Republic of Cabo Verde REPUBLIC OF CABO VERDE: SYSTEMATIC COUNTRY DIAGNOSTIC (SCD) Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion SYSTEMATIC COUNTRY DIAGNOSTIC (SCD) @WorldBank/Africa www.worldbank.org Republic of Cabo Verde Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion SYSTEMATIC COUNTRY DIAGNOSTIC (SCD) International Development Association Country Department AFCF1 Africa Region International Finance Corporation Sub-Saharan Africa Department Multilateral Investment Guarantee Agency Sub-Saharan Africa Department This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Photo credits: center cover - Isidro López-Arcos, “Cabo Verde. Isla de Boavista” May 19, 2010 via Flickr, Creative Commons CC BY-ND 2.0; page xii - F Mira, “Faces of Cabo Verde” June 21, 2009 via Flickr, Creative Commons CC BY-SA 2.0; page 6 - Frank Bach/Shutterstock.com; page 9 - Matthias_Lemm/Creative Commons; page 10 - Julien Lagarde, “Mulher” March 10, 2009 via Flickr, Creative Commons CC BY-NC-ND 2.0; page 14 - Julien Lagarde, “Menina” March 8, 2009 via Flickr, Creative Commons CC BY-NC-ND 2.0; page 58 - Samuel Borges Photography/Shutterstock. com; page 70 - gishasse0/Creative Commons; page 76 - Sabine Hortebusch/Shutterstock.com; v page 78 - Larwin/Shutterstock.com; page 94 - Matthias_Lemm/Creative Commons; page 96 - Samuel Borges Photography/Shutterstock.com; all others - World Bank. Cover design: Circle Graphics, Inc. Design and Layout: Circle Graphics, Inc. Additional material relating to this report can be found on the World Bank Cabo Verde website (www. worldbank.org/caboverde). The material includes a fact sheet. © 2018 International Bank for Reconstruction and Development / International Development Association or The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 www.worldbankgroup.org Acknowledgments The Cabo Verde Systematic Country Diagnostic is a World Bank Group product prepared by a team consisting of International Bank for Reconstruction and Development (IBRD) and International Finance Corporation (IFC) staff, with the involvement of the Multilateral Investment Guarantee Agency (MIGA). The preparation of the SCD was led by Rob Swinkels (Senior Poverty Economist) and Rohan Longmore (Senior Economist). The team gratefully acknowledges the guidance of Louise Cord (Country Director), Andrew Dabalen (Practice Manager), Lars Moller (Practice Manager), Faheen Allibhoy (IFC Country Manager, Senegal), Sophie Naudeau (Program Leader), Paolo Zacchia (Program Leader), Eric Lancelot (Program Leader), Ambar Narayan (Lead Economist), Fiseha Gebregziabher (Economist), Edson Medina (Consultant), and Antonio Baptista (Consultant). The table below presents the full list of input providers. Administrative support was provided by Maude Valembrun (Program Assistant) and Aimee Niane (Program Assistant). The poverty analysis was conducted by the Institute of National Statistics (INE) and Yadira Diaz (Consultant). António Henriques produced a background note on human development. Peer reviewers were Manohar Sharma (Senior Poverty Economist) and Francisco Carneiro (Practice Manager). We would also like to thank Olavo Correia, Minister of Finance, and Carla Cruz, Head of the Planning Department, Ministry of Finance, for organizing country consultations. We are grateful to experts inter- viewed for this study, including Suzano Costa, Clara Barros, Vanilda Furtado, Carlos Varela, Jose Manuel Marques, Carlos Santos, Luis Pedro Maximiano, Remi Nono Womdim, Heloisa Marone, Clarimundo Gonçalves, Serafina Alves, Monica Furtado, Sofia de Mello Figueiredo, Joana Borges, Rosana Almeida, and Adriana Mendonça. Belarmino Silva, Consul General of Cabo Verde in Rotterdam, facilitated consultations with the Cabo Verde diaspora in the Netherlands, together with Luiza Soares. We are thankful for comments received during these consultation meetings, including from representatives of the government, the Central Bank, the private sector, civil society, development partners, and citizens. Helpful feedback on the draft report was received from António Pires, Luca Monge Roffarello and Vanilde Furtado from the UN office in Praia, from Helena Guerreiro of the Portuguese Embassy in Cabo Verde and Carla Cruz. Lastly, we are also grateful to Instituto Nacional de Estatística (INE) for providing access to survey data through its data enclave. ivAcknowledgments Global Practice/Cross-Cutting Support Area Input Providers Education Kamel Braham and Antonio Henriques Energy & Extractives Karen Bazex, David Vilar, and Pedro Antmann Environment & Natural Resources/Fisheries Mimako Kobayashi and Berengere P.C. Prince Finance & Markets Julian Casal Governance Kjetil Hansen Health, Nutrition & Population Edson Correia Araujo Social Protection & Labor Eric Zapatero Larrio Trade & Competitiveness Penelope Fidas, and Laurent Corthay Transport Tojoarofenitra Ramanankirahina, Shruti Vijayakumar, and Arthur Foch Water Oumar Diallo and Pierre Boulanger IFC/Public Private Partnerships Faheen Allibhoy, Anne Bastin, Luciana Harrington, Elsa le Borgne,   Vincent Floreani, Marieme Travaly MIGA Conor Healy ICT Jerome Bezzina Disaster Risk Management Doekle Geert Wielinga and Oscar A. Ishizawa Republic of Cabo Verde – Government Fiscal Year January 1–December 31 CURRENCY EQUIVALENTS Exchange Rate Effective [ March 31] 2018 Currency Unit = Cabo Verdean escudo (CVE) CVE1.00 = US$0.01124 US$1.00 = CVE89.24 Abbreviations and Acronyms BCV Central Bank of Cabo Verde (Banco de Cabo Verde) CVE Cabo Verdean escudo ECOWAS Economic Community of West African States EU European Union FDI Foreign direct investment GDP Gross domestic product GNI Gross national income GPRS Growth and Poverty Reduction Strategy GVA Gross Value Added IBRD International Bank for Reconstruction and Development ICT Information and communications technology IDA International Development Association INE Institute of National Statistics Cabo Verde (Instituto Nacional de Estatística Cabo Verde) IMF International Monetary Fund M&E Monitoring and evaluation MDG Millennium Development Goal MoF Ministry of Finance MIC Middle-income country ODA Official development assistance PEMFAR Public Expenditure Management and Financial Accountability Review PFM Public financial management PPP Purchasing power parity SCD Systematic Country Diagnostic SDG Sustainable Development Goals vi Abbreviations and Acronyms SIDS Small island developing states SME Small and medium enterprise SOE State-owned enterprise SSA Sub-Saharan Africa TVET Technical and vocational education and training TFP Total factor productivity UK United Kingdom UN United Nations UNICEF United Nations Children’s Fund WBG World Bank Group WEF World Economic Forum WGI World Governance Indicators WHO World Health Organization R egional Vice President: Makhtar Diop Country Director: Louise Cord Senior Directors: Carolina Sanchez-Paramo, Felipe Jaramillo Practice Managers: Andrew Dabalen, Lars Christian Moller Task Team Leaders: Rob Swinkels, Rohan Longmore Contents EXECUTIVE SUMMARY........................................................................................................ 1 CHAPTER 1  Introduction................................................................................................... 7 CHAPTER 2  Setting the Stage: Country Context............................................................ 11 Geography..................................................................................................................11 History.......................................................................................................................11 Demographics.............................................................................................................12 Cabo Verde as a Small Island Economy......................................................................12 CHAPTER 3  Past Achievements...................................................................................... 15 Cabo Verde’s Economic Growth Story........................................................................15 Poverty and Shared Prosperity Patterns......................................................................21 Nonmonetary Poverty................................................................................................26 Governance................................................................................................................31 Manifestations of a Development Model That Needs Adjustment..............................34 CHAPTER 4  Key Constraints............................................................................................ 39 Analytical Framework................................................................................................39 Human Capital Constraints........................................................................................39 Relatively High Secondary School Drop-Out Rates.............................................40 Lack of Skills......................................................................................................40 Connectivity Constraints............................................................................................42 Lack of Reliable Inter-Island Transport...............................................................42 Inadequate ICT Infrastructure.............................................................................44 Weak Management of the Power Sector..............................................................45 Risks to Macroeconomic Stability..............................................................................46 High Debt...........................................................................................................46 High Economic Volatility....................................................................................48 Public Sector Performance..........................................................................................49 Insufficient Delivery of Reform...........................................................................49 Decentralization..................................................................................................53 Lack of Resilience.......................................................................................................53 Limited Household Resilience against Shocks.....................................................54 Insufficient Protection of Natural Capital...........................................................56 CHAPTER 5  Opportunities/Possible Pathways to Growth and Poverty Reduction........... 59 Diversified and More Inclusive Tourism......................................................................59 Agricultural and Fisheries Niche Products in Support of the Tourist Market..............61 Logistics and ICT.......................................................................................................63 Island-Specific Opportunities......................................................................................65 viiiContents CHAPTER 6  Summary of Binding Constraints and Remaining Knowledge Gaps............. 67 Prioritization Process..................................................................................................67 Key Knowledge Gaps..................................................................................................67 REFERENCES...................................................................................................................... 71 APPENDIX A  Definition of Peer Countries...................................................................... 75 APPENDIX B  Welfare Data.............................................................................................. 77 APPENDIX C  Explaining Growth Transition in Cabo Verde............................................ 79 APPENDIX D  Rural Livelihood Analysis........................................................................... 81 Maize, Beans and Livestock Livelihood Zone (CV01)..............................................81 Vegetables, Banana, and Papaya Livelihood Zone (CV02).......................................84 Fisheries, Goat and Pig Rearing Livelihood Zone (CV03)........................................86 APPENDIX E Simulation of Improvements in Productivity through Educational Attainment............................................................... 91 APPENDIX F  In-country Consultations for the SCD........................................................ 93 APPENDIX G  Map of Cabo Verde................................................................................... 95 List of Boxes Box 1. Poverty Benchmarks in Cabo Verde........................................................................ 8 Box 2. Cabo Verde’s Growth and Poverty Prospects in the Long-Term.......................... 27 List of Figures Cabo Verde has Made Remarkable Progress in Economic Growth Figure 1.  and Human Capital Achievements...................................................................... 8  eatures of Small Island Economies.................................................................. 13 Figure 2. F Net Annual Migration from Cabo Verde and Some of Its Aspirational Figure 3.  Peers (in % of total population)......................................................................... 13 Figure 4. Sectoral Distribution of Value Added and Employment................................... 13 Figure 5. Real GDP Per Capita Growth (%)...................................................................... 16 Figure 6. GDP and GNI Per Capita................................................................................... 16 Figure 7. Contribution to Real GDP Growth (Supply)...................................................... 17 Figure 8. Key Tourism Indicators...................................................................................... 17 Figure 9. Decomposition of GDP Growth Since 1990...................................................... 17 Figure 10. Sectoral Decomposition of Productivity Growth (% growth)......................... 18 Contents ix Correlation Between Sector Productivity and Change Figure 11.  in Employment Shares (2000–2010)................................................................ 19 Correlation Between Sector Productivity and Change Figure 12.  in Employment Shares (2010–2015)................................................................ 19 The Financial and Euro Debt Crisis Affected Cabo Verde Mainly Figure 13.  through A Drop in Grants, Exports, and FDI.................................................. 19 Figure 14. Growth Rate of Capital.................................................................................... 19 Figure 15. Total Guests (Number) and Tourism Earnings (as a % of Gdp)....................... 20 Figure 16. Tourism Receipts Per Arrival........................................................................... 20 Annual Growth of Consumption Expenditure, 2001–2015, Figure 17.  Per Expenditure Percentile (1 = poorest, 100 = richest) (%) (growth Incidence curve)................................................................................. 21 Figure 18. Poverty Incidence and Number of Poor......................................................... 22 Figure 19A. Poverty Rates by Island, 2001–2015............................................................. 22 Decomposition of Poverty Reduction by Urban and Rural Areas, Figure 19B.  2001–2015 (%)............................................................................................... 22 Decomposition of Poverty Reduction by Income Source Figure 20.  of Main Provider of the Household................................................................. 23 Municipality Poverty Rates (proportion of inhabitants that are poor), Figure 21.  2015................................................................................................................. 25 Figure 22A. Occupational Distribution of Extreme Poverty, 2001 and 2015 (%)............ 26 Proportion of Each Occupational Group that is Extremely Poor, Figure 22B.  2001 and 2015 (%)......................................................................................... 26 Progress Along Human Capital and Living Conditions Indicators, Figure 23A.  1995/2000–2015........................................................................................... 28 Figure 23B. Relative SDG Performance (average of indicators of each SDG)................. 28 Figure 24A. Proportion of 19- to 24-Year-Olds with at Least Secondary School (%)....... 28 Figure 24B. Government Expenditure on Education (% of GDP).................................... 28 Figure 25. Student Retention and Net Secondary Enrollment........................................ 29 Trends of Four Governance Indicators for Cabo Verde and Its Figure 26.  Aspirational Peers (percentile ranking among all countries, 100 = best)....... 32 Figure 27. Proportion of Firms Identifying Crime as a Major Constraint (%) In 2009..... 35 Proportion of the Population Always Feeling Unsafe when Walking Figure 28.  in Their Neighborhood, 2011–2013 and 2014–2015...................................... 35 Figure 29A. Total Debt has Increased Sharply (% of GDP).............................................. 37 Cabo Verde’s Debt is More than Twice the Average for Small States Figure 29B.  and SSA (% of GDP)...................................................................................... 37 Figure 30. Tourism Receipts in Cabo Verde (% of GDP).................................................. 37 Figure 31. Analytical Framework for Poverty Reduction................................................. 40 xContents Percent of Firms Identifying an Inadequately Educated Workforce Figure 32A.  as a Major Constraint (%).............................................................................. 41 Education Efficiency Frontier of Countries, Latest Value Available Figure 32B.  (Cabo Verde is the big dot in red)................................................................. 41 Global Competitiveness Report, 2017–2018: Quality Figure 33.  of Infrastructure Indicators.............................................................................. 43 Figure 34A. Risk Indicators............................................................................................... 46 Figure 34B. Present Value of Debt-to-GDP Ratio............................................................ 46 Figure 35. Weak Diversification of Cabo Verde’s Exports............................................... 48 Figure 36. FDI, Tourism Revenues in % of GDP and GDP Growth, 2000–2016............... 49 The External Position Fluctuates with Global Developments, Figure 37.  2000–2016 (% of GDP).................................................................................... 49 Figure 38. Global Rank Along Doing Business Indicators, 2018 (lower rank = better)... 51 Competitiveness Constraints According to Cabo Verdean Figure 39A.  Entrepreneurs, 2016..................................................................................... 52 Competitiveness Subscores of Cabo Verde and the Seychelles Along Figure 39B.  a Range of Constraints; Scores Range from 1 (Worst) to 7 (Best)................ 52 Changes in Agricultural Prices and Imports as a Consequence Figure 40A.  of a Simulated Drought Shock...................................................................... 54 Effect of Drought on Main Economic Aggregates, % Change Figure 40B.  Compared to Baseline................................................................................... 54 Land Ownership and Use by Rural Wealth Groups (ha) in Two Livelihood Figure 41.  Zones in Rural Santiago................................................................................... 56 Figure 42. Total Contribution of Travel and Tourism in 2016, 2017, and 2027................ 60 Figure 43. Number of Cruise Ship Arrivals in Cabo Verde............................................... 61 Figure 44A. Trading Infrastructure Indicators, 2017........................................................ 63 Figure 44B. Liner Shipping Connectivity Index, Annual, 2004–2015............................... 63 Figure 45. Analytical Framework and Binding Constraints.............................................. 68 Figure C.1. Cabo Verde: Real GDP Growth Rate............................................................. 80 Figure D.1. Income Sources of Different Wealth Groups................................................. 83 Figure D.2. Livelihood Zones in Cabo Verde.................................................................... 88 Figure E.1. Education Expenditure as % of GDP ............................................................ 92 Figure E.2. Changes in Wage Premiums by Scenario, 2017–2030................................... 92 Contents xi List of Tables Table 1. Binding Constraints and a Summary of the Evidence.......................................... 5 Table 2. Access and Use Indicators in Selected Countries in Africa................................ 44  oing Business 2018, Trading Across Borders Indicators: Performance Table 3. D Across Key Indicators of Cabo Verde and Its Peers........................................... 51 Table 4. Summary of Binding Constraints........................................................................ 68 Table 5. Binding Constraints and a Summary of the Evidence........................................ 69 Table A.1. Structural Peers and Aspirational Peers of Cabo Verde................................. 75 Table C.1. Cabo Verde: Long-Run Growth Rates of Macroeconomic Variables.............. 80  1 EXECUTIVE SUMMARY1 O ver the past quarter of a century, Cabo Verde’s decline in the level of FDI, which was influenced by the development progress has been remarkable. Its sovereign debt crisis in Europe. Increased countercyclical gross national income (GNI) per capita has grown capital spending by the government only partly compen- sixfold, from around US$500 per capita in 1986 to more sated for this decline. In addition, returns on private and than US$3,000 in 2008. In 2007 it transitioned to lower- public investments contracted by more than 20 percent, middle-income status, becoming the only non-extractive highlighting weaknesses in the quality of investment under- economy in sub-Saharan Africa to do so in such a relatively taken after the crisis. Although visitor arrivals rebounded short time. The fast economic growth has translated into quickly and earnings from the sector increased, spending substantial welfare improvements for its population. per tourist has declined by 37 percent since 2008. Poverty, Using a national poverty line of PPP US$5.60 per day, the however, continued to drop between 2007 and 2015, most incidence of poverty fell from 58 percent in 2001 (when likely reflecting investments in rural infrastructure, rising poverty measurement began) to 35 percent2 in 2015, remittances, and a further increase in the volume of tour- while extreme poverty, using the national food poverty ism workers. A reduction in fertility also contributed to line of PPP US$2.90 per day, dropped by two-thirds to this decline. 10 percent during this period. Inequality fell, and the consumption-based Gini index dropped from 53 to 42. In the aftermath of the 2008 crisis, the limited impact on Human capital achievements have been equally impressive. growth of government’s countercyclical public investment At 73, life expectancy is the second highest in Africa, after spending and the mounting inefficiencies in its large parastatal Mauritius. In the global gender gap index, Cabo Verde sector led to a rapid buildup of public debt. Cabo Verde’s debt ranks among the world’s best in the “health and survival” has increased by about 70 percentage points to 130 percent and “school enrollment” dimensions. It is among the of the gross domestic product (GDP) in 2016, and the risk of 30 best performing countries in terms of achievement of external debt distress is high. A significant part of the debt the Millennium Development Goals. is held by weakly managed state-owned enterprises (SOEs), which represent a significant source of risk. The government Cabo Verde’s impressive achievements were grounded in has repeatedly had to cover the operational expenses of political stability, sound economic policies, and strong insolvent SOEs from the budget. Although Cabo Verde’s debt institutions that maintained the rule of law, underpinned is overwhelmingly concessional, which has kept debt service its open democracy, and kept corruption under control. low, weaknesses in overall fiscal management practices raise These accomplishments were economically driven by the concerns for sustainability. By the end of 2016, the total exponential development of all-inclusive tourism resorts debt stock for the three largest SOEs reached 34 percent of in 2 of the 10 islands. The economic liberalization that GDP (US$550 million), with the largest debt held by social took place during the 1990s, together with high levels housing, electricity, and airline companies. Fiscal resources to of public investment in infrastructure, one of the world’s further raise competitiveness and tackle poverty are limited. highest levels of development assistance per capita, and high foreign direct investment (FDI) in the tourism sector, Although public investment since 2008 has contributed drove growth and poverty reduction. Remittances further to increased indebtedness, the investment in rural areas contributed to the improvement of living conditions. The may have helped the continued decline in poverty. The tourism sector, driven by a model based on all-inclusive poverty analysis undertaken for the SCD shows that resorts, has become the principal driver of economic growth the construction of dams and rural roads, together with and job creation in the country. the expansion of the rural electricity network and access to water, coincided with a sharp drop in the number of rural The global financial crisis of 2008 led to a sudden, dramatic, poor, from 121,000 to 87,000. This reduction mainly took and sustained slowdown in economic growth that has laid place in the islands of Santiago, Santa Antão, and Fogo. bare the exhaustion of Cabo Verde’s development model. Rural-to-urban migration and an increase in remittances The collapse of economic growth was caused by a sharp also played a role in rural welfare improvements. 2 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion The continued low economic growth highlights limitations Cabo Verde. In addition, severe and repeated droughts have in the current tourism model which does not provide suf- taken a high toll on the resilience of the rural population, ficient benefits to Cabo Verdeans. Although tourist arrivals as was witnessed in 2014 and 2017. The country is also have continued to grow, earnings per visitor almost halved exposed to other hazards, such as hurricanes, landslides, between 2007 and 2015. The growth in hotel room stock coastal erosion, and volcanic eruptions. Although Cabo has also slowed. The country is overwhelmingly sold as a Verde is one of the world’s most vulnerable countries in “sun, sea, and sand” destination, dominated by a few inter- terms of climate change, it is not adequately prepared to national tourist operators, with two of the nine inhabited face the future risks. islands receiving 90 percent of the tourists. There is room to further exploit the potential for strengthening local tour- Reigniting and sustaining economic growth in Cabo Verde ism supply chains and boost spending outside the resorts, requires a paradigm shift in the current development model which is low. The large hotels import most of their food toward economic diversification out of low-margin tourism, and beverage needs, citing unreliable local supply and food- a greater role for private investment, greater public sector safety concerns. There are also broader competitiveness efficiency, more targeted poverty reduction programs, a focus concerns and a low institutional capacity; likewise, policy on the quality and economic relevance of education, and vacuums have constrained a more strategic development enhanced national risk management practices. Constrained of the tourism sector. by debt, the government will have to foster an environ- ment amenable to greater private sector participation in Economic diversification has been hampered by a relatively the economy. This includes addressing the various market weak business climate. According to the 2018 Doing Business and government failures that have been ignored during the report, Cabo Verde is now ranked 127th out of 190 countries; investment boom. The lack of diversification has made the this places it below the average of other lower-middle-income country vulnerable to economic shocks. Modifications to countries, which have an average rank of 118. The report its development model are required to better exploit Cabo identified that the most problematic factors are access to Verde’s comparative advantages, enhance its resilience, and finance, an inefficient government bureaucracy, tax rates, embrace innovation to raise productivity. and an inadequately educated workforce. Although Cabo Verde has benefited from its geographical A lack of economic prospects for disadvantaged groups characteristics, being a small island country also comes leads to social exclusion and could potentially undermine with inherent economic challenges that the country shares social cohesion. The high unemployment rate, especially with other small island developing states (SIDS). These among youth (63 percent of the 15- to 24-year-olds in Praia hardships need to be taken into account when designing are unemployed), threatens to lead to behavioral problems. its new development model. SIDS tend to be unable to Juvenile crime and drug abuse are rising. A recent study access economies of scale; consequently, they have a highly among youth in Praia revealed that a quarter of all 12- to specialized export structure and struggle to be competitive. 21-year-olds had committed at least one violent crime.3 The lack of economies of scale also often has a dampening Cabo Verdeans increasingly feel unsafe4, and there is also effect on the benefits of FDI by limiting the positive spill- some evidence that discontent and dissatisfaction are rising. over effects of interaction between foreign and domestic Women’s opportunities to participate in the labor market firms. Cabo Verde’s tourism industry is a case in point. It are restricted by existing gender norms, which grant them is dominated by large foreign-owned resorts with limited almost exclusive responsibility for domestic chores, chil- links to domestic small and medium enterprises and the dren’s education, and family care5. domestic economy. Consistent with other SIDS, Cabo Verde has difficulties reducing its public debt due to higher As a small and open island economy, exposure to high public spending as a proportion of GDP relative to other trade volatility and susceptibility to climatic and geologi- categories of countries. cal hazards negatively affects the resilience of the economy and households; this could undermine the sustainability of This Systematic Country Diagnostic (SCD) aims to iden- Cabo Verde’s achievements. The 2008 global financial crisis tify the binding constraints as well as the opportunities caused a sudden fall in tourism receipts and FDI. Similarly, for reducing extreme poverty and raising the welfare of the data show that the 2014–2015 Ebola pandemic crisis the poorest 40 percent of Cabo Verde’s population in a in West Africa coincided with a downturn in tourism in sustainable manner. The SCD is driven by evidence and Executive Summary 3 is based on a review of 50 existing studies, an analysis of sample-based test conducted in 2010 revealed poor learn- the available data, and in-country expert discussions that ing outcomes in mathematics and Portuguese for around took place in 2016 and 2017. It benchmarks Cabo Verde’s 40 percent of students in Grade 6. Tertiary education has performance against a set of structural and aspirational peer limited relevance for the labor market, with 70 percent of countries, including the Seychelles, Mauritius, Maldives, and university students enrolling in the humanities and social Saint Lucia (when data is available). The SCD forms the sciences. Technical and vocational education and training foundation of the collaboration between Cabo Verde and (TVET) is not well integrated into the education system and the World Bank Group’s Country Partnership Framework does not meet job market demands. Discriminatory social (CPF) 2018–2021. norms against women leave them with a disproportionate share of domestic and child caring duties and prevent them The analytical framework for the SCD is organized around from engaging in the labor market and improving their three broad pillars for reducing poverty and raising shared living conditions. prosperity in Cabo Verde. These pillars are as follows: (1) economic growth and job creation; (2) social inclusion Insufficient connectivity is another binding constraint to of disadvantaged groups; and (3) strengthening macro and unlocking Cabo Verde’s pathways to prosperity. The archi- household resilience. First, faster economic growth will be pelago consists of nine inhabited islands that are dispersed essential to boost household incomes through the creation and surrounded by rough seas, which poses enormous chal- lenges from the standpoint of infrastructure development. of decent jobs and more productive self-employment. However, despite considerable improvements in recent years, Second, social inclusion will strengthen the human capital the overall supply and quality of the transport infrastructure and physical assets of population groups that currently network remains unsatisfactory, below that of the Seychelles are not sufficiently engaged in the development process and Mauritius. A key constraint is insufficient government and are unable to undertake productive activities. Third, capacity to regulate the sector and to develop and manage macroeconomic stability will help tackle the public debt transport concessions. Information and communications while strengthening household resilience and limiting their technology (ICT) services are inadequate; despite widespread exposure to shocks. A strong and efficient public sector broadband Internet access, available bandwidth per Internet that can reform and deliver results will be an important user is relatively low (about half the amount available to dimension that cuts across the three pillars. users in the Seychelles or Mauritius) and enforcement of the regulatory regime is weak. Despite progress in access Within this framework, the constraints have been identified to and quality of electricity services, shortcomings in the based on systematic benchmarking of Cabo Verde against planning and management of the power sector have led to its aspirational peers along key performance indicators and high electricity losses: 27 percent in 2016. This contributes additional evidence. The eleven constraints are grouped to high energy and desalinization costs for drinking water, under four broad categories: lack of human capital, weak which are among the highest in Africa. connectivity, underperformance of the public sector, and lack of resilience. Risks to macroeconomic stability are currently substantial due to high public debt and exposure to economic volatility. Improving human capital will be of vital importance for Cabo Verde’s public debt has continued to increase despite realizing Cabo Verde’s potential to grow its domestic private fiscal consolidation in recent years6. This limits the fiscal sector, raise productivity, and promote competitiveness and space for further public spending on infrastructure, human innovation. Secondary school drop-out rates are relatively capital, and protecting the poor. Technical and operational high and above those of Cabo Verde’s aspirational peers. efficiency of government spending, including SOEs, is low. The percentage of repeaters in lower secondary school is Better and more systematic engagement of the diaspora high (23 percent), and the survival rate to the last grade in investing in the country could possibly help mobilize of lower secondary is only 77 percent, close to 8 percent- resources. Like many other SIDS, Cabo Verde has a narrow age points lower than the country’s aspirational peers. economic base and its high dependence on tourism and The workforce’s inadequate skills and qualifications are a remittances points to significant external vulnerabilities. major constraint for business: in 2009, 40 percent of firms The high concentration of visitors from a few countries in identified this as a major constraint. Few systematic tests of Europe, along with the vulnerability of the domestic economy learning outcomes are conducted, but the Aferida national to the decisions of foreign investors, exposes the economy 4 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion to high risks, as was witnessed during the financial crisis. undermines the tourism industry. Cabo Verde is con- Cabo Verde also has appeared vulnerable to outbursts of sidered one of the world’s 11 most endangered marine vector-borne diseases leading to a brief dengue epidemic biodiversity “hotspots,” yet the country ranks only 78th out in 2009–2010 and a Zika virus outbreak in October 2015. of 141 countries on the “enforcement of environmental regulations” in the Travel & Tourism Competitiveness Although Cabo Verde has outperformed many of its aspi- Index. Enforcement of environmental regulations remains rational peers along the most recently available7 key gover- inadequate and environmental management has suffered nance indicators, its public sector is regarded as relatively from the unclear assignment of roles and responsibilities. ineffective and inefficient. Delivery of reform is weak8. This Solid waste management is not always up to standard. apparent paradox is caused by several problems in the public sector. These include: (1) antiquated government In the shorter term, Cabo Verde could prioritize resolving norms and procedures, and the current orientation on those constraints that would allow it to access two main “process” rather than “results;” (2) lack of coordination pathways to boost growth, reduce extreme poverty, and between agencies; (3) low technical capacity and high promote shared prosperity: diversified tourism and agri- turnover of highly qualified personnel staff; (4) limited cultural niche products. These must form the core elements performance tracking and evaluation of key programs, of a modified development model and can be unleashed which limit learning about what works, and a lack of timely once the binding constraints are removed. While additional statistics for evidence-based policy making; and (5) a lack opportunities exist in the medium term, these are affected of effective public–private dialogue, as the government by substantial structural barriers that must first be removed. has been relatively weak to provide strategic guidance to the tourism sector. Finally, decentralization has been A diversified and more inclusive tourism sector will be Cabo insufficiently effective. The 22 municipalities—the only Verde’s most likely pathway to progress. Cabo Verde’s attrac- level of government below the central government—have tiveness as tourist destination has generated much wealth a fair amount of autonomy, but suffer from capacity con- for the country. However, its nature, geographic spread, and straints and shortcomings in oversight and supervision. The form needs to change. The image of Cabo Verde as a “sun, country’s PEDS 2017-2021 spells out various measures to sand, and sea” single-product destination is unjustified and tackle the challenges. obscures a wide variety of potential tourism products that Cabo Verde has to offer, including eco-tourism, hiking, adven- Given its geographical characteristics and its location in ture, culture, and history. This illustrates a serious branding the mid-Atlantic, Cabo Verde is highly exposed to natural and marketing challenge. Diversification is likely to spread disasters, and climate change risks have the potential to the benefits more widely across the islands. Forecasts by the significantly derail Cabo Verde’s achievements and prevent World Travel and Tourism Council suggest substantial growth further progress. Extreme weather events have become potential for added value and employment. Diversified tour- more frequent, exacerbating households’ limited resilience ism would generate jobs away from the main tourist resorts to recover and pick up their livelihoods, which particularly and also reduce pressure on housing infrastructure on Sal affects the poor. However, Cabo Verde’s climate mitigation, and Boa Vista. However, international tourism competitive- adaptation strategies, and financial capacities remain limited. ness rankings suggest that serious hurdles remain. Improving The country ranks just 79th on the “climate change readiness inter-island connectivity and strengthening the skill sets of its score,” which is lower than its aspirational peers, including workforce will be essential. Realizing Cabo Verde’s tourism the Seychelles, Mauritius, and Saint Lucia. Despite their potential requires a well-developed tourism sector strategy welcome impact on rural poverty reduction, incomplete that presents a clear vision and policies for diversification. operationalization of rural infrastructure investments and Better management and selection of foreign investors is needed, poor facilitation of supply chains prevent the rural poor in conjunction with support to micro and small enterprises from further building their resilience. Social protection to increase their ability to offer high quality tourist products programs are fragmented and have difficulties reaching and tap into high value tourism supply chains. working age families to protect them against shocks and build their assets. The monitoring of their impact is weak. Agricultural, livestock, and fishery niche products have the potential to be scaled up so to provide enhanced livelihoods There is insufficient preservation of Cabo Verde’s natural and incomes to the poorest segments of the population. capital—perhaps its most important national asset—which Cabo Verde’s horticultural sector has successfully expanded Executive Summary 5 TABLE 1. Binding Constraints and a Summary of the Evidence Constraint Subconstraint Evidence 1 Inadequate human High school drop-out rate Benchmarking: Cabo Verde ranks behind aspirational peers in terms of net capital secondary enrollment, and student retention is relatively low and not improving. Other evidence: A high proportion of children are not in school, not work- ing (IDRF 2015). Insufficient skills Benchmarking: Proportion of firms stating that an inadequately educated workforce is a major constraint is higher than aspirational peers. Long distance from education efficiency frontier. Other evidence: Low scores for the Aferida test on mathematics and Portuguese; 37% of teachers have no degree. 