FOR OFFICIAL USE ONLY Document of The World Bank Report No.108184-TG TOGO SYSTEMATIC COUNTRY DIAGNOSTIC September 19, 2016 International Development Association Country Department AFCF2 Africa Region International Finance Corporation Sub-Saharan Africa Department Multilateral Investment Guarantee Agency Sub-Saharan Africa Department WORLD BANK GROUP Country—Government Fiscal Year Government Fiscal Year January 1 – December 31 Currency Equivalents Currency: FCFA Franc de la Communauté Financière Africaine (Exchange Rate Effective as of June 2016) US$1.00 = FCFA 584.16 Abbreviations and Acronyms ACLED Armed Conflict Location and Event Data ANSAT Agence Nationale de la Sécurité Alimentaire du Togo [National Agency for Food Security] APMT APM Terminals ARSE Autorité de Réglementation du Secteur de l’Electricité [Electricity Sector Regulatory Authority] ARTP Autorité de Réglementation des Secteurs de Postes et de Télécommunications [Telecommunications and Postal Sectors Regulatory Authority] BAL Bolloré Africa Logistics BCEAO Banque Centrale des Etats de l’Afrique de l’Ouest [Central Bank of West African Nations] BIFS Baseline Informal Firm Survey CASIMEC Cellule d’Appui et de Suivi des Institutions Mutualistes ou Cooperatives d’Epargne et de Credit [Center for the Support and Monitoring of Cooperatives and Mutual Savings and Credit Associations] CAGIA Centrale d’Approvisionnement et de Gestion des Intrants Agricoles [Central Organization for the Provision and Management of Agricultural Inputs] CEB Communauté Electrique du Benin [Electricity Community of Benin] CEET Compagnie Energie Electrique du Togo [Electrical Energy Company of Togo] DALY Disability-adjusted life year DB Doing Business DPT Diphtheria, pertussis, and tetanus ECOWAS Economic Community of West African States EITI Extractives Industries Transparency Initiative GDP Gross Domestic Product GFI Global Financial Integrity GNI Gross National Income HHI Herfindahl-Hirschman Index HIPC Heavily Indebted Poor Countries HIV Human immunodeficiency virus HKW Hausmann, Klinger, and Wagner ii HRV Hausmann, Rodrik, and Velasco IAEA International Atomic Energy Agency ICT Information and Communication Technology IFC International Finance Corporation IFMIS Integrated Financial Management Information System IGF Inspection Générale des Finances [General Inspector for Finance] IMF Impôt Minimum Forfeitaire [Minimum Lump Sum Tax] IMF International Monetary Fund INSEED Institut Nationale de la Statistique et des Études Economiques et Démographiques [National Institute of Statistics and Economic and Demographic Studies] IPTp Intermittent preventive treatment for malaria in pregnancy ITRA Institut Togolais de Recherche Agricole [Togolese Institute of Agricultural Research] ITU International Telecommunication Union KHM Cambodia LCT Lomé Container Terminal LLIN Long-lasting insecticide net MDRI Multilateral Debt Relief Initiative MFI Microfinance Institution MICS Multiple Indicator Cluster Survey MSC Mediterranean Shipping Company MT Metric tons NFA Net Foreign Assets NGO Non-governmental organization NPK Nitrogen, Phosphorous, and Potassium NSCT Nouvelle Société Cotonnière du Togo [New Togolese Cotton Company] NTB Nontariff barrier OHADA Organization for the Harmonization of African Business Law OSIWA Open Society Initiative for West Africa OTR Office Togolais des Recettes [Togolese Revenue Authority] PAL Port Autonome de Lomé [Autonomous Port of Lome] PK Phosphate and Potassium QUIBB Questionnaire des Indicateurs de Base du Bien-être [Welfare Indicators Survey] REER Real Effective Exchange Rate RPT French Acronym for Rally for the Togolese People RT République Togolaise [Republic of Togo] SCAPE Stratégie de Croissance Accélérée pour la Promotion de l’Emploi [Strategy for Accelerated Growth and the Promotion of Employment] SCD Systematic Country Diagnostic SIGFIP Système Intégré de Gestion des Finances Publics [Integrated Public Financial Management System] SOE State-owned enterprise SSA Sub-Saharan Africa(n) TdE Togolaise des Eaux [Togolese Water Company] TEU Twenty foot equivalent (container) unit iii TFFS Togo Formal Firm Survey TLU Tropical Livestock Units TP Taxe Professionelle [Professional Tax] TPU Taxe Professionelle Unitaire [Unitary Professional Tax] TRIFS Third Round Informal Firm Survey VAT Value-Added Tax WAEMU West African Economic and Monetary Union WB World Bank WBES World Bank Enterprise Survey(s) WDI World Development Indicators WGI Worldwide Governance Indicators WHO World Health Organization WITS World Integrated Trade Solutions IBRD IFC MIGA Regional Vice President: Vice President: Nena Vice President: Karin Makhtar Diop Stoiljkovic Finkelston Country Director: Pierre Director: Vera Songwe Director (Acting): Dan Biller Laporte and Yasser M. Ibrahim Country Manager: Joelle Country Manager: Ronke- Dehasse Businger Amoni Ogunsulire Task Team Leader: Theresa Task Team Leader: Task Team Leader: Conor Osborne Aimilios Chatzinikolaou Healy iv TABLE OF CONTENTS Executive Summary ....................................................................................................................................... i 1. Introduction .......................................................................................................................................... 1 2. Recent Economic Performance ............................................................................................................ 3 3. Togo’s Performance vis-à-vis the Twin Goals ..................................................................................... 6 Recent Trends in Poverty and Inequality ...................................................................................... 6 Correlates and Circumstances of Poverty: Household and Spatial Characteristics ..................... 8 Sources of Vulnerability ............................................................................................................. 13 Macro-Micro Linkages and Pathways out of Poverty................................................................ 18 3.4.1. Implications for Togo’s Pathways out of Poverty............................................................... 22 4. Togo’s Key Constraints to the Twin Goals ........................................................................................ 23 Diagnostic Framework, Key Questions, and Approach .............................................................. 23 Key Constraint 1: Governance Challenges ................................................................................. 28 4.2.1. Summary of Historical and Political Economy Factors ...................................................... 29 4.2.2. Political Sustainability Risks .............................................................................................. 32 4.2.3. Three Channels of Poor Governance .................................................................................. 33 Key Constraint 2: Weaknesses in Fiscal Governance ................................................................. 34 Key Constraint 3: Policy and Regulatory Barriers to Entry and Distortions to Entry to Private Economic Activity .................................................................................................................................. 40 4.4.1. Other Constraints Due to Policy and Regulatory Distortions to Private Economic Activity (see Appendix B for more details) ..................................................................................................... 43 Key Constraint 4: High and Distortionary Taxation ................................................................... 45 Diagnosing Constraints in Agriculture: Key Distortions to Private Economic Activity Combined with Moderately Constraining Public Service Delivery ......................................................................... 55 Is Inadequate Access to Finance a Key Binding Constraint?...................................................... 67 Moderate Infrastructure Services Constraints ............................................................................ 75 4.8.1. Transport Infrastructure and Services ................................................................................. 76 4.8.2. Costly and Unreliable Electricity Provision ........................................................................ 81 4.8.3. Lack of Competition in Information and Communication Technology .............................. 86 4.8.4. Deficits in the Provision of Water and Sanitation ............................................................... 90 The Role of Skills and Education ............................................................................................... 95 Key Constraint 5: Poor Performance in Disease Prevention and Health Care Delivery ........... 102 v Gender Inequalities ................................................................................................................... 108 5. Summary of Findings and Pathways out of Poverty ........................................................................ 112 Summary of Findings ................................................................................................................ 112 Pathways out of Poverty ........................................................................................................... 114 References ................................................................................................................................................. 122 Appendix A: Methodology and Data Appendix ............................................................................................ I A.1 Detailed Methodological Discussion .................................................................................................. I A.2 Togo-Specific Data Utilized ............................................................................................................ IV Appendix B: Other Less Severe Distortions to Private Sector Activity ..................................................... VI B.1 Labor Market Regulation ................................................................................................................. VI B.2 The Exchange Rate, Exports, and Growth ..................................................................................... VII B.3 Land tenure issues ............................................................................................................................ IX Appendix C: Additional Exhibits.............................................................................................................. XII LIST OF BOXES Box 1: The Mindbook Approach to Diagnostics ........................................................................................ 25 Box 2: Priorities of the Togolese Population for Government Action .................................................... 115 Box 3: HRV Framework .............................................................................................................................. II LIST OF TABLES Table 1: Sources of Growth, 2010–2014 Averages (Constant Prices).......................................................... 3 Table 2: Poverty Statistics Recent Years, National Poverty Line ................................................................. 6 Table 3: Decomposition of Effects of Growth and Distributional Changes on Poverty Headcount Rates, 2011-2015 ..................................................................................................................................................... 7 Table 4: Average Isolation Scores by Region ............................................................................................... 8 Table 5: Employment Status Indicators by Region (% of Working Age Population) ................................ 10 Table 6: Crop Frequencies by National Consumption Quintiles ................................................................ 11 Table 7: Livestock Holdings by Consumption Quintile ............................................................................. 12 Table 8: Percentage of Households Facing Lack of Food over Preceding 12 Months, by Region, 2011 ... 14 Table 9: Employment and Median Earnings............................................................................................... 20 Table 10: Hourly Earnings Distribution, All Jobs, 2011 FCFA ................................................................. 21 Table 11: Vector Auto-regression Results of WGI Sub-Components on Log GDP ................................... 29 Table 12: Togo's Fiscal Accounts (billions of FCFA) ................................................................................ 36 Table 13: Evolution of Togo's Public Debt ................................................................................................. 37 Table 14: Heritage Foundation Rankings in Economic Freedom (2014) ................................................... 40 Table 15: Tests of Key Constraints -- Policies towards and Regulation of Private Enterprise .................. 43 Table 16: Rankings of Comparator Countries in Doing Business Paying Taxes, 2016.............................. 47 Table 17: Indicators of Inconsistent Corporate Tax Treatment, 2007–2010* ............................................ 50 vi Table 18: Profit Margins and Tax Wedge as Percent of Sales .................................................................... 51 Table 19: Income and Taxation of Informal Enterprises ............................................................................ 51 Table 20: Tests of Key Constraints: the Tax System ................................................................................ 53 Table 21: Producer Prices Relative to World Price, Main Crops................................................................ 59 Table 22: Simulated Tax Burden, Agricultural Producers Interacting with Formal Economy, by Tax Regime .................................................................................................................................................................... 62 Table 23: Tests of Key Constraints: Poor Regulation and Tax Policies in Agriculture .............................. 65 Table 24: Banking System Performance Indicators .................................................................................... 68 Table 25: Comparative Indicators of Banks' Reach and Performance, 2012 .............................................. 69 Table 26: Financial Participation by Size of Firm ...................................................................................... 69 Table 27: Microfinance Access and Usage in FCFA Zone......................................................................... 70 Table 28: Tests of Key Constraints in Finance ........................................................................................... 73 Table 29: Percentage of Investment by Region 2009-2014 ........................................................................ 75 Table 30: Average Annual Daily Traffic on National Routes (Simple average of 17 counting station traffic counts) 2012 ................................................................................................................................................ 78 Table 31: Road Network Characteristics by Region ................................................................................... 78 Table 32: Condition of Rural Road Network by Region ............................................................................ 79 Table 33: Passable Main Access Roads in Rural Communities ................................................................. 79 Table 34: Internationally Comparable Recent Electrification Rates (2011) ............................................... 81 Table 35: Togo's Ranking on Cost of Communication Index ..................................................................... 86 Table 36: Access to Safe Drinking Water (Piped water and Standpipes. Percentage of Population) ......... 90 Table 37: Indicators of Operational Performance of Togolese des Eaux ................................................... 91 Table 38: Access to Sanitation .................................................................................................................... 91 Table 39: Tests of Key Constraints in Infrastructure ................................................................................. 93 Table 40: Enrollment and Completion Rates, Primary and Secondary Schooling, Low Income African Countries ..................................................................................................................................................... 97 Table 41: Provision of School Inputs .......................................................................................................... 97 Table 42: Outcomes of 2008 Graduates (2009-2013) ............................................................................... 100 Table 43: Tests of Key Constraints in Education and Skills .................................................................... 101 Table 44: Infant and Child Mortality Rates (per 1,000 live births)........................................................... 104 Table 45: Mortality Rates by Selected Causes 2012-2013 ....................................................................... 106 Table 46: Percentage of Females and Males with Comprehensive, Correct Information about HIV ....... 106 Table 47: Tests of Key Constraints in Health .......................................................................................... 106 Table 48: Person-Interventions in Food Production by Gender and Region, 2012-2013 ......................... 110 Table 49: Secondary Activities of Agricultural Population by Gender .................................................... 111 Table 50: Tests of Gender Inequality as a Key Constraint ...................................................................... 111 Table 51: Detailed Prioritization Matrix of Constraints and Risks by Severity and Timeframe for Sustainability Risks ................................................................................................................................... 121 APPENDIX TABLES Appendix Table 1: Characteristics of Comparator Countries ..................................................................... III Appendix Table 2: Togo-specific data used ............................................................................................... IV Appendix Table 3: Regulation of Labor Market Contracts ........................................................................ VI vii Appendix Table 4: Ratio of Formal Minimum Wage to Value Added Per Worker ................................... VI Appendix Table 5: IMF Estimates of Effective Exchange Rate Alignment with Fundamentals, West African Monetary Union .......................................................................................................................................... IX Appendix Table 6: Percentage of Households with a Land Document ....................................................... X Appendix Table 7: Doing Business Trading Across Borders Indicators of Costs of Compliance with Border Procedures ................................................................................................................................................... XI Appendix Table 8: Top 20 Togolese Goods Exports by Value (2013) ..................................................... XII Appendix Table 9: Inequality Indicators .................................................................................................. XII Appendix Table 10: Plot-Level Frequencies of Second Most Important Crop by National Consumption Quintile ..................................................................................................................................................... XII Appendix Table 11: Percentage of Households Landless and Not Owning Livestock by Region .......... XIII Appendix Table 12: Conditional Correlations with Per Capita Consumption, Demographic and Geographic Characteristics, 2015 ................................................................................................................................ XIII Appendix Table 13: Return on Assets (ROA) Pre- and Post- Tax, Formal Togolese Firms (2014) ....... XIV Appendix Table 14: Summary of Requirements for Investment Approvals ............................................. XV Appendix Table 15: Correlation between Concentration and Effective Rate of Taxation ...................... XVI Appendix Table 16: Estimates of Returns to Education Using Heckman Correction for Selection Bias ................................................................................................................................................................XVII Appendix Table 17: Summary of Tax Code as of 2014........................................................................... XIX Appendix Table 18: Results from Estimation of Gravity Model of Trade ............................................... XX Appendix Table 19: Taxation of Agriculture in Togo ............................................................................. XXI LIST OF FIGURES Figure 1: Growth Rate and Real GDP per Capita ......................................................................................... 1 Figure 2: Value Added Share of Economy by Broad Sector, 1960-2014 ..................................................... 2 Figure 3: Income Trajectory of Togo and Countries with Lower GDP per Capita in 1980 (GDP per Capita, Constant 2005 US$) ...................................................................................................................................... 2 Figure 4: Comparative Poverty Rates in Sub-Saharan Africa (Most Recent Years Available) .................... 2 Figure 5: Services Exports as a Percent of GDP ........................................................................................... 4 Figure 6: Exports as a Percent of GDP ......................................................................................................... 4 Figure 7: Goods Exports by Category, 2013................................................................................................. 4 Figure 8: Gross Savings and Savings Adjusted for Environmental Degradation as a Percentage of Gross National Income (Average 2006-2012 as data are available) ....................................................................... 5 Figure 9: Growth Incidence (Percentage Change in Consumption) by Consumption Percentiles, 2006-2011 (Annual change) and 2011-2015 (Cumulative change) ................................................................................ 7 Figure 10: Estimated Poor Population and Poverty Incidence by Region (South to North) ......................... 8 Figure 11: Time Required to Reach Nearest Health Facility by Region ...................................................... 9 Figure 12: Access to Schooling and Net Enrollment by Region .................................................................. 9 Figure 13: Percentage of Households Using Water Sources ...................................................................... 10 Figure 14: Percentages of Workers by Type of Work and Consumption Quintile .................................... 10 Figure 15: Isolation, Non-Farm Income, and Poverty ................................................................................ 10 Figure 16: Poverty Rates by Age of Household Head ................................................................................ 11 Figure 17: Poverty Rates by Education of Household Head....................................................................... 11 Figure 18: Percentage of Rural Households Affected by Shocks by Consumption Quintile, 2011............ 13 viii Figure 19: Reasons Given for Food Insecurity by Region .......................................................................... 15 Figure 20: Rainfall Trends by Region (Annual Millimeters)...................................................................... 15 Figure 21: Annual cost of environmental degradation by environmental category in 2013, US$ million and percentage of GDP ...................................................................................................................................... 16 Figure 22: Private Investment as a Percent of GDP, Togo and Comparators ............................................. 18 Figure 23: New Firm Density (Number of Firms registering per population age 15-64) ........................... 19 Figure 24: Contributions to Growth 1991-2010 ......................................................................................... 19 Figure 25: International Comparison of Indicator of informality Relative to Per Capita GDP (2011 US$) (Togo in Red) .............................................................................................................................................. 19 Figure 26: Agriculture Value Added per Worker Togo and Comparators (Real 2005 US$) ..................... 20 Figure 27: Cereals Yields (Average 2009-2013) in kg/ha .......................................................................... 20 Figure 28: Types of Employment and Poverty Rates ................................................................................. 21 Figure 29: Diagnostic Framework and Key Questions .............................................................................. 27 Figure 30: Worldwide Governance Indicators, Percentile Rank, 2014 ...................................................... 28 Figure 31: Trends in WGI on Control of Corruption, Government Effectiveness, and Regulatory Quality .................................................................................................................................................................... 29 Figure 32: Official Development Assistance to Togo as a Percent of GNI ................................................ 30 Figure 33: Violent Political and Protest Events in Togo............................................................................. 32 Figure 34: Diagnostic Results 1 ................................................................................................................. 39 Figure 35: Scores on Components of Economic Freedom.......................................................................... 41 Figure 36: Average Public Ownership of Formal Firms ............................................................................. 41 Figure 37: Frequency of Reports as Top or Top Two Obstacles to Business Formal Togolese Firms (2015) .................................................................................................................................................................... 48 Figure 38: Percentage of Firms Considering Tax Rates a Major Constraint .............................................. 48 Figure 39: Average Tax Burden Reported as Percent of Returns (Effects of Various Levels of Taxation, Mean of Formal Firms), 2014 ..................................................................................................................... 48 Figure 40: Total Taxes Paid as a Percentage of Profits by Firm Categories, Reported and Lower Bound as Adjusted for Reporting Bias 2014 .............................................................................................................. 49 Figure 41: Customs Duties as Percent of Import Values, 2013 .................................................................. 52 Figure 42: Intra-annual Rainfall Variation and Income, Cross-Country Comparisons (Togo in black) ..... 55 Figure 43: Frequency of Constraints to Agriculture Listed by Togolese Communities (2012).................. 56 Figure 44: Evolution of Cotton Prices ........................................................................................................ 60 Figure 45: Percentage of Land by Degradation Status................................................................................ 64 Figure 46: Soil Quality, Togo and Neighbors ............................................................................................. 64 Figure 47: Ecosystem Status by Dimension ............................................................................................... 64 Figure 48: Economic Value of Land Ecosystem Services, Togo and Neighbors ....................................... 64 Figure 49: Indicators of Solvency, Togo’s Banks ....................................................................................... 67 Figure 50: Bank Lending to the Private Sector as Percent of GDP, Togo and Comparators...................... 68 Figure 51: Net Interest Margins (percentage points) .................................................................................. 69 Figure 52: Percentage of Formal Enterprises Rating Access to Finance as Biggest Obstacle .................... 70 Figure 53: Frequency of Main Constraints Across Countries According to World Bank Enterprise Surveys .................................................................................................................................................................... 70 Figure 54: Percentage of Investments Financed through Internal Resources ............................................. 71 Figure 55: Percentage of Firms Using Banks to Finance Working Capital ................................................ 71 ix Figure 56: Credit to Agriculture and Forestry as Percent of Sector Value Added (averages for years available) ..................................................................................................................................................... 72 Figure 57: Nominal Interest Rates, UMOA and Togo Averages ................................................................ 72 Figure 58: Real Lending Interest Rates and Private Investment to GDP .................................................... 73 Figure 59: Diagnostic Results 2 ................................................................................................................. 74 Figure 60: Roads Indicators in Comparison ............................................................................................... 77 Figure 61: Road Network Density (kilometer of road) per Capita ............................................................. 77 Figure 62: Energy Consumption per Capita in Road Transport (demand proxy) relative to road density . 77 Figure 63: Container Handling Charges, West African Ports ..................................................................... 80 Figure 64: Rate of Electrification, 2006, 2011, and 2015 ........................................................................... 82 Figure 65: Supply of Electricity Relative to GNI ....................................................................................... 82 Figure 66: Use of Own Generation, Formal Firms, All Sectors ................................................................ 83 Figure 67: Outage Related Losses, Formal Firms, All Sectors .................................................................. 83 Figure 68: Percentage of Formal Firms Claiming Electricity as a Major Constraint ................................. 83 Figure 69: Two Greatest Obstacles for Manufacturing Firms (formal firms reporting in 2015) ................ 84 Figure 70: Electricity Prices in Comparison (US dollars per kWh, Zone Franche Tariffs only) ................ 85 Figure 71: Cost per Minute in US$ of Mobile Calls ................................................................................... 87 Figure 72: Fluidity of Call Signals, Lomé .................................................................................................. 87 Figure 73: Indicators of Voice Quality Mobile Service (Togocell) Lomé (Red=worst quality) ................ 87 Figure 74: Expansion of Telephone Connections by Consumption Quintile.............................................. 88 Figure 75: Percentage of Formal Firms Rating Issues as "Major" or "Severe" (Top 15 Constraints) ........ 89 Figure 76: Percentage of (Urban) Population in Service Areas Served by Water Utilities ........................ 91 Figure 77: Percentage of Population with Potable Water (Piped or Via Bore Hole) by Residence in Lomé, Other Urban, and Rural Areas..................................................................................................................... 92 Figure 78: Main Source of Water by Consumption Quintile, 2015 ............................................................ 92 Figure 79: Percentage of Population Utilizing Open Defecation as Primary Sanitation Method ............... 92 Figure 80: Diagnostic Results 3 ................................................................................................................. 94 Figure 81: Average Years of Schooling ...................................................................................................... 96 Figure 82: Reading Achievement, Adults 22-44 Years of Age Selected African Countries ...................... 96 Figure 83: Number of Tertiary Graduates................................................................................................... 96 Figure 84: Evolution of Mean Math Scores, Second and Fifth Graders, by Gender .................................. 98 Figure 85: French Scores 5th Grade (2010) ................................................................................................. 98 Figure 86: Unemployment by Age and Level of Education ....................................................................... 99 Figure 87: Net Rates of School Enrollment, by Consumption Quintile, 2015............................................ 99 Figure 88: Health Expenditures and Life Expectancy in Comparison ...................................................... 102 Figure 89: Percentage of Population not Consulting Medical Services by Consumption Quintile .......... 103 Figure 90: Rates of Access to Health Services ......................................................................................... 103 Figure 91: Child Health and Nutrition Indicators ..................................................................................... 104 Figure 92: Percentage of Children under 5 Malnourished (Underweight for age by > 2 std. deviations) 104 Figure 93: Causes and Rates of Death, 2012 ............................................................................................ 105 Figure 94: Development Outcomes at Age 3 and 4 .................................................................................. 108 Figure 96: Activity Rates of Children by Gender ..................................................................................... 109 Figure 95: School Enrollment by Gender, 2006, 2011, and 2015............................................................. 109 Figure 97: Summary of Results in Diagnostic Framework ...................................................................... 120 x LIST OF APPENDIX FIGURES Appendix Figure 1: SCD Guidance on Framing the Issues ........................................................................... I Appendix Figure 2: Exchange Rate and Growth ..................................................................................... VIII Appendix Figure 3: Costs of Registering Property (Doing Business) ........................................................ IX Appendix Figure 4: Average Corporate Tax Rates and Concentration by Sector, 2010 (Sectors with Herfindahl-Hirschman Index > .2, Formal Firms, with and without Informal Competition) .................XVII LIST OF MAPS Map 1: Togo and Its Neighbors .................................................................................................................... 1 Map 2: Togo’s Regions ...........................................................................................................................XXII xi ACKNOWLEDGEMENTS This study was prepared by Theresa Osborne, Senior Economist, Poverty Global Practice, Equitable Growth, Finance, and Institutions (EFI), together with the Togo Country Team, under the guidance of Country Directors Pierre Laporte (FY16) and Ousmane Diagana (FY15). Pablo Fajnzylber, Practice Manager, GVP01, supervised this task and contributed many valuable suggestions. World Bank Country Managers Herve Assah (FY15) and Joelle Businger (FY16), IFC Country Manager Ronke-Amoni Ogunsulire, and Program Leaders Volker Treichel (FY15), Jacques Morisset (FY16), Nabil Chaherli, and Azedine Ouerghi, also provided guidance. Poverty Practice colleagues Felicien Donat Edgar Towenan Accrombessy, Prospere Backiny-Yetna, Tom Bundervoet, Aparajita Goyal, Aly Sanoh, and Hans Hoogeveen filled data and analytical gaps, and Andrew Dabalen (Lead Economist, PGP-Africa) provided strategic guidance. Peer reviewers Kinnon Scott and David Rosenthal made helpful suggestions on content and presentation at the concept and final stages. Special thanks go to Hillary C. Johnson, Godwill Kan Tange, Sylvie Nenonene, and Aimilios Chatzinikolaou for their contributions and collaboration. Finally, the team owes a debt of gratitude to the many Togolese who participated in meetings and consultations, and shared their knowledge, experiences, and perspectives throughout the process. Many country team members, listed below, provided valuable input: Core Team Contributors Sylvie Nenonene Senior Communications Officer Godwill Kan Tange Senior Country Economist David Cal MacWilliam Senior Economist MFM Aimilios Chatzinikolaou Senior Operations Officer, IFC Aly Sanoh Economist, Poverty GP Johannes Hoogeveen Lead Economist, Poverty GP Hillary C. Johnson Consultant, Poverty GP Alessia Thiebaud Consultant, Poverty GP Additional Team Contributors Erick Herman Abiassi Agriculture Martien Van Nieuwkoop Agriculture Nicaise Ehoue Agriculture Ozong Agborsangaya-Fiteu Conflict and Fragility Koffi Hounkpe ENV/DRM Benoit Bosquet ENV Raffaello Cervigni ENV Hyacinthe Gbaye Education Pamela Mulet Education Morten Larsen Extractives Nina Inamahoro Extractives Philippe Marie Aguera Fin/PSD Axel Gastambide Fin/PSD Daniel John Kirkwood Gender Helene Grandvoinnet Governance Serdar Yilmaz Governance Robert Yungu Governance Ibrahim Magazi Health John Paul Clark Health Haidara Ousmane Diadie Health Jerome Bezzina ICT xii Michel Rogy ICT Audrey Ifeyinwa Achonu IFC Frank Armand D. Douamba IFC Hamidou Sorgo IFC Francis Yao Attikpo-Magloe Information Technology Guy Kossi Lakpo Information Technology Conor Healy Risk MNGT Lorenzo Bertolini Senior Private Sector Development Specialist John Van Dyck Social Protection Djibrilla Adamou Issa Trade and Competitiveness Leonardo Iacovone Trade and Competitiveness Magueye Dia Trade and Competitiveness Ibou Diouf Transport Alexander E. Bakalian Irrigation Pierrick Fraval Irrigation Matar Fall Water Carolina Dominguez Torres Water Felicien Donat Edgar Towenan Accrombessy Poverty GP xiii Executive Summary I. Introduction 1. Once the “Switzerland of West Africa,” Togo today strives to transition from its status as a low income, fragile state to an emerging economy.1 Soon after independence, Togo was able to achieve economic progress by building an effective public administration and pursuing open, market-oriented economic policies. It established sound governance of the banking sector, successfully exploited its phosphate reserves, and became a subregional hub for logistics, trade, and banking (World Bank 1996, 2013a). At its peak in 1980, Togo’s per-capita gross domestic product (GDP) had risen from US$272 (in 1960) to US$534 (values in 2005 purchasing power parity (PPP) US dollars), a level surpassing that of many developing economies. However, these gains soon began to reverse. Despite growth over the past decade averaging 4 percent, Togo’s real per-capita GDP today remains lower than at its 1980 peak (Figure I). Its extreme poverty rate of 49.2 percent is almost twice that of Ghana directly to its west (25.2 percent).2 At the same time, Togo’s ranking in the United Nations Development Programme’s Human Development Index has fallen from 95th in the world in 1980 (in the bottom 23 percent among the 124 countries with data in that year) to 166th out of 187 countries (bottom 10 percent) in 2013. 2. Early shifts in economic strategy have not been conducive to shared prosperity and poverty reduction. Having achieved some success following pro-market policies, in the mid-1970s the government began moving to inward-oriented, state-led industrial development policies. It created public enterprises, nationalized private companies, adopted price controls, and instituted high rates of effective protection averaging 200 percent. Without more scope to operate, the private sector shrank. Given large public spending programs, inadequate fiscal receipts, and undisciplined budget flows, the government began relying increasingly on external borrowing. Public debt service reached 76 percent of fiscal revenues in 1981, and Togo’s debts became unpayable. Between 1979 and 1990, Togo undertook structural adjustment measures designed to improve public sector management; rehabilitate, privatize, or liquidate public enterprises; and improve economic incentives. It simplified the tax system, lowered and unified tariff rates, eliminated many price controls, and abolished the state’s monopoly on imports (World Bank 1996). Growth returned from 1984 to 1989 despite an unfavorable external environment, and private investment more than doubled from 4 percent to 10 percent of GDP. Nonetheless, some structural reforms remain unfinished, and legacies of Togo’s state-led growth experiment persist. 3. Recurrent political crises have hampered Togo’s economic development. After years of pressure for greater democratization under President Gnassingbé Eyadema, in 1991, Togo entered a prolonged period of political tension, and key development partners curtailed or suspended their programs over concerns about governance, human rights and democracy. Official development assistance fell from 1992 to 2002 and exacerbated the government’s difficulties in delivering public investments and services. In 2002, Togo fell into debt service arrears with the World Bank, which joined other donors in suspending its financing. The further decline in donor support aggravated unsustainable public debt levels, which grew to almost 115 percent of GDP in 2005. With the sudden passing of President Eyadéma in February 2005, presidential elections were organized in April 2005 and, in an atmosphere of heightened political tension and violence, Faure Gnassingbé was elected. The opposition protested the results and political tensions grew further. A national dialogue involving various political parties was organized and resulted in the Global Political Accord (GPA) between government and the opposition in August 2006. The GPA led to a 1 Togo’s current GNI per capita is the ninth lowest of the 35 countries in Sub-Saharan Africa with data available (WDI). 2Questionnaire des Indicateurs de Base du Bien-être (QUIBB) 2015. Extreme poverty is defined as living on less than US$1.90 per capita per day in 2011 PPP. i new round of democratic reforms, including the establishment of a transitional unity government, legislative elections in 2007, and the professionalization of the military. 4. Political reforms since 2006 have stabilized the country, but unresolved political issues still present a risk for Togo. With the 2006 GPA and legislative elections in 2007, development partners reengaged in Togo and the country embarked on a new period of recovery. However, the delayed implementation of some 2006 GPA reforms remains a point of contention. Combined with the government’s difficulties in advancing reforms to broaden and accelerate economic opportunities, Togo remains vulnerable to future episodes of conflict. It has experienced an increase in tensions and violence during election seasons, and such periods remain delicate. 5. Togo has pursued important economic and structural reforms since 2006. Following a range of reforms pursuant to the Heavily Indebted Poor Countries (HIPC) debt relief initiative, Togo qualified in 2010. These economic reforms led to the Figure I: Growth Rate and Real GDP per Capita preparation of the Interim Poverty 20 600 Reduction Strategy (I-PRSP) and a full Percent Real GDP Per Capita 15 PRSP. Building on these two strategies, 500 Togo prepared its Strategy for Accelerated GDP per Capita 10 5 400 Growth and Employment Promotion (SCAPE, its French acronym) for 2013- Growth 0 300 2017. In 2015, Doing Business named Togo 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 -5 200 -10 a Top Reformer for significant -15 100 improvements in the costs of starting a -20 0 business, registering property, protecting minority investors, and paying taxes, GDP per capita (constant 2005 US$) jumping from 164th in the 2014 rankings to GDP growth (annual %) 152nd in 2015 and 150th out of 189 countries in 2016. Other steps have been taken to Source: World Development Indicators (WDI), World Bank. increase transparency, and indicators of democratic governance have improved. For example, Togo’s ranking in the Economist Intelligence Unit’s Democracy Index has improved from 164th out of 167 countries in 2006 to 130th in 2015. 6. Although recent growth has been significant, Togo’s sources of growth appear to be vulnerable to shocks and remain unsustainable. Economic growth has averaged over 5 percent during the past five years, owing to high rates of growth in commerce, transport and services, building, and public works, as well as solid growth in agriculture. However, growth in transport is underpinned in part by trade diversion and smuggling, which are not reliable sources of growth, while large infrastructure investments, though critical for the country’s economic development, are not financed in a fiscally sustainable manner (IMF 2015). Public debt is growing rapidly, and another fiscal crisis could be on the horizon. Adding to these issues are major environmental risks. Climate change has begun to adversely affect agriculture and increase flood risks. Moreover, current economic growth rates are entirely offset by local environmental degradation, primarily through soil and forest resource depletion, coastal erosion, and ambient air and water pollution. Togo ranks 161st out of 180 countries on the 2015 Environmental Performance Index. Due to the country’s failure to accumulate and preserve its physical, financial, and natural wealth, Togo’s net national savings rates are negative when adjusted for environmental degradation (WDI 2006-2012). ii 7. Despite modest poverty reduction over the past several years, Togo is not likely to eliminate extreme poverty by 2030.3 Poverty rates have declined slowly, from 61.7 percent to 55.1 percent between 2006 and 2015 (QUIBB 2105). More efforts are needed to improve the distribution of growth, which has not always benefitted the poor: although consumption increased in all parts of the income distribution between 2011 and 2015, between 2006 and 2011 the bottom 35 percent experienced a fall in consumption (INSEED 2015). The lack of more significant progress in reducing poverty is a result of the country’s inability to sustain an inclusive growth process to which the poor contribute and from which they benefit.4 Private investment remains low, Figure II: Agriculture Value Added per Worker, Togo and averaging 12 percent of GDP over Comparators (Real 2005 US$) 1996–2014, and productivity growth, 1200 demand for labor, and wages are 1000 generally low. Underemployment (at 24.9% in 2015) is high, especially 800 among the country’s youth. Formal 600 firms, which show labor productivity of 400 7.5 times that of informal firms, enter at 200 unusually low rates (World Bank 2015f, 0 1990 1997 1991 1992 1993 1994 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015g, 2016). In addition, agriculture, which accounts for approximately 41 Benin Burkina Faso Guinea-Bissau percent of Togo’s GDP,5 has shown flat Mali Senegal Tanzania productivity trends since 1990 (Figure Togo II). Source: WDI, World Bank. 8. To accelerate and sustain poverty reduction, Togo will need to unleash a more robust, inclusive, and sustainable growth process, led by private economic agents, and supported and amplified by more effective government policies, public investments, and services. This diagnostic seeks to provide an evidence-based analysis and understanding of the key constraints and opportunities on Togo’s path toward sustainable pro-poor growth. II. Key Constraints to Reducing Poverty and Promoting Shared Prosperity Key Constraint 1: Governance Challenges 9. Togo’s centralized system of governance provides little accountability on the part of public institutions and results in low levels of state capacity and weak incentives to formulate and implement policies that are favorable to poverty reduction. Togo ranks below all comparator countries on three Worldwide Governance Indicators (WGI)—voice and accountability, rule of law, government effectiveness, and control of corruption—and worse than all comparators except Bangladesh and Nepal on regulatory quality (Figure III). Two dimensions in particular are key to Togo’s progress: control of corruption, defined as “the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests,” and 3 This goal subsumes the World Bank’s other twin goal of raising the lifetime welfare (using current consumption as a proxy) of the bottom 40 percent of the consumption/income distribution, since Togo’s poverty rates exceed 40 percent. 4 See Ianchovichina and Lundstrom (2009), who provide this definition of inclusive growth. 5 This figure reflects the mean value for 2010–14, as derived from national accounts data. iii government effectiveness, defined as “the quality of public services, the civil service Figure III: Worldwide Governance Indicators, Percentile Rank, 2014 and degree of independence from political 70 pressures, the quality of policy formulation 60 and implementation, and the credibility of 50 the government’s commitment to such 40 policies.” In recent years, when Togo has 30 made improvements in either indicator, 20 growth has responded positively in 10 subsequent years. Yet, despite increased 0 government effectiveness since 2005, Togo still ranks better than only 9.6 percent of countries in the world on the WGI measure. Since 2010, Togo’s control of Control of Corruption Government Effectiveness corruption has fallen to the 16.8th Regulatory Quality Rule of Law Voice and Accountability percentile. 10. These difficulties are rooted in a relatively centralized system of economic governance, shaped by conflicts of interest spanning public, quasi-public, and private spheres. The result is low government effectiveness in formulating and implementing policies enabling private economic activity, including in agriculture; low effectiveness in setting priorities for and delivering public goods and services (including low value for money); and—at the fulcrum of these issues—weak fiscal governance. Key Constraint 2: Weaknesses in Fiscal Governance 11. Weaknesses in the management of Togo’s government budget have led to a structural deficit and a high risk of fiscal liquidity constraints. Since the 1970s, the economy has oscillated between fiscal crisis and rebound growth, accumulating debts and falling into arrears. Over a period of 16 years, from 1979 to 1995 (IMF 2006), Togo rescheduled its public debt 10 times, followed later by multi-lateral debt forgiveness under HIPC in 2010 and multi-donor relief (MDR) programs. Six years after debt relief, public debt has increased rapidly. . The government has made some efforts to reform public financial management (PFM) in accordance with WAEMU directives, but these have not addressed key challenges. The recurrence of supplementary budgets reduces the credibility of the budget, and the line between the budgets of state-owned enterprises and the state remain unclear. Funds flows are difficult to track and fiscal accounts easily manipulated. Budget formulation and public investment management are ad hoc, insufficiently strategic, and nontransparent. In addition, the tax base—in particular, revenues from the small formal private sector (and SOEs)—remains narrow, with only 20 companies accounting for two-thirds of corporate tax revenue. In most sectors where SOEs have operated, they have suffered from mismanagement, inadequate budgetary discipline, and/or bankruptcy. 12. Although Togo’s significant reserves of mineral resources hold the potential to expand needed fiscal space, there has been little progress in making this possibility a reality. Togo’s extractives industry remains largely state-owned and poorly governed. In 2013, according to the Extractive Industries Transparency Initiative, Togo’s declared fiscal receipts from extractive industries totaled only US$31 million, 0.7 percent of GDP, which amounts to approximately 3.5 percent of (non-grant) fiscal receipts. Current efforts to expand phosphates production, with the potential to double fiscal receipts by 2024, are encouraging but proceeding slowly. Despite the potential, the most likely scenario would result in an increase of fiscal revenues relative to 2014 levels of 1 percent commencing in 2021 and rising to 2.5 percent in 2024. iv 13. The current rate of accumulation of public debt raises severe sustainability concerns. Whereas debt relief in 2010 reduced Togo’s stock of public debt to 32.1 percent of GDP, this debt has grown rapidly to an estimated 58.5 percent of GDP in 2015 (according to the government).6 Furthermore, these numbers do not fully account for fiscal liabilities. There are unbudgeted contingent liabilities associated with public ownership of companies that have required periodic infusions of fiscal resources. In addition, the government has adopted a practice of “prefinancing” investments ( préfinancements), whereby liabilities are not budgeted in the year they are assumed, but later appear in the budget as mounting debt-servicing costs. Key Constraint 3: Barriers to Entry, Policies and Regulations that Distort Private Economic Activity 14. Togo’s governance system skews the formulation and implementation of policies and regulations affecting private economic activity. Despite recent reforms to improve the investment climate, a variety of policies, regulations, Figure IV: Scores on Components of Economic Freedom and ad hoc state interventions remain, which distort the landscape for private 90 80 economic activity and block rather than 70 foster healthy competition and a dynamic 60 private sector. The country’s investment 50 climate rates poorly on businesses’ 40 freedom to invest, operate, employ 30 workers, and enjoy adequate property 20 rights protections—collectively termed 10 0 “economic freedom” by a variety of organizations. Togo’s composite economic freedom score from the Heritage Foundation corresponds to a ranking of Property Rights Business Freedom Freedom from Corruption Labor Freedom nd 152 out of 183 countries. Among Investment Freedom comparator countries, on subcomponents Source: Heritage Foundation 2014. of economic freedom, Togo rates poorly on business freedom (higher only than Cambodia), investment freedom (higher only than Nepal), and labor freedom (higher only than Mozambique) (Figure IV). 15. Existing firms consider these constraints to be major obstacles. Over 70 percent of firms participating in the 2009 World Bank Enterprise Survey (WBES) rated corruption as a major or severe constraint to their business (World Bank 2009b), and 42 percent of firms responding to the 2015 Togo Formal Firm Survey (TFFS) cited corruption in the regulatory regime in particular (rather than all forms of corruption) as a major or severe constraint (World Bank 2015f). In addition, 56 percent of formal businesses rated the practices of dominant competitors—some state-owned, some otherwise favored—as major or severe obstacle to their business (World Bank 2015f). A high level of state ownership exacerbates the likelihood of preferential treatment in the regulatory and judicial systems. Togolese SOEs operate not only in the strategic phosphates, cotton, and telecommunications sectors, but also in banking, transport, printing, accounting, distribution of butane gas, livestock slaughter, and cement. In 2009, Togolese enterprises had the highest average share of state ownership when compared to an array of low-income countries. Among manufacturing firms in 2015, an estimated 28 percent still have some state ownership (World Bank 2015f). 16. De jure reforms have reduced barriers to entry for some investors, but important barriers to entry remain. For example, Togo’s 2012 investment code provides wide scope for denying approvals of 6 The latest IMF estimate projection was 62.5 percent. (IMF Article IV, November 2015) v investments either over US$1 million or in sectors deemed strategic. Togo’s regulatory framework presents barriers to accessing inputs, whether imported or domestically produced. Togo ranks especially poorly in Doing Business indicator on trading across borders (2016), as the time cost of complying with border and documentary requirements for importing (but not exporting) amounts to 256 hours and 203 hours, respectively. This compares unfavorably with neighbor Benin, where the same procedures take 72 and 59 hours, respectively. Price regulation also constrains flexible access to inputs with the specifications and quality needed. 17. This confluence of economic distortions constitutes a key constraint to investment and job creation, impeding Togo’s essential pathways out of poverty. It constrains the entry and growth of formal firms, who hold the greatest potential to increase productive employment of both skilled and unskilled workers. Moreover, as discussed below, skewed policies and regulations are among the key constraints to raising agricultural productivity and incomes in rural areas. Key Constraint 4: High and Distortionary Taxation 18. Although Togo has taken significant positive steps to reform its tax administration, its tax system remains overly burdensome and creates a major barrier to investment, formalization, firm growth, and therefore poverty reduction through productive employment. The effects of enterprise taxation on poverty may seem indirect, but the impact on the real incomes of workers is nonetheless large. Corporate taxes can be more inimical to poverty reduction than other taxes: by lowering the marginal revenue product of labor, they can reduce labor earnings that could otherwise accrue to poor people (Feltenstein and Newhouse 2015). Internationally, between 45 and 75 percent of the burden of corporate taxation falls on labor, rather than on owners of capital (Desai 2007). 19. Viewed from the perspective of an enterprise, Togo’s tax system results in an average effective tax wedge—and distortion to private economic incentives—that is exceedingly high. In 2015, Togo’s (formal) firms ranked tax rates as their top constraint to doing business by a significant margin, and 67 percent rated it as a major or severe constraint, as compared to only 37 percent for Sub-Saharan Africa (SSA) on average (World Bank 2009, 2015f). The estimated tax wedge, using data from a representative sample of Togolese formal firms (micro, small, medium, and large)—which combines corporate taxes, local levies, labor and input taxes (apart from import duties), as well as unreimbursed value-added taxes (VAT)—averaged over 90 percent of pretax profits in fiscal year 2014. These taxes, moreover, reduced a healthy average return on assets (ROA) of 146 percent to approximately 14 percent after tax (World Bank 2015f). 