Sudan Economic Report AFRICAN DEVELOPMENT BANK GROUP

About this series This new Country Economic Report series seeks to bring the best possible knowledge to bear on policy and institutional reforms in Africa. It also seeks to develop and help implement the African Development Bank’s High Five strategies, while guiding the design of individual country assistance strategies. And it seeks to enhance the quality and impact of the Bank’s analytical and advisory activities and development policy operations­—­and to foster a community of economists (across sectors) on the continent. The series is produced by the Country Economics Department, in close collaboration with teams in other departments of the Bank’s Vice-Presidency for Economic Gov- ernance and Knowledge Management and Office of the Chief Economist.

Copyright © 2018 African Development Bank Group

ISBN: 978-9938-882-84-1

The opinions expressed and arguments employed herein do not necessarily reflect the official views of the African Development Bank, its Boards of Directors, or the countries they represent. This document, as well as any data and maps included, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries, and to the name of any territory, city, or area. Foreword

t took a long time for economic historians deepen policy reforms. That would strengthen and development theorists to explain the the case for heavily indebted poor countries Imystery of modern economic growth. Some (HIPC) debt relief, which might enlarge the fiscal researchers suggested that a combination of space, attract more concessional financing, and cheap energy costs and high wages encouraged help reintegrate Sudan into the global econo- business people in the western world to devote my. Removal of sanctions also bodes well for more resources to technological innovation. the fairly resilient private sector, which is now Others focused on the benefits of colonial re- looking for opportunities to borrow from the source extraction, or on the social and political African Development Bank and others. Both institutions that encouraged entrepreneurship. traditional and nontraditional creditors are These traditional arguments sounded con- stepping up technical assistance work that vincing for a long while. Today, they are insuf- would position them to take such investment ficient at best. Material and political conditions opportunities. Removal of sanctions will also alone could not have done it. The Industrial improve the operational environment, ending Revolution was primarily the result of ideas. long delays in transferring funds for such devel- People and business leaders found innova- opment partners, including the Bank. tive ways of adopting technology and making Policy makers may want to prioritize policies it commercially viable so that it could boost for grasping low hanging fruit to achieve quick productivity. Some great inventions had been wins that could boost investor confidence and sitting on the shelves for many decades. It enhance the momentum for development. For took some wise and very practical people to Sudan, it is critical to apply the rent generated design the institutions that would create the from natural resources to facilitating diversifi- appropriate incentives and conditions for their cation to other non-resource-based industries. broader use by firms and households, bring It has abundant land and natural resources, benefits and rewards to all stakeholders­—­and so it is a primary-­product exporter in the first stimulate economic growth. stage of development. To upgrade its industri- In a world where labor and capital are quite al structure, it must first close its endowment mobile, the main explanation for the economic gaps with advanced industrial countries by in- differences between rich and poor countries is vesting in human and institutional capital and not just money: It is also and increasingly the in physical infrastructure. difference in their ability to generate, or bor- row and use, the best ideas out there. Ferdinand Bakoup This Sudan Country Economic Report, the Acting Director, Country Economics first in a new series, confirms that it is time for Department After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins the country to generate, borrow, and use the Vice-Presidency, Economic Governance and | best ideas out there. It shows that the per- Knowledge Management/Office of the manent removal of U.S. economic sanctions Chief Economist Foreword creates an incentive for the government to African Development Bank Group iii Preface

he Bank has responded positively to African Development Bank Group assistance a government request to finance the to Sudan will be undertaken in the context of T preparation of an economic recovery the extended Sudan Country Brief 2020–21. master plan through its efforts to intensify This extended brief, as the development coop- its assistance to Sudan in the post-sanctions eration framework between the Bank and the era. The plan will facilitate Sudan’s access to government of Sudan, has two pillars: capacity debt relief and its reintegration into the glob- building for improving service delivery, and ag- al economy. That will, in turn, unlock conces- riculture for job creation and livelihoods. The sional financing, create more fiscal space, - at complementary and mutually reinforcing pillars tract both foreign and domestic investment, address the country’s fragility and are geared and end the country’s international economic toward attaining the Bank’s High 5 development isolation. goals—light up and power Africa, feed Africa, Preparing the plan will proceed in tandem industrialize Africa, integrate Africa, and improve with updating the arrears clearance and debt the quality of life for the people of Africa. The relief strategy financed by the Bank in 2013 assistance will unlock about $277 million for and resuming technical assistance to the Afri- 2020–21, bringing the Bank’s Sudan portfolio to can Union High-level Implementation Panel, about $431 million. The Bank will leverage addi- chaired by the former president of South Af- tional resources from bilateral Trust Funds, Afri- rica, Thabo Mbeki. The strategy will be used ca50, the Global Environment Fund, the Climate by the Tripartite Committee on Debt—com- Investment Fund, and the Green Climate Fund prising the governments of Sudan and South and explore co-financing with other partners. Sudan and the Panel—to seek debt relief. This economic report analyzes the impact Since 2010, the Bank has complemented its of sanctions and suggests a pragmatic poli- technical and advisory services to the Panel, cy framework and set of targeted policies to the lead mediator in Sudan’s initiative to secure achieve quick economic wins. a bailout package to address its debt burden. The Bank will resume technical and advisory Gabriel Negatu services to enable Sudan to build momentum Director General, East Africa Development and seeking debt relief, especially in searching for a Business Delivery Office debt relief champion. African Development Bank Group After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Preface iv Contents

Foreword iii Preface iv Acknowledgements x Abbreviations xi

Overview 1

Part 1 Sudan’s economy 7

Chapter 1 Sudan in the global economy 9 Issues of regional integration 10 Sudan’s assets 11 Sectoral structure and unemployment 11

Chapter 2 A volatile and challenging environment 17 Political background to macroeconomic imbalances 17 The macroeconomic effects of Sudan’s two decades of ‘solitude’ 18 Missed economic opportunities but still resilient 19

Chapter 3 Growing macroeconomic imbalances 23 Fiscal imbalance and inflation 24 Dynamics of public debt and debt sustainability 24 Official external flows, foreign direct investment, and remittances 26 Macroeconomic effects of sanctions 29 Evidence of the price effect of sanctions 31

Chapter 4 Charting a new path 33 Poverty and inequality 34 Opportunities for reengaging with the international community 36 A macroeconomic strategy for the post-sanctions era 41 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins A new path 45 | Contents

v Part 1 Notes and references Notes 47 References 47

Part 2 Targeted strategies for quick economic wins 51

Chapter 5 Sudan’s medium-term options 53 The Growth Identification and Facilitation Framework 54

Chapter 6 Identifying sectors with latent comparative advantage 59 Sudan’s existing comparative advantage 59 Which sectors could Sudan potentially enter competitively? 62 How does comparative advantage change over time? 62 Identifying sectors for quick wins in the short to medium term 64

Chapter 7 Assessing domestic capacity and production costs 69 Sudan’s manufacturing sector 69 Estimating direct production costs 71 Easing institutional constraints to reduce costs 71

Chapter 8 Attracting financing for economic development 75 Sudan’s advantages as a member of international organizations 75 New forms of development financing 75 Patient capital 76

Chapter 9 Scaling up self-discovery by private firms 81 Examples of successful self-discovery by private firms in other countries 81 Support by the government of Sudan 82

Chapter 10 Recognizing the power of industrial parks and providing limited incentives 85 Recognizing the power of industrial parks and export processing zones 85 Providing limited incentives to industries having a latent comparative advantage 87

Part 2 Notes and references After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | References 89 Notes 89 Contents vi Annexes 93

Annex 1. Background information 95 Annex 2. Economic performance 98 Annex 3. Cointegration results 106 Annex 4. Forums and commitments for cooperation with Africa 110 Annex 5. Xinjiang’s successful targeted industrial policies 111

Boxes 1 Growth Identification and Facilitation Framework at a glance 5 3.1 Sanctions, war, trade, and macroeconomic conditions 23 4.1 Setting poverty simulation parameters 36 4.2 Gum arabic for economic recovery and environmental sustainability in Sudan 44 5.1 Growth Identification and Facilitation Framework at a glance 55 5.2 From a commodity exporter to a manufacturing powerhouse: China’s economic transformation 56 6.1 Measuring revealed comparative advantage 60 6.2 Which subsectors create greater numbers of blue-collar jobs? 67 7.1 Profile of a local leather goods producer 70 8.1 Combating desertification through public–private partnerships: The Kubuqi business model 78

Figures 1.1 Sudan, East Africa, and world markets 9 1.2 Natural resource rents in Sudan, 1995–2015 11 1.3 Sudan’s rapidly growing young labor force, 1950–2100 12 1.4 Sectoral value added in Sudan, 1980–2016 12 1.5 Poverty incidence by professional category in Sudan, 2015 14 1.6 Distribution of labor force by sector of activity in Sudan, 2009 and 2015 15 2.1 Timeline of major events in Sudan 17 2.2 Average real GDP growth in Sudan, 1981–2016 19 2.3 Oil rent and GDP per capita growth 20 2.4 Output volatility 20 2.5 Sudan total domestic investment 21 2.6 Bilateral trade of Sudan, by trading partner 21 3.1 Total government revenues and oil rents in Sudan, 1990–2016 24 3.2 Fiscal balance and inflation in Sudan 24 3.3 Public sector wages and government expenditure in Sudan 25 3.4 Sudan’s debt profile 25 3.5 Total and external debt, 1990–2016 26 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins 3.6 Interest arrears, 1990–2016 26 | 3.7 Real exchange rate misalignment, 1990–2016 27

3.8 Real exchange rate misalignment and terms of trade, 1993–2016 27 Contents 3.9 Real exchange rate misalignment and exports performance, 1990–2016 28 vii 3.10 U.S. aid to Sudan, 1990–2016 28 3.11 Remittances to Sudan, 1990–2016 29 3.12 Domestic credit to the private sector, 1980–2016 29 4.1 Sectoral contribution to GDP in Sudan 33 4.2 Agriculture’s share of employment in Sudan 34 4.3 Projecting the Sudanese poverty trend using 2009 data 35 4.4 Projected trends in poverty under alternative scenarios, 2014–20 35 4.5 Projected trends in poverty where structural transformation is driven by a switch in employment 37 4.6 Projected trends in poverty where structural transformation by driven by switches in employment and productivity 37 4.7 The Belt and Road Initiative includes a “string of pearls” in East Africa­—­ Sudan could be one of the pearls 39 4.8 Outward foreign direct investment by BRICS countries, 2000–2016 40 4.9 Composition of China-sponsored projects and programs in Sudan 41 4.10 Composition of China-sponsored infrastructure projects by percentage of projects…and by percentage of dollars spent 41 5.1 Industrialization is an engine of growth: manufacturing and income growth, 1990–2014 53 6.1 China’s revealed comparative advantage is declining in labor-intensive export sectors, 1984–2016 63 6.2 Revealed comparative advantage is declining in some sectors in Egypt, Tunisia, and Vietnam 64 7.1 Sudan’s industrial sector’s share of employment 69 8.1 Shares of world investment from developing country groups will overtake shares from developed countries after 2015, 1965–2030 76 8.2 Composition of external financing flows to developing economies, $1.4 trillion in total, 2016 77 A1.1 Sudan’s young labor force and population premium 95 A1.2 Sudan’s total exports in 2015 were $5.7 billion 97 A1.3 Sudan’s total imports in 2015 were $10.5 billion 97 A2.1 Sudan’s share in regional gross domestic products 98 A2.2 Domestic investments in Sudan 98 A2.3 Oil rents and gross domestic product in Sudan 99 A2.4 Total oil rents and net product taxes in Sudan 99 A2.5 Net taxes on products in Sudan 100 A2.6 Trends in agricultural trade in Sudan 100 A2.7 Total external financing flows in Sudan 101 A2.8 Decomposition of external financial flows in Sudan 101 A2.9 Share of the United States in total ODA in Sudan 102 A2.10 Remittances received in Sudan 102 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | A2.11 Remittance growth and share in GDP in Sudan 103 A2.12 Institutional efficiency indices in Sudan 103

Contents A2.13 Trade facilitation indices in Sudan 104 A3.1 Estimated normalized cointegrating vectors 108 viii A3.2 Generalized impulse responses to a shock in the PPP relation 108 A3.3 Generalized impulse responses to shock in PPP relation with broad money 109 A5.1 Structural change by sector and employment: 1990–2015 112 A5.2 Xinjiang: Trade openness and border trade 113

Tables 1.1 Unemployment and youth unemployment by sex in Sudan, 2015 13 1.2 Youth unemployment in Sudan and several comparators, 1990–2016 13 1.3 Poverty decomposition by state in Sudan 15 2.1 Exports of Sudan, by partner (percent of total exports) 21 2.2 Imports of Sudan, by partner (percent of total imports) 21 3.1 China’s share in total grants and loans and in debt of Sudan, 1999–2007 28 3.2 Financial inflows to Sudan 29 3.3 Macroeconomic impact of 1997 sanctions (before and after analysis) 30 3.4 Macroeconomic impact of 1997 and 2006 sanctions and 2011 secession of South Sudan (impact analysis with additional major shocks) 30 6.1 Sudan and identified comparator countries 60 6.2 Identified subsectors in which Sudan has a revealed comparative advantage 61 6.3 Subsectors in which revealed comparative advantage is declining in comparator countries and which Sudan could potentially enter 62 6.4 Priority subsector identification using the four criteria for identifying subsectors for quick wins in the short to medium term 65 7.1 Foreign direct investment in Sudan’s textiles and leather industry, 1992–2015 70 7.2 Entry-level blue collar labor costs in Sudan and selected countries 71 7.3 Performance of logistics services in Sudan and comparator countries 72 7.4 Access to infrastructure in selected capital cities in Sub-­Saharan Africa (percent of households with access) 73 A1.1 Population density: Sudan and its comparators 95 A1.2 Sudan’s revealed comparative advantage in SITC 4 digit 96 A2.1 Structural transformation (or the lack of) in Africa and Asia 104 A3.1 Relative purchasing power parity (RPPP), 1971Q1–2017Q4 106 A3.2 Inflation error correction model 1970Q1-2017Q4 107 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Contents

ix Acknowledgements

his country economic report is a prod- collaboration with Sudan’s Central Bureau of uct of the Vice-presidency for Eco- Statistics, which led to the successful comple- T nomic Governance and Knowledge tion of the survey and the compilation of key Management. Ferdinand Bakoup (Acting Di- indicators under the supervision of the CBS rector, Country Economics Department) co- Director General, Dr. Karam Allah Ali Abdelrah- ordinated the preparation of the report and man. The team is also grateful to the Sudanese Suwareh Darbo (principal country economist government ministries for their invaluable con- for Sudan) was the Task Team Leader. Vivi- tributions to the poverty study. anus Ngong, Amah Ezanin Marie-Aude Koffi, The following external consultants and re- and Tricia Baidoo helped with coordination of searchers contributed background papers to the various aspects of the production of the different chapters: Yan Wang, Suliman Kab- report. bashi, Adams Adama, Zorobabel T. Bicaba, and Abebe Shimeles (then Acting Director of the Tiguene Nabassaga. Audrey Chouchane and Macroeconomics Policy, Research, and Fore- Mark Eghan provided comments on some parts casting Department) led the team preparing of the report. macroeconomic background papers. The team Sadiq Bentum Commey (Eighth Wonder included Anthony Simpasa and Chuku Chuku. Company Limited) designed the cover of the Linguere Mbaye and Zackary Seogo provided report. Editing and layout were carried out by excellent support and assistance. a team from Communications Development The Statistics Department produced the Incorporated led by Bruce Ross-Larson and in- data on poverty under the guidance of Charles cluding Joe Caponio, Mike Crumplar, and Elaine Leyeke Lufumpa, Director. Louis Kouakou Koua Wilson. led the statistics team, which included Nirina Finally, the report benefited immensely Letsara and Yassine Jmal on poverty issues. The from the advice of Ibrahim Elbadawi, Managing report team is grateful for the very productive Director, Economic Research Forum. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Acknowledgements x Abbreviations

ACDRS Arrears clearance and debt relief KAF Korea–Africa Forum strategy LC Letter of credit AfDB African Development Bank LLMICS Low- and lower-middle income AGOA African Growth and Opportunity Act countries AIIB Asian Infrastructure Investment LPI Logistics Performance Index Bank MVA Manufacturing value added AUHIP African Union High Level ODA Official development assistance Implementation Panel OECD Organisation for Economic Co- BRI Belt and Road Initiative operation and Development COMESA Common Market for Eastern and OFAC U.S. Treasury Office of Foreign Southern Africa Asset Control COP21 Paris Climate Conference OFDI Outward foreign direct investment CPI Consumer price index OOF Other official finance EBA Everything but Arms PPP Purchasing power parity ESA Eastern and Southern Africa PRSP Poverty reduction support plan EU European Union RCA Revealed comparative advantage FAO Food and Agriculture Organization SEZ Special economic zone FDI Foreign direct investment TICAD Tokyo International Conference on FOCAC Forum on China–Africa African Development Cooperation TSA Treasury single account GDP Gross domestic product UAE United Arab Emirates GNI Gross national income UN United Nations HIPC Heavily indebted poor countries UNEP United Nations Environmental I2E Importing to export Programme IFAD International Fund for Agricultural U.S. United States Development VAR Vector autoregression ILO International Labour Organization WDI World Development Indicators IMF International Monetary Fund WITS World Integrated Trade Solution IT Information technology WTO World Trade Organization After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Abbreviations

xi

Overview

.S. economic sanctions were imposed • Terms of financing deteriorated. The letter in 1997 after tensions escalated be- of credit (LC) margin increased from 10 per- Utween South Sudan and Sudan and cent to 100 percent. The name “letter of fighting between the Sudan People’s Liberation cash” superseded “letter of credit.” Army and Sudan Armed Forces and other mili- • New charges were introduced, such as a tias became intense. The sanctions led to two “compliance charge”­—­a fee of up to 2 per- decades of “solitude” for Sudan. Initially, the cent levied by some banks on each trans- effects were mild, since they mainly restricted action. The banks argued that compliance trade, aid, and bank transactions. The sanctions charges compensate for the cost1 of going limited banking sector access to the U.S. dollar through the legal restrictions to comply clearing system in New York and froze govern- with U.S. and European Union sanctions. ment deposit accounts with U.S. banks. • International concessional resources de- The severity of sanctions for individuals clined. Net official development assis- and private business activity began to be felt tance plummeted from $1.5 billion in 2011 to in 2008/2009, when the U.S. Treasury Office of $900 million in 2015 (AfDB). Foreign Asset Control (OFAC) started to moni- • Among macroeconomic indicators2, growth tor international transactions of all major inter- plummeted to 3 percent a year in 2016 and national banks. OFAC especially targeted trans- was projected at 3.5 percent in 2017. Infla- actions with sanctioned countries (Cuba, Iran, tion spiraled to 36.5 percent in 2013 and Sudan, and others) and applied hefty fines on 36.9 percent in 2014. Current account defi- banks doing business with them. cits were huge: 10.3 percent of GDP in 2012 Sudanese in the diaspora resorted to risky, and 8.1 percent of GDP in 2013. The country high-cost, informal, and time-consuming ways went from a fiscal surplus of 0.1 percent of of physically transferring cash to their families GDP in 2011 to a deficit of –3.1 percent in 2012 in Sudan. And the private sector cost of doing and –2.2 percent in 2013. Foreign exchange business in trade finance (exports or imports) reserves plummeted from 1.9 months of became prohibitively high as international and import cover in 2012 to 1 month of import regional banks avoided Sudanese transactions. cover in 2016, and the parallel market ex- The number of international and regional change rate soared while the official market banks willing to undertake transactions with exchange rate remained virtually fixed. (The Sudan has diminished considerably directly gap or premium between the parallel and due to fear of huge fines imposed by regula - official market rate was more than 120 per- tors. The risk-return curve and risk premiums cent in August 2017.) shifted upward considerably as seen in the • Unemployment and poverty rose as a result After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins following: of the exchange rate’s rapid depreciation | • Letter of credit confirmation charges in- and persistent inflation.

creased from 0.1 percent per quarter to • AfDB operations were crippled as interme- Overview 2.5 percent per quarter­—­that is, 25-fold. diary banks refused to conduct transactions 1 bearing the name “Sudan,” so that proj- the Sudanese government to deepen policy ects recorded low disbursement rates even reforms. That would strengthen the case for though the Bank had obtained an OFAC li- heavily indebted poor countries (HIPC) debt cense in September 2015. relief,4 which might enlarge the fiscal space, Sudan reached several milestones3 on the attract more concessional financing, and help way to getting sanctions lifted. Political prog- reintegrate Sudan into the global economy. ress emerged from the National Political Dia- The removal of sanctions also bodes well for logue in 2016, the 2016 Addis Ababa Roadmap the fairly resilient private sector, which is now for Peace, and the formation of a government looking for opportunities to borrow from the of national unity in 2017. The government has Bank and others. Both traditional and nontra- allowed humanitarian aid into Darfur and other ditional creditors are stepping up technical rebellious border areas. Sudan made progress assistance work that would position them to with South Sudan in addressing the contentious take such investment opportunities. The re- issues that dominated the immediate post-se- moval of sanctions will also improve the op- cession years, among which only border de- erational environment, ending long delays in marcation, the “Two Areas,” and the status of transferring funds from such development Abyei have yet to be fully resolved. Sudan’s gov- partners as the Bank. ernment maintains a fruitful relationship with However, the fiscal crisis and the huge debt neighboring countries in combating terrorism burden will persist unless the government and thus contributing to regional stability. reaches out to creditors, and intensifies its The United States permanently lifted sanc- engagement with the International Monetary tions on Sudan on 6 October 2017. The decision Fund to deepen macroeconomic reforms, par- to lift sanctions and end an economic embargo ticularly addressing the exchange rate misalign- came after the Trump administration removed ment and tightening monetary policy improves Sudan from the list of countries whose citizens the investment climate to facilitate private are subject to travel restrictions in September sector activity and inflows of foreign direct in- 2017. Sudan was the only country removed. vestment and official development assistance However, Sudan remains on the list of state ­—­while limiting the quasifiscal activities of sponsors of terrorism, alongside Iran and Syria, the Central Bank of Sudan. And Sudan urgent- and must discontinue its alleged arms deals ly needs to reactivate the Tripartite Commit- with North Korea if the lifting of sanctions is to tee on debt and coordinate with the Bretton be maintained. Woods institutions and the AfDB in the con- A new strategy is needed to address Sudan’s text of the Technical Working Group5 on Debt post-sanctions macroeconomic challenges. for HIPC debt relief. Sudan will continue to face the same macro- The outlook faces risks. The large and per- economic challenges after sanctions as it did sistent external financing gaps over the medium before. This report outlines a strategy aimed term, if unfilled, could create disorderly adjust- at sustainable growth after two decades of ment, depressed economic activity, and rapid sanctions. inflation. Mitigating the risks while maintaining the fixed exchange rate regime will require sig- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | nificant fiscal and monetary adjustment. Other The outlook risks include reduced FDI, remittances from

Overview The permanent removal of U.S. economic the Gulf, and lower oil receipts from South sanctions on Sudan creates an incentive for Sudan. Progress in the national dialogue, which 2 culminated in the 2016 Addis Ababa Roadmap government must invest resource rents inno- for Peace and the formation of a Government vatively in hard and soft infrastructure in and of National Unity in 2017, augurs well for politi- around the selected zones and offer time-lim- cal and macroeconomic stability. ited incentives for foreign and domestic firms to invest­—­“building the nest to attract the phoenixes.” Further integration with the re- A new path gional market would allow Sudan to seize some In today’s increasingly dynamic, multipolar, yet of the 85 million manufacturing jobs that China interdependent world, Africa needs a “can do” may have to relocate in the next decade. Sudan mindset6­—­to cooperate on structural trans- needs to compete for outward foreign direct formation for job creation. Emerging and de- investment from China, India, Saudi Arabia, veloping countries now account for more than South Korea, UAE, and other emerging econ- 57 percent of global GDP, while the advanced omies to foster learning, reduce poverty, and industrial countries account for less than generate employment for its growing young 43 percent. Emerging and developing countries labor force. account for over two-thirds of global growth and are the main drivers of the global econ- Option 2: Augment natural capital such as omy. China alone accounts for 33 percent of land, pasture, and other assets by investing in global growth, due to its economic size and its higher value-added agriculture, horticulture, 6.5 to 7 percent annual growth. tree crops, and animal husbandry. Promote Sudan has an unprecedented opportunity agri-business for green development to get to be a destination for firms relocating from green financing. And combat desertification China and other emerging donor countries (in- following the Kubuqi model in Inner Mongolia. cluding Arabic ones). As real wages rise in China Sudan is endowed with abundant arable pasto- and other upper-middle-income countries, mil- ral land but faces severe drought and desert- lions of manufacturing jobs will move to other ification. Since most of the poor live in rural developing countries along with outward for- areas, the government should enable the pri- eign direct investment. Improved connectivity vate sector to invest in large-scale irrigated ag- from the construction of several special eco- riculture, dairy farming and animal husbandry, nomic zones or agri-ecological parks near Port and the leather supply chain for regional and Sudan on the Red Sea would allow Sudan and global export. The production of fertilizers and other countries in northeast Africa to seize farming equipment could provide inputs for the opportunity provided by the industrial agriculture and agri-business. To increase rural upgrading of China, India, South Korea, Turkey, employment, it might be desirable to attract Saudi Arabia, South Africa, and other leading workers into light manufacturing, such as foot- dragons. wear and garments. Based on the analysis here, policy makers in This strategy would help Sudan to grasp Sudan may consider the following options: unprecedented opportunities as firms from emerging market economies, such as from Option 1: Promote deep openings for foreign China, Egypt, Saudi Arabia, and South Africa, After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins direct investment by setting up special eco- “go global.” With South Sudan and other neigh- | nomic zones (SEZs) or agri-ecological parks, bors, Sudan should jointly form cross-country and making the zone the best place to at- supply chains for assembly of farm machinery Overview tract talent and the best place to invest. The and equipment through original equipment 3 manufacturing or processing trade. Sudan economy, mostly likely because of high trans- should also seek synergies between its emerg- action costs, logistics, and other unfavorable ing tourism and services opportunities and business conditions. If these conditions are im- eco-friendly SEZ development in an inclusive proved, the economy could be competitive in model focused on people, providing training the world market in this industry. and capacity building and attracting talent for a learning and innovative society. Reasons for targeting sectors Currently more than 100 countries world- Sudan has suffered conflicts and embargos and wide have SEZ programs operating several other internal and external shocks since the thousand SEZs. As programs continue to pro- 1950s, exacerbated by the secession of South liferate, Sudan’s policy makers must target SEZ Sudan in 2011. In this context, policy makers sectors and locations (near the port) so that may want to prioritize policies for grasping low foreign and domestic investors are attract- hanging fruit to achieve quick wins that could ed and will generate jobs. The mindset must boost investor confidence and enhance the change from the traditional one of seeking momentum for development. the first and best solutions for improving the The first step is to identify the right target nationwide investment climate to focusing on countries and the right industries as a precon- institutions that unite, infrastructure that con- dition for successful catch up (box 1). Gov- nects, and interventions that target, including ernment must decide which infrastructure to the sectors and SEZs identified in this report. improve and where these services should be provided to facilitate private sector activities. Developing country governments have limit- Targeting strategies for quick wins ed resources to invest in the necessary hard and soft infrastructure, which are often sector Selecting sectors to target specific. Each developing country cannot be Identifying growth pillars or sectors is challeng- successful in all sectors, so individual sectors ing, as economic theory provides few clues for need to be targeted for attention. Identifica- determining which industries are “right” and tion is also important because specialization, which are “wrong.” As some analysts caution, agglomeration, and industrial clustering are “[t]he first problem for the government in car- crucial for achieving economies of scale and rying out an industrial policy is that we actu- reducing costs in any industry. Government ally know precious little about identifying … a needs to provide infrastructure services in ‘winning’ industrial structure. There is not a set certain locations, or incentives for first mov- of economic criteria that determine what gives ers in certain sectors, so that private firms are different countries preeminence in particular not spread too thinly over too many sectors, lines of business.”7 as that reduces the firms’ chances of surviving A pragmatic process for identifying growth and gaining a competitive edge in the interna- pillars is to analyze latent comparative advan- tional market. tage, defined as the “comparative advantage For developing countries whose economies of an economy that is embedded in the factor depend heavily on natural resources, it is crit- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | costs of production [which are] determined ical to apply the rent generated from natural by the economy’s endowment structure.”8 La- resources to facilitating diversification to other

Overview tent comparative advantage could lie in a new non-resource-based industries. Many develop- industry that is not yet successful in today’s ing countries have abundant land and natural 4 BOX 1 Growth Identification and Facilitation Framework at a glance

The six-step Growth Identification and Fa- identified in step 1 or from other high- cilitation Framework can help policy mak- er income countries producing those ers in developing countries identify indus- goods. tries with latent comparative advantage • Scaling up self-discoveries. In addition and facilitate competitive private sector to the industries identified in step 1, the development: government should pay attention to • Choosing the right target. Policy mak- spontaneous self-discovery by private ers should first pinpoint economically enterprises and support the scaling up dynamic countries with similar endow- of successful private innovation in new ment structures to their own and with industries. about 100–300 percent higher per capita • Recognizing the power of industrial incomes measured in purchasing power parks. In countries with poor infrastruc- parity. They would then identify trad- ture and an unfriendly business environ- able goods and services that have grown ment, the government may set up spe- well in those countries for the past 15–20 cial economic zones or industrial parks years. to lower barriers to firm entry and for- • Assisting domestic private firms. If some eign investment. private domestic firms are already pro- • Providing limited incentives to the right ducing in these industries, the firms must industries. Policy makers may consider have the tacit knowledge or local knowl- compensating pioneer firms in the in- edge that lowers costs and makes them dustries identified as having latent com- competitive. Policy makers should try to parative advantage with time-limited identify the obstacles that are prevent- tax incentives, co-financing for invest- ing these firms from upgrading the quali- ments, and access to foreign exchange, ty of their products or that limit entry to to compensate for the externalities cre- those industries by other private firms. ated by first movers and to encourage • Attracting global investors. For indus- firms to form clusters. tries in which no or only a few domestic firms are producing, policy makers may Source: Adapted from Lin and Monga 2011. try to attract FDI from the countries

resources, so they are primary product ex- The strategy to get there is to follow a porters in the first stage of their development. country’s comparative advantage at each To upgrade their industrial structure, they stage of development. When firms choose to After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins must first close their endowment gaps with enter industries and adopt technologies that | advanced industrial countries by investing in are consistent with the country’s compara- human and institutional (intangible) capital and tive advantage, the economy is most compet- Overview physical infrastructure. itive. In these conditions, firms will claim the 5 largest possible market shares and create the dynamic can lead to a virtuous circle: it can up- greatest possible economic surplus. Owing to grade the country’s factor endowment struc- the competitiveness of these industries, rein- ture as well as its industrial structure and, in vested surpluses can earn the highest return, addition, make domestic firms more compet- which allows the economy to accumulate itive in more ­capital- and skill-intensive prod- even more physical and human capital. This ucts over time. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Overview

6 PART 1 Sudan’s economy After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Overview

7

CHAPTER 1 Sudan in the global economy

udan is located strategically on the Red natural resource wealth in oil, metals, and land Sea, the most important ocean shipping suitable for cultivation and pastoral activities. Sroute between two of the world’s largest After the secession of South Sudan in 2011, the markets­—­Asia and Europe. The country bor- country lost 75 percent of its oil revenues and its ders Chad, Egypt, Eritrea, Ethiopia, Libya, and natural resource rent declined, but mineral rent South Sudan and faces Saudi Arabia across the and other resource rents remain substantial. Red Sea. Port Sudan is near the Suez Canal, Dji- Sudan and all East African countries have bouti, and the Gulf of Aden, an area through geographic disadvantages. The World Bank which more than 8,000 commercial cargo ships classified them as “countries far from world and around 8 percent of global sea-borne markets” (figure 1.1).9 They face a three-dimen - trade pass each year. sional challenge: density, distance, and division. After decades of conflict and embargo, Sudan “As the challenges posed by geography become faces unprecedented opportunities and severe more difficult, the response should include challenges. It is divided into three topographic connective infrastructure. In places where inte- regions: the deserts in the north, which account gration is hardest, the policy response should for about 30 percent of its area; the semi-arid be commensurately comprehensive: institu- Sahel belt in the middle; and the wetlands and tions that unite, infrastructure that connects, rain forest in the south. Sudan has considerable and interventions that target.”10