2 Poor connectivity Problematic inter-island Benchmarking: Cabo Verde ranks behind its aspirational peers on the transportation WEF’s quality of infrastructure index, especially regarding quality of port infrastructure and air transport. Other evidence: Expert interviews conducted for the SCD in 2017 suggest maritime and air transport are unreliable in terms of timing. Weak ICT infrastructure Benchmarking: The ITU ranks Cabo Verde behind its aspirational peers in terms of ICT development. Internet use and bandwidth per Internet user are also lower than aspirational peer countries. Low global rank (103rd) on the UN’s e-governance index. Other evidence: Expert interviews conducted as part of this SCD revealed an inadequate regulatory regime and lack of cable capacity. High energy costs Benchmarking: Cabo Verde has higher energy and desalinized drinking water costs than its peer countries. Electricity losses are higher than the average for SSA. Other evidence: High commercial losses of ELECTRA. 3 Risks to macroeconomic High debt Benchmarking: Debt-to-GDP ratio is higher than peers; macroeconomic risk stability and fiscal rates are higher than Mauritius (similar to the Seychelles). sustainability Other evidence: Present value of debt is above sustainability threshold. High economic Benchmarking: Higher volatility of GDP growth than aspirational peers. vulnerability 4 Weak public sector Insufficient delivery of Benchmarking: Lower WGI scores along “government effectiveness” and performance reform “regulatory quality” compared to aspirational peer countries; lower global rank than aspirational peers on Doing Business, and rank is dropping. Larger public wage bill than peers. Other evidence: Political economy studies suggest that the bipartisan political system paralyzes civil society and pressure groups. 5 Lack of resilience Low household resilience Benchmarking: Higher frequency of droughts and storms than peers; lower rank than peers on its Vulnerability score; highly unequal land ownership and low land assets of the extreme poor. Lack of protection of the Benchmarking: Low rank on enforcement of environmental regulations natural environment on the Travel & Tourism Competitiveness Index. Cabo Verde is one the world’s most endangered biodiversity “hotspots.” Other evidence: CPIA scores for Cabo Verde are lowest for environmental sustainability. in the last decade and benefited from the extension of the produced and successfully exported for specific markets. electricity network, better availability of irrigation water, A realistic development strategy for the agricultural and and improved rural roads. The average annual growth livestock sector must indeed focus on niche products and of 4.6 percent per year of the agricultural and fisheries niche markets, such as organic, ethnic, fair trade, nostalgia sector during 2007–2016 reflects the growing shift from products (produtos da terra) for the diaspora and other subsistence agriculture to an agriculture sector increasingly low volume/high added value products focusing on those oriented toward meeting the demands of the urban market. that already show some export performance. The latter Across the archipelago, a range of agricultural goods are include coffee, wine, grogue (rum), cheese, and processed 6 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion fish products. Addressing the absence of an efficient and further constrained by inadequate management of the adequate national logistics system will be essential, together power sector, which contributes to high energy costs, and with organizing production and farmers, improving market also the relatively poor quality of education, in addition information and marketing, and supporting public policies to transport connectivity problems. In the short term, the that further promote increased production, quality systems, ICT sector should probably focus on strengthening its and support for exporting enterprises. Recycling wastewa- support to other sectors, such modernizing the delivery of ter might be crucial to ensure adequate water supply for education and health services across the archipelago and expanded production. developing logistics and tourism. A number of measures are spelled out in the country’s PEDS 2017-2021 that aim While Cabo Verde’s geographical location in the middle of to address the shortcomings. four continents offers the potential to develop a logistics hub, a digital and innovation hub, or even a financial hub, key constraints have yet to be overcome, and further work NOTES is needed to study the potential and assess private sector 1. The analysis presented in the SCD is based on the most recent data interest. Becoming a logistics hub would require building and studies, mostly up to 2016. It also benefitted from analysis under- and maintaining a global competitive advantage. Currently, taken as part of the Government’s new Strategic Plan for Sustainable Development (PEDS by its Portuguese acronym) 2017–2021 which connectivity to global support chains is weak and trading outlined several measures to address some of the binding constraints infrastructure indicators show lower values than Cabo to shared prosperity in Cabo Verde identified in this SCD. 2. As the general poverty rate is 35 percent, the poor nearly overlap with Verde’s aspirational peer countries. Developing a logistics/ the bottom 40 percent, the target group for raising shared prosperity, hub-centered economy is not simply about large infrastruc- which is one of the World Bank’s twin goals. ture projects; it also involves creating a platform for an 3. Dias 2015. 4. Afrobarometer 2015 efficient flow of business activity for which the enabling 5. See the 2013 World Bank Country Economic Memorandum for Cabo environment is currently not optimal. ICT development Verde. 6. Total public debt declined marginally in 2017, the first contraction is below par, with relatively low bandwidth per Internet in in ten years, due primarily to favorable exchange rate movements. user and weak enforcement of the ICT regulatory regime. 7. Up to 2014 8. See for example the recent World Bank reports on ‘Doing Business’ This affects international competitiveness. The feasibility which suggest Cabo Verde has been unable to improve its business of developing Cabo Verde as an ICT or financial hub is climate since 2012.  7 CHAPTER 1 Introduction T his Systematic Country Diagnostic (SCD) presents an the promotion of the country as a tourist destination. The assessment of the main opportunities and constraints total number of available hotel rooms grew by 12 percent for achieving the World Bank’s twin goals in Cabo per annum over the past 16 years. The number of visitors Verde. It assesses the pathways for reducing extreme poverty has also increased at an annual rate of 10 percent, posi- and raising the welfare of the poorest 40 percent of the tioning the country as one of the fastest growing tourist population in a sustainable manner, and identifies the main destinations in 2016. constraints for operationalizing these. The SCD is based on a review of existing documents, analysis of available Social achievements have been equally impressive. The data, and in-country discussions and expert interviews that extreme poverty rate—based on the national food poverty took place during 2016 and 2017. It is driven by evidence line—reduced from 30 percent in 2001 to 10 percent in and benchmarks Cabo Verde’s performance against a set 2015, and the number of extremely poor people dropped of aspirational peer countries that include the Seychelles, from 138,000 to 55,000 during this period (see box 1 for Mauritius, Maldives, and Saint Lucia (when data are a brief description of Cabo Verde poverty lines). Inequality available; see appendix A for details on their selection). fell as the Gini index dropped from 53 in 2001 to 42 in The SCD is not limited to areas or sectors where the 2015. Improvements along nonmonetary poverty indicators World Bank is currently—or anticipates to be—active, but were even more important, including life expectancy (see rather focuses on the country’s development potential and figure 1b), maternal mortality, net primary school enroll- challenges to meeting the objectives of poverty reduction ment, and access to an improved water source. and shared posterity. It lays the ground for the program of collaboration between Cabo Verde and the World Bank Cabo Verde’s social and economic achievements benefited Group: the 2018–2021 Country Partnership Framework. from its political stability anchored in strong democratic institutions, the rule of law, and a relatively strong human Cabo Verde’s economic achievements over the last 30 years capital base. Since independence, political transitions have have been spectacular and are unprecedented on the Afri- proceeded without violence or instability. Few other countries can continent. These achievements are remarkable given on the continent boast such a record. Cabo Verde’s strong the unique challenges the country faces due to its small institutions and relatively well-developed human capital are size, lack of scale for production of goods and delivery partly the result of the colonial period, when the country of economic and social services, remoteness, geographical served as the administrative hub for Portugal’s imperial and dispersion, environmental fragility, and high exposure to commercial interests in the region.1 This feature, and the shocks. Between 1985 and 2016, average GNI per capita openness of the economy, enhanced Cabo Verde’s attractive- increased sixfold, and average annual growth was more ness for foreign investors, triggering sizeable amounts of than 5 percent. Growth was particularly spectacular during foreign direct investment (FDI) in the tourism sector and 2000–2007 when it reached an annual average of 7 percent, support from donors. allowing the country to graduate from low-income status in 2007 (see figure 1a). This made Cabo Verde the only The financial crisis of 2008, followed by the European African country with a non-extractive economy to achieve sovereign debt crisis, hit Cabo Verde unusually hard. Its that status in such a short time. It is currently the richest GNI per capita has plateaued at around US$3,300 per country in West Africa and the 9th richest in sub-Saharan capita since 2009, and even dropped to US$3,000 per Africa (SSA). capita in 2016, halting the completion of its transition to an upper-middle-income country. Real GDP growth aver- The country’s economic performance is mostly attribut- aged only a mere 1.4 percent per year between 2009 and able to significant investment in infrastructure linked to 2016, despite the rebound in tourist arrivals after 2010, as 8 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 1. Cabo Verde has Made Remarkable Progress in Economic Growth and Human Capital Achievements a. GNI per capita (1982=100) b. Life expectancy at birth (years) 2000–2014 900 80 800 75 700 70 600 500 65 400 60 300 55 200 50 100 e e a s us e lle r ic rd m m it i co co he Ve Af r 0 au in in yc n bo 1982 1988 1994 2000 2006 2012 2016 M e- e- ra Se Ca dl dl ha id id Sa -m r-m Cabo Verde Mauritius b- er pe Su w Seychelles Lower-middle-income Up Lo Sub-Saharan Africa St. Lucia increase 2000–2014 2000 Source: World Development Indicators. Note: 1982 is the first year for which GNI data for Cabo Verde is available. revenue per tourist arrival has dropped. This has confined rise in the public debt-to-GDP ratio, from 68 percent in Cabo Verde to the list of top five slowest growing econo- 2008 to 132 percent in 2016, putting the country at high mies in SSA and resulted in a widening of the gap between risk of debt distress. High public debt is likely to constrain Cabo Verde and other aspirational peers such as Mauritius public spending. However, as the country pursues fiscal and the Seychelles.2 consolidation, it will be important to ensure adequate expenditures to promote economic growth and build the The deceleration in growth since 2008 has principally been assets of the poor. attributed to lower investments and a deterioration in the quality of investments. FDI fell and total factor produc- The global financial crisis and the euro debt crisis exposed tivity also decelerated sharply. In response to the crisis, underlying weaknesses in Cabo Verde’s development model, the government initially increased public investment in which suggests it is in need of adjustment. Recent progress infrastructure projects (until 2013); however, this did not in poverty reduction was partly driven by a relatively revive economic growth. Instead, it contributed to a sharp robust flow of remittances, which contributed to raising households’ consumption but without creating sufficient jobs and productivity growth. The available evidence sug- BOX 1. Poverty Benchmarks in Cabo Verde gests that reigniting growth requires creating space for the domestic private sector and addressing the structural bottle- necks that have kept it from participating in the country’s Extreme poverty, based on the international poverty growth sectors. Reduced involvement of the state (where line of PPP US$1.90 per day, halved between 2001 and 2007 (from 16 to 8 percent) and then again 4 percent possible) and a renewed focus on skills development will in 2015. However, there is some uncertainty around have to be an important part of the adjustment to Cabo the 2011 PPP for Cabo Verde. We therefore use the Verde’s growth model. There is also a need to improve national definition of extreme poverty, which is based the management and prioritization of public and private on the costs of meeting basic foods needs in Cabo Verde. This is CVE 136 per person per day. The general investment to reverse a declining productivity and ensure poverty line, which is based on the costs of meeting these contribute more effectively to the country’s develop- basic food and non-food needs, is CVE 250 per per- ment. Making significant changes to this will not be easy, son per day. Using a PPP of 46.7 CVE per US$, these figures are PPP US$2.90 per person per day and PPP as international experience has shown that countries may US$5.36 per person per day, respectively. be resistant to break from policies that have produced previous success. Introduction 9 The report is structured as follows. Chapter 1 provides the main opportunities/pathways for further reducing the relevant context, describing key features of the poverty and increasing shared prosperity. Chapter 5 country, its geography, economy, and the implications of subsequently summarizes the binding constraints and being a small island state. Chapter 2 reviews past achieve- corresponding evidence, and presents the remaining ments in terms of economic growth, poverty reduction, knowledge gaps. human development, and good governance, and pres- ents some manifestations of problems that suggest the NOTES need for a shift in the country’s development model. Chapter 4 presents an analytical framework and discusses 1. Successive Growth and Poverty Reduction Strategies (GPRS) in Cabo Verde all prioritize good governance as a central pillar of the country’s the main constraints for realizing Cabo Verde’s poten- development. tial. This is followed by Chapter 4, which summarizes 2. See INE 2018.  11 CHAPTER 2 Setting the Stage: Country Context T he previous chapter introduced the report and offered At the same time, its geography also holds advantages. Its a concise summary of Cabo Verde’s development natural beauty, year round attractive climate, and proxim- achievements and challenges. This chapter presents ity to Europe—its main tourist market—has enabled the the key defining characteristics of Cabo Verde and places it fast growth of Cabo Verde’s tourism industry. Being an within the context of other small-island developing states archipelago away from mainland Africa also protects the (SIDS). As a small and fragmented archipelago located off country from cross-border security issues, and pests and the West African coast, Cabo Verde faces a unique set of communicable diseases may not reach its islands so easily. development constraints. At the same time, its geography also offers advantages and makes it an attractive tourist destination. Cabo Verde’s high emigration and fast drop History in birth rate has led to a demographic transition taking place faster than elsewhere in Africa. It is the second most Cabo Verde was born out of European colonialism and urbanized country in Africa. Cabo Verde’s economy and the African slavery. The ten uninhabited islands were discov- livelihoods of its people depend largely on the services sector, ered in the 15th century and became a Portuguese terri- and the structure of the economy has remained relatively tory. The colonists almost immediately began to bolster unchanged over the past ten years. The country faces many their numbers with slaves brought in from the mainland of the challenges that are typical of SIDS, including a highly colony of Guinea–Bissau (then Guiné Portuguesa), and specialized export structure, a relatively large public sector, through intermarriage ultimately created a distinct Cabo and exposure to high trade volatility and natural disasters. Verdean ethnic identity. Given its strategic location on the great trade routes between Africa, Europe, and the New World, Cabo Verde quickly became a crucial part of Geography the transatlantic slave trade economy.1 After slavery was formally abolished in 1878, Cabo Verdeans first turned As a small and fragmented archipelago located 650–850 km to whaling (the origin of Cabo Verde’s large emigrant west of the West African coast, Cabo Verde faces a unique set community in the United States) and cod fishing, and of development constraints. Its small population (540,000 then increasingly concentrated on cargo shipping. A large in 2016) is scattered across nine islands that are up to part of the population obtained their income through 300 km apart and separated by turbulent seas. Approxi- agricultural activities where frequent droughts often led mately 88 percent of the population currently lives on four to famine, poverty, and forced migration. islands: Santiago (56 percent), Sao Vicente (15 percent), Santo Antão (9 percent), and Fogo (8 percent). The total Due to its modest natural resources and strategic location, land mass of 4,033 sq km is small and forms less than Cabo Verde has long served as the administrative hub for 1 percent of its total territory, although its land size is still Portugal’s imperial and commercial interests in the region. In much larger than those of its aspirational peers (it is 9 times that context, it received relatively large amounts of invest- the size of the Seychelles and double that of Mauritius). Its ment in its physical and human capital. Following the end vast ocean has a modest marine fertility and its climate is of the military regime in Portugal, the Republic of Cabo like the continental African Sahel, with poor and erratic Verde officially declared its independence on July 5, 1975. rainfall. Availability of fresh water per capita is low, the It initially maintained a state union with Guinea–Bissau, but second lowest in Africa. Only around 10 percent of the this ended in 1980. Unlike in Guinea–Bissau, Cabo Verde’s land is said to be arable. The country is highly vulnerable to military remained small even at the height of the struggle climatic events, including frequent droughts, sea level rise, for independence, and has always remained separate from and storm surges. It is also plagued by volcanic eruptions. the civilian government.2 12 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion Demographics Cabo Verde’s demographic transition is taking place faster than elsewhere in Africa, providing opportunities but also increasing pressure on the labor market. The share of the At 540,000 people, Cabo Verde’s population is small—the population that is of working age has been rising since 2000, fifth smallest in SSA—and is relatively urbanized. Its average and the share of the population between 15 and 64 years old annual population growth rate dropped from 2.0–2.7 percent rose by 1.6 percent per year during 2001–2013 (compared in the 1990s to 1.0–1.2 percent during 2010–2016.3 In 2016 to 0.6 percent per year during 1990–2000). Cabo Verde has about 66 percent of the population lived in urban areas, up already benefited from its demographic dividend. The contri- from 27 percent in 1982, and Cabo Verde is the most urban- bution of growth in the share of the population between 15 ized country on the continent after Gabon. Urbanization has and 64 to the rise in income per capita rose from 7.6 percent been mostly driven by frequent droughts and job creation in in 1990–2000 to 41.4 percent in 2001–2013.6 The share of tourism-related activities. More than one-third of children live the population that is of working age is expected to peak in a household that is headed by a single woman.4 at around 2030.7 By comparison, SSA’s share is expected to reach its highest proportion in 2080. Cabo Verde thus The country experienced high levels of outmigration, has only another 13 years left to reap the benefits from this especially during the 1980s and to a lesser extent from demographic dividend. However, since 2012 the proportion 2003–2007 (see figure 3). The total emigrant population of the population that is “active” (i.e., conducts paid work is estimated to be between 750,000 and 1,000,000 people, or actively looks for work) has dropped from 63 percent to many of whom left before independence in 1975. Over the 58 percent of the working age population. Together with the past 30 years, more than 100,000 Cabo Verdeans (one-fifth high youth unemployment rate (49 percent in urban areas of its current population) migrated abroad. The majority in 2016 and 74 percent among young urban women), Cabo went to Portugal, France, and the United States. Of the Verde is at risk of losing its historic opportunity to reap the more recent migrants, most left to study abroad (around a maximum benefits from its demographic dividend.8 third of all migrants during 2009–2014).5 It is unclear how many return after completing their studies, as no records are kept. Migrants continue to play an important role in Cabo Verde as a Small Cabo Verde’s development via the financial resources they channel into the economy through remittances and foreign Island Economy investment. For example, 17 percent of small tourist busi- Cabo Verde shares many economic challenges with other nesses are owned by former emigrants.8 SIDS, which has implications for its development strategy (see figure 2). The fragmentation of its territory and the dispersion of its small population across nine islands raises costs of trade and prevents cost-effective integration of the domestic market for goods, services, and labor. It contrib- utes to the high cost of delivering essential services, which include health, education, electricity, and drinking water and sanitation services. Although its location in the mid- Atlantic offers strategic advantages, it makes freight services relatively expensive and creates challenges for integrating into global value chains. Like most other small economies, Cabo Verde is unable to access economies of scale, and consequently has a highly specialized export structure. Its economy and the liveli- hoods of its people depend largely on the services sector, which is dominated by the tourism industry. The struc- ture of the economy has remained relatively unchanged over the past ten years. The services sector accounts for roughly 70 percent of economic activities and 65 percent of labor force participation (see figure 4).9 Commerce, hotels, and restaurants (supported by the tourism sector) provide Setting the Stage: Country Context 13 FIGURE 2. Features of Small Island Economies Succeptibility to High terms of trade Limited transportation shocks technological and trade cost— infusion and isolation and falling dispersion productivity - High public expenditures High cost of - High debt levels Highly public service - Limited scope to expand susceptible due to economic base to climate diseconomies - Labor market rigidity and natural of scale disasters - Lack of depth in financial sector Source: Lederman and Lesniak 2017. FIGURE 3. Net Annual Migration from Cabo Verde FIGURE 4. Sectoral Distribution of Value Added and Some of Its Aspirational Peers (in % of total and Employment population) 100% 1.0% 80% 0.5% 0.0% 60% –0.5% 40% –1.0% –1.5% 20% –2.0% 0% –2.5% Value Added Value Added Employment 1982 1988 1994 2000 2006 2012 2007 2015 2015 Cabo Verde Mauritius Public sector Tertiary sector excl public sector Seychelles Secondary sector Primary sector Lower-middle-income Source: Figure 3 calculations use five-year grouped data from the World Development Indicators (data.worldbank.org); Figure 4, based on data from INE and BCV. 14 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion around 23 percent of jobs, followed by public administra- and Italy supply the bulk of the country’s tourists, as well tion and public services (19 percent). In 2015, agriculture, as remittances (together with the US) and FDI. Europe also livestock, and fisheries activities contributed 9.6 percent accounts for close to 100 percent of the country’s commodity to GDP while employing 20 percent of the workforce (see exports, which consist mainly of frozen and processed fish. figure 4). This suggests that labor productivity in this sector Proximity to major West African markets and its Economic is low, and indeed the extreme poverty rate in 2015 was Community of West African States (ECOWAS) membership highest among those working in this sector (28 percent for have not translated into greater export diversification. In day laborers and 21 percent for the self-employed) compared 2014, Africa accounted for just 9 percent of Cabo Verde’s to 10 percent for the whole population. Although important exports and 3 percent of its imports. for rural livelihoods, the primary fisheries sector is small, poorly governed, and contributes only 1 percent to GDP. It Smaller economies tend to have difficulties managing employs 3 percent of the workforce. Canned fish (using fish their public debt. Size also appears to be a factor in caught by large foreign vessels) dominates the manufacturing the relative size of the government’s budget, with small sector, which forms 15 percent of GDP. In 2015, 12 percent economies, including Cabo Verde, spending significantly of GDP was generated in the nonagricultural informal sector, more as a proportion of GDP relative to other categories employing around 21 percent of the workforce.10 of countries. In many of these economies the government is the main employer, which keeps the wage bill high. The Cabo Verde is an open economy and has maintained strong absence of opportunities to exploit economies of scale in ties to Europe, particularly Portugal. Since trade liberalization the provision of public goods also raises the amount of reforms in the early 1990s, the country has maintained a public spending as a proportion of the economy. Weak trade openness ratio of above 90 percent, anchored in sev- fiscal management, susceptibility to damages from natural eral bilateral, regional, and international agreements.11 The disasters, and growth volatility all combine to create an national currency is pegged to the euro under a special part- environment for building up persistently high levels of nership with Portugal. The United Kingdom, Spain, Portugal, public debt. NOTES 1. Lumumba 2013. 2. World Bank 2013a. 3. In Africa, only Mauritius, the Seychelles, Lesotho, and the Central African Republic had lower population growth since 2001. 4. Population census 2010. There are no data that suggest that migration affects gender balances, as both men and women migrate. 5. Rodriguez 2017. 6. Marone 2016. 7. Marone 2016. This is the result of a rapid decline in mortality and fertility (from 5.3 children per woman in 1990 to 2.3 in 2014). 8. Comparable data on the sectoral distribution of employment are only available from 2010 onward, preventing a proper medium-term assessment of shifts in the sectoral distribution of employment and structural transformation. 9. Comparable data on the sectoral distribution of employment are only available from 2010 onward, preventing a proper medium-term assessment of shifts in the sectoral distribution of employment and structural transformation. 10. INE 2015a. 11. World Trade Organization 2015. The country’s trade arrangements include ECOWAS and the African Growth and Opportunities Act (AGOA), which has been extended to September 30, 2025.  15 CHAPTER 3 Past Achievements T he previous chapter presented the country context by until the global financial crisis of 2008 and the subsequent briefly discussing key features of its geography, his- European debt crisis, the country has outperformed its tory, demographics, and economy. It also reviewed peers, with economic growth averaging above 6 percent the main challenges of being a SIDS. In this section we per decade (see figure 5). Real GDP growth averaged a present Cabo Verde’s past achievements, including its high mere 1.4 percent per year between 2009 and 2016, despite economic growth, fast poverty reduction, and success in the rebound in tourist arrivals after 2010, as revenue per improving other social indicators. Important progress in tourist arrival has dropped. GNI per capital followed a the development of good governance is also discussed. We similar pattern and has remained around US$3,300 per end by presenting some of the emerging symptoms that capita since the global financial crisis, before dropping to suggest Cabo Verde’s development model needs adjustment. US$3,100 per capita in 2015 and US$3,000 in 2016. This has confined Cabo Verde to the list of top five slowest Cabo Verde’s development model—based on capital accu- growing economies in SSA, and resulted in a widening of mulation linked to the development of the country’s tour- the gap between Cabo Verde and its aspirational peers such ism sector—in combination with strong institutions for as Mauritius and the Seychelles (see figure 6).1 The details maintaining the rule of law, accountable government, and of the underlined drivers of growth before and after the a stable democracy, has allowed the country to outperform crisis are presented below. peers in social and economic development. However, growth collapsed following the global financial of 2008 and the euro debt crisis. This was largely due to a drop in FDI and official development assistance, as well as declining productivity of Pre-2008 capital and labor. Growth in tourist arrivals soon picked up, but total revenue from tourism stagnated. Nevertheless, Economic growth in Cabo Verde during the pre-crisis poverty in 2015 was substantially lower than in 2007 due to period coincided with significant reforms to liberalize the a movement of poor households to the services sector and economy. At the turn of the 1990s, Cabo Verde embarked income growth in that sector, but also for those who work on an ambitious political and economic liberalization in agriculture and industry or construction. Poverty among plan to reinvigorate growth in the economy. Key reforms the unemployed and inactive also reduced, most likely due to improve the business environment included the elimi- to robust remittances growth. Cabo Verde outperforms its nation of trade barriers and the removal of wage and aspirational peer countries along many governance indica- price controls. The public sector was also rationalized tors, except for “government effectiveness” and capacity to with the divestment of several SOEs, including energy, adequately regulate the private sector, where it lags behind telecommunication, garment, and drug manufacturing them. This apparent governance paradox is exacerbated by companies. In this context, growth accelerated to almost the lack of engagement of civil society activity in holding 8 percent per annum during 1991–2000, from an average the government accountable for the delivery of results. of 6 percent a decade earlier. Weak fiscal discipline trig- gered rising macroeconomic imbalances and an eventual debt restructuring at the end of the 1990s. Growth also Cabo Verde’s Economic decelerated sharply. However, the economy recovered Growth Story quickly with the introduction of a fixed exchange rate arrangement with Portugal in 1998, along with additional Cabo Verde enjoyed robust economic growth during the reforms to anchor the country’s development in tourism, period leading up to 2008, after which growth collapsed including attractive incentives to foreign firms investing and has not fully recovered. Since its independence in 1975 in the sector. 16 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 5. Real GDP Per Capita Growth (%) these services to the public. During 2001–2008, transpor- tation, restaurants, and hotels (mostly related to tourism) 10 recorded the highest growth rate, accounting for one-fifth 8 of the overall growth—reflecting increased dynamism and development of the tourism sector. The contribution of the 6 construction sector to overall growth also grew threefold 4 during this period, motivated by increased public invest- ment in infrastructure and FDI-related construction of 2 hotels (see figure 7). 0 The tourism sector is dominated by the all-inclusive model, –2 1991–2000 2001–2008 2009–2015 anchored in a few international brands (particularly RIU Cabo Verde LMIC Seychelles and Meliá) that rely on international chains of goods St. Lucia St. Vincent SSA and services. Cabo Verde’s tourism sector developed very Mauritius quickly and was backed by rapid growth in the number of hotels, arrivals, and occupancy levels (see figure 8). Source: World Development Indicators and country authorities. Approximately 80 percent of all tourist activities are confined to two small islands that host just 7 percent The reforms led to the emergence of the tourism sector as of the population3—Sal and Boa Vista—and linkages to a central pillar of the country’s development.2 Anchored domestic small and medium enterprises and the rest of in the promotion of the country as a market for European the economy are weak. tourists, the services sector accounted for almost 80 percent of the growth in the economy over the past two and a half Cabo Verde’s economic performance leading up to 2008 was decades. Between 1991–2000, the sectors with the highest driven by structural factors driven primarily by investment in average annual rates of growth were financial, communi- infrastructure. The country has enjoyed gross investment rates cation, hotel and restaurants, and transportation services. of above 35 percent of GDP since the 1990s, which compares There was also a notable expansion in electricity and water favorably with 20.3 percent for SSA or aspirational peers production, as authorities sought to expand provision of like Mauritius, where this was 24.7 percent of GDP. It was FIGURE 6. GDP and GNI Per Capita 14 Separation Political and Introduction Graduation Access 4,000 from economic of exchange to MIC to regional 12 Guinea liberalization rate peg capital 3,500 10 market WTO accession 8 3,000 6 2,500 4 2 2,000 0 1,500 –2 –4 1,000 PAICV MpD (1991–01) –6 PAICV (2001–15) 5 –8 –10 One Multi-political parties 0 1981 1987 1993 1999 2005 2011 2015 GDP growth (left hand side %) GDP per capita (US$) Source: Based on World Development Indicators. Past Achievements 17 FIGURE 7. Contribution to Real GDP Growth (Supply) FIGURE 8. Key Tourism Indicators 8 220 200 6 180 160 140 4 Percent 120 100 2 80 60 0 40 20 0 –2 2001–08 2009–16 1991–00 2001–08 2009–16 Avg. annual growth in arrivals (%) other services transp + hotel and rest Avg. occupancy rate (%) construction mining + manufacturing Avg. no of establishment agr + fisheries GVA Sources: Based on data from INE and BCV. driven primarily by private investments (domestic and FDI) of ODA in 2010 went to transport, storage, and energy.4 as well as official grants and concessional borrowing. The Public investment rates have been very high, averaging a willingness to undertake reforms to ensure macro-stability remarkable 13 percent of GDP. Remittances also contributed allowed the country to access significant development policy to the financing of private investments. financing. In this context, Cabo Verde has been among the world’s top recipients of official development assistance The economy also benefitted from significant productivity (ODA) per capita, although the amounts have declined gains. Decomposing real GDP growth into three sources— since 2010 (from US$667 in 2010 to US$293 in 2015). Key adjusted labor (labor force adjusted for employment rate and infrastructure projects undertaken during this period include labor market participation rate), capital stock,5 and total the country’s seven airports and road network, energy and factor productivity (TFP) growth—revealed that capital and purification plants for drinking water, as well as expansion in labor accumulation have been key determinants of growth healthcare and educational facilities. For example, 89 percent over up to 2008 (see Figure 9). While the contribution from FIGURE 9. Decomposition of GDP Growth Since 1990 1990–2015 1990–2000 2000–2008 2009–2015 11% 9% 7% 5% 3% 1% –1% –3% Capital stock Labor TFP Real GDP growth Sources: INE, BCV, IMF, and World Bank staff estimates and calculations. 18 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 10. Sectoral Decomposition of Productivity Growth (% growth) a. 2000–2010 b. 2010–2015 Services Services Construction Construction Manufacturing Manufacturing Agriculture Agriculture –10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0 –80.0 –60.0 –40.0 –20.0 0.0 20.0 40.0 Percent Percent Within Between-Static Between-Dynamic Note: Within: Productivity gains/losses within sectors. Between-Static: Productivity gains (losses) due to labor movements to higher (lower) productivity level sectors. Between-Dynamic: Productivity gains (losses) due to labor movements to higher (lower) productivity growth sectors. capital reflects the significant investment in infrastructure, economy-wide productivity, which can, however, be turned labor reflects gains from investment in education as well into a key engine of growth by unleashing productivity- as benefits from demographic transition.6 In the 1990s, enhancing structural change. the contribution of infrastructure was complimented by advances in education and increased access to credit by the private sector. Regarding demographic changes, the Post-2008 working age population as a share of the total population increased from 50 percent in 2000 to more than 65 percent Economic growth collapsed after the global financial crisis in 2015, and labor force participation from 35 percent of of 2008 and has not rebounded to previous levels, although the population to almost 50 percent. it was 3.8 percent in 2016. Given the economy’s dependence on the euro area, the crisis affected the flow of funds to Labor productivity growth in Cabo Verde has been mostly Cabo Verde. Notably, FDI, which peaked at 15 percent due to within-sector productivity growth, with limited of GDP in 2008, fell by 5 percentage points of GDP in contribution from structural change (see figures 10a 2009 before averaging 7 percent of GDP over the past six and 10b). For 2000–2010, all sectors registered strong years (see figure 13). Earnings from tourism also fell but productivity growth, with the services sector having recovered quickly, reflecting the introduction of discounts the largest impact on overall labor productivity. While and gains from geopolitical tensions in other neighboring there are significant productivity gaps across sectors for tourist markets (see figure 15). both pre- and post-crisis (for example, manufacturing is approximately 1.6 times more productive than agricul- The deceleration in growth since 2009 is primarily attributed ture, and productivity in finance is almost seven times to a sharp decline in the level of investments, despite increased as high) there has been limited movement from low- to capital spending by the government for the first five years high-productivity sectors such as finance and transport after the crisis.8 Empirical analysis used to identify turning (see Figures 11 and 12).7 Notably, although services and points in long-run growth confirms that the deceleration commerce absorbed most of the workers who moved out in growth in Cabo Verde has been mainly attributable to of the agricultural sector prior to 2010, the impact on the slowdown in capital investment (see figure 14).9 After growth was relatively small as the level of productivity growing at annual rates of close to 10 percent for most of in commerce is low, albeit slightly higher than that of the 2000s, overall investments contracted at an annual rate agriculture. Productivity gaps across these sectors indi- of 1.0 percent since 2009. Gross fixed capital formation cate the presence of allocative inefficiencies that reduce dropped from 38.5 percent of GDP in 2009 to a low of Past Achievements 19 FIGURE 11. Correlation Between Sector Productivity FIGURE 12. Correlation Between Sector Productivity and Change in Employment Shares (2000–2010) and Change in Employment Shares (2010–2015) y = 0.02x + 1.46 y = 0.04x + 1.68 6.0 Log (sectoral productivity/total Log (sectoral productivity/total R² = 0.006 4.5 R² = 0.005 4.0 Transport 5.0 Finance 3.5 productivity) productivity) 3.0 4.0 Finance 2.5 Transport Other 3.0 2.0 services 1.5 2.0 Manufacturing Commerce Commerce 1.0 Other Manufacturing Construction 1.0 Agriculture0.5 Construction services Agriculture 0.0 0.0 –15.0 –10.0 –5.0 –0.50.0 5.0 10.0 –8.0 –6.0 –4.0 –2.0 0.0 2.0 4.0 6.0 –1.0 –1.0 Change in employment share (percentage points) Change in employment share (percentage points) Sources: INE, World Development Indicators, and staff calculations. Notes: 1) The size of a circle represents the relative size of each sector (as measured by its employment share) in 2000. The estimates were obtained based on the bivariate regression: ln(p/P) = α + βΔEmp. share, where p and P denote sectoral productivity and total productivity level, respectively. The red line represents fitted values. 