COUNTRY ECONOMIC MEMORANDUM Central African Republic From Fragility to Accelerated and Inclusive Growth © 2022 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: “World Bank. 2022. From Fragility to Accelerated and Inclusive Growth: A Country Economic Memorandum for the Central African Republic. Washington, D.C.: The World Bank Group.” All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. COUNTRY ECONOMIC MEMORANDUM Central African Republic From Fragility to Accelerated and Inclusive Growth Acknowledgments This Country Economic Memorandum was prepared by a team led by Wilfried A. Kouame under the overall guidance and support of Abdoulaye Seck (Country Director), Han Fraeters (Country Manager), Abebe Adugna (Regional Director), Francisco G. Carneiro (Practice Manaer), Raju Singh (Lead Economist), and Clelia Rontoyanni (Program Leader). Chapter 1 was prepared by Wilfried A. Kouame (Economist), Rachel Perks (Senior Mining Specialist), and Diderot Sandjong Tomi (Economist), with inputs from Habtamu T. Edjigu (Consultant). Chapter 2 was written by Wilfried A. Kouame and Steven M. Pennings (Research Economist), with inputs from Jorge L. Guzman (Consultant) and Gbenoukpo Robert Djidonou (Africa Fellow). Chapter 3 was prepared by Paul Brenton (Lead Economist), Rocard Kouwoaye (Consultant), and Wilfried A. Kouame, with inputs from Koichi Ito (Consultant). Chapter 4 was written by Wilfried A. Kouame and Gbenoukpo Robert Djidonou. Oscar Parlback (Consultant) provided excellent editorial support and drafted the executive summary of the report with Wilfried A. Kouame. Claudia Rocio Manrique, Irene Sitienei, and Appoline Yete (Program Assistant) provided excellent operational and administrative assistance. The report benefited from the constructive comments of peer reviewers Jean-Pierre Chauffour (Program Leader, EAWDR), Souleymane Coulibaly (Program Leader, EEADR), Wael Mansour (Senior Economist, EMNM1), and Alberto Portugal (Senior Economist, ETIRI). The team would like to thank Nabil M. Chaherli (Sector Leader), Fatou Fall (Senior Operations Officer), Heriniaina M. Andrianasy (Public Sector Specialist), Martin Lokanc (Senior Mining Specialist), Charles Douglas-Hamilton (Consultant) and Anas Benbarka (Senior Energy Specialist) for useful discussions and comments. The team also gratefully acknowledges the collaboration with the Government of the Central African Republic, especially officials from Cellule Chargée du Suivi des Eéformes Économiques (CS-REF), in collecting part of the data and information used in this report. The report greatly benefited from two workshops (in November 2020 and April 2021) and interactions with stakeholders in the Central African Republic, including management and staff of: CS-REF, Ministère des Finances et du Budget, Ministère de l’Économie du Plan et de la Coopération, Institut Centrafricain des Statistiques et des Études Économiques et Sociales (ICASEES), le Ministère du Commerce et de l’Industrie, l’Autorité de Regulation des Marchées Publiques, la Direction nationale de la Banque des États d’Afrique Centrale (BEAC), and le Groupement Interprofessionnel de Centrafrique (GICA), among others. Cover photo credit: Wilfried Kouame 2 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth Acronyms and Abbreviations ACS Agents and civil servants IDPs Internally displaced people AfCFTA African Continental Free Trade Area IPD Inclusive and political dialogue Political Agreement for Peace and Reconciliation, KP Kimberly Process APPR Accord Politique pour la Paix et la Reconciliation en Republique Centrafricaine KPCS Kimberly Process Certification Scheme ARMP Autorité de Régulation des Marchés Publics LPI Logistics performance index ASM Artisanal and small-scale mining LTGM Long-Term Growth Model BTI Bertelsmann Stiftung’s Transformation Index LTGM-HC LTGM-Human Capital CAR Central African Republic LTGM-PC LTGM Public Capital CEM Country Economic Memorandum MENA Middle East and North Africa CET Common external tariff Southern Common Market, Mercado Común MERCOSUR del Sur Public Procurement Code, Code des Marchés CMP MINUSCA Mission in the Central African Republic Publics CPI Corruption Perceptions Index NTM Non-tariff measure Disarmament, demobilization, rehabilitation, ODA Official development assistance DDRR and repatriation Organisation for Economic Co-operation OECD ECCAS Economic Community of Central African States and Development EITI Extractive Industries Transparency Initiative RTA Regional trade agreement SCC Special Criminal Court ENERCA Central African Energy, Energie Centrafricaine EU European Union Societe d’Exploitation des Parcs a Bois du SEPBC Cameroun FCV Fragility, conflict, and violence SOCATEL Société Centrafricaine des Télécommunications FSI Fragile state index SSA Sub-Saharan Africa GVC Global value chain TFP Total factor productivity HCI Human Capital Index WGI World Governance Indicators HHI Herfindahl-Hirschman Index WHO World Health Organization ICT Information and communication technologies Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 3 Table of Contents Executive Summary............................................................................................................................8 CHAPTER 1  Fragility and Its Implications on the Social Contract and Living Standards............... 16 A Framework for Analyzing Fragility and Conflict in CAR..................................................................... 17 Why Reforms Have Not Produced Sustained Growth for CAR............................................................. 19 Political Landscape: Coups and Power Struggles between Elites.................................................. 19 Weak Governance and Elite Capture............................................................................................. 24 Mismanagement of Natural Resource Wealth................................................................................ 27 The Cost of Political Instability: Lack of Economic Opportunities and a Deterioration of the Social Contract and Living Standards......................................................................................... 30 Volatile Growth Trajectory.............................................................................................................. 30 Weak economic and Trade Diversification Limited Job Creation and Economic Growth.............. 31 Deterioration of the Social Contract and Living Standards............................................................ 35 Escaping the Fragility Trap: Pathways out of Fragility and Implications for Reform and Development................................................................................................................................. 37 Refocusing the Political Landscape on Development and Restoring the Authority of the State....... 37 Strengthening the Management and Allocation of Mineral Wealth and Public Resources............ 38 Building a Social Contract by Improving Trust and Addressing Grievances................................... 40 Learning from Countries that Escaped the Fragility Trap: Rwanda................................................. 42 References............................................................................................................................................ 44 CHAPTER 2  Past and Future Drivers of Growth.................................................................................. 46 Binding Constraints on Growth............................................................................................................ 47 Weak Financial Intermediation Increases the Cost of Access to Finance....................................... 48 Low Physical and Human Capital Have Contributed to Low Social Returns................................... 48 Market Failures and Micro Risks Such as Corruption and Limited Property Rights have Led to Low Appropriability.................................................................................................... 51 Growth Decomposition and Structural Change.................................................................................... 54 Main Growth Drivers Post-2013...................................................................................................... 54 Total Factor Productivity Has Almost Halved Since 1990 and Has Had a Limited Contribution to Economic Growth.................................................................................................. 54 While No Structural Change, There Has Been a Reallocation of Labor Toward Services............... 55 Way Forward: Potential Drivers of Future Growth................................................................................ 58 A Business-As-Usual Scenario Shows Slowing Growth................................................................... 58 Reforms that Address the Drivers of Growth Would Change the Growth Trajectory..................... 60 A Combination of Reforms is the strongest Pathway to Growth.................................................... 63 What Will It Take to Boost Long-Term Growth?................................................................................... 65 References............................................................................................................................................ 66 4 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth Table of Contents CHAPTER 3  Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth............................................................................................................................... 68 Trade can be a Powerful Force for Stability and Growth...................................................................... 69 High Trade Costs and a Challenging Regional Environment................................................................ 70 A Challenging Regional Environment that Limits Trade................................................................. 73 Low Export Survival Rates, GVC Participation, and FDI........................................................................ 74 Global, Regional, and Cross-Border Trade Opportunities.................................................................... 76 References............................................................................................................................................ 80 CHAPTER 4  Build Up Market-Based Competition, Institutions, and the Regulatory Framework................................................................................................................................................ 82 Limited Market-Based Competition Hinders Private Sector Development.......................................... 83 The Regulatory Framework is Conducive to Elite Capture and Hampers Market-Based Competition......................................................................................................................................... 85 Public Procurement......................................................................................................................... 85 Business Regulatory Environment.................................................................................................. 89 Trade and Customs......................................................................................................................... 90 Other Key Bottlenecks Preventing Competition and Private Sector Development............................. 93 Promoting Market-Based Competition and Reducing Opportunities for Capture............................... 96 Strengthening the Public Procurement System.............................................................................. 96 Addressing Rent-Seeking and Corruption in Trade and Customs.................................................. 97 Improving Business Regulation....................................................................................................... 97 Addressing Competition Issues, Informality, and Capacity Constraints ........................................ 97 References............................................................................................................................................ 98 ANNEXES................................................................................................................................................ 100 Annex 1: Tables Gravity Model Analysis............................................................................................. 101 Annex 2: Business Regulation Practices Questionnaire...................................................................... 102 Annex 3: Competition Policy and Conflict of Interest Restrictions..................................................... 104 Annex 4: Privilege-Resistant Procurement Questionnaire.................................................................. 108 Annex 5: Trade and Customs Questionnaire...................................................................................... 111 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 5 Table of Contents Table of Figures Figure 1. A Framework for Analyzing Fragility and Conflict in CAR........................................................... 17 Figure 2. Repartition of Civil Servant and inhabitants per region............................................................. 18 Figure 3. Evolution and Chronology of Armed Groups, 2005–2020........................................................ 21 Figure 4. Conflict Events and Fatalities..................................................................................................... 22 Figure 5. Health Professionals and Infrastructure are Unequally Distributed in CAR................................. 23 Figure 6. Government Effectiveness and Civil Liberty in CAR vs. Comparators....................................... 24 Figure 7. Corruption in CAR vs. Comparators, 1996–2019....................................................................... 26 Figure 8. Accountability in CAR vs. Comparators, 1996–2019.................................................................. 26 Figure 9. Accountability in CAR vs. Comparators, 1996-2019................................................................... 27 Figure 10. Mineral Marketing Chain in CAR.............................................................................................. 29 Figure 11. Between 1960 and 2019, CAR Experienced Two Peaceful Democratic Transitions, Five Coups, and Two Coup Attempts that Led to a Volitive Real GDP Growth.......................................... 31 Figure 12. Political Instability Led to Disappointing GDP Growth and a Decline in GDP per Capita Over the Past Decades............................................................................................................. 31 Figure 13. CAR Relies Heavily on subsistence Agriculture and Forestry Activities.................................... 32 Figure 14. Export Diversification in CAR................................................................................................... 33 Figure 15. CAR’s Exports, 2000–2018....................................................................................................... 34 Figure 16. CAR’s Product Space................................................................................................................ 34 Figure 17. GDP Growth and Inclusiveness Index, 1961–2019................................................................... 35 Figure 18. Economic Growth Has Not Been Inclusive Over the Last Decades, Despite Some Progress............................................................................................................................................ 36 Figure 19. Youth Unemployment and Inequality Contribute to CAR’s Fragility and Conflicts................... 36 Figure 20. Historical and Potential Trajectories of per Capita GDP, Constant US$ 2010........................... 47 Figure 21. Binding Constraints on Economic Growth in CAR.................................................................... 48 Figure 22. Gross National Savings and Deposit Interest Rates, 2000–2018.............................................. 49 Figure 23. Export Survival Rates, 2000–2017............................................................................................ 51 Figure 24. Inflation and the Real Exchange Rate, 2000–2019................................................................... 53 Figure 25. Decomposition of GDP Growth (Supply Side).......................................................................... 54 Figure 26. Private Consumption and Investment Were the Main Demand-Side Drivers of Growth in 2013-19.................................................................................................................................. 55 Figure 27. TFP in CAR is Low, Has Been Falling, and is Not the Main Driver of Economic Growth.......... 56 Figure 28. Business-as-Usual Growth Projections and Implications for GDP per Capita and Poverty....... 59 Figure 29. TFP and Human Capital Growth Rates are Projected to Fall in the Business-as- Usual Scenario............................................................................................................................................ 60 Figure 30. A shock to TFP would Have a Significant Impact on Real GDP Growth and GDP per Capita.......................................................................................................................................... 61 Figure 31. A shock to human Capital Growth Would Have a Significant Impact on Real GDP Growth.... 62 Figure 32. A positive Shock to Private Investment Would Boost GDP Growth......................................... 63 Figure 33. The Effect of a 1 Percentage Point Private Investment Shock on Growth is Much Larger Than a 1 Percentage Point Shock to Public Investment Due to a Higher Marginal Product of Capital....................................................................................................................................... 63 Figure 34. A Bold Combination of Reforms is Needed to Maximize the Country’s Growth Potential....... 64 Figure 35. CAR Needs Bold and Pro-Growth Reforms that Target TFP, Private Investment, and Human Capital Growth........................................................................................................................ 65 6 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth Table of Contents Figure 36. Measures of Overall Trade Costs.............................................................................................. 70 Figure 37. Logistics Performance Index Ranking, 2018............................................................................. 71 Figure 38. CAR’s Trade Openness............................................................................................................. 72 Figure 39. Merchandise and Services Exports per Capita, 2005–2018..................................................... 72 Figure 40. Comparison of CAR and Lao PDR Tariffs by Economic Category, 2017................................... 73 Figure 41. Export Survival Rates by Country and Destination................................................................... 74 Figure 42. Participation in GVCs, CAR vs. Comparators, 2000–18............................................................ 75 Figure 43. In 2018, FDI Inflows Were About 23 Times Lower in CAR than in Other FCV Countries......... 76 Figure 44. Fertilizer Use per Hectare is Very Low in CAR Compared to in Peer Countries........................ 76 Figure 45. Despite Recent Improvements, CAR Lags Behind Comparators in Terms of Market-based Competition.................................................................................................................... 83 Figure 46. Anticompetitive Policies Remain Widespread in CAR.............................................................. 84 Figure 47. Limited Liberalization of Foreign Trade Affects Competition................................................... 84 Figure 48. CAR’s Public Procurement Framework is Conducive to Privilege Protection............................ 86 Figure 49. Business Regulation Environment Privilege Resistant Index..................................................... 89 Figure 50. There are Several Privilege-resistant Policies in Trade and Customs........................................ 91 Figure 51. Tariff Structure and Transparency Index.................................................................................... 92 Figure 52. Import Restrictions and Special Regimes Index....................................................................... 92 Figure 53. Electronic Processing of Declarations and Connectivity........................................................... 92 Figure 54. CAR’s Private Sector Development index is Among the Lowest in the World.......................... 93 Figure 55. CAR’s Private Property Index Has Remained Stable Over the Past Decade............................. 93 Figure 56. Registering a Property is a Challenge and Costly for Entrepreneurs in CAR............................ 94 Figure 57. CAR’s Tax System Remains Complex........................................................................................ 95 Figure 58. Share of Firms that Point to Informality as Their Biggest Obstacle to Business....................... 95 Figure 59. Competition with Unregistered or Informal Firms is Widespread in CAR................................ 96 Table of Tables Table 1. Key Policy Recommendations (to be completed)......................................................................... 14 Table 2. Road Indicators............................................................................................................................ 50 Table 3. Type and Condition of Road Corridors......................................................................................... 50 Table 4. Corruption, Bureaucracy, Taxes, and Property Rights................................................................... 52 Table 5. Selected Macroeconomic Stability Indicators.............................................................................. 53 Table 6. There is No Evidence of Structural Change in CAR...................................................................... 57 Table 7. Drivers of CAR’s Potential Economic Growth under the Business-as-Usual Scenario................... 60 Table 8. Crop Yield in Kg per Hectare, 2018............................................................................................. 77 Table of Boxes Box 1. Definition of Conflict Actors............................................................................................................ 21 Box 2. CAR can Learn Important Lessons from Rwanda’s System for Appraising and Selecting Large Public Investment Projects................................................................................................................ 43 Box 3. Regional Integration and Trade: A Gravity Analysis........................................................................ 79 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 7 Executive Summary The Central African Republic (CAR) is at a critical How did CAR arrive at this point? crossroads. Despite its significant natural resource wealth, CAR remains one of the poorest and most fragile countries Reforms have not produced sustained growth for CAR over in the world. Cycles of political instability and a heavy reliance the past decades due to a succession of coups and power on natural resources have left the economy poorly diversified struggles between elites, weak governance that creates and with a small private sector. Almost a decade after the opportunities for elite capture, and mismanagement of 2013 civil war, the country remains caught in a fragility trap, natural resource wealth. One of the root causes of the facing episodes of renewed insecurity and a substantial country’s fragility is the struggle between its political elites state-citizen divide. Supported by the 2015 peaceful transition to pursue power and capture natural resources. Political of power, the authorities implemented several reform elites have been exploiting socioeconomic inequalities and programs that helped to restore macroeconomic stability ethnoreligious differences to undermine social cohesion, and steered the economy onto a relatively sustainable path capitalize on local grievances, and gain legitimacy. Its to recovery over 2015–2019. However, the pace of growth political landscape remained relatively unchanged after has been below that of other countries in the region that independence, and the succession of coups reinforced the have had civil wars. The country is also expected to face its atmosphere of violence and discrimination. The history of worse economic performance in 2021 since the 2013 civil CAR is one of continuous exploitation and self-dealing by war, owing to a combination of the COVID-19 pandemic, rulers rather than a focus on service delivery and economic the political crisis following the presidential and legislative development. This situation is exacerbated by the volatile elections in December 2020, weak governance, and an security situation, which pushes policymakers at all levels inability to address privilege-resistant policies and institutions. to seek short-term (personal) gains rather than adopting Moreover, bottlenecks and risks to long-term growth, a long-term reform agenda. Weak governance and judicial including political instability, elite capture, poor services services, along with a lack of accountability and civil liberties, delivery, with significant regional gaps, and lack of inclusion have exacerbated grievances and facilitated the capture and job creation, persist. of resources. The country’s institutions have focused on safeguarding the interests of specific groups instead of The new presidential term—following the pooled promoting an inclusive development agenda. Delays elections in end-2020—is presented with the challenge in implementing much-needed structural reforms have and opportunity to pursue a much-needed structural contributed to the vicious cycle of fragility. transformation agenda. Reforms are needed to transform the economy and facilitate sustainable, private-sector-led Political power in the country has been centralized in the growth. The authorities need to steer the economy onto a hands of a few elites, which has generated ethnic tensions path of accelerated and inclusive economic growth while and feelings of social exclusion, especially in provinces. reducing CAR’s dependence on international aid and the This has been exacerbated by weak and fragmented public export of a few commodities. service delivery. Weak governance and the absence of the state locally, coupled with an uneven national policy This Country Economic Memorandum (CEM) aims to support framework, have led to inadequate and ineffective public policymakers and stakeholders in their efforts to pave the services. While there have been early steps toward reducing way out of fragility through accelerated and inclusive the concentration of political power in the capital city of economic growth. It attempts to answer the following Bangui, more steadfast progress is needed. 4 questions, each of which constitutes a chapter: (i) How has CAR arrived at this point? (ii) What should CAR do to Chronic political instability has contributed to falling living accelerate growth? (iii) How can trade be a vehicle for standards, a deterioration of the social contract, and a lack growth and a way out of fragility? and (iv) Why does the of economic opportunities. Recurrent political instability current regulatory framework fail to boost growth and has led to volatile GDP and income growth, hampering private sector development? By addressing these questions, progress in reducing extreme poverty. The extreme poverty the CEM aims to provide policy recommendations to rate fell by 9.4 percentage points in CAR between 1983 accelerate inclusive growth and escape fragility. and 2019, much lower than the average of 16percentage 8 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth Executive Summary points in Sub-Saharan Africa, respectively. Uneven growth decomposition shows that capital and labor accumulation, performance has translated into a significant lack of rather than productivity improvements, was the main economic opportunities, especially for youth, which has driver of economic growth over 1991–2019, which partly fueled social divisions and grievances. Moreover, income explains the country’s subdued economic performance. inequality deteriorated between the 1990s and mid- The contribution of human capital to growth has been 2010. While it has been gradually improving since 2017, minimal, especially since 2015. Agriculture, which is the income inequality remains elevated and has contributed most important sector to reduce poverty in CAR, suffers to the deterioration of the social contract, deepening the from a lack of productivity growth, which has hampered divide between citizens and the state. CAR’s economy relies agricultural output growth. Growth in the agriculture heavily on subsistence agriculture and forestry activities, sector, albeit limited, has been mainly driven by input but both sectors are underdeveloped. It is also highly intensification (labor) and land expansion. dependent on natural resource and commodity exports, with timber and extractives dominating the country’s export While no structural change, there has been a reallocation structure. Timber, cotton, diamonds, and coffee accounted of labor toward services. In 2011–2019, the share of for 80  percent of exports in 2000–18, making CAR one agriculture value-added in GDP fell while the share of of the least economically diversified countries in the world. services value-added increased. As a result, there has This has limited CAR’s ability to sustain growth, create been a reallocation of labor from agriculture to services, jobs, and reduce vulnerabilities, as weak diversification while the contribution of the manufacturing sector to GDP makes the country’s economy vulnerable to adverse shocks, has been modest and even declined in the past years. undermining its ability to achieve long-term sustainable A decomposition of labor productivity growth suggests development and strengthen resilience. that institutional and technological improvements within sectors (within component) have been the main drivers of changes in productivity in recent years, contributing about 80  percent to labor productivity variation. This Weak economic fundamentals suggests that there is no strong evidence of a structural have slowed growth change characterized by the transition of labor from less productive sectors such as agriculture toward more A growth diagnostic reveals several binding constraints productive sectors such as manufacturing, which raises on economic growth in CAR. First, poor local financial critical questions about economic transformation and intermediation is the main source of credit constraint. access to skilled labor in CAR. There is a significant gap between deposit and lending rates, which appears to be due to information asymmetry that prevents commercial banks from adequately assessing risks. Second, low levels of physical and human capital The role of trade as a mechanism to have contributed to low social returns. The country’s reduce fragility and support growth socioeconomic development potential has been limited has yet to be realized by the poor condition of its road network, lack of a reliable electricity supply (which generates additional costs for CAR’s current trade structure is characterized by low firms), the low-skilled labor force, and weak human capital trade openness, regional trade and integration, and weak accumulation. Finally, market failures and micro risks export diversification. The country’s merchandise trade such as corruption and limited property rights have led openness is low compared to that of peers, suggesting to low appropriability. Structural issues have affected the a considerable potential to accelerate economic growth performance of traditional sectors over the past decades, through increased trade. There is a substantial imbalance and efforts to diversify into high-productivity sectors have in goods trade, with imports accounting for 81 percent of been hampered by market failures. Successive governments CAR’s total trade in 2018. CAR’s level of goods exports, have failed to increase appropriability because of rampant as well as goods exports per capita, is lower than that of corruption, and limited property rights have adversely affected peers, and exports are dominated by a narrow range of the willingness of firms and entrepreneurs to invest. natural resource products (mainly mining and forestry), reflecting very limited diversification in recent decades. Productivity has halved since 1990, contributing to CAR trades mainly with countries outside of Africa and very disappointing economic performance. A growth little with its neighbors. In 2018, less than 5 percent of the Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 9 Executive Summary country’s exports went to African markets. Evidence from lead to elite capture, clientelism, and exclusion, which can a range of countries suggests that increasing trade with take the form of a discretionary allocation of permits, licenses, neighboring countries reduces both the duration and and contracts to connected firms and investors; explicit intensity of conflicts. Key bottlenecks to competitiveness or informal regulatory barriers to entry; and a complex include low logistics performance and significant difficulties regulatory framework that may serve only a few people in trading across borders. and firms. There is, therefore, a potential to leverage regional trade An analysis of privilege-resistant policies in CAR reveals to make CAR more stable by reducing the likelihood of that: conflict and increasing GDP growth. An increase in trade, especially in the region, would provide new economic • The public procurement regime is exposed to opportunities and create export-related jobs that could privilege-seeking and corruption due to ineffective offer alternative sources of income for people otherwise institutions; weak accountability, transparency, and drawn toward violence and armed groups. Facilitating local confidentiality; and limited access to procurement cross-border trade could also address food security concerns, information. There is also no proper grievance redress especially for poor households in border areas, and increase mechanisms, and the fair opportunity process needs incomes in farming communities, which in turn could have a to be improved; long-term impact on productivity by, for example, reducing the level of stunting. • Customs has a crucial role in economic competitiveness through trade facilitation, revenue collection, and national security. The current customs The regulatory framework is system is not transparent and provides significant conducive to elite capture opportunities for corruption and capture. While tariff data are accessible on the website of CAR’s customs and hampers market-based administration and Web Fontaine, the information is competition not up to date. Moreover, the lack of transparency surrounding import restrictions and special regimes Market-based competition, regulatory framework may impede competition and foster rent-seeking and governance, and institution indicators are weak and have corruption; been deteriorating over the past decades, affecting the country’s ability to achieve its growth potential. CAR lags • There are several barriers to competition, including far behind comparators on market-based competition, quality in the electricity, telecommunication, mining, and of the regulatory framework, government effectiveness, forestry sectors. For example, SOCATEL, despite its rule of law, and political stability. Various factors such as deplorable financial condition, maintains a monopoly high market concentration, several underperforming state- on fixed telephony and broadband internet services owned enterprises, an ineffective regulatory framework, and through government treaties. This has had a huge vested interests have hindered market-based competition in effect on the quality of broadband internet services, CAR. Widespread state participation in commercial activities with CAR having the lowest number of people with also deters private sector investment. Anticompetitive internet access in CEMAC; and regulations and the weak ability of the judicial system to solve commercial disputes hinder competition and • Informality in the mining sector is significant and trade. Moreover, limited trade liberalization has affected creates unfair competition between informal and competition and private sector development. formal mining firms. Excessive capital requirements for buying houses that export diamonds discourage The regulatory framework is conducive to elite capture and competition and encourage informality. Informality prevents market-based competition. Elite capture, which in the mining sector has increased the dependency happens when powerful and well-connected groups influence on pre-financing structures, which has led to debt- policies and make them serve their own narrow interests, bondage that traps miners in poverty. The proliferation is widespread in CAR, preventing market-based and fair of informality has also resulted in increased competition competition. The current regulatory framework distorts between formal and informal collectors, leaving formal resource allocation and leads to weak innovation and registered buying houses and exporting firms at a productivity. Governance failures and power asymmetries disadvantage. 10 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth Executive Summary 1 2 Restoring the social contract and Accelerating economic growth. escaping chronic instability. Economic performance has been Chronic power strugglebetween subdued due to weak economic political elites hasled to falling fundamentals and key binding living standards, a deterioration of constraints to growth. the social contract, and a lack of Paving the way out of economic opportunities. fragility through accelerated and inclusive growth and bold reforms. 4 3 Improving market-based competition Tapping into trade as a vehicle for and opportunities for capture. growth and a way out of fragility. Governance, institutions, and Trade structure is characterizedby regulatory framework has limited low trade openness, regional trade private investment as they hamper and integration, and weak export market-based competitions and diversification. facilitate capture. The way forward capacity; incentivizing formalization of the artisanal and small-scale mining (ASM) sector; and reducing • The analysis in this report suggests that for CAR the flow of conflict diamonds by supporting the to escape fragility and to sustain equitable growth, implementation of the Kimberly Process Operational reforms are needed in four broad and inter-linked areas: Framework; and (i) building a social contract and escaping chronic instability; (ii) revitalizing long-term growth; (iii) unlocking • Building a social contract by establishing confidence the potential of trade as a vehicle for growth and a way in state institutions and addressing grievances, which out of fragility; (iv) improving market-based competition should include facilitating inclusive-enough coalitions and addressing opportunities for rent-seeking. and dialogues; addressing grievances, inequality, and corruption; and fostering a national collective understanding and inter-faith religious dialogue. What are CAR’s options to escape the fragility trap? What will it take to boost To escape the fragility trap, the authorities need to long-term growth? consider (Table 1): CAR needs to address the potential drivers of future • Refocusing the political landscape on accelerating growth. Under current conditions, the country’s GDP growth socioeconomic development and restoring the rate is projected to slow over time and reach 3 percent by authority of the state, which should include effective 2050, mainly due to slowing total factor productivity (TFP), power sharing agreements and efforts to accelerate job human capital, and population growth. It would take until creation, improve the business environment, and the late 2030s for CAR to regain its pre-2013 level of GDP diversify the economy. There is also a need to pursue per capita, although extreme poverty rates are expected urgent structural reforms rather than continue to to fall by almost 20  percentage points over 2020–50. benefit from the status quo; Factors that are expected to have a positive impact on GDP growth include the expected increase in the working-age • Strengthening the management and allocation of population and public and private investment. mineral wealth and public resources, which should include reforming the legal and regulatory framework CAR needs to implement bold and strong reforms to of the mining sector; strengthening institutional boost its growth potential, improve living standards, and Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 11 Executive Summary significantly reduce extreme poverty. Reforms need to: activities such as backbone services; and (iii) provide broader (i) increase TFP growth; (ii) attract private investment; and market opportunities that attract private sector investment. (ii) accelerate human capital accumulation. Given the importance of the agriculture sector and regional market opportunities, efforts to increase the export of food • Increase TFP growth. Under the business-as-usual products, especially to neighboring countries, could help scenario, TFP growth is projected to decline from CAR diversify its economy and reduce its dependence on a 2.0 percent in 2019 to 0.6 percent by 2050 reducing small number of export products that have a limited impact real GDP growth and slowing improvements in living on the poor population. standards. Bold and sustained reforms that target innovation and the quality of infrastructure, education, To leverage regional economic opportunities, the government and public institutions are needed to increase TFP needs to address cross-cutting constraints on investment growth, which would require sustainable collaboration and trade. Improving institutions and governance and and cooperation between the government, the private investing in education and infrastructure are critical to sector and development partners. provide a conducive business environment for private sector investment. An increase in investment and the • Attract private investment. CAR needs to address adoption of policy reforms that increase connectivity to the shortage of private investment to boost its growth regional and global markets would allow firms in CAR to potential. The country’s subdued economic performance exploit opportunities for backward and forward linkages is due to, among other factors, insecure property within regional and global value chains. rights, credit constraints, and poor infrastructure (e.g., electricity, roads, internet, etc.). However, there are Investments in trade facilitation are likely to have big opportunities to tap into the potential of private payoffs. The government could enhance cross-border investment to boost GDP growth. This would require and regional trade by simplifying investment and border implementing and sustaining bold reforms to attract management procedures and improve border infrastructure private investment, including enabling market-based to reduce delays and the costs associated with crossing the competition, making it easier to start a business and border. The African Continental Free Trade Area offers a register property, and improving critical infrastructure new multilateral mechanism to deepen trade integration in such as power, ICT, and transportation. Africa. In addition, the government could explore bilateral discussions with neighboring countries to jointly facilitate • Accelerate human capital accumulation. A continuation trade. Measures that have proved useful in other regions of CAR’s education and health interventions (business- include: (i) simplified trade regimes for small-scale traders; as usual scenario) would decelerate human capital (ii) support for trade associations; (iii) regular cross-border growth over the next 30  years and reduce the dialogues on removing non-tariff measures; (iv) small-scale contribution of TFP to economic growth. Improving investments in lighting and security that would allow for human capital would require a greater focus on longer opening hours at the border; (v) investments in increasing the average years of schooling, enhancing sanitation facilities for officials and traders; (vi) enhanced learning outcomes, improving child nutrition, and market information for traders; and (vii) efforts to address providing adequate protection through social welfare logistics constraints. programs. How can trade play a key role in the How can CAR promote market-based path away from fragility? competition and reduce opportunities for capture? Trade could offer a way for CAR to escape the fragility trap. CAR is landlocked and has a relatively small economy, To promoting market-based competition and reduce which means that the opportunities for the domestic opportunities for capture, the authorities should consider: market to drive sustained and inclusive growth are limited. Experience from other countries shows that trade can: • Strengthening the public procurement system. The (i) facilitate access to new technologies that promote public procurement regime is not transparent, and productivity growth; (ii) increase competition, especially officials face significant difficulties in enforcing existing in sectors that provide critical inputs to other economic laws. The government needs to improve transparency 12 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth Executive Summary in public procurement while enforcing existing laws. How can the authorities maximize Transparency can be improved by ensuring that procurement information is made public, is up-to- the impact of reforms on the living date, and includes calls for tenders and requests standards of Central Africans? for proposals. The authorities need to encourage transparency while ensuring confidentiality and equal To escape fragility trap and accelerate inclusive growth, access to information. Also, the government needs to CAR needs to introduce and implement reforms that clearly define the penalties in the case of corruption or significantly improve the well-being of the population fraud by public servants; and by: (i) significantly improving the quality of governance at all levels; (ii) pursuing the implementation of critical but • Addressing rent-seeking and corruption in trade difficult structural reforms; (iii) strengthening transparency and customs procedures. The lack of transparency and ensuring strict accountability and enforcement of surrounding import restrictions and special regimes laws while fighting impunity and corruption; (iv) involving may impede competition and foster rent-seeking and civil society organizations and the public at large in corruption. Customs authorities sometimes apply decision-making processes, as opposed to pursuing purely discretionary import restrictions and special regimes to technocratic and opaque exercises that fuel the feeling protect favored groups or even individual businesses. of exclusion, exacerbate grievances, and deteriorate the Therefore, CAR needs to make import restrictions and already precarious social contract; (v) leveraging the special regimes less complex and more transparent, support, expertise, and experience of the donor community and it needs to strengthen the transparency of its in capacity building and implementing reforms while customs duties and processes. Moreover, the authorities need to enhance the electronic processing coordinating reforms and investment programs to strengthen of declarations to reduce the direct contact between their impact, local ownership, and complementary. CAR customs agents and businesses, which would reduce has been stuck in an extremely low political economy opportunities for rent-seeking and corruption. The equilibrium for decades, which means that it will be difficult use of technology by customs authorities could also to redirect the growth trajectory to achieve sustained reduce costs for businesses (time and resources) and economic growth, poverty reduction, and job creation. minimize inaccuracies and omissions in declarations. Nevertheless, the country has plenty of potential, and In addition to technology, the country needs access opportunities that can be unlocked by refocusing the political to a competent customs workforce to implement landscape on accelerating socioeconomic development technological solutions and update data. and building confidence in public institutions. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 13 Executive Summary TABLE 1 Key Policy Recommendations to Move from Fragility to Accelerated and Inclusive Growth Priority Immediate priorities Short and medium-term priorities Long-term priorities objectives (Next 3 to 12 months) (Next 12 to 36 months) (More than 36 months) • Refocus the political landscape • Address grievance by: (i) expanding • Improving the business environment on accelerating socioeconomic public services and assistance to the and creating inclusive economic development and restoring the most vulnerable, including IDPs, youth- opportunities and jobs to increase the authority of the state, which should at-risk, and food insecure households; opportunity cost of conflict. include effective power sharing (ii) supporting farmers and pastoralists to • Build state legitimacy by: agreements and efforts to accelerate increase the productivity of subsistence (i) constructing and rehabilitating job creation. farming and pastoralism; (iii) promoting basic infrastructure (e.g., roads, Refocusing income-generating activities; and • Build a social contract by establishing water and sanitation, electricity, and the political (iv) improving access to finance and confidence and addressing grievances telecommunication); (ii) providing landscape on rural connectivity. by facilitating inclusive-enough social services (e.g., healthcare, development coalitions and dialogues, fostering • Strengthen the management and education, and preventive services); and restoring a national collective understanding allocation of mineral wealth and public and (iii) implementing income- the social and inter-faith religious dialogue, and resources by reforming the legal and generating activities. contract accelerating the deployment of state regulatory framework of the mining institutions in provinces. sector, strengthening institutional capacity, incentivizing formalization of • Adopt a new mining code and revise the artisanal and small-scale mining the regulatory framework of the (ASM) sector, and reducing the flow mining sector. of conflict diamonds by supporting • Facilitate inclusive-enough dialogues the implementation of the Kimberly and engage representatives of diverse Process Operational Framework. groups such as religious leaders and • Introduce accountability tools such as representatives of civil society and participatory public budgeting and opposing political factions. public expenditure tracking surveys to reduce corruption, elite capture, and rent seeking while increasing accountability. • Strengthen the dialogue and • Implement the National REDD+ • Promote innovation and improve cooperation with private sector working Investment Framework prepared under the quality of road and digital groups and organizations and establish the Central African Forest Initiative. infrastructure, governance, and public a clear and sound multisectoral strategy institutions. • Support the implementation of the for private sector development and Forestry Code, which requires on-site • Strengthen in technical and vocational investment promotion, including processing of at least 70 percent of education and training for skills facilitating import/export, incubators, logs from first grade species to enable development adapted to market Boosting and key business transactions (starting the industrial transformation of the changes. long-term a business, paying taxes, registering a wood sector. growth, property, transparent public procurement • Increase access to new, higher yielding accelerating processes, promoting formalization, and • Address early childhood development seeds and improved fertilizers to human capital fighting corruption, etc.). challenges through: (i) targeted free boost agricultural productivity while accumulation, healthcare policy for children under the promoting agribusiness activities in • Simplify the business registration and age of five and pregnant women and Bangui area. process and publicize information on attracting measures to address child malnutrition; requirements, fees, and procedures for • Promote inclusive and equitable private (ii) a strengthened response and obtaining a business license. access to education by: (i) providing investment mitigation mechanism to respond accelerated learning programs • Design a risk-based approach for to food security crises; and (iii) an and non-formal skills training; and tax inspections to reduce arbitrary adequate social protection system. (ii) reducing school fees to address inspections. • Implement the multisectoral strategy the needs of vulnerable households for private sector development and and marginalized populations such as investment promotion. displaced children and rural out-of- school children and youth; • Implement a risk-based approach for tax inspections to reduce arbitrary inspections. 14 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth Executive Summary TABLE 1 Key Policy Recommendations to Move from Fragility to Accelerated and Inclusive Growth (Continued) Priority Immediate priorities Short and medium-term priorities Long-term priorities objectives (Next 3 to 12 months) (Next 12 to 36 months) (More than 36 months) • Improve the connectivity to regional • Harmonize trade procedures and • Deepen regional trade integration and global markets by identifying streamline NTMs in ECCAS to reduce under the AfCFTA to maximize CAR’s alternative road corridors. delays and ease the free circulation of trade potential through strengthened goods and services, boosting trade bilateral discussions with neighboring • Reduce opportunities for fraud and competitiveness in the region. countries to jointly facilitate trade and through the interconnexion of custom remove non-tariff measures. systems/databases and e-douanes. • Modernize border infrastructure, introduce electronic declarations and • Reduce abusive levies imposed on Improving • Prioritize improvements in border clearance processes, and move to rural producers, pastoralists, and trade to processes for the trade of perishable risk-based compliance control policy, traders along trade corridors (e.g., the accelerate agricultural products by, for example, reconciliation of import-export data, Bangui-Douala corridor) through the growth and introducing a fast lane for these and systematic investigation of all simplification of border management escaping products to reduce the cost of discrepancies. procedures and trade regimes. fragility and wastage that arise from delays at the promoting border. • Implement a simplified trade regime • Make import restrictions and special market-based for small-scale traders, support trade regimes less complex and more competition • Revise Article 29 of Decree No. 09.058 associations, and create a dialogue transparent by providing: (i) publicly to reduce to ensure the institutional platform to find local solutions to accessible and regularly updated opportunities independence of the CRD and challenges traders face. customs duties, which reflect the for capture establish the conditions for latest pricing data; and (ii) publicly participants in public procurement • Improve the transparency of the accessible criteria and conditions for to pursue grievances, complaints, public procurement system by import licenses and fines for violation or recourse actions and request regularly publicizing information for both civil servants and importers. an independent review of the from the integrated information procurement process. system and up-to-date procurement information, including calls for tenders • Amend Article 104 of the CMP to and requests for proposals, which is clearly define fraud, corruption, and required by article 29 of the CMP but unethical behavior; and revise Article not enforced. 102 of the CMP (or Article 17 of the organic law of the Court of Auditors) • Improve market-based competition to clearly define the penalties in the in key sectors to attract private case of corruption or fraud by public investment servants. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 15 © Cristelle Kouame CHAPTER 1 Fragility and Its Implications on the Social Contract and Living Standards 16 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards The Central African Republic (CAR) is at a critical onto a relatively sustainable path to recovery over 2015–19. crossroads. Despite its significant natural resource wealth, This chapter presents a core economic analysis of CAR— CAR remains one of the poorest and most fragile countries which is characterized by fragility, conflict, and violence in the world. Cycles of political instability and a heavy (FCV)—and examines the mutually reinforcing relationship reliance on natural resources have left the economy between fragility, inequality, and lack of inclusion. It also poorly diversified and with a small private sector. Almost discusses lessons learned from previous episodes of a decade after the 2013 civil war, the country remains political instability and ways to improve social cohesion. caught in a fragility trap, facing episodes of renewed Finally, the chapter provides some insights into why reforms insecurity and a substantial state-citizen divide. Supported in the country have not produced sustained economic by the 2015 peaceful transition of power, the authorities growth, and it presents some potential key pathways implemented several reform programs that helped to out of fragility and the related implications for structural restore macroeconomic stability and steered the economy reforms. A Framework for Analyzing Fragility and Conflict in CAR Helping CAR escape the fragility trap1 requires an FIGURE 1 understanding of the dynamics of conflict and fragility. A Framework for Analyzing Fragility In turn, this requires a close examination of the underlying and Conflict in CAR causes as well as the domestic and external players involved in various episodes of conflict. This section proposes a framework for analyzing fragility and conflict in CAR and State Center-periphery actors assessing the relationship between the central government, relationships Collaboration citizens, armed groups, and external actors (Figure 1). The Social legitimacy or contestation or disobedience framework goes beyond the drivers of fragility. CAR has been affected by conflicts and fragility for a long time, and State presence the level of conflict and fragility reached an unprecedented and insecurity External level in 2013. The root cause of the country’s conflicts is Citizens Natural resource actors and elite capture the struggle between its political elites to pursue power Porous borders and capture natural resources. The power struggle has led to the formation of many political and armed groups that Extraction and exploitation Peacemaker too often act as “roving bandits,”2 creating little incentive or agitator Interest for anyone to produce and invest securely. Political elites representation Armed groups have been exploiting socioeconomic inequalities and ethnoreligious differences to undermine social cohesion, capitalize on local grievances, and gain legitimacy. Elites Source: World Bank staff elaboration. and armed groups have established a relationship with the population based primarily on exploitation and extraction. This is exacerbated by porous borders and a dependency on external actors, which has turned CAR into an arena of geopolitical tensions and contestation. 1  The fragility trap is characterized by a combination of a lack of capacity, lack of legitimacy, oppositional identities, inadequate security manifested in sporadic or prolonged outbreaks of violence, and an underdeveloped private sector. Source: Collier, P., Besley, T., & Khan, A. 2018. 2  See Olson (1993) for an extensive discussion on “roving bandits”, democracy, and development. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 17 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 2 Repartition of Civil Servant and Inhabitants per Region 14,000 2,000 12,000 11,523 1,600 10,000 Inhabitants, in ‘000 Civil servants 1,200 8,000 6,000 800 4,000 2,838 400 2,000 991 1,108 370 615 0 0 Ombella, Mpoko, Ouham and Nana Gribizi Haut Kotto, Basse Kotto, Bangui Lobaye, Sangha, Mbaere, Ouham Pende Kemo and Ouaka Bamingi Bangoron, Mbomou, and and Nana Mambere and Vakanga Haut Mbomou Civil servants (left axis) Inhabitants, in ‘000 (right axis) Source: World Bank staff using data from the Ministry of Finance and Budget. The absence of the state and its security forces, particularly and oil in conflict zones has increased the duration of conflicts, outside of Bangui, perpetuates a vicious cycle of fragility. and the abundance of resources that can be extracted with The absence of the state in many local areas has been little access to technology, such as alluvial diamonds, has also exacerbated by past conflicts, which have affected the ability fueled conflicts, capture, and predatory behavior. Evidence of the government to provide adequate public services. from countries in conflicts shows that armed groups tend to More than three-fourths of agents and civil servants (ACS) are attack civilians residing in areas abundant in natural resources. based in Bangui, where the resident population represented about 17 percent of the total population in 2018.3 The most External actors and their vested interests influence populated region in the country, Region 3, which includes the CAR’s fragile political system. The country’s porous borders Ouham and Ouham-Pande prefectures, has only 991 ACS, and dependency on foreign security, humanitarian, and less than 6 percent of the country’s total ACS (Figure 2). development assistance make it prone to regional and About 69 percent of CAR’s internal security staff (police and international geopolitical tensions. Chad and Sudan (Darfur) gendarmerie) and 52 percent of its judicial personnel are are among the prominent regional powers contributing based in the capital city. When present, security staff have to instability in CAR, with rebel groups crossing porous been ineffective in ensuring the safety of citizens, resulting borders. Political unrest and conflicts in these countries in grievances that create a breeding ground for recruitment have a negative impact on CAR. Unsecured borders and to different rebel groups. In the absence of functional state inadequate security have allowed armed groups, along with security forces, armed groups act as “roving bandits” weapons and illegally exploited natural resources (which are and target communities, exploit natural resources, loot used to finance conflicts), to move freely between countries. food aid, smuggle weapons, compromise property rights, Competition between external actors in CAR has also raised and hamper important socioeconomic activities such as concerns regarding the effectiveness of the peacekeeping schooling and seasonal pastoral movements. mission in the country. Recently, the presence of Russian advisors has increased, raising questions and concerns about A dependency on natural resource wealth, coupled with their approach to restoring the rule of law and potential weak governance and management of natural resources, violations of human rights. Also, the growing importance of is a prevailing source of fragility. CAR’s significant natural external actors’ clashes with the interests and approach of resources and the country’s dependency on them have CAR’s traditional partners, especially France and the European worsened grievances, fueled elite contestation, created Union (EU), as well as to some extent the assistance provided opportunities for corruption and informality, and provided by multilateral partners. This creates a complex geopolitical financial opportunities for rebel groups. Weak governance environment that may not be conducive to stability, peace, and management of the natural resource sector have and much-needed structural reforms for sustained growth exacerbated these challenges. The presence of diamonds and development. 3  CAR’s authority’s payroll data. 18 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards Why Reforms Have Not Produced Sustained Growth for CAR Political Landscape: after the governance structure of the Congo’s Free State imposed by the Belgians. Concessions were granted to Coups and Power Struggles French private companies, mainly motivated to strip the between Elites region of its natural commodities, with little investment in infrastructure and institutions. In 1920, a policy of mandatory production of cotton was introduced, a network of roads Development of CAR’s political system was built, and an embryonic system of governance was established. This led to the development of urban centers, The slave trade and related political systems established and Christianity was established by Protestant missions. an environment of mistrust and weak social cohesion. The Colonial rulers used forced labor, and many Ubangians Conflicts and violence are deeply rooted in CAR4 and date were sent to work on the Congo-Ocean Railway, resulting back to the seventeenth century as slave traders began to in thousands of lives lost and fueling frustration and the raid the region. Between the sixteenth and seventeenth sentiment of discrimination among Ubangians. In 1928, the centuries, slave traders, led by powerful sultanates from first rebellion broke out in the Western Ubangui-Chari and the area of present-day Chad (Waddai) and Sudan (Darfur), continued for several years, thereby laying the foundation began to raid the northern and eastern areas of what for the independence movement. is today CAR as part of an effort to expand the Saharan and Nile River slave routes. The Fulani, who were mainly CAR’s political landscape remained relatively unchanged nomads, were often used as labor in Muslim states located after independence and has been characterized by coups further north to ravage territories occupied by the Gbaya and power struggles between elites. The country gained and Banda, animist populations of the south. As a result, independence on August 13, 1960, and David Dacko was existing social cohesion in the area was weakened, and elected as its first president.5 Dacko’s era was marked by local populations were forced to flee for their safety. Also, an attempt to improve households’ living conditions and tensions and distrusts between animists populations and promote economic development and social cohesion Muslims have been exacerbated, as captives of the Fulani between different ethnic groups and the state. However, and Muslim slave traders were enslaved and shipped along clientelism and exploitation surfaced, and President Dacko the Ubangi and Congo rivers to different parts of the globe. was overthrown in a coup by the Council of the Central In the second half of the nineteenth century, the impact African Revolution, headed by Jean-Bedel Bokassa, on of the slave trade on the social cohesion and stability of December 31, 1965. In January 1966, Bokassa abolished CAR was devastating. Jallabah slave traffickers forced their the constitution and proclaimed himself president-for-life captives to choose between conversion to Islam or being and commander-in-chief of the army. A few years later, enslaved and deported. Many villages were looted and set Bokassa proclaimed himself emperor of the CAR empire on fire, pushing the population to flee and fight for safety. and dissolved the Council of the Central African Revolution. The colonial era laid the foundation for an embryonic state Since the reign of Bokassa, corruption and clientelism have and institutions but also reinforced the atmosphere of been widespread in CAR. The Bokassa regime was ruthless violence and discrimination. The Central African territory and mismanaged the country’s resources. The government was invaded by Europeans in the late nineteenth century, during this time was mainly inexistent, and citizens were primarily by the French, Germans, and Belgians. The French taken hostage by a minority of elites, driven by a desire to colonized the country of Ubangui-Chari in 1894. However, control natural resources. This created discontent within the 300 thousand square kilometers of the Sangha and Lobaye population and laid the foundation for chronic and structural basins were ceded to the Germans in 1911 under the Fez instability. On September 21, 1979, Emperor Bokassa was Treaty. The Ubangi-Chari political system was modeled overthrown by former President Dacko. On February 24, 1981, 4  Previously called Ubangui-Chari. 5  David Dacko was elected by the National Assembly under a one-party state, the Mouvement pour l’Evolution Sociale de l’Afrique Noire (MESAN). The party was established in 1950 by Barthelemy Boganda, the first representative of CAR in the French government during the colonial era. MESAN sought to affirm black humanity and advocated for the independence of Ubangi-Chari. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 19 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards a new constitution was approved in a referendum, and established, leading to a rise in the number of zones Dacko was elected president. Dacko’s second presidency controlled by armed groups. Moreover, the implementation carried over weaknesses from the previous regime and was of the demobilization, disarmament, and reintegration characterized by tribalism, nepotism, and corruption. Public program for combatants in the northeast failed, with investments were unevenly distributed across the country, significant adverse effects on security, poverty, and the fueling community tensions, with many feeling like second- humanitarian situation. Between 1999 and 2006 per capita class citizens. On September 1, 1981, President Dacko was income continued to contract sharply, the average number of deposited by the Comite Militaire pour le Redressement years of schooling was less than 7 years, and life expectancy National, headed by General Andre Kolingba, who limited remained relatively unchanged. International support the number of political parties in the country, suspended receded during this period, and the failure of Bozize’s the constitution, and introduced a new constitution by a administration to implement structural reforms to address nationwide-wide referendum in 1986. grievances resulted in the proliferation of armed groups and the first rebel coalition: the Séléka8 coalition (Figure 3). While the country held its first democratic elections in 1992, they did not put an end to coups and violent transitions of The power struggle intensified significantly in the early power. In the 1990s, the fall of the Berlin wall led to a new 2010s and culminated in the 2013 civil war. In November push for democracy in CAR, with pressure from external 2012, the Séléka coalition, headed by Michel Djotodia, actors. The first free elections were held in October 1992, assumed control of the country’s central and northern and Ange-Felix Patasse was elected president after the regions. While a peace agreement involving power sharing second round of voting in 1993, with 53 percent of the vote between the government and armed groups was reached cast. Once elected, President Patasse started a purge of in early 2013, it was broken shortly after. Two months later, the Yakoma6 people, which resulted in ethnic tensions Séléka seized the capital city, Bangui, and overthrew Bozize. and fueled social exclusion. Patasse’s presidency was also After taking power, Djotodia tried unsuccessfully to disband characterized by corruption and the destruction of property, the Séléka. The rebels refused to disarm, becoming known exacerbated by weak government effectiveness. Rebels as ex-Séléka and veered out of government control. The launched an unsuccessful coup attempt in May 2001 by ex-Séléka armed group was motivated by a commitment storming strategic buildings in the capital city of Bangui. to defend and protect the interests of Muslim pastoralists General Francois Bozize, Patasse’s chief of the army and while exploiting pre-existing conflicts with other ethnic and suspected to be behind the coup, was forced to flee the religious groups, resulting in an escalating cycle of inter- country and seek asylum in Chad. In March 2003, Patasse community violence. Christians and other animist farming was overthrown by a surprise attack headed by Francois communities retaliated from acts of violence committed by Bozize, who suspended the constitution, dissolved the the ex-Séléka and set up a self-defense militia known as government, and organized new elections. anti-balaka. As a result, the crisis shifted from a political to religious crisis, leading to millions of internally displaced Delays in implementing much-needed structural reforms people (IDPs) and refugees. Djotodia stepped down in have contributed to the vicious cycle of fragility. Bozize 2014 following a deal negotiated during a summit in Chad. was elected president in May 2005, despite a fragile An interim government led by Catherine Samba-Panza was political context and disputes over the control of power, created, and the reconciliation process launched with the including several rebel attacks against the army. An inclusive Bangui Forum in 2015. and political dialogue (IPD) was adopted between the government and some armed groups to reach a cease- The proliferation of political militias, which represent the fire and lay the foundation for peace and stability. However, main threat to civilians and social cohesion, is a direct most of the reforms agreed upon under the IPD were consequence of the power struggle between elites. not implemented,7 and the inclusive dialogue was never Political militias are the main threat to civilians in CAR 6  Elements of the ethnic group of the former President Andre Kolingba. 7  Some of these reforms included but were not limited to: (i) restoring peace and security; (ii) organizing early legislative elections after the dissolution of the national assembly; (iii) re-organizing defense and security forces; (iv) reorganizing the territorial administration; (v) reforming the judicial system; (vi) continuing the demobilization, disarmament, and reintegration process, with support from the international community; and (vii) initiating economic and social reforms. 8  Séléka is a rebel coalition of dissident factions of two armed groups: the Convention of Patriots for Justice and Peace (CPJP) and the Patriotic Convention for Saving the Country (CPSK). The coalition’s grievances were politically motivated, and its objectives included: (i) the implementation of recommendations from the IPD held in 2008 that set forth conditions for peaceful elections in 2010, carried out in 2011; (ii) financial compensation for the rebels; (iii) the release of political prisoners; and (iv) the reopening of investigations, including the disappearance of former CPJP leader Charles Massi. 20 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth FIGURE 3 Evolution and Chronology of Armed Groups, 2005–2020 2005 2007 2009 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 GALPC: Djotodia MLCJ: Sabone FPRC: Nouredine, Hissene COALITION FPRC: Djotodia, Nouredine, Hissene Seleka Coalition FDC: Hassan RPR: Damane RPR: Damane CPJP: Hissene CPJP: Massi MPC: Al-Khatim MPC: Al-Khatim CPJP Fond: Nouredine CPSK: Dhafanne MPC Siriri: Ambosoro Seleka Renovee: Dhaffane FPR: Lade, Darassa MLCJ: Toumou Deya COALITION ON UPC: Darassa DECEMBER 19, Community self-defense groups Anti-Balaka: Ngaissona 2020 Antibalaka Anti-Balaka: Mokom Local Groups MRDP FDPC: Miskine FDPC: Miskine Other groups RJ: Sayo RJ: Belanga APRD: Demafouth FCCPD: Tshibangu LRA: Kony 3R: Sidiki Source: Adapted from Dukhan 2017. BOX 1 Definition of Conflict Actors The Armed Conflict Location & Event Data Project (ACLED) defines conflict actors as: A. State forces, which are collective actors that are removal of a national power. Instead, they are recognized to perform government functions typically supported, armed by, or allied with a over a given territory and include military and political elite and act toward a goal defined police; by these elites or larger political movements; B. Rebel groups, which are political organizations D. Identity militias, which are armed and violent whose goal is to counter an established national groups organized around a collective, common governing regime by violent acts; feature, such as community, ethnicity, region, religion, or, in exceptional cases, livelihood. C. Political militias, which are a diverse set These include tribal, communal, ethnic, local, of violent actors that are often created for clan, religious, and caste militias; a specific purpose or during a specific time period (e.g., Janjaweed, which is largely active E. Rioters, which are individuals or mobs who either in Sudan) and for the furtherance of a political engage in violence during demonstrations or in purpose by violence. These organizations are spontaneous acts of disorganized violence; and defined by their political goals of influencing and impacting governance, security, and policy. F. Protesters, which are peaceful, unarmed However, these groups are not seeking the demonstrators. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 21 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 4 Conflict Events and Fatalities a. Share of fatalities by conflict actor b. Share of conflict and fatalities by type of violence, 2010–2020 80 60 70 50 60 Percent (%) 50 40 Percent (%) 40 30 30 20 20 10 10 0 State Rebel Political Identity Riot/mob Protesters External/ 0 forces groups milias militias other Battles Violence against Riots Remote violence Protests forces civilians 2013 2014 2020 Conflicts Fatalities Source: World Bank staff using data from ACLED (2021) and iDMC (2020). (compared to state forces, rebel groups, identity militias, Minister Faustin Archange was elected with 62 percent of riots, and protesters), as they were responsible for more the vote cast. A new inclusive government was formed, than 70 percent of all violence targeting civilians in 2020 reshuffled twice in 2017, and then again in March 2019 (Figure 4). These political militias exacerbate the climate following the signature of the Political Agreement for Peace of mistrust, exploit the fracture with the state, and fuel and Reconciliation (Accord Politique pour la Paix et la ethno-religious fragmentation. The number of conflict events Reconciliation en Republique Centrafricaine, APPR) between has increased 25-fold, from 21 in 2005 to 543 in 2020. the government and 14 armed groups. On December 19, Violence against civilians has a direct impact on the size 2020, three rebel groups—Return, Reclamation, Rehabilitation of the working population and limits the ability of people to (3R); the Popular Front for the Renaissance of Central African undertake income-generating activities, which is exacerbated Republic; and the Union for Peace in the Central African when large segments of the population need to flee to Republic—that controlled roughly two-thirds of the country escape the threat of violence, resulting in lower output. formed a coalition named the CPC. The CPC’s intent was Agricultural employment appears to be disproportionately to advance to Bangui because it accused the outgoing concentrated in areas with high levels of conflict, indicating president, Touadera, of rigging the election process. the possible negative impact of conflicts on the potential However, on December 27, 2020, Touadera was re-elected of the agricultural industry and trade. for a second term, with 53.9 percent of the vote, amid an election dispute.9 The Bangui Forum, held in May 2015, laid the foundation for achieving peace and stability in CAR, but power struggles persist, fueling violence and insecurity. Center-periphery relations The forum set the path to stability, reconciliation, and the return to constitutional order with the adoption of the In CAR, political power has been centralized in the hands Republican Pact for Peace, National Reconciliation, and of a few elites, which has generated ethnic tensions and Reconstruction, as well as with the signature of a disarmament, feelings of social exclusion, especially in provinces. Since demobilization, rehabilitation, and repatriation (DDRR) independence, the central government has centralized agreement between the government and 9 out of 10 armed power in the capital city of Bangui, with little transfer of groups. In December 2015, a new constitution was adopted responsibility or resources to local government authorities. by a referendum that expanded the legislature’s power, Members of local governments have often been appointed established a senate, and set a maximum of two terms by the central government, creating an opportunity for for the presidency. The second democratic and peaceful nepotism and unfair processes. Even in the capital city, there elections took place in February 2016, and former Prime is a high level of disillusionment toward the government, 9  The general elections in December 27, 2020, were not fully representative, as large parts of the country could not participate due to lack of security in several districts. 22 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards which is often perceived as composed of a self-serving public infrastructure and services. Post-conflict recovery and elite. These perceptions are compounded in local areas reconstruction have been slow, with only a marginal effect by the weak presence of the state and essential public on the center-periphery relationship and regional disparities. services, including healthcare, education, and sanitation. Weak governance and the absence of the state locally, coupled with an uneven national policy framework, have Persistent regional imbalances between Bangui and the rest led to fragmented public service delivery. of the country have fueled tensions. The successive episodes of conflict have been rooted in inadequate governance of the Access to adequate essential services such as education public sector and dysfunctional institutions due to historical and healthcare remains limited in the provinces. According structural fragility. These challenges have exacerbated the to the latest SARA/HERAMS 2019, there are only 7.3 health political imbalances between Bangui and the country’s professionals per 10,000 inhabitants in CAR (0.8 general provinces. Each crisis was the result of a missed opportunity practitioners, 2.5 nursing professionals, 2.4 other nursing to address the people’s grievances. The provision of public professionals, and 1.6 obstetric care professionals)—way services has often been constrained by the lack of legitimacy below the World Health Organization (WHO) standard of of state institutions, weak central and local government 23 health workers per 10,000 inhabitants. However, the capacity, poor logistical infrastructure, and the status quo of Bangui area has the largest number of health professionals, power coalitions. Despite recent progress, most ACS are still with a ratio of 30.8 health workers per 10,000 inhabitants— not able to collect their salaries locally. Instead, they must above the WHO standard. The Bangui area also has the travel, sometimes long distances, to one of the urban centers highest share of obstetric care workers in the country— to collect their payments at their own expense, worsening 137.40 per 10,000 pregnant women—despite having a low existing frustrations. Public appointments in remote areas fertility rate of 3.8 children per woman (Figure 5). Similarly, are often considered a punishment. according to EMIS 2018–2019 and MICS6 2018–2019, community teachers represent 5 percent of all teachers Center-periphery conflicts are exacerbated in Bangui, while they represent 70 percent of teachers in provinces. Also, 94 percent of classrooms are deemed in by weak service delivery in provinces good condition in Bangui, much higher than 70 percent of Post-conflict recovery and reconstruction have been classrooms in provinces. Other key education statistics such slow in changing the country’s center-periphery political as student-classroom and student-teacher ratios reveal relationship. Over the last decade, there has been a significant regional disparities. significant deterioration in most essential public services in CAR, ranging from health and education to electricity, Bangui’s share of budget allocations and development water, and sanitation services. This has been due to recurrent activities may undermine equitable service delivery. Apart conflicts that have destroyed or damaged part of the existing from Bangui, other cities in the country tend to be small FIGURE 5 Health Professionals and Infrastructure are Unequally Distributed in CAR a. Average distance to a functional public health facility, 2021 b. Key health professionals per 10,000 people Source: World Bank 2021. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 23 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 6 Government Effectiveness and Civil Liberty in CAR vs. Comparators a. CAR suffers from weak governance b. Government ineffectiveness is likely to create and exacerbate fragility –0.4 2 –0.6 Government effectivness (–2.5;2.5) –0.8 1 Government effectiveness MUS SYC BWA ZAF –1.0 CPV NAM RWA 0 SEN GHA –1.2 BEN KEN CIV MRT GMB ZMB ETH BFA MWI BFA NER LSO MOZ GIN CMR GAB TZA TGO –1.4 –1 MDG AGO MLI NGA ZWE GNQ LBRCOG BDI GNB TCD SDNZAR –1.6 COM ERI CAF LBY –2 SOM –1.8 SSD –2 –3 30 50 70 90 110 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 FSI CAR CEMAC FCV SSA Linear fit 95% CI Source: Edjigu and Kouame (2021) using WGI, FSI, Freedom House data. and have relatively inadequate public services. Except for real change to occur, as the decentralization process has Berberati, which has a population of around 100,000, all been on the government’s agenda since independence other urban towns host fewer than 50,000 people (most in 1960. Pragmatic policies and strategies to implement of them have fewer than 20,000 inhabitants). Business decentralization reforms have never been adopted. Instead, activities are concentrated almost entirely in or near decentralization has been mainly governed through a set Bangui. The failure to equitably share public services may of legislative texts and statutory instruments, which have fuel grievances and further widen spatial inequalities. To become irrelevant since the implementation of the special resolve grievances, the government’s urban development delegation (délégation spéciale)—a temporary governance approach needs to focus on the country’s smaller cities and entity to lead local municipalities until members of the local not only on its largest urban areas. government are elected. The authorities have taken early steps toward reducing the concentration of power in Bangui Weak Governance and While the government has taken steps to reduce the Elite Capture concentration of power in Bangui, strong political will is needed to achieve fundamental change. Following the Weak governance and judicial 2016 elections, decentralization reforms have received services have facilitated elite capture renewed attention and have been included in the country’s National Recovery and Peacebuilding Plan (RCPCA 2017– Weak governance is among the key factors contributing 2023) as well as in APPR commitments. A new act on to CAR’s fragility. The country has a weak and fragile decentralization was adopted in 2020, and another act on governance system, with a score of -1.8 on the World Bank’s administrative constituencies has been submitted to the government effectiveness index in 2018, compared to an National Assembly. The decentralization law established average of -0.8 in Sub-Saharan Africa (SSA) (Figure  6).10 regions and municipalities as decentralized entities, vested Low government effectiveness suggests poor public with legal personality as well as administrative and financial service delivery, which is often associated with political autonomy, under the oversight of the central government. connections. In turn, this suggests that CAR suffers from However, the shift from highly centralized political power poor policy formulation and implementation quality. Indeed, to local participation requires strong political will for the country’s successive governments have lacked the 10  Government effectiveness measures the perceptions of the quality of public services; the quality of the civil service and the degree of its independence from political pressures; the quality of policy formulation and implementation; and the credibility of the government’s commitment to such policies (WGI 2020). 24 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards credibility and commitments needed to effectively deliver The country’s political landscape has been dominated by public services to the population. As demonstrated by elites motivated by their personal priorities and who have Massing and Jonas (2008), countries with ineffective and little interest in fundamentally transforming institutions weak governments fail to provide core public services such and improving governance. The successive episodes of as health, education, and water to the poor. The lack of violence and conflict in CAR since its independence can these essential public services, in turn, fuels frustration, also be explained by factors related to the country’s political grievances, corruption, and violence that further undermine landscape. Political actors have traditionally been unable service delivery. to implement bold governance reforms that improve public service delivery. They were often motivated by their The weak judicial system has perpetuated the feeling of personal priorities to sustain elite political networks as well impunity. The country’s judicial system is weak and has as the patronage system, which created an atmosphere deteriorated because of past crises, which resulted in the of distrust and suspicion between the public and political destruction of legal records. Outside Bangui, there are leaders. This was made worse by the elite recycling system, only a few functioning courts, and only 8 out of CAR’s 35 which was primarily designed to ensure short-term stability prisons operate effectively. There have been multiple prison and prevent rebellion. Moreover, political militias and rebel breaks in recent years due to poor prison infrastructure groups have deteriorated the already weak justice system and security. Also, perpetrators of recent conflicts often and institutions, violated property rights, and imposed live in communities near their victims, worsening the racketeering and capture mechanisms. As a result, there perception of insecurity and impunity. A Special Criminal have been little improvement or transformation of the Court (SCC) was created by the transitional government country’s governance framework. led by Sambas-Panza in 2015. The SCC was expected to be made up of 27 judges, of which 14 from CAR and 13 internationally recruited. However, the SCC was never Lack of accountability and civil liberties established, mainly due to a lack of: (i) financial resources (the cost of the SCC was estimated at US$40 million for five has exacerbated CAR’s fragility years, but only US$5 million was committed); and (ii) skilled Corruption and accountability domestic investigators. Furthermore, risks associated with misreporting on the SCC could raise public expectations on CAR lags behind its comparators in accountability and the outcome of each prosecution and lead to further public control of corruption. The World Governance Indicators anger and frustration around the issue of impunity. There is (WGI) project uses key dimensions such as control of also a growing sense of public distrust toward the state and corruption and voice and accountability to benchmark national police, which are often seen as simply serving the countries’ traditions and institutions. CAR’s performance political elite. As a result, it is rare that criminal activities are on control of corruption and accountability indicators is brought before the country’s courts. below that of comparator countries. Compared to the average of SSA and CEMAC, corruption has historically Elite capture in CAR is rooted in weak governance and been a bigger obstacle to businesses operating in CAR institutions. For several years, CAR’s political authority than in other CEMAC countries, particularly in 2013–15, has been characterized as concessionary politics, whereby as political instability and widespread violence significantly access to natural resources was controlled by a handful undermined the rule of law (Figure 7). While corruption has of elites appointed by the centralized state authority. 