Senegal: Selected Issues

Abstract

Senegal: Selected Issues

Enabling Private Sector-Led Growth

This note summarizes growth performance through 2015, explores possible sources of growth and obstacles to unlocking the potential contribution of these sectors, and offers policy recommendations for Senegal to reach high and sustained growth to exit low-income country status.

A. Introduction

1. Senegal has experienced a relatively long period of macroeconomic stability, but its per capita GDP growth has been low. In response to the unsatisfactory growth performance, a new development strategy, the Plan Sénégal Emergent (PSE), was adopted in early 2014. The PSE is based on three pillars (PSE, 2014): (i) higher and sustainable growth and structural transformation with the ambition to make Senegal a regional hub for a number of activities through better infrastructure and private investment in key sectors (e.g., agriculture, agro-business, mining, tourism); (ii) human development, with a focus on some social sectors and expanding the social safety net; and (iii) better governance, peace and security. The three pillars are expected to be the foundation to put Senegal on a higher, sustained and inclusive growth path to reach upper-middle income country and emerging market status by 2035.

2. This note aims to provide policy recommendations for Senegal to sustain high and inclusive growth needed to attain upper-middle income and emerging market status by 2035, as envisaged by the PSE. It first summarizes Senegal’s growth performance over the past 30 years and compares it to that of fast growing countries in the region and elsewhere. It then explores possible sources of future growth and obstacles to unlocking the potential contribution of these sectors before proposing policy options for Senegal to sustain high and inclusive growth.

B. Growth Performance Over the Past Thirty Years

3. Senegal has experienced four growth periods over the past 30 years (Figure 1).1 Economic performance was poor before the 1994 CFA franc devaluation. Senegal then recorded a period of higher growth in 1995–2007, with per capita growth averaging about 1.7 percent. This average masks yearly variations reflecting volatility in agriculture output, with per capita growth nearing 4 percent in some years and dropping to negative values in others. In response to a series of exogenous shocks starting in 2007 (i.e., food and fuel global prices, global financial and economic crisis, the electricity sector crisis and drought in the Sahel), per capita growth decreased to an average of 0.3 percent in 2008–2013. The recent growth uptick, averaging 2.2 percent in per capita terms, is the highest of the four growth periods and, if sustained, could be a turning point for Senegal.

Figure 1.
Figure 1.

Senegal: Real GDP Per Capita Growth

(Percent, 1987-2015)

Citation: IMF Staff Country Reports 2017, 002; 10.5089/9781475564266.002.A001

Sources: Staff calculations based on IMF and World Bank’s data

4. To situate Senegal’s growth performance, it is worth contrasting it with that of fastest growing countries (Table 1). The fastest growing comparators were selected from the following country groups: sub-Saharan Africa (SSA), low income countries (LICs) and lower and middle-income countries (MICs). LICs and MICs were selected based on their 1987 World Bank classification. MICs include both lower and upper-middle income countries. Average real GDP per capita in 2010 US$ over 1987-2015 was used to rank countries, excluding resource-rich ones.

Table 1.

Senegal: Average Real GDP Per Capita Growth, 1987-2015

article image
Source: Staff calculations based on World Bank’s data.

World Bank Classification (GNI per capita - US$)

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Source: World Bank

5. Senegal’s annual per capita growth of only 0.6 percent for the period 1987 to 2015 was significantly lower than that of all the fast-growing countries (Figure 2). In the high growth episodes, per capita growth averaged 1.8 percent. In the current high growth episode, it has reached the lower bounds of the top 10 in SSA (equaling Tanzania in the 10th position, at 2.2 percent). This differs from past experience where growth has fallen short of the authorities’ target under successive poverty reduction strategies (PRS). If the PSE growth targets were to be achieved and maintained over the next 20 years, this would place Senegal in the same league as the fastest-growing Sub-Saharan African economies such as Cabo Verde, Ethiopia, Mauritius and Mozambique.

Figure 2.
Figure 2.