20. Togo’s tax regime increases the risks of doing business and expands the scope for negotiation or formal exonerations, both of which can be rescinded easily. Although Togo’s recent efforts to reform its tax collection procedures have resulted in improved integrity and transparency, the issues of complexity, lack of clarity, unpredictability, and discretion remain. For example, VAT-registered firms are able to deduct only 42.6 percent of VAT paid on (nonutilities) inputs that is due to them (World Bank 2015f), and reclaiming VAT invites a tax inspection. Tax treatment appears uneven across companies as well. In 2013/2014, firms with greater market dominance also enjoyed lower effective corporate tax rates. (Controlling for broad sector, total sales, and salary costs, this inverse correlation was statistically significant). In addition, corporate taxes levied on revenues and costs, rather than on profits, elevate profitability risk. They add to firm losses in bad years and can reduce otherwise profitable activities to unprofitable ones: 25 percent of declaring firms paid corporate taxes despite showing either pre-tax or post- tax losses in 2014 (World Bank 2015f). In addition, duties charged on imported inputs, not captured in the above estimates, are higher than for comparator countries, except Benin at over 14 percent. vi 21. A variety of data sources provide evidence that Togo’s tax system results in large distortions to incentives for private economic activity. Togo’s high level of informality, even relative to the region, suggests a relatively greater effort to avoid taxation. Few firms survive in sectors where the tax burden would fall most heavily—those with low profit margins, such as commercial agriculture and agribusiness. As a result, Togo has very few formal agricultural firms. In addition, over the period for which data are available, private investment levels have responded positively to reductions in the tax rate as captured by the Doing Business indicator. A one-percentage-point decrease in its (simulated) tax burden is associated with a 0.32 percent increase in economic growth in the same year, as well as a significant increase in the level of private investment. Whereas none of these indicators is conclusive on its own, in their totality they provide evidence that Togo’s tax system—the tax code, combined with its implementation—represents a key (binding) constraint to inclusive growth. Because entrepreneurs cannot create jobs and increase labor productivity, farm profits, and wages without a greater incentive to invest and grow their businesses, this constitutes a key constraint to poverty reduction as well. Key Constraints 3 and 4 in Agriculture: Policy and Tax Distortions to Private Economic Activity and Moderate Constraints in Public Service Delivery 22. Togolese agriculture and producer incomes suffer severely from variants of the key constraints to more inclusive private-led economic activity. Despite some reform progress, distortions inherent in the policy and regulatory regime drive a large wedge between producers’ potential and actual returns, and thus dampen the potential benefits of public support for the sector. First, a number of restrictions on input provision reduce access to inputs and the profitability of using them, resulting in low usage of improved seeds, low livestock vaccination rates, and high-cost, inefficient delivery of fertilizer. Second, although the government has liberalized some agricultural markets, interventions in remaining markets are sometimes unfavorable to producers.For example, access to markets for maize, the country’s main crop, has been disrupted by the national food safety agency (Agence Nationale de la Securité Alimentaire du Togo, ANSAT), reducing farm income per capita by an estimated 11 percent of the poverty line in 2011. The percentage of the world price that producers receive for products for which the government sets the price—in particular, cotton and peanuts—is low and has fallen over recent years (Baffes 2007; QUIBB 2006, 2011). Yet liberalization of markets for cocoa and coffee in the 1990s improved producer prices, from 55 percent of the world price before liberalization to 70 percent afterward (Akiyama et al. 2003, QUIBB 2011). 23. In addition, as with other sectors of the economy, taxation of agriculture and of the agricultural value chain is a key binding constraint to the development of larger-scale, commercial agriculture and efficient input and output markets for smallholders. Although smallholder producers escape direct taxation, taxes levied on buyers, storers, exporters, or processors of their produce, if paid, would be passed through in the form of reduced producer prices. In the most favorable scenario, taxation of less formal buyers in a year of high agricultural margins would represent a minimum of 33 percent of farm profits. Assuming more realistic producer profit margins, effective taxation rises to between 63 (for those selling to unregistered entities) and 154 percent of farm profits (for those selling to a registered buyer). These tax policies have the effect of largely relegating agricultural production and related services to the informal sector or the state. They impede significant investment in storage and other value chain infrastructure and discourage the entry of agribusiness, thus obstructing the development of higher- productivity, higher-value agriculture. 24. Improving public support for agriculture is important, but will be less beneficial without addressing market access and input market efficiency. A lack of local public goods, such as for water control and market access, is an important constraint to poverty reduction in some localities. Indicators of road quality and traffic levels suggest that rural road access in some areas is moderately constraining. In vii addition, Togo’s slow progress in adopting simple, low-cost water control and irrigation techniques constrains income growth and poverty reduction in certain areas of the country where it would be viable, especially in Togo’s many small inland valleys. Research and development expenditure in agriculture, which generally has a high rate of return, has recently received only 0.07 percent of national GDP, and Togo provides relatively weak extension services; only 5 percent of agricultural producers report having recently had some form of training (RT 2014b). The unsustainable use of biomass as a source of energy and soil degradation also poses a key problem for environmental sustainability. Nonetheless, Togo’s soil quality today remains comparable to that of its neighbors. Yet in such a distorted context for economic activity, these issues are less binding on agricultural growth than the lack of efficient and flexible input and output markets. Key Constraint 5: Poor Performance in Disease Prevention and Health Care Delivery 25. Togo has made inadequate strides in improving the health status of its population. Governance of the health sector is overly centralized, and results are poor relative to spending. Although 15 percent of the public budget is devoted to health care, consumers pay 50 percent of total Figure V: Health Expenditures and Life Expectancy in Comparison health care expenses (See Figure V). Togo’s expenditures on health care as 10 80 9 70 a percent of GDP are the highest 8 60 Percent of GDP among comparators, yet its life 7 6 50 Years expectancy at birth is among the 5 40 lowest at just 59 years (Figure V). 4 30 3 Access to medical consultations has 2 20 fallen between 2006 and 2015, and 1 10 whereas 31.6 percent of urban poor 0 0 people who were experiencing health issues recently accessed health Health expenditures as a percent of GDP Life expectancy at birth services, only 7.6 percent of rural poor people did so (INSEED 2015). Access Source: WDI (most recent years available). to doctors is even lower, with 22.9 percent of Lomé residents having consulted a doctor, 16.7 percent in other urban areas, and only 4.5 percent in rural areas. Absenteeism of health facility staff is estimated at 37 percent, and facilities only stock 44 percent of necessary medications. Nineteen percent of health facilities lack running water, and 29 percent lack improved sanitation. In addition to weak health care services, the poor quality of air and water contributes significantly to Togo’s poor health outcomes. 26. The economic burden of poor health care—marked by premature death, disability, lower learning outcomes, and lower worker productivity—is high and disproportionately affects poor children and women. According to the World Health Organization (WHO), the economic burden of disease due to lost disability-adjusted life years (DALYs) is especially high for maternal, neonatal, and nutritional deficits, followed by HIV, tuberculosis, and malaria. Between 1998 and 2014, the maternal mortality rate was reduced only slightly, from 478 to 401 per 10,000 (national estimates). Despite a marked improvement in the child mortality rate between 2010 and 2012 (to 88 per 1,000 live births), the incidence of preventable childhood diseases also remains high. 27. Although there is little indication that health issues pose a major impediment to growth and job creation in Togo, poor health constrains the opportunities and productivity of poor people through other channels, as well as their overall lifetime well-being. Among informal firms surveyed in viii Lomé, only 6.5 days of business were reportedly lost due to illness each year, a small percentage of total working days (World Bank 2015g). Only 12 percent of formal firms consider the health status of workers to be a major or severe obstacle to their business. However, the estimated loss in the productivity and incomes of agricultural workers due to inadequate malaria diagnosis is likely to be substantial. Although direct evidence is not available for Togo, a recent study on such workers in Nigeria suggests an income penalty as high as 7.7 percent for similar workers in Togo. Given the fundamentally important nature of health status as a prerequisite to well-being and a productive life, and the high estimated costs of preventable disability, illness, and morbidity to poor people, women, and children, Togo’s weak performance in this area represents a key constraint to inclusion and well-being. III. Moderate or Mild Constraints 28. In addition to the key constraints identified in Section II, Togo faces a number of issues that currently appear to be less constraining to progress in reducing poverty than those presented above. 29. Other Policy and Regulatory Issues. There are a number of additional policy and institutional issues that distort incentives for private economic activity. First, Togo’s system of land registration ranks among the least efficient in the world, and there are a high number of land conflicts. There is no clear evidence, however, that improving the inefficient land system will offer a key opportunity for poverty reduction. Similarly, Togo’s minimum wage is higher as a ratio of labor productivity than in all comparator countries, which may reduce hiring of low-skilled workers. In the current context, however, the percentage of firms and workers directly affected by this is relatively low. Finally, when overvalued, the French CFA currency may reduce the country’s export competitiveness. The advantages and disadvantages of the currency and monetary regime shared by WAEMU countries is a complex topic beyond the scope of this study. Nonetheless, there is no evidence from the available indicators that the level of the exchange rate per se constitutes a key constraint in Togo’s current context. (See Appendix B to the Main Report for more details). 30. Infrastructure Services: Moderate Constraints to Growth. Togo’s governance challenges are manifest in significant inadequacies in the country’s infrastructure services . Particularly problematic for inclusive growth are the poor quality and high price of electricity and of information and communication technology (ICT) services. Although Togo’s transport sector is competitive within the region, especially in sea-to-sea transport, continual improvement in logistics efficiency will still be important to retain the country’s competitive advantage as a transport hub for the region. In addition, a lack of adequate rural roads may be a moderate constraint in some localities. Finally, serious shortfalls in water services impede improvements in well-being and contribute to the country’s health and disease burden. 31. Skills and Education: A Moderate Constraint to Inclusion. Improving the quality of education is an important objective in enhancing equity, fostering social development, and preparing the population for future opportunities, but other, more binding constraints must be alleviated first in order to substantially increase the incomes of workers at all levels of educational attainment. Although the average quality of education has fallen recently and presents efficiency and equity issues, the demand for skills in Togo’s labor market is low. The returns to education are well below benchmarks, unemployment rates are high and increase with the level of education, and—contrary to common perceptions—enterprises rate the skills of the workforce as adequate and employ few foreign workers. 32. Gender and Other Inequalities: Moderate Constraints to Inclusion. Cultural and legal obstacles affect the ability of Togolese girls and women to improve their incomes and well-being. Women face gender barriers in accessing employment, and those employed earn only 71 cents for every dollar that men earn.7 7 Estimated average effect within the population (with no differentiation by public or private sectors.) ix Customary law and cultural attitudes pose significant barriers to women’s entrepreneurship by affecting the capacity to contract, inherit, marry, and divorce. In addition, female-headed households have farms that are half the size, on average, as those of male-headed households. Issues such as the worst forms of child labor and trafficking in persons join this and poor water service as moderate constraints to well-being, which can also disproportionately affect the female population. 33. Financial Sector: An Area of Strength for Togo and a Mild Sustainability Risk. Host to 15 banks, Togo enjoys a relatively large and competitive financial sector, with the highest lending-to-GDP ratio among low-income SSA countries. Microfinance is expansive and serves more clients as a percentage of the population (37 percent) than any other WAEMU country, including the informal sector. On average, informal firms are able to borrow over 15 times their monthly sales on short notice, with a median of 5 times their median monthly sales. Relative to other constraints, the lack of credit is not a key constraint for small agricultural producers, who also have access to credit through microfinance institutions, informal savings and credit associations, nongovernmental organizations (NGOs), and other sources. IV. Summary of Findings and Pathways out of Poverty 34. The diagnostic results diagram below (Figure VI) summarizes the findings from this systematic examination of all available data and evidence on which of Togo’s many challenges are key constraints for poverty reduction. Table I provides a more detailed prioritization of issues according to the three pillars of this SCD: inclusive growth, sustainability, and equity/inclusion, showing which are key (or “binding” in the case of constraints to inclusive growth) versus moderate or mild. It also shows sustainability risks according to the timeframe for such risks. Addressing these five current and short-term risks and key constraints can be considered necessary conditions to sustainably eliminating poverty and promoting shared prosperity. Pathways Out of Poverty 35. Togo’s course toward the twin goals of poverty reduction and shared prosperity can be charted along four essential, interrelated pathways: (1) growth in increasingly formal and productive off-farm businesses for more remunerative employment; (2) transformation of agriculture toward more productive, higher-value, and sustainable smallholder and commercial production; (3) reduced macro-fiscal and political risks and improved value for money in public expenditures; and (4) improved health status of the population, especially poor and vulnerable people. For pathways (1) and (2) to be successful, private actors, including smallholders in agriculture, micro and small businesses, and larger private entrepreneurs, will need the scope to leverage Togo’s comparative advantage in agriculture and services, to identify and make productive investments, to create value, and to stimulate expanding and increasingly remunerative employment opportunities. Rising incomes in either the agricultural or nonfarm sector would strengthen demand for goods and services across a range of sectors and increase the productivity of land and labor—the assets that poor people possess. Domestic remittance income, food security, and overall resilience of the economy would rise, reducing both urban and rural poverty. Moreover, within a conducive public governance framework, these developments could in turn provide expanded resources to invest in the public goods and services needed to enhance well-being and equity of opportunity, while also shoring up fiscal and environmental sustainability risks. 36. Pathway 1: Growth in increasingly formal and productive off-farm businesses for more remunerative employment. To unblock this pathway Togo can build on recent progress by: x Addressing the key constraints:  Putting in place arrangements and practices to reduce conflicts of interest and enhance the accountability, transparency, capacity, and independence of public entities involved in the design and implementation of policies and regulations affecting private economic activity.  Clarifying the investment code with more specific and limited rationales for denying approvals and a balanced and independent process for contesting them.  Reducing the paperwork and clearance burden for imports.  Reducing the role of the state in directly owning and/or operating for-profit activities in sectors where more competitive markets can emerge.  Establishing mechanisms to monitor the quality and consistency of regulatory actions and for impartial dispute resolution.  Reforming Togo’s tax framework to reduce the level of total taxation, simplify the tax code, and rebalance the risks that it poses to private entrepreneurs. And taking complementary steps:  Addressing the high cost and low quality of electricity and ICT services by: o Adapting institutional arrangements and practices to reducing conflicts of interest in the governance of these sectors. o Strengthening the independence and capacity of the electricity regulator. o Clarifying and reinforcing the commercial orientation and managerial autonomy of the electricity company, CEET. o Fully embracing the logic of private competition to alleviate the high prices and poor quality of ICT services. o Strengthening the dialogue between the government and the private sector, in order to better respond with effective policies to changing needs. 37. Pathway 2: Transformation of agriculture toward more productive, higher-value, and sustainable smallholder and commercial production. Togo has begun to address some of the constraints identified, most recently adopting a plan to reform the fertilizer subsidy program. To ensure lasting progress, Togo should consider: Addressing the key constraints:  Enhancing the professional capacity, independence, and accountability of the functions performed within the Ministry of Agriculture and other public entities in the sector, including the agricultural research institute (Institut Togolais de Recherche Agricole, ITRA) and ANSAT.  Reforming the licensing process for providing veterinary services and providing public support as needed to strengthen animal health and traceability systems.  Improving the flexibility, speed, and accountability of the country’s seed registry, with expedited procedures for seeds registered elsewhere in the ECOWAS zone.  Improving market access for basic food grain and other producers by: o Ensuring that export permits are provided consistently and efficiently. o Working within ECOWAS to lower nontariff barriers (NTBs). o Ensuring that ANSAT’s actions are more consistently favorable to producers (while also enhancing food security). xi o For example, by adopting more efficient mechanisms for smoothing pricesand the availability of grains. In addition to removing barriers to international trade in food products, these mechanisms can facilitate grain storage by the private sector. o Alleviating revenue-based taxes on enterprises providing inputs, marketing/market access, storage services, value addition, or commercial-scale production in the sector and ensuring that requirements within the value chain for reimbursement of VAT are consistent with the informality of producers in the sector. And taking complementary steps:  Pursuing an integrated strategy to disrupt the vicious circle of deforestation and soil depletion, adverse microclimate impacts, reduced surface water, and declining productivity in rural areas.  Facilitating the use of small-scale irrigation (especially in drier areas and valley bottoms) in a manner that draws upon international experience and is suited to local conditions, including through user-managed and -financed systems.  Assessing the viability of additional feeder road investments in specific zones where their absence is at least a moderate constraint to agriculture (in particular in Plateaux).  Ensuring that sanitary and phytosanitary, labor market, and value chain regulations are supportive of commercial-scale agricultural operations, with improved traceability and sanitary systems.  Ensuring consistent application of (lower) import duties and other import requirements for agricultural inputs.  Ensuring that road maintenance and road asset protection systems perform well and that roadblocks are minimized. 38. Pathway 3: Reduced fiscal and political risks, and improved value for money in public expenditures. Addressing the key constraints:  Strengthening the transparency and accountability of public financial management, with a clear separation between the budgets of various public entities and state-owned enterprises and controls on unbudgeted flows.  Improving public investment management, including comprehensive systems to monitor public investments and expenditures, and value for money in procurement.  Reducing the fiscal costs of public enterprises, either through privatization (where competitive markets would result) or increased commercial discipline, competition, and a clean, transparent, and disciplined separation of SOE and other public financial accounts. And taking complementary steps:  Improving value for money in public service delivery through improved capacity for intervention design, evaluation of results, and learning, beginning in sectors with important fiscal implications and impacts on poverty (such as health and education).  Relying, whenever feasible, on private provision of infrastructure services (with appropriate public- private partnership frameworks) and strengthening the autonomy and capacity of infrastructure sector regulators, while improving maintenance funding to achieve greater financial sustainability.  Broadening the tax base by simplifying the tax code and reducing discretion in implementation, compliance requirements, and the total rate/burden of the system. xii  Ensuring that any subsidies, including for fuel and fertilizer, are minimized, pro-poor, and cost- effective.  Accelerating efforts to improve governance of the extractives sector, with an emphasis on monitoring production and sales, tracking fiscal receipts, and implementing suitable regulation.  Optimizing use of well-targeted cash transfers to reduce poverty, to the extent that these are shown to be more cost-effective than other public expenditures and that fiscal stability is achieved.  Intensifying efforts to broaden and deepen dialogue with civil society and opposition groups, improve responsiveness to citizen voice, and show tangible progress in fulfilling outstanding agreements (including from the Global Political Accord).  Considering ways to increase the government’s responsiveness to the public investment priorities of regions, towns, and communities. 39. Pathway 4: Improved health status of the population, especially poor and vulnerable people. To pursue this pathway in a cost-effective manner, Togo should consider: Addressing the key constraints:  Studying the primary drivers of poor health outcomes (including health service delivery, air and water pollution, cooking fuels, and water services).  Based on this diagnostic, implementing evidence-based interventions to improve disease prevention and health services, especially to address maternal health, respiratory infections, diarrhea, malaria, and other diseases that impose high costs on poor people.  Enhancing accountability and learning by monitoring and evaluating the results of measures introduced and adjusting as needed to improve cost-effectiveness. And taking complementary steps:  Integrating environmental sustainability into Togo’s public institutions and ministries, with clear roles and responsibilities to avoid the negative effects on air quality of an inefficient use of urban spaces, congestion, and other sources of poor ambient air quality, and of increased pressure on clean drinking water sources. xiii Figure VI: Key Constraints Togo Faces in Eliminating Extreme Poverty Levels of Causation Inadequate (Inclusive) Growth Inadequate Equity of (slow structural transformation, low labor High Risk of Recurrent Fiscal Proximate Opportunity and Well-  productivity and wages, and Political Crisis Causes of underemployment, and low agricultural Being for Poor People  Poverty productivity)  0)  Inconsistently pro-poor Key Low Private Investment and  distribution of growth and lack Slow progress in improving Outcomes Entrepreneurship (including in of pro-poor distributional human development smallholder agriculture) policies Specific Key Electricity, ICT, and or (3) Barriers to Entry and (4) High and Distortionary (5) Poor Performance High Distortions local infrastructure in Binding and Taxation (agriculture and in Disease Prevention (agriculture and some zones moderate Moderate nonagriculture) and Health Care nonagriculture) constraints Constraints Low effectiveness in setting priorities for and High corruption and low government effectiveness (2) Poor Fiscal in formulating and implementing policies toward Governance delivering public goods and services private economic activity (including agriculture) Deeper Causes (1) Governance System that Fosters Weak Accountability Note: Dark Blue = Key Constraint. Medium Blue = Other Finding. xiv Table I: Detailed Prioritization Matrix of Constraints and Risks by Severity and Timeframe for Sustainability Risks Severity of Constraint Key or Binding Constraints to Poverty Moderate constraints Mild constraints Reduction (Numbered as in Figure VI) Current constraints to poverty (1) Poor governance (low government  High cost of electricity for productive  Minimum wage regulation reduction through inclusive effectiveness and poor control of corruption) uses (especially manufacturing).  Skills deficits or mismatch growth (3) Barriers to entry and binding distortions  Unreliable internet and costly  High transport and logistics to private activities due to high-level telecommunications (services and costs** corruption and poor policy and regulatory manufacturing)  Inadequate land titling system** performance (in agricultural and  Lack of local infrastructure goods such as  Poor urban water service nonagricultural sectors). feeder roads,* water control assets,* (4) High and distortionary taxes (in (agriculture) depending on locality agriculture and non-agriculture) Sustainability risks (2) Current: Macro/fiscal crisis due to weak Short- or medium-term (1-10 fiscal governance years) constraint or risk to poverty reduction through inclusive growth  Political conflict or crisis  Soil degradation  Inadequate security of tenure for  Deforestation smallholders  Coastal erosion**  Banking sector insolvency  Microfinance sector insolvency Long-term constraint or  Natural water availability and weather risk  Inadequate use of urban spaces sustainability risk to poverty due to climate change for energy efficiency and disaster reduction (over 10 years) through preparedness inclusive growth Current constraints for inclusion (5) Low accessibility and quality of health-  Gender-based discrimination in  Insecure land tenure in rural areas and equity related services and disease prevention economic and social spheres (including medical services, insecticide-treated  Poor educational quality in poor and bed nets, improved ambient air quality, and rural areas clean drinking water, where unavailable)  Poor urban water services  Worst forms of child labor and human trafficking. *Rated higher in importance due to consultations, but key analytical gaps remain. **Analytical gaps. xv 1. Introduction 1. Once known as the “Switzerland of West Africa,” Togo is now a low income, fragile state, which seeks to become an emerging economy.8 A small country of 7 million people, nearly 100 kilometers (km) wide and situated between Ghana and Benin, Togo is comprised of over 30 ethnic groups and numerous local languages. The country’s geography is diverse, and its natural assets include land resources and rainfall patterns that are Map 1: Togo and Its Neighbors generally favorable to agriculture, significant phosphate and other mineral resources, and a natural deep-water port of nearly 17 meters that is unique in the subregion. Soon after independence in 1960, Togo was able to achieve economic progress by building an effective public administration and pursuing open, market-oriented economic policies. It established sound governance of the banking sector, exploited its phosphate reserves, and became a subregional hub for logistics, trade, and banking (World Bank 1996, 2013a). At its peak in 1980, Togo’s per-capita gross domestic product (GDP) had risen from US$272 (in 1960) to US$534 (values in 2005 purchasing power parity (PPP) US dollars), a level surpassing that of many developing economies. However, these gains soon began to reverse (Figure 1). 2. Togo has been unable to steer a sustained path to poverty reduction. After Figure 1: Growth Rate and Real GDP per Capita early economic gains, in the mid-1970s the 20 600 government shifted to a state-led economic Percent Real GDP Per Capita 15 model that was relatively closed to 500 international trade. Growth, always volatile 10 GDP per Capita 400 (Figure 1), turned negative in recurrent 5 Growth periods of fiscal or political crisis. The 0 300 structural transformation out of agriculture 2012 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 -5 into higher-productivity sectors that had 200 been underway stalled (Figure 2). Despite a -10 100 spate of growth averaging just over 4 -15 percent over the most recent decade,9 -20 0 Togo’s real per-capita GDP today remains GDP per capita (constant 2005 US$) lower than its 1980 peak. Thus, living standards have fallen below those of many GDP growth (annual %) previously poorer countries (Figure 3); Source: WDI (accessed 2015) Ghana directly to the west now has a level of GDP per capita almost three times that of Togo. National poverty rates remain high, at over 55 percent, and in internationally comparable terms Togo has an extreme poverty rate (49.2 percent) almost twice that of Ghana’s 25.2 percent (2015), and higher than 8 Togo’s current GNI per capita is the 9th lowest of the 35 countries in Sub-Saharan Africa with data available (WDI). Those with data with a lower per capita GDP are the Central African Republic, Burundi, Malawi, the Democratic Republic of Congo, Liberia, Niger, Mozambique, Eritrea, Guinea, and Ethiopia. The World Bank classifies Togo as a fragile state based upon its Country Policy Institutional Assessment (CPIA) score. 9 National accounts. Only projected national accounts figures are available beyond 2011, and these are not considered reliable. 1 that of Uganda, Ethiopia, and Tanzania (Figure 4).10 At the same time, Togo’s ranking in the UN’s Human Development Index has fallen from 95th in the world in 1980 (in the bottom 23 percent among the 124 countries with data in that year) to 166th out of 187 countries (bottom 10 percent) in 2013. Figure 2: Value Added Share of Economy by Broad Figure 3: Income Trajectory of Togo and Sector, 1960-2014 Countries with Lower GDP per Capita in 1980 100 (GDP per Capita, Constant 2005 US$) 90 800 80 700 70 600 % du PIB 60 500 50 40 400 30 300 20 200 10 100 0 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 1980 1990 2013 Average of 30 Countries < Togo 1980 Togo Agriculture Industrie Service Source: WDI 2015. Source: WDI 2015. 3. This systematic country diagnostic (SCD) attempts to answer the question: what key constraints (and opportunities) does Togo face in sustainably accelerating progress in poverty reduction and shared prosperity? Answering this broad question Figure 4: Comparative Poverty Rates in Sub-Saharan requires a country-specific response to the Africa (Most Recent Years Available) following three interlinked questions: What are the most binding (key) constraints to (broad-based) Mozambique Liberia economic growth? What are the key issues Guinea Bissau constraining the inclusion of poor people in Rwanda Burkina Faso growth? And what are the main risks to the Nigeria Benin sustainability of the country’s progress in reducing Niger poverty? Understanding the answers to these Mali Togo questions requires an understanding of the Tanzania Gambia, The country’s recent economic performance, context, Senegal Ethiopia and strengths, as well as an examination of the Uganda evidence on the full range of issues and potential Côte d'Ivoire Ghana constraints. The next chapter reviews Togo’s recent Botswana Cabo Verde economic performance, and Chapter 3 details its 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% progress toward the World Bank’s twin goals of Poverty headcount ratio at $3.1 a day (PPP) (% of population) poverty reduction and shared prosperity, Poverty headcount ratio at $1.9 a day (PPP) (% of population) highlighting the implications for Togo’s pathways Source: PovCalNet out of poverty. Chapter 4 presents the diagnostic approach and the evidence on which factors are most constraining. Chapter 5 summarizes the findings and charts pathways toward progress. 10 2015 QUIBB. Extreme poverty is defined as living on under US$1.90 2011 Purchasing Power Parity (PPP). 2 2. Recent Economic Performance Main Messages:  Togo’s economy is oriented heavily toward the services sectors and agriculture, which account for 22 and 41 percent of GDP, respectively (average 2010–2014).  Togo’s main export partners are within the Economic Community of West African States (ECOWAS).  Economic growth over the past five years, averaging over 5 percent, has been driven by high rates of growth in commerce, other services, and building and public works, as well as growth in agriculture averaging 6.6 percent.  Togo faces demographic and social pressures, and its economy is not resilient to external and internal shocks, especially high fiscal and political risks.  Due to low wealth accumulation and rapid environmental degradation, Togo’s net national savings rate (adjusted for environmental depletion) is negative. 4. The growth recorded in Togo over the past five years (2010–2014), averaging 5.1 percent per year, has been driven primarily by growth in the tertiary sector, in particular in trade and other services (Table 1). According to national accounts projections (which may not be reliable beyond 2011), growth has also been significant but volatile in agriculture, due to especially high growth in 2014. Agricultural growth through 2013 was 3 percent, and 0.3 percent according to FAOSTAT. Although building and public works comprises only 5.8 percent Table 1: Sources of Growth, 2010–2014 Averages (Constant Prices) of the economy, the rate of Average Average growth has been highest in Year-on-year Share of Contribution to this sector at 14 percent per Sources of Growth from Growth Rate Economy Growth (percentage year over this period. Productive Sectors (percent) (percent) points) 5. As a small country Primary Sector (of which:) 6.2 40.8 1.78 within the Economic Agriculture (of which:)) 6.6 31.1 1.20 Community of West Food crops 5.3 29.2 0.76 African States Cash crops 13.1 1.9 0.44 (ECOWAS), Togo’s Secondary Sector (of which:) 6.5 17.5 1.27 economic prospects Extractives 6.7 3.4 0.19 depend upon the ability to Manufacturing 5.1 6.8 0.48 export goods and services. Services comprise a high Electricity, gas, and water 0.5 2.9 -0.04 share of the country’s Building and Public Works 14.0 4.5 0.64 exports relative to Sub- Tertiary Sector (of which:) 12.0 22.1 2.87 Saharan Africa (SSA) and Commerce 13.5 7.8 1.29 other comparators Transport, warehousing, and (Figure 5). Yet according to communications 2.1 5.2 0.13 official statistics, the Banking and Insurance 7.5 2.0 0.16 transport, warehousing, and Other services 27.2 7.1 1.28 information and Note: Togo’s National Statistics Agency has only validated figures through 2011. communication technology Source: National Accounts. (ICT) sectors have been 3 Figure 5: Services Exports as a Percent of GDP growing only slowly at 2.1 percent per year, on average.11 Albeit high and growing, total exports have yet to attain their 1980s level and underperform rapidly growing economies such as Cambodia (Figure 6). In addition, Togo’s goods exports consist mostly of highly capital-intensive goods—in particular, crude materials, mineral fuels, and lightly processed primary exports (Figure 7) which create relatively few jobs; cement clinker tops the list at over US$165 million in 2013. (These Source: WDI. exports are followed by cotton and a variety of processed and manufactured products (see Appendix Table 8 for the top 20 export goods). Figure 6: Exports as a Percent of GDP 70 6. Although recent growth has been 60 Benin significant, Togo’s economy is neither Cambodia resilient to shocks nor sustainable. As a 50 Cote d'Ivoire relatively open economy, Togo is subject to Ghana 40 shocks emanating from its major trading Mozambique 30 partners, which are primarily within the Nepal 20 region,12 from energy supply disruptions from Rwanda Nigeria and Ghana, and from international 10 Senegal commodity price movements, particularly in 0 Tanzania cotton, phosphates, and petroleum.13 In 1980-1989 1990-1999 2000-2009 2010-2013 Togo addition, growth in Togo’s transport and Source: WDI logistics sector—relatively low according to official statistics through 2014—depends partly on trade diversion and smuggling, and therefore Figure 7: Goods Exports by Category, 2013 may not provide a persistent source of growth (World 3% 0% Food and live Bank 2010).14 Agricultural growth is based in large part 6% 1% animals on transitory productivity increases (IMF 2015). In 9% addition, growth depends in part upon large fiscal Beverages and stimulus and infrastructure investments that will be tobacco 20% difficult to sustain (IMF 2015). Public debt is rising 28% Crude materials, rapidly and was estimated at over 62 percent at the end 2% inedible, except of 2015 (IMF 2015). Furthermore, demographic and fuels 3% Mineral fuels, economic pressures may portend growing social 28% lubricants and instability.15 Population growth is high at 2.7 percent. related materials Youth unemployment and underemployment are elevated, and with 60 percent of the population at less Source: COMTRADE 11 These figures may not reflect all informal activity and growth in transport services may have increased in 2015. 12 According to World Integrated Trade Statistics (WITS) (importing country figures), Burkina Faso is Togo’s leading export destination, followed by Benin, Ghana, Niger, and Nigeria. 13 Togo is an importer of petroleum and has put in place fuel price stabilization policies, which until recently have tended to result in net subsidies. 14 For example, about half of transit trade was recently estimated to enter Nigeria unofficially (World Bank 2010). 15 See, for example, www.acled.com (discussed below). 4 than 25 years old and an urbanization rate of 4 percent per year, Togo faces challenges in employing its expanding working-age population. Public service needs are growing. Yet the government has faced difficulties meeting its existing payroll obligations, and public employees such as education and health workers have recently staged strikes over pay Figure 8: Gross Savings and Savings Adjusted for Environmental issues. Adding to these sustainability Degradation as a Percentage of Gross National Income (Average 2006- challenges is a level of environmental 2012 as data are available) degradation that entirely offsets 20 current economic growth rates. Including air and water quality, land 15 degradation, and coastal erosion, this 10 degradation costs the economy 5 approximately 6.8 percent of GDP per year (RT and WB 2015).16 As a result 0 TZA SEN GHA KHM BEN TGO of Togo’s failure to accumulate and -5 preserve the nation’s physical, -10 financial, and natural wealth, net Adjusted savings: gross savings (% of GNI) national savings rates adjusted for Adjusted net savings, excluding particulate emission damage (% of GNI) environmental degradation are Source: WDI negative (Figure 8). 16To compute the value of losses, a combination of methods were used, including monetization of health impacts, of future productivity losses, and of current defensive spending (in the case of coastal erosion). 5 3. Togo’s Performance vis-à-vis the Twin Goals Recent Trends in Poverty and Inequality Main Messages:  Over 55 percent of Togo’s population remains poor after a slow decline from over 61 percent in 2006.  Whereas economic growth between 2006 and 2011 did not increase the living standards of most poor people, growth between 2011 and 2015 did, while also reducing the poverty gap and inequality.  Over 60 percent of the reduction in poverty between 2011 and 2015 is attributable to growth (with the rest due to distributional changes).  However, the impact on the headcount poverty rate of Togo’s growth (the elasticity of poverty with respect to growth) is low relative to the rest of Sub-Saharan Africa. 7. Despite modest poverty reduction over the past several years, Togo is unlikely to meet the goal of eliminating extreme poverty by 2030.17 Combining recent growth rates (averaging 5.5 percent from 2006 to 2015) with Togo’s 2.7 percent population growth rate results in less than 3 percent per-capita income growth. Poverty rates have declined since 2006, from 61 percent to 55.1 percent in 2015 (Table 2), but this reflects a relatively low impact of growth on poverty headcount rates. Each percentage Table 2: Poverty Statistics Recent Years, National Poverty Line point increase in real per-capita growth has Poverty Headcount Ratio (Percent) resulted in a reduction of only 0.2–0.3 2006 2011 2015 Change percentage points in the poverty rate over the Lomé Urban 30.8 28.5 34.8 4.0 period, relative to a reduction of 0.7 percent for 18 Other Urban 46.4 44.7 37.9 -8.5 the continent as a whole. Rural 75.1 73.4 68.7 -6.4 8. The distribution of growth is also Total 61.7 58.7 55.1 -6.6 important for poverty reduction and Poverty Gap depends on pro-poor policies, as well as Lomé Urban 26.6 24.2 12.1 -14.5 temporary fluctuations in determinants Other Urban 30.6 34.2 12.0 -18.6 such as relative prices and weather. Gains or Rural 40.7 45.1 29.2 -11.5 losses for poor people in one period can Total 38.2 41.6 22.1 -16.1 reverse in another, as has occurred in Togo’s Distribution of the Poor (Percent of Total) case. Consumption growth from 2006–2011 Urban 21.1 22.4 23.0 1.9 was regressive; although real consumption Rural 78.9 77.6 77.0 -1.9 growth occurred for those in the top 55 percent Source: QUIBB 2006, 2011, 2015. of the consumption distribution, it fell for the bottom 35 percent (Figure 9).19 Consumption growth was positive for people living in Lomé at all levels of consumption and for the top 80–85 percent living in the regions of Maritime and Kara; yet for every other region, in both rural and urban areas, the change in per-capita consumption over the five years was negative.20 17 This goal subsumes World Bank’s other twin goal of raising the lifetime welfare (using as a proxy current consumption) of the bottom 40 percent of the consumption/income distribution, since Togo’s poverty rates exceed 40 percent. 18 Real GDP per capita from WDI and national poverty rates. The poverty line for per-capita nominal consumption in 2015 is 344,408 FCFA per year. 19 This is a measure of average consumption growth at various points in the distribution in the year income is measured and is not a statement regarding mobility within the distribution of given households over time. 20 The distributional pattern of growth between 2006 and 2011 could not have been the result of a single negative shock to agriculture or the effect of flooding in 2010, as agricultural statistics for 2011 show no drop in production. (République Togolaise 2011b). 6 As shown in the right panel of Figure 9, however, this pattern changed between 2011 and 2015, when growth in consumption for all parts of the national consumption distribution was registered, except the very bottom. Over this period, in contrast to 2006–2011, growth in consumption was largely positive in rural areas, which benefitted from real growth in agriculture, and was also positive in secondary cities (INSEED 2015, using QUIBB). A decomposition shows that most of the decline in poverty was through growth (2.2 percentage points), although a pro-poor distribution of growth also played an important role, reducing poverty by 1.4 percentage points (Table 3). The poverty gap—the average gap between the consumption of the poor and the poverty line—also declined dramatically, from 51.6 to 22.1 percent. The net effect on inequality of the trends observed between 2006 and 2015, as measured by the Gini coefficient, was an increase between 2006 and Figure 9: Growth Incidence (Percentage Change in Consumption) by Consumption Percentiles, 2006-2011 (Annual change) and 2011-2015 (Cumulative change) Total (years 2006 and 2011) Total (years 2011 and 2015) 4 Growth-incidence 95% confidence bounds Growth at median Growth in mean 6 Mean growth rate 2 4 Annual growth rate, % 2 Annual growth rate % 0 0 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 -2 -2 -4 -4 -6 -8 -6 -10 1 10 20 30 40 50 60 70 80 90 100 Expenditure percentiles Expenditure percentiles Source: QUIBB 2006, 2011, 2015. 2011 from 0.36 to 0.39, and a slight decline to 0.38 in 2015 (INSEED 2015).21 Table 3: Decomposition of Effects of Growth and Distributional Changes on Poverty Headcount Rates, 2011-2015 Difference Growth Effect Distribution Effect National -3.6 -2.2 -1.4 Grand Lomé 6.3 7.8 -1.5 Other urban -6.9 -5.3 -1.6 Rural -4.7 -5.5 0.9 Source: QUIBB 2011, 2015. Source: QUIBB 2006 and 2011 21See Appendix Table 9. 7 Correlates and Circumstances of Poverty: Household and Spatial Characteristics Main Messages:  Poverty rates are higher in rural areas (68.7 percent) as in urban areas (37.9 percent) (QUIBB 2015)and are generally higher for the northernmost regions.  Although the northernmost region, Savanes, has the highest poverty rate, the greatest number of poor people live in Plateaux, a region with high agricultural potential.  The poorest regions, in particular Savanes and Centrale, tend to have lower access to health and education services, improved water, and electricity.  Poor households are more likely to be employed in agriculture than nonpoor households, but with the exception of relatively few cash crop farmers, cropping patterns do not vary significantly over the income distribution. Maize is by far the most important crop.  Poor people are more likely to live in areas that are more isolated from markets and services and to have less-educated household heads. 9. Poor people in Togo’s are more likely to be Figure 10: Estimated Poor Population and Poverty living in rural areas, to work primarily in Incidence by Region (South to North) agriculture, and to live in relative isolation from markets and services. Although the rate of urban poverty has risen with the migration of poor people to Togo’s cities, the rate of rural poverty remains almost twice that of urban areas, at 69 percent (Table 2), and rural areas account for approximately 77 percent of all poverty. Poverty rates generally increase as one moves away from the coastal Maritime region north to Plateaux, Kara, then (south again) to Centrale, and finally to the driest region, Savanes (Figure 10 and Map 2, Appendix C page XXII). 10. The regions with the greatest poverty Note: The 2015 QUIBB survey is not representative at the headcount rates, Savanes and Centrale (over 90 regional level. and 80 percent, respectively), and Plateaux, with Source: QUIBB 2011. the greatest number of poor people, also tend to have lower access to services. An index of households’ isolation, constructed using the distance and transport time to markets, primary and secondary Table 4: Average Isolation Scores by Region schools, water sources, bus stations, and health Isolation Score, Based on Time Poverty centers, is correlated with poverty and increases as Grand Lomé -0.56 27.2 one travels north from Lomé, albeit not uniformly. Maritime -0.001 53.9 This index is higher in Plateaux and lower in Centrale Plateaux 0.29 64.7 Centrale 0.12 80.2 than would be predicted by the poverty incidence Kara 0.26 68.4 (Table 4). The time required to reach the nearest Savanes 0.47 90.8 health facility is highest in Savanes, with 33 percent Source: World Bank staff, using République Togolaise, of the population living over one hour away from such QUIBB 2011. a facility, as compared with only 10 percent in 8 Maritime region (Figure 11) and just over 20 percent in Kara, Centrale, and Plateaux. Although access to primary education is similar across regions, access to a secondary school is lowest in Savanes, followed by Plateaux, then Centrale (Figure 12). Residents of Savanes and Centrale are less likely to have an improved water source (piped, bottled, pumped well, or borehole) than those in other regions. In addition, usage of electricity falls as one travels north from Lomé, and is lowest in Savanes (Figure 13). 11. Poverty is associated with isolation and greater reliance on agriculture. An estimated 60 percent of the nation’s active population and 97 percent of the rural active population are engaged wholly or primarily in agriculture (République Togolaise (RT) 2014b). There is a clear correlation between consumption levels and employment off-farm, with almost 60 percent of those self-employed on-farm falling into the bottom consumption quintile, versus only 12 percent in the top quintile (Figure 14). In addition, the poorest and most isolated region, Savanes, has a higher percentage of working age people primarily employed in agriculture (68 percent in 2011) and the highest rate of under-employment of all the regions (Table 5). It also has a distinctly higher percentage of under-employed seasonal or temporary workers – 34.8 percent, versus only 4.1-4.6 percent in the other regions excluding Lomé. More isolated households, which are more often located in the poorest regions, are also less likely to have a second source of income, typically outside of agriculture (Figure 15). Figure 11: Time Required to Reach Nearest Health Figure 12: Access to Schooling and Net Enrollment by Facility by Region Region 120 120 100 100 80 80 60 60 40 40 20 0 20 Access Net Access Net enrollment enrollment 0 Lomé Maritime Plateaux Centrale Kara Savanes Primary Secondary Less than 30minutes 30-60 minutes > 1 hour Lomé Maritime Plateaux Centrale Kara Savanes Source: QUIBB 2011 Source: QUIBB 2011 9 Figure 13: Percentage of Households Using Water Sources Table 5: Employment Status Indicators by and Electricity for Lighting by Region Region (% of Working Age Population) 100 Percentage of under- 80 Primarily employed 60 employed seasonal/ 40 in Under- temporary agriculture employed workers 20 Lomé 1 17.8 1.1 0 Lomé Maritime Plateaux Centrale Kara Savanes Maritime 24 20.8 4.4 Plateaux 58 16.3 4.5 Piped or bottled water Pumped well or borehole Centrale 40 22.8 4.1 Well or rainwater River, spring, dam, or reservoir Electricity for Lighting Kara 40 28.0 4.6 Savanes 68 43.7 34.8 Source: QUIBB 2011 Source: QUIBB 2011 Figure 14: Percentages of Workers by Type of Work Figure 15: Isolation, Non-Farm Income, and Poverty and Consumption Quintile 90 70 80 60 70 50 60 40 50 30 40 20 30 20 10 10 0 Bottom Second Third Fourth Top 0 Quintile Quintile Least 2nd least 3rd least 4th least Most Self-employed on farm Farm wage isolated isolated isolated isolated isolated Non-farm wage Non-farm self-employed % of HHs with nonfarm income Poverty Rate Source: QUIBB 2011 Source: QUIBB 2011 12. Few of Togo’s agricultural producers engage in high-value crop production, and there is relatively little differentiation of crop choice by household consumption levels. Smallholder households cultivate on average 3.5 hectares and produce a combination of food and cash crops (RT 2014b), as well as livestock.22 The main cash crops are cotton, coffee, cocoa, and oil palm, together representing 7 percent of cropped land and contributing 9 percent of GDP. Thirty-eight percent of land under these crops lies in the Plateaux region, which hosts 85 percent of all coffee and cocoa plots.23 Still, coffee and cocoa farmers 22 Many food and other crops are sold for cash, so here “cash crops” refers to any crops that are not produced in part for consumption by the household but rather entirely for sale. 23 Thirty-two percent of land is in Maritime (where oil palm, cocoa, and cotton are produced), 16 percent in Savanes, 9 percent in Centrale, and 5 percent in Kara. Of the land devoted to cash crops, 67 percent is intercropped with cereals, root crops, or legumes. 10 represent only 8.3 percent of the agricultural households in Plateaux (QUIBB 2011), and only 0.3 percent of households in Centrale. There is only a slight difference in the main crops grown across consumption quintiles (Table 6). Maize is by far the dominant crop for all quintiles. Yet the poorest households tend to grow more sorghum and millet than the rest, and richer households grow more cocoa and coffee. There is more differentiation in the second-most important crop Table 6: Crop Frequencies by National Consumption grown. As shown in Appendix Table 10 (Appendix Quintiles C), more well-off households tend to grow more Quintile 1 Q2 Q3 Q4 Q5 beans and manioc as their second crop. At the same Plot-Level Average Frequency (percent) time, the poor tend to be more concentrated in 58. livestock rearing than the non-poor (Table 7), due in Maize 51.6 47.5 49.7 52.6 1 Manioc 2.7 4.6 6.4 7.3 9 part to drier conditions in the Savanes region, which Sorghum 11.1 9.3 6.6 4.3 4.4 are more suited to extensive livestock than to Rice 6.1 5 3.8 3.4 3 intensive crop production. In fact, landlessness is Millet 8.8 3.6 2.5 1.4 0.6 actually the lowest and livestock ownership the Yams 4.5 8.5 7.3 6.5 5.4 highest in Savanes among the regions (Appendix Household-Level Frequency (percent), Table 11). Rural Households Cocoa or coffee 1.5 3.5 4.1 4.2 1.5 Source: QUIBB 2011 Figure 16: Poverty Rates by Age of Household Head Figure 17: Poverty Rates by Education of Household 80 Head 70 100 60 80 50 60 40 30 40 20 20 10 0 0 No primary Partial completed Tertiary 15-29 30-44 45-64 65+ education secondary secondary Poverty Rate 2006 Poverty Rate 2011 Poverty Rate 2015 2006 2011 2015 Source: INSEED, using QUIBB. Source: INSEED, using QUIBB. 13. Certain demographic features are associated with greater levels of poverty, although one cannot infer causality from any of these correlations. Female-headed households in rural areas are more likely to be poor. Poverty rates for households with a young household head aged 15–29 have risen since 2011, whereas those for households headed by a person aged 65 and over have fallen (Figure 16). Households with a more educated household head have higher consumption levels (Figure 17). In addition, holding constant regional and other household characteristics, larger households, households with a spouse of the household head having 11 completed only primary education, and those with Table 7: Livestock Holdings by Consumption Quintile monogamous marriages (rather than polygamous Consumption Quintile No livestock TLU marriages or widowed) are more likely to be poor Poorest 29.9 1.47 Second quintile 33.5 1.16 (Appendix Table 12.) Third 50.3 0.78 Fourth 62.3 0.43 Richest 75.5 0.33 Note: TLU =an aggregate measure of livestock holdings; one cow equals 0.7 TLU. Source: World Bank staff, using QUIBB 2011 12 Sources of Vulnerability Main Messages:  Poor people are increasingly vulnerable to environmental factors affecting their health, well-being, and incomes.  The groups most vulnerable to a life of chronic poverty or exploitation are poor children who have been orphaned or otherwise separated from their parents, as well as youth at risk for human trafficking.  Approximately one-fifth of Togo’s nonpoor population remains vulnerable to adverse climatic and health shocks, and a substantial share (more than 40 percent) of the population is food insecure.  The annual costs of environmental degradation exceed Togo’s rate of economic growth. Of measurable components, approximately 6.8 percent of GDP is lost each year through the effects of reduced air and water quality, land degradation, natural disasters, and coastal erosion. o Of these, the degradation of air, water, and land resources is likely to have the greatest direct impact on poor people. 14. Despite recent progress in reducing poverty, Togo’s nonpoor population remains vulnerable to a variety of adverse shocks, including economic downturns, natural disasters, normal weather variability, and illness. Uninsured risk is an issue for agricultural producers, who are vulnerable to changing weather and price fluctuations, and the vast Figure 18: Percentage of Rural Households Affected by Shocks by Consumption Quintile, 2011 majority of Togo’s rural poor depend upon rainfed agriculture. In 2011, over 70.0% 50 percent of households in 60.0% the bottom three quintiles of the consumption 50.0% Poorest quintile Second poorest Third Fourth Richest distribution claimed that 40.0% drought or badly timed rainfall have adversely 30.0% affected them in the 20.0% previous year (Figure 18). Households also report 10.0% experiencing adverse price 0.0% movements, crop and animal disease, floods, and illness of a household member in significant percentages. Soil degradation, high input prices, and weather shocks were reportedly more Source: République Togolaise, QUIBB 2011. pronounced problems for poor people. Given such risks, approximately 22 percent of the population was recently estimated to have fallen into poverty as a result of temporary adverse shocks, and another 20 percent of the population was 13 determined to be nonpoor but vulnerable to falling into poverty (World Bank 2012d).24 In 2015, 10 percent of people consume only 20 percent more than the poverty line, and 70 percent of the population lives on under US$3.10 per day (2011 PPP). In the presence of these risks, households without sufficient buffer savings or risk-mitigation instruments will tend to reduce the use of productive inputs, which makes exiting poverty more difficult.25 15. With high levels of poverty and risk, food insecurity remains a major issue. In 2011, the percentage of households Table 8: Percentage of Households without adequate food was highest in the Maritime region, at 80 Facing Lack of Food over Preceding 12 Months, by Region, 2011 percent, followed by Savanes at 65.7 percent and then Kara— Region Percentage the three driest regions, generally. Yet the rate of food insecurity Lomé 59.1 was higher than 40 percent for all regions, including Lomé Maritime 80.0 (Table 8). For those households considered food insecure, the Plateaux 48.6 frequency cited of a poor harvest as the reason increases as one Centrale 41.7 progress north, to 77.5 percent of the food insecure population Kara 56.1 in Savanes (Figure 19). In contrast, the frequency of inadequate Savanes 65.7 financial resources is higher further south. Source: République Togolaise, QUIBB 2011. 