## 1. Quality of Roads in Selected Landlocked Countries

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---

### Background and purpose
- The paper assesses competitiveness in the C.A.R. from a range of perspectives with the aim of "providing a comprehensive view of competitiveness in a post-conflict setting."
- Several standard price and current account measures are used as a starting point and "supplemented by other indicators aimed at capturing the impact of the fragile security and institutional setting in the country."
- Transport costs are treated as an important supplementary indicator and "partly proxies for the security problems faced by the C.A.R."

### Relevance to competitiveness and trade
- Improving the C.A.R.’s external competitiveness—defined as "the country’s ability to produce goods and services cost-effectively with respect to other countries"—is identified as essential to economic recovery.
- For a land-locked country, transport cost is highlighted as "a critical issue."

### Key challenges affecting road quality and transport cost assessment
- Data availability and quality is "extremely poor," with "substantial weaknesses in price and balance of payments data" that introduce "significant uncertainties" into analysis.
- Security conditions remain "very unstable" even after formal hostilities ended in March 2003, with implications for transport and logistics: "The additional uncertainty and costs associated with a still-unstable security environment weigh heavily on economic decisions by the private sector."
- Institutional and governance weaknesses are central constraints: "Weak institutions and widespread corruption can impose significant direct and indirect costs on business."

### Role of the transport/roads analysis in the paper
- The assessment of transport cost is explicitly linked to Section IV: "Section IV examines transport cost, which, in addition to being in part a proxy for the residual security problems in the C.A.R, is a critical issue for a land-locked country."
- Transport cost analysis is intended to complement price- and account-based measures of competitiveness and to capture costs not fully reflected in CPI-based real exchange rate measures.

### II. EXTERNAL TRADE PERFORMANCE — Key facts and interpretation
- Exports and imports of goods fell from 18 percent and 41 percent of GDP in 1980 to less than 10 and 20 percent in 2004.
- In 2004, diamond and timber together accounted for more than 85 percent of total export earnings compared with 53 percent in 1987.
- Coffee and cotton together provided about one-quarter of export receipts in 1987, and now represent less than 5 percent.
- Following trade liberalization and the 1994 devaluation of the CFA franc:
  - Exports and imports increased, respectively, to 20 percent and 16 percent of GDP in 1994.
  - Since 1995 exports and imports as a share of GDP continuously decreased, reaching respectively 9.6 and 10.5 percent in 2004.
  - The ratio of exports plus imports (of goods) to GDP fell from 36 percent in 1994 to 20 percent in 2004.
- Trade balance dynamics:
  - Trade balance first improved during much of the 1990s, but deteriorated more recently.
  - Real effective exchange rate remained largely flat since 1995.
  - Terms of trade have deteriorated mildly since the mid-1990s.
- Interpretation:
  - Recent trade developments appear to reflect economic dislocation from political instability, weak macroeconomic policies, and adverse external shocks including regional conflict spillovers.
  - Sharp drop in imports mirrored by fall in consumption and investment; import compression may have masked a worse trade balance absent instability.
  - Exports affected by instability; competitiveness problems appear endemic in key sectors, notably cash crops.

