C ô te d ’ I vo i r e C o u ntr y Ec o n o m i c Me m o ra n d u m SUSTAINING THE GROWTH ACCELERATION APRIL 2021 © 2021 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. As the World Bank encourages the dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes, provided that the source is acknowledged. Images in this work are used with permission from ©Joana Choumali. Additional permission is required for reuse. https://joanachoumali.com/index.php/projects/mix-media/alba-hian. • As The Wind Whispers Albahian 80 X80 Cm Joana Choumali 2019 • Demain 50x50 Cm Série Albahian 2018 Joana Choumali • Holding those strings 50 X 50 Cm Joana Choumali 2019 • And You Walk Alongside Me Albahian 2019, Joana Choumali Attribution—Please cite the work as follows: “World Bank. 2021. Côte d’Ivoire Country Economic Memorandum © World Bank.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. 2 I Côte d’Ivoire Country Economic Memorandum Acknowledgments The report was prepared by a team co-led by Nathalie Picarelli, Fiseha Haile and Amina Coulibaly. The team included Alexa Tiemann, Tiangboho Sanogo, Mariana Iootty, Maciej Drozd, Seidu Dauda, Gonçalo Coelho, Georgiana Pop, Hibret Belete Maemir, Alberto Portugal, Aleksandar Stojanov, Jean-Philippe Tre, Jeanne Oyolola, Franck M. Adoho, Maya Eden, Gabriel Lawin. The team received guidance from Coralie Gevers; Lars Christian Moller; Andrea Coppola; Jose R. Lopez Calix; Theo David Thomas. Sally Hinchcliffe provided an excellent editorial support and Joseph Anoh outstanding graphic design. Christine M. Richaud and Mame Fatou Diagne led the report during concept stage. Micky O. Ananth, Maude Jean- Baptiste, and Haoua Diallo provided excellent operational and administrative assistance, respectively. The team would like to thank Chorching Goh, Luc Christiaensen and Gerard Kamboufor useful discussions. Very useful comments were received from the peer-reviewers: Melise Jaud, Gaurav Nayyar, Miguel Eduardo Sanchez Martin. This report would not have been finalized without the generous financial assistance from the Umbrella Facility for Trade Trust Fund. The report benefited immensely from the comments of Ivorian authorities, as well as from discussions with representatives of the Ivorian private sector and academia from the conceptual stage. Côte d’Ivoire Country Economic Memorandum I 3 Abbreviations AfCFTA African Continental Free Trade Agreement AGOA African Growth and Opportunity Act APEX-CI Association for the Promotion of Exports of Côte d'Ivoire ARTCI Regulatory Authority for Telecommunications (Autorité de Régulation des Télécommunications de Côte d’Ivoire) ARTI Regulatory Authority for Inland Transportation BCEAO Central Bank of West African States (Banque Centrale des États de l'Afrique de l'Ouest) CEM Country Economic Memorandum CET Common external tariff CIAP Classification Ivoirienne des Activités et des Produits CPIA Country Policy and Institutional Assessment CPSD Country Private Sector Diagnosis DUS Single exit duty ECOWAS Economic Community of West African States EMDE Emerging market and developing economy EPA Export promotion agency EU European Union FDI Foreign direct investment GDP Gross domestic product GII Gender Inequality Index GNI Gross national income GVC Global value chain HCI Human Capital Index ICT Information and communications technology INS National Statistics Institute (Institut National de la Statistique) ISIC International Standard Industrial Classification LIC Low-income country LMIC Lower middle-income country LPI Logistics Performance Indicator LRIC Long-run incremental cost MNO Mobile network operator MTR Mobile termination rate MVNO Mobile virtual network operator NAEMA Harmonized Nomenclature of Activities for Afristat Member States (Nomenclature d’Activités des Etats Membres d’Afristat) NTM Non-tariff measures OLS Ordinary least square PCM Price cost margin PNIA National Program of Agriculture Investment (Programme National d’Investissement Agricole) PPP Public-private partnership ppt Percentage point PTA Preferential trade agreement R&D Research and development RCA Revealed comparative advantage SME Small and medium enterprise SMP Significant market power SPS Sanitary and phytosanitary standards SSA Sub-Saharan Africa TFP Total factor productivity TFPR Revenue total factor productivity TFPQ Physical total factor productivity VAT Value-added tax WAEMU West African Economic and Monetary Union WBES World Bank Enterprise Survey WTO World Trade Organization 4 I Côte d’Ivoire Country Economic Memorandum Content Abbreviations 4 Contents 5 Executive Summary 7 Chapter 1. Beyond the Miracle: Sustaining the growth acceleration 15 1.1. The key characteristics of the growth acceleration 16 1.2. Why the current model needs rethinking 20 1.3. The way forward: Sustaining high and more inclusive growth 27 Annex 1.1. Lessons from fast-growing economies 30 Annex 1.2. Selection of peer countries 31 References 32 Chapter 2. Productivity: It’s almost everything 34 2.1. Aggregate productivity growth: Trends and drivers 35 2.2. Firm-level productivity dynamics 41 Annex 2.1. Output and employment shares across low- and lower middle-income countries 46 Annex 2.2. Firm-level census data 47 Annex 2.3. The impact on productivity of removing misallocation 48 References 49 Chapter 3. Boosting productivity growth through competition policy 50 3.1. What is the state of competition in Côte d’Ivoire? 52 3.2. Are policies constraining competition in Côte d’Ivoire? 58 3.3. What actions can the Government take to foster competition? 69 Annex 3.1. Price cost margin as a proxy of market power: Theoretical and empirical assumptions 73 Annex 3.2. Empirical analysis drawing from Enterprise Survey data 74 References 77 Chapter 4. Export diversification as a driver of structural transformation 79 4.1. The quest for export diversification 81 4.2. Trade policy areas to support diversification 90 4.3. The impact of the COVID-19 crisis on export performance 95 4.4. How can trade serve the productivity agenda? 96 Annex 4.1. Further export data 101 Annex 4.2. Border costs and taxes 102 References 103 Chapter 5. Improving agricultural productivity for inclusive growth 104 5.1. Why agriculture matters for inclusive growth 106 5.2. Productivity: The missing piece for Ivorian agriculture? 110 5.3. What will it take to climb the ladder? 119 Annex 5.1. Additional information 124 References 125 Technical appendices 128 Legal references end notes (Chapter 3) 140 Côte d’Ivoire Country Economic Memorandum I 5 Demain 50x50 Cm Série Albahian 2018 Joana Choumali Executive Summary 1. The Ivorian economy needs to sustain its Beyond the Miracle: Sustaining the growth acceleration. During the last decade, Côte d’Ivoire’s growth performance has been impressive. high growth and making it more To achieve its ambitious goal of reaching emerging inclusive market status within one or two generations, however, it needs to maintain the strong growth for many years to come. Fewer than 15 countries 4. During the last decade, Côte d’Ivoire’s growth have managed to sustain high growth for over 25 performance has been so impressive it has years in the postwar period, and their experience been dubbed the “second Ivorian miracle”. Real has shown that increasing productivity is at the gross domestic product (GDP) growth averaged heart of it. To follow in their footsteps, Ivorian 8.2 percent per year (5.7 percent in per capita growth also needs to be more inclusive and reduce terms) over 2012–2019. Although the country is yet structural imbalances, including the gap between to recover the ground lost in the previous decades, the economic capital, Abidjan, and the rest of the it is now one of the fastest-growing countries in country. How? This report addresses this question Sub-Saharan Africa (SSA). This growth has been by focusing on three carefully selected sectors. supported by political stability, after over a decade of political crisis, reinforced by ambitious public 2. This report aims at supporting policy makers investment programs, making it less vulnerable to in Côte d’Ivoire in their bid to sustain the high external shocks. growth during the next decade while making it more inclusive. It attempts to answer the 5. Growth has been driven by a rapid expansion following questions: (i) How competitive are Ivorian of services and industry on the supply side, product markets and is limited market competition and private consumption and investment on an obstacle for productivity growth? (ii) Can the demand side. Services accounted for almost export diversification be the route to structural half the growth in 2012–2019, followed by industry, transformation? (iii) Is increasing agricultural largely reflecting a construction boom. On the productivity a key ingredient for inclusive growth? demand side, the major contributors were private By addressing these questions, the report aims consumption and total investment. Structural to provide policy recommendations that support factors, particularly infrastructure and credit sustained high and more inclusive growth. growth, have reinforced growth, partly reflecting the progress Côte d’Ivoire has made in infrastructure 3. The report is organized into five chapters. development. Sound macroeconomic policies also Chapter 1 analyzes the key drivers and limitations supported growth. of the current growth model. Chapter 2 provides insights into the key characteristics of productivity 6. Côte d’Ivoire has set for itself an ambitious growth in Côte d’Ivoire. Chapter 3 examines goal of achieving emerging market status by the challenges of competition, with a particular 2030 and realizing this goal requires placing focus on two enabling upstream sectors, mobile productivity growth at the heart of the growth telecommunications and road freight. Chapter 4 strategy. The National Development Plan (PND, evaluates the potential for export diversification from its French acronym) 2021-2025 and the and highlights potential areas for reform. Chapter Vision 2030 frame this objective. Achieving 5 addresses the question of how to increase sustained productivity growth requires the right productivity in agriculture. As the COVID-19 set of policies that promote the efficient allocation pandemic has hit the world in 2020, with of resources, competitive market dynamics, and consequences on the policy choices developing within-sector improvements (including adopting economies will need to make in forthcoming years, new technology and innovation). Investment will the report discusses its implications. The main also be needed to sustaining the high growth. messages are summarized below. Although investment has increased significantly in recent years (22 percent of GDP in 2018), it remains below the average for SSA countries. In particular, private investment is much lower: at 12 percent of GDP, it is 4 percentage points (ppts) below Côte d’Ivoire Country Economic Memorandum I 7 the average for SSA. The country has one of the growth. This is in contrast with the previous decade highest returns to investment among its SSA peers, during which labor and, to a lesser extent, capital however, reflecting years of underinvestment in accumulation explained most of growth. Yet, while key infrastructure. TFP has grown faster than in its peers, levels are still lower than in the 1970s and below non-SSA 7. Growing fiscal vulnerabilities will require developing economies. choosing the right policy options to harness growth opportunities while maintaining 10. Côte d’Ivoire has experienced a considerable macroeconomic stability. As the COVID-19 crisis shift in its structure of employment, but limited causes the country’s debt and fiscal dynamics to changes in its structure of output. Agriculture’s deteriorate, private investment will increasingly be share of total employment fell from 60 percent in needed. Domestic resource mobilization remains 2008 to 48 percent in 2018. In contrast, its share low with the tax revenue to GDP at 11.5 percent of total output barely declined from 22 percent in in 2019, compared to an average of 16 percent for 2012 to 20 percent in 2019. Despite the substantial WAEMU countries. Following the recent Eurobond change in employment structure, most of the labor issuances, public debt increased to 41.2 percent that left agriculture relocated into low-productivity of GDP. To sustain the growth momentum, the and largely informal trade and distribution services. Government needs to gradually change its role Job creation has not kept pace with growth and from being the main provider of infrastructure to lower employment rates have had a negative becoming an enabler of private participation. impact on growth. 8. Inclusiveness and equity will need to be part of 11. Firm-level analysis shows that most of the the growth process, as identified by the PND productivity gains have been driven by (2021-2025). Economic growth has been followed improvements within manufacturing firms, by steadily declining poverty rates, which dropped and that allocative inefficiencies remain from 44 percent in 2015 to 39.4 percent in 2018. considerable. Productivity growth has been Access to electricity, health infrastructure, and higher in manufacturing and, to a lesser extent, clean drinking water have all increased across the in services for most of this period. Within-firm income spectrum. However, the gains have mostly productivity growth accounts for much of the been concentrated in urban areas, particularly in change in productivity since 2012. New firms Abidjan, and income inequalities remain high. The have proved less productive than existing firms, richest 20 percent of the population accounted for but the firms exiting markets have been less more than 40 percent of total consumption in 2018, productive than surviving ones so firm entry while the bottom 40 percent for only 18 percent. and exit have enhanced productivity overall. Human development outcomes are improving, Côte d’Ivoire has made significant progress in but slowly and unequally. Growth has not created improving the business environment in the last enough formal productive jobs, with the informal seven years, but its reforms do not seem to have sector accounting for more than 80 percent of total addressed allocative inefficiencies. Consistent with employment in 2018. The share of the working-age the evidence for modest, but positive structural population is projected to increase, but the country change, limited resources may have moved will need to create high-quality jobs for its young towards firms that have higher productivity. The people if it is to reap its potential demographic evidence also suggests that the most productive dividend. firms have not necessarily increased their market shares. Significant productivity gains could be achieved by reducing resource misallocation. Productivity: It’s almost everything 12. Many factors are needed to achieve faster productivity growth. As such, policies to boost productivity cut across many policy areas and 9. Productivity is the ultimate driver of are highly complementary. This report addresses economic growth, with sustained increases some of the key areas that should reinforce Côte in productivity critical to improving living d’Ivoire’s national productivity system so that its standards over time. Productivity growth comes growth model can benefit from higher productivity from improvements within sectors and firms, the and inclusiveness. Using the World Bank’s new entry of more productive new firms into markets Country Economic Memorandum (CEM) 2.0 and the exit of less productive ones, and the analytical framework, three key sectors were reallocation of resources into more productive identified: competition, trade diversification, and firms or sectors. Since 2012, increased physical agriculture. These areas were chosen on the basis capital accumulation and total factor productivity of a comprehensive analysis summarized in a (TFP) have accounted for most of the economic Country Scan and discussed with the Government 8 I Côte d’Ivoire Country Economic Memorandum and other relevant stakeholders. They were also can significantly affect the functioning of chosen because of the need to expand knowledge. markets. Having a sound competition policy and As such, the CEM 2.0 framework is not expected legal framework is critical. Côte d’Ivoire’s dual to be exhaustive and Côte d’Ivoire may face membership of two regional organizations—the challenges to growth which are outside the scope West African Economic and Monetary Union of the report. For example, human capital is also a (WAEMU) and the Economic Community of West key driver of productivity and inclusive growth, but African States (ECOWAS)—significantly affects its this has been addressed elsewhere. national competition framework. Under WAEMU law, Côte d’Ivoire’s Competition Commission lacks the power to enforce competition rules at the national level. However, the WAEMU Commission, Boosting productivity growth which enforces competition rules in the region, through competition policy does not have the resources to do so effectively. Côte d’Ivoire’s Competition Law prohibits some standard business practices even among firms 13. Competition is weak in Ivorian markets, with which lack the power to exploit consumers or business activity dominated by relatively exclude potential competitors. The Competition few market players. Competition is crucial for Commission also lacks real institutional productivity growth. It helps enhance productivity independence. It does have powers to advocate within firms, improve allocative efficiency between on competition, price regulation, and import limits, firms, boost the market selection of more productive and could play an important role in advocating for firms, and encourage the exit of less productive less restrictive measures for competition, such as ones. Perception-based indicators and firm-level price transparency rather than regulating prices. data point to high levels of market dominance and limited numbers of new firms. There is a 16. Market outcomes in mobile telecoms services, a key enabling sector for the economy, could be relatively high perceived level of operational improved. Service coverage has been expanding business risk related to the lack of a level playing rapidly, but significant gaps remain. The market field, a perception that has not changed over the shares of the three established operators have not past five years. According to the latest World changed significantly in recent years even with the Economic Forum’s Global Competitiveness Report advent of new services such as mobile payments. (Schwab 2019), Côte d’Ivoire ranked 106th out of 140 Prices have fallen but remain higher than peer countries in terms of the perceived extent of market countries. The Government has taken some steps dominance in 2019. Relatively few new firms are to embed competition considerations into sector starting up, weakening competitive pressure. policies. It has favored competition by ensuring Although high levels of market concentration are all network operators have access to the same not necessarily a cause for concern, especially frequency bands and awards spectrum on a “use in a small domestic market like Côte d’Ivoire, it or lose it” basis, ensuring all operators competed persistently concentrated markets do pose risks of for new 4G business at the same time. However, anti-competitive behavior, especially where there it has not yet held any spectrum auctions and its are barriers to entry shielding incumbent firms regulation of mobile termination rates (charged from competition. for connecting a call to a competitor’s network) 14. Price cost margins (PCMs)—a proxy for market reinforces existing market powers among the power—have increased in recent years among operators. non-manufacturing firms as a small number of firms have been able to increase their market 17. Similarly, market functioning in road transport services, another key upstream sector, could power over time. This may not imply a decline be improved. High prices and low service quality in competition but could indicate allocative indicate room for efficiency gains. Shippers pay inefficiencies in the services sector. Competition more to transport a standard container via Côte from informal firms has also become an increasing d’Ivoire than in Ghana or Togo. Travel times also obstacle to private sector growth, although higher vary more widely than in comparator countries. levels of informal competition are associated with Rising market concentration suggests there is higher labor productivity among formal firms. potential to improve competition. Regulatory A large informal sector can still hamper overall restrictions on access to freight limit competition productivity, however, by impeding the efficient between domestic and foreign trucks. Anti- allocation of resources. competitive business practices also make it harder 15. There is scope for Côte d’Ivoire to strengthen for new entrants to compete. its Competition Law. Government interventions Côte d’Ivoire Country Economic Memorandum I 9 Export diversification as a driver of not grown as fast as those to the rest of the world. Despite improvements to infrastructure, structural transformation customs procedures remain relatively costly and time consuming. Inland logistics and lack of timely access to the Port of Abidjan also reduce 18. No country has achieved sustained high growth incentives to exporters. and significant poverty reduction without integrating into the global economy. Côte 21. Fostering regional integration will increase the d’Ivoire is integrated into the global trading system, incentives for Ivorian firms to export. A trade but mainly through exports of an increasingly agenda should be at the heart of any strategy limited basket of commodities. The predominance for economic diversification. It will require a of the commodity-exporting sector is reflected in multipronged strategy, from improving access to low economic complexity1 given its GDP per capita credit to pursuing deeper trade agreements and level. Cocoa remains the dominant export, making reforming customs procedures, among others. up 42 percent of exports, followed by petroleum Streamlining border procedures by implementing (18.5 percent) and gold (9.5 percent). Its export adequate regional product standards could markets are similarly concentrated, with the top 20 eliminate market segmentation across WAEMU destination countries accounting for 80 percent of And ECOWAS member states and the duplication total exports. Travel and transport account for more of costs at borders, for example. Côte d’Ivoire must than 60 percent of services exports, with increases also undertake advanced reforms of its domestic in tourism and business travel driving most of the legal system to enable the exchange of information recent increases in this sector. The country’s highly across borders. Improving logistics efficiency to concentrated export basket and low economic support increased diversification of products and complexity are limiting productivity growth. destination markets will be important to increase value chain integration. 19. Côte d’Ivoire’s export survival rate is below that of comparators, with larger firms showing better survival rates than smaller firms. For countries to achieve export diversification and growth, they need firms to both successfully enter new export Improving agricultural productivity markets and continue to export to them. However, for inclusive growth these trading relationships tend to be short lived in Côte d’Ivoire: less than 35 percent of export activities initiated in a given year remained active 22. The agricultural sector plays a key role in after that year. The country’s participation in Côte d’Ivoire, accounting for 22 percent global value chains (GVCs) has been declining of GDP and 50–70 percent of total export since 2010. It is more likely to engage in backward earnings. Agricultural output has been volatile, participation—exporting commodities for firms reflecting weather changes and fluctuations in in other countries to add value to—than forward international prices of export crops, although less participation, where intermediate inputs are so in recent years. As it remains the main sector imported for processing and re-export. of employment, improving productivity will be key to accelerating poverty reduction and achieving 20. The country could do more to take advantage sustained and inclusive growth. Agricultural value of its existing trade agreements. Despite added measured as output per hectare is currently its membership of ECOWAS and WAEMU, low, but has shown sustained growth since 2012. regional trade remains underdeveloped, although High levels of labor productivity compared to the undocumented informal trade may account for wider region largely reflect the relatively large land some of the low numbers. Its membership of holdings per farmer. Overall, the figures suggest regional trade agreements limits its scope to set that the country’s labor-intensive farming model tariff policies, as it applies the ECOWAS common with limited capital endowments and use of external tariff (CET) along with other taxes levied technology is not efficient. by ECOWAS and WAEMU. In other areas, these regional trade agreements have policy gaps, such 23. The sector is dominated by smallholders as a lack of harmonization of product assessments and informal employment, with low levels of and standards, which act as barriers, particularly mechanization and input use. The majority of to smaller exporters. Despite preferential trade farmers grow export-oriented cash crops, with agreements with the European Union (EU) and just 20 percent only growing food crops. Cocoa the United States, exports to these markets have is the most common cash crop, although crops 1 The Economic Complexity Index (ECI) measures of the knowledge intensity of an economy by considering the knowledge intensity of the products it exports. 10 I Côte d’Ivoire Country Economic Memorandum are regionally specific, with cashew production recently being developed in the north. With little The economic impact of the mechanization, households rely heavily on non- COVID-19 crisis family labor. Poorer households in rural areas tend to specialize in agricultural wage- and self- 26. The COVID-19 pandemic has triggered the employment, which are largely low-productivity deepest global recession in decades. Global occupations. They are thus more likely to earn GDP contracted by 3.3 percent in 2020 while the most of their income from farming, with richer SSA economy contracted by 1.9 percent. Côte households participating more in off-farm d’Ivoire was poised for another year of strong employment. growth in 2020 until the crisis set in. The global 24. Most of the increase in agricultural crisis reduced demand for the country’s exports, productivity has come from more input use, which fell by 13.6 year-on-year in April and 20.5 with no improvements in allocative or technical percent in May, and negatively affected tourism. efficiency—in fact, technical efficiency declined Strict social distancing measures caused a sharp between 2012 and 2016. Limited use of improved deceleration in economic activity, particularly in seeds, diversification, mechanization, and access the hospitality, construction, transport, and retail to finance are all associated with lower crop yields. sectors, with most firms and households reporting Education levels are lower in rural areas, hampering a fall in income. Lockdown measures have also farmers’ ability to handle the growing complexity affected agriculture, limiting access to agricultural of agricultural production and marketing. While inputs, while border closures have reduced the research capacity has expanded, spending on supply of labor. Even if containment measures agricultural research and development (R&D) has were short lived, there was a temporary increase stagnated and remains low. Access to finance is in poverty. also significantly constrained, with rural dwellers 27. Although the shock may be temporary, its less likely to have used any financial services, effects may be long lasting, reinforcing the formal or informal than their counterparts in peer need for new structural reforms. The country is countries. Despite increases in recent years, only coming out of the crisis with higher public debt, one quarter of farmers use inorganic fertilizer. limiting its ability to continue pursuing its public- Finally, gender gaps are large. Male-headed investment-driven growth model. The impact of households tend to be more productive than those COVID-19 on advanced economies may mean a headed by women, who have less education as sustained decline in foreign direct investment (FDI) well as less secure land tenure and even more inflows. There may be a long-lasting impact on limited access to finance. human capital development through the closure of 25. There is significant scope to increase schools, the interruption of public service delivery, agricultural productivity in Côte d’Ivoire. Labor and falling household incomes. On the other productivity is much higher in non-agricultural jobs hand, the crisis could put less productive firms in urban areas and, within agriculture, the more out of business, reallocating resources to more productive households are ten times as productive productive enterprises. Given the specificity of the as the less productive ones. To improve productivity year 2020, this study focuses mainly on the period in the sector, greater use of mechanization and 2012-2019. irrigation could help mitigate the seasonality of 28. The impact of COVID-19 may exacerbate agricultural work. Access to financial services, underlying global trends that will change the including insurance, is needed. Gender gaps in future growth path in developing economies. endowments need to be addressed to reduce Many global trends that are already underway the productivity difference between female- and are likely to accelerate as a result of the crisis. The male-headed households. Reinforcing farmers’ automation of manufacturing jobs or the switch capabilities and human capital together with the to greener technologies are a few examples. The development of processing activities could create amplification of these trends will have important higher value-added off-farm jobs. implications for the long-term drivers of growth in developing economies. In the post-COVID-19 world, Côte d’Ivoire needs to continue building the foundations of a competitive, diversified, and more inclusive economy. Côte d’Ivoire Country Economic Memorandum I 11 The way forward economic diversification, and supporting more inclusive growth should remain at the heart of the reform agenda. By looking at long-term structural 29. To sustain the high growth momentum, challenges for growth, this report provides guidance increase inclusiveness, and reduce the social on policies compatible with a resilient recovery, and economic fallout resulting from the and the ambitious objective of achieving upper- COVID-19 crises, Côte d’Ivoire needs to focus middle income status. Policy recommendations are on long-term drivers of growth. Increasing presented in each sectoral chapter of the report. productivity and competitiveness, promoting Selected ones are summarized in the table below. Main policy recommendations for high and inclusive growth Timeline for im- Fiscal impli- Boosting productivity growth through better market rules plementation cations To improve the regulatory and institutional framework (WAEMU) - Develop efforts within WAEMU to approve legislation delegating powers to Short-term Low Côte d’Ivoire’s Competition Commission to investigate and decide on an- ti-competitive practices that occur in the national territory and do not have cross-border effects. - Work toward the issuing of rules at the WAEMU level regulating cooperation Short-term Low between the WAEMU Commission and Côte d’Ivoire’s Competition Com- mission. To improve the regulatory and institutional framework (National) - Encourage the Competition Commission to carry out market studies and im- Short-term Low prove communication and collaboration with sector-specific regulators and other government institutions to address competition issues. - Publish online annual and quarterly reports by Côte d’Ivoire’s Competition Short-term Low Commission on the application of the Competition Law. Road freight - Open markets to international competition by renegotiating bilateral freight Medium-term Low sharing agreements and backhauling/cabotage restrictions with neighbor- ing countries. Export diversification as a driver of structural transformation Increasing the benefits from regional integration and preferential tariffs - Update the organizational structure of APEXI-CI and its financial capacity to Low to me- Short-term carry out export promotion activities and support exporters. dium - Streamline border procedures by implementing adequate regional product standards, including mutual recognition agreement on product conformity Medium-term Low and technical requirements, particularly in agriculture, cosmetics, and toi- letries. - Assess the current institutional arrangements and reallocate foreign trade Medium-term Very low policy responsibilities. Improving logistics efficiency to support increased diversification of prod- ucts and destination markets - Carry out specific sectorial studies to assess the logistics needs of each in- Short-term Low dustry, especially in the sector of agribusiness and light manufacturing. - Reassess customs duties on imports and progressively eliminate export du- Medium-term Low ties such as the single exit duty and waive exporters’ registration fees. 12 I Côte d’Ivoire Country Economic Memorandum Improving agricultural productivity for inclusive growth - Capital, labor, and inputs - Accelerate the implementation of the Rural Land Law to ensure land tenure Short-term Low security. Technology and knowledge - Adopt an agriculture innovation policy. Short-term Low Frameworks and institutions - Implement the Uniform Act on Cooperative Societies (AUSCOOP), in par- Short-term Low ticular, the amendments it introduces in the former national law governing SCOOPs. - Provide technical support to micro-credit institutions for women’s agricul- Short-term Low to medium tural activities. Markets and integration - Support the development of secondary towns with initiatives such as Côte Medium-term High d’Ivoire Infrastructure for Urban Development and Competitiveness for Sec- ondary Cities. Sustaining the growth momentum Growth per capita has been impressively high …recent growth helped reduce poverty, although since 2012… more needs to be done to make it more inclusive 60 60 2015 2018 50 50 40 40 30 30 60 2015 2018 20 50 20 40 10 10 30 0 1970 1973 1976 1979 1982 1985 1988 0 20 National Abidjan National Other OtherRural Abidjan Urban Rural 10 Urban 2015 2018 Non-S Sub-Sa 0 Côte d …. productivity has improved but remains 40 lower …sustained Market productivity National dominance growth Abidjan to is perceived be high1 would Other Rural require than those of non-SSA developing economies enhancing market Urban competition 800,0 Côte d'Ivoire Western Africa 0,50 30 0,45 35 40 Market 700,0 dominance Market dominanceis Ghana is perceived to perceived to be be1high Ethiopia high 2 0,40 20 30 Kenya 30 600,0 0,35 25 0,30 10 20 500,0 0,25 20 400,0 0,20 0 15 10 0,15 300,0 1988 2012 1970 1973 1976 1979 1982 1985 1991 1994 1976 1997 1979 2000 1982 2003 1985 2006 2009 1997 2015 10 0,10 0 0,05 Non-SSA Developing Countries 5 200,0 1988 2012 1970 1973 1991 1994 2000 2003 2006 2009 2015 0,00 Sub-Saharan Africa (SSA) Non-SSA Developing 0 Countries 100,0 Côte d'Ivoire Sub-Saharan Africa (SSA) 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Côte d'Ivoire 0,0 Other Urban Rural 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 Non-SSA Developing Countries Sub-Saharan Africa (SSA) Côte d'Ivoire Value added per hectare of agricultural land Export concentration Value added per hectare of agricultural land in commodities is high Export concentration in commodities is high 800,0 Côte d'Ivoire 0,50 Western Africa 0,50 800,0 d'Ivoire Africa Côte Western Western Africa 0,50 0,45 Ghana GhanaEthiopia 0,45 Ethiopia 0,45 12 Ethiopia 0,40 Kenya Kenya 0,40 0,40 2 Source: Global Competitiveness 600,0 600,0 0,35 Index and authors’ calculations. Note: in each 0,35 graph the solid 10fit for the data and the shaded area represents the line is a linear 0,35 95% confidence interval. Question asked: In your country, how do you characterize 0,30 corporate activity? 