16. Climate change increases the population’s vulnerability to weather-related risks. Average rainfall has trended downward since 1946 (Figure 20), and mean temperatures have risen by an estimated 0.24 degrees Celsius per decade from 1960 to 2009 (McSweeney et al. (undated)). The drier, hotter conditions in the poorest, northern part of the country (particularly the Savanes region) will make it increasingly difficult for its residents to generate a livelihood from agricultural activities on which they disproportionately depend. In addition, periodic flooding can cost a significant amount to the economy. In 2010, according to World Bank and government figures, flooding was estimated to have cost 1.2 percent of GDP, and this risk will likely grow with the effects of climate change. 17. Poor people are also vulnerable to local environmental degradation that affects their access to fertile soils, water, clean air, and fisheries. Togo ranks 161st out of 180 countries with respect to environmental performance, according to the 2015 Environmental Performance Index, with an overall score of 27.91 out of 100. By comparison, neighboring countries Benin, Burkina Faso, and Niger rank 150th, 126th, and 142nd, respectively. 18. The cost of various forms of resource degradation, estimated to total 6.8 percent of GDP per year, arises through water and ambient air pollution, land degradation, and coastal erosion (Figure 21). Health outcomes are increasingly affected by air pollution from dust, exhaust fumes, factory smoke, bush fires, and waste incineration (RT 2010). The lost economic value from declining water quality, as a result of pollution from feces, domestic sewage, industrial effluent, filtrate pits, and dumps, is estimated at 1.13 percent of GDP (RT 2010). Moreover, land degradation is estimated to cost 0.82 percent of GDP per year.26 Natural ecosystems are subject to a vicious circle of deforestation due to the use of biomass and increased clearing of land for agriculture, worsening microclimates, declining availability of surface water, rising 24 2006 data. Although no vulnerability assessment has been done using more recent data, these magnitudes are likely to be similar today. By definition, the distribution of shocks is relatively persistent over time, and the risks of a major macro crisis have not diminished. 25 See, for example, Christiansen and Dercon (2011), Osborne (2006), and Zimmerman and Carter (2003), which underscore the importance of risk in farmers’ decisions to utilize lower-investment, lower-return technologies. Risk alone does not generate a poverty trap according to its technical definition, but can induce greater persistence of poverty if there is no expansion of opportunities, change in technologies, or rise in the returns to the assets held by the poor. 26 According to WDI, the rate of forest depletion is over 7 percent of GNI per year. While data sources therefore differ on the economic costs of these trends, the general conclusion is that they are alarming. 14 evapotranspiration, and declining yields (RT 2010). Other geographic assets to the Togolese economy are also at risk. The rate of mineral depletion, at 1.3 percent of gross national income (GNI) per year over the period 2006–2013 (WDI), is also high if this wealth is not reinvested for the benefit of the population. If not addressed more proactively, the mitigation costs of coastal erosion will increase. Out of Togo’s 55 km of coastline, 40 km (the entire coast east of Lomé) is eroding at an average yearly rate of 6–10 meters per year, at an accelerating rate all along the coastline. During some extreme events, this retreat can reach up to 15 meters in four months. In addition to rising sea levels and changing sea and weather patterns, the main causes of erosion have been port construction, sand mining (now illegal), and the construction of a dam in Akossombo (Ghana), which prevents inland sediments from reaching the coast.27 There are no available studies quantifying the economic impacts on poor people, but there are local media reports of the disruption of some fishing livelihoods. The costs to the economy of a failure to put in place a more permanent solution, at least as measured by the annual costs of defensive spending, are high, as shown in Figure 21.28 In addition to these issues, a range of environmental, economic, and social factors threaten Togo’s savannah and wetland biodiversity and ecosystems. 19. Without more data on the distribution of impacts of these issues, it is difficult to rank them with confidence in terms of their poverty impact. Whether directly or indirectly, all of these issues are likely to affect poor people through deteriorating health, reduced agricultural productivity, or shrinking employment opportunities in sectors that depend upon coastal assets. Nonetheless, based on the importance of health as a precondition to well-being, and the size and directness of effects on the incomes of the poor, the most costly environmental issues in terms of sustaining poverty reduction appear to be land degradation and ambient air quality, issues that this study discusses further below. Figure 19: Reasons Given for Food Insecurity by Region Figure 20: Rainfall Trends by Region (Annual Millimeters) 100 80 60 40 20 0 Lomé Maritime Plateaux Centrale Kara Savanes Bad harvest High market price of products Inadequate financial resources Source: République Togolaise, QUIBB 2011 Source: PRIO GRID (monthly meteorological statistics from the University of Delaware (NOAA 2011) 27 As a result, the sediment deficit along the coasts of Togo and Benin is estimated at around 1 million m3/year. It will be important for Togo and its neighbors to mitigate and reverse this damage to protect landed assets along the coast and economic activities that are dependent upon them. More than 90 percent of the country’s industries are located on the coastline, including the port. Already, some local fishing communities have had to adjust by fishing further out to sea, changing occupations, or moving away. 28 The government is considering a US$100 million investment plan to build approximately 100 groins along the coast. However, this plan might prove to be insufficient, and would induce strong negative downstream effects, especially in Benin. 15 Figure 21: Annual cost of environmental degradation by environmental category in 2013, US$ million and percentage of GDP Togo Cost of Environmental Degradation, 2013 Togo Cost of Environmental Degradation, 2013 (US$ million) (% of GDP) 400 3% 350 317 3% 2.50% 295 2.29% 300 2% US$ million 250 % of GDP 200 2% 146 1.13% 150 106 1% 0.82% 100 1% 50 0.04% 20 0 0% Ambient Air Water Quality Land Coastal Zone Nat. Dis. & Air Water Land Coastal Zone Nat. Dis. & Indoor Air Water & Degradation Global Env. Global Env. Sanitation Forest Loss Source: Republic of Togo and World Bank 2015. 20. Certain circumstances tend to render poverty more persistent for the poorest of the poor. Among Togo’s chronically poor population are some specific groups that face greater vulnerability to a life of deprivation. Perhaps the most vulnerable group is poor children affected by disease or disability within the family, as well as orphans and children separated from their biological parents. These groups are especially vulnerable to neglect and exploitation; for example, orphans are 13 percentage points less likely to attend school (World Bank 2012d). Poor and socially vulnerable children are at greater risk of malnutrition, of engaging in child labor in its worst forms, or of being caught in human trafficking. For both boys and girls, according to the United States State Department, falling into forced servitude is a peril of poverty and vulnerability that disproportionately affects young women and children.29 Other vulnerable groups face additional challenges. Having a disability is linked with higher poverty rates. For example, in Lomé, a household with a disabled household head is 17 percent more likely to be poor than a household with an able- bodied head, and those affected by HIV/AIDS and other diseases are most vulnerable to lifelong poverty.30 21. Safety net programs to address the vulnerability issues in Togo have historically focused on emergency interventions, but have increasingly included a broader array of programs. Interventions in Togo include in-kind transfers such as school feeding, nutrition supplements, and food aid, as well as cash transfers, temporary employment through labor-intensive public works, and waivers for services (for example, free cesarean sections or school fee waivers). More spending goes to reactive, coping responses than preventative measures; approximately half of the total amount spent on safety nets has been for emergency in- kind distribution, and in-kind transfers of food are the most common type of safety net program used. 29 Togo is a Tier 2 country in the Trafficking in Persons 2015 report, the tier where most countries of the world fall. (Tier 2 Watchlist and Tier 3 are worse rankings, and Tier 1 the best.) According to the United States State Department, “Togo is a source and transit country for men, women, and children subjected to forced labor and sex trafficking. The majority of Togolese victims are exploited within the country; forced child labor occurs in the agricultural sector —particularly on coffee, cocoa, and cotton farms—as well as in stone and sand quarries. Children from rural areas are brought to the capital Lomé and forced to work…or are exploited in prostitution. Near the Togo-Burkina Faso border, Togolese boys are forced into begging by…religious teachers… Togolese girls and, to a lesser extent, boys are transported to Benin, Gabon, Nigeria, Ghana, Cote d’Ivoire, and the Democratic Republic of the Congo and for ced to work in agriculture. Children from Benin and Ghana are recruited and transported to Togo for forced labor. Traffickers exploit Togolese men for forced labor in agriculture and Togolese women as domestic servants in Nigeria. Togolese women are fraudulently recruited for employment in Saudi Arabia, Lebanon, the United States, and Europe, where they are subsequently subjected to domestic servitude or forced prostitution.” http://www.state.gov/j/tip/rls/tiprpt/countries/2013/215635.htm 30 In 2009, the Joint United Nations Programme on HIV/AIDS (UNAIDS) estimated that approximately 120,000 Togolese were living with HIV/AIDS, 62 percent of whom were women. There are about 66,000 orphans due to AIDS between the ages of 0 and 16. Increased health costs, reduced productivity, and the effects on families of AIDS-related deaths makes these households particularly vulnerable 16 Additional transfer programs target highly vulnerable groups, and coverage has been limited, with the exception of universal programs like fee waivers for primary education. As a result, total expenditures on safety nets have been low as a share of the national budget, as a share of GDP, and compared with expenditure levels in other African countries (World Bank 2012d).31 31On average, between 2008 and 2010, not including general price subsidies, annual spending on safety nets amounted to 12 billion FCFA, which represents about 7 percent of total social spending in the country, 1.8 percent of the national budget, and 0.5 percent of GDP. 17 Macro-Micro Linkages and Pathways out of Poverty Main Messages:  Togo has been unable to sustain inclusive growth—growth that is broad-based across sectors and inclusive of a large part of the country’s labor force—over recent decades.  Private investment has been persistently low, as have productivity growth, firm entry, labor productivity, and wage growth.  Formal firms, which have 7.5 times greater labor productivity than informal firms, are few, and wages of nonfarm workers are 6 times those of on-farm workers.  Agricultural productivity growth has been relatively flat since 1990, in contrast to that of neighboring Benin, with its similar agro-climatic conditions.  For Togo to accelerate and sustain poverty reduction, it will need to unleash a more vigorous, inclusive, and sustainable growth process, led by private economic agents in both agricultural and nonagricultural sectors, and supported and amplified by more effective government policies, public investments, and public services, to: o Generate growth in increasingly formal and productive off-farm businesses for more remunerative employment; and o Transform the agricultural sector into a more competitive, higher value-added sector.  More specific pathways and the key constraints or blockages along these pathways will be identified in Chapter 4. 22. Over recent decades, Togo has been unable to sustain a growth process that is sufficiently robust and broad-based across sectors to include a large part of the country’s labor force—growth to which poor people contribute and from which they benefit.32 Inclusive growth requires Figure 22: Private Investment as a Percent of GDP, Togo and participation by private economic agents, Comparators including smallholders in agriculture, micro and 25 small businesses, and larger private entrepreneurs who can identify and make 20 Percent of GDP productive investments, create value, and stimulate increasingly productive and 15 remunerative employment opportunities. 10 23. Togo has not achieved an adequate level of private investment. The average level 5 of 12 percent of GDP over 1996–2014 is lower than for comparator countries (Figure 22). 0 Foreign direct investment (FDI), which averages around 5 percent of GDP over the past decade (WDI), is, however relatively high, due most recently to investment in the country’s port 1996-2000 2001-2005 2006-2010 2011-2014 (WDI). Thus, domestic private investment is Source: WDI particularly low. The rate of entry of new 32 See Ianchovichina and Lundstrom (2009), who provide this definition of inclusive growth. 18 registered firms, a proxy for the dynamism of the formal private sector, is also low relative to that of Sub- Saharan Africa and comparator countries such as Nepal and Ghana (Figure 23), and total factor productivity growth has been negative for the decade through 2010 (Figure 24). The main factor contributing to aggregate growth has been increasing labor supply, which does not bring higher average incomes if not accompanied by increased physical and human capital. Total capital stock has grown slowly, with public investment totaling, on average, 5 percent of GDP over the past 15 years, and dipping to negative levels in some periods. Allocative efficiency is low; transferring 1 percent of labor from agriculture to nonagricultural sectors would increase output by an estimated 1.9 percent (IMF 2015a). Figure 23: New Firm Density (Number of Firms Figure 24: Contributions to Growth 1991-2010 registering per population age 15-64) 9.000 100% 8.000 90% Capital Stock (α 80% * gK) 7.000 70% 6.000 Share of Real GDP Growth 60% Labor ((1-α) * 5.000 gL) 50% 4.000 40% 3.000 Human Capital 30% per Labor ((1-α) 2.000 20% * gh) 1.000 10% Total Factor - 0% Productivity (gA) -10% -20% Total Period -30% -40% 1991-2010 1991-2000 2000-2005 2005-2010 Source: World Bank Doing Business Note: National accounts data beyond 2010 are projections only. Source: World Bank staff calculations. 24. Togo’s enterprises are overwhelmingly smaller and less formal than is typically required for a dynamic economy with increasing productivity. Firm size (as measured by the number of employees per firm) is positively correlated with per-capita income internationally, in part because larger firms tend to be more productive.33 Although reliable data do not exist on Togo’s firm sizes, tax records for formal firms suggest that at Figure 25: International Comparison of least 90 percent of such firms have fewer than six employees, Indicator of informality Relative to Per and a high percentage of Togo’s workforce is informally Capita GDP (2011 US$) (Togo in Red) employed, even relative to West Africa (Grimm et al. 2011). 100 Percentage of Formal Firms with Informal Competitors In addition, size and formality are associated with greater 80 productivity: value added per worker in Togo’s formal sector 60 is approximately 7.5 times greater than that in the informal sector (World Bank 2015f, 2015g). Yet even for a country with 40 low income, Togo’s economy is more informal than is typical 20 (Figure 25.) 0 25. In addition, agricultural performance has not 0 10000 20000 GDP Per Capita 2011 USD 30000 exhibited positive trends. Accounting for approximately 41 Source: WBES and WDI 33 See, for example, Poschke (2014) and Haltiwanger et al. (2010). 19 percent of Togo’s GDP,34 Figure 26: Agriculture Value Added per Worker Togo and Comparators productivity in agriculture has (Real 2005 US$) been relatively stagnant since 1200 1990. Agricultural productivity 1000 per worker is higher than in countries with drier climates 800 (Figure 26). Its performance is 600 relatively flat, however, and even 400 growth in 2014 does not put it above its 2008 levels. These 200 trends contrast with those of 0 Benin, which has similar agro- climatic conditions, but which Benin Burkina Faso Guinea-Bissau entered 1990 with lower value Mali Senegal Tanzania added per worker. Although Togo’s agricultural productivity Togo has increased since 2009, there Source: WDI remains a major gap with that of its neighbor. Moreover, cereal yields are the lowest of comparator countries, including Ghana and Côte Figure 27: Cereals Yields (Average 2009-2013) in d’Ivoire, which fall in a similar climatic zone (Figure kg/ha 27).35 The low cereals yields for Benin coupled with high 5000 agricultural productivity per worker suggest that some of 4000 the gains in the latter are due to higher value crop choice. 3000 26. Given trends in productivity, demand for 2000 labor and the remuneration of work are low, 1000 especially in agriculture. One-third of active workers are either unemployed or underemployed. Togo’s 0 unemployment rate was 7.4 percent in 2011, an increase over an estimated 6.4 percent in 2006, despite a decline in labor participation rates from 79 to 70 percent. In addition, 23 percent of active workers were Source: WDI underemployed—that is, working fewer hours than desired or in a lower-skilled job than would be Table 9: Employment and Median Earnings commensurate with their level of education and Median % of training. Wages are generally low, especially earnings remunerated for those employed in agriculture. As shown in (year) workers Table 9, median earnings of agricultural Farm self-employed 100,000 34.7 laborers and on-farm self-employed workers in Farm wage-employed 60,000 7.3 2011 were approximately one-quarter those for Nonfarm wage-employed 360,000 19.4 Nonfarm self-employed 272,790 38.6 nonfarm self-employed and nonfarm wage Note: Only remunerated workers reporting earnings are included. employed workers (at 60,000 and 100,000 Source: World Bank staff, using QUIBB 2011 FCFA per year, relative to 272,790 and 34This figure reflects the mean value for 2010–2014, as derived from national accounts data. 35Cereal yields are a measure of the productivity of land (whereas per-worker productivity proxies for the productivity of labor). Data on agriculture value added per worker are not available for Ghana or Côte d’Ivoire. 20 360,000 FCFA per year, respectively).36 Table 10 demonstrates the relationship between hourly earnings, hours of work, and consumption levels. As shown, median hourly earnings for those at the 50th percentile of the consumption distribution are over five times those of the bottom decile. Combining higher wages with the ability to work more hours, earners in the top decile of the distribution are able to earn over 50 times more than those in the bottom decile. Table 10: Hourly Earnings Distribution, All Jobs, 2011 FCFA Consumption Percentile 10 25 50 75 90 Median annual earnings all jobs 27,984 77,940 216,000 600,000 1,558,800 Average hours worked per week 26 30 33 40 40 Hourly earnings all jobs 21.05 50.00 125.00 288.68 750.58 Source: World Bank staff using QUIBB 2011 27. A shift from agriculture to off-farm private employment has contributed to Togo’s recent improvement in poverty rates. Given recent growth in tertiary sectors and construction and public works, between 2011 and 2015 the percentage of the population employed as independent agriculturalists fell from approximately 48 to 38 percent, while salaried private sector workers increased from 11 to 17 percent (Figure 28). Although the poverty rate for independent agricultural workers fell Figure 28: Types of Employment and Poverty Rates over the period from 78 to 73 percent, 90 since the poverty rate (49 percent) is 80 lower for private sector employees, 70 this shift out of agriculture is 60 50 responsible for a substantial part of 40 the decline in poverty over the period. 30 Shifts between employment 20 categories are responsible for 10 reducing the poverty rate by 0 2011 2015 2011 2015 approximately 5 percentage points, and increasing agricultural incomes Percent of Population Poverty Rate by 1.8 percentage points.37 Public sector salaried Private sector salaried 28. Togo’s population is mobile Other independent Independent agriculturalist and responsive to economic Source: INSEED 2016, using QUIBB opportunities. Approximately 49 percent of the working-age population has moved between prefectures (a subregional unit, of which there are 39 in Togo) since birth, and approximately 34 percent have moved between regions (QUIBB 2011). Many have moved to take higher- paying occupations and diversify household income sources, as illustrated by the fact that 16 percent of households receive domestic private transfers averaging approximately 64,000 FCFA per year (or 26 percent of GNI per capita in 2014). In addition, many Togolese live and work outside the country and send back remittances. Eight percent of Togolese households receive transfers from overseas, averaging 118,000 CFA (approximately US$238). In total, this represents 11 percent of GDP in 2010 and an estimated 8 percent of GDP in 2014, making Togo somewhat dependent on remittances. 36 These are close to the poverty line of 264,000 FCFA per capita in that year, although one worker must typically support several household members. 37 World Bank staff decomposition, using QUIBB 2011 and 2015. These improvements are partially offset by increased poverty rates outside of agriculture, and total changes are also affected by shifts in the dependency ratio and employment rates of the working-age population. 21 3.4.1. Implications for Togo’s Pathways out of Poverty 29. To accelerate and sustain poverty reduction, Togo will need to unleash a more vigorous, inclusive, and sustainable growth process, led by private economic agents and supported and amplified by more effective government policies, public investments, and public services. International evidence suggests that the conditions that spur sustained, broad-based growth also tend to reduce poverty (Ravallion 1995; Kraay 2006), as well as shared prosperity (Dollar et al. 2014). Moreover, the efforts of Togo’s population engaged in productive work will be needed to lift almost half of the population out of poverty. Given the economic trends and poverty dynamics discussed above, an essential pathway to poverty reduction for Togo will be growth in increasingly formal and productive off-farm businesses that can create employment opportunities. Alleviating urban poverty, which may continue to grow as migrants arrive from rural areas, requires urban-based employment sufficiently productive to provide a living wage, as well as more resources to finance improved services. At the same time, given Togo’s unexploited comparative advantage in agriculture and concentration of poverty in rural areas, an additional key pathway for poverty reduction will be to transform this sector toward more productive, higher-value activities (potentially including livestock, vegetable and tree crops, and fisheries), and more environmentally sustainable production by both smallholders and commercial operators. Pursuing these pathways requires that private actors, including agriculturalists, micro and small businesses, and larger private entrepreneurs identify and make productive investments, create value, and stimulate expanding and increasingly remunerative employment opportunities.38 Generally, rising income in agriculture and urban-based sectors will tend to increase demand for goods and services provided by the other; strengthen supply linkages; and increase the productivity of land and labor—the assets that poor people possess. Remittance income, food security, and the overall resilience of the economy would also rise with more inclusive growth along these pathways. Within a conducive public governance framework, growth can in turn provide the resources needed to invest in the public goods and services needed to enhance well- being and equity of opportunity, while also shoring up fiscal and environmental sustainability risks. Additional pathways, therefore, must also be taken to strengthen the equity and sustainability pillars of poverty reduction. To further define and pursue these pathways requires identifying the key constraints blocking Togo’s progress, so that interventions can be prioritized and often-difficult reforms well targeted. Identifying Togo’s key constraints to growth and to the inclusion of the poor, as well as key sustainability risks, is the topic of Chapter 4. 38According to both theory and empirical evidence, wages can only rise along with employment in a sustained manner if complementary investments are made and/or total factor productivity increases. 22 4. Togo’s Key Constraints to the Twin Goals Diagnostic Framework, Key Questions, and Approach Main Messages:  As detailed in Chapter 3, Togo has failed to deliver on all three pillars of the SCD framework: (1) it has shown inadequate inclusive growth—and indeed shows a long-run trend of negative real growth per capita, albeit partially reversed by a recent spate of growth; (2) when growth has occurred it has not proven sustainable, and sustainability risks remain high; and (3) the government has not adequately ensured that growth is consistently inclusive and that opportunities are equitable.  The SCD framework, detailed for the Togolese case, is presented at the end of this section, with the key SCD pillar questions, the key symptoms of Togo’s difficulties, and remaining questions to be answered.  Given Togo’s status as a fragile state and growing international evidence linking governance to economic performance, the framework includes the questions: Is poor governance a key constraint to (Togo’s) poverty reduction? If so, how (through which broad channels) does Togo’s governance affect poverty?  In addition to characterizing overall governance challenges, the SCD identifies and prioritizes more specific constraints by examining the evidence on a full range of candidates. The issues to be examined can be broadly classified (along the lines of the Growth Diagnostics Framework by Hausmann, Rodrik, and Velasco (HRV)) as follows: Are there large distortions affecting private economic incentives that are binding for growth or key constraints to equity/inclusion? If so, what are they? Is access to finance adequate to support (or rather a binding constraint to) inclusive growth? How costly are infrastructure constraints for inclusive growth or equitable opportunities, and which ones are most costly? Are there key failures in delivering social services, important for building the human capital needed for growth—that is, sufficiently skilled and healthy workers—or for inclusion? If so, which areas are most constraining?  Sustainability issues, discussed in the previous chapter, are integrated into the most relevant sections of the report. 30. The primary task of this study is to diagnose the underlying reasons for Togo’s poor performance, as described in Chapters 1–3. Each of the three central SCD questions is relevant: What are the key constraints to (and opportunities for) economic growth in Togo? What are the key issues constraining inclusion of poor people? What are the country’s main sustainability risks? (Appendix Figure 1: SCD Guidance on Framing the Issues). A logical framework for organizing the diagnostic is presented at the end of this section in the form of a diagram that maps the reasons for poor performance in Togo, from deeper causes at the bottom to the high-level SCD pillars at the top (Figure 29). In Togo’s case, the observed outcomes include insufficiently inclusive growth, poor sustainability, and inadequately equitable opportunities. Insufficiently inclusive growth is associated with slow structural transformation, low labor productivity and wages, underemployment, and low agricultural productivity, as discussed in Section 3.3. Although Togo’s failure to sustain growth in the past is clear, the question remains: What are Togo’s key sustainability risks today? 23 31. Beneath the three high-level outcome pillars are the general drivers of these outcomes. First is low private investment and entrepreneurship. Private investment and entrepreneurship—the process of identifying and pursuing economic opportunities and creating value—are generally the basis for sustained, inclusive economic growth over the long term, as illustrated by Togo’s experience with state-led growth in the late 1970s. At the same time, Figure 29 captures Togo’s inconsistently pro-poor distribution of growth (Section 3.1) due to a lack of pro-poor policies, as well as slow progress in improving human development indicators (Chapter 1) as drivers of inadequately equitable opportunities, but also potentially of low growth. 32. The bottom of Figure 29 explores whether poor governance is a key constraint and central challenge for poverty reduction in Togo and, if so, how—through what channels—it might cause or perpetuate poverty. “Governance” is defined as the exercise of economic, political, and administrative authority to manage an entity’s (in this case a country’s or a sector’s) affairs, including the mechanisms and processes through which citizens and groups (including organizations and interest groups) articulate their interests and through which these interests are mediated and reflected in the exercise of authority. Given Togo’s status as a fragile state, as well as the growing international evidence linking governance to economic development, these questions could prove fundamental to contextualizing the other constraints identified, which may not be amenable to purely technocratic solutions.39 They may also present key sustainability risks. 33. In addition, the diagnostic would not be complete without identifying key specific policy or institutional constraints—in particular, those that are either binding constraints to growth or otherwise key to inclusion or sustainability.40 To assess which specific constraints are binding for growth, the diagnostic applies an augmented version of the Growth Diagnostics Framework developed by Hausmann, Rodrik, and Velasco (HRV) (Hausmann et al. 2005). HRV represents the most comprehensive feasible method for responding to the question posed in the growth pillar of the World Bank’s SCD guidance (Appendix Figure 1): “What Constrains Private Investment and Entrepreneurship?” The possible constraints affecting private economic activity are many, but can be grouped into four broad questions: (1) are there large distortions affecting private economic incentives to contribute to Togo’s growth and, if so, what are they?; (2) is access to finance adequate to support (or, rather, binding for) inclusive growth?; (3) how costly are infrastructure constraints for inclusive growth, equitable opportunities, and well-being, and which are most constraining?; and (4) are there key failures in delivering needed human capital for growth—that is, sufficiently skilled and healthy workers—and/or are there key deficits in the area of social service delivery, whether for inclusive growth or well-being? Within each broad question are a number of more specific issues to be examined. Combined, they span the key questions posed in the HRV tree (Appendix A, Box 3).41 34. To implement the HRV approach to diagnosing constraints to growth, four types of hypothesis tests of a binding constraint to growth are used (Box 1). The spirit of these diagnostic tests, proposed by Hausmann, Klinger, and Wagner (2008), is to ask: if the lack of a factor—for example, human capital or peace and security—were a binding constraint, then what economic behavior or symptoms would one expect to see in the economy? Does one observe these symptoms? If a constraint is binding, given the need for broad-based growth, it is also key to poverty reduction. Appendix A provides greater detail on the methodology, its limitations, and other methodological options considered, as well as the rationale for comparator countries chosen (Appendix Table 1) and details on Togo-specific data used (Appendix A, Table 2). 39 See, for example, Açemoglu and Robinson (2012). 40 We use the term “binding” as synonymous with “key” for the inclusive growth pillar, and “key” for the equity and sustainability pillars, as the term “binding” may not be as apt with respect to all issues. 41 One question in the HRV tree that is not included in the diagram is whether a lack of natural capital is binding on growth. This (and environmental sustainability issues) are addressed in an integrated manner in this SCD and is not shown in the diagram to simplify the presentation. 24 35. Although the HRV Box 1: The Mindbook Approach to Diagnostics methodology was designed to The Mindbook (2008) proposes a way of viewing data that matches and diagnose constraints affecting checks symptoms against a series of hypothesized conditions (or “diseases,” to use a medical analogy). It provides examples of tests growth that is broadly based and motivated by the general question: If the lack of a factor—for example, broadly shared, this study augments human capital, road networks, or electricity—or of a condition—such as the approach to ensure that the peace and security or predictable property rights protections—were a constraints identified are also key to binding constraint to growth, then what symptoms would one expect to see poverty reduction. First, it conducts a in the economy? And does one observe them? separate diagnostic within the This approach proposes to test for four possible conditions or symptoms of agricultural sector, where growth is a binding constraint, as follows: (1) the costs to economic actors necessary for poverty reduction in the (businesses and producers) of the constraint are high; (2) economic actors short- and medium- term. Second, it would be attempting to get around the constraint; (3) actors or activities focuses efforts on identifying that are intensive in the constrained factor would tend not to survive or constraints that affect nonfarm sectors thrive (for example, one would not expect to see water-intensive where employment opportunities can manufacturing in a desert); and (4) over time, periods when the constraint be expanded. In addition, the SCD was relaxed should see a positive growth response (unconditional on other factors.) identifies constraints that are not binding for growth but are otherwise Source: Hausmann, Klinger, and Wagner (2008). key for inclusion. These could be constraints that specifically affect the real incomes or the well-being of the poorest or least advantaged groups, whether these arise through human capital constraints, discrimination, or deprivation of fair or adequate returns to the assets of poor people (such as land and labor). To prioritize inclusion appropriately, the diagnostic examines evidence, where available, of: (i) significant lost income for poor people (or possibly adverse distributional effects), in the case of constraints to growth; and in the case of service delivery, of (ii) unusual disparities in access; (iii) the number of people affected; and/or (iv) severe losses in terms of well-being for poor people.42 Finally, in identifying and prioritizing sustainability risks, the approach is to weight the approximate magnitude of effects on growth and on poor people, and the likely timeframe for such effects to occur. 36. This diagnostic draws upon a wide array of sources. These include household surveys, agricultural census surveys, informal and formal firm surveys, impact evaluation data, third-party indicators of policy performance, data on aggregate outcomes, press reports, sector-specific indicators, reports, research, and interviews. At the time of launching the study, the team held a series of meetings with government officials as well as civil society and private sector groups, both in Lomé and in the country’s interior, to help frame the issues and context. In addition, because data at the level of firms—the engines of growth—were lacking, the team conducted a survey of formal firms in July 2015 (TFFS). This survey was drawn from the population of all firms filing tax declarations, and includes a larger and more representative sample of formal firms than do the World Bank Enterprise Surveys (WBES). In particular, the TFFS includes microenterprises—firms with fewer than five employees, which were estimated to comprise 40 percent of all formal firms. 43 Whereas the respondents to the WBES for Togo, conducted in 2009, comprised 58.7 percent small firms (with over five employees and less than 500 million FCFA in revenues), 29 percent medium-sized firms, and 12.3 percent large firms, the 2015 TFFS included much smaller enterprises: 34.2 percent were microenterprises, 45.5 percent were small enterprises, 15.8 percent were medium-sized enterprises, and 4.5 percent were large 42 This does not necessarily imply that a specific measure of inequality would be reduced, but that the effect of the constraint is negative on the poor. It was not feasible to assess each policy or circumstance affecting the distribution of benefits or costs within the population, given the data and time available. Moreover, given the World Bank’s twin goals, this is not required for an SCD. 43 The population contained firms with revenues ranging from 15,000 FCFA (US$30) to over 108 billion FCFA (US$218 million) annually. 25 enterprises.44 Ten percent of firms earned less than US$4,700 in annual revenues, 25 percent less than US$15,000, and 50 percent less than US$71,000. The TFFS surveyed firms in Lomé, as well as Sokode and Kara, the country’s second- and third-largest cities. The questionnaire departed somewhat from a standard WBES in that it was more specifically designed to permit tests of binding constraints.45 Finally, formal consultations were conducted in three of the country’s regions, plus Lomé, with a broad range of stakeholders to discuss and contextualize general findings. 37. The rest of this chapter is broadly organized according to the structure of the logical framework diagram (Figure 29). First, it considers the issue of governance (at the bottom) as it relates to Togo’s history and political economy. Next, the report proceeds broadly from left to right across the row on “specific key (including binding) and moderate constraints,” to ask whether an issue (for example, a lack of sufficient human capital, gender equality, infrastructure, lack of financing, or other constraint) represents a binding constraint to broad-based growth or a key constraint to inclusion. The focus of this chapter is on presenting evidence to answer these questions, rather than describing each problem in detail. The question on whether there are key economic distortions and risks to private entrepreneurship is addressed in Sections 4.4 and 4.5. Section 4.6 diagnoses constraints in agriculture separately, covering the range of HRV questions where relevant. It is presented next given the significant overlap with issues explored in the pervious two sections. Section 4.7 resumes the issue-by-issue inquiry shown in Figure 29 by answering the question of whether a lack of financing is a binding constraint to inclusive growth. Section 4.8 presents the evidence available regarding inadequate provision of infrastructure. Sections 4.9–4.11 present the growth and equity issues associated with investment in and utilization of Togo’s human capital—namely, education, skills, health, and disease prevention, as well as gender bias issues. 44 Population weights were used to compute all descriptive statistics to ensure that they were representative of the underlying population. 45 One must always be careful in interpreting firm-level data to take into account that firms in existence are somehow able to circumvent constraints and therefore may not fully represent all potential investors or entrepreneurs. At the same time, it is likely that the issues that impact these firms and the ways they operate to circumvent constraints are informative not only regarding their own constraints, but those of the investors and entrepreneurs, farmers and small business entrepreneurs that are too discouraged to invest. 26 Figure 29: Diagnostic Framework and Key Questions Levels of What Key Constraints Does Togo Face in Causation Eliminating Extreme Poverty? Inadequate (Inclusive) Growth Low Sustainability: Inadequate Equity of Proximate (Slow structural transformation, low labor productivity and wages, under- What are the main sustainability Opportunity and Well- Causes of employment, and low agricultural risks? Being for Poor People Poverty productivity) 0) Outcomes of Inconsistently pro-poor these Low private investment and Slow progress in improving distribution of growth Constraints entrepreneurship (including in human development and lack of pro-poor smallholder agriculture) distributional policies Specific Key/ What Are the Key Are There Large How Costly Are Binding and Is Access to Finance Various Weaknesses and Impacts Distortions to Moderate Adequate or Binding? Infrastructure in Human Capital and Economic Incentives? Constraints Constraints? Social Service Delivery? If so, how does poor governance affect poverty? Deeper Causes Is poor governance a key constraint? Medium blue = findings. Light blue = questions remaining. 27 Key Constraint 1: Governance Challenges Main Messages:  Togo’s system of governance has provided relatively weak incentives to public institutions for accountability to the Togolese population, and these institutions in turn do not provide a favorable policy framework for inclusive growth. This governance challenge presents a key, cross-cutting constraint to poverty reduction, and operates through the following channels: o High corruption and low government effectiveness in formulating and implementing policies affecting private economic activity, including agriculture. o Poor fiscal governance. o Low government effectiveness in setting priorities for and delivering public goods and services.  These governance failures result in a high risk of recurrent fiscal crisis and ongoing risk of political instability, as well as more specific policy and institutional constraints to poverty reduction, to be diagnosed in the rest of this report. 38. Togo faces challenges in key aspects of governance that are central to the achievement of sustained economic growth. It ranks below all comparator countries on the Worldwide Governance Indicators (WGI)—voice and accountability, rule of law, government effectiveness, and control of corruption, and worse than all comparators except Bangladesh and Nepal on regulatory quality (Figure 30). Among these dimensions of governance, at least two have been related empirically to growth in Figure 30: Worldwide Governance Indicators, Percentile Rank, 2014 international studies. One is control 70 of corruption, defined as “the extent 60 to which public power is exercised 50 for private gain, including both petty and grand forms of corruption, as 40 well as ‘capture’ of the state by elites 30 and private interests.” The other is 20 government effectiveness, defined as “the quality of public services, the 10 civil service and degree of 0 independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies.” Control of Corruption Government Effectiveness Although Togo has made major Regulatory Quality Rule of Law efforts to improve its government Voice and Accountability effectiveness since 2005, it still ranks above only 9.6 percent of countries in the world on the WGI measure. It rates only slightly higher—in the 16.8th percentile of countries—on control of corruption. On this indicator, Togo’s ranking has actually declined since 2010 (Figure 31). Moreover, for Togo, as in the international data, improvements in either of these indicators appear to positively 28 affect growth. In years when either indicator of governance has risen, growth has responded positively in subsequent years (Table 11).46 4.2.1. Summary of Historical and Political Economy Factors 39. Formerly a part of the German protectorate Togoland, Togo was granted as a mandate to France by the League of Nations after World War I and remained a Figure 31: Trends in WGI on Control of Corruption, Government French colony until 1960. The Effectiveness, and Regulatory Quality country’s first post-independence 35 constitution, drafted in 1961, gave Percentile of rated countries 30 the presidency a quasi-monopoly on executive power and the authority to 25 dissolve the elected national 20 assembly, thereby providing no real 15 legislative check on the power of the president. Early difficulties in 10 establishing independent civil 5 institutions, effective political competition, or other systemic 0 checks on the dominance of the executive have since impeded the establishment of accountable public Control of Corruption: Percentile Rank Regulatory Quality: Percentile Rank institutions. This has in turn Government Effectiveness: Percentile Rank adversely affected the effectiveness Poly. (Government Effectiveness: Percentile Rank) of state action and limited country’s economic development.47 40. Efforts to introduce effective political competition and civilian rule lost traction early. After a short period of struggle to establish and preserve multipartyism, Togo experienced two military coups, the second of which occurred in 1967 when Etienne Eyadéma (later renamed Gnassingbé Table 11: Vector Auto-regression Results of WGI Sub- Eyadéma) took power. He subsequently ruled Components on Log GDP for 38 years until his death in 2005. Lag 1 Lag 2 41. Under President Eyadéma, Togo’s political and economic systems became Government Effectiveness 0.174*** -0.007 increasingly centralized. The president’s Control of Corruption 0.102*** 0.082** office appointed the officials and controlled the ***Statistically significant at 1 percent level. ** Statistically significant at 5 percent level. budgets of all subnational government entities, including prefectures and municipalities, and influenced the selection of traditional chiefs. The ruling party, the Rally for the Togolese People (RPT in its French acronym), dominated all levels of the state bureaucracy. The Eyadéma Government also adopted increasingly state-controlled economic policies. Whereas the period 1960–1973 was a phase of broadly pro-market, open economic policies, in the mid-1970s 46 While this correlation does not prove causation, one can say that improved governance “Granger caused” the response, meaning that changes in the governance indicator help to predict GDP in subsequent periods.. 47 See Açemoglu and Robinson (2012) for a historical analysis of the role of what they call “inclusive” versus “extractive” governance institutions, and Açemoglu et al. (2014) for recent empirical evidence linking democratic institutions to growth. 29 the government began shifting aggressively to inward-oriented, state-led industrial development policies (World Bank 1996). It created public enterprises, nationalized private companies, adopted stringent price controls, and instituted high rates of effective protection, averaging over 200 percent and reaching over 600 percent in some sectors. By 1976, an estimated 68 percent of mining and 48 percent of manufacturing sectors were state-owned (Tchaboure and Kodjo 2004).48 The executive branch directly or indirectly controlled all important economic activities, including strategic state-owned enterprises producing cotton and phosphates, Togo’s main export commodities. Without more scope to operate, the private sector shrank, and as the government expanded, fiscal deficits became a perennial problem. With large public spending programs, undisciplined budget flows between the government and state-owned enterprises (SOEs), and inadequate fiscal receipts, the government began to rely increasingly on external borrowing. Although fiscal stimulus initially helped maintain GDP growth through 1980, public debt service increased from Figure 32: Official Development Assistance to Togo as a Percent of GNI 11 percent of fiscal revenues in 1973 to 76 percent in 1981. As soon as Togo 20 experienced a significant terms of trade 18 shock, as it did in the late 1970s, its debts 16 became unpayable. 14 Percent of GNI 12 42. Between 1979 and 1990, with 10 the aid of the World Bank and the 8 International Monetary Fund (IMF), 6 Togo took steps to implement 4 structural adjustment programs to 2 improve public sector management, 0 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 rehabilitate and privatize viable public enterprises, and liquidate nonviable ones.49 Programs designed to improve Source: WDI economic incentives were adopted—for example, to liberalize some agricultural markets, simplify the tax system, lower and unify tariff rates, and abolish many price controls and the state’s monopoly on imports (World Bank 1996). Growth returned from 1984–1989, despite an unfavorable external environment, and private investment more than doubled from 4 percent to 10 percent of GDP. 43. Subsequent years were marked by demands for more open and democratic governance, political instability, and recurrent fiscal difficulties. Internal pressures for multiparty democracy had begun to grow in the late 1980s, and by 1991 Togo had entered a prolonged period of political crisis. Official development assistance fell from 1992 to 2002 (Figure 32), and the declining level of partner engagement exacerbated the government’s difficulties in delivering public investments and services. In 1999, after several years of political instability, the government signed the Lomé Framework Agreement, which included a pledge by the president to respect the constitution and not seek another term in office. It also included the negotiation of legal status for opposition leaders and former heads of state (including their immunity from prosecution for acts in office) and the provision of rights and duties of political parties and the media. The president also agreed to dissolve the National Assembly in March 2000 and to hold new legislative elections, to be supervised by an independent electoral commission. However, after a number of postponements and an opposition boycott of the eventual election, the resulting legislature amended the constitution to allow unlimited presidential terms.50 48 The phosphates industry was nationalized in 1974. See Decalo (1990), p. 58. 49 Togo privatized 30 of 73 public enterprises under this program (World Bank 1996). 50 http://www.state.gov/outofdate/bgn/togo/196489.htm; http://www.globalsecurity.org/military/world/war/togo.htm 30 In 2002, when the country could no longer pay its debts, the World Bank joined other donors in suspending its assistance. In 2005, President Eyadéma died suddenly and the military named his son, Faure Gnassingbé, as head of state, in lieu of the speaker of the National Assembly as stipulated by the Constitution.51 The government later reversed itself and agreed to hold near-term presidential elections, and in an election marked by violence and widespread instability, President Faure was declared the winner.52 A further decline in donor support aggravated unsustainable public debt levels, which grew to almost 115 percent of GDP in 2005 (IMF 2007). 44. Steps taken since 2006 have helped stabilize the country and resulted in some reform. In August 2006, a national dialogue involving various political parties led to the government and opposition signing a Global Political Accord, ushering in a new round of democratic reforms, including the professionalization of the military. Legislative elections in 2007 were deemed free and fair. These moves brought optimism regarding the government’s commitment to fundamental reform and the full reengagement of development partners. The Togolese government has since delivered a range of structural economic reforms, and on this basis achieved debt relief under the Heavily Indebted Poor Countries (HIPC) initiative in 2010, as well as additional multilateral and bilateral debt relief. Togo was named a Top Reformer by Doing Business in 2015 for significant improvements on the cost of starting a business, registering property, protecting minority investors, and paying taxes, jumping from 164th in the rankings in 2014 to 152nd in 2015 and then to 150th out of 189 countries in 2016. Other steps have been taken recently to increase transparency, such as the publication of an audit of public procurement (Grant Thornton 2015) and the reestablishment of a national anticorruption commission. Some progress has been made to improve budget transparency and public administration. The Office Togolaise des Recettes (OTR) was established to alleviate corruption and complexity in the country’s tax administration. Indicators of democratic governance have also improved. Freedom House has reclassified Togo as “partly free,” an improvement on its 2006 designation as “not free.” Similarly, its ranking in the Economist Intelligence Unit’s Democracy Index improved from 164th out of 167 countries in 2006 to 130th in 2015. 45. Yet the scope and success of reform efforts have been limited by the lack of strong, independent institutions that can adopt and translate reform measures into more meaningful change.53 Decision making remains centralized, and the office of the president appoints the prime minister and all high-level administration officials. Despite calls for decentralization as a means to introduce greater accountability and permit improved service delivery at the regional level, prefects and mayors are chosen by the central government. In addition, the government faces continued pressure to implement more fully the terms of the Global Political Accord. Although the number of military officers in high government office has diminished recently, progress on professionalizing the military and placing it under civilian control remains incomplete. The government also faces continued pressure to reestablish presidential term limits, and civil society and opposition political parties have struggled to find ways to influence Togo’s political and economic course. 46. Further adding to the country’s challenges are serious problems of drug trafficking, illicit financial transfers, and maritime piracy. Togo has emerged as a key transit point in the trafficking of 51 Associated Press. The constitution was changed to obviate the need for an election within 60 days and was originally scheduled for 2008 (nytimes.com). 52 Seventeen incidents of violence were recorded before the election and six afterwards, according to ACLED. Fearing further violence, individuals claiming to be opposition supporters fled Togo. See UNHRC: http://www.refworld.org/pdfid/42f762f54.pdf. Freedom House rated Togo “not free” in 2005 and 2006 due to low scores on political rights (6 out of 7, where 7 = worst). The Economist’s Democracy Index ranked Togo 164th out of 167 countries in 2006. http://www.economist.com/media/pdf/DEMOCRACY_INDEX_2007_v3.pdf. 53 For example, the anticorruption agency has no legal authority to bring sanctions, and without stronger mechanisms to redress defects in the conduct of public procurements, the release of information is likely to have limited impact. See Pritchett and Werker (2012), who document the lack of correlation between Doing Business (proxying for de jure) and WBES (proxying for de facto) outcomes. 31 cocaine between Latin America and Europe and a transit hub for methamphetamines and heroin. Moreover, the seas off the West African coast have recently supplanted the Gulf of Aden as the main hot spot for piracy. Despite international support for Togo’s efforts to combat these problems, they increase the country’s vulnerability to penetration by powerful criminal organizations and to deteriorating governance. 54 According to studies by Global Financial Integrity and the Open Society Initiative for West Africa (OSIWA), Togo tops the list of all countries regarding the level of illicit outflows of financial resources as a percentage of GDP (GFI 2015a), which reached 76.3 between 2008 and 2012. Using a longer time frame, flows representing 69 percent of cumulative GDP were illegally earned, transferred, or used over the period from 2003 to 2013, and 84 percent between 2006 and 2013 (GFI 2015b; Dahlberg 2015).55 While the precise provenance of Togo’s illicit funds transfers is not clear, it appears to be some combination of illegal trade transiting through and originating in Togo, the avoidance of foreign exchange deposit/surrender requirements, and laundering of illegally obtained funds.56 Depending upon the actual breakdown of these sources, the transfer of illicit funds could represent a major loss of resources that could otherwise be devoted to public and private investments in the country. 4.2.2. Political Sustainability Risks 47. Further risk of political crisis presents a key sustainability risk for Togo over the next five to ten years. Togo’s apparent peace and security and recent economic gains belie its vulnerability to a political crisis or other precipitating economic shock. Togo Figure 33: Violent Political and Protest Events in Togo remains a fragile state, vulnerable to episodes of violent conflict. The government therefore 70 faces the difficult task of advancing reforms to 60 broaden and accelerate economic 50 opportunities, while also preserving the support of key vested interests. Social and economic 40 dissatisfaction increases vulnerability to 30 internal or external shocks. The strikes staged 20 in recent years by health and education workers protesting low wages and inadequate working 10 conditions signal escalating social tensions. 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Growing conflict over land, evident in the past year, is also likely under increasingly difficult environmental conditions. Although interethnic Source: ACLED social relations are generally good, perceived interregional inequities could exacerbate other tensions. Election seasons are also a source of tension: Togo has seen an uptick in violent events since 2010 relative to the period 2006–2009, notably in 2013 when 54 Together with other governments of ECOWAS and under the supervision of the United Nations, Togo has implemented more stringent controls at ports and airports and has participated in capacity-building programs launched by the United States to strengthen local responses to piracy and illegal trafficking. 