## _wp0480

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---

### I. Introduction
- The Central African Republic (C.A.R.) is one of the poorest countries in the world and ranked 168th out of 175 countries listed in the 2003 United Nations Development Program Human Development Index.
- Resident population was estimated at about 3.9 million in 2002.
- Economy highly dependent on diamonds and timber.
- Key constraints on sustained economic growth: political instability, weak governance, a low level of human capital, inadequate infrastructure, and conflicts in neighboring countries.
- Paper examines:
  - qualitative explanations of political instability and poor economic performance;
  - empirical determinants of political instability in the country;
  - empirical factors (including political instability) that have influenced economic growth.

### II. Main empirical conclusions and policy implications
- Determinants of political instability (empirical results summarized):
  - Propensity for political instability has been increased by past low tax revenue.
  - Propensity for political instability has been increased by deteriorations in the terms of trade.
  - Mechanism: weak revenue performance undermines government’s ability to pay salaries of civil servants and provide basic social services, raising frustrations and triggering political instability.
  - Insufficient economic diversification increases vulnerability to terms of trade shocks, raising economic and political volatility.
- Policy implications (drawn from empirical findings):
  - Efforts to enhance the country’s capacity to mobilize revenue would be critical in lowering the propensity for political instability.
  - Diversification of the C.A.R.’s economic base would reduce vulnerability to external shocks and diminish the propensity of terms of trade shocks to fuel domestic conflict.
- Impact of political instability on growth:
  - Direct impact of political instability on growth is not significant once domestic investment and economic performance in neighboring countries are accounted for.

### III. Economic and political performance since independence (high-level summary)
- Since independence in 1960, the C.A.R. economy has been intermittently and adversely affected by political instability and social unrest.
- Chronic weak revenue performance led to accumulation of domestic wage and external debt arrears and degradation of basic social services.
- Significant downward trend in terms of trade since 1977.
- By the late 1990s, the country was caught in a domestic and external debt trap.
- Despite democratization efforts in the 1990s (contested elections in 1993 and 1999), political situation remained tenuous.

### IV. Chronology of key events (selected)
- 1960: Independence with David Dacko as president.
- 1962: One-party state declared.
- 1965: Dacko ousted by Jean-Bédel Bokassa.
- 1972–1979: Bokassa’s increasingly repressive rule; 1977 proclamation as emperor.
- 1979: Bokassa ousted; Dacko returns.
- 1981: Dacko deposed by André Kolingba.
- 1991: Political parties permitted.
- 1993: Ange-Félix Patassé elected president.
- 1996 May and 1997 November: Soldiers’ uprisings over unpaid wages.
- 1999: Patassé re-elected.
- 2000 December: General strike by civil servants over back pay; riots follow.
- 2001 May: At least 59 killed in abortive coup by André Kolingba.
- 2001 November: Clashes after attempt to arrest sacked army chief General François Bozizé.
- 2002 May: Curfew lifted.
- 2002 October: Six days of heavy fighting in Bangui; Libyan-backed and Jean-Pierre Bemba forces involved.
- 2003 March: General Bozizé mounts successful coup and declares himself President.