1 = dominated by a few business groups; 7 = spread among 0,30 0,30 8 many firms. 0,25 0,25 0,25 400,0 0,20 6 400,0 0,20 0,20 0,15 0,15 4 Percent 0,15 0,10 0,10 200,0 0,10 0,05 2 200,0 0,05 0,00 0,05 0 0,00 0,00 0,0 -2 200120032005200720092011201320152017 0,0 -4 200120032005200720092011201320152017 C ô t e d ’ -6 I v o i r e C o u n t r y E c o n o m i c M eSSA m o r a n dCote I 13 u m d'Ivoire 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 60 35 30 50 25 40 20 30 15 10 20 5 10 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 ….more0inclusive growth needs higher agricultural … export diversification is critical for structural National Abidjan Other Urban Rural productivity, which remains 2015 2018 below those of peers transformation and sustained growth Non-SSA Developing Countries Sub-Saharan Africa (SSA) Value added per hectare of agricultural land Export concentration in commodities is high Côte d'Ivoire 800,0 Côte d'Ivoire Western Africa 0,50 0,50 Ghana Ethiopia 0,45 0,45 700,0 0,40 0,40 Kenya 600,0 0,35 0,35 0,30 500,0 0,30 0,25 0,25 400,0 0,20 0,15 0,20 300,0 0,10 0,15 0,05 0,10 200,0 0,00 0,05 100,0 0,00 0,0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 12 10 8 6 4 Percent 2 0 -2 -4 -6 SSA Cote d'Ivoire 3500 3000 2500 2000 1500 1000 500 0 Cote d'Ivoire Lower Middle Income Low income 10 ETH 9 CIV 8 Top RWA performers GDP growth, 2012-2018 7 GIN Rising stars NER 6 COD SEN TZA TGO KEN GHA BFA MOZ BEN 5 SLE CMR ZMB UGA SYC MLI BWA STP 4 GMBMRT MWI MDG GNB MUS GAB NAM 3 LBR NGA COM SWZ SDN TCD CPV LSO 2 AGO BDI ZAF COG 1 Weak performers Backsliders 0 -1 0 1 2 3 4 5 6 7 8 9 GDP growth, 2000-2011 14 I Côte d’Ivoire Country Economic Memorandum Chapter 1 Beyond the Miracle: Sustaining the growth acceleration As The Wind Whispers Albahian 80 X80 Cm Joana Choumali 2019 Prepared by Fiseha Haile, Nathalie Picarelli, and Amina Coulibaly with contributions from Maya Eden. Côte d’Ivoire Country Economic Memorandum I 15 1. During the last decade, Côte d’Ivoire’s growth the future. The COVID-19 crisis has reinforced the performance has been impressive—so much so need to focus on structural reforms that address . that it has been dubbed “the second Ivorian miracle” long-term challenges and ensure that economic As the country aspires to achieve emerging market recovery is sustainable, inclusive, and private status by 2030, understanding the drivers behind sector-led. the high growth in recent years—as well as the limitations—will help define the growth strategy for 1.1. The key characteristics of the growth acceleration High growth since 2012 allowed from the prolonged political crisis that took a heavy toll on the economy. Second, the economy Côte d’Ivoire to catch up with has become more resilient to external shocks comparators (notably commodity price volatilities) supported by ambitious public investment programs and higher private investment. For instance, Côte 2. Economic growth has been impressively rapid d’Ivoire managed to withstand the sharp drop in and stable since 2012. Real gross domestic cocoa prices in 2017. In past decades, the economy product (GDP) growth averaged 8.2 percent was very exposed to massive fluctuations in cocoa (5.7 percent in per capita terms) over 2012–2019, prices which, combined with low investment in compared to less than 0.5 percent in 2000–2011 physical capital, partly explains the higher growth (Figure 1.1). This substantially exceeds the country’s volatility. Third, the sources of growth in this post- growth rates in preceding decades when the crisis period have started to show some signs of economy experienced massive boom and bust diversification. Growth accounting analysis shows cycles. Growth was remarkably high in the 1960s that increases in capital accumulation and total and 1970s—often referred to as the “Ivorian factor productivity (TFP) account for most of the miracle”—averaging about 8 percent. However, economic growth. This report focuses mainly on Côte d’Ivoire experienced a reversal of fortunes, the post-2012 period, while making comparisons triggered by the sharp slump in cocoa prices in with 2000–2010 where necessary. the 1980s and exacerbated by the political crisis in the 2000s and early 2010s. As a result, growth 4. Despite the recent growth acceleration, Côte remained persistently low between 1980 and d’Ivoire has yet to recover the ground lost in 2011—the so-called “lost decades”—with per capita previous decades. Figure 1.2 shows the steep rise growth falling into to negative territory, on average. in GDP per capita since 2012, comparing it with In fact, the country had not recorded positive per its historical performance and relevant peers. GDP capita growth for longer than four consecutive per capita increased significantly, from US$1,790 years until the crisis ended in 2011. Since taking in 2000 to US$2,290 in 2018, but this is only two off in 2012, the economy experienced the longest thirds of the level in 1978. Côte d’Ivoire’s GDP per spell of sustained high growth in recent decades, capita was nearly four times that of the average exceeding regional and Sub-Saharan Africa (SSA) for lower middle-income countries (LMICs) in the averages. 1970s while it is almost on a par today. As one of the fastest-growing SSA countries (Figure 1.3), it 3. Political stability and new sources of growth has however surpassed the SSA average in 2019, have supported the steady high growth rates of closing the gap that opened during the political the recent years. First, unlike in previous decades, crisis. there has been relative political stability since 2012. The growth acceleration partly reflects recovery 16 I Côte d’Ivoire Country Economic Memorandum Ghana Ethiopia 0,45 5 700,0 10 0,40 Kenya 0 600,0 0,35 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 0 National Abidjan Other Urban Rural 0,30 500,0 0,25 Non-SSA Developing Countries 2015 2018 0,20 Sub-Saharan Africa (SSA) 400,0 Côte d'Ivoire 0,15 300,0 0,10 800,0 Côte d'Ivoire Western Africa 0,50 0,05 200,0 0,45 700,0 Ghana Ethiopia 0,00 0,40 100,0 Kenya 600,0 0,35 0,30 0,0 500,0 0,25 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 400,0 0,20 0,15 300,0 0,10 Figure 1.1: Real GDP growth was higher than SSA since 2012 0,05 200,0 60 0,00 35 100,0 30 12 50 0,0 25 10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 40 20 8 30 15 6 10 20 4 Percent 5 2 12 10 0 10 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 0 0 8 National Abidjan Other Urban Rural -2 2015 2018 Non-SSA Developing Countries 6 -4 Sub-Saharan Africa (SSA) 4 Percent Côte d'Ivoire -6 2 SSA Cote d'Ivoire 0 800,0 Côte d'Ivoire Western Africa 0,50 Source: Ministry of Economy 3500 -2 and Finance and World Bank 700,0 Ghana Ethiopia 0,45 0,40 -4 Kenya 3000 600,0 0,35 Figure 1.2: Per capita -6 income is beginning to regain SSA in earlier decades some of the ground lost0,30 Cote d'Ivoire 2500 500,0 0,25 2000 400,0 0,20 3500 0,15 1500 3000 300,0 0,10 1000 2500 200,0 0,05 0,00 500 2000 100,0 0 1500 0,0 1000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 500 0 Cote d'Ivoire Lower Middle Income Low income Cote d'Ivoire 12 Lower Middle Income Low income Source: World Development Indicators. 10 10 8 ETH 9 6 CIV 10 8 Top 4 Percent ETH 9 RWA performers GDP growth, 2012-2018 7 CIV GIN 5. 6 COD 2 8 Rising starsthis report, Côte d’Ivoire will Throughout Topbe aspirational peers. Structural peers are defined NER TZA 0 performers SEN RWA GDP growth, 2012-2018 7 GIN GHA 5 benchmarked against relevant peers to gain Rising stars TGO KEN NER BEN -2 MOZ BFA as countries with similar economic and structural 6 COD SLE CMR SEN UGA TZA 4 insights into areas where reforms could help 5 TGO KEN SYC ZMB -4 MLI MOZ BWA STP BEN GHA BFA characteristics, and for Côte d’Ivoire they are MDG SLEGMBMRT MWI CMR MUS UGA -6 3 promote sustained and shared growth. This 4 GAB GNB GMB NAM SYC MRT ZMB MLI BWA STP NGA Ethiopia, Ghana, SSA and Cote Senegal. Aspirational d'Ivoire LBR COMMDG GNB SWZ MWI MUS SDN TCD CPV 2 Country Economic Memorandum (CEM) uses a 3 GAB LBR COM LSONAM NGA SWZ AGO SDN TCD peers are countries that set a good development BDI ZAF COG 3500 CPV LSO 1 set of regional, Weak performers 2 BDI structural, ZAF COG and aspirational peers Backsliders 3000 AGO precedent and that Côte d’Ivoire often refers to for 1 Backsliders 0 (Annex 1.2). Weak Regional peers include the averages 3 performers 2500 policy inspiration. Kenya, Morocco, Sri Lanka, and 0 -1 0of the -1 0 SSA 1 1 and 2 2 LMICs, 3 3 4 and 5 4 the 5 West 6 6 African 7 7 20008 8 9 9 Vietnam belong to this group. Over the last few growth, GDP GDP 2000-2011 growth, 2000-2011 Economic and Monetary Union (WAEMU) or the 1500 decades, these countries have grown faster than 1000 Economic Community of West African States Côte d’Ivoire, despite having generally similar initial 500 (ECOWAS) countries, as necessary. It has used 0 4 structural conditions. a data-driven approach to identify structural and Cote d'Ivoire Lower Middle Income Low income Figure 1.3: Its recent growth places Côte d’Ivoire among Sub-Saharan Africa’s rising stars 10 ETH 9 CIV 8 Top RWA performers GDP growth, 2012-2018 7 GIN Rising stars NER 6 COD SEN TZA TGO KEN GHA BFA MOZ BEN 5 SLE CMR ZMB UGA SYC MLI BWA STP 4 GMBMRT MWI MDG GNB MUS GAB NAM 3 LBR NGA COM SWZ SDN TCD CPV LSO 2 AGO BDI ZAF COG 1 Weak performers Backsliders 0 -1 0 1 2 3 4 5 6 7 8 9 GDP growth, 2000-2011 Source: World Development Indicators. 3 Structural and aspirational peers were defined using the following criteria: income level, nominal GDP per capita, population in 2017, Human Capital Index (HCI) and Country Policy and Institutional Assessment (CPIA) score. 4 WAEMU countries include Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo while the ECOWAS countries include the WAEMU countries and Cabo Verde, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Nigeria, and Sierra Leone. Côte d’Ivoire Country Economic Memorandum I 17 The manufacturing and helped reduce infrastructure gaps, including in the energy sector, and stimulate aggregate demand. services sectors, together with Government investment increased from an improvements in structural factors, average of 2.8 percent of GDP in 2000–2011 to 6.7 have driven recent growth percent in 2012–2018. This is unlike earlier periods, when it was more volatile. Increased government expenditure has also helped stimulate domestic 6. Growth in 2012–2018 was driven by a rapid demand. In contrast, net exports contributed expansion of services and industry. Figure 1.4 negatively to growth, partly due to terms-of-trade breaks down output and growth into their major and climatic shocks. supply- and demand-side components. On the 8. Further analysis shows that growth was supply side, GDP growth was supported by mainly driven by improvements in structural strong growth in agricultural production, reflecting factors. Figures Figure 1.6 and Figure 1.7 show favorable weather, high prices, and an improved the determinants of growth over 2012–2018. The business environment. Agricultural production analysis tries to explain growth using three factors: grew by 50 percent between 2012 and 2019, which structural features (infrastructure, credit growth or is much faster than the SSA average of 22 percent. financial deepening, trade, education, government However, since 2012, growth has been increasingly size, institutions), stabilization factors (inflation, driven by services and industry. Services exchange rate), and external conditions (terms of accounted for about 4.1 percentage points (ppts) trade, export commodity prices). Recent growth of the 8.6 percent growth in 2012–2019 compared has been driven by domestic rather than external with 1.9 ppts for agriculture. The expansion of factors. Structural factors explain half of the growth financial and telecommunications services as per capita in this period. This reflects the substantial well as transport and retail trade underpinned progress Côte d’Ivoire has made in infrastructure the growth in services. Industry was the second development and financial deepening, which largest contributor, explaining 2.6 ppts of growth, was partly facilitated by restrained government and largely reflecting a construction boom. The consumption. Increased infrastructure investments, construction sector has benefited from public and supported by an expansionary fiscal policy, led to private investment in infrastructure. a significant increase in access to electricity and 7. Investment and private consumption were greater availability of roads, among other benefits.5 the major contributors on the demand side Infrastructure investment was supported by public- (Figure 1.5). Although historically investment has private partnership (PPP) programs in the road, rail, made only a marginal contribution to growth, it and energy sectors. The impact of infrastructure has increased substantially in recent years. Total development was high both because the economic investment increased from 18 percent of GDP in returns were high and the physical expansion 2012 to 22 percent in 2018. This primarily reflected was substantial (see Section 1.2). An increase in a significant rebound in public investment, which domestic savings, from 13 to 17 percent of GDP over the period, also helped underpin investment. Figure 1.4: Services contributed the most to Figure 1.5: On the demand side, private consump- growth on the supply side tion explains most of growth 10 10 8 8 7,0 7,0 6 6 4 4 2,0 2,0 2 2 0 0 2000-2011 2000-2011 2000-2018 2000-2018 2012-2018 2012-2018 2000-2018 2000-2011 -3,0 2000-2018 2000-2011 2012-20182012-2018 -3,0 -2 -2 AgricultureAgricultureIndustry Industry Net Exports Net Exports Investment Investment Private Consumption Private Consumption Government Consumption Government Consumption Services Services GDP growth rategrowth rate GDP rate growth rate GDP growth GDP Source: Ministry of Economy and Finance and World Bank staff estimates. Source: Ministry of Economy and Finance and World Bank staff estimates. 5 The energy 5,5 sector saw5,5 2,5 significant large investments to support increased production, 2,5Soubré hydroelectric dam and the modernization of two thermal including the power plants, Azito and Ciprel (World Bank 2020a). Over the last five years, the Government and the private sector invested over US$2 billion to upgrade/rehabilitate Annualized GDP per capita growth (in %) Annualized GDP per capita growth (in %) 2,0 2,0 Annualized GDP per capita growth (in %) Annualized GDP per capita growth (in %) transport infrastructure, following more than a decade of underinvestment caused by the prolonged political crisis. 3,5 3,5 1,5 1,5 1,0 1,0 1,5 1,5 0,5 0,5 0,0 0,0 -0,5 -0,5 -0,5 -0,5 18 I Côte d’Ivoire Country Economic Memorandum -1,0 9. In addition, sound macroeconomic policies 10. While Côte d’Ivoire’s public investment-led have supported growth. Côte d’Ivoire has growth strategy shares common features with achieved stronger outcomes in this area than most those of historically fast-growing economies, of its non-WAEMU peers. Inflation has remained it diverges in some respects, both in terms of low at 0.8 percent over 2012–2019, the real effective conception and outcomes. The Commission on exchange rate is in line with fundamentals, and the Growth and Development studied the experiences external balance more or less stable (IMF 2019). As of 13 economies that have grown at more than 7 noted above, recent growth was largely a structural percent for 25 years or more.6 Table 1.1 in Annex phenomenon; however, cyclical factors also 1.1 compares the common characteristics of these contributed to the growth acceleration. Growth has economies and Côte d’Ivoire. Of these five major been supported by procyclical monetary policy. characteristics, Côte d’Ivoire shares, to some Monetary policy was relatively loose, as in other extent, in the exploitation of the world economy. It WAEMU countries, as evidenced by the increase is also similar in terms of ensuring macroeconomic in real money growth from an average of 8.9 stability and government leadership in the percent in 2005–2010 to 12.5 percent in 2011–2016. development process. On the other hand, it has The benchmark interest rate of the Central Bank made limited progress in mustering high rates of West African States (BCEAO) steadily declined of savings and investment and letting markets from 3.8 percent 10 in 2008 to 2.5 percent in 2017. allocate resources efficiently. Limited competition An important 10 cyclical component is related to the in key sectors, including transport and telecoms, rapid growth8 in private sector credit partly driven continues to create an uneven playing field and 7,0 8 by monetary 6 loosening. Expansionary monetary 7,0 hamper private sector growth.7 It has shown only policy6 contributed to a sharp increase in credit limited structural change and uneven regional 4 growth, which surged from 15 percent of GDP in development, 2,0 with the impact of growth felt 4 2000–2010 2to 23 percent in 2011–2018 and helped 2,0 unevenly across the population. It also features 2 support private investment growth. a number of what the Commission identifies 0 2000-2018 2000-2011 2012-2018 0 as 2000-2018 -3,0 2000-2011 policies, suboptimal 2012-2018such as open-ended 2000-2018 2000-2011 2012-2018 -2 2000-2018 2000-2011 2012-2018 -3,0 protection Net Exports of some sectors from competition. Investment -2 Agriculture Industry Agriculture Industry GDP growth rate Investment Net Exports Private Consumption Government Consumption Services Services GDP growth rate Private Consumption GDP growth rateGovernment Consumption GDP growth rate Figure 1.6: Structural factors have largely driven Figure 1.7: Infrastructure investment has been a growth during 2011–2018 key growth driver (2011–2018) 5,5 2,5 2,5 5,5 Annualized GDP per capita growth (in %) 2,0 Annualized GDP per capita growth (in %) Annualized GDP per capita growth (in %) 2,0 Annualized GDP per capita growth (in %) 3,5 3,5 1,5 1,5 1,0 1,0 1,5 1,5 0,5 0,5 0,0 0,0 -0,5 -0,5 -0,5 -0,5 -1,0 -1,0 Residual (unexplained growth) Residual (unexplained Persistence Persistence growth) Schooling Credit/GDP Schooling Credit/GDP External External StabilizationStabilization Trade/GDP Gov Cons./GDP Gov Cons./GDP Trade/GDP Structural Infrastructure Structural Infrastructure Source: Ministry of Economy and Finance and World Bank. Source: Ministry of Economy and Finance and World Bank. 30 30 NER 25 NER 11. COVID-19 caused a 25 TZA Private investment (% GDP) substantial economic BWA and retail sectors, which account transportation, TZA Private investment (% GDP) UGA ETH Sudan BWA deceleration. The AGOCODcrisis 20 health for almost half of ETH employment. The GDP and and economic UGA Sudan AGO COD BEN 20 affected the country through both NAM domestic NAM BEN informal sector represents more than 80 percent MOZ 15 and external channels (Box 1.1). MUS domestic On theMUS of employment (Christiaensen and Premand 2017), LBR CIV BFA TGO MOZ COG 15 MDG Togo LBR CIV BFA TGO COG social distancing front, stringent 10 measures MDG Togo MLI emphasizing SEN the vulnerability of firms and workers. GMB GNQ MLI RWA 10 inBDI caused a sharp deceleration economic ZWE MWI activity, On the external SEN the global crisis has reduced front, RWA BDI SWZ GMB GNQ 5 particularly in the ZWE hospitality, construction, MWI external demand for Ivorian exports. Disruptions SWZ 5 GNB GNB 0 6 The 13 economies that experienced high, sustained growth in the postwar period were Botswana; Brazil; China; Hong Kong, China; Indonesia; Japan; the Republic 0 of Korea; Malaysia; Malta; Oman; Singapore; 0Taiwan, 2 4 and Thailand China; 6 8 (Commission 12 and Development 10on Growth 14 16 2008). 18 Public investment (% of GDP) 7 Côte d’Ivoire ranks among the top eight African 2 that are 0 countries 6 to be highly 4 perceived 10 8 concentrated 12 Bank (World 14 16 only 18 2020a). When monopolies and duopolies are considered, it ranks in the top four most concentrated. Public investment (% of GDP) 3,5 15 3,0 3,5 15 Public Investment (% GDP) Private Investment (% GDP) Public Investment (% GDP) 2,5 3,0 10 Private Investment (% GDP) 2,0 2,5 10 1,5 2,0 5 1,0 1,5 Côte d’Ivoire Country Economic Memorandum I 19 0,5 5 1,0 to global supply chains have also delayed foreign the crisis may be long lasting, reinforcing the need direct investment (FDI) inflows. While it also for structural reforms (see Section 1.3). negatively affecting remittances, these amounted to less than 1 percent of GDP in 2019. The effects of 1.2. Why the current model needs rethinking Current challenges call for a deeper sector is even more concentrated with the top 20 companies accounting for almost 95 percent of private sector-led growth model in turnover. One company alone, Société Ivoirienne the medium term de Raffinage, represents almost 54 percent of the sector’s turnover. Value addition is dominated by large firms across virtually all sectors. Similarly, 12. The private sector remains small and dominated FDI remains low, averaging 2 percent of GDP by a few formal firms, while the vast majority over 2015–20188, much lower than in the country’s of firms are small or microenterprises. In the structural and aspirational peers. FDI remains agribusiness sector, the top 20 firms account for 98 concentrated in the telecoms, agroprocessing, and percent of the turnover of the sector (World Bank extractive sectors. 2020a). The non-agroprocessing manufacturing Box 1.1: The impact of COVID-19 in Côte d’Ivoire The COVID-19 pandemic has triggered the deepest global recession in decades. First appearing in China in December 2019, the coronavirus disease (COVID-19) quickly became a global pandemic in early 2020. The economic fallout resulting from the health crisis and the containment and mitigation measures necessary to limit the spread of the virus, has caused the most severe economic recession since the Great Depression. While the ultimate outcome is still uncertain, the crisis resulted in contractions across the vast majority of emerging market and developing economies (EMDEs). Global GDP contracted by 3.3 percent in 2020, despite unprecedented policy support. SSA contracted by 1.9 percent in 2020, the deepest contraction on record. In most EMDEs, per capita incomes are expected to shrink. The crisis is expected to do lasting damage to labor productivity and potential output. Côte d’Ivoire was poised for another year of strong economic growth in 2020 until the impact of COVID-19 set in. Its effect on growth comes through both external and domestic channels. Externally, Côte d’Ivoire’s main trading partners have reduced their imports, while the domestic impact is linked to the effect of confinement measures (such as closures of restaurants and shops and public transport capacity limitations) on domestic demand and supply-side decisions. Real GDP growth is expected to decline sharply from nearly 7 percent in 2019 to around 1.8 percent in 2020. Two surveys carried in April 2020(i) indicate that most firms and households were affected in the first half of the year. Firms have faced the disruption of value chains and temporary closures. Among the firms interviewed, 38 per- cent had closed temporarily. In Abidjan, 60 percent of firms were closed due to stricter lockdown measures. As a result, virtually all firms saw steep declines in sales with an average drop of nearly 70 percent compared to the previous month. Financial services, tourism, and hospitality were the most affected sectors. The crisis has also limited the availability of inputs. Overall, 42 percent of firms faced a reduced or limited availability of intermediate inputs or services required for their operations. About one third of firms were also hit by constraints on transportation and logistics more generally. Still, 88 percent expected the shock to be temporary with no major disruptions in the medium term. The prevalence of the informal sector, limited social safety nets, and reduced remittance flows have reduced household incomes. In April 2020, 71 percent of households surveyed reported they had suffered a drop in their in- come. Many households were very concerned about how they would meet their regular basic living expenditures with 62 percent of households uncertain about how to pay their next utility bill and 74 percent of households concerned about food expenditure. 8 World Development Indicators. 20 I Côte d’Ivoire Country Economic Memorandum While the shock is expected to be temporary, its effects may be long lasting, reinforcing the need for structural reforms. As the health crisis gradually dissipates, provided the domestic outbreak remains under control, Côte d’Ivoire should return onto its original path of strong growth in 2021. However, some of the effects may take longer to reverse. For example, the pandemic has the potential to have a strong impact on human capital development due to the loss of lives, the interruption of public service delivery, and the impact on household incomes that may lead to suboptimal cop- ing mechanisms (sale of assets, forgone girls’ education). See Section 1.3 for implications for the future growth agenda. Source: World Bank (2020b, 2020c). ________________________________________ (i) The COVID-19 Business Pulse Survey (COVBPS) was very recently developed by the World Bank’s Finance-Com- petitiveness and Innovation practice. The COVBPS provides a rapid survey to understand the impact on businesses of the epidemic. It is designed to be conducted by phone or online and allows for adaptation to local contexts. It surveyed 604 establishments following a stratification by size, location and sector. The survey took place between April 14 and 29, 2020. The COVID-19 Household Survey covers a sample of 800 households across the country and builds on the latest household survey conducted in 2018 (Enquête Harmonisée sur les Conditions de Vie des Ménages, EHCVM). Phone interviews were conducted during April 11–17, when the Government confinement measures had been in force for three to four weeks. The majority of surveyed households are in Abidjan (88.3 percent), the remainder being in rural areas and secondary cities throughout the territory (11.7 percent ). 13. The private sector is concerned about access infrastructure; (iv) lack of development of capital to credit. The World Bank (2020a) identified markets leading to a shortage of local currency four key constraints to private sector growth: financing; and (v) limited availability of digital access to finance, transport and logistics, digital financial services. Many of these factors are connectivity, and skills. Domestic credit to the related. For example, private banks’ inability to private sector has increased from 18.5 percent of mobilize deposits is primarily linked to the high GDP in 2012 to 26 percent in 2018, but remains cost of financial services, lack of documentation, well below the averages for SSA (51 percent) and and a lack of public trust in financial institutions. LMICs (45 percent). It is also below all its peers but Low financial inclusion exacerbates the problem Ghana. Access to finance remains a key challenge while credit concentration is made worse by the for firms, particularly smaller ones, with a large lack of credit infrastructure, limited digital financial share identifying access to finance as a major services, and the poor development of capital constraint, according to the 2020 World Bank markets. Doing Business report (World Bank 2020d). Almost 70 percent of enterprises identify access to finance 15. Gross investment has increased significantly in as a major constraint, far higher than regional recent years, but it remains below the averages peers, according to the World Economic Forum›s for SSA and lower middle-income economies. perception-based Executive Opinion Survey. Loans Investment—by both private and public entities— to a few large customers make up the bulk of bank is a key driver of growth. Sustaining rapid growth lending: just five borrowers represented one third without impressive rates of investment is rare. The of all banks’ credits (World Bank 2020a). Financial total investment rate rose from 10 percent of GDP inclusion is low with only 15 percent of adults in 2000–2011 to 18 percent in 2012–2018 (Figure having an account at a formal financial institution, 1.8). This reflects an increase in public investment an area where Côte d’Ivoire is outperformed by all by about 3.9 ppts and in private investment by its structural peers. At 24 percent, the share of firms 4.2 ppts over the same period. Gross investment using banks to finance investments is also low. remains slightly lower than in its structural peers: Ethiopia (38 percent), Ghana (23 percent), and 14. Access to credit is limited due to constraints Senegal (24 percent). It also falls short of the that prevent the greater development of the threshold suggested by the experiences of the financial sector.9 The World Bank (2020a) finds high-growth cases identified by the Commission that five main factors limit the development on Growth and Development: “Overall investment of the financial sector and constraint access rates of 25 percent of GDP or above are needed to credit: (i) low deposit mobilization; (ii) poor for a strong, enduring growth.” (Commission on financial inclusion; (iii) weak credit information Growth and Development 2008). These high- 9 In addition, capital market activity is limited, as the fixed-income market is dominated by government bonds and the regional equity market is thin and illiquid. Côte d’Ivoire Country Economic Memorandum I 21 10 8 7,0 6 4 10 2,0 growth 2 economies also invested a further 7–8 (23 percent), Ghana (15 percent), and Senegal (17 8 7,0 percent of GDP in education and health, compared 2000-2018 It is percent). than the SSA average of 16 also lower2012-2018 2000-2011 0 6 to 6 percent in Côte d’Ivoire. 2000-2018 2000-2011 2012-2018 -3,0 percent (Figure 1.8). While the level of investment 10 4 -2 Net2,0 matters, the efficiency Exports Investment of both public and private Agriculture Industry 16. Côte8d’Ivoire stands 2 out among Services SSA rate GDP growth countries 7,0 Private Consumption investment GDP growth rate Government Consumption is at least as important. Comparing for its 6 relatively low 0 private investment rate. 2000-2018 the marginal returns2000-2011 2012-2018 to public versus private 2000-2018 2000-2011 2012-2018 -3,0 Over 4 time, in developed -2 economies, private Netinvestment Exports canInvestment give an idea of their efficiency. Many Agriculture Industry2,0 investment 2 takes a greater role Services and contributes GDP growth rate Private Consumption GDPfactors Government Consumption growth ratecould explain why they differ, including the to potential 0 5,5 output and job creation by directly 2000-2018 2,5 quality 2000-2011 of institutions, management practices, and 2012-2018 expanding the economy’s productive capacity Annualized GDP per capita growth (in %) -3,0 2000-2018 2000-2011 2012-2018 2,0 the quality of the banking sector. Faced with a Annualized GDP per capita growth (in %) -2 Net Exports Investment et al. 2018). (Barhoumi Agriculture In Côte Industry public d’Ivoire, Private financing constraint, Côte d’Ivoire needs to make 1,5 2,5 5,5GDP growth Consumption Government Consumption 3,5Services rate GDP growth rate investment is marginally higher than the SSA Annualized GDP per capita growth (in %) critical choices about the nature of its investment 2,0 Annualized GDP per capita growth (in %) 1,0 average but private investment3,5 is far below it. Its financing.10 Understanding the efficiency of public 1,5 1,5 private investment rate averaged 12 percent of GDP 0,5 1,0 5,5 2,5 and private investments will be crucial to informing in 2015–2018, below its 1,5 structural peers: Ethiopia 0,0 0,5that choice. Annualized GDP per capita growth (in %) 2,0 Annualized GDP per capita growth (in %) 3,5 -0,5 1,5 -0,5 0,0 -0,5 -0,5 1,0 1,5 Residual (unexplained growth) Côte d’Ivoire and SSA peers: -1,0 Trends -1,0 in investment Persistence 0,5 Schooling Credit/GDP Residual (unexplained growth) Persistence Schooling Credit/GDP External Stabilization Stabilization Trade/GDP Gov Cons./GDP External 0,0 Trade/GDP Gov Cons./GDP Infrastructure 1.8:Structural Figure-0,5 Public investment Structural has been above -0,5 the Sub-Saharan African average, but private investment Infrastructure been below it (2018) has-1,0 Residual (unexplained growth) Persistence Schooling Credit/GDP External Stabilization 30 Trade/GDP Gov Cons./GDP Structural 30 Infrastructure NER 25 TZA Private investment (% GDP) NER BWA 25 UGA Sudan TZA ETH Private investment (% GDP) AGOCOD 20 BWA BEN UGA NAM 30 Sudan ETH AGOCOD 20 15 MUS MOZ NAM MDG NER BEN LBR CIV BFA TGO COG 25 Togo TZA Private investment (% GDP) BWA MLI 10 MOZ SEN 15 UGA Sudan AGO MUS COD BDI GMB GNQ ETH RWA 20 ZWE LBR MWI CIV BFA TGO COG TogoBEN NAM 5 MDG SWZ MLI 15 10 MUS MOZ SEN LBR CIV BFAGMB GNB GNQ TGO COG RWA MDG Togo 0 BDI ZWE MWI MLI 10 SWZ 6 SEN 5 0 GMB2 GNQ 4 8 10 RWA 12 14 16 18 BDI Public investment (% of GDP) ZWE MWI Source: World Development 5 Indicators. SWZ GNB 3,5 0 GNB 15 0 Figure 1.9: Côte d’Ivoire’s 3,0 2 capital-output 0 private 4 6 8 Figure10 1.10: 12Public 14 and Public private 16 (% GDP) Investment 18investment have both 0 2 4 6 8 Public10 investment 12 16 14 of GDP) (% 18 Private Investment (% GDP) ratio is one of the lowest 2,5 in Sub-Saharan Public investment Africa (% of GDP) rebounded after being stagnant in the 2000s 10 2,0 3,5 3,5 15 15 1,5 Public Investment (% GDP) Public Investment (% GDP) 3,0 3,0 5 (% GDP) Private Investment 1,0 Private Investment (% GDP) 2,5 10 2,5 0,5 2,0 10 1,5 2,0 0,0 0 Congo, DR Angola Ghana Gabon Rwanda Cote d'Ivoire Mauritius Sierra Leone Comoros Guinea-Bissau Mozambique Malawi Guinea Burkina Faso Namibia Sudan Togo Botswana Eq. Guinea Zambia Tanzania Mauritania 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 5 1,0 1,5 0,5 5 1,0 0,0 0 0,5 Sierra Leone Congo, DR Angola Ghana Rwanda Gabon Cote d'Ivoire Mauritius Cote d'IvoireSierra Leone Guinea Comoros Togo Congo, DR Eq. Guinea Guinea-Bissau Mozambique Rwanda Malawi Mozambique Guinea Burkina Faso Namibia Sudan Comoros Botswana Sudan Zambia Tanzania Botswana Mauritania 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 25 25 0,0 0 Private 20 20 Ghana Angola Gabon Mauritius Namibia Togo Eq. Guinea Guinea-Bissau Malawi Burkina Faso Zambia Tanzania Mauritania 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Government 15 Source: IMF 2020 Investment and Capital 15 Stock Dataset. Percent 25 25 10 10 Private 20 20 5 Government 5 15 0 15 25 25 Percent 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 10 0 10 20 Private 20 Source: Eden (2020). Burkina Faso Nigeria Rwanda Lesotho Niger Mauritania Kenya South Africa Mauritius Senegal Gabon Angola STP Sierra Leone Togo Benin Cabo Verde Eswatini Cameroon Djibouti CAR Namibia Mozambique Côte d'Ivoire Guinea Botswana 5 Sudan Government 5 0 15 15 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Percent 0 10 Source: Eden (2020). Burkina Faso Rwanda Niger Mauritania Kenya Mauritius Senegal Angola STP Nigeria Lesotho Gabon South Africa Sierra Leone Togo Benin Cabo Verde Eswatini Cameroon Djibouti CAR Namibia Mozambique Côte d'Ivoire Guinea Botswana Sudan 10 5 5 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 0 Source: Eden (2020). Burkina Faso Nigeria Rwanda Mauritania Kenya STP Lesotho Niger Mauritius Senegal Gabon Cameroon South Africa Sierra Leone Angola Djibouti CAR Mozambique Togo Benin Cabo Verde Eswatini Namibia Côte d'Ivoire Guinea Botswana Sudan 10 For example, the private sector has had limited access to domestic credit in recent years partly because investments in government bonds were more profitable for commercial banks than lending to the private sector (World Bank 2020a). 