A Aggregate Growth

Benin’s growth performance has been relatively modest since independence. With an estimated US$3,161 gross domestic product (GDP) per capita (at 2017 international prices) in 2018, Benin ranks among the world’s poorest countries, just at the upper limit of the poorest 15 per cent. As can be observed from Figure 2.1, its real GDP per capita was only 72 per cent higher in 2018 than in 1960, reflecting a weak annual growth rate of 0.94 per cent. Total GDP growth has been considerably faster, but it bears emphasis that three-quarters of it have been amputated by the high population growth rate (2.85 per cent on average). As in other sub-Saharan African (SSA) countries, population growth continues to be an important challenge: while it is expected to decline slowly, it should still reach 2.5 per cent per year in 2030.Footnote ¹

Figure 2.1 Benin’s GDP per capita: levels, absolute and relative to sub-Saharan Africa (1960 = 100), and growth rates, 1960–2019. LHS, left-hand side; RHS, right-hand side.

Sources: Author’s calculation based on data from World Development Indicators (WDI).

Benin’s growth performance from independence in 1960 to the present time closely matches the major changes in economic policy the country has witnessed under its successive political regimes. One can accordingly distinguish three main subperiods:

B Growth and Structural Change

Economic growth always comes with structural changes: some sectors increase their weight in total output while others, typically agriculture, recede. Structural changes also explain the growth of labour productivity, and thus of GDP per capita. Indeed, overall productivity gains result from both the reallocation of labour from least to more productive sectors of the economy and from productivity gains within sectors. This section analyses the structural changes that took place in Benin, as well as their contribution to growth. We proceed in two steps. First, we discuss briefly the results of a ‘growth accounting’ aggregate analysis that spans the 1970–2017 period. Second, we examine the relationship between aggregate growth and the sectoral structure of activity and employment. This sectoral analysis had to be restricted to the 1999–2017 period, and sometimes even a shorter period, due to limited availability of fully time-consistent data.Footnote ²

The growth accounting analysis decomposes GDP growth into the contributions of the production factors, labour and capital, and of total factor productivity (TFP). Appendix 1 to this chapter presents this decomposition for the five decades since 1970. A striking result emerges, which is the contraction of the capital-per-capita ratio over the whole period since 1970. Capital only weakly contributed to growth, except in 1971–1980 (a period of substantial public investment) and in the very recent years when, at last, some capital deepening occurred again. It thus appears that, by and large, growth of GDP per capita, which largely coincides with labour productivity, has mostly resulted from TFP growth, at least since the 1980s. TFP growth appears to have more than compensated for the effects of the decline in capital intensity. It turns out, however, that the observed changes in TFP largely reflect the major changes that have occurred in the sectoral structure of the economy rather than autonomous productivity gains. This is what we argue in what follows.

To assess the extent of the structural changes, we first focus on broad patterns. Table 2.1 shows that the primary (mostly agriculture) and tertiary (services, broadly defined) sectors dominate Benin’s economy in terms of gross value-added at factor cost (GVA). The share of the primary sector has been decreasing over the whole period, but it is remarkable that it did so only recently, suggesting indeed the limited dynamism of the economy prior to recent years. The share of the tertiary sector has increased, another typical pattern of the development process. It now represents more than half of total GVA – that is, of GDP. At the same time, however, the share of the secondary sector (manufacturing, utilities, and construction) declined, which points to quite a worrying aspect of Benin’s development.

Table 2.1 also reports the large role played by the informal sector in Benin: two-thirds of GDP originate in the informal sector. The ratio is equal to unity in the primary sector, where all activity is recorded as informal. It is approximately constant in the two other sectors, but declines overall because of the falling weight of the primary sector. Altogether, however, the change in informality has been limited and concentrated in the recent period.

Table 2.2, adapted from Haile (Reference Haile2018), zooms in on the most recent period (2006–2015) and provides more disaggregated data.Footnote ³ It combines GVA and employment data, from which it is possible to derive relative levels and changes in sectoral labour productivity. It also provides an interesting decomposition of the overall change in labour productivity.

On the GVA side, the table roughly confirms the conclusion of Table 2.1; that is, a recent drop in the share of agriculture, a slightly larger drop in manufacturing, and a continuous increase in services, with a surge in finance and to a lesser extent transport. The latter evolution is related to the surge in re-exports from Cotonou’s port after 2011, as will be shown later. On the employment side, the most noticeable change is the huge drop in the share of agriculture essentially in favour of commerce, other services, and, to a lesser extent, transport. Equally noticeable is the extremely limited change in the employment share of the other sectors, especially manufacturing.