FIGURE 1.1 Sudan, East Africa, and world markets

Regions with High-income countries Countries close to

world markets After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Large countries far from | world markets Small countries far from world markets Sudan in the global economy

Source: World Bank 2009. 9 Countries far from world markets can pro- integration, including by seeking the African mote regional integration and seeking large Growth and Opportunity Act (AGOA) prefer- countries such as China, Egypt, and India that ences offered by the United States. A bilateral can serve as a regional conduit to world mar- free trade agreement with South Sudan (which kets. A combination of efforts can improve is a part of AGOA) is critical. Enhanced regional institutional cooperation and regional infra- cooperation could create a policy environment structure investment. But that is not enough. conducive to building connectivity structures, Targeted interventions and incentives will such as ports, railways, road corridors, and also be necessary through the establishment broadband networks linked to functioning of special economic zones and preferential hubs in neighboring countries. measures to attract foreign direct investment After the lifting of international sanctions, (FDI) and access to markets and to productive Sudan and other northeastern African coun- inputs. tries will have unprecedented opportunities in the next decades in the multipolar world economy, particularly due to the recent de- Issues of regional integration velopment of supply-chain trade.11 Reduced Sudan has a great potential to benefit from transport costs, thanks to recent investment regional integration. The country is endowed in cross-regional infrastructure, enable East Af- with a 500 mile coastline on the Red Sea and rican countries to target the large EU market, strategically located Port Sudan, while most of which accounts for 35 percent of world trade, its neighbors are landlocked, including Chad and the Asian market, which accounts for and South Sudan. But Sudan is less integrated 33 percent, by using the “importing to export” into the global economy than any of its region- (I2E) model to join existing supply chains in the al neighbors except Eritrea, Somalia, and South region. Sudan, largely due to its undiversified economy Multilateral development banks and some and restrictive trade policies. Sudan must un- bilateral donor organizations are enhancing dertake reforms that will enhance its capacity their support for the United Nations Sustain- to benefit from regional integration and trade. able Development Goals. New financing plat- It should exploit its trade with landlocked forms, facilities, and instruments are being es- neighbors. Sudan is already working closely tablished.12 China has emerged as Africa’s most with Ethiopia to improve interconnectivity by important economic partner in aid, trade, in- exploring a rail link opportunity. vestment, and infrastructure financing. As labor Sudan is a member of several regional com- costs rise rapidly in China’s coastal regions, munities, including the Arab League, the East- manufacturing centers are moving to China’s ern and Southern Africa (ESA) group, and the inland and western regions, and the Chinese Common Market for Eastern and Southern government is encouraging enterprise “going After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Africa (COMESA). It also has preferences in the out” and “going global” by relocating manufac- European Union (EU) market under the “Every- turing in developing countries. In doing so, Chi- thing but Arms” (EBA) initiative for least devel- nese firms of all sizes and sectors are bringing oped countries. Negotiations for World Trade capital investment, managerial know-how, and Organization (WTO) membership are well entrepreneurial spirit to every corner of the advanced. African continent. They are creating millions of

Sudan in the global economy With the U.S. embargo lifted in 2017, Sudan jobs in developing countries including African needs to deepen its regional and global ones (see chapter 4).13 10 Sudan’s assets FIGURE 1.2 Broadly speaking, a country’s development Natural resource rents in Sudan, 1995–2015 depends on human and social capital, physical Percent of GDP capital, and natural and environmental capital. Forest Minerals Oil 25 Institutions and technologies shape the gover- nance, efficiency, and effectiveness of the use 20 of such assets. These natural and factor en- 15 dowments represent the total budget that the 10 country can allocate to primary, secondary, and tertiary industries to produce goods and serv- 5 ices. The relative abundance of endowments in 0 a country, which determines the relative factor 2011 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 prices in it, are a given at any specific time but changeable over time. And infrastructure is a Source: Based on World Development Indicators database, accessed 21 October 2017. fourth endowment that is fixed at any given specific time and changeable over time.14 What is Sudan’s endowment structure? It is about 64 percent of the land is exposed to de- characterized by abundant land and natural re- sertification due to natural or human factors, sources but inadequate labor and human cap- the population density in the oasis and urban ital and inadequate physical and infrastructur- areas is high. The largest metropolitan area, al capital. The country’s natural resource rent Khartoum, includes some 7 million people, of was one of the highest in the world, accounting whom approximately 2 million are displaced for more than 15 percent of GDP in the years from the southern war zones and the western around 2007. After the 2011 South Sudan seces- and eastern drought-affected areas. Sudanese sion, Sudan lost 75 percent of its oil revenues, Arabs account for 70 percent of the popula- and total natural resource rents declined to less tion, with the rest being Arabized Beja, Copts, than 5 percent in 2015 (figure 1.2). However, this Nubians, and other peoples. Sudan is almost is no reason for dismay. Several countries have entirely Muslim. Most citizens speak Sudanese provided excellent examples of rising from the Arabic.15 ruins of war and the lack of natural resources Sudan’s working-age population (15–64) to become world manufacturing centers, par- stands at 22 million, or 45 percent of the ticularly the East Asian newly industrialized total population, and is growing rapidly, with countries (NICs) (including South Korea) and, low young-age and old-age dependency lev- later, China and Vietnam. Cambodia, Ethiopia, els (figure 1.3). The labor force includes about Myanmar, and Uganda have made considerable 12 million people, with an overall labor force progress. participation rate of 54 percent (31 percent for After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Sudan’s population is estimated at about women and 76 percent for men). With such a | 39 million, with 66 percent living in the rural young and growing labor force, Sudan will ex- areas (of whom 20 percent are largely nomad- perience a demographic dividend. ic). The population is growing relatively rapidly at around 2.1 percent a year, with the average household size about 5.8 persons. The coun- Sectoral structure and unemployment try has a low population density­—­around Sudan is the fourth largest economy in Sub-­ Sudan in the global economy 46 persons per square kilometer­—­but since Saharan Africa, with a gross domestic product 11 FIGURE 1.3 FIGURE 1.4 Sudan’s rapidly growing young labor force, 1950–2100 Sectoral value added in Sudan, 1980–2016 Population (millions) Share of GDP

100 1980–89

Age 15–64 80 Agriculture 35% Services 49% 60

40 Age 14 and under Industry 15% (Manufacturing 8%)

20 1990–99

Age 65 and over 0 Services 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 45% Agriculture 42% Source: United Nations population projections.

Industry 14% (GDP) of $160 billion (in 2014 purchasing power (Manufacturing 7%) parity), following Nigeria, South Africa, and An- 2000–09 gola, in that order. With a gross national income (GNI) of $1,740 per capita, Sudan is classified Services Agriculture 41% 34% by the World Bank as a lower-middle-income country. Despite its resource abundance, Sudan has not yet used its natural resource rent to diversify its economic structure. Like many of the East African countries, Sudan has made an Industry 25% (Manufacturing 7%) inadequate structural transformation. 2010–15 The share of agricultural value added has maintained at high level of 39–40 percent Agriculture 35% of GDP, and agriculture accounts for 80 per- Services cent of the labor force, implying low produc- 53% tivity. Of the land, 64 percent is exposed to desertification due to human or natural fac- Industry 12% tors. The drought of the past few years ex- (Manufacturing 6%) acerbated the situation. Serious environmen- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins 2016 | tal degradation has affected Sudan during the past 20–30 years, caused by low rainfall Agriculture (38 percent), overcutting of trees (32 per- 40% Services cent), overcultivation (15 percent), and over- 58% grazing (13 percent). The share of industrial value added declined dramatically after the Industry 3% Sudan in the global economy conflict and secession from 11 percent to a mere 5 percent. The share of manufacturing Source: World Development Indicators. 12 value added has stagnated at around 6 per- TABLE 1.1 cent, lower than the 10 percent average for Unemployment and youth unemployment by Sub-­Saharan Africa and lower than 8 percent sex in Sudan, 2015 average of the lower-income group of de- Percent veloping countries (see annex 5). The service Youth sector accounted for over 50 percent of GDP. Total unemployment unemployment (ages 15–24) The country is not able to create sufficient Male 9.4 21.4 formal sector jobs for its young and growing Female 22.2 30.0 population. Total 13.5 24.9 Many smaller countries have seen the share of manufacturing in GDP increase over time.16 Source: AfDB based on Sudan household survey 2015. Among the small global players that industrial- ized between 1994 and 2014, Cambodia, Myan- mar, and Sri Lanka have made marked progress, Youth unemployment, at 25 percent, is much and Bangladesh experienced a more modest higher than in Sudan’s neighbors or the Sub-­ increase in manufacturing’s share of GDP. In Saharan average (tables 1.1, 1.2). Sudan has not Sub-­Saharan Africa, Botswana, Lesotho, Nige- been able to generate enough jobs for young ria, and Uganda were the biggest gainers, with entrants into the labor force. Many college 2–4 percentage point increases in manufac- graduates have been unemployed, suggesting turing’s share of GDP between 1994 and 2014, both low job creation for these young entrants starting from lower base shares than the Asian and a mismatch between their skills and labor countries did. market demands. The high youth unemploy- Sudan’s unemployment rate has been high­ ment is a potential source of instability and —­14–15 percent­—­ for more than two decades. conflict.

TABLE 1.2 Youth unemployment in Sudan and several comparators, 1990–2016 Percent

Comparator countries 1990–99 2000–09 2010–15 2016 China 9.2 9.4 10.3 10.6 Sudan 23.3 23.0 21.5 22.4 Tunisia 31.8 30.3 36.8 35.7 Vietnam 4.7 5.3 5.7 6.4 Neighbors of Sudan

Central African Republic 6.7 6.8 6.6 6.9 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Chad 5.6 5.8 5.8 5.8 Egypt 27.2 28.0 33.3 33.4 Ethiopia 6.0 5.6 5.3 5.7 Eritrea 7.5 7.5 7.2 7.3 Libya 19.5 19.1 18.7 19.2 Sub-­Saharan Africa 8.0 8.1 7.5 7.4 Sudan in the global economy

Source: World Development Indicators database, accessed 24 October 2017. 13 Sudan’s high youth unemployment was 35–54, with 96 percent working. This inequality driven largely by overdependence on oil-led is largely due to structural rigidities related to growth, which failed to create jobs and also labor laws and cultural norms preferring male led to the neglect of other productive sectors, workers and discouraging employers from hir- such as agriculture. The mismatch between the ing women in certain jobs. Inclusive growth in skills of young graduates and the demands of Sudan would require not only economic di- the labor market makes it difficult to absorb versification to create jobs but also conscious them even as the service sector records rea- policies to remove constraints on female labor sonable growth. The government is working force participation, including improving wom- closely with the African Development Bank en’s access to land and credit and offering pro- (AfDB) to address this problem through the EN- grams that target women. ABLE Youth Program, 17 which seeks to create Unemployment is a major cause of poverty business opportunities and employment for in Sudan. Although individuals living in house- youth along priority agricultural value chains. holds with unemployed heads represent only Sudan’s high growth in the late 2000s was 2.4 percent of the population, 50 percent of neither inclusive nor broad based, and it left them are poor. The most affected homes are wide inequality across ages, sexes, and regions those whose head is an unpaid family worker without appreciably reducing poverty. This is (figure 1.5). The 2014 poverty incidence was es- most notable in the labor force participation timated at 36.1 percent, and inequality is high, rates, where the workforce participation of despite a decline in the Gini index from 0.354 in men is shown to be higher than that of women 2009 to 0.292 in 2014. across all age groups, recorded at 76 percent Inequality among Sudan’s states is high. for men compared with only 31 percent for Those with the lowest poverty incidence are women. Only 29 percent of women ages 35–44 the Northern, Al-Gezira, and River Nile (table are active in the workforce, and only 14 per- 1.3). The Kordofan and Darfur states are the cent of those ages 65 and older. The highest poorest. A breakdown of poverty by state sup- workforce participation is among men ages plemented by an index of priority shows which states should be prioritized for poverty reduc- tion measures. South Kordofan and West and FIGURE 1.5 Central Darfur, in which two in three people Poverty incidence by professional category in Sudan, 2015 are poor, have the highest priority index­—­over Percent 1.8­—­and require special attention from policy 70 makers. Red Sea and East and South Darfur are

60 also priority states. Manufacturing is the most productive sec- 50 tor of the economy, where formal jobs are cre- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | 40 ated. But manufacturing also employs far fewer 30 people than agriculture or services (figure 1.6).

20 Without manufacturing sector development, unemployment is unlikely to be resolved, es- 10 pecially for youth and women, potentially lead- 0 Retired Economically Employer Paid Own Unemployed Unpaid ing to social unrest. This issue is not limited to inactive employee account family Sudan in the global economy worker worker Sudan­—­it threatens all of Sub-­Saharan Africa, Source: AfDB Statistics. Europe, and elsewhere. 14 TABLE 1.3 FIGURE 1.6 Poverty decomposition by state in Sudan Distribution of labor force by sector of activity Percent in Sudan, 2009 and 2015 2009 Poverty Population Absolutea Relativeb Priority Industry 8% State incidence share contribution contribution index Northern 12.2 2.2 0.3 0.7 0.32 River Nile 19.9 3.9 0.8 2.1 0.54 Agriculture Services Red Sea 51.4 3.7 1.9 5.3 1.43 38% 54% Kassala 27.9 5.6 1.6 4.3 0.77 Al-Gadarif 31.6 5.1 1.6 4.4 0.86 Khartoum 29.9 17.4 5.2 14.4 0.83

Al-Gezira 18.3 11.5 2.1 5.8 0.50 2015 White Nile 40.9 5.9 2.4 6.7 1.14 Industry 8% Sinnar 25.9 4.6 1.2 3.3 0.72 Blue Nile 34.6 3.1 1.1 3.0 0.97 North Kordufan 39.1 9.3 3.7 10.1 1.09 Agriculture Services 45% 47% South Kordufan 67.0 2.5 1.7 4.6 1.84 West Kordufan 40.5 2.5 1.0 2.8 1.12 North Darfur 42.3 6.9 2.9 8.1 1.17 West Darfur 64.1 2.6 1.7 4.7 1.81 Source: AfDB based on Sudan household 2009 and 2015 South Darfur 49.2 7.8 3.8 10.6 1.36 surveys. Central Darfur 67.2 3.3 2.2 6.1 1.85 East Darfur 50.4 2.0 1.0 2.8 1.40

Source: 2014 household budget survey. a. The state’s contribution to Sudan’s total poverty incidence of 36.1 percent. b. The state’s share of poverty as a percentage of the total number of poor people in Sudan. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Sudan in the global economy

15

CHAPTER 2 A volatile and challenging environment

he past five decades have challenged countries in the aftermath of adverse shocks. the Sudanese economy with political This chapter examines Sudan’s macroeconom- Tand economic shocks such as civil con- ic performance under the U.S.-imposed em- flict, military coups, and economic sanctions bargo as well as the implications of the 2017 (figure 2.1). Although such shocks undermined removal of these sanctions for the Sudanese the country’s capacity to efficiently use its re- economy. sources, the economy has been quite resilient. Many factors can explain this resilience. The oil boom that washed the economy with Political background to revenue, particularly between 1999 and 2010, macroeconomic imbalances pushed up domestic demand at an unprece- Since the mid-1970s, Sudan has experienced dented rate. Investment increased from a mere volatile domestic and regional political environ- $422 million in 1960 to an average of $17 billion ments. It has faced a protracted north–south between 2009 and 2016. Private consumption civil war and about five internal conflicts within continued to increase despite the secession the north, two of which are not permanently of South Sudan, buoyed by remittances from settled. Six of its seven neighboring countries abroad that were channeled mainly through are currently unstable, in conflict, or fragile to informal means due to restrictions on interna- some degree, while porous borders facilitate tional financial transactions, particularly from illegal trafficking of arms, drugs, and humans the United States. As a result, per capita GDP (including potential radicals), into the country. rose sharply from $687 in 1980 and reached In 1997, the United States levied the first round $2,216 in 2016.18 of sanctions on Sudan. In 2011, South Sudan se- Sudan’s experience illustrates econom- ceded after long years of bitter civil war. The ic mechanisms that can be useful to African Sudanese economy has largely depended on

FIGURE 2.1 Timeline of major events in Sudan After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

1994 Oct. 2000 Jan. 2007 2014 Jan. 2017 | Non-accrual status Started New currency with European U.S. sanctions with the World Bank exporting oil an exchange rate of Union eased; temporary due to arrears $1 = 2 Sudanese pounds sanctions and under review 2011 1997 2006 Secession U.S. sanctions U.S. sanctions, of South Oct. 2017 on Sudan Darfur war Sudan Removal of articles 1 and 2 of U.S. sanctions

2011 2012 2013 2015 1960 1994 1997 2000 2006 2007 2008 2009 2010 2014 2016 2017 A volatile and challenging environment

Source: AfDB compilation. 17 oil, which contributed about 8 percent of GDP easing of the 20-year U.S. blockade in October and more than 50 percent of fiscal revenues 2017 offered prospects for the country’s rein- between 1995 and 2011. When South Sudan tegration into the global economy and bright- seceded, the world’s newest country received ened its medium-term economic outlook. 75 percent of the oil revenues formerly ac- cruing to Sudan. Sudan, whose oil revenues dropped sharply to 2.2 percent of GDP in 2012– The macroeconomic effects of 15, was left with a depleted fiscal position. Sudan’s two decades of ‘solitude’ Those events had mixed effects on Sudan’s Before the sanctions were levied in 1997, Sudan macroeconomic conditions. The oil boom bol- already confronted several macroeconomic stered the country’s economy and fiscal posi- challenges. Between 1980 and 1996, the fiscal tion. However, it also created a disincentive to deficit averaged –10.8 percent of GDP, fueling search for new sources of revenue and growth. average annual inflation of nearly 70 percent. The imposition of sanctions compounded the The external current account deficit was above situation and led to Sudan’s international iso- 30 percent of GDP. Excessive domestic absorp- lation. But it also pushed the country to look tion to finance infrastructural development inward and to other partners, such as China, with very limited fiscal space created the high Kuwait, Qatar, Saudi Arabia, and United Arab fiscal deficits. Debt started to build in 1970s, Emirate, for trade and investment to sustain largely due to the country’s social and political its economy. Nonetheless, the oil sector re- instability and conflicts, and to sluggish eco- mained the main source of revenues and en- nomic performance from the 1970s through gine of growth. Those windfall revenues also the early 1990s, later amplified by economic stoked the “Dutch disease”­—­the harmful ef- sanctions. External debt escalated to a peak of fects of large increases in a country’s income­ 558 percent of GDP in 1990, compounded by —­effects resulting in little or no detectable increased accumulation of arrears due to low structural transformation. With the civil war debt service payments. Sudan committed an against South Sudan intensified and militias average of 22 percent of its exports to debt emerging in Darfur and other regions, Sudan service, with the lowest rate, 5.6 percent, re- faced increasing international isolation, and corded in 1993. By the time sanctions were im- its economy fell into an abyss as resources posed in 1997, the external debt had declined were diverted to fight the wars. In 2011, when but remained a high 139 percent of GDP, and South Sudan declared independence, the Su- debt service stood at 6.7 percent of exports. danese economy grew by a mere 0.9 percent, These macroeconomic imbalances slowed sharply down from 6.5 percent the previous the economy to an average annual growth of After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | year. As oil revenues shrank, the fiscal defi- only 2.9 percent between 1980 and 1996. The cit plummeted to –3.1 percent of GDP in 2012 recent easing of sanctions, by leading to nor- from a surplus of 0.8 percent the year before. malization of relations with the internation- Inflation nearly doubled from 18.1 percent to al community, could bring about debt relief.19 35.7 percent. The prospects for debt relief are favorable Poverty is also high in Sudan. In 2014, the given Sudan’s recent reforms: satisfaction of proportion of people living below the pover- the milestones for the lifting of sanctions, suc- ty line was estimated at 25 percent. In the rural cessful implementation of 13 staff-monitored

A volatile and challenging environment areas, the poverty rate of 27 percent is higher programs; preparation of an arrears clearance than in the cities, where it is 23 percent. The and debt relief strategy (ACDRS), satisfaction 18 of the technical requirements for heavily in- ethnic strife and internal conflict. The most debted poor countries (HIPC) debt relief,20 and pronounced occasions were the First Sudanese creation of a government of national unity in Civil War (1955–72) and the Second Sudanese which major opposition parties participate Civil War (1983–2005), which culminated in the (following the National Political Dialogue that July 2011 secession of South Sudan. These con- began in 2014). However, concerted efforts will flicts were rooted in economic, political, and be required to assure creditors and investors social inequalities. of the country’s continuing commitment to re- The third hypothesis attributes much in- forms when trade and financial conditions be- fluence to the imposition of sanctions. How- come less restricted. ever, from 1997 to 2009, sanctions were not The Bank is updating the ACDRS, which it enforced to the letter, and therefore macro- financed 2013, and as a facilitator is resuming economic performance was not much affect- assistance to the African Union High Level ed. For instance, during the first wave of the Implementation Panel (AUHIP) mediating be- 1997 sanctions, real GDP grew by an average tween Sudan and South Sudan on post-seces- of 18.3 percent a year, higher than the 2.9 per- sion issues. The resulting report will be used cent recorded in the pre-sanctions era (figure by the Tripartite Committee, comprising the 2.2). This was mainly fueled by high oil export AUHIP and the governments of South Sudan earnings, which grew by about 50 percent in and Sudan as an instrument for policy dia- 2004, boosting fiscal revenues and support- logue on debt relief. And the Bank continues ing economic growth. In addition, foreign di- to work with the World Bank, International rect investment and private transfers rose to Monetary Fund (IMF), and Paris Club credi- $2.5 billion, more than one-third higher than in tors in the context of the Technical Working 2003. These favorable developments allowed Group to advocate for debt relief on behalf Sudan to build foreign exchange reserves from of the two countries. The poverty reduction 1.5 months of imports cover at end-2003 to support program (PRSP) for Sudan, which the 2.9 months by 2005. The government also ac- Bank is financing as one of the conditions for cumulated deposits in the oil savings account HIPC debt relief, is also being finalized. Finally, the lifting of sanctions augurs well for the U.S. removing Sudan from its list of state sponsors FIGURE 2.2 of terrorism, eventually paving the way for Average real GDP growth in Sudan, 1981–2016 HIPC debt relief. Annual percentage 20 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Missed economic opportunities but 15 still resilient Sudan’s development challenges and oppor- 10 tunities in shaping the outcome of the econ- omy can be viewed under several competing 5 hypotheses that reinforce each other.21 The first cites the role oil has played in the Suda- 0 nese economy. The second relates to political 1981–96: 1997–2005: 2006–10: 2011–16: 1997–2016: Pre-sanctions First wave Second wave Secession Sanctions average instability. Since its independence from Brit- A volatile and challenging environment ish rule in 1956, Sudan has been plagued by Source: AfDB Statistics Department. 19 that were higher than projected by 0.5 percent tight monetary policy and refrained from mon- of GDP. etizing the deficit.22 This brought the rate of Despite higher government expenditures, inflation down from an average of 81.6 per- higher fiscal revenues helped keep the fiscal cent between 1981 and 1996 to 14 percent be- deficit low, averaging only –0.02 percent of tween 1997 and 2005.23 These favorable macro- GDP during the first wave of sanctions com- economic developments bolstered the growth pared with –11.8 percent in the preceding de- of the economy, with real GDP expanding at an cade. The improved fiscal situation obviated unprecedented average of 18.3 percent a year. the need for new net domestic financing. In Concomitantly, per capita income nearly tri- the context of the National Comprehensive pled from $449 in 1997 to $1,099 in 2005. (Fig- Strategy, the Central Bank of Sudan introduced ure 2.3 shows the close relationship between oil rent and growth in per capita income in the FIGURE 2.3 sanctions era.) Oil rent and GDP per capita growth Sudan’s heavy dependence on the volatile oil Oil rent (percent of GDP) GDP per capita growth sector was reflected both in negative growth 25 0.3 1997 U.S. sanctions 2006 U.S. sanctions 2014 EU sanctions episodes, typically long but of small magnitude, and in positive growth spurts, which have been 20 0.2 short but of larger magnitudes. The volatility affected prospects for economic diversification 15 0.1 GDP per capita growth and transformation. The variability in output growth has been high even in comparison with 10 0.0 other countries in the region such as Kenya and Tanzania. Only Ethiopia’s real GDP growth has

5 –0.1 been more volatile (figure 2.4). Sudan’s variabil- Oil rent ity was especially high during the first round of

0 –0.2 sanctions from 1997 to 2005, in both historical 1981 1985 1990 1995 2000 2005 2010 2016 and country comparative terms. Source: Based on World Development Indicators database, 2017. High output variability affected the coun- try’s public investment. But private investment, FIGURE 2.4 averaging 19.6 percent of GDP a year, emerged Output volatility as the major driver of growth. Because of 3-year moving standard deviation of real GDP growth strong private investment, growth in total do- Sudan Kenya Tanzania Ethiopia mestic investment accelerated by an annual 14 average of about 2.5 percent during 2002–06, After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | 12 reaching a high of 25.7 percent of GDP in 2006 10 (figure 2.5). The sharp decline in 2008 marked

8 the implementation and subsequent strength- ening of the second round of sanctions, which 6 had been imposed in 2006. Later, investment 4 picked up as uncertainty associated with the 2 sanctions petered out. However, domestic in-

0 vestment fell rapidly in 2011 with the secession 1981–90 1991–96 1997–2005 2006–16 A volatile and challenging environment of South Sudan and a decline in physical capital Source: AfDB Statistics Department investment in the oil industry. 20 FIGURE 2.5 FIGURE 2.6 Sudan total domestic investment Bilateral trade of Sudan, by trading partner Percent of GDP Share of imports by partner

30 Share of imports (percent)

100 1997 U.S. sanctions 2006 U.S. sanctions 2014 EU sanctions

20 75 Emerging and developing countries

50 10 Advanced economies 25 European Union

0 United States 1999 2002 2004 2006 2008 2010 2012 2014 2016 0 Source: AfDB Statistics Department. 1980 1985 1990 1995 2000 2005 2010 2016

Sudan–China trade The embargo pushed Sudan to search for Share of total trade (percent) alternative sources of international support, 80 1997 U.S. sanctions 2006 U.S. sanctions 2014 EU sanctions largely turning to the east and the Gulf coun- tries for aid, trade, and investment. A large share of Sudan’s agricultural exports goes to 60 countries of the Arabian Peninsula, in partic- Imports from China ular the United Arab Emirates and Saudi Ara- 40 bia.24 More than 40 percent of investments in the major non-oil sectors come from three Gulf countries­—­Kuwait, Saudi Arabia, and 20 United Arab Emirates (UAE). During 2000–10, Exports to China eight of Sudan’s top 10 investors were Arab 0 countries, with total investments amounting to 1980 1985 1990 1995 2000 2005 2010 2016 $4.5 billion, 60 percent of total Sudan foreign Source: Computations based on Directorate of Trade and Services data.

TABLE 2.1 TABLE 2.2 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Exports of Sudan, by partner (percent of total exports) Imports of Sudan, by partner (percent of total imports) |

Before 1997 After 1997 Before 1997 After 1997 Partners 1980–89 1990–97 1998–2006 2007–16 Partners 1980–89 1990–97 1998–2006 2007–16 Advanced economies 65.0 47.3 48.7 25.9 Advanced economies 49.1 47.9 43.0 19.8 Emerging markets and Emerging markets and developing countries 34.8 52.7 51.3 74.1 developing countries 50.2 52.1 57.0 80.2 European Union 43.3 36.2 29.9 16.0 European Union 35.2 34,4 13.4 3.3 United States 10.8 4.5 1.0 1.0 United States 3.7 3.8 0.2 0.2 A volatile and challenging environment

Source: Based on Directorate of Trade and Services data. Source: Based on Directorate of Trade and Services data. 21 investments.25 In 2015, official creditors such as 38.7 percent of total foreign investment, but in Kuwait, Qatar, Saudi Arabia, and UAE deposited the oil industry, it accounted for 99.9 percent. an estimated $2.7 billion in the Central Bank of China’s dominance resulted from the isolat- Sudan, boosting the country’s foreign exchange ing effect of U.S. sanctions, which drew other liquidity and reserves. western allies away from Sudan (figure 2.6, ta- Asian firms also became increasingly in- bles 2.1, 2.2). Although the U.S. share of Sudan’s volved in Sudan’s oil, led by the China National trade was low even before sanctions, it contin- Petroleum Corporation with a 40 percent stake ued to decrease, and same trend appears for in the sector. Other firms were Malaysia’s Petro- the European Union and other advanced econ- nas, and India’s Oil and Natural Gas Corpora- omies. At the same, Sudan has traded more tion, and the Sudan state oil company Sudapet. with emerging markets and developing econ- China’s dominance in the oil sector was evident omies (EMDEs). Among the EMDEs, China’s in its share of FDI in the sector. China’s foreign share of Sudan’s imports and exports increased investment in Sudan across all sectors stood at greatly beginning in 1997. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | A volatile and challenging environment

22 CHAPTER 3 Growing macroeconomic imbalances

udan’s stable macroeconomic environ- to support the transition following the 2005 ment, which, buoyed by oil revenues, South Sudan independence referendum. S prevailed for much of the late 1990s Non-oil revenues were also lower than pro- and early 2000s, suffered seriously from the jected. Sudan’s fiscal position became severe- expanded sanctions regime of 2006 (box 3.1). ly impaired. The macroeconomic imbalances The economy was already showing weakness, carried over into the first quarter of 2007 and and oil revenues were less and less adequate accumulated in later years.