22 I Côte d’Ivoire Country Economic Memorandum GNB Public Investment (% GDP) 3,0 0 0 2 4 6 8 10 12 14 16 18 Private Investment (% GDP) 2,5 Public investment (% of GDP) 10 2,0 3,5 15 Public Investment (% GDP) 3,0 1,5 Private Investment (% GDP) 2,5 5 10 1,0 2,0 0,5 1,5 5 1,0 0,0 0 0,5 Congo, DR 1989 Ghana Angola Gabon Rwanda Cote d'Ivoire Mauritius Comoros Burkina Faso Guinea Sierra Leone Namibia Togo Eq. Guinea Sudan Eq. Guinea Botswana Guinea-Bissau Mozambique Malawi Burkina Faso Zambia Tanzania Mauritania 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 0,0 0 Congo, DR Angola Ghana Gabon Rwanda Cote d'Ivoire Mauritius Guinea Sierra Leone Comoros Mozambique Malawi Namibia Guinea-Bissau Sudan Togo Botswana Zambia Tanzania Mauritania 1985 1987 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Figure 1.11: Côte d’Ivoire has among the highest Figure 1.12: Returns to public investment have returns to aggregate capital of its peers caught up with private investment returns 25 25 25 25 20 20 20 Private 20 Private Government 15 Government 15 15 Percent 15 10 Percent 10 5 10 10 5 0 5 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 5 0 0 Source: Eden (2020). Burkina Faso Nigeria Rwanda Lesotho Niger Mauritania Kenya Gabon Mauritius Senegal South Africa Angola STP Cameroon Sierra Leone CAR Togo Benin Cabo Verde Eswatini Namibia Djibouti Mozambique Côte d'Ivoire Guinea Botswana Sudan 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 0 Source: Eden (2020). Burkina Faso Senegal Nigeria Rwanda STP Lesotho Niger Mauritania Kenya Mauritius Gabon Cameroon South Africa Sierra Leone Angola Djibouti CAR Mozambique Togo Benin Cabo Verde Eswatini Namibia Côte d'Ivoire Guinea Botswana Sudan Source: Eden (2020). Source: Eden (2020). Would Côte d’Ivoire benefit from capital stock. This was Côte d’Ivoire’s position at the end of the political crisis. Decreasing returns increasing private investment over to factors of production implies a higher marginal public investment?11 productivity of public capital when the capital stock is low (Berg et al. 2015). A high rate of return to private investment may reflect credit- 17. Côte d’Ivoire has one of the highest returns constrained conditions which prevent the private to aggregate capital among its SSA peers, sector from taking advantage of good investment reflecting the fact that it is emerging from opportunities. It may also indicate high (perceived) years of underinvestment in key infrastructure. investment risk.12 Figure 1.10 shows the evolution Figure 1.11 compares estimated rates of return in returns to private and public investment. In the to aggregate capital. Higher rates of return to 2000s, public and private investment rates were capital are consistent with its generally low level low and stagnant. Since 2012, both have been of capital stock, with the capital-output ratio increasing steeply, but with private investment remaining among the lowest in SSA (Figure 1.9). increasing at a faster pace. In contrast, its public capital-output ratio is almost on a par with the SSA average, as a result of the 19. Weak domestic tax revenue has meant significant public infrastructure investments made increasing reliance on external borrowing to in recent years. Despite the recent increase in finance investment. Fiscal pressures remain physical capital accumulation, capital continues considerable given weak domestic revenue to be scarce in the economy as the political crisis mobilization and rising capital spending. Despite delayed its accumulation. While public investment progress made in recent years, tax revenue has caught up, supported by active government performance lags that in frontier countries13 and programs, private investment still lags behind. emerging markets. Tax revenue stood at 11.5 percent of GDP in 2019, compared to an average 18. Returns to public investment have largely of 16 percent for WAEMU countries and a regional caught up with those for private investment target of 20 percent. Recent Eurobond issuances, (Figure 1.12). Four alternative approaches have public debt increased to 41.5 percent of GDP. been used to estimate returns to investment (see External debt surged from 18 percent of GDP Appendix 1). All indicate that there are currently in 2017 to 26.5 percent in 2019. Côte d’Ivoire has high returns to both private and government increasingly relied on international commercial investment of over 10 percent. This is higher borrowing to finance infrastructure investment and than any reasonable estimates of the risk-free address pressing development needs. rate, which tend to fall between 0 and 5 percent, suggesting that investment may have been 20. Although the overall risk of debt distress is inefficiently low in the past. The marginal increase still moderate, the country’s vulnerability to in public investment depends on the initial capital shocks remains high, which would put pressure stock. A country with permanently low efficiency on external debt sustainability. The fiscal position accumulates less capital, resulting in a lower public is strained by interest payments and debt service 11 To address these questions, this report draws upon a comprehensive empirical analysis contained in the background note (Eden 2020; see Appendix 1). 12 Approach 2 allows the rates of return on government and private capital to be different from one another. It implies a risk-adjusted rate of return to private investment of 12–18 percent, depending on the average rate of return on private investment. A structural approach (Approach 3) suggests a risk-adjusted rate of return of 17 percent. 13 Ethiopia, Ghana, Kenya, Mauritius, Mozambique, Rwanda, Senegal, Tanzania, Uganda, and Vietnam. Côte d’Ivoire Country Economic Memorandum I 23 costs which consume 10 percent and 18 percent was associated with a 0.71 percent reduction in of total fiscal revenue, respectively. As COVID-19 poverty, compared to only 0.43 percent over 2008– worsens the existing debt and fiscal dynamics, 2015. Nonetheless, the relationship between income private investment will increasingly be needed. growth and poverty reduction remains well below Further, there are concerns over the quality of the SSA average.15 Recent research suggests this government spending. For instance, a significant could be explained by poor initial conditions. Where amount of government expenditure has been used a larger share of the population lacks assets, access to subsidize loss-making processing of cocoa to public goods and services, and sufficient income beans, the national airline Air Côte d’Ivoire, and opportunities, this limits their ability to contribute private education, among other schemes (World to and participate in growth (Christiaensen and Hill Bank 2020a). 2018). High fertility rates are another explanation (Beegle and Christiaensen 2019). 21. To sustain growth, Côte d’Ivoire needs to explore ways to support private sector- 23. Non-monetary poverty has also shown led growth while finding complementary improvement. Most notably, access to electricity mechanisms to finance infrastructure. Both has improved for all income groups, with 81 private and public infrastructure investment will be percent of households having access to electricity needed in the future. The existing growth strategy in 2018, a 20 ppts gain since 2015. For households may involve important trade-offs. In the past 15 in the bottom 40 percent of the income distribution, years, privately funded infrastructure investment access to electricity jumped from 49.6 percent in has been on the rise in SSA, using a variety of 2015 to 71 percent in 2018. Similarly, access to modalities ranging from concessions and PPPs to health infrastructure increased by 30 ppts over equity investment, syndicated loans, infrastructure this period. Large public infrastructure investment bonds, and bank lending. In a context of growing programs explain this progress. However, the fiscal vulnerability, Côte d’Ivoire needs to tap into improvement has been slower in rural areas. For this market, by steadily trimming public investment example, while there is near-universal access to while generating and focusing spending on drinking water (91 percent), the gains have been much-needed social outlays and public good concentrated in Abidjan and access in rural areas provision. Lack of access to credit is holding back has stagnated at 86 percent. an important driver of growth—the private sector. Limited market competition and an inadequate 24. Most of the gains have been concentrated in regulatory framework also remain obstacles to urban areas, particularly Abidjan, exacerbating private sector growth. The Government needs to the rural-urban divide. The decline in poverty change its role from being the main provider of over 2015–2018 was driven by a large reduction infrastructure to becoming an enabler of private in urban poverty (Figure 1.13). The urban poverty participation in the sector. rate declined by 11.7 ppts, as one million people were lifted out of poverty in cities, a third of them in Abidjan alone. In contrast, the number of poor increased marginally in rural areas over the same Inclusiveness and equity need to period (+2.4 ppts). In 2018, the rural poverty rate was 54.6 percent compared to 34.7 percent in be part of the growth process urban areas (excluding Abidjan), with the gap between urban and rural areas more than tripling. These trends exacerbate spatial inequalities. 22. Poverty rates have steadily declined since 2011 The wealth generated in recent years has also but growth could have been more inclusive. remained concentrated in the greater Abidjan area. After increasing during the political crisis and This partly reflects the concentration of recent reaching 55 percent in 2011, the incidence of growth in capital-intensive sectors (construction, poverty has steadily declined. It dropped from transportation, and telecoms) and the mixed 44.4 percent in 2015 to 39.4 percent in 2018 (Figure performance of the cocoa sector which suffered 1.13; World Bank 2020e).14 These significant gains from climatic and price shocks in recent years. The largely mirror the growth of the Ivorian economy greater Abidjan area hosts close to 20 percent of which brought gains across the income spectrum. the population but 80 percent of private firms and The contribution of economic growth to poverty 90 percent of formal employment (World Bank, reduction has also improved: between 2015 and 2020a). 2018, a 1 percent increase in per capita GDP growth 14 Poverty rates as defined according to the national poverty line. Due to changes in survey design and in poverty line measurement, the poverty rates series from 1985 and 2008 are not directly comparable with those from 2011 to 2018. Previous communications from the Ivorian government indicate slightly different rates (46.3 percent in 2015 and 37.2 percent in 2018). 15 The average income growth elasticity of poverty is -1.91 in SSA (Beegle and Christiaensen 2019). 24 I Côte d’Ivoire Country Economic Memorandum Figure 1.13: Poverty rates have steadily declined, Figure 1.14: Income inequalities are extremely high driven by gains in urban areas in urban areas 60 60 80 70 50 50 Q5 Richest 60 Q1 Poorest 40 40 50 30 30 40 20 30 20 10 20 10 10 0 National Abidjan Other Urban 0 Rural 0 2011 2015 2018 National Abidjan Other Urban Rural Abidjan Other urban Rural 2011 2015 2018 Source: National Institute of Statistics and World Bank staff calculations. Source: National Institute of Statistics and World Bank staff calculations. 25. Recent growth has not created enough formal formal sector amounted to 40,000 jobs. The share productive jobs. With an urbanization rate of 50 of the working-age population (15–64-year-olds) percent in 2018 (World Bank, 2019a), Côte d’Ivoire is projected to increase from 58 percent of the is one of the most urbanized countries in SSA after population in 2019 to almost 65 percent in 2040. Ghana and Cameroon. Yet, as in most countries in The demographic dividend could potentially be the region (Lall et al. 2017), urbanization has not large, but will only be achieved if the youthful been accompanied by the structural transformation population can be productively employed.16 Gender Inequality Index (1 most unequal) of the economy, limiting the creation of higher productivity jobs in the formal sector. The SSA bulk 27. CoteIncome d Ivoire inequalities Vietnam remain high, particularly Senegal of the labor force is engaged in informal orGhana semi- in Kenya cities. While the Morocco rapid growth of the last three Linéaire (Cote d Ivoire) informal activities in trade/retail and distribution. years has benefited the poor,17 income inequalities 0,7 Cote d Ivoire; Job creation has not kept pace with 0,65 the rapid Cote d Ivoire; remain high. The richest 20 percent of the 0,657 0,667 0,6 economic growth: the portion of the working-age SSA; 0,593 population accounted Cote d Ivoire; 0,663 for more than 40 percent SSA; 0,572 0,55 population who are employed (i.e. the employment 0,5 of total consumption SSA; 0,579 in 2018, while the bottom 40 0,45 rate) fell from 70.3 percent in 2015 to 62.1 percent percent for only 18 percent. Vietnam; 0,314 Further, inequalities 0,4 in 2018 (World Bank, 2020e). The informal 0,35 sector in cities are extremely high. In Abidjan, the top 20 Vietnam; 0,333 Vietnam; 0,333 represented more than 80 percent 2010 0,3 of 2011 total2012 2013 2014 percent consumes 85 times as much as the bottom 2015 2016 2017 2018 2019 employment in 2018, and informality was highest in 20 percent (Figure 1.14). This gap is only 1.5 in rural agriculture (over 80 percent of wage employment). areas, reflecting the greater prevalence of poverty there. Two priorities emerge from these trends in 26. Côte d’Ivoire needs to create more and better- poverty reduction, fertility rates, job creation, and quality jobs for its growing youth bulge. Over urbanization: the need to improve agricultural the next two decades, it is estimated that between productivity to reduce monetary rural poverty, and 350,000 and 400,000 young people will join the to unlock the creation of higher-productivity jobs working-age population each year (Christiaensen in cities to absorb the increasing urban population and Premand 2017). In 2017, job creation in the and reduce large income inequalities. 16 The economic benefits of a demographic dividend are not automatic. For the youthful workforce to add value, they must be equipped with education and skills. 17 Consumption among the bottom 40 percent grew by 5.6 percent per year, while that of the top 60 percent declined by 2.5 percent per year over the 2015–2018 period (World Bank 2020e). Côte d’Ivoire Country Economic Memorandum I 25 60 80 70 50 Q5 Richest 60 Q1 Poorest 40 50 30 40 30 20 Figure 1.15: The productivity of the next generation is lower than in peer countries 20 10 10 0 0 National Abidjan Other Urban Rural Abidjan Other urban Rural 2011 2015 2018 Source: World Development Indicators, Human Capital Index, World Development Report 2019 and authors’ calculations. Note: The Human Capital Index ranges between 0 and 1. It measures productivity of the next generation of workers relative to the benchmark of full education and health. An economy in which the aver- age worker achieves their health and education potential will get a value of 1. Gender Inequality Index (1 most unequal) Figure 1.16: Gender inequalities are higher than in peer countries and decreasing slowly SSA Cote d Ivoire Vietnam GSenegal Kenya ender Inequality Index (1 most unequal) Morocco Ghana Linéaire (Cote d Ivoire) SSA Cote d Ivoire Vietnam 0,7 Cote d Ivoire; Senegal 0,65 Kenya Cote d Ivoire; Morocco 0,657 0,667 0,6 Ghana Linéaire (Cote d Ivoire) SSA; 0,593 Cote d Ivoire; SSA; 0,572 0,55 0,663 0,7 SSA; 0,579 Cote d Ivoire; 0,5 0,65 Cote d Ivoire; 0,657 0,45 0,667 0,6 0,4 SSA; 0,593 Cote d Ivoire; SSA; 0,572 0,314 Vietnam; 0,55 0,663 0,35 Vietnam; 0,333 Vietnam; 0,333 SSA; 0,579 0,5 0,3 0,45 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0,4 Vietnam; 0,314 0,35 Vietnam; 0,333 Vietnam; 0,333 0,3 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Gender Inequality Index (GII) UNDP (2019b) and author’s calculations. Note: The GII is an inequality index. It measures gender inequalities in three important aspects: (i) reproductive health, measured by maternal mortality ratio and adolescent birth rates; (ii) empowerment, measured by proportion of parliamentary seats occupied by females and proportion of adult females and males aged 25 years and older with at least some secondary education; and (iii) economic status, expressed as labor-market participation and measured by labor-force participation rates of women and men aged 15 years and older. The higher the GII value the more dispar- ities between females and males and the greater the loss to human development. 28. Human development outcomes are improving, country was at the bottom quartile of the Human albeit slowly and unequally. Child survival Development Index in 2019, well below its structural rates increased noticeably over the last decade.18 and aspirational peers (UNDP 2019a). School access and enrollment rates improved at all levels, reaching full enrollment at the primary 29. Low human capital formation is limiting level.19 However, this progress masks income, inclusive growth. Measured by the Human gender and geographical disparities with much Capital Index, children born in Côte d’Ivoire in slower progress in rural areas, girls’ education, and 2018 will only be 35 percent as productive growing lower-income households (Lee 2019). On nutrition up as they could be if they enjoyed complete and health indicators, the country is also lagging. education and full health.20 This figure is 67 percent In 2018, 22 percent of children were stunted, and in Vietnam, 52 percent in Kenya and 50 percent in thus at risk of cognitive and physical limitations Morocco (Figure 1.15). Côte d’Ivoire urgently needs that can last a lifetime. Stunting rates in rural areas to upgrade the human capital of its workforce to are more than twice as high as in urban areas (27.4 achieve better and more inclusive growth. percent compared to 12.5 percent). In 2019, the 18 The proportion of deaths per 1,000 live births declined from 84 in 1995 to 60 in 2015 for children under the age of one year and from 125 to 96 for children under the age of five years (Welmond et al. 2020). 19 As measured by gross enrollment rates, that is the number of children enrolled at a given level of the education system as a proportion of the school-age population. 20 Globally, 56 percent of all children born in 2018 will grow up to be, at best, half as productive as they could be; and 92 percent will grow up to be, at best, 75 percent as productive as they could be (World Bank Human Capital Index 2018 https://www.worldbank.org/en/publication/human-capital). 26 I Côte d’Ivoire Country Economic Memorandum Box 1.2: Gender inequality is a barrier to poverty reduction in Africa Beegle and Christiaensen (2019) discuss the implications of high levels of gender inequality in Africa. As in many other regions, women in the continent suffer large inequalities in education, health, empowerment, and income-generating activities with lasting consequence for poverty reduction and higher productivity growth. On average, women in the region are less productive than men as farmers, and their non-farm business activities are less profitable. Why? Because women face more severe borrowing constraints, limited access or title to productive assets, fewer political and legal rights, more stringent constraints on mobility and socially acceptable activities, and lower levels of human and physical capital, so returns to their investments can be expected to be inferior. In fact, the associated poverty trap is a bigger threat to women. For example, as discussed in the report, although both poor men and women face credit constraints, the constraint is often more severe for women, notably when they cannot borrow as much as men with the same initial collateral. Women will then be more vulnerable to being trapped in poverty or unable to recover from economic shocks without help. These structural inequalities not only matter in their own right but also impede poverty-reduction efforts. Beyond the intrinsic value of equal opportunities, gender equality brings with its economic growth and poverty-reduction opportunities for countries. Source: Beegle and Christiaensen (2019). 30. Gender inequalities are a drag on present and men and earn 30 percent less (Christiaensen and future growth. While major reforms and policy Premand 2017). initiatives to support women’s empowerment have been in place since 2011, women in Côte d’Ivoire 31. Some poor human capital outcomes are face challenges across multiple domains including directly related to gender inequality. For economic outcomes, human capital, and voice example, school enrollment is significantly and agency. In 2019, the country ranked 165th out reduced because fewer girls manage to complete of 189 countries in the UNDP’s Gender Inequality secondary school. High maternal mortality—higher Index (GII),21 a position that has slowly improved than for any other structural and aspirational over time, and remained below its peers (Figure peer—is a very important contributing factor to low 1.16). Only half of working-age (those aged 15–64) adult survival rates, particularly for younger adults women work, compared to approximately two (Welmond et al. 2020). Progress in gender equality thirds of working-age men (Copley and Donald is needed to achieve greater poverty reduction and 2020). Even with the same level of education, increase productivity (Box 1.2). women are half as likely to have a salaried job than 1.3. The way forward: Sustaining the growth acceleration and its inclusiveness 32. Sustaining the high growth momentum, while country needs to implement coordinated policies making the process more inclusive, will be that preserve macroeconomic stability, maximize key to Côte d’Ivoire meeting its objective of private investment, and build resilience to fragility. achieving emerging market status by 2030. Reducing inequality is also critical: high levels of The country has set itself an ambitious goal. inequality tend to reduce the pace and durability Improving the quality of institutions, achieving of growth (IMF 2017). The combined effect of the a more balanced and inclusive growth, and COVID-19 pandemic disrupting global trends, promoting structural change, are at the core of this climate change, and demographic pressures, all vision. As other success stories have highlighted, add to the need for new ingredients in the recipe to create sustainable and inclusive growth, the for growth during the next decade. 21 While the data collected by the GII is primarily meant to be compared across countries and within years, due to potential changes in indicator definition, it can nevertheless be an instructive tool in examining the big picture and identifying important drivers of inequality over time. Côte d’Ivoire Country Economic Memorandum I 27 33. Productivity growth should be at the core of this model. Economic theory provides alternative Box 1.3: Description of the CEM 2.0 analytical narratives around key necessary conditions and framework long-term drivers of growth. The pioneer work The CEM 2.0 approach proposes innovations by Solow (1956) emphasized the importance of in the process and substance of growth analy- investment and productivity to boosting economic ses. In terms of substance, the CEM 2.0 proposes activity, while Romer (1986, 1990) identified a simple analytical framework organized around 20 human capital as essential to long-term growth guiding questions: 10 questions at the macro level through fostering productivity and innovation. The and 10 questions at the micro level. This is combined experiences of the country’s aspirational peers with two overall questions regarding the choice of have shown that countries develop and transform period of analysis and peer countries. The macro themselves by increasing productivity (Chapter 2). questions are designed to encourage the employ- Productivity is the fundamental driver of long-run ment of the most common growth diagnostic tools and decomposition techniques. The micro questions growth. Krugman (1994) termed this phenomenon are designed around the framework proposed by “inspiration” as opposed to “perspiration” (factor Syverson (2011). accumulation). In Côte d’Ivoire, physical and human capital accumulation remain important in Using the analytical framework of the CEM 2.0, key the short to medium term as the country continues areas were identified as the main constraints to eco- to catch up with aspirational peers. Yet, in the nomic growth in Côte d’Ivoire. They were then fil- medium to long run, policies that enhance the use tered using prioritization criteria.22 The themes were of these factors, and thus increase productivity, will selected not only because they are of high program/ strategic relevance but also because they lacked be key to sustaining high and inclusive growth. recent analysis. For example, while human capi- 34. Achieving sustained productivity growth is tal emerged as one important driver, it has and is being sufficiently discussed in other studies (World generally difficult, but achievable. It needs Bank 2017, Lee 2019). Consultations with various the right set of policies that promote the efficient Ivorian stakeholders were also held on the basis of allocation of resources, competitive market the country scan presentation to discuss the areas dynamics, and within-sector improvements. It of analysis. requires a competitive business environment capable of promoting innovation and attracting productive sources of financing. This will help to create new local firms and increase labor productivity and employment potential (World Bank 2020a). Trade policy can also support a What are the prospects for growth wider economic diversification agenda. Export diversification plays an important role in sustaining as the world emerges from the growth by promoting productivity, economies of COVID-19 crisis? scale, and resilience to external shocks. Increasing productivity growth in the agricultural sector will be paramount for both sustained high growth and 36. Post COVID-19, Côte d’Ivoire will need to inclusiveness. continue to develop policies to strengthen its domestic fundamentals for growth and 35. This report provides an in-depth analysis increase resilience to external shocks. An of these three areas critical to improving extended period of weak global growth would productivity and inclusion: market competition pose significant challenges to achieving sustained (Chapter 3), export diversification (Chapter 4), economic growth. The country will come out of the and agriculture (Chapter 5). These areas were crisis with higher public debt levels. Its fiscal space identified using the analytical framework of the will be constrained. The Government’s capacity CEM 2.0 (Box 1.3). While this report is concerned for capital spending, one of the main drivers with long term drivers of growth, new challenges of recent growth, will be limited, accelerating have also risen as the world is confronted with the the need to transition to a private sector-led COVID-19 pandemic. Strengthening the economy’s growth model in the medium term. Increasing productive capability and the inclusiveness of the productivity and competitiveness, promoting growth process have thus become all the more economic diversification, and supporting more important for Côte d’Ivoire. inclusive growth should remain at the heart of the reform agenda. By looking at long-term structural challenges for growth, this report provides 22 The criteria used to select thematic areas include findings from consultation with the client, priorities as identified in the development program, strategic relevance for the Bank’s engagement, availability of recent work on the topic, and data availability. See World Bank (2019b). 28 I Côte d’Ivoire Country Economic Memorandum guidance on policies compatible with a resilient capital development and gender inequalities. recovery from the economic and social fallout from Investing in education, training programs, and the the COVID-19 crisis, and the ambitious objective development of digital technologies will be needed of achieving upper-middle income status in the to support the transition of the youth to high- decades to come. productivity jobs. 37. Once the worst of the crisis is over, it will be 39. The impact of COVID-19 remains uncertain but important to focus on policies that can support the crisis may exacerbate underlying global sustainable growth. In the short term, ensuring trends that will change the future growth path that the recession has as few permanent impacts in developing economies. Emerging market on the economy as possible will be key. In the and developing economies (EMDEs) differ from medium term, the private sector needs to take advanced economies in both the structure of their center stage. Concerted efforts should be made economies and the tools available to reduce the to address key constraints to firm productivity and impact of shocks (Djankov and Panizza 2019). At competitiveness, notably to promote the efficient the end of the pandemic, however, they will have allocation of resources towards more productive to face the same emerging world. While there sectors and firms. This would help unlock the are many unknowns, many global trends that potential of private enterprises and attract foreign are already underway are likely to accelerate as investors, thereby fostering access to finance as a result. 