This reallocation of output and employment across sectors entails strong changes in terms of sectoral productivity relative to the overall productivity gain – which proceeded at an annual rate a little below 1 per cent a year. Agriculture has seen its share in both GVA and employment decline, but the latter more significantly so. As a consequence, its productivity has substantially increased, while remaining among the lowest across sectors. This probably means that the sector has shed its ‘surplus workers’, those with very low productivity.

Manufacturing has kept a stable, relatively minor share in total employment. As its share in GVA has fallen by 5 percentage points, its level of labour productivity has fallen too, possibly indicating a change towards lower-productivity activities. This decline of labour productivity in manufacturing is also observed in other West African countries, but it is more pronounced in Benin (see Haile, Reference Haile2018). Furthermore, as can be seen in the left-hand panel of Table 2.2, the sector’s absolute productivity went down in Benin at an annual rate of 3%. This significant downward trend is presumably due to a combination of factors, among which is insufficient competitiveness, possibly reflecting the lack of investment in physical and human capital noted earlier, as well as other constraints relating to the business environment and public infrastructure (see, e.g. Ministère de l’Economie et des Finances, 2019, pp. 28–33; see also Section 2.4).

The same major drop in labour productivity can be observed in ‘commerce’ and ‘other services’, which make up more than one-third of total GVA. As a matter of fact, labour productivity in the former sector had become lower than in agriculture by 2015, as if those surplus or low-productivity workers in agriculture who migrated towards commerce simply shared the value-added potential of this sector with the incumbents. The phenomenon is less pronounced in ‘other services’, which include the government sector where productivity is essentially assimilated to wages, higher than in the rest of the economy.

Outside agriculture, utilities, transport, and finance are the only sectors where productivity has not decreased. The latter two sectors most likely benefited from a surge in CBT with Nigeria and the re-export of imports arriving at Cotonou Autonomous Port. There is no doubt that this boosted the transport sector. It also boosted the finance sector through trade financing on the import side of re-exports to Nigeria.

The general picture that comes out of this evolution of the structure of output, employment, and productivity is rather worrying. While most of the limited overall productivity gain in Benin between 2006 and 2015 was due to labour leaving low-productivity agricultural activities to work in higher-productivity sectors, it has come at the cost of decreasing productivity in the latter. In other words, no sector could be really considered as a growth engine in Benin, except perhaps the financial sector, but with practically no impact on employment.

This view of economic growth in Benin appears fully consistent with the growth accounting exercise summarised earlier where TFP was found to be the main source of growth. It is clear that most of that TFP growth is attributable to net labour migration out of agriculture, with no autonomous productivity gains in the destination sectors.

The last columns of Table 2.2 show a decomposition of the aggregate productivity gain of the Beninese economy into two parts: first, the part attributable to changes in the structure of employment; and second, the part attributable to changes in within-sector productivity. The result is appalling and fully confirms the preceding conclusions. Per se, the reallocation of labour away from agriculture into commerce and other services contributed to an annual growth of overall productivity equal to 1.73 per cent. Yet, sectoral productivity changes contributed negatively, at an annual rate of −0.77 per cent to the change in overall labour productivity. While productivity increased in the agricultural sector, because of surplus labour leaving the sector, it decreased in other major sectors of the economy. Thus, the general picture is that of workers leaving the agricultural sector because there are better income opportunities elsewhere, but, as a matter of fact, essentially reducing income per capita in the destination sectors.

Benin’s economic development until the mid-2010s can be summarised by a dismal rate of capital accumulation, and the total lack of a growth engine able to push the whole economy forward. Instead, the little growth that has taken place over the last few decades seems more consistent with some income gain from CBT with Nigeria or cotton exports fuelling limited growth in demand for domestic services. In any case, it is doubtful whether the agriculture-cum-service model that seems to be the pattern of Beninese growth over the last decades can be the source of sustainable development. Strong productivity-enhancing strategies are needed.

