## WAEMU and CEMAC: Real Effective Exchange Rate and Components

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### Introduction: context and high-level findings
- The 1994 devaluation of the CFA franc was a result of a prolonged deterioration of the terms of trade, a steep rise in labor costs, and a nominal appreciation of the French franc against the U.S. dollar, all of which resulted in an overvalued exchange rate.
- The 50 percent devaluation in January 1994 was instrumental in making CEMAC and WAEMU countries more competitive; reinforced by prudent macro policies and structural reforms, it helped GDP return to positive growth rates.
- Since the introduction of the euro in 1999, the CFAF has been pegged to the euro at CFAF 655.957 per €1.
- Main assessment findings:
  - Some areas of improved competitiveness (particularly export profitability and market share in CEMAC driven by oil market developments).
  - Other areas where competitiveness has worsened, including real effective exchange rate appreciation and poor scores on cost of doing business and governance.
  - Serious competitiveness gaps relative to peer groups, notably in business environment, governance, and human capital.
  - Need for structural reform policies to boost productivity, reduce excessive factor costs, diversify production, and attract higher domestic and foreign private investment across sectors.

### Competitiveness framework (environment and policy)
- Competitiveness components:
  - Environment: costs, prices, exchange rates, wages; their impact on export capacity and employment.
  - Policy: determinants of business performance and productivity—business environment, governance, technology, infrastructure, human capital, macro performance.
- Framework foundations:
  - Builds on the Ireland NCC approach and embeds other models (GCR, WCY) to emphasize inputs (policy-controllable) and essential conditions.
  - Analysis traces environment and policy determinants sequentially to give a comprehensive account for all fourteen CFA franc zone countries.

### Growth, quality of life, and productivity
- Growth and oil dependence:
  - Since 1994, real GDP growth in the CEMAC averaged about 5 percent of GDP (with a pronounced drop in 1999).
  - In the WAEMU, growth averaged about 4 percent.
  - For 2001–06 CEMAC growth was almost double the SSA average.
  - Petroleum constitutes the bulk of CEMAC export receipts and more than half its budgetary revenue; of the six CEMAC members, only the Central African Republic does not produce oil.
- Real per capita and productivity:
  - Real per capita growth: WAEMU grew at lower than SSA rates; CEMAC was about the SSA rate.
  - Productivity index (real per capita GDP vs partner countries): persistent decline for both WAEMU and CEMAC since the late 1990s; both indices at about the same levels in 2006.
  - WAEMU productivity is the lowest among developing comparator groups including SSA, with trends indicating a decline since 1995–2000.
  - CEMAC productivity is at about the SSA level and has been improving since 2000.
- Quality of life indicators:
  - Human Development Index (HDI): CEMAC and WAEMU rank below OECD and below emerging Asia and Latin America; CEMAC performs marginally above the SSA average.
  - All WAEMU countries rank in the “low human development” part of the HDI; Guinea-Bissau, Burkina Faso, Mali, and Niger rank among the five lowest in the index, with virtually no improvement since 2000.
  - CEMAC: Chad and the Central African Republic are in the bottom seven of the HDI; the rest rated as in “middle human development.”
  - Life expectancy: at about 50 years, life expectancy for both WAEMU and CEMAC ranks much below the averages for emerging Asia and Latin America.
  - Income inequality: Gini coefficient is higher in CEMAC than WAEMU, about at the SSA average, and above emerging Asia and the OECD.
- Summary point: Recent GDP growth increases have largely failed to translate into improved quality of life and sustainable living standards.

### Productivity and labor market indicators
- Productivity index measurement:
  - Ratio of real per capita GDP relative to each region’s main trade partners (logarithmic terms), normalized to 1 in 2000.
  - Measured productivity compared with trading partners for both WAEMU and CEMAC has been declining.
- Demographics and labor market (1990–2004):
  - Average population growth rate in WAEMU: about 2.7 percent.
  - Total labor force participation rate in WAEMU in 2004: about 79 percent.
  - Comparator labor force participation rates in 2004: SSA 76 percent, LMI countries 71 percent, Latin American countries 70 percent.
  - Female labor force participation: WAEMU and CEMAC compare favorably with LMI countries (57 percent) and Latin American countries (55 percent).
- Interpretation:
  - High population growth rates exert a resource constraint.
  - Some labor market conditions, such as labor force participation, appear promising relative to comparator groups.

### Exchange rates, IRER, and REER measures
- Exchange rate indicators used:
  - CPI-based REER, labor-cost-based REER, internal real exchange rates (IRER), unified regional exchange rates (URNEER and URREER), service-sector-deflator-based REERs.
- REER movements since 1994:
  - CEMAC REER: appreciated cumulatively by about 32 percent through December 2000 and by another 21 percent from January 2001 to December 2006; by December 2006 the CEMAC REER was at 86 percent of its predevaluation level.
  - WAEMU REER: appreciated by about 21 percent through December 2000 and by another 11 percent from January 2001 to December 2006; by December 2006 the WAEMU REER was at 77 percent of its predevaluation level.
  - Most recent appreciation for both unions was essentially due to the strengthening of the Euro to which the CFA franc is pegged.
- Cross-country REER variation (end-2006, percent of predevaluation level):
  - WAEMU: Mali’s REER at 66 percent; Benin’s REER at 89 percent.
  - CEMAC: Equatorial Guinea at 116 percent; Gabon at 70 percent.
- Table 1 (periods: Jan 1994–Dec 1998; Jan 1999–Dec 2000; Jan 2001–Dec 2006) — exact figures preserved:
  - WAEMU:
    - Real effective exchange rate: 29.6  -9.1  10.8
    - Nominal effective exchange rate: 12.2  -7.5  13.0
    - Relative Price Index: 13.7  -1.7  -1.9
  - CEMAC:
    - Real effective exchange rate: 43.0  -10.6  20.9
    - Nominal effective exchange rate: 12.4  -8.5  11.8
    - Relative Price Index: 27.0  -2.4  7.8

### Internal Real Exchange Rate (IRER) findings
- IRER definition: ratio of the prices of nontraded goods (PNT) to tradable goods (PT).
- Key IRER findings:
  - CEMAC IRER fluctuations followed CPI-based REER but with wider amplitude.
  - By end-2006 total cumulative yearly appreciation of the IRER since 1994 was about 11 percent, bringing it to 91 percent of its predevaluation value.
  - The CPI-based REER was 86 percent above its predevaluation value in CEMAC.
  - WAEMU IRER measures tracked the CPI-based REER closely until about 2003; after 2003 the CPI-based REER appears to overestimate erosion of competitiveness because both IRER measures are below the REER.

