Liberia's Constraints Analysis
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The production of the constraints analyses posted on this website was led by the partner governments, and was used in the development of a Millennium Challenge Compact or threshold program. Although the preparation of the constraints analysis is a collaborative process, posting of the constraints analyses on this website does not constitute an endorsement by MCC of the content presented therein. 2014-001-1569-02 LIBERIA CONSTRAINTS ANALYSIS SEPTEMBER 2013 PREPARED BY: CORE TEAM NATIONAL MILLENNIUM COMPACT DEVELOPMENT PROJECT GOVERNMENT OF LIBERIA Government of Liberia United States Government Core Team MCC Team Monie R. Captan – National Coordinator Sarah T. Lucas – Country Team Lead Samuel D. Tweah, Jr. – Economist Carrie Monahan – Sr. Program Officer Philip Pleiwon – Private Sector Lead Sarah Olmstead – Economist Nicholas Dikenah – M&E Specialist Tamara Heimur – Private Sector Lead Samuel Duo – Social & Gender Specialist Algerlynn Gill – M&E Specialist Joy Kazadi – Outreach Lead Nilufar Ahmad – Social & Gender Specialist J. Darious Kollie – Program Assistant Gwedolyn Heaner – Social & Gender Consultant MCC Ministry of Finance Dr. Alexander Neutah Bradley Cunningham, Econ. Analysis Edward Corcoran Peter Rosner, Economic Analysis Andrew Carter, Economic Analysis Central Bank of Liberia Leonard Rolfes, Land Boimah S. Kamara Rick Gaynor, Land Augustus J. Panton Ellen Moran, Infrastructure Raji Adnan Stuart Kerr, Legal and Regulatory Reform Jennifer Gerst, Human Capital Ministry of Commerce & Industry Victor Levine, Human Capital John Spray Marcel Ricou, Human Capital USAID Michael Nicholson – Economist Liberia’s Constraints Analysis i Table of Contents 1 Executive Summary ........................................................................................................................ 1 1.1 Introduction .............................................................................................................................. 1 1.2 Constraints Analysis Methodology .......................................................................................... 3 1.3 Preliminary Considerations ..................................................................................................... 4 1.4 The Binding Constraints .......................................................................................................... 5 1.5 “Leaning Binding” Constraint................................................................................................... 7 1.6 Major Constraints .................................................................................................................... 8 1.7 Major Risks ............................................................................................................................ 10 1.8 The Historical Context of Binding Constraints in Liberia ....................................................... 11 1.9 Summary of Evidence: Drilling Down the HRV Growth DIagnostic Tree .............................. 14 2 Overview of Liberia’s Growth and Development Experience ........................................................ 18 2.1 Economic Policies of Liberia: 1960-2011 .............................................................................. 18 2.2 Structure of the Liberian Economy ........................................................................................ 21 2.3 The Conflict-Growth Nexus ................................................................................................... 34 2.4 Key Question for Constraints Analysis: What Constrains Private Investment in Liberia? .... 35 3 Does Costly Finance Present a Binding ConstrainT to Liberia’s Growth? ................................... 37 3.1 Overview of the Financial Sector .......................................................................................... 37 3.2 Risks and Weaknesses of the Liberian Financial Sector ...................................................... 39 3.3 Soundness of the Financial Sector ....................................................................................... 40 3.4 Application of the Principles of Growth Diagnostic: The Four Tests ..................................... 45 3.5 Conclusion ............................................................................................................................. 53 4 Do Macroeconomic Risks and Distortions Pose a Binding Constraint to Growth in Liberia? ....... 54 4.1 Growth trends ........................................................................................................................ 54 4.2 Fiscal balance and public debt .............................................................................................. 55 4.3 Monetary Developments: Inflation and Exchange Rate ........................................................ 56 4.4 Conclusion ............................................................................................................................. 58 5 Do Micro Risks Pose Binding Constraint to Liberia’s Growth? ..................................................... 59 5.1 Political Stability .................................................................................................................... 60 5.2 The Rule of Law .................................................................................................................... 62 5.3 Government Effectiveness and Regulatory Quality .............................................................. 63 5.4 Corruption and Transparency ............................................................................................... 65 5.5 Contract Enforcement ........................................................................................................... 70 5.6 Application of the Principles of Growth Diagnostics: The Four Tests ................................... 72 5.7 Conclusion ............................................................................................................................. 78 5.8 Access to Land ...................................................................................................................... 78 5.9 Application of the Principles of Growth Diagnostics: The Four Tests ................................... 84 5.10 Conclusion ............................................................................................................................. 93 5.11 Government Capacity and Concessions Management ........................................................ 95 Liberia’s Constraints Analysis ii Corruption and Weak Financial Management ............................................................... 96 Concessions Management, employment, Environment and growth ............................. 98 Conclusion ..................................................................................................................... 98 5.12 Taxation ................................................................................................................................. 99 5.13 Application of the Principles of Growth Diagnostics: The Four Tests ................................... 99 Conclusion ................................................................................................................... 101 5.14 Market Access and Barriers to Trade ................................................................................. 102 Liberia’s current foreign trade ..................................................................................... 102 Liberia’s current domestic trade .................................................................................. 103 Barriers to foreign trade .............................................................................................. 104 Risk from proposed future trade policy ....................................................................... 107 Barriers to domestic market access ............................................................................ 108 5.15 Application of the Principles of Growth Diagnostics: The Four Tests ................................. 108 Conclusion ................................................................................................................... 109 6 Market Failures............................................................................................................................ 111 6.1 Information and Coordination Externalities ......................................................................... 111 6.2 Are Export Diversity and Product Complexity in Liberia low? ............................................. 111 6.3 Information Externalities and ‘Self-Discovery’ ..................................................................... 112 6.4 Product Space Analysis ...................................................................................................... 113 6.5 Information Externalities in Agriculture ............................................................................... 115 6.6 Conclusion ........................................................................................................................... 118 7 Does Human Capital Present a Binding Constraint to Liberia’s Growth? ................................... 119 7.1 Demographic Structure ....................................................................................................... 119 7.2 Health .................................................................................................................................. 121 7.3 Application of the