23 This will most certainly be true for the well as new technologies and expertise. digital economy, the automation of manufacturing jobs, or the switch to greener technologies. The 38. Sustainable growth will also require increased decline in globalization and the regionalization of investments in human capital and policies supply chains may accelerate. Labor markets and to facilitate learning. Human capital and skills knowledge exchanges might have to adapt to a are significantly lagging behind those of peer new normal where the nature of work is different. countries, holding back productivity growth. The The amplification of these trends will have COVID-19 crisis may cause a long-lasting impact important implications for the long-term drivers on human capital development. The sudden of growth in developing economies and will also closure of schools could lead to a deterioration affect institutions and governance structures. In and erosion of learning outcomes, including an the post-COVID-19 world, Côte d’Ivoire needs to increase in children dropping out of school. The continue building the foundations of a competitive, economic cost for households may lead to a drop diversified, and more inclusive economy. in demand and educational supply. These shocks could be costly with lasting effects on human 23 This section builds on the discussion reflected in “How Will the World Be Different After COVID-19?” (IMF 2020b). Côte d’Ivoire Country Economic Memorandum I 29 Annex 1.1. Lessons from fast-growing economies Table 1.1: Growth Commission recommendations and Côte d’Ivoire’s experience Common characteristics of fast-growing economies Côte d’Ivoire’s strategy and experience They fully exploited the world economy. Remains open to international trade with, and investment from, third countries. They maintained macroeconomic stability. Stable macroeconomic environment, no central bank fi- nancing of fiscal deficits, and sustainable public debt. They mustered high rates of saving and investment. Savings are low. Investment has increased lately but re- mains low compared to peers. They let markets allocate resources. Low market competition in some key sectors (telecoms and transport) are obstacles to private sector development. They have committed, credible, and capable governments. Yes. Policy ingredients Technology transfer. Limited. FDI is low but domestic market dominated by small and informal firms. Competition and structural change. Limited. Efficient labor markets. Weak. Export promotion and industrial policy. Nascent stage. Côte d’Ivoire has articulated a vision of de- veloping an export led strategy. Capital flows and financial market openness. Not open capital account. Financial sector development. Financial market growing, but lags behind those of other middle-income SSA countries, with a poor savings culture. Urbanization and rural investment. Rapid, unmanaged urbanization. Weak rural infrastructure. Equity and equality of opportunity. Significant income inequality. Challenges remain in equality of income and opportunity. Regional development. Urban population is concentrated in the greater Abidjan area. Uneven regional development. The environment and energy use. Energy sector roadmap aims to diversify the energy mix with more renewable energy. The quality of the debate. Limited but improving policy debates. Examples of sub-optimal growth policies Subsidizing energy except for very limited subsidies target- Limited subsidies through VAT for electricity. ed at highly vulnerable sections of the population. Providing open-ended protection of specific sectors, indus- Limited protection of specific industries. tries, firms, and jobs from competition. Imposing price controls to stem inflation, which is much bet- Limited. ter handled through other macroeconomic policies. Banning exports for long periods of time to keep domestic No. prices low for consumers at the expense of producers. Poor regulation of the banking system combined with ex- Excessive interference in the banking system exists. cessive direct control and interference. Resisting urbanization and, as a consequence, underinvest- No. ing in urban infrastructure. Source: World Bank staff elaboration based on Commission on Growth and Development (2008). 30 I Côte d’Ivoire Country Economic Memorandum Annex 1.2. Selection of peer countries Table 1.2: Structural and aspirational peers: Key statistics Population Human Cap- Nominal GDP per CPIA   Income level (millions) ital Index capita (US$) score 2017 (HCI) Côte d’Ivoire Lower middle-income 1,504.5 25.00 0.4 3.5 Structural peer(s): low- and lower middle-income, CPIA score>=3.4, Population 10–110 million Ethiopia Low-income 772   109.2 0.39   3.5 Ghana Lower middle-income 1,529 28.28 0.4 3.7 Senegal Lower middle-income 1,250 15.86 0.4 3.8 Aspirational peers: + HCI>=0.5; GDP per capita <4,000 Kenya Lower middle-income 1,569 46.73 0.5 3.9 Morocco Lower middle-income 3,033 34.85 0.5 3.8 Sri Lanka Lower middle-income 3,918 21.44 0.6 3.5 Vietnam Lower middle-income 2,204 93.64 0.7 3.8 Côte d’Ivoire Country Economic Memorandum I 31 References Barhoumi, K., H. Vu, S.N. Towfighian, and R. Maino. 2018. IMF. 2016b. “Côte d‘Ivoire: Selected Issues.” Country Public Investment Efficiency in Sub-Saharan African Report No 16/148. 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Côte d’Ivoire Country Economic Memorandum I 33 Chapter 2 Productivity: It’s almost everything Holding those strings 50 X 50 Cm Joana Choumali 2019 Prepared by Nathalie Picarelli, Fiseha Haile, Amina Coulibaly and Hibret Belete Maemir. 34 I Côte d’Ivoire Country Economic Memorandum 1. Productivity—the efficiency with which (the entry of more productive new firms and the firms transform inputs into production—is exit of less productive ones); or (iii) improved the ultimate driver of economic growth.24 allocation of factors between sectors and firms,25 or As Paul Krugman (1994) noted “Productivity a combination of all three. A steady accumulation isn’t everything, but, in the long run, it is almost of economic fundamentals (physical capital, everything.” Countries can achieve productivity skills, technology, and institutional capabilities), growth in different ways. Structural change appropriate policies, and/or the efficient movement (the movement of resources from low- to high- of resources to the most productive sectors is thus productivity sectors) is important at early stages of needed to achieve productivity gains. Since 2012, development (Diao et al. 2019), while technological Côte d’Ivoire’s total factor productivity (TFP) has change is needed in the long term (Helpman 2009). been a major contributor to its economic growth. Sustained increases in productivity are critical to Labor productivity has increased steadily on improving living standards over time. Long-term aggregate since 2011. Analyzing Côte d’Ivoire’s increases in earnings in industry or agriculture— productivity patterns at macro and micro levels the source of employment and livelihoods for many is critical to better understanding its capacity to of the poor—can be achieved only by increasing generate high-quality jobs and improve living workers’ or farmers’ productivity. The creation standards. of more and better jobs is thus directly linked to the agenda of raising productivity. In addition, 3. The chapter is organized as follows. Section 2.1 productivity-driven cost reductions reduce the presents the key trends in aggregate productivity prices of key products consumed by the poor and and structural change since 2012. Section 2.2 thereby increase households’ purchasing power investigates productivity patterns at the firm level. (Cusolito and Maloney 2018). It uses data about individual firms to disentangle the drivers of labor productivity, determine 2. Sustaining high economic growth and whether productivity growth is the result of within- improving living standards requires sustained firm improvements or reallocation effects, and productivity gains. Productivity growth occurs ultimately indicate which policies can help boost due to (i) improvements within sectors and within productivity (see Box 2.1 for definitions). firms (as each worker produces more); (ii) selection 2.1. Aggregate productivity growth: Trends and drivers26 Capital accumulation and total growth that made the largest contribution in the post-crisis period, however, at 3.7 ppts. In contrast, factor productivity growth account the only drivers of growth before 2012 were capital for most of recent growth and labor accumulation, with TFP making only a marginal contribution, and a negative one of -0.2 ppts during 2000–2011. Before 2012, growth only 4. Increased capital accumulation and total accelerated during periods of higher investment factor productivity account for most of the in physical capital and employment growth, which economic growth since 2012. Rapid growth usually coincided with a rise in commodity prices, between 2012 and 2018 was partly achieved on and vice versa (World Bank 2019).27 Since then, the back of faster capital accumulation, which the sources of growth have somewhat diversified contributed 2.9 percentage points (ppts), or one with a greater contribution from services and third, of Côte d’Ivoire’s growth in gross domestic manufacturing, favoring TFP gains. Recent TFP product (GDP) (Figure 2.1: TFP growth ). It was TFP gains also partly indicate the better use of existing 24 Almost half of the difference in per capita income across countries is explained by differences in total factor productivity (Caselli 2005, Hsieh and Klenow 2010, Cusolito and Maloney 2018). 25 The term is also used to describe changes in the sectoral composition of output. As production shifts tend to accompany labor shifts, the process of structural change is arguably set in motion only once labor is reallocated to high-productivity sectors. 26 The analysis uses employment data for 2008, 2014, and 2018 from household and labor force surveys. Data on gross and sectoral value added come from the UN National Accounts database. 27 World Bank (2019). “Back to the future: How could Côte d’Ivoire catch up again with South Korea.” World Bank Côte d’Ivoire Country Economic Memorandum I 35 capital in the immediate post-crisis period.28 Total factor productivity (TFP) and labor productivity Figure 2.1: TFP growth and capital accumulation Figure 2.2: TFP growth has played a greater role explain much of the recent growth spell in growth than for peer countries (2012–2018) 10,0 10,0 SSA SSA WAEMU WAEMU 8,0 8,0 Togo Togo 3,7 3,7 6,0 6,0 Senegal Senegal 35,0 Niger Niger 4,0 4,0 30,0 Mali Mali 0,8 0,8 25,0 2,0 0,3 0,3 Guinea-Bissau 2,0 Guinea-Bissau 20,0 Cote d'Ivoire Cote d'Ivoire 15,0 0,0 0,0 -0,2 -0,2 10,0 SSA Burkina Faso Burkina Faso 10,0 -2,0 WAEMU Benin -2,0 8,0 Benin 5,0 Togo Capital StockCapital Stock 3,7Labor 0,0 6,0 Labor Senegal -2 0 -2 2 0 4 2 6 4 8 6 10 8 10 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 GDP Growth GDP Growth Total Factor Productivity Total Factor Productivity Niger Capital Labor TFP stock TFP 4,0 Capital stock Labor Mali Non-SSA Developing Countries 0,8 2,0 0,3 Sub-Saharan Africa (SSA) Guinea-BissauSource: World Bank staff estimates. Source: World Bank staff estimates. 35,0 35,0 Côte d'Ivoire Cote d'Ivoire 0,0 -0,2 30,0 30,0 Burkina Faso Figure -2,0 2.3: Aggregate labor productivity has Benin Figure 2.4: …and is now higher than other begunCapital to rise above the median for Sub-Saha- 25,0 25,0 fast-growing peer countries Stock Labor -2 0 2 4 6 8 10 ran Africa Total Factor Productivity … GDP Growth 20,0 20,0 Capital stock Labor TFP 15,0 15,0 35,0 10,0 10,0 30,0 5,0 5,0 25,0 20,0 0,0 0,0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 15,0 Non-SSACountries 10,0 Developing Countries Non-SSA Developing 5,0 Africa (SSA) Africa (SSA) Sub-SaharanSub-Saharan 0,0 Côte d'IvoireCôte d'Ivoire 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Non-SSA Developing Countries Sub-Saharan Africa (SSA) 100% 100% 100% 100% Côte d'Ivoire 80% 80% 80% 80% Source: Calderon et al. (Forthcoming). Note: Using median across countries Source: Dieppe (2020). in each region (US=100). 100% 60% 60% 100% 60% 60% 80% 80% 40% 40% 40% 40% 5. TFP 60% has grown faster in Côte d’Ivoire than in 60% 20% 2.4). 20% (Figure Despite catching up in this way, 20% 20% countries, peer although levels are still lower relative productivity still remains below the levels 40% 40% 0%1970s and 0% than the 1970s. Growth in TFP made a larger of the the growth in labor productivity 0% 0% 20% 2002 2002 2008 2008 2015 It is 2015 2018 much 2018 contribution 20% to growth in Côte d’Ivoire than in its slightly has decelerated Agriculture since Mining 2015. also Manufacturing 1970 1980 2000 1990 2010 2000 2018 2010 2018 Agriculture Mining Manufacturing peers 1980 regional1970 (Figure19902.2: TFP growth ). Measured 0% lower than Utilities Utilities in other ConstructionConstruction developing countries Transport Transport outside Agriculture Mining and Utilities Commerce CommerceFinance Finance Otherper Other services services as output 0% per worker relative Mining Agriculture to theand UtilitiesStates, United 2002 The SSA. 2008 2015 substantial gap2018in output worker 1970 1980 Manufacturing Manufacturing 1990 2000 Construction 2010 Construction 2018 Agriculture Mining Manufacturing labor productivity has also increased much faster SSA and the between Construction Utilities United States can be Transport Commerce Commerce Mining Transport Transport Commerce Agriculture than for regional Other peers services and Utilities since 2012. Its median attributed Finance to the scarcity Other services of inputs of production Other services Manufacturing Construction relative labor productivity Commerce decoupled from that Transport (physical capital and human capital) in the region of Sub-Saharan Other services Africa (SSA) in 2012 (Figure 2.3) and the fact that these inputs are combined in a 25 and by 2018 25 was much higher than other fast- less efficient manner (Calderon et al. forthcoming). growing economies 25 20 20 like Kenya and Ethiopia 2015 15 15 10 28 An examination of 10 episodes of civil conflict across the world from 1960 to 2001 has shown that output declines as a result of crises, mostly due to the destruction 10 of the output loss is regained within 4 years through a rebuilding of the capital stock (Cerra and Saxena 2008). of capital. On average, half 5 5 5 0 0 0 36 I Côte d’Ivoire Country Economic Memorandum 3,0 3,0 3,0 al l Box 2.1: Estimating the sources of productivity growth Differences in output per worker (labor productivity) are driven by capital deepening and efficiency gains obtained through technological change, resulting in rising total factor productivity (TFP). Empirical evidence suggests that al- most half of the difference in per capita income across countries is explained by differences in TFP (Easterly and Levine 2001, Caselli 2005, Hsieh and Klenow 2010).29 There are three main sources of aggregate productivity growth. The contribution of each of them to productivity growth is a subject of ongoing debate (Cusolito and Maloney 2018): 1. Improved firm performance (within firms). At the center of productivity analysis is the firm. The within-firm com- ponent is related to individual firms becoming more productive by increasing the amount of output they produce with a given amount of inputs (such as labor, capital, land, raw materials, and other intermediate inputs) because they have expanded their internal capabilities, including managerial skills, workforce skills, innovation capacity, and ability to absorb technology. 2. Improved allocation of factors of production across firms (between firms). The between-firm component is associ- ated with the reallocation of factors of production and economic activity to more efficient firms. Ideally, the most productive firms would attract the most resources, thereby ensuring the greatest possible output. However, a myriad of distortions—including poorly designed legislation or political patronage that prevents resources from moving from less efficient firms—can create allocative inefficiencies that reduce productivity gains. 3. Improved entry and exit of firms (selection). Aggregate productivity growth can also be explained by the entrance of high-productivity firms (relative to the industry average) and the exit of low-productivity ones. When estimating productivity it is important to go beyond the aggregate data to the firm level. Aggregate TFP numbers are estimated as the residual of an aggregate production function for the whole economy, which ignores technological differences across sectors within countries. As such, they carry measurement problems. They also mask differences among individual firms. To differentiate various possible influences on productivity, this report computes the following different productivity measures throughout: o Total factor productivity: estimated as the residual of a Solow-decomposition, a procedure which decom- poses a country’s output growth rate and shows to what extent it can be attributed to the accumulation of factors of production (physical capital, human capital) and to what extent to technological progress (esti- mated as a residual). o Labor productivity: defined as value added/output per worker. o Revenue total factor productivity (TFPR): defined as the portion of firm-level revenue or sales that cannot be explained by the contribution of capital, labor, energy, and other inputs. To account for differences in produc- tion technologies across sectors, the TFPR estimation allows for heterogeneous sector-specific production functions. Being a revenue-based measure, TFPR is not free of price effects; this means this proxy for effi- ciency might capture not only technical efficiency but also market power deriving differences in quality and other factors affecting demand for the product. o Physical total factor productivity (TFPQ): defined as TFPR minus whatever is driving firm-level price vari- ation. This price variation, in turn, can be broken up into three components: differences in input prices, differences in market power, and differences in quality and other factors affecting demand for the product. Source: World Bank (2020); Cusolito and Maloney (2018). 29 See the Romania Country Economic Memorandum (World Bank 2020). Côte d’Ivoire Country Economic Memorandum I 37 30,0 25,0 Capital Stock Labor 20,0 25,0 -2 0 2 4 6 8 10 Total Factor Productivity GDP Growth 20,0 15,0 20,0 Capital stock Labor TFP 15,0 10,0 15,0 35,0 10,0 5,0 10,0 30,0 5,0 0,0 5,0 25,0 0,0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 0,0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 20,0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Non-SSA Developing Countries 15,0 Non-SSA Non-SSA Developing Developing Countries Countries Sub-Saharan Africa (SSA) 10,0 Sub-Saharan Africa (SSA) Sub-Saharan Africa (SSA) Côte d'Ivoire Côte d'Ivoire Figure 2.5: add- Agriculture’s Côte d'Ivoireshare of gross value 5,0 Figure 2.6: … but its share of employment has ed has not changed much in recent decades 0,0 … fallen steadily since 2002 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 100% 100% 100% 100% 100% Non-SSA Developing Countries 100% 80% 80% Sub-Saharan Africa (SSA) 80% 80% 80% 80% Côte d'Ivoire 60% 60% 60% 60% 40% 60% 60% 40% 40% 20% 40% 40% 40% 20% 100% 100% 20% 0%20% 20% 20% 0% 80% 2002 2008 2015 2018 80% 1970 1980 1990 2000 2010 2018 0% Agriculture 0% Mining Manufacturing Utilities Construction Transport 0% 60% 0% Agriculture Mining and Utilities 2002 60%Commerce 2002 2008 Finance 2008 2015 Other 2015 2018 services 2018 Agriculture Mining Manufacturing 1980 1970 1970 1990 1990 Manufacturing 1980 2010 2000 2000 Construction 2010 2018 2018 Agriculture Mining Manufacturing Commerce Transport Utilities 40% Utilities Construction Transport Construction Transport 40% Agriculture Mining and Utilities Commerce Commerce Finance Finance Other services Other services Agriculture Other services Mining and Utilities Manufacturing Manufacturing Construction Construction 20% 20% Commerce Commerce Transport Transport 25 Figure Other services2.7: Labor Other services productivity is highest in mining and utilities, 0% and lowest in agriculture (2018) 0% 20 2002 2008 2015 2018 Agriculture Mining Manufacturing 1970 15 1990 1980 2000 2010 2018 25 Utilities Construction Transport 25 Agriculture 10 Mining and Utilities Commerce Finance Other services 20 20 5 Manufacturing Construction Commerce Transport 15 15 0 Other services 10 10 5 5 25 0 20 0 15 3,0 Log (sectoral productivity/total 10 2,5 2,0 Mining and Utility 5 productivity) 1,5 0 1,0 Construction 3,0 3,0 Transport 0,5 Manufacturing Log (sectoral productivity/total Other services 2,5 2,5 Log (sectoral productivity/total Figure 2.8: Shifts in employment from agriculture 0,0to low-productivity Mining andservices Utility sectors have blunted the 2,0 2,0 Mining and Utility -6,0 -4,0 effects of structural -2,0 -0,5change 0,0 (2014–2018) 2,0 4,0 6,0 productivity) 1,5 productivity) Agriculture 1,5-1,0 Commerce 1,0 1,0 Transport -1,5 Construction 3,0 Transport Construction 0,5 Other services Manufacturing Log (sectoral productivity/total -2,0 0,5 2,5 Other services Manufacturing Change in employment share (percentage points) 2,00,0 0,0 Mining and Utility -6,0 -4,0 -2,0 -0,5 0,0 2,0 4,0 6,0 productivity) -6,0 -4,0 -2,0 Agriculture 1,5 -0,5 0,0 2,0 4,0 6,0 Agriculture -1,0 Commerce 1,0 Transport -1,0 Construction Commerce -1,5 0,5 Other services Manufacturing -1,5 -2,0 0,0 -2,0 Change in employment share (percentage points) -6,0 -4,0 -2,0 Change in employment -0,5 0,0 share 2,0 (percentage points) 4,0 6,0 Agriculture Commerce -1,0 -1,5 -2,0 Change in employment share (percentage points) Source: World Bank staff estimates. Note: The relative size of each sector (measured by employment share) is indicated by the size of the circles in the scatter plots. 38 I Côte d’Ivoire Country Economic Memorandum Considerable change in employment agriculture remains a key growth driver, services contribute the largest share of GDP at 44 percent, structure has not been followed by below the SSA average of 52 percent. Services similar output shifts30 accounted for 55 percent of total employment growth (1.6 million people). Services activities are dominated by non-tradable commerce and 6. The traditional path of economic development informal activities mostly clustered in urban areas. involved manufacturing-led structural Manufacturing contributes 13 percent of GDP, a change. Today’s advanced economies achieved little above the SSA average of 10 percent, and has unprecedented economic success by pursuing experienced a gradual decline in the last decade. the well-trodden path of industrialization (shifting It represents just 8 percent of total exports of workers from agriculture to manufacturing) and goods, far below the SSA average of 20 percent. then deindustrialization (with workers leaving Despite its declining share of output, its share of manufacturing and moving into services). East employment increased from 5 percent in 2008 to Asian economies experienced rapid manufacturing about 9 percent in 2018. expansion during their takeoff periods. At its peak, manufacturing employed 25–45 percent of the labor force in countries like the United Kingdom and the United States before deindustrialization set Labor productivity explains most in. The newly emerging view of structural change emphasizes the contribution of services and of recent growth, with a limited productivity increases within sectors and within contribution from structural change firms to growth and job creation. Technological advances arguably expand the tradability of services and low-income countries could grow 9. Labor productivity levels in Côte d’Ivoire are faster by exploiting their revealed comparative highest in sectors such as finance, utilities, advantage within services. and transport, and lowest in agriculture and commerce. Figure 2.7 shows productivity levels by 7. In contrast, SSA economies generally saw sector. These figures should be put into perspective, a decline in the share of manufacturing since their ultimate impact on the economy largely employment and output, with displaced depends on the relative employment weight of agricultural workers moving into low-productivity each sector. High average labor productivity in service activities. As countries grow richer, the more capital-intensive sectors partly indicates employment in the services sector increases at the that the labor share of value added is small. They expense of agriculture. The figures in Annex 2.1 plot employ only a tiny proportion of the labor force the employment share of major sectors against and are unlikely to generate much employment. income per capita across low- and lower middle- Agriculture, the largest employer, has the lowest income countries. The fitted lines are positive for labor productivity. Productivity in manufacturing services and negative for agriculture, implying and construction is about four times higher than increasing and decreasing shares, respectively, productivity in agriculture. This manufacturing– as income rises. Côte d’Ivoire exhibited similar agriculture productivity ratio is higher than the SSA changes except for the manufacturing sector, average of about 2.3 (McMillan and Harttgen 2014). where output and employment shares remained Productivity differences across sectors, while unchanged. remaining significant, are however considerably smaller when measured per hour worked rather 8. Côte d’Ivoire has experienced a considerable than per worker (Christiaensen and Premand shift in its structure of employment but only a 2017). modest corresponding shift in output. Figure 2.5 and Figure 2.6 show trends in output and 10. Côte d’Ivoire has shown signs of growth- employment by sector. Agriculture’s share of total enhancing structural change in recent years, employment fell from 60 percent in 2008 to about but labor movements into high-productivity 48 percent in 2018 while its share of gross value sectors were small. Figure 2.8 plots the changes added remained almost unchanged, at 20–22 in sectors’ employment shares against relative percent. Total employment increased by 2.9 million productivity (as measured by the log of the ratio people over the same period, of which agriculture between sectoral productivity and total productivity accounted for 16 percent (0.5  million). Although in 2018). A positive correlation between the 30 The analysis considers the following main sectors: agriculture (including fishing, hunting, and forestry), mining and public utilities, manufacturing, construction, commerce (comprising wholesale and retail trade, and hotels and restaurants), transport and communications, and “other services” (including finance and public administration). Côte d’Ivoire Country Economic Memorandum I 39 direction of labor flows and labor productivity in structural change was growth-increasing in Côte individual sectors suggests growth-enhancing d’Ivoire. Agriculture has seen the largest relative structural change is taking place. In a classic loss in employment, but the majority of this labor pattern of structural change, we would expect force ended up in low-productivity and largely to find agriculture in the bottom-left quadrant informal trade and distribution services, such as (representing low productivity and a declining labor commerce, rather than formal manufacturing and share) and the relatively more dynamic sectors in modern service industries—hence the relatively flat the top-right quadrant (higher labor productivity slope of the scatter plot. and a rising labor share). There are signs that Decomposition of growth per capita Figure 2.9: Shapley decomposition shows with- Figure 2.10: …but over a longer time frame in-sector productivity has driven growth in recent the employment rate was the main driver years … (2014–2018) (2008–2014) Employment Employment rate rate Employment Employment rate rate Demographic Demographic effect effect Demographic Demographic effect effect Within-sector Within-sector Within-sector Within-sector Structural Structural change-Dynamic change-Dynamic Structural Structural change- change- Dynamic Dynamic Structural change-Static Structural Structural change- change- Structural change-Static Static Static -3,0% -3,0% -1,0% -1,0% 1,0% 1,0% 3,0% 3,0% -2,0% -2,0% -1,0% -1,0% 0,0% 0,0% 1,0% 1,0% 2,0% 2,0% 3,0% 3,0% Source: World Bank staff estimates. Source: World Bank staff estimates. Note: Shapley decomposition is a methodology that decomposes growth in GDP per capita in two consecutive periods, in its employment, productivity, and demographic components to disentangle the sources of output per worker growth. Static gains (or losses) in productivity occur due to labor shifts from below- to above-average productivity level sectors (or vice versa) while dynamic gains (or losses) in productivity stem from the relocation of workers from below- to above-average productivity growth sectors (or vice versa). 11. High growth in recent years can be explained productivity levels. Lower employment rates and by labor productivity growth and, to a lesser changes in the demographic structure reduced extent, structural change (Figure 2.9 and Figure growth. The negative impact of the employment 2.10).31 Between 2014 and 2018, real value added rate indicates that job creation has not kept pace per person grew by about 5 percent on average with the country’s rapid economic growth. By per year. Aggregate labor productivity growth contrast, over the longer period of 2008–2014, accounted for around 70 percent of this increase. the employment rate was the largest contributor, Structural change accounted for a smaller, but but the new jobs were not necessarily productive, significant, portion of growth per capita, which due to the large share of informal and poorly paid was largely due to static gains.32 Structural change employment (Christiaensen and Premand 2017). promotes static gains if workers move from low Structural change made only a small contribution to high productivity sectors; dynamic gains occur to per capita growth in this period. when labor is re-allocated to sectors with high productivity growth, irrespective of their initial 31 These figures present a decomposition of output (value added per person) growth, which can increase for various reasons: rising labor productivity within each sector (if each worker produces more), structural change (if workers move from low- to higher-productivity activities), demography (if the relative share of the work- ing-age population rises) and employment (if a larger share of the working-age population is employed). 32 Further analysis shows that the productivity growth stemming from structural change was mostly on account of static gains. This reflects that although productivity levels in the rapidly expanding trade and distribution services were generally above the economy-wide average, productivity growth was below average. 40 I Côte d’Ivoire Country Economic Memorandum 2.2. Firm-level productivity dynamics33 Productivity gains were driven by the market are less productive than survivors. The contribution of firm entry and exit is the opposite in improvements within firms the services sector from 2014 onwards. This may reflect higher sectoral inefficiencies linked to the predominance of informality, possibly preventing 12. Aggregate productivity growth during productivity-enhancing selection mechanisms to 2012–2017 has been driven by within-firm take place. improvements in manufacturing. The firm is the main creator of value added and the ultimate driver 15. Firm survival rates vary across sectors. Figure of growth. Figure 2.11 shows the decomposition of 2.13 shows the survival rates of the 2012 cohort of aggregate productivity for the manufacturing sector firms by two-digit International Standard Industrial into within-firm productivity growth, reallocation Classification (ISIC) categories one year and six between firms, and firm entry and exit. Consistent years after entry. Leather and footwear (ISIC 19), with macroeconomic trends, productivity growth paper (ISIC 22), and wholesale trade (ISIC 51) are has been higher in manufacturing and services for among the sectors with the lowest survival rates most of this period. Within-firm growth accounts while the wood sector (ISIC 20) ranks among the for much of the change in productivity, although highest, along with high-end services such as its contribution has been irregular over time. This financial intermediation, real estate activities, and may reflect potential improvements in managerial public services such as education. skills, or internal capabilities more broadly since the end of the political crisis. In recent years, Côte 16. Looking at the overall dynamics among the d’Ivoire has improved its rankings of perceived surviving firms, most had weak employment managerial capacity and entrepreneurial culture growth after entry (Maemir 2020). A recent body even if technological adoption remains below its of literature has documented that the process of peers (Schwab 2019). firm age dynamics are crucial for understanding aggregate productivity growth. Hsieh and 13. Significant numbers of firms do not survive Klenow (2014) show that while firms in advanced their first year, especially smaller ones. Between countries tend to grow faster after entry, firms in 2012 and 2017, on average, 2,200 new firms entered developing countries do not seem to grow as the Ivorian economy per year. The entry rate, they age, contributing to differences in aggregate defined as the ratio of the number of new firms productivity across countries. Boosting aggregate to the total number of firms, was about 16 percent productivity requires not only improving static in 2012–2017. Entries were also accompanied by reallocation but also removing distortions that limit significant numbers of firms exiting. On average, firms’ growth. only 45 percent of new firms survived the first year, and only 20 percent survived after six years (Figure 17. Consistent with the evidence for modest, but 2.12).34 Consistent with the literature, firms which positive structural change, limited resources started small had lower survival rates. Around may have moved towards firms that have higher 50 percent of firms with five or fewer employees productivity. The negative or low contribution exited the market within the first year, and only 20 of the between-firm component suggests that percent survived through 2017. reallocation of market share among surviving firms has not favored the most productive. This 14. Firm entry and exit were largely productivity is true for both services and manufacturing. This enhancing throughout the period. The entry of suggests that firms that contributed the most new firms into manufacturing made a negative to aggregate productivity growth have shrunk contribution to productivity throughout the period in terms of value added while some of the less except between 2011 and 2012. This suggests that productive ones have expanded. Barriers to entrants are less productive than existing firms. competition, red tape, an overbearing presence of However, the contribution of exiting firms was state-owned enterprises, or limited access to credit positive in most years, implying that firms leaving may be preventing resources from flowing from 33 The analysis in this section uses longitudinal firm-level census data from the INS covering 2007–2017 (see Box 2.2 in Annex 2.2). It is based on the background work done for this report by Hibret Belete Maemir (2020). Consistent with the literature, the main results presented are for the manufacturing sector, with some references to services and trade when relevant and consistent. 