Studies Commissioned by the African Development Bank, Regional Department West II - ORWB

1. African Development Bank Group Regional Department West II (ORWB) CAPE VERDE: A SUCCESS STORY & THE ROAD AHEAD Studies Commissioned by the African Development Bank, Regional Department West II - ORWB JULY 2012

2. Outline of the presentation • The studies • The Growth Story • Critical Factors of Success • The Road from Here: Examining the Challenges • Exploring the Road Ahead: Alternative Futures for Cape Verde • Getting There: Key Recommendations Regional Department West II (ORWB)

3. African Development Bank Group Regional Department West II (ORWB) .I. The studies

4. Part I: The Studies • Two studies have been commissioned by the AfDB : • The first, ‘Cape Verde—A Success Story’ aims to explain the Cape Verdean success story to-date and provide lessons from this African experience. • The study narrate and disseminate the Cape Verde development experience since independence in 1975 • It identifies and analyzes the principal factors that contributed to this relative development success among African and Developing countries • It distills some of the key lessons that can be drawn from Cape Verde’s experience, and that may be useful to guide policymakers in other countries Regional Department West II (ORWB)

5. Part I: The Studies • The second, ‘Cape Verde—The Road Ahead’ focuses on the future of Cape Verde and prospects for socioeconomic transformation: • The study undertakes a critical review of Cape Verde’s agenda for the future, its transformation strategy. • It identifies key constraints, explores future possibilities and the economic impacts of alternative macroeconomic policies in terms of economic growth, government finances, wages and employment, and trade balances • It concludes with a set of high level recommendations on how Cape Verde can achieve its transformation agenda in the transition from lower to upper middle income status. Regional Department West II (ORWB)

6. African Development Bank Group Regional Department West II (ORWB) .II. The Growth Story

7. Part II: The Growth Story How does a micro-sized, resource poor island country, starting with nothing in 1975, achieve relative development success in the context of enduring structural vulnerabilities and a fast-moving, competitive global economy? Regional Department West II (ORWB)

8. Part II: The Growth Story • Fast Pace Growth… • 2008: One of 3 LDCs graduated from list • 1991-2010: 6% GDP av. an. gr. • Sustained, robust growth in all three phases of development path: • Central Planning Era 1980-1990: 5.2% • Liberalization Era 1991-2000: 5.8% • Transformation Era 2001-2010: 5.9% • Growth strategy: factor (physical, human) accumulation • A services-based economy, fuelled by booming tourism sector (24% of GDP) • Indirect economic impact estimated as high as 43% (WTTC, 2012) • Fastest growing tourism industry among all highly tourism based economies Regional Department West II (ORWB)

9. Part II: The Growth Story • Balanced Growth for Human Development… • One of the highest (16th) GDP per capita in Africa, $4188 (PPP, USD 2010) • Nearly twice continental average • One of the top performers in all human development indicators in Africa • Will meet MDGs, has already met 4 goals • Human Development Index - 2011 • Cape Verde: 0.568 (7th in S.S. Africa) • S.S. Africa: 0.463 • High adult literacy rate (84), expected yrs. schooling (11.6), life expect. (74) • Among lowest poverty rates in subregion; consistent decline: 37% (2001), 26.6% (2007) Regional Department West II (ORWB)

10. Part II: The Growth Story • Cape Verde – an economic, social, and political success story • High growth, with social inclusion, political stability and social peace since 1975 • One of the most stable multiparty democracies in the world • Peaceful transfers of political power, from colonial rule to independence (1974/75); from one-party rule to multiparty democracy (1991); and 5 presidential elections • Success with and despite structural vulnerability • High level of openness and external dependency • Insularity, micro size, poor natural resources endowment, lack of unified domestic market, Sahel climate, limited agriculture, history of famine and droughts • 2008 graduation based on 2 of 3 criteria, economic vulnerability remains concern Regional Department West II (ORWB)

11. African Development Bank Group Regional Department West II (ORWB) .III. Critical Factors of Success

12. Part III: Critical Factors of Success • Consistent investment in human development • Good governance and sound management of the state and economy • Social-political stability since 1975 • Generosity of the international community as well as the strong ties its global Diaspora retains to the homeland Regional Department West II (ORWB)

