Chapter I ACCELERATING THE GROWTH MOMENTUM AND CREATING BETTER JOBS Benin Country Economic Memorandum 2.0 © 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. The pictures should be attributed to Stephane Brabant unless otherwise specified. Attribution Please cite the work as follows: “World Bank. 2021. Benin Country Economic Memorandum © World Bank.” 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. 2 ACKNOWLEDGEMENT The Country Economic Memorandum was prepared by a team led by Nathalie Picarelli and Xun Yan. The team included Alexandre Henry, Solene Rougeaux, Saint-Martin Mongan-Agbeshie, Felicien Towenan Accrombessy, Hasan Dudu, Jakob Engel, Besart Avdiu, Mathilde Lebrand, Daniel Alberto Benitez, Megersa Abera Abate, Marjan Petreski, Esther Maria Bartl, Houdou Romaric Samson, Lulit Mitik Beyene, Alejandro Sicra, Zhen Liu, Amevi Rocard Kouwoaye, Adam Levai and Noukpo Homegnon. The report was prepared under the overall guidance of Abebe Adugna, Coralie Gevers, Atou Seck and Theo David Thomas. Helpful advice, comments and data were received from Andrea Coppola, Michel Welmond, Susana M. Sanchez, Ernest John Sergenti, Fiseha Haile, Leif Jensen, Olivier Hartmann, Jean Michel N. Marchat, Anouk Pechevy, Jim Cust, Alexis Rivera Ballesteros, Gabriel Stefanini Vicente, and Sidikou Salihou Mamadou. And from peer reviewers Sona Varma, Ashley Taylor, Amina Coulibaly, Wendy Cunningham, Sara Troiano, Paul Brenton and Anne-Cecile Souhaid. Micky O. Ananth, Maude Jean-Baptiste and Benita Mahinou provided excellent administrative and operational assistance. Kartographia provided mobile data visualization support. 24Slides designed the report. Yao Gnona Afangbedji kindly provided photos and communications support. Fiona Hinchcliffe provided excellent editorial support. The team gratefully acknowledges the collaboration with the Beninese authorities, notably the Direction Générale de l’Économie (DGE), the Ministry of Economy and Finance, and the Institut National de la Statistique et de la Démographie (INStaD). The CEM reflects the discussions from a workshop with different stakeholders in Benin in December 2020. This report would not have been finalized without the generous financial assistance from the Umbrella Facility for Trade Trust Fund and NDC Climate Support Facility Trust Fund. The team is grateful to the Development Data Partnership for their data program with X-Mode through which data was made available. 3 TABLE OF CONTENT Page / 003 Acknowledgement Page / 005 Acronyms and abbreviations Page / 006 Introduction Page / 010 Section 1.1: Growth trends and patterns Page / 021 Section 1.2: Improving the growth model Page / 033 Section 1.3: Building a middle-income economy Page / 036 References Page / 038 Terms & Definitions Page / 039 Appendix ABBREVIATIONS AND ACRONYMS ANC Antenatal Care GVCs Global value chains CEM Country Economic Memorandum IMF International Monetary Fund CFAF CFA Franc LICs Low-income countries COVID-19 Corona virus disease LMICs Lower-middle income countries CPIA Country Policy and Institutional Assessment MFI Micro-finance institution CWON Changing Wealth of Nations PIMA Public Investment Management Assessment DE4A Digital Economy for Africa PP Percentage point ECOWAS Economic Community of West African States SSA Sub-saharan Africa ECI Economic Complexity Index TFP Total factor productivity FDI Foreign direct investment WAEMU West African Economic and Monetary Union GDP Gross domestic product WB World Bank 5 Introduction What will it take to sustain the growth momentum and create better jobs? A small open economy, Benin has seen growth that is above-average for the region. Real GDP growth averaged 5.1 percent over 2011-2019, above the sub-Saharan Africa (SSA) average. But this average hides a volatile pattern over the decade, alternating between periods of high growth and years of steep decline, mostly due to external shocks. The most recent high-growth spell – from 2017-2019 – saw real GDP growing at potential for three years and averaging 6.4 percent. This was temporarily halted by the closure of the Nigerian border effective for 16 months from August 2019 and the COVID-19 global crisis. This volatility of high growth spells combined with low productivity growth has translated into limited gains in income per capita. Real income per capita growth is falling behind its peers (on average by 1 percentage point (pp) in the last decade), linked to its high population growth. Close to 90 percent of the labor force is employed in the informal economy, where women are overrepresented. While the economy is timidly diversifying (agriculture still accounts for 28 percent of GDP), the growth of the services sectors has mostly been in the least productive non-tradable areas and manufacturing has shrunk. Human capital remains low and gender gaps are large, which have kept fertility rates high and above the average in SSA. Despite reasonable investment levels, firms have not always translated it into higher productivity or managed to integrate into higher value chains. 6 Laying the foundations for a solid step up the ladder towards a middle-income economy is Benin’s next endeavor. Following its transition from low-income country to lower-middle income country status in 2020, Benin is at the door of a new path. Ambitious reforms in most recent years have opened the door to new opportunities. The challenge: to boost the structural transformation of its economy driven by new growth drivers capable of sustaining an economic acceleration, lifting labor productivity and creating quality jobs for its young labor force, including women. Getting there will require to learn from the positive results and address persistent challenges. By understanding the drivers and key limitations of the current growth model, this chapter aims to help define the growth strategy for the future. While Benin’s economy has been spared by the worse of the COVID-19 crisis, the shock has reinforced the need to focus on structural reforms that address long-term challenges and ensure that economic recovery is sustainable and inclusive. The key conclusions that underpin this report, following the CEM 2.0 framework (Box 1.1), suggest that investing further in human capital and closing gender gaps, particularly to accelerate the decline in fertility rates, and integrate women and youth into a higher quality labor market, should be central. More notably, this new path requires facilitating job-creating investment by the private sector and giving workers and entrepreneurs the capabilities to take advantage of opportunities to access jobs and raise earnings. Regional integration and trade are at the heart of the economic diversification agenda and can drive productivity growth. Deepening market integration, connecting people and creating agglomeration economies through transport infrastructure and services should catalyze additional opportunities, taking advantage of Benin’s geographical position. The chapter is organized as follows: section 1.1 analyzes growth trends and patterns in the last decade; section 1.2 discusses the main limitations of the current model; and section 1.3 outlines the rationale for the deep dives. 7 Box 1.1 The CEM 2.0 methodology CEM 2.0 is an innovative approach to growth analysis The CEM 2.0 methodology offers a simple analytical framework to conduct a diagnostic exercise using the CEM 2.0 Country Scan Tool. This tool helps to systematically scan a country’s performance for several economic dimensions. It is organized around 20 guiding questions: 10 macro-level questions and 10 micro-level questions. The macro-level questions are designed to encourage the use of the most common growth diagnostic tools and decomposition techniques. The micro-level questions are designed around the framework proposed by Syverson (2011). Together they help teams better understand the underlying factors of a country’s growth process, including productivity, employment, trade, investment, and human capital, as well as the business, regulatory and financial environment. The tool also provides structural and aspirational comparators for benchmarking purposes. Using the CEM 2.0 analytical framework, the key constraints to economic growth in Benin were identified and filtered using prioritization criteria. Three themes were selected on that basis, not only because they are of high programmatic and strategic relevance, but also because they have not been the subject of recent analysis. For example, while digital development emerged as an important area of analysis, it has recently been analyzed in the DE4A Diagnostic (World Bank 2020a). The CEM also aims at building synergies with Country Private Sector Diagnostic (ongoing). Areas of analysis were also identified in consultations with various Benin stakeholders, based on the country scan presentation. 8 Benchmarking – Structural, Aspirational Peers and Regional comparisons To identify Benin’s comparator countries, the team combined inputs from the Country Scan Tool with local country context. A set of criteria was used to select countries (appendix 1). 01 Structural peers 02 Aspirational peers Benin Structural peers Aspirational peers Togo, Rwanda and Senegal These Ghana, Morocco, and Sri Lanka. countries have similar economic These countries are LMICs that and structural characteristics as set a good development Benin. precedent, having started from a similar position as Benin. Criteria for selecting structural and aspirational peers 03 WAEMU & ECOWAS 04 Other categories • GDP per capita (constant 2010 US$) WAEMU countries include Benin, • Population 2019 Benin will also be compared with Guinea-Bissau Burkina Faso, SSA average, Low Income (LICs) • Trade (% of GDP) Côte d’Ivoire, Mali, Niger, and Lower Middle Income • Agriculture, value added (% of GDP) Senegal, and Togo. (LMICs) countries averages. • Human Capital Index ECOWAS countries include the • Country Policy and Institutional Assessment WAEMU countries and Cabo Verde, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Nigeria, and Sierra Leone. 9 1.1 GROWTH TRENDS AND PATTERNS Supported by greater macroeconomic stability brought about by institutional reforms and prudent economic policies, Benin has enjoyed above-average growth. However, growth remains fickle, and the achievement is somewhat moderated in per capita terms, casting concerns about a quick catch-up and convergence. 10 1.1.1 Economic growth has evolved from a very volatile past... Structural break analysis suggests 01 Real GDP growth over the long-run is characterized by high volatility that Benin’s growth since its political stabilization (early 1970s) can be divided into three periods. 