### Labor-cost-based and other REER measures
- Labor-cost-based REER proxy: CPI-based REER multiplied by the real wage index (nominal wage index/CPI) due to data limitations.
- Observed patterns:
  - CEMAC: labor-cost-based REER depreciated much more than the CPI-based REER after the devaluation and has remained lower at about 62 percent of its predevaluation level.
  - WAEMU: labor-cost-based REER followed a similar pattern up to 2003 but since then has been appreciating faster than the CPI-based REER, suggesting labor costs in WAEMU have been rising faster than prices after 2003.
  - Cost-based measures suggest competitiveness is more favorable when using labor-cost-based rather than CPI-based REERs (except WAEMU after 2003).
  - The stronger depreciation of the labor-cost-based REER compared to the CPI-based REER suggests downward adjustment of nominal wages.
- Service-sector-deflator-based REERs:
  - In CEMAC: lower than the CPI-based REER.
  - In WAEMU: above the CPI-based REER.

### Unified Regional Exchange Rates (URNEER and URREER)
- URER construction: weights individual country domestic prices by trade between the monetary union and the rest of the world (excluding intra-union trade).
- CEMAC:
  - Average URNEER at end-2006: about 60 percent of its predevaluation level.
  - CEMAC URREER appreciated about 28 percent from 1994 to 2006 and is now at about 83 percent of its predevaluation level.
  - URREER relative to the European Union is less volatile than total URREER due to the peg to the Euro.
- WAEMU:
  - URNEER has appreciated by about 30 percent since 1994 and is currently at 80 percent of its predevaluation level.
  - By 2007 WAEMU URREER was at about 72 percent of its predevaluation level.
  - WAEMU URNEER at end-2006 was about 20 percent higher than the NEER; the URREER was about 5 percent lower than the REER.
- Interpretation: URNEER and URREER end-2006 levels are broadly consistent with NEER and REER findings for both unions.

### FEER, equilibrium, and misalignment conclusions
- FEER approach findings (Edwards (1989) model and Johansen (1995) cointegration methodology):
  - Increases in the terms of trade, government consumption, and productivity improvements tend to cause the exchange rate to appreciate.
  - Increases in investment and openness lead to a depreciation.
- Abdih and Tsangarides (2006) estimates:
  - Both the WAEMU and CEMAC real exchange rates were slightly more appreciated than their estimated long-run equilibrium levels at end-2005, but the estimated misalignments were not statistically significant.
  - Extended analysis up to 2006 concludes that in 2006 also the levels of the real effective exchange rates were in line with the estimated equilibrium real effective exchange rate paths, without any statistically significant misalignments.

### Labor costs, wages, and data limitations
- Labor costs analysis:
  - Index of civil servant wage rates used as a proxy for overall wage movement.
  - Country nominal wage indices constructed from government total wage and salary expenditures and number of civil servants (WAEMU) or population (CEMAC).
  - Real wages proxied by the ratio of the nominal wage index to CPI.
- Observed wage patterns:
  - Nominal wages tended to have grown slower than other domestic prices in most countries in both zones.
  - By end-2006, CEMAC countries showed a similar decline in the real wage index except Equatorial Guinea and Gabon.
  - In WAEMU, real wages in 2006 were lower than in 1993 in Burkina Faso, Côte d’Ivoire, Niger, and Togo; through 2003 they had risen in Benin, Mali, and Senegal.
  - The decline in real wages was most noticeable at the time of the devaluation.
- Data limitations:
  - No reliable total production cost data; unit labor costs could not be computed.
  - Per capita GDP used as a proxy for labor productivity where needed.
- Summary: Real exchange rate measures point to an appreciation of the CFA franc in both WAEMU and CEMAC, suggesting a loss of competitiveness; nominal wages have generally grown slower than other domestic prices.

### Exports, market shares, and FDI
- Export and market-share patterns:
  - Since 2001, CEMAC shares of export market to the world have been increasing, to Africa declining, and to the EU roughly constant.
  - Intra-CEMAC trade has been virtually flat at about 1 percent since 2000.
  - WAEMU market shares to the world appear to be increasing; intra-WAEMU exports have been expanding and are much higher than intra-CEMAC exports.
- Exports-to-GDP and volumes:
  - WAEMU: exports-to-GDP have been increasing; since 2000 volumes (volatile) have been growing by an average of 2 percent.
  - CEMAC: export performance dominated by oil sector; since 1997 decline of non-oil exports to GDP, though they began to pick up in 2005.
  - CEMAC average exports-to-GDP in 2001–06 are higher than in Latin America, SSA, and OECD, and almost at the level of emerging Asia.
  - At about 31 percent, WAEMU’s average export shares are below SSA generally but compare favorably to other comparator groups.
- FDI flows (levels and comparators):
  - Emerging Asia attracted the majority of FDI—US$1.4 billion in 2005.
  - FDI in both WAEMU and CEMAC is low in dollar terms but significant as a share of GDP:
    - FDI in CEMAC amounted to about 40 percent of the region’s GDP in 2005.
    - In WAEMU FDI has been flat at about 15 percent of regional GDP since about 2000.
    - In SSA as a whole FDI in 2005 was 30 percent of GDP.
  - Comparator FDI flows (percent of GDP): lower-middle-income countries 2.5 percent; Latin America 3.0 percent; East Asia and Pacific 2.4 percent; SSA as a whole 3.2 percent; CEMAC 7.1 percent; WAEMU 0.9 percent.
- Sector specialization:
  - Excluding fuels, cocoa, and iron, for 2000–05 average growth in exports in US dollars of products WAEMU countries export was below the overall average for total world exports; average price increases were lower than the world export average.
  - Cocoa and iron saw export price increases higher than average; cocoa’s weight in WAEMU trade largely drives WAEMU export performance.
- Summary: Export volumes show improvement in both regions (CEMAC driven by oil); WAEMU export growth slower but some diversification; FDI increased in CEMAC and stagnated for WAEMU.

