March 2018  |  First Edition CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE Breaking the Cycle of Conflict and Instability CONTENTS Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv 1. Recent Economic and Policy Developments . . . . . . . . . . . . . . . . . . 1 1.1. A Tense Security Situation Slows Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2. CEMAC Monetary Policy Tightens in Response to Dwindling Regional Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3. The Government’s Fiscal Consolidation Efforts Focus on Revenues in the Context of a Constrained Business Environment . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.4. CAR’s Outlook Is Positive, but the Security Situation Remains a Major Source of Downside Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2. Breaking the Cycle of Conflict and Instability . . . . . . . . . . . . . . . . 11 2.1. The Drivers of Fragility and Instability in CAR Are Deeply Rooted in Its History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.2. Building a Capable Public Administration: Historical Lessons . . . . . . . . . . . . . . . . . 16 2.3. Breaking the Cycle of Conflict and Instability: Lessons from the International Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3. The Simulated Impact of Alternative Policies on Inclusive Growth and Poverty Reduction . . . . . . . . . . . . . . . . 29 3.1 Scenario 1: Increased Mining Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 3.2 Scenario 2: Increased Forestry Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3.3 Scenario 3: Increased Service-Sector Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.4 Scenario 4: Increased Investment in Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Technical Annex: Designing a Computable General Equilibrium Model for CAR . . . . . . . . . . . . . 43 i ACRONYMS and ABBREVIATION BEAC Bank of Central African States (Banque des États de l’Afrique Centrale) CAR Central African Republic CEMAC Central African Economic and Monetary Community (Communauté Économique et Monétaire de l’Afrique Centrale) CES Constant elasticity of subsititution CFAF Central African CFA Franc CGE Computable general equilibrium CS-REF Monitoring Committee for Economic Reforms (Comité de Suivi des Reformes Économiques et Financières) DDR Disarmament, demobilization, and reintegration FPRC Popular Front for the Rebirth of the Central African Republic (Front Populaire pour la Renaissance de la Centrafrique) FFP Fund for Peace FSI Fragile States Index GNI Gross national income GTAP Global Trade Analysis Project IMF International Monetary Fund ICASEES Central African Republic Institute of Statistics and Economic and Social Studies (Institut Centrafricain des Statistiques et des Études Économiques et Sociales) LRA Lord’s Resistance Army MINUSCA United Nations Multidimensional Integrated Stabilization Mission in the Central African Republic (Mission Multidimensionnelle Intégrée des Nations Unies pour la Stabilisation en République Centrafricaine) RCPCA National Recovery and Peacebuilding Plan (Stratégie de Relèvement et de Consolidation de la Paix en Centrafrique) SSA Sub-Saharan Africa UNDP United Nations Development Program UPC Unity for the Central African Republic (Unité pour la Centrafrique) WGI Worldwide Governance Indicators ii ACKNOWLEDGEMENTS T his is the first edition in a new series of Central African Republic Economic Updates. The series will analyze evolving economic trends in CAR on by Hans Hoogeveen (Lead Economist, GPV07) and Emilie Jourdan (Senior Operations Officer, FCV). Section III, Analyzing the Potential Impact of Struc- an annual basis to assist the government and its tural Reforms, was prepared by Patricia Geli (Senior development partners in identifying emerging oppor- Economist, GNH07) and Calvin Zebaze Djiofack tunities and addressing persistent challenges. Sub- (Senior Economist, GMTMD), with support from sequent editions will be prepared in advance of the Lacina Balma (Consultant). The report was edited by World Bank Spring Meetings in April. Each edition Sean Lothrop (Consultant). will present an overview of CAR’s evolving macro- economic position, followed by a detailed exploration The team would like to thank peer reviewers Birgit of a specific topical subject. The objectives of the Hansl (Program Leader and Lead Economist, EACPF) series are to strengthen the analytical underpinnings and Jens Kromann Kristensen (Lead Public Sector of development policy in CAR and contribute to an Specialist, GGOEA), as well as Sona Varma (Lead informed debate on policy options to enhance macro­ Economist, GMTMN) and Chadi Bou (Program Leader, economic management and accelerate progress on AFCC2), for their constructive feedback. Franck the twin goals of eliminating extreme poverty and Bousquet (Country Director, AFCC2), Robert Bou promoting shared prosperity in a context of state Jaoude (CAR Country Manager), Francisco Galrão fragility. Carneiro (Practice Manager, MTI), and Yisgedullish Amde (Country Program Coordinator) also provided This edition was produced by a team led by valuable guidance, advice, and encouragement. Souleymane Coulibaly (Lead Economist, Central and West Africa, GMTA1). Section I, Recent Eco - In addition, the team greatly benefited from consul- nomic Developments, was prepared by Etaki Wa tations with key policymakers and analysts in CAR, Dzon (Economist, GMTA1) and Moise Tshimenga including officials from the Monitoring Committee Tshibangu (Economist, GMTA1). Section II, Breaking for Economic Reforms (CS-REF), the Ministry of the Cycle of Conflict and Instability, was prepared Economy, Planning and International Cooperation, by Souleymane Coulibaly, Michel Maellberg (Senior the Ministry of Finance and Budget, and the Central Public Sector Specialist, GGOAW), Evariste Niyonkuru African Republic Institute of Statistics and Economic (Consultant, GGOAC) and Serdar Yilmaz (Lead Public and Social Studies (ICASEES). Finally, the team Sector Management Specialist, GGOAC), drawing would like to gratefully acknowledge the cooperation on the CAR Systematic Country Diagnostics led of staff from the International Monetary Fund. iii iv CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY EXECUTIVE SUMMARY A deteriorating security and humanitarian situation is dimming hopes for a robust economic recovery in the Central African Repub- rise as the public administration expands its reach further beyond Bangui, but total revenue is expected to return to its pre-crisis level of 9 percent of GDP, lic (CAR). After peaking at 4.8 percent in 2015, the and the debt burden is projected to fall from 52 per- annual GDP growth rate slowed to 4.5 percent in cent of GDP in 2017 to 40 percent by 2020. 2016 and 4.3 percent in 2017, as renewed insecurity inhibited economic activity, disrupted agricultural, While these positive developments and the forestry, and mining production, and delayed invest- peaceful presidential election of 2016 have con- ment projects. Although public investment rose from tributed to a climate of cautious optimism, CAR remains a fragile state. The 2013 conflict led to 6 percent of GDP in 2016 to an estimated 7.4 percent unprecedented levels of violence and caused a huge in 2017, private consumption continues to account for negative shock to CAR’s already low level of GDP per the largest share of GDP . Despite a modest increase capita. The conflict is far from over: the central gov- in forestry, diamond, and gold exports, the current- ernment currently controls only about 40 percent of account deficit remained large at 8.5 percent of GDP the national territory, and numerous armed groups in 2017, from 9.0 percent in 2016. Official grants and are active across the country. Reestablishing the rule foreign direct investment continue to finance the defi- of law, building a capable bureaucracy, and laying cit. Reserve coverage fell from 5.5 months of imports the foundation for sustainable growth and poverty in 2016 to 4.4 months in 2017. The inflation rate has reduction will require a carefully calibrated policy stabilized at a moderate level, sliding from 4.6 percent agenda. Adopting innovative approaches to public in 2016 to 4.1 percent in 2017, and is expected to reach service delivery, such as performance-based financ- the CEMAC convergence criteria of 3 percent by 2020. ing for health, and fully leveraging the assistance of external partners, the private sector, and civil society The government continued to implement its fis- could enable the government to begin address- cal consolidation and took corrective action to ing CAR’s extensive development needs in a con- meet its revenue target for end-2017. The domes- text of severe capacity limitations and tight budget tic primary fiscal deficit narrowed from 3.0 per- constraints. cent of GDP in 2015 to 1.1 percent in 2016, which contributed to an overall fiscal surplus (including As it strives to overcome a legacy of fragility and grants) of 1.6 percent of GDP. The overall fiscal sur- violence, CAR can learn important lessons from plus increased to an estimated 1.9 percent of GDP the experience of other post-conflict countries. in 2017, yielding a budget surplus of 0.5 percent of During consultations conducted in Bangui as part GDP . The government is committed to implementing of the preparation of this Economic Update, stu- its arrears-clearance plan while continuing its fiscal dents and private-sector representatives identified consolidation over the medium term, and an average Burkina Faso, Ethiopia, Ghana, Liberia, and Rwanda annual fiscal surplus of 0.7 percent of GDP is pro - as CAR’s aspirational peers. While these countries jected for 2018–2020. Total spending will inevitably have unique histories and idiosyncratic features, each iv EXECUTIVE SUMMARY v underwent a period of conflict or severe instability, service-sector activity would have the second-largest and each has since stabilized. Together, their expe- impact on growth, pushing GDP 4.6 percent above rience underscores the importance of fostering the the baseline by 2030, and the returns would be even development of civil society to consolidate demo- more progressively distributed. Households at all cratic gains, strengthen public accountability, and income levels would benefit, but the gains accruing enhance transparency, while adopting a pragmatic to the poorest would exceed the gains accruing to the set of policy and institutional arrangements to grad- richest households. A growing service sector would ually but persistently increase the quality of the pub- also boost exports more than 10 percent above the lic administration. CAR can adopt these lessons and baseline by 2030. The simulated increase in commer- adapt them to the specificity of its current crisis. The cial mining output would yield very limited gains for authorities also need to carefully tailor its structural poor households. While the facilitating the growth reform agenda to reflect the country’s fragility. of the artisanal mining subsector could potentially have a more positive effect on employment and To inform the design of a policy agenda that income, artisanal mining in CAR is deeply problem- effectively balances these objectives, simulation atic. Finally, a simulated increase in the number scenarios from a computable general equilibrium of skilled workers would have a marginal effect on model are used to examine some structural- macroeconomic indicators due to CAR’s low levels reform scenarios in four important sectors: of educational attainment and the limited capacity mining, forestry, services and education. Under of its economy to leverage skilled labor. This finding the first scenario, the government would adopt mea- suggests that, at least in the near term, focusing on sures to boost commercial mining exports. Under improving the quality and accessibility of basic edu- the second scenario, the government would issue cation and vocational training could have a greater new forestry licenses, increasing forestry-product impact on labor productivity and household income. exports. Under the third scenario, the government would implement productivity-enhancing reforms CAR’s political and institutional fragility reflects in the service sector, accelerating economic activ- its long history of misrule. The government and ity and raising income levels among the poorest its development partners now face the daunting chal- households. Under the fourth scenario, the govern- lenge of implementing an urgent and far-reaching ment would boost public investment in education to reform agenda through a set of weak and unstable increase the number of skilled workers. public institutions. As the international literature demonstrates, pushing fragile states to adopt reforms While all reform scenarios would accelerate too quickly risks overwhelming and potentially dam- growth, the simulated increase in forestry activity aging the limited capacity of the public sector. In this would have the largest impact by far, boosting challenging context, the government could begin to GDP by almost 14 percent over the baseline by break the cycle of conflict and instability by adopt- 2030. Moreover, the distribution of returns to growth ing an innovative approach to delivering education would be moderately progressive, with an especially and health services, designing a policy agenda that positive impact on poorer households. In addition, reflects the experience of other post-conflict countries, public revenues would rise dramatically, exceed- and prioritizing sectors that have the greatest potential ing the baseline by almost 80 percent by 2030, and to rapidly generate broad-based gains in employment exports would increase by more than 40 percent above and income, especially among poor and vulnerable the baseline, bolstering foreign reserves. Greater households. 1 RECENT ECONOMIC AND POLICY DEVELOPMENTS A deteriorating security and humanitarian situation is dimming hopes for a robust economic recovery in CAR. The GDP growth rate slowed from 4.8 percent in 2015 to 4.5 percent in 2016 and 4.3 percent in 2017, and is projected to stabilize at around 5 per- cent over the medium term. Given CAR’s pressing security needs and limited fiscal resources, better expenditure management is critical to ensure value for money in both current spending and capital invest- ment. Meanwhile, the government is striving to restore the efficiency of revenue-collection agencies and expand their presence nationwide. Exports are recovering slowing, heightening security risks, and inter- national aid continues to finance a large current-account deficit. 1.1 A Tense Security Situation investment projects. Rising private consumption, fueled by imports of food and other goods along the Slows Growth Bangui-Garoua Boulai corridor, continues to drive While the economy of the Central African Repub- growth on the demand side, supported by greater lic (CAR) has continued to expand for a fourth public investment and increased commodity exports. consecutive year, deteriorating security condi- Since 2015, economic growth in CAR has outpaced tions have frustrated hopes for a robust recovery. the average rates for Sub-Saharan Africa (SSA) and The real GDP growth rate fell from 4.8 percent in Central African Economic and Monetary Community 2015 to 4.5 percent in 2016 and 4.3 percent in 2017, (Communauté Économique et Monétaire de l’Afrique as intensifying instability in rural areas disrupted Centrale, CEMAC) member states. However, as the agricultural production, exacerbated transportation security situation deteriorates, CAR’s growth is decel- bottlenecks, and delayed the implementation of erating while the regional averages rise (Figure 1.1). 1 2 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY Annual Real GDP Growth Rates by Sector, FIGURE 1.1 CAR and Regional Averages, 2014–17 6.0 4.8 5.0 4.5 4.3 4.0 Services 3.0 Secondary 2.0 Primary 1.0 1.0 CAR SSA 0.0 CEMAC –1.0 –2.0 –3.0 2014 2015 2016 2017 Sources: World Bank and IMF data Note: The primary sector includes agriculture, forestry, livestock, fishing and hunting. The secondary sector includes construction, manufacturing, and extractive industries. The tertiary sector includes services and public administration. Private employment is showing some initial signs of situation hindered the recovery of agricultural activity2 recovery, but only in Bangui (Box 1.1). during the second half of 2017. Cotton production increased between 2007 and 2012, but remains far For the past four years, the primary sector has below its 1970 level of 60,000 tons. In the wake of the driven GDP growth on the supply side. The pri- recent conflict, cotton exports have been modest, mary sector accounted for about 42.3 percent of real rising from 495.2 tons in 2016 to 677.2 tons in 2017.3 GDP growth in 2017, down from 49.9 percent in 2016. The rural population suffered the worst of the violence, Subsistence agriculture contributed 16.0 percent, and population displacement heavily impacted food forestry 11.8 percent, livestock 9.8 percent, and hunt- security and the livelihoods of smallholder farmers. ing and fishing 4.7 percent. After spiking by 33 per- The conflict has not been decisively resolved, and a cent in 2015, forestry1 output has continued to grow worsening security situation caused a steep decline at a rapid pace, compensating for the slowing expan- in cotton, cocoa, and coffee production during the sion of agriculture. Wood production increased by first half of 2017. 