BOX 3.1 Sanctions, war, trade, and macroeconomic conditions

Gravity model VAR analysis The sanctions imposed on Sudan mainly targeted fi- A system of unrestricted vector autoregressions nancial transactions. Inevitably, their effect, including (VARs) as well as a cointegrated VAR (CVAR) also constraints on trade, would have been borne by the examined the effects of the sanctions on selected external sector. Before sanctions, the United States macroeconomic variables in Sudan: gross domes- and Sudan enjoyed sound trade relations, though the tic product, government consumption expenditure, volume of trade was generally low. Using data from government capital investments, the development 1980 to 2015, a gravity model is used to assess the im- of the inflation, and exchange rate dynamics. The pact of sanctions on trade and other macroeconomic simulation was a 40-year period to disentangle the indicators, conditioning for factors such as war and short-term impacts of the sanctions (1 to 3 years), membership in multilateral trade organizations. Trade the medium-term impacts (4 to 6 years), and the and GDP data come from the Statistics Department of long-term impacts (7 to 15 years). Two key results the African Development Bank, supplemented by sta- emerge. First, the imposition of the sanctions had a tistics from the International Monetary Fund and the negative immediate impact on GDP, but the impact World Bank. Data on other variables such as popula- was short-lived, manifesting for around 1 to 5 years. tion and geographical area are drawn from the Centre Second, the impact of the sanctions shock is only After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

d’Etudes Prospectives et d’Informations Internatio- significant in the short to medium-term. In the long | nales. Empirical estimates show that the marginal ef- term (after 10 years), it appears not only to lose sig- fect of the sanctions on Sudan’s exports to the United nificance and strength, but it even becomes positive. States is only +0.3. This suggests that although trade These results suggest that the sanctions on Sudan continued between the two countries, it was small in had short- to medium-term significant impacts, magnitude. The dummy variable is also positive and while in the long term, their effects dissipated, per- significant, suggesting that oil, which constituted the haps due to coping strategies and opportunities that bulk of Sudan’s exports, was used as a conflict com- emerged with other countries­—­for example, China

modity: proceeds were used to finance arms pur- and Arab countries. Growing macroeconomic imbalances chases or defray the adverse impact on the Sudanese 23 economy of constraints on financial transactions. Fiscal imbalance and inflation country. In that time, annual government ex- From 1984 to 1991, the increased size of the penditure increased from $2.7 billion to $14 bil- government and growing insecurity due to lion. In 2005, it declined considerably to $7 bil- persistent conflicts led to an expansionary fis- lion with the end of the civil war. Then the 2008 cal policy designed to maintain the large pub- global financial crisis and attendant decline in lic service, finance the war with South Sudan, oil revenue constrained Sudan’s fiscal space, and fend off insurgency in other parts of the and this was compounded by the secession of South Sudan in 2011, which led to Sudan losing FIGURE 3.1 three-fourths of its oil revenues, widening the Total government revenues and oil rents in Sudan, 1990–2016 fiscal deficit and more than doubling inflation Percent of GDP to 35.6 percent in 2012 (figures 3.1, 3.2). 25 Much of the increase in the deficit was fu- Total natural General government revenue resource rents eled by increased public wages, which account- 20 ed for about one-third of the budget (figure 3.3). They deepened Sudan’s internal macro-

15 economic imbalances, and with limited access to external borrowing, Sudan was mired in twin

10 fiscal and current account deficits. Since 2012, the country has tried to improve revenue gen-

5 eration and reduce the fiscal deficit. A fiscal consolidation policy since 2012 reduced the fis- Oil rents 0 cal deficit to about –1.6 percent of GDP in 2015 1992 1995 2000 2005 2010 2015 and about –1.8 percent in 2016.26

Source: Based on World Development Indicators database and World Economic Out- look, 2017. Dynamics of public debt and debt sustainability FIGURE 3.2 Sudan remains a highly indebted country. The Fiscal balance and inflation in Sudan country’s stock of public debt was at its high- Percent of GDP Percent est in the early 1990s, reaching a peak of about Fiscal balance Inflation 560 percent of GDP in 1990. From 1993, there 4 150 was gradual decline in debt, and by the time 3 the sanctions were imposed in 1997, total pub- 2 lic debt outstanding was about 140 percent, a

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins 1 | 100 quarter of the 1990 level. Due to its interna- 0 tional isolation and difficulties in resolving its

–1 debt and arrears situation, Sudan has not been able to access financing on concessional terms. –2 50 Although total debt outstanding has substan- –3 tially reduced to about 55.2 percent of GDP in –4 2016, Sudan is still in debt distress. –5 0 Sudan’s public debt has grown over the 1995 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Growing macroeconomic imbalances years, exacerbated by the international isola- Source: Based on Central Bank of Sudan data. tion triggered by the sanctions (figures 3.4, 3.5). 24 To finance the budget deficit, it increasingly FIGURE 3.3 built up domestic debt and nonconcessional Public sector wages and government expenditure in Sudan debt (mainly from its Islamic partners). Foreign Log of government expenditure debt, estimated at $53.6 billion as of December 5.0 2016, weighs heavily on the economy.27 At end y = 0.9959x + 0.5481 R² = 0.9758 of 2016, 39 percent of Sudan’s external debt was owed to non-Paris Club creditors, 31 per- 4.5 cent to the Paris Club, 13 percent to interna- tional financial institutions (the World Bank, 4.0 African Development Bank, and Internation- al Monetary Fund), 12 percent to commercial banks, and 5 percent to foreign suppliers. 3.5 A 2016 debt sustainability analysis conduct- ed jointly by the World Bank and the Interna- 3.0 tional Monetary Fund estimated the present 2.75 3.00 3.25 3.50 3.75 4.00 4.25 4.50 value of Sudan’s debt-to-GDP ratio at 93 per- Log of wages cent, far above the threshold of 30 percent. Source: Based on Central Bank of Sudan data. The present value of debts to exports, estimat- ed above 1,400 percent, is alarmingly above the FIGURE 3.4 indicative threshold of 100 percent­—­an un- Sudan’s debt profile precedented debt distress level never record- Percent ed in any pre–Highly Indebted Poor Country Debt/GDP ratio Debt service (percent of exports) 250 initiative African country. At these levels, Su- dan’s external debt stock is unsustainable and 200 therefore constrains the country’s economic recovery prospects. 150 Sudan’s main public debt challenge is the outstanding arrears (figure 3.6). In 2015, total 100 interest arrears amounted to about $5 billion. 50 The buildup of arrears includes new draws of

$520 million from Arab multilateral and bi- 0 lateral creditors, as well as from China and 1980 1985 1990 1995 2000 2005 2010 2015 India, which have regularly supported Sudan’s Source: AfDB Statistics Department. development needs during sanctions. The After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins newly contracted debt mainly financed proj- | ects in the service, energy, and agricultural stable over the past five decades; the pound sectors. External debt increased from $385 mil- was even stronger than the U.S. dollar for part lion in 1970 to about $18 billion in 1995 and of the post-independence period. But the to $53.6 billion as at December 2016. About strength of the Sudanese currency was largely 88 percent of Sudan’s debt is accumulated ar- artificial, propped up by high oil revenues and rears on loan repayments, including 59 percent the government’s failure to make adjustments penalties on delayed payments. to reduce overvaluation. The 1996 sanctions

The official exchange rate of the Sudanese curtailed external financial flows, exports, re- Growing macroeconomic imbalances pound to the U.S. dollar has been relatively mittances, and foreign reserves, resulting in 25 FIGURE 3.5 The persistent overvalued nominal exchange Total and external debt, 1990–2016 rate led to a misalignment in the real exchange Percent of GDP rate for most of the sanctions period (figure 500 3.7). During 1990–2016, real overvaluation has been associated with lower export perfor-

400 mance, and real undervaluation has boosted exports (the correlation is 0.26). However, since

300 overvaluation was fueled by high oil export revenues after the beginning of oil extraction 29 200 in 1999), real overvaluation of the Sudanese Government gross debt pound was associated with marginal improve-

100 ments in the terms of trade, which boosted total exports performance (figures 3.8, 3.9). But External debt 0 the misalignment was also damaging to the 1992 1995 2000 2005 2010 2016 non-oil tradables sector.30 To reverse the trend, Source: AfDB Statistics Department. the authorities devalued the currency in 2007, but this devaluation had an unintended effect FIGURE 3.6 on external debt.31 It is expected that the re - Interest arrears, 1990–2016 cent tightening of monetary policy, reduction $ billion in gold purchases, and the export expansion 8 will improve the exchange rate from 2017 and reduce the current account deficit. Interest arrears, long-term DOD 6 Official external flows, foreign

4 direct investment, and remittances Interest arrears, official creditors Sudan is a large country and has immense de- velopment needs. For instance, in agriculture, 2 investment requirements are estimated about $3.3 billion a year for 2014–20 and $6.1 billion a Interest arrears, private creditors 0 year for 2021–30 (at 2012 constant prices and ex- 1990 1995 2000 2005 2010 2015 change rate). For the private sector, investment Source: AfDB Statistics Department. requirements will amount to about $275 billion a year of private fixed investment (net of for- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

| eign direct investment inflows) during 2014–20. sharp depreciation of the Sudanese pound. Infrastructure investment requirements during Combined with increasing demand for imports, 2014–30 will be about $51 billion. Industrial the depreciation put pressure on Sudan’s cur- sector investment requirements will increase rent account. from a projected $2.4 billion in 2014 to $14 bil- Continued pressure on the balance of pay- lion a year by 2030 (at 2012 constant prices)­—­ ments, stoked by reduced oil export revenues, equivalent to almost 9 percent of GDP.32 led the authorities to maintain exchange re- Such needs explain the country’s increased

Growing macroeconomic imbalances strictions and multiple currencies and impose reliance on nontraditional donors during the a cash margin requirement for most imports.28 sanctions era. China’s aid has been increasingly 26 important in financing critical development FIGURE 3.7 and social projects. Statistics on Chinese loans Real exchange rate misalignment, 1990–2016 and aid to Africa­—­in particular to Sudan­—­are 300 scanty, but early estimates put the share of Real exchange rate index loans as 99 percent of total Chinese financial support to Sudan (table 3.1). Only 1 percent was 200 in form of grants.33 China also accounts for the Real exchange rate index, long-term trend bulk of foreign direct investment (FDI) in Sudan. 100 Although China and other non-Western donors actively supported Sudan over the years of the sanctions, the United States has also been one 0 of Sudan’s main contributors of development Real exchange rate misalignment (percent of long-term real exchange rate trend) assistance. –100 U.S. support picked up in 2010 as prepara- 1990 1995 2000 2005 2010 2016 tions for the secession of South Sudan gained Source: Based on AfDB data. momentum. Most U.S. assistance supported Note: Negative (positive) numbers indicate real overvaluation (undervaluation). the victims of the war. It increased until 2014, when the European Union imposed its own FIGURE 3.8 sanctions (figure 3.10). Since the sanctions re- Real exchange rate misalignment and terms of trade, 1993–2016 stricted financial transactions with Sudanese 100 citizens, remittances from Sudanese in the Real exchange rate misalignment (percent of long-term real exchange rate trend) diaspora to their families in Sudan have been channeled largely through informal, costly, 50 and risky ways. Until the global financial crisis, diaspora remittances were rising, although of 0 smaller size, both as share of GDP and in abso- Terms of trade change lute terms (table 3.2, figure 3.11). Following the (percent) crisis, there was a short-lived recovery. Since –50 the secession of South Sudan, remittances have fallen sharply. –100 Since early 2017, the inflow of FDI was 1993 1995 2000 2005 2010 2016 $476.5 million in the first two quarters (com- Source: Based on AfDB data and International Monetary fund direction of trade statis- pared with $557.9 million in 2016 despite the tics data. lifting of U.S. trade sanctions. Most of the FDI, Note: Negative (positive) numbers indicate real overvaluation (undervaluation). After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins coming from the Arab countries, targeted min- | ing, agriculture, and infrastructure. With full re- vocation of sanctions, FDI is likely to increase. counties (compared with 53.4 percent in 2016), The current account deficit may widen as a re- with 40 percent destined for the United Arab sult due to high FDI-related imports but is ex- Emirates (UAE) due to rising gold exports. The pected to narrow in the medium term pending Common Market for Eastern and Southern ongoing reforms to stimulate exports and im- Africa’s (COMESA) share in Sudan exports de- prove competitiveness. clined by 6 percentage points to 12.9 percent.

During the second quarter of 2017, 58.9 per- The sources of imports remain diverse. FDI in- Growing macroeconomic imbalances cent of Sudan’s exports targeted the Arab flows slowed in 2017 by –0.8 percentage points 27 FIGURE 3.9 FIGURE 3.10 Real exchange rate misalignment and exports performance, U.S. aid to Sudan, 1990–2016 1990–2016 $ billion Percent of long-term trend Log of exports 0.3 Real exchange rate Log of other exports, Log of total misalignment excluding fuel exports 100 10.0

0.2

50 7.5

0 5.0 0.1

–50 2.5 0.0 1990 1995 2000 2005 2010 2016

–100 0.0 1990 1995 2000 2005 2010 2016 Source: Based on World Development Indicators database, Source: Based on AfDB data. 2017.

TABLE 3.1 China’s share in total grants and loans and in debt of Sudan, 1999–2007 Percent

1999 2002 2003 2004 2005 2006 2007 China’s share in total loans and grants offered to Sudan share of grants in total Chinese financial assistance to 2 1 13 3 0.3 19 1 Sudan share of loans in total Chinese financial assistance to 98 99 87 97 99.7 81 99 Sudan share of Chinese grants 9 0 0 20 0.1 11 0 share of Chinese loans 91 100 100 80 99.1 89 100 share of China in total loans and grants 17 7 8 7 76 24 73 share of China in total grants 100 0 0 54 36 14 0 share of China in total loans 16 7 9 6 76 26 74 China’s share in total debt of Sudan share of China in total debt 0.09 0.11 10.23 9.20 0.17 13.88 13.45 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Source: Yagoob, Hadia, and Zuo 2016.

to reach 1.2 percent of GDP, but they are pro- by 15 percent, enhancing the contribution of jected to increase to a 1.5 percent average for the external sector to growth. The decline of 2018–19, reflecting the sanctions revocation. remittances is also explained by the rise in out- The exchange rate reform introduced in ward-bound remittances since 2011 due to the

Growing macroeconomic imbalances early 2018 is projected to raise exports by recent high inflows of economic migrants from 20 percent, FDI by 13 percent, and remittances Egypt34 and by the large amount of money sent 28 TABLE 3.2 FIGURE 3.11 Financial inflows to Sudan Remittances to Sudan, 1990–2016 $ billions $ billion Percent of GDP

Remittances received Remittances received as a share of GDP 1980– 1991– 2001– 2012– 1.6 8 Indicator 90 2000 11 16 Net bilateral aid flows from Development Assistance Committee donors 0.474 0.204 1.349 0.812 1.2 6 Net bilateral aid flows from United States 0.136 0.027 0.550 0.385

Net official development 0.8 assistance received 0.635 0.295 1.156 1.133 4 Grants, excluding technical cooperation 0.480 0.248 1.352 1.010 Personal remittances 0.4 2 received 0.231 0.333 1.101 0.405 Foreign direct investment inflows from all donors 0.003 0.134 1.480 1.608 0.0 0 1990 1995 2000 2005 2010 2016 Source: Based on World Development Indicators database, 2017. Source: Based on World Development Indicators database, 2017. out by the people of South Sudan and expatri- FIGURE 3.12 ate workers in the oil companies after the se- Domestic credit to the private sector, 1980–2016 cession of South Sudan. The sanctions pushed Percent of GDP Sudanese investment toward the neighboring 40 region. For instance, Sudanese investment in

Ethiopia peaked at $2.4 billion in 2014, making 30 Sudan the second largest source of FDI in Ethi- Domestic credit provided by financial sector opia after China. Sudanese investments in Ethi- 20 opia mainly targeted tourism, mining, industry, agriculture, medical drugs, and information and 10 communications technology. Domestic credit to private sector by banks Low aid flows, coupled with limited sourc- 0 es of FDI, would have been expected to entail increased financing from the domestic finan- –10 cial sector. However, exclusion from the in- 1980 1985 1990 1995 2000 2005 2010 2016 ternational financial system meant that banks After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins in Sudan could not access long-term financing Source: Based on World Development Indicators database, 2017. | from international counterparts. The banking sector in Sudan operates under Islamic princi- financial institutions may have been filled by ples, so the financing of the private sector must Islamic ones. conform to them.35 Prior to 1992, banks’ lending to the private sector was low (figure 3.12). This was mainly due to high liquidity from oil export Macroeconomic effects of earnings. The pickup of lending coincided with sanctions the onset of sanctions, suggesting that the fi- A simple econometric analysis of pre- and post- Growing macroeconomic imbalances nancing gap left by established international sanctions macroeconomic indicators should 29 provide further insight into the effect of sanc- at the time of sanctions that sometimes rein- tions and other shocks. But such an approach forced their effect (in the case of secession of has notable limitations. First, Sudan experi- South Sudan) and sometimes cancelled them enced multiple positive and negative shocks (the oil boom, the growth of investment and trade with other partners). Second, in a more TABLE 3.3 robust analysis with synthetic control methods Macroeconomic impact of 1997 sanctions (before and after analysis) using countries that are similar in history, eco- nomic structure, and other considerations as (1) (2) (3) (4) control groups, the results were not statistical- General ly robust and did not make much sense. Econ- Current account government Real GDP  External debt balance  revenues  omywide models, such as computable gen- Variables growth (percent of GDP) (percent of GDP) (percent of GDP) eral equilibrium methods, could have helped d1997 2.045 –148.5*** 20.86*** 0.356 (1.413) (44.31) (6.528) (2.502) but impose highly restrictive assumptions on Constant 2.554** 222.3*** –27.20*** 14.19*** (1.187) (43.03) (6.483) (2.106) household behavior and market clearing condi- Observations 35 35 36 27 tions, making impact analysis complex to cap- R-squared 0.064 0.283 0.271 0.001 ture. But they provide a better insight among alternative approaches. *** p < 0.01, ** p < 0.05, * p < 0.1. The analysis presented in this section focus- Note: Parentheses denote robust standard errors. d1997 is a dummy variable capturing es largely on output growth, external sector in- the marginal effect of the first wave of sanctions. The constant captures the conditional dicators, and fiscal revenues, with and without mean of the dependent variable before the sanctions. additional shocks, captured through appropri- ate identification of dummy variables depicting TABLE 3.4 the onset of the shocks. Besides the first wave Macroeconomic impact of 1997 and 2006 sanctions and 2011 of sanctions, Sudan experienced a strengthen- secession of South Sudan (impact analysis with additional major ing of sanctions in 2006 and 2012. Probably the shocks) single largest shock was the secession of South Sudan in 2011, which started with the transi- (1) (2) (3) (4) tion following the referendum of 2005. Table General Current account government 3.3 presents results focusing on the first set of Real GDP  External debt balance  revenues  Variables growth (percent of GDP) (percent of GDP) (percent of GDP) sanctions imposed in 1997. Table 3.4 includes d1997 3.561** –106.3** 20.57*** –1.482 a set of shocks captured through the dummy (1.535) (45.47) (6.796) (3.055) variables­—­2006 denoting the second raft of d2006 –0.765 –74.86*** 1.007 8.205*** (1.523) (10.22) (2.006) (2.475) sanctions and 2011 capturing the impact of the d2011 –3.652** –10.70*** –0.893 –8.918*** secession of South Sudan. (1.773) (3.407) (2.032) (1.868) After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

| During the sanctions era, Sudan reduced its Constant 2.554** 222.3*** –27.20*** 14.19*** (1.224) (44.40) (6.683) (2.196) external indebtedness. A reduction of nearly Observations 35 35 36 27 150 percent was realized during this period, fol- R-squared 0.198 0.329 0.272 0.311 lowing an increase of 222 percent before it (see table 3.3, column 2), with the gains most felt *** p < 0.01, ** p < 0.05, * p < 0.1. through an improvement in the current account Note: Parentheses denote robust standard errors. The variable d1997 is a dummy variable position. The effect on revenues was insignifi- capturing the specific effects of the first of sanctions, d2006 covers the second wave, cant. This is not particularly surprising, since Su-

Growing macroeconomic imbalances and d2011 covers the secession of South Sudan. The constant captures the conditional dan’s revenues were largely dominated by oil rev- mean of the dependent variable before the sanctions and other shocks. enues, which were not affected by the sanctions. 30 The secession of South Sudan, rather than share of imported inputs, which averaged the sanctions, explains a large and significant 45 percent of total imports in 2012–17, the pass- decrease in GDP growth (see table 3.4). South through from the import price to the CPI is ex- Sudan took away three-fourths of the oil rev- pected to be substantial.38 enues, thereby depriving its northern neighbor. Developments in inflation and nominal ex- Sudan’s revenues fell by about 9 percentage change rate dynamics are examined here by points in relative terms. The combination of estimating the purchasing power parity model the two sanctions impositions and the South of inflation39 in the context of the cointegrat - Sudan secession magnifies the effect on rev- ed vector autoregression and error correction enues. The output effect of South Sudan’s model to identify major shifts in inflation per- secession is especially robust, accounting for sistence in the recent history of Sudan (annex about a 3.7 percentage point fall in real GDP. tables A3.1 and A3.2). Over the last five de- Surprisingly, the secession of South Sudan ap- cades (1970Q1–2017Q4), world inflation and the pears to have had no significant effect on the growth of nominal exchange rate depreciation current account position, as external debt significantly drove inflation acceleration, and fell sharply. In general, results from this naïve the deviation of short-run inflation from equi- econometric exercise corroborate the obser- librium has slowly corrected (about 5 percent vations that growth improved under sanctions, per quarter). More important, both the inter- and so did the debt profile. Revenues were al- cept and slope of inflation changed signifi- ready on the upward trend, and the sanctions cantly in 1990Q1–1996Q4 and 2012Q3–2017Q4. had an inelastic effect on oil revenues. Instead, The slope coefficients on inflation during the secession had the largest effect, which was these subperiods are near unity (estimated at significant, on fiscal revenues. 0.92 and 0.87), confirming the high inflation persistence. Sudan faced similar macroeconomic chal- Evidence of the price effect of lenges during these two subperiods, in ad- sanctions dition to the fiscal effects of the civil war in The U.S. prosecution of some banks in July 2012 both. In the former period, the main challenges for breaking the sanctions against Sudan and were the IMF withdrawal of balance-of-pay- other countries tightened the foreign exchange ments support in 1990, the reduced exports market and significantly widened the gap be- due to the meat export ban imposed by major tween the banks and free market exchange importers in 1992, the cuts in concession- rates.36 Fear of huge fines and rigorous Office al borrowing, and the listing on the U.S. state of Foreign Assets Control (OFAC) monitoring sponsors of terrorism since 1993. In the latter After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins of transactions targeting sanctioned coun- period, the access to multilateral aid was lim- | ties caused the foreign correspondent banks ited, and exports declined due to the loss of (FCBs) to refuse processing transfers to and substantial proven oil reserves after secession from Sudan. The IMF estimates that the paral- and the strengthening of sanctions. lel exchange market covered about 50 percent The withdrawal of FCBs represent new de- of imports in 2016, up from 30 percent in 2013 velopments and presented grave challenges due to the withdrawal of FCB relations with Su- after 2012 and until the revocation of sanc- dan.37 With an estimated 30 percent weight of tions in 2017. Thus, the time-varying param- imports in the consumption basket underlying eters version of the inflation error correc- Growing macroeconomic imbalances the consumer price index (CPI) and 50 percent tion model has been re-estimated by rolling 31 regression to discern changes in inflation inflation persistence soared to 0.30 in the third persistence over the whole sample, including quarter of that year and remained positive, av- these subperiods. Figure A3.1 shows the roll- eraging 0.22 in 2012Q4–2017Q4­—­the longest ing regression result, with 25 quarters as the episode of inflation persistence over the en- window. Negligible before the mid-1980s, the tire review period. These results confirm that coefficient of inflation persistence increased Sudan was hurt by the sanctions through their from a low value of –0.42 in 1990Q1 to reach risk spillover effects on FCB relations (as third 0.03 in 1996Q4 and then 0.55 in 1999Q3. With party). That requires scaling up efforts to re- the rise in oil revenues in the economy in 1999, duce the FCB skepticism in the post-sanction inflation persistence significantly dropped era by strengthening the legal and institution- from this peak to –0.5 in 2012Q1. After the al framework to enhance the environment for strengthening of sanctions in July 2012, doing business in and with Sudan. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Growing macroeconomic imbalances

32 CHAPTER 4 Charting a new path

or examining structural transformation in The decline in agriculture’s contribution to Sudan during the sanctions period and its GDP reflected slower growth in value added, Fevolution afterward, the country’s econ- which averaged only 1.8 percent during 1992– omy can be characterized as comprising three 2016. Overall, the industrial sector’s contribu- sectors­—­agriculture, services, and industry, tion to GDP grew during the sanctions era, but with industry’s manufacturing component this was mainly due to strong activity in the oil treated separately (figure 4.1). The data do not sector. Manufacturing’s share of GDP remained permit detailed sectoral disaggregations. Thus, small, around 9 percent, for most of the peri- the simplistic features of the Sudan economy od. In general, Africa experienced flat manu- presented here should be seen as more illustra- facturing growth in what some have called an tive than comprehensive. Nonetheless, useful era of de-industrialization. Yet, Sudan has huge insights can be drawn. potential in light manufacturing, particularly in Although a shift toward productive serv- food processing, and textiles and leather. Sudan ices and manufacturing would indicate struc- has the second largest population of camels in tural transformation for Sudan, it does not Africa after Egypt and has been self-sufficient appear in the data. Rather, heavy dependence in sugar production. on oil has had a deleterious effect on the Sudan’s poor employment data hamper structure of the economy, resulting in the vir- meaningful analysis of sectoral labor migration tual neglect of other sectors. Agriculture has and how it may have contributed to structural continued to decline since the 1990s, so that change. According to the Sudanese Ministry of the services sector is the largest contributor to GDP, accounting for 47 percent. The once FIGURE 4.1 dominant agricultural sector, which contrib- Sectoral contribution to GDP in Sudan uted over 60 percent of GDP in the pre-oil Value added (percent of GDP) days of the 1960s–1980s, now contributes only 80 32 percent, while industry contributes 21 per- cent. The Dutch disease is especially evident Services in the composition of output. Growth has 60 largely been driven by non-tradable services.

Although this sector shrank by –0.6 percent 40 a year on average between 1996 and 2000 Agriculture

during the first round of sanctions, it picked After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins 20 | up in the early 2000s and has remained buoy- Industry ant since, emerging as the strongest driver Manufacturing of growth. Between 2001 and 2005, growth 0 in value added for the services sector aver- 1980 1985 1990 1995 2000 2005 2010 2016 aged 10 percent a year and contributed about Source: Based on World Development Indicators database, 2016. Charting a new path 40 percent to Sudan’s GDP. Note: Data on the manufacturing sector are limited to 2011. 33 Human Resources and Labor, the agricultural in 2020 and subsequently more slowly. After sector employed 47 percent of the workforce the drastic fall of agriculture’s share in 2012 to in 2011, 13 percentage points lower than the 40 percent, the newly single Sudan began from share in 1990. a lower starting point. The breakaway of South Sudan had a telling effect on Sudan’s employment (figure 4.2). The share of female employment in the agricultural Poverty and inequality sector fell sharply by 17 percentage points after The lack of recent data on poverty and inequal- the secession in 2011, and the share of agricul- ity for Sudan also handicap robust assessment ture in total employment fell by 12 percentage of the outcome of the lifting of sanctions on points.40 This suggests that South Sudan con- people’s welfare. The only available poverty tributed more than its northern neighbor to data go back to the household survey of 2009, the agricultural workforce. Sudan’s decline per- when 46.5 percent of the population was in sisted until 2016, but without a breakdown in poverty and the Gini coefficient measuring in- sectoral employment, the analysis cannot tell equality was 0.35. Data from the yet to be vali- whether workers moved into services, indus- dated household survey of 2014 show a decline try, or manufacturing or how the future em- in the poverty headcount to 36.1 percent and a ployment profile would affect activity in these decline in the Gini coefficient to 0.29. However, sectors. Importantly, however, female employ- although poverty and inequality show consid- ment as share of total employment in agricul- erable declines in the five years between the ture declined the most after the separation of two surveys, the limited availability of data im- the two countries. The rapid pace of the de- pair analysis of how the declines affect struc- cline is likely to persist in the coming years, as tural transformation. female workers find alternative employment in nonfarm sectors. The share of the total labor Calibrating poverty scenarios force employed in agriculture is projected to Simulating the evolution of poverty to 2020 decline from 52 percent in 2011 to 34 percent using the 2009 household survey is very am- bitious because the configuration of the Su- FIGURE 4.2 danese economy has changed, especially since Agriculture’s share of employment in Sudan the separation of South Sudan. To estimate Percent the poverty profile beyond 2009, two main 80 exercises are undertaken: (1) use of the 2009 household survey data while excluding states that were largely in South Sudan and (2) pro- 60 jecting 2014 household per capita consumption from the 2009 dataset by assuming uniform Women 40 consumption growth as reported in the 2014 41

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins survey. These data manipulations come at a | Overall cost, because the Gini coefficient is assumed 20 to have remained constant between 2009 and 2014­—­which is not the case, since preliminary

0 statistics from the 2014 household survey show

Charting a new path 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 it declining. The 2009 data are also used to Source: Based on United Nations Conference on Trade and Development database, 2017. simulate the poverty rate up to 2014 under the 34 constraint that the poverty level in 2014 should (baseline augmented by 2 percentage points), match the observed level generated from the while poverty falls less sharply under the sce- 2014 household survey. This exercise gives addi- nario with growth deceleration (baseline less tional information on how to adjust the pover- 2 percentage points). If the Sudanese econo- ty line and consumption growth. my expands by 2 percentage points above the The projection shows a steady decline in baseline, poverty will decline faster, and con- poverty, from 47.3 percent in 2009 to 25.9 per- versely, if it expands more slowly, growth will cent in 2020 (figure 4.3). It shows the poverty have less poverty reducing impact. rate for 2014 at 35.9 percent, only marginally Figures 4.5 and 4.6 present the results of the lower than the 36.1 percent estimate reported structural transformation simulation, one with in the 2014 household survey preliminary analy- reallocation of labor only and the other with sis. So, the exercise’s characterization of Sudan sectoral labor reallocation accompanied with poverty profile, drawn from the 2009 house- change in sectoral productivity. In the simula- hold survey, mimics the actual trend generated tion of structural transformation where labor from the recent survey. It may therefore be ex- shifts sectors (switch in employment), labor pected that the simulated rate for 2020 based migration from agriculture is good for poverty on 2009 data would not be radically different reduction, particularly when the switch is from from what would be generated had the 2014 agriculture to industry. When the migration household survey data been available. from agriculture is shared between industry and service, the rate of poverty reduction is Poverty simulation for 2014–20 lower. Poverty is projected for the three scenarios­—­ In the second scenario for structural trans- baseline, baseline plus 2 percentage points in formation, we compared an employment growth, and baseline minus 2 percentage points migration from agriculture to industry, plus (figure 4.4, box 4.1). Poverty falls considerably a switch in productivity where the industri- under the scenario with growth acceleration al sector contributes more to GDP than the

FIGURE 4.3 FIGURE 4.4 Projecting the Sudanese poverty trend using Projected trends in poverty under alternative scenarios,  2009 data 2014–20 Percent Percent

50 40 Historical average growth + 2 percentage points

40 30 Historical average growth 30 Historical average growth – 2 percentage points 20

20 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins |

10 10

0 0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020 Charting a new path Source: Based on the 2009 household survey. Source: Based on the 2009 household survey. 35 BOX 4.1 Setting poverty simulation parameters

The baseline model: Uses the historical average of Sudan’s economy resembles those of countries growth rate between 2009 and 2016 as the rate from south of the Sahara, rather than those of its north - 2016 to 2020. ern Arab neighbors, which are more sophisticated and relatively diversified. Hence, to simulate elas- Two growth scenarios: The first growth scenario adds ticity, parameters for the group of countries south 2 percentage points to the historical average growth. of the Sahara are used. The employment-to-sector The second subtracts 2 percentage points. The sim- value-added growth elasticity is used because it is ulation uses 2 percentage points because of Sudan’s more precise than the employment to GDP growth highly volatile growth trajectory. elasticity.

Two structural transformation scenarios: Employ- Methodology for poverty projection: The projection ment migration (from agriculture to services and in- is based on household unit record data extracted dustry) and the same combined with a change in the from the household survey, including household per sectors’ productivity. capita consumption, size of household, sector of ac- tivity of household head, place of residence (urban Employment to GDP growth elasticity: Without or rural), and a sampling weight attributed to the data on employment to use for calculating employ- household in order to have a national representative ment growth by sector for each of the scenarios, the estimate. Poverty is estimated for each projected year simulation could use the employment elasticity to using the Foster-Greer-Thorbecke (FGT) measures ap- GDP growth or to sector value-added growth. The plied on projected household per capita consumption elasticity figures are from ILO (2005), which com- adjusted for inflation. The household consumption puted the employment elasticity to GDP growth projection is based on the household head sector­ and each sector’s value-added growth by region —­valued growth (by sector of activity) adjusted for (Sub-­Saharan Africa and North Africa). The structure intra­sector inequality.

agricultural and services sectors. We observe Opportunities for reengaging with that poverty reduction is faster with the switch the international community in both employment and productivity. An im- The transition to the post-sanctions era offers portant message from this exercise is that, in Sudan enormous opportunities to reengage Sudan, as in most countries in Africa, a substan- with the international community and kick- tial source of poverty can be traced to the ag- start a flow of financial resources to stabilize 42

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins ricultural and services sectors, which are largely the country’s external balance. It also pro - | informal. Thus, structural transformation that vides an opening for discussions on how to leads to movement of labor from the agricul- liquidate the country’s large stock of debt and tural sector to industry has a large poverty re- dismantle the accumulated arrears. In the short duction impact. The impact is even higher, if to medium term, the lifting of sanctions will be

Charting a new path the shift is accompanied by improvements in reflected in increased aid, debt relief, improved sectoral productivity. terms of trade, and other features. 36 Improvement in terms of trade FIGURE 4.5 Improvement in the terms of trade can be ex- Projected trends in poverty where structural transformation is pected to raise GDP growth by 0.2 percentage driven by a switch in employment points and raise domestic absorption by 0.4 per- Percent centage points, according to simulation results 40 conducted with the MAMS model43 up to 2030. Historical average growth + structural employment switch (– 10 percentage points in agriculture, Higher private consumption and investment + 5 in industry, + 5 in services) 30 are likely while the growth of government con- Historical average growth + structural employment switch Historical average growth sumption and public investment continue at the (– 10 percentage points in agriculture, + 10 in industry) same level. The growth in private consumption 20 spending and private investment will create a virtuous cycle, resulting in lower unemployment and poverty rates than in the sanctions period. 10 With higher growth generating higher tax reve- nues, the government will be able to reduce tax 0 rates and tax intake (as a share of GDP). 2014 2015 2016 2017 2018 2019 2020 Since government consumption and public Source: Based on the 2009 household survey. investment are fixed in real terms, financing needs relative to GDP will decline. However, FIGURE 4.6 the appreciation of the exchange rate result- Projected trends in poverty where structural transformation by ing from better terms of trade could dampen driven by switches in employment and productivity the incentives for exports. The opening of the Percent economy in the post-sanctions period could 40 attract foreign capital, raising the productiv- ity and competitiveness of Sudan’s exports in Historical average growth the long term, in contrast to Sudan business- 30 Historical average growth + structural production and employment switch es’ dearth of foreign capital and technology (production: – 4 percentage points in agriculture, – 6 in services, + 10 in industry; 44 employment: – 10 percentage points in agriculture, + 10 in industry) during the sanctions period. The net effect 20 Historical average growth + structural production switch of exchange rate appreciation and improved (– 4 percentage points in agriculture, – 6 in services, + 10 in industry) productivity could raise the competitiveness of Sudan’s non-oil exports, increase employ- 10 ment, and hence reduce poverty.

