West African Economic and Monetary Union: Selected Issues

Selected Issues

Abstract

Selected Issues

Sharing the Dividends of Growth1

1. The WAEMU has been one of the fastest growing regions in sub-Saharan Africa for the past decade. Average growth in the region is projected to exceed 6 percent for a seventh consecutive year in 2018, despite security concerns and terms-of-trade shocks. This growth spell begs the question as to what extent have the benefits been shared across the population and translated into better development outcomes, such as better health, education, lower poverty and inequality, and other indicators targeted at achieving the sustainable development goals (SDGs).

2. The literature provides ample support that a more equal income distribution and more equal opportunities across the population support key macroeconomic outcomes.

  • In countries where income inequality is high, growth spells and growth rates have been lower (Ostry, Berg and Tsangarides 2014; IMF 2015), driven by a number of channels (Gonzales and others 2015; Dabla-Norris and others, 2015): income and wealth inequality can cause underinvestment in physical and human capital (Galor and Zeira 1993; Galor and Moeav 2004; Aghion and others 1999), decrease the degree of mobility across generations (Corak 2013), dampen aggregate demand (Carvalho and Rezai 2014), trigger social unrest, and impede export diversification (IMF 2017). These effects empirically dominate the potentially positive impacts of growth that a less equal income distribution creates by providing incentives for innovation and entrepreneurship.

  • Addressing gender inequality in outcomes (labor force participation, income) and opportunities (education, financial access, health) in itself is an important development objective, including towards achieving the SDGs. In addition, these inequities distort an efficient allocation of human capital in the labor market, with negative implications for productivity (Cuberes and Teignier 2016; Loko and Diouf 2009), growth (IMF 2015; Gonzales and others 2015); firm profits (Christiansen and others 2016), and economic diversification (Kazandjian and others 2016). Conversely, higher gender equality has been linked to less volatility in growth in developing countries (IMF 2014).

  • In sub-Saharan Africa, decreasing the level of income and gender equality jointly to levels observed in fast-growing Asian countries, could increase real GDP per capita growth by some 1 percentage points annually (and higher levels for more ambitious targets) (IMF 2015).

3. In the WAEMU, addressing the above inequities could thus be an avenue to boost diversification, growth and stability, while moving towards achieving the SDGs. As argued in Hooley and Newiak (2015), population growth in the WAEMU provides the opportunity to boost future growth. Countries that have seen an increased number of entries into the labor market amidst declining fertility rates have experienced declining dependency ratios—a prerequisite for the demographic dividend. However, while declining dependency ratios are a necessary condition, they are not sufficient: Human capital accumulation, through better education and health services, is critical to allow workers to take on higher-productivity tasks.

4. Scope of this paper. This paper provides an overview of the state of poverty and inequality of income and opportunity, including between men and women, in the WAEMU, quantifies the impact of these inequities on growth and economic diversification, and suggests some policy measures at the national and regional level.

A. Stylized Facts

Poverty

5. Average poverty has decreased in the WAEMU but has remained high compared to benchmark Asian and African countries (Figure 1). The latest poverty statistics indicated that the average poverty headcount ratio at US$ 1.90 per day—the international extreme poverty line—has decreased by 19.2 percentage points compared to the early 1990s. Although extreme poverty has significantly declined in the WAEMU, about 42 percent of the population still lives on less than US$ 1.90 per day and about 75 percent (90 percent) lives on less than US$ 3.20 (US$ 5.20) per day. Average poverty rates in the WAEMU remain higher than those of benchmark Asian and African countries with long episodes of growth acceleration.2 However, the latest data suggest that the average extreme poverty rate in the WAEMU remains about 13 percentage points below that of benchmark Asian countries when the latter were at the same level of GDP per capita.

Figure 1.
Figure 1.

WAEMU: Trends in Poverty and Inequality

Citation: IMF Staff Country Reports 2019, 091; 10.5089/9781498305945.002.A003

Sources: World Bank, Poverty and Equity Database, 2018; and Solt, Frederick (2016) “The Standardized World Income Inequality Database.” Social Science Quarterly 97. SWIID Version 7.1, August 2018. Benchmarks are chosen to reflect aspirational goals: Asian benchmark includes Indonesia, Malaysia, Philippines, Thailand, and Vietnam. African benchmark includes Ghana, Kenya, Lesotho, Rwanda, Tanzania, Uganda, and Zambia. Country group figures are weighted averages.The dates for which poverty data is available for the WAEMU countries are the following: Benin (2015), Burkina Faso (2014), Côte d’Ivoire (2015), Guinea-Bissau (2010), Mali (2009), Niger (2014), Senegal (2011), and Togo (2015).The dates for which inequality data is available for the WAEMU countries are the following: Benin (2015), Burkina Faso (2014), Côte d’Ivoire (2015), Niger (2014), Senegal (2011), Togo (2015).

