Comments on Protecting Public Investment against Shocks in the WAEMU: Options for Fiscal Rules and

Risk Sharing by Sébastien Dessus & Aristomene Varoudakis

Darryl McLeod, Economics & CIPSFordham University, New York

AFRICA PREM discussion on Shocks and Public Investments in WAEMU Tuesday, June 11, 2013,

Room J11 – 001 12:00 – 2:00 pm

Key findings: Dessus & Varoudakis, 2013

• Public investment in WAEMU responds to negative but not positive shocks… bust but no boom

• Resulting secular fall in public investment reduces long term growth, minimal crowding out, RER appreciation– (public investment multiplier > 1)

• Can fix one reason WAEMU growth less than rest of SSA, and provides a potential payoff of fiscal rules that stabilize public investment… (solidarity fund)

Two questions unanswered…

• Fiscal transfers are key to making currency areas work (Sala-i-Martin and Sachs, 1991) but will they work? Transfers work best with asymetric risks but I countries different cooperation harder..

• Unstable commodity prices common denominator (mentioned in passing in paragraph 40)

• Why does WAEMU not have public spending booms? Donor prudence? Lack of fiscal monetary latitude to create “booms” and sustain expansion?

Methodology

• ECM for stable share of public investment? Why not use budget or external deficit?

• What adjusts is of interest, public and private investment are often residuals, more detail on typical revenue and expenditure categories.

• Can terms of trade rule help or work over time? “solidarity fund” is good, but can smooth any component of spending works, social protection fund as in Chile under Bachelet-Velasco.

Currency unions imply fiscal transfers… but the mechanics of the sharing rule key

Currency union requires fiscal transfers, internal or external or both see Sala-i-Martin and Sachs, 1991.

Post EU crisis, convergence criteria, fiscal targets or even stabilization funds less appealing.

Fiscal revenues/expenditures are fungible, why not stabilize social spending

Country copper/macro stabilization funds work, but WAEMU needs a common fund, contribute during booms, draw down during busts.

Jeff Frankel (2011) describes “popular” Chile rule see also blog, Jan 2010

• But (in 2009) the government had increased spending sharply, using the assets that it had acquired during the copper boom, and thereby moderating the downturn. Saving for a rainy day made the officials heroes, now that the rainy day had come.

• Chile has achieved what few commodity-producing developing countries have achieved: a truly countercyclical fiscal policy.

• .. especially commodity-producers, could usefully apply variants of the Chilean fiscal device. Given that many developing countries are prone to weak institutions, a useful reinforcement of the Chilean idea would be to codify the details legally, and to give legal independence to the panels. There could a requirement regarding the professional qualifications of the members and laws protecting them from being fired, as there are for governors of independent central banks.

• The principle of a separation of decision-making powers should be retained: the rules as interpreted by the panels determine the total amount of spending or budget deficits, while the elected political leaders determine how that total is allocated.

What about the terms of trade & commodity booms? Some risk sharing possible…

Table A1. Main commodity & share in total exports, 2001–2009

WEAMU countriesTop 3 Exports Share of Total

ExportsBenin Cotton,Brazil nuts, cashew nuts,Petroleum 59Burkina Faso Cotton,Gold,Oil seed 81Chad Petroleum,-,- 94Côte d'Ivoire Cocoa,Petroleum,Rubber 67Equatorial Guinea Petroleum,-,- 95Gabon Petroleum,-,- 84Mali Gold,Cotton,Beef 91Niger Uranium,Gold,Beef 60Senegal Petroleum,Phosphate rock,Fish 57

Togo Phosphate Rock, Cotton, Iron Ores 60Source: Couharde, C., I. Coulibaly, D. Guerreiro & V. Mignon (2012) Revisiting the Theory of Optimum Currency Areas: Is the CFA Franc Zone Sustainable? CEPII Working Paper No. 2012-13 (2012) from the International Trade Center www.intracen.org

Asymmetric & often positive shocks

How about a Chile fiscal rule in WAEMU?