### V. Comparative performance: C.A.R. vs. sub-Saharan Africa (averages during 1990-2000; units as indicated)
- Economic performance:
  - GDP per capita (constant 1995 US dollars): 332 (C.A.R.) vs. 559 (Sub-Saharan Africa)
  - GDP growth (annual percent change): 1.4 (C.A.R.) vs. 2.1 (SSA)
  - GDP per capita growth (annual percent change): -0.9 (C.A.R.) vs. -0.5 (SSA)
  - Tax revenue (in percent of GDP): 8.0 (C.A.R.) vs. 20.9 (SSA)
  - Gross domestic savings (in percent of GDP): 4.0 (C.A.R.) vs. 15.7 (SSA)
  - Gross domestic investment (in percent of GDP): 11.4 (C.A.R.) vs. 16.7 (SSA)
  - Trade in goods (in percent of GDP): 25.7 (C.A.R.) vs. 46.9 (SSA)
- Cost structure:
  - Telephone average cost of local call (US$ per three minutes): 0.7 (C.A.R.) vs. 0.08 (SSA)
- External assistance:
  - Aid (in percent of GNI): 13.4 (C.A.R.) vs. 5.7 (SSA)
- Physical infrastructure/technology:
  - Roads, paved (in percent of total roads): 2.3 (C.A.R.) vs. 14.9 (SSA)
  - Mobile phones (per 1000 people): 0.3 (C.A.R.) vs. 3.6 (SSA)
  - Personal computers (per 1000 people): 1.4 (C.A.R.) vs. 8.1 (SSA)
- Social performance:
  - Adult illiteracy rate (in percent of people ages 15 and above): 60.1 (C.A.R.) vs. 44.3 (SSA)
  - Primary school enrollment ratio: 57.7 (C.A.R.) vs. 75.0 (SSA)
  - Secondary school enrollment ratio: 10.1 (C.A.R.) vs. 24.6 (SSA)
  - Tertiary school enrollment ratio: 1.5 (C.A.R.) vs. 3.4 (SSA)
  - Immunization, DPT (in percent of children under 12 months): 53.6 (C.A.R.) vs. 51.5 (SSA)
  - Infant mortality rate (per 1000 live births): 97.9 (C.A.R.) vs. 96.7 (SSA)
  - Life expectancy at birth (in years): 45.7 (C.A.R.) vs. 48.9 (SSA)
- Additional poverty indicators:
  - Life expectancy at birth currently at about 43½ years and declining since 1990.
  - About 70 percent of the population live on less than $1 per day; about 86 percent live on less than $2 per day.

### VI. Trends since 1977 and historical trajectories
- 1977 marks the start of a downward trend in the country’s terms of trade.
- Over 1977-2002:
  - The terms of trade fell by about 52 percent.
  - Per capita real GDP fell by about 36 percent.
- Per capita real GDP has been falling virtually continuously since 1977; per capita real GDP in 2002 was about two-thirds of its level in 1977.
- Presidential-period highlights:
  - Dacko presidency (1960-65): Per capita real GDP fell by about 5½ percent cumulatively.
  - Bokassa presidency (1965-79): 1965-77 per capita real GDP increased by about 10 percent cumulatively; 1977 marked a turning point.
  - Dacko (1979-81): Per capita real GDP fell by almost 11 percent during 1979-81.
  - Kolingba (1981-93): Continued dependence on foreign aid; revenue-GDP ratio rose during 1981−84 then fell in mid-1980s; overvaluation of CFA franc hurt exports.
  - Patassé (1993–March 2003): By 1993 per capita real GDP was about two-thirds of its 1977 level; devaluation of CFA franc in 1994 helped arrest decline; from 1998 some revenue and fiscal consolidation improvements emerged but wage arrears and dissatisfaction persisted; presidency ended in March 2003 coup by Bozizé.

### VII. Political-economy features and structural vulnerabilities
- Concentration of political actors: A few personalities have dominated politics across administrations.
- Rent-seeking and natural-resource effects:
  - Diamonds and timber linked to rent-seeking, corruption, political competition, smuggling, and fraud.
  - Rents from natural resources may have incentivized seizures of power and patronage networks.
- Ethnic tensions:
  - Ethnolinguistic fractionalization: 83 percent in the C.A.R. versus 64½ percent sub-Saharan Africa average (Sachs and Warner (1997) measure).
  - Ethnic appointments shaped army composition (e.g., Kolingba appointments led to over two-thirds of army soldiers being Yakomas by end of presidency).
- Neighborhood effect:
  - Spillovers from Cameroon, Chad, Republic of Congo, DRC, Sudan raise domestic conflict risk.
  - Examples: MLC support for Patassé, Chad asylum for Bozizé, DRC unrest disrupting river transport.
- External shocks and structural vulnerabilities:
  - Limited diversification, slow industrialization, dependence on two principal export commodities and imported oil increase vulnerability to terms-of-trade shocks.
  - Secular depreciation in the real effective exchange rate since 1977 partly counteracted terms-of-trade decline.