55 Illicit outflows from or passing through Togo are also overwhelmingly (99 percent) conducted through misinvoicing of trade as a means to disguise financial transfers to overseas accounts. This percentage has grown, not fallen, since 2000. In fact, these levels are likely to be an underestimate. They exclude any transactions conducted in cash, funds transfers conducted through misinvoicing of trade in services (rather than goods), or through fake same-invoicing. And in at least one notable case—that of gold originating in Burkina Faso and smuggled into Togo before being exported to Lebanon and Switzerland—such transfers were not included in the above figures; Switzerland only began reporting the source of its gold imports in 2014. The purpose of this routing of gold exports is to evade taxation by the authorities in Burkina Faso and to avoid detection of the poor safety and other conditions of minor children working in Burkinabe mines (Berne Declaration 2015). 56 These flows rose from 13 percent of GDP in 2003 to an average of 98 percent from 2006–2010 and 85 percent from 2011 through 2013, indicating little evidence of a positive trend. One arguably “licit” source of these funds flows , through transfer pricing by multinationals to avoid taxation, is not an important factor in Togo. 32 legislative elections were held (Figure 33). Most recently, these events have taken the form primarily of protests, but there have also been cases of violence against civilians. Election periods remain a delicate and potentially destabilizing juncture, with the next presidential vote scheduled for 2020. 4.2.3. Three Channels of Poor Governance 48. In addition to raising fragility concerns, Togo’s governance challenges remain a key, cross- cutting constraint to poverty reduction. Togo’s system of governance results in low capacity, a lack of independence, and weak policy formulation and implementation on the part of public institutions. In addition, corruption is rooted in a relatively centralized system rife with conflicts of interest spanning public, quasi- public, and private spheres. These limit improvements to governance and the effective scope for private sector- led growth, thus reinforcing Togo’s limited public revenue base, the economy’s lack of resilience, and its vulnerability to fiscal and political risk. 49. The effects of a weak system of governance operate through three broad and inter-related channels (Figure 34). These include: (1) high corruption and low government effectiveness in formulating and implementing policies toward private economic activity, including in agriculture; (2) low government effectiveness in setting priorities for and delivering public goods and services; and (3) at the fulcrum of these issues and concerns over fiscal sustainability, poor fiscal governance. These governance challenges produce a high risk of recurrent fiscal and political crisis, the key risks to sustainability. They also represent deeper causes of more specific constraints identified in subsequent sections. Although governance challenges affect the performance of many, if not all, of Togo’s public institutions, its policies, and its ability to provide the conditions and public assets needed for poverty reduction, weaknesses in some of these areas are more binding for growth or limiting to inclusion than others. The task of the rest of this chapter is to identify which of the more specific factors that could potentially impede poverty reduction are the most constraining—those that, if alleviated, would bring the greatest positive effects in reducing poverty. 33 Key Constraint 2: Weaknesses in Fiscal Governance Main Messages:  Togo’s poor fiscal governance has resulted in periodic fiscal crisis and generates risks in the near term, as the debt-to-GDP ratio has risen rapidly following debt forgiveness in 2010.  The nearly routine approval of the supplemental budget law each year in Togo diminishes the credibility of the budget preparation process and generates difficulties in the performance of treasury functions such as cash and liquidity management.  Reforms introduced in recent years to improve budget management have not yet yielded meaningful results.  Public investment and financial management procedures require improved transparency and controls to strengthen budget discipline, as well as streamlining and simplification in some areas. o Further analysis and commensurate steps are required to address the risks to budget sustainability posed by financing mechanisms (such as “pre-financing”) which increase the financing cost of public investments and obscure the total magnitude of public liabilities.  Governance issues in the extractives sector impede the generation of greater fiscal revenues from this source.  The budget risks arising from inadequate supervision and governance of public enterprises need to be addressed and taken into account in the central government’s budget policy. 50. Togo has made some efforts to reform public financial management (PFM) in accordance with WAEMU directives, in particular: (i) the publication of quarterly budget execution reports; (ii) the establishment of an integrated financial management information system (IFMIS); (iii) the creation of oversight bodies such as the Court of Accounts and the IGF (Inspection Générale des Finances); (iv) the creation of a procurement website; and (v) the publication of a procurement newsletter. 51. Nonetheless, weaknesses in Togo’s fiscal management have adverse effects on the country’s macroeconomic framework and hinder the sustained and effective implementation of poverty reduction policies. The accumulation of public debt, observed each year since debt relief in 2010, increases the likelihood of payment arrears. The disconnect between the government’s proposed medium-term expenditures and the annual budget compromises credibility in the budget, as significant budget revisions have had to be made in the course of every recent fiscal year. Deficiencies in budget preparation have led to over-estimation of revenues and the authorization of expenditures which the state treasury has difficulty covering. In turn, fiscal constraints amplify the government’s need to borrow to cover expenditures and thus increase the public debt. Although public resources have totaled on average over 18 percent of GDP in recent years (2006–2012), undisciplined spending and financing practices combined with weak management of SOEs place Togo in a structural fiscal deficit position. 52. In addition, reforms have not yet resolved the lack of strategic budget coordination, transparency, and budget discipline. They have not addressed the broad discretionary power of the minister of finance over the government’s accounts at the central bank, an arrangement that creates delays and a more burdensome process for executing public expenditures, while also weakening intra-governmental coordination and transparency. The operationalization of newly created institutions for internal and external public financial control has been slow and their span of controls is limited, and the absence of effective sanctions greatly 34 diminishes the impact of these institutions. The process for preparing and monitoring public investment needs to be significantly strengthened, and further enhancement of the country’s IFMIS is needed to facilitate improved management and transparency of the budget and public investments and expenditures. In addition, the ministry should take steps to reduce and clarify the modalities for managing extra-budgetary revenues and expenditures. For example, the financing of electoral campaigns and political party activities is not adequately regulated. The budget is not aligned with the government’s recently adopted strategy (Stratégie de Croissance Accélérée pour la Promotion de l’Emploi or SCAPE), well prioritized, or formulated with sufficient coordination. Thus, steps to strengthen budget formulation and execution are needed to ensure a better involvement of the concerned actors and to take into account the medium-term strategies being implemented by line ministries. In addition, the tax base—in particular, revenues from the small formal private sector (and SOEs)—remains narrow, with only 20 companies paying two-thirds of corporate tax revenue,57 and public revenues systematically fall short of projections. Faced with pressing fiscal constraints, the government sometimes seeks recourse to public enterprises. This adds to insufficient public enterprise governance and supervision to further damage their performance and financial position. Moreover, the budgetary risks posed by these enterprises are not sufficiently analyzed or considered in the central government’s budget strategy. As a result of this confluence of issues, Togo has an unusual tendency to accumulate debt and fall into arrears. It shows a historical pattern of growth episodes punctuated by large downturns arising from fiscal or political crisis. Over a period of 16 years, from 1979 to 1995 (IMF 2006), Togo rescheduled its public debt 10 times, followed later by multilateral debt forgiveness under HIPC in 2010 and other multidonor debt relief programs. 53. Togo’s significant reserves of mineral resources hold the potential to expand the fiscal space if successfully promoted and efficiently taxed. Togo’s proven resource reserves include over 2 billion metric tons (MT) of carbonated phosphates, 70 million MT of “uncarbonated” phosphates, 325 million MTs of limestone (used to make cement clinker), and considerable iron ore deposits, as well as marble, manganese, bauxite, and ornamental stones. Yet the strategic sectors are primarily state-owned and underperforming. In 2013, according to the Extractive Industries Transparency Initiative (EITI), Togo’s declared fiscal receipts from extractive industries were only US$31 million, or 0.7 percent of GDP, which amounts to approximately 3.5 percent of (non-grant) fiscal receipts. Negotiations are ongoing between the government and an international company that is bidding on a new carbonated phosphates and fertilizer production venture. Depending on final investment terms, royalty rates, and construction timelines, the government can expect an increment of between 1.0 and 2.5 percent of fiscal receipts (vis-à-vis total 2014 fiscal revenues) beginning in 5–10 years. Another venture under discussion could raise this to 3.5 percent of fiscal revenues in 10–15 years, as estimated by World Bank staff models, thus potentially contributing significantly to a resolution of Togo’s fiscal deficits. Other developments of smaller-scale phosphates, manganese, or iron ore deposits are also possible. Whereas the expansion of mineral operations would have a limited direct contribution to employment creation, sound management of resource revenue in other resource-rich countries has expanded fiscal space, helped solidify the macroeconomic framework, and financed investments in public services and infrastructure. In principle, resource rents can provide a revenue source for direct social transfers to poor people as well. However, international experience provides limited examples of success in accomplishing this, and most examples are from advanced economies (such as Alaska in the United States and Alberta, Canada; see Gupta et al. 2014). 57 Based on 2013 tax filings, as per OTR. Note that the informal sector also pays taxes, as discussed further below. 35 Table 12: Togo's Fiscal Accounts (billions of FCFA) 2013b 2013e 2014b 2014e 2015b 2015e Tax collection (Tax 158.8 171.7 182.9 212 209.8 222.3 administration) Customs receipts 205.1 232.5 331.1 246.2 270.5 294 Non-fiscal revenue 46.3 43 47.6 54.3 52.1 52.3 Grants 95.7 73.5 86.9 45.8 58.9 57.2 Special accounts 3.2 2.3 3.8 2.5 2.5 Total Revenues 505.9 523.9 650.8 558.3 593.8 628.4 Salaries 125.3 130.6 153.8 143.4 162.9 170.5 Other current spending 196.3 265.7 283.6 252.1 269 281.9 Interest on public debts 30.1 25.7 33.8 29.9 33.1 45.4 Non-budget current 0 3.2 0 0 0 8.7 spending Special accounts 3.2 2.3 3.8 2.5 Total current spending 351.8 428.4 473.5 429.2 467.5 500.3 Investment, external 247.6 100.6 141.9 103.2 114.6 138.5 sources Investment, internal sources 103.3 76.9 118.6 104.1 142.6 139.2 Total investment 350.9 177.5 260.5 207.3 257.2 277.7 Total spending 702.7 605.9 734 636.5 724.7 780.2 Overall surplus / deficit -196.8 -82 -83.2 -78.2 -130.9 -151.8 en % du PIB -9.8% -4.1 -3.7% -3.5 -5.6% -6.5% GDP 2016 2016 2216 2216 2329 2329 b=initial budget; e= executed Source: Ministry of Economy, Finance, and Development Planning (Togo) 54. For Togo to realize these potential benefits would require significant governance improvements, and natural resource wealth can create and magnify governance challenges. Although Togo was certified as compliant with EITI guidelines as of 2013, the government has not succeeded in increasing revenue from mining or attracting new investment to develop proven reserves. In 2012, the president committed to reforming the sector in order to boost production, diversify mining resources, and more equally distribute benefits. Some steps have been taken to raise production through investments in the Société Nouvelles de Phosphates Togolaise, the state-owned phosphates company, but a combination of governance, strategic, and technical challenges has resulted in flat production figures. A private concession to develop the proven carbonated phosphates deposit has been awarded to an Israeli-Chinese consortium, but as of January 2016, no firm investment agreement had been made and no date for expected production determined. Progress will remain uncertain for some time. So far, moreover, Togo has not put in place a strategy for improved distribution of mining revenues. A Mining Sector Governance and Development Credit was approved by the World Bank’s Executive Board in November 2015 with the objective of enhancing sector governance and transparency and strengthening environmental and social management of the mining industry. However, improved management of mining revenue and income redistribution will require a more comprehensive reform of public management and sector governance. The principal challenges concern the management, accounting, and monitoring of sales and the accounting of available resources. Inspection and reporting capacities require immediate upgrades to ensure that profits from mineral extraction are captured in the state budget. Moreover, the regulatory framework in the mining industry is not yet adequately developed for the authorities to plan, regulate, and enforce operators’ performance. These issues range from environmental standards to fiscal management and 36 tax administration for the industry. Finally, the mining code remains in flux since the government expressed an interest in promoting new policy priorities in the sector, including accelerating operators ’ research and development of mineral deposits, promoting national investors and subcontractors, and achieving a more direct correlation between project profitability and government revenue collection. Table 13: Evolution of Togo's Public Debt End-2012 End-2013 End-2014 (billions (% of (% of (billions (% of (% of (billions (% of (% of of public GDP) of public GDP) of public GDP) FCFA) debt) FCFA) debt) FCFA) debt) Total Public Debt 922.4 100 46.1 1075.9 100 50.1 1330.9 100 58.5 External Debt 351.2 38 17.6 432.9 40 20.1 613.5 46 26.9 Central Government 278.8 30 13.9 357.4 33 16.6 470.5 35 20.7 Multilateral 164.1 18 8.2 209 19 9.7 243.1 18 10.7 Bilateral 35.9 4 1.8 28.6 3 1.3 26.7 2 1.2 Commercial Banks 78.8 9 3.9 119.8 11 5.6 200.7 15 8.8 SOEs1 72.4 8 3.6 75.5 7 3.5 143 11 6.3 Domestic Debt 571.2 62 28.6 643 60 29.9 717.5 54 31.5 T-Bills+Bonds 224.5 24 11.2 326.8 30 15.2 418.4 31 18.4 Domestic Arrears 263.8 29 13.2 254.3 24 11.8 249.3 19 10.9 1Detailson SOEs’ 2010 external debt have not been communicated by the authorities. Sources: Country authorities and IMF calculations. 55. The current rate of accumulation of public debt raises severe sustainability concerns. Although Togo’s total fiscal deficit was only 1.9 percent of GDP in 2013, it widened to 4.1 percent in 2014 and is projected at 6.5 percent in 2015 (Table 12). Rapidly increasing current expenditures are only partially offset by investment spending that is lower than projected. The most recent debt sustainability analysis, based on IMF estimates, places Togo’s level of debt distress at moderate for external debt and high for internal debt. Whereas HIPC and Multilateral Debt Relief Initiative (MDRI) debt relief in 2010 reduced Togo’s stock of public debt to 32.1 percent of GDP, it has grown rapidly in just a few years. According to the authorities, between 2012 and 2015 total public debt grew from 46.1 percent to 58.5 percent of GDP (Table 13). These figures differ from the most recent IMF Article IV report, which estimates public debt to have reached 62.5 percent of GDP in 2015. While this level compares favorably with the WAEMU standard of 70 percent of GDP, such a rapid accumulation of debt so soon after debt relief suggests increasing risk. Furthermore, the large share of domestic debt in the total debt stock (54 percent in 2014) raises concerns given the higher average borrowing costs and shorter maturities associated with this financing. 56. Furthermore, these numbers do not fully account for fiscal liabilities. Unbudgeted contingent liabilities arise through public ownership of companies that have tended to require periodic subsidies or recapitalization. Key examples include the cotton and electricity sectors, but others as well. The government was obligated to reimburse over 24 billion FCFA in the debts of the former cotton company in 2007 and 2009, for example. Although the promise of fiscal resources may motivate the government’s continued equity holdings, in most sectors where SOEs have operated they have suffered from mismanagement, inadequate budgetary discipline, and/or bankruptcy, in some cases due to financial leakages. One recent, striking example is that of Togo Telecom—a monopoly that would normally be highly profitable—but has instead suffered from 37 conflicts of interest.58 The resulting fiscal losses and required recapitalization of SOEs typically crowd out beneficial uses of public resources. 57. In addition, the government has adopted a practice of “prefinancing” investments (préfinancements), which is associated with a lack of transparency in the budget and in the choice of public investments and an increased cost of financing those investments. Through this mechanism, commercial banks finance investments undertaken in the current year at a higher interest rate with a government guarantee, and the government later reimburses them. These liabilities are not budgeted in the year they are assumed, and the servicing costs are mounting. In the 2014 budget, 81 billion FCFA (3.5 percent of GDP and 11.2 percent of the 2014 budget) was used to service prefinanced investment obligations from previous years. This amount rose to 118 billion FCFA in the initial 2015 budget (5 percent of GDP or 14.2 percent of the 2015 budget), and 125 billion FCFA with a supplementary budget. It is unclear how Togo will manage to service these debts while also meeting its other obligations, but based on the information made available, the country appears vulnerable to another fiscal crisis. 58 Recently, the Court of Audit published a report demonstrating the permeability of accounts of the government with those of state- owned companies. Togo Telecom reportedly lent more than 20.5 billion FCFA to the Togolese government in 2007. Approximately one-third of this amount (6.4 billion FCFA) was paid directly to finance the activities of certain ministries and other public institutions; however, the Court of Audit was unable to verify whether any of these paid services had effectively been provided. The remaining 14.2 billion FCFA was channeled through the state-owned mobile phone subsidiary, Togo Cellulaire. Instead of depositing the money in the public treasury, however, the Court of Audit report notes that the funds were deposited into an account in a state-owned bank with only a letter from the President of the Board of Directors of Togo Telecom. The article notes that the President of the Board of Directors was also the General Director of the bank into which the funds had been deposited at the time. 38 Figure 34: Diagnostic Results 1 What Key Constraints Does Togo Face in Levels of Causation Eliminating Extreme Poverty? Inadequate (Inclusive) Growth Proximate (Slow structural transformation, low labor Inadequate Equity of Causes of productivity and wages, under- High Risk of Recurrent Fiscal employment, and low agricultural Opportunity and Well- Poverty and Political Crisis Being for Poor People productivity) 0) Outcomes of Inconsistently pro-poor these Low Private Investment and distribution of growth Slow progress in improving Entrepreneurship (including in Constraints and lack of pro-poor human development smallholder agriculture) distributional policies Specific Key/ Are There Large How Costly Are What Are the Key Binding and Distortions to Is Access to Finance Infrastructure Weaknesses in Human Moderate Economic Incentives? Inadequate? Constraints? Capital and Social Service Constraints Delivery? High corruption and low government (2) Poor Low government effectiveness in setting effectiveness in formulating and implementing Fiscal priorities for and delivering public goods and policies toward private economic activity Governance services (including agriculture) Deeper Causes (1) Governance system that fosters weak accountability Note: Dark Blue = Key Constraint. Medium Blue = other finding. Light blue = questions remaining. 39 Key Constraint 3: Policy and Regulatory Barriers to Entry and Distortions to Entry to Private Economic Activity Main Messages:  Togo’s governance results in poor formulation and implementation of policies and regulations affecting private economic activity—including in agriculture, as discussed in Section 4.6.  This results in barriers to entry and severe distortions to economic incentives. These pose binding constraints to broad-based growth, as they severely constrain investment, job creation, and increasingly productive employment, as well as agricultural productivity growth.  Togo has low rankings on indicators of policy quality and economic freedom due to relatively high levels of state ownership of for-profit sectors, skewed formulation and implementation of policies and regulations on private economic activity, high costs of corruption for businesses, and low quality of judicial enforcement.  Input sectors, as well as manufacturing, agriculture, and telecommunications sectors (discussed in Sections 4.6 and 4.8, respectively) are all affected.  Other policy and institutional distortions to private economic activity—in particular, the country’s weak land regime, labor market regulations, and the value of the currency—were also tested and no evidence was found that these distortions are binding at this time (Appendix B). These constraints could become more limiting if other, binding constraints are alleviated in the future. 58. Togo’s inability to initiate or accelerate a more inclusive and robust growth process can be explained in large part by a system of governance that provides relatively weak incentives for controlling corruption and improving government effectiveness. One result of this is relatively poor formulation and skewed implementation of policies and regulations affecting private economic activity. 59. Effective, well-targeted regulation is essential for a variety of markets to function well. Such regulation is necessary, for instance, to ensure that buyers have full Table 14: Heritage information, that sellers and financiers are better assured payment, that Foundation Rankings in quality, safety, and environmental resources are protected, that dominant Economic Freedom firms do not exercise market power adversely, and that fair contracting and (2014) labor practices are upheld. In some key sectors, however, Togo’s regulatory World Rank effort serves to block rather than foster healthy competition. As a result, the Mauritius 8 country’s investment climate rates poorly with regard to businesses’ freedom Rwanda 65 to invest, operate, and employ workers, and to enjoy adequate property rights Ghana 66 protections—collectively termed “economic freedom” by a variety of Burkina Faso 98 organizations. Togo’s composite economic freedom score from the Heritage Tanzania 106 Foundation is the lowest among 13 comparator countries (Table 14). On Cote d’Ivoire 107 subcomponents of economic freedom, Togo rates relatively poorly on Cambodia 108 business freedom (above only Cambodia), investment freedom (above only Benin 113 Nepal), and labor freedom (above only Mozambique and Senegal) (Figure Senegal 125 35). Although Togo ranked better than Nepal, Cambodia, and Côte d’Ivoire Mozambique 128 on freedom from corruption, its score was lower than on the other dimensions Bangladesh 131 of economic freedom. Nepal 149 Togo 152 40 60. Although some businesses Figure 35: Scores on Components of Economic Freedom manage to operate in this climate, 90 they perceive corruption to be a 80 major obstacle. Over 70 percent of firms rated this as a major or severe 70 constraint to their businesses in 60 2009, and 40 percent of firms 50 reported paying bribes, compared to 40 27 percent in SSA (WBES most recent years). In 2015, 42 percent of 30 firms cited corruption in the 20 regulatory regime in particular 10 (rather than all forms of corruption) 0 as a major or severe constraint. Among formal businesses, the Property Rights Freedom from Corruption Business Freedom practices of dominant competitors— Labor Freedom Investment Freedom some state-owned, others perhaps favored by the state—are considered Source: Heritage Foundation 2014 a major or severe obstacle for 56 percent of firms (TFFS 2015). Since most potential commercial disputes do not go to court, the judicial system may seem only distantly relevant to skewed treatment. Nonetheless, almost twice the percentage of firms (34 percent) have rated the judicial system as a major or severe constraint in Togo than in SSA generally (19 percent) (WBES, most recent years). The effect of these issues is to dissuade businesses from investing in the first place, or from making more sizeable and visible investments when they do. 61. De jure reforms (established by law) appear to have reduced barriers to entry for small investors, but without reforms that are more fundamental, important barriers to entry remain. Togo has recently reduced the minimum capital requirements for forming a business and streamlined the time required and steps needed to form a small or medium enterprise in line with the Organization for the Harmonization of African Business Law’s Figure 36: Average Public Ownership of Formal Firms (OHADA) guidelines. It has adopted a new investment code (Loi No. 2012 001), which Togo 2009 sets a limit of seven days for approvals of Senegal 2014 Nepal 2013 investments under 600 million FCFA Rwanda 2011 (US$1 million using current exchange Cambodian 2013 Burkina Faso 2009 rates). Nonetheless, with respect to either Tanzania 2013 larger investments or investments in Mozambique 2007 Ghana 2013 sectors that are deemed strategic, the state Bangladesh 2013 retains wide scope for denying approvals. Benin 2009 Each such investment is screened on a Ethiopia 2011 Côte d'Ivoire 2009 case-by-case basis (World Bank 2012c), SSA and although the law sets a time limit for South Asia East Asia and Pacific approval at 30 days, the ministries of All Countries finance, commerce, industry, and other 0.0 0.2 0.4 0.6 0.8 1.0 1.2 relevant industries must all be consulted Source: WBES, most recent years. prior to approval. Moreover, no limitations are provided on the permissible reasons for refusing an application. In addition, in an 41 effort to preserve its sovereignty and protect Togolese land ownership, national regulations forbid foreigners from owning land, they must receive ministerial authorization for a leasehold, and they face restrictions on the hiring of foreign workers. 62. An additional feature of Togo’s regulatory environment is the high level of state ownership of commercial entities. In 2009, Togolese enterprises had the highest average share of state ownership when compared to an array of low-income countries (Figure 36). Of manufacturing firms in 2015, an estimated 28 percent still have some state ownership (TFFS 2015). Public ownership is not necessarily a problem, as long as commercial entities are run on a commercial basis, with accountable corporate governance, sound regulation, and effective competition. In the Togolese context, however, public ownership in commercial sectors (that is, those normally operated by the private sector for profit) has an adverse effect. Sectors with state ownership include phosphates, cotton, telecommunications, banking, hotels, transport, bakeries, pharmacies, printing, accounting, distribution of butane gas, livestock slaughter, and cement, as well as the distribution of certain agricultural inputs. The presence of SOEs can distort the competitive landscape for the private sector, given the strong possibility of preferential treatment in the regulatory or judicial systems. Seven percent of all firms report that their main competitor is an SOE, 22 percent of firms in manufacturing, and 15.8 percent of those in other services (TFFS 2015). 63. Togo’s regulatory framework presents barriers to accessing inputs, with important negative spillovers on the productivity and competitiveness of other sectors. One key obstacle is the difficulty of accessing imported inputs. Togo’s overall ranking in the Doing Business indicator on trading across borders (2016) is better than its overall Doing Business score, at 126th out of 189 countries. However, Togo ranks especially poorly on the time costs of complying with border and documentary requirements for importing (but not exporting).59 Togo ranks 70th out of 82 low-income countries on the time required for border compliance (256 hours), and documentary compliance takes 203 hours, as compared with neighbor Benin’s 72 and 56 hours, respectively (Appendix Table 7). Without a more comprehensive study of nontariff barriers (NTBs) to importing and exporting, one cannot fully assess the effects of these barriers, but these indicators suggest that they present a major obstacle, particularly for a small country such as Togo, located within a regional trading association. 64. Price regulation compounds the difficulties in accessing inputs of suitable quality. Whether designed to curb market power, advantage dominant competitors, or maintain low consumer prices, price regulation can disincentivize quality improvements and price competition. In Togo, sectors with administered prices include transport, insurance, construction materials, notary services, printing, animal slaughter, fuel, pharmaceuticals, and car park management. Approximately 13 percent of formal companies report being subject to some price regulation (TFFS 2015), and among regulated firms 42 percent say they would sell for a different price if they could. Input price regulation and NTBs in importing provide a partial explanation for the fact that 37 percent of formal Togolese firms have trouble accessing inputs in sufficient quantity or quality. Large firms (51 percent) and manufacturing firms (62.3 percent), in particular, consider this problematic. In the construction industry, for example, firms report difficulties in accessing metals products—aluminum (a problem for 56 percent of the relevant firms) and iron bars (for 48 percent), both of which are produced domestically by just one or two suppliers (TFFS 2015 and tax records). 65. The Government of Togo has undertaken important reforms recently to improve the climate for private economic activity, and these have improved Togo’s Doing Business ranking. They may also have contributed to Togo’s recent growth trajectory. Nonetheless, a variety of policies, regulations, and ad hoc state interventions remain, which—particularly in a context of weak control of corruption and low 59Togo ranks better than Mozambique, Côte d’Ivoire, Rwanda, Sierra Leone, Ghana, Bangladesh, Tanzania, and Nigeria in the time and financial cost of complying with documentary requirements to import and export when these issues are combined. 42 government effectiveness—distort the landscape for private economic activity and limit prospects for a broader, more robust, more inclusive growth process. 66. It is difficult to overstate the economic effects of the distortions and barriers described in this section. A summary of Table 15: Tests of Key Constraints - the tests is shown in Table 15. The skewed regulatory and judicial - Policies towards and Regulation of treatment of nonincumbents that may attempt to compete with Private Enterprise Tests of binding Pass? established interests, together with state ownership of commercial constraints to growth sectors and restrictive investment rules in the context of Togo’s on key pathways weak governance, impose a high cost on any actual or potential entrepreneur of significant size that is not part of the system, as High cost to actual or  potential enterprise? indicated by Togo’s low scores on a variety of international Circumvention of  indicators of corruption, effectiveness of policy, and economic constraint evident? freedoms (Test 1). This confluence of economic distortions blocks Few actors present  investment and job creation directly, as well as the dynamic benefits requiring alleviation of of learning, innovating, and developing new capabilities and areas constraint? of comparative advantage. It likely partially explains why there are Correlated with growth  few privately owned medium and large enterprises and why rates of or investment? formal firm entry are low (Test 2). Moreover, in years when And/or adversely  affects income of poor government effectiveness in setting and implementing policies is people? higher, and/or when corruption is better controlled, subsequent growth rates have been higher (Section 4.2, Table 11) (Test 4). The evidence strongly suggests, therefore, that corruption and low government effectiveness in the formulation and application of these policies and regulations constitutes a binding constraint to inclusive growth and poverty reduction. Although data and analysis of the impacts on the distribution of growth are insufficient, as discussed in Section 4.6, similar problems of inappropriate regulation and policies in agriculture are among the binding constraints to raising agricultural productivity and incomes in rural areas. 4.4.1. Other Constraints Due to Policy and Regulatory Distortions to Private Economic Activity (see Appendix B for more details) 67. Although the issues discussed in the foregoing section appear binding based on the available evidence, there are additional sources of distortions to private economic activity that could be important as well. Togo’s system of land registration ranks among the least efficient in the world, and there are many land conflicts, which can threaten security of tenure among poor and less well- represented individuals. For example, 10 percent of formal businesses say they would have invested more if they had a title. Nonetheless, existing businesses rank this issue only 15th among the obstacles they face. Both of these indicators likely understate the true severity of the constraint, since those firms deterred from investing by this constraint are not available to be surveyed. However, land can be transferred with the approval of local officials, and landholders are able to utilize official documents short of a title to establish their rights. In rural areas, informal arrangements largely suffice. Even though women have less secure tenure due to cultural practices, the estimated effects on productivity are small, at least according to a study from neighboring Benin. The issue is perhaps less compelling as a key opportunity to improve Togo’s progress toward the twin goals. In most of SSA, land titling programs have had disappointing results for income growth. Thus, although this area remains an analytical gap, there is no clear evidence from the mixed signals available that Togo’s inefficient land system is a binding constraint to poverty reduction. It represents a mild inclusion risk for the poor, whose land rights may be compromised. 43 68. Similarly, Togo’s labor market regulations create important distortions, in particular minimum wage regulation. Its statutory minimum wage is higher as a ratio of labor productivity than all comparator countries, and given the country’s low labor productivity, remains higher than the wage paid to 67 percent of remunerated workers. This regulation reduces the incentives to hire low-skilled workers, and businesses take measures such as hiring temporary or contract workers to circumvent these labor market regulations. However, the percentage of firms and workers affected is relatively low, and there is no clear evidence that labor market regulations present a binding distortion. 69. Finally, at times when Togo’s currency is overvalued, its export competitiveness may be reduced. The advantages and disadvantages of the country’s currency and monetary regime, shared within the WAEMU, are complex, and this study does not attempt to take a position on this regime. However, it is important to test, using the method set forth in Section 4.1, whether the value of the currency is a binding constraint to growth. Today the currency appears overvalued by up to 9 percent, and this may be a drag on exports and growth. Yet there is no evidence from the available tests that such misalignment constitutes a binding constraint in Togo’s current context. Following devaluation in 1994, the initial boost to growth subsided even as the real effective exchange rate remained lower; there is no correlation over time between the exchange rate and growth or investment, and countries using the FCFA do not have a structurally lower level of exports than would be predicted by a gravity model of trade. Although the currency regime generally is a complex and controversial issue, and may not be optimal for the countries of the WAEMU, there is no clear empirical evidence that it presents a binding constraint for Togo in particular. The details of the data and tests used to test these three areas are presented in Appendix B. Analytical gaps identified:  The effects of Togo’s weak land system on urban development, commercial-scale agricultural investments, land-based resource management, and female-owned agriculturalists.  The global full effects of the monetary and current regime on Togo’s economy. 44 Key Constraint 4: High and Distortionary Taxation Main Messages:  Togo’s new tax authority (Office Togolaise de Recettes) has taken steps to improve the transparency and integrity of the tax collection process.  Because of deficiencies in Togo’s tax code and the remaining complexities of implementation, Togolese enterprises face a highly distortionary tax wedge, which disincentivizes private economic activity. The size of the wedge varies a great deal by enterprise, but averages 90 percent as percent of (pretax) enterprise profits when all taxes and contributions (except import duties) are considered.  This average masks a high level of variation across enterprises, a significant number of which pay corporate taxes even when profits are minimal or negative, and the distortion appears largest for small enterprises.  Taxes based on revenues and costs, rather than profits, are particularly distortionary and raise the risks of investment by amplifying firm losses in bad years.  Implementation difficulties associated with obtaining value-added tax reimbursement and a lack of clarity for quasi-formal and small enterprises add to the distortion.  The high tax distortion creates greater scope for special exonerations, which can reinforce barriers to entry, particularly in a context of weak control of corruption.  This constraint appears to have a major adverse effect on labor income and job creation, as well as smallholder agriculture (see also Section 4.6). 70. Although taxation is necessary in any economy for financing public goods and social expenditures, if the wedge between the economic value of economic activity before and after taxes is too large or uncertain, it can act as a severe hindrance to investment, productivity growth, and employment creation. Overly burdensome procedures can create an additional barrier to formalization and firm growth. Djankov et al. (2010), for example, provide cross-country evidence that higher effective corporate taxation has a large and significant negative effect on investment, including FDI. They also show that higher taxation of corporations increases economic informality, with an especially significant effect on manufacturing sectors. Although the effects of enterprise taxation on poverty may seem indirect, the impacts on the real incomes of workers, the unemployed, and entrepreneurs are nonetheless large. This is illustrated by a recent study on Pakistan, which demonstrates that corporate taxes can be more inimical to poverty reduction than other taxes. Because such taxes reduced investment, they lowered the marginal revenue product of labor, and therefore labor earnings that could otherwise accrue to the poor (Feltenstein and Newhouse 2015). In addition, Desai et al. (2007) show that, internationally, between 45 and 75 percent of the burden of corporate taxation falls on labor, rather than on the owners of capital. If applied in a preferential fashion, a tax code that sets high effective rates can present a barrier to entry and a door to rent-seeking and special exonerations—problems that are particularly prevalent in Togo. 71. Togo’s recent efforts to reform its tax collection procedures appear to have resulted in improved integrity and transparency. In 2013, the government created a new revenue authority, the Office Togolais de Recettes, with the aim of improving the efficiency and transparency of tax collections and unifying customs, value-added tax (VAT), and corporate tax collection in one entity. Operation began in January 2014, and even though the OTR was not fully staffed, an estimated 50 percent of firms filing tax 45 declarations report an improvement in the clarity of procedures and obligations (with 15 percent saying they are worse). Nearly two-thirds (63 percent) claim that the level of corruption has dropped (and 5.4 percent claim it has increased), while 46 percent say that the compliance time required has improved (and 21.2 percent say it has worsened) (TFFS 2015). A large percentage (82 percent) claim to understand the basis of tax calculations, and 90 percent say that in 2014 the OTR requested a typical business in their sector to pay the correct amount per the tax code. 72. Nonetheless, complexity, lack of clarity, and discretion in the system leave room for interpretation and negotiation, and compound problems with the tax code itself. The OTR counts at least 30 separate taxes collected at the national and local levels. Moreover, a comparison of firms’ 2014 tax obligations and payments showed that micro and small enterprises, which are less likely to have access to tax advisors, were more likely than others to pay more taxes than required.60 73. Key elements of Togo’s enterprise taxation are as follows. There are two corporate tax regimes. First, relatively informal and micro businesses with sales of less than 30 million FCFA (US$50,000) can opt into the tax professionelle unitaire (TPU), which is a synthetic tax of 2.5–8.5 percent of sales, depending on the sector. All other firms fall into the régime réelle and must pay corporate taxes as follows: (i) a taxe professionelle (TP), which varies from 0.25 to 1.0 percent of revenues, plus the maximum of either 6 percent of their facility rental value or one-third of the former TP calculation; and (ii) the maximum of the following two taxes: (a) a profits tax (impôts societés or IS) of 29 percent or (b) an impôt minimum forfaitaire (IMF) tax, calculated as 1 percent of revenues (from which businesses in the first 12 months of operation are largely exonerated). In addition to corporate taxes on “results,” firms with sales over 50 million FCFA (US$83,000), previously 30 million FCFA, are subject to VAT of 18 percent (Appendix Table 17). Although a 29 percent tax on profits (or the earlier rates of 30–33 percent) is not out of line with that of many countries, the TP and IMF, which are revenue-based, determine 90 percent of firms’ corporate tax bills (TFFS 2015). In addition, in applying the TPU, the OTR estimates revenues, raising the risks associated with discretion in its implementation. Thus, for most eligible firms (73 percent in 2014), total taxes are higher under the TPU regime (based on simulations using TFFS 2015). Perhaps for this reason, only 3 percent of TPU-eligible firms in 2014 opted into the TPU regime. 74. Firms also pay a variety of input taxes. For example, the tax on land with buildings is 12.5 percent of the rental value of the land (3 percent if no buildings are present), and taxes on salaries paid by employers are 3 percent of the wage bill. In addition, employers are required to contribute 17.5 percent of wages to the Caisse Nationale de Securité Sociale, and employees contribute another 4 percent. Whereas other WAEMU countries have tax provisions that are generally similar to Togo’s, and all are broadly governed by WAEMU directives designed to align policies within the region, there are important differences among them as well. Indeed, although all WAEMU countries have minimum corporate tax provisions, this is not prescribed by any WAEMU directive, and minimum forfeit rates (IMF) vary from 0.1 percent of revenues for some sectors in Côte d’Ivoire to 0.25 percent in Niger and 0.75 percent in Benin—all of which are below Togo’s current (2014) rate of 1 percent of revenues.61 60 Bank staff calculations using TFFS (2015). Although approximately half of firms paid less than their estimated statutory obligations and half paid more, 51 percent of small enterprises (defined as having less than 100 million FCFA in sales) declared more than they owed, whereas only 37 percent of large enterprises did so. 61 See Mansour and Graziosi (2013), which states regarding WAEMU tax regimes, that “all countries have a minimum tax that is typically proportional to turnover and subject to a minimum fixed amount. This tax, which is not envisioned in the directives (and hence arguably illegal when applied to corporations), in some cases represents a non-negligible part of corporate income tax revenue, and could be very distortionary.” 46 75. Viewed from the perspective of an Table 16: Rankings of Comparator Countries in enterprise, Togo’s tax system results in an average Doing Business Paying Taxes, 2016 effective tax wedge—and distortion to private Simulated economic incentives—that is exceedingly high. Country Rank Direct Tax Rate Togo’s fiscal receipts are not out of line with as a % of Profits* comparators as a percent of GDP, ranging in recent Cambodia 95 21.0 years from 16 to 19 percent. However, because the Nepal 124 29.5 burden of enterprise taxation falls on a small part of Bangladesh 86 31.6 the economy, it represents a severe distortion from the Ghana 106 32.7 perspective of an actual or potential formal Mozambique 120 36.1 enterprise.62 In 2015, Togo’s (formal) firms ranked Tanzania 150 43.9 tax rates as their number one constraint to doing Senegal 183 47.3 business, by a significant margin (Figure 37), and as Togo 163 48.5* a major or severe constraint at a significantly higher Côte d'Ivoire 176 51.9 Benin 179 63.3 rate than comparator countries (Figure 38). The *Estimated tax rates are based upon a simulation of direct Doing Business indicator on paying taxes, which is taxes only (excluding VAT). They do not include either based on simulated taxes for a hypothetical company, Professional or Minimum Forfeit taxes. rd ranks Togo 163 out of 189 countries (Table 16), based on a score that understates the actual average effective tax rate.63 Other WAEMU countries with similar tax regimes also rank poorly in Doing Businesses’ Paying Taxes.64 However, without examining country-specific provisions and implementation, one cannot conclude that the issue is similarly constraining in those countries. ∑ 62 Mathematically, if ti is the tax and pi is profits or value added for firms, indexed by i, ∑ ≠ ∑ . 63 The total simulated rate of direct taxation of 48.5 percent of profits does not capture the full effect of Togo’s corporate tax formula. The simulation estimates a burden of 10 percent of profits from corporate profits tax alone, for example, when the actual burden in 2014 averaged over 40 percent, with a median of 18 percent (TFFS 2015). Eliminating labor taxes and contributions paid by employers, which may be partly reimbursed in the future to workers, through simple subtraction still places Togo’s tax burden 5–7 percentage points higher than that of Asian comparators. Moreover, although labor taxes represent almost half of the Doing Business- simulated total tax for Togo, in actuality labor and input taxes combined account for only an estimated 18 percent of profits on average (TFFS 2015). This is in part because the hypothetical firm used by Doing Business is not sufficiently similar to the average Togolese firm. It might also result in part from the distortionary effect of labor taxes on actual labor input to production. Moreover, the tax wedge estimated using TFFS data also includes VAT, as this is part of the total effective tax wedge, and this and other indirect taxes are not included in Doing Business. Togo’s VAT is high relative to standard VAT of 10 percent found in some other comparator countries, such as Cambodia, as well as the VAT in Bangladesh, which ranges from 1.5 to 15 percent (http://www.nbr.gov.bd/faq_page.php?lan=eng&id=2). Moreover, firms in Togo overpay VAT due to difficult reimbursement procedures (TFFS 2015), as discussed below. 64 Of these countries, Burkina Faso rates the highest at 153rd, Benin 179th, and Senegal 183rd out of 189 countries. 47 Figure 37: Frequency of Reports as Top or Top Two Obstacles to Figure 38: Percentage of Firms Considering Tax Business Formal Togolese Firms (2015) Rates a Major Constraint 80 Cost of taxes Political instability 70 Quality of internet connection 60 Access to finance 50 Practices of dominant competitors… 40 Practices of informal competitors 30 Cost of telecommunications Cost of electricity 20 Cost of customs 10 Cost of finance 0 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 Percent listing as greatest obstacle to their business Percent listing as first or second greatest obstacle to their business Sources: WBES, latest years; TFFS 2015 Source: TFFS 2015 76. A computation of average effective tax rates using data from a representative sample of Togolese formal (micro, small, medium, and large) firms provides a further indication of the magnitude of the distortion. When corporate taxes, local taxes, labor and input taxes (apart Figure 39: Average Tax Burden Reported as Percent of from import duties), and unreimbursed VATs Returns (Effects of Various Levels of Taxation, Mean of are combined, the estimated tax wedge averages Formal Firms), 2014 over 90 percent of pretax profits based on 2014 figures (Figure 39).65 Moreover, this wedge reduces a healthy average return on assets (ROA) of 146 percent (excluding all taxes except import duties) to approximately 14 percent after tax.66 Of these components, corporate taxes claimed 38 percent of returns, unreimbursed VAT 32 percent, and input taxes and contributions 20 percent. These estimates may seem unrealistically high, but they are not Input Taxes Unreimbursed VAT out of line with the tax code, given that the IS sets a corporate tax floor of 29 percent of Corporate Taxes Profits net of tax profits, and VAT exceeds 18 percent in practice Source: TFFS 2015. due to difficulties in reimbursements (see discussion below). At the same time, there is a high degree of variability across enterprises in the effective tax wedge, which these means mask. The median total tax wedge in the representative sample was just over 55 percent: half of firms paid less than this (and half paid more). 65Firm-level means (taxes paid/profits) and medians are computed, using firm-level population weights. 66See more details in Appendix Table 13. Gross ROA was lower for firms operating in interior cities (as represented by Sokode and Kara combined) than for Lomé-based businesses, and for manufacturing firms due in part to their higher capital labor ratios. 48 77. Adjustments for possible reporting bias do not affect the overall conclusions. As with all firm surveys, respondents may understate their sales and thereby overstate their effective tax rates. However, firms were guaranteed Figure 40: Total Taxes Paid as a Percentage of Profits by Firm Categories, anonymity and were asked to Reported and Lower Bound as Adjusted for Reporting Bias 2014 reference their official business 180% accounts for profit and loss figures and tax filings for total 160% 154% Total taxes as a percentage of profits 67 tax payments. Tax simulations 140% show no systematic overpayment relative to the sales 120% 115% 106% Average declared total and profits figures provided. 97% tax rate of profits 100% Nonetheless, to provide a lower- 79% 75% bound adjusted estimate based 80% 67% upon firms’ reports on how 60% 59% 59% 52% Average lower bound 48% 47% much their peers underreport 40% 40% estimate of total tax 40% 33% 33% rate of profits sales to the OTR to adjust for possible reporting bias, one still 20% arrives at an estimated tax wedge of 67 percent of pretax 0% profits (again excluding those earning pretax losses) (Figure 40).68 At the same time, these calculations may be viewed as Rates by size and sector understating the distortion, as Notes: These calculations exclude cases of positive corporate taxes on firms making losses. they exclude the 17 percent of Differences across these categories were not statistically significant. Source: TFFS 2015. firms with pretax losses which nonetheless paid corporate taxes.69 In addition, tax declarations data from 2007–2010 show a similar average rate of taxation from corporate and input taxes alone (excluding VAT), which average 84 percent (Table 17). This is higher than the comparable levels for non-VAT taxes of 58 percent observed in the survey data, as one would expect if reporting bias were lower in the survey than in tax declarations. It is not likely, therefore, that reporting bias is driving the overall conclusion that the size of the effective distortion is high. 78. Taxes in Togo that are levied on revenues and costs rather than on profits elevate the risks of doing business and impede the entry, formalization, and growth of small businesses. Revenue-based taxes create a significant probability of reducing otherwise profitable activities to unprofitable ones, and of adding to losses in bad years. They therefore damage the prospects for start-ups with horizons for break-even beyond the one year that tax abatements are available for new companies. Although the tax code contains provisions for offsetting taxes on losses against future taxes, these tax loss carryforwards are limited and are difficult to recoup, and tax payment data used for this analysis would already take account of such offsets.70 As a result, of tax-declaring firms, 25 percent paid corporate taxes despite showing either pretax 67 Survey enumerators confirm that this is what firms usually did. 68 Only 58 percent of respondents reported that their peers underreported revenues to the tax authorities. The adjustment made assumes that all firms underreported, and uses the mean reporting bias claimed by those who report that their peers underreport. 69 It is not possible to compute a sensible tax rate for firms with negative pretax profits. Firms with small positive profits showing losses after tax are included in this calculation, as the amounts they paid are consistent with the tax formula. 70 Carryforward of tax losses was allowed for three years until recently. Now only 50 percent of loss carryforward is allowable in a subsequent year, but the period of carryforward is not limited. Because tax rates are averaged across firms, this should account for 49 or post-tax losses in 2014 (TFFS 2015). Similarly, in 2013, 47 percent of firms declared pretax losses, and 78 percent of these still paid corporate taxes.71 Table 17: Indicators of Inconsistent Corporate Tax Treatment, 2007–2010* 2007 2008 2009 2010 Average Mean total corporate tax plus input taxes/declared gross profits for firms Firms Declaring earning positive profits 81.0 172.0 40.0 44.0 84.3 Positive Pretax Percent paying less than 10 percent Profits (%) company tax 14.6 26.8 26.2 35.2 25.7 Percent paying more than 80 percent corporate tax 84.0 4.3 6.4 24.6 29.8 Percentage of firms declaring pretax Firms Declaring losses* 43.0 41.0 45.6 56.6 46.6 Pretax Losses (%) Of which, percentage of firms paying corporate tax 64.0 81.0 81.0 87.0 78.3 Note: Variability over the years in taxes as a percentage of profits is the result of revenue-based taxation in the presence of fluctuating profitability, as well as changes in tax rates. Source: World Bank staff calculations using actual tax declarations data. 79. Taxation most adversely affects small firms attempting to comply with official tax requirements, but also touches many less formal firms. Small firms filing tax declarations pay more as a percent of profits than medium and large firms do (Figure 40).72 This is due apparently to their greater difficulty in offsetting VAT and other charges, as taxes are higher as a percentage of sales (Table 18).73 While most of Togo’s firms are relatively informal—that is, typically not registered, not filing tax declarations, or exhibiting other characteristics of informality, many microenterprises also pay taxes. The smallest (ambulatory) micro-entrepreneurs are obligated to pay a small fixed charge, but as many are not familiar with their legal obligations, they often pay more than is officially required.74 Moreover, the relatively burdensome TPU was designed for less formal firms, which are also subject to tax on the rental value of their business location. Comprehensive data are not available on taxation of all firms not filing tax declarations. Nonetheless, there are indicators that many pay some taxes and consider them burdensome. A survey of informal entrepreneurs indicates that of the 36 percent who paid taxes in the previous month, direct taxes totaled 41 percent of enterprise income, which is comprised of both the ROA and the entrepreneur’s time (Table 19). Half of such firms most recently surveyed earn very little—less than the minimum wage. Ten percent of these firms rated the cost of taxes as the greatest obstacle to their businesses, the second-most frequently cited top obstacle. Similarly, a recent investment climate assessment (World Bank 2010) focused those able to claim loss-carryforwards in prior years, particularly as profits were higher in 2014 than in 2012 and 2013 (TFFS 2015). 71 2013 tax declarations. Although some changes were introduced in the fiscal code in 2014, the basic elements were the same in 2013. 72 These differences were not statistically significant in a sample of just over 200 firms. 73 This is not due to their lower intrinsic profitability; gross profit margins were just as high for small firms as for others. 74 Authors’ interview with a Deloitte tax expert, November 2015. 