WAEMU Chile rule:

if price over 10 yr

avg contribute

if lower drawn down

% years + contribution

Cumulative contribution

BEN 94% 113BFA 44% -26CIV 63% 24GNB 19% -230Mali 50% 78Niger 50% 11Senegal 19% -209Togo 25% -518Average/total 45% -755w/o Togo 48% -238Chile 56% 216

WAEMU Chile rule (see Figure 4A)

WAEMU Chile rule post 2001 works better (sans Togo)

% years + contribution

Cumulative contribution as

BEN 90% 62BFA 30% -31CIV 100% 117GNB 30% -103Mali 80% 124Niger 80% 169Senegal 20% -112Togo 20% -471Average/total 56% -245w/o Togo 61% 226Chile 56% 256

WAEMU Chile rule starting in 2001

WAEMU Chile rule sans Togo and Senegal not expensive for outside donors.. But may not work either

Bachelet & Velasco renamed and spent copper fund revenues

• June 2008, President Bachelet & Finance Minister, Andres Velasco had very alow ratings

•  Introduced Fiscal Responsibility Bill in 2006, set  structural budget rules (not popular) but also split and renamed Copper stabilization fund as a Pension Reserve Fund and a Social and Economic Stabilization Fund, to replace Copper Stabilization Funds. (Frankel, 2010)

Renamed and spent Chile’s copper fund finally became popular

Does WAEMU have tax base?

Fiscal fund summary• Group contribution/withdrawal rules key due to

incentives problem (why share?) outside funding helps here of course

• Mechanical rule linked to commodity prices seems best, panel of experts sets target price

• Some scope for smoothing terms of trade shocks across countries and over time (or regional)

• social protection fund may be easier sell than public investment fund (to same effect)

CFA Franc zone “sustainable but not optimal…” Couharde et al. 2012

Source: World Bank, Burkina Faso Policy Prioties to Boost Competitiveness, Report No. 78204-BF Figure 5, page 9.

Inflation lower, but growth is too…authors see transfers as alternative to monetary response

Social fund exit rules & penalties?

• Countries that diversify away from commodities may have incentive to weaken exchange rate

• Social fund could be basis of risk/revenue/aid sharing, but could also include exit clauses or “penalties” for issuing local currency or bonds… as with Patagonia paper in Argentina…

• For Argentina local liquidity creation did not work well, eventually led to return to peso….

ReferencesBuffie, E. E., Berg, A., Pattillo, C., Portillo, R., & Zanna, L. (n.d.). Public Investment , Growth , and Debt Sustainability : Putting Together the Pieces.Engel, E., Neilson, C., Valdés, R., & Bank, W. (2009). Fiscal Rules as Social Policy 1 . Motivation : An Example From Chile, 1–30.Frankel, J. (2011). A solution to fiscal procyclicality: The structural budget institutions pioneered by Chile. Retrieved from http://www.nber.org/papers/w16945Sala-i-Martin, Xavier and Jeffrey Sachs (1992), “Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States,” in Matthew Canzoneri, Vittorio Grilli, and Paul Masson (eds.), Establishing a Central Bank: Issues in Europe and Lessons from the U.S.,Cambridge: Cambridge University Press.Spolaore, E. (2013). What Is European Integration Really About? A Political Guide for Economists. preparazione per il Journal of Economic Perspectives, …, (June). Retrieved from http://sites.tufts.edu/enricospolaore/files/2012/08/Spolaore-euro-REVISED.pdfWelch, J., & D. McLeod. “The Costs and Benefits of Fixed Dollar Exchange Rates in Latin America.” Economic and Financial Policy Review (January 1993): 31-44. http://www.dallasfed.org/assets/documents/research/er/1993/er9301c.pdfZafar, A. The Impact Of The Strong Euro On The Real Effective Exchange Rates Of The Two Francophone African CFA Zones. World Bank Policy Research Working Paper No. 3751 (2005).

References 2Couharde, C., I. Coulibaly, D. Guerreiro & V. Mignon (2012) Revisiting the Theory of Optimum Currency Areas: Is the CFA Franc Zone Sustainable? CEPII Working Paper No. 2012-13 (2012).Dabla-Norris, E, J. Brumby, A. Kyobe, C. Papageorgiou & Z. Mills. Investing in Public Investment: An Index of Public Investment Efficiency. IMF Working Paper No. 11/37 (2011). http://www.imf.org/external/pubs/ft/wp/2011/wp1137.pdf.

Devarajan, S. and D. Rodrik. Pro-Competitive Effects of Trade Reform: Results from a CGE Model of Cameroon. NBER Working Paper No. 3176 (1989).

Devarajan, S. and D. Rodrik. Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa. NBER Working Paper No. 3727 (1991).

Devarajan, S. and D. Rodrik. “Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The CFA Zone in Africa.” Open Economies: Structural Adjustment and Agriculture.  Ed. Ian Goldin and L. Alan Winters. Cambridge, New York, and Melbourne: Cambridge University Press, 1992.