### VIII. Empirical analysis — determinants of political instability (Probit model, 1967–2002)
- Model intent: Probability of a coup as function of previous year’s real GDP growth, tax revenue (percent of GDP), changes in terms of trade, and prior political instability.
- Political instability index: PI_t = 1 in years with at least one attempted coup, 0 otherwise.
- Endogeneity check: (2-lag) Vector Auto Regression indicates revenues are weakly exogenous at an annual frequency.
- Probit estimation key quantitative results (Table 4):
  - Real GDP growth (g_{t-1})
    - Coefficient: -6.770
    - t-ratio: 1.24
    - Slope: -1.21
  - Revenue-GDP ratio (revY_{t-1})
    - Coefficient: -0.167
    - t-ratio: 2.68**
    - Slope: -3.01
  - Political instability, previous year (PI_{t-1})
    - Coefficient: 0.605
    - t-ratio: 1.85
    - Slope: 10.8
  - Rate of change in terms of trade (TOTg_{t-1})
    - Coefficient: -4.32
    - t-ratio: 3.78***
    - Slope: -0.46
  - Constant (const)
    - Coefficient: 0.822
    - t-ratio: 0.48
    - Slope: n/a
  - Note: *** and ** indicate significance at the 5 and 10 percent levels, respectively.
- Quantified interpretations:
  - A decline of the revenue-GDP ratio by 1 percentage point raises the probability of a coup by about 3 percent.
  - A worsening of terms of trade by 10 percent raises the probability of a coup by about 4½ percent.
  - Past real GDP growth coefficient negative but statistically insignificant.
  - A coup attempt in a given year raises the probability of another coup next period by about 11 percent (not statistically significant).
- Model fit:
  - Predicted probability series captures four main clusters of instability (late 1970s/early 1980s, early 1990s, mid-1990s, early 2000s) reasonably well; overpredicts probability in late 1980s when no coup occurred.
- Caveats:
  - No indicator of corruption available for C.A.R.; institutional quality not directly controlled.
  - Time series for proximate triggers (e.g., salary arrears) are nonexistent.

### IX. Empirical analysis — determinants of economic growth (1967–2002)
- Sample period: 1967-2002.
- Growth equation form used (as specified): G_t = v_t + InvY_t + BudY_t + RERg_t + TOTg_t + C_t + PI_t + Popug_t
- Regression results (key estimated relationships):
  - Investment-GDP ratio (InvY): coefficient 0.2857; t-value 2.92***.
  - Budget balance-GDP ratio (BudY): coefficient 0.2516; t-value 0.97.
  - Rate of change in real exchange rate (RERg): coefficient -0.0758; t-value -1.31.
  - Rate of change in terms of trade (TOTg): coefficient 0.0449; t-value 0.89.
  - Economic contagion (C): coefficient 0.3688; t-value 2.37***.
  - Political instability (PI): coefficient -0.5163; t-value -0.38.
  - Population growth (Popug): coefficient -0.5077; t-value -1.45.
- Statistical diagnostics:
  - R-square of the regression is 0.37.
  - Durbin-Watson statistic is 2.88; the null of no autocorrelation cannot be rejected.
- Interpretation of key coefficients:
  - Investment: Positive and statistically significant impact on growth (InvY coefficient 0.2857; t-value 2.92***).
  - Economic contagion: Slower activity in neighboring countries adversely affects C.A.R. growth (coefficient 0.3688; t-value 2.37***).
  - Political instability: Dummy has expected negative sign; attempted coup reduces real GDP growth by about 0.5163 percent, but effect is not statistically significant (t-value -0.38).
  - External competitiveness and terms of trade: Expected signs but not statistically significant in core regression.
- Robustness checks:
  - Interaction terms InvY*PI and Popug*PI statistically insignificant and do not alter core results.
  - Lagged change in real exchange rate statistically insignificant.
  - Adding a constant term leaves investment ratio positive but it loses statistical significance at conventional levels.
- Measurement note on economic contagion:
  - C is the growth rate of weighted per capita real GDP of border countries (Cameroon, Chad, Republic of Congo, DRC, Sudan) in 1995 constant U.S. dollars using 1995 GDP weights.

