The Political Economy of Cameroon’s Post-Independence Growth Experience

Chapter 16 of volume 2

Georges Kobou[a], Dominique Njinkeu[b] and Bruno Powo Fosso[c]

CameroonChapter 16

Contents

1. Introduction

2. Natural resources and economic performance in Cameroon

2.1 Analysis of data

2.2 Macroeconomic implications of natural resources: explicit and implicit Dutch Disease

3. Economic elements of growth performance

3.1 Macroeconomic determinants of growth

3.2 Microeconomic determinants of growth

Operation of various markets.

Behaviour of various agents

4. Social and institutional elements of growth performance

4.1 Social aspects of growth performance

Interest groups, rent seeking and coalition building

Management of the equilibrium between regional entities

4.2 Institutional aspects of growth performance

Financial repression

Financial discipline and the inefficient macroeconomic framework

5. Conclusion

Appendix: Data definitions and sources

References

List of Tables

Table 1: Fraction of agricultural area to total area use (in percentage)

Table 2: Primary commodity exports (in millions of USD)

Table 3: Fraction of different segments of population to total population (in percentage)

Table 4: Growth of GDP, inflation, and the real interest rate (in percentage)

Table 5: Macroeconomic aggregates relative to GDP (in percentage)

Table 6: Contribution of factors to growth in Cameroon

Table 7: Contribution of macroeconomic variables to deviation vis-à-vis average real GDP per capita

Table 8: Evolution of international and national prices of certain cash crops (per kg) between 1973 and 1993

Table 9: Distribution of managers of public and state-owned enterprises in Cameroon by ethnic group (in %).

Table 10: Ministerial positions by ethnic groups between 1960 and 2002

List of Figures

Figure 1: Evolution of terms of trade

Figure 2: Evolution of commodity exports relative to GDP (in percentage)

Figure 3: Evolution of commodity exports relative to GDP (in percentage)

Figure 4: Evolution of GDP per capita and growth of GDP per capita

Figure 5: Evolution of oil exports and government spending relative to GDP (in percentage)

Figure 6: Contribution of sectors in GDP

Figure 7: Inflation rate

Figure 8: Evolution of real deposit rate

CameroonChapter 16 page 1

1. Introduction

The growth performance of Cameroon, as in other countries, reflects the interaction of factors like labor and capital, productivity[1] and structural characteristics. The structural characteristics can be considered from two perspectives: the role of new technologies in the growth process (Gordon 2001) and qualitative aspects such as the functioning of markets and the regulatory framework. These qualitative aspects assume center stage in Cameroon. Most markets are underdeveloped, partly due to the institutional rigidities that can be traced to alternative sources of foreign reserves especially from agriculture and natural resources, including oil and wood. As such Cameroon’s growth performance follows that of resource-rich economies; however, availability of more than one resource base has at times prevented the country from feeling the full effect of shocks and so has enabled the government to take a lax macroeconomic management approach, with painful decisions postponed. This overall economic configuration, combined with potentially volatile social tensions, has prevented the country from growing at its potential level.

For a resource-rich country sound policy is crucial and in the case of Cameroon the Franc zone institutional arrangements provide the ingredients for an acceptable macroeconomic framework. But performance has been below potential because of institutional rigidities that are particularly evident in the case of currency appreciation.

The ethnic and regional tensions also complicate policymaking, putting security concerns at the center of all successive governments’ policymaking. The 1960s were influenced by pre-independence rebellion, with significant efforts allocated to peace building and security. A considerable share of state resources was imputed to security expenses. Only with the end of the rebellion beginning in the 1970s could the country really start putting in place its industrial development infrastructures. Public institutions were designed through a consolidation of the British and French cultures of public administration with a tension between a strong central government and a balance between central and lower levels of governments. This also carries over to the legal framework that borrows from the French civil code and the British common law to produce a hybrid system that at times has led to different interpretations of the law, hence increasing uncertainty facing investors.

Although the country has not experienced open conflict, peace building has been a permanent concern of the government and has led to some economically inefficient decisions in the interest of peace. This has not stimulated economic growth.

At least four regional groups need to be taken into account in major policy decisions: the North, the Centre and South, the West, and the English speaking provinces (North-West and South West). Religion also plays a role. The country is almost equally divided between the Christians, Muslims and African traditional believers; with Muslims primarily in the North of the country. Social cohesion obtained through specific management of the linguistic, geographic and religious entities has driven policymaking by all governments.

Under each government politicians have exploited these differences to their advantage, to the point that rent seeking dominates business behaviour (Yates 1996), particularly in recent periods. As such Cameroon shares the characteristics of resource-rich countries (Wunder 2005). This is compounded by the possibility of agricultural revenues compensating the fall in government revenues due to shocks in the price of natural resources that has introduced lesser variability in overall government revenues. From 1986-2003, while cocoa and coffee prices were dropping there was an oil and wood boom that compensated for the loss from agricultural products.