6. In contrast to the decrease in average poverty in the WAEMU, the absolute number of people living in poverty has increased because of population growth. The number of people living in extreme poverty has increased by 16.5 percent (corresponding to 6.4 million of people) compared to the early 1990s, according to latest data available. About 45 million of people out of 102 million still live in extreme poverty in the WAEMU. This reflects high population growth in absolute terms but also differences in population growth dynamics among income groups.

7. Poverty in the WAEMU is higher in rural area than in urban area. The average poverty rate in rural areas is almost double that of urban areas, reflecting inequality of opportunities within those areas.3 Figures on the intensity of poverty—poverty gaps at national poverty lines—suggest a similar picture.

8. The decrease in average extreme poverty rates masks some heterogeneities among WAEMU countries. Extreme poverty rates have decreased in most countries, except in Benin, Côte d’Ivoire and Guinea-Bissau—reflecting the 2002–11 civil strife in Côte d’Ivoire and episodes of political instability in Guinea-Bissau. In countries where extreme poverty rates have decreased, the performances have been heterogeneous. In Burkina Faso, Mali, Niger, and Senegal, the latest extreme poverty data suggested that poverty has decreased by about 1/3 compared to the early 1990s, while the decrease has been modest in Togo.

9. The number of people living in extreme poverty also shows some important heterogeneities. While the number of people living in extreme poverty has more than doubled in Côte d’Ivoire and Guinea-Bissau, it has increased by about 2/5 in Benin and relatively less in Niger and Togo. Only Burkina Faso, Mali, and Senegal show some slight decreases in the number of people living below the extreme poverty line.

Income Inequality

10. The average decrease in extreme poverty has not been accompanied by an improvement in income and gender inequality of similar magnitude. Average income inequality in the WAEMU, as measured by the net Gini coefficient, has decreased by only 1.8 percentage points between 1990 and 2015, a lower performance compared to the average decrease in extreme poverty. In addition, the level of income inequality in the WAEMU remains higher than those of benchmark countries, including when those countries where at the same level of GDP per capita. Income inequality has decreased in four countries (Burkina Faso, Mali, Niger, and Senegal). However, it has also increased in four others (Benin, Cote d’Ivoire, Guinea-Bissau, and Togo), reflecting the above trend in extreme poverty.

11. Despite the overall declining trend in income inequality in the WAEMU, significant heterogeneities persist among income groups. While the top 10 percent of the income distribution accounts for 30 percent of the total income across WAEMU countries, the bottom 10 percent earns only 3 percent of the region’s total income.

B. The Constraints: Human Capital and Inequality of Opportunity

12. Indicators of human capital suggest large gaps in health and education. According to the latest findings of the World Bank’s Human Capital Project, WAEMU countries’ level of human capital index, capturing a number of health and education dimensions, ranks at the bottom of countries worldwide, with particular challenges in Mali and Niger—which rank among the bottom three countries, just after South Sudan (Figure 2, panel 1). These outcomes have been driven by challenges in both education and health.

Figure 2.
Figure 2.

WAEMU: Human Capital and Education

Citation: IMF Staff Country Reports 2019, 091; 10.5089/9781498305945.002.A003

Sources: World Bank Human Capital Project; and World Development Indicators, UNESCO.Note: Scatter plots include a global sample of countries.

13. Education outcomes vary widely across WAEMU countries, suffer from quality issues, and access to them within the population is very unequal.

  • Average years of education vary from less than 6 years in Mali and Niger to over 9 years in Benin and Togo (Figure 2, panel 2). Quality-adjusted education levels are even lower, implying for example half of the education levels in Mali and Niger vs. two thirds in Burkina Faso and Senegal—suggesting there are issues with the efficiency of education (Figure 2, panel 3).

  • Education outcomes vary strongly across countries, income, and gender (Figure 2, panel 4). For instance, the average time in school for a girl who belongs to a family in the bottom wealth quintile in Niger is just about 4 months, whereas a boy who belongs to a family in the richest quintile in Togo enjoys almost 11 years of education on average.

  • Government expenditures on education have increased over time. They reached more than 7 percent of GDP in Senegal in 2015 (up from just above 3 percent of GDP two decades earlier) and are generally above or close to 4 percent of GDP elsewhere, except for Guinea-Bissau (2.51 percent of GDP according to latest available statistics).

