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Chapter 6. Government Failure and Poverty Reduction in the CEMAC

Author(s):
Bernardin Akitoby, and Sharmini Coorey
Published Date:
August 2012
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Author(s)
Shanta Devarajan and Raju Jan Singh 

The countries composing the Economic and Monetary Community of Central Africa (CEMAC) have some of the lowest social indicators in the world (Table 6.1). Although the Republic of Congo (hereafter “Congo”), Equatorial Guinea, and Gabon are middle-income countries, Cameroon, the Central African Republic, and Chad are among the poorest countries. In Cameroon, poverty has increased over time, whereas the other two have remained at high levels of human deprivation. For instance, 55 percent of the population in Chad lives below the poverty line, with 36 percent in extreme poverty.

Table 6.1Rank (out of 169) in the Human Development Index
Gabon93
Equatorial Guinea117
Republic of Congo126
Cameroon131
Central African Republic159
Chad163

Meanwhile, all six countries are rich in natural resources. Cameroon, Chad, Congo, Gabon, and Equatorial Guinea are oil producers, while diamonds are the Central African Republic’s major export. Congo is currently sub-Saharan Africa’s fourth largest oil producer, with an average daily output of 230,000 barrels.1

Although a small oil producer today, Cameroon experienced a rapid expansion in oil production starting in 1978, peaking at 180,000 barrels per day in 1985. Chad, which first shipped oil in October 2003, has about 1.5 billion barrels in proven reserves. Although reliable information on diamond activity in the Central African Republic is scarce, estimates indicate that the country produces between 350,000 and 400,000 carats per year, earning about $50 million in export revenue.

How could these countries be so rich and yet so poor? This question, which has been posed about other resource-rich countries, has spawned a rich literature on various aspects of the “natural resources curse” (e.g., Gelb, 1988; and Sachs and Warner, 2001). This chapter explores whether one particular aspect of these countries’ natural resource endowments contributes to their persistent poverty. Specifically, has natural resource revenue undermined accountability mechanisms in these countries, making it difficult for governments to provide public goods and promote a more equitable distribution of income? This syndrome is dubbed “government failure,” as the mirror image of “market failure,” the situation in which private agents, acting in their own interests, give rise to an equilibrium that is suboptimal from society’s point of view. Government failure occurs when individual government actors, responding to incentives created by existing accountability mechanisms, contribute to an equilibrium that is socially suboptimal. In turn, these government failures impede economic growth and poverty reduction. The Central African Republic, Chad, and Congo have also experienced civil conflict—an extreme form of government failure—which has exacerbated poverty. This analysis suggests that transforming these countries’ natural resources into sustainable growth will require more than technical approaches to strengthening public expenditure management systems (although that is important)—it will require a fundamental shift in citizens’ ability to hold governments accountable for spending natural resource revenue.

Common Features of the CEMAC countries

Although different in many respects, the six CEMAC countries share some common features that may have contributed to their similar outcomes for poverty and human development.

Natural Resource Endowments

All six countries are richly endowed with natural resources, providing windfall revenues to the countries and their governments. In addition, they have many resources that remain to be exploited. For instance, the Central African Republic has largely unexploited natural resources in the form of gold, uranium, and oil deposits along the country’s northern border with Chad, while untapped resources in Cameroon include natural gas, bauxite, diamonds, gold, iron, and cobalt. As Collier (2010) has shown, Africa’s undiscovered mineral reserves are likely to be four times current reserves.

Diversity

Sitting at the crossroads of the peoples of the desert, the savannah, and the forest, CEMAC countries are ethnically, linguistically, and religiously very diverse. This characteristic makes preservation of national unity challenging, and in some instances has led to decades of conflict, as in Chad.

Cameroon was created as a political entity in the late nineteenth century, replacing numerous states and chiefdoms, each of which had its own history, culture, economy, and government. Estimates identify anywhere from 230 to 280 different ethnic and linguistic groups broadly divided by the Adamawa Plateau into northern and southern regions (Neba, 1999). Religious differences add to this diversity. Similarly, more than 80 ethnic and linguistic groups inhabit the Central African Republic; there are 200 ethnic groups in Chad, 15 principal Bantu groups with more than 70 subgroups in Congo, and Gabon has at least 40 ethnic groups with separate languages and cultures. The majority of the people in Equatorial Guinea are of Bantu origin, but the Fang—the largest group—comprises about 70 clans.