34 The survival rates were calculated for a cohort of firms established in Côte d’Ivoire immediately after the crisis in 2012, employing at least one worker in 2012. Firms are classified based on the number of employees on entry in 2012. Survival rates were calculated as the number of firms still operating through time as a share of the firms in that size category established in 2012. The overall survival rate tracks micro firms well because start-ups are largely micro. Not surprisingly, very few firms (4 percent) started off large—employing 20 or more workers. Côte d’Ivoire Country Economic Memorandum I 41 less productive firms to more productive ones. and Ghana (Figure 2.15). A counterfactual analysis However, the low contribution of the between- (Box 2.3 in Annex 2.3) suggests that manufacturing firm component may also result from differences productivity could increase by at least 80 percent in technology, quality, markups, and different by reallocating resources towards more productive levels of experimentation, and may not necessarily firms. only reflect allocative inefficiencies (Cusolito and Maloney 2018). The evidence for Sub-Saharan 19. Non-manufacturing sectors have the Africa, however, emphasizes the high degree of greatest scope for improving productivity by allocative inefficiencies in the region.35 reallocation. Allocative efficiency refers to the optimal distribution of factors of production. Figure 2.16 shows the allocative efficiency by four-digit sector in 2007 and 2017. The scope for improving Significant productivity gains could productivity by reallocating resources to more productive firms is larger in non-manufacturing be achieved by reducing resource sectors, which is in line with evidence from misallocation 36 other countries. For example, in the retail sector, reallocation of resources could increase productivity by up to 200 percent. Given the high 18. The level of resource misallocation is high but share of value added from the services sector in comparable to other countries in the region. Côte d’Ivoire, economy-wide productivity gains Measuring the distribution of revenue total factor from eliminating misallocation could be substantial. productivity (TFPR) across firms suggests there The significant expected gains partly reflect the has been substantial resource misallocation in Côte allocative inefficiency in a sector that is largely d’Ivoire over the period 2011–2017 (Figure 2.14). The non-tradable. Informality is an important source of evidence also suggests dispersion has widened misallocation in SSA.38 The relative cost advantage since 2007. For example, in 2017, the difference in enjoyed by informal firms affects business revenue productivity between firms in the 90th and dynamism by distorting creative destruction and 10th percentiles is 25.3, which is much wider than growth. Incomplete tax enforcement reduces the those documented by Hsieh and Klenow (2009) capital intensity of informal firms, induces excess for India (5.0), China (4.9), and the United States entry of unproductive businesses and misallocates (3.3).37 Yet, while the extent of misallocation in Côte resources towards unproductive firms (Calderon et d’Ivoire’s is much larger than in India and China, it is al. forthcoming). comparable to some of its peers, such as Ethiopia Figure 2.11: Within-firm dynamics contribute the Figure 2.12: Survival rates are low across sectors, most to aggregate productivity in manufacturing particularly for smaller firms Source: Maemir (2020) based on the firm-level census (Centrale des  Bilans) Source: Maemir (2020) based on the firm-level census (Centrale des  Bilans) by INS. Note: Aggregate productivity is decomposed using the methodology by INS. Note: Micro (5), small (5–19), and medium and large firms (+20) are proposed by Melitz and Polanec (2015). defined by number of employees. 35 These are evidenced in how cross-country differences in TFP overwhelmingly explain cross-country differences in income per worker at the aggregate level; marked delays in the structural transformation processes, as shown by the high employment share and very low productivity in the agricultural sector; and pervasive misallocation across farms and firms with deleterious consequences for aggregate output and productivity (Calderon et al. forthcoming). 36 This section quantifies the productivity gains from eliminating this distortion using a structural model proposed by Hsieh and Klenow (2009). Misallocation is estimated by the dispersion of marginal revenue products of inputs across firms. The efficient allocation of resource across heterogeneous production units implies that, conditional upon their operation within the industry, the marginal products are equal across all production units. The cost of deviations from this efficient allocation of resources (also known as misallocation) is typically measured in terms of aggregate output or TFP losses. 37 It is interesting to note that TFPR is less dispersed than TFPQ, suggesting a negative correlation between price and physical productivity. 38 Due to the absence of data on informal firms, the analysis abstracted from addressing potential productivity gains that might be achieved by reallocating resources between formal and informal firms. Put differently, the counterfactual productivity gains reflect only reallocating resources among firms operating only in the formal sector. Since informal firms are often found to be (on average) less productive than formal firms, removing distortions between formal and informal firms operating in the same sector may yield larger productivity gains. 42 I Côte d’Ivoire Country Economic Memorandum Figure 2.13: Survival rates vary by sector, with higher survival rates among services sectors Source: Maemir (2020) based on the Central des Bilans dataset. Note: The two-digit numbers indicate the ISIC category for the sector. The size of the circles, squares and triangles indicate the number of firms founded in 2012 in that sector. The exit rate for the metal sector (ISIC 27) is zero but only a single firm that entered into the market in 2012. The pattern of survival rates was found to be broadly similar among different cohorts of new firms established in the post-recovery period. How can Côte d’Ivoire reduce identified as important constraints. misallocation and increase 22. Policies to boost productivity cut across many productivity? policy areas and are highly complementary. The set of policies and institutions necessary to improve the productivity of an economy can be 20. In principle, many factors may contribute called a national productivity system (Cusolito to resource misallocation across firms. and Maloney 2018). They encompass a wide Impediments such as red tape, barriers to trade, array of highly complementary policy sectors: low access to credit, or limited competition may macroeconomic policies, the trade and competition be preventing resources from flowing from less regime, internal capabilities, and entrepreneurship. productive firms to more productive ones. A rich The rest of this report addresses some of the key strand of literature has explored these factors. areas that should reinforce Côte d’Ivoire’s national Khwaja and Mian (2005) show that politically productivity system so that its growth model can connected firms in Pakistan had greater access benefit from higher productivity and inclusiveness. to credit, the only businesses able to obtain loans Competition policies directly address allocative from government-owned banks. Recent studies inefficiencies while also boosting market selection using firm-level data show that regulatory barriers and productive efficiency (Chapter 3). Trade to the entry of new firms has been used to protect diversification could be a key driver of economic politically connected incumbents (Rijkers et al. diversification, thus accelerating the process of 2017). Large numbers of well-connected firms may structural transformation (Chapter 4). Finally, contribute to low aggregate productivity growth increasing productivity in agriculture (Chapter 5), by preventing more productive firms from gaining the main sector of employment, would also lead to market share, or new and more dynamic firms from a more inclusive growth process. replacing inefficient incumbents. They may also crowd out growth opportunities for non-connected 23. The accumulation of human and physical capital firms. Correa, Cusolito and Pena (2019) show that, is also crucial, although it is not directly addressed in developing countries, improving product market by this report. It can be enhanced by improving competition may contribute the most to reducing competition, promoting trade diversification, and productivity dispersion. increasing agricultural productivity. By improving the functioning of markets, greater competition can 21. Côte d’Ivoire has made significant progress promote private sector investment in infrastructure, on improving the business environment but for example. Trade diversification will support skill its reforms do not seem to have impacted upgrading in higher-productivity exporting firms allocative efficiency. In 2016, access to finance,39 while enhancing agriculture productivity can only political instability and informality appeared to happen through investing in endowments and still be major business environment constraints technology adoption. Governments play a key role for firms. Poor governance and competition in creating the right framework for the system to issues, coupled with preferential trade policies or be successful. They can set the right economic differential access to infrastructure, have also been incentives, eliminate distortions, and eliminate 39 Finance is cited as the most important constraint among all countries in the World Bank’s Enterprise Surveys. Côte d’Ivoire Country Economic Memorandum I 43 a broad set of potential market failures across recommendations for the short, medium, and long sectors. To that end, this report presents policy term. Figure 2.14: There is a substantial degree of resource misallocation in Côte d’Ivoire Source: Firm-level census (Centrale des Bilans) by INS. Note: Productivity is computed for each firm relative to the four-digit industry average (ISIC). As in most oth- er firm-level datasets, the census data for Côte d’Ivoire doesn’t contain information on product prices and quantities. Physical productivity for each firm is inferred by imposing an assumption on the demand structure of firms following Hsieh and Klenow (2009). Figure 2.15: Misallocation in manufacturing is simi- Figure 2.16: The scope for reallocation is larger for lar to regional peers non-manufacturing firms 40 Source: Firm-level census (Centrale des Bilans) by INS. Note: The counterfac- Source: Firm-level census (Centrale des Bilans) by INS. Note: The circles and tual productivity gains are calculated by equalizing TFPR, which is a summary squares indicate the size of each sector in terms of its share of value added to measure of distortions, across the existing set of firms in each industry. each broad sector (manufacturing, trade, and services) in 2007. 40 Improve access to financial services, including insurance, to promote the development of agricultural productivity. 44 I Côte d’Ivoire Country Economic Memorandum 24. One of the long-term repercussions of innovation. Uncertainty impacts firms’ investment COVID-19 could be setbacks to productivity decisions. The experience of the global financial growth. Other epidemics that have occurred crisis shows that government interventions may since 2000 are estimated to have lowered labor allow firms to survive which are not necessarily the productivity by a cumulative 4 percent after three most productive (Restuccia and Rogerson 2017). years, mainly through their adverse impact on investment and the labor force. Given its global 25. On the positive side, the crisis could put less nature, COVID-19 may lead to more sizeable productive firms out of business and reallocate adverse effects (Dieppe 2020). First, the crisis could resources to the most productive within have a had negative impact on the accumulation each sector. Further, the pandemic may create of human and physical capital. Disruptions to offsetting productivity-enhancing opportunities. schooling, the interruption of public service Major recessions sometimes encouraged the delivery, and the impact on household incomes adoption of new technologies in certain sectors. may lead to suboptimal coping mechanisms (such The overall impact is uncertain (see Box 1.1 in as sales of assets or forgone girls’ education) that Chapter 1 on the impact of COVID-19 on firms). affect human capital accumulation in the medium What is certain, however, is that a growth model term. Investments may be lower in the years to that puts productivity at its center will be all the come as sources of financing are constrained. more relevant for Côte d’Ivoire as the world comes Second, a deeper and longer recession could out of the COVID-19 crisis. have lasting effects on the effective allocation of resources, technology adoption, and investments in Côte d’Ivoire Country Economic Memorandum I 45 Annex 2.1. Output and employment shares across low- and lower middle- income countries (2018) Figure 2.17: Share of employment in services ver- Figure 2.18: Labor productivity in services sus GDP per capita versus GDP per capita Figure 2.19: Share of employment in manufac- Figure 2.20: Labor productivity in manufacturing turing versus GDP per capita versus GDP per capita Figure 2.21: Share of employment in agriculture Figure 2.22: Labor productivity in agriculture ver- versus GDP per capita sus GDP per capita Source: WDI and World Bank staff calculations. 46 I Côte d’Ivoire Country Economic Memorandum Annex 2.2. Firm-level census data Box 2.2: Firm-level census data, Centrale des Bilans The data used in this note are drawn from firm-level census data, Centrale des Bilans, provided by the National Statistics Institute (Institut National de la Statistique, INS) for the period 2007–2017. The dataset covers all formally registered firms from all sectors in the country and contains detailed information on each firm including revenue, employment, cost of labor, fixed assets, and other firm characteristics. o Sector classification: For this analysis industries are defined using the four-digit International Standard Industrial Classification (ISIC) Rev 3.1, for example “Manufacture of cocoa, chocolate and sugar confectionery” . A consider- able effort has been made to harmonize the industry classification codes of the firms in the dataset. The dataset is an unbalanced panel spanning an 11-year period, between 2007 and 2017. The observations registered be- tween 2007 and 2012 were classified according to the Harmonized Nomenclature of Activities for Afristat Member States (Nomenclature d’Activites des Etats Membres d’Afrisatat, NAEMA) codes; the observations for the period 2013–2017 were classified using the CIAP (Classification Ivoirienne des Activités et des Produits) codes. In order to guarantee the coherence of the industry classification coding across the whole dataset, the CIAP codes were converted into NAEMA. Some firms switched activities across the years. For these firms the modal code was se- lected. After assigning the modal NAEMA code to each firm, they were converted into the ISIC Rev.3.1 at four-digit level by using standard conversion tables. o Value added: The costs of material inputs were not made available. For this analysis the value added directly reported in the data was used with adjustment for taxes. Côte d’Ivoire Country Economic Memorandum I 47 Annex 2.3. The impact on productivity of removing misallocation .1: Measuring the potential total factor productivity Box Erreur ! Il n'y a pas de texte répondant à ce style dans ce document.. gains from eliminating misallocation The aggregate productivity gains associated with the removal of distortions across production units is calculated by comparing the actual industry-level TFP versus the corresponding value in the absence of distortions. • Actual industry-level productivity. First, obtain the actual industry-level productivity = = 1− 1 −1 −1 ቆ σ ቀ ቁ ቇ , where the mean of firm-level TFPR in industry s is where firms are aggregated based on their share of value added in the industry. In a distorted market, industry-level productivity depends on the level and distribution of firm level productivity and how resources are allocated across firms. • Efficient industry-level productivity. In the absence of firm-specific distortions, the level of industry productivity 1 would be = ൫ σ −1 ൯−1 . In an undistorted market, the industry-level productivity is solely determined by the level and distribution of firm productivity. • Take the ratio of actual TFP over efficient TFP. The productivity loss due to misallocation is calculated by comparing how much would be the TFP of the sector in the absence of distortions versus the actual level of industry-level productivity TFP. Having determined the optimal industry-level productivity, the productivity losses due to misallocation is calculated by taking the ratio of actual TFP over the potential productivity, that is, . • Aggregating the ratio across industries using a Cobb-Douglass aggregator. Following Hsieh and Klenow (2009), the relative weight of different industries in the manufacturing sector is determined by the value-added share, , i.e. ς . 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Côte d’Ivoire Country Economic Memorandum I 49 Chapter 3 Boosting productivity growth through competition policy Demain 50x50 Cm Série Albahian 2018 Joana Choumali Prepared by Mariana Iootty (Senior Economist, ETICI), Maciej Drozd (Economist, ETICI), Seidu Dauda (Economist, ETICI) and Gonçalo Coelho (Consultant, ETICI). Georgiana Pop (Senior Economist, ETICI-Global Lead for Competition Policy) provided selected inputs and overall guidance to the team. 50 I Côte d’Ivoire Country Economic Memorandum 1. Competition is critical for productivity 3. Boosting productivity growth through growth. Competition is defined as a process of improving market functioning is a critical rivalry between suppliers that takes place either challenge for Côte d’Ivoire. It has made in the market or for the market. It can enhance remarkable progress on improving the business productivity growth in three complementary climate since 2011. According to the Doing ways: enhancing productive efficiency, Business Indicators, Côte d’Ivoire went from improving allocative efficiency, and boosting ranking 190th in 2011 to 110th in 2019. However, market selection.41 First, competition leads to an business activity in Côte d’Ivoire is still improvement of productive efficiency at the firm perceived to be dominated by relatively few level by acting as a disciplining force, placing market players. Firm-level data also suggest pressure on individual firms to increase their that its manufacturing industries are relatively internal capabilities to become more productive concentrated compared to some peer countries. (within-firm component). Second, it enhances The size of the informal sector is also perceived allocative efficiency by allowing more efficient as creating market distortions for formal firms. firms to gain market share or to obtain more These issues will need to be tackled if the productive inputs, at the expense of less efficient country wants to attract more private sector firms (between-firm component). Third, it boosts investment. market selection by facilitating the entry of more productive firms and encouraging the exit of 4. The chapter is organized as follows. Section less productive ones (selection component). 3.1 presents recent empirical evidence of See A2.1 in Appendix 2 for a summary of competition outcomes in Côte d’Ivoire, analyzing empirical evidence on the relationships between available data to provide a look at the competition competition and productivity. intensity and dynamics in the domestic market. Section 3.2 then reviews the status of 2. Governments can affect competition as both competition policies and their effectiveness a regulator and a market participant. They in boosting market functioning along two regulate markets, buy inputs, and provide goods dimensions. First, at the horizontal level, it and services. In doing so, governments can analyzes the effectiveness of Côte d’Ivoire’s influence competition by affecting market entry competition law and institutional framework or exit, the market conditions for competition to promote market efficiency by controlling among firms, and the ability of consumers to distortions caused by non-competitive market exercise consumer choice (Office of Fair Trading structures and strategic behavior of firms. Then, 2009). Government interventions are not at sector level, it provides insights into two necessarily harmful. They can level the playing critical sectors: mobile telecommunications field and encourage the smooth functioning and road freight transport. These two sectors of markets. A comprehensive competition were chosen for their relevance to economy- policy framework therefore rests on three key wide productivity growth. Finally, Section 3.3 pillars: (i) fostering pro-competition regulations considers what policy actions the Government and government interventions in markets; (ii) can take to encourage greater competition. promoting competitive neutrality and non- distortive public aid; and (iii) enabling effective competition law and antitrust enforcement (Figure 3.1).42 41 Firms compete to attract customers by offering lower prices, higher quality products or services, or more innovative products and services. When competition in the marketplace is not restricted, firms have the right incentives to improve their economic performance with regard to their actual and potential rivals and, in so doing, deliver the best outcomes for consumers and the whole economy. 42 The first pillar includes measures to reduce market distortions caused by sector regulation and government interventions in markets that reinforce dominance or limit entry, facilitate collusive outcomes, or increase the cost of competing in markets, and that discriminate and protect vested interests. The second pillar encompasses the introduction of pro-competition principles in broader government policies such as public procurement, state aid, trade policy, foreign direct investment policy, and governance of state-owned enterprises. The third pillar includes the effective enforcement of well-designed antitrust laws (typically constituted by merger control and rules against abuse of dominance and anti-competitive agreements) that aim at controlling distortions caused by non-competitive market structures and the strategic behavior of firms. Côte d’Ivoire Country Economic Memorandum I 51 Figure 3.1: Comprehensive competition policy framework Pro-competition regulations and government interventions: Competitive neutrality and Effective competition Opening markets and removing non-distortive public aid law and antitrust en- anti-competitive sectoral regu- support forcement lation Reform policies and regulations Tackle cartel agreements that strengthen dominance: re- that raise the costs of key Control state aid to avoid fa- strictions on the number of firms, inputs and final products vouritism and minimize distor- statutory monopolies, bans on and reduce access to a tions of competition. private investment, lack of access broader variety of prod- regulation for essential facilities. ucts. Eliminate government interven- tions that are conducive to col- Ensure competitive neutral- lusive outcomes or increase the Prevent anti-competitive ity including with respect to costs of competing: controls on mergers. state-owned enterprises. prices and other market variables that increase business risk. Strengthen the general Reform government interventions that discriminate and harm competi- antitrust and institutional tion on the merits: frameworks that distort the level playing field or grant framework to combat an- high levels of discretion. ti-competitive conduct and abuse of dominance. Source: World Bank staff adapted from Kitzmueller and Licetti (2012). 3.1. What is the state of competition in Côte d’Ivoire? Surveys and firm-level data suggest in 2019, falling behind several of its regional and structural peers and all of its aspirational competition is weak in Ivorian markets peers.43 According to data from the Economist Intelligence Unit (Economic Intelligence Unit, Risk Tracker dataset, January 2020), there is a 5. Market dominance and government relatively high perceived level of operational interventions are seen as hampering business risk in Côte d’Ivoire related to vested competition in Ivorian markets. According interests and favoritism and unfair business to the latest World Economic Forum’s Global practices. It ranks worse in this measure than Competitiveness Report, business activity in Ghana and Senegal, among its structural peers, Côte d’Ivoire is perceived to be dominated and all of its aspirational peers (Figure 3.3). by relatively few market players (Figure 3.2). Moreover, this perception has not changed in Côte d’Ivoire ranked 106th out of 141 countries the past five years. in terms of perception of market dominance 43 In this report, Côte d’Ivoire’s structural peers are Ethiopia, Ghana, and Senegal and its aspirational peers are Kenya, Morocco, Sri Lanka, and Vietnam. See Chapter 1 for more information about the selection of the peer countries used in this report. 52 I Côte d’Ivoire Country Economic Memorandum Figure 3.2: Perceived market dominance is similar Figure 3.3: Business risks due to unfair competi- to peer countries (2018 and 2019) tion continue to be seen as high (2015 and 2020) Source: World Bank staff based on World Economic Forum’s Global Competi- Source: World Bank staff based on Economist Intelligence Unit’s Risk Tracker tiveness Index 4.0 2018 and 2019 Datasets. Note: Market dominance scores vary data (January 2020). Note: The graph shows an aggregation of four indicators from 1 (worst) to 7 (best). each scored on a scale from 0 (very little risk) to 4 (very high risk). Figure 3.4: The new business entry density gap is low, weakening competitive pressure (2006–2018) 2,4 2 1,6 1,2 0,8 0,4 0 Ethiopia Côte d'Ivoire Sri Lanka Vietnam Burkina Faso Benin Kenya Senegal Morocco Mali Ghana Niger Togo Observed Predicted Source: World Bank staff based on Enterprise Surveys and World Development Indicators (WDI) database, 2006–2018 (https://datacatalog.worldbank.org/data- set/world-development-indicators). Note: New business entry density is defined as the number of newly registered formal private limited-liability firms per 1,000 working-age people (aged 15–64). The bars show the average observed density rate for the period 2006–2018. The dots show the benchmark predicted by a (linear) 100% regression with (the log of) average GDP per capita 2006–2018 adjusted for (2011) purchasing power parity as the explanatory variable. 80% 60% 40% 6. The 20% relatively low numbers of new firms are discouraging the entry of new competitors. 0% weakening competitive pressure in Ivorian 7. Manufacturing markets are relatively Ghana (2013) Côte d'Ivoire Senegal (2014) Togo (2016) Benin (2016) Burkina Faso Mali (2016) Vietnam (2015) Kenya (2018) Morocco (2019) Niger (2017) Ethiopia (2015) Guinea-Bissau Sri Lanka (2011) markets. Where entry density—the number (2016) (2009) (2006) of newly registered formal firms relative to the concentrated compared to selected working-age population—is low, competitive peers. Firm-level data from the latest World pressure is weakened, harming productivity Bank Enterprise Survey (WBES)—which is growth. Between 2006 and 2018, the average representative of the whole non-agricultural Monopoly Duopoly Oligopoly (2-5) More than 5 business entry density rate of Côte d’Ivoire’s private sector44—suggest that monopolistic and formal private sector was lower than all its duopolistic market structures are widespread aspirational peers and also lower than its in the manufacturing sector. The proportion structural 80,0peer Ghana (Figure 3.4). Similarly, of Ivorian manufacturing firms that consider 74,0 67,0 68,7 70,0 the gap between the observed average 60,0 entry that they operate in monopoly, 57,7 duopoly, or 59,8 56,6 55,2 53,2 52,7 60,0 oligopoly markets appear to be relatively high density between 2006 and 2018 and what would PCM level (%) 50,0 be expected (26%) compared to structural peers Senegal 40,0 given Côte d’Ivoire’s level of income 29,3 per capita 30,0is wider than all its aspirational peers (8%), Ghana (10%), and Ethiopia (24%) and 19,3 20,0 except Sri Lanka and its structural peers Ethiopia aspirational peers Vietnam (11%) and Kenya 10,0 (21%). The share is lower than in the country’s and Ghana. Several factors could explain the 0,0 low entry density during this period, including other two aspirational peers, Morocco (36%) Mean Median Mean Median Mean Median regulatory barriers to entry and policies that and Sri Lanka (26%), however (Figure 3.5). could be shielding certainAll sectors incumbent firms and Manufacturing Non-manufacturing 2009 2016 44 The Enterprise Survey provides a rich source of information about firms and the business environment in which they operate. The survey covers topics as such firm characteristics, annual sales, costs of labor and other inputs, performance measures, access to finance, workforce composition, women’s participation in the labor market, and many aspects of the business environment. The survey respondents comprised formal (registered) firms in the private sector, 526 in 2009 and 361 in 2016. To be included in the survey, firms needed to have at least five employees and to operate in the manufacturing or selected services sectors. “Services” include retail, whole- sale, hospitality, repairs, construction, information and communications technology (ICT) and 7,53transport. Not included in the survey are agriculture, fishing and extractive 100,0 8,0 wth of average PCM -2009-2016 (%) industries, as well as utilities and some services sectors such as financial services, education, and healthcare. Firms with 100 percent state ownership are also excluded. 90,0 7,0 6,01 80,0 6,0 70,0 60,0 5,0 PCM level (%) 50,0 4,0 40,0 3,0 2,52 30,0 2,0 20,0 10,0 C ô t e d ’ I v o i r e C o u n t r y E c o n o m i c M e m o r1,0 andum I 53 8. High levels of market concentration are not enhancing measures or investment in product necessarily a cause for concern.45 First, some and process innovation. On the other hand, markets are prone to greater concentration due persistently concentrated markets can also pose 2,4 to underlying 2 conditions such as significant fixed risks of anti-competitive behavior especially 1,6 1,2 sunk investments, economies of scale costs and 0,8 when there are structural and behavioral 0,4 and high minimum efficient scales. and scope,0 barriers to entry that shield incumbent firms Second, high concentration levels could reflect from competition. In those cases, allocative Ethiopia Côte d'Ivoire Sri Lanka Burkina Faso Vietnam Benin Kenya Senegal Morocco Niger Mali Ghana Togo the fact that successful firms have conquered inefficiencies may be hampering higher a large market shares through efficiency- productivity growth. Observed Predicted Figure 3.5: Monoplies, duopolies, and oligopolies are relatively common in manufacturing 100% 80% 60% 40% 20% 0% Côte d'Ivoire Senegal (2014) Ghana (2013) Togo (2016) Benin (2016) Burkina Faso Mali (2016) Vietnam (2015) Kenya (2018) Morocco (2019) Niger (2017) Ethiopia (2015) Guinea-Bissau Sri Lanka (2011) (2016) (2009) (2006) Monopoly Duopoly Oligopoly (2-5) More than 5 Source: World Bank staff elaboration based on data from the World Bank’s Enterprise Survey for the most recent survey. Note: The shares reflect the percentage of responding establishments that answered “None”, “One”, “2-5” or “More than 5” to the question “For fiscal year [indicated in parenthesis], for the main market in which this establishment80,0 sold its main product, how many competitors did this establishment’s main product/product line 74,0 face?”, respectively. E.g. “None” was 67,0 68,7 coded as “Monopoly” and “One” as “Duopoly” 70,0 59,8 for its main product . Establishments recording no answers to the question and establishments whose main market line is international are excluded. 56,6 60,0 55,2 53,2 52,7 57,7 60,0 PCM level (%) 50,0 40,0 29,3 30,0 19,3 20,0 10,0 Price cost margins have increased over 0,0 distribution of PCMs in 2009 and 2016. The data Mean Median Mean Medianthat the right-hand show Mean of the distribution tail Median time for service firms All sectors is becoming fatter Manufacturing over time, except for Non-manufacturing 2009 2016 manufacturing firms, suggesting that more firms had relatively high PCMs in 2016 than in 2009. 9. The average price cost margin (PCM)—a The rise in average PCM is associated with large proxy for market power—has increased over increases among the firms with the highest by non-manufacturing firms. time, driven 100,0 7,53 8,0 Growth of average PCM -2009-2016 (%) 90,0 margins in the services sector. 7,0 Drawing on WBES 80,0 data, Figure 6,01 3.6 shows the 6,0 70,0 average and median 60,0 values of observed firm- 11. The rise in average PCM has 5,0 been driven PCM level (%) level price cost margins 50,0 in Côte d’Ivoire in 2009 by the ability of a small 4,0 of firms to group 40,0 and 2016.46 At the 30,0 aggregate level, the average increase 2,52 their market power 3,0 over time. 2,0 PCM rose 6 percent 20,0 from 2009 to 2016. PCMs Growth in PCMs has been uneven 1,0 across firms, 10,0 vary across sectors: 0,0 while manufacturing firms as Figure 3.8 shows. Firms in 0,0 the top quartile experienced an average Average of all firms decrease 44.9 percent Average of firms above the 75th Average of firms below the 75th of the PCM distribution have increased their percentile percentile in PCM, the average for services increased by average margins much faster than the rest. 19.1 percent over the same period. The median 2009 2016 The average PCM for these firms rose by 7.53 PCM showed a similar trend: it increased for all percent from 2009 to 2016 compared to 2.52 sampled firms overall, driven by the increase for percent for the other 75 percent of firms over the services sector, while manufacturing firms Inadequately educated workforce the same period. This shows that the increase saw a reduction in the median PCM. Tax rates in the average PCM comes mainly from these 2016 Practices of competitors in the informal sector 16,0 top quartile firms. These firms tend to be larger 10. The proportion of firms charging relatively Political instability Access to finance (in terms of number of full-time equivalent high PCMs has also increased in the past Access to finance employees) and are 3.39 times more productive few years. Figure 3.7 shows the firm-level Political instability than the rest of the firms (see Table 3.5 in Annex 2009 Corruption Practices of competitors in the informal sector 5,5 Access to land 45 This is especially true in the case of small economies, although there may be several challenges0 that need to 10be considered. 20 30 40 50 46 A firm’s price cost margin is the difference between its sales and the total cost of sales, relative to all sales. See Annex 3.1 for additional information on how the PCM is derived. 