14. Health outcomes have improved significantly but major challenges remain, in particular, for children. Under-five mortality rates have declined significantly, and are now on average about half the level of above 200 deaths per 1,000 live births observed in 1990. However, current ratios still imply that more than one in ten children die before reaching their fifth birthday in Mali, and seven to ten children in hundred children die in the remaining WAEMU countries, with the exception of Senegal (less than 5 deaths per 100 children) (Figure 3, panel 1). 17 (Senegal) to 42 (Niger) percent of children suffer from stunting (Figure 3, panel 2). Maternal death ratios have declined, from an average of above 7 percent to below 5 percent, but still imply that a mother dies in every 20th live birth (Figure 3, panel 3). Adolescent fertility rates are among the highest worldwide (Figure 3, panel 4). At the same time, health expenditures have been among the lowest worldwide (Figure 3, panels 5 and 6), both as a ratio to GDP and per capita.

Figure 3.
Figure 3.

WAEMU: Health Outcomes

Citation: IMF Staff Country Reports 2019, 091; 10.5089/9781498305945.002.A003

Sources: World Bank Human Capital Project; and World Development Indicators.

15. In most countries, several inequities in the legal system constrain women from being economically active (Table 1).4 For instance, in Mali, the law requires women to obey their husbands. Some countries differentiate between men and women in the ownership of property (Côte d’Ivoire and Guinea-Bissau) or inheritance rights (Senegal), constraining women’s ability to access finance (Deléchat and others 2018), including as collateral requirements remain high, and impeding women’s economic activity (Gonzales and others 2015a; Figure 4).5 In half of WAEMU countries, the law does not mandate equal pay for equal work. In countries where women are at the center of the economy with a high participation rate in the labor market—as in Burkina Faso, they still have unequal access to decent and quality formal jobs. In addition, some laws support early marriage and child bearing by allowing girls to get married legally as early as 14 with parental consent. In a few countries, authorizing child marriage is not punishable by law.

Figure 4.
Figure 4.

WAEMU: Gender Gaps in Economic Activity and Access to Finance

Citation: IMF Staff Country Reports 2019, 091; 10.5089/9781498305945.002.A003

16. Access to financial services also varies across countries, income and gender, exacerbating the effect of scarce health services and limiting economic opportunities (Figure 5).

  • In 2017, ownership of an account at a financial institution in the WAEMU varied from 9.5 percent (Niger) to 34.1 percent (Togo), compared to almost 37 percent and above 40 percent in African and Asian benchmark countries, respectively. Gender gaps are wide in several countries, with men almost three times as likely to own an account than women in Mali, and almost twice as likely in Côte d’Ivoire and Benin (Figure 5, panel 1), while mobile money account ownership appears somewhat more equally distributed (Figure 5, panel 2). Only a fraction of people who own accounts use it to save (Figure 5, panel 3).

  • In all WAEMU countries, less than 10 percent of the population borrows from a financial institution, with the richest 60 percent of the population three times more likely to borrow than the poorest 40 percent in Côte d’Ivoire, and more than twice as likely in Burkina Faso and Senegal (Figure 5, panel 4)—this result is all the more striking as every tenth (Senegal) to every fourth (Niger) person borrows from some source for health and medication purposes (Figure 5, panel 5). Borrowing for business purposes remains below African and Asian benchmarks in all WAEMU countries.

Figure 5.
Figure 5.

WAEMU: Inequality in Access to Financial Services

Citation: IMF Staff Country Reports 2019, 091; 10.5089/9781498305945.002.A003

Source: Findex 2017.
Table 1.

WAEMU: Gender Inequality in Legal Rights

article image
Source: Women, Business and the Law 2018.

C. The Impact: Quantifying the Impact of Inequality and Education on Growth and Diversification

17. This section quantifies the effect of income and gender inequality and education on growth of GDP per capita and diversification in the WAEMU, relying on econometric analyses from the literature. More specifically, it uses the estimated coefficients of income and gender inequality and years of schooling in econometric analyses done in IMF (2015) and Kazandjian and others (2016) to quantify the average annual GDP per capita growth and export diversification that could materialize if WAEMU income and gender inequality and education levels were to reach those observed in benchmark African and Asian countries. The estimated coefficients from IMF (2015) are drawn from growth regressions that rely on a broad sample of 115 countries over the period 1995–2014. Those growth regressions control for the commonly used growth determinants including initial income, infrastructure, investment, inflation, institutional quality, and terms-of-trade. The coefficients from Kazandjian and others (2016) are drawn from estimates of the effect of gender inequality on diversification using a large panel of 107 countries for the period 1990–2010 and controlling for other determinants of diversification. In both IMF (2015) and Kazandjian and others (2016), the well-known endogeneity concern is addressed using the generalized method of moments (GMM).