### X. Policy-relevant implications and conclusions
- Historical context reiterated: intermittent political instability, poor macroeconomic management, and weak governance since independence.
- Empirical conclusions:
  - Low domestic revenue-GDP ratio and adverse terms of trade shocks significantly raise coup probability.
  - Economic growth is positively influenced by increases in investment and adversely affected by slower activity in neighboring countries.
  - Direct impact of political instability on growth is not significant once investment and neighboring countries’ performance are accounted for.
- Policy recommendations:
  - Enhance government capacity to mobilize domestic revenue to lower the probability of conflicts and to produce direct economic benefits.
  - In a transitional period while revenue mobilization improves, the international community could offer budgetary support.
  - Diversify the economic base to reduce vulnerability to external shocks and to diminish the likelihood that terms of trade shocks fuel political instability.
  - Support efforts in neighboring countries (such as the DRC) to resolve conflicts and restore sustained economic growth, which would benefit the C.A.R.
  - Fight corruption and build strong, efficient institutions; diversification and revenue measures cannot substitute for institutional development.

*Source: _wp0480 - References (IMF working paper content provided in the input).*

### References..............................................................................................................

### _wp0480 - References..............................................................................................................

### I. Introduction
- The Central African Republic (C.A.R.) is one of the poorest countries in the world and ranked 168th out of 175 countries listed in the 2003 United Nations Development Program Human Development Index.
- Resident population was estimated at about 3.9 million in 2002.
- Economy highly dependent on diamonds and timber.
- Key constraints on sustained economic growth: political instability, weak governance, a low level of human capital, inadequate infrastructure, and conflicts in neighboring countries.
- Paper examines:
  - qualitative explanations of political instability and poor economic performance;
  - empirical determinants of political instability in the country;
  - empirical factors (including political instability) that have influenced economic growth.

### II. Main empirical conclusions and policy implications
- Determinants of political instability (empirical results summarized in text):
  - Propensity for political instability has been increased by past low tax revenue.
  - Propensity for political instability has been increased by deteriorations in the terms of trade.
  - Mechanism: weak revenue performance undermines government’s ability to pay salaries of civil servants and provide basic social services, raising frustrations and triggering political instability.
  - Insufficient economic diversification increases vulnerability to terms of trade shocks, raising economic and political volatility.
- Policy implications (drawn from empirical findings):
  - Efforts to enhance the country’s capacity to mobilize revenue would be critical in lowering the propensity for political instability.
  - Diversification of the C.A.R.’s economic base would reduce vulnerability to external shocks and diminish the propensity of terms of trade shocks to fuel domestic conflict.
- Impact of political instability on growth:
  - Direct impact of political instability on growth is not significant once domestic investment and economic performance in neighboring countries are accounted for.

### III. Economic and political performance since independence (high-level summary)
- Since independence in 1960, the C.A.R. economy has been intermittently and adversely affected by political instability and social unrest.
- Chronic weak revenue performance led to accumulation of domestic wage and external debt arrears and degradation of basic social services.
- Significant downward trend in terms of trade since 1977.
- By the late 1990s, the country was caught in a domestic and external debt trap.
- Despite democratization efforts in the 1990s (contested elections in 1993 and 1999), political situation remained tenuous.

### IV. Chronology of key events since independence (selected items from Table 1)
- 1960: The C.A.R. becomes independent with David Dacko as president.
- 1962: Dacko turns the C.A.R. into a one-party state.
- 1965: Dacko ousted by army commander Jean-Bédel Bokassa.
- 1972: Bokassa declares himself president for life.
- 1977: Bokassa proclaims himself emperor and renames the country the "Central African Empire."
- 1979: Bokassa ousted in a coup led by Dacko backed by French troops.
- 1981: Dacko deposed in a coup led by army commander André Kolingba.
- 1991: Political parties permitted to form.
- 1993: Ange-Félix Patassé elected president, ending 12 years of military rule.
- 1996 May and 1997 November: Soldiers stage uprisings over unpaid wages.
- 1999: Patassé re-elected president.
- 2000 (December): Civil servants stage general strike over back pay; riots follow.
- 2001 (May): At least 59 killed in an abortive coup attempt by former president André Kolingba.
- 2001 (November): Clashes after attempt to arrest sacked army chief General François Bozizé.
- 2002 (May): Government lifts curfew imposed after May 2001 coup attempt.
- 2002 (October): Six days of heavy fighting in Bangui; Libyan-backed forces and troops led by Jean-Pierre Bemba help to subdue an attempt by forces loyal to General Bozizé.
- 2003 March: General Bozizé mounts a successful coup while President Patassé is out of the country and declares himself President.

