,” IMF Working Paper 13/108.

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  • IMF, 2014a, “Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries—The Role of Structural Transformation and Diversification.” IMF Policy Paper, March.

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    • Export Citation

  • IMF, 2014b, “West African Economic and Monetary Union. Staff Report on Common Policies for Member Countries,” IMF Country Report No. 14/84.

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Prepared by Monique Newiak.

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Cover IMF Staff Country Reports
Senegal: Selected Issues
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2015: Issue 015
Publisher:
International Monetary Fund
ISBN:
9781484348475
ISSN:
1934-7685
Pages:
83
DOI:
https://doi.org/10.5089/9781484348475.002

Senegal: Growth and Volatility

Productivity

Senegal: Export Diversification

Senegal: Agricultural and Manufacturing Quality

Senegal: Export Concentration and Quality

(Size of Bubbles Proportional to Product Share)

Senegal The Informal Non-Agricultural Sector