Category talk:Cape Verde
From Wikiprogress.org
Part I: Introduction
Cape Verde
Given that the archipelago is relatively small with a population of half a million and relatively isolated from the rest of the African continent, Cape Verde is a very interesting case. The population is relatively peaceful and is less exposed to the troubles and bad habits of the continent particularly with regards to governance and democracy. For example, women dominate the political scene with eight ministers out of fifteen heading the government. "Mulheres dominam no Governo de Cabo verde" Jornal Comunicar Aministracao Publica, March 2010, Number 12. On the economic front it is basically a market taker (vs. market maker such as Brazil) and is vulnerable to any fluctuation, especially now since it is making part of the WTO and has opened its economy.
Recently catalogued as a middle income, Cape Verde still suffers from poverty and, in some areas such as environment and energy, the country has severe deficits. In other words, it was due to two indicators, the ratios of GDP per capita and the human capital index, that made Cape Verde into an middle income economy that must now compete with countries such as Argentina or Algeria, and must even pay for technical assistance from the IMF. However, unlike these two countries, Cape Verde possesses no large land reserves or natural resources and for the moment seems condemned to live mostly from tourism and remittances.
The question is if Cape Verde will clearly make it out of the low income country status and head towards real economic stability? Is the economic dimension regarding income secured?
Part II
Indicators
The indicators selected for the study remain for the most part rather traditional such as GDP, unemployment rates, poverty rates and so on. (see Excel file) However the reader will appreciate that the sources are varied and contain local data (translated from Portuguese). A recent visit to Cape Verde in March has aided this study and collected data from the Contas Geral do Estado 2008. Data from this source is available on the Ministry of Finance's web site yet the printed version is much more comprehensive or at least more user friendly than the various downloadable files. The Banco Central of Cabo Verde also contains a wealth of information on indicators. From my perspective it is mostly directed towards the investor and academic rather than the general population and Cape Verde's authorities.
Unfortunately due to time constraints, it is impossible to make a more holistic approach. The reader may want to go on and explore data on the real shortages regarding water and human capital, the main problems in this country, in order to complement the study.
Part III
Press release
To assure welfare of Cape Verde for the next five to ten years the country will have to bet on its human capital, good relations with donors/creditors and especially the beauty of its beaches coupled with general support of its peaceful and creative people. The main enemies that risk spoiling the ultimate aim of progress are water shortages, over dependence on imports and discrepancies between rich and poor that only accentuates brain drain as well as social tensions.
Why bet only on these three factors?
Because they are the only factors of production. Most traditional economists will agree that income is a result of these sources:
Government products and services
Investments
Consumption
Savings
Net exports
The world is complicated and although it helps to calculate the amounts of money these generate vis-à-vis each other, they may not reflect the expectations that people have and what they live today. This is because of the intangibles such as technology and migration and issues such as reserves of water and access to a clean environment. Furthermore there are different kinds of consumption, investments and government programs. In the case of Cape Verde 67% of the people are less than 30 years hence the type of consumption and government services required are very different from an older developed country such as France.
The idea is to reassess these sources of income from a different angle and see how they affect a country such as Cape Verde. In other words, the strength of this little country is not solely based on a particular type of government spending, investment, net exports, and consumption but rather the quick adaptability of these to the new trends and ecological/cultural context which a larger country may not have.
How to adapt?
A. Consume they say, but why not save- Imports must be stabilized and remittances must be saved.
B. Government income may be vulnerable to important risks. Further efforts to improve and protect public goods such as education, tourist infrastructure (clean environment, airports and roads) and ecology are needed.
C. Investment capacity- Eco-tourism and small enterprises.
However before I go further with these perhaps it is convenient to address some of the most important challenges.
Ecology
Everybody I met in Cape Verde that included government staff at the Ministry of Finance and Central Bank to the taxi driver agreed on the number 1 priority: Water. There is little water on the island and one can see hoards of peoples walking down the streets and dry river beds with plastic containers searching for it. At the Ministry of Finance where I was assigned, there were days when there was no water in the toilets as a method of rationing. The climate itself is very dry and when the rainy season comes it pours so it mostly ends down the sea with the exception of some water that is trapped by small dams that have been built up the mountains to try to capture it.
Water however has a different meaning to different people. For the taxi driver, he (have not met a female driver yet) saves water for personal consumption, the farmer for her/his crops and the hotel manager for his clients. Despite the fact that there are shortages, I never experienced a shortage in the hotel and knowing how westerners use and abuse water I believe that this is a major problem given that Cape Verde is continually promoting more tourism. In fact, going towards the Cidade Velha or old town, there is a large piece of land next to the university that has been blocked off which is generally recognized as the future plan for a golf course!