Senegal: Average Real GDP Per Capital Growth

(Percent, 1987-2015)

Citation: IMF Staff Country Reports 2017, 002; 10.5089/9781475564266.002.A001

Sources: Staff calculations based on IMF and World Bank’s data

6. At the sectoral level, services have seen a faster increase in activity since the mid-1990s (Table 2). This has been particularly the case in transport and telecommunication, although trade has contributed the most to GDP growth. The primary sector, with agriculture leading the way, registered the highest increase in activity during the recent growth uptick. While the share of the tertiary sector in GDP has increased significantly, the share of the secondary sector has remained relatively constant and that of the primary sector (including agriculture) has decreased. The strong contribution of trade to growth and a relatively high share of trade in GDP in Senegal are indicative of the role public investment has played in growth. Also, Senegal’s observed structural shift toward the service sector is different from the pattern of economic transformation observed in countries that have managed to reach upper-middle income status:

  • Malaysia experienced declines in the share of agriculture in GDP and higher increases in shares of industry prior to the development of services. The development of services in Malaysia was preceded by combinations of import substitution and export oriented development strategies. From independence, development initially focused on heavy industries. With the onset of the East Asian Financial Crisis Malaysia introduced its new export oriented strategy with a cluster-based approach to industrial dynamism allowing greater emphasis on the service sector.2

  • Mauritius built up its manufacturing sector by rapidly moving from import substitution in the lead up to independence in the 1960’s to an export strategy based on export-friendly regulations in export processing zones in the 1970’s. Industrial policy channeled tax incentives and subsidies to benefit from trade preferences and promote export sectors. With the end of the Multi-Fibre Agreement and the EU sugar protocol, in 2006 there was shift to promoting globally competitive exports of goods and services.

Table 2.

Senegal: Sectoral Contribution to GDP, 1991-2015

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Source: IMF Staff estimates based on Authorities’ data

Percentage change

Percent

7. Senegal’s service sector is composed mostly of non-tradable in commerce and telecommunication where growth is limited by the small size of the domestic market. Commerce has been a low productivity subsector partly due to the predominance of the informal sector which uses most of the labor force. Although other parts of the service sector have relatively high productivity, the scope for these services to grow is limited. Consequently, reallocation of labor from low productivity agriculture to high value services has been limited and explains in large part the low per capita growth rates of the past 30 years. In the absence of expanding export sectors in manufacturing and services, the main shift has been from agriculture to commerce and the informal sector, both of which have limited growth perspectives and relatively low productivity. For the PSE to succeed, Senegal’s structural transformation would need to shift to the pattern observed in countries like Cabo Verde, Korea, Malaysia, Mauritius and Thailand, all of which emphasized the expansion of globally competitive goods and services.

8. Growth in Senegal has been driven mainly by public investment and remittances-fueled private consumption (Table 3). Remittances grew by an average of more than 20 percent per year between 1995 and 2007 and have become a major source of financing for the economy.3Public investment also grew substantially, particularly during the 1995-2007 growth period, averaging 12 percent while private investment only registered 6 percent average growth.

Table 3.

Senegal: Consumption, Investment and National Saving, 1991-2015

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Annual percentage change

In percent

Nominal growth rates

Source: Staff calculations based on authorities’ data.

9. The performance of investment and exports in Senegal relative to the fastest growing countries could in part shed light on why Senegal has had low per capita GDP growth for 30 years. For comparison purposes, growth episodes are identified in the aforementioned fastest growing countries over 1987-2015. A growth episode is defined as a period of growth in real GDP per capita of 3.5 percent or more for 5 or more consecutive years. The following text table lists the growth episodes by country. Five-year averages before and after the starts of episodes are compared with averages during the episodes to assess the role played by certain variables on growth (Table 4).

Table 4.

Senegal: Growth Episodes in Fastest Growing Countries, 1994-2011

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Source: Staff calculations based on World Ban’s data.