### V. Comparative performance: C.A.R. vs. sub-Saharan Africa (Table 2, averages during 1990-2000; units as indicated)
- Economic performance:
  - GDP per capita (constant 1995 US dollars): 332 (C.A.R.) vs. 559 (Sub-Saharan Africa)
  - GDP growth (annual percent change): 1.4 (C.A.R.) vs. 2.1 (SSA)
  - GDP per capita growth (annual percent change): -0.9 (C.A.R.) vs. -0.5 (SSA)
  - Tax revenue (in percent of GDP): 8.0 (C.A.R.) vs. 20.9 (SSA)
  - Gross domestic savings (in percent of GDP): 4.0 (C.A.R.) vs. 15.7 (SSA)
  - Gross domestic investment (in percent of GDP): 11.4 (C.A.R.) vs. 16.7 (SSA)
  - Trade in goods (in percent of GDP): 25.7 (C.A.R.) vs. 46.9 (SSA)
- Cost structure:
  - Telephone average cost of local call (US$ per three minutes): 0.7 (C.A.R.) vs. 0.08 (SSA)
- External assistance:
  - Aid (in percent of GNI): 13.4 (C.A.R.) vs. 5.7 (SSA)
- Physical infrastructure/technology:
  - Roads, paved (in percent of total roads): 2.3 (C.A.R.) vs. 14.9 (SSA)
  - Mobile phones (per 1000 people): 0.3 (C.A.R.) vs. 3.6 (SSA)
  - Personal computers (per 1000 people): 1.4 (C.A.R.) vs. 8.1 (SSA)
- Social performance:
  - Adult illiteracy rate (in percent of people ages 15 and above): 60.1 (C.A.R.) vs. 44.3 (SSA)
  - Primary school enrollment ratio: 57.7 (C.A.R.) vs. 75.0 (SSA)
  - Secondary school enrollment ratio: 10.1 (C.A.R.) vs. 24.6 (SSA)
  - Tertiary school enrollment ratio: 1.5 (C.A.R.) vs. 3.4 (SSA)
  - Immunization, DPT (in percent of children under 12 months): 53.6 (C.A.R.) vs. 51.5 (SSA)
  - Infant mortality rate (per 1000 live births): 97.9 (C.A.R.) vs. 96.7 (SSA)
  - Life expectancy at birth (in years): 45.7 (C.A.R.) vs. 48.9 (SSA)
- Additional notes:
  - Life expectancy at birth currently at about 43½ years and declining since 1990.
  - About 70 percent of the population live on less than $1 per day; about 86 percent live on less than $2 per day (UNCTAD report cited in text).

### VI. Selected historical economic trajectories and indicators (figures and descriptive highlights)
- Per capita real GDP:
  - Per capita real GDP has been falling virtually continuously since 1977.
  - Per capita real GDP in 2002 was about two-thirds of its level in 1977.
- Terms of trade:
  - Significant downward trend since 1977.
- Budgetary and investment indicators (figures referenced):
  - Figures included: Per Capita Real GDP (1960–2002), Domestic Investment (1960–2002, in percent of GDP), Budgetary Performance (1966–2002, in percent of GDP), Terms of Trade and Real Effective Exchange Rate (1961–2002, index 1990=100), Per Capita GDP relative to neighboring countries (1960–2002).
- Presidential period summaries (selected bullets):
  - Dacko presidency (1960-65):
    - Per capita real GDP fell by about 5½ percent on a cumulative basis.
    - Occurred despite a large increase in capital stock per person and relative stability of the terms of trade.
  - Bokassa presidency (1965-79):
    - During 1965-77, per capita real GDP increased by about 10 percent on a cumulative basis.
    - Increase attributed largely to “Opération Bokassa” program (food supplies, improved yields of export crops, diversification) and generous international donor assistance.
    - 1977 marked a turning point in economic performance.