50 on the informal sector Table 18: Profit Margins and Tax Wedge as Percent of Sales found that taxes were a Number of key issue for such firms, Mean Gross Mean Lower Bound Observation which often led to their Profit Margin Tax/Sales Tax/Sales s disappearance. CASADD All 17.9 14 9 182 (2015) reports similar Small 19.5 16 11 131 Medium 13.2 7 5 25 conclusions. Large 15.1 11 8 26 80. A burdensome Manufacturing 14.6 14 11 27 tax code increases the Construction 14.8 13 9 54 Commerce 16.1 12 9 41 scope and need for either Other services 21.9 15 11 60 preferential treatment or Agriculture-related 9.9 4 category-based Source: TFFS 2015 exonerations, both of which can be rescinded easily. The ease of passing a significant new tax law is demonstrated by the annual changes to the tax code over all years examined for this study, from 2009 to 2014. For example, previously generous zone franche exonerations were largely removed in 2012. Special tax preferences for foreign companies investing over US$150 million, introduced only in 2010, were abrogated in 2012. Tax treatment appears uneven across companies as well. Over 25 Table 19: Income and Taxation of Informal Enterprises percent of companies with Variable Mean Median positive pretax profits paid Average monthly income 84,179 FCFA 34,000 FCFA an average corporate tax of (return to entrepreneur and (US$ 170.26) (US$ 68.77) less than 10 percent of assets) declared profits between Yearly income 775,294 FCFA 315,000 FCFA 2007 and 2010, and a similar (US$ 1568.15) (US$ 637.14) percentage paid over 80 percent (Table 17). Current value of assets 988,917 FCFA 132,000 FCFA (US$ 2020.46) (US$ 266.99) 81. Although no data Entrepreneurs earning at least 49.70% were available to quantify minimum wage the importance of special Average enterprise taxes as a % 40.80%* 10% exonerations or of enterprise income, abatements relative to conditional on paying taxes in fiscal receipts, the past month. *A total tax rate cannot be computed for the sample, as not all firms had paid taxes in the 2013/2014 data show a past month. statistically significant Source: World Bank Baseline Informal Firm Survey (BIFS) 2013. negative correlation between a firm’s market dominance and its effective total tax in 2014 (controlling for broad sector, total sales, and salary costs).75 This result does not appear to be due to higher profitability among dominant firms (and therefore to a lower effective rate of taxation through the IS rather than being subject to the minimum forfeit (IMF), as provided in the tax code). There is no positive correlation in the data between market dominance and profitability (Appendix Table 15). In addition, although only suggestive, there is a negative association across sectors between average corporate taxation and the level of concentration of the sector in 2010 (Appendix Figure 4). 75 T-Statistic on coefficient of market dominance = 2.33. 51 82. The inconsistent implementation of Togo’s VAT system adds to the tax burden. Theoretically imposed on each increment of value added and in principle a relatively efficient tax, like any tax the burden is borne by both producers/suppliers and consumers/buyers, in some proportion.76 In 2014, firms with revenues over 30 million FCFA were subject to VAT.77 A business’s ability to claim VAT credit on inputs is essential to avoid overpaying, and many VAT-registered firms have difficulty obtaining the reimbursements that are due to them. First, small suppliers who are not VAT-registered typically cannot provide a receipt that is acceptable to the OTR.78 In addition, reclaiming VAT invites a tax inspection, and some firms without adequate legal or accounting support fear these visits.79 In fact, on average, formal businesses are able to deduct only 42.6 percent of VAT paid on (nonutilities) inputs from the amount of VAT they pay, and only 25 percent of firms who were supposed to be able to deduct 100 percent of VAT collected were able to do so (TFFS 2015). Unequal VAT treatment distorts competition as well. In 2014, 67 percent of formal businesses paid VAT on inputs (other than utilities), and 62.7 percent of these companies had competitors that did not. Similarly, 44.7 percent of formal firms collect VAT from their consumers, and of these, 60.5 percent have competitors that do not. 83. Duties charged on imported inputs, not captured in the above estimates, are relatively high and constitute a major trade distortion. The average duty for Togolese imports is higher than for all comparator countries except Benin, at over 14 percent (Figure 41), and when combined with VAT, import taxes total over 9 percent of GDP.80 Among formal firms surveyed in 2015, 40 percent judged the high cost of customs duties to be a major or severe constraint to their business—much higher than the SSA average of 26 percent. Among comparator countries, only 22 percent of firms rated this constraint as a major one, ranging from 6 percent in Bangladesh to 56 percent in Benin.81 Moreover, the dynamic Figure 41: Customs Duties as Percent of Import Values, 2013 effects of these taxes are likely to be larger than indicated by the simple tax rate as a percent of 18 16 profits. Various studies have shown that import 14 duties have a negative effect on product 12 diversification, productivity, and profitability 10 in the domestic market (Trefler 2004; Schor 8 2004; Amiti and Konings 2007; Goldberg et al. 6 2010; Topalova and Khandelwal 2011; Bas 4 2012; Bas and Strauss-Kahn 2013; Yu 2014).82 2 0 84. Finally, over time, relaxation of the tax constraint is associated with a positive change in investment and growth. To test this relationship, one can use the only indicator of Togo’s tax burden that is comparable over Source: Heritage Foundation. time—the percent of profits simulation available using the Doing Business indicator on 76 The share of the burden depends on the relationship between the price elasticities of supply and demand for the good or service. 77 The threshold has since increased to 50,000,000 FCFA. 78 Authors’ interviews with OTR and private firms. 79 Authors’ interview with a Deloitte tax expert. 80 Whereas some firms in Togo’s zone franche are able to avoid some taxes, inclusion in the zone franche regime also has costs, as firms cannot sell more than 30 percent of their production domestically. 81 WBES, most recent years. 82 Recent findings by Cruz and Bussolo (2015) have shown that reducing import tariffs had a positive effect on exports and product and market diversification in the case of Morocco, which also has a preferential import duty zone. 52 paying taxes. Although the Doing Business indicator is not a perfect reflection of the tax wedge, changes in it over time are likely to be correlated with changes in the actual burden. In fact, private investment levels have responded positively to reductions in the tax rate as captured by these indicators. A one-percentage- point decrease in the simulated tax burden over the years is associated with a 0.32 percent increase in economic growth in the same year,83 as well as a significant increase in the level of private investment. 84 Although a third factor could cause these correlations, they are robust to the inclusion of other continuous Doing Business indicators such as obtaining credit and the minimum capital requirements for starting a business.85 85. Togo has generally received low scores on the consistency and effectiveness of its tax system in international indicators for some time. In addition to low Doing Business rankings, the Global Insight score on the quality of tax policy effectiveness rated between 0.38 and 0.45 out of 1.0 (with a median for all countries rated of 0.60) between 1996 and 2013, with a particular decline as of 2006.86 A variety of data sources, including firms’ rankings of obstacles, effective tax rates estimated from a representative firm survey, estimates from actual Table 20: Tests of Key tax declarations, and tax simulations for Doing Business, indicate Constraints: the Tax System that the distortion resulting from Togo’s tax system to incentives for Tests of binding Pass? private economic activity are large (Table 20). While not all firms constraints to growth pay high corporate taxes, when corporate, input, labor taxes and on key pathways contributions, and unreimbursed VAT taxes are combined, many do. High cost to actual or  potential enterprise? Moreover, the risks of incurring after-tax losses are elevated by the Circumvention of  reliance on revenue-and cost-based taxation, which appears higher constraint evident? than for other WAEMU countries (Test 1). The fact that profits for Few actors present  existing firms were generally high on a pretax basis indicates that requiring alleviation of there are likely to be many more potentially high-return investment constraint? opportunities in Togo that are not pursued due to these distortions to Correlated with growth  private economic incentives. Togo’s high level of informality, while or investment? certainly not uncommon, is consistent with a relatively greater effort And/or adversely  affects income of poor to avoid taxation, but may also reduce the firm growth and people? formalization generally associated with productivity improvements.  = passes test In addition, tax declaration data for 2013 show a concentration of firms with declared revenues just under the threshold for VAT obligations (Test 2). Relatively few firms survive in sectors where the tax burden would fall most heavily, particularly in sectors with low profit margins, such as in commercial agriculture and agriculture-related business, where there are only a few formal firms according to OTR data (Test 3). Although only suggestive, since there are many possible explanations for Togo’s relatively undeveloped manufacturing sector, higher corporate tax rates (Djankov et al. 2010) together with high import duties may be important contributors. Finally, movements in the constraint over time—even over the relatively short time span of nine years— appears to result in an investment and growth response (Test 4). Whereas none of the above tests is conclusive on its own, the totality of the data and indicators available provides substantial evidence that Togo’s tax system—its code, combined with how it is implemented—represents a binding constraint to inclusive growth. Because entrepreneurs cannot create jobs and increase labor productivity and wages 83 Bivariate regression results with log of growth regressed on log of the tax rate indicator for the period 2007–2015. P-value of the coefficient is 0.002. It is theoretically possible that an increase in growth rates lead to decreases in tax rates as well; however, it seems unlikely that the Government of Togo, with its low capacity and structural fiscal deficits, is attempting to adjust tax rates based on growth projections for the coming fiscal year. 84 P-value = 0.046. 85 It is possible, but not likely, that the government anticipates growth rates and raises taxes in years during which lower growth is projected, but Togo’s tax laws are adopted before growth rates can be projected with any accuracy. 86 This indicator averages in another question on business regulation, but the measures are highly correlated. 53 without a greater incentive to invest and grow their businesses, this constitutes a key constraint to poverty reduction as well. Moreover, as discussed in the next section (4.6), onerous, revenue-based taxation represents a binding constraint to the development of more productive agriculture as well. 54 Diagnosing Constraints in Agriculture: Key Distortions to Private Economic Activity Combined with Moderately Constraining Public Service Delivery Main Messages:  The constraints that Togo faces in agriculture are similar to those in other countries in the region, including weather-related risk and land degradation. Despite the adverse effects of climate change, Togo has more advantageous rainfall patterns than many Sub-Saharan African countries.  However, economic distortions caused by poor formulation and implementation of policies in the agricultural sector reduce the profitability of productivity-enhancing investments by commercial and smallholder agriculturalists to a degree that represents a binding constraint.  Togo’s tax code makes it generally unprofitable for smallholders to sell to formal commercial operators and relegates marketing and value chain activities to the informal sector or the state.  The reduction in profitability and income for poor agriculturalists due to these distortions represents a large fraction of their income, and therefore increases poverty substantially.  Poor public service delivery is also constraining, and the allocation and effectiveness of public spending in the sector appear problematic.  In some areas, a lack of local infrastructure such as irrigation systems (in valley bottoms) and feeder roads (in Plateaux) appear to be key constraints.  Nonetheless, economic distortions due to skewed policy and regulation are more binding and must be alleviated along with these constraints for the requisite investments to bring high returns for the poor. 86. Agriculture is the primary activity for over half of the country’s working population and employs the vast majority of poor people. Despite Togo’s natural comparative advantage in agriculture, however, it has been unable to raise productivity consistently in the sector, including through diversification into higher-value-added products. Although Togo’s land mass is Figure 42: Intra-annual Rainfall Variation and Income, Cross-Country Comparisons (Togo in black) small for the continent, at just 56,000 square kilometers, arable 11 Ln Per capita GDP 2012 (in 2005 land is relatively abundant in per- 10 capita terms, and only 50 percent 9 of the country’s 3.4 million 8 hectares of cultivable land were USD) cultivated in 2012, having doubled 7 since 1996 (RT 2014b). Weather- 6 related risks are an important 5 determinant of household 4 consumption in any given year, 0.000 0.500 1.000 1.500 2.000 and if not mitigated can Coefficient of Variation of within year Mean Monthly Rainfall disincentivize risk taking by Togo (1990-2009) 87 farmers. Yet such risks in Togo Source: WDI and World Bank Climate Change Knowledge Portal are similar to those in Benin and 87 See, e.g., Rosenzweig and Binswanger 1992 and Osborne 2006. 55 other countries of the region, and at a national level Togo still rates relatively favorably within the region on the availability of freshwater resources per capita. Moreover, within the year, the constancy of Togo’s rainfall patterns gives it an advantage relative to its income peers that are similarly concentrated in agriculture (Figure 42). Togo thus remains relatively well suited to rainfed agriculture (Droogers et al. 2001; RT 2014b), but has failed to exploit this comparative advantage fully. 87. Just as with other private sector endeavors, empirical indicators and economic logic can aid in the prioritization of constraints in agriculture. There are often many constraints to productivity- enhancing investment in agriculture, but not all of them are binding to the same extent. Without addressing those that are most constraining, interventions directed at other issues in the sector may fail to have an appreciable impact. This chapter Figure 43: Frequency of Constraints to Agriculture Listed considers the evidence available on all of by Togolese Communities (2012) the applicable constraints in agriculture, applying the logic of the HRV framework. 88. Togolese agriculture suffers severely from variants of the constraints to the wider economy arising from weak policy formulation and implementation, as well as onerous taxation. Such distortions drive a large wedge between producers’ potential and actual returns. In particular, problematic regulation of the sector obstructs the efficient, reliable, and timely delivery of inputs to producers, as Note: Communities were asked yes/no questions regarding whether the well as the development of more problems affected them. accessible and efficient output markets, Source: 2012 Agricultural Census. thus reducing investment, productivity, and agricultural incomes. Other constraints arising through the lack of local public goods such as feeder roads also impede market access and, in some areas of the country where potential for it exists, improved water control is a major constraint. Yet on a national level, these localized constraints appear only mildly or moderately constraining, relative to binding constraints (Constraints 3 and 4), which reduce the profitability of agriculture for all producers. 89. Surveys of households and communities in rural Togo underscore the importance of distortions in input and output markets. After the problem of unfavorable rains, the second-most frequent adverse shock that agricultural households reported in 2011 was that of high prices for agricultural inputs— an issue that is clearly correlated in the data with current poverty status (Section 3.4, Figure 18).88 Similarly, communities rate the lack of improved seeds, low market access, and crop diseases among the five most severe problems for agriculture in their communities in 2012 (Figure 43). 90. A scenario illustrates the issues detailed further in this section from the producers’ perspective. As the planting season begins, the farmer first faces difficulties accessing fertilizer and improved seeds; if available at all, these inputs come late, may be the wrong variety or of poor quality, and are highly priced. Even if traders bring in improved seeds from neighboring countries, these would have no 88Unfavorable rains in 2011 do not imply that rainfall variation, or water control measures to address them, are more binding constraints—with corresponding key opportunities—than other issues. This was a report from just one year. Moreover, water control measures are not viable in most of the country, and background weather risk cannot be eliminated. 56 local quality certification and tend to cost more. If the rains have arrived before fertilizer is available through the state-owned distributor at a subsidized price, the farmer turns to private distributors who charge more to cover their costs. The farmer is willing to pay, because the timeliness of fertilizer application is key to its benefits, and the soil increasingly requires nutrient replenishment. Next, the farmer faces a variety of risks related to the timing and adequacy of the subsequent rains, as well as the risk of pest infestation. The price of insecticides is also high, and the household has livestock that is not vaccinated, because the cost of accessing veterinary services is prohibitive. At harvest time, the farmer finds that marketing her maize crop—never easy—is more difficult than some years ago. There are fewer buyers, and the price is lower than expected, barely covering her costs. Buyers operating in her local market explain that they would normally try to take marketed surplus to Burkina Faso to sell for a higher price. They no longer do so, however, since their stock was recently confiscated at the border. Other buyers take a risk and pay bribes to smuggle the product across, but even these buyers cannot pay a better price. Although some higher-value crops are grown in the community, the price received locally is not high enough to justify the expense of the investments required to grow these crops, and there is no buyer in the vicinity with an established connection to higher-value markets. At the end of the harvest season, the farmer’s income is too low to set aside funds for next year’s activities while also compensating for a rising cost of living. 91. The main policy or institutional issues depriving this farmer of a better income fall into three areas: input market regulations, output market policies, and taxation. First are a number of counterproductive restrictions on input provision. The government agency responsible for testing and approving new seeds, the Institut Togolais de Recherche Agricole (ITRA), requires 2–3 years of testing before new seeds are authorized—including for seeds that have already been approved for use in neighboring countries. In practice, ITRA has typically not approved new seed types within a reasonable time frame, and as a result seed technologies developed elsewhere are not.introduced.89 Moreover, improved seeds (those selectively bred for their desirable properties) that are officially registered in Togo are considered by some not to have the requisite quality. Although traders bring improved seeds into the country, these lack quality control.90 Due to availability constraints, the use of improved seeds is low. Only 14.9 percent of producers and 19 percent of cultivated land (RT 2014b) benefit from them.91 There are also barriers to the provision of animal health services. Approved applications to join the profession of veterinary doctor must apply to a body of peers. Anyone “with an interest” can contest approvals, and the period for appeal of a refusal to include an applicant in the profession is only two weeks.92 Because of these and other barriers to entry, there are relatively few formal veterinary service providers, and all of those listed in firm registries are located in Lomé. Only 17 percent of livestock producers surveyed in 2013 had vaccinated their livestock, and only 6 percent used antiparasitic products (RT 2014b). 92. As recognized by the government’s proposed reform agenda, fertilizer markets are currently distorted and inefficient. A quasi-monopoly in official fertilizer distribution limits the quantity available, as well as the flexibility of the system to provide fertilizer of the optimal type and at the appropriate time (World Bank 2012e). There are three official importation channels: through a state entity, Centrale d’Approvisionnement et de Gestion des Intrants Agricoles (CAGIA), through the Nouvelle Société Cotonniere du Togo (NSCT), or through the private sector. In addition, the limited range of fertilizer types available through official channels impedes the use of more suitable choices by soil type and crop. Only NPK 15-15-15 and 46 percent urea were available as of 2011 (World Bank 2012e), and the availability of 89 Authors’ interviews with producers (2014-2015). 90 Ibid. 91 These are not genetically modified seeds, which are forbidden in Togo. 92 Loi Ordre National de Medicins Veterinaires (September 2004). There are no restrictions on the permissible reasons for refusal contained in the law. 57 PK and other types is limited.93 Unofficial private distribution channels expand access to producers, but their development is constrained. Although the government subsidizes fertilizer marketed through public channels, for most farmers it is either expensive or not available in sufficient quantities at the appropriate times. If fertilizer is not applied at the optimal time or if other complementary inputs such as improved seeds or pesticides are not available, the returns to using it are low or nonexistent (Livingston et al. 2011).94 The subsidy program lacks appropriate targeting and results-based monitoring and evaluation, and makes it more difficult for private distributors to compete (World Bank 2012e). Still, the disparity between official fertilizer import statistics and estimated use from a recent farm survey suggests that informal distribution channels are the major mode of provision. Average fertilizer use in the country was estimated at 117 kg/hectare (RT 2014b)— a level far exceeding estimates based on official import and fertilizer production volumes.95 Moreover, RT (2014b) estimates that approximately half of fertilizer used is imported and distributed by the private sector at market prices. Market prices are high: in 2012, price surveys in multiple domestic markets showed a price of imported fertilizer twice as high as the world price.96 Despite these issues, 35 percent of cultivated land still receives chemical fertilizers (RT 2014b). Perhaps surprisingly, availability is worse the closer one is to the official port of entry, Lomé. For those farmers not using chemical fertilizer, the main reason given is the lack of availability: 63 percent of respondents in Maritime gave this as the main reason, 46 percent in Plateaux, 30 percent in Centrale, 35 percent in Kara, and 25 percent in Savanes.97 Those specifying just a high price represent 15 percent in Maritime, Plateaux, and Central, and 26 and 29 percent in Kara and Savanes, respectively. Farmers give other possible reasons much less frequently than availability and price. Finally, the duties imposed on agricultural inputs, including agricultural machinery, lack clarity and consistency, and the procedures for importing them (discussed in section 4.4) create additional costs (UNDP 2013). 93. Some modes of state intervention in output markets have reduced agricultural incomes. Market access is among the most frequently cited obstacles to agriculture, and is listed as a key obstacle by 60–70 percent of communities (Figure 43). Interventions to establish traceability and quality certification, improve access to storage, and reduce trade barriers would have major impacts on the efficiency of Togo’s agricultural output markets. Rather than focusing on measures such as these, however, the Government of Togo has sometimes pursued interventions that have had the effect of reducing market access. The percentage of the world price that producers receive for products for which the government regulates or sets the price —in particular, cotton and peanuts—is low and has fallen over recent years (Table 21). In contrast, liberalization of markets for cocoa and coffee in the 1990s has improved farmers’ margins; having received only 55 percent of the market price before liberalization, afterwards farmers began to receive 70 percent (Akiyama et al. 2003) (Table 21). 93 World Bank (2012e), confirmed by stakeholder interviews and consultations in 2015. 94 In a recent trial, on-time fertilizer applications registered value/cost ratios of greater than 2 in eight of the 21 cases, compared to a ratio of zero among those who received fertilizer late, and according to common rule of thumb, value/cost ratios of greater than 2 are needed for farmers to adopt fertilizer into their production systems (Livingston et al. 2011). 95 World Bank (2010) used estimated fertilizer use from imports through official/public channels only, and this is a substantial underestimate of actual input use. 117 kg/ha is close to the recommended dose. Attempts to correct any coding errors in the underlying data have not changed the main result using these data, that fertilizer use in Togo is not nearly as low as volumes flowing through official distribution channels suggest. 96 Based on a comparison of sampled market prices of urea in inputs stores in 2012 (Marketing Inputs Regionally Plus, a project of the International Fertilizer Development Center) and the mean world price of fertilizer in the same month. 97 This response frequency combines that for the possible responses “lack of availability” with “lack of availability and a high price.” 58 94. Although the government has Table 21: Producer Prices Relative to World Price, Main made moves to reform certain agricultural Crops markets, in some instances government Median producer price as a proportion intervention has led to reduced producer of world price in US$ prices. Togo typically produces a surplus of 2006 2011 % Decrease maize, the country’s most widely cultivated Maize 1.57 1.16 40.7% Peanuts 0.41 0.20 21.8% crop; 80 percent of rural households grow it Coffee 0.71 0.70 0.2% and 38 percent sell it (QUIBB 2011). Cacao 0.72 0.71 1.0% Therefore, access to external markets for Rice 0.67 0.47 20.4% maize and other crops is crucial for rural Soya 0.89 0.78 10.6% households’ livelihoods. In 2008, a new Cotton 0.23 0.10 57.8% agency, Agence Nationale de la Securité Source: QUIBB 2006, 2011 Alimentaire du Togo (ANSAT), was established and charged in principle with retaining a buffer cereal stock and facilitating the marketing of basic food grains. Although ANSAT may have taken steps to improve food security, some of its actions have disrupted the functioning of maize markets in a manner that has adversely affected farmers, periodically attempting to corner the maize export market while bidding down the producer price.98 Although the export of cereals is technically permitted, it requires a license and, according to multiple accounts, this license is typically not issued.99 For example, in 2011 ANSAT purchased an estimated 32,000 tons of maize for 160 FCFA, and sold it at 226 FCFA in regional export markets, while also effectively prohibiting exports by other private traders (CPOT 2013). While world maize prices rose by 116 percent between 2006 and 2011, the mean producer price in Togo fell by 26 percent, and the ratio of producer to world prices fell by 40 percent (Table 21). Assuming the same production level and marketing costs as in 2006, the effect would be to reduce gross revenues per hectare in 2011 by 35 percent. Absent ANSAT, farmers’ profits per hectare would have been approximately US$138 higher per hectare. With 50 percent of cultivated land devoted to maize and an average farm size of 3.5 hectares (as calculated by World Bank staff, using QUIBB 2011), this represents a loss in annual income for producing households of US$395 (2011 PPP). In per-capita terms for a five-person household, this is almost 11 percent of the international poverty line. Moreover, this loss represents only the first-round effect on income and does not take into account the impact on the household’s ability or decision to invest in inputs in subsequent years. Given certain vested interests at stake, a report advanced by producers’ groups that documented and sought to address this situation was discussed and approved by the Ministry of Agriculture, but has since been shelved. Rather than directly intervening in the purchase of grains to smooth prices and availability, it would be more effective to negotiate open trade policies within the region. Trade and storage by private agents tend to produce efficient smoothing, and if greater price stability were still desired, the optimal policy would be to subsidize market-based storage (Williams and Wright 1991; Deaton and Laroque 1996; Osborne 2004; Gouel and Jean 2012). 95. Institutional and pricing arrangements in Togo’s important cotton sector have also “taxed” producers’ income. Sustaining a viable cotton sector is undoubtedly more challenging given other (rich) countries’ subsidy policies, and the optimal institutional arrangements are far from clear. Yet according to Baffes (2007), in Togo and other West and Central African countries in the FCFA zone, institutional arrangements in the sector have had the unfortunate effect of both taxing cotton producers and generating significant unbudgeted fiscal liabilities. State-owned cotton companies have failed to perform efficiently or respond flexibly to evolving market conditions.100 Since 2000, Togo’s official purchase price of raw cotton 98 Authors’ interviews with producer groups. 99 Authors’ interviews with private sector and maize producers. 100 For example, Baffes points out that, of the countries examined, only Burkina Faso had begun to field test genetically modified cotton seeds, even though one-third of world output was from modified varieties. 59 has been lower than the average of other FCFA countries (Figure 44), where Baffes finds a large distortion. Yet as a result of financial difficulties, from 2005 to 2009 Togo’s vertically integrated state cotton company, SOTOCO, began to experience financial difficulties. The official offer (Figure 44, blue line) price plummeted between 2005 and 2011, and the company was unable to pay many of its input suppliers and cotton farmers. Producer survey data suggest, however, that producers found other means to sell their cotton at a better price, possibly through neighboring countries (Figure 44, red line). Togo’s cotton company has since been restructured to include producers as minority shareholders, and the cotton pricing formula is designed to link more closely to world markets. Still, there does not appear to have been an increase in the share of the world price that Togolese producers receive vis-à-vis the prereform period—if anything, the gap has widened (Figure 44), and it is too early to tell whether the new company will prove more financially sustainable. 96. Whereas some Figure 44: Evolution of Cotton Prices skepticism of market-based 700 reforms is justified, improving 600 outcomes in the agricultural 500 sector will require a substantial 400 measure of liberalization. The 300 200 government has recognized this, 100 but has had difficulties in 0 effectively implementing this 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 agenda. At the same time, the Official purchase price, Togo state’s role in solving market Average producer price (Togo Ag Surveys) failures will need to be realigned. 40% of World Price, A Index in FCFA In particular, the government has Average official purchase price, other CFA countries a role in addressing the lack of quality certification; fostering the Note: 40 percent of the world price is shown to reflect technical rule of thumb fiber yields from raw cotton. diffusion of new, sustainable Source: World Bank Commodity Price Databank, BCEAO and NSCT. technologies; establishing traceability systems; and promoting plant and animal health. Liberalization, to be successful, must be well designed and implemented to take into account both the limitations of the free market, and the limitations of state capacity and governance quality (Jayne et al. 2002; Akiyama et al. 2003; Kherallah et al. 2000).101 The case of neighboring Benin may be instructive, given its similar agro-climatic conditions and similar level of productivity since 1990 (Section 3.3, Figure 26).102 Although progress in Benin may have stalled more recently, the steps it took to liberalize input supply between 1991 and 1996 had an appreciable positive effect at the time. In particular, the Government of Benin eliminated subsidies and price controls on crops and agricultural inputs, reduced the role of the government in agricultural marketing, and promoted private sector participation in agricultural production and trading activities—in particular, agricultural processing, seed multiplication, veterinary services, and the importation of veterinary medicine (IFPRI 2001). Farmers 101 As Jayne et al. (2002) have documented, often when agricultural reforms have not had the intended results, it has been because they have not been implemented as intended or other policies have served to cancel out the benefits. 102 According to a recent World Bank review, Benin’s agriculture sector faces a serious institutional constraints, including: (i) lack of a comprehensive and fully operational policy and regulatory framework to guide public interventions in agriculture; (ii) inadequate fiscal regime for agricultural enterprises that does not provide sufficient incentives for agricultural entrepreneurship; (iii) quasi- absence of organized input supply and distribution systems, outside cotton; (iv) inadequate agricultural credit facilities and financing systems; (v) insufficient incentives within the traditional rural land tenure system to make long-term investments in agriculture; and (vi) lack of insurance systems for managing agricultural risks. However, this review also shows more rapid growth in agriculture in Benin than in Togo (World Bank 2011). 60 surveyed in 2000 reported an improved distribution and use of inputs, including improved seeds and fertilizer; indeed, the use of fertilizer increased at one of the fastest rates in SSA, and agricultural production grew along with commercialization and exports. Moreover, the availability of improved seeds, which were distributed primarily by the private sector, improved, especially for poorer households (IFPRI 2001).103 Over this time frame, agricultural productivity well surpassed that of Togo (Figure 26). 97. As with other sectors of the economy, taxation of agriculture and of the agricultural value chain is a major constraint to the development of larger-scale, commercial agriculture and efficient input and output markets for smallholders. Whereas in other countries agriculture typically receives preferential tax treatment, in Togo the sector largely does not. Agricultural producers are exempt from the TPU; however, officially all individual agricultural producers earning over US$625 per year are subject to a profit tax, starting at 4 percent and increasing to 45 percent for those earning over US$25,000. In addition, agricultural firms with revenues over 30 million FCFA (US$50,000) are subject to the IMF, TP, and IS (Section 4.5). In contrast, Mozambique, for example, sets a 10–16 percent profit tax rate for agriculture, and Ghana sets zero profit tax for the first 3–10 years, then a rate ranging from 0 percent in rural areas to 20 percent in Accra thereafter (compared to 32.5 percent for most industries). Until 2012, Togolese agriculture was also subject to 18 percent VAT, and for firms that were engaged in agricultural export and paid VAT on inputs, only 60 percent of this was reimbursable under the tax code.104 105 98. Although smallholder producers escape direct taxation, taxes levied on buyers, storers, exporters, or processors of their produce, if paid, would likely be passed through almost entirely in the form of reduced producer prices.106 First, a buyer or trader with a tax identification number who packages, sells, exports, or processes agricultural output is subject to VAT, IMF, and TP. Those without a tax identification number (of any size) are subject to a tax of 5 percent of revenues.107 Shifting these taxes to producers, as would normally occur, would result in a high burden as a percentage of their profits. Table 22 shows the simulated tax burden on producers in a variety of scenarios. In the most favorable scenario, if buyer-wholesalers were small and had no tax identification number, and producers’ margins were high—at, say, 15 percent of costs (as they were for maize in the United States, on average, between 2010 and 2014, according to the United States Department of Agriculture), taxes would represent a minimum of 33 percent of farm profits. For a larger, formal buyer/wholesaler, with a tax identification number and subject to VAT, this share would rise to 82 percent. Assuming more realistic, thinner producer profit margins of 8 percent, similar to the 5–8 percent estimated for Tanzania (Livingston et al. 2001) and 9 percent estimated from the 103 Access to credit was not a major constraint: there was no relationship between participation in the cotton chain and purchase of seeds, 98 percent of which were purchased on a cash basis. Yet in fertilizer, distribution remained under partial state control – distribution was restricted through licensing, with fixed pan-territorial pricing, and so for this input only, cotton-farming areas showed greater availability. 104 Although Senegal and Côte d’Ivoire both impose an agricultural VAT of 18 percent, Ghana has charged (until 2014) just 12.5 percent, and Cambodia 10 percent VAT on agriculture. Benin exempts agriculture entirely from VAT and exempts agricultural cooperatives from the profits tax. 105 Togo also levies tariffs on certain imported agricultural inputs. Most imported machinery, equipment, and parts are subject to a 5 percent duty, plus 18 percent VAT and a community tax (“taxe communautaire”) of 6 percent on some items. Insecticide is subject to an average tariff rate of 17 percent (between 5 and 20 percent), and fertilizer to a 5 percent duty. Although imports of fertilizers and other inputs are in principle VAT-exempt, in practice they are not consistently exempted, according to input providers. Yet in many countries with which Togo competes, agricultural inputs are neither dutiable nor subject to VAT. In Ghana, for example, machinery, apparatus, appliances and parts thereof designed for use in agriculture, veterinary activities, fishing, and horticulture, as well as industry and mining, are VAT-exempt. Benin has import duties on its books, but has extended exemptions to this from year to year. Cambodia charges no import duty on agricultural equipment and inputs, and Tanzania exempts agricultural inputs from VAT. 106 Standard microeconomic theory shows that the allocation of the burden of a tax depends upon the relative price elasticity of supply versus demand for the good being taxed. 107 This applies only to non-VAT paying firms (with less than 50 million FCFA in sales). In other cases, exports are subject to a 1 percent export tax (potentially reimbursable against VAT, if payers register with the tax authorities). 61 agriculture-related firms in Togo (TFFS Table 22: Simulated Tax Burden, Agricultural Producers 2015), effective taxation rises to between Interacting with Formal Economy, by Tax Regime 63 and 154 percent of farm profits.108 In Hypothetical With Tax ID years when farmers experience losses due Producer With No in VAT to weather and price fluctuations, the Profit Margin Tax ID Regime (%) impact would be even more deleterious. 15% 33% 82% 99. These tax policies have the effect 10% 50% 123% of largely relegating agricultural 8% 63% 154% production and related services to the Source: World Bank staff calculations using Fiscal Code 2014. informal sector or to the state. Commercial operators are typically needed to make value chain investments, provide market-relevant technical support, develop export market linkages, and contribute to improved quality control, packaging, and brand marketing. Yet the need to avoid onerous taxation distorts the structure, reinforces a tendency toward informality, impedes investment in storage and other infrastructure, and discourages the entry of agribusiness—thus limiting the sector’s ability to develop and market higher-value-added products. This partly explains why there are very few formal agricultural firms filing tax declarations in Togo; of five firms doing so in the primary sector in 2013, only one produced agricultural or horticultural products.109 100. Given such distortions to incentives in commercial agriculture, the paucity of farm machinery in use in Togo is perhaps not surprising. A recent count found Togo to have fewer than 200 tractors in good condition and in use (RT 2014b). Although widespread mechanization is unlikely to be efficient for smallholder agriculture, some mechanization is likely to become increasingly viable as labor transitions out of agriculture. Yet rather than addressing the underlying obstacles to private investment in equipment, the government has resorted to direct gifts of farm equipment to farmers —most recently 173 tractors, five bulldozers, five excavators, hydraulic diggers, and water sprinklers, with a total value of 13 billion FCFA (approximately US$22 million).110 101. Other constraints to agriculture are important, but currently less binding. First, while access to financial services can be difficult for some producers, the facts indicate that a lack of credit is not a binding constraint for smallholders.111 Many agricultural producers have access to credit through microfinance institutions, informal savings and credit associations, nongovernmental organizations (NGOs), and other sources. In 2012–2013, approximately 15.7 billion FCFA (over US$30 million) of credit was extended to smallholder agriculture: 47 percent of cash credit from microfinance institutions (MFIs), 22 percent from mutual groups, and 10 percent from family members.112 According to CASIMEC data, interest rates on loans were low, ranging from 5–9 percent, below average bank lending rates. The main form of security was a group guarantee, used for 61 percent of loans, followed by third-party guarantees from family or others, and then land at 2 percent and housing at 1 percent (RT 2014b). Of the average 100,005 FCFA in cash expenses incurred per agricultural household in 2012, 31,460 was borrowed and the rest was financed from own savings (RT 2014b), implying a similar level of self-financing to that of formal firms (70 percent; see Section 108 Calculations of VAT assume a similar level of input VAT recovery as in the formal sector generally. 109 Drawn from TFFS 2015 firm listing and follow-up exercise. 110 How the recipient farmers are chosen is not clear. See http://www.republicoftogo.com/Toutes-les-rubriques/Politique/13- milliards-d-equipements-remis-aux-paysans. 111 The theoretical basis for credit as a binding constraint in a dynamic context is weak without some other obstacle present. See Osborne (2006). 112 Similarly, approximately 56 percent of in-kind credit was from MFIs or NGOs, 14 percent from groups, 4 percent from government or other projects, and 5 percent from suppliers. Tontines, rotating savings and credit associations, numbered approximately 3,885 in Togo in 2012, and mutual groups numbered 1,587. 62 4.5). Moreover, only a small percentage of agricultural producers not utilizing fertilizer cite a lack of money or “other reasons” for not doing so (RT 2014b). 102. As a result of inadequate funding, skewed allocation of financing, and inadequate design of interventions (World Bank 2012e), effective public support for agriculture is lacking in Togo. Public spending on agriculture is relatively low, and the allocation and effectiveness of these expenditures is unclear. A review of public expenditures showed that, between 2002 and 2011, the government devoted only 5–6 percent of its budget to all expenditures in agriculture (excluding feeder roads)—less than Burkina Faso (9.5 percent in 2011), Ghana (11.2 percent), and Senegal (11 percent in 2009).113 When feeder roads are taken into account, Togo spent 6.5 percent of agricultural GDP on agricultural programs in 2010, ranking in the middle range among SSA countries (World Bank 2012). Yet the problem of expenditure levels appears to be secondary to that of the allocation and effectiveness of this spending. Agricultural spending reaches a relatively small proportion of the agricultural population. Overall spending appears to have been biased toward the Maritime region, possibly as a result of the centralization of management in and near Lomé, and a lack of both human and material resources has meant that the Ministry of Agriculture has struggled to adopt a results-based approach. Moreover, the functional allocation of spending has been problematic. A large percentage of expenditures has been for internal resources and nonpublic goods: over the period 2005- 2011, 42 percent was for for personnel and other administrative expenses; 28 percent for the purchase of fertilizer; and just 27 percent for (unspecified) investments, some of which may be nonpublic in nature. Research and development expenditure in agriculture, which generally has a high rate of return, received only 0.07 percent of national GDP, and this was for ITRA personnel (World Bank 2012e). A greater allocation of agricultural spending to public goods, including research and development efforts designed to complement those of Togo’s neighbors as well as robust monitoring and evaluation, are needed to improve the impact of this expenditure (AMR 2013). Since the provision of nonpublic goods, such as through ongoing programs to distribute free input kits, has not been shown in other contexts to have an appreciable and sustained positive impact, these and other programs should be rigorously evaluated so as to enable a more effective allocation of public resources in the sector (World Bank 2012e). 103. Poor prioritization of spending has resulted in a lack of effective support for technology adoption, an activity that has had a positive impact in other contexts in Africa. Togo provides relatively weak extension services; only 5 percent of agricultural producers report having had some form of training recently (RT 2014b), and across all categories, agricultural expenditures were recently estimated to reach not more than 10 percent of producers (RT 2014b). Nonetheless, the lack of knowledge is likely to be a secondary constraint in the current context, simply because the benefit of such training—via the profitability of improved technology adoption—also depends on the existence of efficient, flexible input and output markets. Moreover, farmers’ survey responses provide no indication that Togolese farmers are unaware of the benefits of basic inputs like fertilizer and improved seeds. Of the available explanations for not using them, essentially no farmers surveyed in 2012–2013 replied that they did not see the value or did not wish to use them (RT 2014b). Since it is not possible using available data to assess the importance of a lack of research, development, and extension services in Togo, the severity of this constraint in the current context of low economic profitability incentives and barriers to entry in input sectors remains an analytical gap. 104. Unsustainable use of biomass and soil degradation also adversely affect Togo’s agricultural productivity. Sixty percent of Togo’s population lives in areas with degraded biomass, and Togo has a relatively high percentage of degraded land, which continues to degrade (Figure 45). Degradation occurs primarily through deforestation, which proceeds at a worrying rate of 1.4 percent per year,114 costing the country 0.66 percent of GDP per year (World Bank 2015a). Combined with soil loss and deforestation, land 113 Higher spending in these countries is not associated with intensification or productivity improvements, however. 114 www.fao.org/nr/lada/gladis/ 63 degradation costs an estimated 0.82 percent of GDP per year in natural wealth. As a result, rural communities name soil loss among their top constraints. Nonetheless, the current status of Togo’s land assets does not explain the country’s relatively poor agricultural performance. Using available data, in fact, Togo’s soil quality remains comparable to that of its neighbors (Figure 46), and its soil and water resources are fairly good overall (Figure 47). Where Togo is an outlier in the region is in the economic value of land-based ecosystem services (Figure 48), presumably because in such a distorted context for economic activity the country utilizes its resources to produce relatively little value added. Figure 45: Percentage of Land by Degradation Figure 46: Soil Quality, Togo and Neighbors Status Figure 47: Ecosystem Status by Dimension Figure 48: Economic Value of Land Ecosystem Services, Togo and Neighbors Source: FAO GLADIS [2015] 105. Togo’s slow progress in adopting simple, low-cost water control and irrigation techniques constrains income growth and poverty reduction in certain areas of the country. There are cost- effective systems that improve productivity while also reducing climatic risk, including small-scale collective irrigation schemes that employ water diversion from rivers and small earth reservoirs (which often 64 have multiple objectives, including the production of rice, vegetables, livestock, and fish). Moreover, simple soil and water conservation technologies can aid in coping with climate variability, particularly in the north of the country. Of particular benefit could be the introduction of partial water control structures in Togo’s many small inland valleys. Out of an estimated 185,000 hectares of such valleys, water control technologies are used on just 5,000, mostly for rice production. Their low unit cost per hectare makes it possible to reach more beneficiaries than more expensive systems, and they are relatively simple for local farmers to manage and operate on a sustained basis, thus reducing dependency on external assistance. Conversely, investing in expensive full water control schemes, such as in the existing 2,300 hectares currently equipped but not fully cultivated, does not appear to be as efficient an avenue for food security and poverty reduction in Togo. 106. The successful deployment of irrigation systems requires careful, participatory planning based on knowledge of the landscape and local conditions, integration into product markets, and an enabling policy framework. Preparation requires the establishment and participation of local community institutions to enable the sustainable operation of infrastructure (such as dykes and simple networks of canals and drains), efficient production, environmental protection of the watershed by farmers, and an approach to balancing land rights between stakeholders. Introduction into areas with high population density, adequate water resources, and road access is likely to prove the most viable route.115 An enabling policy framework is also critical to viability and sustainability. The International Water Management Institute (IMWI) has concluded that the overall policy directions captured in Togo’s 2010 Water Policy are well suited to these objectives. In particular, the government focuses on overall water resources planning and regulation, whereas management is to be participatory and empower farmers’ organizations. Nonetheless, a more fully specified legal and institutional framework that authorizes and supports local initiative may be needed to define the precise roles of various parties in the operation, regulation, management, and financing of irrigation systems. Moreover, measures to improve access to markets, in part by enabling community or private value chain investments and ensuring supportive tax and regulatory policy, must accompany these efforts. 107. The lack of local public goods, such as those that support water control and market access, are important constraints but Table 23: Tests of Key Constraints: Poor Regulation and are heterogeneous and location-specific. Data are not available to Tax Policies in Agriculture fully evaluate the aggregate poverty impact of such constraints. In Tests of binding Pass? addition to unexploited water control measures, as discussed in constraints to growth Section 4.6, there are indications that road access in some areas, on key pathways particularly in the Plateaux region, is also moderately constraining. High cost to actual or  potential enterprise? 108. Although the agricultural sector faces a multitude of Circumvention of  challenges, distortions to private economic activity in the sector constraint evident? arising through poor quality regulation and taxation of input and Few actors present  output markets have a high direct cost for producers (Table 23), requiring alleviation of including in maize and cotton sectors, as well as in commercial constraint? agriculture (Test 1). Policy constraints result in a high level of Correlated with growth n.a. or investment? smuggling of seeds, fertilizer, and produce in order to avoid these And/or adversely  restrictions (Test 2), as well as a striking scarcity of tax-compliant affects income of poor commercial-scale agriculture and agribusiness (Test 3). In addition, people? although Test 4 is not possible with the available data, the actions of n.a. = no test available/inadequate ANSAT to weaken access to output markets further, particularly information noticed by producers in 2011, may explain the decline in rural incomes in that year despite a surplus harvest and rising world maize prices. 115This process could benefit from a comprehensive mapping of its valley bottoms and the systematic implementation of existing approaches (for example, CIRAD’s DIARPA, “Inland Valley bottom consortium,” or SMART IV of Africa Rice). 65 International and Togolese experience both support a positive correlation between some carefully implemented liberalization (with supporting measures) and outcomes in the sector. Analytical gaps identified:  The actual or potential returns to research and extension services in Togo, particularly without alleviation of other constraints.  The full potential for viable irrigation in Togo. 66 Is Inadequate Access to Finance a Key Binding Constraint? Main Messages:  Host to 15 banks, Togo enjoys a relatively large and competitive financial sector, with the highest lending-to-GDP ratio among low-income SSA countries.  Microfinance is expansive and serves more clients as a percentage of the population (37 percent) than in any other WAEMU country.  Risks in the lending environment, unresolved nonperforming assets at one state-owned bank, and inadequate supervision of the microfinance sector raise systemic risks.  However, there are no indications from available data that inadequate access to financing is a binding constraint to inclusive growth: o Neither a low supply of financing, movements in interest rates, nor firms’ degree of reliance on financing alternatives indicate that inadequate access to finance is a binding constraint. 109. A country’s financial sector is key to enabling economic activity and ideally allocates resources to the most promising sectors and entrepreneurs. However, it may fail to perform this role adequately due to a lack of investible funds, poor supervision or regulation, inadequate means to screen borrowers and enforce repayment, or other distortions that affect the availability or allocation of credit. As evidenced in Sections 4.4–4.6, highly distorted private incentives are binding constraints to private investment and entrepreneurship. By reducing the scope of attractive investments, this would in turn reduce the demand for financing. The evidence presented in this section shows that—although imperfect—Togo’s financial sector performs reasonably well in meeting this demand, particularly given the risks inherent in Togo’s real economy. Figure 49: Indicators of Solvency, Togo’s Banks Source: IMF 2015b. 110. Although Togo’s financial sector is sound overall, parts of the system exhibit significant fragility. Two banks remain wholly state-owned (with four others retaining some state ownership), and these appear to still face serious solvency issues; one has been under “administration provisoire’’ for years. The financial condition of some banks has weakened since 2012–2013, with worsening solvency indicators, asset quality, profitability, and liquidity (Table 24). As a result, average capital adequacy ratios are lower and the nonperforming loan ratio higher than the WAEMU average (Figure 49). Enforcement risks are elevated and, as a result, average collateral requirements are high—albeit on par with similar countries—at approximately 67 235 percent. Disaggregated data are not available to assess the degree to which such issues are driven by poor governance of SOEs or government difficulties in servicing its debts. Outside the banking sector, weak supervision of MFIs represents an additional source of potential instability. The microfinance supervisory body at the Ministry of Finance is understaffed and has not yet implemented a risk-based supervisory approach in line with international best practice. As a result, the ratio of nonperforming loans is relatively high for MFIs (9 percent in March 2015). And according to the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), there are approximately 40 MFIs (out of over 80 licensed entities) with financial difficulties as of December 2015—16 with major difficulties. Table 24: Banking System Performance Indicators 2011 2012 2013 2014 2015 Solvency Ratios Regulatory Capita / Risk-weighted Assets 11.7 11.4 11.4 8.5 8.9 Base Capital / Risk-weighted Assets 10.6 9.8 10 7.2 7.5 Asset Quality NPLs / Gross Loans 10.9 11.4 12.5 15.4 15.6 Profitability Return on Assets 2 1.6 1.6 0.9 n.a. Return on Equity 13.6 22.9 24 19.4 n.a. Liquidity Liquid Assets / Total Assets 33.4 44.6 43.8 43.5 41.7 Liquid Assets / Total Assets 46.4 65.7 67.3 63.6 58.9 Source: IMF 2015b. 111. When viewed from the perspective of meeting the demand Figure 50: Bank Lending to the Private Sector as Percent of for financing of private economic GDP, Togo and Comparators activities, however, the sector has 70 Bangladesh shown marked development. Bank 60 lending to the private sector has risen Kenya to the highest level as a percent of GDP 50 among all low-income SSA countries, Nepal 40 though it is lower than in comparator Asian low-income countries (Figure 30 Togo 50).116 Togo now has 15 banks and is home to two major pan-African 20 Low Income African banking groups, ETI and Oragroup, the 10 Country Mean (excl. Togo) Low Income country’s largest banks in terms of total African Max 0 (excl. Togo) assets in 2013.117 The sector is 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: WD 116 Some of this credit may be for financing of public works under the prefinancing arrangement that has become more common in Togo, whereby private companies undertake these works and borrow from banks, but with a central government guarantee. Nonetheless, the level of bank lending suggests a willingness to finance viable projects. 