### III. EXCHANGE RATE MEASURES — PPP and ERER results
- PPP discussion:
  - Three PPP concepts discussed: law of one price, absolute PPP, relative PPP.
  - Law of one price holds well for homogeneous primary commodities traded on major exchanges after adjustments; differentiated products deviate more.
  - PPP-based indicators useful for long-run movements among industrial countries, less so for short-run movements or for industrial-developing country pairs.
- ERER computation for the C.A.R.:
  - Concern: strengthening of the CFAF vis-à-vis the dollar in 2003-04 resulted in some appreciation of the REER.
  - Model framework: Edwards (1989) dynamic three-good small open economy with fixed exchange rate; Johansen cointegration procedures applied to annual data 1980-2005.
  - Fundamental determinants considered: productivity growth (TPROG), openness to trade (OPEN, proxied by imports plus exports), financial flows (NFAY, net foreign asset position in percent of GDP), government spending (GOVCY), and terms of trade (TOT).
  - Estimated long-run cointegrating relationship:
    - ln(REER) = 0.9 ln(TOT) - 0.1 ln(OPEN) + 0.6 ln(GOVCY) - 0.06 TPROG  + 0.01 NFAY.
  - Interpretation of coefficients:
    - REER appreciates when terms of trade improves, government spending increases, and capital inflows increase.
    - REER depreciates when openness to trade and productivity increase.
    - OPEN and NFAY not statistically significant; TPROG coefficient sign differs from expected (technological progress exception).
  - Fitted ERER and deviation episodes:
    - Three periods of disequilibrium identified: deteriorating competitiveness during 1988-93; improving competitiveness during 1994 and 1997-2001; deteriorating competitiveness during 2003-04.
    - REER was overvalued at time of 1994 devaluation, became undervalued thereafter, and became overvalued relative to theoretical ERER in the past two years (relative to the report).
  - Estimated effects:
    - A one percentage point increase in the deviation of the REER from its equilibrium level induces, on average, about 0.5 percentage point of GDP fall in the trade surplus.
    - A 1 percentage point deviation of REER reduces per capita real GDP growth by about 0.3 percent (from a one-order autoregressive distributed lag model).
- Policy implications:
  - Structural reforms of products and factor markets to increase flexibility and productivity.
  - Fiscal policy to improve provision of public goods and restrain key factor prices, such as wages.
  - Labor market reforms to increase wage-setting flexibility.

### IV. TRANSPORT AND PRODUCTION COST MEASURES
- Rationale: transport costs as proxy for production costs in a post-conflict setting; reflect security problems and high transport bills for a large landlocked country with poor infrastructure and limited transport options.
- Data source: UNCTAD and country authorities; comparative illustrations for cotton sector competitiveness using C.A.R., Benin, Burkina Faso cost structures.
- Literature context:
  - Transport costs remain a major barrier to trade despite technological improvements (Anderson and van Wincoop, 2004).
  - Transport costs impede African development; weak transport infrastructure is systemic (Sachs and others, 2004; Commission for Africa, 2005).
  - For landlocked countries, land transport is seven times more costly than sea transport for each unit of distance (Limão and Venables, 2001); infrastructure accounts for 60 percent of predicted transport costs for landlocked countries in their model.

A. Geography, Infrastructure, and Transit Issues
- Country characteristics:
  - Area: more than 600,000 km2.
  - Population density: 5 inhabitants per km2.
  - Nearest ports from Bangui: Douala (around 1,600 km) and Pointe-Noire (around 1,800 km).
  - Rural road network: estimated at around 15,600 km, much currently unusable.
  - Paved national road: only 700 km out of around 10,000 kilometers (authorities’ estimates).
- Transport modes and constraints:
  - River traffic to Pointe-Noire limited to no more than six months a year due to seasonal water levels.
  - No railways connecting to neighboring countries.
  - Air transport limited due to inadequacy of Bangui-M’poko Airport.
  - Over 90 percent of C.A.R. freight goes via the Cameroonian border; Bangui-Douala route has proliferated checkpoints.
    - Drivers encounter 25-30 checkpoints between Bangui and the Cameroonian border.
    - Illegal charges estimated between CFAF 350,000 and CFAF 450,000 per truck (about $0.50 per kilometer).
  - Banditry and insecurity along roads; river piracy increased; significant shift from river to land transport in the 1990s increased export costs.
- Transit to Cameroon:
  - High administrative costs and long delays at the border despite an accord to simplify transit formalities.
  - No unique customs document for transit; border post hours not harmonized.

B. International Comparison of Transport Costs
- C.A.R. has higher freight and insurance costs to exports than sub-Saharan Africa average; deterioration significant between 1970 and 1990 per Amadji and Yeats (1995).
- C.A.R. among the lowest proportions of paved roads among landlocked countries and faces poor transit neighbor road quality.
- Example unit container costs:
  - Cost of sending a standard container from Baltimore to Côte d’Ivoire: about $3,000; to the C.A.R.: $13,000 (largely due to high land transport costs).
- Selected route examples:
  - Douala – Bangui: Distance (km) 1,600; Total Cost (US$) 7,900; Cost per km (US$) 4.94.
  - Douala – D'Jamena: Distance (km) 1,900; Total Cost (US$) 8,000; Cost per km (US$) 4.21.
  - Dar-es-Salaam – Kigali: Distance (km) 1,650; Total Cost (US$) 4,980; Cost per km (US$) 3.03.
  - Mombasa – Kampala: Distance (km) 1,440; Total Cost (US$) 3,250; Cost per km (US$) 2.26.
  - Walvis Bay – Harare: Distance (km) 2,409; Total Cost (US$) 3,585; Cost per km (US$) 1.49.
  - Average in developed countries: United States 1.10; European Union 1.65.
- Conclusion: Douala-Bangui corridor among the costliest in the world.