53.3 percent in 2017 and represented roughly half of total exports. Meanwhile, a worsening security 2 The deteriorating security situation is not the only reason for the decline in agricultural activity, as low productivity constrains 1 Although forestry is expanding, fiscal revenue from the forestry output even in secure areas. More effective support for the subsector fell by about 60 percent, year-on-year. Since average agriculture sector, including the increased provision of improved lumber prices in 2017 were higher than in 2016, the cause of this seeds, fertilizers, and extension services, will be necessary to decline in revenues is unclear, and the mechanism for estimating boost productivity. timber prices should be assessed. 3 World Bank, 2016. RECENT ECONOMIC AND POLICY DEVELOPMENTS 3 BOX 1.1 The Employment and Poverty-Reduction Outlook T he public sector dominates formal employment in CAR, while subsistence agriculture, artisanal mining, and the forestry sector are major sources of informal employment. As of November 2014, the public sector employed 26,853 civil servants and 7,129 contractual workers. No official statistics of formal employment in the private sector are available, but contractual workers in the public sector likely outnumber formally employed workers in the private sector. In 2011, just 282 formal firms were operating in Bangui and Berberati (CAR’s largest and third-largest cities), most employing between 5 and 19 workers. Given the negative impact of the crisis on the economies of both cities, coupled with the effective suspension of formal economic activity in the rest of the country, the total number of formal employees in the private sector is unlikely to exceed 4,000. Meanwhile, despite the decline in agricultural production in the wake of the 2013 crisis, the agricultural sector still accounts for 70 percent of employment. The resumption of artisanal mining is providing some additional informal employment, and anecdotal evidence indicates that processing the waste generated by lumber companies now provides about 4,000 direct jobs. This would make forestry and wood-processing the second-largest formal employer after the public sector. Instability and violence have increased the poverty rate. The last nationally representative household survey was conducted in 2008. The poverty rate was estimated at 50 percent in urban areas, 69 percent in rural areas, and 66 percent nationwide. Estimates based on recent GDP trends suggest that the national poverty rate exceeded 75 percent in 2017. In the 2016 Human Development Index, CAR ranked lowest in the world at 188th out of 188 countries. Restoring security is a prerequisite for sustainable poverty reduction. Armed groups continue to hold sway over about 60 percent of CAR’s territory, causing large-scale forced displacement. Multiple armed groups con- trol key diamond- and gold-mining sites, cutting off a major source of employment and income from the national economy. Access to basic social services is limited in Bangui and almost nonexistent outside the capital. If the real GDP growth rate averages 4.0 percent over the medium term, as projected, the poverty rate should slightly decline from a peak of 77 percent in 2013 to 74 percent by 2019, with per capita GDP edging up from about FCFA 10,000 in 2013 to about FCFA 13,000 in 2019. However, restoring state control over the entire national territory remains a fundamental development challenge. The secondary sector grew at a robust rate of contributed to the expansion of both construction 7.2 percent in 2017. The secondary sector, which and public utilities, which grew by 5 percent. The mainly consists of manufacturing (including wood mining subsector experienced the fastest growth, processing), construction and mining, represents albeit from a very low post-crisis base. Mining’s about 16 percent of GDP. The manufacturing sub- contribution to GDP is estimated at just 0.5 percent, sector has expanded at a rate of 2.0 percent since but the adverse security situation in mining areas 2015, led by the food industry. In 2017, an expanding likely results in significant underreporting. Prior to wood-processing subsector boosted manufacturing a 2013 embargo, diamonds accounted for nearly to almost 5 percent of GDP. The construction sub- half of CAR’s total exports. The country produced sector’s contribution to GDP rose from 4.0 percent an estimated 10,957 carats of diamonds in 2016,4 in 2010 to 5.5 percent in 2017. Donor-funded proj- ects and a substantial increase in public investment 4 https://www.kimberleyprocess.com/en/central-african-republic as part of the government’s reconstruction program #2015 4 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY Diamond and Gold Production by Volume, 2010–17 FIGURE 1.2 (thousands of carats and grams) 7.0 6.0 5.0 4.0 Diamonds (Carats) 3.0 Gold (gr) 2.0 1.0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 Source: The Central African Republic Institute of Statistics and Economic and Social Studies (Institut Centrafricain des Statistiques et des Études Économiques et Sociales, ICASEES) and diamond production is projected to reach rate as in 2016. The government’s efforts to secure 59,985 carats in 2017, a roughly six-fold increase. control over Bangui and other cities such as Bambari CAR produces fewer diamonds than regional leaders and Berberati have facilitated trade and commerce, such as Botswana (31.4 million carats), Democratic but weak rural infrastructure and lingering insecurity Republic of Congo (14.7 million carats), and Angola continue to inhibit the growth of the service sector. (8.3 million carats),5 and the ongoing embargo Moreover, the limited reach of telecommunications reduces diamond production and official exports. and financial services are binding constraints on The Kimberly Process members have decided to economy-wide growth. partially lift an embargo on diamond exports from the CAR, imposed since May 2013. Exports resumed An anemic recovery is extending the conflict’s only from certain sites in the “green zone”, under gov- negative economic impact. The real GDP growth ernment control. Official gold exports tripled from rate averaged 3.5 percent between 2009 and 2012. 32.9 kg in 2016 to 117.5 kg in 2017 (Figure 1.2). In 2013, GDP plunged by 36 percent. Since 2014, growth has averaged 3.7 percent, just slightly above Trade-related activities continued to dominate its pre-crisis level. Persistent security challenges the tertiary sector in 2017. Trade, transportation, have made it impossible to rebuild destroyed capi- telecommunications, and non-merchant services tal, both physical and social, or to restore confidence comprise the bulk of the service sector, which in the business climate. Current projections indicate accounts for approximatively 38 percent of CAR’s that per capita GDP will not return to its 2012 level GDP. Services grew by 4.2 percent in 2017, the same until 2025 (Figure 1.3). To return to its pre-crisis trajectory, CAR’s economy would need to grow at a 5 These comparator-country figures are for 2016. rate of over 10 percent per year for the next three years. RECENT ECONOMIC AND POLICY DEVELOPMENTS 5 The Impact of the Conflict on per Capita GDP FIGURE 1.3 (US$ in purchasing-power-parity terms) 1,800.0 1,600.0 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 GDP PPP per capita (current US$) Trend (average 2010-12) 2012 level Source: Estimates and projections based on World Bank and IMF data 1.2 CEMAC Monetary BEAC), which prioritizes controlling inflation and maintaining the CFA franc’s peg to the euro. Policy Tightens in The BEAC supported structural adjustments among Response to Dwindling member countries after the oil-price slump in 2014 Regional Reserves led to a sharp rise in statutory advances and a rapid As economic growth slowed and CEMAC tight- drawdown of foreign-exchange reserves. The BEAC’s ened its monetary policy stance, CAR’s inflation relatively loose monetary policy stance negatively rate eased from 4.6 percent in 2016 to 4.1 per- affected the external balance: regional reserves cent in 2017. However, rising insecurity disrupted decreased from 5.1 months of imports in 2013 to aggregate supply, while the ongoing resettlement 2.3 months of imports in December 2016. In CAR, of displaced persons boosted aggregate demand, statutory advances quickly exceeded the BEAC’s ceil- keeping the inflation rate above the 3 percent ing, as the country’s shallow financial sector proved CEMAC convergence criterion. The food-price infla- unable to support continued growth (Box 1.2). tion rate fell from 4.5 percent in 2016 to 3.9 percent in 2017, but resurgent violence will continue to put In contrast to other CEMAC member states, upward pressure on consumer prices—especially the deterioration of CAR’s monetary position food prices. was driven by renewed conflict rather than by the collapse of global oil prices. In March 2017, CEMAC monetary policy is managed at the the BEAC responded by raising its main policy rate regional level by the Bank of Central African by 50 basis points to 2.95 percent, causing broad States (Banque des États de l’Afrique Centrale, money to decline from 5.8 percent of GDP in 2014 6 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY BOX 1.2 The Financial Sector C AR’s underdeveloped financial sector plays a limited role in supporting economic growth. The financial sector is shallow, and bank supervision is weak. The banking system comprises four commercial banks, 11 microfinance institutions, two postal banks, two insurance companies, and a social security fund. The gov- ernment relies more on the regional market than some of its peers, which increases uncertainty. For example, the government mobilized CFAF 18 billion in early 2017, yet it failed to secure an additional CFAF 4 billion in May 2017 after launching the second of five planned auctions. Inadequate infrastructure and deficiencies in the legal, judicial, prudential and regulatory frameworks inhibit both the entry of new financial institutions and the growth and diversification of existing institutions. While CAR’s financial sector has expanded modestly in recent years, the country’s financial inter­ mediation levels remain among the lowest in the world. Credit to the economy stabilized at 18 percent of GDP over 2016–17, up from 4 percent in 2014. Financial-soundness indicators suggest that banks remain resilient, although the high level of nonperforming loans (NPLs) is a source of concern. All banks meet the new standard for regional reserve requirements adopted by the BEAC’s monetary policy committee in March 2017. The average capital-adequacy ratio appears high, rising from 32 percent in December 2016 to 40 percent in June 2017, but due to unreliable data, capital buffers may be significantly overestimated. Credit risk has not improved since 2013, and NPLs have consistently exceeded 25 percent of gross loans. About half of NPLs are part of the large stock of outstanding government payment arrears. Bank lending is largely focused on short-term loans to the public sector, leaving banks exposed to sovereign risk. Liquid assets represented 31 percent of total assets in 2017, unchanged from 2016, and deposits have increased by 13 percent since June 2016. Deposits rose from 75 percent of gross loans at end-2015 to 105 percent at end-June 2017. to 1.1 percent in 2017. Nevertheless, broad-money the­ the overall terms of trade to deteriorate. Never­ growth exceeded expectations, as transfers by less, reserve coverage remains high at 4.4 months NGOs and the partial repatriation of export receipts of imports, above the CEMAC average of 2.7 months drove a sharp rise in net foreign assets. In 2018, (Figure 1.4). the BEAC’s efforts to ease pressure on the region’s external balances are expected to cause further The implementation of the 2017–2021 National monetary tightening. Low regional reserves and the Recovery and Peacebuilding Plan (Stratégie de prospect of tighter monetary policies by the Euro- Relèvement et de Consolidation de la Paix en pean Central Bank are expected to keep monetary Centrafrique, RCPCA) and ongoing disarma- conditions tight across the region. ment, demobilization, and reintegration (DDR) efforts boosted demand for service imports in The current-account deficit worsened in 2017. The primary income deficit, which mainly absolute terms in 2017 as imports soared. The reflects salary repatriation by international workers, current-account deficit rose from CFAF 94.7 billion, widened gradually from an estimated CFAF 0.6 billion or 9.1 percent of GDP , in 2016 to an estimated CFAF in 2016 to CFAF 1.6 billion in 2017 as the government 95.5 billion, or 8.5 percent of GDP , in 2017. Although began implementing the RCPCA. During 2018–19, the income-transfer deficit narrowed from CFAF the service trade deficit is expected to reach CFAF 3.2 billion in 2016 to CFAF 1.7 billion in 2017, rising oil 2.4 billion and will be financed by a combination of imports and a widening services-trade deficit caused foreign direct investment, grants, and debt inflows. RECENT ECONOMIC AND POLICY DEVELOPMENTS 7 The Growth of International Reserves and Broad Money, FIGURE 1.4 2010–17 (CFAF billions) Central African Republic CEMAC 500 25,000 400 20,000 15,000 200 10,000 100 5,000 0 –100 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 International reserves International reserves Money and quasi-money (M2) Money and quasi-money (M2) Source: BEAC data 1.3 The Government’s Fiscal customs controls and closer monitoring of tax exemptions. However, CAR still has the lowest level Consolidation Efforts of domestic revenue collection among CEMAC Focus on Revenues in the countries (Figure 1.6). Taxes on domestic goods and Context of a Constrained services contribute 46 percent of total revenue, but Business Environment value-added tax (VAT) plays an increasingly import- ant fiscal role (Figure 1.7). While the authorities’ efforts CAR’s fiscal position remains favorable in 2017 to strengthen revenue collection yielded positive despite increased spending pressure. Priority investments in infrastructure and public institu- tions, as well as the need to reequip security forces, Domestic Revenue FIGURE 1.5 have shifted the burden of fiscal consolidation to and Expenditures, the revenue side. Between 2016 and 2017, efforts to CAR, 2012–2017 strengthen tax and customs administration boosted (% of GDP) total domestic revenues by 0.9 percentage point of 17.0 GDP. Meanwhile, primary expenditures rose from 14.0 9.2 percent of GDP in 2016 to 10.8 percent in 2017, 11.0 reflecting increased public investment. This nar- 8.0 rowed the fiscal surplus from 1.3 percent of GDP in 5.0 2016 to 0.5 percent in 2017 (Figure 1.5). Borrowing 2.0 from the BEAC and foreign creditors financed the –1.0 investment budget. –4.0 –7.0 Domestic revenue has increased gradually, in line 2012 2013 2014 2015 2016 2017 with CAR’s slow economic recovery. Domestic Domestic revenue Overall balance revenue rose from 8.2 percent of GDP in 2016 to Expenditure 9.1 percent in 2017, reflecting stronger excise and Sources: World Bank and IMF data 8 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY Domestic Revenue The expenditure-consolidation effort has focused FIGURE 1.6 and Expenditures, on tightening control over the wage bill, dem­ CEMAC Member onstrating the government’s commitment to fiscal States, 2017 discipline. Although current primary expenditures (% of GDP) rose from 9.0 percent of GDP in 2016 to 9.8 percent 35.0 in 2017, this trajectory remains consistent with the 30.0 government’s commitment to fiscal consolidation 25.0 and reflects better expenditure controls, especially 20.0 over the wage bill (Figure 1.8). Following an audit 15.0 10.0 of the civil-service payroll, the wage bill fell from 5.0 5.4 percent of GDP in 2016 to 5.2 percent in 2017. 