12 Commodity price Political transition shock/Naira Growth showed a highly volatile cyclical pattern during the devaluation 10 1970s and 1980s, largely reflecting the high dependence on CFAF Global exports, centered on a few key agricultural raw materials. revaluation COVID-19 8 Financial Since the 1990s, a series of national and regional reforms have Nigeria crisis seen quicker and more stable growth, averaging at 4.5% during export ban 1992-2010. The CFA Franc (CFAF) realignment in 1994 allowed 6 for greater economic stability for WAEMU countries and deeper trade and economic integration amongst member states (Van 4 den Boogaerde and Tsangarides 2005). Macroeconomic stability was also underpinned by reforms to the public administration and governance, as well as fiscal and financial sector 2 consolidation (IMF 2000). By the end of the global financial crisis around 2011, growth 0 further accelerated, displaying higher peaks but also deeper 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 troughs, suggesting Benin remains vulnerable to external -2 shocks. The volatility during this period is less correlated with agricultural commodities, and more connected to growth Avg. growth rate (std dev): variations in neighboring countries and movement in oil prices. -4 1972-1991: 3.3% (4.3%) 1992-2010: 4.5% (1.4%) The focus of the CEM will be 2011-2019, building on the 2011-2019: 5.1% (2.0%) previous CEM (World Bank 2009). Because of the COVID-19 -6 crisis, the year 2020 will be treated separately. Source: WDI 11 1.1.1 Economic growth has evolved from a very volatile past... ... to Benin becoming a relatively strong performer in SSA 02 Average real GDP growth was above the SSA average in 2011-2019 Over the past decade, real growth has accelerated, positioning Benin as one of the rising stars of the region. 10 8 Over the past decade, economic growth has accelerated, with Benin growing close to potential for several years, positioning 6 Benin it as one of the region’s rising stars. Between 2011 and 2019, (5.1) economic growth averaged 5.1%, above the SSA average of SSA Average (4.1) 4.1%. Macroeconomic stability supported growth in the 4 second half of the decade. While Benin’s economy has been accelerating, volatility has 2 prevented it from sustaining high growth for more than three consecutive years. High volatility creates uncertainty in market expectation and impairs capital accumulation. It 0 affects stable revenue mobilization and therefore undermines Zambia Chad Uganda Benin CAR* Sierra Leone Ethiopia Madagascar Burkina Faso Tanzania Lesotho Burundi Liberia Zimbabwe Congo Comoros Kenya Togo Guinea Cape Verde STP* Swaziland Mali Cameroon Mauritania Ghana Nigeria Guinea-Bissau Senegal Mozambique DRC* Rwanda Eritrea Malawi Niger Angola Gambia Cote d'Ivoire Sudan state capacity, especially in public investment, redistribution, -2 and poverty reduction. While Benin remains vulnerable in an increasingly integrated economy, in 2020, during the global COVID-19 crisis, Benin’s economy showed remarkable resilience (Box 1.3), supported by a large fiscal stimulus and limited local contagion. Source: WDI and authors’ calculations. Note: SSA country list excludes high income, upper middle-income countries, and South Soudan. CAR stands for Central African Republic, STP for Sao Tome e Principe and DRC for Democratic Republic of Congo. Country-colors vary depending on comparator group. 12 1.1.1 ... to Benin becoming a relatively strong performer in SSA. GDP and Growth Decomposition Growth is driven by services, and increasingly by private investment 03 Supply side: sector share in GDP 04 Supply side: contribution to growth Growth since 2000 has been driven by a steady expansion of 100% services, on the supply-side, and increasingly, by agriculture 90% in recent years. On the supply side, output is supported by 5.0 80% strong growth in the service sector. Its share in GDP has grown 70% 44% 49% 48% from 44% over 2000-2010 to 49% in the subsequent decade. The 60% 3.0 importance of services in Benin’s economy is primarily driven by 50% the country’s role as a trade and transit hub for surrounding 40% 30% 18% 15% 16% landlocked countries. Agricultural production has grown the 1.0 20% most, by 61.8% between 2011 and 2019 (or an annual compound 10% 27% 27% 28% rate of 5.5%), much faster than the SSA average of 22%, reflecting 2000-2010 2011-2019 2016-2019 0% -1.0 improved technology and favourable policies to overcome 2000-2010 2011-2019 2016-2019 Agriculture & livestock Fishing and forestry Extractives adverse weather and price shocks. However, industry has not Manufacturing Construction Commerce Primary sector Secondary sector Tertiary sector Net taxes Transport & ICT Other services Government shown the same fast-paced growth: its share in GDP has dropped Net taxes Real GDP growth from 18% (2000-10) to 15.4% over 2011-2019, mostly dragged down by a declining share of manufacturing, from 13.6 to 10.8 05 Demand side: sector share in GDP 06 Demand side: contribution to growth over the same periods (Box 1.2). 110% 6.0 Private investment and private consumption are the major contributors on the demand side. Although historically 10% 17% 20% 5.0 90% marginal, investment’s contribution to growth has increased 70% 4.0 substantially in recent years, driven by private investment. Private 3.0 investment as a share of GDP increased from 3.6% (2000-2010 50% average) to 15.3% over 2011-2019. This primarily reflected an 79% 73% 71% 2.0 30% increase in FDI. Domestic credit plays an important role in private 1.0 investment, although the growth of which is relatively weak in 10% 0.0 recent years. Government consumption has only increased 2000-2010 2011-2019 2016-2019 -10% 2000-2010 2011-2019 2016-2019 -1.0 timidly, from 9.3% (2000-2010) to 10.7% (2011-2019). Restrained Private consumption Government consumption Private consumption Private investment Government consumption Public investment government expenditure reflects low domestic revenue Private investment Public investment Inventory Net exports Inventory Net exports mobilisation, which limits the scale of public investment. Real GDP growth 13 1.1.1 ...to Benin becoming a relatively strong performer in SSA. Private investment has driven gross investment growth Thanks to a recent surge in private investment, gross investment increased 07 Despite having a private capital-output ratio above the average of SSA… Gross investment has increased significantly in recent years; it was above the average for SSA during 2011-2019. Investment is a 3.5 key driver of growth. Sustaining rapid growth without impressive 3.0 rates of investment is rare. The total investment rate rose from 18.2% 2.5 of GDP in 2000–2010 to 21.3% in 2011–2019, surpassing the average 2.0 1.5 for SSA slightly (21%) and staying above 23% since 2017. This reflects 1.0 an increase in private investment that almost doubled since 2010, to 0.5 represents 80% of gross investment due to higher FDI and private 0.0 sector credit (Appendix 4). In contrast, public investment has been steady at average of 5 percent of GDP, constrained by low domestic Guinea Benin Chad Congo, DR Mauritania Rwanda Botswana Niger Djibouti Ethiopia Zimbabwe Togo Malawi Kenya Gambia Senegal Switzerland Guinea-Bissau Mali Sudan Zambia Gabon Mozambique Namibia Madagascar South Africa Nigeria Liberia STP Uganda Ghana Lesotho Cameroon Eq. Guinea Cabo Verde Comoros Burundi Cote d'Ivoire Mauritius Angola Seychelles Sierra Leone Burkina Faso Tanzania revenue mobilization. Capital stock per capita has increased, with Benin only trailing Senegal among structural peers; but far below aspirational ones. Source: IMF 2020 Investment and Capital Stock Dataset Still, gross investment remains lower than in its structural peers: Togo (28 %), Rwanda (25%), and Senegal (24%). It also falls short of the 08 …Benin displays average to low returns to aggregate capital threshold suggested by the experiences of the high-growth cases 25 identified by the Commission on Growth and Development of 25% of GDP or above (Commission on Growth and Development 2008). 20 These high-growth economies also invested a further 7–8% of GDP in education and health, compared to below 5% in Benin (chapter II). 15 More importantly, aggregate returns to capital can be improved. Percent 10 While the level of investment matters, the efficiency of both public and private investment is at least as important. Faced with a financing 5 constraint, exacerbated by low domestic revenue mobilization, and as 0 it comes out of the COVID-19 crisis, Benin needs to make critical choices about the nature of its investment financing. Improving the Benin Kenya Lesotho Mauritius Nigeria Angola Senegal Rwanda CAR Cabo Verde Namibia Togo South Africa STP Eswatini Côte d'Ivoire Mozambique Gabon Djibouti Botswana Niger Mauritania Cameroon Burkina Faso Sierra Leone Guinea Sudan business climate to attract competitive financing (Chapter IV) and improving the quality of its Public Investment Management (Chapter III) remain crucial. Source: Eden (2020) Source: IMF 2020 Investment and Capital Stock Dataset 14 1.1.1 ...to Benin becoming a relatively strong performer in SSA. Box 1.2 A premature de-industrialization? Previous experiences suggest that industrialization can be important for boosting productivity, creating jobs, and permitting catch-up and convergence. It is often regarded as a necessary stage in an economy’s structural transformation – i.e., the movement of workers from lower to higher productivity employment. East Asian economies experienced rapid manufacturing expansion during their takeoff periods. Similarly, manufacturing, at its peak, employed 25-45% of the labor force in countries like the United Kingdom and the United States (US) before de- industrialization set in. De-industrialization – the decreasing share of employment and output in manufacturing – has been observed in the US since the 1950s and in Europe since the 1970s. Since the 1990s, however, a more significant de-industrialization trend has been documented than was seen in advanced, post-industrial economies. Developing economies (especially in Latin America and SSA) started to experience falling manufacturing shares in both employment and real value added as early as the 1980s. In many developing economies, manufacturing began to shrink at much lower income levels than those at which advanced economies started to de-industrialize. This phenomenon has been dubbed “premature deindustrialization” (Dasgupta and Singh 2006; Rodrik 2015). There are many factors behind de-industrialization in the developing world, including globalization, labor-saving technologies, over-reliance on a single commodity in resource-rich countries, overheated economies with high capital inflow, etc. Promoting manufacturing requires improved infrastructure, governance and a business environment so as to attract foreign investment, education and training for upskilling the labor force. It also requires better access to finance to support investment and innovation by local firms. Insufficient infrastructure services (electricity and water) and inefficient customs procedures (for input of foreign origin) undermined the competitiveness of Benin’s manufacturing firms (World Bank 2016). Recent studies suggest that it may be too early to conclude that Africa is de-industrializing, as the share of employment in manufacturing has been rising since 2005 (Kruse et al. 2021; Diao et al. 2021), with a similar trend observed in Benin recently (detailed in section 1.2). It may also not be entirely appropriate to apply the growth path of 1980s Asia to the African context of the 21st century. Still, the above-mentioned policy actions (for instance, improved infrastructure and governance) would remain vital for developing other sectors with the same ends: creating jobs, closing the productivity gap and transforming the economy. 