Since independence successive governments have primarily relied on the relatively rich economic set of opportunities to entertain social cohesion through redistributive policies. Lack of sound governance structure has turned good intentioned redistributive policies into rent seeking and corruption. No sustainable long-term economic strategy was ever developed. The rich resource base and the carefully designed macroeconomic institutions turned out to retard growth instead of setting the country on a sound economic growth path.

Post independence economic growth performance in Cameroon is therefore based on the combination of a resource-rich nature and the social and institution characteristics. The objective of this paper is to disentangle the process stimulated by the natural resources on the period 1960-2000, in order to understand the contribution to the growth process of each of these different components. The rest of the paper is organized as follow. We first present the main resource-rich characteristics of the economy, and then analyze the patterns and economic determinants of growth before assessing the role of social and institutional variables. The final section concludes with lessons for future economic policy

2. Natural resources and economic performance in Cameroon

Economic performance in the post independence period was driven by the diversified source of foreign reserves including natural resource and agricultural products. These sources of foreign reserves are analyzed before we consider their macroeconomic implications on the overall economy.

2.1 Analysis of data

Time-series annual data for the period 1960-2001 are used for the analysis. The data are from the Food and Agriculture Organization (FAO), International Financial Statistics (IFS) released by the International Monetary Fund, World Development Indicators (WDI) released by World Bank, and OPEC Annual Statistical Bulletin are described more completely in the appendix.

The analysis is on three sub-periods: 1961-1977; 1978-1985 and 1986-2001.[2] During the first phase, the government’s priority was peace building following the pre-independence rebellion by the Union des Populations du Cameroun (UPC) and the early 1960’s subversion of State security. This period was also characterized by early industrialization based on import substitution. The second phase started with oil production and export in 1978. Two social and political events during this period are important: the constitutional change of political leadership in 1982, and the political leadership struggle that led to social tension and a failed military coup in 1984. This period was marked by major industrial and agro-industrial projects. The third phase, from 1986 to 2001, was characterized by a combination of social tension in the post 1984-coup period, the introduction of press freedom and multi-party politics in 1990, and the devaluation of the national currency in 1994.

Cameroon has an area of 475,000 km square. Table 1 shows that agricultural area represents on average 19% of total area use. The forest area is constant over time, and represents 77 % of total area use. These results can be explained by the fact that rapid urbanization due to the oil boom is good for the conservation of the forest (Wunder and Sunderlin 2004). There is a small evolution of the area used for permanent cultures in the three sub-periods: 1.38% in 1961-1977, 2.37% in 1978-1985 and 2.62% in 1986-2001.

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

For a commodity-exporting country like Cameroon, movements in the terms of trade are key determinants of economic performances. We define the terms of trade as the ratio of imports prices to the prices of its exported goods. As depicted in Figure 1[3] the evolution of the terms of trade of Cameroon is very irregular. These are largely caused by the different shocks that affected the country especially the variations in international prices of primary agricultural and mineral products, the Dollar to French Franc exchange rate. Three phases transpire from the trend in the prices of agricultural crops: (1) sudden fall in the prices between 1977 and 1978, (2) high volatility with a downward trend between 1989 and 1992 and (3) price increases between 1992 and 1994. These phases are more pronounced for coffee than cocoa. The price of coffee fell by 40% between 1976 and 1978, while the fall in cocoa's price was only 10%. Between 1992 and 1994 the price of coffee increased by 120% while that of cocoa increased by only 25%. The first negative shock spans the late 1970s and 1980s. Overall we have five shocks on mineral prices: (1) a negative shock in 1979, (2) a positive shock between 1980 and 1986, (3) a positive shock between 1987 and 1990, (4) a second negative shock between 1991 and 1993, and (5) a third positive shock in 1994.[4] In this paper, we focus on the following shocks: the beginning of oil exports in 1978; the fall of oil prices in 1991; and the devaluation in 1994.

***Figure 1 near here***

As Table 2 illustrates, exports of major agricultural commodities (coffee and cocoa) increased from the period 1961-1977 to the period 1978-1985. After the beginning of the oil exploitation, exports of coffee and cocoa fell drastically to respectively USD 133 and USD 138 millions in 1986-2003 from respectively 161 and 229 in 1961-1977. Exports of wood, cotton and rubber increased in all the sub-periods, even after the beginning of oil exports. These products have not been affected by oil exports, unlike coffee and cocoa. During 1961-1977, the total value of commodities exports was USD 187 millions and jumped in 1978-1985 to 1288 due to oil exports and reaching USD 1538 millions in 1986-2003.

****Table 2 near here***

In Figures 2 and 3 we compare the share of all export commodities with the share of oil exports in GDP. Figure 2 shows that between 1961 and 1978 exports of cocoa and coffee fluctuated around 5% of GDP. But after the beginning of oil exports in 1978, there was a significant fall in the exports of these commodities. Even the currency devaluation in 1994 did not improve the export performance of these commodities. From the same graph, wood exports grow slowly until 1974 and fall between 1975 and 1987 whereas oil exports increase. Wunder and Sunderlin (2004) argue that oil wealth was not large enough to reverse forest loss and cause forest area to expand. But after 1989, the wood exports begin to increase and reach a peak in 1994, the year of currency devaluation.

