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Making a Blessing of Oil: Sources of Growth in the CEMAC Region, Remarks by Rodrigo de Rato, Managing Director of the International Monetary Fund
March 15, 2006
As Prepared for Delivery
Thank you very much.
1. I am delighted to be with you today, to exchange views on the sources of growth for the countries of the Central African Economic and Monetary Community. Economic growth is the main engine that drives economic development and lifts people out of poverty. Without growth, all decisions become more difficult, all fights over resources more contentious, all progress more fragile. So growth is fundamental. I have some ideas, based on what the IMF has learned from the experience of countries around the world, on policies that can promote growth, and pitfalls to be avoided. I will share those ideas with you today. But I believe that a great feature of this seminar is that it allows an exchange of views among you, who will lead the efforts to raise growth in your countries. Professor William Easterly wrote recently that "development everywhere is homegrown," and that "Africa's true saviors are the people of Africa." As I look around this room, I see many who can be saviors.
2. Most of the countries of CEMAC are in a different and, at first sight, more fortunate position than other countries in sub-Saharan Africa. For the last two years, GDP growth in the CEMAC countries has been boosted by increased oil production. The balance of payments and budgets of the CEMAC countries have also greatly benefited from high oil prices. But there are many people who have not benefited from this windfall. Despite significant increases in per capita income, CEMAC countries still rank in the bottom quartile for social development indicators. For example, here in Equatorial Guinea, the infant mortality rate was almost unchanged between 1995 and 2002. Many other countries represented here today are also far away from achieving the Millennium Development Goals. So I'd like to begin by exploring why in many countries very strong growth in one sector has not led to growth in the rest of the economy, and why growth in the economy as a whole has not always led to an improvement in most people's standard of living.
3. In many countries, oil and other valuable natural resources have been more of a curse than a blessing. If you look at low-income countries that are oil and gas producers around the world, about half of their population still lives on less than a dollar a day. And many countries with large oil resources tend to have weak or, in some cases, non-existent political and economic institutions. There is a theory that these things are linked. The theory suggests that when revenue from natural resources is large, governments have less incentive to build a base of tax revenue and citizens have less incentive to monitor their spending. Institutions are stunted while corruption flourishes. Moreover, the volatility of world oil prices has led to boom-bust cycles in many countries dependent on oil revenues. On the other hand, oil money is often wasted on huge and unsustainable projects, especially when oil prices are high, causing governments to run into financial trouble when prices drop. Meanwhile, the non-oil economy withers, a problem that is compounded if oil exports lead to an appreciation of the real exchange rate, the so-called "Dutch disease." Stagnation in the non-oil economy leaves most people worse off—because most people are not employed in resource extraction—and leaves the whole country ill-prepared for the time when commodity prices drop or the oil or other natural resources run out.
4. A good starting point for promoting sustainable and broad-based growth in the CEMAC countries, then, is to look for ways in which "the curse of oil" can be turned into a blessing.
5. The first priority is clearly to avoid losing the money. Damien Ondo Mañe, in his thoughtful paper on the challenges facing the Gulf of Guinea, notes that "the rule of law and the fight against corruption are the areas where oil producers of the region perform the worst." Corruption is an issue that must be dealt with. A start can be made in the oil sector itself, where transparency about and public accountability for the use of oil revenues can make a vital contribution. There is a wealth of advice on this subject. The IMF published last year a Guide on Resource Revenue Transparency, to help communicate best practices. There is also the Extractive Industries Transparency Initiative, which the IMF supports and which many countries, including some CEMAC countries, have now committed themselves. By fostering more public accountability through transparency, these initiatives can help raise the quality of public expenditure, reduce poverty, and eliminate opportunities for corruption. But ultimately it is up to the governments and leaders of the region—including civil society—to ensure that money is not stolen or wasted, but is instead used to better the lives of poor people.
6. The second priority is to ensure that oil revenues are spent wisely. This has implications for both the pace of spending and the choice of projects. Overall, the trade-off is between investing more in education, health, and infrastructure today and holding the proceeds from oil sales in financial assets. In making this decision, we would suggest that governments and citizens should be guided by the initial position, and by capacity constraints. For example, debt might need to be reduced to lessen vulnerability to external shocks. And more money can be invested in real assets without waste if there are fiscal and monetary policies that preserve economic stability and strong public expenditure management systems to raise the quality and return on public investment.