15 1.1.1 ...to Benin becoming a relatively strong performer in SSA. Recent macroeconomic indicators showing relative stability The growth performance has been supported by prudent macroeconomic 09 Recent growth has been around potential until 2020 10 Inflation (2011-2021) has been kept low policies 8 15 Percent, monthly yoy. Benin has achieved stronger outcomes in this area than most of its 7 13 non-WAEMU peers. Recent growth has been closed to potential output. 6 11 Inflation has remained low. General monthly inflation (y/y) averaged 1.3% 5 9 and food inflation (monthly y/y) averaged 1.6% over 2011m1–2021m4, 4 7 reflecting good harvest and imported euro-area low inflation. The real 3 5 effective exchange rate is generally in line with fundamentals, and the 2 3 external position has been more or less stable in the recent decade on 1 1 account of positive terms of trade which have improved since 2014 and -1 stabilized around 2017. 201101 201401 201701 202001 201107 201201 201207 201301 201307 201407 201501 201507 201601 201607 201707 201801 201807 201901 201907 202007 202101 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -3 -5 Monetary policy was relatively loose, as in other WAEMU countries, Potential growth (%) Real growth (%) Food Nonfood Headline which is evidenced by the increase in real money growth since 2018 with Source: INSAE, IMF, WBG staff estimates and projections. Source: BCAEO, WBG staff estimates and projections. an average of 8.9% over 2018-2020. The policy rate of the Central Bank of West African States (BCEAO) steadily declined from 3.8% in 2008 to 2.5% 11 External position has been kept stable on account of 12 Total revenue and grants increased while in 2017, and further declined to 2.0% in 2020. Expansionary monetary stabilized terms of trade public expenditure surged in recent years policy contributed to a sharp increase in credit growth, which averaged at 2012=100 % GDP 20 11.6% in 2018-2020 and helped support private investment growth. 200 180 Fiscal policy could play a bigger role in promoting growth. The level of 160 140 15 total revenue and grants was stable but relatively low (14%), constraining 120 the spending power. After a surge in 2015-17, expenditure declined 100 steadily until the COVID-19 crisis in the context of fiscal consolidation. 80 60 10 Capital spending as share of public expenditure is relatively high (30% 40 over 2010-2020) but its share of GDP merely averaged 4.8%, which was 20 5 low compared with developing countries with similar per capita GDP level. 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020e Benin would benefit from a higher and stable level of capital expenditure. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Other Grants Non-Tax Tax To this end, careful budget allocation as well as improved domestic Terms of trade Oil Cotton Total revenues and grants Total expenditures revenue mobilization will be the key (Appendix 3). The latter is currently Source: IMF. Source: Beninese authorities and Bank staff calculation. constrained due to the low tax base – in a predominantly informal economy. 16 1.1.1 ...to Benin becoming a relatively strong performer in SSA. 1.1.2 Real growth is less impressive in per capita terms... Benin’s per capita growth has averaged 2.2% in the past decade. Although this is around the SSA median, the regional measure is trumped by more fragile countries. Benin’s performance is below that of structural peers. Although it’s catching up with the SSA average, it still has a long way to go to catch up with LMICs: it would take about 30 years to reach the average for LMICs if per capita growth does not accelerate, all else being equal. Its per capita income level diverged from that of SSA around 2005. At current levels of per capita growth (2011-2019 average), Benin will catch up with the SSA average (excluding high and upper-middle income countries) within half a decade. However, it will still take 33 years to reach the mean of LMICs, and 55 years to enter the upper-middle income group. 13 Average per capita GDP growth in SSA, 2011-2019 Guinea-Bissau 14 GDP per capita: Benin vs. SSA Mozambique Burkina Faso Sierra Leone Cote d'Ivoire Madagascar Cape Verde Mauritania Cameroon Zimbabwe Swaziland Comoros Tanzania Ethiopia Burundi Rwanda Lesotho Senegal Gambia Uganda Zambia Nigeria Guinea Malawi Angola Liberia Eritrea Ghana Congo Sudan Kenya Benin DRC* Niger CAR* Chad Togo STP* Mali 7 6 5 4 3 2 1 0 -1 -2 Source: WDI and authors’ calculations based on constant 2010 USD. Source: WDI and authors’ calculation. Note: SSA country list excludes high income, upper middle-income countries (see Definition and footnote [6]), and South Note: the SSA average (constant 2010 USD) is calculated with the same country list excluding high income, upper middle- Soudan. income countries, and South Soudan. The numbers of years needed to reach mean lower-mid income and UMC are calculated based on per capita GNI (Atlas method current USD, WDI) instead. 17 1.1.2 Real growth is less impressive in per capita terms... ...and appears less satisfactory when benchmarked against peer countries In the last decade, Benin’s GDP growth has lagged 15 Real GDP growth is less impressive against peers behind its structural peers, while its per-capita 7 Structural (6.0%) growth is the second lowest of all its peers. 6 5 Aspirational (5.0%) 5 4 percent During the most recent decade (2011-2019), Benin’s real 3 average growth has been lower than that of all its structural 2 1 peers, suggesting that its troughs have damaged Benin’s 0 chance for higher growth. While the growth rate is slightly Togo Morocco Ghana Senegal Sri Lanka Rwanda Benin higher than the average of its aspirational peers, this could reflect the fact that these countries have probably passed the catch-up stage of faster growth. Benin’s per-capita growth, however, is lower than the average 16 Real per capita growth is the lowest among structural peers of both peer country groups. It ranks the second lowest among all seven countries and is only higher than Morocco. Aspirational (3.5%) 4.5 The volatility of economic growth combined with low Structural (3.3%) 3.5 productivity growth (Section 1.2), and high population growth 2 2.5 percent (Appendix 2) have prevented further gains. As a result of the 1.5 slow per-capita growth, poverty remains high, declining only 0.5 slowly from 41% in 2015 to 38.5% in 2019, based on the -0.5 national poverty line. Togo Ghana Morocco Senegal Sri Lanka Rwanda Benin Source: WDI and authors’ calculation; Notes: Constant 2010 US$ 18 1.1.2 ...and less satisfactory when benchmarked with peer countries. Box 1.3 How was Benin affected by the COVID-19 crisis? Daily new cases and deaths Daily cases (7-day moving average) Daily deaths The COVID-19 pandemic has triggered one of the deepest global 130 110 recessions in recent history. The coronavirus disease (COVID-19) became a 90 global pandemic in early 2020. The economic fallout of the health crisis and 70 50 the containment measures has caused one of the most severe economic 30 recessions in recent history. Global GDP is estimated to have contracted by 10 3.3% in 2020. In the short-term, SSA experienced its worse recession on -10 -30 record, though displaying one of the smallest contractions, at 1.9% in 2020, second only to emerging and developing Asia. In per-capita terms, however, growth has been negative, and poverty has risen in many countries. Emerging Total confirmed cases (per million people) markets and developing economies are also expected to bear more scars than WAEMU range Benin SSA average advanced economies in terms of economic activity and human capital losses. 3500 3000 In Benin, COVID-19 cases and deaths remained low. Benin first COVID-19 2500 case was recorded on March 16, 2020. Since the onset, however, cases have 2000 1500 remained low with total recorded deaths staying just above 100 by June 2021. 1000 The low number of cases allowed for a relatively short-lived period of 500 restrictive measures from end March to mid-May 2020, during which mobility 0 was reduced but economic activities were never completely shutdown. Source: Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (as of June 15, 2021), and authors’ cal culation. Notes: negative cases are result of data adjustment around May 19, 2020, when Benin corrected its number of cases due to the double counting of PCRs and rapid-tests. 19 1.1.2 ...and less satisfactory when benchmarked with peer countries. Box 1.3 How was Benin affected by the COVID-19 crisis? (continued) Demand side decomposition As a result, and supported by a rapid and large countercyclical fiscal 8 6.7 6.9 response, the COVID-19 crisis has had only a moderate impact on Benin’s 3.8 short-term growth. Growth decelerated in 2020 by close to 3 pp. A large 4.073930938 1.664703407 fiscal stimulus package of close to 4% of GDP phased between 2020 and 2021 3 (Appendix 5) kept real GDP growth positive at 3.8% (1% in per capita terms), outperforming most WAEMU and neighbouring countries. 2018 2019 2020 The deceleration was driven by agriculture, manufacturing, construction, -2 Private consumption Government consumption transport and ICT – mostly due to reduced activity in the second quarter. The Private investment Public investment service sector was the hardest hit at the beginning of the pandemic due to Inventory Net exports social distancing measures. On the demand side, private investment – the Supply side decomposition recent rising growth driver – turned negative in 2020. Public investment and consumption drove growth on the demand side. 6.7 6.9 3.8 While the short-term impact may have been limited, the medium-term effect is uncertain. Benin will need to engage in fiscal consolidation in the years to come, which strengthens the case for structural reforms to boost private 0 sector-led growth. The pace of the recovery will also depend on access to and 2018 2019 2020 roll out of vaccines, while human capital and gender gaps may have worsened Agriculture and livestock Fishing and forestry Extractives across income groups. Manufacturing Construction Commerce Transport & ICT Other services Government Source: INSAE and author’s calculations 20 1.1.2 ...and less satisfactory when benchmarked with peer countries. 1.2 IMPROVING THE GROWTH MODEL An effective growth strategy would build on the foundation of hard-won macroeconomic stability and the success of past reforms, while tackling the major stumbling blocks to sustained higher productivity growth. 