C. Effect of Transport Costs on Competitiveness: The Cotton Sector
- Cotton production:
  - Over 40,000 tons in 1998; production declined to 1,500 tons in 2003.
- Transport stages and costs:
  - Domestic: collecting cotton seeds to ginning facilities — very costly due to poor rural roads.
  - Export: transporting cotton fiber to ports — high costs from poor infrastructure and insecurity domestically and in transit countries.
- Comparative transport cost indicators (selected figures):
  - Average transport cost of seed cotton to ginnery (CFAF/kg):
    - C.A.R. 2002/03: 32; 2003/04: 30; 2004/05 est.: 35.
    - Burkina Faso 2002/03: 19; 2003/04: 19; 2004/05 est.: 17.
    - Benin 2002/03: 25; 2003/04: 55; 2004/05 est.: 17.
  - In percent of total purchase price (seed):
    - C.A.R. 2002/03: 18; 2003/04: 20; 2004/05 est.: 21.
    - Burkina Faso 2002/03: 11; 2003/04: 10; 2004/05 est.: 11.
    - Benin 2002/03: 8; 2003/04: 11; 2004/05 est.: 12.
  - Average transport cost of cotton fiber from ginnery to FOB (CFAF/kg):
    - C.A.R. 2002/03: 117; 2003/04: 106; 2004/05 est.: 106.
    - Burkina Faso 2002/03: 71; 2003/04: 74; 2004/05 est.: 74.
    - Benin 2002/03: 152; 2003/04: 20; 2004/05 est.: 17.
  - In percent of FOB cost (fiber):
    - C.A.R. 2002/03: 11; 2003/04: 14; 2004/05 est.: 12.
    - Burkina Faso 2002/03: 10; 2003/04: 11; 2004/05 est.: 11.
    - Benin 2002/03: 22; 2003/04: ...; 2004/05 est.: ...
  - Average total FOB transport cost (CFAF/kg):
    - C.A.R. 2002/03: 193; 2003/04: 178; 2004/05 est.: 188.
    - Burkina Faso 2002/03: 108; 2003/04: 111; 2004/05 est.: 106.
    - Benin 2002/03: 73; 2003/04: 15; 2004/05 est.: 158.
- Memorandum items (production level of cotton seed, tons):
  - C.A.R. 2002/03: 2,220; 2003/04: 1,500; 2004/05 est.: 6,800.
- Interpretation:
  - Transport cost shares are larger in C.A.R. than in Burkina Faso and Benin.
  - Low production levels in C.A.R. raise average total cost due to fixed production costs; transport costs are largely variable and very high.
- Policy recommendations (cotton sector):
  - Strengthen security.
  - Improve road and river transport infrastructure.
  - Remove procedural bottlenecks on international transit routes.

D. Other Cost-Based Measures of Competitiveness
- Unit labor costs:
  - Direct data unavailable; proxy used: average civil service wages as benchmark for private formal sector wages.
  - In 2003 average civil service wage in C.A.R. was around $2,500 per year (high by sub-Saharan African standards).
  - As a ratio to per capita GDP, average civil service wage is also large, suggesting low employment capacity in private sector and lower competitiveness.
- Energy costs:
  - Domestic petroleum product prices are administered and changed only once (in January 2006) over the past six years (as of the report).
  - High cost of electricity manifested mostly in frequent power outages and supply disruptions rather than tariff rates; these represent real costs difficult to capture in price measures.