11 historically been a major barrier to business in the country, Operating permits for the use of natural resources are often ongoing insecurity following the 2013 crisis has further granted without economic consideration. Instead, they are exacerbated corruption. “traded” in exchange for rents, which are used to nourish patronage networks and maintain power. Elite recycling is Voice and accountability in CAR have been improving common and designed to perpetuate control over resources since 2013, but there is still a significant gap compared and maintain privilege, resulting in a weak and inefficient to the SSA average. The country’s ranking in the voice public sector that fails to deliver adequate public goods and and accountability index improved from 179th out of services. A lack of transparency and weak law enforcement— 190 countries in 2013 to 164th out of 190 countries in 2019. two issues undermining governance in CAR12— facilitate However, the country’s voice and accountability index capture while reinforcing the sentiment of impunity. value of −1.2 is worse than the SSA average of −0.60, 11  Exploration licenses and mining permits are now offered through the Ministry of Mines and Geology, and they have to be approved by Parliament (Article 60 of the Constitution). 12  According to the IMF Governance Diagnostic: IMF Country Report No. 21/5. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 25 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 7 Corruption in CAR vs. Comparators, 1996–2019 a. Control of corruption deteriorated in CAR during the first half b. Control of corruption is negatively correlated of the 2010s, before it started to improve in 2016 with the fragile state index (FSI) –0.4 1 SYC CPV BWA –0.6 RWA Control of corruption (–2.5;2.5) NAM MUS STP Control of corruption ZAF –0.8 0 SEN GHA LSO BFA BEN GMB TZA SLE ETH –1.0 NER CIV ZMB MLI TGO MWI KEN MOZ LBR DJI MRT GIN GAB –1.2 –1 MDG AGO NGA COM UGA CMR ZWE CAF ERI SDN TCD –1.4 COG BDI GNB COD GNQ SOM SSD –1.6 –2 30 40 50 60 70 80 90 100 110 120 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 FSI CAR CEMAC FCV SSA Linear fit 95% CI Source: Edjigu and Kouame (forthcoming) using WGI data. demonstrating the low perception of citizens in CAR than their counterparts in peer countries, especially following regarding their ability to participate in selecting their own the 2013 crisis. On the Freedom House’s civil liberty restriction government and enjoy freedom of expression, freedom of index, which ranks countries from 1 (strong liberties) to 7 association, and a free media (Figure 8). (no liberties), CAR ranked 1st out of 190 countries in 2020. CAR’s score of 7 is much worse than the SSA average of 4, which suggests that freedom of expression and belief, Restrictions on civil liberty associational and organizational rights, the rule of law, and Access to civil liberties remains extremely low in CAR, personal autonomy and individual rights are significantly contributing to the country’s fragility and fueling restricted in the country (Figure  9). For instance, media grievances. Citizens in CAR have less access to civil liberties outlets are increasingly aligned with national politicians and FIGURE 8 Accountability in CAR vs. Comparators, 1996–2019 a. Voice and accountability have been improving in CAR since 2013, b. Voice and accountability are negatively but there is still a significant gap compared to the SSA average correlated with the FSI 0 CPV MUS ZAF –0.2 Voice and accountability (2.5, –2.5) GHA 0.5 BWA NAM SLE BEN SEN SYC Voice and accountability –0.4 LSO BFA LBR MWI GMB CIV –0.6 MLI TZA MDGZMB KEN NGA –0.5 MOZ NER UGA GNB –0.8 GIN TGO MRT AGO GAB CMR RWA COGZWE ETH –1.0 CAF COD –1.5 TCD COM –1.2 BDI DJI SDN SOM SSD –1.4 GNO ERI –1.6 –2.5 30 50 70 90 110 1996 1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 FSI CAR CEMAC FCV SSA Linear fit 95% CI Source: Edjigu and Kouame (forthcoming) using WGI data. 26 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 9 Accountability in CAR vs. Comparators, 1996–2019 a. CAR has a high score on the civil liberty restriction index b. The lack of civil liberties in CAR contributes to the country’s fragility 7 8 ZAF SDN GNQ ERI SSD 6 CAF Civil librities restriction index Civil liberty restriction (1–7) 6 STP AGO CMR BDI ETH TCD 5 RWA GAB MUS GNB GIN ZWE TGO ZMB MWI COD NGA 4 4 TZA NAM MRT UGA LSO COM BRA SYC LBR SOM MDG MLI 3 GHA 2 MOZ BWA SEN NER BEN SYC 2 CPV 1 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 40 60 80 100 120 FSI CAR CEMAC FCV SSA Linear fit 95% CI Source: Edjigu and Kouame (forthcoming) using Freedom House data. foreign governments, with limited support for independent investment, the absence of a stable mining investment media, and courts are generally inefficient, with limited framework, and the suspension of past mining projects. authority of the government to enforce judicial decisions.13 For example, the Passandro gold project and the Areva As demonstrated in the literature,14 restrictions on civil Bakouma uranium project highlight the risks of investing liberties increase the likelihood that a country is fragile in a country that lacks a strong and stable government. and suffers from conflicts. Moreover, a study by Edjigu and More recent outbreaks of armed military unrest across Kouame (2021) finds that a country’s fragility increases as it the country—even in traditionally ‘stable’ mining zones restricts civil liberties. Restrictions on civil liberty in CAR fuel in the southwest—reveal the precarious political situation and grievances and social exclusion. the very real presence of armed discontent in CAR. Critical to assuring international investors of the mitigation of these risks is the government’s capacity to cement its authority Mismanagement of Natural and control territory, especially in active mining areas, which are part of important international transparency initiatives, Resource Wealth as well as in critical mining areas in the east, which continue to service the income of several large and strategic armed Fragility continues to undermine groups. In the absence of a cohesive governance strategy, the industrial development of the country’s mining sector is mainly made up of artisanal and small-scale mining (ASM) activities. Albeit a critically CAR’s mining sector important source of employment in some rural areas, the wider social and economic benefits of the ASM sector The mining sector has played a critical role in past conflicts remain unrealized because of the illicit trade of artisanally and perpetuating the country’s fragility. CAR is a mineral- mined diamonds and gold. Ongoing, coordinated, and rich15 country, which makes it susceptive to challenges targeted assistance from various technical partners to associated with the so-called natural resource curse.16,17 the government is expected to bear fruit with respect The mining sector suffers from low investor confidence due to institutional and regulatory mining reforms necessary to to insecurity, a lack of available geo-scientific data on the attract responsible, foreign investment in the sector over country, an unfavorable business environment for mining the long term. 13  See the latest Freedom House assessment for an extensive discussion: https://freedomhouse.org/country/central-african-republic/freedom-world/2021. 14  See, for instance, Bertocchi and Guerzoni (2012). 15  Gold, iron ore, uranium, phosphates, nickel, cobalt, copper, columbite-tantalite (coltan), tin, and tungsten. 16  Van der Ploeg, F. 2011. Natural Resources: Curse or Blessing? Journal of Economic literature, 49(2), 366-420. 17  The natural resource curse refers to the correlation between access to natural resources and lower economic growth. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 27 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards Elite capture, corruption, and general mismanagement miners losing their main source of livelihood.22,23 Results have negatively affected CAR’s mining sector since the from a survey conducted by the World Bank in 2018 indicates 1960s.18 Successive external shocks and internal crises that women were disproportionately more affected by the have exacerbated governance challenges that have liquidity crisis than men, noting that without financing to long stymied the development of the sector. Weak public engage in more substantive activities, women were forced institutions, deficient infrastructure, political instability, to take physically grueling low-paying jobs in sectors such and the geographic isolation of many mining regions have as transportation.24 facilitated the looting of diamond and gold mines and encouraged the illicit trade.19 Nearly a decade on from the The mining sector’s value chain is dominated by two central 2013 crisis, there is still widespread insecurity across the patron-client relationships, and capital requirements country, and the government struggles to control more than discourage competition. The first patron-client relationship half of the territory. Recent research reveals that some of is referred to as the collector’s system. It is designed to the strongest emerging rebel groups have moved beyond mitigate artisans’ financing problems in CAR, and it involves simply taxing gold and diamonds to organizing and collectors bearing the risk of artisans by prefinancing controlling the trade to major international markets. This their activities, including materials, food, medication, means that some armed groups are now embedded mining permits, and clothing, in exchange for an opportunity in mineral supply chains rather than benefiting through to buy their minerals below the international market predatory practices (e.g., roadblocks and taxation). price. The second relationship is between the bureaus of Experience from other areas around the world suggests export companies and collectors. Here, export companies that ‘cleaning’ these supply chains will require considerable prefinance (with in-kind resources and cash) the collectors political will and resources from the government to in exchange for an exclusive deal to buy their products. implement due diligence systems that meet the United CAR’s mining market tends to be monopolistic because of States and EU regulations on responsible sourcing. the requirements and installation costs imposed on export companies, which are important barriers to the entry. Unfair Informal artisanal diamond mining activities have left competition between informal and formal mining firms the mining sector and its workers increasingly vulnerable is a huge challenge for the government. There is also an to external shocks over the last two and a half decades. informal market in which artisans sell products they hide from CAR had yet to recover from the effects of the 2008 global recession when the 2012 political crisis hit. The deteriorating collectors. Informal traders (debrouilards) obtain products security situation forced the suspension of CAR from the informally from artisans and sell them directly to exporters Kimberly Process Certification Scheme (KPCS)20 and the (bureau d’achat) or outside the country (Figure 10). Extractive Industries Transparency Initiative (EITI).21 It further caused many mining firms to close their operations, More recently, the impact of COVID-19 on international putting a halt to investments in exploration, legal diamond trade and domestic travel has made the situation in exports, and tax revenues from the mining sector. In eastern the country’s precarious mining sector even worse. The CAR, several mining areas came under the control of armed government had to suspend legal diamond and gold groups, and these areas remain under their control to this exports for few months at the start of the COVID-19 day, which further contributes to the country’s instability. pandemic in 2020. This, in turn, led to a significant liquidity During the 2008 financial crisis and in the aftermath of the crisis for diamond collectors, many of which have not 2012 crisis, the reduction in the number of buying offices been able to re-establish their businesses.25 This situation (and consequently the number of collectors, who depend was exacerbated by other issues such as the significant on their pre-financing) had a considerable humanitarian drop in the international market price for diamonds and impact on local mining communities, resulting in many a disagreement between buying houses and evaluators 18  World Bank. Project Appraisal Document for the Natural Resources Governance Project. http://documents1.worldbank.org/curated/en/823091521079287934/pdf/CAR- PADnew-02212018.pdf 19  Malepli and Chirico (2014) show that road quality and distance from Bangui affect both the likelihood that mines will be looted and the prevalence of cross-border smuggling. 20  The Kimberley Process is a joint initiative by governments, firms, and civil society groups to stem the flow of so-called “conflict diamonds”—rough diamonds used to finance militant groups that are often mined under extremely brutal conditions. See www.kimberleyprocess.com. 21  The EITI is the global standard to promote the open and accountable management of extractive resources. See: https://eiti.org 22  Matthysen and Clarkson (2013). 23  Delve Country Profile Report for CAR. https://delvedatabase.org/resources/delve-country-profile-central-african-republic. 24  Kelly, J., and R. Perks. 2018. A Gendered Assessment of the Impact of the Conflict on the Artisanal Diamond Mining in the Central African Republic: Case Study of Nola, Carnot and Berberati. Background Note (unpublished). World Bank: Washington, DC. 25  2020 annual report from the Directorate General of Mines and Geology. There were 135 collectors in 2020. 28 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 10 reforms, with support from the World Bank and technical Mineral Marketing Chain in CAR partners, to align its mining regime with international best practices. These reforms include: (i) the revision of the Exporters mining code with a technical committee, which is expected to submit a revised mining code to Parliament in July 2021, Minerals following public consultations (to be concluded in 2021); Débrouillards Minerals Collectors (ii) the completion of an Institutional Functional Review of the Ministry of Mines (completed in 2021); (iii) the finalization of a revised mining policy (to be concluded in 2021); (iv) the design of an integrated database management Informal circuit Prefinance Prefinance Formal circuit system for the Ministry of Mines (to be concluded in 2021); and (v) the legal recognition of the KPCS Secretariat through a Presidential decree (already completed). The Presidential decree giving legal recognition to the KPCS Secretariat Minerals Minerals in CAR has been pivotal in unlocking significant financing Artisans from a range of technology partners to further advance the country’s legal diamond exports from compliant zones. Source: World Bank staff elaboration. To improve the performance of the Ministry of of Mining and Geology, the authorities need to redefine its mandates at BECDOR26 on diamond parcel pricing. A global data and provide civil servants with the tools to effectively collection effort led by the World Bank to ascertain the govern the sector. Deficiencies in information management— impact of the COVID-19 crisis on miners reveals that all particularly the lack of an integrated database management diamond miner respondents in CAR reported a near-total system or an online geographic information system-linked collapse of the country’s legal diamond supply chain in mining cadaster—inhibit the government’s ability to plan the second and third quarters of 2020. Although cross- and execute effective mining-sector policies. Across all border smuggling was already common well before the departments and services within the Ministry of Mining and 2013 crisis,27 with as much as 50 percent of CAR’s diamond Geology, there is a lack of human, material, and financial and gold production exiting the country undeclared,28 it is resources. Moreover, ministries and other public agencies thought to have grown significantly since. Some speculate involved in the mining sector do not communicate regularly. There is limited data collection and analysis, and different that upwards of 90 percent of the diamond trade across institutions operate separate and often conflicting databases land borders is illegal. for recording key information, such as the number of licensed mining firms or the scale of fiscal revenues. The regional Directorates of Mines, Geology, and Petroleum report to the The mining sector’s institutional Cabinet of the Minister and not to the Directorate General and regulatory framework is being of Mining and Geology directly, and there is no centralized statistics office to manage and analyze all sector-related improved, which should address data. As a result, no single agency has access to real-time some of the drivers of fragility data to produce comprehensive or authoritative reports on basic sectoral statistics. Recent strong leadership in the mining sector has resulted in the adoption of a pro-reform agenda. The personal The government and other stakeholders continue to show a efforts of the minister of mines cannot be understated. clear willingness to fully resume transparency initiatives The government is committed to implementing a range of in the country. Prior to its suspension, CAR played a leading 26  Bureau d’Evaluation et de Contrôle de Diamants et Or. 27  Many of the persecuted Muslim collectors, who had pre-financed artisanal miners, fled to Cameroon to avoid the escalating violence. Following CAR’s suspension from the KPCS, several buying houses, unable to generate revenue, closed their operations in CAR and established offices in neighboring Cameroon near CAR’s border. Artisanal miners were heavily dependent on collectors for pre-financing. Legal exports of diamonds from CAR were banned, forcing miners who depended on the trade for their livelihoods to sell their products through illicit channels in the informal economy. Several collectors who had fled to Cameroon maintained close business relationships with artisanal miners they had previously pre-financed in CAR. 28  Hinton and Levin 2010; Matthysen and Clarkson 2013. The more favorable export tax for diamonds in neighboring Cameroon and higher premiums on gold in both Cameroon and Sudan also encourage smuggling. Both countries’ central banks hold a monopoly on official gold purchases in the country. Cameroon offers miners an additional 5 percent above the market price, while Sudan offers more than 20 percent. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 29 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards role in the implementation of the EITI in the sub-region. themselves in CAR. In September 2020, government The EITI Secretariat is expected to conduct a more formally recognized the KP Secretariat as the body that will comprehensive in-country review to assess the viability of implement the KP’s operational framework in CAR. Despite implementing the EITI in CAR in 2021. Following significant the easing of the requirements under the KPCS, the formal improvements in the implementation of the KPCS in CAR supply chain for diamonds in CAR has not yet recovered, and since the partial ban was lifted in 2015, the operational over 90 percent of the estimated production of diamonds framework of the Kimberly Process (KP) was further revised in the country is smuggled to neighboring Cameroon or in 2019, which involved moving from a pre-approval process to other countries via the Bangui airport.29 The country’s to a notification process. This has had a positive impact by exports of diamonds are far below pre-ban levels, with reducing the time to export diamonds and allowing for only 50,410.6 carats exported in 2020.30 Production faster recycling of capital for buying houses. In 2019, the remains low compared to past years because of insufficient government further reduced the export tax rate for diamonds financing, a lack of operational buying houses, and a high to 4 percent, further incentivizing buying houses to establish level of smuggling. The Cost of Political Instability: Lack of Economic Opportunities and a Deterioration of the Social Contract and Living Standards Volatile Growth Trajectory GDP growth has averaged barely 1.3 percent, below that of comparators, and the country has never experienced an CAR has been caught in a cycle of recurrent violence. episode of sustained growth. During the period 1960–2018,32 Political instability and violence have shaped CAR’s economy CAR experienced three episodes of growth acceleration over the past forty years. Successive coups led to severe and five periods of growth deceleration, with no growth economic and political crises that unraveled the country’s spells. The first two episodes of growth acceleration were social fabric, displaced over 25 percent of the population, in the 1970s, with an average growth rate of 2.3 percent and accelerated the collapse of state institutions. Between in 1970–74, before it fell to an average of 1.8 percent in 1960 and 2019, CAR experienced two peaceful democratic 1975–1979. The most recent episode of growth acceleration transitions, five coups, and two coup attempts (Figure 11). happened right before the 2013 crisis, with an average Governance and institutions remain weak, and citizens growth rate of 3.1  percent in 2007–12. CAR’s economy lack access to basic services. CAR is characterized by a low has been on a relatively sustainable path since 2015, with population density of 7 people per square km, significantly an average growth rate of 4.1  percent between 2015 lower than the average of 52 people per square km in SSA. and 2019—the highest five-year growth average since The country suffers from high level of poverty, which has independence. only fallen marginally since the 1980s relative to comparator countries, and the share of the population living in extreme Decades of conflict and political instability and volatility poverty increased from 65.9 percent in 2008 to 71.4 percent have shaped CAR’s economy and deteriorated living in 2019. standards. CAR’s GDP growth averaged 1.4  percent between 1960 and 2000, followed by a relatively high As a result, the country has not experienced sustained average growth rate of 3.4 percent over 2001–2010. In the economic growth since independence.31 Since 1960, CAR’s last decade, which can be characterized as “lost decades,” 29  https://www.researchgate.net/publication/333223352_Diamond_Mining_and_Conflict_in_the_Central_African_Republic. 30  2020 annual report from the Directorate General of Mines and Geology. 31  Karakülah and Kouame 2021. 32  Sustained growth periods happen under two conditions. First, it happens when structural breaks occur, which in turn happen when a country time series abruptly changes at a point in time. The changes can be identified as either “growth upbreaks” (if they result in a period of higher growth than before the structural break) or “growth down-breaks” (if they result period of lower growth than before the structural break). The second condition happens during periods that begin with a growth upbreak, followed by a period of at least 2 percent average per capita income growth, which is considered a growth spell. 30 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 11 Between 1960 and 2019, CAR Experienced Two Peaceful Democratic Transitions, Five Coups, and Two Coup Attempts That Led to a Volitive Real GDP Growth 2009 - Clashes between government 2016 - Faustin 1993 - Ange-Felix Patasse 20 and rebels, UN Security Council Touadera 1965 - Dacko ousted by wins presidential elections, 1979 - Bokassa agrees to create a UN peace win a peaceful the army commander, ending 12 years of military rule ousted in a coup building office for CAR election 10 Jean-Bedel Bokassa 0 Percent (%) 2012 - Seleka –10 rebel coalition 1981 - Army commander rapidly overruns 2003 - Rebel leader and former army Andre Kolingba seizes power north and centre commander Francois Bozize seizes power –20 . of country –30 2013 - The presidential palace and the rest of Bangui fell to rebel forces. Michel Djotodia, declared himself President –40 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Authors’ calculations using data from the World Development Indicators (WDI). GDP contracted by an average of 0.7 percent per year, owing to the substantial drop in GDP by 36.7 percent during the Weak Economic and Trade 2013 civil war (Figure 12a). Unlike in peer countries, GDP Diversification Limited Job per capita has been falling in CAR since independence. The country’s average GDP per capita dropped from Creation and Economic Growth above US$600 in the 1960s and 1970s to below US$500 CAR relies heavily on subsistence agriculture and forestry in the 1990s and 2000s, before deteriorating further to activities, although both sectors are underdeveloped. below US$400 during the last decade (Figure 12b). The Since 1991, the agriculture sector has accounted for combination of insecurity and the weak legitimacy of the 50.9 percent of GDP and 80 percent of total employment. state in areas controlled by armed groups has intensified However, the civil war in 2013 reshaped the sectoral social polarization and limited sustained productive composition of GDP. The share of agriculture in GDP dropped activities across the country. from 50.7 percent in 2012 to 32.4 percent in 2019, while FIGURE 12 Political Instability Led to Disappointing GDP Growth and a Decline in GDP per Capita over the Past Decades a. GDP growth has been disappointing and lower than that of comparators b. GDP per capita has been falling, widening the gap with peer countries 10 7,000 8 6,000 5,000 Constant 2010 US$ 6 Percent (%) 4,000 4 3,000 2 2,000 0 1,000 –2 0 1961–70 1971–80 1981–90 1991–00 2001–10 2011–19 1961–70 1971–80 1981–90 1991–00 2001–10 2011–19 CAR CEMAC FCV SSA CAR CEMAC FCV SSA Source: authors’ calculations using World Bank data Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 31 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards the share of services in GDP increased from 30.4 to the country’s export material costs are relatively high. 43.6 percent over the same period (Figure 13a). The presence Transporting timber by road to Cameroon or by river to of several humanitarian agencies, especially the United Pointe Noire in the Republic of Congo is costly. As such, there Nations Multidimensional Integrated Stabilization Mission is an incentive to process materials in the country instead in the Central African Republic (MINUSCA) since 2013, of exporting them. Private companies carry out commercial explains the significant increase in the contribution of the harvesting under management and operating permits. As of services sector to GDP. Moreover, the main reason for 2019, CAR’s 14 management and operating agreements the decline in the contribution of agriculture to GDP was the consisted of 11 active timber companies and 3 other deteriorating security situation in and after 2013, especially companies not actively operating in the country.33 These in rural areas that were especially affected by violence companies often act as local social service providers, from armed groups. CAR’s agriculture sector has been and forestry taxes are important for local communities’ particularly vulnerable to the various episodes of conflict, budgets. violence, and coups since independence in 1960. Despite the decline in the agriculture sector’s share in GDP, its share Conflicts have created substantial barriers to trade. in total employment has remained relatively unchanged. Armed conflict increases the transaction costs of trade through the destruction of lives, property, infrastructure, Timber, cotton, diamond, and coffee accounted for land, and transportation networks, by restricting the 80 percent of exports in 2000–18. CAR is highly dependent movement of people and their ability to undertake trade- on natural resources and commodity exports, with timber related activities, through more restrictive border control and extractives dominating the country’s export structure measures,34 and through the taxation of trade by armed (Figure 13b). Diamonds were the most significant contributor militias. This limits the ability of producers to access critical to the country’s total exports until they were replaced by inputs such as seeds and fertilizers and restricts their access timber in the beginning of the 2000s. Timber exports are to markets to sell their produce, severely constraining the primarily based on the export of logs and, to a lesser extent, economies of border regions. According to Schouten and sawn wood, accounting for 62  percent of the country’s Kalessopo (2017), mechanisms of extorsion implemented total export earnings in 2000–18. Due to CAR’s landlocked by ex-Seleka (one of the numerous armed groups) in CAR location and its relatively poor transportation infrastructure, generate around EUR 6 million per year (about 0.3 percent FIGURE 13 CAR Relies Heavily on Subsistence Agriculture and Forestry Activities a. The share of agriculture in GDP continues to decline, although the b. . . . and cotton, coffee, diamond, and timber account for sector employs about 80 percent of the labor force . . . 80 percent of exports. 100 80 Diamond 10% Percent (%) 60 Others 20% 40 20 Coffee Cotton 0% 8% 0 Employment Share of real GDP Employment Share of real GDP Employment Share of real GDP Employment Share of real GDP Employment Share of real GDP Employment Share of real GDP Employment Share of real GDP Timber 62% 1991 1995 2001 2005 2011 2015 2019 Agriculture Industry Services Source: Authors’ calculations using the UN COMTRADE dataset 2000–18. Source: MFMod, ILO, and authors’ calculations. 33  Cadre national d’investissement REDD+ 2020–2025 de la RCA, Ministère de l’Environnement et du Développement Durable (2019). 34  For example, Calì and Oliver (2013) find that by increasing the costs of production and mobility, Israel’s checkpoints in the West Bank have a significant detrimental effect on trade with a 17-percent drop in the share of sales of West Bank firms outside their areas of business. 32 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards of GDP in 2019) by taxing economic activity in areas under to a collapse of global diamond prices), and governance their control. and transparency issues in the diamond industry. Between 2000 and 2018, CAR’s total exports were reduced by CAR’s exports are among the least diversified globally, half, from US$237.7 million in 2000 to US$121.0 million and the country has become less diversified during the in 2018 (Figure 15a). Exports reached their lowest point last decade. The country’s level of economic diversification, at US$74 million in 2015, as renewed insecurity inhibited measured by the number of trade partners and products economic activities. The export of wood products increased exported, is lower than the average of SSA, CEMAC, and progressively over the last two decades, but it failed to countries suffering from FCV. CAR exports 50 products compensate for the revenue losses from the fall in diamond (6-digit Harmonized System level)—less than one-fourth of exports. The decline in diamond exports started several the average of SSA—to 28 countries—nearly half of the years before the 2013 crisis. While diamonds were the most average of SSA and 10 markets fewer than the average significant contributor to CAR’s total exports from 2000 of FCV countries (Figure 14a). The Herfindahl-Hirschman to 2004, diamond exports declined by 70 percent (from Index (HHI), which is a measure of the dispersion of trade US$169 million to US$47 million) during this period. The value across trade partners, shows that CAR’s level of trade collapse in the export of diamonds was compensated by an diversification has declined over time. Between 2010 and increase in the export of timber, which has been the most 2017, its score on the HHI increased, an indication of significant contributor to CAR’s total exports since 2005 the country’s failure to diversify the range of products it (Figure 15b). produces and exports (Figure  14b). CAR’s low level of export diversification is also an indicator of its dependency CAR’s export structure remains dominated by mining and on trading partners. Its vulnerability to trade shocks is high, forestry. The country’s position in the product space is particularly as most of its export products are going to a relatively sparse, peripheral, and scattered, but there are limited number of markets. emergent activities and possible future diversification paths (Figure 16).35 In 2000, CAR’s product space was quite Weak export diversification has led to volatile export empty at the center, mainly due to the dominant position revenues. CAR’s exports have declined substantially since of diamond exports, accounting for 72.5 percent of total the 2000s, mainly due to the combination of political exports in 2000. Diamonds have a peripheral location in instability, the global economic crisis in 2008 (which led the country’s product space (purple circle in Figure  16), FIGURE 14 Export Diversification in CAR a. The country’s exports are among the least diversified in the world, b. CAR’s exports have become more concentrated during the with limited access to export markets and products last decade relative to neighboring countries. 250 0.50 222 Number of products and markets Herfindahl-Hirschman Index (0−1) 200 0.40 150 0.30 99 100 90 0.20 50 50 44 50 35 0.10 28 0 0.00 CAR FCV CEMAC SSA 2010 2011 2012 2013 2014 2015 2016 2017 Number of products Number of markets CAR ROC DRC Cameroon Source: Authors’ calculations using data from MFMod and ILO. Source: Authors’ calculations using the UN COMTRADE dataset.  The product space analysis helps to identify sectors and goods that have large linkages to other sectors and a significant impact on upgrading domestic capacity. The colored 35 nodes represent CAR’s export with a comparative advantage that can be qualified as “revealed” (greater than 1 in both years). Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 33 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 15 CAR’s Exports, 2000–2018 a. There has been a substantial decline in export revenues due to the b. While the export of wood products has increased progressively, it has failed to collapse of the diamond sector. compensate for the revenue losses from the fall in diamond exports. 250 180 160 Total exports value (million US$) 200 140 Exports value by products 120 150 100 80 100 60 40 50 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Diamond Timber Cotton Coffee Source: Authors’ calculations using data from UN COMTRADE, 2000–2018. meaning that they do little to facilitate diversification into Weak economic diversification has limited CAR’s ability other products. The next highest export products, including to sustain growth, create jobs, and reduce vulnerabilities. wood, raw cotton, and coffee, are also located near the The country’s heavy dependence on subsistence agriculture periphery (red, green, and yellow circles, respectively, in and the export of a few commodities makes the economy Figure  16). CAR’s product space in 2018 provides some vulnerable to adverse shocks and undermines its ability to signals as to emergent activities and possible future paths achieve long-term sustainable development and strengthen of diversification. For example, the country’s exports that resilience. Exports have declined substantially over the year consisted of wax, furniture and parts, machines for last two decades, mainly due to a combination of political working minerals, metallurgy, paints and varnish, and instability, the 2008 global economic crisis, and governance centrifuges, as well as various agricultural products such and transparency issues in the diamond industry. Moreover, as tomatoes, carrots and turnips, legumes and avocados, CAR’s participation in global value chains (GVCs) is limited pineapples and mangoes, and other fruits. and has been declining over the years. Participation in FIGURE 16 CAR’s Product Space 2000 2018 Source: The Observatory of Economic Complexity (MIT). 34 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards GVCs enables developing countries such as CAR to take upwards, but not on all points. This suggests that the benefits advantage of developed countries’ advanced industries of growth were not shared equally among the population. rather than having to build up their own industrial capacity.36 Between 2003 and 2008, the share of income among GVC participation can generate quality jobs, increase households in the top 20 and 40 percent of the income productivity (through scale effects), and reduce poverty by distribution increased, while it fell among households in the boosting income and productive employment.37 bottom 20, 40, and 60 percent of the distribution (Figure 18). Moreover, CAR’s performance on the inclusiveness index shows that the inclusiveness of economic growth deteriorated Deterioration of the Social between 2010 and 2014. While it has been gradually improving since 2017, it remains below the 2008 level. Contract and Living Standards Impact on poverty and inclusiveness Unemployment and income inequality Recurrent political instability has led to volatile GDP and Lack of economic opportunities and youth unemployment are income growth resulting in minor progress in reducing also key drivers of fragility. CAR’s youth unemployment rate extreme poverty in CAR relative to peer countries. An (share of total labor force aged 15–24) was 11.5 percent in estimated 71.4 percent of the population lived below the 2018, higher than that of many SSA countries (Figure 19a). international poverty line (US$1.90 per day, 2011 PPP) Lack of economic opportunities fuels frustration and in 2019, down from 80.8 percent in 1983. Compared to grievances among the affected population and is a key driver the average of CEMAC, SSA, and countries affected by of conflict and state fragility (Bertocchi and Guerzoni 2014; FCV, the reduction of poverty in CAR has been marginal Edjigu and Kouame 2021). By decreasing the demand for ( Figure  17 ). Although the country’s poverty rate has labor, unemployment reduces the opportunity cost of joining decreased, the number of people living in extreme poverty a rebellion (Collier and Hoeffler 1998). The costs associated increased from 1.9 million in 1983 to 3.4 million in 2019. with armed conflict include the labor opportunity costs and Moreover, economic growth has not been inclusive over economic disruptions caused by warfare. Therefore, efforts the last decades, despite some progress over the past year. aimed at stabilizing CAR need to include job creation and Economic growth in CAR shifted the indifference curve38 economic transformation initiatives. FIGURE 17 GDP Growth and Inclusiveness Index, 1961–2019 a. Economic growth in CAR been and lower than in comparator countries. b. The share of people living in extreme poverty has increased in CAR. International poverty line, US$1.90 per day, 2011 (%) 10 90 8 Average GDP growth, percent (%) 80 Share of people living in extreme 6 70 60 poverty (%) 4 50 2 40 0 30 20 –2 1961–70 1971–80 1981–90 1991–00 2001–10 2011–19 1983 1988 1993 1998 2003 2008 2013 2015 2017 2019 CAR CEMAC FCV SSA FCV SSA CEMAC CAR Source: Authors’ calculations using data from PovcalNet 2019. Source: WDI and authors’ calculations. 36  World Development Report 2020. https://www.worldbank.org/en/publication/wdr2020. 37  See the World Development Report (2020) for an extensive discussion on GVC participation, quality jobs, and productivity. 38  The indifference curve connects points on a graph representing different income share to highlight the inclusiveness of GDP growth. See Anand et al., (2013) for extensive discussion. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 35 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards FIGURE 18 Economic Growth Has Not Been Inclusive Over the Last Decades, Despite Some Progress a. CAR’s indifference curve has shifted upwards, but not on all points. b. CAR’s score on the Inclusiveness index has been falling since 2013, but it remains above pre-2013 levels. 70 1.0 60 0.9 0.8 50 Inclusiveness index (0–1) Income share (%) 0.7 40 0.6 30 0.5 20 0.4 10 0.3 0 0.2 Bottom 20 Bottom 40 Bottom 60 Top 40 Top 20 0.1 1992 2003 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Authors’ calculations using WDI, MPO, and POVCALNET data. Source: Authors’ calculations using WDI, PMO, and POVCALNET data. Note: The horizontal axis shows the population by income group (with the leftmost Note: The inclusiveness index is an average of the three min-max normalizations being the bottom 20 percent and rightmost the top 20 percent). The y-axis shows of the three inclusive growth indicators: poverty, inequality, and the inverse the mean income share of each corresponding income group during the latest employment-to-population ratio. Ramos et al. 2013. surveys. Income inequality can contribute to the deterioration of levels of inequality reduce social bonds and cohesion. They the social contract. A commonly used indicator of inequality argue that income inequality, by aggravating disparities is the Gini index, which varies from 0  percent (perfect and weakening social cohesion, presents a threat to a equality) to 100  percent (perfect inequality) (World Bank country’s social fabric. It also reduces the capacity to 2020). CAR’s Gini index increased from 43.6 percent in 2003 change extractive institutional practices against the poor. to 56.2 percent in 2008 (latest available data) (Figure 19b). Collier et  al. (2003) find that some of the root causes of Income inequality translates into disparities in access to violent conflict are related to the inequality of economic essential services and fewer opportunities to escape the opportunities, particularly low and unequally distributed fragility trap. Wilkinson and Pickett (2010) find that higher per capita income. FIGURE 19 Youth Unemployment and Inequality Contribute to CAR’s Fragility and Conflicts a. Youth unemployment is positively associated with fragility. b. Inequality is also positively associated with fragility. 35 60 NAM HTI ZMB CAF (% of total labor force ages 15–24) BWA SOM Unemployment, youth total 25 AGO GNB 50 COG Gini index SSD BEN CMR SSD COM LSO 15 MLI MWI GHA ZWE RWA GMB TGO TCD UGA MDG CAF CPV COD ERI DJI CIV SEN TZA KEN COM MWI SLE ZWE 40 SEN MOZ PRK GNB BDI BFA GAB 5 BEN TZA UGA GIN GMB MUS MDG LBR ETH BDI AFG TCD BFA LBR SLE TGO NPL NGA ETH RWA NER SDN NER GIN MLI MRT 30 –5 55 65 75 85 95 105 115 70 75 80 85 90 95 100 105 110 115 FSI FSI Linear fit 95% CI Linear fit 95% CI Source: Edjigu and Kouame (forthcomi-ng) using World Bank data. Source: WDI and authors’ calculations. Note: The Gini index reflects the latest available data for each country. 36 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards Escaping the Fragility Trap: Pathways Out of Fragility and Implications for Reform and Development Refocusing the Political successful implementation of peace agreements and sustainable conflict resolution require a range of power- Landscape on Development sharing measures.39 On the political front, power sharing and Restoring the Authority implies the involvement of key protagonists in a conflict in a political dialogue and organization. This implies the of the State redistribution of power among all rival parties, including unity governments at the national or local level. In the context Restoring the authority of the state and of CAR, political power sharing needs to be conducted with power sharing caution to avoid rewarding violence and focus on elite pacts. On the economic side, power-sharing arrangements consist CAR’s political landscape needs to focus on escaping of providing economic opportunities to all citizens and fragility. Past attempts to address the political crisis and groups involved and affected by conflict, as well as sharing instability were unsuccessful mainly because of mistrust the country’s economic resources equitably between groups between the state, armed groups, and citizens; a focus on in a way that is intended to address the political, social, temporary containment strategies for conflicts and violence geographic, and economic divisions of conflict. Finally, on instead of addressing their root causes; and unfished reform the military side, power-sharing arrangements translate into agendas. To make sustainable progress toward escaping the implementation of the APPR and the DDRR agreement the fragility trap, CAR needs to revamp its political landscape with the participation of armed groups. and address the deep roots of past political crises. The political process also needs to include representatives of local communities, religious leaders, and armed groups, as Job creation, business environment, this could help to restore the authority of the state, improve and economic diversification trust, and repair the social contract. The authorities need to protect civil liberties and property rights as well as ensure The authorities need to focus on creating inclusive economic the impartial enforcement of contracts to establish the opportunities and jobs to increase the opportunity cost foundation of a stable democracy and achieve sustained of conflict. Unemployment, social exclusion, feeling of improvements in living conditions. The 2020 presidential and frustration, and grievances are among the main drivers of legislative elections were a missed opportunity to strengthen fragility and conflict. Several studies have demonstrated the authority of the state with a second consecutive and that employment increases the opportunity cost of joining smooth democratic transition. Still, the upcoming local armed groups.40 In an environment such as CAR with a elections in 2021 and 2022 could provide an opportunity high level of unemployment, job creation, especially for to improve local governance and advance much-needed the youth, is critical to escape fragility. Providing economic decentralization. Avoiding past failures and implementing opportunities and jobs can disincentivize ex-combatants the 2019 peace accord, especially the complete DDRR and potential insurgents from joining armed groups, and it agreement, is critical to paving the way out of fragility. As can help build social cohesion in fragmented communities. demonstrated in previous crises, the lack of implementation Given the number of challenges facing CAR, policymakers of peace agreements and the failure of demobilization, should prioritize agricultural infrastructure development, disarmament, and reintegration processes have allowed targeting rural and marginalized communities, as the armed groups to rally around their most hardline leaders. agriculture sector still employs more than 80 percent of the labor force. To facilitate the integration of ex-combatants Power sharing beyond the country’s elites should be an into the labor market, the country will need invest in human integral part of an inclusive political landscape. The capital development, especially vocational skills. 