Côte d’Ivoire: Post-Coup Development Prospects Business 487
Business 487
Economics and Politics of Development
Prof. Marvin Zonis
04.24.2000
Country Report
Côte d’Ivoire: Post-Coup Development Prospects
Submitted by:
Kelley Graham
Amy Major
Steve Rao
Stephen Starr
Sue Vo
Thank you to our sponsors:
CNA Financial, Deutsche Bank, Diamond Technology Partners, and Pfizer.
Table of Contents
- Executive Summary
- Country Model
- Economic, Political and Social Variables
- Funding
- Stability of Government
- Rule of Law
- Ethnicity/Religion
- Variable Mix
- Conclusions
- Appendix
I. Executive Summary
On December 24, 1999, Côte d’Ivoire experienced the first coup d’état in the country’s history. Prior to the unprecedented coup, Côte d’Ivoire had been lauded for its political stability, particularly during the 23 years under President Felix Houphoüet-Boigny. The country’s economic growth, notwithstanding a downturn in the 1980s, was primarily attributed to the country’s political stability, while other structural factors were largely ignored. Political stability, however, revealed itself to be much more fragile under Houphoüet-Boigny’s handpicked successor Henri Konan Bédié, culminating in the Christmas Eve coup.
The post-coup development prospects for Côte d’Ivoire lie in the country’s ability to address these previously ignored structural factors. There are practically dozens of variables that will impact the country’s development prospects, but we focus on four variables as critical to the country’s economic development in the short-term future. We address each of the four key variables – funding, stability of government, rule of law and ethnicity – in this report.
We will argue that the short-term development prospects for Côte d’Ivoire are poor. More specifically, we believe that prospects in the 1-2 year horizon are dismal due to the instability of the political system and the imperative for external capital, not to mention the enduring problems of corruption and lack of transparency. In the 3 -5 year horizon, we believe the prospects are better but not optimistic, as the country grapples with issues related to ethnicity, social mobility, continued need for external funding, and transition from a commodities-based economy.
- Country Model
In this section, we start with the current economic and political environment. We then draw out from the current environment the major variables impacting the near-term prospects for Côte d’Ivoire. These variables form the core of our country model.
Current Environment
The so-called “Ivorian miracle” had stumbled in the 1980s when a combination of low world commodity prices and rapidly increasing debt revealed some of the structural weaknesses of an economy that over-relied on export commodities and external debt financing. Following debt default, debt restructuring, commencement of privatization, and currency devaluation, the Ivorian economy rebounded. GDP growth improved from 1.8 percent in 1994 to approximately 7.0 percent in each of the successive four years.
Yet, despite this economic rebound, the political situation deteriorated. The military coup was the culmination of the deterioration of trust in Bédié and his party, the PDCI. Specifically, the military justified the coup by pointing to: (i) the extra-constitutional attempts by Bédié to exclude political candidates because of their “non-Ivorian” status and to extend the presidency from 5 to 7 years; (ii) Bédié’s play to ethnic and anti-Muslim fears; and (iii) the level of corruption. The average Ivorian will tell you that “it was just too much.”
The popularity of the military, however, cannot continue unabated. Indeed, it has begun to decline noticeably according to a number of interviewees. Elections are supposed to take place in October 2000, but as yet a new constitution has not been completed, nor have the specifics of the elections been determined.
Social Stability: Ethnicity/Religion
Concerns are surfacing over the secretive nature of the framing of the new constitution, despite the broad range of political and ethnic interests represented by those selected by the military leaders to take part in the framing of the new constitution. One particularly disturbing aspect has been the resurfacing of Bédié’s originally-proposed idea that candidates without two Ivorian parents cannot run for office. Even though the current regime maintains a semblance, and in effect reality, of political inclusion, the long-standing ethnic/religious tensions in Côte d’Ivoire persist. We know from the experiences of many other developing countries that economic development issues cannot be analyzed without regard to the social structure of a ethnically and religiously heterogeneous society, particularly with respect to, crassly put, who wins and who loses.
Stability of the Government
The stability of the government is crucial for the country’s development prospects. By government stability we do not mean that Côte d’Ivoire needs another Houphoüet-Boigny. However, a weak government would be very vulnerable to yet another military coup, the probability of which are relatively high given the unprecedented first coup. The projection of fairness in the upcoming elections will be critical in legitimating the new government, as well as legitimating the election process. The latter will be important if the country is to sustain a constitutional mechanism for government change as an alternative to coups. In analyzing the mechanisms for government stability, we hope to look beyond the immediate transition from military rule.