***Figure 2 and 3 near here***

The exploitation of oil and other natural resources has social and economic consequences. As shown in Table 3, urban and non agriculture population increased rapidly after the discovery of oil whereas rural and agricultural population decreased. The urban population was 20.41% in 1961-1976, 32.71% in 1978-1985 and 44.19% in 1986 –2001. The non agriculture population was 19.86% in 1961-1976, 32.81% in 1978-1985 and 41.68% in 1986 –2001. The agricultural and rural populations fall respectively from 80.14% and 79.59% to 67.19% and 67.29% in 1978-1985, and to 58.32% and 55.81% in 1986-2001. The rural-urban migration was caused by rising public sector employment and increase in urban construction (Devarajan 1999; Benjamin et al 1989). The macroeconomics effects are presented in the next sub-section.

***Table 3 near here****

2.2 Macroeconomic implications of natural resources: explicit and implicit Dutch Disease[5]

In this sub-section, we analyse the effect of oil boom and other resources (e.g. wood) on income, consumption, saving, investment, and government expenditures. There are two complementary hypotheses about how prices behave in the presence of a windfall (Devarajan 1999). One is in case of “Dutch Disease” whereby the price of non-tradables is expected to rise relative to that of tradables. The second hypothesis is that the price of non-tradable capital goods rises relative to the price of non-tradable consumer goods. In the case of Cameroon with many natural resources, we distinguish the case of an explicit “Dutch Disease” (oil windfall) and an implicit “Dutch Disease” (exports of other resources like wood when the price of oil declines).

The macroeconomic analysis of Cameroon offers a good opportunity to study the link between external economic changes and forests. We know that oil economies often fluctuate due to heavy reliance on a single export commodity with an unstable world market price. Wunder and Sunderlin (2004) assume that “on average oil- and mineral- exporting tropical countries have more forest left and lose them at a slower rate than non mineral-exporting countries”. In the case of Cameroon, the forest area remains constant over time.

As illustrated in Figure 2, the exports of wood decrease in oil boom period and increase in a crisis period. This means that the government uses the revenues of wood exports during the crisis to offset the loss of oil revenues. For this reason we say that the wood exports can be an implicit “Dutch Disease”.

Economic growth in Cameroon has been irregular from 1960-2000, and this can be seen both at the overall macroeconomic level and at the sectoral level. Table 4 and Figure 4 show that during the first phase, from 1960 to 1977, the economy grew at an annual average rate of 4.6%. This period was also characterized by early industrialization based on import substitution. The end of this period coincided with the beginning of oil exploitation and exports. This period fits with a soft control classification.[6]

The second phase starts with oil production and exports in 1978, and is followed by exceptional growth. The economy grew by 6.9%. Investment, consumption, and saving shares in the GDP increased, and government expenditures decreased in this period (see Table 5 and Figure 5). GDP per capita reaches a peak of US$ 900 in 1985 (Figure 4).

***Table 4, Table 5, Figure 4, and Figure 5 near here

The peace dividend of the first period, combined with favourable exchange rates and other macroeconomic policies stimulated this growth process. However, oil mismanagement could be considered one of the main reasons for the decline in growth observed during the 1980s. The mid 1980s was inconsistent with sustainable growth. The period was marked by major industrial and agro-industrial projects. The state massively subsidized various economic sectors by prioritizing the industrial sector.

When Cameroon formally announced the discovery and exploitation of important oil wells, the government decided to avoid the Dutch Disease by ensuring that the focus of economic operators was kept on the pursuit of the green revolution. This was done by removing oil revenues from the normal budget process and creating a special account managed directly by the Presidency.

The 1986-2001 period was characterized by a combination of social tension in the post 1984-coup period, the introduction of press freedom and multi-party politics in 1990. These social events, combined with appreciating exchange rate and other external shocks (e.g., the fluctuations of international price of primary agricultural and mineral products), led to unprecedented growth collapse. Economic growth was reignited with exchange rate adjustments and the reform of trade and fiscal policy in 1994. This period had a combination of near state break-down (at the beginning of the period) but thereafter-soft control. Although the devaluation facilitated positive growth rates, because of ill-functioning institutions (partly materialized by corruption rankings) the country has not been able to generate the level of growth that could also reduce poverty.

During this period, GDP grew at 0.53%. The growth decline could be attributed to a generalized fall in cash crop prices, which also generated a fall in the purchasing power of farmers and was accompanied by an increase in the costs of their production. Farmers invested more in food crops, to the extent that agricultural inputs for cash crops were diverted to food crops, which had become more profitable (Douya 1995). The growth decline was also due to the failure of the macroeconomic institutions set up around the CFA agreements to provide for long-term sustainable growth and development. The intensification of the restructuring of the production machinery and the change in the monetary parity occurred in 1994.[7] The combined effect of devaluation and of an enabling[8] international environment thanks to the rise in cash crop prices contributed to growth. The economy, particularly the industrial sector, experienced very difficult times, partly because of State involvement and exposure to external shocks. The industrial sector was the hardest hit by the adjustment program introduced.[9]