21 Productivity growth has trailed during the past decade 1.2.1 Productivity growth needs a boost A B …preventing …preventing Benin Benin fromfrom catching catching up up with peers 17 Productivity growth has been low… 18 with peers Over recent decades, labor productivity growth has lagged Labor productivity growth rate (percent) Labor productivity level relative to South behind peers. Between 2001 and 2018, Benin’s output per worker Africa (2011-2018) grew at an average rate of 1.2% a year. As a result, by 2018 the 6.0 average worker in Benin produced only 16.2% more real output than 40 4.0 in 2001, compared to 50.4% for a worker in Rwanda, and 56.5% in Sri Lanka. Despite an uptick in the most recent decade, output per 2.0 20 worker still grew at an annual average of 2.0% over 2011-2018, slightly 0.0 lower than other WAEMU peers like Senegal and Côte d’Ivoire. Total 0 2001-2010 2011-2018 2016-2018 factor productivity (TFP) has also shown slower growth (Appendix 7), -2.0 while firm level productivity is declining (Chapter IV). Benin Togo Rwanda Senegal Benin Togo Rwanda Senegal Ghana Ghana Morocco Sri Lanka Limited productivity growth has been one of the main factors behind slow per-capita growth. A decomposition of per-capita GDP Source: Prospect Group (2020), Notes: GDP per employment, in 2010 constant dollars. South Africa displays one of the highest levels in SSA. Source: Prospect Group (2020), Notes: GDP per employment, in 2010 constant dollars. South Africa displays one of the highest levels in SSA. growth shows that the growth contribution of demographic factors (i.e., change in working age population), labor participation and C 19 Labor productivity Labor contributed productivity less than contributed lesspeers thanto per capita peers to pergrowth capita growth employment over the last decade was similar to comparator countries. Most of the difference in growth between Benin and its Decomposition of growth in per capita value added (2011-2019) peers is explained by its significantly lower rate of labor productivity growth. Sub-Saharan Africa (excluding high income)… Lower middle income… The decomposition also shows that a demographic transition is in Togo… place. The positive contribution of demographic change combined Rwanda… with slow labor productivity growth suggests that Benin is not taking Senegal… full advantage of the demographic dividend (Chapter II). Benin… More on Appendix 6: what has driven labor productivity in the last -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 decade? Productivity Employment Rate Participation Rate Demographic Change Source: WDI and Authors’ calculation 22 1.2.1 Productivity growth needs a boost Low productivity growth reflects a large informal sector Economies at Benin’s level of development transform by absorbing workers into better jobs (typically waged jobs) through the process of structural change. The number of waged jobs that an economy generates is therefore a key indicator of the quality of its growth process. Benin lags behind structural peers for waged employment and progress has been slow in the past two decades. Formal firms struggle to grow and create the job opportunities to move labor out of low-productivity and informal employment. In 2018, about 90% of employment was informal – the third largest in SSA. Women are over- represented: 95% of women have informal jobs compared to 85% of men. Excluding agricultural self-employment, 5 sub-sectors represent 80% of informal businesses and employ 70% of informal workers, the majority in the services sector (manufacturing, hospitality, retail, transport, other services). Sales and productivity are declining, while employment growth is 20 Only 11% of Beninese were formally employed in 2018 21 the weakest among peers, despite growing capital investment Paid Employees and Self-employed, by Country and Year Benin Firm Performance 100% 60 52.8 80% 50 37.3 40 60% 30 40% 16.3 20 12.2 10 10 2.3 20% 31% 34% 41% 49% 8% 11% 19% 21% 9% 21% 18% 25% 0 0% -10 -6.5 -9.2 2000 2018 2000 2018 2000 2018 2000 2018 2000 2018 2000 2018 -20 Real annual sales Annual employment Real annual labor Percent of firms Benin Togo Rwanda Senegal Ghana Morocco growth (%) growth (%) productivity growth buying fixed assets (%) Other self-employed Self-employed unpaid family workers 2009 2016 Self-employed employers Paid employees Source: UN statistics and author’s calculations. Source: World Bank Enterprise Survey (WBES) and authors’ calculations. 23 1.2.1 Productivity growth needs a boost Benin’s informal workers are between one quarter to one half less productive than formal ones Blinder-Oaxaca decomposition of the informality gap Benin’s informal workers are less productive, 22 in productivity reflecting differences in endowments (such as education) as well as in opportunities. Average log hourly wages Average log consumption per capita Informal workers are between 20 and 40% less productive than formal workers in Benin (Appendix 11). About half of the productivity differential is explained by workers’ • Formal workers 6.1 • Formal workers 13.5 endowments (such as age, gender, education and location), suggesting waged employment attracts better equipped • Informal workers 5.3 • Informal workers 12.6 individuals. Returns to education for example are up to twice as high for formal workers. Among informal workers, male • Difference • Difference workers are one fourth more productive than female workers, 83.9% 83.6% (Raw productivity gap) (Raw productivity gap) which suggests large gender gaps (Chapter II). The other half of the productivity differential suggests formal workers use • Explained part by characteristics 40.4% • Explained part by characteristics 64.8% those endowments better. This could be due to their capacity to invest in higher levels of capital per worker, for example. • Unexplained part • Unexplained part 34.3% 48.2% A high level of informality is costly for governments, firms and (Adjusted productivity gap) (Adjusted productivity gap) workers as it can prevent innovation, financial deepening, domestic revenue mobilization and skills development. • Interaction of the two parts 9.1% • Interaction of the two parts -29.4% Details on the relationship between informality and *** p<0.01, ** p<0.05, * p<0.1. Household *** p<0.01, ** p<0.05, * p<0.1. Household productivity can be found in Box 1.4 and Appendix 8 explains weights used accordingly. weights used accordingly. how informality is affecting other economic drivers in Benin. Source: Background paper on Informality and productivity (Petreski 2021) 24 1.2.1 Productivity growth needs a boost Box 1.4 Informality and productivity: A complex relationship Evidence suggests that formal firms are much more productive than informal ones. In Mozambique, informal firms sell about 14 times less and are 2-3 times less productive (Aga et al 2019). Competing theories explain the prevalence of informality. Some highlight the costs of formalization, such as regulatory compliance and tax burdens (Loayza 2002), while others pinpoint the different characteristics of informal firms (education, skills, managerial attitudes). There is a strong relationship with economic output, with informality especially prevalent in low-income countries (LICs) but declining as countries become wealthier (La Porta and Schleifer 2014). Because informality is both a cause and a consequence of the lack of economic and institutional development, it creates negative incentives and productive inefficiencies (including limiting the investment capacity of the public sector, and the development of a domestic financial sector – more details in Benin in Appendix 8), while also providing a source of employment in low productivity and capacity settings. The causes of informality are complex and interrelated. Formalization strategies thus need to be broad, including making labor markets flexible, reforming social protection systems, increasing labor productivity, making the regulatory framework and the justice system efficient, and rationalizing the tax system (Loayza 2018). Any policy for the informal sector that aims to raise productivity should be based on a careful analysis of the determinants of productivity among informal and formal firms. Further, not all firms are the same. Benhassine et al. (2018) showed for Benin that some informal firms are closer to formal ones, and that this group of firms is more likely to benefit more from formalization incentives than other firms. Specifically, they find that formalization was more likely among male business owners, those with more education, those operating outside the biggest market in Cotonou (Dantokpa), and those that were classified ex-ante as being more similar to formal businesses. 25 1.2.1 Productivity growth needs a boost Limited productivity growth in services has failed to support economic transformation, despite shifts in employment Employment has gradually shifted towards services and industry, 23 Employment growth has gained pace in industry and but with lower productivity growth services relative to agriculture since the 2000s, resulting in a decline in the share of agriculture in total employment: between 2011 and 2018 it fell from 44.7% Correlation Between Change in Sectoral Productivity and to 41%, to be on a par with services. Employment Shares, by Period But this shift has only marginally been followed by a 5.0 Annual change in productivity, percent change in the structure of output. Agriculture 4.0 Agric represented 25.8% of GDP in 2019, a level almost unchanged for two decades. Domestic value addition in 3.0 manufacturing remains low, and its contribution to value 2.0 Agric Agric Ind added has shrunk at the profit of services, mostly in the 1.0 non-tradable sector. Services exports in 2019 were the Ind Serv Serv Serv lowest of Benin’s structural peers and below the level 0.0 expected given its GDP per capita. Overall, the tertiary Ind -1.0 sector has failed to create the higher productivity wage jobs necessary to support the process of structural -2.0 transformation. -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 With the appropriate policies, services could be a driver Annual change in employment share, percent of structural change, as the sector assumes an enabling 1991-2000 2001-2010 2011-2019 role for economy-wide productivity (Box 1.5). Source: WDI, ILO and authors’ calculations. Notes: the circles size represent the number of total employed in each sector. 