### V. GOVERNANCE AND QUALITY OF INSTITUTIONS
A. Current State of Institutions in the C.A.R.
- Governance definition (Kaufmann, Kraay, and Zoido-Lobatón, 1999) covers:
  - (i) process by which governments are selected, monitored and replaced;
  - (ii) capacity of government to formulate and implement sound policies;
  - (iii) respect of citizens and the state for institutions governing economic and social interactions.
- Political process and instability:
  - Numerous politico-military crises in past decade with several coups or attempted coups.
  - From independence in 1960 to the present, only two democratic elections led to a change in government (as reported).
  - World Bank governance indicators 2004: less than 15 percent of 209 countries had lower "voice and accountability" scores; only 8 percent ranked worse on political instability.
  - University of Maryland’s Polity IV: president faced restrictions only from 1993 to 2002; regime classified as strong presidential system.
- Government effectiveness:
  - Only 2 percent of countries surveyed by World Bank have less effective governments than the C.A.R.
  - Heritage Foundation Index of Economic Freedom classifies C.A.R. as mostly “unfree” economy, marked by heavy government regulation and intervention.
- Rule of law, corruption, and property rights:
  - Natural resources (diamonds, timber) contributed to rent-seeking activities.
  - In 2004, C.A.R. ranked in the third percentile of the World Bank’s indicator of corruption (only 3 percent of countries are worse).
  - World Bank 2004 CPIA gives C.A.R. an unsatisfactory score in transparency, accountability, and corruption in the public sector.
  - Heritage Foundation ranks C.A.R. at 4 on a scale of 1 to 5 for protection of private property (4 indicating weak protection).
  - Enforcement of contracts relies mainly on informal channels; laws and regulations unpredictable; judicial decisions often not published.
  - Recent reforms: training judges specialized in financial matters; adoption of a new criminal code and an anticorruption law.

B. Impact of Institutions on the Business Environment
- Reforms undertaken:
  - Implementation of provisions of OHADA treaty to harmonize business law and combat corruption.
- Doing Business (World Bank) assessment:
  - C.A.R. generally ranks below Sub-Saharan African average except for starting a business, registering property, and protecting investors.
  - Compared with CEMAC average, C.A.R. fares better for most indicators.
- Specific weaknesses:
  - Lags behind SSA averages in labor regulations, protecting investors, and enforcing contracts.
  - Rigidity of employment index: C.A.R. scores 73; Sub-Saharan African average is 47 (scale 0–100; higher = more rigid).
  - Hiring and firing are harder in C.A.R. than average SSA country.
  - Enforcement of a simple commercial contract takes longer and costs more than SSA average, though cost relative to disputed amount has decreased recently.

### VI. CONCLUSIONS — Summary and policy priorities
- Summary of findings:
  - RER and trade measures suggest mild overvaluation in recent years and export performance hampered by competitiveness issues.
  - Decline of exports and export diversification largely due to political and security disruptions; import compression suggests trade measures might have shown larger deficits absent disruptions.
  - Non-price factors—poor security and weak institutions—are critical in post-conflict settings and warrant measures beyond conventional price or current account indicators.
  - Transport costs and governance measures provide comparable cross-country/time indicators and paint a worrisome picture for the C.A.R.’s competitiveness.
- Competitiveness triangle methodology:
  - Transport costs: index based on unit costs in Table 2 with unit costs in the United States set to zero on the index.
  - Governance indicator: cost of starting a business (as share of per capita income) from Figure 6, normalized on a scale of 0 to 100.
  - Labor costs: average civil service wage from Table 4, multiplied by 10.
  - Interpretation: wider triangle = deeper competitiveness problems.
- Overall assessment:
  - C.A.R. fares significantly worse on most measures and is well behind the Sub-Saharan African average.
- Recommended priorities to restore competitiveness:
  - Improved security and strengthened institutions.
  - Sound macroeconomic policies.
  - Structural reforms to foster labor market flexibility, improved contract enforcement, and a lighter regulatory burden.
  - Greater and more effective public investment in infrastructure.

*Italicized source: IMF Working Paper content as provided in the supplied PDF excerpt.*

### 1. Quality of Roads in Selected Landlocked Countries ...................................................12

### 1. Quality of Roads in Selected Landlocked Countries ...................................................12

### Background and purpose
- The paper assesses competitiveness in the C.A.R. from a range of perspectives with the aim of "providing a comprehensive view of competitiveness in a post-conflict setting."
- Several standard price and current account measures are used as a starting point and "supplemented by other indicators aimed at capturing the impact of the fragile security and institutional setting in the country."
- Transport costs are treated as an important supplementary indicator and "partly proxies for the security problems faced by the C.A.R."