30 percent in 2013. Private investment accounted for most as external conditions and institutional changes—were of the decline, the impact of which was partially offset by found to be insignificant in explaining the downward shift countercyclical public spending until 2013. Public invest- in Cabo Verde’s growth trajectory. ment has declined in recent years as authorities sought to rationalize the public investment pipeline, given mounting In addition to the markedly lower investment growth, concern over the country’s debt. While lower private invest- the collapse in economic activities in Cabo Verde after ment tied to FDI could have been influenced by the economic the crisis is also attributable to lower investment effi- slowdown in Europe, credit to the private sector in Cabo ciency, which contributed to a sharp contraction in TFP. Verde stalled because of rising nonperforming loans in the Although overall investment levels have declined, it local banking sector. Other determinants of growth—such remains well above those of Cabo Verde’s aspirational FIGURE 13. The Financial and Euro Debt Crisis FIGURE 14. Growth Rate of Capital Affected Cabo Verde Mainly through a Drop Investment growth in Grants, Exports, and FDI 0.3 SIS + IIS, a = 0.01 50% 0.2 0.1 30% 0.0 10% –0.1 –10% –0.2 FDI –30% –0.3 Grants 1985 1990 1995 2000 2005 2010 2015 Exports –50% 2005 2008 2011 Sources: INE, BCV, IMF, and World Bank staff estimates and calculations. Note: Figure 14 - Red line represent the actual growth rate. Blue line is the fitted valves derived from the statistical test in Doornik et al. (2013). Structural breaks determined by Step-Indicator Saturation (SIS) and Impulse-Indicator Saturation (IIS) (with breaks selected at target size α = 0.01). 20 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion peers since the crisis. However, the return on private and despite continued rise in arrivals. Visitor arrivals recovered public investments have both contracted by more than quickly after the financial crisis, but stagnated after 2012 20 percentage points since the crisis. Lower investment and only picked up again in 2016 (see figure 15). After the efficiency reflects the relatively limited impact on growth crisis, the growth in tourism arrivals approximated 9 percent of increased public investments during the immediate per annum, down from 11.5 percent before 2008, and has aftermath of the financial crisis and a missing contribu- not been sufficient to offset the impact of lower investment tion from structural reforms that would have sustained and restore growth to historical levels. The rate of growth TFP growth. Notably, TFP growth was negative during in hotel room stock has slowed (to 9 percent per annum) 2009–2015 (see figure 9). relative to the pre-crisis period (14 percent per annum), and the contribution of the tourism sector to GDP only grew Many of the infrastructure projects undertaken with public until 2010, after which it remained constant (see figure 15). funds—roads, ports, airports, electricity supply, and dams to support irrigated agriculture, undertaken to counter the More importantly, receipts in US$ per arrival have steadily impact of the global recession—generated little growth.10 declined. In 2007, tourism revenue was about US$1,500 per This was further compounded by weakening credit con- arrival, slightly above the average for the Pacific and the ditions and limited contribution from other structural Caribbean islands (see figure 16). By 2015, however, Cabo factors, including education. Cost underestimates and Verde had seen a steady decline bottoming at US$800 per overestimates of benefits are a common feature of large arrival, while small island states in the Pacific and Carib- infrastructure projects.11 A case in point in Cabo Verde is bean have maintained approximately the same level. The the US$150 million investment in the rehabilitation of the decrease in spending per tourist is possibly related to the Praia port, which experienced significant cost overruns and falling competitiveness of the destination and the protracted lower than expected benefits due to underutilization (and use of discounts to draw visitors. The impact of falling limited engagement of private sector users during design revenues per tourist outweighed the combined effect of and construction). For small economies like Cabo Verde, 22 percent growth in occupancy between 2009 and 2016 the cost of inefficient infrastructure investments can have and 118 percent in the number of available rooms. Similarly, significant adverse macroeconomic impacts. the construction sector, which was important in driving growth in the years leading up to the crisis, contracted The slowdown in economic growth coincided with a sharp by 0.4 percent. However, agriculture and fisheries picked deceleration in the growth of the tourism sector after 2008, up, taking advantage of investment in the sector and rural FIGURE 15. Total Guests (Number) and Tourism FIGURE 16. Tourism Receipts Per Arrival Earnings (as a % of GDP) 700,000 25.0 1.5 600,000 US$, thousands 20.0 500,000 Visitor arrivals 15.0 1.0 % of GDP 400,000 300,000 10.0 200,000 0.5 5.0 1999 2004 2009 2014 100,000 West Africa Ebola Pandemic Global nancial crisis 0 0.0 2000 2004 2008 2012 2016 Cabo Verde Gross tourism earnings (rhs) Paci c island small states Caribbean small states Total guests Sources: Based on World Development Indicators and BCV. Past Achievements 21 infrastructure more broadly in the years before and just second six months) to 2015, when it rose by more than after the crisis. a quarter, have led to substantial welfare increases across the country. Poverty reduction between 2001 and 2015 was the result of growth in poor household consumption; Poverty and Shared redistribution did not play in role. Prosperity Patterns Inequality fell, and the consumption-based Gini index Growth during 2001–2015 was pro-poor. The annual dropped from 53 in 2001 to 42 in 2015, a level that is still growth in per capita expenditure was higher for the poor- relatively high but typical for SSA. During 2001–2015, the est 40 percent of the income distribution (around 5.7 per- number of poor decreased by around 76,000 (30 percent) cent)12 than for the top 60 percent (around 5 percent per and the number of extreme poor by 82,000 (a reduction year) (see figure 17). This is above the developing country of 60 percent) (see figure 18b). As the general poverty rate median of 2.5 percent growth of the bottom 40 percent is 35 percent, the poor overlap nearly with the “bottom during 2009–2014. 40 percent.” Therefore, in this SCD we will refer to both extreme poverty and general poverty. Cabo Verde witnessed dramatic poverty reduction during 2001–2015. Using a national poverty line (equivalent to Between 2001–2007 poverty reduction was slowest on the PPP US$5.40 per person per day in 2015 prices; see Box 1) poorest islands, but during the following years this was the the incidence of poverty fell from 58 percent in 2001 to opposite. During 2008–2015, poverty reduced fastest on 35 percent in 2015, while extreme poverty, defined as those the islands with the highest poverty rate, suggesting there below the national food poverty line (PPP US$2.90 per is convergence in welfare across islands (see figure 19a). person in 2015), dropped from 30 percent to 10 percent The poverty rate in Santo Antão, the poorest island in during this period (see figure 18a).13 Spectacular growth rates 2001 and 2007, dropped by 20 percentage points during during the period from 2002–2007 (the first six months),14 2007–2015, while in the capital Praia—the richest part of when GNI per capita almost doubled, and during 2007 (the the country— poverty slightly increased during this period FIGURE 17. Annual Growth of Consumption Expenditure, 2001–2015, Per Expenditure Percentile (1 = poorest, 100 = richest) (%) (growth Incidence curve) 9 8 7 6 Annual growth rate, % 5 4 3 2 1 0 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 Expenditure percentiles Sources: Based on IDRF 2001 and IDRF 2015 surveys (INE). 22 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 18. Poverty Incidence and Number of Poor a. Poverty incidence and GNI/capita b. Number of poor, 2001–2015 2001–2015 (in '000) 70 4,000 300 150 60 250 125 3,000 50 200 100 US$/ person Percentage 40 2,,000 150 75 30 100 50 20 1,000 10 50 25 0 0 0 0 2002 2004 2006 2008 2010 2012 2014 2001 2007 2015 Extreme poverty (left axis) Number of rural poor (left axis) General poverty (left axis) Number of urban poor (left axis) GNI per capita (right axis) Number of extreme poor (right axis) Sources: Based on IDRF 2001, QUIBB 2007, and IDRF 2015 surveys. FIGURE 19A. Poverty Rates by Island, 2001–2015 FIGURE 19B. Decomposition of Poverty Reduction by Urban and Rural Areas, 80% 2001–2015 (%) 70% Changes within urban Changes due to 5.0 and rural areas population shifts 60% 50% 0.0 40% 30% –5.0 Rural from rural areas 20% Urban to urban areas 2001 2007 2015 –10.0 Praia Rest of Santiago S. Antão S. Vicente Fogo Other islands –15.0 –20.0 Sources: Calculations based on data from IDRF 2001, QUIBB 2007, and IDRF 2015 surveys (INE). Past Achievements 23 (see figure 19a). Extreme poverty in Santo Antão is now also household businesses (see figure 20, first bar). During almost just one-third of what it was in 2001. During the this period, there was high growth in tourism-related 2000s, internal outmigration, usually from rural areas to activities, which created substantial numbers of jobs. These urban Praia, Sal, and Boa Vista, was highest for the poorest mostly benefited those already active in the services sector. islands, and between 2007–2015, rural poverty reduced However, a shift toward wage labor in the industrial sector more rapidly than urban poverty (see figure 18b). (including construction) also contributed to a decrease in poverty (see figure 20, second bar). Urbanization appears to increasingly work less well for poverty reduction. The number of poor urban people barely Between 2008 and 2015 multiple factors contributed to changed during 2007–2015 (see figure 18b). Decomposi- poverty reduction. During this period, average annual tion analysis of poverty reduction during 2001–2015 into economic growth per capita was 3.3 percent, lower than changes within urban and rural areas, along with changes during 2001–2006 when this was 4.7 percent; this was due to population shifts from rural to urban areas, shows caused by a lower growth of the services sector. However, that rural to urban migration increased urban poverty by poverty reduction continued after 2007. Low population 4 percentage points, slowing down overall reduction of growth due to falling fertility and continued emigration poverty in urban areas (see figure 19b, second column). helped maintain GDP per capita during 2009–2015. Decom- The drop in rural poverty was in part caused by migration position analysis of poverty reduction by income source of to urban areas (see figure 19b, second column), although main provider of the household suggests poverty reduction most of it was caused by welfare changes with rural areas was driven by four factors: (see figure 19b, first column). i. Income growth of those active in the services sector Poverty reduction during 2001–2007 was driven by high (wage earners and household businesses) (see figure 20, economic growth of the services sector. Decomposition third bar), and a population shift into the services sector. analysis suggests that poverty levels dropped between 2001 The latter substantially slowed down the contribution and 2007, mainly due to fast welfare improvements of those toward poverty reduction in that sector, though (see working within the services sector, mostly wage earners, but figure 20, last bar). FIGURE 20. Decomposition of Poverty Reduction by Income Source of Main Provider of the Household 2001–2007 2008–2015 Population Population Within shift across Within shift across Sector sectors Sector sectors 4 4 Unemployed and inactive 2 2 Commerce + services 0 0 self-employed –2 –2 Commerce + services wage earners –4 –4 Industrial self- employed –6 –6 Industrial wage –8 –8 laborers –10 –10 Agriculture self- employed –12 –12 Agricultural wage –14 –14 laborers Sources: Calculations based on data from IDRF 2001, QUIBB 2008, and IDRF 2015 surveys (INE). 24 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion ii. The second driver of poverty reduction during 2008–2015 44 percent of the population. Most of the rural extreme and was income growth of the poor who depend on the agri- moderately poor live in municipalities where small-scale cultural and fisheries sector for their livelihood. These agriculture and fisheries are the main sources of income. include agricultural laborers, farmers, and fishermen. Many of the urban extreme poor live in Praia (7 percent The agricultural sector grew at an annual average of of all extreme poor live there) and the town of Mindelo 4.6 percent per year during 2007–2016. Income growth on Sao Vicente (7 percent). As can be seen in figure 21, was most likely facilitated by public investments in Paúl on Santo Antão has the highest extreme poverty rate rural infrastructure, including roads, electricity, dams, (32 percent), followed by São Filipe on Fogo (29 percent) and small-scale irrigation systems, funded by ODA and and Santa Cruz on Santiago (27 percent). concessional loans. The expansion of small-scale irriga- tion systems,15 together with the introduction of new technologies—in particular in horticulture—has raised Poverty Profile income-earning opportunities in rural Santa Antão and rural Santiago. Movement of poor agricultural laborers The “inactive” constitute the largest group of the extreme out of the sector also contributed to poverty reduction poor. In 2015 the largest group of the extreme poor (see figure 20, last bar). (38 percent) and the poor (34 percent) was formed by iii. Third, growth of the industrial sector (including construc- those living in a household where the main provider was tion, fish canning)—which was on average 3.2 percent “inactive”—that is, not conducting paid work and not per year (higher than the 1 percent per year of the services looking for work. This is followed by those working in sector)— likely led to welfare increases of workers in the agricultural sector, which constitute 24 percent of the this sector during 2008–2015. extreme poor and 16 percent of the poor. A fifth of the iv. Finally, improved welfare among the unemployed and extreme poor and 28 percent of the general poor depend inactive—most likely due to robust remittances (which on the services sector for their main income source. The grew from US$139 million in 2007 to US$212 million sectoral distribution of the general poor and extreme in 2015, or from 9 percent to 13 percent of GDP)—also poor has not changed much since 2001 (see figure 22a). played an important role. The amount of remittances Cabo Verde receives per year is equivalent to total Extreme poverty incidence is highest among those whose government spending on health and education.16 main provider works in the agricultural sector. In 2015, 24 percent of this group was extremely poor, down from Although there was a considerable reduction in poverty, it 42 percent in 2001. This is followed by the “inactive,” declined less than expected given the spectacular growth 14 percent of whom were extremely poor in 2015, com- in GNI per capita during 2001–2008. High initial welfare pared to 32.5 percent in 2001. However, poverty reduced inequality and a weak connection of the tourism sector to fastest for those who depend on the services sector for their the local economy are likely important reasons. The elasticity income. The proportion of this group that is extremely of poverty reduction to growth for the 2001–2015 period poor fell from 19 percent in 2001 to 4.5 percent in 2015 was low (0.25) by international standards.17 (see figure 22b). There are large differences in extreme poverty rates across Of the unemployed, 40 percent are poor, which is only a geographical areas. Municipality level extreme poverty rates somewhat higher proportion than the population as a whole in 2015 varied between 1 and 32 percent (see figure 21). (35 percent); the extreme poverty rate is similar for both About 90 percent of the extreme poor live on four of the nine groups (13 percent and 10 percent). Similarly, the extreme inhabited islands: the interior of Santiago (with 45 percent poverty rate among those living in a household whose main of the extreme poor), followed by Santo Antão (13 percent), provider is “inactive” is only somewhat higher (14 percent) Fogo (12.5 percent), the capital Praia (12 percent), and Sao than for the entire population (10 percent). The proportion Vicente (8.5 percent). This distribution is somewhat like the of unemployed and the inactive who are extremely poor has distribution of the population as a whole, as high (extreme) come down fast since 2001 (see figure 22b), which could be poverty pockets occur on each of the highly populated islands. related to the fast rise in remittances. The unemployed can However, the interiors of Santiago, Fogo, and Santo Antão afford to remain without paid work only if they receive some are overrepresented among the extreme poor: they contain transfers from family members or others, which in 2007 71 percent of the extreme poor while they only harbor was the case for two-thirds of the unemployed. Data from Past Achievements 25 FIGURE 21. Municipality Extreme Poverty Rates (proportion of inhabitants that are poor), 2015 Sources: INE 2017b, based on IDRF 2015 survey. 26 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 22A. Occupational Distribution of FIGURE 22B. Proportion of Each Occupational Extreme Poverty, 2001 and 2015 (%) Group that is Extremely Poor, 2001 and 2015 (%) 100 Agriculture 80 Inactive 60 Unemployed 40 Industry 20 0 Services 2001 2015 Agriculture Services Industry 0 10 20 30 40 Inactive Unemployed 2001 2015 Sources: Calculations based on IDRF 2001 and IDRF 2015 surveys. the 2010 population census revealed a positive correlation between remittances and unemployment, suggesting that Nonmonetary Poverty the reservation wage for individuals receiving remittances The substantial progress in poverty reduction has been is higher, and that remittance income allows them to stay accompanied by even more impressive improvements along unemployed for longer periods. nonmonetary poverty indicators (see figure 23a). Many of these show levels that are above those of countries with Poverty also has a gender dimension: 43 percent of the similar income per capita levels. At 73, life expectancy at extreme poor live in households where a single mother birth is the highest in all of SSA, together with Mauritius is the only breadwinner, whereas 29 percent of all Cabo and the Seychelles. Solid performance has been demonstrated Verdeans do. Many children grow up in situations of orfão for different health indicators (infant mortality rate, propor- de pai vivo, an expression used to depict the case in which tion of births attended by skilled health staff—although the a child has a living father but receives no support from prevalence of anemia is relatively high),19 education (primary him. This situation particularly affects children in poor school completion), providing piped water to premises and households. As is common elsewhere, the poor often also expanding coverage of the electricity network. Access to have lower education levels. electricity rose from around 50 percent of households in 1999 to 98 percent today. Only 3.9 percent of children Achieving the World Bank’s objective of reducing extreme were underweight in 2009.20 poverty18 below 3 percent by 2030 is feasible in Cabo Verde. It would require an annual GDP per capita growth rate of Gender gaps in human capital are minimal and Cabo around 4 percent. While this may be attainable, in order Verde tops the global gender gap index in the “health and to eradicate extreme poverty it will be important to ensure survival” and “school enrollment” dimensions. The fertility that growth adequately benefits the extreme poor. This rate dropped spectacularly from 5.3 in 1990 to 2.4 children will require providing the extreme poor with assets such as per woman in 2015. Unmet demand for contraception is human capital by making advanced education more attrac- relatively low (17 percent in 2005) and, as mentioned, tive, affordable, and relevant to the labor market. In rural maternal mortality is currently also relatively low at 42 areas—where two-thirds of the extreme poor live—they will per 100,000 live births, below the average of upper-middle- need irrigated land and opportunities to participate in value income countries (54) and all of Cabo Verde’s aspirational chains of horticulture and livestock production. Providing peers. Only 4.4 percent of births were estimated to be access to production technologies and markets will be essen- unassisted in 2014. The gender parity index of secondary tial to build their resilience. Box 2 presents simulations of school enrollment has been above 1 since 1990 and is cur- various drivers of economic growth to assess their impact rently 1.12, which implies that drop-out rates are higher on growth and reduce extreme poverty in Cabo Verde. for boys than girls. The gender parity index for primary Past Achievements 27 BOX 2. Cabo Verde’s Growth and Poverty Prospects in the Long-Term This box present results from simulations of various drivers of economic growth to assess their impact on growth and further reduction of extreme poverty in Cabo Verde. The analysis uses the long-term growth model (LTGM) developed at the World Bank and is based on the celebrated Solow-Swan growth model, but is extended to include human capital, demo- graphics, and other growth drivers that are important in developing countries. In each simulation, investment is assumed to remain at 33 percent of GDP. This is similar to rates maintained in Cabo Verde during the past two decades, despite the global financial crisis and the euro debt crisis. The model also tracks the effect of changes in growth on poverty rates. A scenario with higher productivity growth and more effective capital investment results in a faster growth and a steeper decline in poverty than envisaged under business-as-usual with almost stagnant productivity growth. In the higher productivity scenario, growth in TFP is allowed to increase from its historical rate of close to zero (as in the baseline), to the average for most small states (1.3 percent). In addition to increasing growth directly, faster productivity growth in the higher productivity scenario also increases the effectiveness of investment by around 20 percent over the forecast horizon, by reducing the capital-to-output ratio. This accelerates per capita growth to around 4 percent (see figure B2), which reduces extreme poverty (at PPP US$2.90 per day) from 10.5 percent in 2015 to 3 percent in 2030, and close to 0 percent in 2050 (see figure B1). FIGURE B1. Extreme Poverty Rate (%) Under FIGURE B2. GDP Per Capita Growth Rate (%) the Baseline Situation and a Scenario of Faster Under the Baseline Situation and a Scenario of Productivity Growth Faster Productivity Growth 12% 5% 4% 10% 4% 8% 3% 3% 6% 2% 4% 2% 1% 2% 1% 0% 0% 28 31 34 37 40 43 46 49 16 19 22 25 16 19 22 25 28 31 34 37 40 43 46 49 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Baseline Scenario Baseline Scenario In order to approach the government’s growth target of 7 percent per annum, greater efficiency in capital and an improvement in TFP growth are necessary. It should be stressed that this is an overambitious and unlikely outcome: sus- tained 7 percent per capita growth is unrealistic, as even under favorable assumptions, simulations using the LTGM can only produce sustained per capita growth of 4 percent (see figure B2). Moreover, these assumptions include maintaining the cur- rent high rates of investment, which may be unsustainable given the country’s state of indebtedness. enrollment has been between 0.95 and 1.0 since 1990 and SDG 6 (drinking water; less well on sanitation), SDG 13 is presently 0.95. Female literacy is 85 percent, up from (Climate Action, driven by low CO2 emission) (see fig- 53 percent in 1990. ure 23b). To some extent, the country also performs well on SDG 5 (Gender Equality) and SDG 12 (Responsible Cabo Verde is in the global top 30 countries in terms Consumption, due to good performance on the municipal of achievement of the Millennium Development goals waste per capita indicator). The country’s greatest challenges (MDGs)23. However, progress along the indicators of the in terms of reaching SDG targets are in SDG 8 (Decent Sustainable Development Goals (SDGs) has been uneven so Work and Economic Growth), SDG 9 (Industry Innova- far. The country scores particularly well on SDG 4 (Educa- tion and Infrastructure) as expenditures on Research & tion) due to relatively high school enrollment and literacy, Development are low, SDG 10 (Reduced Inequalities)24, and 28 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 23A. Progress Along Human Capital and Living FIGURE 23B. Relative SDG Performance Conditions Indicators, 1995/2000–2015 (average of indicators of each SDG) % population without access to piped water on premises % not 82 % population completing without access lower to improved secondary… 60 56 sanitation 41 % population 28 24 without 18.9 Infant mortality 46 10 29.5 electricity rate (per 1,000) access (%) 8 15 37 42 % of births not 26 83 maternal attended by mortality rate skilled health (per 100,000) staff (%) female illiteracy rate 2015 (%) 1995/2000 Sources: World Development Indicators and Sachs et al. 2017. FIGURE 24A. Proportion of 19- to 24-Year-Olds FIGURE 24B. Government Expenditure on with at Least Secondary School (%) Education (% of GDP) 90 6 5.5 80 5 70 4.5 60 4 50 3.5 40 3 2007 2008 2009 2010 2011 2012 2013 2014 30 Cabo Verde 20 Lower-middle-income extreme poor moderately non-poor poor Sub-Saharan Africa Seychelles 2001 2007 2015 Mauritius Sources: Based on INE’s IDRF 2001, QUIBB 2007, and IDRF 2015 surveys. Past Achievements 29 SDG 11 (Sustainable Cities and Communities). Cabo Verde extreme poor and moderately poor. A funding program for ranks 96th out of 144 countries along the SDG index. poor students that subsidizes transport, uniforms, and fees appears to play a role, although the evidence base for that While there has been steady progress in increasing access is weak, as these programs are not well monitored. Twelve to improved sanitation facilities, reaching 72 percent of the percent of the student population receives school fee subsidies population in 2015, Cabo Verde lags behind its aspirational through funds that are allocated to municipalities using a peers on this indicator.25 Moreover, following rapid growth formula that reflects where needs are greatest. Those are in the number of internal migrants attracted by tourism- typically large, rural geographic areas with only one or two related jobs, the main tourist islands, especially Boa Vista secondary schools serving the area.21 Inequality in terms of but also Sal, have faced difficulties in providing adequate basic health service coverage also seems to be low.22 housing and proper water and sanitation services (includ- ing treatment of solid residues), in addition to the supply While primary education is universal, learning outcomes of electricity and an adequate road network. are suboptimal and contribute to relatively high drop out and repetition rates in secondary school. Primary education Gaps in coverage of education services among wealth groups has been universal for the past 25 years with a primary are lower than typical for SSA. Educational attainment net enrollment rate of 98–99 percent, which is higher improved considerably for the poor during 2001–2015, than Cabo Verde’s aspirational peers (it is 95 percent for and the gap with the nonpoor has narrowed substantially, upper-middle-income countries). However, the Aferida although some differences persist (see figure 24a). The pro- national sample-based test conducted in 2010 revealed portion of the extreme poor that have completed secondary poor learning outcomes in mathematics and Portuguese education has more than doubled since 2001 and grown for around 40 percent of students in grade 6. The Aferida from 30 percent in 2001 to 65 percent in 2015. The gap test scores were lower for children from poor families and with the nonpoor has reduced from 35 percent to 23 per- for those in single-headed households. Although transition cent, according to INE’s IDRF household survey data (see rates to secondary school are high (85 percent), inadequate figure 24a). Cabo Verde’s government expenditure on educa- primary school learning appears to have contributed to tion as a percentage of GDP has been consistently higher than high levels of repetition and drop outs at lower second- that of its aspirational peers (see figure 24b), and spending ary. The secondary net enrollment was 69 percent in 2014 appears to have been progressive, benefitting many of the (see figure 25a), lower than those of its aspirational peers. FIGURE 25. Student Retention and Net Secondary Enrollment a. Net secondary enrollment rate b. Student retention at primary (grade 1–6) and in Cabo Verde and its peers, secondary (grade 7–12) level during 2001–2003, 2007–2014 (%) 2006–2008 and 2011–2013 (%) 90 110 100 80 90 70 80 percentage 60 70 50 60 50 40 40 30 30 20 20 2007 2008 2009 2010 2011 2012 2013 2014 G1 G2 G3 G4 G5 G6 G7 G8 G9 G10 G11 G12 Cabo Verde .. Lower-middle-income .. Grade 1–12 Sub-Saharan Africa .. Seychelles .. 2001–2003 2006–2008 Mauritius .. Upper-middle-income .. 2011–2013 Sources: World Development Indicators and Ministry of Education. 30 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion Only 65 percent completed grade 9 and only 44 percent of departing Cabo Verde to pursue education abroad, as well the relevant age cohort completed grade 12 in 2013 (see as the emergence of new tertiary education institutions. figure 25b). The quality of teaching is likely to be affected A closer look at enrollment patterns reveals that the by the fact that 23 percent of teachers in secondary school poorest quintile accounts for only 9 percent of tertiary are without a degree26—nao licenciados27—a figure that enrollment, while individuals from the highest quintile differs substantially across schools, which would imply account for 31 percent. While this is a more equal dis- unequal opportunities for children to learn. In addition, tribution than in many other countries, it suggests that there is little systematic tracking of learning outcomes opportunities to obtain a tertiary education are not equal and no standardized national tests exist, making it hard for all Cabo Verdeans. to take timely corrective action when schools or classes underperform. Cabo Verde has suffered from a “brain drain,” but some research suggests that massive emigration from Cabo Many students leave school without sufficient skills to meet Verde also has significantly encouraged the accumulation the needs of a competitive services sector, and entrepreneurs of human capital in the country. The prospect of obtaining state that the inability to obtain adequately trained person- a qualified job abroad can also be an incentive and raise nel is an important constraint for them (see figures 32a the returns on getting an education. Batista and others, and 39a).28 Unemployment among school leavers is high and for example, find that an increase in the probability of returns to secondary education and to university education someone’s future migration by 10 percentage points have dropped significantly over time, according to data from raises the average probability of completing intermedi- the IDRF 2001 and the IDRF 2015 household surveys. In ate secondary schooling by nearly 4 percentage points.31 2015, the consumption expenditure of those with a second- Moreover, emigrants comprise an important group of ary education was 3.4 percent higher than those without, investors in the country.32 A proportion of them invest everything else remaining the same. This was 9.5 percent in in Cabo Verde when they return to the country after 2001. For university education, these figures were 23 percent having worked abroad, using their savings as their main in 2015 compared to 29 percent in 2001. source of finance. This also contributes to the build-up of foreign reserves and job creation. Technical and vocational education and training (TVET) has a low coverage and accounts for just 5 percent of secondary Health indicators for Cabo Verde are among the best in level enrollment. The current TVET is characterized by a SSA, but several concerns around the public health system dispersed offering of professional and technical trainings remain. MDG 4, which focused on reducing child mortal- and does not constitute a true system that is well articu- ity, and MDG 5, which focused on improving maternal lated and meets job market demands. Higher education health, were both achieved. However, a recent report by has limited relevance for the labor market, with 70 percent the World Health Organization (WHO) on specific risk- of university students enrolling in humanities and social prone populations suggests that the country is facing sciences, 20 percent in sciences and engineering programs, a concentrated HIV epidemic, even if national overall and 10 percent in life, environment, and health sciences infection levels remain below 1 percent.33 In 2009–2010, programs. In 2016, 21 percent of those with post-secondary Cabo Verde faced a dengue epidemic for the first time, education were unemployed, compared to 17.3 percent in and in October 2015 a Zika virus outbreak was declared. 2012.29 An additional 13.5 percent were inactive.30 Even The vulnerability of the country concerning vector-borne though the proportion of Cabo Verdean students seeking diseases is a major public health concern and a challenge higher education abroad decreased from 8 percent in 2005 for health security.34 It also impacts the tourism industry. to 4 percent in 2013, around 0.5 percent of the popula- Total health expenditure as a percentage of GDP was tion leaves the country annually, many of whom will be 4.8 percent in 2014, which is above the figure for the qualified workers. Seychelles but similar to Mauritius’s and the average for lower-middle-income countries. It is below the mean of Gross enrollment rates at the tertiary level are at 22 percent, upper-middle-income countries (6.2 percent). Out-of- above aspirational peers such as the Maldives (16 percent) pocket expenditures comprise 22 percent of total health and the Seychelles (14 percent), but lower than Mauritius expenditures, which is much more than the Seychelles (37 percent). Tertiary enrollment has been increasing in but much less than Mauritius and the average for upper- recent years, reflecting a lower number of young individuals middle-income countries. Past Achievements 31 The country is moving toward an epidemiological transi- emphasized the importance of public participation in tion and is facing the double burden of communicable major policy decisions, ensuring adequate representation (41 percent of all deaths) and noncommunicable diseases from each of the islands.42 The transition to a pluralistic (46 percent).35 Infectious diseases coexist with noncommu- democratic state has been successful at the political level, nicable and chronic diseases, which are linked to lifestyles and decentralization has created a vibrant local democracy. and deeply marked by social and gender issues. The leading causes of premature death in 2010 (in terms of years of The country consistently performs better than the bench- life lost, YLLs) were cerebrovascular disease, HIV/AIDS, mark for lower-middle-income countries with respect to and ischemic heart disease. Three risk factors accounted key dimensions of governance. For four out of the six mostly for the disease burden: high blood pressure, dietary World Governance Indicators (WGIs), Cabo Verde even risks, and child and maternal malnutrition. The leading scores higher than upper-middle-income countries, includ- risk factors for children under 5 and for adults aged 15–49 ing its aspirational peers Mauritius and the Seychelles. In were suboptimal breastfeeding and occupational risks, 2015, the country ranked 3rd out of 54 states in the Mo respectively.36 Additionally, the country is struggling to Ibrahim Governance in Africa Index,43 behind Mauritius fight alcoholism, a complex social and public health prob- and Botswana. The integrity of Cabo Verde’s institutions is lem.37 The health system is traditionally oriented toward unmatched in West Africa. Cabo Verde’s Polity IV score— maternal and child health and medical and hospital care, which reflects qualities of governing institutions44—is 10, and will need to strengthen extension work and basic which is higher than South Africa’s (9) and matches African attention across people’s life cycle, while making the health star performer Mauritius (10). promotion components more robust, in order to stimulate healthy behavior and lifestyles.38 In addition to stress-related Cabo Verde is relatively free of corruption. On Transpar- illnesses, emerging concerns include substance abuse and ency International’s Corruption Perceptions Index (2016), mental health issues, especially young men’s, and violence Cabo Verde ranks second in SSA behind Botswana. On the and its impact on young people’s mortality. WGIs, Cabo Verde ranks in the 79th percentile on Control of Corruption, relative to the SSA average of 30th, and well Gender-based violence is prevalent, but the stigmatization above the average rank of 50th for upper-middle-income of victims has decreased. In 2005, one in five women in countries. It also scores above Mauritius and the Seychelles Cabo Verde reported to have experienced intimate partner (see figure 26a). It is close to the OECD average ranking of violence, and in 2015 gender-based violence formed about 85. There is no law providing immunity from prosecution to one-quarter of all crimes reported to the police.39 It is the top ranking officials (political appointees or civil servants) second most common crime against individuals. However, and suspected corruption is closely scrutinized. Top govern- Cabo Verde has developed an increasingly comprehensive ment officials are required to disclose income and assets legal framework to address gender-based violence,40 and and are not immune from being prosecuted under the law police forces have created specialized offices to receive for malfeasance. Furthermore, rules on conflict of interest complaints. In addition, civil society initiatives have raised are observed and enforced. It is worth mentioning though awareness of the problem. All these elements are probably that the perception of corruption in the country has gone behind a significant increase in the number of official up in recent years. While in 2002–2003 only 5.6 percent complaints reported to the police. of the population thought that all or most politicians are involved in corruption, this had risen to 15.3 percent of the population in 2013–2014. During this period the propor- Governance tion of the population that thought that some politicians are involved in corruption rose from 27 to 39.5 percent. Cabo Verde has been described as a model of good gover- These percentages are highest among younger age groups. nance, political rights, and civil liberties in Africa, repre- senting a fundamental pillar of the country’s development Free and fair elections, at the national and local level, progress.41 Political openness, initiated in the 1990s, heralded and democratic transitions of government are the norm. political stability, respect for majority rule, and the build- According to Freedom House, Cabo Verde is classified as ing of institutions to maintain the rule of law. Since the “free” both on their “Freedom of the World” and “Freedom first elections in 1991, Cabo Verde has had three peaceful of the Press” surveys, attesting that the country serves as government transitions. Cabo Verde’s leaders have always a model for political rights and civil liberties in Africa. 