Living conditions also differ widely across regions within a country. Cameroon’s economic growth, for instance, has shown large regional disparity. The incidence of poverty in four regions (Adamawa, East, North, and Extreme North) increased significantly between 2001 and 2007 although the country’s overall poverty trend was steady. The two northern regions (North and Extreme North) saw the biggest poverty increases, of 13.6 and 9.6 percentage points, respectively. Similarly regional disparities are substantial in Chad, where the poverty rate is 50 percent in the rural parts of the north, but 70 percent in the rural south.

Historical Legacy

The CEMAC countries have a common heritage of having been administered forcefully, often by private companies, during the colonial period. This may explain the distrust of the private sector. The reported financial successes of Leopold II’s concessionary companies in the Congo Free State in the latter half of the nineteenth century encouraged the French government to develop its Equatorial African territories by granting companies large concessions. Two dozen such concessions extended over large portions of present-day Central African Republic, Congo, and Gabon. The activities of the companies also affected Southern Chad. Similarly, in Cameroon the German Empire handed colonization to private companies, known as the Kolonialgesellschaften.

In return for the exclusive right to exploit these lands by buying local products and selling European goods, the companies promised to pay rent to the colonial state and promote the development of their concessions. These private enterprises tended, however, to invest as little as possible in the development of the territories, while reaping as much short-term profit as they could from their natural resources, frequently using brutal methods to force Central Africans to work for them.

At the turn of the twentieth century, public opinion in France and Germany revolted against the abuses of the system, leading to some changes. The traditional economies and societies of the African colonies, as well as the environment, had by then been severely disrupted (Coquery-Vidrovitch, 1972). One of the most striking consequences was the substantial demographic decline experienced in this region: from an estimated 10 million people at the beginning of the twentieth century, the population of French Equatorial Africa is thought to have declined to less than 5 million at the end of the colonial period in 1960 (Singh, 2008).

Equatorial Guinea—a Spanish colony—is an extreme case of unequal development. On the main island, Biyogo, much of the indigenous population had been transformed into fairly prosperous farmers dependent upon migrant, especially Nigerian, labor. The island had the highest literacy rate in sub-Saharan Africa. In the mainland, Rio Muni, by contrast, from where the postcolonial leaders emerged, infrastructure and education services were rudimentary and Spanish military rule was often brutal (Sundiata, 1988).

In sum, CEMAC countries are ethnically heterogeneous and mistrustful of the private sector as an engine of development. The discovery of oil, therefore, has provided an opportunity for governments to assert themselves as the main actors. It has also opened the possibility for disenfranchised groups to attempt to capture the oil revenue for their own groups. As shown below, these factors, combined with intrinsic aspects of natural resource revenue, have conspired to keep these countries from sustained growth and poverty reduction.

Elements of Government Failure

The symptoms of the underlying problem in the CEMAC countries—government failure—can be illustrated by examining various aspects of their public finance.

Dependence on Resource Revenue

The governments of the oil-producing countries depend heavily on oil revenue. This revenue needs relatively little administrative effort to collect compared with other revenue sources. Perhaps more important, they are much less costly politically because residents are spared the burden of heavy taxation. As a result, even compared with other oil-producing countries, CEMAC countries mobilize relatively little non-oil revenue (Figure 6.1).

Figure 6.1Share of Oil Revenue in Total Revenue, Selected Oil-Producing Countries, Average 2007–09

Sources: Country authorities; and IMF staff calculations.

Note: CEMAC = Central African Economic and Monetary Community.

However, heavy dependence on oil revenue complicates fiscal policy. These resources are typically volatile and uncertain. Linking public spending to resource revenue tends to lead to macroeconomic volatility and reduce the quality of public spending. Furthermore, because citizens do not directly contribute to this revenue, some evidence indicates that they exert less effort in holding the government accountable for its spending.

Lack of Transparency

Despite years of technical assistance to improve public expenditure management, expenditure processes in Central Africa remain among the most opaque in the world according to the Open Budget Index (Figure 6.2). Overall governance indicators are also worse for these countries than for their Coopération Financière en Afrique Centrale (CFA) zone counterparts in West Africa and the rest of Africa (Figure 6.3). Because the population does not finance the bulk of public spending through their taxes, they do not feel as great a need to hold government accountable for the use of public money (Devarajan and others, 2011). The government, for its part, prefers to have discretion over its spending and therefore has little incentive to increase the non-oil revenue share.

Figure 6.2Open Budget Index Scores, 2006–10

Sources: International Budget Partnership; and IMF staff calculations.

Note: WAEMU = West African Economic and Monetary Union. CEMAC = Central African Economic and Monetary Community; WAEMU = West African Economic and Monetary Union.