39  Hartzell & Hoddie 2003, 2007. 40  Collier and Hoeffler 1998. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 37 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards Promoting private sector development is crucial to create country’s socioeconomic development targets. Realizing jobs and improve living standards. Reforms and interventions the potential socioeconomic benefits of mining in CAR would in the private sector could focus on developing agricultural require continued efforts to reinforce institutional stability value chains (including mini-value chains) such as cash crops, and promote strong sectoral oversight. First, reforming livestock, artisanal mining, and forestry; increasing access to mining laws and regulations based on international best finance; and attracting foreign direct investment. Moreover, practices would provide the necessary framework for business environment reforms to improve market-based sustainable resource management. Second, strengthening competition and competitiveness can foster stability, peace, institutional capacity would enable the government to and social cohesion through better jobs, tax generation, and oversee and manage the mining sector. Finally, supporting the provision of public goods and services. To improve the formalization in the artisanal mining sector would enhance business environment, CAR’ authorities need to: (i) address socioeconomic development outcomes. key bottlenecks such as inadequate access to reliable electricity, limited access to markets, lack of property rights, Reform the legal and regulatory framework and political risks, as well as cross-cutting governance issues; (ii) strengthen government capacity; and (iii) deploy of the mining sector the state across the territory. A revision of the country’s mining policy would allow the government to define the country’s long-term vision Economic diversification could also be a pathway out of for the mining sector, rationalize ministerial objectives fragility.41 CAR suffers from low economic diversification and activities, and coordinate efforts to regulate the and is heavily dependent on natural resources, making its sector across ministries. Targeted background studies, economy vulnerable to external shocks. Evidence shows in addition to a comparative legal review of neighboring that the structure of an economy affects the likelihood jurisdictions, would inform the government’s proposal to of conflict and fragility.42 For example, less diversified revise the mining policy. Before the proposal is submitted countries that are dependent on natural resources are likely to the legislature, there needs to be extensive stakeholder to face episodes of conflict. In CAR, armed groups finance consultations on the proposed revisions, including the their activities in part with revenue from natural resources. implementing modalities. The findings and recommendations Access to natural resources reduces the opportunity cost of the institutional functional review of the Ministry of of rebellion, which in turn exacerbates civil conflicts. Mines and Geology43 will provide important inputs on the A high level of dependency on natural resources can also priorities for sector development during the revision of widen income inequality and create a feeling of exclusion the mining policy. among certain segments of the population. Economic diversification could, therefore, be a pathway to address The authorities are in the process of reviewing the Mining the fragility trap and escape the vicious cycle of violence Code. A national committee has been appointed to review by supporting structural transformation and job creation; the Mining Code, and it is supported by international legal generating more significant economic opportunities; and consultants through the World Bank’s Natural Resources reducing inequality and grievances, frustration among the Governance Project. The technical committee is scheduled population, and conflicts. to submit a revised Mining Code to Parliament at end-July 2021, following public consultations on the draft version. The new Mining Code is expected to be aligned with Strengthening the Management international best practices, the 2016 Constitution, and the government’s commitments outlined in the Peace and Allocation of Mineral Agreement of February 2019. Lessons from other SSA Wealth and Public Resources countries suggest that a successful reform effort requires: (a) experienced international lawyers who can provide the CAR’s fragility has an adverse impact on the ability of government with a cross-country perspective on different the government and development partners to achieve the legislative options; (b) a formal consultative process involving 41  World Bank Group. November 2019. “Central African Republic Economic Update: Strengthening Domestic Revenue Mobilization to Sustain Growth in a Fragile State.” World Bank, Washington, DC. 42  Collier and Hoeffler 1998, 2000a. 43  Funded by the World Bank’s Natural Resource Governance Project. 38 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards the private sector and civil society; and (c) an open dialogue A fully integrated database management system should forum designed to actively solicit input from miners and be established with clear reporting requirements, and affected communities. methodological standards should be issued to regional offices. Many of the challenges faced by the Ministry of The government should create a transparent licensing Mines and Geology in managing and reporting on the system based on a comprehensive mining cadaster. The mining sector could be resolved if government officials cadaster should be a mining registry that encompasses had access to real-time data. Improving data management all licenses issued in the country (artisanal mining, systems would enable public agencies to monitor sectoral semi-mechanized, exploration, and mining concessions). developments and share knowledge with other government International best practices also call for establishing a agencies and the general public. Data management is dedicated administrative unit tasked with managing all crucial to sectoral transparency and the KPCS and EITI stages of the licensing process, from application and award processes, as well as to improve ministerial oversight of to eventual expiration or cancellation. The cadaster will the mining sector. A reliable and up-to-date database on need be in line with the procedures outlined in the Mining diamond and gold production and their trade is essential Code and accompanying regulations for the application, to verify the shipments of diamond and gold, and it would evaluation, granting, and compliance monitoring of mineral foster greater transparency and oversight of the supply rights and related permits. chains for diamonds and gold. The United States Agency for International Development’s AMPR project supports the government in improving its compliance with the KP, Strengthen institutional capacity ensuring the responsible sourcing of gold along the supply The government has shown a strong interest in improving chain, and assessing the links between ASM and increased the governance of the mining sector through more effective socioeconomic development. information management. It also plans to create both a cadaster system and an integrated database management The authorities need to improve the capacity of the Diamond system as part of the World Bank’s Natural Resources and Gold Assessment and Control Office to properly value diamond and gold exports to ensure the government receives Governance Project. These efforts should improve the its fair share of tax revenues. The government wants to government’s capacity to monitor and manage operators, collect more tax revenue from the mining sector, and it realizes analyze and communicate production and export statistics, the importance of gold over diamonds in generating revenue. and assess the effectiveness of outreach programs, such The EU-funded GODICA project is providing technical as the formalization of artisanal miners. Additionally, the assistance and capacity building support to the Diamond institutional functional review of the Ministry of Mines and Gold Assessment and Control Office to help it to better and Geology will help the authorities identify key reform value gold and diamond consignments for export. areas and gaps in institutional capacities that need to be strengthened. Incentivize formalization and support the KPCS The Ministry of Mines and Geology should consider using the findings of the institutional functional review to A national action plan to strengthen the diamond chain of improve the capacity of monitoring agencies to oversee, custody was recently adopted. A key objective of updating monitor, and regulate the sector. Organizational relationships the government’s regulatory and policy framework governing should be precisely defined, with clear mandates for each the mining sector is to have international trade restrictions department. Staff skills should be matched against job entirely removed, including the partial ban on diamonds descriptions to encourage meritocracy and professionalism, from CAR by the KP and the United Nations sanctions and staff performance should be thoroughly assessed. targeting supply chain actors. Since 2016, the government Deficiencies in human, material, and financial resources has, with the help of donors, made progress in creating need to be assessed, and resource constraints need to “compliant zones” to end trade restrictions, which reduce be addressed accordingly. Tailored training programs tax revenue. The 2020 national action plan for strengthening could be designed to fill critical institutional knowledge the diamond supply chain includes measures to incentivizing and skills gaps. formalization, strengthening the cooperative system,44 and  There has been a strong push by the government to enhance the cooperative system by reforming and restructuring the National Union of Cooperatives (UNCMCA), which 44 underwent a leadership change in 2020. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 39 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards improving the law enforcement framework to combat fraud and smuggling. The government has also partly Building a Social Contract privatized the former state-owned enterprise COMIGEM, by Improving Trust and which has been capitalized. Addressing Grievances There are many socioeconomic benefits to formalizing Inclusive-enough coalitions and dialogues ASM. These include but are not limited to: (i) increased tax revenues; (ii) stronger oversight; (iii) improved transparency CAR could benefit from a continues national dialogue and traceability of diamonds and gold along the supply and reconciliation process. Many African countries have chain; and (iv) better information about the challenges had a national dialogue in varying political contexts and and needs of communities and operators in the ASM environments, ranging from Benin in 1991 to Tunisia in sector. Policymakers should work to progressively formalize 2015. The national dialogues in Tunisia, South Africa, and the ASM sector through a combination of targeted measures Rwanda are among the most successful and helped these and strict oversight. The government needs to assess the countries escape fragility and recurrent conflicts. CAR could barriers to formalization and legal registrations. Increasing learn from the experience of these countries and stop the the number of registrations of ASM sites would strengthen current permanent stop-and-go approach to national policy the operational framework of the KPCS in CAR and dialogues. While the 2008 IPD between the government enhance the traceability of minerals. Efforts to increase and some armed groups was a good initiative, it was registrations should initially focus on: (a) areas with the seen as elite-driven and a way to grab power, and most highest concentration of ASM; and (b) areas most affected of the commitments and reforms agreed upon were not by fraud. Electronic tablets could be used to capture implemented. To be successful, national dialogues need registration data, including details on the individual artisanal to be inclusive and engage representatives of diverse and small-scale miners; the location of the mining sites; and groups such as religious leaders and representatives of information from the miner’s registration books. Digitally civil society, opposing political elites, and armed groups. linking the artisans’ registration books, the collectors’ Inclusive national dialogues could pave the way to establish notebooks, and the buyers’ bordereaux would be a first step trust, facilitate an honest exchange over differences, and in supporting the government’s action plan for reforming acknowledge diverse political interests. They could also the diamond supply chain. bring together different groups into a working coalition to put the country on a path toward reconciliation and social Over the long term, the industrial mining sector has the healing. potential to significantly contribute to employment, infrastructure development, and tax revenues. Natural Inclusive-enough coalitions and dialogues are crucial to resources have been linked to conflicts and weak governance restore trust and confidence. Before CAR can achieve a over the past decades, highlighting the natural resource comprehensive institutional transformation through political curse. However, this is not predetermined. Accompanying reforms and effective decentralization and service delivery, measures such as improved transparency and accountability the government needs to restore and build the public trust as well as investment in jobs could reverse the curse into and confidence in state institutions. This can be done through an opportunity. Security has proven to be a necessary inclusive-enough coalitions. Inclusive-enough partnerships pre-condition for attracting investment in many countries. and national dialogues engage a broad segment of the Successful resource-endowed countries attract investments society, including community, business, civil society, and by ensuring their policy, legal, regulatory, and institutional opposition leaders (World Bank 2011). This is necessary frameworks are clear, consistent, and predictable. Moreover, to restore confidence, transform institutions, and create they have clarified the roles and responsibilities of continued momentum for positive change. At the national government agencies and investors alike, backed by a level, inclusive-enough coalitions and dialogues between transparent, non-discretionary set of rules and decision- the government, citizens, and external actors (e.g., making processes. In 2020, the government organized the development partners and investors) can generate SEMICA conference to engage industry representatives and national support for major development goals. At the attract investment into the mining sector. In the short term, local level, the involvement of community leaders and the authorities need to prepare the structural foundation local civil society organizations can help the government for becoming an attractive jurisdiction for investment over identify priorities and deliver much-needed public goods the long term. and services. 40 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards CAR should focus on reforming institutions that ensure and the development of commercial agriculture, including citizens are secure and have access to judicial services. agribusiness. The experience of most former fragile countries shows that prioritizing institutional reforms that address challenges The authorities need to address spatial disparities between related to security, justice, and jobs is crucial to escape Bangui and provinces that foster a perception of social the fragility trap. The authorities in CAR have yet to adopt exclusion. There are significant disparities between Bangui significant reforms in these areas. The first institutional and the rest of the country. Most of the government’s policy reforms should focus on ensuring state security to build a decisions are focused on Bangui, where the provision of social contract between citizens and the government. The goods and services is concentrated. Several provinces have state needs to protect the population and centralize the been economically and politically neglected, leading to country’s fragmented security services, which sometimes deep-seated grievances and a conducive environment for operate without legitimacy and violate human rights. Efforts the emergence of armed groups and conflict. A sustainable to reform the security and justice systems also need to be political landscape will be hard to reach when the distribution cognizant of gender issues and the inclusion of women of benefits is inconsistent with the country’s power in decisions related to security and justice. Increased distribution. The economic and political outcomes of CAR’s participation of women in security and justice reforms could institutions are unsustainable over time, and it is, therefore, provide valuable insights into the challenges faced by imperative to tackle spatial disparities both to help prevent women in CAR. It could also enhance women’s access to conflict and to strengthen the social contract. judicial services, reduce incidents of sexual misconduct, and improve citizens’ trust in the government’s ability to Moreover, rent-seeking, elite capture, and corruption remain ensure security and justice. pervasive in CAR and need to be addressed. For decades, elites and armed groups have exploited the country’s natural resources. Primary export commodities, including gold and Addressing grievances, inequality, and corruption diamonds, remain mainly informal, facilitating corruption and capture. While there are anti-corruption regulations, Providing public goods and services, especially in the social there is still a high level of mismanagement, fraud, and lack sector, is crucial to restore the legitimacy of state authority. of transparency surrounding the country’s natural resources. The provision of public service delivery could signal the CAR’s courts and its justice system are inefficient and presence of the state and improve social cohesion. In CAR, politicized, and existing laws are not enforced. Increasing the authorities can build state legitimacy by: (i) constructing the transparency of budget and expenditure information and rehabilitating basic infrastructure (e.g., roads, water and is an important step toward reducing corruption and rent sanitation, electricity, and telecommunication); (ii) providing seeking. Involving the local community and civil society social services (e.g., healthcare, education, and preventive organizations to combat corruption is also essential. For services); and (iii) implementing income-generating activities. example, the government could introduce tools such as participatory public budgeting and public expenditure Moreover, addressing grievances, inequality, and corruption tracking surveys to alleviate corruption, elite capture, and is essential to build a social contract. The vicious cycle rent seeking while increasing accountability. of fragility, inequality, and poverty has resulted in public frustration and mistrust. Unless these grievances are addressed, armed groups will continue to exploit them. National collective understanding and inter-faith Potential urgent measures that the government should religious dialogue consider include: (i) expanding public services and assistance to the most vulnerable, including IDPs, youth-at- The authorities should consider fostering a national risk, and food insecure households; (ii) supporting farmers collective understanding among all ethnoreligious groups. and pastoralists to increase the productivity of subsistence During the successive conflicts in CAR, rebel groups and farming and pastoralism; (iii) promoting income-generating political elites have divided the society along ethnic and activities; and (iv) improving access to finance and rural regional lines. For example, in the recent conflicts, the Anti- connectivity. Addressing grievance would also require Balaka and Séléka groups used religion (Christianity and a carefully conceived agricultural land reform that will Islam) to rally their supporters and expand their influence. To secure land titles to avoid fueling future conflicts. Such a build confidence among ethnoreligious groups, CAR needs reform, along with the provision of strategic infrastructure, to stop the divisive rhetoric and take steps to strengthen could trigger the transformation of the agriculture sector the national identity. Also, the country must establish positive Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 41 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards norms and create trust and a social contract between ethnic emphasized strict accountability, broad ownership and groups. Though the group dynamics are different, the goal-setting, adaptation, and innovation.47 Rwanda’s strong authorities could consider the experience of South Africa’s policy institutions, combined with home-grown solutions, “rainbow nation” to unify groups and foster a sense of have enabled it to escape the fragility trap and achieve national identity.45 sustainable economic growth. Establishing an interfaith platform will be essential to ensure an effective national dialogue, heal the religious Accountability and broad ownership divide, and foster stability in the country. In CAR, local Rwanda’s post-conflict policies and institutions emphasize priests, pastors, and imams can have a unique role in conflict national dialogues, accountability, and a zero-tolerance stabilization because many live among armed groups. They approach to corruption. Public officials in the country are also have significant local authority and trust compared to vulnerable to dismissal at even a hint of transgression. Since politicians and are usually seen as less confrontational, 2006, government workers have been required to sign an fairer, and more impartial than many other actors. They annual performance contract under Imihigo (“promise” could facilitate local peace and security dialogues, broker or “pledge”). The contract lists annual work objectives, freedom of movement agreements, and play an essential and workers can be dismissed if they don’t meet their role inter-community mediation. For example, under the objectives.48 To promote ownership and belongingness, local interfaith platform in CAR’s southwest, religious leaders Rwanda has an event called Umushyikirano (National act as primary mediators and facilitate dialogues between Dialogue) that brings the entire population together to opposing armed groups in the area. This platform needs to discuss the country’s development progress. The event, be expanded to other regions. which is a home-grown solution to build public trust, creates an opportunity for the public to provide feedback to the government on ongoing or planned programs in terms of meeting the priorities of the people. The government Learning from Countries that is also encouraging local political ownership through its National Decentralization Policy. Local governments are Escaped the Fragility Trap: empowered to deliver core public services such as health, Rwanda education, water and sanitation, and agricultural services. Devolution fosters local ownership and participation, and CAR could learn from Rwanda’s home-grown institutions it has facilitated Rwanda’s escape from the fragility trap, that emphasize strict accountability, broad ownership as it combines ownership, accountability, and control. and goal setting, adaptation, and innovation. Two decades Umuganda (National Service) has also been a key tool to ago, Rwanda was one of the most fragile countries in the rebuild social cohesion. On the last Saturday morning of world. Up to 1 million people were killed in less than four each month, Rwandan residents engage in community months during the Rwandan Genocide in 1994. Following service such as building, repairing, and cleaning roads or the civil conflict, the country’s infrastructure, civil service, houses for the poorest segments of the community. and social structures were devastated. The post-conflict government, with help from the international community, Rwanda’s strategic use of international aid was decisive adopted a unique approach to reconstruct and rebuild in its success. Initially, foreign assistance represented a part of the social fabric with policies and institutions large share of the country’s public budget. However, the that enabled the country to overcome past conflicts and government was primarily in charge of how assistance should fragility. Today, Rwanda is one of Africa’s fastest-growing be used, and it established coherent coordination and economies, outperforming many other countries, including accountability structures. The government has even been fragile states, with solid and stable economic growth over willing to reject international assistance it deems unhelpful. an extended period.46 After the initial period of stabilization, The authorities have also emphasized “what works” rather Rwanda developed a new institutional framework that than imitating traditional development models. 45  Gibson, 2006 46  Putzel 2009; Redifer et al. 2020. 47  IMF 2020. 48  IMF 2020. 42 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards BOX 2 CAR Can Learn Important Lessons from Rwanda’s System for Appraising and Selecting Large Public Investment Projects Rwanda is widely celebrated for its system of appraising and selecting large public investment projects. For projects above a certain threshold (about US$750,000) and public-private partnerships, they follow the following steps: I. Prepare feasibility studies covering technical, IV. Make recommendations on financing, financial, social, environmental, and economic including whether and to what extent the aspects; private sector could be involved; and II. Assess feasibility studies monthly by an V. Prioritize projects based on the evaluation investment committee chaired by the Ministry scores for annual and medium-term budget of Economic Planning and Finance; planning. III. Evaluate each project according to specific A similar process is in place for local government criteria with a quantitative score, including social projects, assessed by a district investment advisory benefits, economic returns, and synergies with committee. The Rwanda Development Board approves other ongoing projects; public-private partnerships and joint ventures in consultation with the Investment Committee. Public Investment and financial and growth-enhancing public infrastructure (e.g., electricity, gender inclusion water, and roads); and (iii) introducing greenfield enterprises in sectors with strong potential, taking into account the Rwanda’s public investment was carefully selected and country’s landlocked geography, low labor productivity, directed to restructure the economy toward new activities and high input costs. The investment areas are carefully with higher returns to productivity and growth. Rwanda selected based on their robustness to facilitate business has channeled significant public resources to improving start-ups or new economic activities in higher value-added human capital development, building growth-enhancing sectors, improve education outcomes, reduce input costs, infrastructure, and developing higher-value economic and expand access to markets (Box 2). activity in areas of comparative advantage.49 The authorities have focused investment spending in three main areas: CAR could follow Rwanda’s strategy to improve access (i) improving labor skills via health and education; (ii) creating to finance, especially for women and youth. Rwanda’s 49  IMF 2020. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 43 CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards target of 90 percent financial inclusion by 2020 was almost associated with a more secure and stable state.52 Rwanda is achieved when it recorded 89 percent financial inclusion an example of gender equality in SSA. In 2020, the country in 2016. To achieve this goal, Rwanda has implemented ranked in the top 10 for gender equity globally and was several strategies,50 including: (i) expanding microfinance the most gender-equal country in SAA. The reasons for activities, particular through the Umurenge SACCO;51 Rwanda’s impressive progress in gender equality include its: (ii) introducing mobile finance; (iii) licensing different foreign (i) political will and leadership; (ii) enabling legal framework; commercial banks and creating SACCOs for each sector; (iii) proactive public policies; (iv) supporting institutions; and (iv) introducing innovations and a favorable regulatory (v) home-grown solutions. The Rwandan Constitution has environment for women (e.g., by removing laws that impede set a 30 percent quota for women in elected positions, women’s access to physical assets and inheritance rights); resulting in many women holding decision-making positions. and (v) establishing government programs that target w Currently, women hold more than 50 percent of seats in omen and youth (e.g., the Women’s Guarantee Fund and the Parliament. The country has also introduced a law that Access to Finance Strategy for Women and Youth program). promotes equal opportunities and equal pay for women as well as equal rights for land access, ownership, and If it followed the path of Rwanda, CAR could close its utilization. In the early 2000s, Rwanda started a gender gender gap and create a more secure and stable country. budgeting initiative, a tool to evaluate how fiscal policies Research on gender inclusion provides strong evidence may affect men and women differently, which has been an that women’s empowerment and gender equality are important strategy to reduce the gender gap. References Anand, Rahul, Mr Saurabh Mishra, and Mr Shanaka J. Peiris. Inclusive Massing, S., & Jonas, A. (2008). Service delivery in fragile situations: growth: Measurement and determinants. International Monetary Key concepts, findings and lessons. Organization for Economic Fund, 2013. Cooperation and Development (OECD). Baird, M. (2011). Service delivery in fragile and conflict-affected states. Putzel, J., Esser, D., & Moens, L. (2009). State-Building in Fragile Situations–How Can Donors Do No Harm and Maximise Their Bertocchi, G., & Guerzoni, A. (2012). Growth, history, or institutions: Positive Impact. A Literature Review”. Joint study by LSE and What explains state fragility in sub-Saharan Africa?. Journal of Peace PricewaterhouseCoopers LLP. Research, 49(6), 769–783 Olson, M. (1993). Dictatorship, Democracy, and Development. American Bigirimana, M., & Hongyi, X. (2018). Research on relationship between Political Science Review, 87(3), 567–576. financial inclusion and economic growth of Rwanda: Evidence from commercial banks with ARDL approach. International Journal of Redifer, L., Alper, E., Meads, N., Gursoy, T., Newiak, M., Thomas, A., & Innovation and Economic Development, 4(1), 7–18. Kwalingana, S (2020). The Development Path Less Traveled. Collier, P., & Hoeffler, A. (1998). On economic causes of civil war. Oxford Schouten, P., & Kalessopo, S-P., (2017). The Politics of Pillage: The economic papers, 50(4), 563–573. political economy of roadblocks in the Central African Republic. Dansk Institut for Internationale Studier and Dansk Institut for Collier, P., Besley, T., & Khan, A. (2018). Escaping the Fragility Trap. Report Internationale Studier. of the Commission on State Fragility, Growth and Development, chaired by David Cameron, Donald Kaberuka and Adnan Khan, Wild, L., Chambers, V., King, M., & Harris, D. (2012). Common constraints London School of Economics, International Growth Centre and and incentive problems in service delivery. Overseas Development University of Oxford, Blavatnik School of Government. Institute, London. Dukhan, N., (2017). Splintered Warfare. Alliances, affiliations, and Wilkinson, R., & Pickett, K. (2010). The spirit level. Why equality is better for everyone. agendas of armed factions and politico-military groups in the Central African Republic. The Enough Project. World Development Report (2011). The World Bank’s World Development Report 2011 on conflict, security and development. World Bank. Basdevant, O., Ramarozatovo, A., Swanepoel, J., and Taiclet, B., (2021). Central African Republic Governance Diagnostic Report. IMF Country World Bank. (2021). Central African Republic Economic Update: Report No. 21/5. Investing in Human Capital to Protect the Future. Lind, A. T. (2018). The role of inequality in state fragility. A quantitative World Bank 2019. Country Partnership Framework for The Central analysis on the role of inequality in state fragility (Master’s thesis, UiT African Republic for the Period FY21-FY25 Norges arktiske universitet). World Bank 2019. Social Contracts and World Bank Country Gibson, J. L. (2006). The contributions of truth to reconciliation: Lessons Engagements: Lessons from Emerging Practices. Independent from South Africa. Journal of conflict resolution, 50(3), 409–432. Evaluation Group. Washington, DC: World Bank. 50  See IMF 2017; Bigirimana, M., & Hongyi 2018. 51  The Umurenge Savings and Credit Cooperatives (Umurenge SACCOs) is s a government initiative aimed at increasing the financial inclusion of Rwandan citizens. 52  Hudson, V. M., Ballif-Spanvill, B., Caprioli, M., & Emmett, C. F. (2012). Sex and world peace. Columbia University Press. 44 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth © Stephan Gladieu CHAPTER 1 – Fragility and Its Implications on the Social Contract and Living Standards Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 45 © Cristelle Kouame CHAPTER 2 Past and Future Drivers of Growth 46 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth By 2025, GDP per capita is expected to be roughly similar the post-2020 election disputes has also hurt the economy to the level recorded in 2003—the year when Rwanda’s and pushed the country to a critical inflection point. It is GDP per capita outpaced that of CAR. This means that now estimated that CAR could lose 4 years in per capita CAR would lose a total of 22 years in per capita income income growth, with estimates showing that GDP per growth due to the combined impact of the 2003 and 2013 capita is expected to remain at the same level in 2023 as in coups, the COVID-19 pandemic, and the 2020 presidential 2019, prior to the COVID-19 pandemic and post-election and legislative elections disputes. Renewed insecurity amid disputes (Figure 20). Binding Constraints on Growth This section identifies binding constraints on CAR’s developing country, such as CAR, with daunting subdued economic growth using the Growth Diagnostic developmental challenges, it is not unusual to assume analytical framework. Binding constraints on economic that all challenges constrain economic growth. However, growth differ across and within countries over time. The not all challenges constrain growth equally, and the Growth Diagnostic method is based on the idea that government and development partners are unable to there may be many reasons for slow or inexistent economic address all distortions due to limited resources. Therefore, growth, and each reason generates a distinctive set of the authorities need to know which development challenges symptoms. The method was developed by Hausmann, have the largest impact on economic growth. The analysis Rodrik, and Valesco (2005) and differs from other analytical reveals that the main structural binding constraints on approaches by using an evidence-based approach to economic growth in CAR are: (i) the poor quality of public prioritize the binding constraints on economic growth. To infrastructure; (ii) the low level of human capital; (iii) market identify the binding constraints on growth, the framework failures; (iv) poor financial intermediation; (v) government requires a sequential approach, starting at the top and failure in securing property rights; and (vi) corruption working down the growth diagnostic tree.53 In a typical (Figure 21). FIGURE 20 Historical and Potential Trajectories of per Capita GDP, Constant US$ 2010 1,000 900 CAR: rising to the 2004–12 per capita 800 growth rate without the 2013 crisis Central African Republic 700 (CAR) real GDP per capita Constant US$ 2010 (constant US$ 2010) 600 CAR: pre-COVID-19 500 per capita projections 400 300 Rwanda (RWA) real GDP per capita 200 (constant US$ 2010) CAR: post-COVID-19 CAR: post-COVID-19 and renewed insecurity and per capita 100 projections per capita projections 0 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Source: World Bank staff estimates and projections using data from the WDI. 53  https://growthlab.cid.harvard.edu/publications/growth-diagnostics-0 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 47 CHAPTER 2 – Past and Future Drivers of Growth FIGURE 21 Binding Constraints on Economic Growth in CAR Problem: Low levels of private investment and entrepreneurs Lower return economic activities High cost of finance Low social returns Low appropriability Bad international Bad local finance finance Poor geography Bad infrastructure Low human capital Government failure Market failure Low domestic Poor financial saving intermediation Binding Micro risks: Property right, Macro risks: Financial Not binding corruption, taxes monetary, fiscal instability Source: World bank staff using the growth diagnostics methodology by Hausmann, Rodrik, and Velasco (2005). Weak Financial Intermediation become a prominent feature of CAR’s banking system (as in the banking systems of many other developing Increases the Cost of Access countries). However, the size of the collateral requested to Finance with respect to loans is substantial, representing a major constraint for entrepreneurs (Figure  22c). The value of Poor local financial intermediation is the main source of collateral in CAR averages 233.4  percent of the loan credit constraint in CAR. The country’s domestic savings amount, which is high compared to an average of rate is relatively low compared to the average of CEMAC, 219.5 percent in SSA. FCV, and SSA countries (Figure 22). Between 2000 and 2017, the average domestic savings rate, as a share of GDP, was 12 percent in CAR, much lower than an average of 21 percent Low Physical and Human in SSA countries, which could explain its high lending interest rate of above 15 percent (IMF 2018). The growth diagnostic Capital Have Contributed reveals that the main source of CAR’s credit constraint seems to Low Social Returns to be poor financial intermediation due to the significant gap between the deposit interest rate (about 3  percent) Poor infrastructure limits CAR’s and the lending rate (above 15  percent). Weak financial development potential intermediation is, therefore, a binding constraint on private Poor infrastructure is a binding constraint on private- investment spending and economic growth in CAR. sector development and economic growth. CAR’s road concentration is extremely low, and access to electricity, Information asymmetry contributes to low financial which is important to produce goods and services, is intermediation. The banks’ low level of financial intermediation extremely limited, discouraging investments in non-mineral is related to their high perceived risk. Banks have inadequate and non-agricultural sectors. Moreover, the country is ranked access to information to effectively assess risks, and they among the worst performing countries in the world in terms lack the necessary lending tools to cope with information of international logistic performance. asymmetry. This situation leaves profitable investment opportunities unidentified. The use of collateral is one CAR’s road network is underdeveloped and in very poor way to overcome information asymmetry and has recently condition (Table 2). The roads connecting communes are 48 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth FIGURE 22 Gross National Savings and Deposit Interest Rates, 2000–2018 a. Gross domestic saving b. Deposit interest rate 30 12 25 10 20 8 15 6 10 4 5 2 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAR CEMAC FCV SSA CAR FCV SSA Source: Calculations based on data from Word Development Indicators (WDI). Note: CAR = Central African Republic. CEMAC = Central African Economic and Monetary Community. FCV= Fragile, Conflict and Violence Group. SSA = Sub-Saharan Africa. c. Value of collateral needed for a loan 400 355.8 350 300 Percent of loan amount 259.9 250 233.4 227.7 219.5 200 183.8 165.2 171.8 152.1 159.5 150 100 47.3 50 0 CAR TCD ROC DRC LBR NGA SLE SSD CMR NER SSA Source: Calculation using the latest data available from the World Bank Enterprise Surveys. Note: CAR = Central African Republic. TCD = Chad. ROC = Republic of the Congo. DRC = Democratic Republic of the Congo. LBR = Liberia. NGA = Nigeria. SLE = Sierra Leone. SSD = South Sudan. CMR = Cameroon. NER = Niger. SSA = Sub-Saharan Africa. often impassable through much of the year, and the cost and Pointe Noire–Brazzaville–Bangui corridors are still not of transportation is high, especially in remote areas. Half of completely paved. Some sections of the Douala-Bangui he country’s communes report that roads to Bangui are corridor (about 250 km in Cameroon and 210 km in CAR) only accessible 4 to 6 months out of the year. The most are being upgraded as part of CEMAC’s transport transit expensive route to travel in CAR is from the Northeast program. Meanwhile, Cameroon’s segment of the Pointe to Bangui, while travelling from communes in the South Noire–Brazzaville–Bangui corridor (308 km) is unpaved, close to Bangui is relatively cheaper. In addition to its as is 1,000  km on the Congolese side. This means that poor domestic infrastructure, regional transit infrastructure CAR does not have a single all-weather road corridor to is also underdeveloped. CAR relies heavily on regional its coastal port gateways (Table  3). Moreover, inefficient trade corridors to conduct international trade, but its port processes, along with poor road conditions, in Douala, neighbors are not prioritizing the maintenance of their Cameroon contribute to delays and the high cost of portions of the corridors. For example, the Douala-Bangui transporting goods to CAR. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 49 CHAPTER 2 – Past and Future Drivers of Growth TABLE 2 An unreliable electricity supply has been a major constraint Road Indicators to private sector development in CAR. Access to electricity remains poor in CAR relative to comparators. An average Indicator Unit CAR FCV LICs of 14 percent of the population has access the electricity grid, which is less than half of the SSA average of 34 percent Road network km/1000 km2 41 145 132 density [1] of land area (World Bank Global Electrification, 2019). Firms must wait around 7 months to get connected to the main grid, and GIS rural % of rural pop 58 30 23 obtaining a power connection costs around 52 times the accessibility within 2 km from all-season country’s average yearly income per capita. Power outages road are common in the country, and firms endure several hours of the day without access to electricity. Even when power Classified paved % in good or 62 80 86 is available, brownouts (i.e., intentional or unintentional road network fair condition condition [2] drop in voltage) are prevalent, limiting the potential use of electricity. The proportion of firms experiencing power Classified unpaved % in good or 2 72 56 outages is higher in CAR than in many other African countries. road network fair condition Also, a firm’s financial loss due to a power outage is condition equivalent to a quarter of its annual sales in CAR, which is Classified paved AADT 200 843 1,288 the highest in the region. road traffic Classified unpaved AADT 14 31 39 road traffic The low-skilled labor force is a binding constraint on private investment and economic growth Primary network % of primary 61 47 30 overengineering network The country’s low-skilled labor force and weak human asphalted with capital accumulation have contributed to low levels 300 AADT of private investment and economic growth. Human or less capital is a central driver of sustainable growth and poverty reduction (World Bank forthcoming).54 Yet, CAR Source: CAR 3rd Economic Update and AICD Road Sector Database. Note: Total network includes the primary, secondary, and tertiary networks. Classified has substantial gaps in human capital and enormous roads are those that have been classified as public roads in road legislation. GIS = Geographic information system; AADT = Average annual daily traffic; CAR = needs. The country score of 29  percent on the Human Central African Republic. Capital Index (HCI) in 2019 is the lowest in the world, TABLE 3 Type and Condition of Road Corridors Length Type (%) Condition (%) AADT (volume/year) Corridor (km) Paved Unpaved Good Fair Poor <300 300–1,000 >1,000 Douala–Bangui 1,704 69 31 48 25 25 65 20 15 Cameroon 1,118 52 48 30 36 35 53 24 23   CAR [1] 587 100 0 100 0 0 86 14 0 Pointe Noire–Brazzaville–Bangui 2,419 40 54 21 21 49 27 11 0 Cameroon 311 0 100 56 39 0 70 24 0   CAR [1] 535 99 1 100 0 0 79 19 0  ROC 1,573 28 63 0 21 69 0  6 0 Source: AICD calculations. Note: The summation of the good, fair, and poor conditions does not necessarily add up to 100 since the condition of some portions of the network may be unknown. 