0.0 Transfers and subsidies rose from 1.7 percent of p. o a n n ad AC GDP in 2016 to 2.5 percent in 2017. Fiscal discipline ne ng bo ou Re Ch M ui Co Ga er CE n lG m has facilitated the ongoing resolution of domestic ca Ca ria fri to lA payment arrears, a prerequisite for accelerating ua ra Eq nt private economic activity and a priority under the Ce Domestic revenue Government expenditure program monitored by the IMF and the World Bank. Source: IMF data The payment of domestic arrears reached 2.5 percent of GDP in 2017, and the public debt stock declined results, tax revenue in 2017 was still just 80 percent from 69.2 percent of GDP in 2014 to 51.8 percent in of its 2012 level, a decline of 2.4 percentage points of 2017 (Figure 1.9). GDP. Domestic revenue in CAR remains well below the 2016 SSA average of 16.4 percent of GDP, and The implementation of the RCPCA boosted donor support finances 30–40 percent of the budget. investment-related expenditures in 2017. Capital Revenue Expenditure FIGURE 1.7 FIGURE 1.8 Composition, Composition, 2012–17 2012–17 140 180 120 150 100 80 120 60 90 40 60 20 0 30 2012 2013 2014 2015 2016 2017 0 Non-Tax Revenues 2012 2013 2014 2015 2016 2017 Taxes on international trade Capital expenditure Taxes on domestic goods & services Others current expenditure Direct Taxes Wages and salaries Source: World Bank and IMF data Source: World Bank and IMF data RECENT ECONOMIC AND POLICY DEVELOPMENTS 9 The Level and Composition of the Public Debt Stock, 2011–17 FIGURE 1.9 (% of GDP) 70.0 60.0 50.0 % of GDP Domestic 40.0 Foreign 30.0 Total Debt 20.0 10.0 0.0 2011 2012 2013 2014 2015 2016 2017 Source: World Bank and IMF Data spending rose from 3.1 percent of GDP in 2016 to increases in cotton production and exports are antic- 4.3 percent in 2017, about 2 percentage points below ipated after the government clears its arrears in the its pre-crisis level. The share of external financing sector in 2017. Imports of equipment are expected (including grants) remained high at 78 percent of total to remain high as public and private investment capital spending, but domestically financed capital continue to recover. The government is committed spending rose from 0.3 percent of GDP in 2016 to to implementing its arrears-clearance plan, which 0.9 percent in 2017. Donor financing contributed should contribute to an average fiscal surplus of FCFA 44.9 billion of the FCFA 55.0 billion spent on 0.7 over 2018–2020. Total expenditures will increase RCPCA projects. Accelerating the implementation as the public administration expands its presence of structural reforms will be necessary to restore fis- further beyond Bangui, and total revenue is expected cal sustainability, strengthen the public investment to return to its pre-crisis level of 9 percent of GDP. The management framework, and expand the fiscal space annual inflation rate is expected to fall to 3.6 percent for priority investment projects. in 2018 and reach the CEMAC convergence level of 3 percent by 2020. 1.4 CAR’s Outlook Is Positive, Although security in Bangui has significantly but the Security Situation improved, intercommunity tensions and clashes Remains a Major Source between armed groups continue to plague the country. Instability and violence prevent public ser- of Downside Risk vices and humanitarian organizations from reach- CAR’s economic outlook hinges on the consol- ing a large share of the people affected by the crisis. idation of stability, increased investment, and The UN High Commission for Refugees estimated accelerating export growth. The GDP growth rate that over 688,000 people were internally displaced at is expected to stabilize at around 5.0 percent over the end-2017, a 60 percent increase from 2016, and more medium term. As public consumption is expected to than 540,000 people had fled to neighboring coun- support the modest recovery, this projection is con- tries. The atrocities committed during 2017 under- tingent on the implementation of the government’s score the need to accelerate the DDR process and National Recovery and Peacebuilding Plan. Diamond revitalize economic growth. Primary-sector activi- and wood-product exports are forecast to rise, and ties in resource-rich areas are key drivers of future 10 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY growth, yet they are especially vulnerable to insecu- The main source of external risk is the depen- rity and violence. Ongoing instability also threatens dence of the public finances, and especially food security and the provision of basic services. the RCPCA, on international aid. In November 2017, the new administration convened a donor con- Beyond the security sector, a failure to implement ference in Brussels, at which CAR’s development the reforms needed to restore sound economic partners committed US$2.3 billion to support the management is the chief source of downside RCPCA, launch the DDR process, and initiate the risk. Revenue collection is significantly below its reform of the security sector. External resources are pre-crisis level, the public administration remains vital to stability and growth, and even a moderate dis- weak, and CAR depends on external financing to ruption in the flow of international assistance could cover some of its primary expenditures and most of rapidly weaken the government’s fiscal position. its capital spending. In the context of a tightening In addition to multilateral institutions, CAR relies regional monetary policy, expenditure rationalization heavily on bilateral partners and regional organiza- needs to complement revenue measures to continue tions. CAR’s high level of dependence on numerous the fiscal consolidation while protecting poor house- development partners to provide long-term support holds. Over the medium term, fiscal stability will threatens fiscal stability, economic growth, and the be crucial to sustain growth and increase revenue consolidation of the peace process. collection. Any threat to the continuity of the structural reform agenda, or to overall fiscal discipline, could Despite recent positive developments and a derail even the modest recovery achieved thus far. climate of cautious optimism following the peaceful presidential election of 2016, CAR The ability of the government and other stake- remains a fragile state. CAR’s fragility has a strong holders to effectively promote good governance cyclical aspect, as each unresolved crisis lays the in a post-conflict environment is a further source foundation for the next. Escaping this self-reinforcing of downside risk. The complex demands of restor- equilibrium and achieving robust and sustainable ing peace while adopting administrative reforms to poverty reduction will require addressing deep struc- improve governance will strain CAR’s limited insti- tural challenges, including regional inequalities and tutional capacity. Public institutions must ensure the limited presence of the public administration security, promote economic growth, and provide outside Bangui. To accomplish this complex and dif- social services efficiently and equitably. Managing a ficult task, the government will need to fully leverage humanitarian crisis is often a long and difficult pro- its human and natural capital while strengthening its cess, and in CAR’s case this process is complicated public institutions, and Section II examines relevant by the regional threat of Boko Haram, which is active lessons from the experience of other post-conflict in neighboring Cameroon and Chad. The swift reso- countries. As the proper sequencing of reforms is lution of the humanitarian crisis and the successful especially vital in a context of limited institutional return of refugees and displaced persons should cre- capacity, Section III presents a quantitative assess- ate additional fiscal space to invest in institutional ment of the long-term impact of several policy alter- capacity-building. natives currently being considered by the authorities. 2 BREAKING THE CYCLE OF CONFLICT AND INSTABILITY T he Central African Republic (CAR) has experienced successive cycles of violence and conflict. Since gaining its independence from France, CAR has completed just two peaceful transitions of power, one in 1993 and one in 2016. The country’s most recent major conflict began in early 2013 and remains unresolved, leaving an impoverished and traumatized population exposed to further exploitation by armed groups. The central government currently con- trols only about 40 percent of the national territory, and numerous armed groups are active across the country. Reestablishing the rule of law, building a capable bureaucracy, and laying the foundation for sustainable growth and poverty reduction will require a carefully calibrated policy agenda. Drawing on lessons from the experience of other post-conflict countries could enable the government to for- mulate an effective strategy for addressing CAR’s extensive devel- opment needs in a context of severe capacity limitations and tight budget constraints. The political and institutional fragility of the capabilities necessary to execute its core functions. CAR reflects its history, marked by a weak This situation, known as “isomorphic mimicry,” reflects institutional effectiveness. The public adminis- both cynicism manipulation by leaders who deliber- tration displays the superficial aspects of effective ately prioritized the image of good governance over governance—organizational charts, ranks, official doc- actual administrative competence and the lack from uments, bureaucratic procedures, etc.—but lacks reformers’ side of an accurate sense of the time and both the institutional incentives and substantive effort required to develop an effective public sector. 11 12 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY BOX 2.1 CAR Fragility Assessment C AR’s state fragility stems from a complex set of causes. A 2015 World Bank Fragility Assessment, prepared with support from the UN and CAR’s bilateral partners, identified six key drivers of fragility: 1.  A lack of social cohesion at every level of society. Pervasive mistrust between communities, ethnic and religious groups, and state and non-state actors contributes to cycles of violence and enables ruthless leaders to capitalize on unresolved grievances. 2.  The concentration of political power among a small elite with little popular legitimacy. CAR’s political institutions do not effectively incorporate the democratic preferences of citizens into public policy, and its public administration lacks the capacity to provide an adequate supply of public goods and services. Consequently, the state is widely perceived as distant, abstract force controlled by an insular elite. 3.  Socioeconomic and political disparities between Bangui and the rest of the country and between the eastern region and the northern, southern and western regions. Political power is concentrated in Bangui, as is the supply of public goods and services. The inability of the state to provide public services outside the capital or ensure security across the national territory has exacerbated ethnic, regional, and class grievances and facilitated the emergence of armed groups. 4.  Elite capture of scarce natural resources. Former governments and armed groups have a long history of exploiting the country’s gold and diamond reserves for private gain. 5.  Impunity. The failure to punish war criminals or provide justice to victims of violence has created an envi- ronment of impunity that contributes to vicious cycles of conflict and revenge. 6.  Persistent insecurity. The government’s inability to provide basic security contributes to multiple forms of criminality, including weapons trafficking, illegal diamond- and gold-mining, banditry, extortion, and poaching. Consequently, CAR and its development partners 2.1 The Drivers of Fragility and now face the daunting challenge of implementing Instability in CAR Are Deeply an urgent and far-reaching reform agenda through a set of weak and unstable public institutions. As the Rooted in Its History6 international literature demonstrates, pushing frag- As early as the fifteenth century, the area that is ile states to adopt reforms too quickly, even if those now CAR was subject to large-scale systematic reforms are necessary and desirable, risks over- violence. The northern and eastern parts of the ter- whelming and even damaging the limited capacity ritory were subject to military incursions from power- of the public sector. This chapter reviews CAR history ful sultanates in Chad (Waddai) and Sudan (Darfur). to identify the root causes of its fragility (Box 2.1), During the nineteenth century, the development of and then looks at the experience of other countries that went through similarly lengthy fragility periods to identify entry points to start breaking the cycle of 6 This section is a quote from CAR Systematic Country conflict and fragility. Diagnostics. BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 13 new slave-trading routes expanded slaving raids institutions and promote social and economic devel- deep into the interior, weakening social cohesion opment, but both did so in the service of a one-party and forcing people to seek refuge in remote and inac- state predicated on clientelism and exploitation. cessible regions. By the late precolonial era, CAR was only sparsely inhabited. Various ethnic groups Bokassa’s rule was especially brutal and corrupt, lived in villages scattered across the territory, often but even after he was deposed in 1979 CAR’s regarding each other with profound distrust. administrative systems and social institutions continued to deteriorate, and would-be rulers The colonial period laid the foundation for state increasingly appealed to ethnic identity as the institutions, but violence and discrimination basis of political support. By the late 1990s, rival undermined the process of state formation. Euro- national leaders had begun exploiting local conflicts pean colonial powers arrived in the mid-1880s, and and enlisting criminals and militia groups in a strug- in 1906 the territory of Oubangui-Chari was declared gle for dominance. Shifting alliances between polit- a French colony. The French invested little in local ical leaders, rebel movements, militia groups, and infrastructure and institutions, instead governing criminal organizations resulted in a complex pattern through a system of concessions to private compa- of factional violence and inter-community grievance nies. These companies demanded that the local pop- that continues to undermine national cohesion.7 ulation produce rubber and contribute tax revenue, and communities that failed to meet these demands Three military mutinies between 1996 and 1997 were punished severely. While the French colonial catalysed a violent political conflict that led to a government attempted to establish the basis for an bloody coup attempt in 2001 and culminated in effective political and administrative state, these a 2003 rebellion in which President Angel-Félix efforts came later and were less vigorous than in Patassé was ousted by François Bozizé. In 2004, other French colonies. During the colonial period, rebel groups in the north launched a civil war against urban centres were established, a road network was the Bozizé regime. Peace agreements were negoti- built, and new crops such as cotton, coffee, and ated in 2007 and 2008, but disputes regarding their palm oil were introduced. implementation and the failure of the subsequent DDR process8 plunged the country into a renewed The initial post-independence period was marked conflict in 2012. Rebel groups formed the Séléka by regimes that promoted economic develop- Coalition under the leadership of Michel Djotodia ment, but also reinforced the patronage systems and advanced on Bangui. Djotodia ultimately over- and authoritarian governance of the colonial threw Bozizé and became president in 2013. era. CAR achieved independence from France in 1960. However, the new country’s social contract After taking power, Djotodia attempted to dis- was not based on the premise that citizens would solve the Séléka, but most of its component pay taxes to the government in exchange for public groups refused to disarm, becoming known as services and security, but rather that the state would the ex-Séléka. Though the Séléka was largely continue to violently exploit the population for the composed of Muslims and members of pastoralist benefit of a small but powerful elite. CAR’s first post- independence leaders, David Dacko and Jean-Bédel 7 Chauvin and Seignobos, 2013. Bokassa, attempted to build the capacity of public 8 Fragility Assessment, World Bank, 2016. 