Escaping the Low-Growth Trap Public Disclosure Authorized Guinea-Bissau Country Economic Memorandum Public Disclosure Authorized Public Disclosure Authorized Macroeconomics, Trade and Investment Global Practice Public Disclosure Authorized AFCF1 Country Management Unit Africa Region 1 Report No: AUS0001916 © 2020 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work 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. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for no ncommercial purposes as long as full attribution to this work is given. Attribution—Please cite the work as follows: World Bank. (July 2020). Guinea-Bissau Country Economic Memorandum. © World Bank. All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. 2 Acknowledgments The Country Economic Memorandum was prepared by a team led by Fiseha Haile (TTL and Economist, EA2M1). The team included Zenaida Hernandez Uriz (Senior Private Sector Specialist, GFCAC); Emily Elaine Garden (Senior Education Specialist, HAFE2); Rosa Brito Delgado (Economist, EAWM1); Giulio Schinaia (Consultant, EAWM1); Habibu Yaya Bapaah (Consultant, EAWM1); Luiz Felipe Almeida (Consultant, EAWM1); Antonio Manuel Baptista (Consultant, EAWM1); Bienvenue Tien (Consultant, EAWM1); and Josué almeida (Consultant, EAWM1). Overall guidance was provided by Nathan Belete (Country Director, AFCF1); Lars Christian Moller (Practice Manager, EAWM1); Johan Mistiaen (Program Leader, AFCF1); Christine M. Richaud (Lead Economist, EAWM1); Theo David Thomas (Acting Practice Manager and Lead Economist, EAWM1); and Amadou Omar Ba (Country Representative, AFCF1). Fiona Hinchcliffe (Consultant, GMTA2) provided an excellent editorial support. Maude Jean-Baptiste and Micky O. Ananth provided great administrative and operational assistance, respectively. The team gratefully acknowledges the collaboration with the Government of Guinea Bissau. Cover pictures taken from: https://www.oecd.org/japan/escaping-the-stagnation-trap-policy-options-for- the-euro-area-and-japan.pdf Regional Vice President: Ousmane Diagana Country Director: Nathan Belete Global Practice Director: Marcelo Estevao Practice Manager: Lars Christian Moller Task Team Leader: Fiseha Haile (TTL) 3 Acronyms AU African Union CEM Country Economic Memorandum CIMAN Business Environment Reform Commission CPLC Community of Portuguese Language Countries CSO Civil society organization DSSR Defense and security sector reforms ECOMIB ECOWAS Mission in Guinea-Bissau ECOWAS Economic Community of West African States ESP Education Strategic Plan for 2017-2025 EU European Union FCFA West African CFA franc FDI Foreign direct investment GEP Global Economic Prospects HCI Human Capital Index HHS Harmonized Household Survey ICT Information and communications technology IMF International Monetary Fund MICS Multiple Indicator Cluster Survey MSE Micro and small enterprise NGO Non-government organization OHADA Organization for Harmonization of Business Law in Africa P5 Group of international partner organizations in Guinea-Bissau (ECOWAS, African Union, UN, Community of Portuguese Language Countries, and the EU) PAIGC African Party for the Independence of Guinea and Cabo Verde PASEC Program for the Analysis of Education Systems PER Public Expenditure Review RMSPE Root Mean Square Prediction Error SCM Synthetic control method SDI Service Delivery Indicator SSA Sub-Saharan Africa UN United Nations UNICEF United Nations Children’s Fund WAEMU West African Economic and Monetary Union WDI World Development Indicators 4 Contents 1. Overview of Economic Performance ..................................................................................14 2. Fragility, Political Instability and Economic Growth ..............................................................30 2.1. Introduction ........................................................................................................30 2.2. The Economic Cost of Political Instability .................................................................31 2.3. Key Sources of Fragility and Political Instability .........................................................34 2.4. Why have Fragility and Weak Governance Proven Difficult to Address .........................42 2.5. Options for Reform ..............................................................................................44 3. Investing in Human Capital and Foundational Skills ....................................................................47 3.1 Introduction ........................................................................................................47 3.2 The Education Sector: A Brief Overview...................................................................49 Management and strategic direction ....................................................................................49 Enrolment and completion rates ..........................................................................................52 3.3 Binding constraints...............................................................................................56 3.4 Demand and supply of skills in the Bissau-Guinean labor market ......................................65 3.4 Options for Reform ..............................................................................................68 4. Priorities for Private Sector Development ................................................................................74 4.1 Introduction ........................................................................................................74 4.2 Main Constraints to Private Sector Development ......................................................75 4.3 Activating High-Growth Sectors for Diversification ....................................................86 4.4 Private Sector Matters for Job Creation ...................................................................88 4.5 The Regulatory Framework and Gender Equality ......................................................93 4.6 Options for Reform ..............................................................................................94 5 Executive Summary 1. Guinea-Bissau is a small state in West Africa, with a population of around 1.9 million, and is endowed with rich natural resources. The country enjoys an advantageous geographical location and is made up of a mainland and a large archipelago (the Bijagós) consisting of over 100 islands. It has the highest proportion of natural wealth per capita in West Africa. Its natural capital includes agricultural land, fisheries, forests (timber and non-timber), as well as natural habitats and ecosystems protected in national parks. Its continental shelf is home to rich and diverse fishery resources. Despite this untapped potential, poverty and inequality remain high. Two-thirds of the population live below the international poverty line of US$1.90 a day and one-third live in extreme poverty, on $1.25 or less a day. Perennial political instability and the absence of basic institutions have made it one of the poorest and most fragile countries in the world. 2. This country economic memorandum (CEM) provides an in-depth analysis of Guinea-Bissau’s economic performance over the past decade. It examines what has been driving growth, what is holding it back, and what it takes to accelerate growth. It identifies three key constraints to sustained and inclusive growth: fragility and political instability, weak human capital base, and a ‘missing’ private sector. It analyzes the main challenges and opportunities in each area and provides options for policy reform. Throughout the CEM, Guinea-Bissau is systematically benchmarked against relevant peers to gain insights into areas where reforms could help promote sustained growth. The present CEM takes stock of developments since the 2015 CEM, while adopting a different approach in terms of content and process. In terms of content, it selectively addresses three areas that are among the key constraints to sustained high and inclusive growth. In terms of process, the preparation of the present CEM followed the Bank’s new CEM 2.0 guidelines. What does Guinea-Bissau’s economy look like? 3. An undiversified, mono-crop economy. The structure of the economy has barely changed in the last two decades. It is almost entirely dependent on a single cash crop: cashew. Raw cashew nuts account for 90-98 percent of total export earnings. Agriculture accounts for more than 45 percent of gross domestic product (GDP) and employs 80 percent of the labor force. The bulk of the remaining workforce is employed in informal trade and distribution services. Services represent nearly 40 percent of GDP. Guinea-Bissau’s