The combination of weak institutions and ethnic diversity has led to civil conflict in three of these countries. In the Central African Republic, where natural resources are not controlled and taxed by government, the possibility of earning diamond rents led to a winner-take-all mentality—in the absence of institutions for sharing the revenue—with different groups vying for the right to extract minerals. The resulting 30-year civil conflict meant that the country experienced low investment, slow growth, and increasing poverty. The Central African Republic illustrates what happens if none of the natural resource revenue flows to the government. The state becomes too weak to even provide basic public goods, such as security. The challenge in the Central African Republic is how to build state capacity and security to allow legitimate diamond mining, without jumping to the other extreme of state capture and weak accountability to the population.

In Chad, rebel attacks in N’Djamena in 2006 and 2008 increased security demands on the government’s budget, crowding out much-needed social spending (see “Ineffective Allocation of Public Resources” section below). Likewise, Congo’s multiple ethnic groups were engaged in a civil war that left the economy at a much lower level than its resource base would predict.

Figure 6.3Selected Governance Indicators

Sources: Heritage Foundation website; and World Bank staff calculations.

Note: CEMAC = Central African Economic and Monetary Community; CFA = Coopération Financière en Afrique Centrale; SSA = sub-Saharan Africa; WAEMU = West African Economic and Monetary Union.

Figure 6.4Chad: Government Revenues and Expenditures, 1995–2010

Source: World Bank, 2011.

Note: CFAF = Coopération Financière en Afrique Centrale franc.

But the greatest difficulty facing all six countries is managing resource revenue, even in peaceful times. From the point of view of growth and poverty reduction, public spending in these countries has been particularly badly managed—at the aggregate, sectoral, and program levels.

Spending Booms

As oil production increased rapidly in the late 1970s and early 1980s, Cameroon pursued an expansionary and unsustainable fiscal policy, eventually contributing to a deep economic crisis. From 1976 to 1985, inflation-adjusted public spending rose by an average of 15 percent a year, contributing to strong economic growth. By the second half of the 1980s, however, oil production and international oil prices began to decline, bringing Cameroon’s oil boom to an end.

In response, the government carried out fiscal adjustments (mainly cuts in investment) and pursued limited structural reforms. These measures were insufficient to prevent Cameroon from entering a deep recession, which lasted from 1987 until the mid-1990s. In that period, per capita income declined more than 40 percent, and Cameroon accumulated a large public debt, as well as payment arrears. By the early 1990s, it was clear that fiscal adjustment and structural reform alone could not restore competitiveness. In light of similar difficulties in neighboring countries, the CFA franc (CFAF) was devalued by 50 percent in early 1994.

Similarly, Congo’s recent economic history clearly shows that rapid expansion of public spending—on loss-making public enterprises and a bloated public sector wage bill—financed by oil revenue can jeopardize macroeconomic stability. In the 1980s and 1990s, Congo displayed poor fiscal discipline, and its fiscal policy paid little attention to macroeconomic stability. As a consequence, economic growth could not be sustained and a large debt overhang accumulated. Since the restoration of peace in 2002, and especially since 2008, however, the Congolese economy has resumed economic growth, thanks to prudent macroeconomic policy, among other factors. Building on the oil boom of the early 2000s, the country has been running fiscal surpluses. In light of its massive infrastructure needs, Congo is planning large infrastructure investments. The challenge will be to ensure that these investments are properly managed and sequenced to avoid some of the boom-bust cycles experienced in the neighboring countries. As discussed in the “Overcoming Government Failure” section, one approach will be for citizens to demand strong government accountability for how the oil revenue is spent.

In Chad, the government has relied heavily on oil revenue to finance a large expansion in public spending. Government revenue increased more than sixfold between 2003 and their peak in 2008, rising to CFAF 986 billion from CFAF 125 billion, reflecting increased oil production and high oil prices (Figures 6.4 and 6.5). As a result, public expenditure has increased significantly.

Figure 6.5Evolution of Crude Oil Prices, 2004–10

Source: World Bank, 2011.

Since 2003–04, public spending has substantially expanded across all categories. The domestically financed budget increased from about CFAF 337 billion in 2004 to CFAF 905 billion in 2009 (from 14.4 percent of non-oil GDP to about 40 percent of non-oil GDP). The recurrent budget (net of debt-service payments) increased from CFAF 145 billion in 2004 to CFAF 612 billion in 2009 (from 10.2 percent of non-oil GDP to almost 30 percent of non-oil GDP): a threefold increase. The domestically financed investment budget experienced a similar expansion, increasing from 3.4 percent of non-oil GDP in 2004 to 9.4 percent of non-oil GDP in 2009.