14 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY groups, the coalition was driven primarily by polit- resigned. An interim government was established, ical objectives. By contrast, the ex-Séléka strongly and reconciliation process was launched, which cul- identified with the interests of Muslim pastoralists minated in May 2015 in the Bangui Forum. and leveraged pre-existing conflicts with other eth- nic and religious groups into an escalating cycle The forum set the country on a path toward elec- of inter-community violence. Christian and animist tions and a return to constitutional order. A new farming communities responded by forming or scal- constitution was adopted by popular referendum in ing up local self-defence militias, which became December 2015, receiving 93 percent of the vote with known collectively at the anti-balaka. The increas- 38 percent of eligible voters participating. The new ingly ethnic and sectarian nature of the conflict constitution expanded the power of the legislature, resulted in widespread atrocities against civilians, established a Senate to complement the existing in some cases verging on genocide. As the fighting National Assembly, and set a two-term limit on the dragged on, armed groups fragmented and pro­ presidency. Former Prime Minister Faustin Archange liferated (Figure 2.1), greatly complicating efforts to Touadéra won the presidential runoff election in negotiate a resolution. Following an intervention by February 2016 with 62 percent of the vote. Incoming French and African Union forces in 2014, Djotodia Prime Minister Simplice Sarandji named several The Proliferation of Armed Groups in Central African FIGURE 2.1 Republic, 2005–2017 2005 2007 2009 2010 2012 2013 2014 2015 2016 2017 GAPLC: Djotodia MLCJ: Sabone UFDR: Djotodia, Sabone, Damane FPRC: Djotodia, Nourredine, Hissène COALITION FDC: Hassan RPRC: Damane Séléka Coalition CPJP: Hissène CPJP: Massi CPJP Fond.: MPC: al-Khatim Nourredine CPSK: MPC Siriri: Ambosoro Dhaffane Séléka Rénovée: Dhaffane FPR: Laddé, Darassa MLCJ: Toumou Deya UPC: Darassa Anti-Balaka: Ngaïssona Anti-Balaka Anti-Balaka: Mokom Community self-defense groups Local groups MRDP FDPC: Miskine FDPC: Miskine RJ: Sayo Other groups RJ: Belanga APRD: Demafouth FCCPD: Tshibangu 3R: Sidiki LRA: Kony LRA: Kony Source: Nathalie Dukhan, 2017. Splintered Warfare. Alliances, affiliations and agendas of armed factions and politico military groups in the Central African Republic. The Enough Project. BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 15 of the president’s former rivals to the 23-member used by pastoralists. Though ostensibly defen- cabinet formed in April 2016, a move hailed as an sive, both the anti-balaka and UPC have repeatedly important step toward political inclusiveness. The engaged in aggressive violence. The Popular Front government was reshuffled in September 2017 to for the Rebirth of CAR (Front Populaire pour la Renais- incorporate representatives from a wider range of sance de Centrafrique, FPRC) has close ties to Chad, political factions and armed groups. and its stated goal is to secure the independence of the northern regions from the country. Though both While the Bangui Forum and the elections for- are majority-Muslim ex-Séléka factions, the UPC mally put an end to the transition, CAR is not and FPRC represent different ethnic groups and are yet a post-conflict country. The security situation engaged in a violent struggle for control over parts has been deteriorating since mid-2016, and the con­ of the Ouaka and Haute-Kotto regions. In addition to tinued fragmentation of armed groups has contrib- these and other domestic armed groups, the Lord’s uted to rising violence. Although the United Nations Resistance Army (LRA) has been active in CAR Multidimensional Integrated Stabilization Mission since the late 2000s, when a renewed offensive by in the Central African Republic (MINUSCA) is the Ugandan military pushed it across the border in unpopular among some segments of the population, search of safety and resources. it remains vital in the absence of effective domes- tic defense and security forces. Numerous factional Pacifying CAR’s armed groups will require a prag- groups continue to perceive violence as a more matic, multifaceted response combining coercion, expedient means of advancing their interests than sanctions, containment, and cooptation.9 The dif- engagement in the revamped political process. Until ficult task of establishing security is further compli- the government can either integrate these groups cated by the need to meet the expectations of political into national politics or pacify them through the factions and armed groups that have already joined lawful actions of an effective national security appa- the political process. Moreover, the government ratus, MINUSCA’s continued presence will remain must meet these expectations in a context of low necessary. public revenues, sluggish growth, weak institutional capacity, and extreme political polarization. Many armed groups have complex or ambigu- ous objectives, which often combine elements Reestablishing the rule of law, building a capa- of self-defense, community representation, and ble bureaucracy, and laying the foundation for control over resources. Some armed groups are sustainable growth and poverty reduction will essentially organized crime networks that exist for require a carefully calibrated policy agenda. financial gain, while others are self-defense groups Stability is a prerequisite for development, but in an fighting for specific ethnic or territorial constituen- environment where the rule of law is weak, establish- cies. Both types may exploit local grievances to gain ing stability requires the state to leverage the power legitimacy, but they tend to have very limited political of individuals over specific constituencies, which or ideological objectives, if any. The anti-balaka are inevitably leads to corruption and rent-seeking. typically based in specific villages or regions, while ex-Séléka groups such as the Union for Peace in 9 Schneckener, Ulrich 2009: Spoilers or Governance Actors? Engaging Armed Non-State Groups in Areas of Limited State- CAR (Union pour la Paix in Centrafrique, UPC) attempt hood, SFB-Governance Working Paper Series, No. 21, Research to secure control over the transhumance corridors Center (SFB) 700, Berlin, 2009. 16 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY However, uncontrolled corruption can also provoke 2.2 Building a Capable instability by undermining public confidence in the Public Administration: government while encouraging interest groups to vie for control over public resources. Reasserting Historical Lessons the rule of law will require the government to co-opt Development can be defined as a fourfold pro- powerful interests without enabling corruption or cess of economic, political, administrative, and elite capture. Public officials must be incentivized to social transformation. As countries develop, their serve the public, rather than advancing the personal economies grow more productive, their public poli- interests of patrons or the parochial goals of specific cies more accurately reflect the preferences of their ethnic or political groups. Finally, the government citizens, their public administrations become capa- must progressively expand the provision of public ble of carrying out more complex tasks, and rights goods and services, and explicitly link its actions to and opportunities become more equitably distrib- both the democratically expressed will of its citizens uted. This process is driven by an evolving system and their contributions to public revenue. of sociopolitical rules—the behavioral norms and expectations that underpin relationships between A recent World Bank Systematic Country Diag- individuals, civil society, the private sector, and the nostic for CAR identified three necessary con- state (Figure 2.2). During transitional periods, indi- ditions for breaking the cycle of instability and viduals will face multiple conflicting rules systems, conflict: establishing security, addressing griev- creating stress and conflict that can derail the devel- ances, and fostering equitable and inclusive opment process. In this context, the following sec- social and economic development. Persistent tion examines the administrative capability of CAR’s insecurity is arguably the most important obsta- government to affect the course of events across a cle to poverty reduction. Every new violent clash wide variety of domains, including law and order, between armed groups creates additional displace- infrastructure, economic regulation, and contract ment, destroys private property, erodes the state’s enforcement. capacity to provide services, and complicates the efforts of humanitarian agencies. Addressing griev- This analysis uses three sets of indicators to ances is vital to maintain long-term stability, as the measure the different dimensions of administra- effective provision of justice by public institutions tive capacity. These are the Fragile State Index (FSI) delegitimizes violence. Equitable service provision, indicators, data from the Mapping Report on Human including social transfers, is also critical to reduce Rights Violations, and the World Bank’s Worldwide poverty, build human capital, and enhance the abil- Governance Indicators (WGI).10 Projections based on ity of households to engage in productive activities. historical values can shed light on how long it might Finally, promoting broad-based growth and job take a fragile state like CAR to progress from its cur- creation can weaken incentives to engage in vio- rent level of administrative capability to an indica- lence and criminality for economic gain. However, tive threshold consistent with basic stability and ensuring stability and addressing grievances are preconditions for economic growth. As it strives to 10 However, the WDI indicators themselves might be sensitive overcome a legacy of fragility and violence, CAR can to isomorphic mimicry. If so, they would assess how closely a country conforms to the superficial aspects of an effective learn important lessons from the experience of other public administration, rather than how effective its public post-conflict countries. administration actually is. BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 17 FIGURE 2.2 The Fourfold Process of Development • ECONOMY • POLITY • Enhanced • Accurate productivity preference aggregation Rules Systems • SOCIETY • ADMINISTRATION • Equal social • Rational rights, professional opportunities organizations Source: Prittchet and de Weijer, 2010. adequate governance. These sets of indicators also indicators are especially relevant to CAR: (i) the secu- tend to demonstrate that restoration and consolida- rity apparatus, (ii) economic decline and poverty, tion of a State capable of tackling fragility factors, (iii) public services, and (iv) human rights and the restoring security, enforcing the rule of law and ini- rule of law. Higher FSI indicator scores imply greater tiating and implementing good governance reforms vulnerability to state collapse. Countries are ranked are essential for strong, sustainable and inclusive according to their aggregate FSI scores, and lower growth as well as to poverty reduction. global FSI rankings are correlated with high poverty rates, highlighting the fundamental importance of security to sustainable poverty reduction. Lessons from the Fragility States Index For almost 25 years, the Fund for Peace has used The “security apparatus” indicator measures an analytical framework known as the Conflict security threats to a state. It reflects violent inci- Assessment System Tool (CAST) to compile dents such as battles, combat fatalities, rebellions, the FSI. The CAST framework is designed to mea- mutinies, coups, and terrorism. It also includes sure the vulnerability of states to collapse, and it can organized crime and criminal homicides, and the be applied to pre-conflict, conflict, or post-conflict presence of state-supported paramilitaries, inde- situations. The methodology uses both qualitative pendent militias, mercenary groups, and other poten- and quantitative indicators, relies on publicly avail- tial combatants. While large-scale conflict has now able data, and produces quantifiable results. The FSI ceased, CAR’s security situation remains extremely comprises twelve risk indicators divided in four cat- tenuous. Despite the presence of elected authori- egories: cohesion indicators, economic indicators, ties in the leadership of the country, the central gov- political indicators, and social indicators. Four FSI ernment currently controls only about 40 percent 18 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY Aggregate Fragile States Index Scores and “Security FIGURE 2.3 Apparatus” Indicator Scores, Central African Republic and Sierra Leone, 2006–2017 Overall trend Security apparatus 120.0 12.0 100.0 10.0 80.0 8.0 60.0 6.0 40.0 4.0 20.0 2.0 0.0 0.0 06 07 08 09 10 11 12 13 14 15 16 17 06 07 08 09 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Central African Republic Central African Republic Sierra Leone Sierra Leone Source: FSI database. of the national territory, while armed groups con- The FSI’s “economic decline and poverty” indi- tinue to control much of the national territory and cator reflects the tendency of bleak economic relations between communities remain tense. In prospects and high levels of poverty to erode the 2017, CAR ranked 176th out of 178 countries on the stability of the state. Its sub-indicators include per security apparatus indicator, and its score deterio- capita income, gross national product, the unem- rated from 8.9 in 2006 to 9.0. By contrast, Ghana ployment rate, inflation, productivity, debt, poverty ranked 106th, with a score of 2.0, reflecting the rates, and the business climate, and it accounts for country’s dramatic strides toward restoring secu- shocks to commodity prices, trade revenues, and rity after the succession of many military coups foreign investment, inter alia. Despite its abundant between 1978 and 1981. Sierra Leone had a score natural resources—which include uranium, oil, gold, of 7.0 as recently as 2006, but its score dropped to diamonds, cobalt, timber, wildlife, large amounts of 4.3 in 2017 as the government continued to con- arable land, and robust hydrological systems—CAR solidate the security situation (Figure 2.3). The remains one of the poorest countries in the world and CAR’s poor performance under the “security appa- one of the most unequal countries in Sub-Saharan ratus” indicator results from the deterioration of Africa, with the region’s fourth-highest Gini coeffi- the security situation on the ground where every cient.11 CAR’s score on the “economic decline and new violent clash between armed groups creates poverty” indicator deteriorated from 8.1 in 2006 to 9.1 additional displacement, destroys private property, in 2017 (Figure 2.4). erodes the state’s capacity to provide services, and complicates the efforts of humanitarian agencies. Liberia’s experience yields several important les- As rightfully highlighted in the recent Systematic sons for CAR. As it attempted to overcome its own Country Diagnostic for CAR, persistent insecurity is arguably the most important obstacle to poverty 11 World Bank, Policy Note, Poverty, 2016 and World Development reduction. Indicators 2015. BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 19 Aggregate Fragile States Index Scores and “Economic FIGURE 2.4 Decline and Poverty” Indicator Scores, Central African Republic and Liberia, 2006–2017 Overall trend Economic decline and Poverty 120.0 9.5 100.0 9.0 80.0 8.5 60.0 8.0 40.0 20.0 7.5 0.0 7.0 06 07 08 09 10 11 12 13 14 15 16 17 06 07 08 09 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Central African Republic Central African Republic Liberia Liberia Source: FSI database. history of fragility, conflict, and misrule, Liberia’s “eco- CAR’s protracted security crisis damaged nomic decline and poverty” indicator score gradually the state’s already weak capacity to provide improved from 8.9 in 2006 to 8.1 in 2017 (Figure 2.4). essential public goods and services. Due to This trend reflected the country’s gradual economic intensifying insecurity and the breakdown of the recovery after the end of its second civil war in 2003, civil service payroll system, by end-2016 only an as well as a return to competent macroeconomic man- estimated 5 percent of civil servants remained in agement under the transitional government and the postings outside of Bangui. The insecurity has led administration of former President Ellen Sirleaf John- several officials and state agents in the provinces son. It also suggests that, if peace is fully restored and of the country to abandon their posts. Unpaid maintained, more than a decade of sound economic teachers left their posts, school facilities were policies will likely be required for CAR’s economic and looted or destroyed, and teacher recruitment and poverty indicators to approach Liberia’s current levels. training were disrupted. The formal school system effectively ceased to function for two full academic The FSI’s “public services” indicator measures years, and some schools did not resume normal the government’s ability to execute its core func- operations until early 2015. The crisis also under- tions and serve the needs of its citizens. The indi- mined CAR’s healthcare system. Approximately cator encompasses access to healthcare, education, 28 percent of health facilities have been either and water and sanitation, as well as transportation