### Business environment, profitability, and survey indicators
- Profitability patterns:
  - CEMAC export profitability driven by the oil sector and rising oil prices.
  - WAEMU shows overall deterioration of terms of trade since about 1995, coupled with REER appreciation.
  - Constructed profitability measures indicate:
    - CEMAC: export profitability generally increased in last two years, driven by oil; non-oil-sector profitability has been steadily declining since 2000.
    - WAEMU: on average a net decline in profitability since 2002.
- World Bank Doing Business (2006) survey-based indicators (selected exact comparisons and medians preserved):
  - Starting a business: SSA median = 62 days.
  - Hiring cost (percent of salary, median): SSA = 12.5; CEMAC = 20.7; WAEMU = 21.7.
  - Total tax rate (percent of profits): SSA median = 47.7; CEMAC = 59.9; WAEMU = 48.0.
  - Time for export (days) median: SSA = 34; WAEMU = 32; CEMAC = 44.
  - Time for import (days) median: median developing country = 34; WAEMU = 48; CEMAC = 56.
  - Recovery rate (cents on the dollar): CEMAC = 10; SSA = 18; WAEMU = 23.
- Additional Doing Business findings:
  - Costs of starting a business are higher than in SSA generally and other comparator groups.
  - Minimum capital required to start a business in a WAEMU country is 2.5 times higher (in income per capita terms) on average than in SSA.
  - Registering property is about 30 percent costlier in both WAEMU and CEMAC than SSA average.
  - Labor regulations in WAEMU and CEMAC are 20–30 percent more rigid than in SSA; firing costs are almost twice as high as in SSA.
  - Disclosure of ownership and financial information is less satisfactory in CEMAC than in SSA; enforcing contracts is more difficult and costly.
- Summary: Survey-based indicators reveal structural impediments to developing a competitive private sector in both regions.

### Governance, technology, physical capital, and human capital
- Governance (World Bank WGI 1996–2006):
  - Both WAEMU and CEMAC countries tend to rank below average on important governance dimensions compared to countries at similar development levels.
  - CEMAC: fewer than 18 percent of countries in the WGI sample had lower scores than the CEMAC average in 2006; perform worst on government effectiveness and control of corruption (on average less than 13 percent of all countries rank below them).
  - WAEMU: on average rank better than CEMAC; about 30 percent of countries surveyed ranked worse than the WAEMU average; about the 40th percentile in voice and accountability, 24th in government effectiveness.
- Physical capital and technology:
  - Physical infrastructure (percentage of paved roads) improved in 2000–05 vs 1990–95 for both unions.
  - CEMAC infrastructure is particularly poor at about half the SSA average; WAEMU is about 50 percent higher than SSA average and compares favorably with Latin America (27 percent) and the LMI country average (30 percent).
  - REP in WAEMU allocates 80 percent of REP resources to road projects; REP calls for scaling up regional priority spending by about 2,900 billion CFAF, about 11 percent of the region’s 2006 GDP.
  - Mobile phone subscriptions and internet usage: CEMAC performs above WAEMU and SSA averages but below LMI and Latin America benchmarks.
  - Internet service costs in CEMAC are almost two and a half times higher than the SSA average and about four times higher than the lower-middle income country average.
- Human capital (selected exact figures preserved):
  - Life expectancy: about 50 years in WAEMU higher than CEMAC; both regions show declines in 2000–05 compared to 1990–95.
  - Infant mortality: WAEMU improved to about SSA rate of 102 per 1,000; CEMAC marginally worsened in 2000–05.
  - Education and health expenditures-to-GDP: about 4 to 5 percent for health and 2.5 to 3 percent for education in 2000–05.
  - Primary education completion rates: WAEMU 35 percent and CEMAC 521 percent (as reported in source).
  - HIV prevalence in 2000–05: WAEMU 2 percent of population; CEMAC 6 percent of population; LMI country average 1.2 percent; East Asia and Pacific average 0.2 percent.
- Summary: Physical capital indicators show some improvement, particularly for CEMAC; both regions are seriously deficient in human capital indicators.

### Overall competitiveness synthesis and summary judgments
- Key conclusions:
  - Improvements in GDP growth rates have largely failed to translate into improvements in quality of life indicators.
  - Environment indicators show a mixed picture:
    - REER measures indicate clear appreciation following the 1994 devaluation, magnitude depending on the indicator used (labor-cost REER appreciation less pronounced than CPI-based REER; IRER measures show most pronounced appreciation).
    - Export patterns and market shares show some improvements in competitiveness; in CEMAC terms of trade and export profitability recently improved (driven by oil) but non-oil terms of trade and profitability have declined since the late 1990s.
    - WAEMU export profitability has remained roughly constant since 1994 but shows net decline since 2002 in constructed measures.
  - Policy indicators suggest structural rigidities in business climate, governance, and human and physical capital.
- Final summary judgment:
  - WAEMU and CEMAC face significant competitiveness challenges across exchange rate dynamics, sectoral specialization (oil dependence in CEMAC; limited diversification in WAEMU), business environment rigidity, governance deficits, and weak human capital outcomes.

### Competitiveness comparison and policy priorities
- Comparative summary: Both WAEMU and CEMAC “fare significantly worse on the majority of the measures, lagging behind both the SSA average and the LMI country average.”
- Representative indicators considered (as plotted in source figures): Real GDP Growth 2001-06; HDI 2006; Life expectancy; Gini (Inverted); Prevalence of HIV, total (% of population ages 15-49); Roads, paved (% of total roads); Phone subscribers 2000-05; FDI (%GDP).
- Policy priorities and recommendations (preserved wording and emphasis):
  - Structural reforms to boost labor productivity, reduce excessive factor costs, and diversify the base of production and exports of the economies.
  - Reduction of factor costs by improved access to new technologies.
  - Regional integration programs, notably in road infrastructure, telecommunications and energy, and other areas facilitating interregional trade.
  - Creating the right conditions for an increase in domestic and foreign private investment in all sectors of the economy (especially in the non-oil sector for CEMAC), beginning with reforming the legal and regulatory system, governance, and the business environment.