### Relevance to competitiveness and trade
- Improving the C.A.R.’s external competitiveness—defined as "the country’s ability to produce goods and services cost-effectively with respect to other countries"—is identified as essential to economic recovery.
- For a land-locked country, transport cost is highlighted as "a critical issue."

### Key challenges affecting road quality and transport cost assessment
- Data availability and quality is "extremely poor," with "substantial weaknesses in price and balance of payments data" that introduce "significant uncertainties" into analysis.
- Security conditions remain "very unstable" even after formal hostilities ended in March 2003, with implications for transport and logistics: "The additional uncertainty and costs associated with a still-unstable security environment weigh heavily on economic decisions by the private sector."
- Institutional and governance weaknesses are central constraints: "Weak institutions and widespread corruption can impose significant direct and indirect costs on business."

### Role of the transport/roads analysis in the paper
- The assessment of transport cost is explicitly linked to Section IV: "Section IV examines transport cost, which, in addition to being in part a proxy for the residual security problems in the C.A.R, is a critical issue for a land-locked country."
- Transport cost analysis is intended to complement price- and account-based measures of competitiveness and to capture costs not fully reflected in CPI-based real exchange rate measures.

*Source: _wp06303 - 1. Quality of Roads in Selected Landlocked Countries ...................................................12*

### Section IV also considers several other cost measures, including labor costs. Section V

### _wp06303 - Section IV also considers several other cost measures, including labor costs. Section V

### II. EXTERNAL TRADE PERFORMANCE
- Exports and imports of goods fell from 18 percent and 41 percent of GDP in 1980 to less than 10 and 20 percent in 2004.
- In 2004, diamond and timber together accounted for more than 85 percent of total export earnings compared with 53 percent in 1987.
- Coffee and cotton together provided about one-quarter of export receipts in 1987, and now represent less than 5 percent.
- Following trade liberalization and the 1994 devaluation of the CFA franc:
  - Exports and imports increased, respectively, to 20 percent and 16 percent of GDP in 1994.
  - Since 1995 exports and imports as a share of GDP continuously decreased, reaching respectively 9.6 and 10.5 percent in 2004.
  - The ratio of exports plus imports (of goods) to GDP fell from 36 percent in 1994 to 20 percent in 2004.
- Trade balance dynamics:
  - Trade balance first improved during much of the 1990s, but deteriorated more recently.
  - Real effective exchange rate remained largely flat since 1995.
  - Terms of trade have deteriorated mildly since the mid-1990s.
- Interpretation:
  - Recent trade developments appear to reflect economic dislocation from political instability, weak macroeconomic policies, and adverse external shocks including regional conflict spillovers.
  - Sharp drop in imports mirrored by fall in consumption and investment; import compression may have masked a worse trade balance absent instability.
  - Exports affected by instability; competitiveness problems appear endemic in key sectors, notably cash crops.

### III. EXCHANGE RATE MEASURES
A. Purchasing Power Parity (PPP)
- Three PPP concepts discussed: law of one price, absolute PPP, relative PPP.
- Empirical notes:
  - Law of one price holds well for homogeneous primary commodities traded on major exchanges after adjustments; differentiated products deviate more.
  - PPP-based indicators useful for long-run movements among industrial countries, less so for short-run movements or for industrial-developing country pairs.
  - Competitiveness analysis must incorporate structural and cyclical developments, government policies, and financial market conditions.