damaged or destroyed, or cannot function due to and electricity infrastructure. It also reflects the state’s insecurity or a lack of medical supplies and equip- ability to protect its citizens from violence by providing ment. The healthcare system suffers from a deficit effective police and security services. The indicator of around 2,000 qualified personnel, and provincial also accounts for the distributional equity of public healthcare facilities face especially acute short- service provision across household income levels, ages of doctors, midwives, qualified nurses, and between regions, and between rural and urban areas. even nursing assistants. Nationwide, approximately 20 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 2  illion people are food insecure, food reserves in The FSI’s “human rights and rule of law” indica- rural areas are still 40–50 percent below the pre- tor examines the state’s ability and willingness to crisis average, and thousands of children under safeguard basic human rights and its respect the age of five suffer from severe, acute, or mod- for personal and political freedoms. The indica- erate malnutrition. Aside from donor-funded pro- tor attempts to measure violations of legal, political, grams, social protection systems for poor and and social rights, including the rights of individuals, vulnerable groups are almost nonexistent. Infra- groups and institutions. It encompasses the harass- structure remains extremely limited. In 2010, the ment of the press, the politicization of the judiciary, entire country had less than 25,000 km of roads, the internal use of military force for political purposes, and by 2015 mobile telecommunications networks and the repression of political opponents, as well as covered only 59 percent of the population. incidents of politically motivated violence against civilians. CAR’s score on the human rights and rule of The FSI indicator for public services worsened law indicator worsened dramatically from 7.5 in 2006 to substantially between 2006 and 2017, rising 9.7 in 2017, having peaked at 10.0 in 2015 (figure 2.6). from 8.0 to 10.0. Sierra Leone’s experience under- By comparison, Sierra Leone’s 2006 score was similar score the challenge of restoring public services in to CAR’s at 7.0, but steadily improved to 5.3 in 2017 as a post-conflict country. Although its civil war ended the country remained at peace (Figure 2.6). in 2002, Sierra Leone’s FSI score for public services deteriorated from 8.0 in 2006 to 8.8 in 2017. CAR In addition to the FSI, a 2017 mapping report by experienced an even more severe deterioration over the United Nations Human Rights Office of the the same period, and rebuilding the government’s High Commission for Human Rights (OHCHR) capacity to provide vital public goods and services extensively documented human rights viola- will be a long and difficult process. tions in CAR since 2003. The report was based Aggregate Fragile States Index Scores and “Public Services” FIGURE 2.5 Indicator Scores, Central African Republic and Sierra Leone, 2006–2017 Overall trend Public services 120.0 12.0 100.0 10.0 80.0 8.0 60.0 6.0 40.0 4.0 20.0 2.0 0.0 0.0 06 07 08 09 10 11 12 13 14 15 16 17 06 07 08 09 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Central African Republic Central African Republic Sierra Leone Sierra Leone Source: FSI database. BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 21 Aggregate Fragile States Index Scores and “Human Rights FIGURE 2.6 and Rule of Law” Indicator Scores, Central African Republic and Sierra Leone, 2006–2017 Overall trend Human rights and rule of law 120.0 12.0 100.0 10.0 80.0 8.0 60.0 6.0 40.0 4.0 20.0 2.0 0.0 0.0 2006 2008 2010 2012 2014 2016 2006 2008 2010 2012 2014 2016 Central African Republic Central African Republic Sierra Leone Sierra Leone Source: FSI database on recommendations made during an interna- May 9, 2005 and December 20, 2008, 158 incidents tional seminar in Bangui in September 2015, which between December 21, 2008 and March 23, 2013, and followed the Bangui Forum in May 2015. It was 361 incidents between March 24, 2013 and Decem- designed to support the commitment of the govern- ber 31, 2015. The report revealed the extent to which ment and the international community to redress CAR’s recent conflict was marked not only by serious human rights abuses, provide justice for victims, violations of civil and political rights, but also by large- and prevent unresolved grievances from provoking scale violations of economic and social rights, includ- future conflicts. ing rights to health, education, and housing. The key lesson to be learned is that violations of human rights The mapping report identified 620 serious viola- have a negative impact in the CAR and is contributing tions of human rights and international human- to keeping the country as one of the least developed in itarian law.12 These included 32 incidents between the world. CAR ranked last in the UN’s Human Devel- January 1, 2003 and May 8, 2005, 69 incidents between opment Index, a tool which measures development indicators among 188 countries in the world. 12 The mapping project team began by conducting a desk review of information from more than 1,200 public and confidential sources, including reports by the UN agencies, NGOS, the media, and aca- Lessons from the World Bank’s Worldwide demic researchers. The team also investigated previously unveri- fied reports, visited the sites of alleged incidents, and conducted Governance Indicators interviews with around 120 victims, witnesses, public authorities, religious and community leaders, human rights advocates, and The World Bank’s Worldwide Governance Indi- alleged perpetrators. A gravity threshold was used to identify inci- dents revealing “serious violations of international human rights cator (WGI) database confirms the importance law and international humanitarian law,” which included killings, of empowerments rights—specifically voice torture, sexual and gender-based violence, and cruel, inhuman, or degrading treatment, as well as other violations of fundamental and accountability—to development in conflict- human rights, including systematic discrimination. affected countries. Since 1996, the WGI database 22 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY has recorded indicators of six key dimensions of gov- its robust civil society. In Burkina Faso, civil-society ernance: voice and accountability, political stability groups successfully challenged former President and the absence of violence, government effective- Blaise Compoaré’s attempt to alter the constitution ness, regulatory quality, rule of law, and control of to eliminate term limits, and after a volatile but brief corruption. The WGI measure the quality of gover- transitional period, democracy was restored. In 2017, nance in over 200 countries based on almost 40 data Liberia completed the first democratic transfer of sources produced by over 30 organizations world- power from an incumbent President to an opposi- wide and have been updated annually since 2002. tion candidate. The highest WGI scores for voice and The “voice and accountability” indicator captures accountability in these countries highlight the vital the population’s perceived degree of democratic role of civil society in promoting political stability and participation, freedom of expression, freedom of facilitating socioeconomic development. association, and freedom of the press. Since the late 1990s, voice and accountability scores have tended to increase among CAR’s benchmark comparators, 2.3 Breaking the Cycle of Conflict with the notable exception of Ethiopia, while CAR’s and Instability: Lessons from score has declined (Figure 2.7). the International Experience Ghana and Burkina Faso have made steady Though CAR faces profound challenges, the progress in improving voice and accountability, experience of other post-conflict countries can and Liberia made dramatic gains after its 2005 yield important lessons as it strives to overcome election. Ghana has peacefully transferred power a legacy of violence and instability. The peace- between elected leaders and opposing political ful elections in 2016, the positive outcome of the parties for almost two decades, due in large part to Brussels Conference, and progress in the ongoing Worldwide Governance Indicator Scores for “Voice and FIGURE 2.7 Accountability,” Central African Republic and Comparator Countries, 1996–2016 1.00 0.50 BFA 0.00 CAF ETH –0.50 GHA –1.00 LBR RWA –1.50 –2.00 96 98 00 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: World Governance Indicators database (World Bank). BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 23 DDR and security-sector reform processes present Faced with increasing domestic and international cause for cautious optimism. In this context, exam- pressure to reform the political system, the ining the experience of comparable countries such Compaoré government ratified a new multi­ as Burkina Faso, Ghana, Liberia, and Rwanda can party constitution in 1991. Compaoré won the enable policymakers to develop a reform strategy presidency in November 1991, though the election that leverages CAR’s limited social, political, and was marred by widespread claims of fraud and an economic assets to consolidate peace and security. opposition boycott. Major opposition candidates again boycotted the 1998 election, citing government During consultations conducted in Bangui as intimidation and weaknesses in the electoral code, part of the preparation of this Economic Update, but Compaoré defeated two minor party candidates students and private-sector representatives in an election that international observers described identified Burkina Faso, Ethiopia, Ghana, Liberia, as substantially free and fair. In 1999, President Com- and Rwanda as CAR’s aspirational peers. While paoré announced that he was establishing a consul- these countries have unique histories and idiosyn- tative committee to further democratize the electoral cratic features, each underwent a period of conflict process in Burkina Faso. The committee revised the or severe instability, and each has since stabilized. electoral code, established an independent electoral Together, their experience underscores the impor- commission, expanded the opposition’s access to the tance of actively promoting the development of civil state media, and sponsored a constitutional amend- society to consolidate democratic gains, strengthen ment limiting the presidency to two five-year terms. public accountability, and enhance transparency, In October 2005, the Constitutional Council ruled that while adopting a pragmatic set of policy and insti- this term limit did not apply to Compaoré, as it had tutional arrangements to gradually but persistently been enacted during his second term in office. Fac- increase the quality of the public administration. ing a divided opposition, Compaoré was reelected in November 2005 and again in November 2010. Lessons from Burkina Faso In 2014, President Compaoré attempted to alter Burkina Faso has a long history of political insta- the constitution to enable himself to remain bility, coups, and autocratic rule.13 After achiev- in office for a fifth consecutive term. However, ing independence from France in 1960, President power­ ful civil society movements—supported by Maurice Yameogo quickly established a one-party some elements of the military—mobilized mass dictatorship. President Yameogo was overthrown by demonstrations demanding that Compaoré respect Colonel Sangoule Lamizana in a 1969 military coup. constitutional term limits. Following a brief political Though his initial rule was highly autocratic, Presi- crisis, Compaoré was forced to resign the presidency dent Lamizana ushered in a brief period of political lib- on October 31, 2014. A transitional government eralization in the 1970s. However, after a succession organized peaceful elections a year later. Roch Marc of coups in 1980, 1982, and 1983, President Thomas Christian Kaboré won the election and was sworn in Sankara assumed power and ruled until 1987, when on December 29, 2015. he was killed in a final coup led by Blaise Compaoré. The popular movement that diffused Burkina 13 Quoted from Polity IV 2010 Report on Burkina Faso Faso’s 2014 political crisis and maintained con- (http://www.systemicpeace.org/polity/BurkinaFaso2010.pdf). stitutional order was rooted in the country’s 24 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY robust civil society. For decades, Burkinabe civil on political parties in May. However, the opposition society has consolidated its political clout and credi- boycotted legislative elections held later that year, bility. Labor unions are especially powerful in Burkina citing inadequate time to prepare their campaigns. Faso, and grassroots youth organizations have suc- Rawlings won presidential elections in 1992 and cessfully leveraged social media to support political 1996, then stepped down in 2001 in accordance with mobilization. The strength of civil society has been the Ghanaian constitution’s presidential term limits. vital to decreasing the involvement of the military in Rawlings was succeeded by opposition candidate politics, consolidating empowerment rights, and pro- John Kufuor. Kufuor took office in January 2001 and, moting voice and accountability. While Burkina Faso through the setting up of the Truth and Reconcilia- continues to face major development challenges, tion Commission15, set out to promote national rec- freely contested elections are an increasingly well- onciliation among Ghanaians. The mandate of the established social and political norm, and civil society Commission was to establish “an accurate and com- will continue to serve as an accountability system and plete historical record” of alleged human rights vio- a self-correction mechanism, allowing policymakers lations and abuses related to the killing, abduction, ample latitude for trial and error by providing a robust disappearance, detention, torture, ill-treatment, and sense of public ownership over the policy process. seizure of property during three periods of uncon- stitutional government between March 6, 1957 and January 6, 1993. Lessons from Ghana Like Burkina Faso, Ghana has experienced a Partisan infighting continued in 2004 and 2006 series of coups, the first of which ousted Pres- but remained largely within the bounds of con- ident Kwame Nkrumah less than ten years ventional politics. While political intrigue negatively after independence. Nkrumah was succeeded by affected the policy process, over time the government a military junta led by General Frederick Akuffo. In significantly reduced the involvement of the mili- 1979, Flight Lieutenant Jerry Rawlings led a coup tary in politics and reduced corruption. Since 2000, that ousted Akuffo and installed a civilian adminis- multiple peaceful transfers of power have yielded tration under President Hilla Limann.14 The Limann impressive economic dividends, and Ghana’s government, however, quickly fell into public disfavor reputation for stability has enabled it to attract sub- amid widespread allegations of corruption. Rawlings stantial investment and build a diverse economy. Like engineered a second coup in December 1981, which Burkina Faso, Ghana faces significant challenges, deposed the Limann government. Rawlings estab- but a strong civil society continues to reinforce polit- lished a military government, banned all political ical stability and democratic governance. parties, and launched an extensive reform program. Lessons from Liberia As Ghana’s political situation stabilized, the pub- lic increasingly called for greater political open- Liberia has a long history of political instabil- ness. In 1992, the Rawlings government responded ity, civil war, and violence between competing by adopting a new constitution and lifting the ban ethnic groups and political factions.16 Liberia 14 Polity IV 2010 Report on Ghana (http://www.systemicpeace.org/ 15 The National Reconciliation Commission Act, 2002. polity/Ghana2010.pdf). 