Cape Verde - The Road Ahead - African Development Bank

128 Pages·2012·2.02 MB·English

by  Olugenga Adesida

AFRICAN DEVELOPMENT BANK
AFRICAN DEVELOPMENT FUND

CAPE VERDE

THE ROAD AHEAD

Regional–West 2 Department (ORWB)
November 2012

Table of Contents
Acknowledgements............................................................................................................................6
List of Abbreviations ..........................................................................................................................7
Executive Summary ............................................................................................................................9
The Road Ahead: An Introduction .................................................................................................... 12
1. The Road From Here: Cape Verde’s Transformation Agenda ...................................................... 15
1.1 Introduction ................................................................................................................................ 15
1.2 The Four Main Ingredients of Success ........................................................................................ 15
1.3 Why the Transformation Agenda? .............................................................................................. 20
1.4 The Transformation and Modernization Agenda ....................................................................... 23
1.5 Making the Transformation Agenda a Reality ............................................................................ 25
1.6 Summary ..................................................................................................................................... 30
2. The Road from Here: Examining the Challenges ........................................................................... 32
2.1 Introduction ................................................................................................................................ 32
2.2 Unfavorable Initial Conditions .................................................................................................... 33
2.3 The Major Challenges and Constraints to Development ............................................................ 38
2.3.1 Infrastructure ...................................................................................................................... 39
2.3.2 Telecommunications ........................................................................................................... 43
2.3.3 Water and Energy ............................................................................................................... 44
2.3.4 Transportation .................................................................................................................... 45
2.4 Human Capital Resources ........................................................................................................... 47
2.5 Institutional Capacity .................................................................................................................. 52
2.6 Enabling a Favorable Investment Climate .................................................................................. 53
2.7 Innovation-Promoting Institutions.............................................................................................. 55
2.8 Summary ..................................................................................................................................... 58
3. Exploring the Road Ahead: Alternative Futures for Cape Verde ..................................................... 60
3.1 Introduction ................................................................................................................................ 60
3.2 Macro Variables that will Shape the Future of Cape Verde ....................................................... 61
3.2.1 The Key Factors ................................................................................................................... 61
3.2.2 The Critical Uncertainties .................................................................................................... 64
3.3 Four Futures ................................................................................................................................ 69
3.3.1 Ostrich ................................................................................................................................. 70
3.3.2 Tortoise ............................................................................................................................... 73
3.3.3 Atlantic Fox ......................................................................................................................... 77
3.3.4 Atlantic Tiger ....................................................................................................................... 81
3.4 Implications of the Scenarios ...................................................................................................... 86
3.5 Summary ..................................................................................................................................... 89
4. Exploring the Road Ahead: A Quantitative Assessment ................................................................ 90
4.1 Introduction ................................................................................................................................ 90
4.2 Macroeconomic Policies in Economic Growth, Job Creation and Poverty Reduction ................ 91
4.2.1 Exchange Rate Policy........................................................................................................... 92
4.2.2 Fiscal Policy ......................................................................................................................... 93
4.2.3 Monetary Policy .................................................................................................................. 93
4.3 Model and Data .......................................................................................................................... 95
4.3.1 Overview of the Model ....................................................................................................... 95
4.3.2 Data ..................................................................................................................................... 97
4.4 Assessing Alternative Growth Scenarios ..................................................................................... 98
4.4.1 The Baseline Scenario ......................................................................................................... 98
4.4.2 Alternative Scenarios .......................................................................................................... 99
4.4.3 Findings ............................................................................................................................. 100
4.5 Summary ................................................................................................................................... 102