14. Part III: Critical Factors of Success A Closer Look at 4 Key Contributing Factors to Growth • 1. Effective Use of External Financing • ODA and remittances were critical, especially first two phases (40-60% of GDP in 1980s) • Financed capital investments, budget support • ODA: grants and soft loans. Still today, top 10 highest ODA per capita in the world ($664, 2010) • Mostly bilateral donors (Portugal, Spain, other EU, US), but by 2007 FDI surpassed both ODA, remittances • Remittances: big global Diaspora (US, EU), strong ties • Remittances, over 80% from EU source countries • Growth of FDI (12% of GDP, 2008), over 90% concentrated in tourism sector • Cape Verde, seen as safe haven for FDI Regional Department West II (ORWB)

15. Part III: Critical Factors of Success A Closer Look at 4 Key Contributing Factors to Growth • 2. Macroeconomic Stability, Sound Management of Public Finances • Primacy of macroeconomic stability (low inflation, low deficits, policy predictability) • Key pillar of macro stability – peg of CVE Escudos to Euro, since late 1990s • Transparency, results-oriented public investments, autonomy (central bank, auditor) • Key reforms: state modernization reforms to improve efficiency and effectiveness of public services and use of ICTs to increase transparency, effectiveness of managing public finances • Back-off integration, computerization of budget process; tracks all revenues and expenses, with built-in internal audit • Electronic governance system includes “one-stop-shop” platform to deliver most common services to citizens and businesses • Doing business and investment climate reforms, successful. More to be done, but Cape Verde considered top 10 Doing Business reformers in 2010 (Rank 119 in 2012) Regional Department West II (ORWB)

16. Part III: Critical Factors of Success A Closer Look at 4 Key Contributing Factors to Growth • 3. Leadership and Ownership of Reforms • Pragmatic, moderate, results-oriented leadership since 1975 • Leaders committed to build credible institutions • Policy continuity, broad consensus, and legislative majorities • Openness to reforms and ownership of reforms. Cape Verde in ‘driver’s seat’ • Early years, decision to use food aid as means to raise revenues for public works projects • One of the first in Africa to make dual transition to multiparty democracy and economic liberalization. Decision for structural reforms in late 1980s. • Good relations with donor community, based on confidence and credibility, allowed Cape Verde to set own reform agenda: created Budget Support Group; One-UN pilot country • Ambitious Agenda for Transformation to diversify the economy, become international platform for services, transition to upper middle income category Regional Department West II (ORWB)

17. Why the transformation agenda?Future scenarios as envisioned in 2002-2003 Bold decisive leadership, drive significant change/reforms and rapid transformation based on exploiting & building competitive advantages Economic Transformation & Societal Modernization Maintain ODA and remittancessame level while no change in the development approach Precipitous decline in ODA & remittances while development management continue as usual Short term growth but decline in the long term Economic &Societal Decline

18. The transformation agenda Clusters Success factors Human Development & Social Cohesion Sea (Fishries, Transshipment, Research, Oceanography, etc… Infrastructure (Ports, Roads, Airports, Telecomunication , Energy, Water & Saneamento) COMPETITIVENESS Air(FIR Air Transportation, Hub for cargo and passagers, Duty Free, Regional center for services and maintainance ) Human Capital (Education, Health, Professional Training) ICT(Business Process Outsourcing, Back Office e, Back-ups, Technology Parks, Call Centers) Growth Transformation Poverty reduction Good Governance (State Reform, Decentralization,, Security, Justice, Regulation, Macroeconomic, Social protection) FINANCE(IFIs Back up systems, BVC, Banks, Insurance, etc) Reinforce Private Sector (Business environment) TOURISM Global nation, Global e Development of partnerships for competitiveness CULTURAL ECONOMY Agro-Business

19. Part III: Critical Factors of Success A Closer Look at 4 Key Contributing Factors to Growth • 4. Good Governance • Good governance, credible institutions were fundamental, sine qua non for success • transparency, low corruption, continual institutional reforms to improve performance • Top 5 good governance indicators in Africa • In region, outperforms Mauritius in Worldwide Governance Indicators, 2nd in Ibrahim Index and Transparency International • State reform process since 2001 has bolstered good governance and performance Regional Department West II (ORWB)