### Appendices (methodological notes)
- Appendix A — IRER calculation:
  - IRER defined as P_NT / P_T.
  - IRER1: IRER1 = (CPI / P_T)^(1/(1- z)) using import prices as proxy for P_T and z proxied by the share of imported consumption goods in total private consumption.
  - IRER2: based on Devarajan, Lewis, and Robinson (1993) three-good model leading to IRER2 = [(p_y – S_x p_x) / (1 - S_x)] / P_T with import prices used as proxy for P_T.
- Appendix B — UREER calculation:
  - Follows IMF country-level monthly index method and ECB approach for the Euro; intraregional trade removed from trade weights.
  - Steps: obtain trade flows net of intra-regional trade for 2000–04; calculate trade weights; construct regional deflators weighted by GDP_PPP; compute URNEERs as geometric weighted averages; compute URREERs using regional CPIs.
  - Selected trade weight highlights (exact percentages preserved):
    - WAEMU partners: United States 28.4; China, P.R.: Mainland 9.3; Spain 9.2; Italy 6.0; Netherlands 3.5; United Kingdom 2.6; Korea 2.5; Germany 2.2; Nigeria 2.1; Belgium 1.9; Japan 1.9; Canada 1.7; Portugal 1.4; Côte d'Ivoire 1.1; Other 6.6.
    - CEMAC partners: France 26.2; Netherlands 7.9; United States 5.8; Italy 4.9; Spain 4.2; India 4.1; Germany 3.7; China 3.6; Belgium 3.5; United Kingdom 3.0; Thailand 2.7; Ghana 2.1; Japan 2.0; Gabon 1.7; Other 14.7.
  - Coverage note: “For CEMAC, 52 countries accounted for more than 82 percent of total trade. For WAEMU, 32 countries accounted for more than 75 percent of the region’s exports and imports.”

*Source: IMF staff paper — "WAEMU and CEMAC: Real Effective Exchange Rate and Components" (content excerpt, _wp07212).*

### 1. WAEMU and CEMAC: Real Effective Exchange Rate and Components..........................12

### 1. WAEMU and CEMAC: Real Effective Exchange Rate and Components

### Introduction: context and high-level findings
- The 1994 devaluation of the CFA franc was a result of a prolonged deterioration of the terms of trade, a steep rise in labor costs, and a nominal appreciation of the French franc against the U.S. dollar, all of which resulted in an overvalued exchange rate.
- The 50 percent devaluation in January 1994 was instrumental in making CEMAC and WAEMU countries more competitive; reinforced by prudent macro policies and structural reforms, it helped GDP return to positive growth rates.
- Since the introduction of the euro in 1999, the CFAF has been pegged to the euro at CFAF 655.957 per €1.
- Main assessment findings:
  - Some areas of improved competitiveness (particularly export profitability and market share in CEMAC driven by oil market developments).
  - Other areas where competitiveness has worsened, including real effective exchange rate appreciation and poor scores on cost of doing business and governance.
  - Serious competitiveness gaps relative to peer groups, notably in business environment, governance, and human capital.
  - Need for structural reform policies to boost productivity, reduce excessive factor costs, diversify production, and attract higher domestic and foreign private investment across sectors.

### Competitiveness framework (environment and policy)
- Competitiveness is viewed as two interlinked components:
  - Environment: costs, prices, exchange rates, wages; their impact on export capacity and employment.
  - Policy: determinants of business performance and productivity—business environment, governance, technology, infrastructure, human capital, macro performance.
- The framework builds on the Ireland NCC approach and embeds other models (GCR, WCY) to emphasize inputs (policy-controllable) and essential conditions.
- The analysis aims to trace environment and policy determinants sequentially to give a comprehensive account of competitiveness for all fourteen CFA franc zone countries.

### Competitiveness overview — sustainable growth and quality of life
- GDP growth since the devaluation has varied within the CFA franc zone and between WAEMU and CEMAC; outcomes linked to external price/exchange rate developments and structural characteristics.
- Oil developments dominated CEMAC performance; of the six CEMAC members, only the Central African Republic does not produce oil. Petroleum constitutes the bulk of the region’s export receipts and more than half its budgetary revenue.
- Key growth statistics (preserved exactly as in source):
  - Since 1994, real GDP growth in the CEMAC averaged about 5 percent of GDP (with a pronounced drop in 1999).
  - In the WAEMU, growth averaged about 4 percent.
  - For 2001–06 CEMAC growth was almost double the SSA average.
- Real per capita growth and productivity:
  - Real per capita growth was not as favorable: WAEMU grew at lower than SSA rates; CEMAC was about the SSA rate.
  - Disparities reflect higher population growth in WAEMU and higher CEMAC growth driven by oil.
- Nominal and PPP per-capita comparisons:
  - In nominal terms WAEMU and CEMAC output per capita does not compare favorably with peer groups (Latin America, emerging Asia, OECD) in U.S. dollar and PPP terms.
  - CEMAC per capita GDP is barely above the SSA average and below comparator groups.
- Quality of life indicators:
  - Human Development Index (HDI): CEMAC and WAEMU rank below OECD and below emerging Asia and Latin America; CEMAC performs marginally above the SSA average.
  - All WAEMU countries rank in the “low human development” part of the HDI; four WAEMU countries (Guinea-Bissau, Burkina Faso, Mali, and Niger) rank among the five lowest in the index, with virtually no improvement since 2000.
  - CEMAC: Chad and the Central African Republic are in the bottom seven of the HDI; the rest rated as in “middle human development.”
  - Life expectancy: at about 50 years, life expectancy for both WAEMU and CEMAC ranks much below the averages for emerging Asia and Latin America.
  - Income inequality: Gini coefficient is higher in CEMAC than WAEMU, about at the SSA average, and above emerging Asia and the OECD.
- Summary point: Recent GDP growth increases have largely failed to translate into improved quality of life and sustainable living standards.

### Environment and conditions — productivity and labor markets
- Productivity as a driver and indicator of competitiveness; proxied by real per capita GDP.
- Findings on productivity:
  - WAEMU productivity is the lowest among developing comparator groups including SSA, with trends indicating a decline since 1995–2000.
  - CEMAC productivity is at about the SSA level and has been improving since 2000.
  - A constructed productivity index (real per capita GDP vs partner countries) shows persistent decline in productivity for both WAEMU and CEMAC since the late 1990s, with both indices at about the same levels in 2006.

