Democratic Republic of the Congo: Selected Issues
Author:
International Monetary Fund. African Dept.
Search for other papers by International Monetary Fund. African Dept. in
Current site
Google Scholar
Close

This Selected Issues paper takes stock of poverty in the Democratic Republic of the Congo (DRC). Poverty has receded in the DRC over the last decade on the back of gradual stabilization in the security and political situation, strong economic growth, and sharp decline in inflationary pressures. Most social indicators also improved during the period. However, poverty remains pervasive with a level still among the highest in sub-Saharan Africa, and DRC will likely not achieve any of the Millennium Developments Goals by 2015. Policy actions should focus on fostering the development of labor-intensive sector, increasing social spending, and redirecting public resources to the poorest regions of the country.

Abstract

This Selected Issues paper takes stock of poverty in the Democratic Republic of the Congo (DRC). Poverty has receded in the DRC over the last decade on the back of gradual stabilization in the security and political situation, strong economic growth, and sharp decline in inflationary pressures. Most social indicators also improved during the period. However, poverty remains pervasive with a level still among the highest in sub-Saharan Africa, and DRC will likely not achieve any of the Millennium Developments Goals by 2015. Policy actions should focus on fostering the development of labor-intensive sector, increasing social spending, and redirecting public resources to the poorest regions of the country.

The Quest Towards Diversification1

While natural resources have delivered strong economic growth over recent years, the Democratic Republic of the Congo (DRC) faces daunting challenges regarding export diversification and domestic production. Based on cross-country experiences, this note evaluates the type of structural reforms and economic diversification that could contribute to boost and sustain growth in DRC, underscoring the need for improving infrastructure and trade networks, reducing barriers to entry for new products, deepening financial markets, and investing in human capital.

A. The Structure of the Congolese Economy

1. Since the 2000, economic activity in the DRC recovered, exhibiting vigorous growth. From 2002–08, real GDP growth averaged 5.8, but slowed significantly in 2009 with the global financial falling to 2.9 percent. However, after 2010, economic activity recovered and growth remained strong. Over the last four years, real GDP growth averaged 7.8 percent, driven essentially by the mining sector. Inflation fell from 15.5 percent in 2011 to 1 percent in 2014 as the authorities adhered to a fiscal anchor.2 Higher mining exports and sustained foreign direct investment contributed to an overall balance of payment surplus, despite decreasing official transfers.3 International reserves started falling in 2014, further declining in 2015.

2. Notwithstanding recent success, sustaining high economic growth is becoming increasingly challenging. On the one hand, economic growth is projected at 9.2 percent for 2015 and 7.5 percent on average in 2016–19 on the back of continued expansion of mining production with new mines coming on stream. On the other hand, inflation is expected to remain low. Nonetheless, with the current trend decline in copper and oil prices, the current account position is projected to deteriorate over the medium term, economic growth would slow down, and international reserve coverage to fall below four weeks by 2019. Risks to the outlook include: (i) a sharper decline in commodity prices; (ii) continued delays in structural reforms; (iii) escalation of residual insecurity into conflicts.

3. Diversification slowly progresses led by the service sector. Since 2006, exports of minerals have been steadily declining—as a percentage of GDP (Figure 1)—albeit the recent record production of 1 million tons of copper in 2014. While manufacturing—mainly, mining activities—is significant for the development of the country, the value added of services has been essential to the higher growth especially during the last few years. The leading component of the service sector is trade, communications, and commerce, which are indirectly linked to the mining activities mainly in the copper and zinc industry. In terms of sectoral share to GDP, services and manufacturing have maintained a steady but somewhat increasing pattern, while agriculture has maintained a somewhat constant but small contribution since 2010 (Figure 1).

4. DRC has exhibited a remarkable growth behavior vis-à-vis SSA countries in recent years. Since 2009, DRC has shown growth rates (Figure 2) well above the average for sub-Saharan Africa (SSA). At the same time, the share of the industry—as a percentage of GDP—is higher than the average for SSA. Nevertheless, agriculture shows a much faster decline since 2009 vis-à-vis other SSA countries. On the other hand, the services sector has recently shown an upward trend, though with relative volatility. (Figure 2).

Figure 1.
Figure 1.

Democratic Republic of the Congo: Real GDP Growth and GDP by Sector

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: IMF staff estimates based on authorities data.

5. There have been major structural shifts from agriculture to industry in recent years in the formal sector. The decline in the share of agriculture in total output is very distinct for DRC when compared to the average for SSA. Agriculture for SSA remains high, decreasing incrementally since 2010. During recent years, the gap has been filled by low-productivity services and nontradable activities while the share of industry has slightly increased. The average for the share of industry in SSA remained flat at 16 percent of GDP during the last decade; whereas industry in DRC stays consistently above the SSA average. The share of services in DRC remained volatile and low until around 2013, when it picked up.