32 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 26. Trends of Four Governance Indicators for Cabo Verde and Its Aspirational Peers (percentile ranking among all countries, 100 = best) a. Control of corruption b. Voice and accountability 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14 19 19 20 20 20 20 20 20 20 20 19 19 20 20 20 20 20 20 20 Cabo Verde Seychelles 20 Cabo Verde Seychelles Mauritius Mauritius c. Government effectiveness d. Regulatory quality 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 96 98 00 02 04 06 08 10 12 14 96 98 00 02 04 06 08 10 12 14 19 19 20 20 20 20 20 20 20 20 19 19 20 20 20 20 20 20 20 20 Cabo Verde Seychelles Cabo Verde Seychelles Mauritius Mauritius Source: World Governance Indicators. Its scores along the WGIs for voice and accountability are The overall CPIA score has decreased by 0.5 points, with above those for the Seychelles and similar to Mauritius significant deteriorations in most areas, with exception of (see figure 26b). structural policies. However, the country underperforms along the governance Cabo Verde also scores relatively low on indicators that dimensions of “government effectiveness” as it receives a relate to policies and regulations for promoting private sector relatively low WGI for this criterion. Cabo Verde appears to development. Along this latter criterion (“regulatory quality”) be relatively weak in designing and implementing reforms the country is consistently situated below the 50th percentile (see figure 26c). The quality of policy formulation and in WGI rankings, much lower than its rankings along other implementation, the credibility of the government’s com- governance dimensions (see figure 26d). In recent years, mitment to such policies, as well as the management of the government has adopted several reform measures46 to public investment has deteriorated over time, reducing accelerate the country’s competitiveness and create a more the government’ effectiveness. This is also corroborated by enabling environment for the domestic private sector. These the progressive weakening in Cabo Verde’s Country Policy indicators include advances in time and procedures to start and Institutional Assessment (CPIA) scores since 2008.45 a business and registering property, backed by progress in Past Achievements 33 the use of ICT and digital platforms, in addition to the har- holding the authorities accountable for public resource monization of public service front offices. However, reforms use. A World Bank assessment of the Public Investment have been slow and much remains to be done. Management System (PIMS) in Cabo Verde found signifi- cant weaknesses in the preparation, screening, selection, Despite political stability and successive development plans implementation support, and monitoring of public invest- emphasizing the need to create space for greater private ments.49 As a result, the expected returns on several large sector participation, the state remains dominant in most investment projects have not materialized. The involvement sectors of the economy. While SIDS typically have a relatively of civil society in holding the government accountable for large public sector, Cabo Verde’s public sector footprint delivery of results is relatively weak. in the economy is larger than its aspirational peers, and has increased over the past decade with the reacquisition Some Cabo Verdean sociologists have suggested that the of select utility firms that were privatized in early 2000s. governance paradox—of having strong democratic institu- The state is the largest employer in Cabo Verde, and the tions, rule of law, and control of corruption, yet relatively benefits provided to public sector employees are regressive low government effectiveness, weak civic engagement, and and costly.47 The wage bill, at 32 percent of expenditures poor private sector development policies—is the pervasive- and 43 percent of revenues, is relatively large, even when ness of the bipartisan political system that has paralyzed compared with other small island states or other countries civil society and pressure groups.50 Some argue that leaders with small populations. Central government expenditures and other members of civil society organizations—including make up a third of GDP. The dominance of the state in private sector interest groups—usually have been “coopted” economic activities has been a key impediment to private by either one of the two political parties that dominate the sector development and access to finance, as banks choose political system. In that role, civil society becomes “servile” to lend to larger SOEs. Private sector credit contributed to those parties and their vested interests, and either vigor- only around 0.15 percentage points to growth post-2008. ously defends the position of the party in government, or join the univocal critical voice of the opposition. It leads The SOEs that are essential to the delivery of public services to polarization and undermines civil society’s ability to are beset by weak corporate governance. There are 32 SOEs lobby for the cause of their interest group in a politically in Cabo Verde that cover services such as electricity, water, neutral manner. transport, postal services, and real estate. The five largest enterprises account for 80 percent of state-owned capital Civil society organizations are used or taken over by politi- and hold assets equivalent to 36 percent of GDP. While cal parties leading to civic weariness against a pervasive the authorities have introduced legislative48 and institu- state,51 instead of enhancing the quality of democracy, tional changes to strengthen the role of the government promoting debate, and demanding accountability. This in SOE management, significant weaknesses remain. has led to a form of clientelism in which political loyalty Monitoring and reporting remains sporadic, and there is is demanded from civil society organizations in exchange a lack of compliance with current laws and performance for various favors, such as the prospect of obtaining public agreements. sector jobs. The main political parties appear to not allow much space for open and free internal debate or criticism, The country is also confronted by weaknesses in the public making it difficult to change the policy positions of those financial management (PFM) system, which undermines parties from within. government effectiveness. A joint World Bank/IMF public financial management assessment carried out in 2013 The inability of civil society interest groups to open up found that the lack of an overall strategic vision for PFM debates around government shortcomings is an important reforms and poor coordination has in many cases led to constraint. Their failure to adequately represent the inter- partial reforms and rather modest results from an ambitious ests of the domestic private sector and influence decision- reform program. The 2016 PEFA assessment confirmed makers is likely to be one of the reasons for the relatively these findings, highlighting: (1) limited progress in com- poor investment climate. It probably has also contributed mitment controls—i.e., the lack of a system to control, to the low efficiency of public investment, as owners of record, and report outstanding financial commitments; and small- and medium-sized businesses are not sufficiently (2) long delays in the preparation of government accounts consulted on the design and use of these investments. The and external audit reports, as well as subsequent delays in relatively small population where family networks run parliamentary discussions, has compromised their use for across interest groups also plays a role. 34 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion Manifestations of a the lack of scale that characterizes small island economies like Cabo Verde, which may also have a dampening effect Development Model on the benefits of FDI by limiting the positive spillover That Needs Adjustment effects resulting from interaction between foreign and domestic firms. Despite remarkable achievements, a number of challenges Large resort hotels import most of their food and bever- have emerged that suggest the country’s traditional develop- age needs.53 Hotels import an annual total of €26 mil- ment model no longer functions adequately and exposes lion in fish and fresh fruit and vegetables, and only an the country to substantial risk. Growth in GNI per capita estimated 20 percent of fish and 10–12 percent of fruits has stalled52 and the country’s traditional drivers of growth, and vegetables are sourced domestically. Hotel operators the tourism sector, in combination with FDI and public attribute this to the national agricultural and fisheries supply investment in infrastructure, have run out of steam (see chains’ lack of production volume and reliability, in addi- also appendix C). In addition, there is a mismatch between tion to a lack of accepted international food handling and aspirations and opportunities for excluded groups such as safety certifications. Connectivity is likely another reason. unemployed youth and women with children. Cabo Verde Despite substantial public investment in transport-related has entered a dangerous fiscal trajectory and its exposure infrastructure in recent years, inter-island logistical services to trade volatility is high. At this juncture, it is clear that a remain unaffordable for many and are often unreliable, shift in Cabo Verde’s development model is needed. representing a significant constraint for the integration of local markets. All this lowers the national marginal earnings of each additional tourist who visits Cabo Verde. THE TOURISM SECTOR IS NO LONGER A STRONG DRIVER OF GROWTH The 2015 rankings compiled by the Travel & Tourism A deeper look at the tourism sector reveals several challenges Competitiveness Report of the World Economic Forum that affect the prospects of sustained inclusive growth in (WEF) illustrate the difficulties Cabo Verde faces in terms of the coming years. The sector is poorly diversified in terms its tourism sector’s competitiveness. Although relatively well of products, operators, and geography. The country is ranked in the SSA region (6th), the country is positioned 86th overwhelmingly sold as a “sun, sea, and sand” destination, out of a total of 141 countries. The sub-criteria on health anchored around a few international brands, and depending and hygiene (96th), ICT readiness (90th), natural resources on a handful of tour operators for tourism inflows (notably, as (138th), and cultural resources and business travel (137th) are mentioned, a very dominant and vertically integrated foreign the most problematic. Comparable small island countries like group, TUI). As indicated above, two of the nine inhabited the Seychelles, Mauritius, or Barbados fare considerably better islands claim an 80 percent market share. As a result, local on their overall ranking: 54th, 56th, and 46th, respectively. small and micro enterprises (which comprise 92 percent of the 9,400 firms in Cabo Verde) are not sufficiently participat- ing in tourism services or involved in tourism supply chains. A GROWING GROUP OF EXCLUDED Over-reliance on a few international hotel chains for tourism GROUPS LACK OPPORTUNITY also exposes the economy to substantial risks. The high unemployment rate, especially among the youth, Spillover effects of the dominant all-inclusive type of tour- women, and in Praia potentially undermines social cohesion ism toward the rest of the economy are too low. In Cabo and leads to behavioral problems among young people. In Verde, all the larger accommodation establishments are 2016, 41 percent of 15- to 24-year-olds were unemployed, foreign-owned, and therefore many of the profits are sent and among the latter group in Praia this was 63 percent. abroad. Surveys of large all-inclusive resorts indicate that In 2016, around four-fifths of the unemployed lived in currently, average discretionary spending is only €7 to urban areas.54 Overall, unemployment rates for women €13 per tourist per day. Typically, only between one-third (17 percent) are higher than for men (13 percent). The and one-half of this spending takes place outside the hotel. unemployed are relatively well educated and unemployment Moreover, as noted, even though labor is predominantly rates are highest among those with secondary education provided by nationals (an estimated 87 percent overall), (21 percent) followed by those with post-secondary educa- management positions are still dominated by foreigners. tion (12 percent). As noted earlier, the unemployed are on The weak link to the rest of the economy is partly caused by average not much poorer than the rest of the population, Past Achievements 35 as they can afford to be unemployed. However, lack of (15+ years old) live in a household led by a single female, participation of the labor market can lead to feelings of and various studies demonstrate that these youths’ weak social exclusion and not belonging to mainstream society, links to their father contributes to their behavioral problems, and that their lives don’t matter. especially young males.57 Single parenting is also associated with lower learning outcomes.58 While teenage pregnancies The lure of urban gangs to poorly schooled youngsters have dropped over the past 20 years, they still comprise competes with school attendance, and juvenile criminality is around 20 percent of all pregnancies in Cabo Verde59 and growing. According to the 2009 enterprise survey conducted are an important cause of the persistence of single female- in Cabo Verde, 62 percent of firms identified crime as a headed households. Teenage mothers are not allowed to major constraint (see figure 27). In 2017, the UK issued a attend school after they have given birth. safety warning for visitors to Cabo Verde.55 Persistent lack of opportunity and high unemployment among youth are There is some evidence that discontent and dissatisfaction likely to be behind this, which lead to feelings of frustration are rising. This is especially the case among the population in and subsequent behavioral problems. In 2016, robberies, the interior of Santiago Island and among the youth in Praia. burglaries, and break-ins in Praia increased by 285 percent For example, in 2014–2015, 49 percent of the latter group over 2015, with 3,289 reported cases, according to police believed the country was heading in the wrong direction, records. Young people commit more than 75 percent of which is more than double the proportion in 2011–2012, crimes in Praia, and in 2012 almost 90 percent of the jailed when only 23 percent supported this statement.60 Rising population in Praia was under 23 years old. A recent study unemployment, especially among the youth in Praia, as well among youth in Praia revealed that a quarter of all 12- to as perceptions that economic opportunities are not equally 21-year-olds had committed at least one violent crime.56 available for everyone, are likely to fuel these sentiments. In 2014–2015, 33 percent of inhabitants of Praia reported that they always felt unsafe when walking in their neighbor- Existing gender norms grant women almost exclusive hood, up from 15 percent in 2011–2013 (see figure 28). responsibility for domestic chores, children’s education, and family care, restricting their participation in the labor Loose family ties also contribute to school drop out and market and severely reducing their agency.61 A time use survey youth gang violence. A quarter of the working age population conducted in 2012 by INE showed that on average, women FIGURE 27. Proportion of Firms Identifying Crime FIGURE 28. Proportion of the Population Always as a Major Constraint (%) In 2009 Feeling Unsafe when Walking in Their Neighborhood, 2011–2013 and 2014–2015 70 60 35% 50 30% 40 30 25% 20 20% 10 2011/13 0 2014/15 15% SSA Cabo Verde Bhutan Samoa St. Lucia St. Vincent and the Grenadines Mauritius St. Kitts and Nevis 10% 5% 0% All of Cabo Verde Praia Mauritius (urban) Percent of firms identifying corruption as a major constraint Percent of firms identifying crime as a major constraint Sources: WBG Enterprise Surveys and Afrobarometer. 36 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion spent 3.5 hours more per day than men on unpaid work. strengthening programs that aim to build the asset base of Available evidence suggests that this plays an important the poorest groups. The IFAD/GoCV Rural Poverty Reduc- role in explaining many women’s late entry into the labor tion Programme is a case in point.67 While this program force. This increases the likelihood of informality and job funded substantial rural infrastructure investments and is vulnerability. The proportion of women that are employed likely to have had an impact on poverty reduction, concrete (conduct paid work) is lower than men (48 vs. 61 percent information on achievements and impact is unavailable due in 2016), even if disparities in human capital are minor,62 to lack of monitoring. and girls currently perform better in schools than boys. This difference is especially pronounced in rural areas, where only 42 percent of women are involved in economic FISCAL SPACE IS CONSTRAINED AND activities compared to 59 percent of men. EXPOSURE TO TRADE VOLATILITY IS HIGH The authorities are facing elevated pressures on public Differences in human capital play only a minor role in sector finances due to weak fiscal discipline. Fiscal con- explaining women’s lower probability of being employed.63 solidation and growth resulted in a fall in debt leading Most of the difference can be explained by discriminatory up to 2008. However, Cabo Verde’s debt has increased factors and lack of affordable child care services. Even if sharply since the global financial crisis in 2008, partly women’s rights are well anchored in the law and most Cabo because of a significant increase in debt-financed public Verdeans support equal rights,64 these discriminatory norms investments as part of the government’s countercyclical undermine the ability of women to participate more fully response. Since the crisis, Cabo Verde’s debt increased by in the labor market and raise the welfare of their family.65 close to 70 percentage points to 130 percent of GDP in Although Cabo Verde performs well on other gender indica- 2016 (see figures 29a and 29b). Except for 2014–2016, tors, it ranks only 115th on “economic participation and when adverse exchange rate movements accounted for opportunity for women” in the global gender gap index. an increase of approximately 25 percentage points in the Few employers provide child care services, including the debt stock, the evolution of the country’s debt has been large foreign-owned hotels. intricately tied to the performance of primary deficits. The slowdown in growth has also not favored the country’s Poorer population groups face the highest unpaid workloads, debt dynamics. limiting the time they have available to do productive work, improve their skills, or look for employment, which creates Cabo Verde is highly exposed to trade volatility. Its export a poverty trap.66 As mentioned, households headed by single structure is concentrated mostly in tourism and depends females face consistently larger poverty rates compared on a small number of European countries. This exposes the to male-headed ones. As mentioned, in 2015, 29 percent country to terms of trade shocks or other shocks that impact of people lived in a household headed by a single female economic activities in the euro area. During the 2008–2009 breadwinner while they comprised 37 percent of the poor global financial crisis, the country suffered from a fall in and 42 percent of the extreme poor. tourism receipts and FDI. Similarly, the Ebola pandemic crisis in West Africa of 2014 and 2015 reduced tourism Of equal concern is the presence of poor excluded groups receipts by 1.7 percentage points as a percentage of GDP in rural areas that lack access to productive assets and are (see figure 30). The country is also heavily reliant on food also affected by the insufficient coordination of rural pro- imports. While the country boasts a reserve coverage of six duction and weak logistical and marketing arrangements. months of prospective imports, this could be depleted easily Women are particularly affected, e.g., through unclear in the face of a protracted terms of trade shock. land rights in irrigated areas. The poorly coordinated value chains of agricultural and fisheries are partly due to lack Drop in tourism receipts have a significant effect on house- of effective support strategies to access high value markets hold welfare, according to an empirical exercise using a (such as the tourist market) and development of these value computable general equilibrium model for Cabo Verde. It chains, e.g., through better coordination of stakeholders, simulated a drop in tourism receipts per traveler, from its improvement of logistics (including cold chains), and better current level of US$800 per arrival to US$720. The impact maintenance of quality standards. Lastly, weak monitoring on GDP was a reduction of 3.3 percent in 2030. Household of the performance of programs targeted to the poor prevent welfare was negatively affected (–7.8 percent) but the impact an assessment of their effectiveness and are a barrier for was felt more drastically by the richest decile (–8.5 percent) Past Achievements 37 FIGURE 29A. Total Debt has Increased Sharply FIGURE 29B. Cabo Verde’s Debt is More than Twice (% of GDP) the Average for Small States and SSA (% of GDP) 140% 140 120% 120 100% 100 80% 80 60% 60 40% 40 20% 20 0% 0 2002 2010 2011 2012 2013 2014 2015 2016 2017 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Cabo Verde External debt Internal debt Small States & Islands [Average] Total debt Small States & Islands [Median] Sources: MoF and World Bank 2018. FIGURE 30. Tourism Receipts in Cabo Verde (2) air transportation; (3) maritime economy, including port trans- port and fisheries; (4) financial services; (5) ICT; (6) agriculture; and (% of GDP) (7) local products and services. 3. Sal and Boa Vista have seen a combined 3 percent increase in their population to 7.1 percent of the total population between 2000 and 25 2010, partly associated with internal migration of people attracted by tourist-related jobs. 4. OECD and WTO 2013. 5. Capital stock is calculated using the “perpetual inventory method,” 20 following the procedure in Hall and Jones (1999). Annual capital stock is estimated based on information on gross fixed capital formation (GFCF) and depreciation rate of capital, where initial capital stock was estimated using data on initial GFCF, “steady-state” growth rate of output and rate of depreciation of capital. Average rate of depreciation 15 of the capital stock was set equal to 4.7 percent per year based on data from the Penn World Tables. 6. Subsectoral data on employment is not available prior to 2010. However, employment information from the 2000 census is used in the analysis 10 to provide an overall picture. 1999 2004 2009 2014 7. These sectors are relatively small and highly specialized. The analysis considers the following main sectors: agriculture (including fishing, West Africa Ebola Pandemic hunting, forestry, mining, and quarrying), manufacturing, public utilities Global nancial crisis (electricity and water), construction, commerce (comprising wholesale and retail trade, and hotels and restaurants), transport and communica- Cabo Verde tions (hereafter referred to as “transport”), finance, and “other services” Source: World Development Indicators. (including public administration, education, health, real estate, renting and business activities, and community, social, and personal services). 8. Appendix C examines the link between Cabo Verde’s economic growth and its fundamental determinants in further detail to understand turn- than households in the bottom 40 percent of the income ing points (including the sharp downturn after the 2008 crisis) in the distribution (–7.6 percent). This is not surprising, since country’s growth experience. the more skilled and better-off tend to be employed in the 9. This is similar to work done by Hausmann, Pritchett, and Rodrik (2005); Jones and Olken (2008); and Gebregziabher (2015); they identify more dynamic and export-oriented sectors of the economy. episodes of sustained shifts in growth rates and examine explanations for such transitions. 10. Although rural investments appeared to have stimulated rural poverty reduction. NOTES 11. Flyvbjerg 2009. 12. This puts Cabo Verde in the global top 6 in terms of annualized growth 1. See INE 2015. in mean per capita income of the bottom 40 percent, together with China, 2. The government’s Economic Transformation Strategy of 2003 and Mongolia, Paraguay, Bolivia, and Bhutan (Poverty and Data Portal). successive Growth and Poverty Reduction Strategy Papers (GPRSPs) 13. Extreme poverty, using PPP US$1.90 per day, halved between 2001 have consistently identified seven clusters to be prioritized: (1) tourism; and 2007 (from 16 to 8 percent in 2007). The 2015 IDRF household 38 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion expenditure survey suggests the extreme poverty rate based on PPP 35. WHO 2016. US$1.90 per day is already below 3 percent (the benchmark for 36. Complemented by injuries (13 percent). eradication). However, there is some uncertainty around the 2011 PPP 37. Institute for Health Metric and Evaluation 2012. for Cabo Verde. We therefore propose using the national definition of 38. WHO 2016. extreme poverty for poverty projections in this SCD. 39. Ministry of Health 2015. 14. In 2007, GNI per capita grew by 23 percent, as the 2007 household 40. Personnel communication, police department, Praia. survey was conducted that year. 41. ICIEG 2014. 15. Between 2004 and 2015, the number of farms that used irrigation 42. Freedom House 2011. increased by 21 percent and the number of irrigated plots by 18 percent, 43. AfDB 2012. according to the agricultural censuses. 44. Pedro Verona Pires, a former president of Cabo Verde, won the 16. Regression analysis shows that, on average, households for whom US$5 million Mo Abrahim African governance award in 2011. remittances are the main income source have per capita expenditure 45. See the Center for Systemic Peace for more on polity scores, database, levels that are 18 percent higher than other households, keeping other and annual reports. household characteristics the same. 46. See World Bank Group 2017. 17. The average elasticity of extreme poverty reduction in SSA has typically 47. E.g. mudar para competir, the Investment Law, and REMPE (Regime been between 0.8 and 1.1. See Ram 2013. Especial das Micro e Pequenas Empresas) aims to improve the business 18. Using a national extreme poverty line of PPP US$2.90 per person per day. environment for SMEs. 19. Anemia prevalence in 2011 was 61 percent among children younger 48. World Bank 2013a. than five, which is close to the average for SSA, higher than its struc- 49. The legal framework for SOEs was strengthened in early 2016 to tural peers (other lower-middle-income countries). No recent data for provide clearer guidance and limits on SOE debt, among others, and malnutrition are available. reporting responsibilities of SOEs to the state have been expanded 20. The latest official data are from 1994, when 7 percent of children younger beyond standard financial reporting to include detailed information than five were underweight (wasted) and 21 percent were stunted. The on company corporate governance. 2015 MDG report for Cabo Verde puts the proportion of underweight 50. See World Bank 2013a. children in 2009 at 3.9 percent (Ministério das Finanças e Planeamento 51. Costa 2013. 2015). An official survey-based estimate will be available from the IDRF 52. Costa 2013. 2015 survey data and the DHS 2018 survey. 53. Even if GDP per capita has picked up somewhat in recent years. 21. Longenecker and Barnum 2017. 54. World Bank 2013c. 22. Ministry of Health data from 2015 suggest that 90 percent of all children 55. INE 2017a. below 1 year had received all required vaccinations. However, in some 56. Santos 2017. municipalities this figure is much lower: Ribeira Grande de Santiago 57. Dias 2015. (47 percent), S. Salvador do Mundo–Santiago (69 percent), Sal 58. Alves 2014. (75 percent), and S. Domingos–Santiago (79 percent) (INE 2016, 59. UNICEF 2013. table 3.10.). 60. INE 2016, table 60. 23. A full assessment of the MDGs was prevented by lack of data. 61. Afrobarometer R5 2011/13 and R6 2014/15. 24. Based on evidence before the IDRF 2015 became available, which 62. According to a survey (INE 2013) on family practices, in 80 percent suggested inequality has come down. of the families the primary caregiver was the mother, followed by 25. Mauritius, the Seychelles, Maldives, and Saint Lucia all have figures 10 percent where it was the grandmother, 6 percent where it was above 90 percent. another family member, 3 percent where it was both parents, and 26. World Development Indicators. 1 percent where it was the father. 27. Atchoaréna, Da Graça, and Marquez 2008. 63. Some difference in work experience exists, but plays a minor role. 28. World Economic Forum 2015a. 64. According to decomposition analysis using the 2010 census data; see 29. INE 2015. World Bank 2013a. 30. According to data from the 2013 IMC survey (UNICEF 2015). 65. For example, more than 90 percent of Cabo Verdeans believe that 31. Batista, Lacuesta, and Vicente 2012. women should have the same chance to be elected to political office as 32. For example, emigrants hold 17 percent of investors’ licenses in the men (Afrobarometer 2015). tourism sector. 66. Marone 2016. 33. Modeled estimate. 67. Marone 2016. 34. Inforpress 2017. 68. Ministério da Juventude 2013.  39 CHAPTER 4 Key Constraints T he previous chapter presented Cabo Verde’s past the World Bank’s twin goals. Key constraints here can achievements in terms of economic growth, the be grouped under connectivity, logistical services/trading reduction of monetary and nonmonetary poverty, infrastructure, the broader investment climate, and the and the development of institutions for good governance. skills of its workforce. Second, social inclusion requires It concluded that achievements in all these areas have that all population groups—including low-income groups, been impressive. However, it also noted the slowdown marginalized youngsters, and excluded women—benefit in growth the country has witnessed since 2009, and the from development. This necessitates tackling constraints emergence of excluded groups which, in combination with related to improving their human capital, strengthening high public debt, exposes the country to substantial risk. targeted transfer to build their assets, and addressing the It concluded that the country’s development model is in needs of households in which a single mother is the only need of adjustment. breadwinner. Third, to improve resilience of the economy and households, macroeconomic stability is needed, as This chapter presents a set of underlying constraints that well as sustainable resource use and a diversified economy. are causing Cabo Verde’s current challenges. It starts by Realizing economic growth, social inclusion, and build- presenting an analytical framework that identifies three ing resilience all require strengthening the functioning drivers of poverty reduction: raising economic growth, and delivery focus of government, including improving strengthening social inclusion, and improving resilience. collaboration across government agencies and with the These have guided the analysis of binding constraints for private sector. These tasks cut across the three pillars, realizing Cabo Verde’s opportunities. The chapter sub- together with the need to tackle the high public debt to sequently presents the 11 constraints that have emerged maintain macroeconomic stability. from the analysis. The approach adopted in this SCD—to identify the most important constraints that prevent Cabo Verde from realizing Analytical Framework its opportunities—relies on the systematic benchmarking of key performance indicators against the country’s aspi- The key constraints for realizing Cabo Verde’s potential rational peers. In addition, a review of existing studies, were assessed using an analytical framework that identifies expert interviews, and an analysis of available data were three drivers of progress toward reducing poverty and used to assess the impact that removing these constraints raising shared prosperity. Poverty is defined here by low would have on the twin goals. The views of World Bank levels of consumption and sustainable solutions to poverty staff experts were used to further prioritize and fine-tune that require lifting the budget constraint of extremely poor the list of top 11 constraints. The constraints are grouped households through income growth and increasing the under five broad categories: lack of human capital, weak stability of household income. Shared prosperity refers to connectivity, risks to macroeconomic stability, under­ raising the consumption levels of the bottom 40 percent. performance of the public sector, and lack of resilience. Three drivers or pillars for sustaining poverty reduction and further enhancing shared prosperity are identified: (1) rais- ing economic growth and creating jobs; (2) strengthening Human Capital Constraints social inclusion; and (3) improving resilience (see figure 31). Improving human capital will be of vital importance for Economic growth will be essential to completing Cabo realizing Cabo Verde’s pathways for economic prosperity, Verde’s path toward achieving upper-middle-income coun- sustaining poverty reduction, and tackling social exclusion. try status, boosting household incomes, and achieving The following specific constraints are identified. 40 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 31. Analytical Framework for Poverty Reduction Analytical framework for poverty reduction Lower poverty Higher and more stable income and consumption Raise economic growth and create jobs Strengthen social inclusion Improve resilience Connectivity and logistics Human capital of the youth Disaster preparedness Business environment for SMEs Targeted transfers Sustainable resource use Skills Gender norms and care services Diversifying the economy Strengthening delivery focus of government through better collaboration and coordination Fiscal sustainability and macro stability RELATIVELY HIGH SECONDARY SCHOOL most important reasons that children do not complete DROP-OUT RATES secondary school. Although higher than most other African countries, Teenage pregnancies are relatively high,1 limiting many young secondary completion rates are below those of Cabo Verde’s women’s ability to complete their secondary education and aspirational peers. This is despite primary education being prepare for the labor market. As mentioned, teenage girls universal and the existence of relatively high transition who are pregnant or have given birth are not allowed to rates to secondary school (85 percent). The percentage of continue secondary school, which undermines their ability repeaters in lower secondary is high (23 percent), while the to build their human capital and find decent work. A recent survival rate to the last grade of lower secondary is only analysis of service delivery in Health Centers (2015)2 shows 77 percent, close to 8 percentage points lower than inter- that services targeting teenagers and young people are unde- national standards. Reasons for not completing secondary rused. Constraints associated with low demand include poor school include (1) inadequate primary school learning; adaptation of physical space and service delivery, as well (2) inadequate curriculum and low quality of educational as the confidentiality issues and the overall approach. The services that insufficiently motivate adolescent learners; method continues to focus on pregnancy and prevention (3) absence of fathers and lack of affordable care services, of sexually transmitted infections, instead of more positive which lead to lack of adult supervision of children; (4) lack and holistic approaches. of opportunities for pregnant teenagers/teenage mothers to stay in school; (5) lack of household resources to pay for LACK OF SKILLS schooling (including transport); and (6) lack of job pros- pects for school leavers, undermining motivation. Further Inadequate qualification of the workforce is a major con- research is needed to confirm that these are indeed the straint for business: 40 percent of firms identified this as a Key Constraints 41 major constraint (see figure 32a). The quality of the labor labor market, with 70 percent of university students enroll- force, especially in job applicants’ core skills (mathematics, ing in humanities and social sciences. Greater hiring and sciences, and language training), in addition to misalign- redundancy flexibility through the amended Labor Code ment between education supply and the needs of the current also constitutes a key pillar to enhance competitiveness of and prospective labor market, are priority constraints that the formal job market. need to be addressed going forward. Many students who complete school do not possess sufficient skills to meet the The quality of education service delivery varies across schools needs of a competitive services sector. Efforts to address and there are large disparities in the amount of resources a this deficiency have not yielded sufficient results. Notably, school receives. The national student-teacher ratio is 17.8, technical and vocational education and training (TVET) has but varies from 7 to 25 per school. It is estimated that low coverage and accounts only for 5 percent of secondary 23 percent of teachers at the secondary level do not have level enrollment. It is not well integrated into the education the equivalent of a bachelor’s degree but this proportion system and does not meet job market demands. A better varies from 11 to 75 percent across schools, which sug- articulation between general and TVET course diversity gests a high variation in learning conditions for students. and supply is especially important in this context. Most urban secondary schools are well equipped in terms of library, offices, canteen, and sport facilities, but rural There are no standards of quality that are recognized and schools are reportedly less well foreseen. enforced throughout the system, and substantial difficul- ties exist in the teaching of core subjects (mathematics and Secondary school students are expected to pay tuition fees Portuguese). This was also seen in the University of Cabo according to their family income and grade level. The most Verde access tests for 2013, with poor performance in areas underprivileged students (11 percent) receive free education. such as mathematics, physics, and chemistry (with average 90 percent of the collected fees remain at the school level while scores of 4 out of 20) and in Portuguese (average scores 10 percent go to the central administration and decentralised of 6 out of 20). The institutional coordination between agencies. This negatively impacts equity, since schools that all actors at several levels is lacking, and TVET education advantaged populations have fewer resources and enroll dis­ supply suffers from low diversification, with a focus on there is no compensation from the state. Education outcomes civil construction and tourism services. This has translated relative to the amount spent are lower than most other into an unsatisfactory supply of workers to the job market, countries, in particular for secondary education (see figure often misaligned with the concrete needs of Cabo Verdean 32b). Cabo Verde’s education system could also benefit from businesses. Higher education has limited relevance for the increasing resources for pedagogical improvement. FIGURE 32A. Percent of Firms Identifying FIGURE 32B. Education Efficiency Frontier of an Inadequately Educated Workforce as Countries, Latest Value Available (Cabo Verde a Major Constraint (%) is the big dot in red) 60 100 90 Upper secondary education 50 80 40 70 enrollment 30 60 50 20 40 10 30 Cabo Verde 20 0 10 Cabo Verde Mauritius St. Lucia the Grenadines Bhutan St. Kitts and Nevis St. Vincent and 0 0 2 4 6 8 10 Expenditures on education (% of GDP stochastic frontier DEA frontier benchmarks Sources: WBG Enterprise Surveys and World Development Indicators. Note: Data Envelop Analysis (DEA) is used for nonparametric estimation of efficiency frontiers. 