10. Increases in private investment and FDI tend to precede or coincide with episodes of high growth in high growth countries, while the opposite occurs in Senegal (Figure 3). Average FDI as a share of GDP was higher in Senegal (0.6 percent of GDP) than in Mauritius (0.4 percent of GDP) and Cabo Verde (0.3 percent of GDP) 5 years before the beginning of the respective countries’ growth episodes. What is particular to Senegal is that average FDI as a share of GDP was higher, 2.5 percent 5 years after the growth episodes versus 1.9 percent during the growth episode, implying that FDI is being pulled by growth in Senegal rather than FDI leading to growth, as is the case in countries like Cabo Verde, Malaysia, Mauritius and Sri Lanka.4 A similar pattern can be observed regarding private investment as share of GDP, which increased significantly in the Dominican Republic (18.8 to 23.8 percent), Mauritius (from 12.1 to 17.1 percent) and Sri Lanka (from 17.2 to 21.5 percent) during their growth periods. In contrast, private investment increased by more following the 1995-2007 growth period in Senegal (from 14.9 percent before the growth episode, to 17.3 during the growth episode, and 17.7 5 years after the growth episode). Significantly higher exports as shares of GDP during and after the growth periods is observed in the fastest growing countries where increases in private investment and FDI preceded or coincided with growth periods. This could be a reflection of the countries’ respective successful policies of attracting productive private investment and FDI to spur higher and sustained per capita growth via exports. In contrast, the FDI may have been induced to support domestic demand resulting from the growth spurt.

Figure 3.
Figure 3.

Senegal: Before, During and After Growth Episodes

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 002; 10.5089/9781475564266.002.A001

Source: Staff calculations based on IMF and World Bank’s data.

11. Growth has been factor-intensive (Figure 4). A growth accounting exercise suggests that growth is mostly explained by factor accumulation.5 Total factor productivity (TFP) was low before the mid-1990s, and again during 2008-2013. It only grew modestly during the decade of relatively robust growth (1995–2007) and the recent growth uptick. A number of factors could explain this poor productivity performance.6 First, the TFP decline during 2008-2013 coincides with the deterioration of Senegal’s doing business and governance indicators, which could have affected the productivity of both public and private investment. Second, large and increasing remittances may have supported GDP via private consumption, but not sustained growth, as they might have been invested in sectors less likely to increase long-term growth (such as housing and commerce, as evidenced by the significant contribution of commerce to growth).

Figure 4.
Figure 4.

Senegal: Growth Accounting, 1991-2015

Citation: IMF Staff Country Reports 2017, 002; 10.5089/9781475564266.002.A001

12. Compared to fast growing countries, Senegal’s TFP performance has been low since 1987.7 TFP growth over the past 30 years averaged less than 1 percent in Senegal while TFP in Rwanda and Mozambique grew by more than 4 percent on average. Mauritius, India and Sri Lanka averaged more than 1 percent while Poland and China averaged more than 2 percent. This partly explains the higher per capita growth enjoyed by these countries relative to Senegal.

A01ufig1

Average TFP Growth (1995-2007, in percent) Senegal compared to fastest growing countries

Citation: IMF Staff Country Reports 2017, 002; 10.5089/9781475564266.002.A001

C. Growth Outlook and Challenges

13. Over the medium term, growth could largely be driven by a projected strong rebound in productivity provided reforms to open economic space are put in place (Table 5). In addition to existing drivers of growth, mostly in the service sector (IT, financial services), five new sectors are expected to drive growth over the medium to long term if reforms to open economic space are put in place. These include agriculture and agribusiness, manufacturing for export, mining, tourism and housing. As PSE reforms are fully implemented over the medium term, an improved business climate combined with sector-specific reforms would lead to higher productivity growth that will improve economic efficiency and lead to per capita growth rates never seen in Senegal, but typical of the fastest growing countries. Real GDP (per capita) growth is projected at 7 percent (4 percent), driven by improvements in TFP.8 Industry is projected to have the highest increase in economic activity (driven by strong improvement in TFP) followed by the primary and service sectors. A significant increase in total investment (307.3 percent of GDP), particularly private investment and FDI (19.9 and 3 percent of GDP, respectively), is projected to support growth over 2016-21. Domestic private investment and FDI were 17.2 and 2.3 percent of GDP, respectively, in 2015.