0 Foreign aid and debt relief 2014 2015 2016 2017 2018 2019 2020 Sudan will need large investment and financial Source: Based on the 2009 household survey. resources to diversify its economy. The lifting of sanctions could encourage inflows of offi- is also expected to initiate dialogue between

cial development assistance (ODA) to support Sudan and its creditors, leading to foreign debt After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins the country’s development efforts, particu- relief. The expected foreign debt by 2030 is | larly investment in infrastructure, which bore 37 percent of GDP, compared with an average the brunt of the sanctions. Foreign aid is ex- of 114 percent during the sanctions period. A pected to increase, boosting real GDP growth reduction in Sudan’s debt would immediately and stabilizing the macroeconomy, according remove the country’s risk premium, creating Charting a new path to the MAMS model. The lifting of sanctions confidence in the economy. 37 Consequently, the increased aid, debt relief, capacity, and deepen institutional and gover- and access to foreign borrowing could be used nance reforms are expected to improve the to raise spending, particularly for building in- debt situation following the lifting of the eco- frastructure and strengthening human capital nomic sanctions. The AfDB-financed Debt Re- and building skills. The normalization of rela- lief and Arrears Clearance Strategy will be used tions could also affect welfare, translating into by the Tripartite Committee on Debt to reach a 16 percent increase in real household per cap- out to creditors for debt relief. ita consumption in 2030, with the strongest im- In addition, exchange rate reforms and pact emanating from improved terms of trade, structural reforms to improve the business followed by debt relief and increased aid. The environment are critical for stimulating and increases in household consumption would sustaining growth. The delay of a complete bring about a 7 percentage point reduction exchange rate adjustment and the continued in poverty in 2030 from the level in the base harm from rent seeking could worsen incen- period. tives and hence reduce growth regardless of The normalization of Sudan’s relations with the lifting of sanctions. the rest of the world would improve outreach to creditors to negotiate debt relief under the South–South development cooperation Heavily Indebted Poor Countries initiative. That for structural transformation would increase real growth, reduce poverty, Global leaders and the international develop- and promote productivity and economic diver- ment community (multilateral and bilateral sification, according to estimates by the World donors) are looking eastward for new ideas, Bank (2015), the African Development Bank new momentum, and new financing. Over the (AfDB) (2016), and the International Monetary past 10 years, emerging economies, including Fund (IMF) (2017). Debt relief alone would be nontraditional donor organizations such as expected to improve GDP growth by 0.2 per- Arab ones, have become major sources of in- centage points and could also permit paying frastructure investment, foreign direct invest- off accrued interest. A decline in the debt-to- ment, and international development finance. GDP ratio and reduced net interest payments The IMF finds that, “In recent years, China has would be expected to improve the balance of become the largest single trading partner for payments position. The resulting lower interest Africa and a key investor and provider of aid.… payments would enable the government to re- [A] 1 percentage point increase in China’s real duce taxes or, alternatively, to raise spending domestic fixed asset investment growth has on critical social sectors­—­notably education tended to increase Sub-­Saharan Africa’s ex- and health­—­and address the legacies of the port growth rate on average by 0.6 percentage many years of civil conflict, particularly in pre- point.”45 viously neglected regions. Access to interna- China’s approach in South–South devel- tional capital markets could, however, induce opment cooperation differs from that of the

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Sudan to contract more debt, creating a for- established donors by combining aid, trade, | eign debt-to-GDP ratio of 46 percent in 2030. and public and private investment to strive for So, this debt management option is inferior to mutual respect and mutual benefit in a win- one restricted to debt relief, which would keep win situation. Africa–China trade has been the debt-to-GDP ratio at 37 percent. growing at approximately 20 percent a year

Charting a new path Intensified government efforts to inculcate since 2000. China’s FDI has grown 40 percent fiscal discipline, increase debt management in the past ten years.46 Its ODA, as defined by 38 the Organisation for Economic Co-operation 0.7 percentage point two years after the aid and Development (OECD), is small compared project is committed. This result holds for with that of other OECD countries, but it is ODA projects only, and there is no such effect commensurable with the ODA of other coun- for other official finance (OOF).49 tries with per capita income similar to China’s In the autumn of 2013, Chinese President Xi $8,123.47 China has used its comparative ad- Jinping proposed to build the Silk Road Eco- vantage in economy of scale for constructing nomic Belt and the 21st Century Maritime Silk infrastructure to help others investing in large Road (One Belt and One Road, or the Belt and development projects. It is the largest source Road Initiative­—­BRI) (figure 4.7). During the of construction financing, supporting many of inaugural BRI summit in May 2017, Xi commit- Africa’s most ambitious infrastructure projects ted $124 billion to the initiative.50 On 24 Octo - in recent years, including roads, railways, and ber 2017, the BRI was formally included in the hydropower (McKinsey June 2017). charter of the Communist Party of China, sig- Notwithstanding data limitations, Dreher nifying the ruling party’s strong commitment et al. (2017) find significant effects of Chinese to it.51 Through building both land bridges ODA boosting economic growth in recipi- and ocean links, as well as Special Economic ent countries, using an instrumental variable Zones (SEZs), this “transregional infrastructure approach.48 Based on a sample of recipient for connectivity” not only links resource- and countries whose average growth rate is 2.8 per- manufacturing-based economies with the two centage points a year, an additional Chinese largest markets, Europe and Asia, but also helps aid project increases economic growth by to secure ocean shipping transport routes,

FIGURE 4.7 The Belt and Road Initiative includes a “string of pearls” in East Africa­—­ Sudan could be one of the pearls After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Charting a new path

Source: Xinhua. 39 benefiting people in Asia, Europe, and Africa. to set up platforms for its contribution to The three principles of the BRI are “wide con- global development by contributing to set- sultation, joint construction, and shared bene- ting up the AIIB and other new institutions fits” to achieve multiple wins. such as the FOCAC, Silk Road Fund, New As China’s GNI and fiscal revenue contin- Development Bank, and African Capacity ue to grow, its development finance is rising Development Fund. dramatically, reaching an amount estimated • The BRI is the right platform for China’s new at almost $100 billion in 2015–16. That amount role in the global economy. It reflects Chi- includes grants, concessional loans, and ex- nese leaders’ vision of a world order guid- port buyer credits, as well as contributions to ed by shared prosperity, “peaceful coexis- the Silk Road Fund, New Development Bank, tence with differences,” and commitments Asian Infrastructure Investment Bank (AIIB), to sustainability, global public goods, and and other multilateral banks. China’s recent peace and security, drawing on China’s deep commitments at the Forum on China–Africa wealth of Confucianism. Cooperation (FOCAC),52 the Paris Climate Con- China’s outward FDI soared to more than ference (COP21), and the May 2017 BRI summit $183 billion in 2016, ahead of all other emerg- show that: ing market economies and second only to the • China will gradually take on more respon- United States (figure 4.8). Much of China’s in- sibilities and explore its new roles in global vestment is in the form of patient capital. affairs. Its share of ODA in gross national Sudan and China have a long history of income (GNI) is likely to grow from the cur- friendly relations with mutual support, benefit, rent 0.1 percent to 0.3 percent.53 That large and cooperation. China has emerged as Sudan’s increase depends on the definition of ODA, largest trading, investment, and South–South OOF, and development financing. cooperation partner. Over 2003–14, China sup- • The pace of China’s increase depends on the ported at least 53 completed developmental global governance system. China has tried projects or programs in Sudan for a total of $2.6 billion. They included infrastructure proj- FIGURE 4.8 ects, health and doctor teams, and education Outward foreign direct investment by BRICS countries, 2000–2016 social programs.54 Some large projects are FDI outflows ($ billion) ODA (concessional), OOF (nonconcessional), 200 and “vague official finance” loans. Of the 53 1. China completed projects and programs, 21 percent

150 were related to health, 15 percent to power generation and supply, 11 percent to emergen-

100 2. Russian cy response, 9.4 percent to transport and stor- Federation 3. Republic of Korea age, 9.4 percent to debt reduction, 7.6 percent 50 to agriculture, and 5.7 percent each to water,

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins government, and education (figure 4.9). Many | 0 aid programs, such as technical assistance and 5. South Africa 4. India 6. Brazil medical teams, are not measurable in mone-

–50 tary terms. 2000 2002 2004 2006 2008 2010 2012 2014 2016 Of the completed projects, 17 were for in-

Charting a new path Source: United Nations Conference on Trade and Development statistics on foreign di- frastructure, with expenditure amounting to rect investment. $2.36 billion (figure 4.10). These do not include 40 recent commitments or a series of railway re- FIGURE 4.9 habilitation projects implemented by Chinese Composition of China-sponsored projects and programs in Sudan companies.55 Percent

If Sudan can build “Institutions that unite, Non-food commodity assistance 2% Other multisector 2% construct infrastructure that connects, and Communications 2% Unallocated/unspecified 4% Health provide interventions that target,” it could: Government and 21% civil society 6% • Grasp the opportunities provided by the Water supply and BRI. sanitation 6% • Join existing global supply chains for food, Education 6% Energy wool, cotton, leather, footwear, garments, generation Agriculture, and supply and assembly lines of motorcycles, solar forestry and 15% fishing 8% equipment, and farm machinery. Action relating • Become one of the light manufacturing to debt 9% Emergency response and construction–logistics centers of East Transport 11% and storage Africa. 9% Source: Based on a subset of completed projects and programs in Sudan provided by aiddata.com. A macroeconomic strategy for the post-sanctions era Sudan has endured a prolonged economic FIGURE 4.10 blockade, which reduced its access to interna- Composition of China-sponsored infrastructure projects by tional capital and built up debt as it struggled percentage of projects… to adjust. The easing of the sanctions provides Communications 8% a unique opportunity for the country’s author- Water supply and sanitation 3% Transport and storage 3% ities to chart a new economic path for eco- nomic diversification and accelerated and in- clusive growth. This will require bold decisions on key macroeconomic and structural reforms Energy generation to stimulate domestic activity and assure in- and supply vestors of Sudan’s readiness for reengagement 85% with the international community. The strat- egy to kick-start the economy should include … and by percentage of dollars spent a raft of measures covering fiscal, monetary, Other social infrastructure and services 6% exchange rate, financial and external sector, Communications 6% business environment, and sectoral and other Water supply structural policies. and sanitation 18% Energy generation and supply 47%

Fiscal consolidation and domestic After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | resource mobilization Transport and Measures should increase fiscal revenue to cre- storage 24% ate fiscal space for growth-enhancing social spending and public infrastructure, while re- Source: Based on a subset of 17 completed infrastructure projects in Sudan provided by ducing monetization of the deficit. Sudan’s tax aiddata.com. Charting a new path revenues are among the lowest across low- and 41 lower-middle income countries (LLMICs). 56 Tax reduce the external trade deficit and control revenues represented only 6.3 percent of GDP, inflation. compared with an average 12 percent of GDP Reducing the gap between the official in fragile LLMICs in 1995–2015, and the gap has and parallel market rates will require apply- been increasing. Despite efforts to strengthen ing further exchange rate flexibility, removing tax administration, tax revenues increased only remaining restrictions on foreign exchange marginally as a percentage of GDP in 2015 due transactions, and taking measures to reduce to low imports and an overvalued official ex- the persistent overvaluation of the currency. change rate. This limited fiscal space and con- Increasing exchange rate flexibility should be strained pro-growth investment and pover- accompanied by a credible monetary policy ty-reducing social spending. aimed at lowering the rate of domestic infla- Sudan has scope to raise tax revenues. Of tion to less than 10 percent and stabilizing it. A 36 African LLMICs, Sudan ranked 34th in tax ef- timely and less expansionary monetary policy fort, with a gap between taxes owed and taxes with adequate policy instruments can reduce paid of 6.1 percent of GDP. According to the persistent inflationary pressures while ensuring IMF, Sudan should be able to increase its tax- that the banking system has ample liquidity to to-GDP ratio by 6 percent, especially by raising support domestic demand for private sector tax collections on income by 2.3 percent of credit. Exchange rate flexibility would help lib- GDP and on goods and services by 2.8 percent eralize the foreign exchange market for banks, of GDP. Tax reforms should include reform- strengthen competitiveness, attract foreign ing gold taxation, rationalizing exemptions, direct investment, and thereby promote inclu- continuing to strengthen customs and tax ad- sive growth. To operate a more flexible foreign ministration, increasing personal and business exchange regime would require developing an income tax rates and their progressivity, and interbank market and strengthening the central ceasing to grant new tax holidays (which can- bank’s reserve management. not be justified on economic returns grounds) and phasing out existing ones. In a nutshell, Social safety nets to protect the most Sudan should explore increasing tax revenues vulnerable to match the levels of its peers by moving Removal of subsidies and other subventions more to direct taxes, broadening the tax base, and exchange rate adjustments could have removing overgenerous tax exemptions, and unintended and inconsistent effects on the rationalizing subsidies to benefit the most vul- economy, hurting the poor in particular. Mea- nerable sections of the population. sures to mitigate the impact on the poor are therefore critical for reforms to succeed. The Greater exchange rate flexibility revenue gains from improved tax collection Sudan has long had a fixed exchange rate sys- and fiscal space created by fiscal consolidation tem, with periodic devaluations that have could be used to provide social safety nets for

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins proved inadequate to guarantee real exchange the poor and most vulnerable segments of the | rate competitiveness. Adopting a more flexible population, including in particular women and system will facilitate both internal and external children, while also investing in growth enhanc- adjustment to shocks, improve the compet- ing projects. A first step in reducing subsidies itiveness of the tradable sector, and bolster could include better targeting fuel and wheat

Charting a new path exports and discourage imports, especially of subsidies while liberalizing their prices. The nonessential goods. These advantages could people taking advantage of the subsidies are 42 likely to be living in urban areas. This is impor- and should avoid selective servicing of bilateral tant because Sudan cannot afford to subsidize debt. The Zero Option by which Sudan would the rich in urban areas on account of the limit- take on the entire debt burden under certain ed fiscal space. The savings from lifting subsi- conditions has been extended to September dies could also be used to finance social safety 2018 to avoid a complex and protracted appor- net programs. tionment of external debt.58 Public financial management should be Improving the business environment strengthened by sustaining progress in the im- and encouraging private investment plementation of the treasury single account and job creation (TSA). This will entail (1) strengthening bud- Reforms should include streamlining regula- get formulation and planning, with emphasis tions, empowering the private sector, liberal- on revenue projections by the recently es- izing trade and foreign exchange markets, and tablished macro-fiscal unit; (2) improving the unlocking entrepreneurship to complement preparation of the medium-term fiscal frame- public investment in infrastructure and public work and incorporating it into budget planning; services. Steps include reforming the gover- (3) expanding the coverage of the TSA; and (4) nance structure to meet international stan- deploying an integrated financial management dards and codes and developing the expertise system. to design and implement full compliance, start- ing with self-assessments by private firms. In a Sectoral policies for agriculture high-quality regulatory environment, regulators Efficient sectoral policies include improving and financial firms understand how to manage credit, land tenure, infrastructure, off-farm the risks the financial firms face. Policy makers activities, technology transfer, and institu- should be clear about the roles of regulation tional reform. The agricultural sector needs a and the market in ensuring that the efficiently seed industry in conjunction with stepped-up management of financial risks. Improving the research programs for developing new crop business environment and encouraging private varieties suited to conditions in Sudan. It also investment and job creation also require estab- needs effective research-extension-farmer lishing an export promotion agency to organize linkages. And expanding access to credit pro- the implementation of policies to promote grams would include working capital for facil- exports. Such an agency could focus on ways itating yearly crop production and term loans to enhance exporters’ expertise in such basics for purchasing or leasing equipment. as export packaging, quality management, and A careful review of the land rental and ten- marketing skills to sell products and services in ancy system will allow long-term leases for foreign markets. smallholder farming and promote long-term investment in soil fertility and management. Debt relief and public financial Industrialization policy should promote value

management chain development for agricultural capaci- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Sudan is eligible for debt relief under the Heav- ties, while giving more attention to standards, | ily Indebted Poor Countries (HIPC) initiative. quality control, and packaging and product Debt relief hinges on normalizing relations presentation to promote agro- industrial ex- with international creditors, including the IMF.57 ports. All these measures need effective gov-

The authorities should continue to reach out ernment budget allocations for agricultural Charting a new path to creditors to garner support for debt relief services, including research, irrigation, and 43 BOX 4.2 Gum arabic for economic recovery and environmental sustainability in Sudan

Sudan holds huge private sector investment household well-being and income genera- opportunities in small- and medium-scale tion. Moreover, gum arabic trees in Sudan forest enterprises involving gum arabic, one contribute to climate change adaptation of its most important non-wood forest and the resilience of communities, through products. In recent years, the country has the reliable income they provide to produc- supplied 71 percent of the global market. ers and the fodder they provide for live-

The gum arabic belt covers 13 of Sudan’s stock keepers. Gum trees sequester CO2, 15 states, an area of 520,000 square kilome- thus contributing to climate change mitiga- ters. Sudan’s traditional rainfed agriculture tion. In addition, the trees generate environ- and animal husbandry, which occupy more mental and social co-benefits. They provide than 70 percent of the country’s population, nectar for acacia honey production. And are highly vulnerable to climate change and they fix nitrogen through the bacteria in variability. The farmers generally do not have their root systems, thus reducing the need access to insurance or other financial serv- for farmers to apply costly nitrogen fertiliz- ices that could help them cope with shocks. ers, saving them an estimated $78/hectare. Strengthening the gum arabic value chain The potential of gum arabic not yet in Sudan will require building the organiza- been fully realized in Sudan. Weakness- tional, commercial, and technical capacity es include a lack of appropriate collection of an estimated 5,000 gum arabic producer tools, a low level of local processing, low associations (GAPAs) and their 5–6 million prices paid to gum producers (15 percent of smallholder members. Grant funding and export prices), weak market infrastructure, enhanced roles for governments, business and a shortage of financial support. The service providers, financial service provid- density of gum trees is low­—­70–125 trees/ ers, and development agencies are needed. hectare with a yield of 12.5 grams/tree in The AfDB and other partners, such as FAO poorly managed gardens, but could go up and IFAD, are currently supporting this ef- to 150–625 trees/hectare and yield 55–100 fort. Moreover, the Sudanese government grams/tree under good tending and man- is committed to eliminating concessions to agement, as happens in government-owned export raw gum and ensuring financial and reserves. These shortcomings need to be technical support to producers so they can circumvented to ensure that the Sudanese benefit from liberalized trade, as well as ex- share in the world Gum market rebounds port processed gum arabic. to its 80 percent pre-conflict level. To en-

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Export earnings from gum arabic were courage farmers to continue tapping gum | $134.2 million in 2013­—­17 percent of total arabic, the GAPAs must be reactivated, Sudanese exports and 13–15 percent of supported, and strengthened through basic foreign exchange. Gum arabic contributes services; better tapping, growing and tend- 21 percent of household income. Thus, ing techniques; microfinancing and group

Charting a new path Sudan is highly dependent on forests, and support for inclusive green growth, and forest products are part of food security, employment and economic diversification. 44 crop protection. Finally, improving capacity talent and the best place to invest. The govern- and developing a comprehensive monitoring ment must invest resource rents innovatively in and evaluation program providing information hard and soft infrastructure in and around the to national and subnational governments on selected zones and offer time-limited incen- progress program implementation is crucial. tives for foreign and domestic firms to invest­ —­“building the nest to attract the phoenixes.” Further integration with the regional market A new path would allow Sudan to seize some of the 85 mil- In today’s increasingly dynamic, multipolar, yet lion manufacturing jobs that China may have interdependent world, Africa needs a “can do” to relocate in the next decade. Sudan needs mindset59­—­to cooperate on structural trans- to compete for OFDI from China, India, Saudi formation for job creation. Emerging and de- Arabia, South Korea, UAE, and other emerg- veloping countries now account for more than ing countries to foster learning, reduce pover- 57 percent of global GDP, while the advanced ty, and generate employment for its growing industrial countries account for less than young labor force. 43 percent. Emerging and developing countries account for over two-thirds of global growth Option 2. Augment natural capital such as and are the main drivers of the global econ- land, pasture, and other assets by investing in omy. China alone accounts for 33 percent of higher value-added agriculture, horticulture, global growth, due to its economic size and its tree crops, and animal husbandry. Promote 6.5 to 7 percent annual growth. agri-business for green development to get Sudan has an unprecedented opportunity green financing. And combat desertification to be a destination for firms relocating from following the Kubuqi model in Inner Mongolia. China and other emerging donor countries (in- Sudan is endowed with abundant arable pasto- cluding Arabic ones). As real wages rise in China ral land but faces severe drought and desert- and other upper-middle-income countries, mil- ification. Since most of the poor live in rural lions of manufacturing jobs will move to other areas, the government should enable the pri- developing countries along with outward for- vate sector to invest in large-scale irrigated ag- eign direct investment (OFDI). Improved con- riculture, dairy farming and animal husbandry, nectivity from the construction of several spe- and the leather supply chain for regional and cial economic zones or agri-ecological parks global export. The production of fertilizers and near Port Sudan on the Red Sea would allow farming equipment could provide inputs for Sudan and other countries in northeast Africa agriculture and agri-business. To increase rural to seize the opportunity provided by the in- employment, it might be desirable to attract dustrial upgrading of China, India, South Korea, workers into light manufacturing, such as foot- Turkey, Saudi Arabia, South Africa, and other wear and garments. leading dragons. This strategy would help Sudan to grasp

Based on the analysis here, policy makers in unprecedented opportunities as firms from After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Sudan may consider the following options: emerging market economies, such as from | China, Egypt, Saudi Arabia, and South Africa, Option 1. Promote deep openings for foreign “go global.” With South Sudan and other neigh- direct investment by setting up special eco- bors, Sudan should jointly form cross-country nomic zones (SEZs) or agri-ecological parks, supply chains for assembly of farm machinery Charting a new path and making the zone the best place to attract and equipment through original equipment 45 manufacturing or processing trade. Sudan proliferate, Sudan’s policy makers must target should also seek synergies between its emerg- SEZ sectors and locations (near the port) so ing tourism and services opportunities and that foreign and domestic investors are attract- eco-friendly SEZ development in an inclusive ed and will generate jobs. The mindset must model focused on people, providing training change from the traditional one of seeking and capacity building and attracting talent for the first and best solutions for improving the a learning and innovative society. nationwide investment climate to focusing on Currently more than 100 countries world- institutions that unite, infrastructure that con- wide have SEZ programs operating sever- nects, and interventions that target, including al thousand SEZs. As programs continue to the sectors and SEZs identified in this report. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Charting a new path

46 PART 1 Notes and references

Notes 6. Confidence in Africa is so important: an overwhelm- 1. These costs are reflected in all transactions, even ing 74 percent of Chinese firms are confident about where formal OFAC licenses have been obtained. Ul- Africa’s future, so they plan to invest (McKinsey 2017). timately, all such costs are passed to Sudanese citi- 7. Schultze 1983. zens as opposed to the Sudanese government or any 8. Lin and Monga 2011. other official body. 9. World Bank 2009, p. 31. 2. Though these macroeconomic indicators have im- 10. World Bank 2009, p.1. proved since due to fiscal consolidation and reforms 11. See for example, Baldwin and Lopez-Gonzalez (2013) in 2012 and 2013, the fundamentals of the economy “Supply-Chain Trade: A Portrait of Global Patterns are still very weak. and Several Testable Hypotheses,” which argues that 3. The milestones are (1) continued cessation of hostil- reduced transport costs allow adopting I2E and join- ities in conflict areas, (2) humanitarian access, (3) co- ing (rather than building) global supply chains as ways operation with South Sudan, (4) cooperation in com- of catch-up for developing countries. Many East bating terrorism, and (5) cooperation in maintaining Asian countries are examples. regional peace and stability. 12. For example, Germany’s January 2017 Marshall Plan, the 4. The Bank’s efforts in supporting Sudan’s debt relief High 5s of the AfDB, and China’s Belt and Road Initia- efforts include membership in the Technical Working tive. See also Felino and Pinto (2017) on “A Bridge to Group on Debt comprising the International Mone- African Self-reliance: The Big Bond,” the Addis Ababa tary Fund, World Bank, and major creditors and as- Action Agenda, and the follow-up United Nations sisting Sudan to meet all the technical requirements Conference on Trade and Development meeting to be for HIPC debt relief, in close collaboration with the held on 8–10 November, on financing for development. World Bank and the IMF. These included: (1) debt 13. McKinsey 2017; Lin and Wang 2017a. reconciliation, (2) debt sustainability analysis, (3) es- 14. Lin 2012. tablishment of debt relief scenarios, (4) conducting 15. AfDB 2016a. a nationwide poverty survey to prepare an Interim 16. World Bank 2018. Poverty Reduction Strategy Paper (I-PRSP), and (5) 17. Empowering Novel Agri-Business-Led Employment preparation of a Debt Relief Strategy in 2013. This for the Youth (ENABLE Youth). left Sudan and South Sudan only to supply effective 18. AfDB Statistics. political outreach to give traction to the debt relief 19. Debt reconciliation, debt sustainability analysis, debt process. The Bank has also approved $1.0 million in relief scenarios; arrears clearance and debt relief 2014 to fight litigation cases against Sudan filed by its strategy, and implementation of an interim poverty

secondary creditors. reduction strategy paper (I-PRSP) for two years. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | 5. The objective of this group is to provide factual in- 20. They include cessation of hostilities, humanitarian formation and objective analysis for the use of the in- access, cooperation on South Sudan, counter terror- ternational community including Parties to the Com- ism, and cooperation in regional stability. prehensive Peace Agreement signed in January 2005 21. Ali and Elbadawi 2004.

by the Sudan People’s Liberation Movement (SPLM) 22. Ali 2012. Notes and references and the Government of Sudan in examining and un- 23. In the 1980s, deficit financing was the major source 47 derstanding issues related to Sudan’s external debt. of inflation, so the government, in its attempts to reduce the budget deficit, partially removed the equity-based instruments, quantitative ceilings on subsidies on essential consumer goods such as sugar, credit, or reserve ratios. Each has shortcomings. The wheat, and petroleum products. In addition, mea- equity-based instrument cannot be priced efficient- sures to direct the liquidity into the banking system ly. Quantitative ceilings and reserve ratios cannot have been taken to reduce the high rate of inflation guarantee full control of the supply of money. The (Gangi and Mahran 1996). Central Bank thus has less effective instruments of 24. AfDB 2016b. money control than banks in other countries operat- 25. Gadkarim 2012. ing under the traditional non-Shariat system. 26. Expenditure side measures: 50 percent reduction of 36. UNESCWA 2015. government size, removal of 50 percent subsidies 37. IMF 2017. on oil products, and reducing government-procured 38. Sudan Central Bank. goods and services. Revenue side measures: tax re- 39. Purchasing power parity is a key building block of form, tightening loopholes for corruption, and in- many models in international economics. It assumes creasing oil and gold production. changes in foreign inflation and the nominal ex- 27. AfDB 2017. change rate can have immediate pass-through impact 28. The establishment of an official exchange rate (the on the level of domestic prices. CBOS rate) for use in all government exchange trans- 40. The estimate is based on ratio of total employment actions, which in practice differs by more than 2 per- to the adult population combined with the share of cent from the rate commercial banks use. each sector’s contribution to the overall employ- 29. To a lesser extent by improving the terms of trade. ment and sorted by gender. The data were gleaned 30. The correlation between real exchange rate misalign- from UNCTAD (2017). ment and non-fuel exports is 0.16 during 1990–2016. 41. Datasets for the 2014 household survey have not 31. Total public debt continued to increase in recent been validated by the authorities and thus were not years. It reached SDG 137 billion (74 percent of GDP) available for this exercise. at end-2011, up from SDG 65 billion in 2005 and SDG 42. Before sanctions were lifted, a number of back- 49 billion in 2000. This increase in total public debt ground studies were commissioned as input to the was mainly the result of an increase in the stock of World Bank’s country economic memorandum for debt denominated in foreign currency, including a Sudan (World Bank 2015). The analysis in this section devaluation effect. is based on Lofgren (2015), one of the studies. 32. AfDB 2016b. 43. Maquette for MDG (Millennium Development Goals) 33. Yagoob, Hadia, and Zuo 2016. Simulations. See Lofgren (2015). 34. Assal 2010. 44. O’Driscoll 2017. 35. Sudan’s financial sector continues to be dominated 45. IMF 2013, p. 5. by banks operating under Islamic modes of finance. 46. McKinsey 2017. Mobilizing and investing funds should both be in 47. Lin and Wang 2014. accordance with the principles of Islamic Shari’a. Li- 48. The annual production volume of Chinese steel in- quidity management is difficult because of the lim- teracting with the recipient province’s probability of

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins ited number of Islamic financial instruments and receiving aid is used as an instrument variable (IV) to | relatively inactive secondary market, which tends address the endogeneity problem associated with to undermine the Central Bank of Sudan’s ability Chinese aid (Dreher et al. 2017. This recent paper to control reserve money. The Central Bank, which analyzes the effectiveness of Chinese aid, using a operates under the Shariat law, cannot use inter- media-based dataset that captures ODA (more con-

Notes and references est-bearing debt instruments. It cannot discount cessional) and OOF (other official flows, less or not these instruments in the secondary markets, either. concessional) from China to 138 countries in five re- 48 It is thus left with three alternative instruments: gions in 2000–14. Official data are not available on China’s aid and invest- checks. This calculation is based on project data on ment by country and by project. AidData builds a completed projects and programs from aiddata.com. new database from media-based sources covering It does not include recent commitments to Sudan, or five regions: Africa, the Middle East, Asia and the Pa- projects yet to be completed. cific, Latin America and the Caribbean, and Central 55. For railway projects, see AfDB (2016b) annex 8, annex and Eastern Europe. For China, four primary open table 8.3. sources are: English, Chinese, and local-language 56. Sudan has one of the lowest direct tax revenues news reports; official statements from Chinese min- among lower-middle–income countries, collecting istries, embassies, and economic and commercial only 0.6 percent of GDP. This is explained by low per- counselor offices; the aid and debt information man- sonal and corporate income tax rates, multiple ex- agement systems of finance and planning ministries emptions and tax holidays, and low compliance due in counterpart countries; and case study and field to weak administration. research by scholars and nongovernmental organiza- 57. Sudan has satisfied almost all technical requirements tions. These project-level data from 4,304 officially for debt relief including reconciling debt, establishing committed projects and 630 pledges of support are debt scenarios, preparation and implementation of standardized using AidData’s TUFF method. These the I-PRSP for two years, preparation of a debt re- project-level data are categorized into three types: lief strategy with AfDB assistance, finalizing the full ODA, other official flows (OOFs), and vague official PRSP with AfDB assistance, and implementing 13 staff finance (OF). Vague official finance (OF) projects rep- monitored programs. resent official financial flows where there is insuffi- 58. Sudan would take the entire debt burden subject cient open-source information to clearly determine to joint political outreach to creditors and access to whether the flows are more akin to ODA or to OOF. debt relief under the Heavily Indebted Poor Coun- Scholars have challenged its data limitations and tries (HIPC) initiative within two years. Should this classifications approach fail, Sudan and South Sudan would resort 49. Dreher et al. 2017. to debt apportionment, a challenging process that 50. See Chinese President Xi Jinping’s speech at the could be volatile. Summit for the Belt and Road Initiative, 14 May 2017. 59. Confidence in Africa is so important: an overwhelming http://news.xinhuanet.com/english/2017-05/14/ 74 percent of Chinese firms are confident about Afri- c_136282982.htm. ca’s future, so they plan to invest (McKinsey 2017, p.10). 51. In the new charter, the Communist Party of China in- tends “to promote the ‘One Belt and One Road’ con- struction in accordance with the principles of ‘wide References consultation, joint construction, and shared bene- AfDB (African Development Bank). 2016a. “Sudan Country fit.’” General Charter of CPC, Xinhua News Agency, Note.” Abidjan: Côte d’Ivoire. 28 October 2017. ———. 2016b. “Private Sector-Led Economic Diversifica- 52. See annex 4 for commitments. tion and Development in Sudan.” African Development 53. The indicator ODA/GNI is around 0.3 percent for the Bank, Eastern Africa Regional Resource Centre, Nairobi.