54  4th Economic Update for the Central African Republic. 50 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth below the average of 37 and 40 percent in FCV and SSA and move toward more productivity sectors. To accelerate countries, respectively. This means that the prevailing economic growth, CAR needs to create an environment health and education standards cost CAR 71 percent of its conducive to the development of new productive ideas. potential per capita income. CAR’s primary and secondary The speed at which these ideas appear, along with their education completions rates were only 59 and 14 percent, economic significance, is critical to develop new industries respectively, in 2019 (Education Management Information and diversify the country’s exports. The absence of new System 2018–19), lower than the SSA average of 69 and ideas is one of the reasons for the low expected return to 44  percent, respectively, in 2018 (UNESCO Institute for current investment ideas in CAR, and why its investment Statistics). With a Human Development Index of 0.367 in levels and economic growth are low. A lack of new productive 2018, CAR is ranked second to last in the world (188th ideas could be due to a lack of finance, fear of taxation, or out of 189 countries). The country’s adult literacy rate was expropriation. only 36.8 percent in 2018 and educational attainment is low, especially in rural areas. In rural areas, two out of five The low survival rate of exports is a key characteristic of adults (18 years and older) have never gone to primary market failure in CAR. Export survival in terms of entry into school, while only one out of every five adults have new export markets and products as well as the duration completed primary school and acquired some secondary of export flows is a key determinant of export growth and schooling. The low level of human capital in CAR has diversification (Brenton et  al. 2010). Yet, CAR’s export limited its growth potential and could be one of the major survival rate is below 10  percent, far below the average of peer countries ( Figure  23 ). This poor performance contributing factors to its high poverty rate. is explained by several factors such as CAR’s export destinations (closer or more distant markets), recurrent conflicts and insecurity (as discussed in chapter 1), high trade costs, and a challenging business environment. Market Failures and Micro Risks Such as Corruption Conflict, corruption, and limited property rights and Limited Property have prevented efforts to increase appropriability Rights Have Led to Micro risks, including political instability, corruption, and Low Appropriability insecure property rights, hamper entrepreneurial activities in CAR. The country has experienced decades of violence Market failure has prevented innovation and and successive episodes of political instability, which the adoption of more productive practices has substantially limited private sector development. In Structural issues have affected the performance of FIGURE 23 CAR’s traditional sectors. Diamond exports had been Export Survival Rates, 2000–2017 declining since 2000 before they collapsed in 2020 due to the COVID-19 pandemic. Despite ongoing There is a low survival rate of exports in CAR. changes and reforms, the mining sector continues to be 100 undermined by significant informality, artisanal mining, 90 and a history of mismanagement. Similarly, the country 80 has almost lost its entire cotton industry and coffee 70 sector because of the accumulation of arrears; lack of 60 Percent (%) market access for producers; lack of seeds, fertilizer, and 50 pesticides; and inadequate quality assurance on both 40 inputs and outputs. While the wood industry has been 30 growing over the two past decades, it remains highly 20 concentrated toward the export of raw and low value- 10 added products. 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Efforts to develop and export new products are hampered CAR CEMAC FCV SSA by market failures. Many sectors in CAR suffer from market failure, which is characterized by an inability to identify Source: Authors’ calculations based on data from UN COMTRADE, 2000–2017. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 51 CHAPTER 2 – Past and Future Drivers of Growth TABLE 4 performance of the CAR taxation system primarily reflects Corruption, and Property Rights the time needed to comply with tax requirements and processes and the relatively complex tax system. Richardson CAR CEMAC FCV SSA and Sawyer (2001) mentioned tax complexity as contributing factor for noncompliance behavior among taxpayers. In Corruption fact, the more the tax complexity (especially in terms of time Corruption perception 23 23 24 32.2 spent complying and paying tax), the less its compliance score, 0–100 among taxpayers. Taxpayers tend to appreciate a tax system Property Rights that requires little or no compliance time and much simplicity in a competitively challenging business environment where Index of Property rights 19.6 50.3 53.1 52.6 firms care more about profit-generating strategies. Gambo (0–100) et al. (2014) examined the effect of tax complexity on tax Judicial Effectiveness 29.60 42.17 45.33 45.11 compliance in 44 African countries, including the Central (0–100) African Republic. The result indicates a significant negative impact of tax complexity on tax compliance in Africa: Enforcement contracts 82 47 42 42.3 cost, (% of claim) taxpayers spend an extra one day (19hours) beyond the regional average hours on tax compliance in a self-assessment Source: Transparence International, 2018. environment. addition, corruption and limited property rights have Over the past years, macroeconomic instability hampered the ability of entrepreneurs to secure returns has not been a major binding constraint on growth on their investments. In 2020, CAR ranked 156th out of 180 countries on the Corruption Perceptions Index (CPI), CAR’s financial, fiscal, and monetary risks have been with a score of 26—unchanged since 2012 (Table  4).55 contained over the past years, suggesting a relatively Although the performance of CAR is in line with countries stable macroeconomic environment. Macroeconomic in CEMAC, it remains below the average of FCV and SSA instability can be generated by financial, fiscal, or monetary countries. CAR’s poor ranking on the CPI reflects its failure imbalances. For example, the fiscal accounts may be in a to make serious inroads against corruption, which remains structural deficit and debt may be increasing faster than the an important micro risk to private investment. capacity to service it. In addition, monetary policy may be too loose, resulting in a loss of international reserves and an Weak property rights have disincentivized firms and eventual large currency depreciation or devaluation. There entrepreneurs to invest. The Heritage Foundation, a think may also be an exchange rate misalignment that limits tank based in the United States, provides a property rights the profitability of investors. All these types of imbalances index that assesses the extent to which a country’s legal have been limited in CAR over the past years and have framework allows individuals to acquire, hold, and utilize not constituted a binding constraint on economic growth. private property, secured by clear laws that the government CAR’s key macroeconomic indicators have, on average, enforces effectively. In 2019, CAR’s property rights score been below the CEMAC zone’s convergence criteria. was 19.6 (out of 100), well below the average of SSA (52.6) Moreover, the country’s fiscal health scores, as measured by and CEMAC (50.3). The protection of property rights has the Heritage Foundation, have been largely above that of deteriorated over time, as CAR’s score on the property comparator countries, while its monetary freedom scores rights index declined from 50.0 points in 2002 to 19.2 points have been in line with those of peer countries (Table 5). CAR in 2019. The country judicial system is weak and fail to does, however, perform worse than comparators on financial enforce existing laws, prevent seizing and damaging freedom, with a score of 30, lower than the SSA average property without due process, and provide fair judgments of 49, although this has not affected the macroeconomic for entrepreneurs. Also, access to lawyers is difficult and stability of the country. costly. This contributes to a predatory environment where entrepreneurs have little incentive to invest long term. While public debt has been sustainable, CAR remains Difficulty in paying taxes is another key micro risk that at high risk of debt distress. The country’s public debt negatively affects the business environment. The poor declined from 63.0 percent of GDP in 2014 to 44.1 percent 55  https://www.transparency.org/en/cpi/2020/index/caf. 52 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth TABLE 5 GDP, slightly above the average of 8 percent of GDP for Selected Macroeconomic Stability Indicators domestic revenue over the same period. CAR CEMAC FCV SSA Inflation and the real exchange rate have been relatively Monetary Freedom score 72.3 76.2 75.82 75.03 stable. CAR’s inflation rate averaged around 2.3 percent (0–100) between 2000 and 2020—below the CEMAC zone convergence criterion and relatively stable compared to Fiscal Health score 94.30 63.82 68.34 65.99 (0–100) that of FCV and SSA countries (Figure 24). Similarly, the real effective exchange rate has remained stable since the CFA Financial freedom 30 47 49 49 franc was pegged to the euro in 1994. Despite increasing since 2012, reflecting an increase in the consumption of Source: Heritage Foundation 2019. Note: Monetary freedom combines a measure of price stability with an assessment foreign goods, the real effective exchange rate remains of price controls, fiscal health assesses the level of deficits and debt burden, consistent with fundamentals and desirable policies.56 and financial freedom is a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector. In sum, low physical and human capital, market failures, in 2020 due to economic growth, arrears clearance, and weak financial intermediation, and limited property limited new borrowing. However, according to the latest rights have been the main drivers of CAR’s uneven growth DSA (December 2020), CAR remains at high risk of debt performance. While political instability has played an distress. The buildup of debt-related vulnerabilities is due important role in the volatility of economic growth, it is not to low domestic revenue collection, limited exports, and the only reason for the country’s subdued socioeconomic an uncertain macroeconomic environment with a fragile development. Each constraint represents a critical bottleneck security situation. The level of public debt has been to private sector development and growth. Other cross- sustainable over the past years and is currently below cutting constraints include a challenging business climate; that of comparable CEMAC, FCV, and SSA countries. The limited information and communication technologies (ICT) fiscal deficit has also been contained due to significant and digital connectivity; poor quality transport and energy inflow of official development assistance (ODA) since 2015. infrastructure; and lack of skilled labor. Between 2015 and 2020, ODA averaged 7.8  percent of FIGURE 24 Inflation and the Real Exchange Rate, 2000–2019 a. Inflation rate (annual % change) b. Real effective exchange rate 35 250 30 Real effective exchange rate index (2010 = 100) 25 200 20 15 Percent (%) 10 150 5 0 100 –5 –10 –15 50 –20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 CAR CEMAC FCV SSA Source: WDI 2019. Source: Economist Intelligence Unit. 56  IMF Country Report No. 18/380. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 53 CHAPTER 2 – Past and Future Drivers of Growth Growth Decomposition and Structural Change Main Growth Drivers Post-2013 On the demand side, growth in the post-civil war era was driven by private consumption and capital accumulation (Figure 26). In 2014–19, private consumption grew In 2013–19, the main growth drivers were forestry by average of 4.6  percent, contributing an average of and services on the supply side and private 3 percentage points to GDP. Gross fixed capital formation, consumption and investment on the demand side driven by public investment spending, rose from 6.3 percent of GDP in 2013 to 22.4  percent in 2019. Between 2016 On the supply side, post-2013 economic growth has been and 2019, CAR experienced a higher increase in gross fixed driven by the forestry and services sectors (Figure 25). capital formation (24 percent) than the average of CEMAC Forestry and services activities, especially trade, repair, (20 percent) and FCV (19 percent) countries. accommodation, and food, sustained economic growth between 2013 and 2019, although the dynamism of these sectors was lower than before the 2013 crisis. In 2014–19, forestry and logging activities grew by an average of Total Factor Productivity Has 44.5  percent, while the services sector expanded by an average of 11 percent during the same period. However, Almost Halved Since 1990 and growth in these sectors has decelerated since the initial Has Had a Limited Contribution pick-up in growth following the crisis in 2013. A growth decomposition reveals that out of an average annual to Economic Growth growth rate of 3.6  percent in 2014–19, the forestry and Productivity growth is crucial for economic growth and services sectors contributed a combined 3.9  percentage development. Productivity measures how efficient firms are points to GDP. in combining resources to produce goods and services. It FIGURE 25 Decomposition of GDP Growth (Supply Side) a. In 2013–19, forestry and services activities were the main supply-side b. . . . and growth in these sectors have decelerated since the initial drivers of economic growth, although the dynamism of these sectors pick-up in growth following the crisis. was lower than before the 2013 crisis . . . Growth rate by sector, 2010–19 Decomposition of GDP growth (supply side) 60 20 15 40 10 20 5 Percent (%) Percent (%) 0 0 –5 –20 –10 –40 –15 –20 –60 2010–12 2013–15 2016–19 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Crops, livestock and hunting Forestry and logging Crops, livestock and hunting Forestry and logging Fishing and aquaculture Construction Fishing and aquaculture Construction Mining and quarrying Manufacturing Mining and quarrying Manufacturing Transportation, storage and Trade, repair, accommodation Transportation, storage and Trade, repair, accommodation communication and food communication and food Source: Authors’ calculations using data from the National Statistical Office. 54 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth FIGURE 26 Private Consumption and Investment were the Main Demand-Side Drivers of Growth in 2013–19 a. In 2013–19, private consumption and investment were the main b. Since 2016, CAR has experienced a higher increase in gross fixed demand-side drivers of economic growth. capital formation than comparators. Contribution to GDP growth, 2011–19 (demand side) Gross fixed capital formation (% of GDP) 30 35 20 30 10 Percent (%) of GDP 25 Percent (%) 0 –10 20 –20 15 –30 10 –40 –50 5 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 Private consumption Gross fixed investment CAR FCV CEMAC SSA Government consumption Exports Real GDP growth 2010–12 2013–15 2016–19 Source: Authors’ calculations with MFMod data. Source: Authors’ calculations with WDI data. is measured as output per input, implying that productivity CAR is among the least productive countries in SSA, which will increase if inputs are optimally combined to produce contributes to its low GDP per capita. In 2017 (most recent a greater level of output. For example, an increase in labor available data), CAR’s TFP value of 0.23 (relative to 1 of productivity, measured as output per worker, allows firms the US) was below the SSA regional average of 0.41 to produce more goods and services with the same inputs, (Figure 27b). Between 1990 and 2017, CAR’s TFP level fell or produce the same level of goods and services with from 0.44 to 0.23—a decrease of 48 percent. The country’s TFP reached its lowest level (0.2) during the crisis in 2013. fewer resources. Moreover, productivity growth can enable firms to compete over resources (i.e., labor, capital, or Limited TFP growth explains the modest agricultural raw materials) with firms in other sectors of the economy growth in CAR. An analysis of the agriculture sector, which and maintain international competitiveness by reducing is vital to reduce poverty in the country, reveals a lack of consumer prices. Finally, an improvement in productivity productivity growth. In 2019, agriculture accounted for increases firms’ profits and investment opportunities, which 77 percent of employment and 32.4 percent of CAR’s GDP. can lead to higher wages and better working conditions However, a huge share of agricultural households are under for workers. In the long run, an increase in firm productivity the poverty line. The growth-accounting methodology can lead to job creation, and increased productivity results developed by the United States Department of Agriculture in higher public tax revenues. shows that the country’s limited agricultural growth was mainly driven by input intensification (labor) and land Yet, a growth decomposition shows that factor expansion (Figure 27c). Agricultural productivity has been accumulation, rather than productivity, was the relatively stagnant, which kept CAR’s agricultural output country’s main growth driver in recent years. The Solow growth at modest levels (Figure  27d). Moreover, the decomposition shows that capital and labor accumulation, country’s performance on the agricultural TFP index has rather than an improvement in productivity, was the main been highly volatile and falling since 2013. driver of economic growth between 1991 and 2019 (Figure 27a). The contribution of human capital to growth has been minimal, especially since 2015. Instead, labor contributed 97 percent to real GDP growth in 1991–2019, While No Structural Change, although the contribution of labor to growth has declined There Has Been a Reallocation over time. While capital accumulation has contributed to real GDP growth, it reached its highest level to date in 2015. of Labor Toward Services The services sector is growing while the agriculture sector Total factor productivity (TFP) has almost halved since 1990 is declining. The share of agriculture value-added in GDP and has had a limited contribution to economic growth. increased marginally from an average of 38  percent in Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 55 CHAPTER 2 – Past and Future Drivers of Growth FIGURE 27 TFP in CAR is Low, has been Falling, and Is Not the Main Driver of Economic Growth a. Capital and labor accumulation, rather than productivity, boosted b. CAR has witnessed a rapid decline in TFP, growth in CAR between 1991 and 2019. widening the gap with comparators. 100 0.65 23 Share of real GDP growth, percent (%) 80 52 0.55 26 TFP level at current PPPs 60 66 113 10 40 0.45 17 97 3 20 41 27 0.35 32 28 0 –40 0.25 –94 –20 –1 –40 0.15 1991–2019 1991–2000 2001–2012 2015–2019 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Total factor productivity (gA) Human capital per labor ((1–α) * gh) CAR CEMAC FCV SSA Labor ((1- α) * gL*) Capital stock (α * gK) Source: Authors’ calculations using data from Barro and Lee (2013), UNESCO Source: World Bank staff calculations using Penn World 9.1 data. Note. TFP is relative Institute for Statistics, WDI, and the Human Development Index. to the US (=1). c. CAR’s limited agricultural growth has been mainly d. CAR’s performance on the agricultural TFP index driven by input intensification and land expansion. has been highly volatile and falling since 2013. 15 125 Agricultural TFP index (1990=100) 10 120 5 Percentage points 115 0 –5 110 –10 105 –15 100 –20 –25 95 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Agricultural TFP Land expansion CAR CEMAC FCV SSA Input intensification Gross agricultural production Source: Authors’ calculations using United States Department of Agriculture ERS data. 1991–2000 to 42 percent in 2001–2010, before it dropped Conversely, the manufacturing sector’s contribution to to an average of 35 percent in 2011–2019. The decline in GDP is modest and has been declining over the past years. the share of agriculture value-added was compensated by The industry sector’s contribution to GDP fell by a third an increase in the value-added share of services. The share between 1991 and 2011. The relatively slow growth of of services value-added in GDP increased from an average the manufacturing sector compared to services in several of 27 percent in 1991–2000 to 41 percent in 2011–2019. developing countries, including SSA, has become a concern CAR’s economy is not following the standard economic discussed in the recent growth literature.57 In CAR, like in development process characterized by industrial growth many other developing countries, the combination of a following a decline in the agriculture sector. rising services sector with a declining manufacturing sector 57  See, for instance, Krishna et al (2018), Thomas (2009), and Dasgupta and Singh (2006). 56 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth highlights the challenges of industrialization (Rodrik 2016, improvements in the industry sector, but the sector has 2017). Reversing this trend could require fostering the not attracted workers. Agriculture and industry featured development of a few niche sectors for which the country the highest institutional and technological within-sector has a comparative advantage such as agriculture, forestry, improvements in 1991–2019 (Table 6). This means that the and mining. industry sector is attracting few workers, with a meager contribution of the structural change component of As a result, there has been a reallocation of labor from 0.4 percent in 1991–2019, compared to 1.5 and 1 percent agriculture to the services sector instead of the more for the agriculture and services sectors, respectively. productive manufacturing sector. The share of agricultural Between 2011 and 2019, productivity growth induced by employment in total employment fell from 81 percent in the movement of workers to the industry sector was zero, 1991–2000 to 66 percent in 2001–2010. By contrast, the demonstrating that an insignificant number of workers moved to the industry sector. This was likely due to workers share of services employment in total employment doubled lacking the technical skills needed in the sector, which between 1991–2000 and 2001–2010. calls for targeted policy interventions to transform the sector and facilitate labor movements between sectors. Institutional and technological improvements within Similarly, labor movements toward the services sector sectors have been the main drivers of productivity growth also call for targeted policy interventions to accelerate the over the past years. Labor productivity increased by transformation of the sector. 12.18 percent in CAR over 1991–2019, with the within-sector component contributing more than 77  percent to total The manufacturing sector is an important engine of productivity growth—of which 26.9, 26.8, and 23,3 percent economic growth.58 According to the engine of growth came from agriculture, industry, and services, respectively. hypothesis, the relationship between the level of GDP per As a result, labor productivity growth originates mainly from capita and the size of the manufacturing sector is due to institutional and technological changes within sectors, which the certain inherent characteristics of the manufacturing means that it is unlikely the result of a structural shift of sector (Pacheco-López and Thirlwall 2013). For example, labor from less productive sectors such as agriculture to productivity is relatively higher in manufacturing than more productive sectors such as manufacturing. in other sectors, enabling a more rapid improvement in living standards. Also, the manufacturing sector offers There has only been a marginal movement of workers to more opportunities for economies of scale59 and higher the industry sector over the past decade due to a lack technological progress compared to other sectors. of skilled labor. A decomposition of productivity growth Moreover, linkages and spillover effects are more robust shows that there have been industrial and technological in manufacturing than in agriculture and services.60 Szirmai TABLE 6 There is No Evidence of Structural Change in CAR Within component Structural change Structural Productivity Agriculture Industry Service Within Agriculture Industry Service change growth 1991–2000 0.28 6.63 0.24 7.15 0.03 0.12 0.05 0.2 7.35 2001–2010 8.64 3.43 4.07 16.14 3.82 0.97 1.66 6.46 22.6 2011–2019 –0.01 0.08 3.8 3.86 0.07 0 0.96 1.03 4.89 1991–2019 3.28 3.26 2.84 9.38 1.45 0.4 0.95 2.79 12.18 Source: World Bank staff calculations. 58  This has long been recognized in the literature. See, for instance, Kaldor 1960. 59  Kaldor 1967. 60  Hirschman 1958. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 57 CHAPTER 2 – Past and Future Drivers of Growth (2012) provides three additional arguments to highlight agriculture to manufacturing is associated with structural the potential importance of manufacturing. First, there change since the manufacturing sector is assumed to be is a transfer of resources from manufacturing to services, more dynamic. Finally, there is an empirical correlation which provides a structural change burden in the form of between the degree of industrialization and per capita Baumol’s disease.61 Second, the transfer of resources from income in developing countries. Way Forward: Potential Drivers of Future Growth Future growth drivers are analyzed using the Long-Term Growth Model (LTGM)62 and its extensions.63 The LTGM A Business-as-Usual Scenario tools are designed to be simple and transparent, with low Shows Slowing Growth data requirements, which means that they can be readily Under a business-as-usual growth path, CAR’s potential applied in low-income countries like CAR.64 For CAR, two GDP growth would gradually decelerate over time to LTGM extensions are used. The first extension is the LTGM 3 percent by 2050 (Figure 28a). The business-as-usual Public Capital (LTGM-PC) from Devadas and Pennings baseline in the LTGM measures the economy’s potential (2018),65 which separates public and private capital stock growth rate, assuming that long-term growth trends and adjusts the public capital stock for the quality of continue.68 GDP growth in 2020 and 2021 is expected to infrastructure.66 The LTGM-PC allows public and private investment to have separate-sized effects on growth. Public be much lower than potential growth due to the COVID-19 investment will have a larger impact on growth if there is pandemic and post-election disputes (dashed lines in a shortage of public capital relative to GDP, or if public Figure  28a), but the business-as-usual scenario assumes capital is particularly important in the production function that COVID-19 pandemic is a temporary shock and so will (e.g., for essential infrastructure).67 The second extension is have a limited effect on potential long-run growth (which is the LTGM-Human Capital (LTGM-HC), which translates the the focus of the long-term growth simulations). World Bank’s HCI (a forward-looking index that captures the level of human capital a child born today is expected Extreme poverty rates are expected to fall by almost to accumulate by their 18th birthday) into a path for the 20 percentage points over 2020–50 under the business- future productivity of workers each year (a required input as-usual scenario (Figure 28b). According to the most for growth models). This allows for an examination of the recent household survey, CAR’s extreme poverty rate was growth effects of changes in the HCI. 67 percent, and the national poverty rate was 62 percent 61  Baumols’ disease refers to the rise of salaries in jobs that have shown little or no labor productivity growth. 62  Long Term Growth Model by Loayza and Pennings: www.worldbank.org/LTGM. 63  The LTGM and its extensions are a suite of an Excel-based tool to analyze future long-term growth scenarios, building on the celebrated Solow (1956)-Swan (1956) Growth Model. 64  The tools make assumptions about growth fundamentals, such as future TFP growth, investment, demographics, and schooling, and produce future paths for GDP growth, GDP per capita growth, and poverty rates. They are designed to be used for long-run simulation exercises over the next 5–30 years and not for short-run forecasting. The LTGM suite only runs at an annual frequency and does not include a Keynesian demand side, and the models are too simple to capture the multitude of shocks to short-run growth. 65  Devadas and Pennings (2018) “Assessing the Effect of Public Capital on Growth: An Extension of the World Bank Long-Term Growth Model”, World Bank Policy Research Working Paper 8604. 66  The LTGM-PC measures the quality of public capital using a new cardinal Infrastructure Efficiency Index. 67  The growth effect of private investment also depends on whether there is a shortage of private capital relative to GDP. 68  LTGM-PC assumptions: (i) the investment share of GDP is assumed to be 15 percent of GDP (6ppts public and 9ppts private) based on the 2015–2019 historical data and the 2020–22 June MPO forecast; (ii) Total Factor Productivity (TFP) growth is assumed to be at 2 percent in 2020 and fall to and remain at 0.5% by 2040 (close to the pre-war 30-year average using PWT 9.1 data) ; (iii) the labor share is 0.5 (similar to PWT9.1 data); and, (iv) capital-to-output ratio of 4. Human capital growth is based on the LTGM-HC with no change in policy, with an assumed return to an extra year of schooling of 12 percent. 58 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth FIGURE 28 Business-as-Usual Growth Projections and Implications for GDP per Capita and Poverty a. Real GDP growth projections b. GDP per capita and poverty trend under the business-as-usual scenario 6 80 700 70 600 5 60 500 4 50 Percent (%) 2010 US$ 400 Percent (%) 40 3 300 30 200 2 20 10 100 1 Historical data Simulations 0 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 0 2015 2020 2025 2030 2035 2040 2045 2050 Extreme poverty ($1.90/day, LHS) Real GDP per capita level (2010 US$, RHS) Source: World Bank staff calculations and projections using World Bank MPO and Source: World Bank staff calculations and projections using WDI, MPO, and LTGM-PC data. PovCalNet, and LTGM-PC data. in 2008. Under the business-as-usual growth path, both use of technology and innovation, market inefficiency, poor poverty rates are projected fall by almost 20 percentage infrastructure, and ineffective institutions, as well as the points between 2020 and 2050, assuming the country’s quasi-inexistence of research and development, are likely income distribution remains unchanged (i.e., a constant to limit the rate of improvement in TFP. Similarly, human Gini coefficient of 0.56). Real GDP per capita is projected to capital growth is projected to fall from 0.6 percent in 2020 increase slowly from US$384 in 2019 to around US$650 by to 0.15 percent by 2050. The projected decline of human 2050—still far below lower-middle-income status.69 Under capital growth is due to poor conditions of education and this scenario, CAR will not reach its pre-war economic health of today Central African’s children that are expected development level until the late 2030s because of the slow to persist in the baseline simulation. Falling TFP growth rate of GDP growth. over 2020–2050 subtracts 2.3ppts from GDP growth over this period, with falling human capital growth subtracting Slowing TFP and human capital growth explains most of 0.3ppts, and falling population growth subtracting the fall in the baseline growth rate. Historical trend TFP 0.1ppts (all of which are offset by improvement in other growth averaged a mere 0.5  percent between 1983 and growth drivers). 2012 (30-year pre-war historical average). The country’s TFP growth declined by one-third in 2013. Rapid acceleration A demographic dividend and rising productivity of public of TFP growth to 4.1 percent in 2015, before decelerating and private investments assuage the growth slowdown in to 3  percent in 2017 and slowing since then has enabled the baseline. The increase in the working-age population a modest economic recovery (Figure  29). Assuming this ratio from 54 to 65  percent in 2020–50 is projected to trend continues, TFP growth is projected to slow gradually contribute to GDP growth by 0.50 percentage points. While from 2  percent in 2019 to 0.5  percent in 2050 under the both public and private investment rates are constant under business-as-usual scenario (Table 7). TFP will returns to its the business-as-usual scenario, they can still contribute to 2012 level only by 2033–34. Other factors such as the low GDP growth as their marginal products increase. 69  The simulations of the level of GDPPC and poverty do not include the effects of the post-election disputes or COVID-19, which are assumed to be temporary (and so have little effect on GDPCC and poverty). Income groups are based on gross national income per capita (Atlas method) and not GDP per capita, although both usually grow at similar rates in the long run. Real per capita GDP growth is projected to fall to 1.6 percent in 2050. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 59 CHAPTER 2 – Past and Future Drivers of Growth FIGURE 29 TFP and Human Capital Growth Rates are Projected to Fall in the Business-as-Usual Scenario. a. TFP growth, 2014–2050 b. Human capital growth, 2019–2050 4.5 0.7 4.0 0.6 3.5 3.0 0.5 Percent (%) Percent (%) 2.5 0.4 2.0 0.3 1.5 1.0 0.2 0.5 0.1 0 –0.5 0 2014 2019 2024 2029 2034 2039 2044 2049 2019 2024 2029 2034 2039 2044 2049 PWT 9.1 TFP growth baseline Source: World Bank staff projections Source: World Bank staff projections Reforms that Address Total factor productivity the Drivers of Growth Maintaining high TFP growth could boost GDP growth by approximately +2.3 percentage points by 2050. In Would Change the a scenario in which CAR’s authorities implement a set of Growth Trajectory policies that maintain TFP growth at its 2019 rate (2 percent), GDP growth is projected to reach 5.4  percent by 2050 This section examines how reforms that address TFP, (Figure  30). In a context of low productivity, maintaining human capital, and investment growth would impact a TFP growth rate of 2  percent would require structural CAR’s growth trajectory. It assesses several scenarios changes in the economy to move away from subsistence using historical and projected trends of productivity, human agriculture to more high-productivity activities. CAR would capital, and investments benchmarked against other SSA need to implement bold reforms to maintain TFP growth countries. beyond the level reached immediately after the 2013 TABLE 7 Drivers of CAR’s Potential Economic Growth under the Business-as-Usual Scenario Change in baseline GDP growth due to growth driver Change in growth driver Normalized Normalized share contribution of fall in 2020 2050 (percentage points) growth (%) TFP Growth (%) 1.9 0.5 –2.3 205 Human Capital Growth (%) 0.6 0.15 –0.3 28 Population Growth (%) 1.8 1.4 –0.1 9 Working Age to Population Ratio 0.54 0.65 +0.5 –45 Marginal Product of Public Capital 0.07 0.12 +0.4 –39 Marginal Product if Private Capital 0.23 0.29 +0.7 –59 Source: World Bank staff calculations 60 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth FIGURE 30 A Shock to TFP would have a Significant Impact on Real GDP Growth and GDP per Capita a. A positive shock to TFP growth . . . b. . . . would have a significant impact on real GDP growth . . . 2.5 6 5 2 Percent (%) 4 Percent (%) 1.5 3 1 2 0.5 1 0 0 2019 2024 2029 2034 2039 2044 2049 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Baseline 2% TFP growth Baseline 2% TFP growth c. . . . with significantly higher GDP per capita growth (2.3 percentage points by 2050). 4.5 4 3.5 3 Percent (%) 2.5 2 1.5 1 0.5 0 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 Baseline 2% TFP growth 2050 Source: World Bank staff projections. crisis, which was mainly due to the catch-up effect. Much growth by +0.5 percentage points by 2050. The country’s of the TFP growth over the next decade is catch up to 2013. educational outcomes are lower than the average of CEMAC, But the pace of TFP growth is still ambitious—at the 90th FCV, and SSA countries. A child born today in CAR will only percentile of SSA countries over 20  years. Consequently, receive 4.6 years of schooling, well below the SSA median this scenario implies the need for CAR to implement bold of 8.15 years, implying a considerable gap to be filled. The reforms. Based on the literature, the main determinants average years of schooling in CAR is more than two years of TFP include innovation, education, market efficiency, below the level of the 25th percentile of SSA. By improving infrastructure, and institutions.70 In CAR, potential reforms to the average years of schooling, CAR could accelerate human achieve TFP growth of 2 percent include: (i) supporting local capital growth to 1.1  percent by 2039, before it falls to industrial transformation in the wood sector; (ii) promoting 0.7 percent (above the projected decline of human capital agribusiness activities in the Bangui area; and (iii) expanding from 0.6 to 0.15 percent) by 2050 (Figure 31a). However, the country’s small manufacturing sector. a policy change today would have minimal impact on GDP growth until the early 2030s (Figure 31b). Policy changes today would fully benefit younger children while partially Human capital benefitting older children, which means that policies aimed Increasing the average years of schooling to the median at increasing educational outcomes have delayed effects level of SSA (from 4.6 to 8.2 years) could boost CAR’s GDP on human capital accumulation. 70  Kim, Y. E., & Loayza, N. (2019). Productivity growth: Patterns and determinants across the world. World Bank Policy Research Working Paper, (8852). Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 61 CHAPTER 2 – Past and Future Drivers of Growth FIGURE 31 A Shock to Human Capital Growth would have a Significant Impact on Real GDP Growth a. A positive shock to the average years of schooling . . . b. . . . would result in an increase in the GDP growth rate of 0.5 percentage points by 2050. 1.2 5 1 4.5 0.8 4 Percent (%) Percent (%) 0.6 3.5 0.4 3 0.2 2.5 0 2 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Baseline 70% not stunted + 75%ASR Baseline 70% not stunted + 75%ASR c. A positive shock to non-stunting and adult survival rates . . . d. . . . would result in an increase in the GDP growth rate of 0.13 percentage points by 2050. 0.7 4.4 0.6 4.2 0.5 4 Percent (%) Percent (%) 0.4 3.8 0.3 3.6 0.2 3.4 0.1 3.2 0 3 2022 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Baseline 70% not stunted + 75%ASR Baseline 70% not stunted + 75%ASR Source: World Bank staff projections. Improving not-stunted and adult survival rates to the Investment median of SSA could boost CAR’s GDP growth rate by Increasing the private investment-to-GDP ratio to the 0.13 percentage points in 2050. An improvement in the country’s not-stunted rate from 59 to 70 percent and the median level of SSA would boost CAR’s GDP growth rate adult survival rate (to age 60) from 59 to 75 percent would by 0.5 percentage points by 2030 and 1 percentage point reduce the expected fall in the human capital growth rate by 2050. Private investment in CAR is low at 9 percent of by about 0.15  percentage points by 2050. Under this GDP, well below the SSA median of about 15 percent of scenario, the human capital growth rate would decline GDP (20-year average). The adoption of policy changes that from 0.6 percent in 2020 to 0.3 percent by 2050 instead of would enable a progressive rise in private investment to the 0.15 percent in the business-as-usual scenario (Figure 31c). SSA median ratio (an increase of about 7 percentage points Similar to education policies, the impact of health-related in investment rates) over the next 10 years would boost GDP policy changes on GDP growth would be delayed, with growth by 1 percentage point by 2030 and 0.5 percentage younger children benefiting more than older children and points by 2050 (Figure 32). Such policy changes would help adults (Figure 31d). However, the impact of health policies to address the current shortage of private physical capital and on economic growth would be modest, as human capital have a significant impact on GDP growth. The benefit in terms is less sensitive to health than education. Moreover, CAR’s of GDP growth falls after 2030 as the stock of private physical health outcome gaps71 are not as large as its educational capital improves (with an increase in the private capital-to- gaps, especially in terms of average years of schooling. output ratio) and the marginal product of capital declines. 71  CAR’s not-stunted rate of 59 percent is 3 percentage points below the 25th percentile of SSA, while its adult survival rate is 10 percentage points below the 25th percentile of SSA. 62 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth FIGURE 32 A Positive Shock to Private Investment would Boost GDP Growth a. A positive shock to private investment as a share of GDP . . . b. . . . would result in an increase in the GDP growth rate of up to 1 percentage point by 2030. 16 6 15 5.5 14 5 Percent (%) 13 4.5 Percent (%) 12 4 11 3.5 10 3 9 2.5 8 2 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Baseline 15% Ip/Y by 2030 Baseline 15% Ip/Y by 2030 Source: World Bank staff projections. The impact of private investment on GDP growth is twice mainly explained by CAR’s severe shortage of private as large as that of public investment. This difference is capital, as is common in many low-income countries.72 In derived from a growth scenario analysis that compares CAR, the marginal product of private capital is 23 percent, the effect of a positive shock of a 1 percentage point of much higher than a mere 7 percent for public capital. Under GDP increase in public investment (from 6 to 7  percent current conditions, private investment spending will have a of GDP) with a positive shock of the same magnitude on significant impact on growth, although its effect is expected private investment (from 9 to 10  percent of GDP). The to converge by 2050. shock on public investment would boost GDP growth by only +0.08  percentage points, while the shock on private investment would accelerate GDP growth by +0.16  percentage points (Figure  33). The difference is A Combination of Reforms is the Strongest Pathway FIGURE 33 The Effect of a 1 Percentage Point Private to Growth Investment Shock on Growth is Much Larger than A package of reforms has the biggest potential impact on a 1 Percentage Point Shock to Public Investment economic growth, given the modest impact of individual Due to a Higher Marginal Product of Capital reforms. The combined strong reform scenario includes a 0.3 combination of reforms that would affect TFP, human capital, and private investment growth and move CAR’s growth 0.25 fundamentals closer to the SSA median. In particular, the 0.2 package of reforms would improve the country’s security Percent (%) 0.15 environment, make the business climate more predictable, 0.1 increase investment, and improve education and health. 0.05 Under the combined strong reform scenario, GDP growth 0 would more than double compared to the baseline by 2050. 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Under this scenario, GDP growth would reach 5.0 percent 1ppt increase in Ig/Y growth effect by the mid-2020s and 6.6 percent by 2050—3.6 percentage 1ppt increase in Ip/Y growth effect points above the business-as-usual scenario (Figure  34). Source: World Bank staff projections. While this growth rate may seem high, it remains below 72  Devadas, S., & Pennings, S. (2018). Assessing the effect of public capital on growth: An extension of the World Bank Long-Term Growth Model. The World Bank. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 63 CHAPTER 2 – Past and Future Drivers of Growth FIGURE 34 A Bold Combination of Reforms is Needed to Maximize the Country’s Growth Potential a. A combination of reforms has the strongest impact on GDP growth . . . b. . . . leading to higher per capita GDP growth over the long term . . . 8 6 7 5 6 4 Percent (%) Percent (%) 5 4 3 3 2 2 1 1 0 0 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Baseline Combined reforms package Baseline Combined reforms package c. . . . allowing CAR to graduate to lower-middle income status by 2038 . . . . . . and halving the extreme poverty headcount rate by 2045. 