Economic Growth in Benin: Lost Opportunities

Chapter 22 of Volume 2

by Antonin S. DOSSOU[1]and Jean-Yves SINZOGAN[2]

with the contribution of Sylviane MENSAH[3].

BeninChapter 22

Table of Contents

1. Introduction

2. Characteristics of economic growth in Benin

2.1 An evolution of growth consistent with the political history

2.2 Factor accumulation and growth

2.3 Declining total factor productivity

3. Opportunities and syndromes

3.1 Opportunities: the strategic geographical situation

3.2. Syndromes

4. Economic policies and the organization of markets

4.1 The macroeconomic environment: the budget and fiscal policies

4.2 The goods market and the influence of Nigeria

4.3 The labor market: pressures for reallocation

4.4 The financial market: inefficiency

5. Microeconomic agents in the growth process

5.1 Households

5.2 Firms

5.3 The political class

5.4 Institutions: the legal apparatus

6. Conclusions

BeninChapter 22

List of Tables

Table 1: Contribution to the variances of forecast

Table 2: Contributions to the variances of forecast (overall sample)

Table 3: Contributions to the variances of forecast (SSA sample)

List of Figures

Figure 1: Rate of growth per five-year period

Figure 2: Evolution of M2/GDP ratio

BeninChapter 22 page 1

1. Introduction

Benin, called Dahomey until November 1975, is a West African country completely situated in the inter-tropical zone. It has a surface area of 114763 square kilometers, and it stretches 750 km from the North to South, with 125 km of coastline. The country is bordered to the north by the Niger River, which separates it from the Republic of Niger, to the northwest by Burkina Faso, to the west by Togo, to the east by Nigeria and to the south by the Atlantic Ocean.

In 2002, the general census of population and habitation counted 6,769,917 inhabitants (INSAE 2003) with a growth rate of 3.25% and an average density of 59 inhabitants per square kilometers. The rural population represents nearly 61% of the total, and the working population (people who are more than ten years old) accounted for 42% of the total population in 2002. 47% of the population is below 15 and women make up 51% of the population.

Benin is a member of the West African Economic and Monetary Union (Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo) and also of the French Franc zone. The currency is the CFA franc, which is managed by the Central Bank of West African States (BCEAO). The currency was pegged to the French franc and since January 1999 has been pegged to the Euro (100 FCFA = 1 FF and 1 Euro = 6.55957 FF).

Benin is one of the poorest countries in the world. The indicator of human development stood at 0.463 in 2002[4] and life expectancy at birth was 59.2 years. Such socio-demographic indicators indicate weak economic performance.

The performance of the Beninese economy was not promising during the 1960-1997 period: the Gross Domestic Product (GDP) was dominated by the primary and service sectors and basic macroeconomic indicators (growth, inflation, external equilibrium) were below the African average. Agriculture was about one third of GDP and the size of the agricultural sector tended to increase.

The Beninese industrial sector, whose share in GDP remains relatively stable (12.1% on average) is in an embryonic state and employs only 9.1% of the working population (Damiba 1989). The service sector remains the most important part of the national economy (about 55.8% from 1990-1997). The country’s geographic situation favors trade with neighbouring countries, particularly Nigeria. The service sector is dominated by re-exports and transportation.

The level of GDP per capita (in constant 1985 dollars) was nearly 5% lower in 1997 than in 1960, confirming the weak performance of the Beninese economy. From 1965 to 1989, GDP per capita has been declining. During this period, Benin has recorded low, often negative, rates of growth per capita.[5] Apart from 1990 to 1997, when growth reached an annual average of 1.9%, GDP per capita only experienced positive growth in 1960-1964 (0.7%) and 1975-1979 (0.09%). The Beninese economy recorded particularly weak performance from 1985-1989, with the change in GDP per capita averaging-4.5% per year.

This chapter identifies the explanatory factors for the poor economic performance of Benin. It is structured in three parts. The first part explores the characteristics of economic growth through a comparison with the political history of the country, and examines the contributions of factors of production. The second part highlights the influence of the various syndromes that have affected the management of the Beninese economy. The organization of markets has been heavily shaped by economic policy and by the country’s geographic environment, especially the proximity to Nigeria. The third part analyses the role of economic actors, in particular companies, households and political pressure groups.

2. Characteristics of economic growth in Benin

Economic growth in Benin has followed a path consistent with its political history. Total factor productivity growth has been more negative than the average for African countries.

2.1 An evolution of growth consistent with the political history

Dahomey became independent on August 1, 1960. During the following twelve years, the country maintained the political and economic structures of the liberal system inherited from colonization. The significant events of this period were the strong rivalries between political parties (essentially based on ethnic differences) and the numerous intrusions of the Army into the political life through military coups (6 in 12 years). Such instability did not allow the country to meet the expectations aroused by independence.