United States and Japan. The level mandated by the ———. 2017. African Economic Outlook 2017: Entrepre- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Organisation for Economic Cooperation and Devel- neurship and Industrialization. Abidjan: Côte d’Ivoire. opment–Development Assistance Committee is 0.7 Ali, H. M. H. 2012. “Cointegration growth, poverty and in- percent of GNI. However, China is still a developing equality in Sudan.” Economic Research Guardian 2 (1): country, with a per capita GDP around $8,000. 70–98.

54. Detailed official data are not available on China’s Ali, Gadir Ali, and I. Elbadawi. 2004. “Explaining Sudan’s Notes and references aid and investment by country and by project. Aid- Economic Growth Performance.” Working Paper No. 49 Data developed a media-based database, with cross 9; Prepared as a component of the African Economic Research Consortium (AERC) Collaborative Research Research, Helsinki. www.wider.unu.edu/publications/ Project on “Explaining Africa’s Growth Performance.” working-papers/2014/en_GB/wp2014–046/. Assal, M. 2010. “Highly-skilled Sudanese migrants: Gain or ———. 2017a. Going beyond Aid: Development Cooper- drain?” CARIM Analytic and Synthetic Notes 2010/13. ation for Structural Transformation. Cambridge Uni- Bahram P., and M.H. Pesaran. 2009. Time Series Economet- versity Press. rics using Microfit 5.0 A User’s Manual. Oxford, UK: ———. 2017b. “New Structural Economics: Patient Capi- Oxford University Press. tal as a comparative advantage.” Journal of Infrastruc- Baldwin, Richard, and Javier Lopez-Gonzalez. 2013. “Supply-­ ture, Policy and Development 1 (1). http://systems.en- Chain Trade: A Portrait of Global Patterns and Several press-publisher.com/index.php/jipd/article/view/28. Testable Hypotheses.” NBER Working Paper 18957, Na- Lofgren, H. 2015. “External Environment and Domestic Poli- tional Bureau of Economic Research, Cambridge, MA. cy: Alternative Scenarios for Sudan to 2030.” Felino, L. T., and B. Pinto. 2017. “A Bridge to African Self-­ McKinsey. 2017. Dance of the Lions and Dragons: How are reliance: The Big Bond.” Washington, DC: Brookings Africa and China engaging, and how will the partner- Institution. ship involve? June 2017. Dreher, Axel, Andreas Fuchs, Bradley Parks, Austin M. McNown, R., and M. Wallace. 1989. “National Price Levels, Strange, and Michael J. Tierney, 2017. “Aid, China, and Purchasing Power Parity, and Cointegration: A Test of Growth: Evidence from a New Global Development Four High Inflation Economies.” Journal of Internation- Finance.” Working Paper 46, AidData, Williamsburg, VA. al Money and Finance 8: 533–45. Gadkarim, Hassan Ali. 2012. “Will the Sudanese paradox O’Driscoll, D. 2017. “Impact of lifting economic sanctions continue? Insecure investment climate and substantial on poverty and growth.” K4D, HelpDesk Report, Insti- foreign direct investment inflows.” Sudan Report, Chr. tute of Development Studies. Michelsen Institute (CMI). Pesaran, M. H., and Y. Shin. 1996. “Cointegration and the Gangi, Yagoub, and Hatim Mahran. 1996. “The causes of speed of Convergence to Equilibrium.” Journal of inflation in Sudan.” Eastern Africa Social Science Re- Econometrics 71: 117–43. search Review 7. Schultze, Charles. 1983. “Industrial Policy: A Dissent.” ILO (International Labour Organization). 2005. Employment Brookings Review (October): 3–12. Strategy Paper. Geneva. UNCTAD (United Nations Conference on Trade and Devel- IMF (International Monetary Fund). 2013. Regional Econom- opment). 2017. World Investment Report 2017: Invest- ic Outlook: Sub-Saharan Africa. Washington, DC. ment and the Digital Economy. Geneva. ———. 2017. “Sudan: Article IV Consultation.” Country UNESCWA (United Nations Economic and Social Commis- Report No. 17/364, International Monetary Fund, Wash- sion for Western Asia). 2015. “Remittances in Sudan.” ington, DC. Beirut, Lebanon. Lin, J. Y. 2012. The Quest for Prosperity: How Developing World Bank. 2009. World Development Report 2009: Re- Economies Can Take Off. Princeton, NJ: Princeton Uni- shaping Economic Geography. Washington, DC. versity Press. ———. 2015. Sudan Country Economic Memorandum: Lin, J. Y., and C. Monga. 2011. “Growth Identification and Realizing the Potential for Diversified Development. Facilitation: The Role of the State in the Dynamics of Washington, DC.

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Structural Change.” Development Policy Review 29 (3): ———. 2018. Trouble in Making? Future of Manufacturing-­ | 264–90. Led Growth. Washington, DC. Lin, J. Y., and Y. Wang. 2014. “China-Africa Cooperation in ———. World Development Indicators [database]. Wash- Structural Transformation: Ideas, Opportunities and ington, DC. Finances.” Working Paper 2014/046, United Nations Yagoob, A., A. Hadia, and T. Zuo. 2016. “Evaluation of For-

Notes and references University World Institute for Development Economics eign Aid from China on Sudan’s Economic Develop- ment Process.” Developing Country Studies 5 (8). 50 PART 2 Targeted strategies for quick economic wins After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Notes and references

51

CHAPTER 5 Sudan’s medium-term options

odern economic growth is a process FIGURE 5.1 of continuous structural change in Industrialization is an engine of growth: manufacturing and income Mtechnology, industries, and socio- growth, 1990–2014 economic institutions. Except for a few oil-ex- World porting countries, no country has achieved GDP growth, 1990–2016 (annual percent) high-income status without industrialization 10 and dynamic industrial upgrading. Countries need to make a structural transformation from reliance on a traditional agriculture- or 5 resource-based economy to development of a fuller and longer value chain of production that includes processing, trade, light manufac- turing, heavy manufacturing, and services. Es- 0 sentially, development is a process of learning, innovation, and upgrading along this spectrum, moving from land- and resource-intensive sec- –5 tors to labor-intensive or capital- and technol- –5 0 5 10 15 ogy-intensive sectors. The manufacturing sector, in particular, of- Manufacturing value added growth rate, 1990–2016 (annual percent) fers boundless possibilities for the production of tradable goods­—­including technology itself­ Africa —­that enable countries to import what they do GDP growth, 1990–2016 (annual percent) not produce and export what they are good at 10 producing. In the first stage of economic catch- up, manufacturing firms can be instrumental in absorbing appropriate technologies from 5 abroad and in transferring new technologies to non-manufacturing sectors of the economy. Manufacturing is credited with modernizing the 0 agricultural and mining sectors that provide its After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | raw materials through backward linkages and for spawning ancillary activities, particularly services, through forward linkages. –5 There is a positive and significant correla- –5 0 5 10 15 tion between growth of manufacturing value added (MVA) and income growth in the world Manufacturing value added growth rate, 1990–2016 (annual percent) and in the Africa region specifically over 1990– Sudan’s medium-term options 2014 (figure 5.1). Countries with rapid MVA Source: Calculated based on data from World Bank, World Development Indicators, 2017 53 and Lin and Wang 2017a, p. 28. growth, such as Cambodia, China, Laos, Myan- of economic criteria that determine what gives mar, Uganda, and Vietnam, have seen their per different countries preeminence in particular capital GDP grow faster than in countries with lines of business.”60 slower MVA growth. In Sudan, although indus- A pragmatic process for identifying growth trial development was progressing prior to the pillars is to analyze latent comparative advan- secession of South Sudan in 2011, driven largely tage, defined as the “comparative advantage by the oil sector, manufacturing activity de- of an economy that is embedded in the factor clined from 8 percent of GDP in 1980–89 and costs of production [which are] determined by the early 2000s to around 6 percent of GDP in the economy’s endowment structure.” 61 La- 2015, trailing other countries at a similar income tent comparative advantage could lie in a new level (see figure 5.1) industry that is not yet successful in today’s As a fragile and post-conflict country, Sudan economy, mostly likely because of high trans- faces severe socioeconomic, environmental, action costs, logistics, and other unfavorable and humanitarian challenges. So, the key ques- business conditions. If these conditions are im- tions for Sudan are: proved, the economy could be competitive in • How to identify a few growth pillars or sec- the world market in this industry. tors on which the country could focus its limited resources and potentially achieve Reasons for targeting sectors quick developmental results (sector focus, Sudan has suffered conflicts and embargos and vertical target)? other internal and external shocks since the • In which areas should the country concen- 1950s, exacerbated by the secession of South trate its public and private investment in Sudan in 2011. In this context, policy makers order to maximize the impact of foreign di- may want to prioritize policies for grasping low rect investment (FDI), knowledge spillovers, hanging fruit to achieve quick wins that could and agglomeration (zone focus, horizontal boost investor confidence and enhance the target)? momentum for development. The first step is to identify the right target countries and the right industries as a precon- The Growth Identification and dition for successful catch up (see box 5.1). Gov- Facilitation Framework ernment must decide which infrastructure to The Growth Identification and Facilitation improve and where these services should be Framework provides a practical guide for iden- provided to facilitate private sector activities. tifying Sudan’s latent comparative advantage­ Developing country governments have limited —­or what it could potentially do well (box 5.1). resources to invest in the necessary hard and soft infrastructure, which are often sector spe-

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Selecting sectors to target cific. Each developing country cannot be suc- | Identifying growth pillars or sectors is challeng- cessful in all sectors, so individual sectors need ing, as economic theory provides few clues for to be targeted for attention. Identification is determining which industries are “right” and also important because specialization, agglom- which are “wrong.” As some analysts caution, eration, and industrial clustering are crucial for “[t]he first problem for the government in car- achieving economies of scale and reducing costs rying out an industrial policy is that we actu- in any industry. Government needs to provide

Sudan’s medium-term options ally know precious little about identifying … a infrastructure services in certain locations, or ‘winning’ industrial structure. There is not a set incentives for first movers in certain sectors, so 54 BOX 5.1 Growth Identification and Facilitation Framework at a glance

The six-step Growth Identification and Facilitation also set up incubation programs to encourage Framework can help policy makers in developing start-ups in these industries. countries identify industries with latent comparative • Scaling up self-discoveries. In addition to the in- advantage and facilitate competitive private sector dustries identified in step 1, the government should development: pay attention to spontaneous self-discovery by • Choosing the right target. Policy makers should private enterprises and support the scaling up of first pinpoint economically dynamic countries successful private innovation in new industries. with similar endowment structures to their own Rapid technological change may give rise to many and with about 100–300 percent higher per cap- new opportunities that would not have existed a ita incomes measured in purchasing power par- decade or two earlier in the rapidly growing com- ity. They would then identify tradable goods and parator countries. Examples include mobile phones services that have grown well in those countries and related e-services, social media, and green for the past 15–20 years. These are likely to be new technologies. industries in their own country that are consistent • Recognizing the power of industrial parks. In coun- with their country’s latent comparative advantage, tries with poor infrastructure and an unfriendly as countries with similar endowments are likely to business environment, the government may set have similar comparative advantages. A fast-grow- up special economic zones or industrial parks to ing economy that has produced certain goods and lower barriers to firm entry and foreign investment. services for about 20 years will begin to lose its These zones can create preferential business envi- comparative advantage as wage level rises, leaving ronments that most governments, constrained by space for countries with lower wages to enter and low budgets and capacity, are unable to implement compete in those industries. quickly economy-wide. Establishing industrial parks • Assisting domestic private firms. If some private or zones can also facilitate the formation of in- domestic firms are already producing in these in- dustrial clusters and hence reduce production and dustries, the firms must have the tacit knowledge transaction costs. or local knowledge that lowers costs and makes • Providing limited incentives to the right industries. them competitive. Policy makers should try to Policy makers may consider compensating pioneer identify the obstacles that are preventing these firms in the industries identified as having latent firms from upgrading the quality of their products comparative advantage with time-limited tax incen- or that limit entry to those industries by other pri- tives, co-financing for investments, and access to vate firms. The government can then implement foreign exchange, to compensate for the external- policies to remove the constraints and facilitate ities created by first movers and to encourage firms firm upgrading or entry. to form clusters. Because the identified industries

• Attracting global investors. For industries in which are consistent with the country’s latent compara- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | no or only a few domestic firms are producing, tive advantage, the incentives should be limited in policy makers may try to attract FDI from the both time and financial cost. To prevent rent-seek- countries identified in step 1 or from other higher ing and political capture, governments should avoid income countries producing those goods. Foreign incentives that create monopoly rents, high tariffs, investors could bring in not only the capital need- or other distortions. Moreover, incentives should ed but also the general and tacit knowledge about be linked to performance and should be continu-

the design and production technology of a certain ously evaluated against the stated objectives. Sudan’s medium-term options product and perhaps even its entire supply chain 55 and distribution channels. The government could Source: Adapted from Lin and Monga 2011. BOX 5.2 From a commodity exporter to a manufacturing powerhouse: China’s economic transformation

China was a primary product exporter in the late learning by doing, learning by exporting, and adapt- 1970s and early 1980s, when its per capita income was ing foreign technologies of production and master- less than one-third the average in Sub-­Saharan African ing their use, reflecting the importance of learning by countries. China had abundant land and labor but was doing (Greenwald and Stiglitz 2013) and of tacit knowl- capital scarce at that time. Its exports were concen- edge transmission in economic growth. trated in resource-intensive raw materials and primary products, such as crude oil, crude coal, minerals, and China’s rapid transformation in export structure: food and vegetables. Until 1984, crude oil and agricul- following its comparative advantage… tural products accounted for more than half of Chi- 1.0 Food and live animals na’s exports (see figure). Over 37 year of reforming and opening up its 0.8 Crude oil and other crude materials economy, China transformed its natural capital into Miscellaneous manufactured articles produced and human capital as well as intangibles. 0.6 Through gradually opening up, China was able to fol- Other commodities and transactions low its comparative advantages by engaging in initially 0.4 labor-intensive light manufacturing sectors and then Machinery and transport equipment upgrading, allowing rural people access to job oppor- 0.2 tunities in urban areas. Opening to foreign direct in- Manufactured goods vestment (FDI) through the establishment of special 0.0 economic zones allowed the transfer of technology 1984 1990 1995 2000 2005 2010 2014 and tacit knowledge through learning by doing and learning by exporting. Now, manufactures account for …but slow transformation of the employment more than 98 percent of its exports, and China has structure become integrated with the world’s most important 100 supply chains (Lin and Wang 2008). Tertiary sector China’s transformation is attributable in part to 80 continuing domestic investment and opening to FDI Secondary sector in its endowment structure. With annual savings of 60 around 40 percent of GDP and dramatic improvement in education, China’s endowments of human, physical, 40

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins and financial capital have grown significantly. Indeed | China’s composition of assets in national wealth has 20 changed dramatically. The share of natural capital fell Primary sector from 34 percent in 1995 to 25 percent in 2005, while 0 the share of produced capital and intangible capi- 1952 1960 1965 1970 1975 1980 1985 1990 1995 2000 2009 tal increased strongly. Most important, its stock of technological capabilities benefited from importing, Source: Lin and Wang (2008), updated based on UN Comtrade data. Sudan’s medium-term options

56 that private firms are not spread too thinly over of development. When firms choose to enter too many sectors, as that reduces the firms’ industries and adopt technologies that are chances of surviving and gaining a competitive consistent with the country’s comparative ad- edge in the international market. vantage, the economy is most competitive. In For developing countries whose economies these conditions, firms will claim the largest depend heavily on natural resources, it is crit- possible market shares and create the great- ical to apply the rent generated from natural est possible economic surplus. Owing to the resources to facilitating diversification to other competitiveness of these industries, reinvest- non-resource-based industries. Many develop- ed surpluses can earn the highest return, which ing countries have abundant land and natural allows the economy to accumulate even more resources, so they are primary product ex- physical and human capital. This dynamic can porters in the first stage of their development. lead to a virtuous circle: it can upgrade the To upgrade their industrial structure, they country’s factor endowment structure as well must first close their endowment gaps with as its industrial structure and, in addition, make advanced industrial countries by investing in domestic firms more competitive in more human and institutional (intangible) capital and capital- and skill-intensive products over time. physical infrastructure. The Republic of Korea, China, and many other The strategy to get there is to follow a countries have been following their compara- country’s comparative advantage at each stage tive advantages (see box 5.2). After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Sudan’s medium-term options

57

CHAPTER 6 Identifying sectors with latent comparative advantage

ow can a country target the right MVA of 31 percent of GDP; Egypt with an MVA countries and the right industries? The of 17 percent; Tunisia with an MVA of 16.9 per- HGrowth Identification and Facilitation cent; and Vietnam with an MVA of 15.9 per- Framework provides a practical guide (see box cent. China and Egypt are also among the main 5.1 in chapter 5). The first step is to choose the sources of FDI to Sudan. right countries­—­dynamically growing coun- Egypt and Tunisia are selected because their tries with a similar endowment structure and physical and cultural proximity, as well as their a per capita income that is not too far ahead successful industrialization and diversification. of the home country­—­and then to identify (See technical annex 1 for details of the meth- the tradable goods and services that they have odology used in selecting the target coun- been producing for 15–20 years and that are tries.) Xinjiang Autonomous Region of China, declining, thereby providing opportunities for with similar natural endowments as Sudan­—­ the home country. resource‑rich but suffering from desertification For Sudan, comparator countries were select- and labor scarcity62­—­is developing rapidly and ed based on three criteria: they have a per capita has transformed and diversified successfully. It income not exceeding 300 percent of Sudan’s, has a GDP per capita growth rate of 8.05 per- they have been growing consistently over the cent, an MVA of 13.9 percent of GDP in 2015, past 21 years (1995–2016), and they have good and an income level within 300 percent of that performance in manufacturing development as of Sudan. By developing a number of special measured by manufacturing value added (MVA) economic zones and eco-­agricultural and tech- in GDP (table 6.1). Sudan’s average annual in- nical innovation zones, Xinjiang has become a come in purchasing power parity (PPP) measured major exporter of processed food, light manu- in constant 2011 international dollars rose from factures, home appliances, and some high-tech $1,961 in 1995 to $4,385 in 2016, in part because products (see annex 5).

of the global resource boom. But its structure of After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins production is still that of a primary product ex- | porter, similar to that of many countries in Africa. Sudan’s existing comparative Its MVA was 6 percent of GDP in 2016, lower than advantage in Egypt, Tunisia, and several other peer African What is the best way to measure the compara- countries, and much lower than in Xinjiang Au- tive advantage of a country like Sudan? A wide- tonomous Region of China. ly used measure for comparing one country’s For Sudan’s stage of transformation (low export structure with that of other countries average annual income of $4,385 and low level is revealed comparative advantage (RCA). If of manufacturing development, with heavy Sudan’s export of commodity A has a bigger reliance on oil and an urgent need for diversi- share of Sudan’s total exports than commodity fication), the most relevant comparator coun- A’s share in world’s export, then Sudan has an 63 tries include the most dynamically growing RCA in commodity A (RCA > 1). This method is Identifying sectors with latent comparative advantage ones, such as China (including Xinjiang), with an described in box 6.1. 59 TABLE 6.1 Sudan and identified comparator countries

GDP per capita in purchasing power parity (constant 2011 international dollars) Average GDP Manufacturing growth as share of 1995  Share of 2010  Share of 2016  Share of per capita GDP (%) Country ($) Sudan (%) ($) Sudan (%) ($) Sudan (%) 1995–2016 2016 Sudan 1,961 na 3366 na 4385 na 3.9 6.1a Comparator economies China 2,564 131 9,526 283 14,401 328 8.6 30.0 Egypt 6,293 321 9,857 293 10,319 235 2.4 17.1 Tunisia 6,131 313 10,436 325 10,752 245 2.6 16.9a Vietnam 2,042 104 4,486 133 5,955 136 5.3 15.9 Peer economies Angola 2,967 151 5,895 175 6,025 137 3.8 .. Morocco 3,915 200 6,443 191 7,266 166 2.6 18.3 Nigeria 2,750 140 5,150 153 5,439 124 3.2 8.8 South Africa 9,177 468 12,029 357 12,260 280 1.4 13.4 Xinjiang Autonomous Region of China 1,728 88 7,563 224 11,537a 263a 8.05b 13.9

na is not applicable. Source: Author’s calculation based on GIF methodology (Lin and Monga 2011) and World Bank World Development Indicators database. Data on Xinjiang are based on Lin and Wang (2017a). a. Data are for 2015. b. Average growth rate for 2001–16.

BOX 6.1 Measuring revealed comparative advantage

Identifying existing comparative advantage where xij and xwj are the values of country

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins is straightforward, as several established i’s exports of product j and world exports | indicators can be used. One established in- of product j, and where Xit and Xwt refer to dicator is revealed comparative advantage the country’s total exports and world total (RCA). exports. Thus, if RCA > 1, the country has RCA is calculated as follows: a revealed comparative advantage in the product, and if RCA < 1, the country has a xij X revealed comparative disadvantage in the it product. RCAij = xwj

Xwt Identifying sectors with latent comparative advantage

60 An analysis of comparative advantage of only in those 12. For example, even though agricultural products in Sudan using RCA over crude petroleum is Sudan’s top export, ac- 2000–13 reveals that Sudan has a comparative counting for 54 percent of exports ($3.09 bil- advantage in gum arabic (80 percent of world lion) in 2015, Sudan does not currently have a exports), cotton, and animal products (12 sub- comparative advantage in this sector (though sectors altogether; table 6.2).64 The analysis it may have a latent comparative advantage, further showed that Sudan has the capability which is discussed below). Sudan lost 75 per- to produce and export other agricultural prod- cent of its oil revenues after the secession ucts that may be competitive in the interna- of South Sudan in 2011. Unless Sudan forms a tional market. A similar analysis of comparative close free trade relationship with South Sudan, advantage in producing gum arabic in West the future of this industry, including oil pro- Kordofan State during 2010–15 also concluded duction, refining, and exports of refined prod- that production is profitable and has a com- ucts, looks bleak. parative advantage, but the study called for Sudan has a very strong comparative advan- reducing direct and indirect taxes on the com- tage in agriculture, animal husbandry, agro-pro- modity to improve competitiveness.65 cessing, wool, and leather industries. All but While Sudan exports many more products three subsectors (gold, mineral tar and distillate than the 12 shown in table 6.2, it is competitive products, and base metals) with a comparative

TABLE 6.2 Identified subsectors in which Sudan has a revealed comparative advantage

Product Sudan Sudan code Product description 2012 2015 Products at the four-digit level with RCA greater than 1 0 Live animals except fish 88.213 68.552 Sheep and goats, live; bovine animals, live; other live animals 1 Meat and meat Beef, frozen; beef, chilled; meat of sheep/goat, chilled or frozen preparations 1.459 2.963 6 Sugar, sugar Raw sugars; molasses excluding sugar refined preparations, honey 3.832 6.037 8 Animal feed 1.734 1.988 Hay/fodder, green /dry; fodder bran, homogenized food preparations 21 Animal hide, skin, fur, Sheepskin with wool, without wool, bovine hides; hide/skin raw 1.516 1.686 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

22 Oil seeds, oil fruits 12.402 31.983 Groundnuts; sesame seeds; oil seeds /oil fruits, not elsewhere specified | 26 Textile fibers 2.350 3.134 Raw cotton, cotton, carded/combed 28 Base metal, ore Aluminum ore, concentrate; base metal ore/concentrate, not elsewhere specified; waste/scrap cast iron; non-ferrous metal waste, not elsewhere 3.89 4.13 specified 29 Crude animal or Gum arabic/lac resins/balsams; pharmaceutical plants vegetable matter 6.883 0.341 33 Petroleum and Mineral tar /distillate products petroleum products 0.530 6.514 61 Leather manufactures 6.432 2.764 Sheep leather with or without wool;goat/kid leather, no hair; 97 Gold 31.908 7.365 Gold non-monetary, excluding ore

Source: Calculated based on World Integrated Trade Solution (WITS) data (https://wits.worldbank.org/), for product classifications at the one-, two-, and four-digit levels of the Standard International Trade Classification.

Note: RCA is revealed comparative advantage. Data for Sudan at the two-digit level are available only for 2012 and 2015. See annex Identifying sectors with latent comparative advantage table A1.2 for the revealed comparative advantage of products at the four-digit level. 61 advantage are based on agriculture or animal them the needed capital, technology, tacit husbandry. In particular, the country has huge knowledge, and experience, as well as market potential in wool, leather, and processed leath- channels. If Sudan can provide a stable and fa- er products, such as travel bags and special vorable investment environment, with low cost garments. land and good infrastructure in several special economic zones, it could attract multinational corporations from advanced economies as well Which sectors could Sudan as those from dynamic emerging market econ- potentially enter competitively? omies such as China, India, Turkey, and others. As labor and other costs are rising in emerging In step 1b, the sectors where RCAs are de- market economies, firms in those countries are clining in comparator countries are identified seeking opportunities to relocate to lower cost by running regressions and picking sectors countries. If Sudan has a latent comparative ad- whose coefficients are negative and significant vantage in any of these subsectors, with lower and by plotting changes in RCA over time. Sub- transaction and logistic costs, it can grasp this sectors with declining RCAs in at least two (of opportunity to attract foreign and domestic four) comparator countries and from which investors. In particular, as labor cost in China’s foreign enterprises are seeking to relocate eastern coast regions is rising rapidly, large and to other countries with lower costs are then medium-size firms in China are going global. selected as subsectors that Sudan or other They are looking for new destinations to re- low-income countries could potentially enter locate their productive facilities, bringing with (table 6.3). However, because investors consider a country’s investment climate, as well as its geo- TABLE 6.3 graphic location and accessibility to ports and Subsectors in which revealed comparative advantage is declining in roads, the results of step 1b must be checked comparator countries and which Sudan could potentially enter against those of step 2, assessing domestic conditions (see chapter 7). Declining subsectors ( = 1 ) Total (selected if 2 These preliminary results should be cor- Product China Egypt Tunisia Vietnam or more)a roborated by examining current patterns of Apparel clothing /accessories 1 0 1 0 2 FDI inflows into Sudan and comparator coun- Cereals/cereal preparations 1 1 0 1 3

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins tries. Foreign investors can serve as a signal of Crude fertilizer/minerals 1 0 0 1 2 | a country’s existing and latent comparative ad- Fish/shellfish/etc. 0 0 1 1 2 Footwear 1 0 1 1 3 vantages, as in the case of Ethiopia, Tanzania, Meat preparations 1 0 0 1 2 Uganda, and many others. Metal ores, metal scrap 1 0 0 1 2 Miscellaneous food products 1 0 0 1 2 Oil seeds/oil fruits 1 0 0 1 2 How does comparative advantage Petroleum and petroleum change over time? products 0 0 1 1 2 The experiences of catch-up countries re- Travel goods, handbags, etc. 1 1 0 0 2 veal changes in comparative advantage over Source: Calculated using methods and data described in technical annex 1. time. Economists have used RCA analysis to Note: 1 = subsectors with a declining RCA, 0 = others. explain the “flying geese” pattern of develop-

Identifying sectors with latent comparative advantage a. Selected subsectors are those that Sudan could potentially enter (competing with ment (late developers can follow and emulate others) if there are declining RCAs in at least two countries. carefully selected lead economies, enabling 62 them to catch up quicker) and global industrial FIGURE 6.1 relocation. China’s revealed comparative advantage is declining in labor- In early stages of development, latecomers intensive export sectors, 1984–2016 are likely to engage in primary product ex- Revealed comparative advantage ports and labor-intensive light manufacturing. 10

Consider Japan before World War II. It relied Travel goods, handbags, and similar products on labor-intensive industries, with textiles and 8 Textile fibers, other light industrial goods accounting for not manufactured Footwear 60–75 percent of its exports. However, the 6 trade pattern started to change after the war. Clothing By the 1960s, with a GDP per capita of about 4 Textile yarn, fabrics, 35 percent that of the United States, Japan was made-up articles targeting the more capital-intensive industries 2 Leather, leather that were moving out of the United States. A manufactures n.e.s. Electric energy rising share of labor in Japan’s manufacturing 0 sector coincided with a declining share of labor 1984 1990 1995 2000 2005 2010 2016 in US manufacturing. In the 1970s, Japan’s RCA in labor-intensive industries such as clothing Source: Calculated based on UN Comtrade data, SITC rev.1, two-digit. and footwear fell sharply, and its RCA in heavy Note: Revealed comparative advantage = share of an industry in the economy’s ex- manufacturing sectors was rising, notably in ports / its share in global export. machinery and automobiles. In the 1980s and 1990s, just as the United States was upgrading handbags/travel goods, and textile, as well as in its industries, Japan acquired market shares in other resource-intensive sectors such as agri- home appliances, electronics, and computers. culture, coal, and petroleum. At the same time, Similar flying-geese patterns have been ob- the country gained RCA in high tech, electron- served in the Republic of Korea.66 ics, and machinery and equipment sectors. China is now at the stage where western Similar trends are evident in Egypt, Tunisia, countries and Japan were in the 1970s and and Vietnam (figure 6.2). This evidence corrob- where the Republic of Korea; Singapore; and orates the results shown in table 6.3 that there Taiwan, China were in the 1980s, with RCAs is international market space for low-income

declining in some labor-intensive sectors (fig- developing countries in subsectors where RCAs After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins ure 6.1). As labor-intensive industries matured, are declining in comparator countries. How- | wages rose, and firms moved into more tech- ever, low-income developing countries need nologically sophisticated industries in accord to compete for investment and firms that are with the upgrading of their endowment struc- seeking new locations. ture. China’s labor costs are rising rapidly, for More and more enterprises in China and in example, from an average of $150 a month in other emerging market economies are facing 2005, to $500 a month in 2012, and to more pressure to seek low-cost locations in other than $600 a month in coastal regions in 2013 countries, although this trend is not yet ap- (rising 15 percent annually, plus an average an- parent in Tunisia or Vietnam. China alone nual currency appreciation of nearly 3 percent). has an estimated 124 million workers in man- As labor costs rose, China’s revealed com- ufacturing, most of them in labor-intensive parative advantage declined in labor-intensive sectors (85 million, compared with 9.7 mil- Identifying sectors with latent comparative advantage sectors such as garments/clothing, footwear, lion in Japan in 1960 and 2.3 million in the 63 FIGURE 6.2 Revealed comparative advantage is declining in some sectors in Egypt, Tunisia, and Vietnam Vietnam, 1997–2015 Egypt, 1994–2016 Revealed competitive advantage Revealed competitive advantage

20 25 Fish, shellfish, Building fixtures and others Textile fibers Footwear 20 15 Gas, natural/manufactured Crude/synthetic/ Processed animal and rec. rubber 15 vegetable Crude fertilizer/ oils 10 minerals

Coffee/ 10 tea/cocoa/ spices 5 Cereals/cereal preparation Cereals/cereal preparation

Furniture/furnishings Coal/coke/briquettes 0 0 2000 2005 2010 2015 1994 2000 2005 2010 2016

Tunisia, 1990–2016 Revealed competitive advantage

30 Fixed vegetable oils and fats

25 Manufactured fertilizers

20

15

10

Inorganic 5 chemicals Apparel, clothing, Footwear and accessories 0 1990 1995 2000 2005 2010 2016 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins |

Source: Calculated based on World Integrated Trade Solution (WITS) data (https://wits.worldbank.org/). Note: Revealed comparative advantage = share of an industry in the economy’s exports / its share in global exports.