A Cross-Border Trade with Nigeria

Nigeria is the main recipient country of Benin’s CBT, accounting for more than 90 per cent of Benin’s re-export activities. The intense trade between the two countries stems mainly from differences in tariffs, trade restrictions, and subsidies. On the one hand, Nigeria uses tariff and non-tariff barriers as well as exchange controls to protect domestic industries in a number of economic sectors, including cars, textiles, cigarettes, and food items (see, e.g. Igué and Soulé (Reference Igué and Soulé1992); De Melo and Ugarte (Reference De Melo and Ugarte2013); Golub (Reference Golub, Benjamin and Mbaye2012a) for further discussion). Prices for these goods are consequently higher in Nigeria than in Benin, which abides by the lower WAEMU tariff rates. On the other hand, Nigeria, an oil-producing country, subsidises domestic petroleum prices, which are thus lower than formal prices in Benin. These important price differentials between Benin and Nigeria for certain categories of products are a strong incitement to circumvent Nigeria’s import tariffs and trade restrictions through smuggling operations across a long – and porous – border into Nigeria for Benin’s re-exports, and into Benin for Nigerian petroleum and some other products.

The context within which this trade operates is thus intrinsically one of informality and illegality. The import process of the goods intended for the Nigerian market is itself fully formal and legal. It is operated by formal firms, which trade with local and international contractors, borrow from formal banks, and pay income taxes. Related infrastructure, both public (port, customs) and private (parking lots for used cars, warehouses for other products), has been set up in an open and regular way. The unofficial (illegal) aspect of CBT with Nigeria occurs at a later stage when goods that benefited from low customs duties and taxes, because they were declared either for domestic use or for transit to other (landlocked) neighbouring countries, are smuggled to Nigeria. On the other hand, the smuggling of goods bought in Nigeria into Benin is of course utterly unlawful.

The unofficial nature of an important part of the re-exports makes it very difficult to rigorously document their size and estimate their economic impact. The most frequently cited estimate by Golub (Reference Golub, Benjamin and Mbaye2012a) is based on unofficial trade in used cars, which represents a large part of the total unofficial re-export trade to Nigeria. Extrapolating from these data to the whole trade, Golub (Reference Golub, Benjamin and Mbaye2012a, p. 215, 2012b, p. 1159) estimates that the contribution of re-exports to GDP is about 20 per cent and that it directly involves 50,000 people. Such a large estimated contribution of CBT to GDP seems out of proportion with the estimated effects on employment, however. Based on rough approximations described in Appendix 2 to this chapter, we feel that a 10–12 per cent contribution to GDP would be a more reasonable range of estimate.

Since the unofficial CBT with Nigeria is very lucrative for the Beninese economy and since it generates significant tax revenues for the country, it is not only tolerated but even encouraged by the Beninese authorities. Yet, there are important downsides associated with it.

First, Benin has become very vulnerable to changes in economic conditions and trade protection policies in Nigeria. Concerning the latter, Nigeria has not only often changed import tariffs on protected goods, but has also recently closed its border with neighbouring countries, with dire consequences for the Beninese economy. Tellingly, almost half of the volatility of GDP growth in Benin is due to the volatility of the Nigerian economy, itself very much the result of the volatility of global oil prices. A regression of Benin’s GDP growth on the growth of household consumption in Nigeria over the 1980–2017 period suggests that a one standard deviation shock in the latter – not an infrequent event – produces a 1.3 per cent change in Benin’s GDP – a little less than half the standard deviation of GDP growth (see Appendix 3 to this chapter). This means that although Benin is not an oil-exporting country, it has acquired some of the features of the latter through its excessive dependence on trade with Nigeria.

Second, the smuggling of goods from Nigeria into Benin and the ensuing artificially low prices of these goods hamper the development of locally produced goods, like textiles and rice for example.

Third, the illegality inherent in most of the trade between Benin and Nigeria severely damages Benin’s public institutions because of the corruption, tax evasion, and possibly government capture that it entails. This is true at every level in the public sector, but the scale at which the unofficial CBT is organised necessarily implies high-level political connections on the part of the bigger operators, in both countries. The risk of political capture is also strengthened by the illegal practices associated with re-exports, as is evident from the political infighting involving big CBT players.Footnote ⁵

Finally, the permanent tolerance, instead of repression, of fraudulent activities by the authorities does worsen the general business climate because low standards of honesty, compliance with the rule of law, and respect for the country’s institutions have spilled over to other sectors. Consequently, while illicit CBT benefits both countries, it also entails large costs and Benin needs to urgently rethink its development strategy, to make it less dependent on illicit CBT.