2,000 80 Halving of poverty 1,800 70 1,600 60 1,400 2010 US$ 50 Percent (%) 1,200 40 1,000 30 800 600 20 400 10 200 0 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Baseline Combined reforms package Baseline Combined reforms package Low-middle income threshold Source: World Bank staff estimates. Rwanda’s average GDP growth of 7.5  percent over 5 percent by 2050, much higher than a mere 1.5 percent 1998–2017. The higher rate of growth under the combined in the business-as-usual scenario. The reform package strong reform scenario benefits from the increase in the is projected to generate faster per capita growth than growth contribution of TFP (2.3 percentage points of the Rwanda (4.3  percent over 1998–2017), as Rwanda has growth increase with respect to the baseline), human had more rapid population growth. Real GDP per capita capital (0.6  percentage points), and private investment is projected to increase rapidly from US$384 in 2019 to (0.5 percentage points) by 2050.73 more than $1,000 around 2038, which would help CAR graduate to low-middle-income country status and reach The combined reform scenario would significantly improve a per capita income of close to US$2,000 by 2050. This living standards, with CAR graduating to low-middle- growth performance would help the country halve its income status by around 2038. The combined pro-growth extreme poverty rate from 71 percent in 2020 to 35 percent reform package would increase GDP per capita growth to by 2045.74 73  Non-normalized contributions based on the growth impacts of one-by-one reforms are discussed above. 74  Assuming unchanged inequality. 64 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 2 – Past and Future Drivers of Growth What Will It Take to Boost Long-Term Growth? CAR needs to implement bold and strong reforms to boost rights, credit constraints, and poor infrastructure (e.g., growth, improve livings standards, and significantly electricity, roads, internet, etc.). However, there are reduce extreme poverty. Reforms need to: (i) increase TFP opportunities to tap into the potential of private growth; (ii) attract private investment; and (iii) accelerate investment to boost GDP growth. This would require human capital accumulation (Figure 35). implementing and sustaining bold reforms to attract private investment, including enabling market-based • Increase TFP growth. Under the business-as-usual competition, making it easier to start a business and scenario, TFP growth is projected to decline from register property, and improving critical infrastructure 2.0  percent in 2019 to 0.5  percent by 2040 in the such as power, ICT, and transportation. baseline reducing real GDP growth and worsening living standards. Bold and sustained reforms that target • Accelerate human capital accumulation. A innovation and the quality of infrastructure, education, continuation of CAR’s education and health and public institutions are needed to increase TFP interventions (business-as usual scenario) would growth, which would require sustainable collaboration decelerate human capital growth over the next 30 years and cooperation between the government, the private and reduce the contribution of TFP to economic sector and development partners. growth. Improving human capital would require a greater focus on increasing the average years of • Attract private investment. CAR needs to address schooling, enhancing learning outcomes, improving the shortage of private investment to boost its growth child nutrition, and providing adequate protection potential. The country’s subdued economic performance through social welfare programs (CAR Fourth Economic is due to, among other factors, insecure property Update). FIGURE 35 CAR Needs Bold and Pro-Growth Reforms that Target TFP, Private Investment, and Human Capital Growth Boosting productivity: Raising productivity by ensuring sustainable collaboration across government, private sector and civil society Slower pace of Individual and A combined Attracting private investment: improvements in not sustained pro-growth reforms package Enabling market-based competition living standards if reforms are likely the economy to generate could more than Easing starting a business, registering a property grows at current modest impact double GDP Enabling critical infrastructure (power, pace on growth growth rate transportation, ICT) Improving human capital: Increasing the average year of schooling and learning outcomes Improving child nutrition Providing adequate social protection Cross-cutting constraints: Political stability and improved security environment Source: World Bank staff. 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Economic Dynamics, 34, 46-59. 66 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth © Stephan Gladieu Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 67 © Wilfried Kouame CHAPTER 3 Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth 68 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth CAR is relatively small economically, which means that CAR faces strong challenges in leveraging the global market domestic demand is unlikely to be able to drive high and to drive sustained growth and poverty reduction. This sustained growth. CAR has one of the smallest economies chapter reviews the country’s national, regional, and global in the world (around US$4.7 billion in PPP in 2020), ranked trade environment. It discusses the challenges CAR faces 168th out of 175 countries (excluding very small island in effectively leveraging trade as a driver of productivity economies and microstates). The country’s GDP amounts growth, including fragility and conflict, both of which tend to 0.00359 percent of global GDP, and it has a relatively small to suppress trade. In addition to its own small domestic and dispersed population, with only 15 countries having market, the country’s neighbors also have very small a lower population density. Small economies have small economies. The combined GDP of the six countries with markets, which limits productivity growth through, for which CAR shares a border amounts to just 0.33 percent of example, scale and learning effects. In addition, the per global GDP. Furthermore, CAR faces some of the highest capita costs of many public goods tend to be higher in small trade costs of any country in the world, partly due to economies than in their larger counterparts. Nevertheless, the distance to the largest markets in the United States, size is not necessarily a constraint on growth in a globalized Europe, and Asia, but also due to poor trade policies, economy, as small countries can use trade to access large weak transport and logistics services, and burdensome overseas markets to both increase export opportunities border clearance procedures. Nevertheless, there are and reduce costs, as well as widen the range of final products important opportunities to enhance and diversify trade. In available to consumers and intermediate inputs available addition to domestic policy reforms, there are mechanisms, to producers. Small countries, such as Luxembourg, are including the African Continental Free Trade Agreement among the countries with the highest per capita income. and preferential access to the largest overseas markets, Indeed, Alesina et al. (2004) conclude that, “The benefits that can be used to reduce trade costs. of trade openness and economic integration are larger, the smaller the size of a country.” Trade Can be a Powerful Force for Stability and Growth Conflict and fragility have created substantial barriers to taxation of trade may be an important source of revenue trade, but trade can be a powerful force for stability by for both the government and armed groups, and changes promoting socioeconomic development and increasing the in the structure and value of trade may affect the ability to opportunity cost of conflict.75 Trade provides new economic sustain conflict. In some countries, the army is also heavily opportunities and creates export-related jobs that can offer involved in trade. alternative sources of income for those otherwise drawn toward violence and armed groups. However, trade can Evidence from a range of countries suggests that increasing also have a negative impact on jobs in sectors that are trade with neighbors reduces both the duration and subject to greater competition from imports, and without intensity of conflict. Cross-border trade is also associated support the people affected may turn to violence to sustain with a lower risk of conflict when both countries are members their income. Trade can also spur conflict by increasing of the same regional trade agreement. Reducing barriers to the value of economic resources, usually commodities cross-border trade has been found to promote economic such as minerals and precious stones and timber, and the activity in border regions. Cross-border trade typically has incentives to fight over their control. Control of trade in strong backward and forward linkages to local producers high value goods has been a primary factor behind conflict and distribution markets, creating job opportunities in and continuing fragility in several countries such as the production, transport, and logistics in border areas. Moreover, Democratic Republic of the Congo and Myanmar. Finally, facilitating local cross-border trade can be important to 75  See Cali (2015). Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 69 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth address food security issues faced by poor populations in an efficient food processing sector. Imports could also border areas and increase incomes in farming communities. constitute an important source of competition and discipline Key steps that the government can take, with support for domestic firms. The literature has documented how from international development organizations, include increased competition through imports can drive productivity facilitating trade and improving export competitiveness growth. Exporters tend to be more productive than firms in fragile regions, improving the governance of high value that sell only to the domestic market, which means that traded resources, implementing programs to protect the better access to overseas markets that allows resources real income of poor households in fragile regions from to move to exporting firms tends to raise productivity. adverse changes in trade flows, and increasing access to Participation in GVCs can have a strong impact on neighboring markets for goods and services produced in, productivity when foreign direct investment (FDI) and or with strong potential linkages to, fragile regions. the use of imported inputs by exporting firms lead to knowledge and technology spillovers to other firms. It is Trade can play a key role in supporting the future drivers also important to open trade in both goods and services. of growth. Trade can play a key role in supporting productivity For example, greater competition in backbone services, growth. Increased access to global markets could provide such as telecommunications and transport, that lead to local companies with a wider range of inputs and their lower costs and a wider variety of products can contribute embodied technologies that support increased productivity. to productivity growth throughout the economy. Moreover, In agriculture, for example, access to new, higher yielding trade agreements that increase export opportunities can seeds and improved fertilizers can drive agricultural help attract private investment by increasing the size of productivity growth, while access to machinery can support the available market. High Trade Costs and a Challenging Regional Environment CAR faces some of the highest trade costs in accessing FIGURE 36 global markets.76 World Bank (2021) estimates show that Measures of Overall Trade Costs trade costs are high throughout the world, equivalent to 500 an average 100 percent tariff (Figure 36). This means that 450 the cost of trading goods internationally is twice as high as selling goods domestically. Tariffs are responsible for a 400 fraction, one fourteenth, of these average trade costs. The 350 Average trade costs (%) main factors leading to high trade costs are high transport 300 and logistics costs and costs associated with border 250 clearance procedures. CAR faces extremely high costs in 200 accessing markets in Europe, Asia, and North America, 150 equivalent to an ad valorem tariff of around 400 percent. Its trade costs with CEMAC countries are relatively lower, 100 but they still involve a three-fold increase relative to selling 50 to the domestic market. Reducing trade costs should, 0 therefore, be a policy priority to allow CAR to overcome CAR CEMAC FCV SSA the growth challenges related to the size of its economy. CEMAC EU28 ASIA NA Source: World Bank staff calculation using ESCAP-WB trade cost database Note: EU28 = European Union: NA = North America. 76  The measure of trade costs captures all costs involved in trading goods internationally relative to those involved in trading goods domestically. It reflects international transport costs, tariffs, and non-tariff barriers (e.g., costly import and export procedures) as well as other factors that raise trade costs such as the use of a different language or currency (UNESCAP-WB 2017). 70 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth CAR ranks poorly on trade logistics compared to peers. on an old version of the Asycuda++ customs software, dating In 2018, the country’s overall ranking on the logistics back to 1992. It needs to follow other countries and move performance index (LPI) was 154th out of 160 countries, to a new and more sophisticated e-customs system such lower than all comparators except Burundi and Niger as Asycuda World. The benefits of such modern systems (Figure  37). CAR’s low infrastructure quality and logistics include: (i) faster assessment of customs declarations; quality and competence adversely affects its firms’ (ii) reductions in transaction time for payment and release relationships in the region. Also, pervasive logistical of cargo; (iii) greater accountability for revenue collection; bottlenecks in CAR tend to increase trade costs, thereby (iv) facilitates the application of risk management and reducing the competitiveness of domestic firms. selectivity principles, which in turn is crucial in reducing the number of inspections and reducing delays at the border; Trading across borders is a key bottleneck to access and (v) allows for closer interaction between customs and global markets. Inadequate access to transport is one of other agencies with border clearance responsibilities, such the significant obstacles for CAR’s cross-border trading. as those responsible for standards. The implementation of Transportation costs along the main corridor Bangui-Douala such a modern customs system would be an important first are some of the highest globally and limit trade options. step toward reducing the time and cost of border clearance The Ubangi river can accelerate regional integration, procedures and addressing corruption in customs and other unlock opportunities for diversification, boost the country’s border agencies. competitiveness, and reduce the cost of imports. Transporting goods along the Ubangi river is about US$20 cheaper per ton Although tariffs contribute little to trade costs globally, than using the Bangui-Doula corridor. However, the Ubangi CAR’s levies are among the highest in the world. The country river is only navigable four months out of the year, mainly applies CEMAC’s CET to imports from outside CEMAC, between Bangui and Brazzaville, because of the silting of the while imports from CEMAC members are in principle river associated with the impact of climate change and low duty-free, although the costs of proving compliance with water levels. CAR would need to improve the navigability of origin rules may limit preferential trade. The CEMAC CET the river to leverage its potential fully. is relatively simple in that there are only four different tariff rates: (i) 5  percent on products deemed to be essential; A weak customs system and high tariffs (ii) 10 percent on raw materials and equipment; (iii) 20 percent contribute to high trade costs on intermediate goods; and (iv) 30 percent on consumer goods. In 2017, the simple average tariff applied by CAR was CAR’s customs system constrains efforts to improve and 18 percent, which is among the highest tariffs in the world. speed up border clearance processes. The country still relies By comparison, the global average tariff was 7.5 percent, the SSA average was 10.9 percent, the ECOWAS average was FIGURE 37 12.1 percent, and the SADC average was 6.3 percent in the Logistics Performance Index Ranking, 2018 same year. Overall LPI rank 160 Relatively high tariffs raise the cost of consumption, 120 limit the access of firms to inputs, and distort production Timeliness Customs incentives. The highest tariffs are levied on consumer 80 goods in CAR, which has implications for poverty reduction. For example, the tariff on primary agricultural products for 40 household consumption raises the price of imported food 0 by more than 25 percent (similar price increase for imported processed food). The tariffs on inputs for industry are also high Tracking Infrastructure in CAR and considerably above those of Lao PDR (a small and tracing landlocked post-conflict country), constraining the ability of firms to compete in international markets (Figure 40). High tariffs on finished products incentivize firms to produce for the protected market instead for more competitive export Logistics quality International shipments and competence markets. CAR is a member of the CEMAC customs union and CAR Niger Burundi therefore has limited ability to influence the setting of tariffs, Chad Mali Rwanda which means that the country likely needs to advocate for Source: World Bank staff calculations using LPI 2018 and WDI datasets. a review of the CEMAC tariff structure if it is to successfully Note: CAR is compared to a selected number of FCV and landlocked countries in SSA. pursue a trade-driven growth strategy. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 71 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth High trade costs result in low trade openness compared to that of peers and improved between 2016 and 2018 (Figure 38). Commercial services accounted for compared to peers 20  percent CAR’s total services in 2018—lower than an CAR’s merchandise trade openness is low compared to average of 78 percent in peer countries.77 There is, however, that of its peers. The country’s level of goods exports, as no information on the type of services that are driving this well as goods exports per capita, is lower than that of peers trend, and the increase in services trade may reflect the (Figure 39). By contrast, its service trade openness is high presence of international agencies in the country. FIGURE 38 CAR’s Trade Openness a. Merchandise trade openness b. Services trade openness Av. 2005–2007 Av. 2016–2018 Av. 2005–2007 Av. 2016–2018 160 160 160 160 120 120 120 120 COG Trade to GDP (%) Trade to GDP (%) Trade to GDP (%) Trade to GDP (%) COG 80 80 80 80 TCD MLI MLI TCD 40 DRC CMR 40 RWA 40 40 NER CAR COG CAR UGA SDN UGA TCD RWA RWA CAR NER CMR UGA CAR MLI CMR MLI CMRCOG UGA TCD NER SDN NER SDN 0 0 0 0 4 6 8 10 12 4 6 8 10 12 4 6 8 10 12 4 6 8 10 12 Log of GDP per capita (PPP, av) Log of GDP per capita (PPP, av) Log of GDP per capita (PPP, av) Log of GDP per capita (PPP, av) Source: Authors’ calculations using UNCTAD data. Note: Countries in red are CAR’s peer countries. BDI=Burundi, CMR=Cameroon, CAF=Central African Republic, TCD=Chad, COG=the Republic of Congo, ETH=Ethiopia, KEN=Kenya, LAO=Lao People’s Democratic Republic, MLI=Mali, RWA=Rwanda, UGA=Uganda. FIGURE 39 Merchandise and Services Exports per Capita, 2005–2018 Export per capita - goods Export per capita - services 400 100 80 300 Export per capita Export per capita 60 200 40 100 20 0 0 2005 2010 2015 2020 2005 2010 2015 2020 Year Year CAR Cameroon Niger Chad DRC Uganda Rwanda Sudan Mali Source: Authors’ calculations using UNCTAD data. 77  Only commercial services data are available. 72 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth FIGURE 40 Comparison of CAR and Lao PDR Tariffs by Economic Category, 2017 Food and beverages: primary - mainly for industry Food and beverages: primary - mainly for household consumption Food and beverages: processed - mainly for industry Food and beverages: processed - mainly for household consumption Industrial supplies - primary Industrial supplies - processed Fuels and lubricants Capital goods Transport equipment Consumer goods not elsewhere specified Goods not elsewhere specified 0 5 10 15 20 25 30 Source: Authors’ calculations using UNCTAD data. Lao PDR CAR CAR’s exports are dominated by a narrow range of natural and the United States fell by 12 percent and 66 percent, resource products (mainly mining and forestry), and the respectively, between March and June 2020 due to the concentration of exports has increased in recent years. COVID-19 pandemic. Exports to more distant markets require The country’s top 5 export products account for around sophisticated transport logistics and are vulnerable to factors 60  percent of total exports, while the top 20 products that constrain access to the trade corridor to Douala, such as represent about 86 percent of total exports. CAR’s key export climate change-related extreme weather events. products include mineral products (gold and diamonds) and wood. Customs statistics also reveal that reexports of motor vehicles and machinery are also important, reflecting the A Challenging Regional conflict situation and the activities of international agencies present in the country. More detailed transaction-level data Environment that suggest that 10 firms account for more than 80 percent of Limits Trade the country’s total exports. Low export diversification and CAR’s regional trade is limited by the fragility of its the increasing level of export concentration make CAR neighbors and poor cross-border transport linkages. vulnerable to sudden changes in the international price of CAR borders 6 countries that, in principle, offer substantial key mineral products (World Bank 2020b). opportunities for cross-border trade. However, all its neighbors are also affected by FCV, resulting in instability CAR trades mainly with countries outside of Africa and that constrains trade and the ability of countries to address very little with its neighbors. In 2020, over 50 percent of common challenges such as poor connective infrastructure. exports went to the European Union, followed by China Nevertheless, experience from elsewhere (e.g., the border (11 percent) and Pakistan (10 percent). CAR’s motor vehicles between the Democratic Republic of the Congo and and machinery exports are mostly exported by the United Burundi as well as that between Rwanda and Uganda) Nations Mission in the Central African Republic (MINUSCA) suggests that a considerable amount of small-scale cross- and the Embassy of France, and these re-exports artificially border trade can take place in unstable environments, with inflate the country’s current exports. Hence, the role of trade important benefits in terms of food security and poverty in the economy is considerably less than what is suggested reduction. But the Government of CAR does not control by official statistics. In addition, CAR’s reliance on distant all the country’s border crossings, especially those in the export markets makes it vulnerable to external economic east of the country, which means that revenues collected at shocks. For instance, CAR’s exports to the European Union these crossings are funding the armed groups that control Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 73 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth them. This situation puts even more pressure on the Bangui- of origin and sanitary and phytosanitary standards, differ Douala corridor—which is estimated to account for about across ECCAS members (African Development Bank 2019). 80  percent of CAR’s internationally traded goods—as a revenue generator for the government. As a result of high trade costs and poor connectivity, trade plays a smaller role in the economy than it could, exports All members of CEMAC continue to impose border regulations lack diversity, and few firms participate in GVCs. CARs that differ across countries, hampering cross-border and recent trade performance demonstrates that there is regional trade. Complex border procedures involving dual considerable potential for CAR to increase the role of trade border approval increase trade costs and constrain free in the economy to levels seen in comparator countries. More trade. The dual border approval process requires traders inclusive trade can be driven by diversification into a wider to receive approval at the border of both exporting and range of goods and services, including through greater importing countries, which causes delays that raise trade participation in GVCs. Trade diversification can be achieved costs and can sometimes be detrimental to perishable through: (a) the export (or import) of new goods or services; products. These border procedures may be especially harmful (b) the export (or import) of existing products to new markets; to micro firms by increasing their costs and making them less and (c) quality upgrading of exported (or imported) products. competitive. Also, there are still non-tariff measures (NTMs) The agriculture sector holds particular promise as a driver of in the ECCAS region, and some standards, including rules export diversification, especially into regional markets. Low Export Survival Rates, GVC Participation, and FDI Export survival, measured in terms of entry into new and structure of firms’ export survival could inform policies export markets as well as the duration of export flows, is aimed at promoting export diversification. a key determinant of export growth and diversification. (Brenton et al., 2010). Firms in developing countries tend Yet, export survival rates are lower in CAR than in peer to be smaller and less productive than their counterparts in countries, reflecting the high cost of trade. The probability developed countries. As a result, the duration of exports of export relationships surviving past the first year is just tends to be shorter from developing than developed 20 percent in CAR, and the probability of them lasting for countries. Also, the distance of export markets can influence more than two years is less than 10 percent (Figure 41). a firm’s export survival rates. Understanding the challenges These survival rates are lower than those of all peer FIGURE 41 Export Survival Rates by Country and Destination a. Kaplan-Meier estimates b. Survival rates by destinations 1.0 1.0 0.8 0.8 Probability Probability 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 9 Analysis time Analysis time CAF CMR COD COG ETH ASIA CEMAC EU28 NA KEN LAO RWA TCD UGA Source: Authors’ calculations using data from WITS and Export Mirror Data. 74 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth comparator countries. As in other countries, large firms and productive employment. The share of CAR’s exports in CAR have higher survival rates than small and medium- involved in international production (i.e., sum of backward sized enterprises. Exporters in CAR have a greater chance and forward participation, which is an indicator of the level of surviving in Asian, European, and North American of participation in GVCs) fell from 73  percent in 2000 markets than in CEMAC. CAR’s export survival rates in to 58 percent in 2018 (World Bank 2020b). CAR’s level of CEMAC are lower than in other markets around the world. participation in GVCs seems high compared to oil exporters Larger and more productive firms tend to export to high- in CEMAC, but it is distorted by the short value chain of income destinations, while their less productive and smaller diamonds, which have long been among CAR’s top export counterparts tend to serve regional markets. Moreover, products. large firms tend to export raw and mineral products and are better positioned than their smaller counterparts to CAR participates in GVCs primarily through forward address regulatory and other barriers related to exports. linkages, which means it is missing out on the productivity However, the export of raw and mineral products tends spillovers that accrue from backward linkages. CAR’s to have a limited impact on employment and productivity backward linkages—importing foreign inputs to produce growth. The smaller size of firms and the type of products goods to export—are much less extensive than its forward exported (e.g., perishable agricultural products) could linkages—exporting domestically produced inputs to mean that insecurity and barriers to regional trade have countries involved in downstream production—reflecting a greater impact on the survival of exports to regional the dominance of exports of unprocessed minerals and markets than elsewhere. raw materials. While CAR’s GVC participation has been generally higher than that of selected FCV peers, it has Similarly, CAR’s participation in GVCs is limited and has been declining since the 2000s. Integrating into GVCs with been declining over the years (Figure 42). GVCs enable high value-added products through backward linkages can developing countries to take advantage of advanced contribute to productivity growth and more diverse trade economies’ cutting-edge industries rather than having (World Bank 2020b). to build up their own industries (World Bank 2020b). Participation in GVCs can generate quality jobs, increase Recurrent conflicts, high trade costs, and a challenging productivity, and reduce poverty by boosting incomes regional environment contribute to low FDI. As demonstrated in the economic literature, FDI is an engine for growth and an FIGURE 42 important channel for technology transfers from advanced Participation in GVCs, CAR vs. Comparators, 2000–18 to less developed countries. However, CAR appears to be attracting negligible interest from foreign investors relative 0.6 to regional peers, with FDI inflows 23 times lower in CAR GVC position index (0–1) 0.5 than in other FCV countries (Figure 43). Recurrent conflicts, 0.4 combined with high trade costs, poor connectivity, and a challenging business and regional environment, has limited 0.3 CAR’s ability to attract FDI. Along with policy actions and 0.2 reforms to escape the fragility trap and boost growth, the 0.1 country needs to design and implement sound strategies to 0 attract FDI. These strategies could focus on the tradeable sector to leverage foreign savings and demand, and they 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 could target the diaspora to possibly bring back qualified CAR TCD DRC SOM workers and contribute to productivity growth and human Source: Authors’ calculations using Eora data. capital accumulation. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 75 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth FIGURE 43 FIGURE 44 In 2018, FDI Inflows were about 23 Times Lower Fertilizer Use per Hectare is Very Low in CAR in CAR than in Other FCV Countries. Compared to in Peer Countries 1,600 80 1,400 70 Use of Fertilizer (Kg per hectar) 1,200 60 FDI (million US$) 1,000 50 800 40 600 30 400 20 200 10 0 0 CAR FCV SSA CEMAC 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 CAR CEMAC SSA FCV Source: World Bank staff calculations using WDI data. Global, Regional, and Cross-Border Trade Opportunities Reducing trade costs along the Tapping into the potential of agricultural trade Bangui-Douala corridor as a strategy for post-conflict reconstruction Reducing trade costs along the Bangui-Douala corridor is and growth essential to better link CAR to global markets. A substantial Experience from other FCV countries suggests that reduction in trade costs would enable CAR to overcome rebuilding the agriculture sector is an important strategy the limitations of the small domestic market and exploit for post-conflict reconstruction. Many civilians have been large and stable demand in overseas markets in North displaced by conflict in CAR, and their agricultural livelihoods America, Europe, and Asia. Reducing trade costs along have been disrupted. But agriculture is well suited to absorb the Bangui-Douala corridor would enable firms to better demobilized combatants, improve food security, and enhance access imported inputs, encourage investments in activities livelihoods.78 Evidence shows that in low-income countries, related to GVCs, and reduce the cost of consumption for the growth in the agriculture sector can have a more powerful country’s poorest households. Reducing border clearance impact on economic growth, employment, and poverty costs through modernization of customs procedures at the alleviation than growth in non-agricultural sectors.79 The border with Cameroon and in Bangui is an important first development and modernization of CAR’s agriculture sector step toward lowering trade costs that are within the control presents an opportunity to attract private sector investment of the government. Moreover, reviewing and streamlining and generate jobs in processing and services such as bureaucratic control measures, such as procedures related transportation and logistics. to issuing import licenses and permits, would contribute to greater transparency and predictability of trade procedures. Yet, one of the key constraints to agricultural productivity In addition, efforts to remove cost-raising obstacles along is the low use of fertilizer. CAR’s agriculture sector remains the corridor, such as roadblocks, by coordinating with the mostly informal, and the level of agricultural production authorities in Cameroon could lower costs for truckers, and productivity is low compared to regional comparators, reduce journey times, and lower vehicle operating costs. let alone global best practices. There is therefore a huge 78  Birner, Cohen, and Ilukor (2011), see also similar discussion in World Bank (2020) regarding the case of Iraq. 79  Christiaensen et al. (2011) show that a 1 percent increase in agricultural per capita GDP reduces poverty five times more than a similar increase in non-agricultural per capita GDP. 76 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth TABLE 8 Crop Yield in kg per Hectare, 2018 CAR Cameroon Chad Congo DRC Sudan Cassava 2791 14684 8109 10742 8138 Maize 777 1709 1281 938 775 1500 Millet 1114 1388 619 888 670 705 Plantains 2865 13527 7410 4433 Sesame 219 1296 531 437 442 276 Sorghum 1028 1646 867 669 676 Source: FAOSTAT. potential to increase the agricultural output of basic crops. that are readily available outside of CAR. New technologies A key challenge is that fertilizer use per hectare is very low to adapt to climate change will typically require knowledge in CAR compared to peer countries (Figure 44). In 2018, and guidance to ensure they are applied in accordance with CAR consumed 0.19 kg of agricultural fertilizer per hectare local conditions. The spread of new technologies and ideas of arable land, lower than that of any of its peers (Table 8). can be a challenge in developing countries such as the For instance, Cameroon and Kenya used 69 and 84 times CAR, where farmers are often heterogeneous smallholders more fertilizer per hectare of arable land, respectively, than and highly dispersed. Access to extension services can be CAR in the same year. An intensification or increase in the critical in facilitating the uptake of new seed varieties and will use of fertilizer would boost CAR’s agricultural productivity therefore be critical for agricultural firms to adapt to climate and production and increase the export potential of a range change. Previous research has highlighted the potential of agricultural and potentially processed food products. to increase access to extension services by agricultural specialists in Africa through greater cross-border mobility An increase in the use of fertilizer could help CAR increase of extension service providers. This could be achieved agricultural production and become an exporter of through measures such as creating a regional database of agricultural products. If CAR increased its use of fertilizer to agricultural specialists, removing barriers to movement (e.g., the same level as Cameroon, the production of some crops, lengthy administrative procedures to obtain a work permit), including cassava, maize, millet, plantains, sorghum, and and introducing transparent procedures to recognize sesame, would double or increase by five times. An increase the qualifications of agricultural specialists (e.g., mutual in agricultural production could reduce the country’s recognition agreements of professional qualifications).80 dependency on food imports and provide opportunities to accelerate economic growth, increase employment, and reduce poverty. It could also increase CAR’s exports of Deepening regional trade integration to maximize agricultural products, especially to neighboring countries CAR’s trade potential since most of them are net importers of agricultural or food products. Deeper regional trade integration could help CAR increase and diversify its exports and attract private sector Access to new agricultural technologies through trade investment. By increasing the size of the available market, will become even more important to successfully adapt effective regional integration could attract private investment to climate change. For low-income countries, trade is in new activities. For CAR, increasing productivity in key for firms to access knowledge and new technologies. agriculture, together with deeper regional integration, could However, trade barriers often constrain access to new encourage investment in regional food value chains and technologies embodied in imported inputs, including potentially create new food processing jobs. Empirical barriers that limit farmers access to higher yielding seeds evidence shows that regional integration fosters exports 80  World Bank. 2012. “Africa can Help Feed Africa.” Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 77 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth and export diversification (Sanguinetti et al. 2004). Moreover, household incomes and could lift an additional 30 million trade between countries at a similar level of socioeconomic people, or 1.5 percent of the continent’s population, out development is more diversified than trade between countries of extreme poverty by 2030. The largest gains in poverty at different levels of development.81 reduction from the implementation of AfCFTA would occur in countries with high initial poverty rates, including CAR, Efforts to facilitate imports, improve distribution, and where extreme poverty could fall by 5.1 million. To achieve enhance extension services could increase fertilizer these gains, the authorities would need to not only remove application rates. CAR imports most of its fertilizer, with tariffs on intra-Africa trade but also significantly reduce Cameroon being its main supplier in 2018. Farmers in NTBs and, more importantly, improve trade facilitation. Africa, especially those in landlocked countries, face higher prices for fertilizer than farmers elsewhere in the world, For CAR to successfully fulfill its commitments to deepen and markets in many African countries are too small to regional integration under the AfCFTA, the government exploit economies of scale related to fertilizer production needs to adopt policy reforms, supported by technical and blending. The absence of regional fertilizer markets assistance and capacity building. CAR would benefit is partly due to individual countries often specifying their significantly from reducing not only its own trade costs but also own fertilizer blend specifications and specialty products, those in neighboring countries that could be coordinated which means that fertilizers cannot move freely from under the AfCFTA. Improvements in trade facilitation country to country. Regional markets with common fertilizer would require significant investments to modernize border infrastructure, introduce electronic clearance processes, and specifications could generate substantially lower prices. move to modern risk-based approaches for inspections. Deeper regional integration that reduces trade costs would Prioritizing improvements in border processes for perishable increase the availability, reduce the price, and bring more agricultural products (e.g., by introducing a fast lane for variety of imported fertilizers for CAR’s farmers. Hence, such products) would be especially beneficial given the simplifying trade procedures for fertilizer could boost cost of wastage from delays at the border. Box 3 provides agricultural productivity. an econometric analysis of the potential gains for CAR, especially in agriculture, from pursuing deeper regional Harmonizing trade procedures and streamlining NTMs in integration through CEMAC and/or the AfCFTA. ECCAS would reduce delays and ease the free circulation of goods and services, boosting trade and competitiveness in the region. The streamlining of NTMs and the standardization Improve connectivity to regional and harmonization of trade procedures, including borders and global markets procedures, standards, and regulations, would deepen economic and trade integration and cooperation. Efforts to Trade will be essential for CAR to achieve economies of deepen the integration of ECCAS members would inevitably scale, accelerate economic growth, and escape fragility. increase intraregional and cross-border trade, which would Challenges related to CAR being landlocked and a relatively be especially beneficial to CAR.82 small economy translate into limited opportunities for its domestic market to drive sustained and inclusive growth. The African Continental Free Trade Area (AfCFTA) offers an Experience from other countries shows how trade can be opportunity for CAR to pursue deeper and more effective key to access new technologies that promote productivity regional integration. CEMAC has proved to be of limited growth; increase competition, especially in sectors effectiveness in reducing barriers to trade and promoting that provide critical inputs to other economic activities regional integration. The AfCFTA provides an opportunity (e.g., backbone services); and provide broader market to pursue a new approach to integration in Africa that opportunities that attract private sector investment. Given could drive exports, job creation, and poverty reduction the importance of the agriculture sector in CAR and the in CAR. Projections by the World Bank suggest that the full agricultural market opportunities in the region, trade in implementation of the AfCFTA would significantly boost food products, especially with neighboring countries, offers African trade, with exports between African countries a way to diversify the economy and reduce the country’s increasing by over 81 percent, while exports to non-African dependence on a small number of export products that countries would rise by 19  percent. This would increase have a limited impact on the poor. 81  Regolo 2013. 82  Romalis (2007) shows that a country becomes more exposed to trade when its trading partners reduce their tariffs and liberalize their trade regimes. 78 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth BOX 3 Regional Integration and Trade: A Gravity Analysis The adoption of regional trade agreements (RTAs) Increased regional integration is likely to stimulate has increased substantially over the past decades. CAR’s trade with its neighbors, especially its exports According to the World Trade Organization, there of agricultural products. The results of the gravity were 339 RTAs in force as of February 2021.83 Evidence model show that the implementation of the RTAs shows that RTAs boost trade among members and under ECCAS and the AfCFTA would significantly contribute to economic growth.84 For instance, there increase intraregional trade flows. More importantly, is strong evidence that the Association of Southeast ECCAS’ RTA would have a greater impact on Asian Nations (ASEAN), the European Union, and agricultural trade between its members than on total MERCOSUR have boosted trade between their intraregional trade. CAR needs to leverage regional members. A gravity model is often used to estimate integration and cross-border trading to stimulate and the change in trade flows due to the adoption diversify its exports, especially agricultural products, which could accelerate economic growth and alleviate of RTAs.85 poverty. For example, Laos, a landlocked country like CAR, has stimulated its economy by trading with its A gravity model is used to assess the potential neighbors and encouraging regional investment flows. impact of the RTAs of ECCAS and AfCFTA on trade As a result, Laos is now classified as a lower-middle- flows, including agricultural trade flows. In addition income country, and its economic growth is driven to the ECCAS membership, the gravity model mainly by trade with neighboring countries such as includes other variables such as market size (measured Thailand, China, and Vietnam. by GDP), distance, and General Agreement on Tariffs and Trade (GATT) membership. The ECCAS variable Deeper regional integration could benefit CAR not is a dummy variable that takes a value of 1 if a only economically but also politically by increasing country is a member of ECCAS and 0 if it is not. The the opportunity cost of war. Armed rebellions tend empirical estimation is performed over the 2000–2019 to use neighboring countries to plan attacks, recruit, period using the Poisson maximum likelihood (PPML) and procure supplies for groups within the country. An estimator to estimate the potential effects of ECCAS’ increase in bilateral trade among ECCAS members, and the AfCFTA’ free trade agreements. The PPML along with closer ties between the people of different estimator provides some advantages over the ordinary countries, would increase the opportunity cost of least squares (OLS) estimator, including the fact civil war.86 Therefore, efforts to deepen regional that it controls for heteroscedasticity and remains integration and increase trade within ECCAS could consistent with and without the inclusion of zero- help to reduce or prevent conflicts both within and trade observations (Silva and Tenreyro 2006). between countries and promote political stability. 83  https://www.wto.org/english/tratop_e/region_e/region_e.htm. 84  Carrere (2006) shows that RTAs increase trade among members significantly, while Liu (2016) and Vamvakidis (1998) find that RTAs make important contributions to economic growth. 