Figure 2.
Figure 2.

Democratic Republic of the Congo: GDP Contributions by Sector Compared to SSA Countries

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: IMF staff estimates based on authorities data.

6. DRC has exhibited good performance regarding integration into value chains recently. The 2015 AFR Regional Economic Outlook (REO) shows that integration into global value chains has indeed been accompanied by a pickup in income levels. To measure the depth of this integration, the REO relied on the extent of foreign value added in a country’s exports—traditionally referred to as backward integration. By this measure, rising depth of integration has been associated with rising income over time for developing and emerging market economies higher share of its exports enter as inputs for other countries’ exports, reflecting the still-predominant role of commodities in many countries’ exports in the region. By this metric, DRC is above the average against comparators—non-oil resource intensive countries—(Figure 3).

Figure 3.
Figure 3.

Democratic Republic of the Congo: Sub-Saharan Africa and Comparator Countries: Depth of Integration in Global Value Chains, Average 2008-12

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Sources: REO (2015), Eora database; and IMF staff calculations.1 Excluding sub-Saharan African countries.Note: See Annex 3.2 Country Groups for a list of countries in each group.

7. Against this backdrop, structural change and economic diversification become critical aspects of economic development for the DRC. Export diversification is not only associated with lower output volatility but also with higher economic growth rates.4 At the same time, output diversification—including employment diversification—is associated with higher income per capita.5 Also, the type and quality of export products could increase pari passu with the diversification of production.6 This note examines growth potential and benefits from diversification for the DRC.

B. Growth and Factor Inputs

8. Recent structural changes in DRC have yet to catch up with Asian comparators. Figure 4 compares the structural changes in the DRC with those in Afghanistan, Bangladesh, Nepal, and Tajikistan, countries that have been experiencing similar structural changes recently. The value added in agricultural and services sectors in DRC compares poorly against comparators. The compound growth in agriculture as value added to GDP from 2004 to 2013 for the DRC is -2, compared to -2.6, -2.8, -0.6, and 2.7 for the other four countries respectively. The growth of industry, on the other hand, is 3.7 for DRC, compared to -2.5, 0.4, -1.4, and -5.3 for the other countries in that order. The structural change from agriculture to industry is the most evident for the DRC. Other countries seem to have experienced drops in both sectors, with the exception of Tajikistan, which unlike the other countries, witnessed an increase in agriculture and a decrease in industry.

Figure 4.
Figure 4.

Democratic Republic of the Congo: GDP Contributions by Sector

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: IMF staff estimates based on Congolese authorities data.

9. Factor productivity could be enhanced to achieve higher growth rates. Growth decomposition shows that the contributions of capital and labor have not been significant in the DRC (Figure 5). On the other hand, human capital has shown a negligible contribution to economic growth while total factor productivity (TFP) has been stable, including some instances of even negative effect (2009). The decomposition of labor productivity shows no contributions from capital deepening or human capital.

Figure 5.
Figure 5.

Democratic Republic of the Congo: Productivity

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: IMF staff estimates based on data from the Congolese authorities.

10. Developing human capital could have a significant effect on economic diversification and growth rates in DRC. Future investment in health, education and training could benefit from increases in productivity. In particular, emphasis should be put in expanding years of schooling, human resource management and audits and control on costs and spending.

11. DRC’s competitiveness is impaired by structural bottlenecks and a challenging business climate. The 2015 Doing Business report ranks DRC 184th (out of 189 countries). Electricity shortages are among the key concerns among the business community.7 The 2015 Doing Business report ranks DRC 184th (out of 189 countries), worse than most peer countries in the region. Growth has been accompanied by a low level of job creation with widespread underemployment affecting especially women and the youth in urban areas. However, the participation of women in services has shown an improvement in the last decade (Figure 6).

A02ufig02

Doing Business, 2014

(Rank in total of 189 countries)

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: World Bank.
Figure 6.
Figure 6.

Democratic Republic of the Congo: Employment by Sector and Gender

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: IMF staff estimates based on data from the Congolese authorities.

C. Export Diversification

12. DRC’s exports have concentrated on minerals (Figure 7). Overall export diversification and product exports moved slightly upwards, based on exports of new minerals in the last decade. Yet, diversification is still lower vis-à-vis comparators like SSA, Tanzania, Vietnam, and resource intensive (non-oil) countries in SSA.

13. Product diversification could yield growth gains (Figure 8, last chart). Further increasing product variety similar to diversification 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 (Box 1).8 For DRC, this translates into estimated growth gains of 0.2 percentage point if export diversification was raised to levels observed in comparators like Vietnam.