Table 5.

Senegal’s Growth Accounting, 2016-21

article image
Source: Staff estimates based on Authorities and World Bank’s data

14. As described in the PSE, constraints to growth abound in Senegal. The low per capita growth experienced by Senegal over the past 30 years is partly explained by (i) low productivity, driven by a relatively poor business climate and weak governance and by inadequate human capital; (ii) inadequate infrastructure and difficult access to the factors of production; (iii) agriculture’s vulnerability to weather; and problems with access to land and financing. More importantly, the extended period of low growth is also due to delays in the implementation of reforms (caused by resistance from vested interests), notably in the energy sector and the business environment, and the inefficiency of public spending.

15. Unlocking agriculture productivity and enhancing the ability of the economy to create productive employment opportunities is one of the keys to achieving higher, sustained and inclusive growth. Despite its limited contribution to GDP, agriculture has significant potential as a driver of enhanced livelihoods in Senegal. However, growth in the agricultural sector has been slow and volatile over the years, subject to climatic shocks linked to changing rain patterns. Unlocking agriculture growth will require implementing and accelerating ongoing reforms in the groundnut, rice and horticulture sectors, while continuing to develop irrigation and enhance the quality of seeds. A climate favorable to the production of fresh fruits and vegetables throughout the year and the relative proximity to the European market put Senegal in a very good position. Land reform is also critically needed to raise productivity and attract private investment. In the absence of long-term property rights (whether ownership or long-term leases), there is no incentive to pay for investments in land improvement, irrigation and inputs nor is there the collateral to support financing for such investment. In contrast, property rights in agriculture could underpin the transformation of agriculture along the lines of the green revolution in Asia and similar developments in Europe and the Americas. If successful, this process is likely to improve the livelihoods of the large share of the population still living in rural areas. However, productivity increases in agriculture will also generate additional pressures for jobs in new sectors, particularly in established and emerging urban centers. Jobs will be required for the growing urban population which will continue to be fueled by rural migration. Currently, opportunities in urban centers are insufficient and most the population is pushed into low productivity informal jobs in commerce. Productive job creation will likely come from the emergence of diversified service and industrial sectors, to be built on the foundation of enhanced competitiveness.

16. Senegal’s industry has suffered from lackluster performance over the years. The PSE highlighted the challenges facing the industry sector. These include the fragility of the industrial base due to its high level of fragmentation, relatively small units of production, and a limited number of large participants, as well as chronic under-capitalization; high cost of factors of production, particularly energy; unskilled labor (due to very high wages in the formal sector by international standards); under-utilization of production capacity; narrowness of the domestic market and export competitiveness problems; shortage and cost of skilled labor; slowness of reforms regarding the business environment; access to and cost of financing; strong concentration in Dakar; and limited diversification of production. Despite these constraints, the industry sector has growth opportunities linked to the country’s strategic position and stability and its membership in community organizations (West African Economic and Monetary Union—WAEMU, and the Economic Community of West African States - ECOWAS), as well as access to the US market through AGOA and the EU via the Economic Partnership Agreements.

17. The tourism subsector is an important potential source of growth. However, on average, it has only been about 1 percent of GDP since 1990. Performance in the subsector is highly contingent on the quality of domestic supply, growth in target countries, and heightened international competition. Challenges facing tourism in Senegal include, but are not limited to: undiversified and insufficiently competitive supply, poor service quality, a lack of qualified labor, and a failure to promote Senegal as a destination. Resort areas such as Saly and Cap-Skirring need rehabilitation and upgrading. The PSE points to significant tourism potential yet to be developed and promoted, including Point Sarene, Joal, Grand Cote, and Pays Bassari. Despite the constraints, Senegal has significant potential for developing business and cultural tourism in view of its natural wealth, its rich culture and its location. An added opportunity arises if Senegal can market itself as a stable democracy that is safe in a region increasingly affected by turmoil. However, the system for allocating prime tourist land for development needs to be overhauled to focus on competitive international bidding to attract the best world class operators, rather than favoring those who are best connected. Moreover, potential deals need to ensure that the commercial risks are fully passed on to the operators who receive land for development with the Government obtaining a lump sum payment from the highest bidder.