Rule of Law
Related to the issue of political stability is rule of law. Rule of law, or lack thereof, will clearly be played out in the adoption of the constitution and in the election process. Stemming corruption and instituting transparency will also be critical for the prospects of a legitimate political system. Moreover, rule of law is requisite for economic development in terms of attracting the level of domestic and international investment that the country needs. Rule of law will, however, be a huge challenge for Côte d’Ivoire, where a system of checks and balances has never been implemented and where corruption runs deep.
Funding
Even if, in an optimistic scenario, the constitution and the elections are widely regarded as being fair, the new government has little hope of success if external funding dries up. Côte d’Ivoire last week avoided default on its Brady bond, but the country still faces about $15.7 billion in external debt. Debt forgiveness by bilateral creditors and multinational institutions is crucial to the country’s short-term prospects. At the same time, many investors have taken a ‘wait and see’ stance until at least the fall elections, which has contributed to a capital shortage. The government has indicated that civil servants are becoming more strident in their calls for higher pay. The lack of pay increases was also one of the reasons why the military is said to have undertaken the coup. Clearly, the ability to draw financing in the country is crucial not only to government stability, but also to economic development in general, particularly with respect to economic diversification away from commodities.
Omitted Variable
In selecting the above four variables, we had to omit some other important variables. On the top of the list of second tier variables is the transition away from a commodities-based economy. Historically, economic downturns in Côte d’Ivoire have been induced by a fall in commodities’ prices. This is not surprising given that agriculture accounts for over one-fourth of GDP and engages approximately 85% of the population. Diversification of the Ivorian economy is paramount for the country’s long-term economic growth prospects. In the short-term, however, the move away from a commodities-based economy will be very slow going. We omit an analysis of this transition as we believe it is highly reliant on the short-term prospects of the country with respect to political stability, social stability, rule of law and funding – that is, our 4 selected variables.
III. Data and Analyses
We discuss the four factors in terms of their immediacy to the country’s prospects. We start with funding given the pending payment deadlines.
A. Funding
The sharp downturn in commodity prices, particularly cocoa and coffee, sent the Ivorian economy tumbling and created an environment of popular discontent that may have fostered the coup. Prior to this tumble, the Ivorian economy had been registering GDP growth rates of approximately 7% over the last four years. However, just preceding the coup, the government indicated that it would be unable to meet an IMF debt payment. In response to this announcement, the IMF suspended future funding committed under the Enhanced Structural Adjustment (ESA) loans and left the government grappling with a debt burden in excess of $13 billion, or just over 118% of the country’s 1998 GDP.
Debt forgiveness by bilateral creditors and multinational institutions is crucial to the country’s short-term prospects. Without a significant increase in tax revenues, debt forgiveness or additional external financing, the government will default on its debt obligations. In discussing the likelihood of debt forgiveness with interviewees at the African Development Bank (ADB) and the IFC the consensus is that some debt forgiveness will take place. The Ivorian government’s inability to meet foreign debt payments was demonstrated when it “technically” defaulted on its US issued Brady bond payment of $9.5 million last week[1]. The payment was actually made, albeit late, and was financed through a loan from the Africa Development Bank. The government will need to procure financing for another Brady bond payment of $20 million due on April 30.
Interviewees at the IFC and the ADB noted that large investments, particularly related to infrastructure development, have been put on hold, while capital commitments made prior to the coup are being recognized. At the same time, many investors have taken a ‘wait and see’ stance until the fall elections, which has contributed to a capital shortage. Thus, any new capital commitments will be decided after, and pending, a successful election process.
B. Stability of the Government
The Christmas Eve military coup sets a dangerous precedent, serving to make an unstable system even more unstable. What was initially believed to be a popular coup filled with opportunity to breathe new life into an otherwise corrupt and deteriorating system has had an opposite effect. The coup, and subsequent lack of change, is sending a message to the people that if they disapprove of the political system, power can be easily wrested from the hands of those in charge with minimal bloodshed and loss. The problem is that even a leader with the best of intentions will find it impossible to overcome all of these hurdles in making his well-laid plans a reality.
At first blush, the bloodless and popular coup in December 1999 seemed to be an opportunity to part with old ways. People were infused with a new energy and belief in a new system. However, post-coup realities have created a waning enthusiasm. Our first observation that seemed to indicate that the coup was not as popular as first believed, was the ubiquitous military presence. When the military seized power, they resolved to free all political prisoners but in the process ‘mistakenly’ released all prisoners. This enabled the military to assert its legitimacy under the guise of public safety. To aid in the recapture of these criminals, military barricades now block virtually every bridge and major street in Abidjan and all drivers and passengers must present proper paperwork in order to pass.