B Cotton Exports: Historical Heritage and Changing Organisational Structure

Cotton production is a major sector of Benin’s economy and the livelihood of one Beninese out of three depends on it. Cotton does not only play a major economic and socio-political role in the countryside, but forms the basis of more than half of Benin’s industrial production. It also accounts for about 60–70 per cent of export revenue (excluding re-exports) and 45 per cent of tax revenue (excluding customs revenue). Overall, cotton is estimated to account for 13 per cent of Benin’s GDP (MAEP, 2008). This number seems rather large, however, and a contribution within the range of 7–10 per cent seems more reasonable. Indeed, using the average ratio of Benin’s total exports relative to GDP of about 17.8 per cent in 1960–2016 and considering the 60 per cent share of cotton in Benin’s total exports indicated earlier, we arrive at an estimated GDP ratio of 10.6 per cent. Furthermore, if we take into account that the share of cotton in Benin’s total export revenue is probably overestimated and if we use instead the data from the Observatory of Economic Complexity (OEC, see https://oec.world), we find a ratio of cotton revenues to GDP of about 7 per cent, which is the value reported by the World Bank (2016).Footnote ⁶

Beninese cotton production followed a bumpy expansion after independence until 1997, after which production plateaued for seven years. This period of stagnation was immediately followed by a sharp decrease in production in the years between 2004 and 2009, caused by a decreasing dollar price of cotton whose negative impact was further amplified by a persistent appreciation of the CFA Franc. As can be seen in Figure 2.3, this decrease has been particularly severe in Benin compared to its francophone neighbouring countries (Burkina Faso, Cote d’Ivoire, and Mali), suggesting that other country-specific factors have exacerbated the effects of the shock in Benin.

Figure 2.3 Performance of the cotton sector in Benin and West Africa

Sources: Author’s calculation based on data from Food and Agriculture Organization (FAO) Corporate Statistical Database (FAOSTAT). Benin’s data over the period 2016–2017 is obtained from INSAE and the Association Interprofessionnelle de Coton au Bénin (AIC) and is being updated in the FAOSTAT database. Note: West Africa (WA) is a simple average of data from Burkina Faso, Cote d’Ivoire, and Mali. Production is in tonnes, Area in hectares, and Yield is in percentage relative to the value of average yield in the other WA countries.

Benin’s cotton sector has indeed been characterised by excessive political interference since independence and has known long periods of instability, oscillating between private and public modes of governance. This instability was particularly severe after 1990, when the sector embarked on a failed process of liberalisation and privatisation. The causes of the failure are multiple: (1) political actors controlled the whole reform process and thereby made reforms vulnerable to regime changes; (2) liberalisation did not lead to competition, as officially intended, because the allocation of seed cotton was administratively decided and the procurement of seed cotton was not transparent; (3) the rules (e.g. about input quality assessment, input import and distribution, quotas of cotton seeds) were not considered credible since there were no clear enforcement mechanisms against those who violated them; and (4) the reforms were not appropriated or owned by the local authorities since they were undertaken at the behest of donors.

The huge instability of the cotton sector and the failure of reforms are further apparent from the high volatility and the lack of growth of cotton yields over time (Figure 2.3). The value of Benin’s yield lags on average four basis points behind that of other countries.

C Non-cotton Agricultural Exports: An Ancillary Driver of Growth?

Besides cotton, there is a wide variety of other crops, including cassava, maize, cashew, pineapple, palm oil, rice, and vegetable, that could be the basis of a dynamic agro-industrial export sector and even become altogether an ancillary engine of growth, along with cotton. Among those the case of cashew is particularly interesting. Its share in export revenues more than quadrupled in the period between 1995 and 2018, reaching 16.9 per cent at the end of the period (OEC). As a result, cashew has become the second most important contributor to Benin’s export revenue and accounts for 3 per cent of GDP.

Yet, different institutional shortcomings prevent Benin from fully capitalising on the rising world demand for cashew nuts (see www.nutfruit.org/industry) and utilising its natural advantage in cashew production in the central and northern parts of the country. Insecure land property rights (treated in depth in Chapter 7) and insufficient access to external finance have led to underinvestment, for example in the replacement of older trees. This is reflected in the low yields of cashew in Benin (356 kg/ha in 2019) compared to Nigeria (715 kg/ha) and Togo (1530 kg/ha) (FAOSTAT database).

In addition, high costs of electricity and the use of less advanced technology impair the competitiveness of processing firms. Coupled with poor organisation and integration of the actors operating in the sector, this has led to a situation where the bulk of raw cashew is exported essentially to Vietnam and India, instead of the markets of the buoyant advanced economies.