Republic of Korea in 1980). The upgrading of a unique opportunity to grasp some of these China’s manufacturing activities into more manufacturing jobs. sophisticated and higher value-added prod- ucts and tasks will open great opportunities for labor-abundant, lower-income countries Identifying sectors for quick wins in to produce the labor-intensive light-manu- the short to medium term 67 Identifying sectors with latent comparative advantage facturing goods that China leaves behind. The analyses presented so far provides the basis Sudan and other East African countries have for identifying Sudan’s international market 64 opportunities and its latent comparative ad- shows the potential for job creation in vantage. The analyses must be complemented Sudan. by an examination of major constraints and • Sudan’s factor endowment is well suited for opportunities for the development of existing production­—­some elements of the supply products and sectors. Four criteria are used to chain are in place, RCA indices or export spe- winnow down the list of identified subsectors: cialization indicates potential, and labor skill • Production requires low levels of capital, requirements are low or easily transferable. and there is a significant domestic or region- al market. Priority subsectors • Domestic production does not require sig- The following industries/subsectors emerge nificant levels of power (electricity) or does as priorities in the short to medium term (1–5 not have high transport costs (no short-term years) and satisfy all four criteria (table 6.4): need for substantial improvements in road • Agriculture, animal husbandry, and and rail networks to move raw materials and agri-business. Because there are thousands output). of products in these sectors, the specific • Production in comparator countries is done products to be encouraged will depend on by small and medium-size enterprises, which decisions made by firms in a self-discovery

TABLE 6.4 Priority subsector identification using the four criteria for identifying subsectors for quick wins in the short to medium term

Subsectors Criterion 1 Criterion 2 Criterion 3 Criterion 4 Decision 99 sectors from the standard WITS data. They Production requires Domestic production Production in Sudan’s factor Selected as priority are grouped in 12 rows by SITC code (1–99). low level of capital does not require comparator countries endowment is well- sector or not and significant significant electricity is done by small and suited for production domestic or regional or high transport medium enterprises market costs

Agribusiness: Animal husbandry, meat Yes Yes Yes Yes Yes, existing RCA preparation, dairy production, cereals and cereal production (code 0–4), sugar, coffee, animal feed (code 5–9), animal oil, processed vegetable oil (code 41–43)

Textile fibers, crude fertilizer, mineral and No (capital intensive) No (needs stable No (large companies) No No metal ores, scrap metal (code 25–29) power)

Petroleum and refined products, natural gas No (capital intensive) No (needs stable No (large companies) No Depends on free After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins (code 32–34) power) trade with South | Sudan

Chemicals, plastic, fertilizers, perfume, No (capital intensive) No (needs stable Some selected No No chemical materials/products (code 51–59) power) products

Hide, skin, fur (code 11–24), leather Yes Yes Declining Yes Yes manufactures, rubber, paper board (code 61–64)

Textile yarn, fabric, articles; iron and steel, No (capital intensive) No (needs stable No, rising No No non-ferrous metals (code 65–69) power)

Assembly operation of bicycles, other road Yes (assembly only) Yes (assembly only) Yes Yes (assembly only) Yes (assembly only) vehicles, other machinery (code 71–79)

Apparel and clothing, travel goods, handbags Yes Yes Yes Yes Yes (code 81–83)

Building fixtures (code 81–84) Yes Yes Yes Yes Yes Footwear and accessories (code 85) Yes Yes Yes Yes Yes Identifying sectors with latent comparative advantage

Source: Based on steps 1a and 1b of the Growth Identification and Facilitation Framework and the four criteria described in the text. 65 process (see chapter 9). These sectors are leading manufacturer of machinery and en- Sudan’s current export focus and existing gines for earthmoving, mining, and petro- comparative advantage, with Sudan Kena- leum industries; building and road construc- na Sugar as one example. The government tion; electric power generation; materials should provide more support by establish- handling; and farming applications. Sutrac ing special agri-ecological zones (see chapter has been involved mainly in servicing and 10). supplying the large-scale industrial farming • Hides, skins, and leather value chain. Sudan sector in Sudan. GIAD meets the country’s is the second largest producer of livestock in need for other agricultural equipment and Africa, after Ethiopia. Good natural pastures machines. It uses modern production ma- cover almost 24 million hectares, and the chines and the comprehensive quality tech- nomadic pastoral sector accounts for more nique in all its production. The company has than 90 percent of the huge animal popu- a production line for Massey Ferguson trac- lation. Cattle, sheep, and goats are an im- tors (MF 285–290) and GIAD tractors (GIAD portant capital asset and risk management 285), with a productive capacity of five units tool for pastoralists and farmers in times of a day for a single shift. More such firms drought, and they are increasingly important can be attracted and supported to assem- in irrigated agricultural areas as well. Sudan ble similar equipment, such as well drillers, is in a great position to develop the entire tree planting drillers, solar water heaters, supply chain, from hides, skins, and leather and solar equipment using complete knock- to leather goods such as footwear and gar- down kits. ments. If the policies recommended in this • Building materials/fixtures and storage/ report are implemented, this sector has the logistic facilities. This sector has declined potential to create tens of thousands of in Egypt, and there is huge demand for its jobs. Vietnam, Sudan’s main target country products in Sudan and neighboring coun- in this subsector, created 600,000 jobs in tries. It is a labor–intensive sector that does this sector. not need high-skilled workers. Constructing • Clothing/garment sector. Exports are ex- a storage and logistic center near Khartoum panding in this sector, which has the poten- would not be difficult. Several companies tial to create a large number of jobs. In just are operating in this sector, including El-

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins 10 years, Cambodia’s garment sector creat- barbary Building Materials, RAK Ceramics | ed 335,400 jobs. In Vietnam, the textile and Sudanese Investment Co., and Ras al Elkhai- garment sector employs 1 million workers. ma Sudanese Investment Co. Ltd. Elbarbary If Sudan can boost the sector’s growth rate Group, established in 1906, has diversified to comparable levels, tens of thousands of its business and now operates in shipping, jobs could potentially be created in the me- building materials, tire imports, lubricants, dium term. information technology products, automo- • Assembly of farm tractors/machinery tives (both heavy and commercial), spare and motorcycles. At least two companies parts, transportation, warehousing, for- in Sudan assemble farm tractors, including warding, finance, import of national strate- Sutrac tractors operating under the DAL gic commodities, and export of Sudanese Group, and GIAD. Sutrac, a DAL Group Com- products. RAK manufactures and supplies

Identifying sectors with latent comparative advantage pany established in Sudan in 1952 as Sayer & tiles and related products in North Africa. Colley, represents Caterpillar, the world’s The company was founded in 2004 and is 66 headquartered in Khartoum. Ras al Khaimah ancient Egypt and Nubia. Pyramids across produces construction materials. A number Sudan attract tourists from Egypt, Jordan, of cement factories are also operating, in- Morocco, Syria, and other Arab countries cluding Berber, Atbara, Ahkam, and Rabak. and from Western countries as well. Sudan • Tourism and light manufacturing related was ranked the eighth most popular Arab to tourism. Sudan is one of the largest Arab country to visit by the Council of Arab Eco- nations. It is rich in history, dating back to nomic Unity. Sudan also has many modern

BOX 6.2 Which subsectors create greater numbers of blue-collar jobs?

The manufacturing sector is not monolithic. Industries share of total manufacturing jobs, second only to tex- vary in the extent to which they share five pro-de- tiles, garments, and leather products. velopment characteristics and in the number of jobs Capital-intensive regional processing, including they create (see figure): chemical products and refined petroleum products, is • Low-skill labor-intensive tradables. more internationally traded but employs lower shares • Commodity-based regional processing. of blue-collar workers. Medium- and high-skill glob- • Capital intensive processing. al innovators, including manufacturers of transpor- • Medium-skill global innovators. tation equipment and other machinery, electronics, • High-skill global innovators. computing equipment, and pharmaceutical products, Industries in low-skill labor-intensive tradable ac- employ lower shares of blue-collar workers than the tivities, including textiles, garments, leather products, previous two categories. and furniture and manufacturing, employ a high share of blue-collar workers with high employment to out- Manufacturing subsectors with pro-development put ratios. They are highly traded in international mar- characteristics, 2013 kets. These industries also have the lowest output per Average blue-collar share of total employment (percent) worker. Light manufacturing, comprising goods such Subsectors Subsectors where labor All other exhibiting greatest productivity deviated subsectors as apparel, toys, jewelry, and sports equipment, has R&D intensity significantly from others 100 Commodity-based Low-skill

typically required labor-intensive assembly and lim- regional processing labor-intensive After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

tradables | ited fixed-­capital investments. Such firms are often Fabricated metals Wood Textiles, wearing apparel, products and wood and leather products ready to move to new, lower labor cost locations 80 products Other Basic metals Furniture; manufacturing n.e.c. nonmetallic when costs begin to rise. mineral Transportation equipment products Rubber Machinery and equipment n.e.c. Commodity-based regional processing includes Food, and plastic Electrical equipment 60 beverage, products food processing, wood products, paper products, and tobacco products Paper and Medium-skill paper products; global Computing, electronics basic metals, fabricated metal products, nonmetallic publishing innovators and optical equipment and printing mineral products, and rubber and plastic products. 40 High-skill global Coke and Chemicals and innovators These activities are closely linked to agriculture and refined chemical products petroleum Capital-intensive products regional mining. Output is typically less traded international- processing Pharmaceutical products 20 ly, either because the goods are bulky to transport 0 20 40 60 80 or because they require proximity to raw materials Export value-to-output ratio (percent)

(for example, for food processing industries). Among Source: Hallward-Driemeier and Nayyar 2017. Identifying sectors with latent comparative advantage these sectors, food processing stands out for its high 67 hotels including the five star Corinthia Hotel For Sudan, a lower-middle-income country Khartoum. The government pledges $1 bil- located far from the world’s largest markets lion a year to expand the tourism industry. and with a rapidly growing young, low-skill Furthermore, Sudan has been known for its workforce and a weak human capital base, the cotton production since the establishment most relevant subsectors are those in two of of the Gezira scheme in the colonial era. the five groups: There are vast numbers of producers of cot- • Low-skill labor-intensive tradables, includ- ton and wool purses and other handicraft ing garments and leather products, travel products in the main tourist areas such as goods, and assembly of farm equipment and the Marawe and Begrweya pyramids as well motorcycles, which requires large amounts as in several historical sites, including Swakin of low-skilled labor. and Omdurman. • Commodity-based regional processing, es- Some industries with good potential for pecially food processing, animal and vege- profitability and job creation are not listed as table oils, construction materials, and some priority subsectors in Sudan because of their building fixtures and other products. relatively large capital requirement, sophisti- In this dynamic, globalized world, many busi- cated technology, or demands for reliable elec- nesses and investors are wary of entering into trical power, capital, and labor skills. global supply chains of manufactures, especial- In sum, in the short to medium term (1–5 ly given the uncertainty introduced by modern years), Sudan could benefit quickly if the gov- technologies such as robotics and automation, ernment concentrated support on these sub- 3-D printers, and artificial intelligence. But sectors to achieve job creation. global value chains offer new opportunities for structural transformation in Africa. Countries Subsectors with pro-development can enter global value chains at a specific stage, characteristics usually at the assembly stage in manufactur- Once priority subsectors have been identified, ing and commodity production in agriculture. there are no guarantees of success. Success de- Ideally this leads to opportunities to upgrade pends on many factors, including a country’s through knowledge transfers, product differ- ability to respond to external demand, the na- entiation, and the addition of adjacent stages ture of the value chain and the lead firm,68 the of the value chain.

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins country’s commitment, the selection of sec- Measures of trade in value added­—­as op- | tors, the investment climate, and the policies posed to traditional gross measures of trade­—­ in these sectors. A World Bank study presents can provide insights into integration into global some evidence on manufacturing subsectors value chains and its benefits. Africa captures that have the greatest potential for job cre- only a small share of global trade in value- ation. Sixteen manufacturing subsectors were added terms, but its overall integration into identified that can be grouped into categories global value chain is high compared with other based on the following five pro-development regions. However, a good part of that is forward characteristics (see box 6.2): integration of Africa’s commodity exports as • Low-skill labor-intensive tradables. inputs in foreign manufacturing, which creates • Commodity-based regional processing. relatively little additional value added in Africa. • Capital intensive processing. In terms of gains from global value chains, ex-

Identifying sectors with latent comparative advantage • Medium-skill global innovators. port and productivity growth have been easier • High-skill global innovators. to achieve than employment growth. 68 CHAPTER 7 Assessing domestic capacity and production costs

fter identifying sectors with latent accounted for 84 percent of manufacturing comparative advantage, the next step establishments, more than 89 percent of gross Ain the Growth Identification and Facil- output, and 50 percent of capital formation. itation Framework is to assess whether a coun- Sudan’s industrial sector accounts for just over try already has domestic production capacity 11 percent of real GDP in 2010, but declined in these sectors (step 2a) and what its produc- drastically after 2011. In 2016, the industrial sec- tion costs are (step 2b). If a country has a tra- tor was just 3 percent of GDP due to internal ditional industry or sizable activity in a candi- and external shocks. The industrial sector ac- date subsector, or if capacity in the subsector counts for around 8 percent of employment, is growing rapidly, this may signal the existence down from 15 percent in 2011 (figure 7.1). of improved domestic tacit knowledge. Tacit For many years, home-based producers ac- knowledge may be in the form of business be- counted for the bulk of manufacturing activi- havior, routines, attitudes, and networks that ty. In the 1990s, some state-owned factories are available only in the locations where the were privatized, but the new factories that specific industries exist and that are transmit- have emerged since then have been small (with ted mainly through face-to-face communica- the possible exception of the textile industry). tion. Through learning-by-interacting, informa- Many local companies cannot compete with tion and knowledge for innovation occur and imports, which are produced at lower cost with are transmitted across firms. Tacit knowledge better quality and more fashionable designs. is difficult to codify and thus cannot be eas- ily transferred through textbooks or manuals. Many non-cognitive and social skills (such as FIGURE 7.1 innovation and leadership) are in this category. Sudan’s industrial sector’s share of employment Tacit knowledge is a critical competitive niche Percent since it cannot simply be copied, and it can 20 shape a country’s economic structure and the After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | speed at which it evolves.69 15

Sudan’s manufacturing sector 10 Sudan’s manufacturing sector is small, and its share in the national economy has been stag- nant or even declining in recent years in both 5 real value added and employment. The bulk of manufacturing is agro-based and involves pro- 0 cessing of food and raw materials. The sector 2010 2011 2012 2013 2014 2015 2016 is dominated by small- and medium-size firms. Source: Calculated based on World Bank World Development Indicators and Sudan Min- Assessing domestic capacity and production costs Recent surveys indicate that the private sector istry of Investment. 69 The manufacturing industry depends main- high cost of spare parts and energy, and the ly on raw material from food and non-food absence of efficient marketing chains between crops, fisheries, and trees. The sugar industry agriculture and manufacturing. Sudan also is the most well-known component of the produces a range of leather products, from agro-food industry in Sudan, along with the finished leather to the upper part of shoes, wheat flour milling, bakery products, bever- leather garments, and industrial gloves (see ages, confections, canned foods, processed box 7.1 for a description of one leather goods seeds, fruits and vegetables, spices, and edible producer). Among labor-intensive industries, oils. The manufacturing industry has been op- clothing and footwear did not do well in the erating well below its production capacity be- last decade due to internal conflicts and inter- cause of shortages of agricultural inputs, the national sanctions. A review of options for the non-food in- dustry suggests that further development of a number of value chains based on increased BOX 7.1 private investment would contribute substan- Profile of a local leather goods producer tially to sustained strong growth in the decade ahead. The key value chains are as follows: Khartoum Tannery Co. Ltd is the largest tannery in Sudan. Es- • Textiles. tablished in 2001, it employs 210 people. In addition to leath- • Ginning and spinning, yarn dyeing, weaving, er tanning, the company has established a workshop that and knitting. produces leather goods. It specializes in crust leathers (leath- • Clothing, including a wide range of garments. ers that have been tanned and dried but not yet dyed) and • Leather and skin tanning and processing and produces footwear, jackets, and belts. Khartoum Tannery is leather goods. seeking cooperation in marketing and promoting its leather • Shoes and other footwear. products in European markets and in new regional and other Foreign direct investment (FDI) in the gar- international markets. It recently established a garments and ment and leather industries has introduced leather goods unit to expand its business. better technologies and new tacit knowledge of production, management, and global mar- ket connections. Foreign investors who earlier negotiated land leases and utility connections TABLE 7.1 and built their own factories are now consid-

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Foreign direct investment in Sudan’s textiles and leather industry, ered part of Sudan’s domestic capabilities for | 1992–2015 analyses of domestic capacity and production costs (table 7.1). Number of Capital Permanent Temporary Industry projects ($ millions) employees employees Sudan’s domestic capabilities in textiles, Textiles 8 92 922 — garments, leather, and leather products are at Share of total FDI (%) — — — — an incipient stage, and growth in the size and Apparel, except fur 12 40 385 — sophistication of these industries depends on Share of total FDI (%) — — — — steady inflows of capital and accumulation of Finished leather, leather products, and footwear 13 36 342 — tacit knowledge. The small size of the indus- Share of total FDI (%) — — — — tries and their moderate contributions to ex- ports also indicate that there are institutional

Assessing domestic capacity and production costs ­— ­ is not available. FDI is foreign direct investment. and policy constraints that impede expansion, Source: Sudan Ministry of Investment. upgrading, and export. 70 Estimating direct production costs TABLE 7.2 After determining whether a country has ca- Entry-level blue collar labor costs in Sudan and selected countries pacity in identified sectors, the next step is to Country and year Entry-level monthly wage or minimum wagea determine whether it is cost-effective to make Sudan $70 the proposed products in Sudan. Production Bangladesh, 2013 $68 in garment industry and $19 in other costs are a critical factor in investment deci- sectors sions. Alongside security and political and so- China (southern coastal areas), 2017 $659b cial stability, production costs are the most im- India (varies by region and sector) $48–$116 portant consideration when investors look for Ethiopia, 2014 $35–$40 in garment and shoemaking industries new opportunities in low-end, labor-intensive Kenya, 2014 $57 in rural areas and $139 in urban areas manufacturing. This review of production Lesotho (varies by sector), 2014 $102–$112 costs relies on available evidence and field Nigeria, 2011 $115 interviews. Turkey (gross wages), 2015 $479 Sudan has relatively low labor costs, al- Vietnam (varies by region), 2015 $101–$145 though detailed official data are not readily Source: Calculated based on data from en.wikipedia.org, Financial Times Confidential Re- available by sector or industry. According to search (FTCR) China Labour Market Index for China, and staff estimates. the Ministry of Investment, Sudan’s entry-lev- a. Except for China and Ethiopia, the official minimum monthly wage is used as a proxy for el monthly real wage in the industrial sector entry-level labor costs. was $70 in 2016. While this is roughly one-tenth China’s averages and half Vietnam’s, it is high- er than Ethiopia’s and Kenya’s (table 7.2). To Among the 10 strongest “over-performers” are attract foreign and domestic investors, other China (which ranked 27 of 155 countries on lo- policy support may be needed, including the gistics), South Africa (28), Thailand (35), the Phil- removal of institutional constraints. ippines (44), India (47), Vietnam (53), and Uganda (66).71 Sudan can draw on the vast experiences of developed countries and these over-per- Easing institutional constraints to forming developing countries to enhance its reduce costs own trade policies. Two binding constraints were identified that At a rank of 104, Sudan is behind China (27), could be alleviated in the medium run or ad- India (35), Egypt (62), and Vietnam (64) on the dressed gradually through partial solutions Logistics Performance Index, largely because such as industrial parks and special economic of constraints in trade logistics and customs After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | zones (see chapter 10). These involve trade lo- services. In overall ranking in logistics, Sudan gistics and customs clearance practices. is neck-and-neck with Ethiopia, a landlocked country. Among comparator countries, only Trade logistics Tunisia (110) ranks lower than Sudan (table 7.3). On the World Bank’s Logistics Performance This puts Sudan at a disadvantage in attract- Index (LPI), high-income economies domi- ing foreign investment. Sudan has the fur- nate the top rankings and global and regional ther disadvantage of being located far from supply chains, while the 10 lowest performing the world’s major markets in Europe, North economies are almost all among the low and America, and Asia, although it has the ad- lower income country groups.70 Nonetheless, vantage of being on a major shipping route. the logistics performance of some developing Sudan also has the advantage of 500 miles of Assessing domestic capacity and production costs countries transcends their per capita income. coastline on the Red Sea, with its strategic 71 TABLE 7.3 Performance of logistics services in Sudan and comparator countries

Sudan Sudan  China Egypt Ethiopia India Tunisia Vietnam Indicator 2014 2016 2016 2014 2014 2016 2014 2016 Global ranking on Logistics Performance Index 2014 or 2016 153 103 27 62 104 35 110 64 Export time and cost (sea port or airport supply chain) Distance (kilometers) 1,250 1,233 130 379 750 231 25 141 Lead time (days) 6 11 3 2 14 4 1 3 Cost ($) of a 40-foot dry container or a semi-trailer (total freight including agent fees, port, airport, and other charges) 5,000 — — 419 1,500 — 500 — Export time and cost (land supply chain) Distance (kilometers) 1250 1872 402 755 750 729 25 249 Lead time (days) 7 18 6 2 13 6 1 3 Cost ($) of a 40-foot dry container or a semi-trailer (total freight including agent fees, port, airport, and other charges) 5,000 — — 740 2,236 — 500 — Import time and cost (sea port or airport supply chain) Distance (kilometers) 2,000 924 187 426 750 322 25 102 Lead time (days) 5 12 5 3 13 5 2 3 Cost ($) of a 40-foot dry container or a semi-trailer (total freight including agent fees, port, airport, and other charges) 5,000 — — 665 1,500 — 866 — Import time and cost (land supply chain) Distance (kilometers) 2000 1673 649 673 750 473 25 230 Lead time (days) 6 16 9 2 11 6 3 3 Cost ($) of a 40-foot dry container or a semi-trailer (total freight including agent fees, port, airport, and other charges) 5,000 — — 875 2,739 — 1,000 — Share of shipments meeting quality criteria (%) 92.50 67.90 71.64 66.79 40 68.70 57.45 57.38 Clearance time without physical inspection (days) 2 3 2 2 3 2 2 1 Clearance time with physical inspection (days) 3 5 3 6 2 3 4 3 Share of shipments receiving physical inspection (%) 75.00 34.14 9.68 24.07 75.00 21.90 61.24 16.71 Share of shipments receiving multiple inspections (%) 2.50 48.27 3.38 5.75 75.00 3.61 10.61 9.38

­— ­ is not available.

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Source: The World Bank Logistics Performance Index (LPI) 2014 and 2016. | Note: The LPI includes six components: customs, infrastructure, international shipments, logistics competence, tracking and tracing, and timeliness.

Port Sudan, while most of its neighbors are is shorter than that for Ethiopia. If further landlocked. However, the cost of shipping is developed, Port Sudan could provide logis- still very high compared with costs in neigh- tic services not only to Sudan but also to its boring Egypt and Ethiopia (see table 7.3). This landlocked neighbors such as Central African puts Sudan at a disadvantage in attracting Republic, Chad, Niger, and South Sudan. Al- foreign investment. On the plus side, how- though the distance for exports and imports

Assessing domestic capacity and production costs ever, even though the trade distance is far- is greater than for Ethiopia, the lead time for ther for Sudan, the lead time for Port Sudan Port Sudan is shorter. 72 Customs clearance practices TABLE 7.4 In addition to production costs and logistics Access to infrastructure in selected capital cities in Sub-­Saharan Africa services, industrial manufacturing companies (percent of households with access) and their international buyers consider bor- Improved  Improved Fixed-line der procedures as an important factor in in- City (year) Electricity water sanitation telephone vestment and location decisions. The Revised Maputo (2003) 28.8 82.8 48.8 5.2 Kyoto Convention of the World Customs Or- Kampala (2006) 59.0 92.6 100.0 5.4 ganization recognizes swift and predictable Dar es Salaam 59.8 81.1 55.6 43.4 (2004) customs clearance as a prerequisite for nation- Nairobi (2003) 71.4 93.3 82.9 44.4 al prosperity and economic development. In Harare (2005) 86.3 99.2 98.4 17.5 a high-inflationary environment, fast border Addis Ababa (2005) 96.9 99.9 71.8 46.1 clearance is a much more effective incentive Khartoum (2014) 82.2 86.9 85.4 3.0 to exporters than fiscal incentives such as duty drawbacks. Customs control is a sovereign Source: AfDB and UN Habitat 2010. The data for Khartoum were from an earlier edition. power, and duties and fees collected by the customs are an important source of govern- ment revenue. higher in Khartoum than in Nairobi and several In 2016, Sudan ranked 103 of 158 countries other capital cities in Africa (table 7.4). on the Logistics Performance Index (LPI)72 (see The Merowe power project, at a cost of table 7.3), lagging behind all its neighbors ex- €1.2 billion, is a good example. Five regional de- cept Chad and Eritrea. Its LPI deteriorated velopment funds provided 47 percent of the from 2.92 in 2007 to 2.53 in 2016 on a scale of funding, the government of Sudan provided 1, low, to 5, high. Sudan’s performance on LPI 33 percent, and the China Export Import Bank components shows considerable room for provided 20 percent. Various power projects improvement: customs (2.23), infrastructure that are under construction or about to break (2.20), international shipments (2.57), logistics ground have committed funding of $1,006 mil- competence (2.36), tracking and tracing (2.49), lion. Over the longer term, Sudan has the po- and timeliness (3.28). tential to export hydropower if additional ca- pacities are developed and transmission links Infrastructure development to other Nile Basin countries are strengthened. Acknowledging these weaknesses, the gov- Sudan has also made strides in other infra- ernment has invested heavily in infrastructure structure sectors. Liberalization of the infor- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | development since the early 2000s. Thanks mation and communication technology sector to support from emerging market economies has attracted large amounts of private capital. such as China, India, and Saudi Arabia, Sudan Mobile phone penetration increased from less registered one of the fastest growth rates in than 1 percent in 2000 to 74 percent in 2012. electricity generation in Sub-­Saharan Africa Recent connection to an undersea fiber-optic over 2004–14.73 For example, 85 percent of cable has expanded access, improved quality, China’s development cooperation finance in and reduced cost.74 More than 700 kilome - Sudan was concentrated in electricity genera- ters of roads are under construction. In con- tion and transmission. Power generation capac- trast to the heavy financing of power, $13 mil- ity more than tripled from about 1,000 mega- lion is being spent on ongoing rail projects. watts in 2005 to almost 4,000 megawatts in The private sector has funded most of the Assessing domestic capacity and production costs 2012. As a consequence, access to electricity is information and communication technology 73 infrastructure and is rehabilitating some sec- technologies and could be closed by increasing tions of rail lines. financing from the private sector and abroad.77 However, Sudan’s infrastructure develop- For the near and medium term, at least, the ment has had an almost exclusively nation- main challenges for infrastructure develop- al focus.75 For example, while internal road ment are to improve access to quality services corridors have been developed, there is lit- in water and transport, to mobilize the large tle connectivity with neighbors. Sudan has a amount of funding required for expansion gateway to the sea through Port Sudan, but and upgrade, and to expand national capacity the port’s performance is severely hampered to design, formulate, manage, and implement by long dwell times, high costs, and capacity projects and programs.78 constraints. Addressing Sudan’s infrastructure challenges will require sustained expenditures * * * of almost $4.2 billion a year for a decade.76 Cur- rently, Sudan spends about $1.5 billion a year In sum, the analysis of domestic capacity and on infrastructure, $580 million of it lost each production costs does not change the target- year to inefficiencies. Even if the inefficiencies ed sectors identified in step 1, as summarized in were eliminated, Sudan would still face an in- tables 6.3 and 6.4 in chapter 6. The next chap- frastructure funding gap of $2.7 billion a year. ter looks at how to achieve quick wins, by rais- The gap could be reduced by half by choosing ing financing for development and identifying lower-cost water, sanitation, and road-surfacing the kind of capital needed (patient capital). After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Assessing domestic capacity and production costs

74 CHAPTER 8 Attracting financing for economic development

he international development com- Sudan is also a member of the Islamic Devel- munity and national governments are opment Bank, the Inter-Arab Investment Guar- Tfocusing on achieving the Sustainable antee, and the Agreement on Promotion and Development Goals by 2030 and combating Guarantee of Investment among the member climate change, as agreed by the Conference states of the Organization of the Islamic Con- of Parties during the 2015 United Nations Cli- ference. It is also a full member of the Com- mate Change Conference in Paris (COP21, and mon Market for Eastern and Southern Africa the soon to be COP23 in Berlin). Achieving and the Nile Basin Initiative. These member- both objectives will require huge amounts of ships help Sudan’s export-oriented enterpris- resources. Governments and multilateral de- es to be more competitive in international velopment banks need to go well beyond aid markets. to use all financial modes available (aid, trade, and investment) and introduce new modes to meet the challenges of eliminating poverty and New forms of development shifting industrial structures toward green and financing emission-reducing development. These tasks Some donor countries are constrained in ex- are daunting. This chapter presents global fi- tending development aid by heavy debt bur- nancing options and then considers financing dens and slow growth in recent years. Conse- within Sudan under step 3 of the Growth Iden- quently, development finance will need to “go tification and Facilitation Framework. beyond aid” to combine aid, trade, and invest- ment. Financing will come less from official de- velopment assistance79 and more from other Sudan’s advantages as a member of official flows, including loans and investments international organizations from development banks, sovereign wealth Sudan’s membership in several internation- funds, and new strategic investment funds in al organizations can also be leveraged by en- emerging market economies.80 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins terprises in competitive industries to access Global leaders are looking to emerging mar- | finance. Sudan is a member of the World As- ket economies and developing countries to sociation of Investment Promotion Agencies, find new sources of development financing. the Multilateral Investment Guarantee Agency, Some of these countries have much higher sav- and the International Finance Corporation, the ings rates and thus will have higher investment private sector investment arm of the World rates over 2015–30. The share of developing Bank Group, whose mission is to promote sus- countries (including China) in global investment tainable private sector investment in develop- is projected to overtake that of high-income ing countries in coordination with the Foreign countries over that period (figure 8.1). And Investment Advisory Services. These organiza- much of the finance will come in the form of tions are all viable sources of finance for enter- patient capital­—­long-term investment with a Attracting financingfor economic development prises in competitive industries in Sudan. maturity of 10 years or more. 75 FIGURE 8.1 boom), pension funds, and strategic invest- Shares of world investment from developing country groups will ment funds. overtake shares from developed countries after 2015, 1965–2030 • International multilateral financial institu- Share of global investment (percent) tions, regional development banks, and bi- 100 lateral donor-funded development banks play critical roles in turning domestic pub- lic savings into international long-term de- 75 velopment funds (a part of patient capital). Developed countries Therefore, countries should support the es-

50 tablishment of new institutions such as the Asian Infrastructure Investment Bank, the

Developing countries, including China New Development Bank, Silk Road Funds, 25 and other infrastructure funds, which are

Developing countries, excluding China among the providers of patient capital.