### Policy implications and recommended priorities (as stated in source)
- Structural reform priorities to overcome competitiveness challenges:
  - Boost productivity.
  - Reduce excessive factor costs (including labor costs).
  - Diversify the base of production away from narrow commodity dependence (notably oil in CEMAC).
  - Create conditions to attract higher domestic and foreign private investment in all sectors of economic activity.
- Maintain careful attention to competitiveness under the fixed exchange rate regime to preserve gains from the 1994 devaluation.

*Source: IMF staff paper — "WAEMU and CEMAC: Real Effective Exchange Rate and Components" (content excerpt).*

### Part IV.

### Part IV.

### A. Productivity and Labor Market
- Productivity index: measured as the ratio of real per capita GDP relative to each region’s main trade partners (logarithmic terms), normalized for each region to 1 in 2000.
- Measured productivity compared with trading partners for both WAEMU and CEMAC has been declining.
- Demographics and labor market indicators (1990–2004):
  - Average population growth rate in WAEMU: about 2.7 percent.
  - Total labor force participation rate in WAEMU in 2004: about 79 percent.
  - Comparator labor force participation rates in 2004: Sub-Saharan Africa (SSA) 76 percent, lower and middle-income (LMI) countries 71 percent, Latin American countries 70 percent.
  - Female labor force participation: WAEMU and CEMAC compare favorably with LMI countries (57 percent) and Latin American countries (55 percent).
- Interpretation: High population growth rates exert a resource constraint (Malthusian view), while some labor market conditions, such as labor force participation, appear promising relative to comparator groups.

### B. Costs and Prices — Exchange Rates and Competitiveness
- Exchange rate indicators used: CPI-based real effective exchange rates (REER), labor-cost-based REER, internal real exchange rates (IRER), unified regional exchange rates (URNEER and URREER), service-sector-deflator-based REERs.
- 1994 devaluation and subsequent REER movements:
  - CEMAC REER: appreciated cumulatively by about 32 percent through December 2000 and by another 21 percent from January 2001 to December 2006; by December 2006 the CEMAC REER was at 86 percent of its predevaluation level.
  - WAEMU REER: appreciated by about 21 percent through December 2000 and by another 11 percent from January 2001 to December 2006; by December 2006 the WAEMU REER was at 77 percent of its predevaluation level.
  - Most recent appreciation for both WAEMU and CEMAC was essentially due to the strengthening of the Euro to which the CFA franc is pegged.
- Cross-country variation in REERs (end-2006, percent of predevaluation level):
  - WAEMU: Mali’s REER at 66 percent; Benin’s REER at 89 percent.
  - CEMAC: Equatorial Guinea at 116 percent; Gabon at 70 percent.
- Table 1 summary (periods: Jan 1994–Dec 1998; Jan 1999–Dec 2000; Jan 2001–Dec 2006):
  - WAEMU:
    - Real effective exchange rate: 29.6  -9.1  10.8
    - Nominal effective exchange rate: 12.2  -7.5  13.0
    - Relative Price Index: 13.7  -1.7  -1.9
  - CEMAC:
    - Real effective exchange rate: 43.0  -10.6  20.9
    - Nominal effective exchange rate: 12.4  -8.5  11.8
    - Relative Price Index: 27.0  -2.4  7.8

### Internal Real Exchange Rate (IRER)
- IRER defined as the ratio of the prices of nontraded goods (PNT) to tradable goods (PT).
- Two alternative IRER measures used for robustness (IRER1 and IRER2).
- CEMAC:
  - IRER fluctuations followed CPI-based REER but with wider amplitude.
  - By end-2006 total cumulative yearly appreciation of the IRER since 1994 was about 11 percent, bringing it to 91 percent of its predevaluation value.
  - The CPI-based REERs was 86 percent above its predevaluation value.
- WAEMU:
  - IRER measures tracked the CPI-based REER closely until about 2003.
  - After 2003 the CPI-based REER appears to overestimate erosion of competitiveness because both IRER measures are below the REER.

### Labor Costs and Other Real Exchange Rate Measures
- Labor-cost-based REERs proxied by CPI-based REER multiplied by the real wage index (nominal wage index/CPI) due to data limitations.
- Labor-cost-based REER behavior:
  - CEMAC: labor-cost-based REER depreciated much more than the CPI-based REER after the devaluation and has remained lower at about 62 percent of its predevaluation level.
  - WAEMU: labor-cost-based REER followed a similar pattern up to 2003 but since then has been appreciating faster than the CPI-based REER, suggesting labor costs in WAEMU have been rising faster than prices after 2003.
  - Overall, cost-based measures suggest competitiveness is more favorable when using labor-cost-based rather than CPI-based REERs (except WAEMU after 2003).
  - The stronger depreciation of the labor-cost-based REER compared to the CPI-based REER suggests downward adjustment of nominal wages.
- Service-sector-deflator-based REERs:
  - In CEMAC: lower than the CPI-based REER.
  - In WAEMU: above the CPI-based REER.

### Unified Regional Exchange Rates (URNEER and URREER)
- URER constructed weighting individual country domestic prices by trade between the monetary union as a whole and the rest of the world (excluding intra-union trade).
- CEMAC:
  - Average URNEER at end-2006: about 60 percent of its predevaluation level.
  - CEMAC URREER appreciated about 28 percent from 1994 to 2006 and is now at about 83 percent of its predevaluation level.
  - URREER relative to the European Union is less volatile than total URREER due to the peg to the Euro.
- WAEMU:
  - URNEER has appreciated by about 30 percent since 1994 and is currently at 80 percent of its predevaluation level.
  - By 2007 WAEMU URREER was at about 72 percent of its predevaluation level.
  - WAEMU URNEER at end-2006 was about 20 percent higher than the NEER; the URREER was about 5 percent lower than the REER.
- Interpretation: URNEER and URREER end-2006 levels are broadly consistent with NEER and REER findings for both unions.

### Summary Findings and Policy-Relevant Observations
- Productivity relative to trading partners has declined in both WAEMU and CEMAC.
- Demographic pressures (e.g., WAEMU population growth about 2.7 percent) imply resource constraints despite relatively high labor force participation (WAEMU about 79 percent in 2004).
- Exchange rate dynamics since the 1994 devaluation show significant real appreciation of REERs in both regions, with CEMAC and WAEMU REERs at lower percentages of predevaluation levels by end-2006 but with substantial heterogeneity across member countries.
- Labor-cost-based indicators generally point to more favorable competitiveness than CPI-based indicators, particularly for CEMAC, suggesting possible nominal wage adjustments and, for CEMAC, indications of Dutch disease.
- IRER and URER analyses provide complementary perspectives: IRER points to production-cost-driven competitiveness changes; URER abstracting from intra-union trade confirms broader NEER/REER patterns.