D Obstacles to the Development of the Non-agricultural Business Sector

The non-agricultural business sector, excluding CBT with Nigeria, accounts for around 45 per cent of Benin’s private sector. It has been characterised by slow growth over the whole period since independence. Four major growth constraints can be highlighted based on the two waves (2009 and 2016) of the World Bank Enterprise Survey data: (1) external finance constraints; (2) deficiencies in physical infrastructure; (3) informal competitors; and (4) difficulties firms face in dealing with public administration (taxes, customs, and trade regulations). Worryingly, these constraints are not only more severe in Benin than in the average SSA country, but they have also been increasing over time (Figure 2.4). This is particularly true for access to finance and electricity, which will be treated in more detail in the following two subsections.

Figure 2.4 Major constraints to private firms in Benin and sub-Saharan Africa

Source: Author’s calculation based on data from World Bank Enterprise Survey (various years).

A Parallelism between Exports and Imports

Figure 2.5a reports total (adjusted) exports and imports of goods and services, together with estimated re-exports and GDP growth for the 1990–2019 period. Three main points stand out:

Figure 2.5a International trade and real exchange rates: Exports and imports of goods and services, re-exports of goods, and GDP growth

Sources: Author’s calculation from BCEAO website for exports and imports (balance of payment data); WDI for growth.

First, there is a strong parallelism between exports and imports since the re-exports, official and unofficial, must necessarily have been imported in the first place.Footnote ¹³ The dynamics of exports are indeed strongly driven by re-exports, especially since the early 2000s (Figure 2.5a).

Second, there is relatively high volatility in the export and import GDP ratios. This can also be partly explained, since 2004 at least, by the characteristics of CBT and the dependence it entails on positive or adverse developments in the Nigerian economy, as noted earlier.

Third, the balance of goods and services shows a sizeable and persistent deficit throughout the period, with an average of 6.7 per cent of GDP. Despite strong growth in exports since 2004, no reduction in the gap was achieved. We return in the next section to the issues this raises for the sustainability of Benin’s development.

B Composition of Exports and Imports of Goods and Services

The export and import data provided by BCEAO mostly combine official data with estimated unofficial re-exports and imports.Footnote ¹⁴

Concerning the status of re-exports relative to domestically produced export goods, one could hold that, as these goods are all imported, they are of no major concern for the domestic economy. Indeed, if this activity only consisted of organising the transit of goods, it would not be recorded as merchandise exports and imports. However, re-exports involve significant value-added by domestic residents to the imported goods. This is especially the case in Benin, where CBT is a key driver of re-exports. The latter involve the supply of transport and warehouses, as well as of wholesale or even retail trade services, for an amount that is far from negligible even though not readily observable and imperfectly known, as discussed in Section 2.1. Under these conditions, it is indeed justified to consider re-export as the export of services originating in the domestic economy, with of course a huge import component.

Re-exports’ value-added is however intrinsically much lower than that of Benin’s other exports, for similar gross values, and focusing on the former’s large share in total adjusted exports would not do justice to Benin’s other (official) exports, and underestimate the latter’s importance for the economy.

Cotton products (mostly raw cotton) dominate (official) merchandise exports, with a 57 per cent share in 2017–2018, followed by cashew nuts (14 per cent). Palm products, gold, meat, fruit, metal, and petroleum products, though less important (about 2–3 per cent each), contribute to diversifying Benin’s export base.Footnote ¹⁵ The shares of exported products do however vary greatly from year to year.

Exports of services (other than re-export activities) also matter, accounting for an average of 3.4 per cent of GDP for 2010–2019. Travel represents slightly more than a third of export service receipts, indicating that tourism is also a potential driver of the country’s development.Footnote ¹⁶

As already mentioned, merchandise imports evolve, because of re-exports, in parallel with exports. This is reflected in their composition, dominated by food products (e.g. rice for re-export to Nigeria). Imports of services outweigh exports of services, mostly because of freight and insurance expenditures related to the import of goods though the port of Cotonou.

The contribution of net exports to growth is thus dependent on re-export activities whose large gross volume compensates for the low per unit value-added, on agricultural products, cotton and non-cotton, and on tourism. The growth contribution of net exports could be improved if the high potential of non-cotton agriculture and of tourism, which both account for high domestic value-added, could be exploited.