The decline in oil prices in 2008 and 2009 left Chad in an extremely vulnerable fiscal situation. Without appropriate savings, the country had to borrow. The government accumulated some deposits in its account at the Bank of Central African States (BEAC) when oil prices were high (Figure 6.6). However, these deposits proved insufficient when oil prices dropped in late 2008 and early 2009. Not only did domestically financed expenditures not adjust in accordance with lower revenue, they actually increased from 2008 to 2009 by 9.6 percent. As a result, the government had to drain its deposits at the BEAC, request advances to meet its financing needs, and turn to nonconcessional borrowing.

Figure 6.6Evolution of Chad’s Deposits and Advances at the BEAC

Source: World Bank, 2011.

Note: BEAC = Bank of Central African States.

Ineffective Allocation of Public Resources

In addition to mismanaging the aggregate levels of public spending out of oil revenue, these countries have misallocated resources across different uses. The discretion allowed by opaque public expenditure management practices and the need to deal with various demands from fragmented political constituencies have led to striking discrepancies between stated development objectives and actual executed public spending. Two cases in point are Cameroon and Chad.

In Cameroon, budget discipline has not always been strong, contributing to poor practices in budget preparation and execution, and allowing political interference in the budget process. Overall, poor planning and preparation of the budget, and the lack of broad participation by line ministries in the process, has lead to weak ownership and acceptance of the budget. Despite multiple controls in budget execution, the controllers are neither empowered to do their jobs without outside interference nor held accountable, further reducing the efficiency of budget execution.

The social sectors, health and education in particular, along with agriculture and infrastructure, appear to constitute the pillars of the government’s investment strategy. The share of these four key sectors in the investment budget increased from about 42 percent in 2004 to about 68 percent in 2008. This expansion was driven mainly by the infrastructure sector, whose share more than doubled during these four years (from less than 20 percent in 2004 to more than 40 percent in 2008).

However, these priority sectors represented a much smaller share of the treasury’s actual payments, declining from about 44 percent in 2006 to about 30 percent in 2008 (Figure 6.7 and 6.8). This decrease may reflect the difficulty of implementing projects in key sectors or a shift in the government’s priorities between the planning and payment stages. The infrastructure sector again saw the biggest changes: it represented 45 percent of the planned investment outlays in 2008, but only 19 percent of the payments. None of the government’s priority sectors differed from this pattern.

Figure 6.7Budget Allocation to Priority Sectors in Cameroon, 2004–08

Sources: World Bank, 2010a.

Figure 6.8Budget versus Expenditure in Priority Sectors in Cameroon, 2006-08

In Chad, too, budget execution has not reflected strategic priorities. Budgetary appropriations more or less conform to the objectives spelled out in Chad’s Poverty Reduction Strategies (Figures 6.9 and 6.10). Actual spending in priority sectors, including but not limited to health and education, has fallen short of expectations because of problems in budget execution. Priority spending also seems to have been crowded out by unbudgeted expenditures, especially on the military.

Figure 6.9Chad: Priority and Nonpriority Execution, NPRS I (2004–07)

Sources: Country authorities; and IMF staff calculations.

Note: NPRS = National Poverty Reduction Strategy.

Figure 6.10Chad: Priority and Nonpriority Execution, NPRS II (2008–10)

Sources: Country authorities; and IMF staff calculations.

Note: NPRS = National Poverty Reduction Strategy.

Low Value for Money

Resources spent on priority sectors, such as infrastructure, agriculture, health, and education, have resulted in limited improvement in the services provided by these sectors. In Chad, the cost of constructing classrooms is the highest in Africa—and four times the next most expensive country. Despite providing “free” health care, Chad has one of the lowest immunization rates in the world. A leakage rate of 99 percent for nonsalary public spending in health in the country may be part of the explanation (Gauthier and Wane, 2009). Cameroon annually spends about $50 per capita on health, but has the epidemiological profile of countries that spend $10. Road maintenance costs in the country are twice the average for sub-Saharan Africa. Despite huge electricity needs, Congo’s electric utility suffers from 47 percent transmission losses (compared with an African average of 27 percent), overstaffing, low cost recovery (despite relatively high tariffs), and low collection rates. Finally, all these countries have used oil revenue to increase subsidies. In Chad, subsidies are provided to the cotton and electricity sectors; in Cameroon, to aluminum, fuel, and publicly owned enterprises.