0 • Patient capital is highly correlated with 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 entrepreneurial capital and direct invest- Source: World Bank, World Development Indicators. ment from the private sector. Therefore, governments everywhere should improve Patient capital the investment climate to attract foreign China and many East Asian economies rank high direct investment (FDI) and to encourage on long-term orientation.81 Justin Lin and Yan the private sector to invest directly in infra- Wang propose the concept of “patient capital” structure (through public–private-partner- to refer to capital that is invested in a long-term ships and other mechanisms). Among other “relationship,” in which the investor is willing to ways to do this, they can establish special take a stake in the host country’s development, economic zones, eco-industrial parks, and aiming for a win-win.82 Owners of patient cap - eco-cities to improve conditions in the ital are equity-like investors who are willing to manufacturing sector. invest money for as long as 10 years or more in the real sector or in unlisted infrastructure How much patient capital has been projects. And they are willing and able to take invested in developing economies? risks. Patient capital, unlike “impatient capital,” External financing flows to developing econ- can be used to finance the huge infrastructure omies totaled $1.4 trillion in 2016. The largest After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | gaps in Africa and elsewhere. share was from FDI (45 percent), followed by Patient capital has several important charac- remittances (28 percent), official development teristics: assistance (12 percent), foreign portfolio flows • It is highly dependent on the domestic (9 percent), and other investments (mainly banking sector and on institutional investors bank lending; 6 percent) (figure 8.2).83 Of these that can turn the long-term savings of citi- flows, FDI is the most stable and resilient, while zens into loanable funds. Therefore, Sudan foreign portfolio flows are the most volatile, and other developing countries should en- fluctuating greatly over the years. courage the development of commercial Assuming that half of bank lending was and investment banks, institutional investors long term (10 years or longer), the share of

Attracting financingfor economic development such as sovereign wealth funds (Sudan has patient capital flows in 2016 would be around saved part of its resource rent from the oil 60 percent of total external financing flows to 76 developing economies, for an estimated total FIGURE 8.2 of $840 billion.84 FDI, official development Composition of external financing flows to developing economies, assistance, and half of bank loans are catego- $1.4 trillion in total, 2016 rized as patient capital. It is assumed that most Other investments, including bank lending foreign portfolio investment is impatient (less Portfolio investments 6% than 10 years). Remittances may finance con- 9% sumption or investment, but no information is Official available to distinguish the two. development assistance Foreign direct 12% investment Using patient capital to invest in 45% infrastructure Patient capital plays an important role in infra- Remittances structure financing. Successful countries with a 28% strong future orientation85 have better financed infrastructure. Other evidence of patient capi- Source: Calculated based on UNCTAD 2017, p.13. tal can be seen in the rising number of sovereign wealth funds and government-sponsored stra- zones to attract foreign and domestic firms tegic investment funds established by countries in targeted subsectors to invest and settle in including Kazakhstan, Malaysia, Mexico, Mo- for the long haul (see chapter 10). rocco, Nigeria, Philippines, Senegal, South Afri- • Using a payment for ecoservices approach ca, and Vietnam.86 The number of multilateral to combat desertification and to rehabili- strategic investment funds, including those tate damaged areas by developing fruit and for infrastructure, are rising as well. The World vegetable products, herbal medicine plants, Bank recently established a new private sector and other processed food (see box 8.1 for an investment window using International Devel- example). opment Association funding and implemented • In the medium to long term, developing by the International Finance Corporation. In large renewable energy plants such as solar effect, this instrument is using public money to energy plants combined with farming below finance private equity (an approach that is simi- the solar panels and establishing logistics lar to what China has been doing), an innovative centers for multinational corporations. approach worth further consideration. Because this report focuses on the short Sudan could identify the owners of patient to medium term, it is beyond its scope to dis- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins capital and actively seek to attract it, includ- cuss long term investment in infrastructure, | ing FDI, public–private partnerships, long-term such as in Port Sudan and the railway and road lending from development banks, and equi- systems. ty-like strategic investment funds. These equi- ty-like investors are willing to invest money for Combating desertification through eco- a long time and take more risks. Sudan could friendly zones also benefit by seeking investment from green Nearly two-thirds of the land in Sudan (64 per- financing funds. cent) is in danger of desertification. With glob- To attract patient capital, Sudan could al climate change and drought in Africa, it is consider: critical for Sudan and neighboring countries

• Establishing special economic zones in the seek green financing to combat the threat of Attracting financingfor economic development area around Port Sudan and agri-ecological desertification. 77 BOX 8.1 Combating desertification through public–private partnerships: The Kubuqi business model

The United Nations Environmental Program (UNEP) published a report on the Kubuqi business model, which has created wealth through eco-restoration in Ordos City, Inner Mongolia Autonomous Region. It is the first eco-wealth report published by a UN agency and the first case report recognizing China’s work in eco-restoration. Spanning more than 118,000 square kilometers, the Kubuqi Desert is the seventh largest desert in China and was once a significant source of dust storms in northern China. However, for the last three decades, the Elion Group has been restoring degraded land to support local economic growth, such as the compa- ny’s licorice plantations, by adopting the public–pri- vate partnership (PPP) mode of cooperation and also engaging the local population. The UNEP report, prepared from multiple surveys UNEP Executive Director Erik Solheim, speaking at and field research over several years, reveals stunning a press conference to launch the report, said that the statistics on the wealth created from Elion’s ecolog- Kubuqi business model is a role model for China and ical restoration business. Total accountable wealth the world in fighting desertification. “The desert is not reached 500,863 million yuan ($72 billion). The resto- seen as a problem, but an opportunity for change,” ration business has had big impacts in many ways, in- he said. “[The Kubuqi business model] can lift peo- cluding poverty alleviation; per capita annual income ple out of poverty, provide prosperity, develop the rose from 747 yuan to 17,000 yuan (an average annual place while at the same time taking care of the desert increase of 11.5 percent over the survey period) for a and making it greener. This is such a fantastic result.” population of 100,000 people, with Elion creating one The Kubuqi model may not be completely transfer- million job opportunities. able to other countries experiencing desertification, After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Data from a social survey show that Elion con- but they could learn and draw on its experiences and tributed about a third of the annual growth in local technologies. incomes of 8.4 billion yuan. The company also devel- Wang Wenbiao, chair of Elion Group, said the oped 243 patented technologies that cut reforesta- Kubuqi business model was about combining envi- tion costs by 2 billion yuan. Elion also reclaimed and ronmental protection with wealth making, combining is currently restoring 4,475 square kilometers of land, ecology with industry, and combining enterprise de- sequestered 14.5 million tons of carbon, produced velopment with combating the expansion of deserts. 18.3 million tons of oxygen, improved the habitats for “Through the PPP partnership mode, the environment plants and animals, and established 5,391 square kilo- is improved, enterprise profits, and overall develop- meters of windbreaks. ment becomes sustainable,” Wang said. Attracting financingfor economic development

78 BOX 8.1 (CONTINUED) Combating desertification through public–private partnerships: The Kubuqi business model

The Kubuqi model has become a byword for Chi- na’s desertification control efforts. To promote and share the experience of combating desertification, the Kubuqi International Desert Forum was estab- lished in 2007. It has been held five times since then, with the support of governments at all levels, the United Nations, and the UN Convention to Com- bat Desertification Secretariat. More than 2,000 political leaders, experts, and ecological entrepre- neurs from around the world have participated in field trips, professional exchanges, and experience sharing.

Source: UNEP 2017; Zhang 2017. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Attracting financingfor economic development

79

CHAPTER 9 Scaling up self-discovery by private firms

n addition to the industries identified in as December 2010. Both areas of production step 1, the government needs to pay atten- could be further rapidly expanded, including Ition to spontaneous self-discovery by pri- for exports, if the government provided assis- vate enterprises and support the scaling up of tance toward scaling up, e.g., through better successful private innovation in new industries access to finance. (step 4 of the Growth Identification and Facili- Similarly, when local firms in Bangladesh, tation Framework). This is because every indus- China, Japan, and the Republic of Korea had try requires some highly specific inputs, such no historical knowledge in an industry in as knowledge, physical assets, intermediate which some successful firms were beginning to inputs, and labor skills. The existence of some emerge, the state often attracted foreign di- private firms in the industry indicates that the rect investment and promoted joint ventures. economy possesses at least some of those cru- After China’s transition to a market economy cial inputs. in the 1980s, the government invited foreign direct investment (FDI) from Hong Kong China, Taiwan China, Korea, and Japan. Bangladesh’s vi- Examples of successful self- brant garment industry started with FDI from discovery by private firms in other Daiwoo, a Korean manufacturer, in the 1970s. countries After a few years, enough knowledge transfer Governments can support industries where had taken place that production was expanding­ the private sector is already active and where —­the FDI had served as a sort of incubator. successful self-discovery has taken place, Garment plants mushroomed in Bangladesh, helping them to scale up. In Nigeria, for exam- and most of them could be traced back to that ple, successful self-discovery has taken place first Korean firm.87 in sectors including light manufacturing, food India’s information technology (IT) indus- processing, wholesale and retail, construction try is another example. Indian professionals in and car parts, meat and poultry, oil palm, and Silicon Valley helped Indian companies take cocoa. While none of these industries yet advantage of expanding opportunities for out- produces for export, all of them have signifi- sourced IT work in the 1980s. Once the poten- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | cant employment and growth potential and tial of software exports was demonstrated, the could be upgraded for exports. Or consider Indian government helped build a high-speed the case of suitcases. Production of suitcases data-communications infrastructure that al- has recently started In Nigeria and is expand- lowed many Indians in the diaspora to return ing rapidly, with 60 percent of the required home and set up offshore sites for U.S. clients. parts being produced domestically (allowing The Indian software industry grew more than unit costs to plummet) and domestic pro- 30 percent annually for 20 years, with 2008 ex- duction meeting 50 percent of domestic de- ports close to $60 billion.88 mand. A further area of successful self-discov- Chile’s change from a negligible wine ex- Scaling up self-discovery private by firms ery is TV assembly, which began as recently porter to the world’s fifth largest exporter in 81 the 1970s benefited greatly from the govern- services. It ascribes 83 percent of economic ac- ment’s programs to disseminate foreign tech- tivities to the private sector. nology to local farmers and vineyards to im- prove the quality and promote Chilean wine National Agency for Insurance and abroad through the Export Promotion Office, Finance of Exports ProChile, to change the foreign consumer’s In 2005, the government established the Na- perception of Chilean wine.89 tional Agency for Insurance and Finance of Ex- ports as an independent legal entity to provide support to emerging, export-oriented small Support by the government of and medium-scale enterprises and promote Sudan exports. Shareholders of the agency include The government of Sudan also encourages and the Ministry of Finance and Economic Planning, supports FDI for emerging industries, prais- the Central Bank of Sudan, commercial banks, ing its constructive effect on the economy and insurance companies. through added technological, managerial, and The agency’s board of directors is respon- financial wealth. In addition, the government sible for formulating policies and regulations; is well positioned to support competitive in- its chair is elected by the members. In addi- dustries through an enhanced infrastructure tion, its governing structure includes a gen- program in line with its energy master plan, eral manager, two members representing which seeks to boost access to energy from commercial bank shareholders, two members 35 percent to about 60 percent by 2030. Sudan representing insurance company sharehold- has also recognized the value of public–pri- ers, one member representing the Ministry of vate partnerships to finance firms in young Finance and Economic Planning, one member industries. representing the Ministry of Trade, one mem- ber representing the Central Bank of Sudan, Public–private partnerships and two members with expertise in the agen- Sudan has established a public–private part- cy’s activities. nership unit in the Ministry of Finance and It aims to become a leading agency in insur- Economic Planning. Legislation in 2016 called ing and reinsuring export credits and providing for improving the private sector operational finance, guarantees, and promotional support environment and investment climate and main- to enhance the competitiveness of Sudan’s ex- taining long-term macroeconomic stability. A ports, especially non-oil exports. Its objectives public–private dialogue forum has been estab- include the following:

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins lished under the chairmanship of the vice pres- • Insure and reinsure export credits to en- | ident to promote private sector led–growth as hance the competitiveness, volume, and laid out in the Economic Reform Program 2017– value of Sudan’s exports. 19. The program seeks to create the conditions • Conduct market research and studies on for peace and security through sustainable Sudan’s products and services in foreign and inclusive growth with a focus on macro- markets. economic stability; value chain development in • Promote Sudan’s exports globally. the productive sectors, especially agriculture, • Provide short- and medium-term finance with an enhanced role for the private sector and guarantees and pre- and post-shipping

Scaling up self-discovery private by firms in creating jobs; and reducing poverty and in- finance for exports of goods, services, and equality by improving access to basic social intellectual property. 82 • Provide short- and medium-term finance to exporters provide collateral, which few have. firms and projects that produce export-ori- The agency’s export promotion arm does only ented goods, to expand their capacity. training and capacity building. The follow- • Finance the import needs of export-orient- ing recommendations could make the agency ed goods and raw materials. more effective: The agency’s resources come from the Cen- • Move the agency under the Ministry of Fi- tral Bank. The bank invests the resources in Is- nance instead of the Central Bank, and place lamic bonds, which serve as insurance in case its promotional arm under the Ministry of foreign importers default on paying the ex- Finance and Economic Planning. porters. The agency finances exports, including • Separate financing and insurance from animal resources, seeds, and others, through promotion. syndication. • Give the private sector a seat on the board T h e s e r vi ce s of fe re d by t h e a ge n c y co nt r i b u te to: of directors. • Enhancing the competitiveness of Sudan’s • Set up an export-import bank to finance the exports. operations of importers and exporters. • Assisting in providing better and diverse • Bring financing support for different sectors payment terms and facilities for foreign under a single ministry, such as the Minis- buyers. try of Finance and Economic Planning, to • Transferring risks (commercial and non-com- streamline operations. Right now, various mercial risks) to the agency. ministries (Industry, Agriculture and Animal • Working with banks to provide financial re- Resources) provide funds in their respective sources to export sectors. areas, but these facilities are fragmented. • Developing businesses in addition to in- Support, from infrastructure provision to creasing and diversifying exports. training and capacity building and access to The agency’s major challenge is access to fi- finance, should be merit-based and provided nance. The Central Bank, which is supposed to within a sound and transparent policy frame- provide the financing, is primarily concerned work to prevent capture by vested interest with macroeconomic stability and insists that groups. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Scaling up self-discovery private by firms

83

CHAPTER 10 Recognizing the power of industrial parks and providing limited incentives

overnments that are unable to quickly Facilitating trade and economic implement the economy-wide reforms development Gneeded to create a conducive environ- The government of Sudan’s support to private ment for industry growth and expansion, be- enterprises will be especially catalytic consider- cause of budget and capacity constraints, may ing Sudan’s resource endowments, particularly try to create a preferential environment on a its vast tracts of arable land (1.13 million square smaller scale by setting up industrial parks or kilometers), coupled with the opportunities special economic zones and by introducing in- arising with the lifting of US trade sanctions centives that compensate for negative external- and the improved national policy environment. ities. Thus, step 5 in the Growth Identification The easing of sanctions is expected to help and Facilitation Framework is to recognize the Sudan finalize negotiations on an Everything power of industrial parks and special economic But Arms trade agreement with the European zones in countries with poor infrastructure and Union and facilitate accession to the World an unfriendly business environment, while step Trade Organization, which should significantly 6 focuses on providing limited incentives to in- benefit competitive industries. dustries in sectors identified as having latent In addition, Sudan’s 2013 Investment Policy comparative advantage (see chapter 6). focuses on simplification of trade procedures, tax and customs exemptions for inputs used in production, and relaxation of restriction on Recognizing the power of repatriating profits. There is no discrimination industrial parks and export between local and foreign invested capital. In- processing zones vestors are guaranteed against nationalization The binding constraints to trade in Sudan relate or expropriation of their projects and confis- to trade logistics and custom services, as rec- cation or sequestration of profits. Investors ognized by industrial manufacturing companies are also buffered from fluctuations in ex- and their international buyers. Swift and pre- change rates by rules allowing them to trans- dictable customs clearance is a priority for na- fer employee savings, re-export machinery and After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

tional prosperity and economic development. equipment, and repatriate profits at the market | In a high-inflationary environment, fast border rate at the time of deposit irrespective of the clearance is an especially effective incentive current value of the Sudanese pound. Industri- for exporters. The government may set up spe- al projects are subject to a 10 percent tax on cial economic zones or industrial parks to over- business profits and enjoy full exemption from come institutional, policy, and infrastructure custom duties on capital goods. barriers to firm entry and foreign investment. In addition, the government’s Roadmap Establishing industrial parks or zones can also 2017–21 offers a common vision for trade fa- facilitate the formation of industrial clusters, cilitation stakeholders in the public and pri- which can reduce production and transaction vate sectors, to support the continuity of re- Recognizing the power of industrial parks costs. form policies over time and to ensure that all 85 stakeholders are moving in the same direction. Sudan and Port Sawakin, 38 kilometers south International donors can use the Roadmap of Port Sudan and 17 kilometers south of Port as a reference point when providing financial Sudan International Airport. The zone at Garri, and technical assistance to trade facilitation which is about 26 square kilometers, is 70 ki- projects. If implemented, Roadmap measures lometers west of the Sudanese oil refiner in would reduce the time needed for imports and Khartoum. Plans are underway to establish new exports by 40 percent and remove unneces- zones in Agreen, Merowe Kassala, Kosti, Gala- sary costs for traders, leading to an estimated bat, Genenah, and Nyala. The Sudanese Free 25 percent increase in export volume by the Zones and Markets Co. Ltd. manages the free end of 2021. trade zones and infrastructure development areas. It also arranges for trade shows and fairs. Establishing special economic zones The objectives of these special zones are to: For a country like Sudan that is facing logis- • Increase national income and foreign ex- tics constraints, establishing special economic change earnings by promoting exports of zones or industrial parks is one way to over- manufactured and semi-manufactured come barriers to firm entry and foreign direct goods investment (FDI) and encourage industrial clus- • Diversify the export base and export ters. Special economic zones have often been markets. used effectively by latecomer developers (such • Facilitate the transfer of technology, man- as Ireland, China, the Republic of Korea, Mau- ufacturing, storage, and marketing informa- ritius, and Taiwan, China) to emulate leading tion and skills to other entrepreneurs and countries and even catch up with them in the enterprises in Sudan. race to economic prosperity. When economy-­ • Attract national and foreign capital and de- wide barriers to business start-up and expan- ploy them in investment activities. sion remain, special economic zones can pro- The 1994 Free Zones and Free Markets Law vide policy incentives and infrastructure in 1994 conferred the following incentives and specific locations to firms that make it easier benefits on business activities in the zones: to open a business, attract FDI, create jobs, • 100 percent ownership. expand and diversify exports, increase foreign • 100 percent repatriation of capital and exchange earnings, and even serve as “experi- profits. mental laboratories” for new pricing, financial, • No personal income tax or corporate in- and labor policies.90 The expectation is that come tax. the knowledge spillovers from these activities • No currency restrictions. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

| will eventually result in broader private sector • No restrictions on staff recruitment. development, increased productivity, and sus- In addition, the Duty-Free Zones and Shops tained growth and other benefits for the entire Regulations of 2013 applied the following guar- economy. antees to the zones: In 1995, the government established two • Freedom of projects from nationalization, special economic zones: one at the Red Sea seizure, confiscation, or appropriation, and coast in Port Sudan and the other at Garri. freedom of funds from confiscation, freez- The Duty-Free Zones and Shops Act of 2009 es, or seizure unless by judicial order. amended the original legislation. The zone • Freedom of re-transmission of the invest-

Recognizing the power of industrial parks on the Red Sea coast, with a total area of 26 ed capital in case of non-execution of the square kilometers, is located between Port project or its liquidation and disposal of the 86 funds in any provided that all obligations • Offering financing on concessionary terms have been satisfied. for competitive industries. • Freedom of re-export of machinery, equip- • Adopting an industrial cluster model for ment, goods, devices, means of transport, the zones that includes producers, import- and other material imported for the proj- ers, marketing channels, centers of finance, ect provided that all obligations have been technical assistance, and producers of com- satisfied. plementary products to improve value • Freedom from undue exchange rate risk, added, reduce costs, and increase quality. with funds invested in the project specified • Adopting production strategies that take in foreign currency and its components val- into account the demand and supply side ued and registered in one of the banks li- elements. censed to work inside the zone. • Scaling up infrastructure investments. There are 2,700 registered companies with • Improving the business climate. 3,000 permanent employees in the Garri Free Zone and 1,500 registered companies with 400 permanent employees in the Red Sea Providing limited incentives Free Zone. Overall, the experience of these to industries having a latent zones has not been very encouraging. The comparative advantage main challenge facing the zones is lack of Step 6 in the Growth Identification and Facili- coordination among entities, including the tation Framework focuses on providing limited Department of Customs. Other challenges incentives to industries in sectors identified as include: having latent comparative advantage (see chap- • Poor governance and regulatory environ- ter 6). Policy makers may consider supporting ment, including ease of doing business. pioneer firms in those industries with limited • Poor business environment­—­including lack and time-bound tax incentives, co-financing of a one-stop shop where businesses can for investments, or access to foreign exchange. get all the services they need in one place. However, incentives should be limited in size • Inefficient zone management arrangements. and extent and time-bound to avoid corrup- • Unreliable utilities infrastructure­—­including tion and rent seeking. Monopoly rents, high power supply problems. tariffs, and other distortions should be avoid- • Poor quality transport infrastructure, in- ed.91 The award of incentives should be open, cluding port/airport capacity. transparent, and merit based and overseen by Several steps could be taken to upgrade the an independent panel of experts. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

functioning of the special economic zones: There are several reasons why the govern- | • Improving the quality of inputs and prod- ment should limit the amount and duration ucts to promote competitive industries. of subsidies to private firms that are already • Modernizing and expanding industrial engaged in competitive industries.92 The main infrastructure. reason is that excessive incentives will not cre- • Adopting investment policies that encour- ate optimal business conditions for Sudanese age production and productivity in compet- firms to reach their full potential. Rather, they itive industries. lead to contentious issues of coordination and • Concentrating on mass industries rather externalities faced by firms engaged in the in-

than on small industries (adopting the “Big dustries that are consistent with the country’s Recognizing the power of industrial parks Push” approach). comparative advantage. They also impede 87 new industries in the necessary aligning with on imported inputs. As a consequence, DAL the country’s comparative advantage so that Group, one of the largest business entities in its factor costs of production and transaction Sudan, which has been importing wheat at the costs can be at the lowest level possible. subsidized exchange rate, now has a virtual mo- In addition to the incentives offered in ex- nopoly enabling it to earn enormous profits. port processing zones, the government offers Similarly, the sugar and edible oil industries various tax exemptions and subsidies. While it tend to be protected against foreign compe- may make sense in theory to provide tax incen- tition. Furthermore, a lack of transparency in tives and subsidies to competitive industries, Sudan’s tax administration has resulted in com- in Sudan’s case they have led to inefficien- panies engaging in unethical practices, such as cies, rent seeking, and corruption. For exam- bribery and political influence.93 ple, Sudan subsidizes gasoline and diesel fuel, Conflict of interest is another pitfall, and which has led to fuel smuggling into nearby party affiliations and political patronage tend markets with higher prices. Similarly, compet- to override the national interest. A substantial itive industries in the agriculture sector enjoy number of civil servants own companies that indirect support in the form of subsidies and are engaged in business activities with the gov- tax exemptions on agricultural inputs. To keep ernment and that take advantage of subsidies prices low, there are no taxes on raw agricultur- and tax exemptions. It is difficult to hold these al products, no export taxes on raw agricultural government employees accountable since their commodities, no custom duties on exports of companies are never audited. Government rev- agricultural commodities, and no credit ceil- enue suffers as a consequence, and respect for ing, and there is a maximum 3 percent duty government lessens. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Recognizing the power of industrial parks

88 PART 2 Notes and references

Notes as the main objective, and are concessional in char- 60. Schultze 1983. acter and with a grant element of at least 25 per- 61. Lin and Monga 2011. cent (calculated at a discount rate of 10 percent). 62. Xinjiang is surrounded by mountains in the north and See www.oecd.org/dac/stats/officialdevelopment west and deserts in the middle with less than 10 per - assistancedefinitionandcoverage.htm. Lin and cent of land suitable for human habitation. The major Wang (2014; 2017a) suggested an expansion of the religion in Xinjiang is Islam among the Uyghurs and definition. the Hui Chinese minority. 80. Lin and Wang 2017a. 63. This definition was developed by Balassa (1965). 81. Hofstede et al. 1990. 64. Elryah 2015. These products were recently consid- 82. Lin and Wang 2017b. ered by the Central Bank as the main exports for Su- 83. UNCTAD 2017. dan’s Three-Year Development Program for 2012–14. 84. Lin and Wang 2017a. Admittedly, these assumptions 65. Yasseen and Ali 2016. are strong, and these estimates rough. Future studies 66. Chandra, Lin, and Wang 2013. using micro data are needed for developing the exact 67. Lin 2012d; Chandra, Lin, and Wang 2013. measure of patient capital flows. 68. AfDB 2014. 85. Commission on Growth and Development 2008. 69. Hausmann 2013. 86. Halland et al. 2016. 70. Monga and Wang 2012. 87. Mottaleb and Sonobe 2009; Rhee and Belot 1990. 71. World Bank Logistics Performance Index 2016. 88. Bhatnagar 1997. 72. The Logistics Performance Index (LPI) is a measure 89. Benavente 2006. of the extent of trade facilitation as an interactive 90. Monga and Wang 2012. benchmarking tool created to help countries identify 91. Monga and Wang 2012. the challenges and opportunities they face in their 92. Lin 2012a. performance on trade logistics and what they can do 93. U4 Anti-Corruption Resource Centre 2012. to improve their performance. The LPI components include customs, infrastructure, international ship- ments, logistics competence, tracking and tracing, References and timeliness. AfDB (African Development Bank). 2014. African Economic 73. National Energy Research Center, Khartoum, Sudan. Outlook 2014: Global Value Chains and Africa’s Indus- 74. AfDB 2016b. trialization. Abidjan: Côte d’Ivoire. 75. Ranganathan Briceño-Garmendia 2011; World Bank ———. 2015. African Economic Outlook 2015: Region-

2009. al Development and Spatial Inclusion. Abidjan: Côte After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | 76. Ranganathan and Briceño-Garmendia 2011. d’Ivoire. 77. AfDB 2015. ———. 2016a. “Sudan Country Note.” Abidjan: Côte 78. AfDB 2016b. d’Ivoire. 79. According to the OECD definition, ODA includes ———. 2016b. “Private Sector-Led Economic Diversifica-

grants or loans undertaken by the official sector, tion and Development in Sudan.” African Development Notes and references with promoting economic development and welfare Bank, Eastern Africa Regional Resource Centre, Nairobi. 89 AfDB and UN-Habitat. 2010. The State of African Cities. ———. 2012b. New Structural Economics: A Framework Nairobi, Kenya. for Rethinking Development and Policy. Washington, Balassa, Bela. 1965. “Trade Liberalization and Revealed DC: World Bank. Comparative Advantage.” Manchester School of Eco- Lin, J. Y., and C. Monga. 2011. “Growth Identification and nomic and Social Studies 33: 99–123. Facilitation: The Role of the State in the Dynamics of Benavente, J. M. 2006. “The role of research and innovation Structural Change.” Development Policy Review 29 (3): in promoting productivity in Chile.” Economics of Inno- 264–90. vation and New Technology 15 (4–5): 301–15. Lin, J. Y., and Y. Wang. 2014. “China-Africa Cooperation in Bhatnagar, S. C. 1997. “The Indian software industry: moving Structural Transformation: Ideas, Opportunities and towards maturity.” Journal of Information Technology Finances.” Working Paper 2014/046, United Nations 12 (4): 277–88. University World Institute for Development Economics Chandra, V., J.Y. Lin, and Y. Wang. 2013. “Leading Dragon Research, Helsinki. www.wider.unu.edu/publications/ Phenomenon: New Opportunities for Catch-up in working-papers/2014/en_GB/wp2014–046/. Low-­Income Countries.” Asian Development Review 30 ———. 2017a. Going beyond Aid: Development Cooper- (1): 52–84. ation for Structural Transformation. Cambridge Uni- Commission on Growth and Development. 2008. The versity Press. Growth Report: Strategies for Sustained Growth and ———. 2017b. “New Structural Economics: Patient Capi- Inclusive Development. Washington, DC: World Bank. tal as a comparative advantage.” Journal of Infrastruc- Elryah, Y. 2015. “Back to the Agriculture: The Development ture, Policy and Development 1 (1). http://systems.en- of the Comparative Advantage of Sudan’s Commodi- press-publisher.com/index.php/jipd/article/view/28. ties.” Journal of Finance and Economics 3 (1): 1–5. Monga, Célestin, and Yan Wang 2012. “Creating New Jobs Greenwald, B. and J. E. Stiglitz. 2013. “Industrial Policies, the in Tanzania: a Growth Identification and Facilitation Ap- Creation of a Learning Society, and Economic Develop- proach.” Unpublished manuscript for the World Bank. ment.” In J. E. Stiglitz and J. Y. Lin (eds.), The Industrial Mottaleb, K. A., and T. Sonobe. 2009. “An Inquiry into the Policy Revolution I: The Role of Government Beyond Rapid Growth of the Garment Industry in Bangladesh.” Ideology. Palgrave Macmillan. Economics Working Paper 21, National Graduate Insti- Halland, H., M. Noel, S. Tordo, and J. Kloper-Owens. 2016. tute for Policy Studies, Tokyo. “Strategic Investment Funds: Opportunities and Chal- Ranganathan, Rupa, and Cecilia M. Briceño-Garmendia. lenges.” Policy Research Working Paper 7851, World 2011. “Sudan’s Infrastructure: A Continental Perspec- Bank, Washington, DC. tive.” Policy Research Working Paper 5815, World Bank, Hallward-Driemeier, Mary, and Gaurav Nayyar. 2017. Trouble Washington, DC. in the making? The Future of Manufacturing-Led De- Rhee, Y. W., and T. Belot. 1990. “Export catalysts in low- velopment. Washington, DC: World Bank. income countries: a review of eleven success stories.” Hausmann, Ricardo. 2013. “The Tacit Knowledge Economy.” World Bank Discussion Paper 72, World Bank, Washing- Project Syndicate, October 30. ton, DC. Hofstede, G., B. Neuijen, D. Ohayv, and G. Sanders. 1990. Schultze, Charles. 1983. “Industrial Policy: A Dissent.” “Measuring Organizational Cultures: A Qualitative and Brookings Review (October): 3–12.

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Quantitative Study Across Twenty Cases.” Administra- U4 Anti-Corruption Resource Centre. 2012. “Corruption | tive Science Quarterly 35 (2): 286–316. and Anti-corruption in Sudan.” U4 Expert Answer 342, Lin, J. Y. 2012a. The Quest for Prosperity: How Developing Bergen, Norway. Economies Can Take Off. Princeton, NJ: Princeton Uni- UNCTAD (United Nations Conference on Trade and Devel- versity Press. opment). 2017. World Investment Report 2017: Invest-

Notes and references ment and the Digital Economy. Geneva.

90 UNEP (United Nations Environmental Programme). 2017. “Re- ———. World Development Indicators [database]. Wash- view of Kubuqi Ecological Restoration Project: A Desert ington, DC. Green Economy Pilot Initiative.” Nairobi, Kenya. Available Yasseen, G. A. M., and A. Y. E. Ali. 2016. “Comparative Ad- at: https://wedocs.unep.org/rest/bitstreams/14738/ vantage and Protection of Gum Arabic Production in retrieve. West Kordofan State, Sudan (2010–2015).” Scientific World Bank. 2009. Sudan: The Road Toward Sustainable Papers Series: Management, Economic Engineering in and Broad-Based Growth. Washington, DC. Agriculture and Rural Development 16 (2). ———. Logistics Performance Index [database]. Washing- Zhang, Hui. 2017. “UNEP publishes Kubuqi model report on ton, DC. desert eco-wealth.” After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Notes and references

91

Annexes After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Notes and references

93

ANNEX 1 Background information

FIGURE A1.1 Sudan’s young labor force and population premium Population (millions) Population (millions)

200 100 High variant Ages 15–64 80 150 Medium variant 60

100

Low variant 40 Under age 15

50 20

Age 65 and older 0 0 1950 1975 2000 2025 2050 2075 2100 1950 1975 2000 2025 2050 2075 2100 Source: UN Population Projection database. Accessed October 18, 2017.