42 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion Weak linkages between education and work and the opportunities for progress, this will not be possible with- absence of apprenticeships prevents students from acquir- out strengthening connectivity. Improving transport, ICT, ing adequate skill sets that meet the needs of a service and electricity provision also holds important promise for economy. In addition, the education system does not strengthening the quality of education and health care, sufficiently strengthen entrepreneurial capacity and few a more efficient service delivery, and rapid monitoring of students can create their own employment following their outcomes. graduation. Cabo Verde hotel and tourism schools are unable to address all the needs of the tourism industry, especially for basic hotel services such as waiting tables, LACK OF RELIABLE INTER-ISLAND housekeeping, and small repairs. Moreover, as mentioned, TRANSPORT many of these schools are unaffordable for low-income The country’s peculiar economic geography poses enor- households. The Cabo Verde government is currently undertaking various measures to address the shortcom- mous challenges from the standpoint of infrastructure ings mentioned above. development. The fragmented territory requires that key infrastructure such as roads, energy, and ports are dupli- Increases in educational attainment would boost GDP cated, magnifying build-up and maintenance costs. Despite with overall progressive distributional consequences, as improvements following large investment during the past suggested by a global general equilibrium model.3 For the 15 years, the overall supply and quality of the infrastruc- case of Cabo Verde, the distributional aspects of this policy ture network remains unsatisfactory, below that of Cabo remain to be seen, as they would largely depend on who can Verde’s peers, and possibly limiting returns on investment get access to the upper secondary and tertiary education by the private sector (see figure 33a). The 2017 Global systems. If access to higher levels of education continues Competitiveness Index ranks an inadequate infrastructure to be largely determined by income status, then the overall as the 5th major problematic factor for the country; the effects, while remaining positive on the aggregate, can still Doing Business assessment for Cabo Verde points to similar be less advantageous for the poor. issues. The country ranks 95th out of 137 countries along the quality of infrastructure index, and many of its sub- Discriminatory social norms against women leave them scores are between 80 and 100, except for mobile phone with a disproportionate share of domestic and child caring subscriptions. Costs of inter-island maritime transport are duties, and prevent them from realizing their full potential, high, eroding the competitive advantage of local horti­ contributing to the economy, or improving their living cultural, dairy, and fishery products and interrupting their conditions. Analysis suggests that closing the gender gap supply chains. Diversifying tourism requires efficient and in labor market participation could increase GDP by as reliable inter-island transport services. A key constraint is much as 12 percent.4 Without addressing this constraint, insufficient government capacity to regulate the sector and reducing extreme poverty for the 42 percent of the extreme develop and manage transport concessions. Cabo Verde also poor children that live in a household that is headed by a scores relatively low on the quality of electricity supply (see single female breadwinner will be hard to achieve. figure 33b), which is partly due to inadequate planning and management of the sector. Connectivity Constraints The road network is dense in relation to the regional average, but high maintenance costs threaten the con- As an archipelago consisting of nine inhabited islands that nectivity of rural and isolated communities. Cabo Verde are dispersed and surrounded by rough seas, connectivity has invested heavily in the current road network, which is an important constraint for unlocking Cabo Verde’s consists of approximately 1,350 kilometers of road spread potential. It is essential for all three pillars of poverty reduc- among its nine inhabited islands. There are currently 334 tion and shared prosperity presented above: strengthening km/1,000 km2—compared to 81.5 km/1,000 km2 for Africa, economic growth, addressing social inclusion, and building as a whole—consisting of major roads, secondary roads, resilience. Improving transport, ICT, and electricity services and municipal roads and tracks. The World Bank estimates is needed to integrate the domestic market for goods and that the value of the country’s base road infrastructure is labor and to enable rural products and workers from across approximately US$535 million (over 31 percent of GDP). the archipelago to better tap into the tourism industry. While This ration of road value to GDP is moderately high when the diversification of the tourism sector offers important compared to the African average (25 percent). However, Key Constraints 43 FIGURE 33. Global Competitiveness Report, 2017–2018: Quality of Infrastructure Indicators a. Quality of infrastructure index ranging b. Quality of infrastructure index ranging from 1 (best) to 137 (worst)) from 1 (best) to 137 (worst)) 100 Quality of overall infrastructure 90 120 80 Fixed telephone 100 80 Quality of roads lines 70 60 60 40 Mobile-cellular 20 telephone Quality of port 50 0 subscriptions/100 infrastructure 40 pop 30 Quality of air Quality of 20 transport electricity supply infrastructure 10 Available airline 0 seat km Cabo Verde Bhutan Mauritius Seychelles millions/week Source: World Economic Forum 2017. Note: The scores are ranked on a scale from 1 (best outcome) to 137 (worst outcome). given its unique geographical conformation (steep slopes Cabo Verde’s quality of port infrastructure (see figure 33b) and unstable and crumbly terrain conducive to landslides a score of 90, which is above (and thus worse than) peers and rock falls), the current road network has high main- such as Mauritius (65) and the Seychelles (53). tenance costs and does not have the capacity to tolerate large volumes of traffic. Rural communities are particularly Cabo Verde is heavily dependent on air service for its susceptible. Additionally, the drainage structures are cur- domestic and international transportation. The country’s rently inadequate to cater for heavy rainfall.5 domestic air transport market appears large relative to its West African neighbors due to the use of air travel to inter- To meet the government’s objective to transform Cabo connect the archipelago. Cabo Verde makes very intensive Verde into an international logistic hub, it will be essential use of air transport, with 2.4 seats available per capita, to address structural deficiencies in existing maritime compared to 0.2 seats in Senegal.7 The country boasts four infrastructure. Despite significant achievements, the qual- international airports and three aerodromes, but the status ity of inter-island sea transport is not meeting the require- of aviation services is unsatisfactory. ments for a dynamic service economy.6 Deficiencies include (1) an aging cargo ship and passenger ferry infrastructure; The national airline company TACV has been a significant (2) an inadequate port infrastructure; and (3) a weak logistics burden on the budget, with recurring financial support from and limited inter-modal infrastructure network. While the government. In addition, the airline is saddled with about government has privatized inter-island shipping, the maritime €90 million in debt, most of it short term, while assets fleet remains partially obsolete and has not adapted to inter- are worth less than €5 million. The airline is overstaffed island traffic, providing insufficient and unreliable services. and its fixed costs are excessive. Poor management deci- This has kept the costs of inter-island maritime transport sions have repeatedly failed to address these weaknesses. high, eroding the competitive advantage of local niche market Repeated consultancy assessments have concluded that products, including horticultural products across the various the company has no real future as an independent entity, islands, which constitutes a key barrier to greater integration and that it will likely continue to pose a major drain on of the domestic economy. Diversifying tourism away from government revenue. Binter Airlines (from the Canary Cabo Verde’s sea, sun, and sand destinations (Sal and Boa Islands) started operating on domestic routes in 2016, Vista) requires efficient and reliable inter-island transport replacing TACV. In parallel, the authorities have been services to other islands such as Fogo, Santo Antão, and looking for private sector investors to take over TACV’s Sao Vicente. The 2017 Global Competitiveness Index gives international business. 44 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion Overhaul of the governance of key sectors such as sea to users in the Seychelles or Mauritius. Cabo Verde cur- and air transport will be key to overcoming the currently rently ranks 4th in Africa, just behind its aspirational unreliable and expensive inter-island transport. Government peers Mauritius and the Seychelles (see table 2), and concessions for inter-island maritime transport services need 97th globally along the ICT development index. Cabo Verde to make sure there is adequate risk-sharing between the was among the first nations in SSA to connect to a subma- private and public sector, and that the concession is fair and rine cable when it linked to the Atlantis-2 cable in 2000, balanced. This would reduce transaction costs for domestic but capacity is now insufficient. Cabo Verde stands out for products, service supply chains, and catalyze the creation its relatively cheap entry plan that offers theoretical speeds of a dynamic national marketplace. The pursuit of public- of 12 Mbit/s and includes 5 GB of data. Handset-based private partnerships to explore more opportunities and mobile broadband is also relatively cheap. Consequently, heighten efficiency in infrastructure services—as exempli- mobile broadband subscriptions are relatively common fied by the success of the wind-power production company (73 per 100 inhabitants, while for the Seychelles this is Caboeólica—remains an avenue with high potential. 19 percent and Mauritius 37 percent). However, only 43 percent of the population uses the Internet (compared to 50–58 percent for Mauritius and the Seychelles, respec- INADEQUATE ICT INFRASTRUCTURE tively) and only 27 percent of households have access to A well-functioning ICT sector is essential for realizing Cabo the Internet at home (compared to 60 percent in both the Verde’s ambition to become a services hub. It comprises a Seychelles and Mauritius).10 focus area of its new Strategic Plan for Sustainable Devel- opment (PEDS by its Portuguese acronym), 2017–2021. However, there are problems with the access and quality of A well-functioning ICT sector will be crucial for Cabo Verde ICT infrastructure, and regulation is weak. A key difficulty to improve government service delivery, including education in Cabo Verde is the sustainability of competition in the and health, make transport logistics more efficient, and offer ICT sector, due to weak enforcement of the regulatory value-added services to their tourism sector. Access to the regime and a regulator that is insufficiently reactive to Internet and digital technologies can provide substantial anticompetitive practices. The current concession contract “digital dividends;” that is, the broader development benefits for the management, maintenance, and commercializa- from using these technologies. In many instances, digital tion of the Public Infrastructure Network may need to technologies have boosted growth, expanded opportunities, be amended to strengthen the competitiveness of the and improved service delivery. It is important to ensure that country’s telecommunications sector. 3G Internet access impacts are evenly distributed across population groups.8 is currently provided by two mobile operators. The firm currently in charge of operating the Public Infrastruc- Broadband Internet access is widespread and has ben- ture Network—Cabo Verde Telecom—also engages in efited from recent reform, but available bandwidth per retailing ICT services. This provides it with an economic Internet user is relatively low in Cabo Verde (17,000 bits incentive to discriminate against competing providers per second),9 which is about half the amount available of retail services, especially by leveraging market power. TABLE 2. Access and Use Indicators in Selected Countries in Africa Mobile-cellular subscriptions Active mobile broadband Percentage of individuals using per 100 inhabitants subscriptions per 100 inhabitants the Internet Mauritius 140.6 37.0 50.1 Seychelles  158.1 19.1 58.1 South Africa 159.3 59.5 51.9 Cabo Verde 127.2 72.9 43.0 Côte Ivoire 119.3 40.4 21.0 Senegal  99.9 26.4 21.7 Nigeria  82.2 21.0 47.4 Kenya  80.7 15.5 45.6 Source: ITU 2016. Key Constraints 45 A separation of these two powers would seem logical to and US$3.16 per m3, respectively, for residential use.11 High provide opportunity for market participants to compete, costs are caused by small isolated systems (every island has which is important for innovation. its own independent network unable to apply economies of scale), high distribution, and transmission losses of ICT sector governance would need to be revisited in order to 25 percent (a high level by regional standards—for SSA clarify the role and responsibilities of the actors in the sector. it is 12 percent), and dependency on imported fossil fuels There is a need for the government to update the national for electricity generation (around 80 percent). In Santiago, strategy for the digital economy (“Digital Cabo Verde”) that island losses reached 38 percent in 2016 (from 32 percent establishes clearer policy orientations to promote competi- in 2015). This is mainly due to very high losses in Praia, tion and establish an improved governance model for the where energy theft is rampant, despite recently approved ICT sector. The strategy would commit the government to legislation criminalizing it. the principles of deepening the liberalization of the Internet broadband sector in line with international best practices, and ELECTRA’s very weak commercial performance is under- would also create an umbrella governance body for the ICT mining the utility’s ability to maintain the grid, which will sector that gathers both public and private stakeholders, whose have impacts in the medium term. Systematic planning of role would be to make recommendations to the government investments is needed in all segments of the electricity supply regarding key sector issues, including on the implementation chain to respond to demand, ensure sufficient quality and of the strategy in all its dimensions. reliability, and develop least-cost electricity generation. An efficient and well-functioning power sector will be crucial The development of e-governance has been a priority for for lowering the costs of power to improve the business the government since 2003, but meaningful impact has climate and making power and drinking and irrigation yet to be realized. The aim is to develop software for export, water more affordable for poor households. especially in electronic and integrated governance. Efforts are led by the state agency for the information society (NOSI). The high commercial losses also reflect weak capacity to However, in 2016 Cabo Verde still only ranked 103rd globally monitor consumption and payments at the level of the on the United Nations E-Government Index, and, despite electricity consumers. ELECTRA’s retained earnings were progress, its ICT infrastructure continues to lag behind its at a negative US$76 million in 2016, resulting in negative aspirational peers. Currently the challenge is whether the equity. In addition, ELECTRA holds the largest stock of private sector has the capacity to compete in a sustainable government guaranteed debt, although it has not needed any manner, once innovation in the sector has been introduced, guarantees or any other form of government support since mainly by NOSI. There are few skilled workers in the sec- 2013. Another area of concern is the large stock of current tor and much work remains in cultivating the conditions liabilities (approximately US$55 million, as of the end of 2016) for the development of a culture of innovation that helps and outstanding receivables (approximately US$30 million as entrepreneurs formulate and develop ideas and projects. of the end of 2016), but public sector arrears have decreased remarkably (from US$19 million in 2012 to US$4 million in 2016). Until 2015, a performance agreement between WEAK MANAGEMENT OF THE ELECTRA and the government established financial and POWER SECTOR operational targets. However, ELECTRA has been unable Access to electricity has nearly doubled, from 50 percent in to meet commercial targets, and the government has not 2000 to 95 percent today; recent investments have started enforced “penalties” for it. The new current government to contribute to a marked improvement in the quality of terminated the performance contract in 2016 to update electricity services, reflected by a significant decrease in new targets, but it has not yet been concluded. In 2017, interruptions of services. For instance, in Praia, the average the government decided to privatize ELECTRA and has length of interruption dropped from an average of 39 hours set up a path to implement a series of measures—revenue per year in 2011 to less than 5 hours per year in 2016. Some, protection program, regulatory accounting, market sound- mostly low-income, households in remote rural areas are ing, etc.—conducive to privatization by the end of 2019. not connected to the grid. Cabo Verde’s grid-connected power generation is mainly Energy and desalinization costs for drinking water are one based on fossil fuels, but the government aims to obtain of the highest in Africa. They are US$0.25-0.33 per kWh 50 percent renewable energy penetration by 2020. The 46 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion policy commitment to renewable energy has already been Verde is among the most indebted countries on the con- translated into significant utility-scale renewable generation tinent. Progress on debt management reforms has also investments. Renewable generation went from less than been slow, despite broad agreement that this is crucial. 2 percent of the utility’s generation mix in 2010 to about Like many SIDS, the country has an open and undiversi- 22 percent in 2014, mainly due to the first major wind fied economy and narrow export market, which exposes power investment in Africa to be developed and operated it to economic volatility and undermines its resilience to privately by an independent power producer. Nevertheless, terms of trade shocks. increasing renewable energy in the energy mix in Cabo Verde remains constrained by the lack of scale, the need for procedures for renewable energy to access the grid, HIGH DEBT support distributed generation, and the government’s Cabo Verde’s public debt has continued to increase despite insufficient capacity to launch and supervise renewable energy independent power producer transactions. There fiscal consolidation in recent years, limiting fiscal space is a lack of strategy for the development of an energy for development spending. Although there has been an efficiency program in Cabo Verde, which could contrib- uptick in growth since 2016, and the primary deficit, which ute to reducing peak demand and lowering the need for averaged 8.5 percent of GDP between 2009 and 2016 has additional installed capacity. been decreasing gradually since 2013, Cabo Verde’s overall macroeconomic risk is higher than that of Mauritius and about equal to the Seychelles (see figure 34a, second set Risks to Macroeconomic Stability of four columns). Public debt remains elevated and the risk of distress is high (see figure 34b). This represents a Cabo Verde is at high risk of debt distress constraining major constraint to the country’s existing development government spending and its ability to respond to shocks. model, which requires significant capital investment by The country’s exposure to adverse economic shocks is the state. Given the level of indebtedness and sustainability substantial, even when compared to other SIDS. With a challenges, the authorities have sought to contain the situ- public debt of approximately 127 percent of GDP, Cabo ation by rationalizing their investment pipeline. FIGURE 34A. Risk Indicators FIGURE 34B. Present Value of Debt-to-GDP Ratio 80 Cabo Verde 140 70 Bhutan Seychelles 120 60 Mauritius 100 50 80 40 60 30 40 20 20 10 0 2017 2022 2027 2032 2037 0 Baseline Overall Macroeconomic Financial Labour market Tax policy Historical scenario assessment risk risk risk risk Most extreme shock 1/ Threshold Sources: IMF and WBG calculations. Note figure 34a: The risk index runs from 0 (zero risk) to 100 (maximum risk). Note figure 34b: “Extreme shock” refers to the most extreme stress test that includes a shock to GDP and the exchange rate. This case builds on the assumption of a 30 percent depreciation on the exchange rate. The “baseline” forecasts refer to a business-as-usual case without reform. The “historical” scenario looks at fiscal performance over history. Key Constraints 47 While Cabo Verde’s debt is overwhelmingly concessional, effective contingent liabilities generated are much higher which has kept debt service low, weaknesses in fiscal and than the SOE debt officially guaranteed by the state. The debt management practices cause sustainability concerns. government simply does not have the capacity to continue Over 75 percent of Cabo Verde’s debt is external, with bailing out loss-making SOEs, and urgently needs to put in multilateral institutions accounting for approximately place measures to improve their operational and financial 50 percent. Bilateral and commercial loans (mostly from performance to reduce their fiscal burden. Portugal) are semi-concessional, with original maturities of 20 years and interest rates between 1.4 percent and The authorities have published plans to divest interest 1.7 percent. in 23 SOEs to reduce fiscal risk and control public sector balances while furthering greater private sector participa- Cabo Verde’s domestic debt portfolio is mainly comprised tion in the economy. The list of entities announced in 2017 of Treasury Bonds, which has helped keep the debt service- includes TACV, the electricity and telecommunications to-export ratio just below 10 percent. However, the level companies, ports, and others. Many of these entities have of debt has created much uncertainty about the economy’s been in the pipeline for privatization for decades, while prospects. This undermines FDI, and will most likely raise others are added or dropped depending on the political the cost of credit in the economy. The situation has become party in power, suggesting limited political consensus on precarious, as the government has been repeatedly and what services the heavily indebted state should provide. unexpectedly called upon to cover operational expenses of insolvent SOEs from the budget.12 In 2016, this support Restoring fiscal sustainability requires overall macro­ approximated 2 percent of GDP. The problem is further economic and fiscal discipline, complemented by efforts to compounded by weaknesses in existing debt management bolster technical and operational efficiency in government practices. The authorities have been preparing a basic spending. Reducing debt levels implies a smaller fiscal enve- medium-term debt management strategy but have stopped lope, which suggests that growth-enhancing fiscal policies short of preparing an annual borrowing plan to assist in will not come from higher public investment levels, but its implementation and monitoring. There is also room mainly from expenditure reallocations and public service for improvement in making public debt reporting more delivery. Additionally, falling development assistance must risk-oriented and focused on compliance with the strategy. be offset by increased efficiency in revenue collections. However, the authorities have been slow to implement Macroeconomic risks are mounting, requiring prudent fiscal measures, which involve expenditure reallocations and management to avert a crisis. Given existing debt levels and significant risks in the SOEs sector, there is an urgent need improving efforts to boost efficiency in public service to stem the debt generation process. The performance of delivery, including in energy, transport, and education. SOEs vary, but, on aggregate, the SOE portfolio has been loss-making, with some entities requiring assistance from A debt sustainability assessment (DSA) carried out for this the budget, undermining the already fragile fiscal situation. SCD finds that even under baseline conditions gross public At the end of 2016, the total debt stock for the three largest debt is excessive, breaching acceptable thresholds.14 The SOEs reached 34 percent of GDP (US$550 million), with baseline macro framework for the DSA is based on the the largest debt held by the social housing, electricity, and government’s Medium-Term Fiscal Framework (MTFF) airline companies. The national airline (TACV) is the most for 2018–2022, which assumes growth of 4 percent for critical risk in the short term, given that it poses the larg- 2018–2022. The baseline also assumes an average fiscal est burden on the budget and continues to need financial deficit above 6 percent, reflecting the MTFF for expenditure support from government. The latest report on contingent plans and projection of revenue in line with current poli- liabilities from the Ministry of Finance (2016) classifies cies.15 Under this scenario, the present value of external debts held by TACV as high risk given its operational and debt to GDP breaches the 50 percent threshold by a sig- financial performance and profitability prospects in the nificant margin and is expected to gradually decrease to short to medium. Other SOEs have also requested direct below 50 percent by 2027 (see figure 34b). Debt service support from the authorities to deal with their cash flow indicators, however, remain below the threshold through- problems.13 Persistent losses for some of these entities are out. The present value of total public debt exceeds the covered by financial transfers, guarantees, and/or accumu- 74 percent benchmark and remains above it throughout lating arrears with providers. In some cases, they are also the projection period. The expansion of public debt is allowed to contract debt without guarantees. Therefore, the most pronounced under the scenario, which keeps real 48 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion growth and the primary balance at historical averages. FIGURE 35. Weak Diversification of However, a primary balance as high as that over the past Cabo Verde’s Exports decade seems unlikely, given that the primary balance Hirschman Herfindahl (HH) Index of Market over 2005–2014 reflects a temporarily high level of public Concentration investment. Debt sustainability remains sensitive to exports 0.4 and depreciation shock. 0.3 Public debt sustainability is also vulnerable to contingent 0.2 liabilities associated with the debt of SOEs. At the end of 2016, SOE-related contingent liabilities amounted to 0.1 7 percent of GDP. Should the financial situation of the 0 SOEs deteriorate such that the central government would Cabo Verde St. Lucia Maldive Mauritius Seychelles St. Vincent and the Grenadinas St. Kitts and Nevis have to take on all this debt and respect the existing rule of limiting domestic financing to 3 percent of GDP, debt sustainability would be further jeopardized. Reforms to key SOEs are likely to stem the debt-generating process but will most likely increase the stock of debt, limit- Source: World Bank Trade Outcome Indicators. ing the government’s ability to institute growth-enhancing Note: The Herfindahl index is a measure of the dispersion of trade value across an exporter’s partners. The index ranges from 0 to 1, reforms. The national airline company (TACV) is one of the where 0 indicates that a country has a perfectly diversified trade portfolio. largest SOEs in the country and puts a significant burden on the budget, requiring 2 percent of GDP per year to cover operational expenses. The government withdrew from the developing countries have been tightly related to patterns domestic aviation business in August 2017, and initiated of abundance and scarcity in foreign financing.16 The sharp plans to renegotiate the debts of the company (approximately deceleration in growth in Cabo Verde, which took place after 7.0 percent of GDP). A little over half the existing workforce the global financial crisis, was tied to the falloff in FDI (see is to be retrenched. Regarding international operations, appendix C). Sudden stops in financial flows tend to trigger the authorities have since signed a management contract or occur around crisis episodes, with deleterious effects on with Iceland Air to position the country as a transport and economic performance.17 When driven by a sharp decline in logistic hub connecting Europe, North and South America, gross inflows, sudden stop episodes may render the domestic and Africa. economy vulnerable to the decisions of foreign investors. Consistent with many middle-income small states, the HIGH ECONOMIC VOLATILITY financial system in Cabo Verde is relatively developed, but The country is beset by several circumstances that pre- remains challenged by lingering financial sector vulner- dispose it to numerous external and natural shocks. Like abilities, most notably concentration risks for the banking many other SIDS it has a narrow economic base and a high sector.18 The World Bank 2013 report on macrofinancial concentration of their export markets, which may be related sector vulnerability in Cabo Verde concluded that the to increased growth volatility, as shocks in trading partner global financial crisis—through adverse shocks to FDI, countries impact the home market. In 2016, 85 percent of tourism, and official transfer—had a negative impact on tourists to Cabo Verde came from five countries in Europe. growth (see figure 35). An exchange rate peg, deteriorating The dependence on tourism and the high concentration net foreign exchange inflows, and an expansionary fiscal of visitors from just a few countries inextricably ties the policy under the government’s ambitious public investment economy’s performance to the fortunes of that continent. program forced the central bank to raise interest rates. Cabo Verde’s economy contracts when Europe is in reces- Jointly, these developments contributed to decelerating sion, and vice-versa. Cabo Verde’s goods exports are less credit as the economy slowed, investment opportunities diversified than its peer countries (see figure 35). dwindled, loan recovery fell, banks grew more conservative, and the public sector crowded out lending to the private Cabo Verde has been susceptible to sudden stops in FDI. sector.19 Consequently, bank performance deteriorated. The paths of development, growth, and crisis among Nonperforming loans (NPL) rose quickly given exposure Key Constraints 49 FIGURE 36. FDI, Tourism Revenues in % of GDP FIGURE 37. The External Position Fluctuates with and GDP Growth, 2000–2016 Global Developments, 2000–2016 (% of GDP) 25 10 0 8 –2 7 20 8 –4 Months of imports 6 6 –6 % of GDP % of GDP 15 5 4 –8 % 4 10 –10 2 3 –12 5 –14 2 0 –16 1 0 –2 2000 2004 2008 2012 2016 –18 0 2000 2004 2008 2012 2016 Tourism FDI Reserves (rhs) Current account bal (lhs) Real GDP growth (rhs) Source: Based on data from BCV. to the tourism sector and in 2017, NPLs were still high at The WHO identifies strengthening national preparedness, 17 percent. Credit to the economy still has not recovered. response, and recovery for Zika and other arbovirus out- Finally, Cabo Verde’s banking system has a sizable com- breaks as a key priority for Cabo Verde. ponent of emigrant deposits which could be influenced by external conditions. Public Sector Performance While Cabo Verde’s external position has improved somewhat, the country remains vulnerable due to its Given the inherent disadvantages of being a small island increasing external debt and challenges to competitive- nation, and the many inevitable market failures due to ness (see figure 37). The level of international reserves Cabo Verde’s small size, a well-functioning public sector is has recovered, and at the end of 2017 approximated six essential for all three pillars of sustained poverty reduction months of prospective imports, and are projected to remain and shared prosperity. However, Cabo Verde faces several around this level over the medium term. This reflects a challenges in this respect. As was mentioned, Cabo Verde healthy outlook for goods and services exports, and con- scores relatively low along the criteria of “government effec- tinued official financing. The assumption regarding official tiveness” and “regulatory quality.” Fixing these shortcom- financing presupposes that the authorities address some of ings and delivering reforms will be important for creating the current fiscal challenges. The IMF’s latest assessment of jobs, diversifying the economy, promoting innovation, and exchange rate (undertaken in January 2018) suggest that addressing social exclusion. Making decentralization work the rate is broadly in line with fundamentals. will be an essential component of this agenda. As a small island state with a high level of imports, the country is vulnerable to food and fuel prices through the INSUFFICIENT DELIVERY OF REFORM balance of payments. Cabo Verde imports most of its food and fuels, and as such is extremely susceptible to adverse Despite its quality institutions, the government has diffi- terms of trade movements. The use of subsidies is not culties delivering policy reform, promoting and regulating widespread, which limits the impact of the fiscal accounts. the private sector, and selecting and managing public investment that meets user needs. It is relatively weak in Cabo Verde also appeared vulnerable to outbursts of vec- coordinating action across government entities and coher- tor-borne diseases, leading to a brief dengue epidemic in ent sector strategies are often missing. Implementation 2009–2010 and a Zika virus outbreak in October 2015. capacity is weak, especially at the local level, possibly due As mentioned, inadequate capacity to undertake early to an inefficient allocation of human resources. Urban detection and surveillance, assessment, and response to infrastructure development is increasingly inadequate major epidemic and pandemic-prone diseases is a concern. and inflexible labor laws undermine enterprise efficiency. 50 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion Systems for tracking results of government programs are lower than its best ranking of 119th, which occurred in not functioning adequately, despite considerable invest- 2012. The momentum of reforms in Cabo Verde has clearly ments in ICT systems for this purpose by NOSI, which stagnated.21 The country’s rank is below the average of its limits learning of what works. structural peers—i.e., other lower-middle-income countries, which have an average rank of 118.3. Cabo Verde compares An inefficient public sector is the second most important even more unfavorably with its aspirational peers such as impediment for doing business in Cabo Verde, after access Mauritius (ranked 25th) and the Seychelles (95th), who to financing and tax rates, according to the Global Competi- have improved on the Doing Business Index since the 2008 tiveness Report 2017–2018. A range of constraints prevent global financial crisis. Chronic difficulties remain in several changing the public sector from a dominant player that indicators, namely resolving insolvency (ranked 168th), crowds out the domestic private sector, to a regulator and protecting minority investors (164th), getting electricity facilitator, and to one that develops effective partnerships (145th), getting credit (122nd), trading across borders with the domestic private sector, addresses their concerns, (107th), and starting a business (8th)(see figure 38). and designs and implements effective policies. These con- straints include: (1) antiquated government norms and For an open economy, the ease of trading across borders is procedures, and the current orientation around “process” an important criterion. Yet the Doing Business report from rather than “results;” (2) lack of coordination20 between 2018 demonstrates that Cabo Verde lags behind some of its agencies; (3) low technical capacity and high turnover of peers along several aspects. This includes the cost of border highly qualified personnel staff; (4) limited performance compliance to export and to import, and, to some extent, tracking and evaluation of key programs and lack of timely the time to export (see table 3). statistics for evidence-based policy making, including of the tourism sector and learning outcomes; and (5) lack of effec- Competitiveness has not kept pace with the growth in the tive public private dialogue. The civil courts have large case economy, and the problems identified in the Doing Busi- backlogs, which causes significant delays in resolving labor ness Index correspond with responses obtained through disputes. The slow pace of public financial management the Executive Opinion Survey conducted in Cabo Verde (PFM) reforms and weak fiscal discipline—particularly in for the WEF’s report on global competitiveness. The most the SOE sector—has undermined macroeconomic resilience. problematic factors they identified are access to finance, an inefficient government bureaucracy, tax rates, and an Cabo Verde has recently made improvements along several inadequately educated workforce (see figure 39a). Cabo Doing Business indicators. The country has made dealing Verde ranks 110th in the WEF’s Competitiveness Index, with construction permits easier by publishing all regula- just behind the Seychelles (107th). It is outperformed by tions related to construction online, free of charge. The that country on a number of factors, including quality of government has also made exporting and importing easier by implementing an automated customs data management infrastructure, macroeconomic management, labor market system. In addition, resolving insolvency has become less efficiency, and business sophistication (see figure 39b). complicated due to the adoption of a law that introduces a reorganization procedure and facilitates continuation of Access to financing is considered the most problematic the debtor’s business during insolvency proceedings. The factor for doing business by the Global Competitiveness law also allows creditors greater participation in important Report 2017–2018 (see figure 39a). Domestic credit to decisions during insolvency proceedings. Other important the private sector has declined from 66 percent of GDP in recent reform initiatives include the Casa do Cidadão uni- 2011 to 60 percent of GDP in 2016, as banks increased the fied front office for public services; the digitization of the share of their assets deposited with the central bank and land property registry, and the recent launch of the single lent to the government and SOEs. Micro and small enter- investor window seeking to streamline FDI management. prises face significant financing constraints. A 2014 survey showed that only 26.5 percent of total credit to enterprises However, Cabo Verde’s overall business environment goes to micro and small enterprises. Banks indicate that remains weak. Once considered a top reformer on the poor business prospects, limited collateral, lack of proper African continent (specifically in 2011), Cabo Verde’s rela- accounting, and the general macroeconomic environment tive ranking along the Doing Business Index has suffered in are the main reasons for restricting credit. Although a recent years. According to the 2018 Doing Business report, third of registered firms (representing 96 percent of total the country is now ranked 127th out of 190 countries, turnover) report having accounting practices, banks believe Key Constraints 51 FIGURE 38. Global Rank Along Doing Business Indicators, 2018 (lower rank = better) Starting a business 200 Dealing with construction Resolving insolvency permits 150 100 Enforcing contract Getting electricity 50 0 Trading across borders Registering property Paying taxes Getting credit Protecting minority investors Mauritius Seychelles Cabo Verde Source: Doing Business 2018. that most of these financial reports are not credible, not delays in processing VAT refunds (several years in some audited, and prepared primarily for tax purposes. Confu- cases). Failure to handle such basic processes can have sion between personal and business bank accounts and negative consequences for private investment, on which financial flows is common, and accounting standards are the country depends. The authorities have been relatively not enforced. The average cost of finance in real terms is weak in coordinating action across government entities high, with one-year lending rates of up to one year around and in collaborating with the private sector to deliver 10 percent in real terms. results. Notably, the government appears to have difficul- ties designing and implementing a coherent sector strategy In addition to access to finance, inefficient government for the tourism, fisheries, transport, and logistics sectors, bureaucracy is an important impediment for doing busi- or around environmental protection, that brings all public ness in Cabo Verde (see figure 39a). Tourism operators and private sector stakeholders together around a common and other foreign investors are frustrated by the long goal and leads to coordinated action.22 TABLE 3. Doing Business 2018, Trading Across Borders Indicators: Performance Across Key Indicators of Cabo Verde and Its Peers Indicator Cabo Verde Seychelles Mauritius Time to export: Border compliance (hours) 72 82 38 Cost to export: Border compliance (US$) 780 332 303 Time to export: Documentary compliance (hours) 24 44 9 Cost to export: Documentary compliance (US$) 125 115 128 Time to import: Border compliance (hours) 60 97 41 Cost to import: Border compliance (US$) 588 341 372 Time to import: Documentary compliance (hours) 24 33 9 Cost to import: Documentary compliance (US$) 125 93 166 Source: Doing Business 2018. 