To give an idea of the situation, Sao Tome island, which ranked much lower than Cape Verde under the Human Development Index (HDI) and has half of the GDP per capita of Cape Verde has 21% of the population without access to an improved water source which is virtually the same as Cape Verde with 20%. Mauritius, another island country has 100% access to its population. (Economist 2008 report)
Crops are relatively scarce (Economist 2008) so the country basically imports everything from cooking oil to meat products. The major exception is seafood, however at current rates of world consumption, it is likely that the price of these increase and suppliers will focus on exporting it rather than selling it in the local market. "In December 2005 Cape Verde signed a fishing accord with the EU for 2006-2011. Under the agreement 84 EU ships will be allowed to catch 5,000 tonnes of fish each year in Cape Verde's territorial waters in return for an annual payment of €325,000 (US$475,000) and a grant of €60,000 to promote sustainable fishing activities. In 2006 several Chinese companies began experimental fish-freezing operations in Cape Verde with a view to exporting to China in the future." (Economist 2008)
Investment
Remittances from Capeverdians come in to the families left behind mostly for consumption although the government is planning to create financial facilities to capture these funds as savings which can be hopefully used for productive investments by both the public and private sector.
Government spending
The government is highly dependant on donations and concessional loans. This is a serious problem because as the country graduates from a low income country to a middle income these sources of financing will eventually dry up, although for the moment the government has secured some grants for the next two years. Moreover, although there are two major universities and spending on primary education, there is a lot of pressure perhaps even a culture of leaving the country to bring in remittances, therefore the country has difficulty in securing its own human capital. This problem is difficult to tackle when you have 18% unemployment. (Conta Geral do Estado) and 25% of the population live from agriculture which only represents 6% of GDP.
Another problem is that donations (and soft credits) are often directed to help the donor's agenda. For example when it comes to security, the United States has recently signed a 3 million dollar aid agreement with the local government for Cape Verde to improve its coastal guard. . "EUA dao 3 milhoes para seguranca maritima" Number 43, Oje Cabo Verde 24 March 2010. This is mostly to increase technological and human resources to curve drug trafficking and international crime which mostly affects the developed world and it remains to be proven that it actually helps the local population and their main priorities. Donations are always welcome but some are better than others and Cape Verde must prepare comprehensive business plans that potential donors would be ready to finance rather than ending up with an imposed business plan from abroad.
Fixed exchange rate
The Escudo is pegged to the Euro. It may make sense in the short run and decent levels of reserves have been attained. (Economist) "Despite a substantial increase of grants, the current-account deficit is estimated to have widened to 16% of GDP in 2009") and a recent fall of the Euro has given some respite, however an open economy that recently entered the WTO with a fixed exchange rate is a text book example of an extremely risky situation. The chances that this will eventually change are high and quite possibly the hard way because, although there are theoretical ways out of it, there is little that can be done until it happens given that nobody from a political standpoint wants to be the one to devaluate when the fixed exchange rate becomes unsustainable. (As a Mexican national I lived this problem in 1995 and the experience made Argentina 2001 completely predictable despite World Bank claims of economic robustness) Perhaps the best thing that can be done today is to know exactly what to do if it happens, so that Cape Verde will rapidly adapt to the macroeconomic situation and not have bend to all the eventual demands of the World Bank and the IMF.
How will we know that Cape Verde is progressing?
During the UNITAR-OECD study we identified that a country needs to keep track of both objective and subjective indicators.
A. Consume they say, but it is preferable to save.
The current model promoted by the "leading" economies relies on indiscriminate consumption to the extent that after the 9-11 attacks in the US, their president encouraged consumption to save the economy from a serious downturn. The model is not very pragmatic, and in the end the US economy collapsed during 2007-8 seeing the worst economic performance since the Great Depression and it was not due to a lack of consumption or lack of means to fight the war on "terror" all over the world yet may have contributed to its worsening.
Cape Verde must be pragmatic and promote domestic savings at all costs; this may mean strengthening the domestic capital markets and banking system. Appetite for imports must be stabilized and remittances must be saved or used as investment, especially given that they usually tend to dwindle as the traditional family structure changes with current trends towards individualism.
One objective indicator to keep track of is domestic debt. For the moment it represents less than 34% and it is decreasing. The IMF would generally want to reduce it as it is happening especially if it is only used as a tool to finance the peg to the Euro or finance current expenditures, but one has to be careful because the World Bank also wants their own loans to be taken (they have just received new funds due to the crisis) because in the end they are creditors and they need clients. The government must then try to increase the appetite of the pension funds to obtain local obligations and make sure the local lending rate by commercial banks continues to increase particularly for micro-financing.
The subjective indicators
Cape Verde may be too small to make leaps in capital market creation but it can try, particularly among small local investors. Given that concessional loans will dry up soon it is important to increase this debt for long term projects and modernize its capital market structure. The new loans taken must also address the lack of water, brain drain and cleaning the environment. The indicator cannot just be the amount of money spent on these but rather the amount of satisfaction that these generate among the local population and the segment of tourism that Cape Verde is or should aim for (eco-tourists) as opposed to water intensive tourists such as potential golfers.