B. Computation of the Equilibrium Real Exchange Rate (ERER) for the C.A.R.
- Concern: strengthening of the CFAF vis-à-vis the dollar in 2003-04 resulted in some appreciation of the REER.
- Model framework: Edwards (1989) dynamic three-good small open economy with fixed exchange rate; Johansen cointegration procedures applied to annual data 1980-2005.
- Fundamental determinants considered: productivity growth (TPROG), openness to trade (OPEN, proxied by imports plus exports), financial flows (NFAY, net foreign asset position in percent of GDP), government spending (GOVCY), and terms of trade (TOT).
- Estimated long-run cointegrating relationship:
  - ln(REER) = 0.9 ln(TOT) - 0.1 ln(OPEN) + 0.6 ln(GOVCY) - 0.06 TPROG  + 0.01 NFAY.
- Interpretation of coefficients:
  - REER appreciates when terms of trade improves, government spending increases, and capital inflows increase.
  - REER depreciates when openness to trade and productivity increase.
  - OPEN and NFAY not statistically significant; TPROG coefficient sign differs from expected (technological progress exception).
- Fitted ERER and deviation episodes:
  - Three periods of disequilibrium identified: deteriorating competitiveness during 1988-93; improving competitiveness during 1994 and 1997-2001; deteriorating competitiveness during 2003-04.
  - REER was overvalued at time of 1994 devaluation, became undervalued thereafter, and became overvalued relative to theoretical ERER in the past two years (relative to the report).
- Estimated effects:
  - A one percentage point increase in the deviation of the REER from its equilibrium level induces, on average, about 0.5 percentage point of GDP fall in the trade surplus.
  - A 1 percentage point deviation of REER reduces per capita real GDP growth by about 0.3 percent (from a one-order autoregressive distributed lag model).
- Policy implications:
  - Structural reforms of products and factor markets to increase flexibility and productivity.
  - Fiscal policy to improve provision of public goods and restrain key factor prices, such as wages.
  - Labor market reforms to increase wage-setting flexibility.

### IV. TRANSPORT AND PRODUCTION COST MEASURES
- Rationale: transport costs as proxy for production costs in a post-conflict setting; reflect security problems and high transport bills for a large landlocked country with poor infrastructure and limited transport options.
- Data source: UNCTAD and country authorities; comparative illustrations for cotton sector competitiveness using C.A.R., Benin, Burkina Faso cost structures.
- Literature context:
  - Transport costs remain a major barrier to trade despite technological improvements (Anderson and van Wincoop, 2004).
  - Transport costs impede African development; weak transport infrastructure is systemic (Sachs and others, 2004; Commission for Africa, 2005).
  - For landlocked countries, land transport is seven times more costly than sea transport for each unit of distance (Limão and Venables, 2001); infrastructure accounts for 60 percent of predicted transport costs for landlocked countries in their model.
A. Geography, Infrastructure, and Transit Issues
- Country characteristics:
  - Area: more than 600,000 km2.
  - Population density: 5 inhabitants per km2.
  - Nearest ports from Bangui: Douala (around 1,600 km) and Pointe-Noire (around 1,800 km).
  - Rural road network: estimated at around 15,600 km, much currently unusable.
  - Paved national road: only 700 km out of around 10,000 kilometers (authorities’ estimates).
- Transport modes and constraints:
  - River traffic to Pointe-Noire limited to no more than six months a year due to seasonal water levels.
  - No railways connecting to neighboring countries.
  - Air transport limited due to inadequacy of Bangui-M’poko Airport.
  - Over 90 percent of C.A.R. freight goes via the Cameroonian border; Bangui-Douala route has proliferated checkpoints.
    - Drivers encounter 25-30 checkpoints between Bangui and the Cameroonian border.
    - Illegal charges estimated between CFAF 350,000 and CFAF 450,000 per truck (about $0.50 per kilometer).
  - Banditry and insecurity along roads; river piracy increased; significant shift from river to land transport in the 1990s increased export costs.
- Transit to Cameroon:
  - High administrative costs and long delays at the border despite an accord to simplify transit formalities.
  - No unique customs document for transit; border post hours not harmonized.