Figure 5.
Figure 5.

Senegal: Tourism in Senegal and Comparators

Citation: IMF Staff Country Reports 2017, 002; 10.5089/9781475564266.002.A001

Source: Staff calculations based on World Bank’s data.

18. One of the biggest constraints to higher, sustained and inclusive growth in Senegal is its business climate9. In recent years, Senegal has made starting a business easier by reducing the minimum capital requirement and making obtaining construction permits less time-consuming by reducing the time for processing of building permits. Senegal has also improved its credit information system by establishing a credit bureau. Moreover, the government strengthened minority investor protections by introducing greater requirements for disclosure of related-party transactions to the board of directors. Finally, it made paying taxes easier for companies by abolishing the vehicle tax and making it possible to download the declaration forms for value added tax online. These improvements should help attract private investment and FDI, but Senegal started from a low base and is still far behind many SSA and middle-income countries, requiring continued reform to create a business environment that can catapult the economy to a higher, sustained and inclusive growth.10 High costs of energy, and problems with reliability of supply, are widely seen as the most binding constraints to improving the competitiveness of the Senegalese economy.

A01ufig2

Electricity Power Transmission Losses During Growth Episodes

(Percent of Output)

Citation: IMF Staff Country Reports 2017, 002; 10.5089/9781475564266.002.A001

Source: Staff calculations based on IMF and World Bank’s data.

Reforms Required to Achieve PSE Growth Targets

Senegal’s PSE seeks to promote sustained strong growth through economic reforms designed to boost private investment in key strategic sectors. Sustained strong growth is feasible, but will require a determined implementation of the PSE and a break with the status quo. Partial implementation of the targeted reform package could result in a low impact on growth, as a critical mass of reforms is required to unlock the growth rates targeted by the PSE. The following (non-exhaustive) key reforms could add as much as 3–4 percentage points to Senegal’s growth potential, and about 150,000 jobs annually, setting the country on the path to high, sustained and inclusive growth:

  • Foster macroeconomic stability for higher levels of private investment.

  • Create budget space for required public investment in human capital and public infrastructure.

  • Improving PFM to promote the effectiveness of public investment.

  • Promote reforms to the tax system designed to make it simple and easy to comply with to encourage informal SMEs to join the formal sector and support overall investment and job creation.

  • Accelerating the restructuring of SENELEC to increase the level of electricity supply and reduce the costs of production.

  • Reform the peanut sector in accordance with the development objectives of the PSE and PRACAS (Accelerated Program for Agriculture in Senegal).

  • Change the rules for the Special Economic Zones (SEZs) to emphasize good economic governance. Continue to improve human capital.

  • Pass a comprehensive land reform, based on best practices, but adapted to the realities of the country.

  • Reform the labor market to protect workers instead of jobs by making it easy to rotate labor for economic reasons whilst supporting job search and training and an unemployment benefit system.

  • Create an investment regime that is based on rules and that emphasizes ex-post verification over ex ante approval so that FDI and SMEs can flourish.

  • Finalize the implementation of the tourism sector’s reforms.

D. Conclusion and Policy Recommendations

19. For Senegal to reach PSE objectives, reforms under the PSE need to transform the economy and create space for SMEs and FDI to thrive. Steadfast actions in the following areas will be critical if Senegal is to turn the recent growth uptick into a high, sustained and inclusive growth and become an upper-middle income emerging market economy by 2035:

  • Continue to improve the business climate. Reform of Senegal’s business environment should be accelerated if the country is to achieve upper-middle income and emerging economy status. Macro-structural reforms should be stepped up in the energy sector where Senegal still ranks 170th in the world (compared to Mali at 151st, Mauritius at 41st and Malaysia at 13th). Progress in the electricity sector can be achieved by continuing to improve reliability of supply and reduce electricity costs. Reforms of the taxation system, including by simplifying procedures and optimizing the tax rates, is another macro-critical area where Senegal needs to make significant strides. Improving the judicial system, including through better investor protection and registering property, could help boost credit to SMEs and private investment in support of sustained high growth.