*Source: _wp07212 - Part IV.*

### conclusions based on the recent work

### conclusions based on the recent work

### Exchange rates and equilibrium (FEER) findings
- Using the fundamentals equilibrium exchange rate (FEER) approach based on the Edwards (1989) model and the Johansen (1995) cointegration methodology, Abdih and Tsangarides (2006) identify fundamentals that account for most fluctuation of the real effective exchange rates:
  - increases in the terms of trade, government consumption, and productivity improvements tend to cause the exchange rate to appreciate;
  - increases in investment and openness lead to a depreciation.
- Abdih and Tsangarides estimate that while both the WAEMU and CEMAC real exchange rates were slightly more appreciated than their estimated long-run equilibrium levels at end-2005, the estimated misalignments were not statistically significant.
- Extended analysis up to 2006 concludes that in 2006 also the levels of the real effective exchange rates were in line with the estimated equilibrium real effective exchange rate paths, without any statistically significant misalignments.

### Labor costs and wages
- Analysis focuses on labor costs using an index of civil servant wage rates as a proxy for overall wage movement.
- Construction of country nominal wage indices uses government total wage and salary expenditures and number of civil servants (WAEMU) or population (CEMAC).
- Real wages proxied by the ratio of the nominal wage index to CPI.
- Observed patterns:
  - Nominal wages tended to have grown slower than other domestic prices in most countries in both zones.
  - By end-2006, CEMAC countries showed a similar decline in the real wage index except Equatorial Guinea and Gabon.
  - In WAEMU, real wages in 2006 were lower than in 1993 in Burkina Faso, Côte d’Ivoire, Niger, and Togo; through 2003 they had risen in Benin, Mali, and Senegal.
  - The decline in real wages was most noticeable at the time of the devaluation, because exchange rate pass-through to wages is weaker than pass-through to other prices.
- Data limitations:
  - No reliable total production cost data; unit labor costs could not be computed.
  - Per capita GDP used as a proxy for labor productivity where needed.
- Summary statement:
  - Real exchange rate measures point to an appreciation of the CFA franc in both WAEMU and CEMAC, suggesting a loss of competitiveness.
  - Constructed nominal wage indices show nominal wages have grown slower than other domestic prices in the majority of countries in both regions.

### Macroeconomic performance: exports, market shares, and FDI
- Export patterns and market shares:
  - Since 2001, CEMAC shares of export market to the world have been increasing, to Africa declining, and to the EU roughly constant.
  - Intra-CEMAC trade has been virtually flat at about 1 percent since 2000.
  - WAEMU market shares to the world appear to be increasing; intra-WAEMU exports have been expanding and are much higher than intra-CEMAC exports.
- Exports-to-GDP and volumes:
  - WAEMU: exports-to-GDP have been increasing; since 2000 volumes (volatile) have been growing by an average of 2 percent.
  - CEMAC: export performance dominated by oil sector; since 1997 decline of non-oil exports to GDP, though they began to pick up in 2005.
  - CEMAC average exports-to-GDP in 2001–06 are higher than in Latin America, SSA, and OECD, and almost at the level of emerging Asia.
  - At about 31 percent, WEAMU’s average export shares are below SSA generally but compare favorably to other comparator groups.
- FDI flows and diversification:
  - Emerging Asia attracted the majority of FDI—US$1.4 billion in 2005.
  - FDI in both WAEMU and CEMAC is low in dollar terms but significant as a share of GDP:
    - FDI in CEMAC amounted to about 40 percent of the region’s GDP in 2005.
    - In WAEMU FDI has been flat at about 15 percent of regional GDP since about 2000.
    - In SSA as a whole FDI in 2005 was 30 percent of GDP.
  - Comparators for FDI flows (percent of GDP): lower-middle-income countries 2.5 percent; Latin America 3.0 percent; East Asia and Pacific 2.4 percent; SSA as a whole 3.2 percent; CEMAC 7.1 percent; WAEMU 0.9 percent.
- Sector specialization and competitiveness:
  - Excluding fuels, cocoa, and iron, for 2000–05 the average growth in exports in US dollars of products WAEMU countries export was below the overall average for total world exports; average price increases were lower than the world export average.
  - Cocoa and iron saw export price increases higher than average and higher than average export growth; cocoa’s weight in WAEMU trade largely drives WAEMU export performance.
- Summary:
  - Export volumes show improvement in both regions, dominated in CEMAC by oil.
  - Export growth in WAEMU was much slower than for CEMAC but showed some diversification.
  - Export market shares have been increasing in some markets and worsening in others.
  - FDI has been increasing in CEMAC and compares favorably with the rest of SSA, but has stagnated for WAEMU.