Democratic Republic of the Congo: Measuring Export Diversification

Following Henn et al. (2013), export product diversification is measured by the Theil index, which could be decomposed into “between” and “within” sub-indices:

T h e i l I n d e x = 1 N i N E x p o r t V a l u e i A v e r a g e E x p . V a l u e ln E x p o r t V a l u e i A v e r a g e E x p . V a l u e = T h e i l I n d e x = T e h i l b e t w e e n + T h e i l w i t h i n

where i represents 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:

T r a d e P R I C E m x t = α 0 + α 1 ln u n s o b s s e r v a b l e q u a l i t y m x t + α 2 ln p c i n c o m e m x t + α 3 ln D I S T A N C E m x t + e r r o r m x t

where the sub-scripts m, x, and t denote importer, exporter and time period respectively.

Figure 7.
Figure 7.

Democratic Republic of the Congo: Economic Diversification: DRC vs. SSA Countries

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

14. Following IMF 2014a, the following specification for the growth volatility estimations is used:

V o l i , t = α V o l i , t 1 + β D i v i , t + δ x i , t + e i , t

The data cover the time period from 1992–2015. Voli,t denotes growth volatility in country i at time t, which is calculated as the standard deviation of GDP growth using a five-year window. Divi,t denotes the diversification index. The first two indices, Total Theil and the Herfindahl index, capture the effect a country’s overall level of diversification has on volatility. The second two indices, the extensive and intensive margins, can be obtained from a decomposition of the overall Theil index. Extensive diversification occurs when a country exports new product lines, while intensive diversification occurs when a country exports a more balanced mix of existing products. Lower values for all four indices indicate a higher level of diversification. Also, openi,t denotes the trade openness level defined as total exports and imports as a share of GDP. Several regressions include interaction terms between the diversification index and a measure of trade openness xit denotes the interaction term); toti,t denotes other control variables such as terms of trade volatility, inflation volatility, and exchange rate volatility while ei,t is residual error. The data are five-year averages for each variable in order to exclude extreme values and business cycles; thus, t denotes each five-year period. The regressions are estimated using the two-step Generalize Method of Moments (GMM) model because of the dynamic nature of the regression equation. Since there is a lagged dependent variable in the estimation, fixed effects model estimates are biased.

15. Export diversification could help reducing growth volatility (Table 1). Following the methodology in IMF (2014a), Table 1 presents the results of a two-step GMM regression to quantify the effect of diversification on the volatility of growth in a dynamic panel, focusing on DRC and extending the regressions to include the effects of the extensive margin of product diversification. Results show that decreases in volatility are more likely to be achieved through increasing the intensive margin of product diversification. Ceteris paribus, the estimates imply that increasing product diversification to levels in Vietnam or Tanzania could decrease volatility by about one fifth and a third, respectively.

Figure 8.
Figure 8.

Democratic Republic of the Congo: Export Diversification

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: IMF staff estimates based on data from the Congolese authorities.
Table 1.

Democratic Republic of the Congo: Output Volatility and Product Diversification (Higher Theil Index = Less Diversification)

article image
Source: IMF staff calculations.

16. The quality of exports in DRC remains poor with scope for upgrading. The export diversification index produced by the IMF (2014a) covers 187 countries including most low-income countries and provides information on export product diversification and quality from 2000–10. Since higher values of the index indicate higher quality levels, we observe that the product quality for DRC exports have remained relatively poor overtime. Consequently, quality upgrading products seems to be a feasible way to start diversification in the DRC. Producing higher quality of already existing products may lead to exploit the current comparative advantages in the DRC, which can improve export-revenue potential. The limited potential to develop economies of scale in DRC, may suggest that improving the quality of existing products is a potential and promissory alternative for diversification.

Figure 9.
Figure 9.

Democratic Republic of the Congo: Export Diversification and Quality Index

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

Source: IMF staff estimates based on data from the Congolese authorities.

D. The Congolese Informal Economy: a Digression9

17. A dominant but precarious informal sector is boosted by commercial activities. Half of informal jobs are held by women and capital financing is dominated by individual savings. Trade is, by far, the flagship branch of the informal sector in the DRC. Other salient points from the recent survey,

  • 82.3 percent of informal activities are reduced to one person and the average size informal production units (UPI) is 1.3 persons;

  • the average age of each UPI is 7.7 years;

  • over 96 percent of employees have no written contracts;

  • less than 6.9 percent are employees;

  • almost 37 percent of employees work over 60 hours per week;

  • the average monthly salary, calculated over all the informal sector assets, is approximately CDF 62,740.9 (CDF 262,539 in extractive activities) and the hourly salary is CDF 547;

  • more than half of informal jobs (55 percent) are occupied by women, especially, in the trade sector (64.2 percent);

  • the average amount of capital is low at CDF 152,728 (by UPI), but much UPI (22.7 percent) has no capital to undertake their activities;

  • at 88.4 percent of individual savings represents the main form of capital funding for informal production units; and

  • commercial UPI represents 62.1 percent of total UPI, generating 80.4 percent of revenues in the sector.