20. Part III: Critical Factors of Success Key Lessons from Cape Verde Development Experience • Getting the Basics Right • Good governance • Macroeconomic stability and credibility, sound management of public finances • Investing in people • Adapting strategies and policies to keep pace with global evolution • Adaptability of policies; structural reforms, Diaspora mobilization policies, Agenda for Transformation, pioneer in electronic governance • Effective implementation to deliver results • Biggest example is state modernization reforms, and its e-governance platform • Ownership of development priorities and aid • Exemplified by Donor Support Group, pilot country for One-UN/Delivering as One, commitment to Paris and Accra declarations Regional Department West II (ORWB)

21. African Development Bank Group Regional Department West II (ORWB) .IV. The Road from Here: Examining the Challenges

22. Unfavorable Initial Conditions • Cape Verde is structurally, and irreducibly, vulnerable because of its micro scale, insularity and unfavorable natural endowments • High level of external dependency – ODA and Remittances • Tourism is increasing the exposure and vulnerability to external shocks Regional Department West II (ORWB)

23. The Major Challenges and Constraints to Development Infrastructure • Cape Verde has been making progress in infrastructure development. • Its spending on infrastructure is among the highest on the continent • However, the cost, quality and reliability of infrastructure continues to make it a constraint • This concerns all infrastructure – Power, telecom, water, transport, etc Regional Department West II (ORWB)

24. The Major Challenges and Constraints to Development Human Capital Resources The quantitative strides made in education, however, mask serious problems with quality and relevance The existing curriculum at the secondary, medium, and tertiary levels is poorly or not at all aligned with the present needs or future direction of the economy. There is a disconnect between educational and workforce training institutions and businesses. The education sector in Cape Verde lacks effective quality control. The tertiary education sector is especially deficient in this regard. • Cape Verde’s social performance, especially as it applies to education, has been consistently positive since 1975 • An estimated 20 percent of the country´s annual budget is spent on education. • It has one of the highest literacy rates on the continent. • It performs well in terms of total mean schooling years from primary to tertiary levels, estimated at 12 years in 2009, among the top in Africa • Over 500 pre-school establishments, 427 elementary schools, and 69 high schools. • During the last decade, the country has invested heavily in vocational-technical education. A network of ten technical training centers (Centros de Emprego e Formação) have been set up on nearly every island Regional Department West II (ORWB)

25. The Major Challenges and Constraints to Development Global Ranking: Ease of Doing Business • Institutional capacity • Enabling a Favorable Investment Climate • Innovation-Promoting Institutions Cape Verde is making progress but significant challenges remain Regional Department West II (ORWB)

26. African Development Bank Group Regional Department West II (ORWB) .V. Exploring the Road Ahead: Alternative Futures for Cape Verde

27. Exploring the Road Ahead Approaches Scenarios Scenarios are not predictions; Scenarios are stories about the future, capturing images of the future depending on the assumptions of the interplay among the key variables Scenarios methodology presents an approach to help make sense of the world in a more complex and unpredictable global environment • A strategic futures oriented approach – scenarios – which is more qualitative • Quantitative modeling to simulate the implications of macro-economic policies Regional Department West II (ORWB)

28. Macro Variables that will Shape the Future of Cape Verde

29. Defining the Critical Uncertainties Regional Department West II (ORWB)

30. Defining the Critical Uncertainties – Cape Verde’s Competitive Capacity Regional Department West II (ORWB)

31. Scenarios Matrix Regional Department West II (ORWB)

32. Cape Verde’s Competitive Capacity Cape Verde 2025 Boom Four divergent futures Tortoise Atlantic Tiger Cape Verde is coasting along like a Tortoise and kept alive by a buoyant global economy, unable to breakout and barely surviving Cape Verde is ruling the mid Atlantic; has broken into the global marketplace with knowledge driven services and winning International Economic Environment Ostrich Atlantic Fox Cape Verde is overwhelmed by multiple crises; the vision of transformation stunted as the leadership and the nation were unable to respond to the challenges of the times Cape Verde is highly prepared, seeking and seizing opportunities like a fox in a weak global economy Recession Weak Strong

33. Comparing the Scenarios

34. African Development Bank Group Regional Department West II (ORWB) .VI. Getting There: Key Recommendations

35. Elements for a Strategic Agenda • Implementing a new approach for development management • Extending and deepening reforms • Building human resources and skills • Promoting Innovation and entrepreneurship • Expanding Infrastructure and improving the quality • Facilitating access to finance • Ensuring social cohesion Regional Department West II (ORWB)

36. Thank You! Regional Department West II (ORWB)