54 I Côte d’Ivoire Country Economic Memorandum 3.2).47 These firms are also overly represented in higher margins than younger ones. When a few service activities, mainly in wholesale and considering all sectors together, mature firms construction sectors. (6–15 years old) yield PCMs that are, on average, 26.2 percent higher than young ones, even when 12. The2,4 rise in PCMs does not necessarily imply they operate in the same sector and region and 2 a decline 1,6 in competition, however. Rising share similar characteristics (Annex 3.2, Table 1,2 0,8 power—expressed through high PCMs— market 3.3, column 1). PCM differences can be related to 0,4 can be0 the result of more efficient processes both supply factors, affecting costs, and demand Burkina Faso Ethiopia Côte d'Ivoire Sri Lanka Vietnam Benin Kenya Senegal Morocco Niger Mali Ghana Togo or innovation. 48 An in-depth competition factors, affecting prices. Therefore, the fact that assessment of these sectors and markets mature firms have higher PCMs might be either would be needed to better understand not only because these firms are more productive (lower Observed Predicted the intrinsic features of the markets (including marginal costs) or because of price-related supply-side and buyer characteristics), but factors such as higher product quality or lower also to identify and assess the potential anti- demand elasticity.49 In this regard, analysis competitive 100% effects of government intervention in shows that the age effect persists even when those80%markets. All in all, however, these findings controlling for differences in (labor) productivity 60% indicate 40% that there are allocative inefficiencies in (Annex 3.2, Table 3.6Table 3.6, column the services 20% sector, as discussed in Chapter 2. 1),50 which suggests that price differences 0% play an important role in explaining PCM 13. Age emerges as the key factor influencing Senegal (2014) Ghana (2013) Côte d'Ivoire Togo (2016) Benin (2016) Burkina Faso Mali (2016) Vietnam (2015) Kenya (2018) Morocco (2019) Niger (2017) Ethiopia (2015) Guinea-Bissau Sri Lanka (2011) differences between mature and young firms. (2016) (2009) (2006) PCM differences: older firms tend to have Monopoly observed Figure 3.6: Average and median Duopoly cost margins price (2-5) Oligopoly More than 5 have evolved differently across sectors 80,0 74,0 67,0 68,7 70,0 56,6 60,0 55,2 53,2 52,7 57,7 59,8 60,0 PCM level (%) 50,0 40,0 29,3 30,0 19,3 20,0 10,0 0,0 Mean Median Mean Median Mean Median All sectors Manufacturing Non-manufacturing 2009 2016 Source: World Bank staff elaboration based on Enterprise Survey data from 2009 and 2016. Note: The PCM measure is defined as (sales - total cost of sales)/sales, as discussed in Annex 3.1. The analysis excludes negative PCM values as well as PCMs above 100%. Observations in the top and bottom percentile of each ISIC 100,0 7,53 8,0 and as following the Growth of average PCM -2009-2016 (%) rev 3.1 two-digit sector and year distribution are excluded as outliers in the analysis. Survey weights are applied. For interpretation purposes, formula presented in Annex 90,03.1, a PCM value of 40% reflects that prices exceed costs by 67%, for example. 7,0 6,01 80,0 6,0 70,0 60,0 5,0 PCM level (%) 50,0 4,0 40,0 3,0 2,52 30,0 2,0 20,0 10,0 1,0 0,0 0,0 Average of all firms Average of firms above the 75th Average of firms below the 75th percentile percentile 2009 2016 Inadequately educated workforce Tax rates 2016 Practices of competitors in the informal sector 16,0 47 Drawing from Enterprise Survey data—pooled data for 2009 and 2016—an Political instability analysis was applied to capture differences in terms of size (measured in econometric terms of number of full time equivalent employees) and labor productivity Access (definedto finance as sales per full-time equivalent employees) between two groups of firms: firms located above the 75% percentile of PCM distribution (the top quartile firms) andto Access finance the remaining firms. Additional controls included in the specification were two-digit ISIC sector and year fixed effects. Political instability 2009 48 For instance, rising PCMs might enable firms to recoup growing fixed costs Corruption or reward high-risk activities such as investment in research and development. finding that 49 There is a third potential explanation for thePractices mature companies of competitors can command in the informal sector higher PCMs: 5,5 the fact that more seasoned firms are more able to lobby for and create barriers to entry, making it harder for new firms to exert competitive pressure: The nature as well as the level of granularity of the data available in the En- Access to land terprise Survey does not allow us to determine whether this potential explanation in fact holds for Côte d’Ivoire. An in-depth market and competition analysis—including a proper mapping of politically connected firms—would be needed to answer this question. 0 10 20 30 40 50 50 Drawing from Enterprise Survey data, labor productivity is defined as sales divided per full-time equivalent employee. The number of full-time equivalent employees is the sum of the number of full-time employees and the full-time equivalent of part-time employees. Côte d’Ivoire Country Economic Memorandum I 55 Figure 3.7: The number of firms with higher price cost margins is rising, driven by the services sector Firm-level distribution: All firms 2,4 2 1,6 1,2 0,8 0,4 0 Burkina Faso Ethiopia Côte d'Ivoire Sri Lanka Vietnam Benin Kenya Senegal Morocco Mali Ghana Niger Togo Observed Predicted 100% 80% 60% 40% 20% Firm-level 0% distribution: Non-manufacturing Firm-level distribution: Manufacturing Senegal (2014) Ghana (2013) Côte d'Ivoire Togo (2016) Benin (2016) Burkina Faso Mali (2016) Vietnam (2015) Kenya (2018) Morocco (2019) Niger (2017) Ethiopia (2015) Guinea-Bissau Sri Lanka (2011) (2016) (2009) (2006) Monopoly Duopoly Oligopoly (2-5) More than 5 80,0 74,0 67,0 68,7 70,0 56,6 60,0 55,2 53,2 52,7 57,7 59,8 60,0 PCM level (%) 50,0 40,0 29,3 30,0 19,3 20,0 10,0 0,0 Mean Median Mean Median Mean Median Source: World Bank Staff elaboration based on Enterprise Survey data from 2009 and 2016. Note: The PCM measure is defined as (sales - total cost of sales)/ sales, as discussed in Annex 3.1. TheAll excludes negative PCMs values, Manufacturing sectors analysis as well as PCMs above 100%. In addition, Non-manufacturing observations in the top and bottom percentile of each two-digit sector and year distribution are excluded as outliers in the analysis. 2009 2016 Figure 3.8: The growth in price cost margins has been uneven (All sectors) 100,0 7,53 8,0 Growth of average PCM -2009-2016 (%) 90,0 7,0 6,01 80,0 6,0 70,0 60,0 5,0 PCM level (%) 50,0 4,0 40,0 3,0 2,52 30,0 2,0 20,0 10,0 1,0 0,0 0,0 Average of all firms Average of firms above the 75th Average of firms below the 75th percentile percentile 2009 2016 Source: World Bank staff elaboration based on Enterprise Survey data from 2009 and 2016. Note: The PCM measure is defined as (sales - total cost of sales)/sales, as discussed in Annex 3.1. The analysis excludes negative PCMs values, as well as PCMs above 100%. In addition, observations in the top and bottom percentile of each two-digit sector and year distribution are excluded the analysis. as outliers ineducated Inadequately Survey weights are applied. workforce Tax rates 2016 Practices of competitors in the informal sector 16,0 Political instability Access to finance Access to finance Political instability 2009 Corruption Practices of competitors in the informal sector 5,5 Access to land 0 10 20 30 40 50 56 I Côte d’Ivoire Country Economic Memorandum 14. Among manufacturing firms, size emerges Competition from informal firms has as an additional feature, with large firms charging lower margins than small ones. become an increasing threat to private When only considering manufacturing firms sector development (see Annex 3.2, Table 3.3, column 2), the results suggest that size also matters in explaining PCM differences across firms. Large firms 16. Competition from the informal sector has (those with 100 or more employees) tend to been an increasingly large obstacle to private have PCMs that are 78.1 percent lower on sector growth. The WBES has consistently average than the reference category (small ranked competition from the informal sector firms, with 5–19 employees) even when they among the top three obstacles faced by formal operate in the same sector and region and private sector firms. Close to 16 percent of share similar characteristics. This negative size formal sector firms responding indicated that premium persists even after controlling for labor competition from informal sector firms was the productivity differences (see Annex 3.2, Table biggest obstacle to growth in 2016, a significant 3.6, column 2). increase over the 5.5 percent responding this way in 2009 (Figure 3.9). 15. For services, ownership plays a key role, with foreign ownership associated with 17. Higher levels of informal competition are higher PCMs. The analysis for services firms associated with higher labor productivity (see Annex 3.2, Table 3.3, column 3) suggests among formal firms. Econometric analysis that size, export intensity, and foreign ownership shows a positive correlation between the matter for PCM differences among services labor productivity of formal private sector sector firms, even when they operate in the firms and the degree of informal competition same sector and region and share similar these firms face in the market, even when characteristics. Midsize services firms tend to controlling for differences in firm’s size (see have PCMs that are 20.9 percent higher than Annex 3.2, Table 3.4, columns 1 and 2). These small firms while for large firms they are 28 results are consistent with findings from Ali percent higher. A 1 percent unit increase in and Najman (2015) for Sub-Saharan Africa, and direct export revenue as a share of total revenue Ali and Najman (2016) for Egypt. This could be is associated with a 0.48 percent increase in interpreted as a sign that, although informal PCMs; while a 1 percent unit increase in foreign firms have a cost advantage from not complying ownership share is associated with an increase with any law or regulation, the generated cost of 0.31 percent in PCMs. Among these effects, differential between them pushes formal firms only the foreign ownership “premium” persists to be more productive and more competitive to after controlling for productivity differences deprive informal firms of their cost advantage.51 (see Annex 3.2, Table 3.6, column 3). Services It is important nonetheless to keep in mind that sectors with a large foreign presence include the large size of the informal non-tradable sector air transport (84.1 percent foreign ownership), in services may still hamper overall productivity construction (33.5 percent), and retail trade by impeding the efficient allocation of resources (23.8 percent). between formal and informal firms. Selection effects may also be affected, allowing informal firms to survive longer than they otherwise would. 51 The analysis follows the framework used by Ali and Najman (2015) for Sub-Saharan Africa. Drawing from pooled data from the 2009 and 2016 WBES, (log of) labor productivity of a formal private sector firm was regressed against an index that captures the degree of informal competition faced by these firm in a market, where this indicator is defined as the average of the intensity of informal competition experienced by all formal firms in a market aggregated by sector and year. The interaction between the informal competition indicator and firm size dummies (results not shown) are not statistically significant, which suggests that the positive relationship between competition from informal sector and productivity of formal private sector firms do not differ across firm size. Results are available upon request. Côte d’Ivoire Country Economic Memorandum I 57 100,0 7,53 8,0 Growth of average PCM -2009-2016 (% 90,0 7,0 6,01 80,0 6,0 70,0 60,0 5,0 PCM level (%) 50,0 4,0 40,0 3,0 2,52 30,0 2,0 20,0 10,0 1,0 0,0 0,0 Average of all firms Average of firms above the 75th Average of firms below the 75th percentile percentile 2009 2016 Figure 3.9: Competition from the informal sector has been a constraint for formal enterprises since 2009 Inadequately educated workforce Tax rates 2016 Practices of competitors in the informal sector 16,0 Political instability Access to finance Access to finance Political instability 2009 Corruption Practices of competitors in the informal sector 5,5 Access to land 0 10 20 30 40 50 Source: World Bank staff elaboration based on Enterprise Survey, 2009 and 2016. Note: Survey weights are applied. 3.2. Are policies constraining competition in Côte d’Ivoire? 18. Government interventions can significantly 20. Côte d’Ivoire’s dual membership of regional affect the functioning of markets. As organizations significantly affects its discussed above, Ivorian markets face high national competition framework. As a levels of market dominance and limited firm member of two regional organizations—the entry, while price cost margins have increased West African Economic and Monetary Union over time, notably in the services sector. These (WAEMU) and the Economic Community of results can partly be explained by the small West African States (ECOWAS)—each with size of the domestic market which, in principle, its own set of competition rules, Côte d’Ivoire could prevent firms from exploiting economies is subject to contradictory jurisdictional rules. of scale. On the other hand, governments can Whilst ECOWAS permits the application of also have direct influence on these outcomes, as national competition law to conduct that does not a market participant or through interventions to affect trade between member states, WAEMU level—or not—the playing field. prohibits parallel national competition rules and centralizes all competition enforcement in the regional WAEMU Commission (see Appendix 2, A3.4 for a review of the ECOWAS and WAEMU Competition law and institutional competition rules). framework52 21. Under WAEMU law, national competition agencies lack the power to enforce competition rules at the national level. Côte d’Ivoire’s current legal competition framework is not According to WAEMU law, the Competition fully functional Directorate within the WAEMU Commission’s 19. Having a sound competition policy and legal Department of Cooperation and Regional framework is critical to market functioning. Market has exclusive competence to enforce Competition policies and law can promote the competition rules. This limits the role of market efficiency, consumer welfare, low prices, national competition agencies to monitoring and high-quality goods and services by opening national markets in order to identify failures markets to business entry, deterring anti- stemming from anti-competitive practices, and competitive practices, and promoting a level cooperating with the WAEMU Commission playing field. during the investigation stage. Further, the WAEMU Commission lacks the resources it 52 In this section and the rest of the chapter, endnotes (roman numerals) indicate references to legal documents. 58 I Côte d’Ivoire Country Economic Memorandum needs to effectively enforce competition rules of between $172 and $86,000. The Competition across WAEMU, which creates an enforcement Law also determines that the refusal to supply, gap within member states. There is lack of bundle and tying, and placing a commercial effective cooperation between the Commission partner at a disadvantage may also result in and national competition agencies and civil liability. The unfair competition provisions competition units within ministries of trade (or included in the Competition Law should be equivalent authorities). Furthermore, there has streamlined so as not to overlap with the been scant enforcement of the competition rules prohibitions on anti-competitive agreements on anti-competitive agreements and abuse of and abuse of dominance. dominance, even though the Commission has been active in several state aid and internal 24. Application of the Competition Law to anti- market cases. competitive practices has been limited in light of WAEMU’s regional law constraints. The scope for tackling anti-competitive practices is The WAEMU Commission has exclusive limited and institutional shortcomings raise the risk of competence to investigate: (i) state aid; (ii) public interference anti-competitive state practices; and (iii) anti- competitive practices (with and without a 22. Côte d’Ivoire’s national Competition cross-border effect). Before issuing a decision Law from 2013 (last amended in 2019) is on an anti-competitive practice, the WAEMU generally aligned with WAEMU regional Commission must first obtain a non-binding competition law. It applies across all sectors opinion issued by the Advisory Committee of the economy and to all economic agents, be consisting of two members appointed by each they public or private (i.e., it also covers state- member state. As describe above, in common owned enterprises), and it includes provisions with other national competition agencies, Côte on anti-competitive agreements and abuse of d’Ivoire’s Competition Commission performs a dominance. Similar to the regional competition secondary role in the enforcement of WAEMU law, Côte d’Ivoire’s Competition Law does not competition rules. The Competition Commission set forth any mechanism of ex-ante control has asked the WAEMU Commission to assess of potentially anti-competitive mergers, only several transactions, including the creation of establishes that mergers creating or reinforcing joint ventures in the digital payments sector. A a dominant position are tantamount to an abuse joint report from 2018 by the EU and WAEMU of dominance. shows that, between 2003 and 2017, the WAEMU Commission adopted only 10 decisions 23. Côte d’Ivoire’s Competition Law prohibits on substantive matters: 1 decision on anti- unilateral practices regardless of a firm’s competitive agreements, 1 decision on abuse of market position and their effects on the dominance, 2 decisions on mergers, 4 decisions market. Enforcement of unfair competition on state aid, and 2 decisions on anti-competitive rules has represented the core of Côte d’Ivoire’s state actions. Competition Commission activity, with nine cases opened since 2018 (three of which have 25. The independence of a competition authority had a final decision). In contrast to competition is key to its effectiveness. A key aspect of such law rules, unfair competition prohibits business- independence is the ability to act without day- to-business practices (e.g. sale at loss, bundling to-day management by a minister or the political and refusal to deal). As a consequence, the law bodies of government. This includes the power prohibits standard rational business behavior to make final decisions with direct effect on firms even among firms which lack market power that engaged in anti-competitive behavior. Only and are not in a position to exploit consumers a high degree of independence helps insulate or exclude competitors. These include sale at the authorities from political pressures, cronyism, loss (regardless of the existence of predatory and interference with their core mandate to pricing), price fixing, tying and bundling which safeguard competition. Technical independence involves the offer of a product for free (except may be compromised where (i) a competition small items, services with limited value, or the authority is a department in a line ministry; (ii) a offer of samples), refusal to deal, and subordinate line ministry can revoke, has veto powers or has sales. Although the Competition Commission the final say on decisions and cases; or (iii) the cannot enforce national or regional competition line ministry is responsible for industry matters, law rules, it has a mandate to enforce unfair which might conflict with the pursuit of purely competition and consumer protection rules. competition goals. Breach of these rules is punishable with a fine Côte d’Ivoire Country Economic Memorandum I 59 26. Institutional shortcomings limit the mitigating exceptional price hikes could also Competition Commission’s independence be partially addressed through additional price from the Government. Although Côte transparency. d’Ivoire’s Competition Law was passed in 2013, the Competition Commission was only 29. The Commission’s advocacy power on established in 2017, and its Board members price regulation seems to overlap with the appointed in May 2018. The Competition mandate of the National Council Against the Commission’s institutional setting is broadly High Cost of Living which could reduce its in line with international best practice. effectiveness. The Council was established in Pursuant to the Competition Law, however, the 2017, also with price regulation powers that may Government appoints its own commissioner overlap those of the Competition Commission. It before the Competition Commission. The was established under the authority of the Prime role of this Commissioner is to put forward Minister, with the Minister of Commerce as the Government’s point of view in the matters Line Minister, and also has representatives from brought before the Competition Commission. the Government and industry and consumer All reports, information, and other documents associations. Similar to the Competition passed to the Competition Commission are to Commission, the National Council has powers be forwarded to the Government Commissioner to advocate to the Government in the following so an opinion can be issued within 30 days. matters: price rises, stockage of goods, universal access to goods and services, staple goods, and Competition advocacy is one of the few roles the high-consumption goods. Competition Commission is empowered to play 30. In addition, the Competition Law establishes 27. In tandem with its market surveillance that certain products can be subject to powers, the Competition Commission also import limits. The conditions governing plays a competition advocacy role. The import limits have to be set forth in a Council Commission has the power to issue opinions of Ministers’ Decree, following an opinion on legislation and regulation that may affect by the Commission. Ideally, the Commission competition in Côte d’Ivoire, and to propose should not be called to intervene in matters of specific recommendations to improve market price regulation or impose import restrictions. competition to the Minister of Commerce. In Given the safeguards established by Côte this context, the Commission publishes an d’Ivoire’s Competition Law, the Commission annual report on the state of competition in could play an important advocacy role by the economy, assessing the improvements proposing the Government adopts the least that could be made to the legal and regulatory restrictive measures for competition, such as framework. It has already produced two annual price transparency when considering regulating reports (2018 and 2019), as well as a quarterly prices. report for 2020 (January, February, and March). Nevertheless, the reports are not publicly 31. Developing efforts within WAEMU to available which may restrict public scrutiny. approve legislation delegating powers to national competition authorities, including 28. One of the Commission’s roles is to advise the Competition Commission, will be important the Government on issues pertaining to to facilitate investigations and decisions on price regulation. In the event of excessive anti-competitive practices taking place within price spikes, resulting from an exceptional crisis national territories. A draft regulation establishing or due to abnormal market functioning, the the sharing of competences between the Government can regulate prices for staple and WAEMU Commission and national competition high-consumption goods following the opinions authorities was discussed in December 2019. of the Competition Commission (as set forth in Notwithstanding, the view put forward by Côte the 2019 amendment to the Competition Law). d’Ivoire was that the draft Regulation should not The Commission has recently issued opinions be adopted, as it contravened the competition on price setting for digital terrestrial television rules of the WAEMU Treaty (Articles 88, 89 and receivers and hand sanitizing gel in Côte 90), as interpreted by the Court of Justice. Given d’Ivoire in the context of the COVID-19 outbreak. that Côte d’Ivoire’s competition law framework is However, there is a risk that price controls not functional, it is of utmost importance that the imposed to address a short-term event may Competition Commission continues supporting end up deterring the supply of goods precisely the adoption of pro-competition policies through when demand is high. In a situation such as its competition advocacy mandate. the one posed by COVID-19, the objective of 60 I Côte d’Ivoire Country Economic Memorandum 32. The next section looks at competition in two possible. Greater connectivity has also created upstream sectors, mobile telecommunications new opportunities for knowledge sharing and and cargo freight. These sectors were human capital accumulation. ICT has enabled prioritized as key enabling sectors for overall the country to expand and improve public competitiveness and productivity growth on services. Overall, the contributions of mobile the basis of the analysis of the Country Private technologies and services have been estimated Sector Diagnosis (CPSD, World Bank 2020a). to be as high as 8.7 percent of GDP in West The CPSD identified competition issues as key Africa in 2018, with the potential to reach 9.5 constraints for the development of these sectors. percent of GDP in 2023 (GSMA 2019). With the In both sectors, there is evidence of higher COVID-19 crisis, technology is bound to play an prices or mark-ups than in peer countries (World even more important role in promoting socio- Bank 2020b, 2020c) that are symptomatic of economic development. limited competition. In comparison, there is less evidence of weak contestability in financial Côte d’Ivoire could improve market outcomes in mobile services, the third upstream sector singled out telecoms services by the CPSD. The spreads between lending and deposit interest rates are lower in Côte d’Ivoire 34. Mobile telecoms services have been expanding rapidly, but significant gaps remain. There have than in peer countries and other structural been several waves of expansion of coverage. issues, such as weak credit infrastructure, Since 2005, the number of mobile subscriptions appear to drive market outcomes (World Bank has been increasing at a steady rate of more 2020a). Prioritizing mobile services and freight than 2 million every year. 3G was launched in transport keeps the analysis focused, but does 2012 and 4G started in 2016. However, there are not rule out the occurrence of anti-competitive fewer subscribers to mobile data than in some practices in other sectors. comparator countries (Figure 3.10). While most Ivorians live in areas with network coverage (Figure 3.11Error! Reference source not found.), access Competition constraints in upstream in rural areas and 3G/4G penetration could be sectors: Mobile telecommunications53 improved (World Bank 2020a). In addition, some customers own more than one SIM card, meaning that fewer individuals actually use mobile services. 33. The mobile telecommunications sector is a The GSM Association estimates the rate of unique key enabler of economic development and subscribers at around 51 percent of the population resilience in the face of the COVID-19 crisis. for mobile telephony and around 28 percent of The benefits of information and communications the population for mobile data in 2019 (World technology (ICT) extend beyond the ICT sector. Bank 2020a, Calderon et al. 2019). This suggests Digital technologies have made productivity a significant usage gap, potentially linked to the gains in agriculture, manufacturing, and services affordability of services (World Bank 2020b). Figure 3.10: Mobile subscription levels in Côte Figure 3.11: Most Ivorians have some mobile d’Ivoire are comparable to peers (2018) network coverage (2019) Viet Nam Unique subscriptions Unique subscriptions coverage Viet Nam (data) Market Aspirational coverage Sri Lanka (data) Market Aspirational peers Sri Lanka Unique subscriptions peers Morocco (voice) Unique subscriptions Morocco (voice) Kenya Kenya 4G Network coverage Ghana 4G Network coverage Structural Ghana Structural peers Senegal peers Senegal 3G 3G Ethiopia Ethiopia Côte d'Ivoire Côte d'Ivoire 2G 2G 0 100 0 200 100 200 0% 50% 0% 100% 50% 100% Subscriptions per 100 inhabitants (voice) Subscriptions per 100 inhabitants (voice) Subscriptions per 100 inhabitants (data) Subscriptions per 100 inhabitants (data) Percentage of population Percentage of population Source: World Bank staff elaboration based on data from the International Source: World Bank staff elaboration based on ARTCI data. Note: 2G, 3G, and Telecommunications Union (ITU). Note: Data for Ethiopia are for 2017. 4G coverage refers to the network of the market leader (Orange). 80 80 PPP$ PPP$ XOF/min XOF/min XOF/MB Mobile cellular - lowMobile cellular - low usage (70 XOF/MB usage (70 70 min; 20 SMS) min; 20 SMS) 70 Voice (rhs) (lhs) (rhs) DataVoice Data (lhs) 60 Low usage bundle (70 Low 20 bundle (70 min; 20 usage min; 60 53 This section 30 does not cover fixed-line 30 services. According to 3 3 the Regulatory Authority for Telecommunications SMS; 500(Autorité MB) SMS; de 500 MB) des Télécommunications Régulation 50 50 Data-only mobile broadband 1.5 de Côte d’Ivoire, ARTCI), only around 1 percent of the population had a fixed-line connection in the last quarter of 2019. mobile broadband 1.5 Data-only 25 2,5 40 GB GB 25 2,5 40 30 30 20 20 2 2 20 20 15 1,5 15 1,5 10 10 10 1 0 10 1 0 d'Ivoire Ethiopia Kenya Senegal Viet Nam Sri Lanka Ghana Morocco Côte d'Ivoire Senegal Ethiopia Kenya Viet Nam Sri Lanka Ghana Morocco 5 0,5 5 0,5 Côte 0 0 Côte d’Ivoire Country Economic Memorandum I 61 q1 q2 q3 q4 q1 q2 q3 0 0 q4 q1 q2 q3 q4 35. Rapid market growth has not significantly of more than 53 percent for calls and 58 percent affected market shares. In the 1990s, the state for data between 2017 and 2019 (Figure 3.13). telecoms monopoly was replaced by several Despite these decreases, mobile services were mobile service providers, with the state retaining still significantly more expensive in Côte d’Ivoire minority interests in the market incumbent than most structural and aspirational peers in Orange.54 Ultimately, three operators have 2018, the most recent year with comparable become established, and their relative market data (Figure 3.14). A low-usage bundle of voice position has not changed significantly in recent and data services cost more than 7 percent of years (Figure 3.12). Orange has been earning income per capita, for instance.56 around 50 percent of total revenues, followed by MTN (30 percent), and Moov (20 percent). Despite recent improvements, there are several barriers Some reallocation of market shares occurred in to competition in the sector 2016, after the licenses of three mobile operators were revoked due to debts to the state and 37. Mobile telecommunications markets feature several characteristics that make the sector unused spectrum. A fourth operator obtained a a. Voice more prone100% to market concentration and license in 2017 but did not launch service. No potential anti-competitive 90% practices. These new license has been issued since, allowing the 80% characteristics include significant fixed costs three incumbents to take on customers from 70% and sunk investments, 60% economies of scale and defunct operators. The development of new 50% scope, essential facilities and bottlenecks, and a services, such as mobile payments, did not affect 40% reliance on scarce 30% resources, including spectrum. the existing market structure. In fact, Orange’s 20% 10% segments face high fixed costs Entrants to some dominance is particularly pronounced in the due to upfront0%investments in infrastructure, as mobile money segment, where the firm was 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 well as sales and distribution. These high initial responsible for almost two thirds of turnover.55 fixed costs, particularly in upstream segments, Although mobile telecoms markets are typically give incumbents a strategic advantage over concentrated, static market shares suggest that new entrants, because the latter have fewer firms face less competitive pressure. b. Data a. Voice clients to spread their fixed costs. The mobile 100% 36. Prices for mobile voice and data 90% services 100% telecommunications 90% sector is characterized by have fallen but continue to be higher than 80% 80% disruptive technology 70% and continues to evolve in comparator countries. The 70% Regulatory at a fast pace.60% Technology changes lead to 60% 50% Authority for Telecommunications 50% (Autorité de constant innovation 40% and evolution of services 30% Régulation des Télécommunications 40% de Côte and markets, 20%which create new rivals and shift 30% d’Ivoire, ARTCI) reports average price 20% reductions the economic10% strength 0% of existing operators.57 10% 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 0% 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 Figure 3.12: The revenue shares of mobile network operators in Côte d’Ivoire have changed not MTN Orange Moov significantly (2016–2019) a. Voice b. Data c. Money 100% 100% 100% 90% 90% 90% 80% 80% 80% 70% 70% 70% 60% 60% 60% 50% 50% 50% 40% 40% 40% 30% 30% 30% 20% 20% 20% 10% 10% 0% 0% 10% 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 0% 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 Orange MTN Moov Source: World Bank staff elaboration based on ARTCI data. Note: Simple interpolation for Q2 2017 (Orange) and Q3 2017 (voice). b. Data c. Money 100% 100% 90% 90% 80% 80% 70% 70% 54 The Government of Côte d’Ivoire holds a 15 percent stake in Orange Côte d’Ivoire. The other 85 percent is owned by Orange, formerly France Telecom, the multi- 60% 60% national 50% telecommunications corporation partly owned by50% the Government of France. 55 40%The Ivorian Competition Commission has asked the WAEMU Commission to assess several joint ventures in the mobile money market. 40% 56 30% ITU 2018 data on the cost of a low-usage bundle consisting 30% of 70 call minutes, 20 SMS, and 500 MB of data, as percent of gross national income (GNI) per capita. 20% of 70 minutes and 20 SMS cost 11 percent of GNI A bundle per capita in 2018. 20% 57 10%See Pop and Coelho (2020) for a discussion of other 10%important market features that shape competition in the telecommunications market. 