26 1.2.1 Productivity growth needs a boost Box 1.5 Can services-led development be a way for Benin? The traditional path of economic development involved manufacturing-led structural change, but increasingly, evidence is showing that services can be a credible option. Some of the biggest development gains in history have been associated with industrialization and few countries have reached high-income levels without developing a manufacturing base. East Asian economies experienced rapid manufacturing expansion during their takeoff periods, for example. Underlying this process were economies of scale, access to large international markets, innovation and linkages combined with the ability to leverage relatively unskilled labor with capital. Could services-led development provide an alternative option? Globally, the capacity of the services sectors to deliver the twin gains of productivity growth and large-scale job creation for the relatively unskilled is expanding. Technological progress arguably expand the tradability of some services and low-income countries could grow faster by exploiting their revealed comparative advantage within services. Capital accumulation that augments labor is not uncommon to some services sectors such as transportation and telecommunication services. Linkages with other sectors have increased too. Goods trade increasingly include more intermediate inputs from service industries, with the share of services in valued-added trade rising from 31% to 43% between 1980 and 2009 – a result of both forward and backward use of services in production (World Bank 2020). The services sector could have more promise than some manufacturing going forward, especially as it assumes the all-important enabling role for economy-wide productivity. Identifying policy priorities that improve performance across trade, technology, training and targeting (4Ts) can help make services-led development a driver of structural change. For policy makers in developing countries, it should not be a question of manufacturing or services, but a recognition that the potential for services to contribute to productivity and to jobs is growing– and they should act to take advantage of it. 27 1.2.1 Productivity growth needs a boost Investment and capital adequacy 1.2.2 Capital accumulation is still a challenge Investment Investment hashas steadily increased steadily but is still increased but is …and it has …and failed it has to support failed to support A 24 B 25 slightly below comparators… still slightly below comparators… productivity productivitygrowth growth Physical capital. Benin’s total investment has steadily increased since 2010, led by private sector investment (which represents close to 80% of Gross Capital Formation (% of GDP) Capital deepening, percent contribution to productivity growth the total). On average between 2016 and 2019, investment as a share of 35.0 30.0 GDP was above the regional average, at 23.6% compared to 22.3% in the 25.0 4.0 WAEMU and 21.5% in SSA. 20.0 3.0 15.0 2.0 Despite the sustained increase, the quality of the capital stock is 10.0 low with access to infrastructure lagging behind most peers, 1.0 5.0 particularly in transport. The overall quality of infrastructure is low 0.0 0.0 2000-2010 2011-2018 compared to peers with upstream infrastructure such as transport, Togo Senegal Morocco Ghana SSA (all) Benin WAEMU Rwanda -1.0 access to electricity and internet trailing. The Government Action Plan average 2011-2019 average 2016-2019 Benin Togo Senegal Rwanda Morocco Sri Lanka (PAG 2016-2021) has put significant emphasis on these sectors, but needs are large (Chapter III). Capital deepening has grown but is still Source: WDI, Notes: total investment is proxied by gross capital formation. Source: Dieppe et al. 2020 below that of peers. This partly suggests market failures and inadequate investment, explained by the low quality of the business environment C and the inability of formal firms to grow. On the public side, a recent IMF 26 Capital adequacy Capital behind most lags behind stock lags most peers peers PIMA Assessment (2020) found public investment efficiency to be low – driven by low quality, rather than volume and coverage. On the latter, SSA Benin Togo Rwanda Senegal Ghana Morocco Benin is close to comparator countries. By contrast, Benin’s score for the Inputs (2015-2018) quality component (0.71) is lower than the WAEMU average of 0.84 and Total capital stock (% of GDP)* 113 122 160 96.3 135.7 349 711 Government investment (% of GDP) 4.3 4.96 8.9 n/a 6.7 n/a n/a SSA’s at 0.80. While public investment is a key driver of growth, it Total investmentment (% of GDP) 20.9 22.3 18.7 27.6 24.7 24.9 28.9 requires an adequate governance and institutional framework (IMF Outputs (2015-2018) 2020). Access to electricity (% pop) 45.9 38.2 47.97 30.2 63.4 79.1 99.8 Attracting adequate financing in infrastructure is a challenge. Acess to internet (% pop) 21.1 17.4 10.3 19.9 32.9 32.88 60.4 People with basic water (% rural pop) 65.8 58.1 47.3 51.9 68.5 66.8 69.7 Historically, private investment in infrastructure contributed no more Quality of overall infrastructure (1-7) 3.3 2.4 n/a 4.7 3.2 3.7 4.7 than 0.3% of GDP in SSA on average, with a half dozen countries Road quality (1-7) 4.4 2.9 n/a 4.7 3.7 3.5 4.5 managing to attract over 1% of GDP. The bulk of private finance has gone to the energy and transport sectors. Gaps in the policy Source; WDI, WEF, IMF’s Investment and Capital Stock Dataset (2019) and authors’ calculations. Note: In the heatmap, the gree n (red) color represents the country with the best (worst) value for each indicator. Total capital stock is estimated only 2015-2017 environment are the major concern for the quality of both public and private infrastructure investment (Chapter III). 28 1.2.2 Capital accumulation is still a challenge Markets and people need to be better connected There are large regional inequalities in terms of market Supporting connective infrastructure is central to strengthening 27 access within Benin (2020) market integration – both to reduce regional disparities and to integrate with neighboring countries By connecting Benin with the rest of the world, transport infrastructure and services play a key role in the process of structural transformation and job creation. Improvements in market access have been linked to higher GDP growth. Integrating physical infrastructure is both a precursor to and an enabler of deeper economic integration, thereby allowing countries to gain scale economies and harness regional public goods (Foster & Briceno-Garmendia 2010). Benin’s geographical position makes it a key node in two important regional corridors: Dakar-Lagos and Cotonou-Niamey; but transport costs reduce its competitiveness. Domestically, about one third of Beninese firms surveyed in 2019-2020 rated the quality of transport infrastructure as low (CCI 2020). While Benin’s roads increase the costs of commerce and reduce the benefits of its location, focusing on transport services and complementary policies in trade facilitation is as crucial to increase the benefit of infrastructure investments (Lebrand forthcoming). Better connecting people and markets and providing access to services and amenities should also reduce economic distance between regions, and support productivity growth. Only 23% of the rural population has access to a paved road with limited accessibility also hampering human capital accumulation (Chapter III; World Bank 2021). For example, only 54% of women in rural areas had at least 4 antenatal care (ANC) visits, compared to 66% in cities. Limited road infrastructure and transport services are a well-documented constraint in this Source: WorldPop, Open Street Map and authors’ calculations – Ghost Team WB. Notes: This figure represents market access, estimated as a function of transport infrastructure quality and access to cities (population grids). regard. 29 1.2.2 Capital accumulation is still a challenge Improving human capital accumulation and reducing gender gaps would boost growth. Equitable human capital development is both the means and ends of social and economic progress. Improvement in human 28 Productivity of the next generation as measured by the HCI capital will accelerate growth process and the creation of wealth. It is estimated that a child born in Benin in 2020 will be 41% as productive when they grow up as they could have been if they had enjoyed complete education and full health. The figure is 60% in Sri Lanka, the best-performing aspirational peer (Human Capital Index, HCI, 2020). While men and women have similar scores in Benin, women outperform men in all other peer countries but Togo. Gender gaps in human capital are also reflected in access to economic opportunities. Among the active working age population (15-64), women participation (57.5%) was at least 12 pp lower than that of men (69.5%). In addition, the rate of women’s participation hides large inequalities in the quality of jobs they hold, with 95% of them employed in the informal sector. Benin ranks 123rd out of 156 surveyed economies on the Gender Gap Index (WEF 2021), indicating the persistence of significant gender gaps across all areas. Chapter II (Demographic dividend) explores widespread gender gaps in education and health and their economic implications, masked under HCI, using household surveys. As estimated in Chapter II, lower fertility and reduced gender productivity gaps in agriculture and services are associated with an additional 0.35 pp increase in average annual GDP growth and an additional 0.81 pp increase in Source: WDI, HCI, WDR 2019 ; Notes: The human capital index ranges between 0 and 1.The HCI is measured in terms of the productivity of the next generation of workers relative to the benchmark of complete education and full health. An economy in which the average worker achieves average annual per capita growth, over the period of 2022-2035. both full health and full education potential will score a value of 1 on the index. 30 1.2.2 Capital accumulation is still a challenge Benin’s integration into complex GVCs remains limited 1.2.3 Economic diversification and complex linkages with the global marketplace are nascent The Theshare commodities of of share inexport in the commodities the export A 29 basket has declined over time… B 30 …but …butit it remains above remains most above peers most peers basket has declined over time… Low productivity growth and limited opportunities in the formal sector are also linked to limited integration into global trade. Exports have contributed positively to growth in the past decade, and while Benin has come a long way in diversifying away from cotton exports (which represented 60% of merchandise exports in 2005 but accounts for half of that in 2019), commodities are still prevalent in the export basket (cotton, cashew nuts). They accounted for more than 70% of all formal exported goods in 2019, higher than all peers except Ghana and Rwanda. In contrast, while increasing slightly, openness to services exports remains the lowest of all peers, and lower than expected given Benin’s level of income. Source: WDI and authors’ calculations Source: WDI and authors’ calculations Beninese exporters are on average three times more productive than Openness to to services exports is lower than all non-exporting, comparable firms (Chapter IV), which suggests that C Openness services exports is lower D 31 peers than(2011-2018) all peers (2011-2018) 32 Net NetFDI FDIinflows remain inflows below remain peers below peers deepening trade integration, and diversifying into services and other sectors where Benin has a comparative advantage, could support Avg. Openness to Services Exports Net FDI inflows future productivity growth and formal firm creation. Both economic 28.00 7 complexity plotting (Appendix 9) and latent diversification analysis on 24.00 20.00 6 5 Benin’s trade activities (Chapter IV) suggest that Benin’s economic 16.00 4 diversification – if sustained – could support the growth process. 