5. Getting There: Key Recommendations ........................................................................................ 103
5.1 Introduction .............................................................................................................................. 103
5.2 Elements for a Strategic Agenda ............................................................................................... 104
5.2.1 Implementing a New Approach for Development Management ..................................... 105
5.2.2 Extending and Deepening Reforms ................................................................................... 106
5.2.3 Building Human Resources and Skills................................................................................ 108
5.2.4 Promoting Innovation and Entrepreneurship ................................................................... 109
5.2.5 Expanding Infrastructure and Improving the Quality ....................................................... 111
5.2.6 Mobilizing Financing and Facilitating Access to Finance .................................................. 113
5.2.7 Ensuring Social Cohesion .................................................................................................. 114
5.3 Summary ................................................................................................................................... 115
References ..................................................................................................................................... 117
Appendix 1: A Social Accounting Matrix for Cape Verde – 2002 ....................................................... 120
A1.1 Introduction ......................................................................................................................... 120
A1.2 Background .......................................................................................................................... 120
A1.3 A Macro SAM for 2001 ........................................................................................................ 121
A1.4 A Micro SAM for 2002 ......................................................................................................... 124
Appendix 2: Simulation Results ..................................................................................................... 125
Table A2.1: Sectoral Production ......................................................................................................... 125
Table A2.2: Sectoral Investment ........................................................................................................... 126
Table A2.3: Sectoral Exports ................................................................................................................. 127
Table A2.4: Sectoral Imports ................................................................................................................. 128
Acknowledgements
This research project was sponsored and managed by the African Development Bank’s Regional
Department West II (ORWB) under the direction of Franck Perrault, Regional Director.
The study was prepared by Olugbenga Adesida, Mohamed Chemingui and João Resende Santos (AfDB
consultants) under the supervision of Mohamed Hedi Bchir, Principal Country Economist, ORWB,
Mamadou Diagne, Principal Country Economist, ORWB, and Adalbert Nshimyumuremyi, Chief Country
Economist, ORWB, respectively. Research assistance was provided by Cassandro Mendes.
The useful feedback from Desiree Nadege Yameogo, Senior Research Economist, EDRE, and Kim
Harnack, Economist, International Consultant, who served as peer reviewers, and CLSD for English
editing support and translation into French, as well as the insights of many Cape Verdean officials and
experts are all gratefully acknowledged.
List of Abbreviations
ADEI Agency for the Development of Enterprise and Innovation
AfDB African Development Bank
AGOA Africa Growth Opportunity Act
AJEC Association of Young Cape Verdean Entrepreneurs
ANAC Agencia Nacional de Comunicações
ARE Agencia de Regulação Económica
BAU Business-as-usual
BCV Banco de Cabo Verde (Central Bank)
CET Constant Elasticity of Transformation
CES Constant Elasticity of Substitution
CGE Computable General Equilibrium
CI Cape Verde Investment
ECOWAS Economic community of West African States
ECV Escudos Caboverdianos (Cape verdean escudos)
EEZ Exclusive Economic Zone
ELES Extended Linear Expenditure System
EPA Economic Partnership agreement
EU European Union
FDI Foreign Direct Investment
GDP Gross Domestic Production
GNI Gross National Income
GPRSP Growth and Poverty Reduction Strategy Papers
ICF Investment Climate Facility for Africa
INE Instituto Nacional de Estatística
IMF International Monetary Fund
ITC Instituto Tecnológico de Canarias
ITC Information Technology and Communication
LES Linear Expenditure Demand System
LDCs Least Developed Countries
MDGs Millennium Development Goals
NIS National Innovation System
ODA Overseas Development Assistance
SAM Social Accounting Matrix
SET Science, Engineering, Technology
SDE Sociedade de Desenvolvimento Empresarial
SIGOF Integrated System for Budget and Financial Management
SPA Special Partnership Agreement
TFP Total Factor Productivity
UCRE Unidade de Coordenação da Reforma do Estado
USD United States Dollars
UNESCO United Nations Education, Scientific and Cultural Organization
WTO World Trade Organization
Executive Summary
“Cape Verde—The Road Ahead”, is a study commissioned by the African Development Bank (AfDB). It
provides a critical examination of the development experience of Cape Verde, a small island country off
the coast of Senegal. The study complements the companion Bank report, “Cape Verde: A Success
Story”, an in-depth work analyzing the factors behind the country’s development success. As the
companion volume looks at the country’s past trajectory, the present work looks at the road ahead. It
offers a critical examination of the key issues and challenges facing Cape Verde as it attempts to make
the transition to upper middle income country. The study surveys the key challenges and opportunities,
and sets out four alternative futures up to the year 2025. The ingredients behind the success of the past
thirty six years may not be sufficient or relevant for its next phase of development. Cape Verde must
now make the transition to the upper-middle income category, requiring new bases of growth and a
much higher level of economic and institutional capacity to compete successfully. Which future scenario
materializes for Cape Verde will depend greatly on the country’s ability to weather and traverse the
present world crisis, particularly in the Eurozone. As the study points out, Cape Verde’s continued
success is not guaranteed, since its ability to consolidate its past development gains will be strongly
conditioned by the current global crisis. Yet, Cape Verde’s future will be of its own making. Whether or
not it can successfully make the transition to a competitive, upper middle income country will be
conditioned primarily by the alacrity and efficacy with which the country addresses the many policy and
institutional challenges it will face on the road ahead.