117 If accurately regulated and supervised, the presence of these two parent banks is not per se a source of additional risk for Togo (cross-border subsidiaries represent the dominant part of these banks’ balance sheets) and could support the country’s role as financial hub for the region. 68 reasonably competitive and efficient, with Figure 51: Net Interest Margins (percentage points) a low Herfindahl-Hirschman Index of 14 market concentration, at approximately 12 0.13 on a scale of 0 to 1.118 Net interest 10 margins have been among the lowest of 15 8 comparator countries, with just Côte 6 d’Ivoire showing lower levels in 2010 4 (Figure 51). Overhead costs as a 2 percentage of assets are relatively low for 0 an African country, at 3.2 percent, relative to values of 3.9–9.1 for comparator SSA countries except Côte d’Ivoire, and the cost-to-income ratio is lower than for all 2007 2008 2009 2010 SSA countries shown except Ghana, Kenya, and Mauritius. Source: FINSTAT 112. Access rates are as high as or higher than for comparator countries. Table 25: Comparative Indicators of Banks' Reach and The number of bank branches per Performance, 2012 100,000 adults (3.7) falls in the middle of Overhead Commercial the range for Africa and close to the level Costs as Bank Branches percent of per 100,000 Cost to in Cambodia (Table 25). In Togo, Assets Adults Income Ratio microenterprises have similar access to Côte d’Ivoire 2.0 66.7 loans and overdrafts as small firms Nepal 2.0 42.3 (Table 26). Although use of overdrafts is Cambodia 2.2 4.0 48.2 much higher for medium and large Mauritius 2.6 20.8 47.3 enterprises, differences are attributable in Bangladesh 2.8 6.9 42.6 large part to accounting practices: a Togo 3.2 3.7 61.7 higher share of micro and small Senegal 3.9 63.6 enterprises have overdrafts than have Benin 4.5 80.1 audited accounts, whereas this is not the Tanzania 4.8 1.8 62.4 case for medium and large enterprises Kenya 5.8 4.4 49.9 (World Bank 2010). Mozambique 6.3 3.4 61.2 Ghana 7.2 5.0 54.6 113. Togo’s microfinance sector, Rwanda 8.1 2.2 69.5 which serves the informal and Source: FINSTAT agricultural sectors, is relatively well developed. With 85 licensed MFI’s, of which 82 are mutual or cooperative Table 26: Financial Participation by Size of Firm societies,119 it also has an estimated 137 Med/Larg MFIs operating without a license, on Micro Small e Percent with deposit account accounts 91 93 100 which no information is available, Percent with overdraft 51 49 74 according to CASIMEC. Licensed MFI’s Percent with LC or loan 15 23 16 alone lend 5.6 percent of GDP (compared Percent with audited account statements 26 36 73 to 2.6 percent in Benin and 1.7 percent in Number of firms 145 81 74 WAEMU), and have 121 billion FCFA Source: World Bank Enterprise and Microenterprise Surveys 2009. (US$201.6 million) in credit outstanding. 118 Calculated by World Bank staff using OTR tax declarations data for 2013. 119 Of these, seven are networks with 103 affiliated structures and 75 “caisse unitaires,” plus three associations. 69 Among Table 27: Microfinance Access and Usage in FCFA Zone comparators, Togo Number of Credit has the highest MFI per Branches Clients as Deposits outstanding number of MFI 10,000 per 10,000 ratio of per capita per capita clients as a population population population (FCFA) (FCFA) percentage of the Benin 0.05 0.41 0.26 8,635 9,032 Burkina Faso 0.05 0.23 0.13 9,187 6,283 population (Table Cote d'Ivoire 0.04 0.13 0.07 7,229 4,962 27). Guinee-Bissau 0.11 0.10 0.01 142 66 114. As a result Mali 0.08 0.29 0.12 3,878 5,025 of Togo’s relatively Niger 0.03 0.10 0.02 1,341 1,644 Senegal 0.15 0.38 0.21 15,882 18,366 extensive financial Togo 0.13 0.72 0.37 22,363 17,743 sector, firms rate Source: World Bank staff estimates, using data from BCEAO as of September 2014. other obstacles as more pressing. In 2009, only 23.7 percent of Togolese firms rated Figure 52: Percentage of Formal Enterprises Rating access to finance as the greatest obstacle to doing Access to Finance as Biggest Obstacle business, a lower share than in most comparator 60.0 countries (Figure 52). In 2015, this percentage 50.0 fell to 11.2 percent (TFFS 2015). Although 40.0 businesses in other developing countries 30.0 typically rate inadequate access to finance as the 20.0 top constraint to doing business (Figure 53), 10.0 Togolese firms rate taxes and political stability 0.0 to be equal or greater constraints. 115. Given that credit is relatively accessible, Togolese firms tend to rely less on internally generated resources to finance Source: WBES, most recent years available as of 2015. their businesses than firms in comparator countries do. They self-finance, on average, 70 percent of their investment needs (Figure 54), the lowest among the countries shown, whereas firms from Benin, Cambodia, and Côte d’Ivoire self-finance Figure 53: Frequency of Main Constraints approximately 90 percent.120 Togolese firms also use banks to Across Countries According to World finance their working capital with a frequency similar to that Bank Enterprise Surveys in the region as a whole, and in the middle of the range among comparator countries (Figure 55). 116. Informal firms have relatively good access to finance. An estimated 69 percent have accessed credit, with 58 percent of them accessing microfinance, 21 percent loans from family or friends, 8 percent loans from a moneylender, and 2 percent funds from a rotating savings and credit Source: Figueroa and Wagner 2014 120 This is Test 2 of a binding constraint (Mindbook). 70 association, or tontine (Baseline Figure 54: Percentage of Investments Financed through Internal Informal Firm Survey (BIFS) Resources 2013). Although 29 percent of 100.0 informal entrepreneurs rate access 90.0 80.0 to finance as their top constraint, 70.0 only 6 percent had ever had a loan 60.0 rejected. On average, informal 50.0 40.0 firms are able to borrow over 15 30.0 times their monthly sales on short 20.0 10.0 notice, with a median of five times 0.0 their median monthly sales. Over half reported that they had at least two possible sources of financing, and their average debt-to-asset ratios were high at 356 percent. Moreover, small- and medium- Source: WBES, latest years. sized informal firms report requesting and receiving loans more frequently than larger firms do. Less than one-third of individuals who had never requested a loan from a bank or an MFI say this is related to procedures and loan conditions. In fact, collateral requirements for informal firms are generally reasonable. Just 39 percent of surveyed entrepreneurs had to provide a physical or monetary guarantee for their most recent loan, and only 10 percent had to provide both. When collateral is required, it represents on average 144 percent of the loan value.121 Moreover, access to financing and collateral Figure 55: Percentage of Firms Using Banks to Finance values are likely to improve through the Working Capital International Finance Corporation’s (IFC) 45 efforts to establish private credit reporting in 40 WAEMU member countries through the 35 BCEAO. 30 117. Although agricultural producers 25 20 have access to finance through MFIs and 15 informal credit, commercial banks have 10 provided low and declining amounts of 5 credit to agriculture. As shown in, the level 0 of bank credit provided to agriculture and forestry producers is low as a percent of sector value added, relative to that of Benin and the WAEMU, and has fallen between the decades 1980–1990 and 2001–2012 (Figure 56). While Source: WBES, latest years; TFFS 2015. banks must develop the expertise and tools to take agricultural risks, countries with less developed banking sectors and similarly risky weather patterns (such as Benin) have more active bank lending to agriculture, as do other countries in the region with similarly difficult land titling issues. At the same time, it would seem unlikely that Togo’s competitive, expansive, and relatively efficient banking sector would be so unusually unwilling to lend to agriculture, if there were bankable projects in the sector. As discussed in Section 4.6, the distortions that affect private incentives to invest in commercial agriculture are 121MFIs require less collateral than banks, and as a result, micro and small enterprises are generally required to put up less security than larger enterprises. 71 the most likely explanation for these trends. Figure 56: Credit to Agriculture and Forestry as Percent of Fortunately, credit is relatively available Sector Value Added (averages for years available) from nonbank lenders to informal and 10.00% smallholder agriculture (Section 4.6). 8.00% 118. In addition to access, the cost of finance is a potential issue. Until very 6.00% recently, lending interest rates in Togo were 4.00% in line with or less than those in other WAEMU countries (Figure 57). Only in 2013 2.00% did the BCEAO report a rise in Togo’s bank 0.00% lending rate above that in the other countries, 1980-1990 1991-2000 2001-2012 to 12.5 percent. This reflects both higher All UEMOA Benin Togo spreads and an increased cost of funds, as would occur with greater risk in the system or Source: BCEAO increased demand for funds relative to supply.122 Figure 57: Nominal Interest Rates, UMOA and Togo 119. Over time, however, co- Averages movements of interest rates and lending 14 volumes in Togo are not consistent with constraints to the supply of financing 12 driving investment levels. If the lack of 10 supply were more limiting than demand-side 8 factors, in periods when the supply of credit 6 was higher relative to demand, interest rates 4 would fall and lending (and the associated investment) would rise, inducing a negative 2 correlation between interest rates and 0 lending. In Togo, for the few years where 2007 2008 2009 2010 2011 2012 2013 data are available, in periods with lower real UMOA excl. Togo Togo interest rates, lending is instead lower (and the correlation positive). This suggests that Source: BCEAO 2013 shifts in the demand for credit are a more dominant determinant of interest rates and lending levels than are shifts in supply of loanable funds (Figure 58).123 120. Togo’s banking and MFI sectors face solvency issues and systemic risks, and the cost of financing has risen recently with perceived risks in the real economy. After reasonably successful reforms, however, Togo’s financial sector has expanded rapidly and serves most sectors of the economy well, given the risks inherent in the investment climate. Although there are undoubtedly many entrepreneurs who wish to access more financing at a lower price, this is normally the case even in countries with highly developed financial sectors. To review potential binding constraints in the area of finance (Table 28), the supply of financing is relatively high in Togo, and the costs of financing are broadly similar to those of other regional financial sectors (Test 1). There is no sign that firms resort to unusual or costly measures to 122 This could have been the result of heightened political risk in that year, when the main marketplaces of Lomé and Kara were burned down. The banking system was adversely affected by the uninsured business losses and worsening confidence in the business climate. 123 This is a test proposed by HKW. 72 circumvent the requirements of lenders, such as Figure 58: Real Lending Interest Rates and Private by using internal resources to an unusual degree Investment to GDP (Test 2), and no sign that firms requiring a high 14 Private Investment to GDP amount of financing (such as those in capital- 2007 12 intensive industries) are scarce (Test 3). In 2008 2010 2009 10 2011 addition, correlations between interest rates and lending are consistent with demand for financing 8 being the most limiting factor (Test 4). Thus, no 6 available indicators provide support for the lack 4 of finance as a binding constraint to growth and 2 poverty reduction in Togo.124 0 121. Given the results of Sections 4.4–4.7, 0 2 4 6 8 10 the diagnostic framework can be further Real Lending Interest Rate elaborated (Figure 59). The remaining potential constraints to be evaluated are those in specific Source: BCEAO and WDI. areas of public service delivery—in particular, infrastructure services, human capital, and related social services, all of which can in principle affect both growth and inclusion. Table 28: Tests of Key Constraints in Finance Tests of binding constraint to Pass? growth on key pathways High cost to actual or potential - enterprise? Circumvention of constraint - evident? Few actors present requiring - alleviation of constraint? Correlated with growth or - investment? And/or: adversely affects n.a. income of poor people? - = does not pass test n.a. = no test available/inadequate information 124 These findings are consistent with the results of a World Bank growth diagnostic conducted as part of a Country Economic Memorandum (World Bank 2010) and an Investment Climate Assessment using 2009 data. 73 Figure 59: Diagnostic Results 2 What Key Constraints Does Togo Face in Levels of Eliminating Extreme Poverty? Causation Inadequate (Inclusive) Growth (Slow structural transformation, low labor Proximate High Risk of Recurrent Fiscal Inadequate Equity of productivity and wages, under- Causes of employment, and low agricultural and Political Crisis Opportunity and Well- Poverty productivity) Being for Poor People 0) Inconsistently or Key Low Private Investment and inadequately pro-poor Slow progress in improving Outcomes Entrepreneurship (including in distribution of growth human development smallholder agriculture) and lack of pro-poor distributional policies Specific (3) Barriers to Entry and How Costly are What are the Key Binding/ (4) High and Distortionary Weaknesses in Human High Distortions Various Infrastructure Key and Taxation (agriculture and Capital and Social (agriculture and Constraints? Moderate nonagriculture) Service Delivery? nonagriculture) Constraints High Corruption and Low Government (2) Poor Fiscal Low effectiveness in setting priorities for and Effectiveness in formulating and implementing Governance delivering public goods and services policies toward productive sectors Deeper Causes (1) Governance system that fosters weak accountability Dark blue = key constraint; Medium blue = other finding; Light blue = questions remaining. 74 Moderate Infrastructure Services Constraints Main Messages:  Low effectiveness in the allocation of public investments and in governing infrastructure sectors has adversely affected the quality of Togo’s infrastructure services.  In particular, the poor quality and high price of electricity and ICT services represent moderate constraints to inclusive growth.  Without continual improvement in logistics efficiency, moreover, Togo cannot be guaranteed a competitive advantage as a transport hub for the region.  A lack of adequate rural roads may be moderately constraining in some areas of the country, especially Plateaux.  Serious shortfalls in water service impede well-being, and in some cases contribute to the country’s severe health and disease burden (Section 4.10). 122. Togo’s governance challenges are manifest in major inadequacies in the country’s infrastructure services. Following a decline in donor support beginning in the 1990s, the level of public investment (traditionally financed at 80 percent by donors) dropped from 13.8 percent of GDP in 1990 to only 1.1 percent in 2003 (World Bank 2015a). These levels have since rebounded, with especially large recent investments in road and port Table 29: Percentage of Investment by Region 2009-2014 infrastructure, but also in water and Percentage of electricity. Yet as demand for these Regionally- Percentage of services increases, important deficits specific Investment Population Ratio remain. These are likely to vary by Maritime 8.8% 14.9% .59 region, as there appears to have been Plateaux 3.4% 23.5% .14 a skewed allocation of public Centrale 1.1% 10.3% .11 investments and services within the Kara 5.8% 12.8% .45 country. The Savanes and especially Savanes 31.1% 12.5% 2.49 the Kara regions have in recent years Lomé 49.7% 26.0% 1.91 received a disproportionately large Source: République Togolaise (togoreforme.com) share of public investment relative to their populations (Table 29). 123. Togo’s infrastructure constraints span both rural and urban areas, with varying degrees of severity. At 4 percent per year, urban population growth rates in Togo are among the highest in the world. Currently, about 2.9 million people (or about 40 percent of the national population of 7.2 million) live in urban and peri-urban areas. Most of the urban population is concentrated in metropolitan Lomé, where population density is relatively high at 8,341 people per square kilometer (AfDB 2015). More than 60 percent of Togo’s urban population lives in slums (AfDB 2015), which suffer from poor water and sanitation services, as well as higher risks of flooding due to inadequate drainage and other preventative investments. Infrastructure services in secondary cities and rural areas are also generally inadequate, and those that pose the most binding constraints vary by locality. The remainder of this section assesses which deficits are most constraining for growth and for inclusion. 75 4.8.1. Transport Infrastructure and Services Main Messages:  Recent investments in Togo’s port facilities represent a significant positive opportunity as long as service quality and price competitiveness are maintained.  There are no clear indications from a benchmarking of road infrastructure and indicators of demand for road service that inadequacies in Togo’s road network pose a binding constraint to growth.  However, in one region in particular, Plateaux, there are signs (higher traffic and worse road conditions) that inadequate roads are at least moderately constraining.  Togo could take further advantage of its comparative advantage as a transport hub by improving regulation of trucking services, enhancing port efficiency, and reducing unnecessary roadblocks. 124. The quality of Togo’s transport and logistics services will have a major effect on its ability to leverage its geographic position and connect people to markets, public services, and employment opportunities. Togo’s unique capacity in the subregion to accommodate third-generation Panamax ships gives it a comparative advantage as a hub for sea-to-sea transport. The Togolese government, with the support of donors, development financial institutions like IFC, and private partners, has invested heavily in transport infrastructure. The existing Port Autonome de Lomé (PAL) was expanded recently, with works to add berth and yard space beginning in 2011 and a new 35-year concession becoming operational in 2014.125 In addition, a greenfield multiuser terminal, the Lomé Container Terminal (LCT), was concessioned in 2008, built under a build-operate-transfer arrangement, and opened at the end of 2014.126 When Mediterranean Shipping Company (MSC), co-owner of LCT, shifted its regional hub to Lomé at the end of 2014, it reorganized its entire Asia–West Africa trade service to concentrate all traffic through Lomé. As a result, statistics for the first half of 2015 for the port of Lomé show that gateway (domestic and transit) traffic increased by 5 percent, whereas transshipment multiplied by 6, compared to the first half of 2014 (World Bank 2015c). 125. In addition to port infrastructure, the Government of Togo has placed a high priority on improving road infrastructure. For sea-to-land transit, Togo must compete with countries in the region to provide adequate overland infrastructure. Thus, coupled with a road sector strategy that includes improvements to road maintenance, the government is making sizeable investments in both urban and international road corridors, notably along key (North-South and East-West) international trade corridors. Today Lomé’s main roads are also in excellent condition. Moreover, a benchmarking of aggregate indicators does not suggest that there is currently a binding deficit in national road infrastructure. Road density per square kilometer is similar to or greater than that of all other comparator countries, with the exception of Rwanda, a country with much greater population density (Figure 60). When viewed relative to population, Togo’s road density is similar to that of Benin and Tanzania, and better than that of four other comparators, 125 The PAL in Togo is the only port along the West African coast with a natural depth of 14 meters. In 2010, Bolloré Africa Logistics (BAL) was awarded the concession to operate the container terminal Togo Terminal. In March 2011, the extension work for Togo Terminal was launched, for an additional quay of 450 meters and 16 hectares of yard space, which became operational in October 2014. 126 LCT is owned by Thesar Maritime Limited/MSC, and China Merchant Holding holding 50 percent each. The duration of the concession is 35 years, with an option for 10 more years. The second phase of the development of LCT will enable it to reach a capacity of 1.65 million TEUs by end of 2016. 76 but some distance behind Cambodia (See Figure 61). Moreover, the percentage of the road network which is paved is similar to or higher than comparators (with the exception of Nepal. Figure 60). Figure 60: Roads Indicators in Comparison Figure 61: Road Network Density (kilometer of road) per Capita Cambodia Benin Road Density Tanzania Togo Bangladesh Percent of road length paved Rwanda Mozambique Burkina Faso 0 0.0005 0.001 0.0015 0.002 0.0025 0.003 Source: WDI (years are latest available, and range from 2004 to 2011; figures for Togo are for 2007, but match numbers provided through Source: WDI, latest available years. other sources for 2012). Figure 62: Energy Consumption per Capita in Road Transport 126. The provision of national and (demand proxy) relative to road density regional road infrastructure appears 120 nearly adequate to meet demand. Low Road Sector Energy Consumption Benin average daily traffic levels (under 1,000 100 vehicles per day) suggest low demand for road service on some national routes (Table Per Capita 2011 80 30).127 Moreover, energy consumption per 60 capita in Togo’s road transport sector is Togo similar to all comparators, relative to their 40 Cambodia Mozambique road densities, with the exception of Benin 20 Nepal (Figure 62). Since the adequacy of road Tanzania infrastructure is by definition location- 0 Ethiopia specific, however, this benchmarking 0 5 10 15 20 25 30 provides only a general assessment of the Road Density (km per 1000 km land area) extent to which the government may have under-delivered road infrastructure at the Source: WDI (years for road density are as above and for energy consumption are for 2011) national level.128 127 Economic viability depends on the costs of the road, as well as the time and cost savings associated with these levels of traffic, and must be studied for each road in the context of the whole network. 128 Here “under-delivered” means relative to the efficient level, where the investment pays in terms of economic benefits to local communities and the country. 77 Table 30: Average Annual Daily 127. Road condition and density vary by region within the country, Traffic on National Routes and some regions (particularly Plateaux) appear to be underserved (Simple average of 17 counting relative to demand. Given the costs and fiscal sustainability risks of station traffic counts) 2012 overinvesting scarce public funds in roads without ensuring a Region AADT commensurate enlargement of economic opportunities, carefully Maritime 5947 prioritized investment should be targeted where demand and potential Plateaux 1863 impact are greatest. Current road density is greatest in Maritime region Centrale 386 (Table 31), which is appropriate for the locus of a major portion of the Kara 639 economy’s economic activity, at 45 km of road per 100 square Savanes 1075 kilometers of land area. Plateaux follows Maritime in road density Source: AZ Consult and DECO-IC relative to both area and population, due primarily to the high level of cited in Elaboration de la Stratégie nonclassified rural roads provided by private entities. Then follow Kara, Nationale de Developpment des Savanes, and Centrale. Although accurate data on road condition (in Transports au Togo. particular international roughness indices) are not available to assess this issue fully, one can use indicators of recent roadwork as a basic indicator (Table 32). Despite being the poorest region, Savanes has the highest percentage of rural roads rated in good condition (46.7 percent), whereas Plateaux has the lowest percentage in good condition (11.3 percent) and the highest in bad condition (62.8 percent). Outside of coastal Maritime, Plateaux has the highest traffic levels on national routes, indicating high demand for road access (Table 30). Although by international standards traffic levels are low in all regions of Togo, the combination of privately provided Table 31: Road Network Characteristics by Region Road types ADMINISTRATIVE REGIONS Maritime Plateaux Centrale Kara Savanes Total National Roads (paved) km 374 528 348 361 183 1,794 National Roads (unpaved) km 268 338 88 315 259 1,267 Classified Rural roads (created by the state) 209 180 172 309 22 892 Nonclassified rural roads (Created by private companies) 645 2,931 722 884 728 5,910 Urban roads 1056.1 271 150 201 105 1,783 Total km 2551.4 4246.8 1479.6 2070.8 1323.5 11,672 Percentage (%) 22% 36% 13% 18% 11% 100 Area (km2) 5,668 16,920 13,590 11,749 8,673 56,600 Km road/100 km2 area 45.01 25.10 10.89 17.63 15.26 20.62 Without urban roads 26.39 23.50 9.79 15.91 13.74 17.43 Km road/1,000 population 1.01 2.94 2.33 2.63 1.72 1.90 Source: DGTP (Direction Générale des Travaux Publics) January 2008 cited in Elaboration de la Stratégie Nationale de Développement des Transports *Note: Data are adjusted based on recent road construction /repair done between 2008 and 2012. roads, poor road quality, and higher traffic suggests that a lack of adequate road infrastructure is at least moderately constraining in this region of high agricultural potential. 128. The adequacy of rural feeder roads is unclear from the data available. Approximately 60 percent of rural communities have all-season main access roads (Table 33), a share that is not unusual in the region. It is not possible, however, to estimate the economic costs of poor access in the rainy season without more data and a road-by-road evaluation. Nonetheless, according to a recent estimate, a reinvestment of 78 approximately US$50 million is needed to rehabilitate rural roads that are in in bad condition—a significant but not tremendous amount in an economy of over US$4.5 billion. 129. The quality of transport and logistics services does not depend only on infrastructure, but also on the efficiency and cost of service at the nation’s seaports, air terminals, and land borders, as well as the ease of passage on roads within the country. Togo’s comparative advantage in providing port services is an important one, but not guaranteed. Other factors affect the cost and quality of port services, and therefore the choice of Lomé for maritime transit. Regional ports such as Abidjan, Cotonou, Tema, and Lagos have been upgrading their services and have provided some competition with Lomé, and Togo’s market share depends largely on the decisions of large shipping conglomerates, such as MSC. Moreover, the quality and price of service at ports can suffer due to concentration among terminal operators. Bolloré Africa Table 32: Condition of Rural Road Network by Region REGION Good Fair Bad TOTAL (km) (%) (km) (%) (km) (%) (km) (%) SAVANES 350 46.7% 239 31.9% 161 21.5% 750 11.0% KARA 560 29.3% 355 29.8% 278 23.3% 1193 17.5% CENTRALE 320 39.1% 417 46.6% 157 17.6% 894 13.1% PLATEAUX 810 11.3% 346 11.1% 1955 62.8% 3111 45.7% MARITIME 510 41.0% 169 19.8% 175 20.5% 854 12.6% TOTAL 2550 37.5% 1526 22.4% 2726 40.1% 100% 6802 Source: DGTP (Direction Generale des Travaux Publics) cited in Elaboration de la Strategie Nationale de Developpement des Transports au Togo. NB : Good : Roads rehabilitated between 2009 and 2013 Fair: Roads maintained between 2009 and 2013. Bad: Roads not maintained. Logistics (BAL) and APM Terminals (APMT) handle a Table 33: Passable Main Access Roads in persistently high share—currently 78 percent—of container Rural Communities throughput in the sub-region, including at PAL (World Bank Dry Season Only All Season 2015c). It is likely that this market concentration is an Percentage of Communities important reason for high container handling charges in Maritime 40.8% 59.2% West Africa generally, which do not appear to be fully in Plateaux 38.9% 61.1% line with service quality, costs, and investments (World Centrale 34.7% 65.3% Bank 2015c). Currently, however, Lomé’s port charges 129 Kara 42.3% 57.7% appear reasonable relative to others in the region (Figure Savanes 35.6% 64.4% 63). Moreover, competition is possible there between PAL Total 38.2% 61.8% and LCT given high volumes, making quality and price Source: République Togolaise 2013 improvements more likely (World Bank 2015c). The government is planning to introduce more efficient customs and risk-based inspection systems, which will also improve port efficiency. 129 Within the region generally, port pricing practices were inherited from SOEs that had served as a source of cash for privileged interests, and governments have tended to favor concession deals with larger concession fees for the government rather than lower tariffs for users when privatizing their container terminals. While fees have not fallen with these concessions, the quality of service and efficiency nonetheless appear to have risen. 79 Figure 63: Container Handling Charges, West African Ports 180,000 160,000 140,000 Dakar CFA Francs 120,000 Abidjan 100,000 80,000 Lome 60,000 40,000 Cotonou 20,000 - Standard Special Transit Standard Special Transit 20' import rate 20' 20' 20' export rate 20' 20' import inbound export outbound Source: World Bank 2015c 130. Similarly, the benefits of road infrastructure depend on efficient and smooth passage on roadways and at border crossings. A high number of unnecessary checkpoints (TFFS 2015) slows Togo’s road service: 95 percent of formal businesses report multiple internal checkpoints within a 100 km distance when transporting goods, and vehicles must spend an average of 43.6 minutes at each post (TFFS 2015). The full economic costs of transport increase with these delays; they tie up trucking assets and increase the price of transport services, while also depreciating goods in transit. Another factor inhibiting efficient service is Togo’s queuing system for allocating road freight business among transport companies. Under this system, freight assignment is based on place in the queue rather than competition on price or quality, and prices are centrally negotiated.130 As demonstrated by Teravinthorn and Raballand (2009) and Osborne et al. (2014), road freight charges are higher where competition is restrained. In Africa, the lowest-price transport services on major corridors have been those on which there has been international competition—in particular, on the Zambia–Durban corridor. Nonetheless, this issue does not appear to represent a binding constraint at present; Togo’s road freight pricing of approximately 40 FCFA per ton-kilometer is competitive with that of other coastal countries that also have the queuing system, although it is not with coastal countries without such a system (according to the Doing Business indicator on trading across borders). 131. Inadequate transport infrastructure and services do not appear to pose a binding constraint to growth, given Togo’s recent upgrades to its transport systems. However, there remains a key gap in our understanding of the degree to which market power by shipping lines and terminal operators, unnecessary roadblocks, and limited road access in specific rural areas act as barriers to reducing poverty, whether by raising the general cost of living or by making Togolese exports less competitive.131 Analytical gaps identified:  The effects of pricing behavior by shipping companies on Togo’s competitiveness.  The degree to which a lack of rural roads is a constraint (by locality). 130Without more study, it is unclear to what extent the sector adheres to the queuing system. 131Traffic levels are not always an indicator of demand for or economic value of a road in rural areas with very poor access, and detailed data on transport costs, potential time savings, and responsiveness of producer prices and labor market participation to these variables would be required. 80 4.8.2. Costly and Unreliable Electricity Provision Main Messages:  Togo’s electrification rates have kept pace internationally, reaching close to 50 percent (QUIBB 2015), and supply and generation appear to be adequate and exceed those of comparators.  Reliability of electricity service is poor, but similar to other SSA countries and better than that of Ghana and other comparators.  However, the high price of service is a serious constraint to competitiveness, particularly for Togo’s manufacturing companies.  Poor governance of Togo’s electricity distribution company and a lack of independent regulation of the sector have undermined its ability to operate efficiently and in a financially sustainable manner, despite high charges. 132. The overall performance of Togo’s electricity sector has been broadly on par with regional comparators. In the past, Togo had kept pace in providing access, with national electrification rates similar to those of many SSA countries (Table 34). According to internationally comparable data, coverage reached 27 percent in 2011 and showed higher rural electrification rates than in other low-income countries, at 21 percent (with Benin at 6 percent, Tanzania at 4 percent, and Uganda at 7 percent).132 Electrification rates are higher in some neighboring countries—in particular, Ghana at 72 percent and Côte d’Ivoire at 59 percent— especially in urban areas (WEO 2014), but this is to be expected given their higher income levels. Household- level data from 2015 show a significantly higher rate Table 34: Internationally Comparable Recent of electrification, at 37.9 percent in 2011 and 47.9 Electrification Rates (2011) percent in 2015 (Figure 64). Togo’s consumption of Electrification electricity per capita is also high relative to income Urban Rural rate per capita (to the right of the curve in Figure 65) at Ghana 72 90 52 0.15 megawatt-hours (MWh) per capita compared to Cote d'Ivoire 59 85 32 Benin, for example, with 0.09 MWh. Senegal 57 88 33 Eritrea 32 86 17 133. As a small country, Togo has rightly Benin 28 55 6 relied on intraregional trade in power to serve its Togo 27 35 21 electricity consumers. Togo’s economy has Ethiopia 23 85 11 benefited from its membership in the West African Zambia 22 51 3 Power Pool, especially given the lower cost of Mozambique 20 55 5 subsidized electricity from Nigeria and Ghana. Tanzania 15 46 4 Electricity is supplied through the Communauté Uganda 15 55 7 Electrique du Benin (CEB), an organization that is Burkina Faso 13 39 4 co-owned by Togo and Benin and charged with Malawi 7 37 1 developing electricity infrastructure in both Other sub- countries. The CEB is exclusively responsible for Saharan 13 34 4 purchasing and transmitting power according to the Africa Source: IAEA 2013 132 The Ministry of Mines and Energy estimated the level of rural electrification at less than 5 percent in 2010, much lower than the IAEA estimate in 2013. 81 Benin-Togo Electricity Act. The Figure 64: Rate of Electrification, 2006, 2011, and 2015 Compagnie Energie Electrique du 100 90.3 Togo (CEET) is charged with the 90 83.6 distribution and sale of the electricity 80 73.1 76.9 in Togo. 67.4 70 60 2006 134. The sector has been 49.9 49.3 50 expanding, and generation capacity 39.7 2011 40 is adequate to meet current demand. 27.8 2015 30 A thermal generation plant developed 20 16.2 10.2 by ContourGlobal Togo, 10 5.4 commissioned in 2010, and hydro and 0 gas generation projects underway will Lomé Autres urbains Rural Ensemble help reduce average costs, while also Source: QUIBB shielding the sector somewhat from supply disruptions.133 Since it has started operations, ContourGlobal Togo has not been fully utilized, indicating that Togo now has excess generation capacity and may export power within the power pool. 135. As is typical for the region, power cuts remain an important issue. In 2015, approximately 25 percent of businesses reported power cuts for more than 20 percent of business hours, and 56.7 percent of businesses had cuts for less than 20 percent of operating hours. A mere 16.5 percent of formal businesses had not experienced electricity cuts in the past year (TFFS 2015). Given this problem, a high percentage of firms own or share a generator. In 2015, this percentage (for firms comparable Figure 65: Supply of Electricity Relative to GNI to those in the WBES) was slightly 2500 lower than in 2009, at 49 percent. This method, current USD, average 2009-2012) is a level similar to that for SSA Per Capita Gross National Income (Atlas generally and higher than that in Benin 2000 and Côte d’Ivoire, but notably lower than in Ghana, Cambodia, Nepal, and 1500 Senegal (Figure 66). Moreover, half of all firms always use their generators Ghana during power outages, and 16 percent 1000 use them often (TFFS 2015). Finally, Togolese firms report slightly higher Benin 500 losses due to outages as a percentage of Togo sales than is typical for the region, at 6.2 percent, albeit much lower than for 0 Ghana and Nepal (Figure 67). A 0 Average annual electricity 0.2 0.4 consumption 0.6 per capita (Billion 0.8 1 kWh, 1.2 2008-2012) relatively high share of Togolese firms Source: IAEA and WDI consider problems with electricity (both Note: Sample includes all countries with per capita income less than or cost and reliability) to be a major equal to that of Ghana, excluding outliers. constraint (Figure 68). Yet only 1.3 133Disruptions are caused by hydrological conditions, operational constraints, and unavailability of gas, emanating from Nigeria and Ghana (World Bank 2013). In spite of excess capacity in Togo, the governments of Togo and Benin are planning several new generation projects, including CEB's hydroelectric dam at Nangbéto (Benin), one gas turbine project in the Lomé, and one in Cotonou. However, there is no functioning merit order in the existing binational system with respect to gas supply and power dispatch. 82 Figure 66: Use of Own Generation, Formal Firms, All Figure 67: Outage Related Losses, Formal Firms, All Sectors Sectors 70 12 70 60 60 10 50 6.15 50 Percentage/Hours 8 40 6.1 40 Number 6 30 30 4 20 20 10 2 10 0 0 0 Percent of firms owning or sharing a generator If there were outages, average duration of a typical electrical outage (hours) Percent of firms owning or sharing a generator, Togo 2015 Losses due to electrical outages (% of annual sales) Proportion of electricity from a generator (%) Losses due to electrical outages (% of annual sales) Togo 2015 If a generator is used, average proportion of electricity from a generator (%) Number of electrical outages in a typical month Source: WBES (latest years and WBES-equivalent sub-sample from TFFS 2015) percent of firms rate electricity outages as their greatest obstacle, and 2.4 percent as their second-greatest obstacle, perhaps because they utilize own-generated electricity when needed. 136. The price paid for electricity appears to be the deficiency in Togo’s electricity system that is most costly for users—particularly for manufacturing companies. Whereas only 10 percent of all formal firms list the cost of electricity among their Figure 68: Percentage of Formal Firms Claiming Electricity as top two constraints, 41 percent of a Major Constraint manufacturing firms do so (Figure 69). To the extent that Togo charges high prices for Nepal (2013) Togo (2015) electricity to cover minimum long-run Ghana (2013) average costs, this would allow the sector to Benin (2009) expand and improve quality of service. Bangladesh (2013) Togo’s electricity sector does not operate Togo (2009) near to this efficient cost, however, due to Senegal (2014) weak sector governance and Tanzania (2013) underperformance of the distribution sector. Sub-Saharan Africa A recent audit report put the utility’s losses Côte d'Ivoire (2009) at over US$30 million dollars, which the Cambodia (2013) central government will presumably need to Mozambique (2007) cover. Although current data are not 0 20 40 60 80 available, it appears that costs are inflated in Source: WBES (latest years) and TFFS 2015 part due to pressures to add unnecessary staff to the company’s rolls. 83 137. Usage costs are Figure 69: Two Greatest Obstacles for Manufacturing Firms (formal firms generally higher for reporting in 2015) manufacturing firms. Electricity tariffs are differentiated by type of Cost of electricity user, and zone franche consumers Cost of taxes receive a discount of Corruption in the application of… approximately 40 percent, Access to land according to BCEAO. Comparing published usage charges for these Quality of telecommunications users with benchmark countries, Power outages Togo rates in the middle at 18 Practices of dominant competitors Biggest obstacle cents (Figure 70). When all fixed Quality of Internet connection fees, tariffs, taxes, and capacity Autre à préciser charges are factored in, however, Second biggest Political instability formal firms pay, on average, 146 obstacle Access to financing FCFA per kilowatt-hour (kWh); at 2014 exchange rates, this Cost of Telecommunications equals 29.5 US cents. Indeed, Practices of Informal Competitors manufacturing firms reported Cost of Internet Connection paying on average 45 cents per Cost of Financing kWh at the applicable 2014 US$ 0 0.2 0.4 0.6 exchange rate (TFFS 2015; WDI) Percentage of Firms reporting and a median of 33 cents. This is Source: TFFS 2015 excessive for grid-based power, especially given that many countries provide discounts to high-volume consumers. The impact on firms’ viability is significant. If manufacturers’ average electricity costs were reduced to the average for all firms, their pretax return on assets would increase from 23 to 37 percent and after-tax profits from 3 to 17 percent (as calculated by World Bank staff, using TFFS 2015), based on estimates of the elasticity of ROA with respect to average electricity prices paid.134 138. Governance of Togo’s electricity sector has harmful implications for its financial sustainability, operational performance, and ability to attract new investment. Although generation investments have been made, Togo’s electrical distribution network has deteriorated due to a lack of maintenance and investment, leading to severe voltage drops and high levels of technical losses. The electricity regulator, L’Autorité de Réglementation du Secteur de l’Electricité (ARSE), is embedded in the Ministry of Mines and Energy and thus has limited independence, as well as low capacity. Moreover, without sufficient autonomy and a clear commercial orientation, CEET is unable to focus on cost efficiency and financial discipline. Despite charging high prices, CEET still receives a government subsidy.135 Corruption in the customer interface is a major issue as well; 20 percent of sales are subject to fraud,136 and a high share of firms (38 percent) say that a bribe was expected to obtain an electricity connection (WBES 2009). 134 Based on a regression of ROA on the capital-labor ratio, price paid for electricity, and sector and town indicator variables. The price of electricity was negative and significant at the 10 percent level. 135 In particular, it appears that, because of issues related to working capital and given the current level of oil prices, CEET prefers to buy power “at credit” from CEB at a higher price that the marginal cost of power generated by ContourGlobal Togo, thereby accruing increasingly high arrears to CEB. This raises concerns regarding the existence of a functioning merit order in the country and CEET’s long-term financial sustainability. 136 http://news.alome.com/h/79182.html 84 139. A reversal of this state of affairs Figure 70: Electricity Prices in Comparison (US dollars per through strengthened governance will be kWh, Zone Franche Tariffs only) 0.4 critical to turn the sector around. Without establishing financial equilibrium, 0.35 mobilizing the investment financing 0.3 needed to expand the sector further will be 0.25 difficult and costly. To reduce prices, the 0.2 costs of generation and delivery will have 0.15 to fall. In addition, in extending electrification to rural areas, costs should 0.1 be minimized and any cross-subsidies 0.05 budgeted and accounted for separately so 0 that the costs are not passed on to the country’s businesses, which must compete, add value, and create jobs.137 Togo can also access cheaper power by improving Source: BCEAO and Wikipedia arrangements for the dispatch of gas and power in the integrated power pool. In addition, independent power producers could be instrumental in bringing competition and cost efficiencies, but they will view it as risky to invest in a sector that is not financially self-sufficient (and where there is currently excess capacity). To establish financial equilibrium, improve management, achieve cost efficiencies, and expand the system, Togo will most likely have to take the steps shown by international experience to best achieve these outcomes—that is, through independent regulation and professionalization of the governance and management of the utility (Cubbins and Stern 2006; Andres et al. 2013). 137The Togolese government has been undertaking rural electrification actions since at least 1992, focusing mostly on grid extension to villages located near transmission lines, electrification of some villages with solar power, and feasibility studies. 85 4.8.3. Lack of Competition in Information and Communication Technology Main Messages:  Togo’s information and communications sector is a striking example of the government’s tendency to adopt policies that are unfavorable to private investment.  Togo recently ranked second-to-last in the world on the cost of telecommunications, and remains 162nd in the world on the cost of fixed telephone service, 176th on the cost of mobile telephone service, and 168th on the cost of broadband.  The quality of service for mobile telephony and Internet is low, even compared to other low-income SSA countries.  Poor performance in the Internet sector is due to the dominance of a state-owned telecommunications company and weak support for private sector competition.  Given high demand, potential positive spillovers, and the high costs paid by poor people for these services, this constitutes a moderate constraint to poverty reduction. 140. The performance of Togo’s ICT market is a costly example of skewed regulation shaped by conflicts of interest. Although telecom and Internet services exhibit some natural monopoly characteristics, many countries have seen the benefits of introducing private competition into the sector along with appropriate regulation. In Togo, the introduction of bona fide competition has been limited and slow. The fixed-line telephone market is composed of a state-owned monopoly provider, Togo Telecom. The wireless market is a duopoly of Togo Cellulaire (Togocel), the mobile arm of Togo Telecom with 55 percent of the market (as of December 2015), and Atlantique Telecom (Moov), controlled by Emirates Telecommunications Table 35: Togo's Ranking on Cost of Corporation (Etisalat), with 45 percent (TeleGeography Communication Index 2014). Discussions have been underway for several Mobile tel years to permit the entry of a third operator, but progress as % of Global Rank GNI per has stalled. Moreover, according to TeleGeography, Country ( out of 161) capita regulatory red tape has limited the scope for Moov to Cape Verde 105 6 compete fairly in the sector. For instance, Moov only Senegal 126 10.3 recently received (in January 2016) authorization to Ghana 128 7.6 operate a 3G mobile service, a delay that prevented it Cote d'Ivoire 129 14 from competing effectively on the high-end mobile Nigeria 141 10.7 Guinea 142 9.6 segment. Gambia 147 19.3 141. Because of these barriers, costs are high and Mali 149 20.8 quality of service is poor. As Table 35 shows, Togo Benin 151 25.7 Burkina Faso 155 36.1 ranked second-to-last of 161 countries (above only Togo 160 37.2 Niger) on the cost of communications in 2011. In 2015, Niger 161 55.7 it ranked 162nd on the cost of fixed telephone service, Average West 176th on the cost of mobile telephone service, and 168th Africa 21.1 on the cost of broadband service out of over 180 Average World 5.7 countries (ITU 2015). Mobile telephone costs are Source: ITU 2011 especially high, at 37.2 percent of GNI per capita. The cost of calls is much lower in markets where there is robust private competition, such as in Ghana, Kenya, and Tanzania (Figure 71). Furthermore, the quality of mobile voice calls is low, even in Lomé, as shown by the areas of red in Figure 72 and Figure 73. 86 142. Demand for mobile services has been Figure 71: Cost per Minute in US$ of Mobile Calls strong relative to Togo’s level of income, 0.25 particularly when this high pricing is taken into 0.20 0.21 Cost per minute (US$) account. Initial expansion occurred relatively 0.20 0.18 0.18 0.18 quickly, from 56,000 subscribers in 2000 to 2.4 0.15 0.12 0.12 0.14 million in 2010. As of December 2015, according 0.10 to the telecommunications regulatory, the Autorité 0.10 de Réglementation des Secteurs de Postes et de 0.04 0.05 0.05 Télécommunications (ARTP), 75 percent of the population had a telephone (fixed and/or) wireless 0.00 Cote d'Ivoire Senegal Niger Tanzania Benin Burkina Faso Togo Guinee Bisseau Mali Ghana Kenya subscription. Expansion continued apace into 2015, with almost 70 percent of households having access to mobile services—60 percent in rural areas and over 83 percent in urban areas (QUIBB 2015). Yet people must pay high prices for West Africa Competitive comparators mediocre service.138 Affordability thus remains an issue for the poorer segments of the population, Source: Government of Togo 2012, and Telecom regulators for and subscription rates are lower among those in Ghana, Kenya and Tanzania the bottom quintiles (Figure 74). Figure 72: Fluidity of Call Signals, Lomé Figure 73: Indicators of Voice Quality Mobile Service (Togocell) Lomé (Red=worst quality) Source: AzimConsulting 2014 Source: AzimConsulting 2014 138 In 2015, telecommunications accounted for an estimated 4.9 percent of household expenditures. 87 143. Similar issues affect the broadband Internet sector. Togo Telecom dominates the limited fixed broadband market. It owns and operates the only international gateway, and the lack of competition at this entry point most likely explains the lack of competition at the national wholesale and retail levels. According to private operators, between 50 and 80 percent of the final cost to Internet consumers can be attributed to the cost of international bandwidth, and the prices for access to international bandwidth in Togo compare unfavorably with those of other African countries. A standard unit of broadband in Togo costs US$30,000, whereas it costs US$25,000 in Benin, US$16,000 in Nigeria, and US$15,000 in Ghana. The customer base of alternative internet service providers remains extremely limited as well. There were only 63,000 fixed broadband subscribers at the end of 2015, according to the ARTP. With only one of the two mobile operators (Togocel) having been able to offer broadband mobile 3G services (with no license for Moov) before January 2016, Moov served only an estimated 300,000 3G mobile broadband subscribers at the end of 2015 (TeleGeography 2015). The geographic coverage of mobile broadband services remains sparse;139 service is of limited speed and remains unaffordable, with a monthly subscription costing US$8.5 per month for 3G access that is capped at 1 gigabyte (as of February 2016), according to ARTP figures. 144. The current situation in the ICT sector imposes high costs on the Togolese economy. To compete internationally, both foreign and domestic investors in Togo will require higher-quality service at more reasonable prices. Although not rated among the two most constraining factors for business, more firms rated the quality of Internet and telecom services as a major or severe problem than any other constraint (Figure 75). Seventy-one percent of firms utilize more than one mobile telecom provider; 42 percent of multiple subscribers do so to reduce costs, while 57 percent do so to circumvent quality and reliability issues (TFFS 2015). Similarly, among businesses with Internet service, 41 percent utilize more than one type of connection to better ensure service; 64.4 percent experience service disruptions that impede normal business use during more than 20 percent of operating hours, and 14 percent have cuts that disrupt more than 80 percent of operating hours. Figure 74: Expansion of Telephone Connections by Consumption Quintile 2006 2011 2015 100.0 85.3 94.0 94.1 90.6 88.5 90.0 84.7 80.8 80.0 74.9 68.6 67.4 67.0 70.0 64.8 63.4 55.7 57.6 57.3 60.0 46.5 49.5 50.0 39.8 40.0 33.7 34.1 30.0 21.4 20.9 17.6 20.0 13.5 8.9 5.7 10.0 0.3 0.4 1.9 0.0 Plus pauvre Deuxième Troisième Quatrième Plus riche Plus pauvre Deuxième Troisième Quatrième Plus riche Urbain Rural Source: QUIBB 139 Authors’ interview with operators. 88 145. Without a more efficient Figure 75: Percentage of Formal Firms Rating Issues as "Major" telecommunications sector, Togo is or "Severe" (Top 15 Constraints) missing important opportunities for positive spillover effects on the rest of 0.9 the economy, foregoing the potential to 0.8 increase efficiencies in other sectors and 0.7 improve the delivery of social services. 0.6 Without a more dynamic ICT market, 0.5 Togo will continue to lag behind other 0.4 countries in the region in realizing 0.3 opportunities for mobile-based innovation 0.2 in the financial, agriculture, education, 0.1 health, and transport and logistics sectors. 0 Source: TFFS 2015 89 4.8.4. Deficits in the Provision of Water and Sanitation Main Messages:  Togo’s progress in expanding potable water services has been slow, and coverage lags behind that of regional comparators.  Only 42 percent of the population was estimated to have access to safe drinking water in 2013, with up to another 20 percent having access to boreholes (QUIBB 2015), a source that may provide potable water if sufficiently protected.  The main water utility is not financially sustainable and lacks the means to properly maintain and expand the system.  However, given the more binding economic distortions in Togo’s current investment climate and the affordability of alternatives such as wells, boreholes, and storage tanks, difficulties in accessing water services do not appear to be a key constraint to growth at present.  Nevertheless, the lack of clean water provision contributes to poor health—a key constraint to equity and well-being, as discussed in Section 4.10, insofar as it increases rates of infection from waterborne diseases and diarrhea.  More accessible, improved water supply is important for time savings, especially for women and girls. 146. The quality and reach of improved water and sanitation services lag behind Togo’s needs substantially. Only 42 percent of the population was estimated in 2013 to have access to safe drinking water, defined as treated water from a pipe. Although the percentage of the population served has increased over the past 12 years, especially in rural areas, it had reached only Table 36: Access to Safe Drinking Water (Piped water and 40 percent of the population in Standpipes. Percentage of Population) urban areas and 32.5 percent in 2000a 2010 2011 2012 2013 Lomé by 2013 (Table 36). National 31 34 42 44 42 Relative to other countries in the Urban 38 34 43 42.5 40 b region, Togo’s main water Semi-urban 24 29 35 37 42 b utility, Togolaise des Eaux Rural 28 43 46 47 47 (TdE), serves only a small Source: Ministry of Rural Equipment (Togo) in World Bank 2015a. a percentage of the urban Note: b Baseline access rate used to calculate 2015 MDG targets. population (Figure 76). Using Semi-urban areas are those towns with more than 1,500 inhabitants, not including the prefecture administrative centers, which are considered urban the most recent household areas. Rural areas are those with less than 1,500 inhabitants. survey (2015 QUIBB), when one includes boreholes—a source considered “improved” by the World Health Organization if protected from contamination by fecal matter— the situation appears slightly more positive. Up to 62 percent of the population may have access to water that meets this definition—up to 87 percent in Lomé, 69 percent in other cities, and 45 percent in rural areas (Figure 77). Without more details on the technologies used, however, it is unclear whether all of these water points provide safe drinking water, and local purification may still be needed. An additional 23 percent of the population has access to well water, which is typically not protected, leaving 15 percent of the population without any water facilities. Access to improved water is also correlated with consumption and poverty 90 status. Poor people are much less likely to have piped water and more likely to have neither piped, borehole, nor well water sources (Figure 78). 147. Togo’s water utilities have struggled to Figure 76: Percentage of (Urban) Population in expand piped water connections while maintaining Service Areas Served by Water Utilities continuity and quality of service and financial 100% sustainability. Investment in the sector has not kept 90% pace with demand, and maintenance has been 80% 70% inadequate. Technical losses have reached an estimated 60% 28 percent of water produced in 2013. The quality of 50% 40% service, as measured by consumption, continuity of 30% 20% service, and pipe breaks, has also deteriorated over 10% time. Limited production capacity, compounded by 0% expanding connections and technical losses, has meant a drop in daily consumption per capita from 54 to 36 liters per day between 2009 and 2013. TdE shows a 50 percent decline in the continuity of service over four Sources: Respective Water Utilities. years (Table 37). Its operational efficiency is poor, Note: All data is for 2013. with 10.7 employees in the sector per 1,000 connections, relative to a subregional average of 4.7 (World Bank 2015a). Moreover, the utility is not financially sustainable, with a revenue recovery rate of just 65 percent of costs. Regulation of the sector is being shifted to the electricity regulator, ARSE, which lacks both the requisite independence and capacity (World Bank 2015a). Table 37: Indicators of Operational Performance of Togolese des Eaux 2009 2010 2011 2012 2013 Distribution losses (% of production) 19 22 18 29 28 Water consumption per capita (L/day/person) 42 36 45 39 37 Continuity in Lome (hours/day) 18 16 14 14 12 Revenue collection (% of billing) 81 78 86 88 90 Labor efficiency (employees per 1,000 connections) 10.7 10.5 10.3 10.3 10.7 Operating cost recovery ratio 0.74 0.64 0.73 0.66 0.65 Average water tariff per m3 (FCFA) 341 351 352 343 349 Source: TdE 2015. Table 38: Access to Sanitation Total Urban Rural Type of Sanitation Facility 1990 2012 1990 2012 1990 2012 Improved facilities 13 11 26 25 8 2 Shared facilities 24 20 44 43 15 5 Other unimproved 3 16 5 12 3 19 Open defecation 60 53 25 20 74 74 Source: World Health Organization, UNICEF, and Joint Monitoring Program 2014. 