*Source: _wp0480 - References..............................................................................................................*

### 1977. The year 1977 also marks the start of a downward trend in the country’s

### _wp0480 - 1977. The year 1977 also marks the start of a downward trend in the country’s

### Historical political-economy narrative and macroeconomic decline
- 1977 marks the start of a downward trend in the country’s terms of trade.
- Bokassa presidency (until 1979)
  - As the Bokassa presidency became much more repressive and brutal, foreign assistance dwindled, and the country’s capital stock per person started declining.
  - By the end of this presidency, per capita real GDP also started falling, as did domestic revenue and expenditures.
  - In 1979, Bokassa was ousted by David Dacko after widespread protests in which many schoolchildren were massacred.
- Dacko presidency (1979-81)
  - The slide in both per capita capital stock and per capita real GDP continued, with the latter falling by almost 11 percent during 1979-81.
  - In 1981 President Dacko was deposed in a coup led by army commander André Kolingba.
- Kolingba presidency (1981-93)
  - The country remained highly dependent on foreign aid; the slide in capital stock per capita continued.
  - Revenue-GDP ratio increased during 1981−84, then resumed a downward trend in the mid-1980s when the country’s terms of trade declined sharply, reportedly compounded by the smuggling of diamonds.
  - Efforts in the mid-1980s to bring the budget deficit under control were followed by an increasing expenditure-GDP ratio during 1986-91 as the need to jump-start the economy rose.
  - Early 1990s: protracted transition to democracy; social tensions in 1991 led to a protracted general strike, paralysis of public administration, falling tax collections, inability to pay salaries regularly, and accumulation of arrears.
  - The country suffered from an overvaluation of the CFA franc, causing a sharp decline in exports of coffee, cotton, and timber.
- Patassé presidency (1993–March 2003)
  - Ange-Félix Patassé defeated Kolingba and Dacko in democratically held elections in 1993.
  - By Patassé’s accession, per capita real GDP was in a tailspin and the budget deficit was large; per capita real GDP in 1993 was about two-thirds of its level in 1977.
  - Significant decline in per capita capital stock occurred over the same period.
  - Since 1998 a series of efforts started showing some results: slowly rising revenues and fiscal consolidation; the decline in per capita real GDP was arrested in the mid-1990s, aided by the devaluation of the CFA franc in 1994.
  - Propensity for attempted coups and civil disturbances accentuated; widespread dissatisfaction due to massive wage arrears and deterioration in services.
  - Patassé presidency ended in March 2003 by a coup conducted by General Bozizé.

### Qualitative dimensions of the crisis — politics and rent-seeking
- Concentration of political actors
  - A few personalities (Ange-Félix Patassé, François Bozizé, André Kolingba, David Dacko) have been the major players over three decades; many occupied multiple roles across administrations.
- Rent-seeking and natural-resource effects
  - Abundant natural resources (diamonds, timber) are linked to rent-seeking, corruption, and political competition; diamonds have been associated with smuggling and fraud (buyers in Antwerp have declared diamond imports from the C.A.R. higher than reported exports).
  - Rents from natural resources may have incentivized seizures of power; diamonds allegedly used to grease patronage networks; foreign actors have been drawn into domestic politics.
- Ethnic tensions
  - Ethnolinguistic fractionalization in the C.A.R. is 83 percent versus a sub-Saharan Africa average of 64½ percent (Sachs and Warner (1997) measure).
  - Ethnic considerations influenced appointment of key positions and army composition (e.g., Kolingba appointed many Yakomas; by end of his presidency over two-thirds of army soldiers were Yakomas; Patassé appointed northerners).
  - Ethnic loyalty in the army undermined constitutional order and facilitated coups or coup attempts (May 2001 attempted coup involvement noted).
  - However, empirical work cited suggests ethnic diversity per se does not necessarily increase civil war likelihood; countries where one group is 45-90 percent of population face systematically higher conflict risk (Collier and Hoeffler, 2002).
- Neighborhood effect
  - Spillovers from conflicts in neighboring countries (Cameroon, Chad, Republic of Congo, DRC, Sudan) have adverse effects on the C.A.R.; regional conflicts raise the risk of domestic conflict (Sambanis, 2003; Collier and others, 2003).
  - Examples: Patassé received support from the Mouvement de Libération Congolais (MLC) of the DRC; Chad provided temporary asylum to General Bozizé; discovery of oil in Chad aggravated tensions; 2000 DRC unrest disrupted river transport, forcing costlier road transport via Cameroon.
- External shocks and structural vulnerabilities
  - Limited diversification, slow industrialization due to high transport and energy costs, heavy dependence on two principal export commodities (diamonds and timber) and imported oil make the economy vulnerable to terms-of-trade shocks.
  - Following a secular rise between 1961 and 1977, the terms of trade declined in an almost secular way (except 1985–87).
  - Over 1977-2002:
    - The terms of trade fell by about 52 percent.
    - Per capita real GDP fell by about 36 percent.
  - Secular depreciation in the real effective exchange rate since 1977 partly counteracted the adverse effects of terms-of-trade decline.