Several factors make it difficult for the new administration to follow through with their high-minded intentions. This will be true for any subsequently elected administration as well. The current government, under the guidance of General Guei, faces several difficulties, including:
- lack of funds due to Bedie’s frozen overseas assets
- high debt loads that are increasingly difficult to finance
- foreign investors’ suspension of major projects
- international community’s unwillingness to lend further or forgive debt before official elections in October.
In short, the economic situation is deteriorating, the government has limited internal funds and the foreign investment community is not investing external funds. Popular sentiment has changed from celebration to skepticism as government services, such as garbage removal, are slowing or stopping altogether. General Guei, who started his first speech with the word ‘humility’ and condemned the excesses of Bedie, is granting his friends and family lavish privileges, such as luxury cars with sirens to go shopping, just like under the old regime. Finally, although he once stated that he would not run in elections, and the Constitution forbids it, he is having the Constitution reviewed in order to assess whether his candidacy is a possibility.
C. Rule of Law
The lack of rule of law is of definite concern when considering the economic and political risks related to investing in Cote d’Ivoire. There are two key concerns resulting from the lack of rule of law that serve to further exacerbate the unstable situation. One resonates the already uncertain economic problems because people who can not (or do not) adapt well to the prevailing means of conducting business will exit the market. Cronyism is typically the manifestation of this economic concern; those who thrive in the uncertain, and often corrupt, economy are left to influence economic activity to their benefit. The other concern is further destabilization of internal politics because individuals do not perceive the political process to be fair. For a state, such as Cote d’Ivoire, that considers itself to be a democracy (however loosely defined) the apathy that results is debilitating. While the problem of the sheer lack of known, consistently enforced jurisprudence is common throughout Africa, the three primary factors affecting Cote d’Ivoire involve a lack of both transparency and institutions and the prevalence of corruption.
There is a fundamental lack of transparency throughout Ivorian law. Individuals are unaware both of the laws themselves and of their rights as citizens. In addition to the obvious operational problems this lack of awareness can cause within the country, it inevitably encourages a general sense of helplessness and detachment. The long-term effects of such a popular disengagement do not bode well for stability. Additionally, there are serious differences between the rural and urban grasps of the political and legal system. These differences are further exacerbated by the poor quality of rural communication and educational infrastructure.
While some of this lack of awareness and understanding can be attributed to shortfalls within the educational system, the responsibility falls primarily on the shoulders of the government. It appears as though the ruling regimes have supported the lack of transparency as a means of further increasing the power of the state, especially the presidency. Since independence from France, there has been little, if any, effort to improve the population’s knowledge of and access to the legal system. While the effects of any efforts by the new regime to improve the current degree of understanding of the legal and political system will not be evident for quite some time, there are some serious, immediate implications. If the international community does not perceive the upcoming elections to be fair and transparent, it is likely that outside funding will be frozen or reduced. Such a move by the international lending community would prove fatal for the Ivorian economy. Unfortunately, it is too early to guess whether Guei is sincere in his stated intention to overhaul the country’s legal and political system. Any efforts to improve the current lack of transparency will be complicated by factors embedded in Ivorian society, namely the lack of institutions and the prevalence of corruption.
One only has to look to the events leading up to the coup to find concrete evidence of a lack of government and social institutions within Cote d’Ivoire. Prior to the coup to avoid opposition by a political antagonist, Bedie changed the constitution to restrict eligibility in the upcoming presidential elections. This change is just one illustration of how innumerable times since independence from France regimes have manipulated the legal and political system in order to further concentrate power in the hands of a desired few. Long ago the precedent was set that regimes had the power to redefine the laws as they saw fit. This practice further undermines any appearance of political stability that was achieved over the course of the last forty years.
Even in instances where there is an established, relatively consistent institution, such as the legal system as it pertains to business, Cote d’Ivoire shows signs of concern. While there is an established court system that operates within the country, individual access is limited due to time and expense. The ability to maintain a case in the court system requires greater than average shares of both time and money. The lack of transparency and the existence of corruption further complicate the successful operation of the legal system. The current regime has the opportunity to begin the slow, but necessary, process of redefining and establishing governmental institutions via the newly appointed committee for the rewriting of the constitution. Unfortunately, there is little indication that the new constitution will contain enough of the fundamental elements necessary to implement and support such institutions.