0% 0% 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 Orange MTN Moov 62 I n Money C ô t e d ’ I v o i r e C o u c. try Economic Memorandum 38. The Government has taken important steps Radioélectriques). ARTCI has actively regulated to embed competition considerations into operators with significant market power (SMP) sector policy and it can build on these efforts in wholesale and retail markets with bottleneck to improve access and affordability of services. features. ARTCI has also closely monitored The institutional framework in place is broadly in market developments (including price and Unique subscriptions line with regional and international Viet Nam best practice. concentration indices), regularly assessed coverage (data) Market Aspirational Viet Nam Unique subscriptions Sri Lanka The Ministry in charge of Digital Economy and market power across a wide range of markets, coverage (data) peers Market Aspirational Sri Lanka Unique subscriptions Morocco peers (voice) charge of ICT Post is inMorocco policy Kenya in the country. Unique subscriptions (voice) and adjusted regulations to reflect competition Sector regulation Kenya is entrusted to ARTCI, whilst concerns. However, 4G there is potential for more Network coverage Ghana 4G Structural Network coverage spectrum management Ghana is carried out by reforms in all segments of the value chain which peers Structural Senegal peers Senegal 3G the Radio FrequencyEthiopia Ethiopia Management Agency 3G could improve access to and affordability of (AgenceCôteIvoirienne d'Ivoire Côte Gestion de d'Ivoire des Fréquences 2G mobile services 2G (Figure 3.15). 0 100 0 200 100 200 Subscriptions per 100 inhabitants (voice) 0% 50% 100% 0% 50% 100% Subscriptions per 100 inhabitants (voice) Figure 3.13: Average Subscriptions Subscriptions perprices for 100 inhabitants per 100 inhabitants (data) mobile (data) services in Figure 3.14: … but Percentage are still of population higher Percentage than in most peer of population Côte d’Ivoire have come down … (2017–2019) countries (2018) 80 80 PPP$ PPP$ XOF/min XOF/min XOF/MB Mobile cellular - low usage (70 Mobile cellular - low usage (70 XOF/MB 70 70 20 SMS) min; Voice (rhs) Data (lhs) min; 20 SMS) Voice (rhs) Data (lhs) Low usage bundle (70 min; 20 Low usage bundle (70 min; 20 60 60 500 MB) 30 3 SMS; 30 50 3 SMS; 500 MB) Data-only 50 mobile broadband 1.5 Data-only mobile broadband 1.5 25 2,5 40 GB 25 2,5 40 GB 30 20 2 30 20 2 20 15 1,5 20 15 10 1,5 10 10 1 0 10 1 0 Côte d'Ivoire Senegal Ethiopia Kenya Viet Nam Morocco Sri Lanka Ghana 5 0,5 Côte d'Ivoire Kenya Senegal Ethiopia Viet Nam Morocco Sri Lanka Ghana 5 0,5 0 0 0 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 0 Structural peers Aspirational peers 2017 q1 q2 q3 q4 2018 q1 q2 q3 q4 q1 q2 q3 q4 2019 Structural peers Aspirational peers 2017 2018 2019 0,07 staff elaboration based on ARTCI data. Note: Prices for Source: World Bank Source: World Bank staff elaboration based on ITU data. Note: Prices are ad- 0,06 and off-net calls. calls include on-net justed for differences in purchasing power. 0,05 0,07 US$ 0,04 0,06 0,03 0,05 US$ 0,02 0,04 39. The functioning of upstream wholesale 0,01 0,03 0 0,02 Their reference offers are also published on the markets has improved, but there are regulator’s website. Niger Cabo Verde Cote d'Ivoire Chad Benin UgandaNigeria Togo Burkina Faso Zimbabwe Lesotho Morocco Malawi South Africa Mayotte Chad Uganda Botswana Algeria Senegal Mauritania NigerTunisia Tanzania Rwanda Kenya Cameroon Zambia Mozambique Reunion 0,01 0 opportunities for further reforms. In general, 40. Côte d’Ivoire has favored competition in Cabo Verde Cote d'Ivoire Benin Malawi Nigeria Togo Burkina Faso Zimbabwe Lesotho Morocco South Africa Mayotte Botswana Algeria Senegal Mauritania Tunisia Tanzania Rwanda Kenya Cameroon Zambia Mozambique Reunion network operators with SMP have incentives to thwart competition by denying other operators downstream markets by ensuring all three access to 1 their network (for instance, by mobile network operators (MNOs) have 800 limiting access access to the same frequency bands. So 1 600 to submarine cables or the Thousands FCFA Gross margin/loss backbone). 1Thanks 400 coastal location, Côte to its1 800 far, all the 900MHz and 1,800MHz bands have Trip allowances been assigned and margin/loss for 2G Gross 3G services, as Thousands FCFA d’Ivoire has1 several 200 gateways 1 600 and the landing 1 000 1 400 of the West Africa Submarine Cable and the well as 23% Tires of the 800MHz band for 4G, 75% 800 Trip allowances 1 200 Africa Coast to Europe Cable in 2012 brought of the 2,1 00MHz Maintenance band for 3G, and 50% of the 600 competition to 1 000 international bandwidth services. 2,600MHz band for 4G (World Tires Bank 2020b). The 400 Fuel 800 allocation of spectrum holdings has been largely The Government200 has also invested in the fiber Maintenance 600 backbone, but 0 the terms for accessing this symmetrical. 59 Côte d’Ivoire is one of relatively 400 Fuel with technology- publicly owned infrastructure are not clear. few West African countries 200 ARTCI has recognized Orange and MTN as neutral licenses, and the duration of spectrum 0 providers of international connectivity with rights is more balanced than in other countries SMP and Orange as a wholesale provider of in the region, enabling operators to recoup the broadband with SMP. These companies restricted are not restricted investments made (Pop and Coelho 2020). The subject to obligations26 of non-discriminatory country 14 awards spectrum on a use-it-or-lose it access to their infrastructure, transparency, cost- basis, and has recovered unused spectrum from oriented pricing,58 and 38accounting separation restricted not licensees. restricted As a result, all three operators rolled 50 (in the case of wholesale broadband services). 26 out 4G services in 14 2016 and competed for new Backhauling Cabotage 50 58 38 the companies fail to respect this obligation. Subject to the possibility of price regulation by ARTCI should 59 See Pop and Coelho (2020) for further discussion. Backhauling Cabotage Côte d’Ivoire Country Economic Memorandum I 63 business at the same time. According to ARTCI’s The regulator can obtain information about annual reports, revenues from mobile internet the level of fees that new entrants can pay in have nearly tripled since then, while Orange’s an organized and transparent way. As a result, market share in this segment fell by more than spectrum auctions lower entry barriers and one fifth. maximize efficiency. To solicit more interest from potential service providers, spectrum auctions 41. Despite these achievements, no spectrum could be also organized at regional level or auctions have taken place to date. A legal feature pro-competitive instruments such as framework for spectrum auctions is in place, set-asides or bidding credits (Pop and Coelho but implementation is lagging (Pop and Coelho 2020). Finally, more efficient use of spectrum 2020). Generally, spectrum auctions allow could be also promoted by allowing operators to spectrum to be assigned more efficiently than trade their assignments, an aspect which Côte through administrative methods. This is because d’Ivoire’s regulatory framework still lacks. auctions reveal providers’ willingness to pay. Figure 3.15: Selected barriers to competition along the value chain for mobile services Source: World Bank staff elaboration. 42. The regulation of mobile termination rates long-run average incremental cost methodology also impedes downstream competition by and benchmark of selected countries. This tends to reinforcing the market power of operators. overestimate termination charges as it incorporates Mobile termination rates (MTRs) are the rates non-relevant common costs, reinforcing the market charged by network operators for connecting a power of operators that already benefit from the call to a competitor’s network. In the absence largest spectrum holdings.60 of regulation, operators have incentives to set high rates as this locks in customers. For this 43. Even with recent reductions, mobile reason, ARTCI has been capping the mobile termination rates continue to be high. ARTCI termination rates of all three operators. Currently, has almost halved mobile termination rates since these caps are set symmetrically, which means 2015. These changes have been accompanied by that all network operators pay the same price for drops in the average off-net price and off-net/on- connecting to a competitor’s network. However, a net differentials by more than 75 percent between symmetrical rate does not level the playing field, as 2017 and 2019. The lowering of mobile termination operators with fewer subscribers have more off-net rates has encouraged retail competition, as firms traffic. The regulation of MTRs in Côte d’Ivoire is developed new offers to retain their customers and also not fully in line with the long-run incremental ARTCI mandated number portability. Despite these costs methodology. MTRs are set according to the reductions, mobile termination rates continue to be 60 See World Bank (2020a) for further discussion. 64 I Côte d’Ivoire Country Economic Memorandum 80 PPP$ XOF/min XOF/MB Mobile cellular - low usage (70 70 min; 20 SMS) Voice (rhs) Data (lhs) 60 Low usage bundle (70 min; 20 30 3 SMS; 500 MB) 50 Data-only mobile broadband 1.5 25 2,5 40 GB 30 20 2 20 15 1,5 10 10 1 0 Côte d'Ivoire Ethiopia Kenya Senegal Viet Nam Morocco Sri Lanka Ghana 5 0,5 higher than in many comparator countries (Figure in Morocco (1.3 cents), Kenya (1 cent) and Senegal 0 rate of 2.3 US cents is higher than 3.16). The 2019 0 (0.8 cents).61 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 Structural peers Aspirational peers 2017 2018 2019 Figure 3.16: Mobile termination rates are relatively high (2019) 0,07 0,06 0,05 US$ 0,04 0,03 0,02 0,01 0 Niger Cabo Verde Cote d'Ivoire Benin Malawi Nigeria Togo Burkina Faso Zimbabwe Lesotho Morocco South Africa Mayotte Chad Algeria Mauritania Tunisia Tanzania Uganda Botswana Senegal Rwanda Kenya Mozambique Cameroon Zambia Reunion Source: World Bank staff elaboration based on World Bank (2020b). 1 800 Thousands FCFA 1 600 Gross margin/loss 1 400 44. Competition is also hindered by gaps in last 1 200 they do not own infrastructure, facilities-based Trip allowances mile infrastructure. Currently, approximately one providers are required to obtain an individual 1 000 Tires in two Ivorians live in areas not covered by 4G, and license. While this licensing regime is in line with 800 one in four have no access to 3G. The 2G network international best practice, new service providers, Maintenance 600 is more widely available, but still out of reach including a fourth MNO or mobile virtual network 400 Fuel for 7 percent of the population. As in other West operators (MVNOs),64 could be attracted by 200 African countries, the Government has created a lowering licensing fees and limiting the distortions 0 Universal Service Fund to close the access gap caused by sectoral taxes. The fees for renewing in underserved and unserved areas. The Fund the GSM license amounted to CFAF 100 billion in is managed by National Agency for Universal 2015 (around $167 million) and were higher than in Telecommunications Service (Agence Nationale comparator countries.65 In addition, currently, some du Service Universel des Télécommunications) and telecommunications companies are required to pay financed from contributions by network operators an additional tax of 5 percent on top of the standard restricted not restricted amounting to 2 percent of turnover (Progressus corporate income tax rate of 25 percent (World 14 and Dentons 2020). In principle, companies 26 can Bank 2020b). These levies may disproportionately opt out of this payment if they invest in network affect smaller operators and in practice deter their 50 expansion. While this “pay or play” 38 mechanism entry. Several small operators were forced to shut allows operators to use funds more efficiently, its operations in 2016 after defaulting on their dues. to allow for more functioning could be revisited Backhauling competition. Introducing reverse subsidy auctions, 46. Last but not Cabotage least, the enforcement of for instance, could allow more efficient operators competition laws is limited in Côte d’Ivoire. A to compete for funds.62 Guidelines for active crucial pillar of competition policy is the effective infrastructure sharing63 that take into account enforcement of competition law, both ex-ante effects on competition, and monitoring of IHS (a (through merger control) and ex-post (by sanctions tower company with significant market power) for the abuse of dominance and anti-competitive could also reduce the costs of infrastructure roll- agreements). This is particularly important in out. the telecommunications sector, in which market features such as economies of scale limit the 45. Lower fees and consistent taxation could number of operators and increase the likelihood also strengthen competition in retail markets. of anti-competitive business practices. Indeed, Compared to services-based providers, which some of the multinational corporations investing are subject to a general authorization regime as in the country have been found to have violated 61 Cote d’Ivoire reformed the termination rates in 2020 and they have been cut almost threefold, from 13 FCFA/min. ($2.1 c/min.) at the end of 2018, to 5 FCFA/min. in 2021 ($0.8 c/min.), and the decline will continue with 3 FCFA/min. in 2022 and 2 FCFA/min. in 2024. 62 Reverse auctions are auctions in which the sellers compete to obtain business from the buyer by lowering their prices. In the case of infrastructure subsidies, a reverse auction could allow to allocate funding to the company that needs the least support to connect a fixed number of remote users. 63 ARTCI already requires passive infrastructure sharing. 64 MVNOs are operators that do not own the network infrastructure over which they provide services to customers. 65 As part of the 4G rollout, Côte d’Ivoire collected CFAF 300 billion (around $500 million) for three technology-neutral licenses valid for 17 years. Morocco collected MAD 2.8 billion (around $300 million) for three 4G licenses and refarmed spectrum. Senegal collected CFAF 100 billion (around $167 million) from Sonatel for license renewal for 17 years and 4G frequencies, plus 27 billion XOF from Tigo (around $45 million). Morocco’s economy is about three times the size of Côte d’Ivoire. Senegal’s economy is slightly more than half the size of Côte d’Ivoire’s. See Progressus and Dentons (2020) for further details. Côte d’Ivoire Country Economic Memorandum I 65 competition rules in the European Union and Togo (World Bank 2011). Since international transit South Africa. However, as discussed above, in Côte corridors are also major thoroughfares for domestic d’Ivoire, the role of the Competition Commission cargo, it is plausible that prices for international is limited to market surveillance and advocacy, transport are correlated with prices for domestic while the WAEMU Commission has focused on transport. assessing mergers and joint ventures. ARTCI, which also has powers to apply competition rules, 49. Trucking accounts for half of the total cost of has taken decisions with competition implications, transit to the Sahel region. Interviews with firms most notably on on-net/off-net discrimination as a revealed that trucking firms accounted for 53 way to prevent market foreclosure in Côte d’Ivoire. percent of the total logistics costs on the Abidjan- Yet neither the Competition Commission nor the Ouagadougou and Abidjan-Bamako routes WAEMU Commission, nor ARTCI have sanctioned (Nathan Associates 2013). The fees charged by firms for breaches of competition laws. trucking firms also contributed the most to regional differences in transit prices.66 Hauling cargo via the port of Abidjan was more expensive when adjusting for differences in the distance between the start Competition constraints in upstream and end destination. Unit prices charged by truck companies in the region have been also shown sectors: Road freight transport to be higher than prices charged by firms in East and Southern Africa.67 Recent research confirmed elevated price levels and estimated typical margins 47. The transport sector is critical for Côte on the Burkina Faso corridor at around 30 percent d’Ivoire’s development and the response to (Figure 3.17). COVID-19. Transport firms move export crops and mineral resources, deliver imports, and link up 50. Despite high prices, there is evidence of domestic markets. The port of Abidjan is the fourth low service quality. Travel times have been largest port in West Africa and a major transit hub, shown to vary more on routes starting in connecting Burkina Faso and Mali with overseas Abidjan than on comparable routes in the region trade partners. According to the World Bank (Nathan Associates 2013, Teravaninthorn and (2020a), roads are a critical component of transport Raballand 2009). High variability in travel times is infrastructure, handling more than 99 percent of compounded by variability in port dwell times and internal freight movements. This means that Côte border procedures. These differences increase d’Ivoire’s competitiveness and regional integration final costs to shippers moving cargo through Côte hinges on the smooth functioning of the market for d’Ivoire (Nathan Associates 2013). Around three logistics services, particularly trucking. A dynamic quarters of trucks in the country are more than transport market will also be essential during the 15 years old, accounting for some of these delays COVID-19 crisis to protect vulnerable businesses (ENSEA 2014). Containerization is low, as most and consumers from supply chain disruptions. The cargo arriving in the port of Abidjan is stripped following section focuses on international transport before being loaded onto the truck (World Bank via Côte d’Ivoire, but the analysis has implications 2020c). Trucks are often overloaded and damage for domestic transport as well. roads. Shippers have limited options to mitigate the risks associated with road transport through High prices and low quality indicate room for efficiency Côte d’Ivoire (Hartmann et al. 2018). gains in road transport services 48. The prices for transit through Côte d’Ivoire 51. Persistent high prices and increasing market concentration suggest there is potential to appear high compared to other countries in improve market dynamics. High prices for inland the region. Road transport corridors in West transport can be explained by either differences Africa have been shown to be more expensive than in costs or in profit margins. While costs may be comparable corridors in other parts of Africa and partly outside the control of firms (for instance, the world (Teravaninthorn and Raballand 2009). poor roads may drive up vehicle maintenance While representative price data for Côte d’Ivoire are costs, and high fuel prices may increase variable scarce, previous research suggests that shippers costs), margins are more directly linked to paid more to transport a standard 20 foot container competition levels. A trend towards increasing to Burkina Faso via the port of Abidjan than moving market concentration in the sector also justifies a cargo via the ports of Tema in Ghana or Lomé in deeper analysis of competition constraints. While 66 See World Bank (2011) for further details. The research covered also handling, forwarding, and brokerage; customs; loading and escort; and transport union fees. 67 Teravaninthorn and Raballand (2009). While the research did not cover firms operating in Côte d’Ivoire, it has important implications for the country. First, the research compares firms operating in Ghana, one of Côte d’Ivoire’s structural peers, with firms in Kenya, one of Côte d’Ivoire’s aspirational peers. Second, the truck firms surveyed in Ghana moved cargo to Ouagadougou and Bamako, two destinations which are also served via the port of Abidjan. 66 I Côte d’Ivoire Country Economic Memorandum 70 min; 20 SMS) XOF Voice (rhs) Data (lhs) XOF 60 Low usage bundle (70 min; 20 30 3 SMS; 500 MB) 50 Data-only mobile broadband 1.5 25 2,5 40 GB 30 20 2 20 15 1,5 10 10 1 0 Côte d'Ivoire Ethiopia Kenya Senegal Viet Nam Ghana Morocco Sri Lanka 5 0,5 0 0 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 Structural peers Aspirational peers 2017 2018 2019 the trucking sector in Côte d’Ivoire is dominated by conducted by the World Bank (2020c) shows that 0,07 informal and small-scale 0,06 operators, the importance these professional carriers are moving the bulk 0,05 of midsize companies,0,04 vertically integrated logistics of containers to the Sahel region, and that in this US$ groups, and own-account 0,03 0,02 carriers has increased market segment the top three buyers account for over the last decade 0,01 (ENSEA 2014, Hartmann 20-40 percent of total demand. 0 et al. 2018, World Bank 2020a). Recent analysis Cabo Verde Cote d'Ivoire Benin Nigeria Niger Togo Burkina Faso Zimbabwe Lesotho Morocco Malawi South Africa Mayotte Chad Uganda Botswana Algeria Mauritania Tunisia Tanzania Rwanda Kenya Senegal Zambia Mozambique Cameroon Reunion Figure 3.17: Road transport costs to Burkina Faso are higher from Côte d’Ivoire than from Togo (2019) 1 800 Thousands FCFA 1 600 Gross margin/loss 1 400 Trip allowances 1 200 1 000 Tires 800 Maintenance 600 400 Fuel 200 0 Source: World Bank (2020c). restricted not restricted 14 26 50 38 Market functioning is hindered by anti-competitive market, and discriminate against unassociated regulations and business practices Backhauling firms. Cabotage 52. Market functioning is impeded by regulatory 53. Regulatory restrictions on access to freight restrictions and the lack of adequate limit competition between foreign and interventions to address anti-competitive domestic trucks, affecting aggregate supply business practices. Firms in the trucking and prices. In principle, the ECOWAS Inter-State business depend on their ability to obtain cargo to Road Transport Convention seeks to create a level operate. In the case of cargo that arrives in Abidjan, playing field for truckers from ECOWAS member this ability is constrained by (i) international freight states.69 However, access to freight is primarily sharing agreements, backhauling and cabotage governed by bilateral agreements between Côte restrictions;68 and (ii) inefficient intermediation d’Ivoire and neighboring countries. Strategic between shippers and carriers. The World Bank cargo arriving in Abidjan and destined for Burkina Group’s Markets and Competition Assessment Faso, for instance, can only be transported by Tool allows these constraints to be analyzed Burkinabe truckers. In the case of non-strategic based on their effect on markets (Table 3.1). The cargo, two thirds of the transit cargo is reserved first set of constraints, regulatory restrictions, are for foreign trucks. Cargo on the Ouagadougou formal and mandated by international agreements route is allocated on a first-in first-out basis by the and protectionist government policies. These association of Burkinabe transporters, which raises barriers limit entry, reinforce the dominance of the possibility of conflicts of interests, encourages existing providers, and discriminate against foreign collusion and market sharing, and severely limits businesses. The second set, business practices, the ability of more productive firms to increase stem from inadequate government interventions to market share.70 As a result, the market for similar address market failures and rent seeking by firms services is formally split between providers from and their associations. In addition to limiting entry, different countries, limiting supply, inflating prices, these barriers facilitate collusion among existing and reducing the competitiveness of Ivorian ports. providers, increase the cost of operating in the 68 Backhauling is returning from an end destination with new cargo. Cabotage is the transport of cargo between two locations in another country. 69 Convention de Transport Routier Inter-États, A/P2/5/82. 70 See Hartmann et al. (2018) for further details. Côte d’Ivoire Country Economic Memorandum I 67 80 PPP$ XOF/min XOF/MB Mobile cellular - low usage (70 70 min; 20 SMS) Voice (rhs) Data (lhs) 60 Low usage bundle (70 min; 20 30 3 SMS; 500 MB) 50 Data-only mobile broadband 1.5 25 2,5 40 GB 30 20 2 20 15 1,5 10 Table 3.1: Barriers to competition in the trucking sector based on market effects 10 1 0 Côte d'Ivoire Kenya Senegal Ethiopia Viet Nam Morocco Sri Lanka Ghana 5 0,5 Barriers that limit Barriers that facilitate Barriers that discrimi- 0 0 reinforce entry or collusion or increase nate or protect vested q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 dominance q4 costs to compete Structural peers interests Aspirational peers 2017 2018 2019 Regulatory restrictions Freight sharing agreements l l l Backhauling restrictions l l 0,07 restrictions Cabotage 0,06 l l 0,05 Business practices US$ 0,04 0,03 Limited access to information 0,02 l l about cargo 0,01 0 by informal mid- Intermediation dlemen (coxeurs) and transporter l l l Niger Cabo Verde Cote d'Ivoire Benin Malawi Nigeria Togo Burkina Faso Zimbabwe Lesotho Morocco South Africa Mayotte Chad Uganda Algeria Botswana Mauritania Tunisia Tanzania Rwanda Kenya Senegal Zambia Mozambique Cameroon Reunion associations Price recommendations by trans- l porter associations Source: World Bank staff analysis based on the World Bank Group’s Markets and Competition Policy Assessment Tool. 1 800 Thousands FCFA 1 600 Gross margin/loss 54. In 1 400 addition, backhauling and cabotage backhauling restrictions are relatively less common Trip allowances restrictions 1 200 exacerbate the anti-competitive (Figure 3.18). In the end, both types of regulation 1 000 effects of freight quotas. Backhauling and lead to empty legs and limit competition on Tires cabotage rules 800bar Ivorian trucks from carrying a international and domestic routes. This decreases Maintenance 600 from abroad or moving cargo load of freight back truck utilization, drives up trip prices, holds back 400 destinations. Similarly, foreign between two foreign investment in new vehicles,Fuel and reduces quality. trucks are not allowed 200 to transport cargo on their Previous evidence suggests, for instance, that the return trips from,0 or within, Côte d’Ivoire. While number of trips per truck on the route to Burkina most countries limit backhauling and cabotage, Faso is low (World Bank 2015).71 Figure 3.18: Restrictions on cabotage are more common than on backhauling Number of countries restricted not restricted 14 26 50 38 Backhauling Cabotage Source: World Bank staff elaboration based on OECD Product Market Regulation database (2013) and OECD-WBG Product Market Regulation database (2013– 2017). Note: Most countries that restrict backhauling by foreign trucks limit but do not prohibit such practices. 55. The lack of appropriate government about new cargos. Professional trucking firms can interventions to address information contract directly with shippers to some degree, asymmetry between shippers and carriers gives but in the absence of freight exchanges, small rise to anti-competitive business practices. and mid-sized operators rely mostly on informal An inherent market failure in the transport sector intermediaries called coxeurs.72 In Abidjan, these is information asymmetry, such as when carriers intermediaries are paid a commission ranging from have fragmented and incomplete information $85 to $170 per truck or $400 per month (up to 10 71 See also Teravaninthorn and Raballand (2009) for further discussion. 72 See Hartmann et al. (2018) and ENSEA (2014) for further discussion. 68 I Côte d’Ivoire Country Economic Memorandum percent of the trip price).73 Coxeurs focus solely schemes can be abused to restrict entry into the on intermediation and do not assume liability for market, favor some companies over others, and to cargo, and they have been successful in preserving impose additional intermediation fees. The tour de their role despite their high fees. There are fewer rôle also limits incentives to compete on price and of them than the number of truckers (Hartmann et to increase productivity, as more efficient providers al. 2018). Truckers have reported consistently high cannot obtain more business by reducing costs. intermediation fees,74 suggesting that coxeurs hold significant market power. 57. While their intermediary role has diminished over time, transporter associations continue to 56. Moreover, transporter associations are issue price recommendations (Teravaninthorn involved in cargo allocation. Associations and and Raballand 2009, ENSEA 2014, Hartman et alliances of road transport operators are common al. 2018). These price recommendations are not proponents and enforcers of reference prices. binding, but they provide a reference point in price They also often play a market allocation role by negotiations and encourage collusion between organizing queuing. In Côte d’Ivoire, transporter service providers. In addition, since association associations (syndicats) have been involved both membership is widespread, they apply to a in intermediation through the queuing system (tour large group of transporters (Teravaninthorn and de rôle) and in price recommendations. The tour de Raballand 2009, ENSEA 2014). The associations’ rôle is an organized form of market sharing which price-setting role has not been formalized in sector allocates cargo evenly between operators. These regulations (Hartmann et al. 2018). 3.3. What actions can the Government take to foster competition ? 58. Productivity growth requires that resources Strengthening the regulatory and are used in the most efficient way and are allocated to most efficient users. In this institutional framework context, boosting competition is instrumental in promoting increased productivity and economic 59. Improving competition requires growth. The evidence presented in this chapter implementing economy-wide and sector-specific suggests that Ivorian markets suffer from weak reforms. Economy-wide reforms should focus market contestability. Perception-based indicators on strengthening the regulatory and institutional and firm-level data point to high levels of market framework for competition policy. To this end, the dominance and limited firm entry, while price Government could invest in the capacity of regional cost margins have increased over time, driven by and national competition authorities to enforce services firms. These poor outcomes might partly competition laws. It could also revise its Competition be influenced by direct and indirect government Law in line with international best practice and seek interventions in the markets. For example, Côte to empower national competition authorities within d’Ivoire’s current competition law framework is not the WAEMU to investigate and decide on anti- fully functional, primarily due to WAEMU’s regional competitive practices taking place on the national competition law. territory. Table 3.2 summarizes the main policy recommendations to strengthen the regulatory and institutional framework at the WAEMU and national level. While the response to COVID-19 may call for temporary measures for seamless imports of priority goods, or targeted support to specific ailing sectors, it is important to preserve competition in the medium term (Box 3.1). 73 As per evidence provided in Nathan Associates (2013) and ENSEA (2014). 74 See ENSEA (2014) for further evidence. Côte d’Ivoire Country Economic Memorandum I 69 Box 3.1: The Impact of the COVID-19 crisis and mitigation measures In the context of the COVID-19 crisis, government actions to protect competition will be critical to avoid creat- ing obstacles for productivity growth in the medium term. With demand and production experiencing drastic con- tractions, governments around the world have been implementing emergency support measures to bolster economic recovery. These measures often include (i) single-source or expedited procurement of healthcare materials, medicines, and other equipment; (ii) emergency state aid to support specific firms and sectors in the face of damages directly caused by exceptional occurrences and the restrictions imposed; and (iii) temporary flexibility in antitrust enforcement to allow coordination between competitors to ensure stable supplies of essential goods and services. While all these measures are justified in exceptional circumstances, they can trigger potential anti-competitive effects when they affect market fundamentals and eventually distort the creative destruction that competition is expected to trigger. In this con- text, it will be fundamental to ensure that COVID-19 response and recovery policies are not at odds with competition principles (World Bank 2020d). The Government has taken several mitigation measures in the context of the COVID-19 crisis (Table A2.2 in Appendix 2). An in-depth analysis would be needed to assess the specific conditions under which firms will access these support measures, and to gauge their potential distortive effects in the markets. Drawing on World Bank (2020d), it is still possible to highlight some principles for the authorities to consider when implementing or eventually refining the design of these instruments to minimize market distortions while preserving markets. First, it is essential that sub- sidies are made available to a broad set of companies based on objective criteria, and with clear rules, specification of the types of aid and maximum amounts allowed, and the defined timeframes. Second, the support measures should be designed and implemented so as to address the current failures generated by the pandemic and avoid distorting the playing field by granting some market players an undue competitive advantage in the medium to long term. In this regard, it is key to ensure that the support measures are not made available to firms that were failing before the crisis or have structural issues unrelated to the crisis.75 Improving market functioning in the framework for infrastructure sharing and preventing potential anti-competitive behavior by tower mobile telecommunications sector companies could also contribute to faster network expansion. Infrastructure roll-out in unserved and underserved areas could be enhanced through 60. The country could reduce barriers to entry by reverse auctions for infrastructure subsidies, which introducing spectrum auctions and improving could provide incentives for telecommunications spectrum pricing. Some of its valuable spectrum, firms to lower costs. in particular in the 800 MHz band,76 has not yet been assigned. Shifting from administrative procedures 62. Mobile termination rates should be set to market-based mechanisms for spectrum asymmetrically, in accordance with the long- assignment could encourage new operators to run incremental costs (LRIC) methodology, enter and improve the efficiency of spectrum use. and reduced. Coupled with number portability, At the same time, spectrum auctions can provide lower wholesale rates have encouraged retail opportunities for dominant operators to stave off competition in Côte d’Ivoire. The Government competitors. These risks can be actively managed could build on its recent interventions and further through set-asides, caps, and bidding credits, reduce the mobile termination rates to limit off-net among other instruments (Pop and Coelho 2020). surcharges. Mobile termination rates could be also The entry of new operators, including MVNOs, set asymmetrically to act as a counterbalance to could be also encouraged by reducing licensing operators with significant market power and allow fees and allowing spectrum trading. smaller operators to compete more vigorously for consumers. Other measures to support access 61. Competition could be harnessed to expand to networks, such as unbundling and margin- infrastructure. Incentives to expand infrastructure squeeze tests, could be also considered to allow for could be strengthened by making returns more the emergence of mobile virtual network operators appropriable and reducing costs. Improving the 75 For instance, the European Commission has adopted a Temporary Framework to enable Member States to use the full flexibility foreseen under EU state aid rules to support the economy in the context of the COVID-19 outbreak (https://ec.europa.eu/competition/state_aid/what_is_new/sa_covid19_temporary-framework. pdf). The Temporary Framework provides for five types of aid: (i) direct grants, selective tax advantages and advance payments; (ii) state guarantees for loans taken by companies from banks; (iii) subsidized public loans to companies; (iv) state aid to the real economy; and (v) short-term export credit insurance. Under this temporary framework, for example, state guarantees should be limited in maturity (6 years), with an amount limited to the liquidity needed in the foreseeable future and granted only until the end of 2020. In specific cases, state guarantees can only be called upon after financial intermediaries make recovery efforts themselves (Italy). See World Bank (2020d) for further discussion. 