C Real Exchange Rates

The last external trade issue that merits discussion is competitiveness. Although there are many facets to competitiveness, we focus on the relative price component and use the real exchange rate as an indicator.Footnote ¹⁷ Since Benin is on a fixed peg with respect to the Euro and since Benin is a price taker on the international market, its price competitiveness is heavily impacted by the exchange rate of the Euro vis-à-vis other currencies, especially the US dollar and those of Benin’s Asian trade partners.Footnote ¹⁸ Note that price competitiveness with its WAEMU and Communauté Economique et Monétaire d’Afrique Centrale (CEMAC) African trading partners is not directly influenced by changes in nominal exchange rates as these countries are also on a peg with the Euro.

The multilateral index of Benin’s real exchange rate indicates a real appreciation of the CFA Franc until 2008, followed by a continuous depreciation (Figure 2.5b). The appreciation period coincides with the long-lasting appreciation of the Euro against the US dollar (2001–2008), while the depreciation reflects both the reversal of the Euro–US dollar nominal exchange rate and the low rate of inflation that Benin managed to achieve relative to its main official trading partners.

Figure 2.5b International trade and real exchange rates: Multilateral and bilateral CFA Franc–Naira real exchange rates

Sources: Author’s calculation for the real multilateral exchange rate based on data from IMF that were retrieved from the Federal Reserve Bank of St Louis data bank; for the real CFA Franc–Naira exchange rate: Central Bank of Nigeria and Macrobond database.

As Benin is exclusively a price-taking economy, these changes in the Euro–US dollar exchange rate have led to ample fluctuations in local currency cotton prices and thus in producers’ profit margins. Accordingly, the observed evolution of exports very broadly reflects the trend in the multilateral real exchange rate. During the period of continued real appreciation up to 2006, the GDP ratio of exported goods declined (see Figure 2.5a) before increasing again slowly in parallel with the real depreciation.Footnote ¹⁹

But Benin’s multilateral real exchange rate only imperfectly reflects actual changes in the country’s price competitiveness, since it is based on official trade statistics and official nominal exchange rates, while a large part of Benin’s trade is informal. We therefore decided to also analyse the real exchange rate between the CFA Franc and the Naira, Nigeria’s currency.Footnote ²⁰ The evolution of the bilateral real exchange rate with Nigeria combines a trend of persistent real depreciation with, around this trend, several periods of large real appreciation shocks. The real depreciation trend is the result of Nigeria’s CPI inflation being systematically higher than Benin’s and a depreciation of the Naira–CFA Franc rate that falls short by about half of this differential. The short-term real appreciation shocks reflect episodes of large, and often sudden, depreciations of the Naira, mainly as a result of the abrupt fall in oil prices.

These large swings in the bilateral real exchange rate had a significant impact on Benin’s economy. Re-exports declined by about 20 per cent during the two real appreciation shocks of 2009–2010 and 2015–2016. Whether, and to what extent, these declines are due to a loss of price competitiveness is difficult to assess. The drop in real incomes in Nigeria following the large depreciation shocks indeed had an additional, and probably stronger, demand-reducing effect. Accordingly, it appears that the declines in volumes can largely be attributed to the spill-over effect of the decrease in Nigerian demand, a result of the depreciation of the Naira and of the direct income effects of the oil shock. Price competition may probably matter more on the import side of the CBT, where Nigerian products directly, and intensively, compete with domestic ones. The 2015–2016 depreciation of the Naira, for example, led to massive exports of Nigerian products to Benin, at very competitive prices (Ministère de l’Economie et des Finances, 2016, pp. 20–21).

To conclude, as a price taker on international markets and as a member of a monetary and customs union whose external exchange rate is a hard peg, neither exchange rate nor trade policies are in the hands of Benin’s authorities. This represents a key constraint on their policy options, a constraint reinforced by the vulnerability to exchange rate shocks originating from Nigeria, an important partner in official and unofficial trade. As a matter of fact, the only option for Benin to have some control of the competitiveness of its tradeable goods is to keep the evolution of its nominal domestic prices and wages in check. Given that, for low-income countries, wages in the public sector often play a leading role in the dynamics of wages and prices in the private sector, public wage policy may be one of only a limited number of instruments that the authorities can resort to.

A Consumption Bias in Aggregate Spending

Figure 2.6 shows total expenditures (absorption) relative to GDP since 1990, in agreement with the current 2015-based National Accounts methodology that implied some rescaling of aggregates before this date.Footnote ²¹ Total expenditures are the sum of domestic household consumption, of government final consumption, and of total, private and public, gross capital formation (investment). The first striking observation that highlights the acute dependency of the Beninese economy on foreign financing is that total absorption always significantly exceeded GDP (on average by 8 per cent over 1990–1998 and 6 per cent over 1999–2019). The three successive SAPs Benin underwent over the 1989–1999 period tamed absorption for several years – it was at 128 per cent of GDP in 1981 – but the effect did not last, and absorption surged again towards the end of the 1990s and remained high thereafter.