B. International Comparison of Transport Costs
- C.A.R. has higher freight and insurance costs to exports than sub-Saharan Africa average; deterioration significant between 1970 and 1990 per Amadji and Yeats (1995).
- C.A.R. among the lowest proportions of paved roads among landlocked countries and faces poor transit neighbor road quality (Table 1).
- Example unit container costs:
  - Cost of sending a standard container from Baltimore to Côte d’Ivoire: about $3,000; to the C.A.R.: $13,000 (largely due to high land transport costs).
- Selected route examples (Table 2):
  - Douala – Bangui: Distance (km) 1,600; Total Cost (US$) 7,900; Cost per km (US$) 4.94.
  - Douala – D'Jamena: Distance (km) 1,900; Total Cost (US$) 8,000; Cost per km (US$) 4.21.
  - Dar-es-Salaam – Kigali: Distance (km) 1,650; Total Cost (US$) 4,980; Cost per km (US$) 3.03.
  - Mombasa – Kampala: Distance (km) 1,440; Total Cost (US$) 3,250; Cost per km (US$) 2.26.
  - Others listed down to Walvis Bay – Harare: Distance (km) 2,409; Total Cost (US$) 3,585; Cost per km (US$) 1.49.
  - Average in developed countries: United States 1.10; European Union 1.65 (units as per Table 2).
- Conclusion: Douala-Bangui corridor among the costliest in the world.

C. Effect of Transport Costs on Competitiveness: The Cotton Sector
- Cotton production in C.A.R.:
  - Over 40,000 tons in 1998; production declined to 1,500 tons in 2003.
  - High transportation costs, low world prices, and other factors contributed to decline.
- Transport appears in two stages:
  - Domestic: collecting cotton seeds to ginning facilities — very costly due to poor rural roads.
  - Export: transporting cotton fiber to ports — high costs from poor infrastructure and insecurity domestically and in transit countries.
- Comparative transport cost indicators (Table 3, selected figures):
  - Average transport cost of seed cotton to ginnery (CFAF/kg), C.A.R. 2002/03: 32; 2003/04: 30; 2004/05 est.: 35. Burkina Faso 2002/03: 19; 2003/04: 19; 2004/05 est.: 17. Benin 2002/03: 25; 2003/04: 55; 2004/05 est.: 17.
  - In percent of total purchase price (seed): C.A.R. 2002/03: 18; 2003/04: 20; 2004/05 est.: 21. Burkina Faso 2002/03: 11; 2003/04: 10; 2004/05 est.: 11. Benin 2002/03: 8; 2003/04: 11; 2004/05 est.: 12.
  - Average transport cost of cotton fiber from ginnery to FOB (CFAF/kg), C.A.R. 2002/03: 117; 2003/04: 106; 2004/05 est.: 106. Burkina Faso 2002/03: 71; 2003/04: 74; 2004/05 est.: 74. Benin 2002/03: 152; 2003/04: 20; 2004/05 est.: 17.
  - In percent of FOB cost (fiber): C.A.R. 2002/03: 11; 2003/04: 14; 2004/05 est.: 12. Burkina Faso 2002/03: 10; 2003/04: 11; 2004/05 est.: 11. Benin 2002/03: 22; 2003/04: ...; 2004/05 est.: ... (ellipsis as in source).
  - Average total FOB transport cost (CFAF/kg): C.A.R. 2002/03: 193; 2003/04: 178; 2004/05 est.: 188. Burkina Faso 2002/03: 108; 2003/04: 111; 2004/05 est.: 106. Benin 2002/03: 73; 2003/04: 15; 2004/05 est.: 158.
- Memorandum items (production level of cotton seed, tons): C.A.R. 2002/03: 2,220; 2003/04: 1,500; 2004/05 est.: 6,800. Burkina Faso and Benin figures listed in table as per source (multiple values per row).
- Interpretation:
  - Transport cost shares are larger in C.A.R. than in Burkina Faso and Benin.
  - Low production levels in C.A.R. raise average total cost due to fixed production costs; transport costs are largely variable and very high.
- Policy recommendations:
  - Strengthen security.
  - Improve road and river transport infrastructure.
  - Remove procedural bottlenecks on international transit routes.

D. Other Cost-Based Measures of Competitiveness
- Unit labor costs:
  - Direct data unavailable; proxy used: average civil service wages as benchmark for private formal sector wages.
  - In 2003 average civil service wage in C.A.R. was around $2,500 per year (high by sub-Saharan African standards).
  - As a ratio to per capita GDP, average civil service wage is also large, suggesting low employment capacity in private sector and lower competitiveness.
- Energy costs:
  - Domestic petroleum product prices are administered and changed only once (in January 2006) over the past six years (as of the report).
  - High cost of electricity manifested mostly in frequent power outages and supply disruptions rather than tariff rates; these represent real costs difficult to capture in price measures.