12.00 3 8.00 4.00 2 1 Low FDI has also reduced the scope for increased productivity. 0.00 0 Despite an impressive increase in the past decade, the amount of FDI attracted by Benin remains substantially lower than most structural or Togo Ghana Senegal Morocco Benin Sri Lanka RWA SSA Rwanda SEN GHA TGO SSA (exl. HICs) BEN IDA MAR LMICs BEN (2000-2010) aspirational peers, reducing the scope for productivity gains. The expansion of global value chains (GVCs) over recent decades has supported productivity growth in those developing countries that Source: WITS and authors’ calculations Source: WDI, IMF WEO and authors’ calculations integrated into global markets (World Bank 2020b). FDI is a key feature of GVCs and is associated with productivity spillovers through the increased availability of cheaper, better quality, or more varied inputs. 31 1.2.3 Economic diversification and complex linkages with the global marketplace are nascent Is upgrading the relationship with Nigeria the way forward? Nigeria is the Benin’s fastest-growing export market Nigeria is Benin’s main trading partner, and Nigeria is also the main source of illegally the destination of 25.2% of its recorded imported fuel to Benin (kpayo), representing exports in 2019. It has been Benin’s fastest about 85% of consumed fuel. growing export market over the last five years. Upgrading its trade activities with Nigeria and other neighbors could support the Nigeria’s large domestic market and development of Benin’s services exports and protectionist trade policy have made the improve domestic value addition and ports of neighboring West African countries productivity growth. It would help normalize a doorway for indirect imports. Benin, for a tense relationship following the border example, is one of the largest rice importers closure of 2019-2020. in SSA, with the rice then being re-exported through the land border to Nigeria (Chapter Benin’s fastest growing export markets IV). Goulub et al. (2019) estimated that re- (% change 2014-2019) export to Nigeria accounted for almost 45% of total exports. The relationship is more Nigeria 716% complex, however, with porous borders and Bangladesh 440% ethnic ties that have lasted for generations. UAE 52.3% 32 1.2.3 Economic diversification and complex linkages with the global marketplace are nascent 1.3 BUILDING A MIDDLE- INCOME ECONOMY Benin’s path towards sustained high growth and higher productivity job creation should focus on increasing productivity growth, while enhancing human and physical capital accumulation in areas where the gaps are bigger. 33 Benin’s next wager: the path toward a mature middle- income economy Economic theory provides a variety of narratives on the key necessary conditions and long-term drivers of growth. At Benin’s level of economic development, increasing productivity growth is important, but so is focusing on enhanced human and physical capital accumulation. This report offers an in-depth analysis of three key areas that address these challenges in an interdependent manner (see analytical framework): 1) Benin could benefit from the demographic dividend by focusing on human capital, reducing gender gaps to accelerate the decline in fertility rates, and integrating women and youth into a higher quality labor market (Chapter II). 2) Improving transport infrastructure and services can build the backbone of a competitive economy, connecting people and markets, reducing economic distance, and creating agglomeration economies that will catalyze opportunities for both firms and workers (Chapter III). 3) Greater trade integration and facilitating job-creating investment by the private sector could be an engine for economic diversification (Chapter IV). Building a middle-income economy should factor in climate change (Appendix 10 - protecting natural capital assets). Building wealth without depleting its renewable natural capital assets is critical for Benin as it transitions towards higher income levels (Changing Wealth of Nations, 2021). This is issue is not directly tackled in this report. 34 1.3 Building a middle-income country. Analytical Framework Benin CEM 2.0 Higher per capita growth Labor & Economic structure Natural Physical capital Human capital and Firms Capital Educational and skills Investment efficiency, Diversification, trade Protecting and managing development, labor greater market integration, business natural capital assets, market policy, work integration with environment and transitioning to lower incentives and transport infrastructure regulation, financial carbon economy opportunities, and services, access to deepening reducing gender gaps, water and energy, digital improving access to development, health Foundations: Macroeconomic stability, institutions and governance 35 1.3 Building a middle-income country. 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Kruse, Hagen, Mensah, Emmanuel, Sen, Kunal and Gaaitzen de Vries. 2021. “A Manufacturing Renaissance? Industrialization trends in the developing world”, WIDER Working Paper 2021/28. La Porta, R. and Shleifer, A., 2014. Informality and development. Journal of Economic Perspectives, 28(3), pp.109-26. Loayza, N. 1999. The economics of the informal sector: a simple model and some empirical evidence from Latin America. The World Bank. Loayza, N.2018. Informality : Why Is It So Widespread and How Can It Be Reduced? (English). Research & Policy Briefs; Washington, D.C. : World Bank Group. Matta, Samer. 2018. “Dynamic Benchmarking Tool.” MTI Online Tools. https://worldbankgroup.sharepoint.com/sites/MFM/Documents/Tools/Presentation.pdf 36 References REFERENCES Nayyar G., Hallward-Driemeier M, Davies E., Services-led-Development: In the Service of Development?, World Bank, forthcoming Perry, G. E.; Maloney, W F.; Arias, O S.; Fajnzylber, P; Mason, A D.; Saavedra-Chanduvi, J. 2007. Informality : Exit and Exclusion. World Bank Latin American and Caribbean Studies;. Washington, DC: World Bank. © World Bank. Petreski, M. 2021, Productivity-informality nexus in Benin, background paper for Benin CEM 2.0. Rodrik, Dani. 2016. “Premature Deindustrialisation”, Journal of Economic Growth. 21: 1-33. Schwartz, M. G., Fouad, M. M., Hansen, M. T. S., & Verdier, M. G. (Eds.). (2020). Well spent: how strong infrastructure governance can end waste in public investment. International Monetary Fund. Syverson, C. (2011). What determines productivity?. Journal of Economic literature , 49(2), 326-65. Van den Boogaerde, P., & Tsangarides, C. G. (2005). Ten years after the CFA franc devaluation: progress toward regional integration in the WAEMU. World Bank. 2016. Enterprise surveys: Benin 2016 Country Profile . World Bank. 2020a. Benin Digital Development Diagnostic. World Bank. 2020b. World Development Report 2020: Trading for Development in the Age of Global Value Chains World Bank. 2021. Connectivity for Human Capital : Realizing the Right to Education and Healthcare through Improved Public Transport in African Cities. Mobility and Transport Connectivity;. World Bank, Washington, DC. © 37 References TERMS AND DEFINITIONS A situation where the capital per worker is increasing in the economy. This is also referred to as increase in the capital intensity. Capital Capital deepening deepening is often measured by the rate of change in capital stock per labor hour. The process of accelerated economic growth that can result from improved reproductive health, a rapid decline in fertility, and the subsequent shift in population age structure. With fewer births each year, a country’s working-age population grows larger relative to the young dependent Demographic dividend population. With more people in the labor force and fewer children to support, a country has a window of opportunity for economic growth if labor markets can generate high-quality job opportunities. A relative disparity between people of different genders, is reflected in a variety of sectors in many societies. There exist differences between Gender gap men and women as reflected in social, political, intellectual, cultural, scientific or economic attainments or attitudes A term used to describe the set of firms, workers, and activities that operates outside the legal and regulatory framework or outside the Informality modern economy (Perry et al 2007). It denotes activities ranging from legally constituted companies to workers in subsistence activities, but the latter is more prevalent. Labor productivity growth Labor productivity growth can be decomposed into within-sector productivity gains, across-sector gains on account of employment shifts from decomposition low to high productivity sectors, and dynamic gains accounting for the interaction of within- and across sectors. Nigeria’s border closure The period between August 2019-December 2020, during which Nigeria unilaterally closed its land border with neighbors. The Oaxaca-Blinder decomposition method allows for the breakdown of the informality gap into two main components: the endowment effect and the structural effect. The endowment effect refers to the portion of the gap that is a result of differences between both Blinder-Oaxaca decomposition groups in terms of factors of production such as age, family characteristics, rural or urban and so on. The structural effect captures the returns to resources. This portion of the gap results from differences in what is obtained from a given amount of a factor of production. A measure of productive efficiency in that it measures how much output can be produced from a certain amount of inputs. The standard Solow Total factor productivity decomposition estimates whether capital or labor drive economic growth, or whether it grows because those inputs are being used more efficiently (estimated as the residual). World Bank country classifications by income level (2020-2021) classify the world’s economies into four income groups based on GNI per capita World Bank country (current USD based on Atlas method exchange rates): low (<1,036), lower-middle (1,036-4,045), upper-middle (4,046-12,535) and high-income classifications by income level (>12,535) countries. In Sub-Saharan Africa, high-income countries (HICs) include Mauritius and Seychelles, and upper-middle income countries (UMCs) include Botswana, Equatorial Guinea, Gabon, Namibia and South Africa. 38 APPENDIX Chapter I. Accelerating the Growth Momentum and Creating Better Jobs 39 1. Selection criteria for Structural and Aspirational Peers GDP per capita Population Trade Agriculture, value Income level HCI CPIA (constant 2010 US$) (millions) 2019 (% of GDP) added (% of GDP) Benin Lower middle income 1,260 11.9 63.7 26.9 0.4 3.6 Structural Peer (s): LIC and LMIC, CPIA>=3.3, Population 10-50 Rwanda Low income 905 12.6 53.7 24.1 0.4 4.0 Togo Low income 695 8.02 71.2 22.8 0.4 3.3 Senegal Lower middle income 1584 16.2 60.5 14.8 0.4 3.7 Aspirational Peers: + HCI>=0.5; GDP per Capita <5000 Ghana Lower middle income 1884 30.4 71.4 17.3 0.5 3.6 Morocco Lower middle income 3396 36.4 87.5 11.4 0.5 . Sri Lanka Lower middle income 4011 21.8 52.4 7.5 0.6 3.5 Source: WDI, Open Data World Bank; Notes: HCI stands for Human capital index, It ranges between 0 and 1. An economy in which the average worker achieves both full health and full education potential will score a value of 1 on the index. The CPIA is the WB country policy and institutional assessment that ranges from 1 to 6, six being the highest value and denoting a higher quality of institutions. 