Cape Verde today is a different country from what it was in 1975. Little of it resembles the country that
emerged from 500 years of colonial rule in 1975. It is a lower-middle-income country, having graduated
from the United Nations list of Least Developed Countries (LCDs) in 2008. For over a decade, Cape Verde
has been among the fastest growing economies in the world. It ranks among the top high growth
economies in Africa, ranking sixth in the top 17 growth performers in Sub-Saharan Africa during the
1995-2007 regional “great take-off with a real GDP growth rate of 7.2 percent and real GDP per capita
growth of 5.1 percent for the period.”1 In fact, Cape Verde’s economic growth has mirrored the pre-
global crisis strong regional and global performance. But, it is Cape Verde’s unique attributes, and the
characteristics of its growth, that make its performance noteworthy. Its strong performance has been
well-rounded. Its strong growth has resulted in improved living standards for the population, putting the
country on track to meet or surpass all the targets of the Millennium Development Goals (MGDs).2 It has
among the best social indicators on the continent. Its economic performance has been accompanied
and indeed driven by an equally remarkable political performance. Cape Verde ranks among the world’s
most stable democracies, receiving high marks for good governance, political stability, civil liberties, and
its democracy index. This broad-based performance has been propelled by nearly two decades of
continuous structural and institutional reforms.

1 International Monetary Fund (IMF), Regional Economic Outlook: Sub-Saharan Africa (Washington DC: October
2008), 26.
2 Ministry of Finance (2009); Government of Cape Verde, (2011).
Cape Verde is a country in transformation. However, as this study makes clear, the future is uncertain.
On the one hand, the country has a window of opportunity to insert itself in a number of niche markets
in the world economy, taking advantage of its strategic location in the mid-Atlantic, its vast maritime
resources, its endless renewable energy resources, its tourist-friendly climate and its durable social
peace and political stability. On the other hand, the country is confronted by an array of current and
emerging challenges. As this study demonstrates, the country can no longer rely on cheap external
financing such as official development assistance and remittances, which fueled much of the intense
capital investments over the last decade. Further, the country’s own development strategy moving
forward, its “Agenda for Transformation,” lays out the vision and strategy for achieving upper middle-
income status. This agenda however, demands a number of profound reforms. Will the country take the
necessary steps, and do so in time? Can it continue its hitherto proven ability to manage its structural
vulnerability successfully as a small island economy amidst worsening external conditions? In a
generation, will Cape Verde be counted among the very few countries that have successfully made the
difficult transition from lower to upper middle income country?

Four alternative futures are presented as possible options for the road ahead. Each of the four the
futures: The Ostrich, the Tortoise, the Atlantic Fox or the Atlantic Tiger are all plausible. The Ostrich
Scenario results from a combination of doing nothing internally and an ongoing global economic
downturn. The emerging issues and key constraints that Cape Verde must address are neglected
because of inaction. This worst-case scenario is plausible, either because of political paralysis,
deteriorating governance capacity, lack of political will, or prolonged domestic and international
economic distress. The Tortoise scenario is a future where the country’s leadership chooses to rely on
past successes and fails to make the bold reforms necessary. Cape Verde simply becomes too slow and
unresponsive to competitive challenges, coasting along, losing ground and flirting with a fall into the
Ostrich scenario. The Atlantic Fox is a future in which the global economy is sluggish and moving from
one recession to another. In this future, however, Cape Verde reacts like a fox and does what it takes to
constantly create and seize opportunities. The result is a nation better able to weather global challenges
by building its capacity and capability to innovate and compete in niche opportunity areas. The fourth
scenario, the Atlantic Tiger, presents a future of foresight with emphasis placed on building high quality
education, good infrastructure, a strong work ethic, a business friendly environment and high savings. In
this future, Cape Verde has successfully positioned itself as an export-oriented global player in
knowledge driven services.

Which of these four future scenarios becomes reality will largely depend on two critical sets of factors.
The first critical set of factors—naturally for a small, open, insular, vulnerable economy—relates to
trends in the international environment. The present global crisis poses significant challenges for Cape
Verde. More worrisome is the evolution of the present crisis in the Eurozone, which has been Cape
Verde’s biggest source of trade, monetary stability, ODA, foreign investments, remittances, and tourism.
Prolonged crisis in the Eurozone could spell disaster for Cape Verde, a potential body blow to its efforts
to make a steady and sustainable transition to upper middle income. These external factors are in fact
beyond Cape Verde’s control and any policy adjustments it can make. The second group of factors is in