85  For example, see Baier and Bergstrand (2007) and Carrere (2006). 86  Martin et al. (2008) find that trade openness may act as a deterrence to the most severe civil wars. Similarly, Martin et al. (2012) show that countries with a higher frequency of past wars are more likely to sign RTAs because of their ability to promote peaceful relations by increasing the opportunity cost of conflict. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 79 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth To reduce trade costs and improve connectivity to regional investing in better border infrastructure that reduces delays and global markets, the government needs to pursue and the costs of crossing the border. The AfCFTA offers a new national reforms and coordinate policies with neighboring mechanism by which to pursue reforms aimed at deepening countries. Investments in trade facilitation are likely to trade integration in Africa. In addition, the government could have big payoffs. While complex efforts to pursue cross- explore bilateral discussions with neighboring countries to cutting measures are important, improving institutions and jointly facilitate trade. Measures that have proved useful governance and investing in education and infrastructure in other regions include: (i) implementing a simplified are critical to provide a conducive business environment for trade regime for small-scale traders; (ii) supporting trader private sector investment. Investments and policy reforms associations; (iii) creating a regular cross-border dialogue on that increase connectivity to regional and global markets removing non-tariff measures; (iv) small-scale investments would allow firms in CAR to exploit opportunities for in lighting and security that would allow for longer border backward and forward linkages within regional and global opening hours; (v) investments in sanitation facilities for value chains. 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Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 81 © Stephan Gladieu CHAPTER 4 Build Up Market- Based Competition, Institutions, and the Regulatory Framework 82 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework Limited Market-Based Competition Hinders Private Sector Development In CAR, market-based competition, regulatory framework accounting, legal, electricity, and gas, they can become governance, and institution indicators are weak and have a barrier to competition when they restrict investment for been deteriorating over the past decades, affecting the new entry. A weak judicial system can prevent new firms country’s ability to achieve its growth potential. CAR lags from entering the market, increasing the monopolistic far behind comparators on market-based competition, quality positions of existing dominant firms. of the regulatory framework, government effectiveness, rule of law, and political stability. Various factors such as high CAR lags behind its neighbors in terms of market-based market concentration, several underperforming state-owned competition. The country ranks lowest behind Gabon on enterprises (SOEs), an ineffective regulatory framework, and market-based competition fundamentals in the Central vested interests tend to hinder market-based competition African Economic and Monetary Community (CEMAC). in CAR. Widespread state participation in commercial Between 2006 and 2020, CAR’s score on the Bertelsmann activities also deters private sector investment. While Stiftung’s Transformation Index (BTI)87 has been lower than government involvement in the economy is underpinned that of Rwanda and the average of CEMAC (Figure 45a). by a desire to achieve social objectives, including creating The BTI remained at 3 between 2006 and 2014, before it jobs and reducing commodity price volatility, there are dropped by 1 point between 2014 and 2016. Between 2016 negative externalities that affect economic efficiency, and 2018, CAR’s level of competition remained relatively productivity growth, and fiscal sustainability. The country’s unchanged, with a BTI of around 2, before it improved by limited competitive environment is likely to lead to resource 2 to 3 points between 2018 and 2020. The improvement misallocation and limited productivity growth. on the BTI was partly due to an increase in new private firms, in particular real estate and restaurant businesses, Anticompetitive regulations and the weak ability of the because of the continued influx of international organizations judicial system to solve commercial disputes hinder (Bertelsmann Stiftung 2020). All CEMAC member countries, competition. While regulatory policies are standard in excluding Gabon, and Rwanda perform better than CAR on areas such as telecommunications, banking, insurance, local competitive intensity (Figure 45b). FIGURE 45 Despite Recent Improvements, CAR Lags Behind Comparators in Terms of Market-Based Competition a. Market-based competition, 2006–2020 b. Average market-based competition, 2006–2020 5.0 4.5 4.5 4.0 Market-based competition, (1–10) Market-based competition, (1–10) 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0 0 2006 2008 2010 2012 2014 2016 2018 2020 CAR CEMAC FCV SSA CAR CEMAC SSA FCV Source: Bertelsmann Stiftung Foundation. Note: Measured on a scale of 1 to 10, where 10 denotes the best conditions for market-based competition and the existence of comprehensive competition laws that are strictly enforced. 87  The Bertelsmann Stiftung Transformation Index references country-level competition data complementary to the World Economic Forum’s competition indicators. For this section, two subcomponents of the BTI are used: market-based competition and anti-monopoly policy. The scale of each index varies from 1 (worst) to 10 (best). BTI scores are mainly based on opinion surveys among country experts and are available every two years over 2006–2020. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 83 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework FIGURE 46 Anticompetitive Policies Remain Widespread in CAR a. Anti-monopoly policy index, 2006–2020 b . Average anti-monopoly policy index, 2006–2020 6.5 5.0 4.5 6.0 4.0 Anti-monopoly policy (1–10) Competition policy (1–10) 5.5 3.5 5.0 3.0 2.5 4.5 2.0 4.0 1.5 1.0 3.5 0.5 3.0 0 2006 2008 2010 2012 2014 2016 2018 2020 FCV CAR SSA CEMAC CAR CEMAC SSA FCV Source: Bertelsmann Stiftung Foundation. Note: Measured on a scale of 1 to 10, where 10 denotes the best conditions for market-based competition and the existence of comprehensive competition laws that are strictly enforced. CAR has not adopted or enforced legal or political measures and duopolies, especially in the telecommunications and to limit anticompetitive behavior. Between 2006 and banking sectors. 2020, CAR scored 4 on rules that prevent the development of economic monopolies and cartels in the Bertelsmann Limited trade liberalization has affected competition Stiftung Anti-Monopoly Policy index, below the average and private sector development. Between 2006 and 2014, of CEMAC (4.59) and Rwanda (6.125) (Figure 46). CAR CAR scored an average of 4 on the Bertelsmann Stiftung’s underperformed Cameroon, Chad, Guinea, and Rwanda, Liberalization of Foreign Trade index, well below the average although it did perform better than the Republic of of CEMAC (4.87) and Rwanda (6.5) (Figure 47). In 2014, Congo and Gabon. Even though CAR is a member of CAR’s trade with other countries started to deteriorate even CEMAC and has ratified the union’s competition regime, further, as its score on the index fell by 1 point between there are no formal institutions or national enforcement 2014 and 2016. This underperformance is due to the authority in the country. As a result, competition laws in country being landlocked and the poor conditions of road CAR are challenging to enforce, giving rise to monopolies infrastructure, among other factors. FIGURE 47 Limited Liberalization of Foreign Trade Affects Competition a. Liberalization of foreign trade, 2006–2020 b. Average liberalization of foreign trade, 2006–2020 6.0 6 Liberalization of foreign trade (1–10) 5.5 Liberalization of foreign trade (1–10) 5 5.0 4 4.5 4.0 3 3.5 2 3.0 1 2.5 2.0 0 2006 2008 2010 2012 2014 2016 2018 2020 CAR FCV CEMAC SSA CAR CEMAC SSA FCV Source: Bertelsmann Stiftung Foundation. Note: Measured on a scale of 1 to 10, where 10 denotes the best conditions for market-based competition and the existence of comprehensive competition laws that are strictly enforced, respectively. 84 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework The Regulatory Framework is Conducive to Elite Capture and Hampers Market-Based Competition Elite capture happens when powerful and well-connected procurement is an essential component of government groups influence policies and make them serve their narrow spending and has, theoretically, a positive effect on economic interests.88 This distorts resource allocation and leads to growth. Moerenhout and Roy (2012) found that public weak innovation and productivity, as less productive and procurement is an untapped potential for sustainable underperforming firms in the economy may advocate for economic development. This positive link occurs when public policies and institutions to protect their economic power procurement is productively managed, resulting from good and domestic market; obtain preferential treatment; and governance through a proper regulatory framework, good undermine fair competition. In private sector development, institutions, fair competition, transparency, and accountability. governance failures and power asymmetries lead to elite The objective of this section is to study governance and capture, clientelism, and exclusion, which can take the form competition in public procurement. It analyzes and evaluates of: (i) discretionary allocation of permits, licenses, and the following areas of public procurement policies and practices: (i) institutional and regulatory framework governing contracts to connected firms and investors; (ii) explicit or public procurement; (ii) fair opportunity and equality of informal regulatory barriers to entry; (iii) a complex regulatory treatment; (iii) transparency, confidentiality, and access framework and discretionary enforcement of existing to information; (iv) existence and fairness of grievance regulations that protect current privileges; (iv) a weak mechanisms; and (v) transparency, integrity, and accountability competition framework and weak enforcement capacity of the procurement system. The pillars used to assess that limit the government’s ability to identify anticompetitive the fairness and privilege resistance of public procurement behavior and dismantle monopolistic positions. systems are partly based on the Organisation for Economic Co- operation and Development’s (OECD) MAPS methodology CAR’s regulatory framework is conducive to the protection (OECD 2010), which is an auto-assessment tool for countries of privileges and elite capture . There has been little that aim to improve their procurement systems. effort in the recent past to adopt anti-monopoly policies. Also, when competition laws do exist, they are often not Improving the public procurement process is key to realize enforced, as there are no formal institutions or a national CAR’s growth potential. The country’s weak current public authority to enforce competition laws. Moreover, property procurement system and practices, which are characterized rights and acquisition regulations are neither implemented by a lack of accountability, transparency, competition, and consistently nor safeguarded adequately by existing laws. fairness, have contributed to a slowdown in the pace of the This section examines privilege protection and elite capture economic recovery over the past few years. For instance, through three pillars: (i) public procurement, (ii) the business there is no digital platform dedicated to public procurement. regulatory environment, and (iii) trade and customs. A One-third of sector ministries and agencies do not prepare similar methodology was used to study privilege-resistant a procurement plan, few projects are tendered through a policies in the Middle East and North Africa in 2015. competitive process, and critical statistics on procurement contracts are not published. As a result, key development projects related to construction, equipment acquisition, and Public Procurement infrastructure are delayed, suffer from cost overruns, and/or are poorly executed. The country’s procurement challenges Public procurement is important for economic development, make it difficult to achieve value for money and leverage especially in developing countries. Government expenditure public procurement to accelerate economic growth. is an essential determinant of economic growth and development. The importance of government expenditure CAR’s public procurement regime is exposed to privilege- in economic development has also been testified by seeking and corruption. A comparison of CAR to countries Ram (1986) through his growth accounting model. Public in the Middle East and North Africa (MENA)89 reveals that  The World Development Report 2017: Governance and the Law (World Bank 2017) provides a robust framework for understanding governance failures such as discretion, 88 capture, collusion, and privileged treatment.  CAR is compared to countries in MENA and Lebanon in particular because of data availability reasons and the fact that Lebanon is the only FCV country for which data are available. 89 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 85 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework CAR’s public procurement regime is vulnerable to privilege- framework is crucial for an efficient public procurement seeking. On the Public Procurement Privilege Resistance system. Government agencies use public procurement to index, CAR scores lower than the MENA average, although purchase goods and services from private firms, and the it performs better than Lebanon (Figure 48a). The country’s government plays an intermediary role between taxpayers low score can be attributed to a lack of transparency, the and the firms that have been awarded a procurement unequal treatment of firms, and opacity in the public contract. The government must, therefore, enforce the terms procurement system. This can prevent the entry of new firms of the contract to ensure it serves the interest of the public, on the market, as transparency and a fair legal framework which requires a well-designed regulatory and institutional are some of entrepreneurs’ key investment criteria. framework that defines the procurement conditions for suppliers, the supplier’s selection requirements, and how While transparency, confidentiality, and access to procurement bids are evaluated. Picho (2017) found that information are well defined in existing procurement the institutional legal environment, measured in terms of regulation, related institutions and accountability are procurement legislation and regulations, significantly affected weak. A decomposition of the Public Procurement Privilege public procurement performance in the West Nile sub-region Resistance Index reveals that there is little chance for of Uganda. An inadequate regulatory framework gives rise participants in CAR’s public procurement process to pursue to corruption and embezzlement, increases poverty, and grievance, complaints, and recourse actions fairly (Figure 48b). slows socioeconomic development. Accountability, procurement institutions, and the regulatory framework are weak, meaning that the public procurement CAR has a regulatory body that oversees public procurement, system gives rise to corruption and elite capture. CAR’s score but the authority does not have its own budget and relies on the Fair Competition Index is slightly higher than 0.5, on public financing. Under Article 110 of Law No. 08.017 on meaning that there is still room to improve the fair opportunity the Code of Public Procurement, Autorité de Régulation des process. Fair competition in the public procurement system Marchés Publics (ARMP) is the regulatory body that oversees is vital to select the most competent firms and optimize public procurement in CAR. In MENA, Jordan, Lebanon, public services. Transparency, confidentiality, and access to Kuwait, and Algeria do not have a regulatory authority information are defined by the regulatory framework, but their that oversees public procurement, although Algeria has a enforcement is weak, resulting in corruption and rent-seeking. robust application of its procurement law. With Article 2 of Law No. 08.017, the ARMP should have its own budget, but this is still not the case. Budget lines are allocated from Institutions and regulatory framework the central government (they are annexed to the public budget) to ARMP each year for its operation. However, According to international best practices in procurement, ARMP’s budget allocations are not sufficient for it to properly a reasonable and fair institutional and regulatory oversee and ensure the efficiency of the public procurement FIGURE 48 CAR’s Public Procurement Framework is Conducive to Privilege Protection a. Public procurement privilege resistance index, b. Decomposition of the public procurement CAR vs. Lebanon (0–1) privilege resistance index for CAR 0.51 0.8 0.50 0.7 0.49 0.6 0.48 0.5 Index (0–1) 0.47 0.4 0.46 0.3 0.45 0.2 0.44 0.1 0 0.43 Grievance, Integrity and Institutions Fair Transparency, 0.42 Complaint, Accountability and opportunity Confidentiality, Lebanon CAR and regulatory and Access Recourse framework to Information Source: Data collected from local authorities by the authors. 86 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework system. For example, it cannot guarantee the independence equally. Also, the evaluation process should be precise between the government and the procurement system, which and understandable, with realistic requirements for all increases the likelihood of corruption and privilege-seeking. candidates. The criteria should not favor one supplier, or In the MENA region, only Egypt and Oman have regulatory the specific services of a client, in the selection process. authorities with their own budgets. CAR’s regulatory framework claims that procurement Furthermore, the direct supply system does not exist information as well as contractors’ qualifications must be in CAR, even though it is clearly defined in the public understandable and accessible to all potential contractors. procurement law. Decree No. 0118 in Article 3 confers Procurement opportunities must be publicly announced in direct supply operations to the procurement services, a national gazette or widely distributed newspaper, and it is defined as the basic structure responsible for implementing suggested that the advertisement is published on a central the procedures for awarding public procurement contracts. web portal, with different degrees of accessibility to the In practice, the supply system is understood as a central relevant information. The criteria and relevant information purchasing agency, which does not exist. If it existed, it should be advertised and published. Article 20 of the should be linked to the procurement functions. CMP establishes that the participation of an entrepreneur, supplier, or group of suppliers or contractors should be According to CAR’s regulatory framework, the regulator’s based on their qualifications. Articles 20 and 32 of the CMP participation in the planning of public contracts is provide a list of qualification criteria that suppliers must prohibited, which is not always the case in practice. The meet to be eligible to submit a bid, and this list should ban on the regulator’s participation in the planning of public be communicated to suppliers, either through the tender contracts is based on Article 28 of the public procurement notice or tender documents. However, this is not always code (Code des Marchés Publics, CMP), and Articles 2 to 4 the case in practice, and sometimes the requirements favor of Decree No.0118 on the organization and operation of selected candidates. procurement services (Service de Passation des Marchés Publics, SPM) specify the roles in public procurement. There is no need to register as a supplier in a national According to the principle of separation of functions, supplier registry to participate in calls for tenders. Legal firms contract planning is the responsibility of the contracting that fulfill the requirements, such as the possession of tax authority, in collaboration with the Ministry of Finance clearance, registration at the Caisse Nationale de Securite and Budget. After approval by the Minister of Finance Sociale, and registration at the Agence Centrafricaine pour and Budget, the Procurement Plan (Plan de Passation des la Formation Professionnelle et l’Emploi, are eligible to Marchés) must be communicated to the General Directorate submit bids. The conventional classification of firms based of Public Procurement for distribution to the departments on their size is used. Article 64 of the CMP includes a responsible for budget commitment and financial control. margin of preference rules that favor domestic companies: In practice, the neutrality in procurement planning is in 15  percent for national companies and 10  percent for question. While the regulator’s participation in evaluating companies headquartered in other CEMAC countries. The bids is prohibited under Articles 12, 13, 14, and 16 of the legal framework does not establish rules that favor SOEs. CMP, this is not the case in practice, compromising the Article 2 of the CMP prohibits any discrimination, as favoring neutrality of the procurement process. state-owned firms would undermine the principles of free access to public procurement and the equal treatment of candidates provided for in Article 2. Fair opportunity The regulatory framework and its implementing regulations Providing an equal chance to all potential suppliers of provide procedures and methodologies for assessing public procurement is crucial, as it increases competition, technical capacity. According to Article 61 of the CMP, the leading to an efficient allocation of resources. It also procurement committee should in a strictly confidential fosters private sector development by promoting fair manner and within the offers’ validity period first evaluate competition, which in turn reduces corruption. Evidence the offer’s technical proposal and then its financial proposal shows that corruption is high in the public procurement by following the criteria specified in the bidding documents, process in developing countries. For example, practices which contain the assessment procedures and methodologies. that intend to assure the choice of a specific supplier (e.g., According to the procurement procedure manual, the by bypassing the entire procurement process) are prevalent committee should score the technical analysis on a range across developing countries. To ensure fair competition, from 0 to 70 and the financial analysis on a range from 0 to 30, the contracting entities should treat potential vendors before it performs the final weighting. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 87 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework Transparency, confidentiality, and fair competition, and they facilitate an organizational climate based on openness and trust. and access to information While the legal public procurement framework has been Transparency is vital in the public procurement process to clearly defined in terms of complaints and claims, the reduce information asymmetries between procurement institution in charge (CRD) is not independent because officials and potential bidders. Trepte (2005) argues that its decisions require the approval of the minister of in the absence of transparency, the stakeholders’ actions finance. Following the provisions of Article 18 of Decree could be hidden from each other. Transparency allows all No. 05.058 of February 27, 2009, on the organization and stakeholders to access information related to procurement functioning of the ARMP, the CRD is competent to rule activities, which reduces the likelihood of corruption in on complaints from candidates, tenderers, beneficiaries, the public procurement process. Pieroni and d’Agostino holders considering themselves unjustly evicted or injured (2009) have linked the absence of transparency to an in procurement, execution, and settlement procedures. increase in corruption in Africa and transition economies. Under article 28 of the same decree, the CRD is required African countries need to improve transparency in public to render its decision within 15  days of its referral date, procurements to reduce corruption. although this time limit does not apply to the contracting authority or the supply agency—a regulatory gap that Regulations define the security and confidentiality of requires attention. Moreover, the CRD is not fully independent, bids. In CAR, the opening of tenders follows a defined as the approval of the CRD’s decisions by the minister of and regulated procedure enclosed in the registers of the finance and budget (Article 29) appears to undermine its procedures. Tenders need to be opened within 24 hours independence. of the closing date for tender submission, and the security and confidentiality of bids is ensured before the bids are opened. The disclosure of specific sensitive information during reporting or clarification is prohibited. Integrity and accountability The regulatory framework requires that tender documents The regulatory framework for procurement provides are made public in newspapers and on websites, but this instructions for how to address fraud, corruption, conflicts is not followed in practice. Article 29 of the CMP requires of interest, and unethical behavior in tender documents. an integrated information system that provides up-to- Accountability is crucial in any public procurement system. date procurement information, including calls for tenders In the absence of a transparent and accountable system and requests for proposals. However, this document is that ensures participants and stakeholders operate not regularly updated and published as required by law. responsively, corruption and resource misuse will likely Concerning contract awards, following the provisions of follow. Furthermore, accountability can help detect Article 66, paragraph 3 of the CMP, the contract awards inefficiencies and increase the efficiency and effectiveness report, which is validated by the General Directorate of Public of procurements to improve service delivery. Article 103 of Procurement, must be published in a widely distributed the CMP requires bidders to make a written commitment newspaper and on a website. However, the ARMP does not to report to the contracting authority any payment, make the report public and it does not have a website. advantage, or privilege granted to any person acting as an intermediary or agent in remuneration for any service provided to them. This provision helps prevent cases of fraud, corruption, and unethical behavior. Unfortunately, Grievance, complaint, and due to the scarcity of denunciations and complaints, this recourse mechanisms provision appears to be insufficient to ensure actors’ integrity and accountability in the procurement chain, as acts of Grievance, complaint, and recourse mechanisms are fraud and corruption continue to be observed in the public designed to give participants in the public procurement procurement process. While Article 104 of the CMP does process the chance to raise serious issues, complaints, not define fraud and corruption, it lists a variety of acts and difficulties without prejudice. This right is needed to constituting fraud, corruption, and unethical behavior. instill trust in the public procurement system and ensure participants have access to mechanisms to raise concerns However, the regulatory framework is incomplete and without the fear of any negative repercussions. Grievance, does not implement sanctions in the case of complaints. complaint, and recourse mechanisms encourage transparency In terms of penalties, Article 102 of the Public Procurement 88 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework Code does not provide penalties applicable to the FIGURE 49 complaints referred to in the Court of Accounts for offending Business Regulation Environment Privilege public officials. Therefore, the authorities need to amend Resistant Index Article 102 of the CMP or Article 17 of the Court of Auditors’ organic law to provide for the applicable sanctions and Construction empower the CRD to oversee their application. Still, there permits are penalties for private firms. Article 105 of the CMP provides penal, civil, and disciplinary sanctions such as the exclusion, termination, and/or substitution of firms found Tax inspections guilty of fraud or corruption in public procurement. However, there is no secure, accessible, and confidential system for Business publicly reporting fraud, unethical behavior, and corruption. registration 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 MENA CAR Business Regulatory Source: Data collected from local authorities by the authors. Environment foster the registration of firms. For example, the lengthy The business regulatory environment is crucial for private and costly business registration process, along with lack sector development. The private sector is a significant of information for registering a business, negatively affects contributor to job creation and economic growth, and entrepreneurs’ incentives to create and register a business, a healthy business climate is essential for private firms, which has an important impact on overall private sector especially small and medium-sized enterprises, to flourish, development. innovate, and be the main drivers of economic growth. However, CAR’s large bureaucracy, dependent judiciary, Information related to registering a business is not poor infrastructure, and inadequate education system do available on a public portal, but it is available in the not contribute to a good business climate, discouraging registration office. In CAR, the requirements, fees, and private sector development. procedures for obtaining a business registration are not specified on a web portal, although they are available CAR lags behind other countries in MENA in terms of at the business registration office, where the Trade and improving the business regulatory environment. The Personal Property Credit Register is located. The lack of Business Regulation Environment Privilege Resistant index transparency in the registration process may give rise to is made up of three parts: construction permits, tax rent-seeking and corruption. This is especially true if, like inspections, and business registration. CAR’s score on in CAR, there are informal or hidden fees or steps to get business registration is almost one-third of the average of a business registered. For example, in addition to the MENA, and the tax inspection and construction permit formal requirements, the country’s chamber of commerce indexes of MENA are slightly higher than that of CAR requires a consular certificate upon registration, which is an (Figure 49). This section evaluates CAR’s business regulatory unnecessary cost since it is not legally required. environment and its resistance to privilege by examining the three areas of the Business Regulation Environment Privilege Resistant index: (i) business registration, (ii) permits and licenses; and (iii) tax inspections. Permits and licenses: building permits Building permits and licenses help entrepreneurs achieve good building practices. Construction regulation is one Business registration of the factors that affect the investment decisions of entrepreneurs. The World Bank Group (2013) reports The formal registration of firms is crucial for private that providing permits may foster property rights and sector development and formal job creation. Registered contribute to capital formation. However, Moullier and firms are protected by law, and they can access credit from Thomas (2009) argue that complex and costly procedures financial institutions or through other investment channels. encourage builders to proceed without construction permits, However, CAR’s complex registration system does not and regulatory complexity may lead to rent-seeking and Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 89 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework corruption. The World Bank (2010) states that the share of acquired during the firms’ previous audit campaigns. This firms expecting to give gifts in exchange for construction technique is preferred by many developed countries’ tax approvals is correlated with the complexity and cost of administrations, and various international organizations dealing with construction permits. have suggested that it be adopted in developing countries. In CAR, the taxation information on the website of the The requirements and procedures to obtain a building Ministry of Finance and Budget is obsolete, and updated permit are not transparent, opening the door to rent seeking information is only available in a paper-based version in and corruption. The conditions, fees, and procedures for their office. The tax compliance requirements can be obtaining building permits are not publicly available on obtained from the tax authorities, which also communicate a website or in an official journal. Instead, they are only the reporting schedules. accessible internally within the permit office. The lack of public access to information regarding permits may Despite having the finance department director review disincentivize the entry of foreign firms in the construction significant tax-execution decisions, there are still unfair sector and promote rent-seeking and corruption. There are adjustments and low confidence in the tax administration. also hidden requirements, fees, and procedures for obtaining While the head of the finance department reviews important building permits, in addition to official requirements. For tax-execution decisions, it does not prevent baseless example, to “speed up” the process, applicants must turnarounds or bad faith by the tax administration. Taxpayers pay additional informal fees. The increase in fees through need to wait for the confirmation of the tax adjustment and informal payments discourages formalization by increasing settle a reservation according to the amount of the adjustment the costs for construction firms. to have their arguments studied by the legislation committee. When an adjustment is abnormally high, the amount due will The requirements of building permits are complex, and the be high, without the possibility of reimbursement. In the administration responsible for permits lack the necessary case of payment default, tax inspectors have the power to capacity. To obtain a building permit in CAR, the builders suspend or stop business activities. need to present documents such the land title, construction plan, and an estimate of the property’s market value. Building permits must also be renewed periodically if the construction is not completed within a defined period. Moreover, the administration in charge of allocating land Trade and Customs permits lack the necessary competencies and needs to be Customs play a crucial role in economic competitiveness restructured. For example, there is no competent agency through trade facilitation, revenue collection, and national in the country to inform applicants of the permit process or security. The authorities can improve trade facilitation delays in issuing permits within a specified period. by making customs procedures more efficient to reduce transaction costs for exporters and importers. Milner, Morrissey, and Zgoyu (2008) argue that the efficiency of Tax inspections customs procedures is likely to increase trade volumes, which may have an even larger economic impact than Tax inspection is crucial for improving transparency and the direct gains from trade policy reforms. The latter will revenue collection. Tax collection helps the government positively affect the efficiency of government revenue raise public revenue, which is used to invest in physical collection, which in turn can lead to welfare improvements and human capital. It is important to ensure transparency and economic growth. Many developing countries rely more in the tax collection process, and governments use tax heavily on revenue from customs duties than income taxes. inspections to investigate tax fraud and make sure people Finally, a country’s customs administration can strengthen and business pay their fair share of taxes. national security by preventing prohibited products from entering the country and providing important counter- By law and in practice, the authorities in CAR do not follow terrorism functions. Therefore, customs play a crucial role any risk-based approach to planning tax inspections. in economic competitiveness by ensuring the safety of the Risk-Based Audit Selection is an efficient audit approach population and enforcing regulations—vital to attract both used to classify the most likely non-compliant taxpayers. domestic and foreign investment. By targeting likely non-compliant taxpayers, the authorities increase the probability of yielding large amounts of audit CAR is among the countries that do not have a sound adjustments and penalties. The likelihood is defined customs system. Compared to MENA countries, CAR based on the compliance history and the knowledge ranks second to last on the Trade and Customs Privilege 90 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework FIGURE 50 There are Several Privilege-Resistant Policies in Trade and Customs a. Trade and customs privilege resistant index b. Decomposition of the trade and customs privilege resistant index 0.8 1.2 0.7 1.0 0.6 0.8 0.5 0.6 0.4 0.4 0.3 0.2 0.2 0 Electronic Import Tariff Fines and Customs 0.1 processing of restrictions Structure incentives procedures declarations and and to and and special Transparency discover ethics 0 connectivity regimes fraud CAR Lebanon Source: World Bank staff calculations using data collected from the local authorities by the authors. Resistant index, outperforming only Kuwait (Figure 50a). Import restrictions and special A decomposition of the index shows that the country’s customs system suffers from a lack of technology and regimes transparency, resulting in corruption and inefficient customs The lack of transparency surrounding import restrictions procedures (Figure 50b). This section evaluates trade and and special regimes may impede competition and customs policies in CAR and their resistance to privilege. foster rent-seeking and corruption. Customs authorities It covers the country’s: (i) tariff structure and transparency; sometimes apply discretionary import restrictions and (ii) import restrictions and special regimes; (iii) electronic special regimes to protect favored groups or even processing of declarations and connectivity; (iv) fines and individual businesses. Favored firms receive an unfair incentives to discover fraud; (v) customs procedures and competitive advantage, which may lead other firms to ethics; and (vi) grievance mechanisms. exist the market because they cannot compete. In CAR, import restrictions and special regimes are complex and not transparent. Compared to other countries in MENA, Tariff structure and transparency CAR only ranks higher than Lebanon and Kuwait on the Restrictions and Special Regimes index (Figure 52). There The absence of transparency surrounding a country’s is no website where companies in the country can access tariff structure favors discretionary decision-making, all the criteria for import licenses, although the WTO’s arbitrariness, and privileges. It can also lead to rent-seeking Trade Policy Review (available online) includes all relevant and corruption. The official tariff structure needs to clearly information on import restrictions and special regimes. define the duties and taxes on all imports and provide the There are no hidden “de facto” informal requirements in corresponding tax rates. The tariff structure needs to be CAR. The most used customs procedures in the country realistic and reflect the current market, as an unreasonable are: (i) release for consumption (IM4), (ii) final exports increase in tariffs could lead to fraud to avoid paying high (EX1), (iii) transit (EX8, IM8), (iv) temporary admission tariffs. When it comes to tariff structure transparency, CAR (IM5), (v) temporary export (EX2), (vi) re-export (EX3), and is among the countries that need to improve their tariff (vii) warehousing (IM7). While there are no data on the rate system. With a score of 0.5, CAR ranks second to last on of physical inspection90 of imports in CAR, best practices the Tariff Structure and Transparency index in in comparator recommend that the customs administration physically countries (Figure 51). examine around 60 percent of imports. 90  A physical inspection does not include an examination of empty containers. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 91 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework FIGURE 51 FIGURE 52 Tariff Structure and Transparency Index Import Restrictions and Special Regimes Index 0.76 0.45 0.40 0.74 0.35 0.72 0.30 Index (0–1) Index (0–1) 0.70 0.25 0.68 0.20 0.15 0.66 0.10 0.64 0.05 0.62 0 CAR Lebanon CAR Lebanon Source: World Bank staff calculations using data collected from the local authorities by the author Electronic processing of declarations country’s borders are not electronically connected to the customs administration. While one major border office was and connectivity electronically connected to the headquarters in Bangui, it was vandalized following recent security events. The electronic processing of declarations reduces the direct contact between customs agents and businesses, reducing the likelihood of corruption and manipulation. Fines and incentives to discover fraud The use of technology by customs authorities can also reduce costs for businesses (time and resources) and Customs officials are incentivized to discover fraud. In CAR, minimize inaccuracies and omissions in declarations. In there are financial incentives for customs officials to identify addition to technology, Customs also needs access to a and report fraud, as 20  percent of the penalty amount is competent workforce to implement technological solutions shared between all the executives and agents responsible and update data. In terms of the electronic processing of for the adjustment. The government uses this strategy to customs declarations, CAR ranks last among countries improve revenue collection and reduce corruption, but in MENA (Figure 53). In CAR, customs declarations are only a small share of people and businesses pay their fines. processed electronically with the ASYCUDA ++ software, According to the country’s litigation department, the number but it needs to be updated. The procedures and formalities of fines recorded amounted to CFAF 422 million in 2020, around customs declarations are not publicly accessible which resulted in customs revenue worth CFAF 59 million. on a web portal, and the main customs offices along the An estimated 0.72  percent of fines are collected in CAR, which is very low. The authorities need to understand why FIGURE 53 this ratio is so low and implement measures to increase it. Electronic Processing of Declarations and Connectivity 0.8 Customs procedures and ethics 0.7 0.6 Various degrees of sanctions have been imposed on 0.5 unscrupulous customs officials for acts of corruption and Index (0–1) misconduct in CAR. The Customs’ code of ethics lays out 0.4 the rules for customs officials to ensure professional behavior 0.3 and prevent conflict of interest. The code is accessible to 0.2 the public and is immediately applicable in all CEMAC 0.1 member states as soon as it comes into force. Penalties are diverse and varied, with degrees of severity depending on 0 CAR Lebanon the seriousness of the offense committed. According to the Source: World Bank staff calculations using data collected from the local authorities Customs Services Inspectorate’s Activity Report for 2020, by the authors. 4 executives and customs officers are under sanction. 92 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework Other Key Bottlenecks Preventing Competition and Private Sector Development There have only been minor improvements in private in CAR and shows the judiciary’s subordination, corruption sector development in CAR over the past decades. within the judicial system, and the inability to enforce CAR’s business environment suffers from an inadequate contracts. While CEMAC’s average score on the index regulatory framework, weak governance and institutions, improved over time (although it fell between 2018 and and recurrent insecurity.The country’s score on the Private 2020), CAR’s score has remained constant, showing no Sector Development index averaged around 30 between performance (Figure 55b). The low respect for property 2016 and 2020, reflecting minor signs of progress (Figure 54). The index measures the extent to which private firms are permitted and whether state companies are undergoing FIGURE 54 a privatization process consistent with market principles. CAR’s Private Sector Development Index is Among CAR’s relatively low score is an indication that private firms the Lowest in the World face economic, political, or social barriers to improvement 6.0 and that state firms or monopolies dominate strategic Private sector development index (1–10) 5.5 business sectors. 