40 Appendix 2. Benin’s population continues to grow rapidly By mid-year 2019, Benin had a population of 11.7 million, growing The population pyramid is narrowing slightly at the youngest at 3 percent, more rapidly than Ghana (2.2 percent), Togo (2.4 (under 15) and the oldest ages (55 and +), with more youth aged 15- percent), Morocco (1.2 percent), and Sri Lanka (0.6 percent). 30 entering the labor market. Since the 1990s, population growth has been the highest among Benin’s population is predominantly young, with 48% under the A1 A2 peers. age of 15. Population growth by age cohort in the period 1979-2019 80&+ Male Female 70-74 60-64 50-54 2013 1992 40-44 30-34 2019 20-24 1979 2002 2016 10-14 00-04 20 15 10 5 0 5 10 15 20 Source: WDI and author’s calculations Source: UN statistics and authors’ calculations 41 Appendix Strengthened domestic revenue mobilization and budget optimization can boost growth performance. 3. How to improve fiscal policies? Total revenue and grants were maintained at a relatively stable but Changes and recent sharp rise in expenditure A3 Tax level remains inadequate A4 correlated little with growth performance... low level. Total domestic revenue was relatively stable with movement 40 mainly driven by changes in tax revenue: it declined since 2012 due to the 35 reduction of tariffs, before slowly bouncing in 2016 but never reaching 30 the level in early 2010s. The share of total revenue and grants as GDP 25 averaged 14% (2010-20) which is below that expected given its income 20 level: it is lower than the mean of LICs (18% in 2017) and much lower than 15 the LMIC average (26.19% in 2017). 10 5 Public spending has seen a recent surge, but fiscal policy has been 0 mostly a stabilizer rather than an instrument for long term growth. -5 Expenditures surged since 2015 and averaged 17% (compared with 14% -10 during 2010-2014). Although relatively high as share in total expenditure 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020e GDP Public expenditure (averaged 30% over 2010-2020), capital expenditure as share of GDP remains extremely low (4.8% over 2010-2020), which is low for its current Source: IMF WEO and authors’ calculations. Source: Beninese authorities and authors’ calculation. income level (capex is inversely related with the income level). A5 Capex drives the pro-cyclical behavior of the A6 ...while its level remains low for a developing Benin would benefit from a higher and stable level of social and public expenditure... economy investment spending, supported by a stable source of revenue. To this end, improved domestic revenue mobilization will be the key. Benin 0.4 0.30 needs to continue reducing its reliance on customs revenues from the 0.3 (0.34) 0.19 (0.28) transit trade with Nigeria (chapter IV) – vulnerable to external shocks and 0.2 (0.16) 0.1 0.01 (0.17) (0.15) political cycles in the neighboring country - and expand its domestic tax - base to increase spending capacity. Since 2017, the government (0.1) Others Wages & salaries CAPEX Goods & services Primary expenditure Interest Total expenditure Subsidies & transfers (0.2) demonstrated its commitment to the domestic revenue mobilization (0.3) (0.4) agenda by developing a new Strategic Plan (Plan d ’Orientation Strategique de l’administration fiscale – POSAF). The effort of modernizing the tax administration through electronic payment systems started in 2016 under the Program for Supporting revenue mobilization in Benin (PAARIB) project. Expanding the tax base will happen through the Source: Beninese authorities and authors’ calculation using 2011-2017 public Source: MFMOD and authors’ calculation. development of a dynamic formal private sector and structural change. expenditure. 42 Appendix 4. What has driven private investment growth? While domestic credit to the private sector and FDI have Domestic Credit to the private Net FDI inflows 2005-2019 increased since the first decade of the 2000s, levels sector 2005-2019 (% of GDP) (% of GDP) remain well below peers 70 12 60 10 Credit to the private sector jumped from 9.8% in the first decade of the 50 8 2000s, to 16.7% over 2011-2019. The steady increase is linked to higher savings, the diversification of government financing, and 40 6 the amendment in 2011 of the OHADA Uniform Act on Secured Transactions, which helped improve the legal administrative basis for collateral. Yet, despite 30 4 a near doubling, it remains low when compared to the SSA average (46.5% over 2011-2019) or to a country like Morocco (89.2%). 20 2 FDI inflows also drive private investment growth but remain low. Net FDI inflows averaged 1.9% of GDP over 2011-2019. While this is a major increase 10 0 compared to 1992-2009 (when they were near zero), this remains below the SSA average (2.3%) and pales in comparison to countries like Togo (3.7%) and 0 -2 Ghana (6.3%). The bulk of inward direct investments originates from France, 2005 2010 2015 2019 2000 2005 2010 2015 2019 which accounts for 40%, followed by investments from countries within the Structural peers Aspirational peers SSA (excl. HICs) Structural peers region (Togo and Côte d’Ivoire). The cotton industry, the Port of Cotonou, telecommunications, agriculture, energy, and the cement industry have the WAEMU SSA (excl. HICs) Aspirational peers Benin best prospects for, and are the main economic drivers of, investment. Benin Outward direct investments originating from Benin is limited, and mostly oriented towards France (43%). Source: World Development Indicators and author’s calculations 43 Appendix 4. What has driven private investment growth? (Cont’d) Domestic private investment accounts for around 15 percent of GDP in recent years. The monthly use of credit from domestic financial institutions shows that short-term credits account for over one third of the total banking credit while medium and long-term credit account for around two thirds. Evolution of credit growth (monthly, yoy) is relatively smooth except for a credit boom in late 2018 and a bust in late 2019 linked to the border closure with Nigeria. Longer-term credit growth within industry is primary driven by the construction sector. Financial institutions: medium to long-term credit growth Financial institutions: medium to long-term credit growth in industry Percent, monthly yoy Percent, monthly yoy 200 60 150 40 100 20 50 0 Jun-18 Aug-18 Jun-19 Aug-19 Jun-20 Aug-20 Dec-17 Dec-18 Dec-19 Dec-20 Apr-18 Apr-19 Apr-20 Feb-18 Feb-19 Feb-20 Feb-21 Oct-17 Oct-18 Oct-19 Oct-20 0 -20 -50 -40 -100 -60 Agriculture Industry Service Credit growth Mining Manufacturing Utilities Construction Credit growth in industry Source: BCEAO 44 Appendix Quarterly growth 5. What has been the impact of the COVID-19? A A7 Levels of quarterly value added reflect an overall normal seasonal trend Quarterly indicators suggest all sectors have been affected by COVID-19 through a variety of channels. The service sector Quarterly GDP (CFAF billion, constant price) appeared the hardest hit at the beginning of the pandemic due to 2500 Net Taxes social distancing measures, including limitations on the number of 2000 Tertiary passengers in shared transit modes. Net tax performance reflects the 1500 Secondary measures to extend tax filing to Q3, while the decline, starting in 2019, 1000 500 also reflects the negative impact of the border closure with Nigeria on Primary 0 customs revenue due to lower re-export activity. Both bounced back Real GDP 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 quickly in the second half of 2020 once these policies were lifted. Meanwhile, the secondary sector (and to some extent, the primary A8 Sectoral contributions to quarterly growth suggest decreased sharply in 2020Q2 sector) declined slowly but steadily throughout 2020, reflecting a dampened aggregate demand at home and abroad, as well as labor Contribution to quarterly growth (ppts, y/y) shortages in agriculture from border closures which limited migrant flows from neighbouring countries. 10 Net taxes 8 Tertiary The strong bounce back and relatively contained impact reflect 6 4 Secondary the limited domestic contagion, and the success of the large 2 Primary fiscal stimulus package. Benin entered the COVID-19 crisis in a 0 comfortable position with a fiscal deficit at 0.5% of GDP. This allowed 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 GDP -2 authorities to increase current and capital spending on the back of additional concessional financing provided by IFIs. It increased to A9 While service and net taxes bounced back in the second half of 2020, secondary and primary 4.7% of GDP (incl. grants) as a result of capital spending, almost sector performance remained poor doubling to 7% of GDP, while current spending was up by 50% in Quarterly growth (percent, y/y) nominal terms, reaching 12.4% of GDP. The overall response package, 20.00% including health spending, amounted to 3.7% of GDP, with 75% 15.00% GDP executed in 2020. The package of economic measures included cash 10.00% Primary transfers; electricity and water bill subsidies; urgent social projects; 5.00% Secondary credit lines and refinancing measures to foster access to finance for 0.00% Tertiary SMEs. With increasing debt levels (at 47.9% of GDP in 2020), Benin will 2019Q1 2019Q2 2019Q3 2019Q4 2020Q1 2020Q2 2020Q3 2020Q4 Net taxes focus on reining in spending in 2021, renewing the importance of -5.00% structural reforms to foster private sector-led growth. 