7. It is also important to develop the institutional framework. At the regional level, economic integration can produce remarkable benefits. Regional integration is a key policy goal for CEMAC, but it has proceeded only slowly so far. It should be matched by greater efforts by CEMAC countries to further open trade with the rest of the world. Within CEMAC, trade is sometimes hampered by tariffs and more fundamentally by non-tariff barriers, such as lengthy and complicated customs procedures. Removing them would make it easier for businesses to flourish and goods to circulate. Barriers to trade between CEMAC and other regions are also too high. When I was in Benin last May, farmers and government officials from all over West Africa underscored the damage being done to agriculture in developing countries by protectionist policies in the developed world, and I have consistently urged the major industrial countries to take the lead in trade liberalization. But just like developing countries in other regions, CEMAC must also do its part. Reducing your own tariffs will primarily benefit CEMAC consumers and producers—and it is critical if CEMAC countries are to take full advantage of trade reforms in developed countries and other developing countries.
8. Diversification is also important. Strengthening non-mineral sectors will increase resistance to shocks and broaden the revenue base. One way that countries can encourage diversification and prepare themselves for economic downturns or the eventual disappearance of natural resources is to invest in their own people. Improving education and health stimulates economic growth by raising both labor productivity and the participation of the labor force. It promotes the development of other political and economic institutions. And of course, it makes possible a better, more fulfilled life for a country's citizens.
9. One area where we believe the CEMAC countries have some work to do is on the business environment. Two years ago, the World Bank conducted a Doing Business Survey that contained some depressing statistics. For example, on average, it costs almost twice as much in terms of income to create collateral in CEMAC countries as elsewhere in sub-Saharan Africa. In every country in CEMAC covered by the survey, the rigidity-of- employment index, which measures difficulty of hiring and firing, is significantly above the average for the rest of Africa. And when a business goes bankrupt, it is about twice as costly and time-consuming for creditors to close it, and the recovery rate on their investments is about half that in countries elsewhere in sub-Saharan Africa.
10. What can be done about these problems? The bankruptcy issue suggests that some reform of the judicial system may be needed. But the nature of the other problems suggests that part of the solution lies in measures to develop the financial sector and liberalize labor markets. Let me elaborate on these issues.
11. In the CEMAC countries, the coverage of the banking system is very limited, in part because interest-rate restrictions make banks reluctant to accept new deposits or broaden their lending. The preliminary findings of the ongoing Fund-Bank Financial Sector Assessment Program suggest that removing floors on deposit rates would encourage banks to accept deposits from a wider range of customers, and lifting ceilings on lending rates could encourage them to broaden their lending beyond established businesses, and take more risks on new businesses, which are promising sources of job growth in the future. So it is very important to strengthen the financial sectors in the CEMAC countries, and this includes addressing the issues of undercapitalized banks and widespread non-compliance with prudential regulations. One encouraging development in recent years has been the increased attention to microfinance. But here too, regulators could do more to encourage growth. For example, I understand that over half of the licensing applications for microfinance institutions submitted recently have yet to be considered.
12. There may also be scope to liberalize labor markets. There are difficult trade-offs here. Minimum wages, rules that prevent firms from laying off workers, and strong unions all provide important protections for workers. But labor markets are important for international competitiveness, and when restrictions are too rigid, they dissuade businesses from hiring workers, leading to higher unemployment. And as labor regulation increases, the informal sector—which has worse working conditions—grows. So what is an important protection for some may leave many, perhaps most, worse off.
13. Let me conclude by saying a few words about what the IMF can do to help. First, of course, the IMF will continue to provide policy advice—and financial assistance when it is needed—to promote policies that support stability, growth, and poverty reduction. The Poverty Reduction and Growth Facility (PRGF) will remain the main instrument for assisting members which need financial support. Last year our Executive Board also created a new instrument under the PRGF trust to provide financial support to low-income members dealing with exogenous shocks, including those arising from natural disasters and conflicts in neighboring countries that disrupt trade. For others, we are strengthening both regional surveillance and surveillance of individual countries, including through the Policy Support Instrument. This is a forward-looking instrument, based on policy advice rather than lending, which was developed in response to requests from low-income country governments. The IMF also provides technical assistance, with a focus on developing key economic institutions. I announced yesterday that to support this effort the IMF will open a new Africa Regional Technical Assistance Center in central Africa, covering eight countries, including the CEMAC countries. We are also currently reviewing the IMF's medium-term strategy, including the strategy for our work on low-income countries.
14. In many ways, then, the IMF can be helpful to its members. And I hope the suggestions I have made today will be helpful to you. But I want to return to what I said at the beginning, that development and solutions to problems must be homegrown. So I thank you for your attention, and I give the floor to you.
Thank you.
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