16 Ibid. BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 25 was established in 1821 as a homeland for freed US Many faction leaders made no serious attempts slaves. Despite hostility from the indigenous popula- to reconcile their differences through the political tion, the small minority of Americo-Liberian settlers process, and civil unrest increased. In 1999, rebel swiftly established themselves as the ruling polit- forces launched an insurgency in the north of the ical class in Liberia. Although indigenous groups country. In early 2001, President Taylor remobilized comprised 95 percent of the population, they were 15,000 of his own former guerilla fighters to combat politically and economically marginalized. the insurgency. By 2002 the violence had spread to the outskirts of Monrovia, severely destabilizing the Following violent unrest in the late 1970s, Pres- central government. The security situation contin- ident William Tolbert was overthrown in a coup ued to deteriorate, and by March 2003 over 100,000 by Master Sergeant Samuel Doe in 1980. Presi- displaced people lived in camps on the outskirts of dent Doe’s ten-year rule, which favored his indigenous the capital as rebel forces continued their march Krahn ethnic group, was widely unpopular and marked toward Monrovia. by increasing levels of ethnic violence. Liberia’s first civil war broke out in December 1989, and President Under intense domestic and international polit- Doe was executed. Liberia then descended into chaos, ical pressure, Charles Taylor resigned from as numerous warlords competed for political power office in August 2003. A transitional government and economic resources. The Economic Community was formed, which included representatives from of West African States (ECOWAS) brokered a ceasefire rebel factions and the former Taylor regime. Sporadic in November 1990, but the interim government had violence continued to plague the countryside, and little control outside the capital city of Monrovia. Most factional groups actively resisted a UN-backed dis- of the country was controlled by Charles Taylor, head of armament effort, but by late October 2004 the DDR the National Patriotic Front of Liberia, and competing process was largely complete. In November 2004, warlords. A brutal seven-year conflict ensued in which the leaders of the three largest factions signed an over 200,000 Liberians were killed and most of the pop- agreement disavowing violence and pledging to dis- ulation was internally displaced. solve their paramilitary wings, which enabled them to run for office in the 2005 elections. Liberia’s first civil war officially ended in 1996 with the Abuja Peace Accords. Elections were Liberia’s experience underscores the importance held in July 1997, after most rebel groups had trans- of controlling corruption and fostering a robust formed their militias into political parties. Charles civil society in a post-conflict environment. Taylor won the presidency with more than 75 percent Despite its history of fragility and conflict, Liberia’s of the vote, and his party won over three-quarters of International Country Risk Group score for corrup- the seats in the legislature. While opposition parties tion control rose steadily from 0 in the early 1990s raised allegations of electoral fraud, international to 1 in the late 1990s, 2 during the 2000s, and 2.5 observers declared the elections free and fair, and all after 2010. This trend appears to reflect a robust and but one of the competing political parties eventually consistent public demand to reduce corruption, as accepted the election results. both Ellen Sirleaf Johnson, first elected in 2005, and her successor, George Weah, elected in 2017, cam- Even after the 1997 elections, insecurity and paigned on promises to fight corruption. Johnson factional fighting continued to plague Liberia. Sirleaf’s credentials as a former World Bank and 26 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY UN staff member made her an especially credible from his political base in the north of the country, advocate for good governance. However, Liberia’s which controlled Rwandan politics for the next fifteen bureaucratic quality remains extremely poor, reflect- years. In 1991, facing an insurgency from Tutsi-led reb- ing its long history of weak governance and cyclical els in Uganda as well as mounting political pressure conflict. President Weah has called on members of from domestic Hutu opposition parties, Habyarimana the country’s large diaspora to return and bolster declared his intention to reestablish a multiparty sys- the stock of human capital in both the private and tem. However, the Habyarimana government made public sectors. CAR faces a similar situation, and an only modest efforts at political liberalization. appeal to qualified members of the diaspora to serve in the public administration could rapidly enhance Rising ethnic violence ultimately led to the 1994 its bureaucratic quality. Rwandan genocide. As the Tutsi-led military offen- sive escalated in early 1993, President Habyarimana signed a peace agreement that included sharing Lessons from Rwanda power with both the Hutu opposition and the Tutsi Rwanda has emerged from genocide and state rebels. However, Habyarimana failed to implement failure to become one of the world’s leading eco- the agreement, as extremists within the Hutu power nomic reformers. Rwanda’s profound ethnic divi- movement began to dominate both the political sions can be traced back to its precolonial history, discourse and government policy. Habyarimana but multiple colonial powers deliberately exploited was killed in April 1994 when his airplane was shot those divisions to entrench their dominance. In 1959, down as it approached Kigali airport. As the country an increasingly politicized Hutu majority—with the descended into anarchy, Hutu militias began mas- support of the Belgian military—launched a revolt sacring Tutsis and Hutu opponents. A wave of vio- that overthrew the Tutsi monarchy. In September lence engulfed the country, and over 800,000 Tutsis 1961, the Party of the Hutu Emancipation Movement were killed. However, Tutsi-led rebel forces captured (PARMEHUTU) won an overwhelming victory in a Kigali, driving the Hutu militias into neighboring UN-supervised referendum. After Rwanda achieved countries, and established an interim government. independence from Belgium in 1962, PARMEHUTU leader Gregoire Kayibanda became the country’s Pasteur Bizimunga, a Hutu, became president first president. in 1994, but real executive power was held by Vice President Paul Kagame, a former leader of In the postcolonial period, Hutu hegemony was the Tutsi insurgency. Kagame became president in maintained through the systematic persecu- March 2000, and a new constitution ratified in June tion of Tutsis and the increasing subversion of 2003 ended the interim government and established democratic institutions to Hutu nationalism. a basis for new elections. The government regis- Amid rising ethnic violence in the early 1970s, tered eight political parties, but banned the major Kayibanda was ousted by Major General Juvenal opposition party, which it accused of promoting a Habyarimana in a bloodless coup. President Habyari- divisive ideology. In August 2003, President Kagame mana dissolved the National Assembly, abolished all won a landslide victory over two Hutu candidates. autonomous political activity and reinforced the state International observers reported that although the ideology of Hutu supremacy. In 1975, Habyarimana election was a positive step toward democratization, established a one-party state dominated by Hutus it was marred by numerous election irregularities BREAKING THE CYCLE OF CONFLICT AND INSTABILITY 27 and political intimidation. President Kagame was fostering a strong civil society has proven highly reelected in 2010, winning over 93 percent of the vote effective in stabilizing social and political dynamics in in an election that international observes deemed fragile states, and respect for democratic processes highly problematic. In 2017, at the end of his second diffuses the volatility inherent in one-party rule. and ostensibly final term, Kagame altered the consti- tution to allow himself to remain in power until 2034. The experience of these four comparator coun- tries yields important lessons for CAR. The sta- Over the past 20 years, Rwanda has achieved a bilization of political systems in Burkina Faso and remarkable transformation, from a failed state Ghana highlights the importance of fostering a scarred by genocide to a world leader in struc- robust civil society to anchor the democratic process. tural reform. However, Rwanda’s democratic pro- Liberia’s history reveals how stable, credible politi- cess remains deeply flawed. President Kagame ran cal institutions that enjoy broad popular support are unopposed in the 2017 election, and one of his most vital to enable conflicting interest groups to resolve outspoken critics, Diane Rwigara, was placed under disputes without resorting to violence. The coun- house arrest and barred from running for office. try’s return to democratic rule also underscores the Rwanda’s scores on indicators of voice and account- importance of combatting corruption and ensuring ability, respect for physical integrity, and empower- accountability and transparency in the public sec- ment rights, are comparable to those of CAR, yet its tor. Finally, Rwanda’s experience in the wake of the scores for bureaucratic quality and corruption con- genocide highlights the dramatic progress that can trol are far higher. A sustained focus on improving be achieved when a government commits to struc- the business environment has accelerated growth, tural reform and bureaucratic capacity-building. while a robust social protection system continues to As CAR strives to overcome its legacy of violent strengthen human development indicators. Never- conflict, drawing on these lessons can help policy- theless, the indefinite extension of Kagame’s rule has makers craft an agenda for consolidating political heightened the uncertainty surrounding future tran- stability, safeguarding essential human rights, and sitions of power, casting Rwanda’s future into doubt. progressively expanding the government’s ability to It is imperative that policymakers in CAR draw the serve the needs of its citizens, calling on its Diaspora correct lesson from Rwanda’s experience: although as needed. This will be necessary to implement the development does not require robust democratic insti- public policies discussed in the last part of this first tutions or the reliable enforcement of political rights, edition of the CAR Economic update. 3 THE SIMULATED IMPACT OF ALTERNATIVE POLICIES ON INCLUSIVE GROWTH AND POVERTY REDUCTION C AR’s policy agenda must be carefully tailored to reflect the country’s institutional fragility and limited administrative capacity. In this context, the following section presents a computable general equilibrium model for CAR, which is used to evaluate alter- native reform scenarios in the mining, forestry, services, and educa- tion sectors. Under the first scenario, the government would adopt measures to boost industrial mining exports. Under the second sce- nario, the government would issue new forestry licenses, increasing forestry-product exports. Under the third scenario, the government would implement productivity-enhancing reforms in the service sec- tor, accelerating economic activity and raising income levels among the poorest households. Under the fourth scenario, the government would boost public investment in education, increasing the number of skilled workers. While all four reform scenarios would accelerate growth, the increase in forestry activity projected under the second scenario would have by far the largest impact on inclusive growth, followed by the reforms to increase productivity in the service sector projected under the third scenario. 29 30 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY CAR’s structural reform agenda must be care- description of the model’s methodology is included fully designed to account for the country’s lim- in a technical annex. ited institutional capacity and history of conflict. The international literature yields important lessons to inform the pace and sequencing of reforms. Bazzi 3.1 Scenario 1: Increased and Blattman (2014) find that rising public revenue Mining Exports from oil or minerals lowers the risk and length of High transportation costs reduce CAR’s com- war, which suggests that an increase mining and/or petitiveness. The road between Bangui and the forestry activity could support the peace process, port of Douala in Cameroon is the country’s most but only if resource revenues are properly managed. vital trade link. However, the road is not fully paved, Miguel et al. (2004) find that inclusive growth tends and poor road conditions impose substantial costs to reduce conflicts in Sub-Saharan Africa. Collier in terms of both delays and vehicle damage. These et al. (2003) find that policies designed to promote costs are exacerbated by the prevalence of admin- social inclusion, such as public education, help istrative barriers, both formal and informal, which reduce post-conflict risks and promote broad-based proliferated during the crisis, and by long customs- growth by signaling the government’s commitment clearance times at the port of Douala. In addition to to a peaceful and inclusive society. Multiple studies weak infrastructure and high administrative costs, also highlight the importance of business-climate security risks discourage transportation firms from reforms—including measures to clarify and enforce operating in CAR. property rights—in reviving investment in the urban economy, which in CAR is dominated by the ser- Under the first projection scenario, reducing vice sector. transportation and trade costs is assumed to boost mining exports to the level that prevailed Policy changes can generate complex, indirect before the civil war. Transaction costs are modelled effects on economic activity across sectors and as a traditional “iceberg effect”: transportation is socioeconomic groups; by estimating these treated as a source of exogenous friction that is fixed effects, a well-designed computable general and proportional to the value shipped. The simula- equilibrium (CGE) model can inform sound pol- tion calibrates iceberg transaction costs based on a icy decisions. CGE models can project the impact 70 percent increase in mining exports in 2017. Rising of proposed reforms or shocks on a range of macro- mining exports would cause the real exchange rate economic indicators, including the national accounts to appreciate, generating an increase in import vol- (growth, consumption, investment, and the fiscal umes in response to the additional export income. balance) and the external accounts (exchange rates, Higher income from the expansion of trade would the trade balance, the debt stock, and the current also support increased consumption. These demand account). CGE models also can capture the dis- effects would cause GDP to rise to about 1 percent tributive impact of a policy—a critical feature, as the above the baseline in 2017 and more than 2 percent successful implementation and long-term sustain- above the baseline in 2030 (Figure 3.1), as rising ability of economic policies depend in part on policy- incomes bolster domestic savings and investment. makers’ ability to manage their distributive effects. Under this scenario, the overall fiscal deficit would This chapter uses CGE model for CAR to simulate narrow sharply between 2017 and 2025 and vanish the effects of four alternative policy scenarios. A by 2030 (Figure 3.2). THE SIMULATED IMPACT OF ALTERNATIVE POLICIES ON INCLUSIVE GROWTH AND POVERTY REDUCTION 31 GDP Growth Increasing mining exports would have import- FIGURE 3.1 Decomposition ant consequences for other sectors. Production under Scenario 1 would decline in all sectors except agriculture (Fig- (% deviation from ure 3.3), as rising mining exports would cause the the baseline) real exchange rate to appreciate (Figure 3.4), reduc- ing the competitiveness of tradeable goods such 25 as forest products and manufactures. In addition, 20 GDP at growing demand for labor and capital in the mining constant prices sector would increase production costs in other Private sectors. However, this effect is small for agriculture— 15 consumption despite its reliance on the same pool of unskilled labor Public 10 consumption demanded by the mining sector—as rising incomes Investment would boost demand for agricultural products. The 5 Exports effect is also small for the service sector. Although services, like mining, are capital intensive, the substi- 0 tutability of capital between the two sectors is limited. 2017 2025 2030 Source: World Bank staff calculations. All income groups would benefit from increased mining exports, but households in the wealthiest The Public decile would benefit far more than households at FIGURE 3.2 any other income level. By 2030, households from Finances under Scenario 1 all ten income deciles would have higher incomes rel- (% deviation from ative to the baseline (Figure 3.5). However, wealthier the baseline) 10 Sectoral Growth FIGURE 3.3 8 under Scenario 1 (% deviation from 6 Overall balance the baseline) 4 Government 90 revenue 78.68 2 80 74.91 68.86 Total 70 0 expenditure 60 Agriculture 50 Forestry –2 40 Mining –4 30 2017 2025 2030 Manufacture 20 Source: World Bank staff calculations. 10 Services 0 –10 –20 2017 2025 2030 Source: World Bank staff calculations. 