Devarajan, S. “Real Exchange Rate Misalignment in the CFA Zone,” Journal of African Economies 6(1). (1997): 35-53.Elbadawi, I., L. Kaltani, & R. Soto. “Aid, Real Exchange Rate Misalignment and Economic Performance in Sub-Saharan Africa.” SSRN Electronic Journal (2009): 2–42. http://dx.doi.org/10.2139/ssrn.1526569

Chapter 4 on macro policy for post-conflict recovery UNDP-BCPR, 2008

Pre-conflict Growth

Years in conflict

Growth during conflict

Post-conflict years

Post-conflict growth

Post minus pre conflict

growth

1 Afghanistan 1978-2001 2.6% 24 -6.5% 6 10.4% 7.8%

2 Angola 1975-2002 3.4% 28 -1.3% 5 11.8% 8.4%

3 Azergaijan 1991-94 -2.2% 4 18% 13 9.4% 11.6%

4 Bosnia-Herzeg 1992-95 -12% 4 3.6% 12 11% 22.4%

5 Cambodia 1970-91 22 -4.0% 16 4.8%

6 Chad 1765-190 26 -0.3% 17 2.3%

7 Congo, Dem. Rep. 1996-2001 -4.0% 6 -5.2% 6 2.6% 6.6%

8 Croatia 1991-93 3 -13% 13 4.5%

9 El Salvador 1979–1991 2.0% 13 -2.5% 16 1.9% -0.2

10 Ethiopia 1974-1991 1.1% 18 -0.9% 16 2.3% 1.2%

11 Georgia 1991-94 2.4% 4 -1.0% 13 7.7%

12 Lebanon 1975-1990 0.0% 16 -5.0% 17 3.7% 3.7%

13 Liberia 1980-2003 -2.0% 15 -9.3% 4 2.8% 4.8%

14 Mozambique 1976-1992 1.6% 17 -1.4% 15 5.3% 3.7%

15 Rwanda 1990-1994 0.7% 5 -8.4% 13 4.0% 3.3%

16 Solomon Islands 1998-2003 0.3% 6 -5.7% 4 3.2% 2.9%

17 Sierra Leone 1991-2001 -0.1% 11 -7.3% 6 8.0% 8.1%

18 Tjiikistan, 1992-97 -2.3% 6 -15% 10 7.1% 9.4%

19 Uganda 1979-81 -1.0% 13 -2.0% 16 2.9% 3.9% Average -0.6% 12.7 -3.6% 11.5 5.5% 5.2%

1 Burundi 1991–2002 1.8% 12 -2.9% 5 0.4% -1.32 Congo, Rep.of 1993–1999 2.1% 7 -1.4% 8 1.8% -0.43 Côte d'Ivoire 2002–2003 -0.6% 2 -3.2% 4 -0.1% 0.5

4 Guatemala 1965–95 30 0.9% 12 0.6%5 Guinea-Bissau 1998–99 0.4% 2 -13% 8 -3.2% -3.56 Haiti 1991–1995 -0.3% 5 -4.9% 12 -0.1% 0.17 Namibia 1973–1989 -2.8% 17 -1.0% 18 1.6% 4.48 Nicaragua 1978–1990 1.7% 13 -6.8% 17 0.8% -0.99 Papua New Guinea 1989–96 0.7% 8 1.7% 11 -1.2% -1.9

Source: see UNDP BCPR (2008) for a very similar classification.

Cty, conflict start end date (all figures per capita GDP growth)

Table 4.1 Strong Growth Recovery (SGR) Countries

Weak Growth Recovery countries(from my draft, slightly different countries than in the final report)

