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Systematic Country Diagnostic (Scd) Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 106725-GB GUINEA-BISSAU TURNING CHALLENGES INTO OPPORTUNITIES FOR POVERTY REDUCTION AND INCLUSIVE GROWTH Public Disclosure Authorized SYSTEMATIC COUNTRY DIAGNOSTIC (SCD) JUNE, 2016 Public Disclosure Authorized International Development Association Country Department AFCF1 Africa Region Public Disclosure Authorized International Finance Corporation Sub-Saharan Africa Department Multilateral Investment Guarantee Agency i ACKNOWLEDGEMENTS We would like to thank the following colleagues who have contributed through invaluable inputs, comments or both: Vera Songwe, Marie-Chantal Uwanyiligira, Philip English, Greg Toulmin, Francisco Campos, Zenaida Hernandez, Raja Bentaouet, Paolo Zacchia, Eric Lancelot, Johannes G. Hoogeveen, Ambar Narayan, Neeta G. Sirur, Sudharshan Canagarajah, Edson Correia Araujo, Melissa Merchant, Philippe Auffret, Axel Gastambide, Audrey Ifeyinwa Achonu, Eric Mabushi, Jerome Cretegny, Faheen Allibhoy, Tanya Yudelman, Giovanni Ruta, Isabelle Huynh, Upulee Iresha Dasanayake, Anta Loum Lo, Arthur Foch, Vincent Floreani, Audrey Ifeyinwa Achonu, Daniel Kirkwood, Eric Brintet, Kjetil Hansen, Alexandre Marc, Asbjorn Haland, Simona Ross, Marina Temudo, Pervaiz Rashid, Rasmane Ouedraogo, Charl Jooste, Daniel Valderrama, Samuel Freije and John Elder. We are especially thankful to Marcelo Leite Paiva who provided superb research assistance for the elaboration of this report. We also thank the peer reviewers: Trang Van Nguyen, Sebastien Dessus and Nadia F. Piffaretti. Marek Hanusch has also had a key role as co-Task Team Leader of the Concept Note and main author of the Country Economic Memorandum, both documents which have been central to the making of this Systematic Country Diagnostic. ii LIST OF ABBREVIATIONS AfDB African Development Bank APBG Guinea-Bissau Port Authority AU African Union BCEAO Central Bank of West African States BOAD or WADB West African Development Bank CCVI Climate Change Vulnerability Index CEM Country Economic Memorandum CPIA Country Policy and Institutional Assessment CPLP Community of Portuguese Language Countries DB Doing Business Report DEA U.S. Drug Enforcement Administration DGO Directorate of the Budget DTF Distance to Frontier DTIS Diagnostic Trade Integration Study EAGB National Utility Company (Empresa de Eletricidade e Águas de Guiné-Bissau) ECF Extended Credit Facility ECOMIB ECOWAS Security Mission in Guinea-Bissau ECOWAS Economic Community of West African States EI Extractive Industries EU European Union FAO United Nations Food and Agriculture Organization FAOSTAT United Nations Food and Agriculture Organization Statistics FCFA or CFA West African Franc (Currency) FCS Fragile- or Conflict-Affected States FDI Foreign Direct Investment FGM Female Genital Mutilation FUNPI Fund to Promote Industrialization of Agricultural Products GDP Gross Domestic Product GIC Growth Incidence Curve GNI Gross National Income HA Hectare = 1,000 m2 HHI Herfindahl-Hirschmann Index IBRD International Bank for Reconstruction and Development (The World Bank) ICT Information and Communication Technologies IDA International Development Association IFC International Finance Corporation ILAP Household Survey (Inquérito Ligeiro para a Avaliação da Pobreza) ILO International Labour Organization IMF International Monetary Fund INEC National Institute of Statistics of Guinea-Bissau IUCN International Union for Conservation of Nature iii LCD Least-Developed Countries MAB UNESCO Man and the Biosphere Program MCS Monitoring, Control and Surveillance MDGs Millennium Development Goals MFI Micro Finance Institution MICS Multiple Indicator Cluster Survey MTN MTN Group, Telecommunications NAPA National Programme of Action of Adaptation to Negative Effects of Climate Changes NGO Non-Governmental Organization NPL Non-Performing Loan OAF One Acre Fund ODA Official Development Assistance OECD Organisation for Economic Co-Operation and Development PAIGC Party for the Independence of Guinea-Bissau and Cabo Verde PEFA Public Expenditure and Financial Accountability PEMFAR Public Expenditure Management and Financial Accountability Review PFM Public Financial Management PPP Purchasing Power Parity R&D Research and Development SCD Systematic Country Diagnostic SDI Service Delivery Indicators Survey SE Social Enterprises SME Small and Medium Enterprises SPS Social Protection Strategy SSA Sub-Saharan Africa SSR Security Sector Reform TSA Treasury Single Account UN United Nations UNCTAD United Nations Conference on Trade and Development UNDC United Nations Office on Drugs and Crime UNDP United Nations Development Program UNESCO United Nations Educational, Scientific & Cultural Organization UNICEF United Nations Children’s Emergency