52 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 39A. Competitiveness Constraints According FIGURE 39B. Competitiveness Subscores of to Cabo Verdean Entrepreneurs, 2016 Cabo Verde and the Seychelles Along a Range of Constraints; Scores Range from 1 (Worst) to 7 (Best) Access to financing Inefficient government bureaucracy Institutions Tax rates 6 Infrastructure Inadequately educated workforce 5 Inadequate supply of infrastructure Innovation 4 Macroeconomic Restrictive labor regulations 3 environment Poor work ethic in national labor force 2 Health and Insufficient capacity to innovate Business 1 primary Crime and theft sophistication 0 education Tax regulations Poor public health Higher Market size education Corruption and training Inflation Technological Policy instability readiness Good market Foreign currency regulations efficiency Government instability/coups Financial market Labor market development efficiency 0 5 10 15 20 25 Seychelles Cabo Verde Source: World Economic Forum 2017. Note: From the list of factors, respondents to the World Economic Forum’s Executive Opinion Survey were asked to select the five most problematic factors for doing business in their country and to rank them between 1 (most problematic) and 5. The score corresponds to the responses weighted according to their rankings. Cabo Verde lacks a culture of accountability for results at The country is also confronted by deficiencies in available all levels of government, and even of civil society entities. human capital,26 suggesting that the education system Monitoring and evaluation of government programs is needs reform. According to the 2009 Investment Climate weak and limited use is made of statistics for planning Assessment,27 almost 50 percent of firms surveyed consider purposes, according to a recent evaluation of the national a lack of adequately qualified workforce as a problem for poverty reduction and growth strategy from 2012–2016 doing business, among the highest percentage among peers. (DECRP 3).23 The civil courts have large case backlogs, Similarly, the Global Competitiveness Index 2016 shows which causes significant delays in resolving labor disputes that an inadequately educated workforce is the 4th most among other things. problematic factor in doing business in the country (see figure 39a). As mentioned, many students leave secondary The formal labor market has been historically rigid, and school before completion, and even those who finish school reform has just recently been enacted. The lack of flex- lack the skills to compete in a dynamic service sector. At the ibility of the formal labor market has been among the same time, the low coverage and poor quality of the TVET top concerns of the Cabo Verde business community.24 In systems prevent individuals from meeting the demands February 2016,25 the government responded by amending for knowledge and skills of private and public employers. the Labor Code after prolonged discussions with a federa- tion of labor unions. The amendments include a series of The tourism sector—the country’s main engine of growth— measures that enhance flexibility to increase formal labor has lacked strategic guidance, particularly in relation to market competitiveness. These include: more flexibility integrating SMEs into the sector. While resorts experience for overtime ceilings, simpler procedures for redundancy healthy room occupancy rates, smaller establishments in certain cases of absence or lack of adaptation to the in Cabo Verde struggle to attract tourists. The existing job post (including in the case of collective redundancies), practice in the country favors large external operators. reduced redundancy severance pay in certain conditions, Smaller establishments, largely domestic, are dispropor- and the creation of a framework for temporary work. tionally unable to benefit from the generous incentive Transferring staff from one island to another allegedly still packages offered to all-inclusive foreign investors. This faces regulatory complications. However, it is probably too impairs their ability to compete and creates significant early to assess the impact of these reforms to the labor code. disparity in the quality of tourism offerings by SMEs, Key Constraints 53 and ultimately the attractiveness of the destination. This DECENTRALIZATION is largely due to the lack of an integrated strategy for the Given Cabo Verde’s geography, decentralization of deci- sector, resulting in scarce promotion outside the major sion-making around service delivery is unavoidable for brands, lower quality of construction and amenities in ensuring it can be tailored to local circumstances. Yet smaller establishments, and a shortage of qualified staff this has considerable cost implications and requires to service the sector. Beyond attracting FDI, the country substantial capacity improvements at the local level. The lacks a clear approach for a diverse tourist services sector 22 municipalities—the only level of government below that better exploits the unique natural beauty and cultural the central government—have a fair amount of autonomy. offerings of each island, generates higher returns per visi- Their expenditures have grown substantially over time30 tor, and creates more employment across the country. The and they appear to have built significant arrears, although latest consolidated approved tourism strategy dates from reliable figures are lacking. A transparent and rules-based 2010, and the associated tenure and implementation period system for horizontal allocation from central to local terminated in 2013.28 No evaluation of its implementation level of government exists, but municipalities suffer from or impact is known, and a new strategic master plan has severe capacity constraints, and oversight, supervision, not been in effect since then. In recent years, institutional and monitoring of municipalities at the central govern- arrangements for coordinating and promoting the tourism ment level is weak. sector have changed frequently. Sal and Boa Vista islands, which receive the bulk of the The need for institutional stability and for increasing staff tourists, are struggling to match infrastructure development capacity in the tourism governance framework remain to the growth trend. There are challenges in providing some of the key challenges on the table. There is a lack of proper water and sanitation services, problems in the regular public-private dialogue (PPD) and meetings of the supply of electricity, gaps in the road network, and scarcity Tourism Chamber (an association of private sector tourism of adequate housing for the growing number of tourism operators) with local and national government officials workers. Building regulations are not always maintained, have occurred irregularly, with no measurable results. Data and together with the weak treatment of solid residues, collection on the tourism sector remains insufficient, which this negatively affects Cabo Verde’s landscape and natural is underscored by Cabo Verde’s 2015 ranking of 111th environment. Underlying constraints include weak local (out of 141 countries) in “Comprehensiveness of Travel & governments’ capacity to enforce regulations and possible Tourism Data” by the WEF. Gaps in vocational and other inefficiencies in staff allocation. training are corroborated by Cabo Verde’s 82nd ranking in “Human Resources and Labor Market” of the WEF’s Monitoring and assessment of the effectiveness and efficiency Travel & Tourism Competitiveness Index. The Cabo Verde of territorial and urban planning, land management, and Hotel and Tourism School has not yet been able to address social service delivery (such as social protection programs) all of the tourism industry’s needs, and is present only on have been limited, and the magnitude of municipal debts is the island of Santiago, outside of the main tourism poles unclear. Lack of analysis of municipalities’ spending needs of Sal and Boa Vista. and tax income potential affect the design of a suitable fiscal transfer mechanism. Recently, government has decided to The inability of civil society interest groups to adequately transfer the management of the social housing program (Casa represent the interests of the domestic private sector and Para Todos) to municipalities. This will require significant influence decision-makers is likely to be an important con- additional support to smaller and weaker municipalities. straint. It is possibly one of the reasons of the low investment efficiency, where investment decisions are made without sufficiently involving owners of small- and medium-sized Lack of Resilience business owners. As mentioned in Chapter 2, the relatively small population, in which family networks run across inter- As a SIDS, Cabo Verde is highly vulnerable to economic and est groups, has also played a role. Instead of enhancing the climate shocks, and high youth unemployment undermines quality of democracy, promoting debate, and demanding its social fabric. In addition, inadequate protection of its accountability, civil society organizations are used or taken natural capital threatens the tourism sector and other liveli- over by political parties, which leads to “civic lethargy” hood sources. Its lack of resilience constitutes an important against a pervasive state.29 risk to further progress. 54 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion LIMITED HOUSEHOLD RESILIENCE shocks affect the resilience of households—in particular AGAINST SHOCKS the poor—making it increasingly hard for them to recover from such weather events. Given its geographical characteristics and its location in the mid-Atlantic, Cabo Verde is highly exposed to natural The negative effect of an agricultural productivity shock disasters, including droughts, extreme storms, sea level has an immediate negative effect on GDP. Simulations of rise, and volcanic eruptions. Climate change is expected to an agricultural output shock of 10 percent and a loss of rapidly increase Cabo Verde’s exposure to extreme weather value added in agriculture of around 12 percent suggested events, while disaster response options remain insufficient. this would reduce GDP by 0.5 percent (see figure 40b). Historical data show that Cabo Verde has always suffered from recurrent severe droughts, which have taken a high The main effect of the shock will come from a reduction toll on the livelihoods of the people and affected their in agricultural and food production and an increase in resilience. Prior to its independence in 1975, the cycle of agricultural prices. To replace domestic output, imports of droughts caused widespread famine and forced migration. agricultural products increase from 4.8 to 6.0 percent as a It is estimated that 30,000 people needed urgent assistance share of total imports (see figure 40a). during the most recent drought of 2014, with many having lost all or a large part of their cereal crops in the most These risks are expected to worsen, as Cabo Verde is one affected islands.31 In 2017 the country suffered another of the countries that is most vulnerable to climate change. severe drought. The 2016 World Risk Report ranked Cabo Verde at 141st of 173 countries in terms susceptibility to natural disasters.32 Cabo Verde is also affected by periodic heavy rainfall In addition, the country is ranked 117th out of 182 countries that—in combination with high elevation steep slopes— on a global index33 that measures a country’s exposure, causes flash floods and leaves a trail of destruction in sensitivity, and capacity to adapt to the negative effects of coastal zones and low-lying urban settlements. The country climate change (a lower rank means higher vulnerability). is also exposed to other hazards such as landslides and The country ranks 79th on a climate change readiness score. coastal erosion. Sea level rise and volcanic eruptions also Cabo Verde’s rankings on these scores are lower than its threaten the country’s development progress. Such repeated aspirational peers, including the Seychelles, Mauritius, and FIGURE 40A. Changes in Agricultural Prices FIGURE 40B. Effect of Drought on Main Economic and Imports as a Consequence of a Simulated Aggregates, % Change Compared to Baseline Drought Shock 30 GDP –0.5 25.5 Private Consumption –0.6 20 Government Consumption –0.5 10.8 10 5.0 Government Investment –0.5 0 Consumer Prices Producer Prices Imports –.6 –.4 –.2 0 % change with respect to baseline Source: Simulations using national accounts data. Key Constraints 55 Saint Lucia, but higher than the Maldives. International irrigated land—is highly unequal, with the poor owning experience shows that poor and other vulnerable groups— little or no land. This severely limits the opportunities of such as female-headed households, young children, and the the poor to benefit from agricultural development and elderly—are the most impacted by natural hazards due to support programs, according to a livelihoods assessment their tendency to live in disaster-prone marginal areas and conducted in 2016.36 The study covered three livelihood urban slums, their reduced safe housing options, and their zones in rural Santiago: a maize, beans, and livestock zone, low capacity to recover from shocks.34 an irrigated horticultural zone (in valley bottoms), and a fisheries zone. In each zone, households in sampled areas Climate change risks have the potential to significantly derail were asked to divide themselves into four wealth groups both growth and equity objectives in Cabo Verde. Extreme that ranked from “rich” to “medium” to “poor” and “very weather events have become more frequent, which adds poor.” The poor and very poor typically each included about to the vulnerability of low-income households. Droughts 30 percent of the households, while the medium and rich occur with a periodicity of about 5 years. As recently as covered 20 and 10 percent, respectively. For each of these 2014, Cabo Verde experienced another drastic reduction groups, information was collected regarding asset owner- of rainfall, leading to water shortages and major harvest ship, income levels, and food sources. It was found that the loss, severely impacting rural livelihoods. The Food and “very poor” in the maize, beans, and livestock zone have Agriculture Organization (FAO) reported that the January very few assets. They own no land (see figure 41) and have 2015’s maize harvest in Cabo Verde was the lowest ever little livestock. They meet their consumption needs through recorded in the country’s history, following a downward sharecropping arrangements with rich farmers (who typically trend over the last few years.35 The country suffered another own 1.2 ha) as well as casual wage labor for other farmers. serious drought in 2017. Intense rainfall events caused by In the irrigated horticultural zone the “very poor” cultivate strong storms and tropical cyclones, such as the extra­ only 0.1 ha of irrigated horticultural land, compared to ordinary passing of Hurricane Fred through Cabo Verde 1 ha of the rich. The wealthiest group (about a quarter) of on August 31, 2015, can lead to significant and damaging rural households own up to 10 times more irrigated land floods across the country. Shoreline erosion caused by sea than the poorest quarter (see figure 41). level rise is already a significant problem to Cabo Verde’s coastal ports and beaches. Critical infrastructure such as Incomes of the “very poor” in rural areas, especially in the seaports and roads are at risk. Repeated shocks undermine maize, beans, and small livestock livelihood zone, are very the resilience of households to recover and pick up their low and their weak asset base makes them extremely vulner- livelihoods, which particularly affects the poor. able to weather, price, and other shocks. These households can make ends meet only through remittances they receive. Cabo Verde is also highly vulnerable to geological hazards. Incomes for the “very poor” typically consist of around This is evidenced by the historical record of volcanic activity CVE 50,000 per year per household (around US$500) of the Pico de Fogo Volcano, which has erupted 29 times obtained from casual wage labor, and CVE 15,000 (around since the discovery and settlement of Fogo island 550 years US$150) from sharecropping on dryland, according to the ago. The average frequency has been one eruption every livelihoods study. This translates to around US$0.30 per 19.2 years. Most recently, Pico do Fogo erupted in 1951 capita per day. Remittances add another US$0.30. Typical and 1995, and again in November 2014. The last time the incomes of the “poor” are around double that.37 The study eruption lasted 88 days, more than twice the duration of suggests that dryland is not very productive, with yields the previous two eruptions, which destroyed the livelihoods of maize (the main home grown staple) between 600 and of the two communities of Chã das Caldeiras. The volcanic 700 kg/ha. In the irrigated horticultural zone and in the eruption also impacted air quality, prevented normal flight fisheries zone, annual household incomes of the very poor operation, and negatively affected the tourism industry. are somewhat higher (CVE 175,000, or around US$1 per person per day, excluding remittances) and about double To enable the rural poor to benefit from agricultural growth, that amount for the “poor.” The “rich” in these areas make several structural constraints need to be addressed. A poorly around six times as much. Unless “very poor” households functioning land market due to an incomplete cadaster (especially those headed by a single woman) have access to exacerbated by absentee land ownership has sometimes led more irrigated land and capital to make it productive, or to unclear land rights, which particularly affects the poorest other local income-earning opportunities, their resilience households and female farmers. Access to land—especially to droughts and other shocks will remain low and they 56 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 41. Land Ownership and Use by Rural Wealth Groups (ha) in Two Livelihood Zones in Rural Santiago 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Dryland owned Dryland Dryland owned Dryland Irrigated land cultivated cultivated cultivated Maize, beans and livestock zone Horticultural zone very poor poor middle group rich Sources: Save the Children and Ministry of Agriculture 2017a and 2017b. will be unable to escape from extreme poverty. Appendix D challenging to extend coverage to the poorest, to socially presents more detail of the livelihoods assessment that was excluded youth, also to those in rural areas. Existing tar- conducted for the SCD. geted programs that transfer subsidies to the poor and help them build their productive assets are essential for Raising the resilience of poor fishing households is hampered building resilience, addressing the unequal distribution by the weak net value generated in the fisheries sector and of assets, and strengthening social inclusion. Many of the weak links to high value markets. With fish stocks deterio- poor are not yet covered by social assistance, especially rating due to inadequate overall management of the sector, poor families with working age members. The government fishing in the artisanal segment has extended to previously of Cabo Verde intends to design a productive safety net untargeted, lower-value species. Lack of coordination among program that combines the provision of cash transfers, fishers and weak fish stock management has led to “race productive assets, and care activities to the informal youth to fish” problems associated with open-access fisheries and the poor, especially in rural areas. However, in a very regimes. In addition, weak integration of the artisanal decentralized context, technical capacity in municipalities segment into the local and national economy, along with to implement social protection programs is insufficient. limited collaboration with the high value tourist markets, They are understaffed and underfinanced. In addition, appear to limit the creation and retention of net value. As coordination between the many different social programs an archipelago nation with limited logistical connection being implemented at central and decentralized level is weak. between islands and a limited development of cold chains, Moreover, these programs are not adequately monitored, arbitrage opportunities with other islands are limited. Hotels preventing an understanding of what works and what does spend an estimated €12 million on imported fish each year. not. In addition, investing in a single social registry would Even if local fish costs about a third of the price of imported be key to reducing fragmentation, improving coordination, fish and tends to be of higher quality, it is estimated that and improving targeting of the extreme poor and other only about 20 percent of hotel fish consumption is bought socially excluded groups. locally. If hotels here were to source a larger proportion of fish locally, this would likely increase the revenue of local INSUFFICIENT PROTECTION fishers, save hotels sizable expenses each year, and improve OF NATURAL CAPITAL the tourist experience. Cabo Verde’s performance along indicators related to its Although Cabo Verde’s social protection system is more policies and institutions for environmental sustainability advanced compared to other countries in SSA, it remains have lagged in recent years and are relatively low. They are Key Constraints 57 the lowest among all its World Bank’s Country Policy and Verde’s important natural resources, also depend on a Institutional Assessment (CPIA) indicators. Given Cabo healthy coastal aquatic environment. Uncontrolled waste Verde’s reliance on its natural capital for its tourism-based disposal also affects the quality of ground water, with a economy and the importance of preserving the resource base direct impact on poor communities. upon which many poor household depend, the inadequate protection of its natural environment against pollution and damage is a concern. Healthy natural resources are NOTES equivalent to a social safety net. 1. The rate was 18 percent in 1998 (World Development Indicators). A more recent estimate is 20 percent, which is higher than many other There is insufficient preservation of Cabo Verde’s natural African countries (Panapress 2015). 2. Panapress 2015. capital, undermining the tourism industry. Cabo Verde 3. Ahmed et al. 2017. ranks only 78th out of 141 countries on the “enforce- 4. Marone 2016. 5. World Bank 2013b. ment of environmental regulations” in the Travel & 6. Ibid Tourism Competitiveness Index38 (see above). Cabo Verde 7. Ibid is considered one of the world’s 11 most endangered 8. World Bank 2016b. 9. ITU 2016. marine biodiversity “hotspots.” A total of 22 dolphin 10. ITU 2016. and whale species can be found in its waters, which are 11. National Implementation Unit, Enhanced Integrated Framework, and Ministry of Tourism, Industry, and Energy (MTIE) 2013. also an important nesting ground for several endangered 12. SOEs play an important role in implementing the government invest- sea turtles. Yet Cabo Verde’s biodiversity is under severe ment programs. pressure from irresponsible hotel construction and tourist 13. IFH manages a large social housing project (Casa Para Todos) financed out of a €160 million credit line from Portugal. practices. Overfishing, limited enforcement of environ- 14. As Cabo Verde is strong performer based on its CPIA results, the mental and building regulations, and various forms of thresholds for external public debt for high risk under the DSA includes, among others, a present value of external debt of 50 percent of GDP and pollution all pose a significant threat to the quality of an external debt services ratio of 25 percent of exports. The benchmark the country’s natural environment. Furthermore, unregu- for total debt is 74 percent of GDP. 15. Cabo Verde – IMF Staff Report for the 2018 Article IV Consultation. lated coastal sand extraction for construction purposes 16. Calderon and Kubota 2011. remains one of the main preventable environmental issues 17. Becker and Mauro 2006; Cerra and Saxena 2009. increasing the risk of sea water intrusion in aquifers 18. See IMF Country Report no. 13/292. Selected issues paper on the challenges of small middle-income countries in SSA. and coastal lands. Environmental issues are particularly 19. World Bank 2013a. pertinent for Cabo Verde, as the health of the tourism 20. The 2017 World Development Report speaks to the importance of coordination among institutions to spur a results culture. industry depends largely on the natural beauty of the 21. Centro de Políticas Estratégicas 2015. archipelago. 22. It should be noted that in 2015 the government established a steering committee to promote stakeholder coordination on “blue growth” related activities, following the adoption of a Blue Growth Charter (Carta a Despite considerable progress in defining the legal frame- favor da promoção do crescimento azul em Cabo Verde). However, work and drafting environmental action plans, regulation it is probably too early to assess its impact. 23. Ministério das Finanças e Planeamento 2016. enforcement remains inadequate, particularly in clusters 24. World Bank 2010. that are strongly environmentally dependent such as agri- 25. Legislative-Decree 1/2016, published on the Official Bulletin on February 4, 2016. culture, fisheries, and tourism. Environmental management 26. See appendix E for more detail on the simulation. in Cabo Verde has suffered from the unclear assignment 27. World Bank Enterprise Surveys. 28. Ministry of Economy Growth and Competitiveness 2010. of roles and responsibilities and is a manifestation of the 29. Costa 2013. government’s coordination failure. 30. They comprised on average 5.5 percent of GDP during 2002–2010. 31. FAO 2015. 32. United Nations University Institute for Environment and Human Poor management of solid waste generated by tourist Security (UNU-EHS) 2016. resorts, and various forms of pollution, pose a significant 33. Developed by the Notre Dame Global Adaptation Initiative. The Vulnerability score measures a country’s exposure, sensitivity and capacity threat to the country’s natural environment. Systems and to adapt to the negative effects of climate change. The Readiness score rules for the management of solid waste are suboptimal measures a country’s ability to leverage investments and convert them to adaptation actions. (University of Notre Dame 2018) across the country. Regulation seems to be poorly enforced, 34. Skoufias, Rabassa, and Olivieri 2011. with entire communities dumping waste in unapproved 35. Sanchez 2015. 36. Save the Children and Ministry of Agriculture 2017b. areas, including the sea, which affects the country’s envi- 37. Save the Children and Ministry of Agriculture 2017b. ronment. Fish stocks, which represent another of Cabo 38. World Economic Forum 2015b.  59 CHAPTER 5 Opportunities/Possible Pathways to Growth  and Poverty Reduction T Diversified and More he previous chapter outlined the binding constraints that prevent Cabo Verde from realizing its potential. This chapter discusses the country’s opportunities Inclusive Tourism and pathways for further raising the welfare of the bottom 40 percent of its population and reducing extreme poverty. This SCD concludes that a diversified and more inclusive It concludes that a diversified and more inclusive tour- tourism sector will be Cabo Verde’s most likely pathway ism sector will be Cabo Verde’s most likely pathway to to growth and poverty reduction. In the last fifteen years, progress. In addition, the range of agricultural goods that international tourism to Cabo Verde has grown substan- are produced offer the potential to better exploit niche tially, and in 2016 tourism output was US$0.7 billion markets, such as organic, ethnic, fair trade, and nostalgia and comprised 45 percent of GDP. It is the main source products. Cabo Verde’s geographical location in the middle of foreign exchange earnings and directly and indirectly of four continents also offers the potential to develop a supports around 39 percent of total employment. As men- logistics or ICT hub, but key constraints may need to be tioned, this situation is largely attributed to “all-inclusive” addressed first. package holidays run by Europe’s largest tour operators. Findings suggest that despite weak links to the rest of the Cabo Verde’s recently completed Strategic Plan for Sustain- economy, tourism has played a central role in lifting people able Development 2017–2021 positions it as a Pais Plata- out of poverty in past years. Although according to the forma no Atlentico Medio, a hub in the mid-Atlantic. The IDRF surveys, the proportion of the population that earn strategy presents seven priority hubs, or plataformas, that their living in the services sector grew from 34 percent in will spearhead the country’s future growth: (1) a maritime 2001 to 44 percent in 2015, the proportion of people in platform to provide supplies and services to freighters, this sector who are extremely poor has dropped faster than cruise ships, and other vessels; (2) an air transport hub for other occupational groups: from 19 to 5 percent during this passengers from countries bordering the Atlantic; (3) a period (see figure 22b). However, to sustain this progress commercial and industrial hub that transforms Cabo Verde and create the jobs that are urgently needed for Cabo Verde’s into an international business center; (4) a financial hub, youth, the nature, direction, and form of future planning creating an international financial platform; (5) an invest- and investment in the tourism sector needs to change and ment hub for Cabo Verde’s diaspora; (6) the development diversify. It requires the delivery of greater complementari- of a tourism sector that benefits all islands and is grounded ties, balance, and diversity to the overall tourism product in the national environment, culture, and history; and and brand.1 (7) a digital and innovation hub. The image of Cabo Verde as a single product, “sun, sand, and Analysis of the available evidence suggests that in the short- sea” destination is unjustified. Beyond its impressive beaches term, Cabo Verde has three main opportunities to boost and sand dunes, the variety of Cabo Verde’s total tourism growth, reduce extreme poverty, and promote shared pros- product embraces a wealth of diversity. This illustrates a perity: diversified and more inclusive tourism; agricultural serious branding and marketing challenge for the industry.2 niche products that could feed into high value tourist and Unknown to many, Cabo Verde offers coral reefs for snor- export markets; and possibly the development of Cabo keling and diving, one of the world’s three main sea turtle Verde as a logistics hub. Other opportunities may exist in nesting sites, game fishing, water sports (including sailing, the medium term, but currently face a set of constraints yachting, wind, and kite surfing), hiking and trekking in that have yet to be tackled. rich hill ecosystems, volcano exploration, birdwatching, and 60 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion canyoning. Similarly, its famous music, festivals, cultural this bring benefits to the homeport country, but it would heritage are relatively unexplored as tourist products. For also bring more cruise arrivals to West Africa. The latest the most part, these have yet to be packaged and promoted available data shows that 2013 was the strongest year on to the international tourism market. Cabo Verde could also record for cruise ship tourism, with 157 ships making stops tap into the retirement or senior citizens market. For this, in Cabo Verde, carrying a total of 75,643 passengers, up access to high quality medical care, affordability, safety, from 22,909 in 2008 (see figure 43). The port of Mindelo ease of international and local connectivity, and tax status (Porto Grande) is Cabo Verde’s leader with 57 cruise ship are important considerations. Diversification is likely to port calls in 2013, followed by Praia with 39, and Santo further increase tourism investment while spreading the Antão with 15. There are no official estimates on the number benefits more widely across the country. of passengers that exit the ships—which typically dock for 1–2 days—to tour the respective islands, but ENAPOR (the Forecasts by the World Travel and Tourism Council suggest national port operator) estimates that number to be about that added value from tourism—including wider effects 70 percent, with raw projections placing expenditures per from investment, the supply chain, and induced income tourist at about €45 during a day in a city.3 impacts—could grow further and double to CVE 143 bil- lion, or US$1.5 billion, in 2027 (see figure 42a). Direct Broadening tourism offerings to include culture would allow and indirect employment could grow from 97,000 jobs Cabo Verde to tap one of the fastest-growing segments of in 2017 to 152,000 jobs in 2027 (see figure 42b), and the the tourism industry worldwide. Close to 50 percent of World Travel and Tourism Council predicts that annual all international leisure tourism has a cultural component. employment growth in Cabo Verde’s tourism industry Gore island in Senegal, for example, has marketed itself as during the next 10 years could be 4.5 percent per year, the a heritage destination by turning its slave trade monuments 7th highest in the world. into tourist destinations. Exposing Cabo Verde’s visitors to its rich traditions in music, art, and cuisine offers a significant Cruise ship tourism represents an emerging and interest- opportunity to connect a broader segment of the popula- ing niche with high potential. Given its position in the tion to the tourist market. In addition, community-based mid-Atlantic, home-basing cruise ships could generate tourism has considerable potential to make the sector more significant benefits to the country and open new markets. inclusive, provided some of its challenges can be overcome.4 Having invested in several ports in recent years, explor- ing opportunities to have a major cruise line based out of As mentioned in Chapter 2, Cabo Verde’s 2015 ranking Cabo Verde, similar to Jamaica and islands in the Pacific, compiled by the WEF’s Travel & Tourism Competitiveness could grow the country’s tourism business. Not only would Report suggests that realizing its tourism potential requires FIGURE 42. Total Contribution of Travel and Tourism in 2016, 2017, and 2027 a. GDP in CVE (in billions) b. Employment 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 2016 2017 2027 2016 2017 2027 Direct Indirect Induced Direct Indirect Induced Sources: World Travel and Tourism Council 2017. Opportunities/Possible Pathways to Growth and Poverty Reduction  61 FIGURE 43. Number of Cruise Ship Arrivals anchored in Cabo Verde’s sustainable development of its vast in Cabo Verde oceanic and coastal areas. The blue economy is a long-term strategy aimed at supporting sustainable and equitable eco- 125 127 nomic growth through ocean-related sectors and activities.6 102 Although Cabo Verde signed the Blue Growth Charter in 2012, greater effort is needed to minimize environmental degradation, biodiversity loss, and the nondurable use of marine resources, and to maximize the economic and 39 social benefits to the population. Much work remains to 31 27 strengthen the coherence of its public policies linked to the 22 20 development of tourism and the maritime economy with those of other components of the blue economy. In addi- 2009 2010 2011 2012 2013 2014 2015 2016 tion to tourism, this includes established traditional ocean industries (such as fisheries) and maritime transport, but Source: ENAPOR also new and emerging activities, such as offshore renewable energy, aquaculture, seabed extractive activities, and marine biotechnology and bioprospecting. The blue economy aims major action. There is considerable potential to raise the to move beyond business as usual and to consider economic excursion rate and increase average spending on excursions development and ocean health as compatible propositions. per arrival.5 Access is a major issue and constraint in the development of tourism in Cabo Verde, especially in terms of product diversification. International access remains limited, high cost, and unreliable, with a high degree of Agricultural and Fisheries dependence on charters. Improving the expensive and sometimes unreliable inter-island transportation system will Niche Products in Support be important for product expansion and diversification. of the Tourist Market The sector’s institutional and regulatory framework urgently Cabo Verde’s agricultural sector has successfully expanded needs attention, as was mentioned in Chapter 4. Tourism, in the last decade, as witnessed by the growing supply of by nature, is a genuinely transversal sector. The industry domestically produced fresh food in the markets.7 The is very diverse, and widely recognized to be an unwieldy agricultural sector grew at an annual average of 4.6 percent and complex phenomenon to develop and promote. The per year during 2007–2016, which is faster than the annual complexity of planning and management activities is partly growth of 3.2 percent of the economy as a whole. It reflects due to the diverse activities of different subsectors—and the the growing shift from subsistence agriculture to an agri- wide range of government ministries, private sector, and culture increasingly oriented toward meeting the demands civil society actors that are drawn into the industry’s policy of the market.8 Despite the paucity and fragmentation of and institutional environment. This is a huge institutional agricultural land, insufficient and irregular precipitation, challenge for all governments. In Cabo Verde, particularly poor soil fertility, and rugged terrain, production has grown important is the need to fill the current governance vacuum largely due to the incorporation of new technologies and in the sector. This includes the supervision and oversight of investments made in electricity and dams, and in response tourism tax funds recently attributed to municipalities. A to the fast growth of the urban domestic market. Agricul- quality label program is being prepared, modeled after the ture in Cabo Verde is predominantly based on subsistence Seychelles Secrets initiative. The objective will be to train, family production, which consists of very small plots certify, and promote locally-owned small accommoda- and rain-fed farming. However, irrigation, especially drip tion establishments in all islands. Under a new program, irrigation, has expanded fast, following the completion of 20 Cabo Verde companies involved in the tourism value various dams and gravity irrigation schemes in Santiago chain will receive training and certification in certain ISO and Santo Antão during the past 10 years. According to quality management systems. the Agricultural Census of 2004 and 2015, the number of farms that use irrigation increased from 7,023 to 8,580, A better exploitation of Cabo Verde’s “blue economy” and the number of irrigated plots from 10,612 to 12,563 offers sizeable opportunities for more diversified tourism, during this period. In 2015, 19 percent of the farms used 62 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion irrigation and 14 percent of all plots were irrigated, up empirical research to identify and understand the real from 11 percent in 2004.9 bottlenecks faced in the process of exporting agricultural products and creating special task forces to resolve these Across the archipelago, a range of agricultural goods are bottlenecks. The strategy of promoting the export of agri- produced and successfully exported for specific markets; a cultural and livestock products necessarily requires the realistic export strategy must indeed focus on niche prod- organization of production and farmers, market informa- ucts and niche markets. These include organic, ethnic, fair tion, the improvement of marketing, and public policies trade, nostalgia products (produtos da terra for the dias- that promote increased production, quality systems, and pora), and other low-volume/high-added-value products. support for exporting enterprises.11 The “Cabo Verde” brand adds value and should derive its competitive edge from incorporating the country’s unique Successive governments have designated the fisheries sector cultural and historical characteristics. The sector’s growing as a strategic sector of vital importance to the country’s commercial orientation has also been stimulated by the social and economic development; however, despite recent participation of business enterprises in the production and growth, its contribution to the economy remains small. commercialization of wine, sugarcane-based liquors, and The sector’s contribution to the economy has experienced goat cheese. Quality is a major preoccupation, however, positive developments mainly due to increased exports of and the lack of food safety certifications remains a key canned fish. But while production has gone up in recent challenge for the corresponding supply chains. Further years—from 20 tons in 2007 to 34 tons in 2015—its con- expansion of production might require more efficient use tribution to GDP has fallen, from 2 percent of GDP in of water from irrigation schemes and more innovative ways 2000 to 1.2 percent in 2015. In 2000, around 5 percent to reuse water, including recycling wastewater. Expanding of the labor force worked in the fisheries sector, but this agricultural production would create opportunities for a dropped to 3 percent in 2013. A large proportion of the large segment of the country’s rural population, many of artisanal fishers and fish traders are poor. In a case study whom are extremely poor. of Santiago island, one-third of fisheries households were classified as extremely poor, with daily incomes of around The major obstacle to commercialization is the absence US$4.90 per family.12 of an efficient and adequate national logistics system. The problem is magnified by the extreme degree of production Despite opportunities for growth, current limiting factors fragmentation, both in terms of the proliferation of small for the fisheries sector are substantial. These include ille- plots and the geographic discontinuity of the country. gal fishing, poor supervision of and control over marine Another chronic problem farmers face is the high rate of activities, as well as poor control over catches by licensed post-harvest loss. One promising solution has been the vessels. There is also a lack of scientific knowledge about construction of a network of collection, treatment, and the dynamics and evolution of the main stocks. Therefore, distribution centers. Private management of these post- the focus should be on creating the conditions for sustained harvest centers should be promoted, with an active role improvement in the sector’s productivity and competitive- in the training of farmers and other chain operators, and ness, based on an ecologically and economically sustainable the promotion and dissemination of market information. approach. Deepening ongoing efforts to embrace the concept Domestic support policies and institutions must also be of the blue economy would offer opportunities for sustain- established to foster quality export-oriented production.10 able and inclusive exploitation of marine resources and to Existing preferential trade agreements of which Cabo Verde realize potential synergies between sectors that depend on is already a part, like the U.S. AGOA and the European EPA, them, such as marine-based tourism.13 provide privileged market access to 1 billion consumers, including large diaspora communities. Efforts must be made to impart greater efficiency in the distribution channels and commercialization of seafood Exporters face different requirements than those applied products, increasing operators’ income levels and the welfare to the national market, thus specific export support is of fishing communities. The primary objective should be required. These include credit lines for export, applied to strengthen the capacity to supply the domestic market, research, agribusiness development centers, and grants. taking advantage of improved market opportunities offered Export market information needs to be improved, which is by the tourism sector—which is currently estimated to pur- just one component of a much larger program to conduct chase less than 20 percent of its fish locally—and increased Opportunities/Possible Pathways to Growth and Poverty Reduction  63 demand of the canning industry. However, it should be and indirect effects on the economy. The PEDS recognizes noted that local sourcing of seafood by the hotel industry that this vision is to be realized through strong participation could possibly have negative consequences on fish avail- of the private sector, with the state in the role of promoter. ability for local consumption and increase pressure on fish resources. Cabo Verde needs an innovative business model Cabo Verde’s geographical location in the middle of four that ensures the sustainability of the fish supply that is continents indeed offers potential for the development of a grounded in research, along with an in-depth understand- logistics hub, but key constraints have yet to be overcome ing of ecosystems. and further work is needed to assess private sector inter- est. Becoming a logistics hub would require building and maintaining a global competitive advantage. Currently, Logistics and ICT connectivity to global support chains is weak, and trading infrastructure indicators show lower values than Cabo Cabo Verde’s new Strategic Plan for Sustainable Devel- Verde’s aspirational peer countries (see figures 44a and b). opment (the PEDS) proposes that the country become a For example, Cabo Verde is ranked lower than Mauritius, logistics hub for maritime and air transport, capitalizing Seychelles, and Senegal along “burden of customs proce- on Cabo Verde’s strategic location along major maritime dures” and also on “quality of port infrastructure” (see and aviation routes. It identifies market opportunities—for figure 44a). The country is also ranked lower than various example, in the field of bunkering and transshipment. peer countries on the UNCTAD’s “liner shipping connec- The potential to become an air transport hub is based on tivity index,” although in 2017 a major improvement was the country’s location at the intersection of important air witnessed (see figure 44b). This index captures how well routes that connect the continents bordering the Atlantic. countries are connected to global shipping networks. It Around 120 aircraft fly over Cabo Verde’s air space every looks at number of ships, their container-carrying capacity, day, totaling a daily flow of between 18,000 and 24,000 maximum vessel size, number of services, and number of passengers. This excludes passengers to and from Cabo companies that deploy container ships in a country’s ports. Verde. The PEDS argues that if Cabo Verde can capture 5 percent of this market share after 5 years, and 10 percent The logistics/services hub-centered economy is not simply after 10 years, the country will have captured an interna- about large infrastructure projects; it is also about creating a tional market of around 2,400 passengers per day, in transit, platform for an efficient flow of business activity for which which is equivalent to about 24 flights with medium-sized the enabling environment is currently not optimal. It would aircraft. This could grow to 100 flights and eventually require developing incentives to attract foreign investors and to 124 daily flights with larger aircraft, totaling about finding an essential private partner with adequate technical, 24,800 passengers per day. This will have important direct financial, and commercial means to set up a hub strategy FIGURE 44A. Trading Infrastructure Indicators, 2017 FIGURE 44B. Liner Shipping Connectivity Index, Annual, 2004–2015 5 4.5 35 4 30 3.5 25 3 20 Burden of customs Quality of port procedure, WEF infrastructure, WEF 15 (1 = extremely inefficient (1 = extremely to 7 = extremely underdeveloped to 7 = well 10 efficient) developed and efficient by international standards) 5 Cabo Verde Seychelles 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Mauritius Lower middle income Senegal Cabo Verde Seychelles Mauritius Maldives Sources: World Economic Forum 2017 and UNCTADStat. 