### Business environment and profitability
- Profitability patterns:
  - CEMAC export profitability driven by the oil sector and rising oil prices.
  - Impact of appreciating REER in CEMAC was somewhat contained as exports increased and terms of trade improved.
  - WAEMU shows overall deterioration of terms of trade since about 1995, coupled with REER appreciation, suggesting challenges to export competitiveness and profitability despite an overall improvement of the export index.
  - Evidence of erosion of non-oil export profitability in CEMAC.
  - Constructed profitability measures (export price index-to-tertiary GDP deflator and export price index-to-wages deflator) show:
    - CEMAC: export profitability generally increased in last two years, driven by oil; non-oil-sector profitability has been steadily declining since 2000.
    - WAEMU: on average a net decline in profitability since 2002.
- Survey-based indicators (World Bank Doing Business, 2006):
  - CEMAC and WAEMU countries rank among the lowest in aggregated ease of doing business.
  - Key Doing Business findings (selected):
    - Costs of starting a business are higher than in SSA generally and other comparator groups.
    - Minimum capital required to start a business in a WAEMU country is 2.5 times higher (in income per capita terms) on average than in SSA.
    - Registering property is about 30 percent costlier in both WAEMU and CEMAC than SSA average.
    - Labor regulations in WAEMU and CEMAC are 20–30 percent more rigid than in SSA; firing costs are almost twice as high as in SSA.
    - Disclosure of ownership and financial information is less satisfactory in CEMAC than in SSA; enforcing contracts is more difficult and costly.
    - Closing a business in CEMAC is about twice as costly and time-consuming than in SSA; recovery rate extremely low (10 cents on the dollar compared to 18 for SSA).
    - In WAEMU, time to close a business is longer but cost is lower than SSA average; recovery rate about 23 cents, above both CEMAC and SSA averages.
  - Quantitative indicators (medians and comparisons):
    - Starting a business: SSA median = 62 days (from Table summaries); CEMAC and WAEMU show higher burdens.
    - Hiring cost: median SSA = 12.5 percent of salary; CEMAC = 20.7; WAEMU = 21.7.
    - Total tax rate (percent of profits): SSA median = 47.7; CEMAC = 59.9; WAEMU = 48.0.
    - Time for export (days) median: SSA = 34; WAEMU = 32; CEMAC = 44.
    - Time for import (days) median: median developing country = 34; WAEMU = 48; CEMAC = 56.
- Summary:
  - Profitability of exports improved in CEMAC due to rising oil prices but has lately declined somewhat in WAEMU.
  - Survey-based indicators reveal structural impediments to developing a competitive private sector in both regions.

### Governance
- World Bank Worldwide Governance Indicators (WGI) 1996–2006 cover six dimensions: voice and accountability; political stability and absence of violence; government effectiveness; regulatory quality; rule of law; control of corruption.
- Both WAEMU and CEMAC countries tend to rank below average on important governance dimensions compared to countries at similar development levels.
- CEMAC:
  - Fewer than 18 percent of countries in WGI sample had lower scores than the CEMAC average in 2006.
  - Perform worst on government effectiveness and control of corruption components (on average less than 13 percent of all countries rank below them).
  - Rankings by component range between the 14th and 30th percentiles, with relatively higher rankings on political stability.
  - Notable country variations (examples from text): Gabon typically ranks highest; CAR in 3rd percentile government effectiveness; Equatorial Guinea 5th in voice and accountability; Chad 10th in political stability; Congo 5th on rule of law.
- WAEMU:
  - On average rank better than CEMAC; about 30 percent of countries surveyed ranked worse than the WAEMU average.
  - On average WAEMU countries are about the 40th percentile in voice and accountability, 24th in government effectiveness.
  - Excluding Côte d’Ivoire and Guinea Bissau from averages improves rankings by as much as 10 percentage points.
  - Country examples: Mali 60th percentile voice and accountability, 51st rule of law; Senegal 50th government effectiveness, 43rd regulatory quality; Benin 58th political stability; Burkina 58th control of corruption.
- Summary:
  - Countries in both regions tend to rank below average on government effectiveness, regulatory quality, rule of law, and control of corruption compared to peers.

### Technology, physical capital, and human capital
- Infrastructure and technology indicators:
  - Physical infrastructure (percentage of paved roads) improved in 2000–05 vs 1990–95 for both WAEMU and CEMAC.
  - CEMAC infrastructure is particularly poor at about half the SSA average; WAEMU is about 50 percent higher than SSA average and compares favorably with Latin America (27 percent) and the LMI country average (30 percent).
  - REP (Regional Economic Plan) in WAEMU allocates 80 percent of REP resources to road projects.
  - REP resources scale-up mentioned: REP calls for regional priority spending to be scaled up by about 2,900 billion CFAF, about 11 percent of the region’s 2006 GDP.
- Technology access:
  - Mobile phone subscriptions and internet usage: CEMAC performs above WAEMU and SSA averages but below LMI and Latin America benchmarks.
  - Benchmarks from figures: LMI=187 (mobile subscriptions), United States (US$ 15) cost of Internet services reference, United States (630) internet users per 1,000, LMI=63.
  - Internet service costs in CEMAC are almost two and a half times higher than the SSA average and about four times higher than the lower-middle income country average.
- Human capital indicators (selected):
  - Life expectancy: about 50 years in WAEMU higher than CEMAC; both regions show declines in 2000–05 compared to 1990–95.
  - Infant mortality: WAEMU improved to about SSA rate of 102 per 1,000; CEMAC marginally worsened in 2000–05.
  - Education and health expenditures-to-GDP ratio about 4 to 5 percent for health and 2.5 to 3 percent for education in 2000–05—insufficient to attain the Millennium Development Goals per the source.
  - Primary education completion rates: WAEMU 35 percent and CEMAC 521 percent (as reported in source); both below SSA level.
  - HIV prevalence in 2000–05: WAEMU 2 percent of population; CEMAC 6 percent of population; lower- and middle-income country average 1.2 percent; East Asia and Pacific average 0.2 percent.
- Summary:
  - Physical capital indicators show some improvement, particularly for CEMAC, but both regions are seriously deficient in human capital indicators.

### Overall conclusions and competitiveness synthesis
- The multifaceted competitiveness approach applied to WAEMU and CEMAC produces these key conclusions:
  - Improvements in GDP growth rates have for the most part failed to translate into improvements in quality of life indicators.
  - Environment indicators show a mixed picture:
    - REER measures indicate clear appreciation following the 1994 devaluation, magnitude depending on the indicator used (labor-cost REER appreciation less pronounced than CPI-based REER; internal real exchange rate measures show most pronounced appreciation).
    - Export patterns and market shares show some improvements in competitiveness.
    - In CEMAC, terms of trade and export profitability recently improved, driven by oil price and volume increases, but these improvements failed to translate into increased export market shares; non-oil terms of trade and profitability declining since late 1990s.
    - WAEMU export profitability has remained roughly constant since 1994.
  - Policy indicators suggest structural rigidities:
    - Business climate, governance, and human and physical capital improvements face significant challenges.
  - Final summary judgment:
    - WAEMU and CEMAC face significant competitiveness challenges across exchange rate dynamics, sectoral specialization (oil dependence in CEMAC; limited diversification in WAEMU), business environment rigidity, governance deficits, and weak human capital outcomes.