Figure 2.6 Structure of absorption, 1990–2019 (per cent of GDP)

Source: Author’s calculation based on data from WDI; series in percentage of Benin’s rescaled GDP.

Considering the composition of absorption, the first noticeable feature is the relative size of household final consumption expenditures, which remained close to 80 per cent from 1999 until 2006, before sliding down to 68 per cent in 2019. This raises two questions: why such a high propensity to consume; and why the slide?

A country comparison indicates that the Beninese consumption ratio over GDP has in general been higher than in the average low-income or SSA country over the last twenty years. It is however difficult to find a convincing explanation for this beyond that of differences in national account methodologies for measuring household consumption, an aggregate whose measure is often particularly imprecise.Footnote ²² In line with this, the three available household surveys do indeed report an average per capita real consumption that is about 30 per cent lower than the national account data.Footnote ^23, Footnote ²⁴ One can however expect that the evolution of the consumption ratio reasonably describes actual trends in consumption patterns.

A second feature of the absorption picture is, precisely, the slide in the household consumption ratio.Footnote ²⁵ Various factors could explain the decline in the household consumption ratio since 2006. First, the deep deflationary shocks in Benin in 2008–2009 and 2015–2016 caused by the reversal in oil prices and its effect on the Nigerian economy may have increased precautionary savings and thus participated in the decline of the consumption ratio.Footnote ²⁶ It is however doubtful that this argument can explain the persistent decrease of this ratio over the whole period since 2006. A more fundamental factor may be at play. As further discussed in the last part of this chapter, inequality has been on a rapidly increasing trend in Benin. Increased inequality in income distribution and its effects on aggregate consumption patterns is most likely one of the factors behind the observed fall in Benin’s household propensity to consume.

Government consumption has reached a largely constant 10 per cent share of GDP since the mid–2000s, after a downward adjustment in the 1990s. This level is in line with those observed for most WAEMU members, slightly higher than for the average SSA country – once Benin’s recent rescaling of national accounts has been accounted for.

The share of gross capital formation in GDP has exhibited marked changes over the last thirty years. After a strong rise in the early 1990s following the transition back to a market economy, the ratio steadily declined until 2006, before clearly picking up again from 2013 on, reaching a 25 per cent average over the last years. Taken over the whole period, Benin’s investment-to-GDP ratio of 17 per cent was not only below what was observed elsewhere in the region but, most importantly, it proved too low to prevent the capital-to-labour ratio from declining, endangering the growth of per capita income, as discussed earlier. The strong rebound of investment over the last seven years is thus a welcome positive development. Given the significant structural change Benin is confronted with, a sustained level of both public and private investment is indeed a sine qua non for improving growth performance through increased productivity.

The combined high-level consumption of households and government in Benin for a time coincided with a retreat of capital expenditures, up to the late 2000s. These trends have been reversed since, consumption receding in favour of investment. These structural changes in absorption have been eased by Benin’s access to external financing. Not only has past investment been less constrained by consumption expenditures thanks to external financing, but the recent rise in investment could also be financed despite an insufficient increase in domestic savings. The extent to which this persistent, and seemingly easy, access to external finance has provided Benin with the indispensable resources to redeploy its economy, and not invited or sustained excess spending, is a legitimate but delicate question. To gain some insight about it, we focus next on two closely related aspects: how constrained resources are for the public sector and how efficiently they are managed; and which financing channels could Benin mobilise to sustain this structural recourse to external financing.

B Efficiency versus Resource Constraint in the Public Sector

With total spending close to 15 per cent of GDP (17 per cent in the last five years) and a large proportion of formal employment, the Beninese government is a major economic actor.Footnote ²⁷ However, it is an actor that does not have the means for the crucial role it is expected to play. On the one hand, the observed imbalance between government domestic savings and investment translates into a recurrent budgetary deficit and thus a strong public finance constraint. On the other hand, Benin’s mobilisation of domestic resources appears to be low, and both government revenue and spending exhibit significant inefficiencies. These latter come at a high cost at a time when foreign grants and loans are trending downwards, even raising the issue of sustainability of basic public services.