### Empirical analysis of determinants of political instability (Probit model, 1967–2002)
- Model specification intent
  - Probit model assesses probability of a coup as a function of previous year’s real GDP growth rate, tax revenue (as percent of GDP), changes in terms of trade, and political instability (previous year).
  - Index of political instability: dummy PI_t = 1 in years with at least one attempted coup (failed or successful), 0 otherwise.
  - Data spliced from IMF World Economic Outlook and World Bank World Development Indicators databases.
- Endogeneity and VAR checks
  - Potential endogeneity between revenue performance and political instability addressed by a (2-lag) Vector Auto Regression with revenue, GDP growth, political instability, and investment.
  - Results show revenues are weakly exogenous to the system at an annual frequency, suggesting political instability does not lead to low revenues in the annual data.
- Probit estimation key quantitative results (Table 4)
  - Real GDP growth (g_{t-1})
    - Coefficient: -6.770
    - t-ratio: 1.24
    - Slope: -1.21
  - Revenue-GDP ratio (revY_{t-1})
    - Coefficient: -0.167
    - t-ratio: 2.68**
    - Slope: -3.01
  - Political instability, previous year (PI_{t-1})
    - Coefficient: 0.605
    - t-ratio: 1.85
    - Slope: 10.8
  - Rate of change in terms of trade (TOTg_{t-1})
    - Coefficient: -4.32
    - t-ratio: 3.78***
    - Slope: -0.46
  - Constant (const)
    - Coefficient: 0.822
    - t-ratio: 0.48
    - Slope: n/a
  - Note: *** and ** indicate significance at the 5 and 10 percent levels, respectively.
- Interpretation of estimated effects (quantified)
  - A decline of the revenue-GDP ratio by 1 percentage point raises the probability of a coup by about 3 percent.
  - A worsening of terms of trade by 10 percent raises the probability of a coup by about 4½ percent.
  - The coefficient on past real GDP growth has the expected negative sign (poorer growth → more instability) but is statistically insignificant.
  - A coup attempt in a given year is estimated to raise the probability of another coup in the next period by about 11 percent, but this effect is not statistically significant.
- Model fit and predictive performance
  - Figure 6 (predicted probability of coup, 1967–2002) shows the model captures four main clusters of instability (late 1970s/early 1980s, early 1990s, mid-1990s, early 2000s) relatively well, though it predicts high probability in the late 1980s when no coup occurred.
- Caveats
  - Indicator of corruption is not available for the C.A.R.; institutional quality could not be directly controlled.
  - Time series for certain proximate trigger variables (e.g., salary arrears) are nonexistent.

### Policy-relevant implications and growth determinants
- Suggested policy implications (from the empirical results)
  - Improving the C.A.R.’s capacity to mobilize domestic revenue could reduce recurrence of adverse political events.
  - Diversifying the economy to reduce vulnerability to terms-of-trade shocks could lower political instability risk.
  - Fighting corruption could help stabilize political dynamics tied to resource rents.
- Growth-determinants model (neoclassical growth framework)
  - Growth equation form used (variables as in source):
    - G_t = v_t + InvY_t + BudY_t + RERg_t + TOTg_t + C_t + PI_t + Popug_t  (as specified in the text)
  - Empirical finding highlighted
    - Investment has a statistically significant positive impact on growth in the C.A.R. (consistent with studies on sub-Saharan Africa).
    - The C.A.R. is particularly vulnerable to shocks from neighboring countries: a decrease by 1 percent in the weighted per capita real GDP growth rate in neighboring countries reduces per capita real GDP growth in the C.A.R. by about [value continues in the source beyond excerpt].