*Source: _wp07212 - conclusions based on the recent work (PDF).*

### 34. Using representative indicators already discussed, we plot WAEMU and CEMAC indicators

### _wp07212 - 34. Using representative indicators already discussed, we plot WAEMU and CEMAC indicators

### Competitiveness comparison: WAEMU and CEMAC versus SSA and LMI countries
- Summary finding: Both WAEMU and CEMAC “fare significantly worse on the majority of the measures, lagging behind both the SSA average and the LMI country average.”
- Representative indicators referenced (as plotted in Figures 33–34):  
  - Real GDP Growth 2001-06  
  - HDI 2006  
  - Life expectancy  
  - Gini (Inverted)  
  - Prevalence of HIV, total (% of population ages 15-49)  
  - Roads, paved (% of total roads)  
  - Phone subscribers 2000-05  
  - FDI (%GDP)
- Interpretation rule used in plots: “the further the distance away from the group toward the center, the worse the competitiveness problems.”

### Policy priorities and recommendations
- Major objective: “Building competitiveness in order to raise growth and improve the quality of life needs to be a major objective of WAEMU and CEMAC and each of their member countries.”
- Recommended priorities (bullet list preserved from source wording and emphasis):
  - Structural reforms to boost labor productivity, reduce excessive factor costs, and diversify the base of production and exports of the economies.
  - Reduction of factor costs by improved access to new technologies.
  - Regional integration programs, notably in road infrastructure, telecommunications and energy, and other areas facilitating interregional trade.
  - Creating the right conditions for an increase in domestic and foreign private investment in all sectors of the economy (especially in the non-oil sector for CEMAC), beginning with reforming the legal and regulatory system, governance, and the business environment.

### Appendix A — Calculation of the Internal Real Exchange Rate (IRER)
- Definition: “The internal real exchange rate (IRER) is calculated as the ratio of the domestic prices of nontradable to those of tradable goods.”
- CPI decomposition: Let z be the share of tradable goods in the CPI basket.
  - CPI = (P_T)^z (P_NT)^(1- z)         (equation (2))
- First proxy (IRER1):
  - IRER = P_NT / P_T         (equation (1))
  - Reorganized expression: IRER1 = (CPI / P_T)^(1/(1- z))         (equation (3))
  - Empirical proxies used: import prices (from the import price index) used as a proxy for prices of tradable goods; z proxied by the share of imported consumption goods in total private consumption.
- Second proxy (IRER2) — based on the three-good model of Devarajan, Lewis, and Robinson (1993):
  - Aggregate income identity: p_y Y = p_d D + p_x X         (equation (4))
  - With S_x = X/Y, derive: p_y – p_x S_x = p_d D / Y         (equation (5))
  - Rearranged: p_d = (p_y – S_x p_x) / (1 - S_x)         (equation (6))
  - IRER2 expressed as: IRER2 = [(p_y – S_x p_x) / (1 - S_x)] / P_T         (equation (7))
  - Empirical proxies used: import prices used as a proxy for the price of tradable goods.

### Appendix B — Calculation of the Unified Regional Effective Exchange Rates (UREERs)
- Methodology overview:
  - Follows IMF country-level monthly index method and ECB approach for the Euro.
  - Key feature: correct calculation of trade weights for each region, with intraregional trade removed to avoid bias.
  - Data sources: IMF, International Financial Statistics; IMF, Direction of Trade Statistics.
- Calculation steps:
  1. Obtain total merchandise exports and imports for each CEMAC and WAEMU country to calculate flows net of intra-regional trade for 2000–04.
  2. Calculate weights based on total merchandise exports and imports for 2000–04. Source notes: “For CEMAC the main partners are the United States (28 percent), France (20 percent), other Euro-area countries (24 percent), China (9 percent) and, others (19 percent). WAEMU trades mainly with France (26 percent), other Euro-area countries (26 percent), Nigeria (10 percent), the United States (6 percent), and others (32 percent). CEMAC trade is more concentrated in a few countries; WAEMU has a longer list of partners and trades more with other African countries.”
  3. Construct a common deflator for each region from national consumer prices weighted by domestic product at purchasing power parity (GDP_PPP). The average GDP_PPP for 2000–04 produces the country’s relative weight in the aggregated CPI inflation of the monetary union. Domestic CPI inflation for partner countries is weighted by the same trade weights used in the UREER calculation.
  4. Calculate URNEERs as geometric weighted averages of third-country exchange rates relative to the monthly average of the CFA franc exchange rate. URREERs are based on URNEERs and national consumer prices. Regional CPI is the weighted average of CPIs of countries in the region, with weights based on GDP_PPP for 2000–04.
- Formulae used (textual forms preserved):
  - URNEER: URNEER = 1 / (sum over i of w_ji * ln(e_ij * Exp_j))  [formula representation as given in source]
  - URREER: URREER = 1 / (sum over i of e_CPI_i * w_ji * Exp_j)  [formula representation as given in source]
  - (Notation in source: j is the CEMAC or WAEMU, i is the partner country, e is the exchange rate in local currency for US dollars, and w_ji is the weight of country i in total trade of the region j (sum of the weights is 1). CPI refers to the consumer price index of either the region j or the country i.)
- Subgroup UREERs: It is possible to obtain UREERs for subgroups (e.g., European Union, rest of SSA) by listing relevant countries and renormalizing weights to sum to one.
- Trade weight highlights (Table 1 excerpts, exact percentages preserved and associated with WAEMU and CEMAC columns):
  - WAEMU partners and percentages: United States 28.4; China, P.R.: Mainland 9.3; Spain 9.2; Italy 6.0; Netherlands 3.5; United Kingdom 2.6; Korea 2.5; Germany 2.2; Nigeria 2.1; Belgium 1.9; Japan 1.9; Canada 1.7; Portugal 1.4; Côte d'Ivoire 1.1; Other 6.6.
  - CEMAC partners and percentages: France 26.2; Netherlands 7.9; United States 5.8; Italy 4.9; Spain 4.2; India 4.1; Germany 3.7; China 3.6; Belgium 3.5; United Kingdom 3.0; Thailand 2.7; Ghana 2.1; Japan 2.0; Gabon 1.7; Other 14.7.
- Additional note from source on coverage: “For CEMAC, 52 countries accounted for more than 82 percent of total trade. For WAEMU, 32 countries accounted for more than 75 percent of the region’s exports and imports.”

*Source: _wp07212 - 34. Using representative indicators already discussed, we plot WAEMU and CEMAC indicators (PDF content provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp07212.pdf_