Table 2.3a provides an overview of the government’s resources, spending, and deficit financing over 2002–2019.Footnote ²⁸

C Foreign Assistance Dependency

The external position of Benin is described with some detail in Table 2.3b. This essentially combines saving and investment expenditures of the private sector and the government and shows how the observed gap between domestic savings and investment is financed by the rest of the world.Footnote ³⁹

Investment expenditures systematically exceed domestic savings for the government, but also for the private sector. The latter is responsible for the largest part of the overall imbalance between 2002 and 2013, while the government takes the largest share in the deficit over 2014–2019 as a result of increased spending. Migrant remittances and foreign grants significantly reduce Benin’s total domestic savings imbalance, but the current account deficit (item 4 Table 2.3b) remains significant, 5.4 per cent of GDP on average.

The contribution of foreign direct investment towards closing the financing gap is a modest 1.5 per cent of GDP on average. To cover the remaining funding needs, Benin has thus to rely on capital transfers from donors and on external borrowing. The former represented a rather constant resource flow of 1.5 per cent of GDP, except in 2006 when a large public debt write-off was recorded.Footnote ⁴⁰ External borrowing amounted to about 2 per cent of GDP.Footnote ⁴¹ Most borrowing abroad is in the form of public or publicly guaranteed debt. External non-guaranteed private-sector debt is minimal.

The increase in borrowing has resulted in a progressive increase in the external debt-to-GDP ratio over the last years up to its 2019 level of 27 per cent. At first this level might not appear alarming compared to its previous crisis level of 87 per cent in 1994 and given that almost all external debt is currently at concessional terms with multilateral development agencies or bilateral lenders.Footnote ⁴² Yet, Benin’s external dependency should not be minimised, since future official development assistance (ODA) might not be as forthcoming as in the past. Indeed, ODA clearly appears to be on a declining trend.Footnote ⁴³ At around 5 per cent of GDP over the last ten years, it is well below the 10–15 per cent levels witnessed in the 1990s. Should this trend persist, Benin would face increased external financing constraints. Current account deficits at levels observed in the past would then need to be financed at non-concessional terms, at higher and possibly fast-increasing costs – assuming of course that access to international financial markets could be maintained.

Benin’s development policy should thus give the highest priority to guaranteeing the sustainability of its external debt and, more broadly, to decreasing its foreign financing dependency by curtailing its current account deficit, grants excluded. In this respect, crucial future challenges include expanding the export base, cutting or rationalising public spending, increasing public investment, and tax collection efficiency.

A Demographic Pressure

As emphasised in Section 1, population growth is still very high in Benin, on average 2.8 per cent per year in 2005–2018. While it is not significantly different from that of other SSA countries, it is largely above the growth rate of other developing regions. This high level of population growth can be explained by the high fertility rate, which was still at five children per woman in 2018. Poverty and low education levels appear to be the main driving forces behind that rate.

High population growth poses a number of challenges for Benin’s economic development. First, it requires the private sector to create more jobs in order to absorb a growing labour force, especially given the high proportion of young people, typical of a fast-growing population. Current economic growth trends would imply that the majority of newcomers would have to turn to low-productivity jobs in the informal sector. Poor-quality jobs for a high proportion of the youth may have a high social and even political cost, as they may lead to increasing inequality and grievances. Avoiding this outcome requires increasing the volume and/or the efficiency of investment so as to put the level of physical capital per worker on a positive trend. Second, high population growth puts pressure on the government to scale up public services in health and education.

B Persistence of Poverty and Rising Inequality

C Literacy and Education

D Health-Care Issues

Even though it was halved in the last thirty years, neonatal and infant mortality remains very high in Benin. The neonatal mortality rate was still 32.5 and the infant mortality rate 63.1 per 1,000 live births in 2016, somewhat above the SSA average. Malnutrition among children under 5 (stunting) not only remains higher than elsewhere in the region, but has worsened over the past thirteen years (DHS, 2013). As would be expected, stunting and wasting are of greater concern in rural areas.

The overall quality and efficiency of health-care delivery systems clearly need to be improved. The World Bank (2015a) notes that the government’s food and nutrition reform programme has suffered from weak institutional arrangements, reflected in various disjointed, small-scale sectoral components housed in the Agriculture, Health, and Family Affairs ministries. It is also striking that, in 2016, doctors’ wages were higher in Benin than in other SSA countries with better-performing health-care systems (Prady and Sy, Reference Prady and Sy2019).