TABLE A1.1 Population density: Sudan and its comparators Population density (persons per square km), as of 1 July

Country 2000 2010 2020 2030 2040 2050 China 136.7 144.8 151.7 153.5 151.0 145.3 Egypt 70.2 84.5 103.4 120.3 137.7 154.1 Morocco 64.6 72.6 83.1 91.6 97.9 102.3 Nigeria 134.3 174.1 226.3 289.9 365.8 450.9 South Africa 37.7 42.5 48.4 53.1 56.9 60.0 South Sudan 11.0 16.5 22.3 28.2 34.7 41.5 Sudan 15.4 19.5 24.7 31.1 38.2 45.5 Thailand 123.2 131.6 135.9 136.3 133.8 128.0 Tunisia 62.4 68.5 76.6 82.7 86.5 89.4 Turkey 82.2 94.0 108.9 114.9 120.8 124.3 Vietnam 258.9 285.3 317.2 342.8 358.7 369.7 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

Source: UN Population Projections. | Annex 1

95 TABLE A1.2 Sudan’s revealed comparative advantage in SITC 4 digit

Product Sudan Sudan Product Sudan Sudan code Product description RCA 2012 RCA 2015 code Product description RCA 2012 RCA 2015 11 Bovine animals, live 48.84 0.00 2450 Fuel wood/wood charcoal 12.87 0.36 12 Sheep & goats, live 1023.59 866.44 2631 Raw cotton,excl linters 5.69 10.27 19 Live animals n.e.s. 8.27 11.09 2634 Cotton,carded/combed 15.58 111 Beef, fresh/chilled 2.21 0.21 2821 Waste/scrap cast iron 5.38 0.18 112 Beef, frozen 0.45 2.39 2851 Aluminium ore/concntrate 4.03 121 Meat sheep/goat fr/ch/fz 24.24 52.39 2879 Base metal ore/conc nes 3.89 4.14 449 Maize ex sweet corn nes 2.24 0.01 2882 Non-fer metal waste nes 2.21 1.73 542 Dried legumes 4.78 3.40 2922 Lac/gums/resins/balsams 467.99 5.37 548 Veg prod nes,fresh/dried 18.13 11.72 2924 Pharmaceutical plants 6.25 3.54 573 Banana/plantain,frsh/dry 1.53 3352 Mineral tar/distil prods 24.89 611 Raw sugars 10.13 4213 Groundnut (peanut) oil 0.00 5.72 615 Molasses ex sugar refine 15.40 289.47 4215 Safflower oil 0.02 1.50 811 Hay/fodder, green/dry 28.14 41.51 4218 Sesame (sesasum) oil 5.09 3.28 812 Fodder bran/by-products 5.57 0.02 4314 Animal/vegetable waxes 0.53 1.29 981 Homogenized food preps. 5.08 5112 Cyclic hydrocarbons 6.60 2112 Bovine hides, whole, raw 5.83 16.36 5146 Oxy-func 1.37 1.28 amino-compounds 2116 Sheep skin common w/ 2.81 6.41 wool 5791 Polyethylene wast/scrap 1.80 3.74 2117 Sheep skin without wool 3.18 6115 Sheep leather w/out wool 80.96 52.24 2119 Hide/skin nes/waste 5.48 6116 Goat/kid leather,no hair 27.44 22.73 2221 Groundnuts, unroasted 2.51 6423 Note books/folders etc 0.00 1.28 2225 Sesame seeds 397.48 812.47 8928 Printed matter nes 0.00 15.30 2237 Oil seeds/oil fruits nes 28.38 0.25 9710 Gold non-monetary ex ore 31.91 7.37

Source: Calculated based on data from WITS. Note: If RCA > 1, then the subsector has comparative advantage. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 1

96 FIGURE A1.2 Sudan’s total exports in 2015 were $5.7 billion Percent of total exports Crude Petroleum Sheep and Other Oily Goats Seeds 7.4%

Forage Crops 9.6% Insect Resins Dried Legumes Sheep and Goat Meat Other Animals

Locust Beans, 1.8% 0.80% 2.1% Seaweed, Sugar…

Raw Sugar Postage Stamps Gold 1.4% 1.7%

Scrap Raw Copper Cotton 54% 12%

Source: OEC: http://atlas.media.mit.edu/rw9v8e.

FIGURE A1.3 Sudan’s total imports in 2015 were $10.5 billion Percent of total exports

Telephones Human or Nitrogenous Cold- Rolled Hot-Rolled Packaged Animal Blood Fertilizers Iron Iron Medicaments Raw Sugar 1.3% 0.94% 0.68% 1.6% 0.80% 3.0% Semi- 4.6% Finished Iron Large Construction Air Pumps Vehicles Unpackaged Iron Animal Food Stovetops 1.1% Medicaments Iron Railway Products Excavation Electric Machinery Batteries 2.6% Yeast 0.97%

Knit Women's Felt or Coated Rubber Tires Concentrated Liquid Pumps Suits Fabric Garments Milk

1.1% Light Pure 1.0% Packing Bags Woven Cotton Tractors Ethylene Polymers Planes, Fermented Cars Milk Non-Knit Men's Products Helicopters, Shirts Light Synthetic 0.71% and/or Spacecraft Cotton Fabrics Non-Knit Men's Plastic Lids 1.7% 1.6% Suits Sawn Dried Wood Vehicle Parts Wheat Legumes Tea Refined Petroleum Gas Petroleum 6.8% 1.1% 2.5% 1.2% 0.74% Rubber Footwear Buses Seed Oils Delivery Trucks Wheat Flours Coffee Lard

1.0% After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Source: OEC: http://atlas.media.mit.edu/3jwu94. Annex 1

97 ANNEX 2 Economic performance

FIGURE A2.1 Sudan’s share in regional gross domestic products Percent

Share of Eastern Africa GDP Share of Africa GDP 40

30

20

10

0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2016

Source: AfDB calculations based on UNCTAD database.

FIGURE A2.2 Domestic investments in Sudan $ billion

20

15

10

5

0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2016 After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins |

Source: AfDB calculations based on WDI database (2017). Annex 2

98 FIGURE A2.3 Oil rents and gross domestic product in Sudan $ billion

100

GDP 80

60

40

20 Oil rent

0 1996 2000 2005 2010 2015

Source: AfDB calculations based on WDI (2017) and UNCTAD database.

FIGURE A2.4 Total oil rents and net product taxes in Sudan $ billion Oil rents Net taxes on products 20

15

10

5

0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: AfDB calculations based on WDI database (2017). After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 2

99 FIGURE A2.5 Net taxes on products in Sudan $ billion

25

20

15

10

5

0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2016

Source: AfDB calculations based on WDI database (2017).

FIGURE A2.6 Trends in agricultural trade in Sudan $ billion

3

2 Agricultural imports

1 Agricultural exports

0

–1 Agricultural trade balance

–2

Source: AfDB calculations based on UNCTAD database. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 2

100 FIGURE A2.7 Total external financing flows in Sudan $ billion

3

Net official development assistance

2

Total foreign direct investment

1

0 Net financial flows, bilateral

–1 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: AfDB calculations based on WDI database (2017).

FIGURE A2.8 Decomposition of external financial flows in Sudan $ billion

3

Net official development assistance and official aid received

2

Grants, excluding technical cooperation

1

0 Total foreign direct investment Net bilateral aid flows from the U.S.

–1 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: AfDB calculations based on WDI database (2017). After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 2

101 FIGURE A2.9 Share of the United States in total ODA in Sudan Percent

60

30

0

–30 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: AfDB calculations based on WDI database (2017).

FIGURE A2.10 Remittances received in Sudan $ million

2,000

1,500

1,000

500

0 1980 1985 1990 1995 2000 2005 2010 2016

Source: AfDB calculations based on WDI database (2017). After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 2

102 FIGURE A2.11 Remittance growth and share in GDP in Sudan Percent

300 8

Remittances received 200 6

Remittance growth

100 4

0 2

–100 0 1980 1985 1990 1995 2000 2005 2010 2016

Source: AfDB calculations based on WDI database (2017).

FIGURE A2.12 Institutional efficiency indices in Sudan Index

Business regularory environment Transparency and corruption 3

2

1

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: AfDB calculations based on WDI database (2017). After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 2

103 FIGURE A2.13 Trade facilitation indices in Sudan $ per container

Cost to export Cost to import 4,000

3,000

2,000

1,000

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: AfDB calculations based on WDI database (2017).

TABLE A2.1 Structural transformation (or the lack of) in Africa and Asia Percent of GDP

Value added by 1980– 1990– 2000– 2010– Value added by 1980– 1990– 2000– 2010– sector 1989 1999 2009 2015 2016 sector 1989 1999 2009 2015 2016 Botswana Lesotho Agriculture 8.7 4.3 2.7 2.6 .. Agriculture 18.3 9.3 6.7 5.9 .. Industry 57.5 51.6 44.8 36.5 .. Industry 18.1 31.9 39.1 32.7 .. Manufacturing 6.0 5.7 6.3 6.5 .. Manufacturing 8.5 10.3 22.1 12.1 .. Services 33.8 44.1 52.5 60.9 .. Services 63.7 58.8 54.2 61.4 .. All three sectors 100.0 100.0 100.0 100.0 .. All three sectors 100.0 100.0 100.0 100.0 .. Egypt Nigeria Agriculture 19.8 17.2 15.1 12.1 11.9 Agriculture 36.3 33.4 35.3 21.7 21.2 Industry 30.6 31.8 36.1 38.0 32.9 Industry 33.6 43.0 40.4 25.4 18.5 Manufacturing 14.4 17.5 17.9 16.4 17.1 Manufacturing 8.7 5.5 3.1 8.3 8.8 Services 49.7 51.0 48.8 49.9 55.2 Services 30.1 23.6 24.3 52.9 60.4 All three sectors 100.0 100.0 100.0 100.0 100.0 All three sectors 100.0 100.0 100.0 100.0 100.0 Kenya Sudan Agriculture 32.4 30.8 27.5 29.9 35.6 Agriculture 35.3 42.1 34.0 35.3 39.5 Industry 19.4 17.8 19.2 20.2 19.0 Industry 15.3 13.5 25.2 11.5 2.6 Manufacturing 12.0 11.5 12.3 11.9 10.0 Manufacturing 8.1 7.2 7.0 6.1 ..

After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins Services 48.2 51.5 53.3 50.0 45.4 Services 49.4 44.5 40.8 53.2 57.9 | All three sectors 100.0 100.0 100.0 100.0 100.0 All three sectors 100.0 100.0 100.0 100.0 100.0 Annex 2

104 TABLE A2.1 (continued) Structural transformation (or the lack of) in Africa and Asia Percent of GDP

Value added by 1980– 1990– 2000– 2010– Value added by 1980– 1990– 2000– 2010– sector 1989 1999 2009 2015 2016 sector 1989 1999 2009 2015 2016 Uganda India Agriculture 57.6 47.9 25.6 27.1 24.4 Agriculture 32.9 28.4 20.5 18.3 17.4 Industry 9.4 14.9 25.4 20.8 19.7 Industry 30.5 31.2 32.6 31.2 28.8 Manufacturing 5.5 7.2 7.5 9.8 8.8 Manufacturing 18.9 18.6 18.1 16.9 16.5 Services 33.0 37.2 49.1 52.1 55.8 Services 36.6 40.5 46.9 50.5 53.8 All three sectors 100.0 100.0 100.0 100.0 100.0 All three sectors 100.0 100.0 100.0 100.0 100.0 Comparator countries in Asia Myanmar Bangladesh Agriculture .. .. 48.0 30.7 28.2 Agriculture 33.7 26.7 20.3 16.8 14.8 Industry .. .. 16.8 31.9 29.5 Industry 20.7 23.1 24.7 27.1 28.8 Manufacturing .. .. 12.2 20.0 .. Manufacturing 13.5 14.6 15.7 17.1 17.9 Services .. .. 35.2 37.4 42.3 Services 45.6 50.2 55.0 56.1 56.5 All three sectors .. .. 100.0 100.0 100.0 All three sectors 100.0 100.0 100.0 100.0 100.0 Sri Lanka Cambodia Agriculture 27.5 23.8 14.1 8.8 8.2 Agriculture .. 47.0 34.2 33.9 26.7 Industry 27.3 26.6 28.9 30.6 29.6 Industry .. 16.1 25.6 25.9 31.7 Manufacturing 14.2 14.2 17.9 19.4 16.9 Manufacturing .. 11.2 18.3 16.5 17.2 Services 45.2 49.6 57.0 60.6 62.2 Services .. 37.0 40.3 40.3 41.6 All three sectors 100.0 100.0 100.0 100.0 100.0 All three sectors .. 100.0 100.0 100.0 100.0 Vietnam China Agriculture ...... 20.5 18.1 Agriculture 28.9 20.1 12.0 9.3 8.6 Industry ...... 36.9 36.4 Industry 44.1 45.0 46.1 44.4 39.8 Manufacturing ...... 14.9 15.9 Manufacturing 35.7 32.6 31.9 30.8 .. Services ...... 42.6 45.5 Services 27.0 34.9 42.0 46.4 51.6 All three sectors ...... 100.0 100.0 All three sectors 100.0 100.0 100.0 100.0 100.0 .. is [explain] Source: World Bank, World Development Indicators. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 2

105 ANNEX 3 Cointegration results

TABLE A3.1 Relative purchasing power parity (RPPP), 1971Q1–2017Q4

Part A Null hypothesis, rank (αβ′) = r r = 0 vs. r = 1 r ≤ 1 vs. r = 2 λ-max 27.471* 12.151 95 percent critical values 24.214 16.327 90 percent critical values 21.663 13.801 Trace-statistics 39.621* 12.151 95 percent critical values 32.030 16.327 90 percent critical values 28.654 13.801 Part B Normalized cointegrating vector Ln Sudan CPI Ln Exchange rate Ln World CPI Time trend 1 –0.848*** –0.176 –0.021*** (0.000) (0.101) (0.264) (0.009) Over-identifying restrictionsa 1 –1.064*** –1.000 0.004 (0.000) (0.093) (0.000) (0.004

*** Significant at 1 percent; ** significant at 5 percent; * significant at 10 percent. Numbers in parentheses are symptomatic stan- dard errors.

Note: Data properties are assessed by applying the standard augmented Dickey Fuller testing procedure to the logarithms of Sudan CPI, the nominal exchange rate and the world CPI (measured by U.S. CPI). The test includes intercept and trend in the log level of a given variable with five lags; but without intercept and trend in its first difference. The choice of lag length is determined by Schwarz Bayesian Criterion (SBC). The results, not reported to conserve space, reject the null of no unit root in the levels of all variables; but confirm their stationarity in first difference. Accordingly, the RPPP relation is estimated using the standard CVAR of the included variables together with a linear trend, and two-step dummies: D90s and D2010s, capturing infla - tion acceleration taking the value of one in 1990Q1–1996Q4 and 2012Q3–2017Q4 and zero otherwise. The lag length of the VAR underlying the cointegration analysis is based on the SBC, which selects two lags. The dummies are estimated unrestricted into the cointegration space, while the world CPI is entered as an exogenous forcing variable.

As seen in the table, both the λ-max and Trace eigenvalues statistics reject the null of no cointegration at the 5 percent signifi- cance level and confirm the presence of at most one cointegrating vector, which normalized in the top of part B of the table. The analysis of the persistence profile due to Pesaran and Shin (1996) confirmed that estimated cointegrating vector is genuine.

a. CHSQ. (1) statistic = 6.416, P-value = (0.011) and further overidentification restrictions in line with the purchasing power parity theory reject the law of one price for Sudan.

Source: Authors’ calculations based on data from the IMF financial statistics, Pick Currency Year Book. Various editions. New After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

| York: Pick Publishing Co. and the Central Bank of Sudan. Annex 3

106 TABLE A3.2 Inflation error correction model 1970Q1-2017Q4

ΔLnSudanCPI is the dependent variable Ordinary least squares model (1) AR (1) corrected model (2) Regressors (ΔLn exchange rate) 0.091*** 0.104*** (2.965) (3.487) ΔLnWorldCPI 1.046** 1.065** (2.058) (2.321)

The error correction term (ECT)t–1 –0.056*** –0.050*** (3.481) (-3.525) D90s –0.049*** –0.047** (-2.053) (2.006) D2010s –0.053** –0.051** (-2.174) (-2.287) ΔLnSudanCPI*D90s 0.937*** 0.922*** (7.961) (7.863) ΔLnSudanCPI*D2010s 0.867*** 0.873*** (2.965) (3.135)

ˆμ t–1 –.0147** (-2.051) Constant 0.007 0.009 (0.622) (0.919)

*** Significant at 1 percent; ** significant at 5 percent; * significant at 10 percent. Numbers in parentheses are p-values.

Note: Δ denotes the first log difference; ΔLnSudanCPI*D90s and ΔLnSudanCPI*D2010s stand for inflation growth interacted with the D90s and 2010s dummy (see table A3.1).

Diagnostic tests model (1): R 2 = .56. LMS CHSQ (4) =41.052 (0.000) ***. R 2 = 0.54. RESET CHSQ (1). = 1.6070 (205). F-statistic (7,183) = 33.0423***. NORM CHSQ (2) = 24.8674 (.000) ***. DW-statistic = 2.262. HET CHSQ (1) = 1.8257 (.177).

LMS: Lagrange multiplier test of residual serial correlation RESET: Ramsey’s RESET uses the square of the fitted values to test the functional form. NORM: Jarques-Bera test for normality of residuals HET: Test for heteroscedasticity based on squared residuals.

Model (2) is estimated to correct for the presence of residual serial correlation. R 2 = .57. R 2 = 0. 55. F-statistic (8,182) = 29.781***. DW-statistic = 2.034. Log-likelihood ratio test of AR (1) versus OLS CHISQ (1) = 3.7475 (0.053) *; which selects model (2).

Source: See source for table A3.1. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 3

107 FIGURE A3.1 Estimated normalized cointegrating vectors Persistence profile of the effect of a systemwide shock Persistence profile of the effect of a systemwide shock to the cointegrating vector 1972Q1–1983Q3 to the cointegrating vector 2012Q1–2017Q3

1.00 1.00

0.75 0.75

Cointegrating vector (CV) Cointegrating vector (CV)

0.50 0.50

0.25 0.25

0.00 0.00 1 5 10 15 20 25 30 35 41 1 5 10 15 20 25 30 35 41 Horizon (quarters) Horizon (quarters) Source: Authors’ calculations based on the estimation of the VARX model.

FIGURE A3.2 Generalized impulse responses to a shock in the PPP relation Generalized impulse response(s) to one S.E. shock in Generalized impulse response(s) to one S.E. shock in world CPI’s error correction equation 1972Q1–1983Q3 world CPI’s error correction equation 2012Q1–2017Q3

0.06 0.15

0.03 Sudan CPI World CPI 0.10 Exchange rate 0.00 Exchange rate Sudan CPI

0.05 –0.03

World CPI –0.06 0.00 1 5 10 15 20 25 30 35 41 1 5 10 15 20 25 30 35 41 Horizon (quarters) Horizon (quarters) Source: Authors’ calculations based on the estimation of the VARX model. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 3

108 FIGURE A3.3 Generalized impulse responses to shock in PPP relation with broad money Generalized impulse response(s) to one S.E. shock in Generalized impulse response(s) to one S.E. shock in world CPI’s error correction equation 1972Q1–1983Q3 world CPI’s error correction equation 2012Q1–2017Q3

0.08 0.10

0.08 0.04 Sudan CPI Sudan CPI World CPI Exchange rate 0.06

0.00 Broad money Exchange rate Broad money 0.04

–0.04 0.02 World CPI

–0.08 0.00 1 5 10 15 20 25 30 35 41 1 5 10 15 20 25 30 35 41 Horizon (quarters) Horizon (quarters) Source: Authors’ calculations based on the estimation of the VARX model. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 3

109 ANNEX 4 Forums and commitments for cooperation with Africa

Highest number of participations at head Year of creation of state level from Africa’s partnerships and frequency Africa Major announcements at the most recent event Forum on China-Africa 2000–2015, Triennial. 45 heads of state and China committed to support Africa by investing $60 billion Cooperation (FOCAC) government (2015). (tripling commitments in 2012) in the next three years, including $5 billion for grants and no-interest loans, $35 billion for concessional loans and export buyers’ credit, and the rest as commercial financing. Tokyo International 1993, every 5 years. 41 heads of state (2008). Contribute to the growth of Africa with private and public Conference on African means of up to $32 billion in the next five years. Development (TICAD) US–Africa Leaders’ 2014 45 heads of state and $7 billion financing to promote American exports to and Summit government (2014) investment in Africa; $14 billion private sector investment in clean energy, aviation, banking and construction; $12 billion Power Africa Initiative. France–Africa Summit 1973. Annual until Around 40 heads of Double trade with Africa in the next five years; donations 1990, biennial since. state and government and projects to reach €20 billion (about $21 billion) in the (2013) next five years. India–Africa Forum 2008, 2011, 2015 41 heads of state and $10 billion concessional credit over the next five years; Summit government (2015) $600 million grant assistance including $100 million India– Africa Development Fund and $100 million India–Africa Health Fund; 50,000 scholarships over the next five years. Africa–Turkey 2008, 2014 7 presidents (2014) Tariff preferences and duty-free privileges to expand trade Cooperation Summit and investment from $30 billion in 2013 to $50 billion by 2019. Korea–Africa Forum; KAF: 2006, triennial. 5 heads of state (2006) Increase official development assistance to Africa; expand Forum on Economic KOAFEC: 2006, scholarship programs for African students. Cooperation; Forum on biennial. KOAFIC: Industry Cooperation 2008, annual.

Source: South–South Policy Team at UNDP. Issue Brief No. 14, December 2015. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 4

110 ANNEX 5 Xinjiang’s successful targeted industrial policies

hina’s Xinjiang Uyghur Autonomous Re- industrial parks, to ensure that firms have ac- gion, on the Silk Road to Central Asia, cess to basic facilities, including water, electric- Chas been identified as a priority region ity, gas, telecommunication, and roads, and lev- in China’s new development strategy of “Going eling the SEZ sites for constructions (Ge 2010). West and Linking East.” The strategy aims to shift the economic gravity from China’s more advanced coastal regions toward less devel- Key features of SEZs in Xinjiang oped inland provinces, transforming Xinjiang The special economic zones have been one into a modern manufacturing and energy pro- of the most important industrial policies to duction base as well as a trading hub to pro- attract investment, technology, and human mote regional integration with countries in capital from inland provinces and overseas to Central Asia. Xinjiang province. SEZ development in Xinjiang To accelerate the development of manufac- differs markedly from that in coastal provinces turing and energy sectors, an array of public in several key aspects. financed investment projects and targeted in- • First, it recognized Xinjiang’s special loca- dustrial policies have been implemented in Xin- tion, a landlocked region far from China’s jiang since the early 2000s (Wang et al. 2014). large domestic market, and bordering coun- These include public financing of major infra- tries in Central Asia, all with small domestic structure projects, direct financial and institu- markets.94 tional development (R&D institutions, financial services, and cross-border customs manage- ment), establishing cross-border free trade RUSSIAN FEDERATION zones, and a range of targeted industrial polic- es, particularly special economic zones (SEZs). KAZAKHSTAN The central government has invested heav- ily in transportation, logistics capacity, and in- MONGOLIA UZBEK. KYRGYZ formation management systems to improve REP.

TAJIKISTAN PDR connectivity between Xinjiang and countries XINJIANG KOREA in Central Asia. The investment in transporta- AFG. KOREA, tion capacity (railway, highway, and aviation) REP. PAKISTAN increased more than fourfold over 2000–12. The New Eurasian Land Bridge­—­coming into CHINA INDIA NEPAL operation in 2013, starting from Chongqing (and BHUTAN Zhengzhou) to Hamburg, Germany­—­is one of After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins the most important rail routes passing through BANGLADESH | Xinjiang and Kazakhstan. The local govern- MYANMAR VIET. Annex 5 ments in Xinjiang implemented the “five ac- LAO PDR cesses plus one leveling” policy in all SEZs and THAI. 111 • Second, Xinjiang is rich in natural resourc- one of least developed regions, with short- es, with oil, natural gas, and coal account- ages of skilled labor force. ing for 30–40 percent of China’s reserves. So, SEZs in Xinjiang focused on developing But it faces severe water shortage due to its production networks and regional supply value climate, with total water reserve at a level chains, high value-added services using in- of about 3.5 percent of China’s total water formation and communication technology, volume. and regional economic integration through • Third, it is China’s only province with the cross-border free trade zones and value chain largest ethnic minority population, current- development. To speed China’s economic in- ly facing escalation of ethnic conflicts, and tegration with countries in Central Asia, two cross-border free trade zones, Khorgors and FIGURE A5.1 Kashgar, were established in the early 2000 Structural change by sector and employment: 1990–2015 along Xinjiang’s border with Kazakhstan, Tajik- Shift of employment share across industry istan, and Kyrgyzstan.95 Percent of GDP These SEZs cover free trade zones, logistics 1990 2000 2012 2015 parks, export-process zones, industrial parks, 75 and high technology development zones. By 2012, there were about 70 technological devel- opment areas in Xinjiang, 16 sponsored by the 50 national government and 54 by the provincial government. The majority of firms registered in SEZs originated in inland and coastal provinces (Ge 2010). 25 The development of SEZs has targeted sev- eral pillar industrial sectors considered com- patible with local endowment structure. The 0 targeted pillars include high technology manu- Primary Secondary Tertiary facturing sectors, agribusiness, mining and en- Structural change in sectoral share of GDP ergy, chemicals and textiles, manufacturing and Percent of GDP machinery, building materials, food processing, 1990 2000 2012 2015 and tourism. Within the identified industries, 40 policy support was given to firms from inland provinces that promote private local firms al-

30 ready in those industries.

Major development outcomes 20

Rapid growth and structural change

10 The rapid development of SEZs, together with targeted investment in infrastructure and re- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

| gional economic integration, has been the 0 driving force in spurring economic growth and Agriculture Industry Construction Transport Wholesale/retail

Annex 5 transformation in Xinjiang. Between 2000 and Source: Xinjiang Statistics Yearbooks, 1991, 2001, 2013, and 2016. 2015, total GDP increased sevenfold in constant 112 prices. The economic growth also improved Industrial upgrading living standards, with household per capita Looking at the level and composition of indus- disposal income increasing fivefold, from 3,631 trial structure (measured by value added of 4 yuan in 2000 to 16,859 in 2015. SITC sub-sector) between 2000–15. All sub- Xinjiang also saw transformation from an sectors saw fast growth. But investment from agricultural economy to one more balanced firms registered in SEZs focused primarily on across primary, secondary, and tertiary sectors. resource and capital-intensive industries while Industrial value added in GDP rose to about labor-intensive (textile) was less prominent. 30 percent in 2015 from just over a quarter in Food processing and beverages saw rapid ex- 1990 (figure A5.1). Xinjiang’s economic structure pansion, as did technology-­intensive sectors, had converged to that of the China’s national including machinery and equipment manu- economic structure, indicating its catching up facturing and oil processing, coking, smelting, in overall economic development. medicine, plastic, and chemical products. The structural change of the economy had been accompanied by a large-scale labor re- Regional economic integration: trade location both across sectors and between and supply value chain urban and rural areas (figure A5.2). The share Xinjiang has become a much more open of employment in the agricultural sector economy over the past two decade, with the dropped by about 16 percentage points, with trade-to-GDP ratio increasing from 10 per- the surplus labor released from the agricul- cent in 1990 to about 22 percent in 2012 (see tural sector being largely absorbed in the in- figure A5.2). Border trade rose to more than dustrial and tertiary sector. Xinjiang also saw 50 percent of total trade in Xinjiang in 2012, rapid urbanization, with the urban share rising from only 15 percent in 1990. Xinjiang has also from 34 percent in 2000 to more than 45 per- become the major FDI destination, with its FDI cent in 2015. flows accounting for over 18 percent of Chi- na’s total FDI in 2012, up from only 4 percent in 1990. FIGURE A5.2 The complementarity of resource endow- Xinjiang: Trade openness and border trade ment between China and Central Asia has been Percent of GDP the driving force for the recent surge in trade Trade/GDP Border trade share between the two regions (Tang 2002; Tian 60 2010). Trade patterns between China and Cen- tral Asia are dominated by oil and natural gas, which accounted for more than 80 percent of 40 Central Asia’s exports to China, underscoring Xinjiang’s crucial role as a pivotal hub for Chi- na’s energy imports. Trade between Xinjiang and Kazakhstan, Xinjiang’s largest trading part- 20 ner, increased 45-fold between 2000 and 2013. The Khorgors free trade zone, which start- After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins

ed in 2010, boosted economic integration be- | 0 tween Xinjiang and Kazakhstan. Between 2010 1990 2000 2010 2012

and 2012, total trade increased 49 percent, Annex 5 Source: Xinjiang Statistics Yearbooks. dominated by cross-border trade. 113 The SEZs brought financial resource, tech- Tajikistan, Afghanistan, Pakistan, Kyrgyzstan, Uzbeki- nology, know-how, and human capital to Xin- stan, and India (a combined international market with jiang through investments by firms in devel- a population of 1.3 billion). The Khorgors SEZ, bor- oped inland provinces. Together with increased dered with Kazakhstan, includes a free trade zone, a intergovernmental economic cooperation in financial trading district, and about 35 manufacturing Central Asia focusing on infrastructure devel- firms. opment and trade facilitation, they have fos- tered regional production networks and supply value chains among countries in Central Asia. References The Xinjiang SEZs, combined with well de- Ge, Y. 2010. “Development strategies of logistic system in signed and targeted investment, can catalyze China’s western regions to promote economic integra- transformational change even in less devel- tion of Central Asia.” Report commissioned by Korea oped regions with myriad economic and loca- Maritime Institute. tional disadvantages. Che, C. B., J. Zhu, H. L. Yang, and D. Y. Zhang. 2008. “Re- search on Xinjiang’s strategy on sustainable develop- ment of natural resources.” Mandaluyong, Philippines: Notes Asian Development Bank. 94. The eight countries sharing borders with Xinjiang in- Wang, L., Y. Ge, and J. Y. Lin. 2014. “Assessing Xinjiang’s In- clude Russia and Mongolia in the north, Kazakhstan, dustrial Policies: Special economic zones as an instru- Azerbaijan, Kyrgyz Republic, Tajikistan, and Uzbeki- ment to promote regional integration and sustainable stan in the west, and Afghanistan and Pakistan in the development.” Mandaluyong, Philippines: Asian Devel- south. opment Bank. 95. The Kashgar SEZ in Yili prefecture is a pivotal freight Lin, J. Y., and Y. Wang. 2014. “Kazakhstan and Regional Inte- transportation hub in western Xinjiang, with a bor- gration: Joining Global Supply Chains via Growth Iden- der of 888 kilometers and four entry ports connect- tification and Facilitation.” Mandaluyong, Philippines: ing China with six neighboring countries, including Asian Development Bank. After Decades Two of “Solitude”: Targeted Strategies for Quick Economic Wins | Annex 5

114 Sudan Economic Report AFRICAN DEVELOPMENT BANK GROUP The Sudanese economy was for under more sanctions than two removal decades. of these sanctions The creates an permanent incentive for policy makers and development stakeholders in Sudan to deepen removal of sanctions also bodes for well the fairly economic reforms. The resilient private sector, which is now looking for opportunities to transform an already and dynamic economy. resilient This Sudan Economic Report, the new second series, analyzes the in impact of a sanctions and suggests a pragmatic policy framework and set of quick economic wins. achieve policies to targeted Avenue Joseph AnomaAvenue Abidjan 01 BP 1387 01 Côte d’Ivoire www.afdb.org