32 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY Exchange-Rate and the government. By promoting responsible artis- FIGURE 3.4 Dynamics under anal mining alongside large commercial mining oper- Scenario 1 ations, the government could increase the returns (% deviation from that accrue to poorer households. the baseline) 0 3.2 Scenario 2: Increased –1 Forestry Exports –2 Prior to the 2013 crisis, CAR’s forestry sector –3 represented over 6 percent of GDP, roughly half –4 of total exports, and about 10 percent of public –5 revenue. It also employed a significant workforce in remote regions, providing about 4,000 direct jobs and –6 6,000 indirect jobs. Under the country’s revenue- –7 sharing framework, forestry companies were required –8 to pay local communities about FCFA 1 billion per 2017 2018 2023 2029 2030 Source: World Bank staff calculations. year. CAR has an estimated 5.4 million hectares of Note: Negative values imply real exchange-rate appreciation. forested area: 3.8 million hectares in its southwest region and another 1.6 million in the southeast. Thus households would tend to benefit much more than far, industrial logging has taken hold only in the poorer ones, and a large premium would accrue to southwest, and the country retains vast unexploited households in the top income decline. This regressive forestry potential. distribution of returns reflects the capital intensity of the mining sector, where more than 70 percent of The second scenario simulates an increase in value addition is captured by private capital owners forestry-product output driven by the issuance Real Consumption Growth by Income Decile FIGURE 3.5 under Scenario 1 (% deviation from the baseline) 35 Decile 1 30 Decile 2 Decile 3 25 Decile 4 20 Decile 5 15 Decile 6 9.74 Decile 7 10 6.27 Decile 8 5 Decile 9 Decile 10 0 2030 Source: World Bank staff calculations. THE SIMULATED IMPACT OF ALTERNATIVE POLICIES ON INCLUSIVE GROWTH AND POVERTY REDUCTION 33 of new forestry licenses. It projects an increase The Public FIGURE 3.7 in forestry exports necessary to balance the govern- Finances under ment budget by 2030. Under this scenario, produc- Scenario 2 tion would rise by 70 percent above the baseline in (% deviation from 2017 and by more than 110 percent in 2030. Rising the baseline) forestry exports would boost real GDP by about 100 5 percentage points above the baseline in 2017 and 80 by almost 14 percentage points in 2030 (Figure 3.6). 60 The model assumes that the government would use 40 Overall the additional revenue generated by increased for- 20 balance estry exports to reduce the fiscal deficit (Figure 3.7). 0 Government –20 revenue The resulting improvement in the government’s fis- –40 Total cal position would accelerate public debt repayment –60 expenditure and limit the need for new borrowing. The conse- –80 quent reduction in the crowding-out effect of public –100 borrowing would increase private investment and –120 boost growth. 2017 2025 2030 Source: World Bank staff calculations. Rising forestry exports would have sectoral effects similar to those caused by the increase scenario. Real exchange-rate appreciation (Fig- in mining exports simulated under the previous ure 3.8) would cause production to fall in other export-oriented sectors, such as mining and manu­ GDP Growth facturing, while agricultural output would remain FIGURE 3.6 largely unchanged (Figure 3.9). However, unlike in Decomposition under Scenario 2 the previous scenario, rising forestry exports would (% deviation from increase production in the service sector. the baseline) The simulated increase in forestry production 45 would benefit households in all income groups. 40 Under this scenario, household income levels for GDP at 35 all groups would be at least 15 percent above the constant 30 prices baseline scenario by 2030 (Figure 3.10). Poorer 25 Private households would benefit because unskilled labor consumption 20 represents about 45 percent of the value added by Public the forestry sector, and wealthier households would 15 consumption 10 benefit because capital also represents 45 percent Investment 5 of value added in the sector.17 In addition, rising gov- Exports ernment revenue under this scenario would lower 0 –5 2017 2025 2030 17 The production tax equals about 50 percent of the value added Source: World Bank staff calculations. by the forestry sector. 34 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY Exchange-Rate Sectoral Growth FIGURE 3.8 FIGURE 3.9 Dynamics under under Scenario 2 Scenario 2 (% deviation from (% deviation from the baseline) the baseline) 120 –7.8 100 –8.0 80 –8.2 Agriculture 60 Forestry –8.4 –8.6 40 Mining –8.8 Manufacture 20 –9.0 Services 0 –9.2 –6.21 –9.16 –20 –9.4 –17.69 –9.6 –40 2017 2025 2030 –9.8 Source: World Bank staff calculations. 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: World Bank staff calculations. Note: Negative values imply real exchange-rate appreciation. Real Consumption Growth by Income Decile under Scenario 2 FIGURE 3.10 (% deviation from the baseline) 35 Decile 1 30.19 30 Decile 2 27.35 25 Decile 3 Decile 4 20 Decile 5 15 Decile 6 Decile 7 10 Decile 8 5 Decile 9 Decile 10 0 2030 Source: World Bank staff calculations. THE SIMULATED IMPACT OF ALTERNATIVE POLICIES ON INCLUSIVE GROWTH AND POVERTY REDUCTION 35 the fiscal deficit, which would increase private invest- Sectoral Growth FIGURE 3.11 ment and further boost the incomes of the wealthiest under Scenario 3 households. (% deviation from the baseline) 3.3 Scenario 3: Increased 12 Service-Sector Productivity 10 The low productivity of the service sector is a significant obstacle to growth in CAR. Basic 8 Agriculture public services such as piped water, electricity, and Forestry 6 5.85 healthcare are limited in scope and inadequate in both Mining quantity and quality. Deficiencies in water and sanita- Manufacture 4 3.60 tion services cost CAR an estimated US$64 million Services per year, or nearly 4.5 percent of annual GDP , in addi- 2 tional healthcare costs and lost productivity.18 The 0.12 health sector suffers from low immunization rates, 0 2017 2025 2030 dilapidated infrastructure, a lack of qualified staff, limited geographical coverage, and inadequate moni- Source: World Bank staff calculations. toring and epidemiological surveillance capabilities. GDP Growth Implementing productivity-enhancing reforms FIGURE 3.12 Decomposition in the service sector could accelerate economic under Scenario 3 activity and boost incomes among the poorest (% deviation from households. A 10 percent improvement in produc- the baseline) tivity would increase value addition in the service 12 sector by 8 percent over the baseline by 2030 and accelerate growth in other sectors, especially mining, GDP at 10 constant manufacturing, and forestry (Figure 3.11).19 Enhanced prices service-sector productivity would also add 5 percent 8 Private to GDP by 2030 (Figure 3.12). consumption 6 Public Under this scenario, poor households would consumption experience the greatest percentage increase in 4 Investment consumption. Consumption among households Exports in the bottom 40 percent of the income distribution 2 would rise by 4.5 percent over the baseline by 2030, 0 2017 2025 2030 18 World Bank, 2016. Source: World Bank staff calculations. 19 The cost of the investment necessary to generate this improvement is not included in the simulation, and these results should be interpreted as representing the upper end of the possible effects. 36 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY Real Consumption Growth by Income Decile under Scenario 3 FIGURE 3.13 (% deviation from the baseline) 7 6 Decile 1 Decile 2 5 4.73 Decile 3 Decile 4 4 Decile 5 3 Decile 6 Decile 7 2 Decile 8 1 Decile 9 Decile 10 0 2030 Source: World Bank staff calculations. while consumption among households in the top Educational outcomes are extremely poor. The 60 percent would rise by 2.5 percent (Figure 3.13). gross primary enrollment rate is 87 percent, and The distribution of returns would favor lower-income the completion rate is just 45 percent, indicating households because unskilled labor would contribute serious internal dysfunction in the education system. 30 percent to the total increase in value added by The quality of the learning environment is generally the service sector, while skilled labor would contrib- very low: most schools lack adequate infrastruc- ute just 16 percent. ture, equipment and materials, and there are not enough teachers to meet demand. Many existing teachers are underqualified, and a growing number 3.4 Scenario 4: Increased are parents recruited to serve as teachers on an Investment in Education ad hoc basis. Public investment in education in CAR has Under the fourth scenario, an increase in public declined for over two decades. Due to limited tax education spending would boost the number of revenues and the low budgetary priority accorded skilled workers by 10 percent. Given CAR’s low to education, only 1.45 percent of GDP was devoted education indicators and underdeveloped industrial to the sector in 2005, the lowest share of any Afri- and service sectors, increasing the number of skilled can country and far below the continental average workers would raise GDP by just 2 percent over the of 3.7 percent. In 2012, public education spending baseline by 2030.20 However, as skilled workers earn declined further to 1.2 percent of GDP and repre- sented just 7.8 percent of total spending. Education spending fell from 28 percent of public expenditures 20 Because the simulation does not incorporate education costs, (excluding debt service) in 1996 to just 14 percent these results can be interpreted as the upper end of possible in 2005. effects. THE SIMULATED IMPACT OF ALTERNATIVE POLICIES ON INCLUSIVE GROWTH AND POVERTY REDUCTION 37 GDP Growth Decomposition under Scenario 4 FIGURE 3.14 (% deviation from the baseline) 3.5 3.0 2.5 GDP at constant prices 2.0 Private consumption Public consumption 1.5 Investment 1.0 Exports 0.5 0.0 2017 2025 2030 Source: World Bank staff calculations. higher wages than unskilled workers, aggregate specific competencies demanded by growing eco- household income would rise. Moreover, this effect nomic sectors such as forestry, mining, and services. would be progressive, and the income level of poor households would rise by 1.2 percent relative to the The simulations presented above are subject baseline (Figure 3.14). The increase in the supply to several important caveats. First, while the of skilled workers would lower the average wage of simulations are consistent with the macroeconomic skilled workers by about 3.5 percent relative to the framework for CAR, they are primarily illustrative. baseline, while a commensurate reduction in the Moreover, the model’s results are determined in supply of unskilled workers would increases their part by the assumptions and calibrating parameters average wage by about 0.4 percent. described above and detailed in the technical annex. For example, the assumption that all surplus revenue These results suggest that policymakers should arising from the simulated policy changes would focus on strengthening basic education and be allocated to investment significantly influences the vocational training. CAR’s economy requires results. In addition, although the baseline scenario workers with basic levels of education and job- reflects the structure of CAR’s economy as closely as specific skills. Sustainably increasingly the under­ possible, data quality and availability affect the accu- lying productivity of the labor force will require racy of the model. Notwithstanding these limitations, investment in early childhood development and the CGE model provides valuable insights to inform primary education. While more advanced levels the government’s policy agenda. of education will become increasingly valuable as the economy develops, given the country’s current While all four reform scenarios would accelerate budget constraints the most effective approach will growth, the increase in forestry activity under be to strengthen primary education and vocational scenario two would have the largest impact by training to equip workers with the basic skills and far, boosting GDP by almost 14 percent over the 38 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY baseline by 2030. This certainly reflects the good Finally, the increase in skilled workers sim- regulation and administration of this sector despite ulated under the fourth scenario would yield the security challenges. Moreover, the distribution of very modest economic gains, highlighting the returns to growth would be moderately progressive, inability of CAR’s underdeveloped economy with an especially positive impact on households in to make effective use of skilled labor. The sim- the second, fifth and sixth income deciles. In addition, ulated increase in skilled workers has the weakest public revenues would rise dramatically, exceeding impact on macroeconomic variables of any scenario. the baseline by almost 78 percent by 2030, and exports Although skilled workers are in short supply, CAR’s would increase by more than 40 percent above the economy lacks sophisticated industrial and service baseline, bolstering foreign reserves. sectors that could fully leverage the value of skilled workers. In this context, policymakers should focus Greater service-sector activity under the third on strengthening basic education and expanding scenario would have the second-largest impact access to vocational training. on growth, pushing GDP 4.6 percent above the baseline by 2030, and the returns would be even Although the simulations did not look at the more progressively distributed. Households at all agriculture sector, it can provide a solid eco - income levels would benefit, but the gains accruing to nomic opportunity and help to break the cycle households in each of the bottom five income deciles of conflicts and instability. An estimated 75 per- would exceed the gains accruing to any of the top five. cent of the population depends on agriculture, and A growing service sector would also boost exports 85 percent of communes report agriculture as more than 10 percent above the baseline by 2030. primary economic activity, and 35 percent report livestock as secondary economic activities. Within Increased mining activity under the first scenario the primary sector, subsistence agriculture, livestock would have a relatively weak impact on growth, rearing and hunting and fishing are key activities but this finding is sensitive to the model’s specifi- contributing respectively 32, 14 and 8 percent to cations. The CGE model examines capital-intensive overall GDP in 2016. Yet, according to UN-OCHA, half commercial mining, as opposed to relatively labor- the population (2.5 million people) needs humani- intensive artisanal mining. Furthermore, the simu- tarian assistance and though CAR has a favorable lated 70 percent increase in legal diamond exports environment for agriculture, close to 1.3 million is highly conservative, given the level of exports that people (28 percent of the population), are food inse- prevailed before the 2013 crisis. While artisanal min- cure. Policies and reforms to promote a productive ing has the potential to generate significant improve- agriculture sector can therefore provide a solid ments in employment and income, the artisanal sub- economic opportunity and help break the cycle of sector is overwhelmingly informal and unregulated. conflicts and instability. This will be examined fur- Moreover, artisanal mining is a potential driver of ther in the upcoming editions of the Central African conflict and instability. Economic Update. 4 CONCLUSION D espite a gradual improvement in macro­ economic indicators and a climate of cautious optimism following the peaceful pres­ public accountability, enhancing transparency, and progressively enhancing the quality of the public administration, leveraging the Diaspora as needed. idential election of 2016, CAR remains a fragile state. The 2013 conflict led to unprecedented levels CAR’s structural reform agenda must also be of violence and caused a huge negative shock to carefully tailored to reflect the country’s fragil­ an already low GDP per capita. Moreover, the con- ity. The results of the CGE model indicate that, while flict has not been decisively resolved. Reestablish- multiple reform scenarios would accelerate growth, ing the rule of law, building a capable bureaucracy, an increase in forestry activity could boost GDP well and laying the foundation for sustainable growth and above the baseline. Greater service-sector activity poverty reduction will require a carefully calibrated could also accelerate growth, with an especially policy agenda. Adopting innovative approaches to progressive distribution of returns. By contrast, an public service delivery in health and education, and increase in commercial mining activity would have a fully leveraging the assistance of external partners, very limited impact on the welfare of poor households. the private sector, and civil society could enable the While the facilitating the growth of the artisanal government to begin addressing CAR’s extensive mining subsector could potentially have a more pos- development needs in a context of severe capacity itive effect on employment and income, artisanal limitations and tight budget constraints. mining in CAR is deeply problematic. Finally, a simulated increase in the number of skilled workers As it strives to overcome a legacy of fragility would have a marginal effect on macroeconomic and violence, CAR can learn important lessons indicators due to CAR’s low levels of educational from the experience of other post-conflict coun­ attainment and the limited capacity of its economy tries. Lessons from comparator countries under- to leverage skilled labor. This finding suggests that, score the importance of actively promoting the at least in the near term, focusing on improving development of civil society to consolidate demo- the quality and accessibility of basic education and cratic gains and progressively reduce the influence vocational training could have a greater impact on of the military on institutions, while strengthening labor productivity and household income. 