  • Reform the peanut sector in accordance with the development objectives of the PSE and PRACAS (Accelerated Program for Agriculture in Senegal), by rebuilding a competitive oil milling sector through the introduction of increased competition, structuring and regulation of small land holders, bringing small-scale oil manufacturing units up to standard, and implementation of seed legislation to promote the creation of small processing companies and curb exports of unprocessed seeds. The potential actions to achieve these outcomes are outlined in the following World Bank study:”Etude diagnostique de la chaÎne de valeurs arachide au Sénégal: Proposition de réformes”. In addition, further measures to mobilize resources for irrigation and mechanization would help boost agriculture productivity.

  • Change the rules for the Special Economic Zones (SEZs) to emphasize good economic governance. While it important to undertake comprehensive reforms to improve Senegal’s overall business environment, it is unlikely that the recent rate of improvement will be sufficient to achieve high, private-sector led growth in the near term. A SEZ can help attract domestic and private investment. However, Senegal’s experience has shown that businesses have not responded to previously-offered 50-year tax holidays, suggesting that FDI and SMEs are looking for a supportive regulatory framework, rather than tax exemptions. Partly as a result of the peer learning facilitated by the Fund, the authorities are working with the Government of Mauritius to set up a Zone of Good Economic Governance. This zone should aim to have one of the best business climates in the world, as well as a tax regime that has limited rules based tax exemptions applicable to all and is easy to comply with. This approach is more likely to unlock FDI and create space for SMEs than the current regime. For the new approach to work, however, the economic governance of these zones needs to be protected from rent-seeking that has kept FDI that is not seeking favors and SMEs from taking hold. One option would be for the zone to be given the power for its own economic regulation, a provision available in the legislation. Moreover, the rules could be made by investors and workers in the zone together with Government representatives.

  • Continue to improve human capital. Endogenous growth theory suggests a strong linkage between human capital investment and growth (Romer, 1990). Human capital includes education, health, training and other investments that enhance an individual’s productivity and few economists would argue against the view that investments in health, knowledge and skills of people are as important as investments in physical infrastructure. Better human capital attracts FDI and multinational enterprises. Cleeve and others (2015) show a robustly positive and significant effect of human capital on FDI inflows. Recently, FDI has been concentrated in relatively skill-intensive production and services and less toward primary and resource-based manufacturing (Cleeve and others, 2015).11 If Senegal is to attract higher value-added FDI and multinational enterprises in its quest for higher, sustained and inclusive growth, its human capital needs to be upgraded beyond basic skills required for FDI inflows. At the early stages of their development, countries like Malaysia adopted policies aimed at upgrading their human capital beyond the basic skills required to attract FDI.

  • Improve labor market efficiency. In addition to productivity and capital, employment is one of the supply-side drivers of sustained growth.12 Well-functioning labor markets are essential to sustained growth. Indeed, labor market efficiency could lead to employment growth through greater flexibility in wage setting and in hiring and firing policies, while maintaining adequate worker protection. Senegal could benefit from labor market reforms as a relatively rigid labor market has resulted in high wages. Prudent public employment and wage policies could reduce skill mismatch in the labor market and further enhance potential for growth. A good starting point would be to update labor laws and the rules for recording contracts and managing disputes, consistent with the 1998 evaluation of the code which focused on changes necessary for Senegal to achieve emerging country status.

  • Introduce a comprehensive land reform. A study based on land reform in India showed that land reform has a positive and significant impact on income growth and accumulation of human and physical capital (Deininger and others, 2007). In Senegal, land reform is critically needed to raise productivity and attract private investment. Passing a comprehensive land reform, based on best practices, but adapted to the realities of the country, in order to establish property rights, is essential for the development of the agriculture sector and could help boost credit to SMEs and private investment in support of sustained high growth.