91 148. Access to improved Figure 77: Percentage of Population with Potable Water (Piped or Via sanitation is more limited than for Bore Hole) by Residence in Lomé, Other Urban, and Rural Areas water services, especially in rural 100 areas (Table 38). Access to 90 86.9 83.1 improved facilities has fallen from 80 72.3 68.9 68.6 13 to 11 percent of the population 70 66.1 61.8 between 1990 and 2012, and for 60 56.1 45.0 50.6 2006 shared facilities from 24 to 20 50 39.9 2011 38.6 percent. Although access to 40 2015 unimproved facilities has increased, 30 rates of open defecation as the 20 primary sanitation method remain 10 high, at 43 percent of the population 0 Lomé Autre urbain Rural Ensemble (Figure 79). Source: INSEED using QUIBB 149. Clean water and urban sanitation services are key inputs to health, with implications for Figure 78: Main Source of Water by Consumption Quintile, 2015 child nutrition and impacts on 50 morbidity and mortality from 45 waterborne diseases. As such, it is 40 likely that the lack of progress in 35 providing clean water services is an 30 important contributor to Togo’s 25 20 underperformance in improving 15 health outcomes related to diarrhea, 10 which causes 9 percent of deaths in 5 children under five. At the same 0 time, upgrades to water and Poorest Fourth Third Second Richest sanitation services are needed to Piped borehole well unimproved improve the urban population’s quality of life. Source: INSEED using QUIBB 2015. Note: Estimates differ across data sources due to differences in dates, data 150. Nonetheless, Togo’s poor capture methods, and definitions. provision of water services appears to be only mildly Figure 79: Percentage of Population Utilizing Open Defecation as constraining to investment and Primary Sanitation Method growth. Most businesses (52.3 90 78.3 percent) use water from TdE, and 80 71.770.0 36.1 percent use wells. Whereas many 70 businesses experienced cuts in water 60 57.1 service, 44 experienced no service 50 47.3 42.9 2006 40.6 cuts during 2014, and 43 percent had 40 33.4 2011 cuts less than 20 percent of the time. 28.5 2015 30 Businesses manage service cuts by 20 11.5 storing water or using alternative 10 5.9 4.5 sources, and the costs of taking these 0 measures are not considered high. Lomé Autre urbain Rural Ensemble Only 15 percent of formal businesses Source: INSEED using QUIBB 92 consider inadequate water service to be a major obstacle, and less than one percent consider it among their top two problems. Similarly, among the informal enterprises surveyed, essentially no firms listed inadequate water service as their main obstacle (TRIFS 2015). In the current investment climate, therefore, even dramatic improvements in water services are unlikely to produce the inclusive growth that the country needs to accelerate poverty reduction. Nonetheless, water and sanitation services are important for the health and well-being of the population, and represent an important equity issue. 151. Based on available indicators, infrastructure Table 39: Tests of Key Constraints in Infrastructure services — particularly the Tests of high price and low quality of binding electricity and ICT services— constraint to Electricity Transport ICT Water & appear to be moderate growth on key Sanitation constraints to inclusive pathways growth, as do local High cost to  -  - infrastructure deficits such as actual or water control systems in potential Tests enterprise? certain zones and feeder roads in others (Table 39). Deficits in Circumvention  -  - of constraint water and sanitation services evident? affect well-being, health, and Few agents - - - - consumer convenience, but present appear less constraining for requiring growth at present given the alleviation of importance of other, more constraint? pressing issues. A summary of Correlated n.a. n.a. n.a. n.a. findings at this stage is shown in with growth or Figure 80. The remaining investment? questions to be assessed are in And/Or: - - -  the area of human capital and Unusually related social service delivery. high disparities? Severe effects - - - C on (non- income) well- being of poor? Service     deficits affects large % of population?  = passes test. - = does not. C=contributes to severe issue (Health). n.a. = no test available or inadequate information. 93 Figure 80: Diagnostic Results 3 What Key Constraints Does Togo Face in Eliminating Levels of Causation Extreme Poverty? Proximate Inadequate (Inclusive) Growth causes of (Slow structural transformation, low High risk of recurrent Inadequate Equity of Poverty labor productivity and wages, under- fiscal and political crisis Opportunity and Well- employment, and low agricultural productivity) Being of the poor 0) Key Inconsistently pro-poor Low Private Investment and Slow progress in Outcomes distribution of growth Entrepreneurship (including in improving human and lack of pro-poor smallholder agriculture) development distributional policies Specific (3) Barriers to Entry and Electricity, ICT, and What are the Key Binding/ (4) High and Weaknesses in Human High Distortions local infrastructure Key and Distortionary Taxation Capital and Social Service (Agriculture and non- in some zones are Moderate (Agriculture and non-) Delivery? Agriculture moderate constraints Constraints (2) Poor High Corruption and Low Government Fiscal Low effectiveness in setting priorities for Effectiveness in formulating and implementing Governance and delivering public goods and services policies towards productive sectors Deeper Causes (1) System of governance that fosters weak accountability 2 Dark blue = Key Constraint; Medium blue = other finding; Light blue = questions remaining. 94 The Role of Skills and Education Main Messages:  Until recently, Togo’s population had enjoyed relatively high educational attainment. Enrollment and completion rates remain comparable to other low-income countries, and continue to increase.  However, the average quality of education has fallen in the past several years, and schools in poor areas are of lower quality, presenting an important equity issue.  In addition, there are some specific skills shortages, and skills training does not always match up well with market needs.  Yet while the supply of skills may be considered low in Togo, the demand for skills is even lower. o The returns to education are low relative to international benchmarks; unemployment rates are high and increase with the level of education, ranging from 9.4 percent for secondary graduates aged 25–34 to as high as 55 percent for the youngest tertiary graduates. o Existing enterprises perceive the available supply of skills to be adequate. o Few firms employ foreign workers, and many skilled workers leave Togo for other opportunities.  Improving the quality of education is an important objective for equalizing opportunities and raising the efficiency of public resource expenditures, as well as preparing the country for future growth opportunities.  However, there is no compelling empirical evidence that, for Togo, increases in education and improvements in training would rapidly and significantly increase private investment, job creation, and incomes without a significantly better enabling environment for private economic activity— investment and entrepreneurship across a broad range of sectors that can employ Togo’s workers and poor people.  Therefore, other constraints must be alleviated in order to increase the incomes of workers at all levels of educational attainment. 152. In Togo, just as elsewhere, education serves multiple social and economic purposes. Access to basic education is an important precondition for equity of opportunity. Education can be intrinsically fulfilling to the individual, and can contribute in important ways to a country’s social and political development. At the same time, people invest in education to raise their future earnings or the earnings potential of their children. This section examines whether a lack of skills and education in Togo poses a binding constraint to economic growth through the channels of private investment and productivity growth, without calling into question its importance for other social objectives. It also evaluates the degree to which inequitable access to education constitutes a constraint to inclusion. 153. Until at least the year 2000, Togo had a modest advantage in the level of education of its workforce. Figure 81 shows average years of schooling in Togo and comparator countries in 1990, 2000, 95 Figure 81: Average Years of Schooling and 2010. Until 2000, among comparators, only Ghana’s population had a higher average level of schooling than Togo. Today, Bangladesh and Tanzania have surpassed Togo, which nonetheless retains a higher average educational attainment than Cambodia, Benin, Rwanda, and Senegal. Moreover, until recently adults in Togo with six years of schooling were among the highest-achieving readers in the region (Figure 82, green bar). They still exceed the mean for low-income SSA countries (gold bar). Togo’s rates of enrollment and Source: Barro and Lee completion at the primary and secondary levels have increased significantly since 2006/07, and are now well above the average for low-income SSA countries (Table 40). The number of tertiary graduates has also expanded (Figure 83). Figure 82: Reading Achievement, Adults 22-44 Years of Figure 83: Number of Tertiary Graduates Age Selected African Countries Source: Pole de Dakar 2013 154. Notwithstanding these achievements, there are legitimate concerns regarding the quality, efficiency, and equity of Togo’s education and training system. The expansion of the system to more remote areas has accompanied a decline in the average quality of schools.140 Although the average pupil- teacher ratio of 44 is close to the African mean of 43, there are failures in the provision of suitable infrastructure and didactic materials (Table 41). Mean test scores fell in math for second and fifth graders between 2000 and 2010, although not to a statistically significant extent (Figure 84). Moreover, the performance of Togolese fifth graders on French tests is generally lower than that of students in other French-speaking African countries (Figure 85). It is likely that these performance trends disadvantage Togo’s poor population the most and compromise its future human capital. 140 This does not necessarily imply a decline in quality of already existing schools. 96 Table 40: Enrollment and Completion Rates, Primary and Secondary Schooling, Low Income African Countries Primary Secondary 1st Cycle Secondary 2nd Cycle Enrollment Completion Enrollment Completion Enrollment Completion Togo (2011-12) 138.3% 79.0% 66.0% 41.9% 26.3% 19.3% Togo (2006-07) 107.4% 69.4% 52.6% 36.5% 21.8% 10.5% Benin (2010-11) 130.4% 64.3% 53.4% 40.8% 29.9% 19.5% Burkina Faso (2009-10) 89.0% 65.0% 31.0% 16.6% 7.1% 5.4% Ghana (2008-09) 109.1% 74.8% 82.6% 71.9% 32.9% 30.0% Rwanda (2008-09) 203.0% 44.8% 29.0% 22.0% 17.0% 13.0% Tanzania (2008-09) 108.4% 77.9% 54.6% 23.7% 5.0% 2.6% Average of Comparators 125.6% 58.2% 42.7% 29.8% 16.5% 12.8% Source: Pole de Dakar and Ministry of Education (Togo) Comparators are 20 SSA countries with GDP/capita between 350-750 US$ in 2010 155. There are indications from a subset of recent graduates that there exists at least a mild mismatch between skills and labor market needs. Any skill areas in excess demand would tend to show unemployment rates close to zero, even for Table 41: Provision of School Inputs new graduates.141 An examination of outcomes for recent (2008) graduates of higher education and professional training programs shows low rates of unemployment (between 0 and 2 percent) for graduates with a Masters in Law or Masters in Science, Civil Engineering (tertiary level), and for those graduating with either a certificate of apprenticeship or a professional diploma (Table 42). In other fields, unemployment rates range from 4– 19 percent, depending on the type of degree. While some disparity in excess Source: Pole de Dakar 2013. demand is to be expected in any labor market, policies in the sector can improve the relevance of higher education and training programs for the labor market. Government efforts have recently included accreditation of 55 private institutions of higher education, which could improve market relevance. Additional alternative paths will be needed in addition to the current linear pathway of general education through to university, particularly for workers moving from agriculture into urban-based sectors.142 141 Excess demand means that the supply of workers with the skill in question is not sufficient to meet demand. In such cases, wages would tend to increase for the workers with the requisite skills, but as the supply adjusts, unemployment would be close to zero. 142 http://www.republicoftogo.com/Toutes-les-rubriques/Education/Enseignement-superieur-55-etablissements-prives-reconnus. 97 156. Overall, however, Figure 84: Evolution of Mean Math Scores, Second and Fifth Graders, by while the supply of skills is low Gender in Togo, the demand for skills is even lower. The economy is unable to absorb and fully employ available skilled workers. Youth unemployment is high across general categories of education and training, and is higher for those with more education, ranging from 9.4 percent for secondary graduates aged 25–34 to as high as 55 Source: Pole de Dakar 2013 percent for 15–24 year old tertiary graduates (Figure 86).143 In fact, in all fields, recent graduates worked less than 90 percent of the four years since graduation, and only 66 percent on average; 63 percent wished to work more (Table 42). In addition, a relatively high percentage of graduates in all fields—14 percent, on average—have gone abroad, with higher percentages doing so in low-unemployment fields like civil engineering and science. 157. Furthermore, the return to education for those who are employed is generally low. The Figure 85: French Scores 5th Grade (2010) average wage premium is estimated at approximately 5.5 percent per year of schooling, which is low compared with the SSA mean of 12.4 percent and the global mean of 9.7 percent.144 When the costs of education are taken into account, social and private rates of return range between -1.9 and 2.9 percent (Pole de Dakar 2013), compared to higher levels for SSA more generally (Montenegro and Patrinos 2014). Although the quality of education can reduce the return, quality issues are unlikely to account for such low returns; rather, this is an indication of the low Source: PASEC 2012 demand for skilled labor in the Togolese economy. 158. Informal entrepreneurs also earn a relatively low return on education. Among the entrepreneurs surveyed, controlling for personal initiative and cognitive ability, each additional year of education is estimated to have a return of 5 percent (with earnings comprising returns to both entrepreneurial effort and invested capital). An examination of the returns to specific types of education shows little to no significant effect on earnings from completing 143 In Togo, as in other countries with educational quality issues, it is often argued that more-educated workers prefer to remain unemployed than to work below their perceived competencies. However, this too is an indication that the available jobs do not adequately reward the skills that they provide. 144 See Appendix Table 16 for details on this estimation, which includes a Heckmann correction for selection into wage/remunerated employment. 98 primary school or completing technical Figure 86: Unemployment by Age and Level of Education degrees (vis-à-vis having no education). 60.00% However, middle school completion increases earnings by 29 percent, and high 50.00% school or tertiary education by 52 percent 40.00% relative to no education. Yet even these 30.00% numbers translate into returns to each year of 20.00% schooling of 3–4 percent per year, similar to returns in the broader group of remunerated 10.00% workers. These labor market outcomes 0.00% No Primary Secondary 1 Secondary 2 Tertiary Technical contrast starkly with those of countries schooling complete and Professional showing binding skills deficits, such as 15-24 yrs 25-34 yrs. 35-64 yrs. Training Namibia, which has educational quality Source: QUIBB 2011 issues similar to or worse than Togo’s. In Namibia, because skills are a key constraint, unemployment rates are declining with the Figure 87: Net Rates of School Enrollment, by level of education to near zero at the highest Consumption Quintile, 2015 levels, and the returns to education recently 100 ranged between 11 percent per year for 90 80 basic education to 34 percent for tertiary 70 education (World Bank 2005).145 60 50 159. Despite anecdotes to the 40 contrary, formal businesses in Togo 30 20 generally do not rate the qualifications of 10 workers as a significant issue. The 0 Poorest Fourth Third Second Highest majority of firms (55 percent) report that Quintile Quintile worker skills are no obstacle at all, and only 15 percent consider them a major or severe Primary Secondary obstacle (TFFS 2015). Less than 1 percent Source: QUIBB 2015 say that workers’ skills are among their top two obstacles, and only 6.5 percent of firms say that workers’ skills do not match their needs at all. Almost 80 percent of firms consider worker skills to be at least an adequate match or better. Moreover, firms do not expend unusual efforts to circumvent a skills constraint. Approximately 31 percent offered their employees formal training, the same as the average for SSA and less than the average for comparators such as Cambodia, at 68 percent (WBES, latest years), and training for these lasts an average of 54 days per new employee. Finally, only 5 percent of all formal businesses employ foreign workers because they cannot find the skills they need locally (TFFS 2015). 145 Montenegro and Patrinos (2014) estimate the returns to education in Namibia to be 18.5 percent. 99 Table 42: Outcomes of 2008 Graduates (2009-2013) Percentage of Unemployment time employed Further Rate from 2009-2013 study Abroad Masters in Economic Science 4.0% 76.0% 21.2% 18.2% Masters in Letters 9.2% 77.2% 76.5% 12.1% Master in law 0.0% 78.9% 50.0% 11.3% Master of science 1.1% 86.9% 18.7% 24.6% Tertiary Education (TE) Grandes écoles 3.8% 82.4% 5.1% 19.2% BTS engineering (besides civil) 10.0% 67.6% 11.0% 18.7% BTS civil engineering 0.0% 76.6% 3.4% 19.0% ALL TE 7.5% 75.6% 13.8% 17.0% Bac 2 non civil engineering 19.4% 45.2% 76.8% 10.3% Bac 2 civil engineering 8.0% Diploma Technician 5.6% 85.2% 11.0% 16.0% Professional and Technical Education (PTE) Certificate of professional training 9.5% 75.8% 8.9% 26.6% Certificate of apprentice 2.0% 89.0% 5.7% 12.3% Diploma Professional studies 0.0% 68.4% 6.7% 16.7% ALL PTE 15.1% 55.7% 40.2% 11.5% All Graduates 16.1% 65.5% 40.2% 13.9% Source: PERI 2013 160. Because there are other, more pressing constraints limiting economic opportunity, Togo’s high rates of unemployment and low return to skills will only worsen if the demand by employers for educated and skilled workers is not increased in the presence of an expanding supply of skills.146 Despite issues in the education and training sector, therefore, there is no compelling empirical evidence that increases in education and improvements in training would rapidly and significantly increase private investment, job creation, and incomes without a significantly better enabling environment for private economic activity—investment and entrepreneurship across a broad range of sectors that can employ Togo’s workers and poor people. 161. Nonetheless, unequal access to higher-quality education constitutes a moderate constraint to equity of opportunity. As in any economy, people with fewer skills and education tend to earn less than those who are more highly trained. Rates of enrollment in secondary education, in particular, are inversely correlated with poverty status in Togo (Figure 87), with 62 percent of children in the richest quintile attending secondary school and only 37.5 percent of those in the bottom quintile. As in many SSA countries, there are likely to be significant quality differentials between schools in poor, rural areas vis-à-vis schools 146Poverty rates are also highest for households with less educated household heads (See Figure 17 above). Because people sort into types of employment according to their skills and education, this dimension of inequality is considered a normal outcome of any economy; and without raising returns to education, providing more education will increase equity of opportunity, but all else equal may not increase average returns to education. 100 in towns, and although having a secondary or tertiary education does not appear to raise consumption significantly in rural areas, it does matter for accessing urban-based employment opportunities.147 162. The lack of skills or education among Togo’s Table 43: Tests of Key Constraints population does not pass any of the available tests of a in Education and Skills binding constraint to inclusive growth (Table 43). First, the Education and returns to education are low (Test 1). Economic actors are not Skill: attempting to import substantial numbers of skilled workers or Tests of binding make an unusually high effort to train their employees. (Test constraint to growth Pass? 2). Although a full benchmarking is not feasible, Togo is not on key pathways unusually scarce in sectors that require education and skill High cost to actual or - (Test 3). Finally, although it is not possible to conduct Test 4 Inclusive potential enterprise? given the lack of high-frequency changes in the level of Growth Circumvention of - educational attainment of a population, Togo’s periods of constraint evident? negative per-capita GDP growth occurred despite the Few actors present - population’s relatively high level of educational attainment. requiring alleviation Investments in improved quality of education and training of constraint? would therefore contribute to Togo’s future human capital, Correlated with n.a. raise the returns to public expenditures in the sector, and growth or strengthen equity of opportunity. However, this rates as a investment? moderate rather than a key constraint to equity because the And/Or: Unusual - returns to education are low for the reasons diagnosed earlier disparities in in this chapter. service? Severe effects on - well-being Affects large number  of people  = passes test. - = does not. n.a. = no test available. 147 The conditional correlation coefficient on secondary and tertiary education, conditioning on region and demographic variables, is negative in rural areas. 101 Key Constraint 5: Poor Performance in Disease Prevention and Health Care Delivery Main Messages:  Togo’s health outcomes—as measured by life expectancy and mortality rates due to preventable diseases such as HIV/AIDS, malaria, tuberculosis, and lower respiratory infection—are poor, particularly given the country’s high total health expenditures as a percent of GDP.  Progress in reducing maternal mortality in particular has been slow, and inadequate access to female and maternal health care is a primary impediment to inclusion.  The health status of Togo’s population does not appear to constrain investment by off-farm enterprises to a significant extent. Based on evidence from Nigeria, however, inadequate access to diagnostic and curative care can have a substantial effect on earnings in agriculture.  Health is a precondition for other aspects of inclusion and well-being, and rates of access to care are correlated with income. These considerations, combined with Togo’s poor performance in disease prevention and health service provision, clearly signal a key constraint to inclusion. 163. Good health is the foundation of well-being and a prerequisite for accessing life’s opportunities. Health status affects child learning, the ability of adults to work and take care of family members, and the productivity of agriculture and businesses. Although higher incomes provide a means to access health-related goods and services, favorable outcomes also depend on access to clean water and air, nutrients, and affordable and effective health services. 164. Togo’s health care delivery system Figure 88: Health Expenditures and Life Expectancy in has made at best uneven strides in recent Comparison years to provide effective, accessible 10 80 health care to the population. Governance 9 70 8 Percent of GDP of the health sector is overly centralized, and 60 7 6 50 results are poor relative to spending. Years 5 40 Although 15 percent of the public budget is 4 30 3 devoted to health care, consumers pay 50 2 20 percent of total health care expenses (Figure 1 10 0 0 88). Moreover, relative to Togo’s expenditures—the highest among comparators as a percent of GDP, at 8.6 percent—life expectancy at birth is low, at just 59 years. Health expenditures as a percent of GDP Life expectancy at birth Source: WDI. Most recent years available. 102 165. Access to medical Figure 89: Percentage of Population not Consulting Medical Services consultations is highly by Consumption Quintile correlated with 60 socioeconomic status and 50 residence in urban areas, and access has fallen over 40 recent years. Between 2006 30 and 2015, the percentage of 20 Togolese who experienced an illness and accessed a hospital 10 or clinic (in the prior year) fell 0 from 30 percent to 20 percent. Poorest Second Third Fourth Richest However, a concomitant rise quintile poorest in consultations at 2006 2011 2015 dispensaries, from 19 to 38 percent, meant that those not Source: INSEED 2015 using QUIBB consulting any medical services fell between 2006 and 2011 and remained flat at approximately 38.8 percent in 2015. Those in the highest consumption quintile are much less likely to forego any medical consultation when ill than those in lower quintiles (Figure 89). In addition to financial costs, the average distance to health facilities is an important barrier to access in rural areas, and staffing of facilities is insufficient, with a disproportionate share of personnel concentrated in Lomé. In 2015, whereas only 7.9 percent of rural people experiencing illness consulted a medical practitioner, Figure 90: Rates of Access to Health Services 40.6 percent did in 2006 2011 2015 urban areas. 57.0 60.0 Moreover, rural 51.0 51.0 access rates were 50.0 49.0 45.5 43.0 47.5 higher in 2011 than in 39.0 2015, at 18 percent. 40.0 37.0 34.0 34.8 Whereas 31.6 percent 30.0 29.9 32.0 30.0 26.0 26.7 of the urban poor 23.0 accessed health 20.0 15.0 16.0 16.0 16.0 18.0 12.0 15.0 services in the past 9.0 7.2 7.7 11.0 8.2 10.0 5.5 year, only 7.6 percent of the rural poor did 0.0 so (Figure 90). Plus pauvre Deuxième Troisième Quatrième Plus riche Plus pauvre Deuxième Troisième Quatrième Plus riche URBAIN RURAL Access to doctors is even lower, with 22.9 Source: INSEED 2016 using QUIBB percent of Lomé residents having consulted a doctor, versus 16.7 percent in other urban areas and 4.5 percent in rural areas. Moreover, the quality of care is poor. Absenteeism among health facility staff is high, at an estimated 37 103 Figure 91: Child Health and Nutrition Indicators percent, and facilities only stock 44 percent of the medications deemed necessary by health experts. Furthermore, 19 percent of health facilities lack running water, 29 percent lack improved sanitation, and 49 percent have no electricity.148 166. Despite recent improvements in child health outcomes, the high incidence of preventable childhood diseases remains a severe problem. For children under five, the main cause of death is malaria, followed by acute respiratory infection and prematurity. Some progress has been made in child Source: WHO immunization rates, and DTP-3 coverage has risen from its low in the late 1990s Figure 92: Percentage of Children under 5 Malnourished to above the average for World Health (Underweight for age by > 2 std. deviations) Organization (WHO) countries Sub-Saharan Africa… (Figure 91). Nutrition indicators are on par with or better than comparators. Bangladesh 2013 The proportion of children who are Cambodia 2010 underweight (for age) is low relative to Benin 2006 Asian countries, as well as to Benin, Senegal 2014 Senegal, and the SSA average (Figure Togo 2010 92). The proportion of children who Cote d'Ivoire 2012 are stunted has declined since 1995, Mozambique 2013 but has not budged since 2010 (Figure Tanzania 13.6 91). However, the most recent Ghana 2011 available data show high rates of 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 anemia (71 percent in 2011), and only 57 percent of children under five use Source: WDI insecticide-treated bed nets. Vitamin A supplementation rates dropped from 100 percent in 2010 to 61 percent in 2013 (WDI). The net result of this mixed performance has been no improvement in child and infant mortality Table 44: Infant and Child Mortality Rates (per rates between 2006 and 2010, followed by a marked 1,000 live births) improvement between 2010 and 2012 (Table 44). 2006 2010 2012 167. In the general population, mortality rates Infant Mortality 77 78 42 due to common causes remain significantly higher Rate in Togo than in neighboring Benin and Ghana. The Child Mortality 123 124 88 greatest causes of death are lower respiratory Rate infections, HIV/AIDS, and malaria, followed by Source: MICS diarrheal diseases and stroke (Figure 93). Rates of 148 Service Delivery Indicator study 2014 (World Bank, African Development Bank, and African Economic Research Consortium). 104 death from HIV, malaria, and maternity exceed those of key comparators, except Nigeria (Table 45). Although HIV infection rates have fallen from 6.0 percent in 1999 to 2.9 percent in 2012 (CIA Factbook 2015), HIV remains a major issue. 168. The economic burden due to premature death, disability, lower learning outcomes, and the lower worker productivity associated with poor health care are high, and disproportionately affect poor children and women. According to the WHO, the economic burden of disease due to lost disability- adjusted life years (DALYs) Figure 93: Causes and Rates of Death, 2012 is highest for maternal, neonatal, and nutritional deficits. These issues are followed by HIV, TB, and malaria (Figure 93). Just 71 percent of pregnant women accessed prenatal health care in 2010, and only 54 percent did so four times or more (WDI 2010). Women have higher rates of HIV infection than men do, due in part to gender gaps in knowledge of the disease. Only 20 percent of Togolese females between the ages of 15 and 49 have comprehensive and correct information on HIV Source: WHO transmission (WDI 2014), a lower percentage than in 2010, whereas 33 percent of men in the same age range do (Table 46). Moreover, fertility rates are high, and the use of contraceptives is low. An estimated 63 percent of the need expressed by married women in 2010 is met (WDI).149 In addition, between 1998 and 2014, the maternal mortality rate was reduced only from 478 to 401 per 10,000 (national estimates). The private cost of care appears to be a key constraint to maternal health. The government charges for childbirth services (with the exception of cesarean sections), and as a result, there are large gaps between access to birth assistance and prenatal care by wealth quintile; 60 percent of women and 70 percent of women in the poorest quintile cite a lack of money for treatment as a barrier to accessing care. Physical proximity to care is also an obstacle, and preventative care is not sufficiently comprehensive. Anemia, which affects over 58 percent of pregnant women, is thought to be related to high malaria prevalence. Yet intermittent preventive treatment for malaria in pregnancy (IPTp) is not routinely provided, nor are long-lasting insecticide nets (LLINs) made available during antenatal consultations. 169. In addition to weak health care services, the poor quality of air and water contributes significantly to Togo’s poor health outcomes. Ambient air pollution—which has been linked to Togo’s leading cause of death, lower respiratory infection (Mehta et al. 2011)—is a growing problem that compromises the sustainability of any improvements made in health and well-being (World Bank 2015b). Over 90 percent of households use solid fuels (wood and charcoal) as their primary cooking fuel, and only 149 More evidence is needed on the reasons for low contraceptive use, as this area is not covered in the recent Demographic and Health Survey. 105 Table 45: Mortality Rates by Selected Causes 2012-2013 (Per 100,000 population unless otherwise specified) Senegal Benin Ghana Togo Nigeria Under 5 mortality rate (per 1000 live births) 55 85 78 85 117 Maternal mortality ratio 320 340 380 450* 560 Deaths due to HIV/AIDS 14 31 41 100 129 Deaths due to Malaria 57 79 69 83 107 Deaths due to Tuberculosis among HIV negative 21 12 4 12 94 Source: WHO *National estimates = 401 8.5 percent cook with clean natural gas or electricity Table 46: Percentage of Females and Males (INSEED 2015). This factor should be studied, along with with Comprehensive, Correct Information vehicular and other emissions, and addressed as potentially about HIV leading causes of Togo’s high rates of death from 2010 2014 respiratory infection. % of females ages 15-49 29.5 20.3 170. The poor health status of Togo’s population % of males ages 15-49 41.9 32.9 Source: WDI could adversely affect investment, job creation, and productivity, especially in rural areas. A recent study in Nigeria gives some indication of the productivity losses associated with poor health care for agricultural workers. Among Nigerian sugarcane workers, those provided with proper diagnosis and treatment of malarial symptoms received a 10 Table 47: Tests of Key Constraints percent wage premium—presumably reflecting an expected 10 in Health percent increase in their productivity (Dillon et al. 2014). Scaling this Tests of binding effect by the relative malaria death rates in the two countries results constraint to growth in estimated lost productivity of 7.7 percent (relative to that obtained on key pathways with proper diagnosis) for similar workers in Togo—a sizeable Pass? percentage of income, particularly for poor people. Yet there is little High cost to actual or  indication that the general health status of the population is a major potential enterprise? impediment to off-farm private investment and job creation. Among Inclusive Circumvention of - Growth informal firms surveyed in Lomé, businesses lost only 6.5 days per constraint evident? year of business due to illness, which represents a small percentage of Few actors present - total working days (TRIFS 2015). Formal firms in the country’s three requiring alleviation main cities reported losing 11 worker-days due to illness on average of constraint? per year, or two worker-days per employee (TFFS 2015). Similarly, Correlated with n.a. only 12 percent of firms consider the health status of workers to be a growth or major or severe obstacle to their business, and essentially none investment? consider it to be among their top two obstacles. And/Or: Unusual  disparities in service? 171. While health issues do not appear to obstruct firm entry Severe effects on  and aggregate productivity growth, poor health constrains the well-being? opportunities and productivity of the poor through other Affects large number  channels, as well as their overall lifetime well-being (Table 47). of people? Given the fundamentally important nature of health and nutritional  = passes test. - = does not. status, and the high estimated costs of preventable disability, illness, n.a. = no test available. and morbidity to poor people, women, and children, Togo’s weak 106 performance in this area represents a key constraint to economic inclusion and the well-being of the population. 107 Gender Inequalities Main Messages:  Cultural and legal obstacles affect women and girls’ access to opportunities, particularly to attend secondary school, earn equal income to men in the labor market, access inputs when working as small entrepreneurs, and enjoy more secure land tenure in rural areas.  Through these issues, as well as through harassment, limited autonomy, and pressures for early marriage, gender bias impedes the full utilization of the talents and abilities of half of Togo’s workforce and represents an important constraint to equity of opportunity. 172. Cultural and legal obstacles affect the ability of Togolese girls and women to improve their incomes and well-being. Togolese parents tend to value girls’ education highly, and at very young ages development outcomes are similar for girls and boys (Figure 94). School enrollment rates are reasonably high through age 11 for both sexes. However, there is a significant gap between boys’ and girls’ enrollment Figure 94: Development Outcomes at Age 3 and 4 in secondary school (Figure 96). This may be in part because girls are more engaged than boys are in helping in the household or family businesses (Figure 95). Yet perhaps more important to explaining this gap is the gender disparity in returns to employment. 173. Women face gender barriers in accessing employment and, if employed, earn less than men do. Although women work informally and at home, men are 24 percent more likely to be in a paid job than women are.150 The share of Togolese firms with female participation in ownership (32 percent), the Source: MICS 2010 proportion of female full-time workers (25 percent), and the proportion of firms with a female top manager (15 percent) are low, albeit similar to SSA averages.151 Once employed, men earn significantly more than their female counterparts do. Controlling for experience, years of education, ability, and location, women earn 71 cents on the dollar that men earn, due to the combined effects of differences in occupation, sector of employment, and gender-wage premiums (Appendix Table 15).152 150 Until recently, by law, persons (which in practice meant women) could only be employed to the extent that their spouses did not object and make this objection known to the prospective employer. Togo, along with Mali and Côte d’Ivoire, ha s recently reformed this law. 151 These are slightly lower than the global averages of 35 percent, 31 percent and 18 percent respectively. The inclusion of micro enterprises in the sample for Togo actually reduces the percentage of female ownership, so using the sample more similar to WBES would make Togo’s percentage of female-owned businesses more similar to other countries. 152 World Bank staff estimates, using QUIBB 2011. Econometric analysis of the determinants of hourly rates of compensation also controlled for unobservable ability or advantage, which may affect selection into employment. The variables used to identify the model (excluded from the second stage) were whether or not the individual’s mother and father were still alive. 108 Figure 96: School Enrollment by Gender, 2006, 2011, and 174. Customary law and cultural 2015 attitudes appear to pose significant 100 barriers to women’s entrepreneurship. 90 While statutory law is relatively progressive 80 (especially with the 2012 reforms to the 70 Family Code), Togo’s Ordinance Number 60 78-35 of 1978 allows for the application of 50 customary law across several areas that are 40 critical for doing business: the capacity to 30 contract and inherit, in addition to the right 20 to marry and divorce (Hallward-Driemeier 10 and Hasan, 2012). Profits of informal 0 female-operated firms are 62 percent lower Male Female Male Female than are those of their male counterparts, Primary Secondary due largely to differential management 2006 2011 2015 practices and access to inputs (BIFS 2013). Female-owned informal businesses are Source: QUIBB more likely to be operated either without a fixed location or in the home, and have less access to household labor and informal credit. Female entrepreneurs also have greater unpaid caretaking responsibilities than men, spending on average 19.3 hours per week caring for children and the elderly, relative to 8.8 hours for male entrepreneurs. In addition, although educational disparities do not explain differences in profits, female Figure 95: Activity Rates of Children by Gender entrepreneurs may more frequently cut short their education to run businesses female male 153 Work at home for 28 hours or more than men do. Once access to inputs Children aged 12 - 14 Work at home for less than 28 hours is taken into account, however, returns Work 14 hours or more do not vary between male- and female- Work less than 14 hours owned businesses. Work in family business Do unpaid work 175. Among formal firms, female Do paid work ownership appears to have little Children aged 5 - 11 effect on opportunities and Work at home for 28 hours or more profitability. Access to inputs is equal, Work at home for less than 28 hours and there is no statistically significant Work for at least 1 hour relationship between the gender of the Work in family business owners and profits or sales. However, Do unpaid work Do paid work formal businesses owned at least partially by women appear to receive 0 50 Percent 100 more requests for bribe payments Source: MICS 2010 153 Among female-owned informal businesses, an estimation of total earnings on cognitive ability, assets, sector, and education found no statistically significant relationship between educational attainment and enterprise income, whereas the estimated return is approximately 7 percent per year for men. The most likely explanation is selection bias: women with entrepreneurial opportunities or ability may undertake less schooling in order to pursue these, whereas men are less likely to do so. For women, but not for men, cognitive ability and experience in the field raise earnings significantly, controlling for educational attainment. 109 (TFFS 2015),154 and are more likely to report that interactions with tax authorities have worsened since the establishment of OTR. 176. A lack of female autonomy compromises women’s ability to participate in the economy. Among female entrepreneurs in Lomé, 44 percent cannot go to the market or to the health clinic for health needs without their husbands’ permission (BIFS 2013). Among young married urban women with at least a high school-equivalent education, 41 percent cannot go to the market without permission, 65 percent cannot go to visit friends or family in their city, and only 41 percent have money that they can spend without their husband’s permission (World Bank 2013c). Furthermore, over 20 percent of the population believes that it is acceptable for a man to beat his wife for certain reasons (RT 2013c).155 177. Sexual harassment in the workplace is also an important constraint to women’s opportunities. In a recent survey, young graduates expected that 55 percent of women face harassment when seeking a job or a promotion, and 58 percent of young people know someone personally who has been a victim of sexual harassment in the workplace (65 percent of female respondents and 55 percent of male respondents) (World Bank 2013c). Furthermore, 40 percent of young women have been victims of sexual harassment during their own job search (World Bank 2013c). Similarly, informal entrepreneurs in Lomé expect that 58 percent of female entrepreneurs face sexual harassment in the context of operating their business, and 13 percent of female entrepreneurs were victims of business-related sexual harassment in the previous twelve months, 69 percent of which were victims multiple times in the same year (World Bank 2013c). 178. Gender differentiation also pervades Table 48: Person-Interventions in Food Production by Gender and Region, 2012-2013 work roles and labor markets in rural areas. Region Men Women Total There are clear gender differences in the types of labor that men and women provide in agriculture, Maritime 219,233 84,704 303,937 if the number of discrete tasks performed in Plateaux 913,302 233,414 1,146,716 agriculture is any indication. Men perform more Centrale 502,181 64,401 566,582 than twice as many person-interventions as women Kara 1,164,820 239,467 566,582 156 Savanes 776,412 570,954 1,347,366 (Table 48). Off-farm work tends to differ by Total 3,575,948 1,192,940 4,768,888 gender as well. Among rural households engaged Source: RT 2014b. in secondary activities, rural women are more likely to work in trading activities than men. Men are also more likely to be artisans or livestock producers (Table 49). 154 Women-owned firms report in higher numbers bribe requests during the following transactions: request for an import permit (48 percent of female-owned firms vs. 9 percent of male-owned firms), during transport stops (21 percent female-owned vs. 16 percent male-owned), and when importing or exporting. Whereas they cite access to finance as one of their top two constraints in higher percentages than their male counterparts, there is no evidence that women-owned firms receive fewer loans or more loan denials than male-owned firms. 155 According to the same survey, only 10 percent of women have experienced some form of domestic violence. Women may have underreported instances of domestic violence for fear that their husbands, who also interacted with the same surveyor, would learn of it. While the numbers may also be biased for similar reasons regarding opinions on when it is acceptable for a man to beat his wife, the following scenarios were the most accepted: 22 percent for drinking alcohol, 21.1 percent for talking back to their husbands, 19.7 percent for having an unknown visitor, 17.7 percent for being negligent toward the children, and 15.5 percent for going out without permission. 156 A person-intervention is defined as the execution of a task (such as planting or harvesting) by a person. It is not a time-input measure. 110 179. Rural women have more limited access Table 49: Secondary Activities of Agricultural to land and other inputs than men do. On Population by Gender average, the farms of female-headed households Men Women are half the size of those of male-headed Agriculture 20.6 22.5 households—2.19 versus 4.35 hectares (RT Livestock Farming 45.6 24.4 2011). Yet there is no detectable gender Fishing 1.4 0.4 disparity in the frequency of responsibility for Artisanry 10.6 4.2 plots under cash crop cultivation (RT 2014b), Trading 5.9 34.8 and female land “ownership” rates have Transport 4.0 0.6 increased from 2006 to 2011 (RT 2011). In addition, Togo’s laws grant women the right to Service 2.8 1.5 own land. In many communities, however, Manufacturing 3.0 7.6 cultural tradition dictates that only males may Building/ Public Works 0.4 0.2 inherit or own property. To the extent that Public Administration 1.2 0.4 women have less secure tenure, this may reduce Forestry 0.2 0.1 the incentives for women to invest in productive Forest Harvesting 0.4 0.4 inputs (Ali et al. 2014, Goldstein et al. 2015). Other 3.9 3.0 Unfortunately, the data that would be needed to link access to land, tenure arrangements, and use Total Engaged 433,481 476,153 of other non-land productive inputs to gender— Source: RT 2014b and thus to disentangle the effects of gender- related obstacles on productivity in agriculture—are not Table 50: Tests of Gender Inequality as available for Togo. a Key Constraint 180. Although Togo’s legal framework provides the Tests of binding basis for improving gender equality, the remaining constraint to growth problems of harassment, limited autonomy, pressures for on key pathways Pass? early marriage, disparate wages, difficulties in accessing adequate health services, and differential access to land remain. As a result, the issue of gender discrimination, High cost to actual or - Inclusive potential enterprise? although at a level similar to many other countries, remains a Growth Circumvention of - major inclusion issue in Togo, impeding the full utilization of constraint evident? the talents and abilities of half of Togo’s workforce. Gender Few actors present - inequality therefore represents an important moderate requiring alleviation constraint to equity of opportunity and inclusion (Table 50). of constraint? Correlated with n.a. growth or investment? And/Or: Unusual - disparities? Severe effects on - well-being? Affects large number  of people?  = passes test. - = does not. n.a. = no test available. 111 5. Summary of Findings and Pathways out of Poverty Summary of Findings 181. The Diagnostic Results Diagram (Figure 97) summarizes the findings from this systematic diagnosis of Togo’s key constraints and opportunities for poverty reduction. Togo faces key deficits in all three SCD pillars: inadequate growth, weak inclusion, and a lack of sustainability. As highlighted at the bottom of the figure, Togo’s system of governance has not evolved in a manner that is conducive to strong accountability to all sectors of the Togolese population. The system of governance results in the interrelated problems of weak control of corruption and low government effectiveness in formulating and implementing policies on private economic activity (including in agriculture), poor fiscal governance, and low government effectiveness in setting priorities for and delivering public goods and services. These broad channels affect many specific issues and constraints in the country, but through the evidence presented in Section 4, one can identify those that are most binding for growth, or otherwise key to inclusion or sustainability, as shown in dark blue. 182. Table 51 shows a more detailed prioritization of issues according to the three SCD pillars along the dimensions of severity of a constraint and, for sustainability risks, the timeframe for such risks. The current binding or key constraints are in the left hand column in bold. These are (1) poor governance (in particular, weak control of corruption and low government effectiveness), a reality that perpetuates and constrains progress in alleviating the other constraints identified. It leads in particular to (3) barriers to entry and large distortions to incentives for private economic activity, through poor formulation and implementation of policies and regulations vis-à-vis productive sectors, including agriculture, mining, services, and manufacturing. These barriers include state ownership of commercial sectors and skewed implementation of policies and regulations on private activity. Another binding constraint, closely related to the others, is (4) the country’s changeable, onerous, complex, and distortionary tax system (comprised of both the tax laws and their implementation). As a result of this constraint, smaller enterprises that are less directly affected by other barriers (Constraint 3) struggle to gain a footing and grow under the terms of the tax system. Other potential investors in manufacturing, services, agriculture, and mining must seek special exonerations or other tax shields. Moreover, by taxing revenues at the juncture of the informal and formal agricultural economy, the country’s tax system impedes the commercialization of agriculture and the development of agricultural service sectors. These constraints greatly limit the scope for inclusive growth: the level of private investment and entrepreneurship is low, as are productivity growth, wage growth, and improvements to agricultural productivity and incomes. These constraints go a significant way toward explaining the country’s low returns to labor and land, the main assets that poor people possess. 183. These issues are intertwined with the most crucial sustainability risk that Togo faces, that of macro fiscal risk (Constraint 2). Because the tax base is narrow, fiscal management is poor, and state- owned enterprises are not financially sustainable, the country has oscillated between fiscal crisis and rebound growth since it shifted to a state-led growth model in the 1970s. Just a few years after HIPC debt relief in 2010, public debt has grown rapidly, raising serious risks of another fiscal crisis. 184. Adding to these is the key equity and inclusion issue of poor disease prevention and health (Constraint 5). Good health is a prerequisite for well-being and a productive life, and it disproportionately affects poor people, women, and children; yet Togo has not made adequate public efforts in disease prevention or curative care, despite relatively high (public and private) spending on health. 185. Addressing these five key constraints can be considered a necessary condition without which progress toward the World Bank’s twin goals will be at best slow and halting. Whereas solving other 112 issues can have incremental positive effects and reduce future risks, if these constraints are not also alleviated, the results of other poverty reduction reforms and investment efforts will likely fall short. 186. Infrastructure constraints, while not among the key (binding) constraints to inclusive growth, are moderately constraining (Table 51), middle column (top)). Particularly problematic are: (i) the high cost of electricity provision for productive purposes, a factor that is particularly constraining to manufacturing and services sectors; (ii) the high cost and poor quality of ICT services, which impede Togo’s ability to leverage its comparative advantage in logistics, finance, and other services; and (iii) local public infrastructure such as feeder roads and water control systems, which are not binding on a national scale, but which appear at least moderately constraining in some localities. Although inadequate water service is not a binding constraint to growth, the lack of clean water in some areas of the country is an important contributor to poor health outcomes and presents an equity issue. 187. Some additional analytical and data gaps remain. In particular, the following factors are not well understood:  How severely constraints in the land regime may obstruct large investments and commercial agriculture, the productivity of women agriculturalists, and improved land management;  The degree to which inadequate provision of agricultural extension services limits agricultural productivity growth in Togo’s current investment climate;  The severity of constraints in the provision of adequate feeder and other location-specific road investments (given that road-specific traffic counts, costs, and international roughness indices are lacking);  The impact of pricing behavior in the maritime sector on trade and competitiveness; and  The effects of tariff and nontariff barriers on growth and distributional outcomes, particularly as WAEMU implements a common external tariff. There are also gaps in capturing data on environmental conditions, and gaps in existing household-level data, which make it impossible to link circumstances, assets, inputs, infrastructure, and prices to income and consumption. The new West African household survey harmonization initiative will help to fill this latter gap. 188. Given the nexus of constraints associated with fiscal expenditures, taxation, and public service provision, a priority analytical agenda for the Bank going forward would be:  A full public expenditure review, which would include an assessment of the allocation and impact (value for money) of public expenditure.  A more detailed study of options for reform of Togo’s tax regime, given the economy’s current level of formality and implementation constraints.  Additional (cross-disciplinary) analytical work to understand the main causes of poor health service delivery and access, as well as the drivers of high rates of preventable disease and options for reform of the sector.  A study of the potential benefits and risks of, and options for, pursuing decentralization of public functions and authority. This agenda, under discussion in Togo for some time, is a potential avenue for reducing the concentration of authority in the central government, and if pursued effectively, for improving service delivery and responsiveness to citizen voice. 113 Pathways out of Poverty 189. Given Togo’s general decline in real living standards between 1980 and 2005 and its only partial success over the past decade in expanding and broadening the economy, there is no route out of poverty that does not involve significant reforms to accelerate inclusive growth. While it will also be necessary to address the most pressing issues regarding equity and the well-being of poor and vulnerable people, this diagnostic makes it clear that such efforts alone will not be sufficient. The main priorities of the Togolese population are consonant with an emphasis on income-generating opportunities, but reflect weaknesses in health and other service delivery (Afrobarometer 2015 Box 2). Greater scope for a more inclusive, dynamic growth process led by private economic activity would help build an economy that is more resilient to shocks and enable a virtuous circle of rising incomes, expanding fiscal resources, and an increasing ability to pay for public and other services to improve well-being. In particular, a more expansive and diversified private sector, increasingly formal and productive, is needed to spur a virtuous circle of increased opportunities and living standards. If current trends persist, two-thirds of Togo’s population could be living in urban areas by 2025, and if more formal and productive nonfarm employment opportunities continue to lag behind, Togo’s increasingly educated workers will either go abroad (where they can only contribute to Togo’s economy through remittances) or remain employed in low -productivity informal enterprises. Togo has many opportunities to harness this workforce, given the natural assets that it has yet to fully exploit—in particular, relatively beneficial conditions for agriculture, a location in the heart of the Economic Community of West Africa, and a comparative advantage in maritime and related transport services. Mineral wealth presents both opportunities and risks. 