39 40 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY CAR’s political and institutional fragility reflects of the public sector. In this challenging context, the its long history of misrule. CAR and its development government could begin to break the cycle of conflict partners now face the daunting challenge of imple- and instability by adopting an innovative approach to menting an urgent and far-reaching reform agenda delivering education and health services, designing through a set of weak and unstable public institutions. a policy agenda that reflects the experience of other As the international literature demonstrates, pushing post-conflict countries, and prioritizing sectors that fragile states to adopt reforms too quickly, even if have the greatest potential to rapidly generate broad- those reforms are necessary and desirable, risks over- based gains in employment and income, especially whelming and even damaging the limited capacity among poor and vulnerable households. REFERENCES Armington, Paul S. (1969}, “A Theory of Demand for Products Distinguished by Place of Production”, IMF Staff Papers. Vol. 16, No. 1 (Mar., 1969), pp. 159–178. Bazzi, S. and C. Blattman (2014). Economic Shocks and Conflict: Evidence from Commodity Prices. American Economic Journal: Macroeconomics, 6(4), 1–38. Caselli, F. and W. Coleman II (2001). The US Structural Transformation and Regional Convergence. Journal of Political Economy 109, 584–616. Chauvin E., Seignobos Christian. (2013). L’imbroglio centrafricain: Etat, rebelles et bandits. Afrique Contempo- raine (248), 119–148. ISSN 0002-0478 Chenery, H. and M. Syrquin (1975). Patterns of Development, 1957–1970. London: Oxford University Press Collier, P., V.L. Elliott, H. Hegre, A. Hoeffler, M. Reynal-Querol, and N. Sambanis (2003). Breaking the Conflict Trap: Civil War and Development Policy. Washington, DC: World Bank. David L. Cingranelli and David L. Richards (1999). Measuring the Level, Pattern, and Sequence of Government Respect for Physical Integrity Rights. International Studies Quarterly, Vol 43.2: 407–18. de Melo, J. and D. Tarr (1992), “A General Equilibrium Analysis of U. S. Foreign Trade Policy”, MIT Press, 1992, Business and Economy. Lant Prittchet and Frauke de Weijer, 2010. Fragile State: Stuck in Capability Trap. Background Paper for the World Development Report 2011. Martin, Will J. and Mitra, D. (1999), “Productivity Growth and Convergence in Agriculture and Manufacturing”, World Bank Policy Research Working Paper No. 2171. Matsuyama, K. (2008). Structural Change, in Steven N. Durlauf and Lawrence E. Blume, eds., The New Palgrave Dictionary of Economics, 2nd ed., Palgrave Macmillan, 2008. Miguel, E., S. Satyanath, and E. Sergenti (2004). Economic Shocks and Civil Conflict: An Instrumental Variables Approach. Journal of Political Economy, 112(4): 725–53. Nathalie Dukhan, (2017). Splintered Warfare. Alliances, affiliations and agendas of armed factions and politico military groups in the Central African Republic. The Enough Project. Schneckener, Ulrich (2009). Spoilers or Governance Actors? Engaging Armed Non-State Groups in Areas of Limited Statehood. SFB-Governance Working Paper Series, No. 21, Research Center (SFB) 700, Berlin, 2009. 41 Stone, R. (1954) Linear Expenditure Systems and Demand Analysis: An Application to the Pattern of British Demand. The Economic Journal, 64, 511–527. UNDP (2015). Rapport d’Analyse Diagnostique de la Problématique de l’Emploi, particulièrement l’emploi des jeunes en RCA post crise. UNDP , Bangui, Septembre 2015. Van der Mensbrugghe, D. (2005), “Linkage Technical Reference Document”, Development Prospects Group, The World Bank. World Bank (2011). World Development Report 2011: Conflicts, Security and Development. Washington: World Bank. World Bank (2016). “Central African Republic: Building a New Foundation for Stability and Growth”, Washington: World Bank Report No. AUS16528. TECHNICAL ANNEX: DESIGNING A COMPUTABLE GENERAL EQUILIBRIUM MODEL FOR CAR T he CGE model for CAR presented below is a single-country variation on the World Bank’s global CGE model.21 The model is calibrated methodological aspects: (i) the production function, in order to highlight the mechanism through which productivity-enhancing investment in the agricul- based on a social-accounting matrix (SAM) compris- tural sector affects the economy; (ii) the macroeco- ing 24 economic activities, 24 sectors, 6 productive nomic closure assumptions, in order to examine how factors, and 10 household types. The CAR CGE model additional revenues generated by various reforms are is recursive and dynamic: it explicitly models the allocated and to assess their impact on economic convergence of prices and volumes to their new val- performance; (iii) household consumption, in order ues. This approach links a series of static equilibria to emphasize the distributional effect of structural with a set of equations, which update, in every period, reforms in different sectors; and (iv) international the main macroeconomic variables. The static block trade, in order to highlight the role of the Armington is presented first, followed by the dynamic block. constant elasticity of substitution (CES) function and the small country-level assumption regarding the treatment of tradable goods. The Static Model The static model is developed from the neo- The model describes an economy with 24 sec- classical structural-modeling approach pio- tors producing 24 commodities. All sectors are neered by De Melo et al. (1982).22 As most of the assumed to produce under conditions of constant model’s underlying assumptions are common in returns to scale and perfect competition, implying the CGE literature, this section discusses only four that the prices for all goods equal the marginal cost of production. Producers maximize their profits by 21 Van der Mensbrugghe, 2005. minimizing production costs under the constraint of 22 The theoretical framework relies on neoclassical assumptions, a multilevel production function. At the top level, total including constant returns to scale and perfect competition, output is the sum of value added and intermediate where firms maximize profits to determine output supply and factor demand. See, e.g.: de Melo and Tarr, 1992. outputs produced, following a Leontief production 43 44 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY technology. At the second level, intermediate outputs of a given product into incompressible and discre- are estimated by combining all products in fixed pro- tionary consumption. The allocation of household portions, also per a Leontief structure, and total value consumption across products depends on relative added is obtained by aggregating the contributions of prices and income elasticities, which are sector- capital, labor, land, and natural resources. specific in this model. Factor markets are assumed to be perfectly Macroeconomic closure rules determine how competitive. The labor market comprises 6 types economic balances recover after a shock. macro­ of labor distinguished by education level and com- These closure rules specify how the model achieves: fis- pensation structure: “unskilled” denotes workers cal equilibrium (i.e., balanced government accounts), with incomplete secondary education; “semi-skilled” capital-account equilibrium (i.e., balanced investment denotes workers who have completed secondary and savings accounts), and external equilibrium education and who may have an incomplete tertiary (i.e., balanced transactions with the rest of the education; and “skilled” denotes workers who have world). The CAR model includes specific closure completed tertiary education. Workers in each of the rules for each equilibrium. three education levels are classified as either “sala- ried” or “non-salaried.” Each type of labor is assumed The government earns revenue through pro- to be perfectly mobile between sectors, implying a duction taxes, export taxes, import tariffs, sales uniform wage for each labor type across all sectors, taxes, and income taxes. All tax rates are fixed at which is determined by economy-wide labor supply base-year levels. Public current and capital expendi- and demand. The capital stock is fixed within each tures are also fixed as shares of real GDP. This implies period, and demand determines how capital is allo- that government savings (i.e., the primary balance) cated across sectors. In other words, capital is fully is endogenous and adjusts to clear the government mobile across sectors, and the rate of return is the balance. Foreign and domestic borrowing close the same for all sectors. gap between public investment and public saving. The composition of public borrowing (i.e., the ratio of The model includes 10 categories of households foreign borrowing to domestic borrowing) is fixed at distinguished by income decile. Households the base-year value. Alternative government closure receive both wage and nonwage income, includ- assumptions are included in the simulated energy- ing remittances and capital gains. Remittances are and transportation-subsidy reform scenarios. denominated in foreign currency. Households use income for consumption, income-tax payments, A savings-driven closure is assumed to fix the savings, and transfers. The shares of income-tax savings rates of all households and firms. Aggre- payments and savings in total household income gate investment—which, together with an exogenous are assumed to be constant. The consumption of a rate of depreciation, determines the next period’s cap- product by a household is determined by a Stone and ital stock—adjusts to ensure that investment equals Geary linear expenditures system (LES) utility func- savings. The volume of available savings is determined tion. This function decomposes the consumption 23 by an exogenous level of foreign saving, endogenous government saving, and households who save a fixed share of their after-tax income. In this context, an 23 Stone, 1954. increase in government revenue due to the removal TECHNICAL ANNEX: DESIGNING A COMPUTABLE GENERAL EQUILIBRIUM MODEL FOR CAR 45 of subsidies would boost savings, stimulating current The Dynamic Model investment and accelerating future growth. Although it has certain drawbacks, the recur- External closure is achieved by adjusting the sive dynamic CGE model used in this study is real exchange rate. It is assumed that CAR is a easier to set up and solve than a model based price taker in international markets. International on an inter-temporal optimization-resolution prices are exogenous, while the current-account bal- approach.26 The dynamic path follows the neoclassi- ance equals (exogenous) foreign savings. Changes cal growth framework (i.e., the Solow growth model), in the real exchange rate, and thus in domestic implying that the long-run economic growth rate is prices, generate corresponding changes in the vol- determined by three main factors: capital accumula- umes of imports and exports demanded to meet the tion, the growth of the labor supply, and increases in current-account target. The main implication of this productivity. The stock of capital is endogenous and closure assumption in the context of CAR is that depends on the historical rate of return to capital, while an increase in commodity exports causes the real labor supply and productivity growth are exogenous. exchange rate to appreciate, reducing the compet- itiveness of the non-commodity sectors—a classic The capital stock in each period is the sum of symptom of “Dutch disease.” depreciated capital from the previous period and new investment. The capital stock is endog- This model follows the Armington assumption enous, since investment is determined by the avail- of imperfect substitution between imports from able public and private savings in the previous period different countries.24 Import demand is estimated and the availability of external financing. The alloca- via a nested CES function, which aggregates, at the tion of capital across sectors depends on the return first level, domestic and imported goods and, at the to capital in each sector in the previous period. The second level, imported goods from various trading maximum stock of labor available in each period partners. Export supply is symmetrically modeled as increases with the growth rate of the working-age a constant elasticity of transformation (CET) func- population (ages 15–64), which is obtained from tion. At the top nested level, producers allocate their World Bank population forecasts. output to domestic or foreign markets according to relative prices; at the bottom level, exports are distrib- For the final determinant of growth, the LINKAGE uted to different destination markets. Trading part- model assumes technological progress spe- ners identified in the 2015 SAM include the CEMAC cific to each sector and factor of production. member states and the rest of the world (ROW).25 As Productivity changes are derived from a combi- CAR is a price taker in international markets, import nation of variables, but they also involve a degree demand and export supply do not affect global of judgement. First, agricultural productivity is prices. In other words, international trade reflects assumed to be factor-neutral and exogenous, and is the small-country assumption. Accordingly, import set equal to estimates from empirical studies.27 Pro- and export prices are exogenously determined. ductivity in the manufacturing and service sectors See Armington (1969) for further details. 24 The calibrated version of this model includes only one trade 25 26 See Van der Mensbrugghe (2005). partner, ROW. 27 See, e.g., Martin and Mitra, 1999. 46 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: BREAKING THE CYCLE OF CONFLICT AND INSTABILITY is labor-augmenting, and productivity growth is the actual quantity of labor supplied in each period assumed to be persistently higher in manufacturing is determined endogenously by the model. than in services. A baseline scenario is constructed from these assumptions before the simulations are The SAM, which is used to calibrate the CGE run. In the baseline scenario, the GDP growth rate is model, is a comprehensive data framework exogenous. en­compassing both social and economic indi- cators. The SAM captures the interaction between production, income, consumption and capital accu- Data Sources and Model Parameters mulation by domestic and external institutions in a The model is solved year-by-year from the 2001 single square matrix. The SAM also establishes an base year through 2030. To generate a dynamic initial equilibrium, in which every agent’s expendi- solution, certain assumptions are made regarding tures must equal its receipts, in the form of equal the evolution of the exogenous variables. Baseline column and row sums. Beyond the SAM, several growth is calibrated using the near- and medium- external parameters are necessary to calibrate behav- term assumptions of the World Bank’s Macro-Fiscal ioral functions for consumer preferences, produc- Model (MFMod). Assumptions regarding the evolu- tion technology, and commodity trade. This analysis tion of remittances, foreign direct investment, and uses the parameters provided by the Global Trade the overall capital account are derived from IMF Analysis Project (GTAP) model.28 sources. Assumptions for years beyond the MFMod projection period, which ends in 2020, are based on trends for 2017–2020. The maximum quantity of 28 The GTAP elasticities appear to be consistent with the literature, labor available in each period reflects World Bank as the agricultural subsectors have lower elasticities than the population projections for the 15–64 age cohort, but service subsectors.