64 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion for serving the Americas, Europe, and the African market. identifies ICT as a constraint (see Chapter 4) rather than However, other enabling conditions would also need to an opportunity, but when key policy barriers are overcome be strengthened. These include improvement of human this could well be turned around and the ICT sector could capital, ICT services and electricity, and broader aspects become a key pillar in the country’s development strategy. of the investment climate (see Chapter 4). The quality of air and maritime transport are currently a constraint for Cabo Verde’s development, but these could well turn into MANUFACTURING an opportunity and possibly lead to Cabo Verde becoming Manufacturing can be an important vehicle of structural a logistics hub once these and broader investment climate transformation, moving people out of low-productivity pri- constraints have been tackled. mary sectors into higher productivity ones. It has been a key driver of Mauritius’s success following a targeted industrial Cabo Verde has substantially improved its connectivity and policy that including labor reform, export processing zones use of ICT over the past decade, leading to relatively high with duty free access for imported inputs, tax incentives, a levels of broadband adoption, extent of use by the govern- segmented labor market, and ensuring preferential access ment, and availability of local online services. The country for end products.15 For Cabo Verde, the services sector has has benefitted from its geographic location and is already been the main engine of its growth, but as economic growth served by two cables. Cabo Verde ranks 4th among African has grinded to a halt in recent years, the question is whether countries along the ICT Development Index (IDI), however, manufacturing—which is the traditional growth escalator it is behind South Africa and its aspirational peers Mauritius for developing economies—will be an important driver of and the Seychelles. As mentioned, bandwidth per Internet growth in Cabo Verde going forward. The industrial sec- user is relatively low at 17,000 bits per second,14 and one tor currently constitutes 15 percent of GDP, and during of its two cables is currently at full capacity. The Ella-link 2009–2016 grew on average by only 0.3 percent per year, cable from Brazil to Portugal (scheduled to enter service compared to 1.7 percent of the services sector. by the end of 2019), is planned to connect to Cabo Verde. If realized, this will help address the increasing demand For Cabo Verde to achieve Mauritius’s manufacturing suc- for international capacity in the country and reduce the cess, it would need to increase the competitiveness of its current reliance on one submarine cable. trade infrastructure, its workers’ skills, and its ability at the national and local level to dialogue with the private sector. As mentioned, a key difficulty for ICT development in Cabo Industrial policies can play a central role in promoting Verde is weak enforcement of the ICT regulatory regime, manufacturing and providing cheap industrial land, port which undermines international competitiveness. It has led facilities, and duty-free import of materials and equipment to unfair competitive practices from the vertically integrated for export production. While Cabo Verde could develop operator, creating a particularly challenging operational these facilities, it faces key challenges in terms of the quality environment for other private sector players in the market. of its basic infrastructure services, including connectivity in There are indications that recent developments may threaten terms of shipping and air transport, as well as electricity, the gains from liberalization achieved over the last dozen drinking water, and ICT. Its broader regulatory environ- years, which will undermine the sustainability of the ICT ment for the private sector will need to be strengthened, business environment. The feasibility of developing Cabo and improving vocational training will be key to lowering Verde as an ICT hub is further undermined by inadequate the training costs facing would-be private investors. planning and poor management of the power sector, which contributes to high energy costs; the relatively poor quality Policy interventions should start by learning from its current of education; and transport connectivity problems. manufacturing sector—mainly the export of canned and frozen fish—and assess the constraint these firms face and In the short term, the ICT sector should probably focus on address these. Implementation of industrial policies should strengthening its support to other sectors, such as modern- be decentralized as much as possible to increase proximity izing the delivery of education and health services across to entrepreneurs, improve accountability, and foster com- the archipelago and developing logistics and tourism. To petition between local governments. It will be essential to further assess the potential for realizing the vision of Cabo learn from further pilot initiatives and put in place effective Verde as an ICT hub, further analysis is needed on how the monitoring and evaluation mechanisms to regularly review enabling environment for that can be improved. This SCD and improve ongoing interventions. Maintaining a stable Opportunities/Possible Pathways to Growth and Poverty Reduction  65 and conducive macroeconomic environment and ensuring Mindelo (Sao Vicente) that natural resources are well managed are additional conditions for growth in the manufacturing sector. Island-Specific Opportunities Cabo Verde’s nine inhabited islands vary in terms of their demographic trends, social and agro-ecological characteristics, geography, and comparative advantage for different tourist products. They provide a range of opportunities. Below we briefly summarize these for six of the main islands that cover more than 90 percent of the population. Sao Vicente. The island of Sao Vicente is the second largest island in terms of population. Around 15 percent of the Santiago. Santiago is by far the largest island in terms of population are found here, a proportion that has remained size and population. In 2015, 57 percent of the population stable since 2001. Around 9 percent of the country’s poor lived on this island, up from 54 percent in 2001. Most of and 11 percent of the extreme poor, respectively, are located them live in Praia, which now contains 28 percent of the on this island. The bulk of the population lives in Mindelo, country’s population, up from 22 percent in 2001, and the country’s cultural capital that also has a large deep-sea which has by far the highest agglomeration of people port and a ship yard. Several fish packing factories are in the country. More than half of the extreme poor live found here. The island has limited cultivable land and its in Santiago, the bulk of them in rural areas. Roads have agro-ecological potential is probably low. Opportunities for substantially improved in recent years, and various dams growth and increased shared prosperity consist of further have been constructed across valleys, together with small- expanding cultural tourism and other blue economy-based scale irrigation schemes. Water is expensive and commonly activities, as well as cruise ship visits. Expansion of fisheries applied to crops using drip irrigation techniques. Horti­ depends on the protection and sustainable management of cultural production has expanded in recent years, providing fish stocks and the possible development of aquaculture. the growing urban market of Praia with a steady supply of The PEDS also identifies the potential to expand the bun- fruits and vegetables. Some traders also take their produce kering of sea vessels and the development of ship yards. to the tourist resorts in Sal and Boa Vista islands. There is considerable potential to further expand horticultural Santo Antão. Around one-tenth of Cabo Verdeans currently production, but this would require recycling wastewater live on the mountainous island of Santo Antão, down from and expanding low-cost desalinization of sea water. Praia’s 14 percent in 2001. It has long been the poorest island, but economic potential mostly consists of business tourism, extreme poverty has come down faster than anywhere else logistics, and cruise ships. in Cabo Verde, and dropped spectacularly from 48 percent Santiago 66 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion in 2001 to 17 percent in 2015. Investments in infrastructure, Sal and Boa Vista. These islands had small populations such as roads and dams, some expansion of agricultural until the tourism boom and the expansion of all-inclusive niche products such as goat cheese and rum, trekking resorts attracted substantial numbers of tourist workers tourism, and outmigration are likely to have contributed from other islands. The islands have little arable land and to increased welfare. The island is renowned for its natural receive little rainfall. Attractive beaches in combination beauty and has steep mountains and deep valleys. It receives with biodiversity hotspots constitute important assets. more rainfall than other islands. Its development potential Urban development has remained behind demand, lead- consists of expanding the production of agricultural niche ing to poor housing and sanitation facilities for workers. products, and trekking and community-based tourism. Employers have not invested in housing development for their staff. Development potential consists mainly of further Santo Antão diversifying tourism, including water sports, sea fishing, and bio-tourism. Boa Vista Fogo. Fogo currently contains around 6.6 percent of Cabo Verde’s population, down from 8.8 percent in 2001; outmi- gration has been relatively high. It currently has the highest extreme poverty rate: 20 percent, which is twice the national average. Around 12.5 percent of the extreme poor live here. The island is characterized by its large, old, volcanic crater, where several eruptions through new, small subcraters have NOTES taken place over the past 50 years and as recently as 2014. 1. National Implementation Unit, Enhanced Integrated Framework, and Important income sources include tourism, the produc- MTIE 2013. 2. National Implementation Unit, Enhanced Integrated Framework, and tion of wine and coffee on the crater’s slopes, as well as MTIE 2013. the production of goat cheese. Potential for development 3. PwC 2014. consists of expanding tourism, including of the diaspora, 4. World Bank 2013c. 5. World Bank 2013c. and agricultural production. 6. See, for example, the World Bank report on the Blue Economy (World Bank and United Nations 2017). 7. Few records of the production of fresh produce are kept, but Fogo expert interviews confirm this finding. Overall agricultural sector growth. 8. National Implementation Unit, Enhanced Integrated Framework, and MTIE 2013. 9. Ministério da Agricultura e Ambiente et al. 2017. 10. National Implementation Unit, Enhanced Integrated Framework, and MTIE 2013. 11. National Implementation Unit, Enhanced Integrated Framework, and MTIE 2013. 12. Save the Children and Ministry of Agriculture 2017c. 13. See, for example, the World Bank report on the blue economy (World Bank and United Nations 2017); the Cabo Verde Charter in Favor of Promoting Blue Growth and FAO organized a conference on blue growth/economy in Cabo Verde (Mindelo) (FAO 2017). 14. ITU 2016. 15. World Bank 2014c.  67 CHAPTER 6 Summary of Binding Constraints and Remaining Knowledge Gaps T he previous chapter summarized Cabo Verde’s the private sector, and academics, as well as those in the opportunities to reignite growth, further reduce donor community. Initial consultations were undertaken poverty, and strengthen social inclusion. In this in 2016 to frame the concept and hypotheses. A second concluding section, we provide a summary of the binding round of consultations was undertaken in Praia, Santo constraints presented earlier, together with the drivers of the Antão, Sao Vicente, and Boa Vista during October 24–30, constraints and the evidence. We also discuss the remaining 2017, as a consistency check of the binding constraints knowledge gaps. that were identified. Appendix F presents the in-country consultations in Cabo Verde in more detail. A third round This chapter brings together the various development was conducted on January 21, 2018, with representatives challenges confronting Cabo Verde under five overarching of the diaspora in Rotterdam, the Netherlands. There was binding constraints. The SCD identifies the most important broad support for the evidence on the achievements, chal­ opportunities and obstacles to reducing poverty and improv­ lenges, opportunities, and priority constraints. Participants ing shared prosperity in Cabo Verde. Based on existing took note of the findings, many of which supported those evidence presented in the preceding chapters, more than a of the recently approved Strategic Plan for Sustainable third of the population is poor. This is due in part to low Development (the PEDS). human capital and governance and fiscal challenges, which, when combined with economic dispersion, limit economic The third step consisted of consultations with the World opportunities. Table 4 summarizes the binding constraints Bank Country Team for Cabo Verde, during which bind- and describes their drivers. Figure 45 presents their relation­ ings constraints were discussed and modified. Country team ship to the analytical framework presented in Chapter 4. members ranked the constraints using a worksheet that summarized the rationale and evidence for each constraint. They then ranked the constraints from 1 to 10 along two Prioritization Process criteria: the poverty impact of removing the constraint; and the strength of the evidence. The diagnosis and prioritization of development constraints is the result of a three-step process. The first step resulted in the analysis findings covered in the preceding chapters. This includes benchmarking Cabo Verde against its aspira­ Key Knowledge Gaps tional peers—the Seychelles, Mauritius, and other relatively advanced small developing states—along a series of perfor­ This SCD has been informed by a review of more than mance indicators to identify areas where the country is 50 studies, primary data analysis, expert interviews, and lagging behind. Expert interviews, available reports, analyses stakeholder consultations. While this provided a wealth of of statistical data to assess the main drivers of economic information, a number of data gaps have been identified. growth and poverty reduction, and limiting factors that The main country sources of information for this SCD caused growth to stall were used to identify the remaining were data from the national accounts, household surveys, constraints for progress. Evidence from these processes led labor force surveys, and other macroeconomic and social to a list of 10 priority constraints. indicators from government and secondary sources. The WBG’s Doing Business and Enterprise Surveys were used to The second step involved in-country consultations with capture firm business climate concerns. This SCD identifies government officials, civil society members, individuals in knowledge gaps and signals potential directions for future 68 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion TABLE 4. Summary of Binding Constraints Constraint Description of drivers of the constraint 1 Inadequate human capital High secondary drop-out rates and insufficient quality of education lead to a workforce that lacks the skills required for a diverse and dynamic service economy. 2 Poor connectivity Inter-island transport is expensive and unreliable, which affects the integration of domestic markets for labor and goods. Inadequate ICT infrastructure and weak institutional arrangements prevent faster progress in this essential backbone of the service economy. Weak planning and management of the power sector affects the provision of less costly and more reliable delivery of electricity and water for consumption and irrigation. 3 Risks to macroeconomic stability High public debt is preventing the government’s ability to invest in key infrastructure, particularly and fiscal sustainability in the power and transport sectors. Together with high economic vulnerability due to heavy reliance on all-inclusive tourism and tourists from a small number of European countries, this potentially undermines macroeconomic stability. 4 Weak public sector performance The government is not sufficiently effective in terms of delivering the needed policy reforms, and accountability on results delivery is weak. This negatively affects the creation of a more favorable investment climate for the domestic private sector, and the generation of a well- qualified workforce. Public-private collaboration is inadequate to develop a more diverse services sector and to make infrastructure investments more productive. Decentralization is incomplete, and local capacity and duplication efforts could undermine the cost-effective delivery of results on the ground. 5 Lack of resilience The growing exposure to weather shocks is an important constraint for sustaining development progress, as it undermines the resilience of both households and the economy. Cabo Verde’s natural environment is insufficiently protected, and its performance along indicators related to its policies and institutions for environmental sustainability have lagged in recent years and are relatively low. research, as they go beyond the scope of this SCD. These which demand-led models can be considered for scaling are the following: up, and what specific dimensions of SME capabilities are the least developed (production management, sales and •  Skills. Conducting additional work on skills from the marketing, personnel management, etc.). point of view of the firm to better understand the extent •   School drop outs. High secondary school drop-out rates to which the lack of skill supply is inhibiting investments are an essential constraint for Cabo Verde’s progress. in process and technology improvements (or vice versa). Several possible causes have been mentioned in this The analysis could also look specifically at how the report. However, evidence is limited and little is known private sector is dealing with the lack of higher skills, how this differs across areas and population groups and what factors are influencing these. • Efficiency of school expenditure. While Cabo Verde has FIGURE 45. Analytical Framework and allocated substantial budgetary resources to education Binding Constraints over the past 15 years, the education system could yield savings by more efficiently using resources. The unit Analytical framework Binding constraints for poverty reduction cost per student at the secondary and tertiary levels is high compared with international benchmarks, but Raise economic 1. Inadequate human capital the results are significantly lower. The average teacher growth wage in Cabo Verde is 15 percent higher than positions 2. Poor connectivity requiring equivalent qualification on the labor market. Non-teaching staff account for 29 percent of the total Strengthen social number of employees at the Ministry of Education and inclusion 3. Risk to fiscal sustainability their corresponding wages comprise 25 percent of total education expenditures. Cabo Verde’s education system 4. Weak public sector performance would benefit from a better targeting of social expenditures Improve while increasing resources in pedagogical expenditures. resilience 5. Lack of resilience of the • Market integration. The extent to which markets for economy and households goods and services are integrated is unknown, and Summary of Binding Constraints and Remaining Knowledge Gaps  69 TABLE 5. Binding Constraints and a Summary of the Evidence Constraint Subconstraint Evidence 1 Inadequate human capital High school drop-out rate Benchmarking: Cabo Verde ranks behind aspirational peers in terms of net secondary enrollment (see figure 25a), and student retention is relatively low and not improving (see figure 25b). Other evidence: High proportion of youth are not in school, not working (IDRF 2015). Insufficient skills Benchmarking: Proportion of firms stating that an inadequately educated workforce is a major constraint is higher than aspirational peers (see figure 32a). Long distance from education efficiency frontier (see figure 32b). Other evidence: Low scores for Aferida test on mathematics and Portuguese, 37% of teachers have no degree. 2 Poor connectivity Problematic inter-island Benchmarking: Cabo Verde ranks behind its aspirational peers transportation on the WEF’s quality of infrastructure index (see figures 33a and 33b), especially regarding quality of port infrastructure and air transport (see figure 33b). Other evidence: Expert interviews suggest maritime and air transport are unreliable. Weak ICT infrastructure Benchmarking: The ITU ranks Cabo Verde behind its aspirational peers in terms of ICT development. Internet use (see table 2) and bandwidth per Internet user are also lower than aspirational peer countries. Cabo Verde has a low global rank (103rd) on the UN’s e-governance index. Other evidence: Expert interviews revealed inadequate regulatory regime and lack of cable capacity. High energy costs Benchmarking: Cabo Verde has higher energy and desalinized drinking water costs than its peer countries. Electricity losses are higher than the average for SSA. Other evidence: High commercial losses of ELECTRA. 3 Risks to macroeconomic stability High debt Benchmarking: Debt-to-GDP ratio is higher than peers (see and fiscal sustainability figure 29b); macroeconomic risk rates are higher than Mauritius (similar to the Seychelles) (see figure 33a). Other evidence: Present value of debt is above the sustainability threshold. High economic vulnerability Benchmarking: Higher volatility of GDP growth than aspirational peers. 4 Weak public sector performance Insufficient delivery of reforms Benchmarking: Lower WGI scores along “government effectiveness” and “regulatory quality” compared to aspirational peer countries (see figures 26c and d); lower global rank than aspirational peers on Doing Business (see table 3), and rank is dropping. Larger public wage bill than peers. Other evidence: Political economy studies suggest that the bipartisan political system paralyzes civil society and pressure groups (Costa 2013). 5 Lack of resilience Low household resilience Benchmarking: Higher frequency of droughts and storms than its peers; lower rank than peers on its Vulnerability score; highly unequal land ownership and low land assets of the extreme poor (see figure 41) (Save the Children 2017abc). Lack of protection of the natural Benchmarking: Low rank on enforcement of environmental environment regulations on the Travel & Tourism Competitiveness Index. Cabo Verde is one the world’s most endangered biodiversity “hotspots.” Other evidence: CPIA scores for Cabo Verde are lowest for environmental sustainability. 70 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion important for understanding key requirements for a remitter as well as the impact of remittances on house­ improving logistics and market integration. An analysis hold income and behavior could be useful in explaining of price trends of goods across the archipelago should unemployment and poverty. This could include assessing shed light on this. how the diaspora can be better engaged to contribute to •  Decentralization. Weak service delivery at the local level Cabo Verde’s development. in terms of urban planning, and developing housing and •  Political economy of SOE reform. This SCD is limited in sanitation systems and irrigation development, are a key terms of its discussion of the political economy of reforms constraint. The extent to which municipality capacity, in Cabo Verde. For example, the SOE sector has long been efficiency, and accountability are constraints for efficiently an important player in the delivery of public services in delivering this service is not known, yet this would seem Cabo Verde, but reforms to improve its performance essential for improving the efficiency of investments. and management have not yielded the desired results. •  Constraints regarding better engagement of the diaspora. Recently, performance-based contracts were introduced, With remittance playing an important role in economic but never enforced. A related area for improvement is to development in Cabo Verde, fresh analysis on the profile of collect and report on debts of all SOEs.  71 REFERENCES AfDB (African Development Bank). 2012. 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Economic Impact 2017: Cape Verde. https://www.wttc. ———. 2014b. “Cape Verde: Improving the Performance org/-/media/files/reports/economic-impact-research/ of the State: Governance and Public Management.” countries-2017/capeverde2017.pdf.  75 APPENDIX A Definition of Peer Countries T he Cabo Verde SCD features a systematic benchmark- c. Having a population of less than 1.5 million people. ing exercise using a pre-identified list of structural d. Having general government gross debt above 50 percent and aspirational peer countries. The country’s of nominal GDP. performance is also compared against lower- and upper- middle-income country groups as well as SSA. The peers were selected using the MFM Find My Friends Toolkit as follows: Aspirational and Regional Peers Under this classification, we allow for higher levels of Structural Peers development. The criteria used are: a. Being a small island state. We selected countries with similar economic characteristics b. Having a population less than 1.5 million people. to Cabo Verde using the following criteria: c. Being an upper-middle to high-income country. a. Being a lower-middle-income country. d. Having an international tourism receipt (as a percentage b. Having an international tourism receipt (as a percentage of total exports) greater than 25 percent. of total exports) greater than 18 percent. e. Having a debt-to-GDP ratio of greater than 50 percent. TABLE A.1. Structural Peers and Aspirational Peers of Cabo Verde General Tourism government Investment, receipts as gross debt as % of Classification Population % of total % of nominal nominal 2016 GNI per Country by income Region (million) exports GDP GDP CPIA capita, US$ Cabo Verde Lower MIC SSA 0.5 53.0 110.0 39.0 3.8 2,970 Structural peers Bhutan Lower MIC SAR 0.8 19.0 94.0 57 3.7 2,510 Sao Tome and Principe Lower MIC SSA 0.2 64.0 74.0 29.4 3.1 1,730 Samoa Lower MIC EAP 0.2 65.0 55.0 — 4.0 4,100 Aspirational peers Mauritius Upper MIC SSA 1.3 27.0 56.0 19.0 4.6 9,760 Seychelles High income SSA 0.1 35.0 68.8 32.9 3.6 15,410 St. Lucia Upper MIC LAC 0.2 58.0 80.2 20.5 3.7 7,670 St. Kitts and Nevis High income LAC 0.1 34.0 82.9 30.0 3.6 15,860 St. Vincent and the Upper MIC LAC 0.1 47.0 77.9 25.1 3.7 6,790 Grenadines Sources: MFM Find My Friends Toolkit and World Development Indicators.  77 APPENDIX B Welfare Data T hree household surveys have been conducted recall method based on shorter questionnaire with a less in the last 17 years: the IDRF 2001–2002, the comprehensive set of consumption items. The 2001–2002 QUIBB 2007, and the IDRF 2015 . While the survey might thus have overestimated inequality and 2001–2002 and the 2015 surveys used very similar con- possibly consumption, while the 2007 survey probably sumption questionnaires, and both used a 15-day household underestimated consumption. A strictly valid comparison food consumption diary, they differed in the way durable of the consumption aggregate of the 2001–2002 survey consumption goods were valued. The 2001–2002 survey and the 2015 survey would require adjusting the valu- valued durables at their purchase value, while the 2015 and ation of the consumption durables in the consumption 2007 surveys applied user values. The QUIBB 2007 survey aggregate of the 2001-2002 survey. This was not done had no household consumption diary and instead used a for the analysis presented in this SCD.  79 APPENDIX C Explaining Growth Transition in Cabo Verde A review of economic growth transitions was the government pursued state-led economic policies and conducted that covers the period 1985-2015. maintained a dominant public sector. The economy grew It includes the following variables: domestic at a solid pace of nearly 5 percent in the 1980s. Starting economic policies (investment, exports, imports, real in the early 1990s, Cabo Verde introduced ambitious eco- effective exchange rate, terms-of-trade, inflation), political nomic liberalization and decentralization measures aimed circumstances (the polity index, an indicator for regime at reinvigorating growth. As a result, the economy moved changes), and the external environment (terms of trade). into higher gears, with real GDP growth approximating The choice of variables is partly justified by the findings double digits in 1992–2000. However, economic growth of some recent studies (e.g., Haussmann et al. (2005); Imam slowed during the early 2000s due to weak fiscal man- and Salinas (2008)) which show that growth turnarounds agement—surge in fiscal deficit—triggering a plunge in are associated with increases in investment and trade, with international capital flows, including donor support. The real exchange rate depreciations, and regime changes. The last turning point, in 2008–2009, coincides with the start link with changes in terms-of-trade is weak. Specifically, of the growth deceleration that followed the Eurozone the analysis uses a structural break approach to address the crisis, which took a heavy toll on Cabo Verde’s economy following questions: (1) Did Cabo Verde’s economy experi- by reducing FDI inflows and tourism demand. GDP growth ence sustained shifts in growth rates since the mid-1980s? was only 1.3 percent on average in 2009–2015, compared (2) What policies or other correlates are likely associated to 7.4 percent in 2001–2008. with growth accelerations or decelerations? And (3) what were the possible causes of sustained growth transitions? The growth deceleration since 2008–2009 coincides with a sharp decline in investment and import growth rates Similar to work done by Haussmann et al. (2005), Jones (see table C.1). In contrast, changes in the growth rates and Olken (2008), and Gebregziabher (2015) an algorithm of exports as well as the remaining determinants are not searching for structural breaks developed by Doornik significantly linked with the growth deceleration after et al. (2013) is used to determine the existence, timing, and 2008–2009. Similarly, external conditions and institutional significance of breaks in long-run growth rates. Sustained (or regime) changes were found to be insignificant deter- shifts in growth rates are defined following Haussmann minants of the downward shift in the growth trajectory. et al. (2005): (1) For a shift in mean growth rate to be Average annual growth in (gross) investment stood at categorized as a growth turnaround it should be sustained 16 percent during 2003–2008 and fell drastically to for at least 8 years and the change in growth rate must –0.02 percent in the post-2009 period. Similarly, import be at least 2 percentage points; (2) There can be more growth averaged 11 percent in 2003–2008 but sharply than one instance of growth turnaround as long as the contracted to an average of –4.6 percent during 2008–2015. dates are more than 5 years apart; (3) Trend breaks were This essentially reflects the sharp decline in capital goods selected at 1 percent target size (i.e., α = 0.01). The target imports resulting from lower investment. However, the size determines the significance level below which a break long-run growth rate of exports experienced only a slight is not kept in the model (see Doornik et al. 2013). decline. Disaggregating gross investment shows that the growth rates of both government and private investment Cabo Verde’s GDP growth experienced three turning points declined markedly. However, the drop in public invest- over the past three decades: 1992, 2001, and 2009 (see ment growth was more pronounced, from 12 percent in figure C.1). Econometric evidence indicates the presence 2003–2008 to –15 percent in 2008–2015. The results also of a growth take-off in 1992 and growth decelerations in show that the sharp downturn in growth was also linked 2001 and 2009. These are associated with extraordinary to significant contraction in FDI flows, from 25 percent to (economic and institutional) events. During 1975–1991, -8 percent between these two periods. 80 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE 1. Cabo Verde: Real GDP Growth Rate TABLE C.1. Cabo Verde: Long-Run Growth Rates of Macroeconomic Variables 0.175 0.150 Var. δ11 1992 δ11 2001 δ11 2009 0.125 Δyt 0.084 –0.048 –0.057 (5.97)*** (–3.72)*** (–4.11)*** 0.100 Δinvt 0.021 0.081 –0.153 0.075 (0.16) (1.78)* (–2.46)*** 0.050 Δext 0.127 –0.008 –0.025 0.025 (2.53)*** (–0.18) (–0.51) 0.000 Δimt 0.046 0.024 –0.132 (0.97) (0.55) (–3.33)*** 1985 1990 1995 2000 2005 2010 2015 Δreert 0.002 0.007 –0.006 GDP growth rate SIS + IIS, = 0.01 (0.07) (0.446) (0.398) Source: Red line: real GDP growth rate. Blue line: fitted line derived Δinft –1.09 2.49 –2.11 from the statistical test in Doornik et al. (2013). Structural breaks (–0.56) (1.33) (–1.05) determined ny Step-Indicator Satiration (SIS) and Impulse–Indicator Saturation (IIS) (with breaks selected at target size a = 0.01). The target Δtott 0.00 0.006 0.018 size determines the significance level below which a break is not kept (0.00) (0.07) (0.28) in the model. ΔFDIt — — –0.272 (–1.68)** Notes: t-values in parentheses; δ1 is the long-run growth rate of yy the macro-variables; δ11 measures the shift in long-run growth rates that accompanied the extraordinary events in year yy. Some of the coefficients are statistically insignificant due to substantial fluctuation in the annual growth rates, which appears to have increased the standard errors of these estimates.  81 APPENDIX D Rural Livelihood Analysis F rom October to December 2016, a livelihood assess- with deeper soils. Household economic activities are ment of the three main livelihood zones was conducted related to the production of crops and animals for own on Santiago, the main island of Cabo Verde. Around consumption and for sale, miscellaneous trade (including half of Cabo Verde’s population lives on this island. Data were production and sale of sugar cane drinks), straw sales and collected using both quantitative and qualitative approaches. agricultural labor work. While the findings are not necessarily representative for the population in each of these zones, data were collected from a Households grow maize and various bean species, often range of contrasting localities that were thought to illustrate cultivated together with varieties of pumpkin. Families of the different situations in each zone. Findings were presented all wealth groups typically have animals but numbers and in a report in Portuguese. Below we present summaries of type differ. Most keep small numbers because of limited the findings for each of the three zones in Santiago island: space and shortage of pasture and water. Cattle, sheep and the Maize, Beans and Livestock Livelihood Zone (CV01), the goats are fed with crop residues in the stables, or taken to Vegetables, Banana, and Papaya Livelihood Zone (CV02), specific areas of common pasture. Pigs and poultry are fed and the Fisheries, Goat and Pig Rearing Livelihood Zone from the remainder of the family’s meals, and chicken and (CV03). 