190. Togo’s course toward the twin goals can be charted along four essential, interrelated pathways: (1) Growth in increasingly formal and productive off-farm businesses for more remunerative employment. To lift half of the Togolese population out of poverty will require consolidating and accelerating the tentative structural transformation that is currently underway. This pathway is important not only for areas near Lomé and other cities, but also for residents of remote areas such as rural Savanes, where temporary or seasonal workers currently cannot earn enough to exit poverty, and where climatic conditions are unlikely to support sufficient growth in agricultural livelihoods to raise the population out of poverty. (2) Transformation of agriculture toward more productive, higher-value, and sustainable smallholder and commercial production, a more vibrant agricultural service sector, and agricultural jobs. The agriculture sector can be a major source of poverty reduction and is important as a generator of agricultural wage jobs, food security, and supplies to the urban sectors. (3) Reduced fiscal and political risk and improved value for money in public expenditures. (4) Improved health status of the population, especially the poor and vulnerable. For pathways (1) and (2) to be successful, private actors—including smallholders in agriculture, micro and small businesses, and larger private entrepreneurs—will need to identify and make productive investments, create value, and stimulate expanding and increasingly remunerative employment opportunities. Rising income in the agricultural and nonfarm sectors would increase demand for goods and services provided by the other sector, strengthen supply linkages, and increase the productivity of land and labor—the assets that poor people possess. It is not possible to predict Togo’s precise areas of comparative advantage in a less distorted environment for private economic activity, and it is best for the government to adopt a broad, supportive posture rather than to pick winning sectors. One can, however, envision a Togo with expanded and diversified services sectors—for example, those that provide inputs and add value to an increasingly productive and commercial agricultural sector. The country could expect growth in hospitality, logistics and trade services, retail sectors servicing an increasingly prosperous population, and ICT services. To achieve greater productivity, new industries would be more formal and larger than the country’s currently highly informal sectors, but small informal entrepreneurs would benefit from these developments by providing goods and services to a growing market. If Togo can alleviate constraints in the electricity sector, in input regulation and taxation, and in the total 114 Box 2: Priorities of the Togolese Population for Government Action When asked what their greatest priorities are for government action, in the most recent (2015) Afrobarometer Survey, 80 percent of Togolese adults place income and employment issues among their top three priorities (see Left Panel below). These issues are followed by infrastructure issues, and then social services. Among specific priorities, after unemployment, health ranked second most frequently as peoples’ top concern, and was the most frequently cited among their top three worries (right hand panel). Water supply and road infrastructure also rated highly among the most important issues, and education was among the most frequently cited second or third priority. Although rectifying historical under-investment in key public services is essential for improving the well- being of the Togolese people, the population gives a clear precedence to expanding economic opportunities and incomes. Responses to Question "Which Problems are the Highest Priority for the Government to Confront?" Source: Afrobarometer Survey 2015, a nationally representative random sample of 1200 Togolese adults. tax burden, it could also see growth in light manufacturing sectors, which can create both high- and low- skilled jobs. Within a conducive public governance framework, such a process would in turn provide the resources to invest in the public goods and services needed to enhance well-being and enhance equity of opportunity, while also shoring up fiscal and environmental sustainability risks, the central challenges addressed by Pathways 3 and 4. More detailed steps are outlined below: Pathway 1: Growth in increasingly formal and productive off-farm businesses for more remunerative employment: To unblock this pathway, Togo can build on recent progress by: Addressing the key constraints:  Putting in place arrangements and practices to reduce conflicts of interest and enhance the accountability, transparency, capacity, and independence of public entities carrying out the design and implementation of policies and regulations affecting private economic activity. 115  Clarifying the investment code with more specific and limited rationales for denying approvals and a balanced and independent process for contesting them.  Reducing the paperwork and the clearance burden for imports.  Reducing the role of the state in directly owning and/or operating for-profit activities in sectors where more competitive markets can emerge.  Establishing mechanisms to monitor the quality and consistency of regulatory actions and for impartial dispute resolution.  Reforming Togo’s tax framework to reduce the level of total taxation, simplify the tax code, and rebalance the risks that it poses to private entrepreneurs. And taking complementary steps:  Addressing the high cost and low quality of electricity and ICT services by: o Adapting institutional arrangements and practices to reducing conflicts of interest in the governance of these sectors. o Strengthening the independence and capacity of the electricity regulator. o Clarifying and reinforcing of the commercial orientation and managerial autonomy of the electricity company, CEET.157 o Fully embracing the logic of private competition to alleviate the high prices and poor quality of ICT services. o Strengthening the dialogue between the government and the private sector, in order to better respond with effective policies to changing needs. Pathway 2: Transformation of agriculture toward more productive, higher-value, and sustainable smallholder and commercial production. Togo has begun to address some of the constraints identified, most recently adopting a plan to reform the fertilizer subsidy program. To ensure lasting progress, Togo should consider: Addressing the key constraints:  Enhancing the professional capacity, independence from conflicts of interest, and accountability for results of the functions performed within the Ministry of Agriculture and other public entities in the sector, including ITRA and ANSAT.  Reforming the licensing process for providing veterinary services and providing public support as needed to strengthen animal health and traceability systems.  Improving the flexibility, speed, and accountability of the country’s seed registry, with expedited procedures for seeds registered elsewhere in the ECOWAS zone.  Improving market access for basic food grain and other producers by: o Ensuring that export permits are provided consistently and efficiently; o Working within ECOWAS to lower NTBs.  Ensuring that ANSAT’s actions are more consistently favorable to producers (while also enhancing food security). 157Detailed reforms are needed to the parameters by which the boards of these two institutions are chosen and operate, with the aim of ensuring that they remain independent and professional. 116  For example by adopting more efficient mechanisms for smoothing prices and availability. In addition to removing barriers to international trade in food products, it can facilitate grain storage by the private sector (Deaton and Laroque 1996; Gouel and Jean 2012).  Alleviating revenue-based taxes on enterprises providing inputs, marketing/market access, storage services, value addition, or commercial-scale production in the sector and ensuring that requirements within the value chain for reimbursement of VAT are consistent with the informality of producers in the sector. And taking complementary steps:  Pursuing an integrated strategy to disrupt the vicious circle of deforestation and soil depletion, adverse microclimate impacts, reduced surface water, and declining productivity in rural areas.  Facilitating the use of small-scale irrigation (especially in drier areas and valley bottoms) in a manner that draws on international experience and is suited to local conditions, including through user-managed and -financed systems.  Assessing the viability of additional feeder road investments in specific zones where their absence is at least a moderate constraint to agriculture (in particular in Plateaux).  Ensuring that sanitary and phytosanitary, labor market, and value chain regulations are supportive of commercial-scale agricultural operations, improved traceability, and sanitary systems  Ensuring consistent application of (lower) import duties and other import requirements for agricultural inputs.  Ensuring that road maintenance and road asset protection systems perform well and that roadblocks are minimized. Pathway 3: Reduced fiscal and political risks, and improved value for money in public expenditures. Addressing the key constraints:  Strengthening the transparency and accountability of public financial management, with a clear separation between the budgets of various public entities and state-owned enterprises and controls on unbudgeted flows.  Improving public investment management, including comprehensive systems to integrate information, monitor public investments and expenditures, and enhance value for money in procurement.  Reducing the fiscal costs of public enterprises, either through privatization (where competitive markets would result) or increased commercial discipline, competition, and a clean, transparent, and disciplined separation of SOE and other public financial accounts. And taking complementary steps:  Improving value for money in service delivery and evaluate results, beginning in sectors with important fiscal implications and impacts on poverty (for example, health, education, and agriculture).  Relying, whenever feasible, on private provision of infrastructure services (with appropriate PPP frameworks) and strengthening the autonomy and capacity of infrastructure sector regulators, while improving maintenance funding to achieve greater financial sustainability. 117  Broadening the tax base by simplifying the tax code and reducing discretion in implementation, compliance requirements, and the total rate/burden of the system.  Ensuring that any subsidies, including for fuel and fertilizer, are minimized, pro-poor, and cost- effective.  Accelerating efforts to improve governance of the extractives sector, with an emphasis on monitoring production and sales, tracking fiscal receipts, and implementing suitable regulation.  Utilizing limited, well-targeted cash transfers to reduce poverty to the extent that these are shown to be more cost-effective than other public service expenditures and to the extent that fiscal stability is achieved.  Intensifying efforts to broaden and deepen dialogue with civil society and opposition groups, improve responsiveness to citizen voice, and show tangible progress in fulfilling outstanding agreements (including from the Global Political Accord).  Considering ways to increase the government’s responsiveness to the public investment priorities of regions, towns, and communities. Pathway 4: Improved health status of the population, including the poor and vulnerable . To pursue this pathway in a cost-effective manner, Togo should consider: Addressing the key constraints:  Studying the primary drivers of poor health outcomes, which may operate across traditional sector boundaries (including health service delivery, air and water pollution, cooking fuels, and water service); and o Based on this diagnostic, implementing evidence-based interventions to improve disease prevention and health services, especially to address maternal health, respiratory infection, diarrhea, malaria, and other diseases that impose a high cost on the poor. o To enhance accountability and learning, monitoring and evaluating the results of measures introduced and adjusting as needed to improve cost-effectiveness. And take complementary steps:  Integrating environmental sustainability into Togo’s public institutions and ministries, with clear roles and responsibilities to avoid the negative effects on air quality of the inefficient use of urban spaces, congestion, and other sources of poor ambient air quality, as well as increased pressures on clean drinking water sources. 191. It will be important to sequence reforms and interventions carefully, in light of Togo’s difficult fiscal situation. Because education plays many roles in society, as noted under Pathway 3, Togo can and should improve the value for money in educating Togo’s children and youth, to prepare them to benefit from expanding economic opportunities in Togo and to provide greater equity of opportunity to poor people and to girls and women. Moreover, after key priorities are addressed, Togo could expand direct cash transfer programs to poor people. There is recent evidence tha,t in some contexts, transfers of cash or productive assets have lasting effects on the incomes and assets of the poor (for evidence from Western Kenya, for example, see Haushofer and Shapiro 2013). Even if pathways to higher growth develop rapidly, some transfers will be needed to address the country’s most entrenched poverty. Distribution-neutral growth in Togo would have to be as high as 9.7 percent per year for the next 15 years to achieve a 3 percent extreme poverty rate (World Bank 2015e). Nonetheless, given the nature of the constraints identified, alleviation of binding constraints could result in a growth process that skews in favor of the poor. Moreover, given Togo’s 118 current governance and fiscal challenges, a large transfer program in the context of modest growth may not be cost-effective. Thus, a prerequisite to a major expansion in government-financed transfers would be to ensure that the incidence on the poor of any resulting increase in taxation—through reduced job creation or remuneration, through a higher cost of living, or through the effects of macro-fiscal crisis—would not offset the benefits to poor people of such transfers. Improved fiscal governance would be required, in combination with alleviation of the high tax burden, which currently appears to fall, directly or indirectly, on poor people. 119 Figure 97: Summary of Results in Diagnostic Framework Key Constraints Togo Faces in Eliminating Extreme Levels of Poverty Causation Inadequate Inclusive Growth Proximate (Slow structural transformation, low High risk of recurrent Inadequate Equity of causes of labor productivity and wages, under- Opportunity and Well- Poverty employment, and low agricultural fiscal and political crisis productivity) Being 0) Inconsistently pro-poor Key Low Private Investment and distribution of growth and Slow progress in Outcomes Entrepreneurship (including in lack of pro-poor improving human smallholder agriculture) distributional policies development Specific (3) Barriers to Entry and Electricity, ICT, and Binding or (4) High and (5) Poor Performance High Distortions local infrastructure Key and Distortionary Taxation in Disease Prevention (Agriculture and non- in some zones Moderate (Agriculture and non-) and Health Care Agriculture moderate constraints Constraints High corruption and low government (2) Poor Low effectiveness in setting priorities for effectiveness in formulating and implementing Fiscal and delivering public goods and services policies towards private economic activity Governance Deeper (including Agriculture) Causes (1) Governance system that fosters weak accountability Note: Dark Blue = Key Constraint. Medium Blue = other finding. 120 Table 51: Detailed Prioritization Matrix of Constraints and Risks by Severity and Timeframe for Sustainability Risks Severity of Constraint : Key or Binding Constraints to Poverty Moderate constraints Mild constraints Reduction (Numbered as in Figure 97) Current constraints to  High cost of electricity for productive  Minimum wage regulation poverty reduction through (1) Poor governance (low government uses (especially manufacturing).  Skills deficits or mismatch effectiveness and poor control of  Unreliable internet and costly  High transport and logistics inclusive growth corruption.) telecommunications (services and costs** (3) Barriers to entry and binding distortions manufacturing)  Inadequate land titling system** to private activities due to high-level  Lack of local infrastructure goods such  Poor urban water service corruption and poor policy and regulatory as feeder roads*, water control assets,* performance (Agricultural and non-). (agriculture) depending on locality (4) High and distortionary taxes (in agriculture and non-agriculture) Sustainability risks: Short or medium term (1-10 years) (2) Current: Macro/fiscal crisis due to  Soil degradation  Inadequate security of tenure for constraint or risk to poverty weak fiscal governance  Deforestation smallholders reduction through inclusive growth  Coastal erosion**  Banking sector insolvency  (2-5 years) Political conflict or crisis  Microfinance sector insolvency Long term Constraint or  Natural water availability and weather risk  Inadequate use of urban spaces for Sustainability Risk to poverty due to climate change energy efficiency and disaster reduction (over 10 years) through preparedness inclusive growth Current constraints for (5) Low accessibility and quality of health-  Gender-based discrimination in  Insecure land tenure in rural inclusion and equity related services and disease prevention economic and social spheres. areas. 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Journal of Development Economics 71 (2), 233– 260. 130 Appendix A: Methodology and Data Appendix Appendix Figure 1: SCD Guidance on Framing the Issues A.1 Detailed Methodological Discussion 192. The approach to diagnosing binding constraints to sustained, broad based growth proposed by Haussmann, Rodrik, and Velasco, and recommended by the World Bank SCD Secretariat, starts from two simple and uncontroversial propositions. First is the recognition that private investment and entrepreneurship—the process of identifying profitable business opportunities, productivity improvements, and innovations, and applying resources to the creation of value—are the primary drivers of sustained, broad based economic growth. Second is the recognition that these drivers mainly depend on scope to invest and the prospect of an adequate rate of return to the investor, given the risks as well as the costs of financing. These investors include the poor and agriculturalists, who must decide how much to invest in productivity- I enhancing inputs in agriculture, just as other entrepreneurs do. The HRV approach suggests three general possibilities, as depicted by the three main branches of a tree (Box 1) . First, on the two left-most branches, returns to entrepreneurs in an economy may be too low to make investment Box 3: HRV Framework worthwhile. This may be due to weak private What Constrains Private Investment and Entrepreneurship? “appropriability” of the economic gains from investments due a large distortions even Low Returns to Economic High Cost of Finance Activities where investments otherwise would be highly profitable (in this report this is called Low Low Intrinsic Costly Local Costly Foreign “distortions to private economic activity”. Appropriability Returns Finance Finance Alternatively, as depicted in the next (central) Macro Risks Low Savings Natural Capital branch, private returns may be low because the intrinsic (social) returns are low due some Micro Risks Costly Human Capital intermediation lacking complementary factors such as Market Failures infrastructure, natural capital (e.g., soil or (in innovations) Infrastructure water resources), or human capital (skills, “Self discovery” education, and health). The third (right) branch captures the possibility that private returns are high, and thus there are sufficiently strong incentives to invest, but that the level of investment is primarily constrained by the high cost of financing. 193. The approach requires a prioritization based upon a preponderance of empirical evidence. The approach to developing such evidence proposed by Hausmann, Klinger, and Wagner (HKW 2008) serves as a general guide for interpreting the data and information available. To identify and rank constraints requires an examination of multiple symptoms or indicators of a high value (a high “shadow price”) to the economy of a specific constrained factor (e.g., investible funds or skill), through the application of up to 4 types of diagnostic “tests.” The approach is summarized in Box 2. To illustrate the diagnostic mindset HKW propose, take the example of skills. If a poor level of skills training were a binding constraint to growth, one would expect to see not only a low level of skills relative to other similar economies, but also signs of high demand for skills. In particular, one would expect to see: (i) a high return to individuals with the skills in demand: (ii) unusual and/or costly efforts by entrepreneurs to circumvent the constraint by using foreign workers, and/or spending on employee training; (iii) relatively few enterprises in the economy requiring high skills; and (iv) a correlation over time in the level of skills available and investment or growth. Some of these may not be feasible, depending on the issue and data. In many cases, benchmarking was used in order to assess whether outcomes in Togo (e.g., skills levels or financing costs) should be considered “high” or “low.” Benchmark countries were chosen to have similar levels of income and, in some cases, to have similar historical or geographic features to those of Togo. For this reason, Benin, Cote d’Ivoire, and Ghana, as well as Senegal were selected. Mozambique and Tanzania were used to represent poor, coastal African countries with a different colonial influence. At the same time, comparing a country to others outside its region, even if dissimilar in these dimensions, can enrich the value of the comparisons and help avoid falling into the trap of comparing countries with similar constraints. Therefore, three Asian countries with the closest levels of GDP per capita to that of Togo were included – Bangladesh, Cambodia, and Nepal – despite their other dissimilarities. The precise choice of comparators for each benchmarking exercise is adapted to the availability of data and the question to be addressed, and II in some cases, high goal countries such as Mauritius may be included to illustrate contrasting cases or possibilities. Appendix Table 1: Characteristics of Comparator Countries Population density (people Rural GDP per capita, PPP Merchandise per sq. km Population (current trade (% of of land (% of Population, total international $) GDP) area) Total) Low income $ 1,874.40 48.9 57 70.0 Sub-Saharan Africa (developing only) $ 3,358.31 50.6 40 63.4 Benin 10,323,474 $ 1,790.75 46.9 92 56.9 Cote d'Ivoire 20,316,086 $ 3,210.45 83.6 64 47.2 Ghana 25,904,598 $ 3,992.09 65.1 114 47.3 Mozambique 25,833,752 $ 1,105.07 83.8 33 68.3 Cambodia 15,135,169 $ 3,041.08 146.3 86 79.7 Bangladesh 156,594,962 $ 2,948.01 43.7 1203 67.2 Nepal 27,797,457 $ 2,244.80 38.8 194 82.1 Senegal 14,133,280 $ 2,242.00 63.3 73 56.9 Tanzania 49,253,126 $ 1,775.06 51.7 56 69.8 Togo 6,816,982 $ 1,390.52 84.1 125 61.0 Source : WDI Rigor and Shortcomings of HRV/Growth Diagnostic Approach: The HRV methodology may appear to some to be insufficiently rigorous insofar as it relies upon indicators. However, any rigorous evidence on specific sub-questions (e.g., the returns to training) available can and should be factored into this approach. Moreover, there are no other real alternatives. Whereas Computable General Equilibrium modeling and econometric modeling can be used to explore sub-questions, it is not generally feasible to use these approaches in a single unified model containing all of the variables one needs to examine in a comprehensive diagnostic. A complementary methodological approach, which could help illuminate the marginal impact of alleviating constraints at the household level, would be through an econometric estimation of household income or consumption as a function of productive factors. Factors such as land, skill, and other productive assets, productive inputs such as fertilizer, seed, ideally rainfall and soil quality, health status, road access, access to other infrastructure, inter alia, would be included in the analysis. If data on all these factors were available, and simultaneity issues could be addressed to identify causal impacts of each, this would be of significant value for the study. However, such comprehensive data are not available in an integrated data set for Togo (See Appendix Table 2). Moreover, the coefficients estimated may not explain why the returns to fertilizer, land, labor, physical capital, skill, or livestock were low, as all of these appear to be. Thus while informative as one piece of a larger diagnostic, such results may not tell us what the underlying constraints impeding a more robust economic transformation are. III A.2 Togo-Specific Data Utilized Appendix Table 2: Togo-specific data used Data set Details/comparability to other data Issues or gaps with data source Togo Formal Firm Survey 2015 Sampling frame: All firms filing tax No agricultural firms were surveyed declarations in 2013. This survey includes and few agriculture-service related Undertaken for this SCD 34.2% were microenterprises, 45.5% small firms due to inability to identify such enterprises, 15.8% medium-sized firms from the population listing. enterprises, and 4.5 percent large enterprises, whereas the WBES for Togo conducted in 2009 included 58.7% small firms (with over 5 employees and less than 500 million FCFA in revenues), 29% medium-sized firms, and 12.3% large firms, Ten percent of firms had less than 4700 US$ in annual revenues, 25 percent less than US$ 15,000, and 50 percent less than US$ 71,000. The TFFS surveyed firms in Lomé, as well as Sokodé and Kara, the country’s second and third largest cities. World Bank Enterprise Survey Survey of formal firms with at least 5 Not representative of all formal firms 2009 employees (no micro-enterprises) in Togo. QUIBB 2006, 2011, 2015 Household-level consumption and welfare No data on access to or use of inputs indicator surveys apart from land. No community-level data on access to infrastructure or other public and private services. 2015 QUIBB is not representative at the regional level. Agricultural Census 2011-2014 Surveys of agricultural households. Detailed data on access to and use of inputs, but no data on production. Data quality issues make findings uncertain. Togo Informal Firms Impact Sampling frame: 1,500 informal companies Only includes entrepreneurs in Lome Evaluation Baseline Survey in the non-agricultural sector in Lome who and does not include agricultural firms. applied to a World Bank funded training Furthermore, as the entrepreneurs program. To be eligible, the firms had to applied to a training program, they have less than 50 employees, have existed may have different characteristics than for at least 12 months, and not have an average entrepreneur. registered at the Chamber of Commerce or the CFE. IV Togo Informal Firms Impact Sampling frame: The same 1,500 informal Only includes entrepreneurs in Lome Evaluation Third Round Follow- companies in the non-agricultural sector in and does not include agricultural firms. up Survey Lome as in the Togo Informal Firms Impact Furthermore, as the entrepreneurs Evaluation Baseline Survey. A random applied to a training program, they subset of 300 firms was selected to answer may have different characteristics than additional questions designed for the SCD an average entrepreneur. on obstacles and reasons for informality. Togo Youth Employment Impact Sampling frame: 3,700 youth who enrolled Not representative of all youth and a Evaluation Baseline Survey at ANPE and who were eligible for the higher concentration of youth in Lome. program AIDE. To be eligible, youth had to be between 18 and 40 years of age, have a minimum degree of CAP or BEP, and have completed their studies. The program targeted youth with little or no professional experience. Afrobarometer Survey Political opinions survey of 1,200 Includes a wide range of questions on individuals. political perceptions and actions; however, the questions are mostly opinion based rather than fact based. V Appendix B: Other Less Severe Distortions to Private Sector Activity 194. Togo’s most binding constraints to inclusive growth are barriers and distortions that severely impede the ability of households and enterprises to retain a sufficient share of the gains from their economic efforts. At the same time, there are other risks and distortions that could distort private economic activity in Togo, but which do not appear to be binding – in particular, the country’s labor market regulation, exchange rate levels, and land tenure arrangements. B.1 Labor Market Regulation 195. Reasonable labor market regulation is important for guaranteeing worker health and safety, fair compensation, and decent working conditions; yet if such regulation raises the risks and costs of investing too much, it could hinder job creation and possibly pose a binding constraint to growth. Appendix Table 3: Regulation of Labor Market Contracts 196. Togo’s labor regulation Are fixed-term What is the maximum Paid annual Is third party is not particularly restrictive contracts cumulative duration of a leave approval with respect to the rules prohibited for fixed-term employment (working needed before governing contractual terms permanent relationship (in months), days) - 1 dismissing one tasks? including all renewals? year worker? and dismissal with the possible exception of paid Bangladesh No No limit 17 Yes leave requirements (Doing Benin No 48 24 Yes Business 2016. See Appendix Cambodia No 24 19 No Table 4). Although an Cote d'Ivoire No 24 27 No enterprise’s ability to adjust its Ghana No No limit 15 Yes workforce is important for its Nepal Yes No limit 18 Yes hiring decisions, Togo’s requirement of a permanent Senegal Yes 24 24 Yes (indefinite term) contract for Togo Yes 48 30 Yes workers employed beyond 48 months does not appear to be binding for most firms. The majority (60%) of formal sector workers hold indefinite term contracts, and the Appendix Table 4: Ratio of Formal Minimum average duration of definite term contracts falls well Wage to Value Added Per Worker below 48 months (on average about 13 months). Only Ratio of minimum 16.4 percent of firms use hiring practices such as the use wage to value of consultants, independents, interns, apprentices, and Country added per worker temporary workers to avoid regulation. In addition, only Bangladesh (Dhaka) 0.00 one percent of firms hire foreign workers for greater Cambodia 0.00 regulatory flexibility (TFFS 2015). Yet 8.5 percent of formal firms claim they would have hired more workers Rwanda 0.00 if there were no labor market regulations. Ghana 0.26 Cabo Verde 0.30 197. Togo’s minimum wage appears to be the most problematic of its labor regulations. Although Tanzania 0.46 low by many standards at 35,000 FCFA (US$ 58) per Benin 0.65 month, it gives the highest ratio of minimum wage to Nepal 0.84 average labor productivity of comparator countries (See Senegal 1.14 Appendix Table 4), ranking 183rd in the world of 189 Togo 1.25 countries (Doing Business 2016). Given this Source: Doing Business 2016 misalignment, relatively few workers actually receive VI the minimum wage. Of all paid workers formally and informally employed in 2011, 67 percent received less than the minimum wage (at the time) in their primary employment. Among informal enterprises, just over half earned less from their labor and asset income combined.158 In addition, of the businesses using independent or temporary workers to avoid labor regulations, 23.4 percent did so to avoid paying the minimum wage; only 3.6 percent did so to avoid contract rigidity, and even less to avoid social contributions (3 percent) or hiring/firing procedures (3 percent). Moreover, 25.2 percent of firms pay a wage equal to the minimum, suggesting that it is binding for them, and may have dissuaded other potential investors. At the same time, only 11.4 percent of formal firms pay a wage below the minimum; and 63.4 percent of formal businesses pay all of their workers a wage higher than the minimum. These data suggest that although Togo’s minimum wage is a potential deterrent to investment and job creation, there is no strong indication that it represents a binding constraint to growth. B.2 The Exchange Rate, Exports, and Growth 198. The optimal arrangements for the currencies of the FCFA zone is a complex topic involving issues of history, monetary policy, control of reserves, and sovereignty, which go beyond the scope of this study.159 Yet for this SCD to be comprehensive, it must at least attempt to address a narrower question – whether the value of the currency has such a large and direct negative impact on Togo’s international competitiveness and growth to constitute a binding constraint. If the FCFA were systematically over-valued, the price of Togolese exports in a foreign currency would be higher and disadvantage exporters and domestic producers. The FCFA has clearly been overvalued from Togo’s perspective during various periods since independence, notably in the years leading up to the 1994 devaluation against the French Franc. Following devaluation, the economy enjoyed a 3-year growth spurt. Yet despite the fact that the official exchange rate ($/FCFA) remained lower thereafter, subsequent economic growth returned to more modest levels consistent with long run averages. As shown in Appendix Figure 2, the real effective exchange rate (REER), which takes into account price movements within Togo and in trading partners, has remained consistently lower than the pre-devaluation period. The IMF’s most recent assessment of the FCFA’s alignment with fundamentals within the West African Monetary Union, using four methodologies, shows a slight over- valuation of between 1 and 9.8 percent (See Appendix Table 5from IMF 2015b),160 before the recent depreciation of the currency and the euro against the dollar. 158 Staff calculations from World Bank BIFS (2013). 159 See, e.g., Pouémi and Diawara (1980). For example, without greater control of monetary policy, Togo may not be able to smooth growth cycles effectively. 160 The IMF states: The exchange rate appears broadly in line with fundamentals if the planned fiscal consolidation materializes. Four methodologies are used to assess the WAEMU’s real exchange rate from different angles: “EBA-lite” provides a current account benchmark for 2013 based on the WAEMU’s fundamentals relative to the rest of the world adjusted by a policy gap (the region’s policies relative to an optimal level and relative to the rest of the world). The macro-balance and real equilibrium exchange rate approaches provide current account and real exchange rate benchmarks based on a set of fundamentals expected for the region and its trading partners in the medium term. Finally, the external sustainability approach provides a current account benchmark which is consistent with stabilizing NFA at -40 percent (median for lower middle income countries). VII Appendix Figure 2: Exchange Rate and Growth FCFA/USD 180 Devaluation 0.6 160 0.5 140 0.4 120 0.3 100 0.2 80 0.1 60 0 40 Political crisis 20 -0.1 0 -0.2 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 REER_index (2010=100) $/FCFA Official Rate (x100) Source: WDI 199. Although the FCFA regime certain presents complex issues for Togo. It may not be the optimal arrangement for currency zone countries, and it precludes the use of counter-cyclical monetary policy. However, at least when the direct and proximate impacts on exports and growth are examined, there is no evidence that the value of the currency is binding on growth for Togo. First, if a misaligned or over-valued exchange rate were a binding constraint, in periods when the currency value was lower, growth or exports would respond positively.161 However, this is not the case whether one examines the correlation between the REER and exports or GDP growth.162 In addition, a test using the gravity model of trade shows no 161 As in the logic of the Mindbook test 4, the idea is not to test whether there is a statistically significant effect, all else equal, but rather to see if the effect is so large as to dominate other determinants of growth and exports through an unconditional correlation test. 162 Specifications utilized include: (i) instrumental variables in levels of the variables of interest, using the official exchange rate – a value exogenous to Togo’s economic adjustments—as an instrument for the REER, which adjusts endogenously; (ii) first differences to address a possible unit root in the exchange rates; and (iii) vector autoregressions to address possible lagged effects. Dependent variables were real exports of goods and services in local currency and real gdp in local currency. The only statistically significant results showed a positive correlation between the $/FCFA exchange rate and exports and positive changes in the $/FCFA and GDP growth – the opposite of what one would expect if a higher valued currency depressed exports and growth. VIII effect of being a FCFA country on exports Appendix Table 5: IMF Estimates of Effective Exchange Rate relative to the predicted level of exports, once an Alignment with Fundamentals, West African Monetary Union indicator variable for Sub-Saharan Africa (which has a negative and significant coefficient) is included.163 This does not mean that a devaluation would not have at least a temporary stimulative effect, all else equal, but that the effect is not sufficiently large to dominate other, more binding and persistent influences on Togo’s exports and growth performance. Moreover, the structural benefits of a stable currency also need to be considered when assessing the merits of a change in exchange rate regimes, in addition to the likelihood in a country such as Togo of developing independent institutions for setting monetary policy. B.3 Land tenure issues 200. Togo’s land tenure system is extremely inefficient. Its formal land registration and titling system ranks among the most costly in the world, at 182nd place in Doing Business 2015. The time required to complete the registration process is the highest of the comparator countries, and the financial cost is among the highest at over 9 percent of property values (See Appendix Figure 3). Yet land markets are Appendix Figure 3: Costs of Registering Property (Doing Business) reasonably active: 27 percent of households Time (days) have purchased land, and 26 percent have 0 100 200 300 400 inherited land. Between 2006 and 2011, the Togo percentage of households owning land increased Benin from 49.2 to 59.2 percent – from 65.1 to 76.9 percent among rural households, and from 22.1 Cambodia to 36.2 for urban households. Given the Mozambique dominance of customary forms of tenure in rural Rwanda areas, only 9 percent of rural landowning households had some type of land-related Botswana document in 2011, whereas 49 percent of urban Sub-Saharan… households did. Formal documentation is also 0 5 10 15 lower for low-income households (See Cost (%) and Procedures (number) Appendix).164 Given the difficulties of obtaining a title, most land transfers occur Cost (% of property value) Procedures (number) Time (days) without a formal transfer of title. More than 40 percent of transfers are recorded through a 163 There are issues with data quality in all trade statistics, so results can never be entirely conclusive. To address self-reporting bias due to smuggling and illegal financial transfers, trade statistics of trading partners are used. 164 In rural areas customary forms of land tenure are dominant, so a low level of titling is to be expected. By far the most frequent method of accessing land in rural areas is through inheritance, the method reported by 56 percent of households, followed by gifts at 18 percent, and rental for 13 percent IX certified sale document (with three official stamps). Of all documents conferring ownership or use rights, only 13 percent in rural areas and 10 percent in urban areas were titles.165 201. Land Appendix Table 6: Percentage of Households with a Land Document conflicts are costly All National Consumption Quintiles and common. Rural households 1 2 3 4 5 Approximately 12 8.87 4.39 4.44 5.07 9.71 18.05 percent of households Urban households have experienced a conflict over land, in 49.04 24.59 48.56 43.99 62.26 67.74 Source: QUIBB 2011 both rural and urban populations (QUIBB 2011). In addition, six percent of formal firms have had legal issues related to land during the past 5 years, with only half of these resolved. Time to resolution averaged approximately one year, but for those still awaiting resolution, the average wait so far has been 880 days. Time spent on the case has absorbed 20 worker-days, and the financial cost has averaged approximately 2 million FCFA (source: TFFS 2015). The frequency of conflicts may be on the rise given population pressures and failures to provide transparent mechanisms to enforce land rights, and there are anecdotal accounts of people being pushed off their lands illegally. Therefore, the issue of regime legitimacy and social conflict intersect to some extent in the lack of legal protections for land rights of the poor. 202. Yet despite the significant cost Togo’s inefficient land registratio n system imposes on households and businesses, it appears less constraining for investment and entrepreneurship than other issues. Purchasing land is a one-time transaction, which normally does not affect businesses on an ongoing basis, as long as no conflicts ensue. In addition, firms have other options, including rental or leasehold; thus, only 30.5% of formal firms own any land or buildings (TFFS 2015). Ownership is more common for firms outside of Lome (49.4%) and for those in manufacturing (71.5%). For those who do not own land, only 7 percent said this was due to the complexity of procedures. Many investors also seem to feel secure enough to invest without a title. Of land-owning businesses, only 40.4 percent have a title document; 20.2 have a certificate (with three stamps), and 29.4% have no document proving ownership. Only 10 percent of businesses who have ever lacked a land title say they had reduced the level of investment for this reason (TFFS 2015). In addition, although the land registration system may be a greater barrier to those not investing than those who do, there appear to be ways to manage this obstacle: Difficulty accessing land ranks only 15th among constraints most frequently considered major or severe by formal firms (TFFS 2015). Among informal entrepreneurs, this was the most severe obstacle for less than one percent of firms (TRIFS). 203. Moreover, ownership of land does not seem to be a prerequisite for accessing formal credit. Among formal firms, having land does not affect the probability of being denied credit: 64 percent of firms with landholdings experienced a recent loan rejection, whereas only 36 percent of those without land were rejected. Further econometric investigation shows no positive association between landholdings and loan applications or rejections, conditional on sector and size of the firm (Bank staff using TFFS 2015). 204. In agriculture, land tenure issues pose a mild obstacle for both commercial scale operations and smallholders. There are relatively few commercial scale agricultural plantations in Togo. However, based upon interviews, it appears that as long as local officials are favorable to an investment, they will help arrange land access. Sugarcane, horticultural, dairy, fisheries and other commercial agricultural investments that have taken place, if disrupted, have experienced issues associated more with rent seeking or lawlessness 165 Source: Bank staff using QUIBB 2011. X rather than access to land or title disputes per se. For smallholders, greater security of tenure may affect incentives to invest in land and increase agricultural productivity. Although there is no direct evidence on this question for Togo, the empirical literature on land tenure in Sub-Saharan Africa suggests that the impacts of improved tenure arrangements on the continent, if any, are not large (Lawry et al. 2014). A recent study in Benin showed, for example, that in communities benefitting from land demarcation and formalization, households were one percentage point more likely to plant tree crops and in some cases fallow land to preserve soil quality (Goldstein et al. 2015). This suggests that tenure security may be an important obstacle to more productive and sustainable agriculture in Togo as well. Nonetheless, the size of the effect from the Benin study suggests an increase in income for a relatively small share of the poor population, at least in the short run. 205. The evidence is somewhat mixed and incomplete on the issue of Togo’s land system. The available indicators suggest that Togo’s cumbersome and insecure land rights regime elevates the risks of social exclusion and conflict and may disadvantage female farmers and foreign investors. However, they provide no clear evidence that it is a binding constraint to growth and poverty reduction in Togo’s current context. Appendix Table 7: Doing Business Trading Across Borders Indicators of Costs of Compliance with Border Procedures Trading Across Borders Time to Cost to Time to Cost to Time to Cost to Time to Cost to export: export: export: export: import: import: import: import: Border Border Documen- Documen- Border Border Documen- Document- Rank compli- compli- tary tary compli- compli- tary ary ance ance compliance complianc ance ance compliance compliance Economy (hours) (US$) (hours) e (US$) (hours) (US$) (hours) (US$) Nepal 60 64 226 19 85 30 156 48 80 Cambodia 98 45 375 132 100 4 240 132 120 Senegal 113 41 486 26 96 56 885 54 545 Benin 116 72 387 57 80 72 579 59 529 Togo 126 26 163 15 25 256 820 203 252 Mozambique 129 78 602 70 435 14 354 24 310 Côte d'Ivoire 142 110 364 120 136 125 456 89 267 Rwanda 156 97 183 42 110 282 680 290 366 Sierra Leone 164 55 552 134 227 182 782 137 387 Ghana 171 108 490 89 155 282 725 282 302 Bangladesh 172 100 408 147 225 183 1,294 144 370 Tanzania 180 96 1,160 96 275 402 1,350 240 375 Nigeria 182 159 786 131 250 298 1,077 173 564 XI Appendix C: Additional Exhibits Appendix Table 8: Top 20 Togolese Goods Exports by Value (2013) Net weight in kg. Value in US$ Cement and Clinker 1,629,977,830 $ 165,659,941.19 Cotton, neither carded nor combed 33,617,208 $ 57,402,253.53 Transport or packing materials 27,192,492 $ 53,200,427.67 Water, mineral water, and sparkling water 30,635,428 $ 31,622,999.30 Wigs, beards, other hair product 4,260,147 $ 24,936,484.23 Packing sacks 8,419,459 $ 19,413,279.85 Plaits and similar articles 7,132,510 $ 17,763,576.27 Milk and cream, including concentrated or sweetened 12,804,179 $ 13,346,225.52 Other plates, sheets, films 14,359,700 $ 12,085,723.26 Marble, travertine, limestone products 301,615,400 $ 9,439,274.30 Mineral and chemical fertilizer containing 2-3 elements 14,359,700 $ 9,342,871.28 Laminated plate products in iron, steel and other alloys 9,756,223 $ 8,993,496.62 Iron ore and its concentrates 870,000,000 $ 8,396,081.29 Petroleum or other bituminous oils, other than crude oils 5,988,127 $ 8,207,892.74 Candies without cocoa 6,679,087 $ 8,100,056.96 Cocoa, whole beans or broken, raw or roasted 4,431,105 $ 7,826,242.79 Automotive transport vehicles 1,219,185 $ 6,596,438.69 Coffee, whether roasted or decaffeinated, shells and husks 3,884,395 $ 6,423,011.15 Seeds and oleaginous fruits, including crushed 27,731,474 $ 5,562,812.79 Medications 457,724 $ 5,023,026.17 Tarpaulins and Exterior Blinds, tents, and sails 2,356,000 $ 4,982,592.50 Source: OTR Appendix Table 9: Inequality Indicators 2006 2011 2015 Gini coefficient 0.361 0.393 0.380 P90/P10 5.02 6.31 5.92 P75/P25 2.3 2.64 2.59 Source: INSEED 2015 using QUIBB Appendix Table 10: Plot-Level Frequencies of Second Most Important Crop by National Consumption Quintile Q1 Q2 Q3 Q4 Q5 Maize 9 12.9 12.8 11 15 Manioc 12 18.8 19.2 25.7 26.8 Sorghum 16 13.8 14.9 11.4 8.6 Rice 4.3 4.2 3.7 3.4 2.7 Haricots/Niebe 12.4 11 14.6 12.4 16.7 Millet 14.4 6 2.3 3.2 1.2 Peanuts 8.9 5.7 4.4 4.4 3.1 XII Appendix Table 11: Percentage of Households Landless and Not Owning Livestock by Region Percent Percent with No Landless Livestock Lomé 83.8 87.8 Maritime 47.1 68.6 Plateaux 40.0 34.3 Centrale 22.3 34.7 Kara 24.2 28.9 Savanes 11.8 21 Source: QUIBB 2011 Appendix Table 12: Conditional Correlations with Per Capita Consumption, Demographic and Geographic Characteristics, 2015 .Explanatory Variables All Grand Lomé Other Urban All Urban Rural Constant 12,190*** 12,622*** 13,585*** 13,192*** 11,170*** Domain Rural ref ref ref ref ref Grand Lomé 0,171*** ---- ---- ---- ---- Other urban 0,311*** --- ---- ---- ---- Number of Household Members by Age Group Age 0 to 4 years -0,372*** -0,437*** -0,418*** -0,425*** -0,404*** Age 5 to 14 -0,389*** -0,508*** -0,397*** -0,463*** -0,376*** Age 15 to 59 -0,364*** -0,285*** -0,458*** -0,363*** -0,348*** More than 60 -0,309*** -0,150*** -0,325*** -0,217*** -0,366*** Age 0 to 4 years squared 0,040*** 0,088*** 0,078*** 0,082*** 0,043*** Age 5 to 14 years squared 0,027*** 0,051*** 0,024*** 0,041*** 0,026*** Age 15 to 59 years squared 0,018*** 0,011*** 0,027*** 0,018*** 0,016*** More than 60 years squared 0,080*** -0,028*** 0,049*** 0,005 0,123*** Gender of household head Female ref ref ref ref ref Male 0,192*** -0,112*** -0,751*** -0,527*** 1,219*** Level of instruction, household head No education ref ref ref ref ref Primary 0,127*** 0,006 0,023*** 0,026*** 0,169*** Partial Secondary 0,105*** -0,011 0,202*** 0,062*** 0,078*** XIII Complete secondary 0,475*** 0,439*** 0,534*** 0,481*** 0,109*** Superior 0,018** 0,040** -0,196*** -0,012 -0,002 Level of instruction, spouse of head No education ref ref ref ref Ref Primary -0,069*** -0,007 0,028*** 0,012*** -0,113*** Greater than primary 0,251*** 0,333*** 0,186*** 0,283*** 0,233*** Marital Status of household head ref ref ref Ref Married (monogamous) ref Married (polygamous) 0,219*** 0,253*** 0,281*** 0,244*** 0,191*** Widowed 0,425*** 0,707*** 0,508*** Household head employment status Independent agricultural ref ref ref ref producer ref Public sector salaried 0,249*** 0,133*** 0,222*** 0,165*** 0,449*** Private sector salaried 0,125*** 0,136*** 0,122*** 0,101*** 0,102*** Other independents 0,165*** 0,248*** 0,115*** 0,179*** 0,045*** Not working 0,107*** 0,054*** 0,183*** 0,067*** 0,107*** 2 R 0,627 0,657 0,509 0,552 0,6090 Appendix Table 13: Return on Assets (ROA) Pre- and Post- Tax, Formal Togolese Firms (2014) Location of HQ Sector Other Agriculture All Interior Lome Manufacturing Construction Commerce services related* Gross Return Mean 146.0% 59.0% 149.0% 23.5% 223.1% 133.1% 138.4% 75.1% on Assets Median 29.2% 7.2% 31.6% 3.9% 32.2% 31.6% 29.2% 45.3% ROA after Mean 116.4% 55.3% 118.5% 16.2% 201.0% 113.7% 90.0% 60.7% input taxes Median 18.2% 7.1% 20.0% 3.0% 25.6% 14.3% 21.3% 30.7% ROA after Mean 70.1% 43.8% 71.0% 6.3% 182.2% 14.7% 81.5% 32.3% input and unreimbursed VAT Median 13.1% 5.6% 13.1% 3.0% 13.1% 7.7% 20.4% 19.7% ROA Net of Mean 13.9% 21.2% 13.6% -0.4% 49.0% -21.7% 36.3% 15.8% all taxes Median 4.9% 5.1% 4.9% 1.8% 11.6% 4.9% 3.7% 11.7% Number of observations 177 34 143 28 52 41 56 4 Source: TFFS 2015 *There were too few firms engaged in an agriculture-related business in the sampling frame to obtain a sufficient sub- sample of these firms and consider any differences with other sectors as significant. XIV Appendix Table 14: Summary of Requirements for Investment Approvals Approvals of Between 50 million and 600 million CFA: régime de déclaration. Must submit a investments standardized application to the Agence nationale de la Promotion des Investissements et de la Zone Franche Above 600 million CFA: régime d’agrément. Case-by-case agreement with the Agence after consultation with the Minister of industry, Minister of commerce, Minister of finance, and other relevant ministers. If the investment plan is of strategic interest, companies can negotiate a different agreement with the State (Art. 48) Restrictive Investments in the following sectors cannot fall in the régime de déclaration: requirements Mining and hydrocarbons Banking Insurance Weapons and military Trading Brokerage Storage, except for animal/vegetal/fishing products Management of ports and airports These sectors fall into the régime d’agrément. To submit an application, the investment must be at least 50 million and the majority of permanent jobs must be reserved to Togolese nationals. The duration of tax and customs exonerations is limited to a) a “periode d’installation” (up to 24 months for regime de declaration / 36 months for regime d’agrement, with a possibility of a one-time extension of 6 months) + b) a “periode d’exploitation” of 5 years. The cumulative tax reductions cannot exceed 55% of pre-tax profits.* The company can hire foreigners as supervisors/managers but must train/hire/promote as many Togolese nationals to equivalent positions within 4 years Proceeds from exports must go to a bank account in Togo Requirements for Régime de déclaration: must process application within 8 business days the government Régime d’agrément: must process application within 30 business days (but can put it on hold to request additional information) If an application is refused, the Agence must provide a list of reasons why it was refused. The code provides no limitations on valid reasons. Source: République Togolaise 2012 Loi 2012-001 Portant Code d’Investissements en République Togolaise. *Prior to 2012, foreign investments of more than $150 million had the following preferential tax treatment: Always exempt from TVA, import/export duties, TAF, BIC, TFPB, dividend tax, all other trade tariff/duties. Exempt from IS for first 10 years, then 15%; Exempt from IMF for first 10 years, then 15%; Exempt from TP for first year, then 5%- 15% for next 20 years, then normal rate TS rate at 2%. These were abrogated in 2012. XV Appendix Table 15: Correlation between Concentration and Effective Rate of Taxation ROA Total tax rate as a percentage of profits Capital to labor -0.00267 ratio (-1.19) [0.24] Market share -1.35591 -1.11309 squared (-0.97) (-2.33)** Construction 0.07806 -0.27553 (0.20) (-0.59) Commerce 0.39256 2.33514 (0.91) (0.83) Other 0.65304 -0.33808 services (1.32) (-0.67) Owns land -0.15229 (-1.16) Multinational 1.14528 -0.12857 company (1.13) (-0.59) Salary costs -0.00000 (-0.09) [0.93] Sales -0.00000 (-0.87) [0.39] Constant 0.10184 1.24080 (0.25) (2.09)** [0.81] [0.04] R2 0.23 0.07 N 81 65 Notes: Sectors across data sources (TFFS 2015 and OTR tax declarations data) were matched using a strict sector matching criteria, which resulted in the sub-samples above. TFFS 2015 is used to compute the rate of taxation in 2014, and 2013 sales (TFFS 2015), and 2013 tax filings (OTR) matched by sector are used to compute the firms’ market share. XVI Appendix Figure 4: Average Corporate Tax Rates and Concentration by Sector, 2010 (Sectors with Herfindahl-Hirschman Index > .2, Formal Firms, with and without Informal Competition) 80% 70% Probable Informal 60% Competition Corporate Tax Rate 50% Less Informal 40% Competition 30% Linear (Probable 20% Informal Competition) 10% Linear (Less Informal 0% Competition) 0.0000 0.2000 0.4000 0.6000 0.8000 1.0000 1.2000 HHI Source: Bank staff calculations. Only includes firms with positive pre-tax profits. Appendix Table 16: Estimates of Returns to Education Using Heckman Correction for Selection Bias Pooled Male Female Ln(wage) equation Male=1 0.4153 *** Years of education 0.0583 *** 0.059 *** 0.055 *** Household size 0.0095 0.024 ** 0.003 Experience 0.0406 * 0.0285 0.0305 Experience squared -0.0005 * -0.0003 -0.0004 Urban -0.1116 -0.141 -0.103 Rural -0.6167 *** -0.596 *** -0.644 *** Urban Golf Region dummies Yes Yes Yes First Stage Results Wage employment=1 Male=1 0.248 **** Father alive -0.0335 -0.0938 ** 0.0208 Mother alive 0.0767 *** 0.0446 0.0869 ** Years of education 0.0478 *** 0.0506 *** 0.0404 *** Household size -0.0554 *** -0.07 *** -0.0441 *** Experience 0.165 *** 0.1717 *** 0.1546 *** XVII Experience squared -0.0023 *** -0.0023 *** -0.0021 *** Urban 0.2225 *** 0.195 ** 0.2454 *** Rural 0.1605 *** 0.1559 * 0.1668 *** Urban Golf Region dummies Yes Yes Yes Source: QUIBB 2011 XVIII Appendix Table 17: Summary of Tax Code as of 2014 TPU regime All Others Regime/Type Only for “personnes physiques.” Revenues <30 M 2.5% of CA for production/commerce, 8.5% for services, with revenues as TPU (Taxe estimated by OTR. Professionnelle Cannot be less than 6,000 FCFA for Unitaire) production/commerce and 12,000 for services. .25%-1% of gross revenues depending on sector + TP (Taxe maximum of 2%-6% of rental value of location or 1/3 - Professionnelle) of TP on gross revenues (Raised in 2013 from .25-.85 percent) IMF (Impôts Max of this and IS: 1% of CA minus TVA. Fixed Minimum - amount for companies with CA<5 M (50,000 FCFA) Forfaitaire) and for companies with CA>50 B (500 M FCFA) If IS exceeds IMF: 29% of gross profits for all sectors IS (Impôts sur les - (Unified from sector specific range 27-30 percent in Sociétés) 2013) Can now opt for VAT registration 18 percent. Agricultural products exempt since 2012. TVA (Taxe sur le (Art. 309). 18% of value added. Companies with CA<30 million (now 50 million) Valeur Ajoutée) Threshold in 2015 50 million FCFA exempt. TS (Taxe sur 3% of salaries/benefits paid. Declined from 7 percent - Salaires) to 5 percent in 2013, and then to 3 percent in 2014. Sector-Specific Taxes, 2014 IRTR Fixed amount per vehicle 2,000-50,000 FCFA Taxe spéciale sur les Fixed amount per bottle boissons TAF 10% of financial profits Added exemptions 5% of chiffre d'affaires from gambling services Taxe sur les jeux de hasard Taxe sur les Rate or fixed amount per event spectacles Accises sur les Fixed amount per liter of product produits pétroliers Autres droits 1%-30% of import price or wholesale price d’accises Increased rate on tobacco (45%) (Art. 390) Source: Code Fiscale du Togo et Lois de Finances 2010-2014 XIX Appendix Table 18: Results from Estimation of Gravity Model of Trade XX Appendix Table 19: Taxation of Agriculture in Togo 1- Tax on farm entrepreneurial income (Impôt sur le revenu des personnes physiques (IRRP) a. It is a single annual tax on farm profits from farming b. It includes the profits that farmers get from selling the products of their harvest. c. Profits from selling others’ produce or from transforming their produce are subject to taxation applied to commerce or industry, as applicable. d. However, it excludes individuals (whether farmers or not) whose total net income does not exceed the guaranteed minimum wage e. It also excludes net property income of properties permanently and exclusively affected for agricultural use f. In addition, excluded are farm incomes derived from food crops grown on 10 hectares of rain fed land and 5 hectares of irrigated land. g. Annual net income below 375,000 CFA (approximately US$ 625.00) after deductions is exonerated. The progressive tax rates is about 4% for annual net income less than 600,000 CFA and 45% for annual income above 15 million CFA (US$ 25,000). 2- Corporate Tax (Impôt minimum forfaitaire and Impôt sur les Sociétés) a. Agricultural producers are liable to corporate tax irrespective of their purpose, limited liability companies, limited shareholder companies, associations and all other legal persons engaged in a business or a profit-making operations. b. However, the following companies with operations related to agriculture are exempted from corporate tax i. Cooperatives involved in the production, processing, conservation and sale of agricultural products for non-commercial purposes ii. Cooperatives and agricultural unions in the supply chains iii. Agricultural credit unions iv. Companies, organizations, cooperatives and associations recognized for their public utility and responsible for rural development or agricultural promotion c. The corporate tax rate is 27 percent. d. A minimum forfeit of 1 percent of revenues is payable, as with other sectors. e. Companies also pay an annual flat-rate corporate tax of 50,000 CFA for turnover of less than 5 million but up to 20 million CFA for turnover greater than 30 billion CFA. 3- Other Taxes: Business Tax (Taxe Professionnelle) a. For companies (not expressly exempted) engaged in agriculture, forestry and fisheries a business tax of .5 % plus a levy on the rental value of business premises or 1/3 of .5% of revenues, whichever is higher. 4- Tax on wholesale and export of agricultural goods. a. An export duty or tax on domestic wholesale sales of goods applies to products from agriculture, fishery and livestock is set at 5% of sale (or FOB) price for operators without a fiscal identification and 1% for those with such identification 5- TVA a. Subject to the value added tax (except special exemptions) are all import operations in Togo including import from the ECOWAS free zone. Exemption for operations related to agriculture and fishery have been repealed. Imports of agricultural inputs and equipment are still exempt from VAT. VAT is a unique rate of 18%. XXI Map 2: Togo’s Regions XXII