  • Finalize the implementation of reforms in the tourism sector, in particular, by: (i) diversifying the supply of services through developing and exploiting tourist potential, (ii) improving the quality of services and the workforce, (iii) improving the marketing of Senegal as a top tourist destination, (iv) developing micro tourism, and (v) improving connectivity with target markets.

  • Raise external competitiveness to boost exports by improving logistics performance and strengthening infrastructure13.

20. The above, if continuously underpinned by coherent strategies and long-term planning frameworks, could help establish robust institutions. This will require government structures that are transparent and accountable, which in turn will depend on leadership commitment to reaching the PSE objectives.

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1

Senegal’s growth periods are derived by computing 5-year moving averages of the growth rates of real GDP per capita in 2010 US$.

2

”Clusters are made up of firms that are linked in some ways and that are geographically proximate. They are geographic concentration of inter-connected companies, specialized suppliers, service providers, firms in related industries, and associated institutions such as universities, standards agencies and trade associations in a particular field that compete and/or cooperate with each other. The fact that these firms and institutions are geographically proximate facilitates the movement of ideas and people between them, which ultimately promotes innovative behavior.”–Desrochers and Sautet (2004, page 234).

3

The jury is still out on the impact of remittances on growth but Giuliano and Ruiz-Arranz (2008) show that remittances can boost growth in countries with less developed financial systems by providing alternative options to finance investment and by helping overcome liquidity constraints. This latter finding is corroborated by Bettin and others (2015).

4

Average FDI as share of GDP was 0.2, 3.2, 0.2, and 0.3 percentage points lower five years after the growth episodes in Cabo Verde, Malaysia, Mauritius and Sri Lanka, respectively.

5

The growth accounting exercise uses a standard Cobb-Douglas production function, with an elasticity of output with respect to capital of 0.3, and an annual depreciation rate of the capital stock of 5 percent. The economically active population (from the World Bank database) is used as a proxy for labor input.

6

Eichengreen and others (2011) found that 85 percent of the slowdown in the rate of output growth can be explained by a slowdown in total factor productivity growth (TFP), much more than any slowdown in physical capital accumulation. Productivity growth can be affected by several factors, including, but not limited, to individual decisions to acquire skills, access to different types of public infrastructure, and a higher share of workers with advanced education engaged in innovation activities.

7

Note that the TFP data used in this paragraph is different from the one underlying Senegal’s growth accounting exercise. The growth accounting exercise uses real GDP in CFAF (base year =1999). The TFP data used for comparison comes from the Penn World Table version 9.0 and is at constant national prices with 2011 as base year. The fastest growing countries are selected based on data availability.

8

To reach upper-middle income status in 20 years, Senegal would need to quadruple its current $1000 US$ per capita. To achieve this goal, a 7 percent average annual growth combined with no more than 3 percent in population growth would be needed. It should be noted that in the World Bank’s income classification, the lower bound for upper-middle income countries has increased by about 30 percent between 1995 and 2015, which means that Senegal’s current $1000 GNI per capita may need to reach about US$ 5320 in 2035 to reach upper-middle income status, implying that growth rates higher than 7 percent may be required.

9

For more details, see the Selected Issues Paper entitled “Export Diversification and Competitiveness in Senegal.”

10

Senegal’s rank improved to 153rd in 2016. Mali’s rank is 143rd while that of Mauritius, Seychelles, and Malaysia is 32nd, 95th and 18th, respectively.

11

Asiedu (2006) showed that countries that are endowed with natural resources or have large markets will attract more FDI. However, the same study showed thatan educated labor force, good infrastructure, macroeconomic stability, openness to FDI, an efficient legal system, political stability and less corruption also promote FDI.

12

Barro (1997) and Barro and Sala-i-Martin (2004) provide comprehensive literature reviews.

13

For more details, see the Selected Issues Paper entitled “Export Diversification and Competitiveness in Senegal.”

Senegal: Selected Issues
Author: International Monetary Fund. African Dept.