B. Government income is currently well managed according to the IMF however the ONE-UN does give indications that although governance may be doing well the finances may be in a risky state if expenditures are not well targeted to handle the key issues of the country. The government must continue persisting on education, health, tourist infrastructure (clean environment, airports and safe roads) and ecology which are for the most part public goods.
Objective indicators:
Public Aid to Development is 15% of GDP and the economy depends on grants and soft loans. (ONE UN) Major expenditures are on public administration (11.5% of 2008 budget), education (22%), health (8%) and what the Ministry of Finance calls "other" (32%) which includes debt service (7%). Spending is not the best indicator given that one can argue that throwing money at the problem does not necessarily solve it, however one cannot help notice that the amount paid in debt service during 2008 is close to what it paid for health! This is particularly troubling when 5% of children live with extreme malnutrition. (ONE-UN)
Subjective indicators
The passage to the WTO and middle income country will mean that grants will be reduced and if domestic savings are insufficient it will have to acquire new loans at market rates.
If you tour the largest island, Santiago, you will notice that there is a lot of trash on the streets. An indicator of progress would be the amount of trash found on major streets.
C. Investment capacity- Eco-tourism, education and small enterprises.
If Cape Verde will become middle-income it is because it believes the status provides them better ratings and can attract investments. The quantity and especially the quality of these investments will have to improve the economic conditions of the country. This however is not guaranteed and countries such as Bolivia have done everything in the past to please the creators of the economic model based on free trade and privatizations with no concrete results for the population which has ended in political problems and disdain of globalization.
The international community must support the Minister of Tourism. Ms Fatima Fialho got it right: "(..)we want sustainable tourism and this sustainability is divided into three dimensions: environment (considering the fragility of the ecosystem and the diversity); the cultural dimension (promoting our culture, which is quite unique), and the economic dimension.(…) We have been in cooperation with the Ministry of Labour and Professional Training in order to train in this particular area and we will inaugurate our own Hotel and Tourism School (…) We have no intention to compete with the large tourist destinations, we have our own advantages. We are not interested in large entrepreneurs that will seek large benefits without the population getting something positive out of it." Ms. Fialho goes on with the need to diversify the type of tourist businesses and further invest in communications and transport. (Cabo Verde Oje 31 March 2010 Number 44)
Objective indicators:
Process the number of tourists, where and how long they stayed as well as their origin. In 2009 there were 330,319 entries and recorded 2,021,597 hotel stays (10% higher than 2008). It has four international airports and a 300 million euro project to improve the commercial ports is being considered. (Cabo Verde Oje 31 March 2010 Number 44)
Subjective indicators:
No indicators were found in this area. It would be interesting to record the amount of pollution that these tourists generate and amount of strain this causes to the ecology. This includes hotels that have or don't have alternative energy uses and recycling. Record the efforts and campaigns made by hotels and authorities to prevent pollution and other externalities caused by tourism.
Hotels must dedicate a part of their earnings to improve the water conditions of the surrounding areas. Rain water collectors can be built for both private and public use. A quota must be set per hotel and over that quota a special tax must be collected. This can be done the other way around by giving tax incentives to those that collect, save and share their water.
Conclusion
Cape Verde has done well in the major indicators. The Economist's indicator called the quality of life has showed a progression from 5.48 and 5.63 which make it advance from a rank of 83 to 66. (Economist country report) The Gini coefficient is 0.59 today and no longer 0.49 which it had 10 years ago. (ONE-UN)
Composite indicators show a very optimistic approach towards Cape Verde. Indeed, the city of Praia is safe, prices are stable for the foreigner and life seems fine. However, when you talk to people and look into a set of indicators and accounting data there is concern with water, securing public financing and the sustainability of its ecosystem. This is why it failed the vulnerability dimension when it graduated from the low income status.
As long as Cape Verde continues to be a democracy, makes a viable economic strategy and continues under the wing of Europe should a shock occur, it may avert disaster. On the other hand I visited some villages in the rural area and although I saw poverty and lack of services, there was music, art and laughter that are not found in the villages of Switzerland. One particular village called Rebeloens on the east coast of the island of Santiago seemed happy living in their huts, the children played outside without being watched by expensive nannies and I was told that the people there categorically refused a modern housing project proposed by the Central Government. So what do I or anyone know about progress? It will remain rather undefined…
References
Information translated and adapted where needed from the Central Bank of Cape Verde site "indicadores"http://www.bcv.cv/
Data from the Conta Geral do Estado 2008 of the Mnistry of Finance (General Accounting Office)
Facts from The ONE Programme in Cape Verde (UN and Republic of Cape Verde signed 20 July 2008 by Petra Lantz, Resident Coordinator, and Jose Brito, Foreign Affairs Minister)
Country report Cape Verde The Economist Intelligence Unit January 2010
Country Profile 2008 Cape Verde The Economist Intelligence Unit