Pre-conflict Growth

Years in conflict

Growth during conflict

Post-conflict years

Post-conflict growth

Post minus pre conflict

growth

1 Afghanistan 1978-2001 2.6% 24 -6.5% 6 10.4% 7.8%

2 Angola 1975-2002 3.4% 28 -1.3% 5 11.8% 8.4%

3 Azergaijan 1991-94 -2.2% 4 18% 13 9.4% 11.6%

4 Bosnia-Herzeg 1992-95 -12% 4 3.6% 12 11% 22.4%

5 Cambodia 1970-91 22 -4.0% 16 4.8%

6 Chad 1765-190 26 -0.3% 17 2.3%

7 Congo, Dem. Rep. 1996-2001 -4.0% 6 -5.2% 6 2.6% 6.6%

8 Croatia 1991-93 3 -13% 13 4.5%

9 El Salvador 1979–1991 2.0% 13 -2.5% 16 1.9% -0.2

10 Ethiopia 1974-1991 1.1% 18 -0.9% 16 2.3% 1.2%

11 Georgia 1991-94 2.4% 4 -1.0% 13 7.7%

12 Lebanon 1975-1990 0.0% 16 -5.0% 17 3.7% 3.7%

13 Liberia 1980-2003 -2.0% 15 -9.3% 4 2.8% 4.8%

14 Mozambique 1976-1992 1.6% 17 -1.4% 15 5.3% 3.7%

15 Rwanda 1990-1994 0.7% 5 -8.4% 13 4.0% 3.3%

16 Solomon Islands 1998-2003 0.3% 6 -5.7% 4 3.2% 2.9%

17 Sierra Leone 1991-2001 -0.1% 11 -7.3% 6 8.0% 8.1%

18 Tjiikistan, 1992-97 -2.3% 6 -15% 10 7.1% 9.4%

19 Uganda 1979-81 -1.0% 13 -2.0% 16 2.9% 3.9% Average -0.6% 12.7 -3.6% 11.5 5.5% 5.2%

1 Burundi 1991–2002 1.8% 12 -2.9% 5 0.4% -1.32 Congo, Rep.of 1993–1999 2.1% 7 -1.4% 8 1.8% -0.43 Côte d'Ivoire 2002–2003 -0.6% 2 -3.2% 4 -0.1% 0.5

4 Guatemala 1965–95 30 0.9% 12 0.6%5 Guinea-Bissau 1998–99 0.4% 2 -13% 8 -3.2% -3.56 Haiti 1991–1995 -0.3% 5 -4.9% 12 -0.1% 0.17 Namibia 1973–1989 -2.8% 17 -1.0% 18 1.6% 4.48 Nicaragua 1978–1990 1.7% 13 -6.8% 17 0.8% -0.99 Papua New Guinea 1989–96 0.7% 8 1.7% 11 -1.2% -1.9

Source: see UNDP BCPR (2008) for a very similar classification.

Cty, conflict start end date (all figures per capita GDP growth)

Table 4.1 Strong Growth Recovery (SGR) Countries

Weak Growth Recovery countries(from my draft, slightly different countries than in the final report)

ODA inflows to SGR ctys surged

Yet weak REER maintained

Price of nominal flexibility

Happy endings for inflation/growth

Source: Bosworth and Collins (2006)

GDP Growth

Output per worker

Capital Contributes

Human Capital

TFP Growth

Labor force

Growth

Capital Stock

GrowthEducation Contibutes

China 8.9% 7.9% 3.6% 0.29% 3.8% 1.0% 11.6% 0.29%Mozambique 7.9% 5.6% 1.8% 0.12% 3.7% 2.1% 7.3% 0.12%Ireland 8.1% 3.8% 0.4% 0.26% 3.1% 4.2% 5.5% 0.26%Uganda 6.8% 4.3% 1.2% 0.22% 2.9% 2.4% 5.8% 0.22%India 6.4% 4.8% 1.7% 0.46% 2.6% 1.6% 6.5% 0.46%Finland 3.6% 2.2% -0.1% 0.32% 2.1% 1.3% 0.9% 0.32%Tanzania 4.6% 1.9% -0.1% 0.13% 1.9% 2.6% 2.4% 0.13%Greece 3.3% 2.6% 0.6% 0.35% 1.7% 0.7% 2.5% 0.35%Cameroon 3.8% 1.1% -0.7% 0.23% 1.6% 2.7% 0.7% 0.23%Sweden 2.9% 2.2% 0.3% 0.34% 1.6% 0.7% 1.6% 0.34%Malawi 2.5% 0.6% -1.2% 0.35% 1.5% 1.9% -1.6% 0.35%Norway 3.2% 1.9% 0.3% 0.21% 1.4% 1.2% 2.1% 0.21%Iceland 3.5% 2.1% 0.5% 0.31% 1.3% 1.4% 2.8% 0.31%Dominican Rep 5.4% 2.7% 1.2% 0.30% 1.2% 2.6% 6.2% 0.30%Senegal 4.8% 2.0% 0.6% 0.20% 1.1% 2.7% 4.6% 0.20%Ethiopia 4.2% 1.8% 0.4% 0.28% 1.1% 2.4% 3.7% 0.28%Rwanda 2.6% 1.3% 0.0% 0.20% 1.1% 1.3% 1.3% 0.20%Denmark 2.5% 1.9% 0.7% 0.22% 1.0% 0.5% 2.5% 0.22%Korea 5.3% 3.5% 2.1% 0.44% 1.0% 1.7% 7.9% 0.44%Tunisia 4.6% 1.7% 0.3% 0.43% 0.9% 2.8% 3.8% 0.43%USA 3.3% 1.9% 0.9% 0.11% 0.9% 1.4% 4.1% 0.11%

Countries ranked by Total Factor Productivity Growth 1993-2003

African miracles?