76 Compared to the 2,6000 MHz band, the 800 MHz band requires a third of the investments to achieve the same 4G coverage with the same level of service. See World Bank (2020b) for further details. 70 I Côte d’Ivoire Country Economic Memorandum 63. Finally, and most importantly, Côte to negotiate, they should be feasible to the extent d’Ivoire should strengthen its capacity that gains and losses are balanced. As backhauling to enforce competition regulations in the restrictions are less common, this suggests that telecommunications sector. As noted in the they should be a priority for reforms. Short-term previous section, empowering national competition challenges should also not overshadow the long- authorities within WAEMU member states to term, non-zero gains of mutual liberalization. investigate and decide on anti-competitive Allowing backloads has contributed to halving practices taking place within their national freight transport prices between Malawi and South territory is a necessary first step. Strengthening Africa, for instance (Vilakazi 2018, Kunaka et al. the capacity to enforce competition regulations 2013), and Côte d’Ivoire’s transport corridors could at national level is equally important. In the case benefit from similar price reductions. of telecommunications, this could be achieved through investments into the Competition 66. The Ivorian Competition Commission could Commission and/or ARTCI, as both institutions undertake a market study of trucking and cargo share the powers to apply competition rules in the allocation. Relaxing international quotas and sector. Given some remaining state participation restrictions on foreign trucks can result in lower in the telecommunications sector, these changes prices and higher quality. However, if firms exert should be accompanied by efforts to increase the significant market power, they can appropriate independence of the Competition Commission the gains of liberalization as rents. Intermediation and ARTCI. between shippers and carriers appears to be costly and opaque, and the variation in prices charged by middlemen and truckers limited. This suggests potential anti-competitive behavior by market Reducing distortions in the road participants. While the enforcement powers of the Competition Commission are limited, it is transport sector authorized to detect anti-competitive practices and to advocate for pro-competition policies. Since its establishment in 2017/18, the Commission has 64. Pro-competition interventions in road not surveyed the trucking market. The Commission transport should encompass regulatory could forward the findings of its market study to the reforms, antitrust action, and the creation of WAEMU Commission, and request the launch of market institutions. Reforms to the road freight investigations which may lead to formal sanctions. market in Côte d’Ivoire could focus on three pillars: (i) opening the market to international competition; 67. Creating freight exchanges and promoting (ii) monitoring, deterring, and sanctioning anti- standard contracts between shippers and competitive market practices; and (iii) creating carriers are equally important. The market freight exchanges and promoting standard power of intermediaries stems partly from the contracts between shippers and carriers. While information asymmetry between shippers and the first reform should correct the anti-competitive carriers. Addressing these market failures is likely to effects of existing government policies, the reduce the potential for anti-competitive practices second and third reforms will require government in road transport. Virtual freight exchanges are intervention to overcome market failures. Pro- a practical solution, which have been piloted in competition reforms should be accompanied by Burkina Faso and other countries. In addition, other policies to improve infrastructure, streamline encouraging formal transport contracts (including transit, and enforce quality standards. long-term rate contracts), and implementing regional regulations on consignment notes,77 65. Opening the market to international would increase the share of direct transactions competition will require coordinated action between shippers and carriers. by West African countries. National freight quotas have been established to protect the 68. Pro-competition reforms could reduce interests of transporters from landlocked countries. transport costs by around 30 percent. Potential Backhauling and cabotage rules primarily protect reductions in margins and intermediation charges the interest of Ivorian truck firms. If multilateral could contribute to savings of up to US$800 per negotiations to liberalize transport services fail, trip on the Abidjan-Ouagadougou route (World Côte d’Ivoire could still advocate for the relaxing Bank 2016). Pro-competition reforms in other of national quotas in exchange for the lifting of countries have had similar price effects. In Mexico, backhauling or cabotage restrictions in its territory. for instance, allowing shippers and carriers to While changes to existing agreements are difficult contract directly contributed to five-year price 77 See Hartmann et al. (2018) for further details. Provisions related to consignment notes are included in the Organization for the Harmonization of Business Law in Africa Single Act on transport contracts, the ECOWAS Inter-State Road Transport Convention, and WAEMU Regulation 14. Côte d’Ivoire Country Economic Memorandum I 71 reductions of 23 percent (Hartmann et al. 2018). In France, sector deregulation was accompanied by long-term price decreases of 33 percent. Reforms in Rwanda accomplished price reductions of more than 30 percent in one year (Teravaninthorn and Raballand 2009). Table 3.2: Policy recommendations: Boosting productivity growth through better market rules Timeline for im- Fiscal impli- plementation cations To improve the regulatory and institutional framework (WAEMU) - Develop efforts within WAEMU to approve legislation delegating powers to Short-term Low Côte d’Ivoire’s Competition Commission to investigate and decide on an- ti-competitive practices that occur in the national territory and do not have cross-border effects. - Work toward the issuing of rules at the WAEMU level regulating cooper- Short-term Low ation between the WAEMU Commission and Côte d’Ivoire’s Competition Commission. - Encourage the strengthening and adequate resourcing of the WAEMU Medium-term Low Commission to enhance competition enforcement. To improve the regulatory and institutional framework (National) - Encourage the Competition Commission to carry out market studies and Short-term Low improve communication and collaboration with sector-specific regulators and other government institutions to address competition issues. - In a scenario where the Competition Law has become enforceable, review Medium-term Low the Competition Law in order to: o align with international best practice (e.g. provisions on abuse of dominance, prohibition of cartels, adequate sanctions, prohibition of anti-competitive mergers by introducing a substantial lessening of competition test, in line with international best practice) o .establish that unilateral practices including sale at loss, tying, bun- dling and refusal to deal should only be prohibited when they are car- ried out by a dominant company and cause anti-competitive effects in the market. - Publish online annual and quarterly reports by Côte d’Ivoire’s Competition Short-term Low Commission on the application of the Competition Law. - Streamline the Competition Commission’s advisory role on price regulation Medium-term by limiting its intervention to the mitigation of its impact on competition. Mobile telecommunications - Lower barriers to entry for additional operators, including MVNOs, by re- Medium-term Medium ducing license fees, limiting tax distortions, and introducing market mecha- nisms for spectrum allocation (auctions) and redistribution (trading). - Clarify access conditions to publicly owned infrastructure to level the play- Medium-term Low ing field for service providers. - Improve the functioning of wholesale and retail markets by reducing and Short-term Medium setting asymmetric mobile termination rates in line with the LRIC method- ology. - Ensure the independence of ARTCI and strengthen its capacity to investi- Medium term Low gate and sanction anti-competitive behavior. Road Freight - Open markets to international competition by renegotiating bilateral freight Medium-term Low sharing agreements and backhauling/cabotage restrictions with neighbor- ing countries. - Improve the transparency and efficiency of cargo allocation by creating Medium-term Low freight exchanges and promoting standard contracts between shippers and carriers. - Launch a market study into trucking and cargo allocation to detect an- Medium-term Low ti-competitive practices and to advocate for pro-competition policies. 72 I Côte d’Ivoire Country Economic Memorandum Annex 3.1. Price cost margin as a proxy of market power: Theoretical and Li = Pi − MCi Pi empirical assumptions The standard (theoretical) definition of market power is account for − theunit marginal ሺ ∗ ሻ − ሺ ∗ ሻ fully − mimic ≅ = cost in order to = the ability of a firm to maintain prices above marginal the Lerner index; however, as ሺ marginal∗ ሻ cost not is cost, which is the level that would prevail under perfect available at firm level, the expression uses total variable competition. The exact magnitude of a firm’s market cost to approximate marginal cost. Based on this firm- power—which is tied to the gap between its price and level measure, it is possible to aggregate it for a given marginal cost—would depend on the format of the sector I as: residual demand curve faced by the firm. The steeper തതതതതതതത 1 = ෍ the residual demand, the larger the price cost margin ∈ difference, the higher the market power retained by the firm. Some caveats must be highlighted when interpreting PCM results. First, the PCM measure cannot be taken as Following this standard approach, the gap between an absolute and should not be used to compare different price and marginal cost could be approximated by a markets, since margins will be naturally higher in markets Lerner Index which is calculated as L = Pi − MCi , where a large proportion of costs are fixed. In this i Pi regard, it is safer to use markup to illustrate comparisons reflecting how far a firm’s price is from its marginal cost. of firms within markets, for instance to shed light on the correlation with other firm characteristics and economic To retrieve the Lerner Index empirically, the current variables (such as productivity, ownership, size, or analysis follows the approach originally suggested by location), or to assess changes over time. Second, rising − ሺ ∗ ሻ − ሺ ∗ ሻ − ≅ = = PCMs do not necessarily imply declining competition Tybout (2003) where the price cost margin (PCM) ሺ ∗ ሻ at firm level is computed by taking the difference between as high PCMs might enable firms to recoup high-risk Pi − MCi investments associated, for instance, with research production value and Ltotal i = variable costs divided by Pi production value. Specifically, and drawing from firm- 78 and development activities. In this context, a tougher level information available in the World Bank Enterprise (not less competitive) competition environment would Survey rounds of 2009 and 2016, തതതതതതതത firm-level 1 observed explain the fact that large and more efficient firms— = ෍ with a cost or quality advantage—are able to extract PCM can be proxied as: ∈ higher price margins while also obtaining larger market − ሺ ∗ ሻ − ሺ ∗ ሻ − ≅ = = shares. This would be a typical situation in “winner ሺ ∗ ሻ takes most” markets (Van Reenen 2018) such as high- for firm i at time t (2009,2016); where quantity (q) is tech digital markets engaging in platform competition. simplified in the ratio and leaves the expression with Against this backdrop, to be able to ascertain that high price p and unit variable cost c. Variable cost is defined PCMs necessarily reflect declining competition, one as the sum of the തതതതതതതത costs of ෍ 1 materials, labor, electricity, would need to run an in-depth assessment to examine = fuel, water, and communications ∈ services; it does not whether there are indeed competition issues affecting include cost of capital (which is considered a fixed these markets. cost). It is worth highlighting that, in principle, c should 78 There would be a second way to retrieve the Lerner Index empirically: a parametric method introduced by De Loecker and Warzynski (2012), where the price mar- gin, or markup, is computed as the ratio of the production elasticity of the flexible input to the expenditure shares in that inputs. This methodology requires estimating a production function in order to recover the output elasticity corresponding to the flexible input. Côte d’Ivoire Country Economic Memorandum I 73 Annex 3.2. Empirical analysis drawing from Enterprise Survey data Table 3.3: Firm characteristics and price cost margins in Côte d’Ivoire: Conditional correlations (2009 and 2016) Dependent variable: (log) PCM (1) (2) (3) All Manufacturing Non-manufactur- firms firms ing firms Firm size group: Medium: 20-99 0.095 -0.076 0.189* (0.140) (0.260) (0.094) Large: 100 or more -0.767 -1.521* 0.247 *** (0.487) (0.863) (0.069) Firm age group: Mature (6-15 years) 0.233* 0.321 0.122 (0.115) (0.208) (0.128) Older (more than 15 years) 0.333 0.947 * -0.012 (0.230) (0.460) (0.084) Firm export intensity (%) 0.001 0.007 0.005*** (0.008) (0.013) (0.001) Firm % of foreign ownership 0.000 -0.006 0.003*** (0.003) (0.006) (0.000) Female manager 0.176 0.574 0.029 (0.135) (0.333) (0.055) Year fixed effects Yes Yes Yes Two-digit sector fixed effects Yes Yes Yes Region fixed effects Yes Yes Yes No. of observations 705 239 466 R-squared 0.106 0.197 0.173 Source: World Bank Staff elaboration based on Enterprise Survey data from 2009 and 2016. Note: Results are from an ordinary least square (OLS) regression using 2009 and 2016 World Bank Enterprise Surveys data for Côte d’Ivoire. Survey weights are not applied.79 The dependent variable is the logarithm of price cost margin (PCM), defined as (sales - total cost of sales)/sales. Whenever available, total cost of sales includes the costs of materials, labor, electricity, fuel, water, and communications services. The analysis excludes negative PCM values as well as PCMs above 100. In addition, observations in the top and bottom percentile of each two-digit sector and year distribution are excluded as outliers in the analysis. Standard errors clustered at the sector level in parentheses. ***, **, and * indicate significance at 1 percent, 5 percent, and 10 percent. The reference category for firm size is small (5–19 employees) and for firm age group is young (1–5 years). 79 While the consensus in the literature is to use survey weights for descriptive statistics, there is still a debate as to whether weights should be used in multivariate models such as regression analysis (see Kish and Frankel (1974); Solon, Haider, and Wooldridge (2015); and Karr and Berzofsky (2016) for further discussion). 74 I Côte d’Ivoire Country Economic Memorandum Table 3.4: Competition from the informal sector and labor productivity of formal firms in Côte d’Ivoire: Conditional correlations (2009 and 2016) Dependent variable: (log) labor productivity All firms (1) (2) Informal competition index 0.384* 0.449*** (0.201) (0.160) (Log) firm age 0.283*** (0.094) Firm size group: Midsize: 20-99 0.911*** (0.105) Large: 100 or more 1.841*** (0.350) Year fixed effects Yes Yes 2-digit sector fixed effects Yes Yes No. of observations 791 786 R-squared 0.231 0.339 Source: World Bank Staff elaboration based on Enterprise Survey data from 2009 and 2016. Note: Results are from an OLS regression using pooled data from 2009 and 2016 World Bank Enterprise Surveys data for Côte d’Ivoire. The dependent variable is the logarithm of real annual labor productivity of formal firms (i.e. sales per full-time equivalent employees). The key explanatory variable of interest is the degree of informal competition faced by formal sector firms in a market, which is defined as the average of the intensity of informal competition experienced by all formal firms in a market. Standard errors clustered at the sector level in parentheses. ***, **, and * indicate significance at 1 percent, 5 percent, and 10 percent. The reference category for firm size is small (5–19 employees) and for firm age is young (1–5 years) Table 3.5: Characteristics of high markup firms in Côte d’Ivoire (2009 and 2016) Conditional correlations between markups and individual firm characteristics Dependent variable: Dependent variable: (log) size (log) labor productivity All firms Manu- Non-ma- All Manu- Non-ma- facturing nufactu- firms facturing nufactu- firms ring firms firms ring firms (1) (2) (3) (4) (5) (6) Top 75th percentile 0.434*** 0.577 *** 0.381* 1.481*** 1.356*** 1.514*** (0.137) (0.179) (0.181) (0.241) (0.236) (0.346) Two-digit sector fixed ef- Yes Yes Yes Yes Yes Yes fects Year fixed effects Yes Yes Yes Yes Yes Yes No. of obs. 734 260 474 734 260 474 R-squared 0.306 0.358 0.229 0.343 0.401 0.310 Source: World Bank Staff based elaboration based on World Bank Enterprise Survey data from 2009 and 2016. Note: Results are from OLS regressions using 2009 and 2016 WBES data for Côte d’Ivoire. Standard errors clustered at the sector level in parentheses. ***, **, and * indicate significance at 1 percent, 5 percent, and 10 percent. Côte d’Ivoire Country Economic Memorandum I 75 Table 3.6: Firm characteristics (including productivity) and (log of) price cost margin in Côte d’Ivoire: Conditional correlations (2009 and 2016) Dependent variable: (log) PCM (1) (2) (3) All Manufacturing Services Firm size group: Medium: 20-99 0.014 -0.138 0.122 (0.137) (0.251) (0.095) Large: 100 or more -0.925* -1.671* 0.119 (0.473) (0.800) (0.078) Firm age group: Mature (6-15 years) 0.197 * 0.296 0.090 (0.100) (0.198) (0.112) Older (more than 15 years) 0.273 0.877 * -0.056 (0.233) (0.492) (0.073) Firm export intensity (%) 0.001 0.007 0.002 (0.009) (0.014) (0.002) Firm % of foreign ownership -0.001 -0.007 0.002** (0.003) (0.006) (0.001) Female manager 0.147 0.530 0.008 (0.152) (0.323) (0.075) Year fixed effects 0.107 *** 0.099 0.086*** (0.030) (0.091) (0.018) Two-digit sector fixed effects Yes Yes Yes Region fixed effects Yes Yes Yes Firm size group: Yes Yes Yes No. of observations 705 239 466 R-squared 0.114 0.197 0.210 Source: World Bank Staff elaboration based on World Bank Enterprise Survey data from 2009 and 2016. Note: Results are from an OLS regression using 2009 and 2016 WBES data for Côte d’Ivoire. Survey weights are not applied. The dependent variable is the logarithm of price cost margin (PCM), defined as (sales - total cost of sales)/sales. Whenever available, total cost of sales includes the costs of materials, labor, electricity, fuel, water, and communications services. The analysis excludes negative PCM values as well as PCM above 100%. In addition, observations in the top and bottom 1 percentile of each two-digit sector and year distribution are excluded as outliers in the analysis. Standard errors clustered at the sector level in parentheses. ***, **, and * indicate significance at 1 percent, 5 percent, and 10 percent. The reference category for firm size is small (5–19 employees) and for firm age group is young (1–5 years). 76 I Côte d’Ivoire Country Economic Memorandum References Aghion, Philippe and Rachel Griffith. 2005. 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Washington, D.C.: World Bank Group. 78 I Côte d’Ivoire Country Economic Memorandum Chapter 4 Export diversification as a driver of structural transformation And You Walk Alongside Me Albahian 2019, Joana Choumali Prepared by Alberto Portugal (Senior Economist, ETIRI) and Aleksandar Stojanov (Jr. Professional Officer, ETIRI). Côte d’Ivoire Country Economic Memorandum I 79 1. Empirical evidence shows that no country has partners. Another strand of economic opinion achieved sustained growth and significant (Easterly and Reshef 2014) argues that rather than poverty reduction without integrating into shifting resources between sectors, Africa should the global economy (World Bank 2020). focus on moving up the quality ladder (IMF 2017). Integration into the global economy lies behind Trade diversification plays a critical role in all these the successful diversification of countries in choices. East Asia into manufacturing, which in turn has led to unprecedented poverty reduction (World 3. Diversification and quality upgrading will Bank 2020). A key aspect of this process is be critical to increasing value addition diversification. A less diversified output and export and achieving higher productivity jobs in structure increases the volatility of fiscal revenues Côte d’Ivoire (Figure 4.1). In 2019, agricultural and the trade balance and has substantial commodities accounted for 85 percent of total implications for growth and the industrialization exported goods, with cocoa representing 42 which enables countries to transition from low- percent of total exports. Domestic value addition to middle-income economies (World Bank 2020). in agricultural products remains low, despite Export diversification can support growth and the country’s comparative advantage in food drive structural transformation, an effect that is processing and related products. This is the result stronger in low-income countries and diminishes of low inward foreign direct investment (FDI) and as the level of income rises (IMF 2017). Commodity reduced firm-level capacity to scale up production exporters like Côte d’Ivoire with concentrated through investment in capital and knowledge export baskets that are highly susceptible to accessibility. The predominance of the commodity- international price fluctuations have the most to exporting sector is reflected in the country’s low gain from diversification towards higher-value level of economic complexity82 given its level of added goods and services. per capita gross domestic product (GDP) (see Chapter 1). Product and market diversification will 2. Sustained growth involves structural change be essential for generating employment in more and export-oriented diversification. One of productive tradable sectors, as identified in the the key factors of economic development is that National Export Strategy. Export diversification can the route to structural transformation involves the thus also be a key driver of the diversification of movement of resources from low-productivity domestic production.83 Economic diversification activities to high-productivity ones (the between has become all the more relevant as the component). As discussed in Chapter 2, the COVID-19 crisis reveals the greater vulnerability of traditional view is that resources should move first commodity-dependent countries to global shocks. from agriculture to industry and then to services.80 An alternative view suggests reallocating resources 4. This chapter explores the opportunities for from agriculture directly into services (Carmignani Côte d’Ivoire to diversify its exports as a and Mandeville 2014), given that manufacturing- driver for structural transformation. Section 4.1 led industrialization may not be accessible for examines the country’s main trade patterns. Section developing countries today.81 This option might 4.2 explores the policy areas related to trade and become more relevant as the world exits the logistics relevant to supporting greater economic COVID-19 crisis. Yet, the recent flagship report on and export diversification. Section 4.3 analyses the the future of manufacturing-led growth in Africa impact of the pandemic on export performance. shows that the share of all manufactured products Section 4.4 provides policy recommendations. in intra-Africa trade, at 43 percent, was roughly double the share of Africa’s exports to all trading 80 For instance: Hansen and Prescott 2002; McMillan, Rodrik, and Verduzco-Gallo (2014). 81 East Asian countries pose formidable competitive challenges to developing countries, particularly given globalization and the reduction in trade barriers virtually everywhere else. In addition, new trade rules are narrowing the room for industrial policies such as local content requirements, subsidies, and import restrictions, which were aggressively deployed by Asian countries in the past (Rodrik, 2013, 2014). Further, technological development in recent decades have made manufacturing itself more capital- and skill-intensive than in the past, making poor economies less well positioned to exploit opportunities in some manufacturing industries. 82 The Economic Complexity Index measures the knowledge intensity of an economy by considering the knowledge intensity of the products it exports. 83 Indicators of diversification based on export data are readily available and comparable across countries due to the consistency of international trade data. In contrast, the availability, quality and comparability of output, employment and firm-level data varies across countries and across time and is notably absent or of poor quality in the poorest countries. 80 I Côte d’Ivoire Country Economic Memorandum Figure 4.1: Economic diversification Economic Diversification Output Export Diversification Diversification Cross-sectoral Across Quality New Products Across Markets rebalancing Products Upgrading 4.1. The quest for export diversification84 Côte d’Ivoire is integrated into the than it was in 2005–2007, even as income per capita increased (Figure 4.2). The growth rate has global trading system, but mostly also been much slower than in its structural and through exports of goods rather than aspirational peers,85 except Sri Lanka (Figure 4.4). services 6. Trade openness in services deteriorated between 2016–2018, and remains lower than expected given Côte d’Ivoire’s level of income. 5. Côte d’Ivoire’s merchandise trade openness is Despite recent growth in services exports, it high given its level of economic development performed below all its structural and aspirational and compared to peers (Figure 4.2). Merchandise peers (Figure 4.5). Services accounted for 8.6 exports—i.e. of goods rather than services— percent of total Ivorian exports in 2018, which is accounted for almost 92 percent of total exports in considerably less than for its peers, with services 2018, dominating the country’s export bundle. Total exceeding 25 percent of exports in Ghana, Senegal, goods exports have more than doubled in recent and Ethiopia (Figure 4.6). Overall, Côte d’Ivoire’s years, rising from under US$8 billion in 2008 to more service trade openness remained lower than all its than US$17 billion in 2017 its peak before declining structural peers and Senegal in the same period in 2018. Despite the growth, merchandise trade (Figure 4.3). as a share of GDP—a commonly used measure of trade openness—was still lower in 2016–2018 84 This section provides a quantitative and qualitative assessment of historic trade performance about the evolution of trade and the participation of firms in global value chains (GVCs). More specifically, the analysis will focus on five aspects : (i) the level, growth, and market share performance of existing exports (intensive mar- gin); (ii) the diversification of products and markets (extensive margin); (iii) the quality and sophistication of exports (quality margin); (iv) the entry and survival of new exporters (sustainability margin); and (v) global value chain integration and foreign direct investment. The methodology will include using some tools from Reis and Farole (2012), as well as the more recent literature on GVCs. 85 See Chapter 1 for description of Côte d’Ivoire’s structural and aspirational peers. Côte d’Ivoire Country Economic Memorandum I 81 Figure 4.2: Côte d’Ivoire’s merchandise trade openness is higher than expected given its per capita in- come Source: World Development Indicators, authors’ calculations. Note: Trade openness is the ratio of the sum of exports and imports (trade) over GDP. Each dot represents a country. The curve shows the average of trade openness for a given per capita income. The grey band represents the 95 percent confidence interval. Figure 4.3: Côte d’Ivoire’s services trade openness has deteriorated in recent years Source: World Development Indicators, authors’ calculations. Note: Trade openness is the ratio of the sum of exports and imports (trade) over GDP. Each dot represents a country. The curve shows the average of trade openness for a given per capita income. The grey band represents the 95 percent confidence interval. Export products and destination concentration of cocoa exports. Cocoa maintained the highest revealed comparative advantage markets remain highly concentrated (RCA) over the past three decades (see Table 4.4 in Annex 4.1). In 2019, 10 products accounted for more than 80 percent of total exports, with cocoa 7. Just a few products account for an making up 42 percent, petroleum 18.5 percent, and overwhelming majority of exports, with cocoa gold 9.5 percent. Most of these products require remaining dominant (Figure 4.7). Primary little domestic value addition and are vulnerable commodities continue to be the main engine of to global supply and demand shocks, which can export growth, accounting for over 85 percent of easily jeopardize the trade balance. total exports in 2016–2018. Within the primary sector, foodstuffs dominate exports, reflecting the strong 82 I Côte d’Ivoire Country Economic Memorandum Figure 4.4: Côte d’Ivoire’s goods exports have Figure 4.5: Côte d’Ivoire’s growth in services grown more slowly than in most of its peers exports is almost negative Source: World Integrated Trade Solution (WITS) Export Mirror Data, authors’ calculations. Note: Export evolution is benchmarked against the year 2000 Source: UNCTAD data for services exports, authors’ calculations. Note: Export which equals 100. evolution is benchmarked against the year 2005 which equals 100. Figure 4.6: Côte d’Ivoire’s export basket continues to be dominated by goods Source: World Development Indicators, authors’ calculations. Note: Data for Kenya correspond to 2017 as figures were not available for 2018. 8. Merchandise exports have become more countries are in the top 20: Mali (2.8%, 11th) and concentrated on a few products. The number Burkina Faso (2.5%, 14th). However, one explanation of products exported has shown a tendency for low regional exports could be undocumented to stagnate since 2005, indicating that Ivorian small-scale cross border trade within the region exporters have not been diversifying their products. that remains unaccounted for. Côte d’Ivoire’s Côte d’Ivoire’s export product concentration, market composition has hardly changed in the measured by the Herfindahl–Hirschman Index,86 is past ten years and its pace of diversification has higher than its peers except for Ethiopia and Ghana slowed in recent years, becoming more dependent (Figure 4.9). Product concentration has increased on its top five destination countries (Figure 4.10). in recent years, except in 2017 when it temporarily This trend is similar to its peer countries, and it has fell as a result of the decline world cocoa prices. outperformed some of its structural peers such as Ghana and Senegal and converged towards larger 9. In terms of markets, most goods are exported economies such as Kenya. to Europe and North America. The top 20 destination countries account for 80 percent of total 10. Travel and transport account for over 60 percent exports (Table 4.1). Because of their preferential of Côte d’Ivoire’s total services exports. Data on market access, the European Union (EU) and the trade in services are far less disaggregated than United States remain the main export destinations. for trade in goods. Trade in services has shown a Regional trade with Economic Community of recovery since 2015, mainly as a result of a sharp West African States (ECOWAS) and West African increase in tourism and business travel, which were Economic and Monetary Union (WAEMU) severely disrupted during the political crisis (WTO countries is relatively weak. Only two WAEMU 2017). However, insurance and financial services 86 The Hirschman-Herfindahl Index (HHI) is the sum of the squared export shares by product. Thus: 0