*Source: Excerpt from IMF working paper content unit _wp0480 - 1977. The year 1977 also marks the start of a downward trend in the country’s*

### 0.35 percent. Changes in the real effective exchange rate—an indicator of external

### _wp0480 - 0.35 percent. Changes in the real effective exchange rate—an indicator of external

### Regression results: determinants of economic growth (1967-2002)
- Sample period: 1967-2002.
- Key estimated relationships:
  - Investment-GDP ratio (InvY): coefficient 0.2857; t-value 2.92***.
  - Budget balance-GDP ratio (BudY): coefficient 0.2516; t-value 0.97.
  - Rate of change in real exchange rate (RERg): coefficient -0.0758; t-value -1.31.
  - Rate of change in terms of trade (TOTg): coefficient 0.0449; t-value 0.89.
  - Economic contagion (C): coefficient 0.3688) ; t-value 2.37***.
  - Political instability (PI): coefficient -0.5163; t-value -0.38.
  - Population growth (Popug): coefficient -0.5077; t-value -1.45.
- Statistical diagnostics:
  - R-square of the regression is 0.37.
  - Durbin-Watson statistic is 2.88, which is greater than the 5 percent upper bound for the parameters (1.9). The null of no autocorrelation cannot be rejected.

### Interpretation of key coefficients and effects
- Investment: Positive and statistically significant effect on economic growth (InvY coefficient 0.2857; t-value 2.92***).
- Economic contagion: Slower economic activity in neighboring countries has an adverse effect on the C.A.R.’s growth (coefficient 0.3688) ; t-value 2.37***).
- Political instability:
  - The dummy variable for political instability has the expected negative sign; an attempted coup reduces real GDP growth by about half a percent.
  - The direct impact of political instability on growth is not statistically significant in the core specification (PI coefficient -0.5163; t-value -0.38).
  - Possible reasons: most adverse military events in the C.A.R. have been relatively low in intensity, limiting immediate disruption; political instability may affect growth indirectly through the investment channel.
- External competitiveness and terms of trade:
  - Changes in the real effective exchange rate and in terms of trade have the expected signs but are not statistically significant in the core regression (RERg coefficient -0.0758; t-value -1.31; TOTg coefficient 0.0449; t-value 0.89).

### Robustness checks and additional specifications
- Interaction terms tested:
  - InvY*PI and Popug*PI were added to test Fosu (2001) hypothesis that political instability affects growth through factor efficiency; both interaction variables are statistically insignificant and do not affect core results.
- Lagged effects:
  - A lagged change in the real exchange rate was added; the effect of lagged changes in the real exchange rate on growth is statistically insignificant.
- Constant term:
  - Adding a constant term leaves the investment ratio positive but it loses statistical significance at conventional levels of confidence.
- Measurement note on economic contagion:
  - C is measured as the growth rate of the weighted per capita real GDP of border countries (Cameroon, Chad, the Republic of Congo, the DRC, and Sudan) expressed in 1995 constant U.S. dollars. 1995 GDP weights are used.

### Conclusions and policy implications
- Historical context:
  - Since independence in 1960, the C.A.R. economy has been intermittently affected by political instability and social unrest (military coups, army rebellions, extended labor disputes), combined with poor macroeconomic management and weak governance.
  - Chronic weak revenue performance led to accumulation of domestic wage and external debt arrears and degradation of basic social services, which in turn contributed to prolonged labor strikes and army rebellions.
- Empirical conclusions:
  - A low domestic revenue-GDP ratio and an adverse terms of trade shock significantly raise the probability of a coup.
  - Economic growth is positively influenced by increases in investment and adversely affected by slower activity in neighboring countries.
  - The direct impact of political instability on growth is not significant once domestic investment and neighboring countries’ performance are accounted for.
- Policy recommendations drawn from results:
  - Enhance the government’s capacity to mobilize revenue to lower the probability of conflicts and to produce economic benefits directly.
  - In a transitional period while domestic revenue mobilization improves, the international community could offer budgetary support.
  - Diversify the country’s economic base to reduce vulnerability to external shocks and to diminish the likelihood that terms of trade shocks fuel political instability.
  - Support efforts in neighboring countries (such as the DRC) to resolve conflicts and restore sustained economic growth, as these would be beneficial for the C.A.R.’s economic performance.
- Institutional caveat:
  - Diversification and revenue measures cannot substitute for building strong and efficient institutions, which are necessary to escape the poverty and governance trap.

*Source: IMF working paper content provided in the input.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2004/_wp0480.pdf_