1 ducks are given grain. From December to June, when the animals are taken to the grazing areas, they drink water in the streams and or in the community owned watering Maize, Beans and Livestock taps in the grazing areas. Men are responsible for cattle, Livelihood Zone (CV01) sheep and goats, while women are responsible for caring for pigs and poultry. DESCRIPTION Poorer households only have access to poor quality land The maize, beans and livestock livelihood zone covers owned by the state or rent marginal land at low prices from population clusters both in the interior of the island and in private households. Household of medium wealth rent the coastal zone that are dedicated to rainfed agriculture, better quality lands at higher prices. Richer families have with emphasis on the cultivation of maize and different full ownership of the land they cultivate. The workforce varieties of beans, and breeding of different species of consists mainly of family members and sometimes salaried animals (cattle, goats, pigs and poultry). Communities labor. Maize and bean seeds are locally sourced, stored by on the island of Santiago that are part of this livelihood households and used year after year. Richer families also zone include those in the municipalities of São Domingos, have some irrigated land and produces vegetables mainly Santa Cruz, Santa Catarina, Ribeira Grande de Santiago, destined for the market. São Miguel and Tarrafal. The population density is about 297 people per square kilometer. All communities have access to drinking water, either piped or provided by water tankers. The electricity and water The climate is characterized by two well-demarcated company of Cape Verde, Electra SARL, is responsible climatic seasons: the cooler “dry season” from December for the production, transportation and distribution of to June, and the hotter “rainy season”, which runs from electricity and desalinated water in Santiago. For piped August to October. The average annual rainfall ranges water the payment is made monthly after consumption. from 200 to 400 mm, and the average temperature is Electric power is also available in all communities. All between 28 to 35° Celsius. Dryland agriculture is most households use conventional or near-conventional toilets, common in this zone and is practiced both on steep in compartments adjacent to homes or inside their homes. slopes with shallow soils and on more moderate slopes Public institutions of basic health, with a few medicines 82 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion and with only basic health technicians, are present in most WEALTH GROUPS communities. However, households often travel to areas Study participants divided community households into four where better health care can be found, such as a health wealth groups using their own criteria for wealth. Four center with a doctor. groups were distinguished: ‘very poor’, ‘poor’, ‘medium wealth’ and ‘rich’. Wealth differences are characterized by type of land tenure, amount of land cultivated for crop MARKETS production and animal husbandry, and the existence of A tarmac road in excellent condition connects the main nonfarm income sources. towns in the area. From the office of the town Councils, where the main markets are located, most of the commu- All household practice rainfed agriculture, while only nities can be reached through roads that vary from good some rich families practices irrigated horticulture on (most of them) to reasonable. In the rainy season, access to smaller portions of land. Households of medium wealth the market is difficult for certain communities, especially and better-off households own the land they cultivate, where roads are not paved. and also rent out land. Very poor households practice share cropping or rent state land. Only households of The movement of people between the main cities in this zone medium wealth and the better-off households have cattle, is usually by mini-buses (Toyota Hiace). From the cities to while all have goats, sheep and poultry. Households the communities the transportation is mostly conducted by in the very poor and poor category heavily depend on Toyota Hilux or Toyota Dyna vans, conveniently prepared uncertain and temporary jobs, while households in the for different types of transportation, including transporting other categories have more constant sources of income, children to school. such as salaries. All communities have shops where food and basic products Very poor (27%) and poor households (38%) together can be bought throughout the year, including imported make up almost two thirds of the households in the rice that is typically bought by households in large area, while households of medium wealth 24%) and the quantities. Maize is sold at a lower price. These stores better-off (11%) make up the rest. Wealthier families have refrigerators and most allow purchasing on credit, give preference to members of the poorer families of the also for the very poor families. Households can also buy same community when they look for agricultural workers. items from street vendors, who visit the communities The difference in wealth between the wealth groups is two to three times a week with small vans. Farm tools enormous. Very poor families in this area have difficul- and agricultural inputs are only available in Praia and ties continuing their studies and completing secondary Assomada. education if they do not receive support for payment of school expenses. Of the number of people who found paid work in the refer- ence year of 2015/16, about 95% found temporary work within the area (80% in rural areas and 15% in urban FOOD SOURCES` areas), mainly for construction work, and 5% in urban areas outside the area (Praia, mainly), which typically happens All households are heavily dependent on the market to from March to July. purchase their food. The better off households cultivate larger portions of land and therefore have a greater con- The possibility of consumption of maize, beans and tribution from their own crops to their food consump- other crops from their own production allows families tion. They also have more cattle that provide them with to reduce their food expenses. June to August are the milk. The poorer households have less land and animals months when very poor and poor families find it dif- and have to buy more food to make up for gaps in their ficult to obtain food because during that period there is production capacity. a shortage of own produce and prices are high. During this period, members of these families intensify their In the reference year, a typical very poor family produced search for temporary work. For very poor families the about 220 kg of maize, a poor household up to 320 kg, sale of animals helps with paying school expenses and and medium and better-off households produced 400 kg purchasing food. and 440 kg, respectively. For beans these quantities are Appendix D 83 90 kg, 140 kg, 160 kg and 200 kg respectively. In this zone, EXPENDITURE it is not typical to sell crops from rainfed parcels as all food Food expenditure accounts for more than 50% of the total is self-consumed or used for gifts. Very poor households expenditure of the two poorest groups. Even in an aver- obtained 26% of their calorie consumption from own age year such as the reference year, very poor households production, while this was 52% for the better-off. Imported used about 28% of their income for the purchase of rice. rice is the most important staple food for households for They spent a similar percentage of income on purchasing all wealth groups and provides 20–25% of their minimum non-basic foods, which included maize grain and wheat calorie requirement. The very poor and poor families do not flour, beans, bread, sugar, oil, pork, chicken and fish. always manage to obtain the food they need and depend All wealth groups spent between 4000 and 24000 ECV on school snacks and gifts from neighbors and relatives, (US$50–250) for payment of water for human consump- for a total of 5%. tion. For poorer households, water expenditure represents 3% of total annual expenditure and 1% of total annual expenditures for the richest. CASH INCOME School expenses include school fees, uniforms, statio- In the reference year, the cash income of poor families nery, and transportation which for poor household in this area is about one sixth of that of the better-off account for 7–8% of total expenditures and income, while households and there is considerable inequality in the for medium and better-off households this is 6% distribution of wealth in the area under analysis. Salaried and 3% of their total income. Very poor households jobs are important for the two wealthiest groups while often have difficulties even sending their children to sales of animal products are an important additional primary school, while those at the upper end of the income source for the better-off. For the very poor and wealth scale send them more easily into secondary school. poor households, the most important sources of income With regard to health costs, families in this area seek are gifts/remittances, followed by seasonal farm and treatment in health facilities outside the community, nonfarm work (Figure D1). whenever necessary. FIGURE D.1. Income Sources of Different Wealth Groups 1,000,000 trabalho permanente 900,000 ofertas/remessas 800,000 pequenos negócios auto-emprego 700,000 mão de obra - casual 600,000 venda de gado 500,000 venda de produtos pecuarios 400,000 venda de culturas 300,000 200,000 100,000 0 Muito pobre Pobre Médio Folgado Source: Rural livelihoods assessment October 2016 84 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion RISKS irrigation water, it arguably holds the highest potential for agricultural development. There are a number of shocks that affect this area on a regular basis. The main, and most devastating, periodic This zone extends through Santiago’s four agro-ecological hazard is unreliable or inconsistent rainfall, occurring zones, with greater predominance in the sub-humid once every three years, and leading to serious declines zones. These are located at an altitude between 400 and in agricultural production. Winds affect the marketing 600 meters, with a rainfall between 400 and 600 mm per of products in the dry season. During the rainy season year. This area is rich in water resources. Most of the irrigated access to certain communities is hampered due to flooding perimeters are located in coastal areas, downstream of the impacting on marketing, movement of people and ability river basins, and fed by river dams and springs. Alluvial to look for work. and colluvial soils predominate in the valleys. Dryland agriculture is practiced on sloping land or terraces where Other dangers affecting economic activities are: stray soils are of poorer structure and less fertile. dogs, which attack livestock, reducing herds and dis- couraging breeders, and crop pests and diseases such as Household livelihoods consist of two main pillars: produc- green locust. For animals, diseases such as the African tion and sale of irrigated crops, and occasional agricultural or plague, with great mortality of pigs, stand out. Occa- nonagricultural work. The latter is of particular importance sional conflicts occur when cattle and goats invade the for the poorest households. Agricultural production on rain- rainfed cropland. fed land is also practiced, together with livestock keeping. Very poor families only have pigs and poultry, while poor and average families have goats, pigs, and poultry, while COPING MECHANISMS rich families also have cattle. In response to shocks and years of poor production, On irrigated land farm households grow various vegetables, households try to meet their minimum food needs and usually short-cycle (ranging from 75 to 120 days) such as cash needs through a series of strategies. These include: tomatoes, cabbage, carrots, potatoes, cabbage, pumpkin, (i) increase the sale of animal products such as pigs. Richer watermelon, cucumber, and lettuce. Sugar cane, cassava, households can increase milk sales. The poorer groups can banana, papaya, and other fruits are also grown. Farmers increase sales of goats and sheep but they do not have many. divide their land into small plots and several horticultural Second (ii) all households try to reduce expenditure on crops are grown next to each other. On rain-fed land, some non-essential or expensive items such as coffee, sugar households grow maize and varieties of beans and pumpkin and oil and beans, and use that money to buy more kilos from July to October, but production levels are low. of rice. Third (iii) poorer households look for temporary agricultural work, including harvesting and selling of crop Wells and boreholes are managed mostly by the munici- residues, or conduct informal small commercial activities pality, and some by local farmers’ associations. Irrigation in nearby communities or further away. Households with is done by flood or drip irrigation systems. Farmers must relatives in more distant areas can increase their request pay for irrigation water and the price depends on the type for support in cash or in kind (food). of irrigation practiced. Kindergarten and elementary schools exist in the com- Vegetables, Banana, and Papaya munities, but children must travel long distances to attend secondary schools. Some households benefit from trans- Livelihood Zone (CV02) port subsidy and scholarship programs to send children to secondary school. Elementary schools provide school The vegetables, banana, and papaya livelihood zone is lunches for all children, financed by FICASE (Cabo Verde located on flat lands along the humid valleys in the moun- Social and School Action Foundation). These are of major tainous area in municipalities of São Domingo, Santa Cruz, importance to children from the poorest families. Santa Catarina, Tarrafal, and São Miguel on the Island of Santiago. Population density is about 297 people per The farms are small and mostly family-run, but rich farmers square kilometer. As this zone is characterized by access to often hire laborers, usually members of poor families, at Appendix D 85 CVE 1,000 per day (around US$11). Richer households compared to the medium and rich is enormous, and even also hire workers to work on sugarcane and to process between very poor and poor, or between medium and the sugarcane byproducts (rum). rich the difference is large. Irrigated agriculture requires capital to invest in adequate land, technology, and inputs. Off farm work is important for poor families and includes Often only rich families have these means. informal trade and housing construction. Construction work peaks when emigrants return to the country for vaca- Richer households sometimes provide the poorest ones with tion. Almost all households have cellphones and everyone various types of food, including maize, fruits, and sometimes has access to the Internet—mostly through their mobile ready-made meals. They give preference to members of the phones—except the poorest. same community when looking for workers. MARKETS FOOD SOURCES Even if the national tarmac road that connects the main In the reference year for the assessment (October 2015 to towns is in excellent condition, some communities remain September 2016) very poor households produced about difficult to reach, especially during the rainy season. 250 kg of maize, while rich families produced about 350 kg. Very poor households harvested about 100 kg of Marketing of horticultural products is mainly done by beans while others produced 150 kg. In this zone these are rabidantes, who buy the products from the farmers’ plots, only for home consumption. Households typically manage and the farmer must place the product where it can be to obtain around 32–39 percent of the minimum calories reached by transport. required from their own production. The rest of the food is purchased. Very poor families are typically unable to obtain Horticultural crops are grown in the irrigated plots through- all the calories they need. The deficit is filled by “food aid” out the year. However, very poor households plant crops less provided through school meals and offers from neighbors frequently, as they do not always have sufficient resources and family members. to buy the seeds, which can be costly. May to August are the months when very poor and poor SOURCES OF CASH INCOME families have a harder time buying food, as prices are higher In the reference year, the cash income of rich families was then. They therefore seek more casual work around this time. almost eight times higher than that of very poor house- holds. Very poor households obtain less than 50 percent of their income from agricultural production. For them, WEALTH GROUPS temporary work (in agriculture and self-employment) is Focus group discussions with community leaders were used more important as a source for obtaining money. In the to identify criteria for local wealth differences and to define reference year, rich families had lower profits per unit of wealth groups based on those criteria. Wealth groups were cultivated land than the very poor. determined first by the size of irrigated land and the invest- ment made in that land. Rich families own the parcels they cultivate and have the means to buy inputs and technologies, PATTERN OF EXPENSES and to pay for full-time or temporary labor. They have the Poorer households spent a larger portion of their annual largest plots. Very poor families often sharecrop land of cash just to meet food needs. Even in an average year, very the rich, while poor and middle-income families often rent poor households spend about a quarter of their income on land. Very poor families also have fewer animals. rice. In absolute terms, the better-off share of households spent about 60 times more on productive inputs than very Very poor households (35 percent) and poor families poor households. (35 percent) together make up more than half of the house- holds in the area. Medium (20 percent) and rich households All wealth groups spent a relatively large amount of money (10 percent) combined represent less than a third of the on water for human consumption, for watering animals and population. The difference between very poor and poor for irrigating crops, with poorer families spending around 86 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion CVE 9,500–15,000 (US$100–160) per year on water while PRODUCTIVITY OF GOODS/ASSETS this is around CVE 25,000–80,000 (US$300–900) per year Richer households invest more in irrigated land than poorer for rich households. Expenditure on water represented ones, either by purchasing more inputs and better quality between 6 to 8 percent of total annual expenses for each ones; by acquiring, using, and maintaining drip irrigation wealth category. equipment; or by hiring labor. Drip irrigation systems are more economical in terms of water costs, but have Households in the highest wealth category spent about acquisition costs that poorer families cannot afford. The eight times more on education than households in the productivity of irrigated land therefore differs between very poor category. Very poor households in general are wealth categories: for households in the richest category, only able to send their children to primary school, and productivity of their irrigated plots is about double those of secondary school is only accessible to them if they have the rich. At the same time, very poor to average households access to a subsidy program. Out-of-pocket spending spend between 13–18 percent of their income on agricultural on health care ranged from 1.0 to 4.2 percent of total inputs, while those in the richest wealth group spend more expenditures. Families seek treatment in out-of-community than half of their income on this. health facilities when needed. When asked what they need to move out if poverty, house- holds in the poorest wealth category indicated that drip RISKS irrigation systems and animals for breeding, and improve- The main, and most devastating, periodic hazard is unreliable ment of marketing conditions—e.g., rehabilitation of access or inconsistent rainfall, occurring once every three years, roads and market guarantee for products, are priorities. and leading to serious declines in agricultural production. Mobilization of water for certain rain-fed areas in order Winds and heavy storms affect the marketing of products to have more irrigated plots was also mentioned. Lower during the dry season, and during the rainy season it pre- costs of water and electricity for water pumps, credit lines vents access to certain communities. Crops and animals to purchase animals, construction of infrastructures for are affected by a range of pests and diseases. intensive farming, and controlling stray dogs were also mentioned. PATHWAYS OUT OF POVERTY The size of the dryland and irrigated land owned is directly Fisheries, Goat and Pig Rearing proportional to the wealth of the families. Ownership of Livelihood Zone (CV03) land is related to the financial ability of households at some point in their life to acquire land. The price of a portion of The fisheries, goat and pig rearing livelihood zone consists land is high, and very poor households have no ability to of population pockets where annual income is mainly negotiate and acquire irrigated land. obtained through activities linked to fisheries due to their access to sea. Communities are found in the flat areas of The productivity of rain-fed land does not vary much the Municipalities of Santo Domingo, Santa Cruz, Santa between households, as they use the same technology, Catarina, Ribeira Grande de Santiago and Tarrafal (on manual cultivation, and techniques, limiting investment Santiago Island). The population is settled in small clusters in production tools such as hoes. along the coast and the vegetation consist of herbaceous steppe type. This zone is part of the Agro-Ecological Zone Richer families cultivate dryland areas according to the needs (ZAE) that is located at an altitude of between 0 and 200m, of the family, depending on their stock of maize and beans; and characterized by an arid climate with annual rainfall they also exploit the entire extent of their irrigated land, direct- of less than 300mm. The coastal areas are poor in water ing a large part of the capital they own toward the purchase resources and have shallow soils. of more profitable inputs and technologies and to pay for full- time or temporary labor. Poorer families that are unable to The household economy is based on various self-employment obtain satisfactory income from the plots of land they exploit activities linked to sale of fish, other trade and construc- are unable to accumulate and maintain a reserve of resources tion. Agricultural production and animal breeding (cattle, that allows them to invest in upgrading their activities. goats, pigs and poultry) are also practiced, providing Appendix D 87 households food and income. Fishing is a key activity hooks. Very poor household are not themselves involved in that provides the fishermen cash income (from the fishing the actual catching of the fish as they do not have fishing activity or sale of fish). It is also a source of employment equipment, but they conduct other fisheries related activi- for the poorest groups. ties such as sales activities. The fishing is artisanal using mainly 4–5 m rowing boats The difference in access to food and cash income between and/or 5–8 HP outboard motors, and boats with nets the different wealth groups is large. The very poor and poor (5–6 m boats and 15 m HP) or angling (from the shore groups carry out temporary work and represent more than on the rocks). Fishing activities are carried out either near half of the households living in the CV03 livelihood zone. the communities or in fishing areas outside of the living The medium wealthy and better-off count form less than areas of the community and sometimes on other islands one third of the households. There is an interdependency (ie. Maio and Boavista). between these groups: without the work of the poorest groups, the richest would face difficulties in conducting The poorest households usually also possess rainfed plots, their fishing activities. In the same way, without the cash using land belonging to the state or renting from private income earned with the fishing work, the poorest households households. These lands are located far from the residences cannot survive and would have to leave the area to look for and sometimes outside of the fishing zone. Richest families work opportunities. Children from very poor families have own the land they cultivate. difficulties to continue school attendance or to complete their secondary education if the family does not receive support to pay costs of attending school. MARKETS A concrete national road that is in excellent condition con- SOURCES OF FOOD nects the main towns of the Island. From the municipality council headquarters, where the main points of commerce The majority of the food needed for the household comes are located, it is possible to reach all communities through from the market: counting for 81 to 95% of the minimum mostly good quality roads. requirements in the reference year, increasing with house- hold wealth. Rice, the most expensive cereal after maize The zone can be easily reached by means of transport provided flour, is the most important for households in all wealth by Toyota Hiace vehicles. Household members use these groups (37–40% of the minimum Kcalorie requirements). to carry out their purchases, to go to school or go to their Vegetable oil contributes 21–25% and bread 4–9% of mini- place of work. Products for sale are consequently available mal Kcalorie needs. Other purchased foods like maize or in the areas two to three times a week through small vans, wheat flour, beans, sugar, beef, chicken and fish contributed usually Toyota Hilux. The cost of travel per passenger varies 17% to 23% of the minimum calorie needs. from 40 to 300 CVE (US$0.5–4) depending on the distance. SOURCES OF INCOME WEALTH GROUPS In the reference year, the incomes of the very poor house- Rural households were divided into four wealth groups holds are a little more than half those of the poor. Medium namely very poor, poor, medium wealthy and better off wealthy households earn a cash income slightly higher than using criteria defined during focus group discussions with half the income gained by the better-off group. The better-off the community and based on their understanding of differ- gain five times as much cash as the very poor. For medium ences between the different wealth groups. The wealth of wealthy and better off households, fish sales represent the different groups is determined by ownership of fishing more than 95% of their total cash income. The very poor equipment that influence the type of fishing carried out and households receive about 85% of their income from the is also related to access to capital. Better-off families own sale of fish and about 10% of their total income through 5 m vessels, using 5HP or 8HP engines. Medium wealthy different types of temporary jobs and self-employment. families possess 5 m boats that are moved by use of oars All the household wealth categories sell animals but the as they do not have the means to purchase engines. Poor proportion is more important for the very poor households families fish from the shore, on the rocks using lines and for whom this represents about 5% of the total annual 88 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE D.2. Livelihood Zones in Cabo Verde Zonage des Moyens d’existence CV 00 CV 01 : MAIS, LEGUMINEUSES ET PETIT BETAIL CV 02: MARAICHAGE, PAPAYE ET BANANE CV 03: PÊCHE, PORCINS ET CAPRINS CV 04: PÊCHE, MAIS ET LEGUMINEUSES CV 05: CANNE A SUCRE ET PRODUITS DERIVES CV 06 PASTORALE CV 07 income. During the reference year, members of very poor animal herds and family labour and for certain households and poor households work in temporary activities like the rainfed lands. Very poor households have low crop land sale of various products, extraction and sale of sand for productivity. This can be explained by the lack of labor construction, totaling about 10% and 3% of the annual that is not always available at certain periods and for household income. This additional source of income is specific activities (weeding) as they sometimes prefer to important for these families.. go for other activities through which they gain more. Poor households usually cultivate the poorest land as they do not have enough money to rent better land or RISKS to pay transport costs to access better land outside of The main and most devastating livelihood risk is the inconsis- the area. tent rainfall with low rainfall happening every three years and leading to serious decline of agricultural production. Winds and heavy storms also affect the fishing activities and the sales PATHWAYS OUT OF POVERTY of fish products in the dry season. During the rainy season, Poorer families have too few resources to improve their access to certain communities is complicated with an impact living conditions by themselves. In the agricultural area, on trade and movement of people who then cannot work. they indicated they need better animals for breeding, as well as get to buildings to properly keep their animals and improving the commercialization of their products PRODUCTIVITY OF GOODS AND ASSETS by rehabilitation of the roads, better connectivity between For the households living in the CV03 livelihood zone, communities and markets and beaches. These families seek the main productive resources are fishing equipment, external solutions for the education of their children, so Appendix D 89 that when they grow up they can find secure employment. income activities of this area linked to fishing. All the In addition, they look for options to move far away from households look for solutions that benefit the commu- their household to seek for alternative income. Those poor nity in general and not just to their wealth groups or households would like to see more job opportunities be household. developed in the vicinity of their communities. The wealthiest households request the same interventions NOTE as the poorest, such as support to education, permanent 1. See: Save the Children and Ministry of Agriculture 2017a, 2017b and jobs, animals and interventions to improve their main 2017c for the full reports.  91 APPENDIX E Simulation of Improvements in Productivity through Educational Attainment I n Cabo Verde, the education system is an important private sector’s share has increased gradually to reach element of a path to higher productivity that would help 17.7 and 65 percent at the mid-secondary and tertiary transition toward a higher-value added economy that levels of education, respectively. In tertiary education, can offer and export more sophisticated products and while enrollment went from 2 to 23 percent between services. Cabo Verde has a strong compulsory basic education 2000 and 2014, increases in the standard of living has system, and is closing the gap in secondary and tertiary been the main factor determining enrollment at this level. education with countries with a similar income per capita.1 Youth coming from the poorest quintile account for just During the last decade Cabo Verde achieved nearly univer- 9 percent of higher education while youth from the richest sal access to basic education. Gross primary completion quintile account for 31 percent. reached 98 percent, while gross secondary enrollment was 92.6 percent; 8 and 18.8 percentage points higher than This section covers the main results of a modeling scenario countries with a similar income per capita. that allows for a conservative increase in the supply of semi-skilled and skilled relative to unskilled labor relying on Despite recent progress in basic education, the secondary constant enrollment rate (CER) assumptions. In the baseline level is the weak link of the education system. It is esti- scenario, it is assumed that the skill composition among mated that 87.5 percent of young people access secondary unskilled, semi-skilled and skilled labor stays constant at 60, 30, and 10 percent of the total working age population, education but only 45 percent complete it. Low student respectively. In this scenario, growth in the supply of more retention might be caused by (1) insufficient learning skilled labor comes merely from demographics—as older outcomes at the primary level, especially in mathematics;2 workers retire and more educated and younger generations (2) inadequate curriculum and teacher practices at the replace them. By 2030, CER assumptions would allow the secondary level; and (3) a low quality of education service labor supply of semi-skilled and skilled labor to increase overall. The percentage of repeaters in lower secondary 17.0 and 18.2 percent, with respect to the baseline. is high—23.3 percent—while the survival rate to the last grade of lower secondary is only 76.6 percent, close to Total government expenditure on education is adjusted 8 percentage points lower than international standards. due to the increase in demand. Expenditure on education was 5.0 percent of GDP4 in 2013 with 15.8 percent of this Around 27 percent of the population, or close to amount dedicated to tertiary education.5 By 2030, it is pro- 137,600 students, are enrolled in the education system. The jected that 16.7 percent of the government budget spent on proportion of students enrolled in primary education was education will be used for tertiary education, as a response 48 percent, 36 percent in secondary, and 8.9 percent in to increase in demand for this type of education service. To tertiary education.3 By 2030, it is projected that the school- allow the cost of education to keep pace with international age population will not increase in absolute terms, but standards, the expenditure per student grows on average, their share in the total population will decline from 35.7 to 4.3 percentage points on an annual basis. This will keep the 28.6 percent. Meanwhile, the population between 22 and expenditure per student as a percentage of GDP per capita 65 years old will grow from 47.1 to 55.6 percent of the at 67.4 percent by 2030, up 5.9 percentage points from its total population. level in 2013.6 Under the alternative scenario, government expenditure on education as a percentage of GDP would Until now, the public sector has taken the lead in com- increase from 5.0 to 5.3 percent by 2030. pulsory education while the private sector has supported higher levels of education. The public sector covers For the government, raising the bar in terms of education 99.1 percent of enrollment at the primary level, but the per student pays off because the investment leads to a more 92 Republic of Cabo Verde: Adjusting the Development Model to Revive Growth and Strengthen Social Inclusion FIGURE E.1. Education Expenditure as % of GDP FIGURE E.2. Changes in Wage Premiums by Scenario, Per Capita 2017–2030 1,000 0 –1.5 –2.7 150 –10 61.5% –20 20 –22.0 $250 $1,800 $14,000 –24.2 GNI per capita, log scale Baseline scenario Education 95% C.I. Cape Verde Skill to Unskilled Semi-Skilled to Unskilled Other developing countries Source: World Bank simulations. Sources: World Development Indicators. productive workforce. Despite government expenditure in points lower in the alternative scenario than under baseline education increasing by 0.3 percentage points as a share of conditions. Increases in educational attainment would tend GDP, the government’s overall fiscal balance would maintain to have a positive boost for GDP with overall progressive its fiscal stance with respect to the baseline, at -6.5 percent distributional consequences, as has been tested in a global of GDP. A neutral fiscal effect is caused by faster increases general equilibrium model by Ahmed et al. (2017). For the in direct (0.3 percent), and indirect (0.1 percent) revenues case of Cabo Verde, the distributional aspects of this policy than government total expenditures (1.2 percent). Increase in remain to be seen, as they would largely depend on who can government revenue is largely caused by an overall increase access the upper-secondary and tertiary education systems. If in economic activity, particularly in the service sector. For access to higher education continues to be largely determined instance, in the alternative scenario, GDP would be 0.2 per- by income status, then the overall effects, while remaining centage points higher by 2030, while value added in services positive on the aggregate, can still be more disadvantageous would be 0.5 percent higher and service exports 1.3 percent. for the poor. Despite higher growth, not all sectors would benefit equally. NOTES The sectoral composition of the new value added would vary significantly across sectors, benefiting economic activities that 1. Further description of this methodology can be found in Gable, Lofgren, and Osorio-Rodarte 2015. rely more intensively than others on semi- and skilled labor. 2. According to the Aferida test, a national large-scale education assess- Among services, two of them—(1) consultancy activities, ment conducted in 2010, half of 6th grade students in 2010 had a level of learning outcomes that could be qualified as concerning and only technical, scientific, and similar and veterinarian activities; 27 percent would have satisfactory learning outcomes. Cabo Verde’s and (2) accommodation, restaurants, and liquor stores—are TVET system is weak in quantitative and qualitative terms. Despite many young people leaving the secondary level without qualification the sectors that would generate a larger share of the new value and facing difficulties on the job market, the TVET has a low coverage added, 36.3 and 14.2 percent, respectively. In the industrial and accounts only for 5 percent of secondary level enrollment. sector, electricity, gas, steam, air conditioning, water storage, 3. Percentages correspond to the 2013–2014 school year. Cabo Verde’s education system is composed of four levels with corresponding official treatment, and distribution value added would represent school ages: primary (6–11), secondary (12–17), and tertiary (18–22) 7.1 percent of new value added, with respect to the baseline. levels. Compulsory education starts at primary school and last for 10 years, until mid-secondary school. Higher labor productivity would be reflected in 0.3 percent 4. UNESCO 2017, “Government Expenditure on Education, Total higher household incomes. Under current assumptions, an (% of GDP).” 5. UNESCO 2017, “Expenditure on Primary as % of Government increasing proportion of skilled and semi-skilled labor will Expenditure on Education (%)”; UNESCO 2017, “Expenditure on reduce their wages relative to those of unskilled labor, everything Secondary as % of Government Expenditure on Education (%)”; UNESCO 2017, “Expenditure on Tertiary as % of Government else equal. From 2018 to 2030, reductions in wage premiums Expenditure on Education (%).” for skilled to unskilled workers would be 21.5 percentage 6. Using data from World Bank WDI database.  93 APPENDIX F In-country Consultations for the SCD S everal rounds of in-country consultations were under- SCD findings and explore hypotheses. Smaller sessions taken in 2016 and 2017 as part of the SCD preparation were held with representatives from parliament, and process. The last round of consultation took place select sectors including financial, ICT, and tourism. October 24–30, 2017, and included visits to four of the nine Outside of Santiago, local governments facilitated the inhabited islands—Santiago, Santo Antão, Sao Vicente, and invitation of large and diversified groups of stakeholders Boa Vista. The large, interdisciplinary team was led by the and visits to private companies, harvest centers, utilities, WBG Country Director for Cabo Verde and composed of the and tourism operators, among others. Separate con- practice manager for poverty, sector specialists from poverty, sultations were held with representatives of the donor social development, macro-fiscal, trade and competitiveness, community. energy, transport, and IFC. The choice of islands presented opportunities to reach a wide cross-section of the population, Several participants raised specific concerns. The issue of with Santiago being the commercial capital, Sao Vincente the poor connectivity (both transportation—air and sea—and cultural and fisheries hub, Boa Vista a rapidly growing tourist Internet) were raised repeatedly across the islands as market, and Sao Antão for agriculture and high poverty major impediments to boosting growth in agribusiness, incidence. Another objective was to explore connectivity and and limiting the growth potential of tourism. Women’s service delivery issues across the archipelago. associations raised issues related to the difficulties in devel- oping their income-generating activities because of lack of The objective of these consultations was to present the ini- access to land and external finance. The level of indebted- tial diagnostic developed by the WBG team and to collect ness in the country was raised often in the context of the feedback from stakeholders. Overall, the diagnostic was well need to find ways to create space for greater private sector received, with a widespread recognition of the relevance of participation in the economy. Across the islands visited, underlying hypotheses that the development model behind the skills mismatch was seen as a big challenge to poverty the transformation of the economy to middle-income status reduction. Of equal importance were questions about some had stopped working because of (1) deficiencies in human of the investment undertaken by the government in the capital; (2) connectivity challenges; (3) a poor macro-fiscal recent past and the fact that most farmers still relied on environment; (4) waning government efficacy; and (5) lack rainfall, as the irrigation system to connect farmers to the of resilience. water in the dam reservoirs is not always developed to a full extent. In Santiago and Sao Vincente, the quality of the The team met with representatives from the public and business environment and of the governance framework private sectors and civil society to present the initial also received substantial attention in the discussions.  95 APPENDIX G Map of Cabo Verde