### V. GOVERNANCE AND QUALITY OF INSTITUTIONS
A. Current State of Institutions in the C.A.R.
- Governance definition (Kaufmann, Kraay, and Zoido-Lobatón, 1999) covers:
  - (i) process by which governments are selected, monitored and replaced;
  - (ii) capacity of government to formulate and implement sound policies;
  - (iii) respect of citizens and the state for institutions governing economic and social interactions.
- Political process and instability:
  - Numerous politico-military crises in past decade with several coups or attempted coups.
  - From independence in 1960 to the present, only two democratic elections led to a change in government (as reported).
  - World Bank governance indicators 2004: less than 15 percent of 209 countries had lower "voice and accountability" scores; only 8 percent ranked worse on political instability.
  - University of Maryland’s Polity IV: president faced restrictions only from 1993 to 2002; regime classified as strong presidential system.
- Government effectiveness:
  - Only 2 percent of countries surveyed by World Bank have less effective governments than the C.A.R.
  - Heritage Foundation Index of Economic Freedom classifies C.A.R. as mostly “unfree” economy, marked by heavy government regulation and intervention.
- Rule of law, corruption, and property rights:
  - Natural resources (diamonds, timber) contributed to rent-seeking activities.
  - In 2004, C.A.R. ranked in the third percentile of the World Bank’s indicator of corruption (only 3 percent of countries are worse).
  - World Bank 2004 CPIA gives C.A.R. an unsatisfactory score in transparency, accountability, and corruption in the public sector.
  - Heritage Foundation ranks C.A.R. at 4 on a scale of 1 to 5 for protection of private property (4 indicating weak protection).
  - Enforcement of contracts relies mainly on informal channels; laws and regulations unpredictable; judicial decisions often not published.
  - Recent reforms: training judges specialized in financial matters; adoption of a new criminal code and an anticorruption law.

B. Impact of Institutions on the Business Environment
- Reforms undertaken:
  - Implementation of provisions of OHADA treaty to harmonize business law and combat corruption.
- Doing Business (World Bank) assessment:
  - C.A.R. generally ranks below Sub-Saharan African average except for starting a business, registering property, and protecting investors.
  - Compared with CEMAC average, C.A.R. fares better for most indicators.
- Specific weaknesses:
  - Lags behind SSA averages in labor regulations, protecting investors, and enforcing contracts.
  - Rigidity of employment index: C.A.R. scores 73; Sub-Saharan African average is 47 (scale 0–100; higher = more rigid).
  - Hiring and firing are harder in C.A.R. than average SSA country.
  - Enforcement of a simple commercial contract takes longer and costs more than SSA average, though cost relative to disputed amount has decreased recently.

### VI. CONCLUSIONS
- Summary of findings:
  - RER and trade measures suggest mild overvaluation in recent years and export performance hampered by competitiveness issues.
  - Decline of exports and export diversification largely due to political and security disruptions; import compression suggests trade measures might have shown larger deficits absent disruptions.
  - Non-price factors—poor security and weak institutions—are critical in post-conflict settings and warrant measures beyond conventional price or current account indicators.
  - Transport costs and governance measures provide comparable cross-country/time indicators and paint a worrisome picture for the C.A.R.’s competitiveness.
- Competitiveness triangle (Figure 9) methodology:
  - Transport costs: index based on unit costs in Table 2 with unit costs in the United States set to zero on the index.
  - Governance indicator: cost of starting a business (as share of per capita income) from Figure 6, normalized on a scale of 0 to 100.
  - Labor costs: average civil service wage from Table 4, multiplied by 10.
  - Interpretation: wider triangle = deeper competitiveness problems.
- Overall assessment:
  - C.A.R. fares significantly worse on most measures and is well behind the Sub-Saharan African average.
  - Restoring competitiveness requires:
    - Improved security and strengthened institutions.
    - Sound macroeconomic policies.
    - Structural reforms to foster labor market flexibility, improved contract enforcement, and a lighter regulatory burden.
    - Greater and more effective public investment in infrastructure.

*Italicized source: IMF Working Paper content as provided in the supplied PDF excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06303.pdf_