Fund VMS Vessel Monitoring System WAEMU West African Economic and Monetary Union WARFP West Africa Regional Fisheries Program WDI World Development Indicator WDR World Development Report WGB World Bank Group WGI Worldwide Governance Indicator iv Regional Vice President, IDA: Makhtar Diop Vice President, IFC: Snezana Stoiljkovic Vice President, MIGA: Karin Finkelston Country Director, IDA: Louise Cord Regional Director, IFC: Vera Songwe Senior Directors: Ana Revenga, Carlos Felipe Jaramillo Practice Managers: Pablo Fajnzylber, Seynabou Sakho Task Team Leaders: Javier E. Baez, Rohan Longmore v TABLE OF CONTENTS 1 INTRODUCTION ............................................................................................................... 2 1.1 Guinea-Bissau is rich in natural resources and has opportunities to develop some sectors that can ignite growth .............................................................................................................. 2 1.2 Economic growth, poverty reduction and shared prosperity performance have been disappointing ........................................................................................................................... 3 1.3 A vicious cycle of low assets, low productivity and lack of inclusiveness ...................... 3 1.4 An undiversified and vulnerable economic base and an unfriendly business climate ..... 4 1.5 Cross-cutting challenges stemming from endemic fragility and a weak governance framework ................................................................................................................................ 5 1.6 Dark clouds on the horizon risk sustainability of growth, distribution and poverty reduction .................................................................................................................................. 8 1.7 Looking ahead, change in Guinea-Bissau will require major strategic efforts ................ 8 1.8 Diagnostics framework .................................................................................................... 9 1.9 Scope and process .......................................................................................................... 12 2 POVERTY, SHARED PROSPERITY AND EQUITY .................................................. 14 2.1 Poverty in Guinea-Bissau is deep and entrenched ......................................................... 15 2.2 Inequality is particularly high and the poor are not able to capitalize on growth .......... 20 2.3 The productive capacity of households is undermined by low human and physical capital, and an inefficient use of natural resources ................................................................ 23 2.4 Assets are not only low but also are used at suboptimal levels ...................................... 33 2.5 Returns to assets are inadequate and undiversified ........................................................ 36 2.6 Private transfers provide modest support to household incomes ................................... 40 2.7 Household well-being is highly vulnerable to shocks .................................................... 41 3 MACRO LEVEL COUNTRY CONTEXT ..................................................................... 44 3.1 Growth has been low, largely due to a narrow economic base ...................................... 46 3.2 Low productivity, savings and investments also underpin slow growth ........................ 51 3.3 Economic growth is fragile ............................................................................................ 53 3.4 Structural weaknesses constrain the effectiveness and equity of fiscal policy .............. 55 3.5 An underdeveloped private sector and multiple supply-side constraints hinder actual and potential output ............................................................................................................... 58 3.6 Untapped economic opportunities to spur shared growth .............................................. 68 4 WEAK PUBLIC GOVERNANCE AND INSTITUTIONS ARE A CHALLENGE FOR SHARED PROSPERITY .............................................................................................. 75 4.1 Fragility, institution-building and economic development ............................................ 76 4.2 Repeated cycles of fragility in Guinea-Bissau ............................................................... 78 4.3 A rentier economy .......................................................................................................... 80 4.4 Rent extraction is facilitated by weak public governance .............................................. 83 4.5 The way forward for stronger governance and less fragility ......................................... 86 vi 5 SUSTAINABILITY
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