18. The results indicate that the WAEMU’s real GDP per capita growth rate and diversification could significantly benefit from decreases in income and gender inequality and improvements in education opportunities (Figure 6). Bringing the average level of income inequality in the WAEMU to the level observed in benchmark countries could potentially increase annual real GDP per capita growth by about 0.2–1.4 percentage points. In the same vein, closing gender inequality and female legal equity gaps has the potential to boost annual per capita income growth by about 0.2–0.5 percentage points. The results also suggest that differences in years of schooling could explain about 0.3–0.5 percentage points of the WAEMU’s income per capita growth rate shortfall compared to benchmark countries. A similar picture emerges for diversification, as reducing gender inequality gap relatively to African and Asian benchmark countries are also found to increase export diversification index by about 0.2 and 0.4 units, respectively (Figure 7). The magnitude of this effect is relatively large, as it is equivalent to up to about 1/4 standard deviations of the index across low-income and developing countries.

Figure 6.
Figure 6.

WAEMU: Average Annual Additional Growth Rate from Closing the Gap in Income and Gender Inequality and Education

Citation: IMF Staff Country Reports 2019, 091; 10.5089/9781498305945.002.A003

Source: Authors’ calculations.
Figure 7.
Figure 7.

WAEMU: Average Annual Additional Export Diversification from Closing the Gap in Gender Inequality

Citation: IMF Staff Country Reports 2019, 091; 10.5089/9781498305945.002.A003

Source: Authors’ calculations.

D. Policy Recommendations

19. A number of national policies are appropriate to increase economic opportunity for a wide range of the population:

  • Providing men and women, and boys and girls, with the same legal rights, and enforcing these rights is an essential step. Countries should eliminate any legal provisions that undermine equality of opportunity through differentiating in property and inheritance rights across genders and introduce anti-discrimination laws, such as in access to credit. The authorities should also raise awareness of existing rights and strengthen enforcement. For instance, in Senegal, a National Strategy for Women’s Economic Empowerment was launched in 2018, this can serve as an inspiration to other WAEMU countries.

  • Investing in education and health is critical to improve the accessibility and quality of education tailored to labor market needs and strengthen health outcomes. In particular, continued efforts to enhance the availability, accessibility and affordability of quality services—including sexual and reproductive health and rights for women and girls—are central to achieving progress. It will require additional fiscal space.6 To increase fiscal space for these expenditures, there is scope to replace across-the-board subsidies that benefit all segments of the population, including the wealthiest (while introducing well-targeted social transfer schemes to mitigate any adverse impact from such reforms). In addition, significant efforts are still required to increase overall domestic revenue mobilization.

  • Boosting infrastructure—particularly on social protection and public services—will help close gender gaps in education, access to electricity, water and sanitation facilities, as girls tend to spend a disproportional amount of time on household activity and are disproportionately affected by safety issues at school. Improved infrastructure would also more generally increase productivity and improve the ease of doing business in the WAEMU (see previous chapter in this paper on Boosting Competitiveness to Foster Trade Integration, Weather Terms-of-Trade Shocks and Support External Buffers).

  • Member countries should also continue to develop social spending indicators as part of the implementation of the regional directive bearing the Finance Act.

20. Regional policies, guidelines and monitoring could help with the implementation of these policies. These include:

  • Implementing the regional gender strategy, supported by consistent monitoring through the WAEMU commission, will be critical.

  • Leveraging structural funds dedicated to regional integration and agriculture development could also help;

  • Monitoring the efficiency of education and social spending by the WAEMU Commission and ensuring data provision along guidelines, so as to keep policymakers aware of both improvements and remaining challenges.

References

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1

Prepared by Hippolyte Weneyam Balima and Monique Newiak. The paper has benefited from comments from Bruno Versailles, Johnson Nkem Ndi and Yaindy Nuesi Bautista (UN Women), and colleagues from Benin and Guinea-Bissau teams.

2

Benchmark Asian and African countries refer to countries which had similar GDP per capita levels two-to-four decades ago but have experienced long-lasting growth acceleration since then. Remaining consistent with previous WAEMU’s Article IV consultations, the group of African benchmark countries includes Ghana, Kenya, Lesotho, Rwanda, Tanzania, Uganda, and Zambia. The group of Asian benchmark countries includes Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

3

While the poverty rate is 27.5 percent in urban areas, it is 54.0 percent in rural areas. Poverty rates in urban and rural areas are defined here using national poverty lines since data based on international poverty lines is not available.

4

A recent paper of Malta and Tavares (2019) provide a interesting analysis of gender gaps in education and labor market in Senegal.

5

For instance, Niger still relies on a colonial version of the civil law that does not allow married women to open a bank account without the permission of their husbands (World Bank, 2018).

6

For a reference on building fiscal space in the WAEMU, see Barhoumi and others (2016).

West African Economic and Monetary Union (WAEMU): Selected Issues
Author: International Monetary Fund. African Dept.