The military coup of October 1972 marked the end of political pluralism. The country was ruled by the armed forces until 1975, with a constant background struggle for influence between various groups of intellectuals. It then entered a period of single party rule, led by the People’s Revolution Party of Benin. This was followed by the institution of a Marxist-Leninist regime and a highly state-run policy. Thus, 1972 to 1989 (and especially 1975 - 1989) is the so-called revolutionary period of relative political stability imposed by a strong military-Marxist regime whose objective was to break with the previous rule. Benin was no longer closely aligned with France and embarked on a “new program of national independence.” Socialism was proclaimed as the “means for development” and Marxism-Leninism the “philosophical guideline.”

Kerekou ruled throughout this period. His rule ended in February 1990 with a national conference of powerful figures. This meeting put the country on a path to democracy and began its movement towards a free-market economy. The weakness of the state-controlled economy led to the rejection of any idea based on the control of the economy by the state and clearly forced Benin to accept the principles of a free-market economy and structural adjustment policies. The choice to open the country to foreign markets (a policy of export promotion) also explicitly required the reorganization of the cotton sector and its accompanying institutions.

There is a significant similarity between the various stages of the economic and political development of the country. A distinctive political pattern also determines the three important periods of the country’s economic history: 1960-1970, 1975-1989, and 1990-1997.

In the first period the economy was based on the export of agricultural products used as raw materials by French industries and imports of manufactured products from France. The economy recorded weak performance with an annual average growth of -0.8 %.

The second period was characterized by state control of the economy and large state investment. Because of a Marxist tendency, the state substituted for the private sector in all fields: industry, home and foreign trade, banks, insurance, etc. From the mid 1980s, the economy, was faced with deterioration of the terms of trade and the loss of competitiveness at the macroeconomic level, and was vulnerable to external shocks such as the slump in prices of raw materials because of the large role of the state. During this period, the annual average growth rate of GDP per capita fell to –2.1%.

The third period was marked by the liberalization and the opening of the economy. The reforms undertaken since 1990 have started the progressive liberalization of the economy. Concurrently, home and foreign trade have been liberalized, and the barriers to trade have been reduced to reasonable tariff protections. The state banks were closed and dozen of private banks and financial institutions have opened in their place. Restructuring occurred in other sectors, namely transportation, energy, telecommunications, the legal body and the civil service. Over this last period, the annual growth rate of GDP per capita recovered to 1.9%.

The 1990-1997 period also corresponds to the improvement in the economic situation in and relations with Nigeria. Trade has been liberalized and structural adjustment measures have reduced non-tariff barriers and pooled various import duties. Benin has diversified its export recipients to include major shipments to Brazil, Indonesia and Thailand. Benin continues to import the same amount, however, despite importing less from France, its largest source of imports.

The sectoral decomposition of growth in Benin by sub-period offers another reading of these trends. It shows that capital has contributed a great deal, and that labor’s contribution has been insignificant. These influences, however, are overwhelmed by the very negative growth in total factor productivity.

2.2 Factor accumulation and growth

Despite the increase in the investment rate, the contribution of capital to growth has followed a negative trend since 1960, going from 1.8% in 1960-1964 to 1.3% in 1990-1997. Such a decline shows that the amount of investment has been insufficient to ensure the reproduction of existing capital, and to increase the capital stock. According to data published by O’Connell and Ndulu (2000), apart from South Asia, Sub-Saharan Africa has the lowest rate of investment as a share of GDP of all the studied areas. Over the 1970-1989 period, this rate was estimated at 10.1% in international dollars against 18.9% for Latin America and the Caribbean, 19.8% for countries of East Asia and the Pacific, and 26.6% for industrialized countries. Low foreign investment seems to be the main cause.

The continued decrease of the capital contribution per capita from one sub-period to another seems to have lessened over the 1990-1997 period, during which, for the first time since 1960, the capital contribution has not fallen. The boost given to investment by the restoration of trust in the private sector and the improvement of the quality of investments because of the programs backed by the IMF and the World Bank explain this result.

Over the whole period, the contribution of capital to Beninese economic growth is higher than for Africa as a whole and sub-Saharan Africa in particular. While the rate of capital contribution per capita to growth in Benin between 1960 and 1995 is 1.62%, for Africa it stands at 0.8% (Collins and Bosworth 1996) and for the sub-Saharan zone at 0.6% (O’Connell and Ndulu 2000). The comparatively strong contribution of measured capital accumulation per worker may reflect high initial public investment rates during the period of state capitalism; but also, possibly, the financing of small-scale enterprises – particularly in the services sector which comprises 58% of GDP – through the informal financial sector. Attin (1990) emphasizes the relatively profitable nature of the small-scale and speculative enterprises that dominate the Beninese service sector.[6]

As for labor, its contribution to economic growth in Benin is much smaller, probably because of the insufficient quality of the workforce. The contribution, which varies from 0.58% in 1978-1979 to 0.66% in the 1990s, still remains higher than the average contribution in African countries, which is estimated at 0.2% for the whole continent as well as for sub-Saharan Africa over the 1960-1994 period (Collins and Bosworth 1996; O’Connell and Ndulu 2000). Schooling in Benin improved relatively faster than in other Francophone countries, even before independence.