45 Appendix Productivity growth was almost entirely driven by within-sector labor 6. What has driven labor productivity in productivity improvements over 2011-2019. Within-productivity gains in agriculture were much higher than in the average comparator country, the last decade? while within services it was the among the lowest. Productivity gains from across-sector labor movements were more limited than for most structural and aspirational peers. Gains in agriculture productivity reflect the strong government support to the sector since 2016. Within sector productivity gains were higher in the primary sector Decomposition of Growth in per capita Value Added, by %point contribution to total annual labor productivity growth Country (2011-2019) Within-sector productivity Static reallocation Dynamic reallocation Agriculture Services Industry 6.0 100% 80% 60% 4.0 40% 20% 0% 2.0 -20% -40% 0.0 -60% Within Within Within Within Within Within Inter-sectoral Inter-sectoral Inter-sectoral Inter-sectoral Inter-sectoral Inter-sectoral -2.0 Benin Senegal Rwanda Togo Ghana Morocco 2011-2018 2011-2018 2011-2018 2011-2017 2011-2017 2011-2018 Total=2.9% Total=4.5% Total=2.9% Total=3.1% Total=1.9% Total=0.0% Togo Senegal Ghana Rwanda Morocco Benin Source: WDI and authors’ calculation Source: WDI and authors’ calculation 46 Appendix 7. Standard Solow decomposition shows that physical capital is the driver of growth, while total factor productivity (TFP) has contributed little since 2000 Growth accounting suggests that capital accumulation has been one of the main drivers of growth over 2011-2018, as in most countries in SSA. Physical capital accumulation is one of the long-term drivers of productivity growth, together with innovation and enhanced human capital. While the contribution to growth from TFP was low, Benin still ranks above the WAEMU median, and on par with the least fragile countries of the group (Senegal, Togo). However, when compared to its own performance across time, TFP growth has slowed down since the 1990s, with its share becoming negligible in the 2000s. The contribution of physical capital slightly declined (2000-2010) before rebounding in the latest decade, mainly driven by capital accumulation. Comparison with neighboring countries and regional averages, 2011- A10 A11 Growth accounting; Benin, across time 18 average 6 Benin Burkina Faso 5 Cote d'Ivoire 4 Guinea-Bissau Mali 3 Niger Senegal 2 Togo 1 WAEMU SSA 0 1990-2000 2000-2010 2011-2018 -3 -1 1 3 5 7 9 Capital stock Labor TFP Real GDP growth Capital Stock Labor TFP Source: National Statistical Office and authors’ calculations Source: WDI and authors’ calculation 47 Appendix Informality is costly for all economic actors 8. How is informality affecting The share of commodities in the Benin’s economic drivers? A export A12 Firms’ technology adoption is low B …but A13 Most it remains loans are inabove most peers services High informality affects Benin’s growth by hampering private basket has declined over time… sector competitiveness and the public sector’s ability to provide Do You Use Technology Licensed From A SECTORAL DISTRIBUTION OF BANK LOANS basic services. Foreign-Owned Company? (2018) For example, firm-level technology absorption in Benin is the lowest 20 17.6 16.7 WAEMU Benin among peers and most firms fail to introduce innovations. This 14.5 14.4 compares to an average of only one third in SSA (Chapter IV). 72 80 66 15 10 9.3 8.0 60 Financial deepening is also affected. The formal banking sector suffers from elevated credit concentration and consequent weak 32 40 22 5 2.1 20 profitability and credit quality (World Bank 2018). Due to the high concentration in commerce linked to trade with Nigeria, industry’s 6 2 0 0 Benin Ghana Morocco Rwanda Senegal Sri Lanka Togo AGRICULTURE INDUSTRY SERVICE share of credit is below the WAEMU average. The main reasons given by banks for not extending credit beyond a select customer base are Source: World Bank Enterprise Survey (2016) and authors’ calculations Source: Financial Sector Review (2018), World Bank the lack of creditworthy investment projects and weaknesses in the legal and judicial environment. As a result, microfinance institutions Openness to services Benin has the exports second largest is lower penetration (MFI) serve a large segment of the population. About 37% of adults in C A14 D Net FDI inflows remain below peers A15 By limiting the tax base, informality also constrained than all peers (2011-2018) of microfinance in the WAEMU public resources Benin hold an account with an MFI, the second-highest penetration in % of Adults with an MFI account Average tax revenue (% GDP), 2022-19. the WAEMU. 45 40 22 By constraining the tax base, informality also limits the public sector’s 35 20 capacity to invest in productive spending: Benin’s tax revenue-to-GDP 30 25 18 ratio is among the lowest in SSA, at 10.4% in 2019. 40% of domestic 20 15 16 revenue is customs revenue – highly dependent on re-export trade 10 14 with Nigeria. While the share of capital expenditure in the total budget 5 0 12 averaged 29% over 2010-2019, the capital budget is characterized by a substantial dependence on external financing. Externally-financed Benin Niger Togo Senegal Mali Guinea- Burkina Cote d 10 Ivoire Bissau Faso 8 capital expenditure represents just under one-half of total in the Benin Togo Senegal Rwanda MoroccoGhana budgets from 2010-2019, though levels can fluctuate substantially from year to year. Source: Financial Sector Review (2018), World Bank Source: MFMOD and author’s calculations 48 Appendix 9. Benin’s economic complexity should support productivity growth Benin’s economy is more complex, but has 33 Economic complexity and GDP per capita (2001-2019) grown less smoothly along with GDP per capita, than aspirational peers The economic complexity index (ECI) is a measure of an economy’s capacity. The literature has found that economies with greater complexity, per unit of GDP per capita, grow faster (Hausmann et al. 2014). On average, scholars find that an increase of one standard deviation in economic complexity, at the same level of GDP per capita, is associated with an increase in annual growth of between 4% to 7%. While Benin’s ECI has oscillated greatly in the past decade, regaining ground lost during most of the 2000s, in 2019 it was higher than other structural peers. This suggests that Benin’s economic diversification – if sustained – could support the growth process. Source: Observatory of Economic Complexity; Notes: The higher ECI reflects higher level of economic complexity. The index in 2019 ranges between -2. 32 (Guinea Bissau) and 2.27 (Japan) 49 1.2.3 Economic diversification and complex linkages with the global marketplace are nascent 10. Building wealth while preventing natural capital depletion Per Capita Wealth - Benin 25,000 Sustained economic growth over the long term requires building and managing a broad portfolio of assets: constant 2018 US$ produced, human, and natural capital (renewable and non-renewable). Although GDP is an important indicator of 20,000 per capita economic progress, it is a flow measure that doesn’t reflect changes in the underlying asset base. For instance, it does not 15,000 reflect depreciation, depletion, or degradation of assets; nor does it not indicate whether accumulation of wealth is 10,000 keeping pace with population growth, or whether the mix of different assets will support a country's development goals. The World Bank has established a program for measuring national wealth to monitor long-term economic well-being and 5,000 guide the development process seen through the lens of a country’s assets. 0 1995 2000 2005 2010 2015 2018 LICs are often scarce in human and productive capital. Therefore, natural capital offers an opportunity to generate -5,000 additional revenue that the government or the private sector can invest in capital accumulation. In the process, economic Produced capital Natural capital - renewable development might imply a reduction in the share of natural capital in total wealth, but it shouldn’t imply a reduction in Natural capital - nonrenewable Human capital per capita natural capital. Ghana’s share of human capital in total wealth has increased, while its natural capital share has Net foreign assets decreased. However, its natural capital per capita rose from US$6,000 to a peak of US$9,000 during the 2004–14 commodity boom and dropped again to US$6,000 in 2018. Other countries have reduced the natural capital share but improved their value of natural capital per capita (e.g., Chile). Degrading the value of renewable natural capital has been Share of wealth associated with lower or declining total wealth per capita. 100% In the period 1995-2018, Benin’s growth has almost entirely come through capital accumulation and the intensive use of 80% natural capital, rather than through sustained productivity growth. Overall, per capita wealth was stagnant over 1995– 2018. While human capital was at least 20% higher in 2018 than in 1995, renewable natural capital declined by more than 60% 30% (led by the degradation of protected areas and sub-oil assets, the latter in the late 1990s). Renewable capital is the 40% main cause of stagnant wealth per capita in Benin, as it is for Nigeria, Burkina Faso and Côte d’Ivoire. Other neighbors 20% with increasing wealth per capita do not have this issue. This has also resulted in slower GDP growth during the same years compared with countries where natural per capita wealth increased or remained constant, like Cambodia and 0% Benin Lower middle Sub-Saharan Africa Azerbaijan. As Benin continues to increase its share of produced capital, it should do so while ensuring the sustainability -20% income (low and middle income) of natural capital per capita. Produced capital Human capital Natural capital Net foreign assets 50 Appendix 11. Estimating productivity differential between formal and informal workers This analysis builds on the background paper by Petreski (2021). The paper uses the following strategy to measure the productivity differential between formal and informal workers, using the household survey EHCVM 2018. First, the analysis uses a regression analysis, with the following specification and an OLS estimator: = + ∗ + σ ∗ + σ ∗ + • whereby the measure of productivity is wage per hour, to approximate personal productivity (individual level); consumption per capita, to approximate personal productivity; agricultural production per hectare and per labor input (household members and non-family workers employed on the plot), sales revenue per worker, to approximate firm-level productivity. • For the analysis of the individual-level productivity, personal characteristics – endowments – reflect a Mincerian earnings function, as follows: gender, age, marital status, religion and highest educational level attained. • For the analysis of the agricultural smallholder productivity, it relies on agricultural endowments: number of workers split between contributing family workers and hired non-family workers; and size of the arable land. • For the analysis of the firm-level productivity, it relies on the firm’s endowments: capital (premises, machines, equipment); labor (split on contributing family members and hired workers); and inputs (a sum of the purchases of raw materials, electricity, rent, licenses, but excluding taxes), to reflect a Cobb-Douglas production function. • is a vector of other observable explanatory characteristics. • The analysis split the sample on informal-formal workers/firms to estimate the Mincerian and Cobb-Douglas functions separately. It also relies on a Blinder-Oaxaca decomposition to understand, for example, if returns to education differ between formal and formal workers; or if returns to scale are diminishing, constant or increasing depending on the formality of the production unit. • Selection bias is corrected using a Heckman two-step method, whereby in the first stage the probability of employment / probability of being an active firm is regressed on a set of observable characteristics, while in the second, the productivity is regressed on the set of characteristics and a predicted probability of the first stage, known as the inverse Mills ratio, which corrects for selectivity in the main outcome equation. Endogeneity concerns remain. 51 Appendix HEADQUARTERS THE WORLD BANK 1818 H Street, NW Washington, DC 20433 USA Tel : (202) 473-1000