5.0 Property rights and property acquisition regulations 4.5 Property rights and property acquisition regulations 4.0 are neither implemented consistently nor safeguarded adequately by law. Private property in urban areas is 3.5 defined formally in law but enforcement is lacking because 3.0 of the country’s weak application of the rule of law. On the Private Property index, which measures the degree to 2.5 2006 2008 2010 2012 2014 2016 2018 2020 which government authorities ensure well-defined private property rights and regulate property acquisition, CAR’s CAR CEMAC SSA FCV average score in 2006–2020 was the second lowest in Source: Bertelsmann Stiftung Foundation. CEMAC, outperforming only Gabon (Figure 55a). This is an Note: Measured on a scale of 1 to 10, where 10 denotes the best conditions for indication that private property is likely to be expropriated private sector development. FIGURE 55 CAR’s Private Property Index Has Remained Stable Over the Past Decade a. Average of private property index, 2006–2020 b. Private property index, 2006–2020 6 5.5 Private property index (1–10) Private property index (1–10) 5 5.0 4 4.5 3 4.0 2 3.5 1 3.0 0 2.5 CAR CEMAC FCV SSA 2006 2008 2010 2012 2014 2016 2018 2020 CAR CEMAC SSA FCV Source: Bertelsmann Stiftung Foundation. Note: Measured on a scale of 1 to 10, where 10 denotes the best conditions for private property acquisition. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 93 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework rights in the country can also be attributed to its recurring have steadily decreased in CEMAC since 2015, costs episodes of violence and instability. Furthermore, almost have remained constant in CAR. The cost of registering a all land in rural areas belong to the government, although property was higher in CAR (26.9 percent of property value) citizens exploit them. Registering property in CAR can than in Rwanda (12 percent) and the average of CEMAC take up to 75  days for foreign investors, and contract (12.93 percent) in 2020. enforcement in Bangui’s commercial court can take up to 660 days (BTI 2020). Access to credit and electricity Registering a property is more challenging in CAR. In It is a challenge for businesses to access credit and CAR, property rights can be obtained through purchase, electricity in CAR. Taxes, electricity, and credit are the concession, and rental. Ownership rights are conditioned top three bottlenecks to the business environment in CAR on the application for legal title and property registration. (World Bank, 2020). Access to electricity, which is essential According to Landlinks (2021), registering property in for producing goods and services, is minimal, discouraging CAR requires five procedures, averaging 75  days. Only economic investments in CAR. Moreover, CAR is among an estimated 0.1% of properties in CAR are titled and the worst-performing countries in the world in terms of registered because of the complex property registering international logistic performance. Only 14 percent of the system. People can apply to the government for property population had access to electricity in 2016—mainly in permits in CAR, but they are often tricky and expensive to the capital Bangui. Access to credit is another obstacle to obtain (World Bank 2008). private sector development in CAR. Access to credit is vital for firms to expand their operations, meet their daily costs, Moreover, property registration is costly in CAR. The hire and pay new workers, and acquire inventory. Credit to property registration cost is defined as the total of official the economy remains at a deficient level of 13 percent of charges associated with completing the procedures GDP. Microfinance firms account for only 1 percent of total to transfer a property, including fees, transfer taxes, credit facilities, serving 0.5 percent of the population. Mobile stamp duties, and any other payment to the property banking has recently been introduced, with the potential registry, notaries, public agencies, or lawyers. The cost to help overcome some of the country’s geographic and of registering a private property in CAR averaged almost infrastructure challenges. However, poor information and 31.46 percent of the value of the property between 2005 and 2020, above the average of 16.61 percent in CEMAC communication technologies infrastructure and low network (Figure 56). However, while property registration costs coverage hinder mobile banking penetration. Challenges related to paying taxes FIGURE 56 Registering a Property is a Challenge and Costly for The country’s tax system remains complex. The different Entrepreneurs in CAR types of taxes paid by firms include the corporate income tax, sales tax, VAT, and employee labor taxes (e.g., payroll Cost of registering a property (% of property value), 2005–2020 taxes and social payments). A private firm in CAR pays an 21 average of 56 taxes, more than in Rwanda and the average of CEMAC (Figure 57). While the number of taxes paid by 19 Percent (%) of propoerty value firms fell dramatically in Rwanda between 2017 and 2018, 17 it increased in CEMAC and remained constant in CAR 15 over the same period. Nevertheless, the time required to pay taxes in CAR is an average of 493  hours, lower 13 than the CEMAC average of 569.38 hours, the Republic 11 of Congo’s 604 hours, Cameroon’s 650 hours, and Chad’s 9 745.6 hours. 7 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 A ubiquitous informal sector CAR CEMAC SSA FCV The prevalence of the country’s informal sector deters Source: Bertelsmann Stiftung Foundation. investment and the entry of new formal firms. Informality 94 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework FIGURE 57 CAR’s Tax System Remains Complex a. Taxes payments (number per year) b. Paying taxes: time (hours per year) 70 600 65 500 Number of payment per year 60 400 Hours per year 55 50 300 45 200 40 100 35 30 0 SSA FCV CAR CEMAC 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 CAR CEMAC SSA FCV Source: World Bank Enterprise Survey data 2020. is a widespread phenomenon in developing countries. Competition between formal and informal firms impedes Businesses are considered informal if they do not: (i) officially private sector growth and the entry of new firms. Indeed, register their activities; (ii) pay taxes; (iii) hold a formal 45  percent of firms in CAR point to competition with account; and/or (iv) respect employment and operating informal firms as a major business constraint (Figure 59b). licenses (Djidonou & Foster-McGregor 2020). Informal firms To stimulate private sector development, it is, therefore, take advantage of their lower production costs to compete important to strengthen institutions to improve the business with registered formal firms that are forced to follow climate and encourage formalization. regulations and therefore often have higher production costs. The competition between formal and informal firms prevents the entry of new firms. The share of firms that point to the informal sector as their biggest obstacle to FIGURE 58 business is 7.2 percent of surveyed firms in CAR—higher Share of Firms That Point to Informality as Their than in Guinea (2.8 percent) and the Republic of Congo Biggest Obstacle to Business (3.6  percent), but lower than the average of CEMAC 12 (8.61  percent) as well as in Rwanda (8.85  percent) and Cameroon (24.1 percent) (Figure 58). 10 8 The competition posed by informal firms is a major Percent (%) constraint to the development of the formal sector and 6 the entry of new formal firms. Informal firms take advantage of their lower cost structure, which is the result of their 4 tax evasion and access to cheaper labor, to compete with 2 registered formal firms. In CAR, 66.7 percent of registered firms compete against unregistered informal firms, lower 0 CAR CEMAC FCV SSA than the average of 76  percent in CEMAC and much lower than more than 90  percent in Chad (Figure 59a). Source: World Bank Enterprise Survey data. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 95 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework FIGURE 59 Competition with Unregistered or Informal Firms is Widespread in CAR a. Share of firms competing against informal firms b. Share of firms identifying practices of informal competitors as a major business constraint 80 60 70 50 60 40 50 Percent (%) Percent (%) 40 30 30 20 20 10 10 0 0 SSA CAR FCV CEMAC SSA FCV CAR CEMAC Source: World Bank Enterprise Survey data. Promoting Market-Based Competition and Reducing Opportunities for Capture Strengthening the Public to increase transparency related to punishment, as it does not define fraud or corruption, although it lists various acts Procurement System that constitute fraud, corruption, and unethical behavior. Improve transparency in public procurement while Define in the regulatory framework the right for participants enforcing existing laws. CAR’s public procurement system to request an independent review as part of the procurement is not transparent, and the authorities face significant process. Based on the provisions of Article 18 of Decree difficulties in enforcing existing laws. Strengthening the No. 05.058 of February 27, 2009, on the organization and public procurement would require providing sufficient functioning of ARMP, only the CRD is competent to rule resources to ARMP to ensure its independence. The agency on complaints from candidates, tenderers, beneficiaries, should be endowed with its own budget instead of being and holders who considering themselves unfairly evicted financed entirely through the state budget. There are also or injured during procurement, execution, and settlement significant gaps to close in terms of existing laws, including: procedures. Also, a time limit needs to be set for decision- (i) Decree No. 0118 in Article 3, which confers direct supply making by the contracting authority or the supply agency. operations to the procurement services, defined as the basic Article 28 of the above-mentioned Decree requires the structure responsible for implementing the procedures for CRD to render its decision within 15 days of the date of its awarding public procurement contracts; and (ii) Article 2 of referral, but this time limit does not apply to the contracting the CMP, which prohibits any discrimination and ensure free authority or the supply agency. Therefore, this regulatory access to public procurements and the equal treatment gap should be addressed. of candidates. Transparency can also be improved by regularly publicizing information from the integrated Ensure that the administrative review body is institutionally information system, which provides, at a minimum, up-to- independent and autonomous in resolving complaints. The date procurement information, including calls for tenders independence of the CRD is undermined by the need for and requests for proposals. While this is required by the Minister of Finance and Budget to approve its decisions article 29 of the CMP, it is not currently implemented. This (Article 29 of Decree No. 09.058). The authorities need to needs to be addressed to encourage transparency while guarantee the autonomy of the CRD and create a system ensuring confidentiality and access to information. Finally, that allows complaints to be collected and managed an amendment to Article 104 of the CMP is recommended transparently. While Article 103 of the CMP intends to prevent 96 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework cases of fraud, corruption, and unethical behavior, the provision appears inadequate to ensure the integrity Improving Business and accountability of the public procurement process, Regulation evidenced by reports of fraud and corruption but a scarcity Risk-based approaches are recommended to minimize of denunciations and complaints. the risk of arbitrary decision-making in tax inspections. The survey conducted for this study indicates that the tax Clearly define the penalties in the case of corruption or administration does not follow risk-based approaches for fraud by public servants. Article 101 of the CMP provides inspections, although, risk-based audit selections have the application of sanctions (criminal, civil and disciplinary been demonstrated to be an efficient audit approach to charges) for government employees convicted of fraud or classify the most likely non-compliant taxpayers. corruption in public procurement, but it does not provide the Code with penalties. In practice, this provision is not Simplify business registration processes to reduce applicable since of Article 102 of the CMP is incomplete opportunities for capture and informality. The business and does not provide for applicable financial penalties. This registration is lengthy and costly. Furthermore, information can be addressed by revising Article 102 to provide for the for registering a business needs to be publicly available. applicable sanctions and empower the CRD or Article 17 of The requirements, fees, and procedures for obtaining a the organic law of the Court of Auditors. business registration are not specified on a web portal but at the business registration office. The business registration process needs to be transparent to avoid rent-seeking Addressing Rent-Seeking and corruption. The surveyed business authorities reported informal or hidden fees or steps to get a business registered. and Corruption in Among others, there are irrelevant costs that are not Trade and Customs representative of a service. Make import restrictions and special regimes less complex and more transparent. The lack of transparency surrounding import restrictions and special regimes may impede Addressing Competition competition and foster rent-seeking and corruption. Issues, Informality, and Customs authorities sometimes apply discretionary import restrictions and special regimes to protect favored groups Capacity Constraints or even individual businesses. CAR needs to strengthen Improve market-based competition in major sectors the transparency of its customs duties, processes, and to attract private investment . The power and system. Information about customs duties needs to be telecommunications sectors are important for the proper regularly updated to reflect the latest pricing data and functioning of other sectors of the economy. Improving made accessible to the public. Similarly, the criteria and competition in both sectors could enable the development conditions for import licenses as well as fines for violation of other sectors such as agribusiness, mining, and forestry. for both civil servants and importers should be publicly Also, enhancing competition in mining and forestry could accessible. accelerate industrialization, increase productivity along value chains, and create income gains for smallholder farmers. Enhance the electronic processing of declarations to reduce the direct contact between customs agents and Sustain key reforms in the mining sector to reduce unfair businesses in order to reduce opportunities for rent- competition and informality. Informality is a significant seeking and corruption. The use of technology by customs challenge for CAR. In most cases, artisans in the mining supply authorities can also reduce costs for businesses (time and chain may prefer to sell their products to the informal rather resources) and minimize inaccuracies and omissions in than formal sector because of more favorable conditions. declarations. In addition to technology, Customs also needs Corruption in the informal sector and opportunities for access to a competent workforce to implement technological capture are widespread, which explains the large size of the solutions and update data. This needs to be done in parallel informal sector in both mining and forestry. with the interconnection of all customs processing systems, communication channels, and databases. This will facilitate Strengthen the capacity of actors is key sectors. The regular reconciliation of trade and customs data while forestry and mining sectors need skilled labor as well as reducing fraud and corruption. training in logistics, administrative management, accounting, Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 97 CHAPTER 4 – Build Up Market-Based Competition, Institutions, and the Regulatory Framework and marketing to improve productivity and overall efficiency. stimulating new investments. If barriers to competition More market-based competition in these input sectors and structural issues are addressed, these sectors have could generate large welfare gains for the overall economy the potential to accelerate industrialization and increase by reducing costs in other sectors and unleashing their productivity along value chains, as well as to generate potential, optimizing the use of existing infrastructure, and income gains for smallholder farmers. 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American Economic Review, 76, 191–203. 98 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth © Wilfried Kouame Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 99 © Stephan Gladieu Annexes 100 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth ANNEX 1 – Tables Gravity Model Analysis Annex 1: Tables Gravity Model Analysis TABLE A1 Gravity Model Estimation for ECCAS and AfCFTA (1) (2) (3) (4) ECCAS AfCFTA Total Total Variables trade Agriculture trade Agriculture Regional trade agreements 0.185* 0.288** 0.095** −0.061 (0.104) (0.123) (0.046) (0.112) Log(GDP of the exporting country) 0.142*** 0.146*** 0.129*** 0.116*** (0.012) (0.017) (0.003) (0.015) Log(GDP of the importing country) 0.184*** 0.063*** 0.165*** 0.059*** (0.012) (0.015) (0.007) (0.017) Log(GDP per capita of the exporting country) 0.065*** −0.161*** 0.050*** −0.148*** (0.012) (0.018) (0.006) (0.019) Log(GDP per capita of the importing country) −0.015 −0.032* −0.018 −0.039* (0.016) (0.018) (0.013) (0.020) Log (Population-weighted distance) −0.211*** 0.001 −0.224*** −0.061 (0.037) (0.039) (0.020) (0.047) Member of GATT – Exporting country 0.067* −0.180** 0.098*** −0.157** (0.038) (0.077) (0.012) (0.072) Member of GATT – Importing country 0.051 −0.018 0.040 −0.020 (0.058) (0.067) (0.038) (0.076) Constant −2.238*** −1.608*** −1.480*** −0.542 (0.391) (0.492) (0.207) (0.509) Observations 11,839 5,523 80,733 6,551 Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 101 ANNEX 1 – Tables Gravity Model Analysis TABLE A2 Gravity Model: Variables Definition and Source Variable Definition Source Total trade Bilateral trade between the exporting and the importing UN COMTRADE countries Agricultural trade Bilateral trade of agricultural products between the UN COMTRADE exporting and the importing countries Regional trade agreements Regional trade agreements is a dummy variable that Authors’ construction take value one if exporting and importing countries are both members of ECCAS or AFcTA, and zero otherwise GDP of the exporting country Gross domestic product of the exporting country CEPII GDP of the importing country Gross domestic product of the importing country CEPII GDP per capita of the exporting country Gross domestic product per capita of the exporting CEPII country GDP per capita of the importing country Gross domestic product per capita of the importing CEPII country Population-weighted distance Population-weighted distance between most populated CEPII cities, in km Member of GATT – Exporting country Dummy variable that takes value one if the exporting CEPII country is a member of GATT, and zero otherwise Member of GATT – Importing country Dummy variable that takes value one if the importing CEPII country is a member of GATT, and zero otherwise Annex 2: Business Regulation Practices Questionnaire The CEM team investigated the governance of business permitting and licensing regime), and (c) tax inspections. regulation practices, in order to characterize gaps and entry These areas relate to different parts of the life cycle of points for the design of privilege-resistant policies. This a business. Business registration is essentially an entry task is inspired in the analytical framework of business the requirement although, in many countries, registration needs report on Privilege-Resistant Policies in the Middle East and to be renewed at regular intervals during a firm’s operations. North Africa (2018).91 Weaknesses in the business regulatory Obtaining a construction permit is relevant to both the entry regime create scope for the discretionary enforcement of and operations stages. Unless a firm is operating from a regulations. The intention of this work is not to provide a rented premise, one of the first things it needs to do is comprehensive assessment of all possible areas of business construct a factory or office premise. Moreover, additional regulation but, at least, cover three areas that are important construction work is often required during the lifetime of a from a firm’s point of view and exemplify characteristics of business, especially for those expanding their operations. the business regulation regime. The areas are (a) business A tax inspection is a regulatory interface that is largely and registration, (b) obtaining construction permit (proxy for the frequently encountered during operations. 102 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth Business Regulation Questionnaire Comments, details, Privilege-resistant trade and customs questionnaire Yes No sources Business registration 1 By regulation, are the “requirements”, “fees” and “procedures” for obtaining business registration specified on a web portal or at the regulator’s office? 2 Is registration a one-off process or does it need to be renewed periodically? 3 Are there informal or hidden requirements, fees or steps for obtaining business registration, in addition to the official ones? Permits and licenses: construction permits 4 By regulation, are the “requirements”, “fees” and “procedures” for obtaining construction permits publicly available on a website or national gazette? 5 Are there hidden requirements, fees and procedures for obtaining construction permits, in addition to the official ones? 6 By regulation and in practice, does obtaining construction permits first require a number of other preapprovals? 7 By regulation, do construction permits need to be renewed periodically? 8 By regulation, are the relevant agencies required to inform applicants about decisions or delays in providing construction permits within a specified timeframe? Do they inform in practice and are they required to justify their decisions? 9 Are there appeal mechanisms? Are they used and effective? Tax inspections 10 By regulation and in practice, do the authorities follow risk-based approaches to planning tax inspections? Are routine tax inspection visits announced and their purpose clearly stated? 11 Are the tax compliance requirements published and accessible on a web portal or at the |relevant authority? 12 By regulation, are the tax enforcement decisions vetted by a commission or supervisor, at least for major decisions (as opposed to the inspector alone)? 13 Do tax inspectors / inspectorates have powers to suspend / stop operations of businesses? 14 Are firms given a grace period during which they may remedy deficiencies? 15 By regulation and in practice, are there grievance reporting and redress mechanisms? Finally, based on the gaps identified, where are the entry points for privilege-resistant policies to be put in place on the issue of business regulation practices? Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 103 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth Annex 3: Competition Policy and Conflict of Interest Restrictions The CEM team examined the competition policy, vested of all entities that perform commercial functions. Pillar 1, interest, and conflict of interest restrictions in order to which consists of pro-competition regulations and characterize gaps and entry points for the design of government interventions, comprises (a) regulation of privilege-resistant policies. This task is inspired by the network sectors to simulate competitive market outcomes; report’s analytical framework on Privilege-Resistant Policies (b) infusing competition principles in different public in the Middle East and North Africa (2018)92. policies (for example, public procurement, trade, investment, and industrial policies); and (c) conducting competition assessments in regulatory impact assessments of procedures, regulations, or policies to understand their Competition Policy impact on competition and to identify more procompetitive alternatives. When a competition law has been enacted and Market competition is a key driver for achieving greater a functional competition authority is in place, competition innovation, productivity, and economic growth. Greater enforcement (pillar 2) complements economic market competition is enabled through a comprehensive regulation (pillar 1). Competition authorities monitor and competition policy framework that includes a set of policies punish anticompetitive behavior by firms and prevent and laws ensuring competition in the marketplace is not mergers that could harm competition. The survey should restricted in such a way as to reduce economic welfare93. focus on the competition law aspects that ensure a system In practical terms, competition policy involves two pillars: of checks and balances and that reduce the risks of (a) the promotion of measures to enable contestability, undue private and public influence over the competition firm entry, and rivalry; and (b) the enforcement of antitrust policy and decision-making process. The assessment laws (typically rules against abuse of dominance and aim to describe as far as possible the three main aspects anticompetitive agreements, and merger control) and described below, which should be enacted so competition state aid control. The former involves the improvement of authorities can avoid undue public or private influence in regulations and administrative procedures by government the implementation of competition laws aspects. It should bodies, while the latter focuses on business behavior also highlight any developments in these areas. Competition Policy and Conflict of Interest Restrictions Questionnaire Privilege-resistant competition policy questionnaire Yes No Comments Effective enforcement of competition law 1 Is there a competition act/law in place? If the answer is yes, when was it enacted (mm/dd/yyyy)? Provide the complete name and number of the act/law 2 Is there a functional competition authority in place? By functional, we mean an authority with executive regulations in place (to activate the law), staff, and a budget. If the answer is yes: Please provide the full name of the competition authority. 3 If available, please provide the website for the competition authority. Provide the website address of the relevant authority 4 If a specific act or law for the creation of the agency is needed, when was such act or law issued (mm/yyyy)? (continued on next page)  Mahmood, Syed Akhtar, and Meriem Ait Ali Slimane. 2018. Privilege-Resistant Policies in the Middle East and North Africa: Measurement and Operational Implications. MENA 92 Development Report. Washington, DC: World Bank.  Motta, Massimo. 2004. Competition Policy. Cambridge, U.K.: Cambridge University Press. 93 104 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth ANNEX 3 – Competition Policy and Conflict of Interest Restrictions Competition policy and conflict of interest restrictions Questionnaire (Continued ) Privilege-resistant competition policy questionnaire Yes No Comments 5 Where relevant, what is the parent ministry that hosts the competition authority? 6 When did the competition authority start to take on casework (mm/yyyy)? 7 Does the competition legal framework include provisions that address horizontal and vertical agreements, abuse of dominance, merger control, anticompetitive regulation or competition advocacy, or actions of public officials that facilitate anti-competitive behavior? 8 Are there economic sectors or enterprises exempted from the application of the competition framework (for example, State-Owned Enterprises (SOEs), state bodies or agencies, professional associations)? 9 Is there a specific framework and procedure that public bodies should follow to grant state aid (subsidies, tax breaks, government land, concessional loans) to private enterprises and SOEs in such a way to minimize competition distortions? 10 Does the competition authority have the mandate to issue opinions on government policies and draft legislation and regulations as part of its role in advocacy? Are the opinions binding or is there a mechanism to monitor their implementation? 11 Does the competition authority have the necessary power and tools to uncover illegal practices (for example, case prioritization, adequate fines, leniency program, inspection powers)? 12 Do sector-specific regulators have a competition law mandate, including the investigation of anticompetitive practices or the analysis of mergers? Can the staff of the regulator participate in the investigations and market inquiries carried out by the competition authority? (i.e., telecommunications, energy, transport, banking regulators, or public procurement agency, or consumer protection agency) Maintaining trust and independence in competition law and policy implementation 13 Is the competition authority entrusted with enforcing competition an independent body or a ministerial department? 14 Is the competition authority accountable before the legislative or executive powers? 15 Can an anticompetitive merger or acquisition be allowed on grounds other than the competition (for example, public interest)? 16 Is there an objective procedure to select and dismiss the board members of the competition agency? 17 To ensure continuity in operations and strategy implementation, are board members jointly nominated or at intervals? 18 May the competition authority’s board members hold other offices or appointments in the government or the industry? 19 Are there different teams from the competition authority/(ies) involved in opening the investigation, prosecuting, and reaching a decision? 20 What is the financing mechanism of the competition authority? 21 Are market operators represented on the board of the competition authority? (continued on next page) Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 105 ANNEX 3 – Competition Policy and Conflict of Interest Restrictions Competition policy and conflict of interest restrictions Questionnaire (Continued ) Privilege-resistant competition policy questionnaire Yes No Comments Procedural fairness and transparency 22 Can the competition authority’s decisions be vetoed by the line ministry(ies) or any other executive branch body? 23 Are there protections for ensuring that companies’ confidential or privileged business information during investigations, merger reviews, and market studies is not disclosed to third parties? 24 Are the competition authority’s decisions subject to effective review by an independent appellate body? 25 Does the competition authority publish guidelines/communications/updates explaining how the following are assessed (Horizontal agreement, Vertical restraints, Abuse of dominance, Merger control, Fine setting, Investigative procedures, Treatment of confi- dential information) Conflict of Interest Restrictions aim to prevent situations that frequently give rise to conflicts of interest. Restrictions place the burden of compliance on Conflict of interest refers to when an individual could exploit the public official, who must be aware of the laws, identify an official capacity for personal benefit but has not done so the situation, and act accordingly. Clear definitions of yet. The presence of a conflict of interest is not an indicator prohibited conduct reduce the pressure of uncertainty on of improper conduct, but rather a warning, or risk, of its public officials and employees by establishing a distinct possibility. Some of the most significant risks or conflicts of line between acceptable and unacceptable activities. Policy interest appear in situations associated to stockholdings makers and others must also provide a clear definition of or private firm ownership, officials holding government conflict of interest and specify a broad prescription to avoid contracts, gifts and hospitality, patronage or nepotism, and resolve any perceived conflicts of interest that arise private firm engagements (for example, board member, during performance of job tasks. In lieu of an enforceable advisor, company officer), outside employment with code of conduct, this broad restriction on conflicts of interest international organizations, voting on policy decisions and encourages public officials to consider the effect that private postemployment engagements. The operating principle interests may have on the public’s perception of their ethics of a conflict of interest system is to assist public officials in as representatives of the state. It also provides a means of avoiding situations in which a conflict of interest could arise. reprimanding officials who violate the spirit of the law, rather Restrictions on conduct, incompatibilities, or engagements than specific provisions or restrictions on behavior. 106 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth ANNEX 3 – Competition Policy and Conflict of Interest Restrictions Conflict of Interest Restrictions Questionnaires Privilege-resistant trade and customs questionnaire Yes No Comments Conflict of Interest Regulation 1 Are there laws regulating restrictions on conflict of interest? Is there a constitutional requirement to avoid specified conflict(s) of interest? 2 In there a code of conduct / ethics regarding conflict of interest? 3 Are head(s) of state, Ministers/cabinet members, members of Parliament, civil servants, spouses and children obligated to avoid specified conflict(s) of interest? 4 By regulation are there restrictions for public officials (specify which) spouses and children regarding income and assets (accepting gifts, private firm ownership or stock holdings, ownership of state-owned enterprises)? 5 By regulation are there restrictions for public officials (specify which) spouses and children regarding business activities (holding government contracts; role as board member, advisor, or company officer of private firm; NGO or labor union membership; outside employment or post-employment? Enforcement and sanctions 6 Are there penal sanctions, fines, or administrative sanctions stipulated for violations of conflict of interest regulations that restrict behavior for head(s) of state, Ministers/cabi- net members, members of Parliament and civil servants? 7 Is there a specific enforcement body and a process for addressing potential violations of conflict of interest restrictions? Finally, based on the gaps identified, where are the entry points for privilege-resistant policies to be put in place on the issues of Competition Policy and Conflict of Interest Restrictions? Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 107 CHAPTER 3 – Challenges and Opportunities of Leveraging Trade as a Vehicle for Sustained Growth Annex 4: Privilege-Resistant Procurement Questionnaire Privilege-Resistant Procurement Questionnaire Privilege-resistant procurement questionnaire Yes No Comments, details Institutional and regulatory frameworks 1.1 Is there a regulatory body or an authority that oversees public procurement? 1.2 If there is a regulatory body or an authority in charge of public procurement; does it have its own budget? 1.3.1 Pursuant to the regulatory framework, is the regulatory body’s involvement in direct procurement operations prohibited? 1.3.2 Pursuant to the regulatory framework, is the regulatory body’s involvement in procurement planning prohibited? 1.3.3 Pursuant to the regulatory framework, is the regulatory body’s involvement in bids evaluation prohibited? 1.3.4 In practice, is the regulatory body’s involvement in direct procurement operations prohibited? 1.3.5 In practice, is the regulatory body’s involvement in procurement planning prohibited? 1.3.6 In practice, is the regulatory body’s involvement in bids evaluation prohibited? 2.1 Is there a regular procurement planning exercise instituted by law or regulation that starts with the preparation of multiyear plans for the government agencies, from which annual operating plans are derived? 2.2 Are procurement plans prepared in support of the budget planning and formulation process? Fair opportunity 3.1 Does the regulatory framework require that procurement opportunities other than sole source or price quotations be publicly advertised in a national gazette or widely distributed newspaper? 3.2 Does the regulatory framework require that procurement opportunities other than sole source or price quotations be publicly advertised in a central web portal? 4 Does the legal framework establish that participation of any contractor, supplier or group of suppliers, or contractors is based on qualification? 5.1 Does the regulatory framework establish rules that favor national companies? 5.2 What is the margin of preference for national suppliers? 6.1 Is it mandatory to enroll as a supplier on a national suppliers’ registry to participate in biddings? 6.2 Is the registration time frame specified in the legal framework? 7 Is there a classification system for the firms/contractors? (continued on next page) 108 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth ANNEX 4 – Privilege-Resistant Procurement Questionnaire Privilege-Resistant Procurement Questionnaire (Continued ) Privilege-resistant procurement questionnaire Yes No Comments, details 8.1 Does the regulatory framework provide a list of qualification criteria that suppliers must meet in order to be admitted to submit a bid? 8.2 Does the regulatory framework provide that qualification criteria should be communicated to suppliers, either through the tender notice or tender documents? 9 Does the legal framework establish rules that favor state-owned enterprises? 10.1 Does the regulatory framework and its implementing regulations provide procedures and methodologies for assessment of technical capacity? 10.2 Does the regulatory framework and its implementing regulations provide procedures and methodologies for combining price and technical capacity under different circumstances? Transparency, confidentiality, and access to information 11 Does the legal framework mandate the following? Check all that apply. 11.1.1 By regulation, opening of tenders follows a defined and regulated procedure. 11.1.2 Public opening of tenders occurs in the 24 hours following the closing date for bid submission. 11.2.1 By regulation, records of proceedings for bid openings are retained. 11.2.2 By regulation, records of proceedings for bid openings are available for review. 11.3 By regulation, security and confidentiality of bids are maintained prior to bid opening. 11.4 By regulation, disclosure of specific sensitive information during debriefing or clarifications is prohibited. 12.1 Is there an integrated information system that provides, at a minimum, up-to-date procurement information, including tender invitations, requests for proposals? 12.2 Is there an integrated information system that provides, at a minimum, up-to-date procurement information, including contract award information? 13 Is this information system accessible to the public at no or minimum cost? (Please specify the cost.) 14 Are the following decisions publicly posted on a government website or a national gazette? Check all that apply. 14.1 Modifications of tender documents 14.2 Cancellation of a call for tenders 14.3 Award notices Grievance, complaint, recourse 15.1 Does the regulatory framework provide for the right of participants to ask for an independent review in a procurement process? 15.2 Does the regulatory framework establish time frames for issuance of decisions by the procuring agency? 15.3 Does the regulatory framework establish time frames for issuance of decisions by the administrative review body? 15.4 Is the administrative review body institutionally independent and autonomous with regard to resolving complaints? Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 109 ANNEX 4 – Privilege-Resistant Procurement Questionnaire Privilege-Resistant Procurement Questionnaire (Continued ) Privilege-resistant procurement questionnaire Yes No Comments, details Integrity and accountability 16.1 Does the regulatory framework for procurement include provisions addressing the following? 16.2 The regulatory framework for procurement gives instructions on how to incor- porate fraud, corruption, conflict of interest, and unethical behavior in tendering documents. 17 Does the regulatory framework cover the following? Check all that apply. 17.1 Covers fraud and corruption. 17.2 Provides a definition of what is considered fraud and corruption. 17.3 Spells out the individual responsibilities and consequences for government em- ployees found guilty of fraud or corruption in procurement. 17.4 Spells out the individual responsibilities and consequences for private firms or indi- viduals found guilty of fraud or corruption in procurement. 18 Is there a secure, accessible, and confidential system for the public reporting of cases of fraud, unethical behavior, and corruption? 19 Does the regulatory framework provide for the following? Check all that apply. 19.1 Exclusions for criminal or corrupt activities. 19.2 Administrative debarment under the law subject to due process. 19.3 Prohibition of commercial relations or blacklisting. 20 Does the government have in place an anticorruption program to the following? Check all that apply. 20.1 Prevent corruption in public procurement. 20.2 Detect corruption in public procurement. 110 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth ANNEX 4 – Privilege-Resistant Procurement Questionnaire Annex 5: Trade and Customs Questionnaire The CEM team analyzed the governance of the trade and the process of importing inputs or exporting goods can be customs system in order to characterize gaps and entry very costly, sometimes threatening the very survival of the points for the design of privilege-resistant policies. This business. Thus, the private sector’s enabling environment task is inspired by the report’s analytical framework on should guarantee trade and customs policies that are Privilege-Resistant Policies in the Middle East and North simple and legible, leaving little room for undue discretion Africa (2018).94 Importing and exporting are important that leads to arbitrariness and privileges. operations in the life cycle of a firm, and unfair treatment in Privilege-Resistant Trade and Customs Questionnaire How many, comments, details, Privilege-resistant trade and customs questionnaire Yes No sources Tariffs structure and transparency 1 Are tariff data publicly available on a web portal accessible to all? 2 Is the information current, reflecting latest tariff data? 3 How many tariff bands are there? 4 What are the 5 highest tariff peak rates? And for which types of goods? 5 Who sets trade policy (tariffs, licenses, etc.)? – Presidential Decree, Ministry of Finance, Trade etc., And how often can changes be made? 6 Which agencies are legally entitled to be present at the border crossing? 7 Which is the lead agency for border management? Import restrictions and special regimes 8 Are there nonautomatic import licenses, outside usual prohibited/regulated goods (for example, weapons)? 9 Are the criteria for the awarding of import licenses stated in a web portal (accessible to all)? 10 Are there “de facto” hidden, informal requirements, in addition to the official ones? 11 What is the number of customs regimes? 12 How many types of import licenses and permits exist? 13 What is the percentage of physical inspections (%)? 14 Does the count of physical inspections include the empty containers in the denominator? 15 Do ex-post controls exist? 16 Where import licenses issued? Is it just in the capital? Are there any fees? (continued on next page)  Mahmood, Syed Akhtar, and Meriem Ait Ali Slimane. 2018. Privilege-Resistant Policies in the Middle East and North Africa: Measurement and Operational Implications. MENA 94 Development Report. Washington, DC: World Bank. Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth 111 ANNEX 5 – Trade and Customs Questionnaire Privilege-Resistant Trade and Customs Questionnaire How many, comments, details, Privilege-resistant trade and customs questionnaire Yes No sources Electronic processing of declarations and connectivity 17 Are customs declarations electronically processed for imports—at least at the main ports? 18 If yes, are paper declarations required in addition to the electronic process? 19 Are trade clearing procedures and formalities publicly available on a web portal? 20 Are the main customs offices on the borders electronically connected to the headquarters? (that is, centralized bookkeeping, communication channels, networked database) Fines 21 What is the ratio of the total value of “infringement / value of duties” for a year? 22 Is there a publicly available web portal with the scale of infringement fines? 23 Are there financial incentives for customs officials to discover fraud? 24 If yes, what are the incentives for customs agents to discover fraud? No incentive; a flat incentive; a percentage of the fine; is it capped? 25 Is the incentive to discover fraud capped? 26 What is the value of the ratio “average salary/average value of the duties” of custom agents? Customs procedures and ethics 27 Is there a procedures manual for customs agents? 28 In the customs authority, are there internal audits regarding compliance with internal procedures? 29 In the customs authority, are there internal audits regarding internal fraud and corruption? 30 Is there a code of conduct or rules on conflict of interest in customs? (Please specify which one exists in comments section.) 31 Is the customs code publicly available? 32 Do regulations to implement the customs code exist? 33 How many customs agents are sanctioned for corruption every year (on average over the past 5 years)? 34 Were there custom agents sanctioned in the past year? How many? 35 Are there any export bans, licenses or taxes? 36 Are there special regimes for small-scale traders? Laws and appeals (grievance mechanisms) 37 By regulation, is there a possibility to appeal decisions? 38 By regulation, is there an official time frame for appeal? 39 By regulation, is there a possibility of recourse to independent jurisdiction in the final instance? 40 How many appeal cases are there per year (please average over the past 5 years)? 41 Can we get a list of gazetted (official) border crossings — and any information on the facili- ties at those borders — power, water etc. — opening hours. 112 Country Economic Memorandum: Central African Republic – From Fragility to Accelerated and Inclusive Growth