Though the labour is abundant and cheap, it has not contributed much to growth in Benin. The country did not manage to accumulate human capital sufficient to match the investment in physical capital.

These various observations are strengthened by the econometric analysis carried out using the augmented Solow growth model specified by Mankiw, Romer and Weil (1992) and estimated by Hoeffler (1999) to underline the contribution of the factors of production to growth.[7]

The predictive quality of the model is generally good for Benin. For 1960-1997 the prediction error is 4.2%. The average growth rate estimated by the model is –2.3% against an actual rate of –2.4%. Significant disparities appear in some sub-periods. The prediction errors in 1985-1989 and 1990-1997 are large and result from a shortage of explanatory factors. Thus, the model overestimates the growth rate from 1985 to 1989, and underestimates the rate from 1990 to 1997. These two periods are unique in the country’s economic growth as seen in Figure 1, which shows the five-year growth rates.[8]

***Insert figure 1 near here***

Because of the massive twin deficits, from 1985 to 1989, the country experienced a serious economic and social crisis that caused a political one. The growth rate was at its lowest (-18.6%), with the State’s debts affecting both civil servants and the public sector.[9]

On the other hand, after the national conference, the 1990-1997 years mark the country’s recovery at the political, social and economic levels. The political, institutional and economic environments have been liberalized and economic reforms carried out as part of adjustment programs backed by the Bretton Woods institutions. The growth rate during this period (9.3 %) is the highest since 1960.

The analysis of the contribution of explanatory variables to the deviation of actual growth from the sample mean allows us to highlight in each period the unique features of the Beninese economy in comparison with the average characteristics of the whole sample. The results of the contributions calculations, made by Ndulu and O’Connell (2000) are restated in Table 1.

***Insert Table 1 near here****

Benin registers a lower growth rate than the sample mean over the whole period as well as over each sub-period. This observation confirms that the performance of the Beninese economy has been below those of the other countries included in the sample. The highlighted sub-periods, 1985-1989 and 1990-1997, correspond to the highest and the lowest differences as well as to the highest and the lowest growth rates.

In 1990-1997, the country followed the average trend of all the countries studied, including the South-East Asian countries with high economic performance. In terms of growth rate Benin is in the 50th percentile (the median), the 53rd percentile and the 68th percentile for, respectively, the whole sample, developing countries and Sub-Saharan Africa countries.

The overall poor performance can largely be explained by the low investment rate (calculated on the basis of international prices). Over all the sub-periods (except 1980-1984[10]), this variable contributes the most to the deviation of actual growth from the sample mean. As this contribution is negative; the differences compared to the other countries in the sample come from the low rate of savings.[11]The GDP per capita at the beginning of the period also shows a large (positive) contribution to the deviation of actual growth from the sample mean. The positive contribution of initial income comes from the conditional convergence property of the estimated regression: Benin’s low level of GDP, even relative to that of other sub-Saharan countries, tends to raise its predicted growth rate, other things equal. However, the country could not benefit from this advantage because of the low investment rate which did not allow it to adequately replace and accumulate physical capital.

Though the contributions of the factors tend to show the importance of the role played by capital, the augmented Solow model demonstrates that capital growth has remained below the minimum required to be a sustainable driver of growth.

The augmented Solow model (Hoeffler 1999; O’Connell and Ndulu 2000) well describes the trend of growth in Benin over the whole period under consideration, in that the prediction error is quite low (below 5%). However this conclusion is not valid for analysis by sub-period. The largest residuals (in absolute value) are registered over 1985-1989 and 1990-1997, highlighting the importance of these periods in the explanation of growth in Benin.

2.3 Declining total factor productivity

Labor and capital have made positive contributions to economic growth in Benin. Total factor productivity growth, however, (the residual of the equation) has been very negative over the whole period to such a degree that it is the main explanatory factor of the weak performance of the Beninese economy. The path of the residual over the period actually follows the same trend as that of growth. Thus the half-decades 1965-1969 and 1985-1989, during which the residuals reached their highest values in absolute value, also correspond to the decades when the growth rates have been the most negative. On the other hand, during the 1990s when total factor productivity growth was lowest (in absolute value), the country recorded good economic performance. Total factor productivity growth in Benin is larger in magnitude than the average for the continent. Over the 1960-1994 period, the residual stands at –0.6 % for the whole continent, –0.4 % for the Sub-Saharan zone, and –3.1% for Benin.