A02ufig03

Informal Activityby Sector

(percent)

Citation: IMF Staff Country Reports 2015, 281; 10.5089/9781513590189.002.A002

National Statistical Agency, DRC (2014)

18. Access to capital and lack of human capital represent significant constraints to economic activity in the informal sector. Personal saving emerges as the main source of financing in DRC’s informal sector, thereby limiting the development of commercial activities and investment. The informal economy employs 24.5 million, representing 88.6 percent of total employment in the formal sector (27.7 million) while the informal economy represents 55.3 percent of total GDP. The work force in the informal agricultural sector had average 4.2 years of schooling and 6.9 years in the (informal) non agricultural sector. In 2012, the national average of schooling reached 5.8 years. The survey shows that education in the formal sector is higher in most cases above the primary level with school attendance representing 12.2 and 12.0 years for employees of the private and public sector, respectively.

E. Conclusion

19. DRC’s competitiveness is impaired by structural bottlenecks, a challenging business climate, low productivity, and weak human capital. Further progress on improving the business climate and addressing electricity shortages in particular could render significant benefits. At the same time, developing human capital could ease production constraints and improve the investment cycle. Indeed, policy changes aiming at education and productivity could carry positive impacts on the informal economy, which is half the size of total GDP. Furthermore, although overall export diversification and product exports moved slightly upwards in recent years, production diversification could yield higher growth rates.

References

  • 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 EconomiesIMF SDN/13/08.

    • Search Google Scholar
    • Export Citation
  • Dabla-Norris, Era, Jim Brumby, Annette Kyobe, Zac Mills, and Chris Papageorgiou, 2011, “Investing in Public investment EfficiencyIMF Working Paper 11/97.

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

    • Search Google Scholar
    • Export Citation
  • Imbs, Jean, Claudio Montenegro, and Romain Wacziarg, 2012, “Economic Integration and Structural Change,” The World Bank. April.

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

    • Search Google Scholar
    • Export Citation
  • Institut National de la Statistique, 2014, “Résultats de l’enquête sur l’Emploi, le Secteur Informel et sur la Consommation des Ménages en 2012,” Septembre.

    • Search Google Scholar
    • Export Citation
1

Prepared by Rodolfo Maino. Dafina Glaser provided valuable research assistance. The assessment of diversification should be interpreted cautiously due to data limitation.

2

The fiscal anchor was adopted in the context of the 2009 Enhanced Credit Facility Program with the Fund, prohibiting financing from the central bank.

3

In 2014, copper production reached 1.065 million tons in 2014 and new projects should further expand production in the coming years. Last year alone, copper exports grew by 16.3 percent, making the country the world’s 6th largest copper exporter. The production of gold has more than doubled since 2013.

4

Henn, Papageorgiou, and Spatafora (2013).

5

Imbs, Montenegro, and Wacziarg (2012).

6

Henn, Papageorgiou, and Spatafora (2013).

7

As pointed out in an independent evaluation of the Doing Business survey (see www.worldbank.org/ieg/doingbusiness), care should be exercised when interpreting these indicators given subjective interpretation, limited coverage of business constraints, and a small number of informants, which tend to overstate the indicators’ coverage and explanatory power.

8

IMF (2014a) finds that output diversification has a decisive impact on growth for LICs. The standard deviation of output diversification in low income countries is 0.078, resulting in a predicted increase in the growth rate of LICs by 100*(−0.078)*(−0.176) = 1.373 percentage points.

9

As reported in a survey of the informal economy by the Institute of National Statistics (2014).

  • Collapse
  • Expand
Democratic Republic of the Congo: Selected Issues
Author:
International Monetary Fund. African Dept.
  • Figure 1.

    Democratic Republic of the Congo: Real GDP Growth and GDP by Sector

  • Figure 2.

    Democratic Republic of the Congo: GDP Contributions by Sector Compared to SSA Countries

  • Figure 3.

    Democratic Republic of the Congo: Sub-Saharan Africa and Comparator Countries: Depth of Integration in Global Value Chains, Average 2008-12

  • Figure 4.

    Democratic Republic of the Congo: GDP Contributions by Sector

  • Figure 5.

    Democratic Republic of the Congo: Productivity

  • Doing Business, 2014

    (Rank in total of 189 countries)

  • Figure 6.

    Democratic Republic of the Congo: Employment by Sector and Gender

  • Figure 7.

    Democratic Republic of the Congo: Economic Diversification: DRC vs. SSA Countries

  • Figure 8.

    Democratic Republic of the Congo: Export Diversification

  • Figure 9.

    Democratic Republic of the Congo: Export Diversification and Quality Index

  • Informal Activityby Sector

    (percent)