One reason for the low value for money in these countries is that, in all of them, most spending circumvents the public procurement system. In Cameroon, only about a quarter of contracts go through the procurement system. The figure in Congo was estimated to be about the same, although the share has increased since the country reached the completion point for the Highly Indebted Poor Countries initiative, with concrete, on-the-ground results from these reforms. The more general point is that there appear to be few incentives for using public revenue cost efficiently, possibly because citizen scrutiny of these spending decisions is minimal. That a sizable share of this revenue is spent on subsidies also indicates that it may be an instrument of political patronage.

Overcoming Government Failure

The coexistence of natural resource rents and poor economic performance in the CEMAC countries is more than a coincidence. Poor performance stems from a fundamental feature of the revenue from mineral extraction. When the revenue accrues directly to the government without passing through the citizenry, as would revenue from taxation, citizen scrutiny—or even knowledge—of this resource revenue is weaker (Devarajan, 1999). Knowing this, government can exercise more discretion in public spending, leading to unsustainable fiscal deficits (as was the case in Cameroon in the early 1990s, and in Chad more recently), misallocation of resources away from priority sectors, and extremely low value for money. When the revenue does not accrue to the government, as with the Central African Republic’s diamonds, and the state’s capacity is weak, the “first-come, first-served” nature of natural resources extraction leads to civil conflict and an even further weakening of the state.

What can be done in these situations? Broadly speaking, there are two categories of actions. One is to strengthen governments’ capacity for taxation and public expenditure management. If governments employ a medium-term expenditure framework, they are more likely to see the future consequences of current expenditure patterns and, possibly, avoid running into debt problems. Similarly, if governments strengthen their capacity to evaluate public investment programs—including by using benchmark information to assess the costs of their investments—both the allocation of resources and value for money would improve.

However, these “supply-side” interventions can only go so far when the pervading problem is the government’s lack of accountability to its citizens for spending resource revenue. A second category of solutions, therefore, is to change the way resource revenue accrues to the government. Instead of having the revenue go directly from the oil company (for instance) to the government, it could be transferred directly to the citizens, who would then be taxed to finance public expenditures. Such a scheme is a variant on the direct distribution mechanisms already being practiced in, for instance, the state of Alaska in the United States, where a portion of oil revenue is transferred directly to citizens. As Devarajan and others (2011) show in an analytical model, such a scheme could lead to greater citizen scrutiny of government spending (even if that scrutiny is costly) and, ultimately, to better public expenditure decisions.

To be sure, this approach would not work in a country such as the Central African Republic, where the problem is lack of government revenue (the Central African Republic has one of the lowest revenue-to-GDP ratios in Africa, and public services are virtually nonexistent outside the capital city). The challenge for that country is to strengthen the capacity to collect revenue from other sources so that the state can provide the basic public good of security, which would, in turn, allow for legal diamond mining. But even in this case, citizen feedback on how the state spends its additional tax revenue would be critical for sustaining that revenue.

Direct distribution of resource revenue combined with taxation will also challenge the already weak implementation capacity of the CEMAC countries. Current tax administration is weak, and the governments lack effective means of distributing cash transfers to citizens. However, thanks to modern technology and an understanding of fiscal policy in low-income countries, both these problems can be addressed. First, tax administration is weak in these countries because they have not had to rely on taxation for public revenue. Countries with comparable per capita income, such as Ghana and Kenya, have reasonably well-functioning tax systems. The CEMAC governments should be able to learn from Ghana and Kenya and develop their tax systems—especially if taxation becomes their only source of revenue. Second, although governments may now lack the means of transferring money to citizens, the enabling technology has improved so much that it should be possible in the near future. Low-income countries are already introducing personal debit cards (with verifiable anthropomorphic information, such as fingerprints embedded in the chip) to carry out various antipoverty schemes, such as India’s health insurance program (Gelb and Decker, 2011). With the advent of mobile banking, and the ubiquity of mobile phones in Central Africa, it will be possible to make these transfers by mobile phone, thereby reaching people in remote areas as well.

No doubt, a proposal to transfer resource revenue directly to the public and then tax them will be resisted by governments that are accustomed to having discretion over public expenditures. But these are the same governments that have wielded this discretion poorly. The citizens of CEMAC countries have not benefited to the fullest extent from their countries’ rich natural resource base. They deserve better. With commodity prices expected to remain high through 2020 and the possibility of even more mineral discoveries in these countries, their citizens have an opportunity to launch their countries on a path of sustained economic growth and poverty reduction. The citizens of CEMAC countries—and indeed the international community—should ensure that natural resource revenue is not squandered in the future.

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