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 NIGER CONSTRAINTS ANALYSIS January 2014 TABLE OF CONTENTS ACRONYMS ............................................................................................................................................... 2 EXECUTIVE SUMMARY ........................................................................................................................ 3 1. OVERVIEW ....................................................................................................................................... 14 2. NATURAL CAPITAL ....................................................................................................................... 20 3. ACCESS TO FINANCE .................................................................................................................... 25 4. HUMAN CAPITAL ........................................................................................................................... 39 4.1 EDUCATION ................................................................................................................. 39 4.2 HEALTH ........................................................................................................................ 44 5. INFRASTRUCTURE ......................................................................................................................... 51 5.1 TRANSPORTATION .......................................................................................................... 51 5.2 WATER ................................................................................................................................. 60 5.3 ELECTRICITY ..................................................................................................................... 70 5.4 TELECOMMUNICATIONS ............................................................................................... 76 6 MICRO-APPROPRIABILITY OF RETURNS .............................................................................. 79 7 MACROECONOMIC RISKS AND DISTORTIONS .................................................................... 95 8 MARKET FAILURES AND INNOVATION ................................................................................ 103 MCC Niger Threshold Program Design: Constraints Analysis Final Report 1 ACRONYMS AADT Annual Average Daily Traffic AfDB African Development Bank AHA Medium-to-large Managed Irrigation System (Aménagement Hydro-Agricole) ANPE National Employment Promotion Agency (Agence Nationale pour la Promotion de l'Emploi) ASECNA Agency for Aerial Navigation Safety in Africa and Madagascar (Agence pour la Sécurité de la Navigation Aérienne en Afrique et à Madagascar) AUC African Union Commission BCEAO Central Bank of West African States (Banque Centrale des Etats de l'Afrique de l'Ouest) CNAM Niger Mediation and Arbitrage Center (Centre de Médiation et d’Arbitrage du Niger) CNUT Nigerien Council of Public Transport Users (Conseil Nigérien des Utilisateurs des Transports Publics) DGI Directorate General of Taxes (Direction Générale des Impôts) DHS Demographic and Health Survey DREIN Development of an Electrical Interconnection Network DTIS Diagnostic Trade Integration Study GDP Gross Domestic Product GNI Gross National Income GON Government of Niger ECOWAS Economic Community of West African States FAO Food and Agriculture Organization FCFA CFA franc FDI Foreign Direct Investment FSDP Financial Sector Development Project HIPC Heavily Indebted Poor Countries Initiative HRV Hausmann, Rodrik, and Velasco (see References) ICT Information and communications technology IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund INS Nigerien Statistics Institute (Institut National de la Statistique) ITU International Telecommunication Union MCC Millennium Challenge Corporation MCA Millennium Challenge Account MDG Millennium Development Goal MFI Microfinance Institution MDRI Multilateral Debt Relief Initiative MCC Niger Threshold Program Design: Constraints Analysis Final Report 2 NIGELEC Nigerien Electricity Society (Société Nigérienne d'Electricité) PCS Dry season perimeter (Périmètre de contre-saison) PERREN Extension and Reinforcement of the Nigerien Electric Network (Projet d'Extension et de Renforcement des Réseaux Electriques du Niger) PREM Poverty Reduction and Economic Management OECD Organisation for Economic Co-operation and Development OHADA African Organization for Harmonization of Business Rights (l’Organisation pour l'Harmonisation en Afrique du Droit des Affaires) PIP2 Private Irrigation Promotion Project (Projet de Promotion de l’Irrigation Privée) PRASE National Program for Access to Modern Electrical Services (Programme National de Référence d'Accès aux Services Energétiques Modernes) UN United Nations UN Comtrade United Nations Commodity Trade Statistics Database UNECA United Nations Economic Commission for Africa UNFPA United Nations Population Fund UNICEF United Nations Children’s Fund USAID United States Agency for International Development WAEMU West African Economic and Monetary Union (Union Economique et Monétaire Ouest Africaine) WAMU West African Monetary Union (Union Monétaire Ouest Africaine) WHO World Health Organization MCC Niger Threshold Program Design: Constraints Analysis Final Report 3 EXECUTIVE SUMMARY Methodology This constraints analysis for Niger represents a combined effort by the Millennium Challenge Corporation (MCC) and the Government of Niger (GON) to identify potential sectors for investment as part of the compact development process in Niger. It is based on the growth diagnostics approach, pioneered in 2005 by Ricardo Hausmann, Dani Rodrik, and Andrès Velasco (HRV). As HRV point out, all developing countries face an array of economic and development challenges, but not all of these challenges are equally restrictive to growth. Prioritizing among potential investments and interventions is especially important given that the country’s implementation capacity, political space, and financing necessary to address these challenges are frequently scarce and valuable. A particular strength of HRV’s growth diagnostic methodology, compared with other diagnostic tools, is its recognition that every country is different. The tool, which has been refined based on a wide range of experience inside and outside of MCC, is designed to sift through the available evidence to identify country-specific binding constraints. The method starts from two simple propositions. First is the recognition that private investment and entrepreneurship are the primary drivers of sustained economic growth. Private investment includes the process of identifying profitable business opportunities, productivity improvements, and innovations; entrepreneurship is the application of resources for the creation of value. Sustained economic growth depends upon adequate rates of return to the investor. Understanding the reasons for inadequate growth and private investment requires an analysis of the factors that affect the returns and constraints that private entrepreneurs face. Incentives for private investment fall into three broad categories: (i) the overall expected return to an investment; (ii) the share of the return an investor can expect to keep; and (iii) the cost of financing the investment. The methodology requires an investigation of the influences of each of these three factors in a country-specific context. The diagnostic tree in Figure 0.1 provides a visualization of this investigation, with factors affecting investor returns on the left branch and factors affecting financing costs on the right. Second is that sub-optimal economic outcomes must be the result of either constrained supply or of limited demand. Poor economic outcomes include low levels of investment, consumption, employment, or credit. The most binding constraints are those for which the supply of a productive factor or condition of the business climate is severely constrained, while at the same time being highly demanded by businesses. Utilization of a factor within an economy may be low because of a low supply of the factor or low demand for the factor. For example, the quantity of credit could be low, but this alone does not indicate a constrained supply of finance. The low quantity of credit may be the result of low demand because potential borrowers are constrained by an inadequate MCC Niger Threshold Program Design: Constraints Analysis Final Report 4 supply of other factors such as infrastructure or an unsupportive business environment. Only in the case of low supply and strong demand is a factor a candidate to be a binding constraint to investment and growth. Figure 0.1 -- The HRV Growth Diagnostic Tree Source: HRV, 2005 Supply and demand dynamics can be difficult to disentangle. Hausmann, Bailey Klinger, and Rodrigo Wagner (2008) suggest the following four tests to evaluate whether a binding constraint exists within a particular sector: (i) The shadow price of the constraining factor is high;1 (ii) Changes in the availability of the constraining factor are correlated with changes in investment or growth; (iii) Economic