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Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

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Industrial Policy in Senegal

Industrial Policy in Senegal

Then and Now

Chapter:
(p.136) 7 Industrial Policy in Senegal
Source:
Manufacturing Transformation
Author(s):

Fatou Cisse

Ji Eun Choi

Mathilde Maurel

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0007

Abstract and Keywords

Senegal is the fourth largest economy in West Africa, with a real GDP and GDP per capita estimated respectively at US$760 and US$11.26 billion. The economy underwent prolonged decline until 1995, but has since recovered steadily. As a result per capita GDP has more or less stagnated since independence. The country’s economy is driven mainly by the service sector, which since 1980 contributed over 55 per cent of GDP, while agriculture and industry accounted for less than 20 per cent each. There has been noticeable improvement in industry’s share in the composition of GDP since 1990, exceeding that of agriculture. Unlike its resource-rich neighbours, Senegal’s economy is driven largely by public investment and private consumption, with share of exports remaining unchanged over the years. It is not surprising that policy makers in Senegal strived to nurture the manufacturing sector in the decades following independence.

Keywords:   Senegal, industry, agriculture, public investment, manufacturing sector, service sector

7.1 Introduction

Industrial Policy in SenegalThen and Now

Figure 7.1 Sectoral decomposition of GDP in Senegal

Source: Authors’ computation using data from World Development Indicators (World Bank 2014).

Senegal is the fourth largest economy in West Africa after Nigeria, Ivory Coast, and Ghana, with a real GDP and GDP per capita estimated respectively at US$760 and US$11.26 billion (AEO 2014). The economy underwent prolonged decline until 1995, but has since recovered steadily. As a result per capita GDP has more or less stagnated since independence. The Senegalese economy is mainly driven by the service sector, which since 1980 contributed more than 55 per cent of GDP, while agriculture and industry accounted for less than 20 per cent each (Figure 7.1). Since 1990 there has been a noticeable improvement in the share of industry in the composition of GDP, exceeding that of agriculture.

Unlike its resource-rich neighbours, Senegal’s economy is largely driven by public investment and private consumption, with share of exports remaining unchanged over the years. It is not surprising therefore that policy makers in Senegal strived to nurture the manufacturing sector in the decades following independence.

It is indeed in the manufacturing sector that learning effects, technological innovation, and diversification are most likely to occur. While small economies cannot benefit from scale economies because of the small size of their internal market, trade openness is a powerful driver of industrial development. The strategy of openness is successful when it is based upon high competitiveness, which reinforces the profitability of the manufacturing sector.

The aim of this chapter is to review policies that have been put in place during the last decades to promote the Senegalese manufacturing sector. Section 7.2 depicts the structure of the industrial sector—sectoral composition (p.137) at the 2-digit International Standard Industrial Classification (ISIC) level, size distribution, employment, ownership, share of foreign direct investment (FDI), and export contribution as well as sunrise and sunset industries. Section 7.3 analyses total factor productivity (TFP), its features across industries, as well as the patterns of productivity change. It aims at relating TFP with ‘fundamentals’ for industrial development: availability of electricity (both in terms of quantity and quality), education level of a production worker, and trade policy, among others. Section 7.4 explores the evolution of the policies of industrial development since 1965. It also discusses the emerging policy issues and sums up the major current problems that industrial development faces in Senegal.

7.2 The Evolution of Senegal’s Industrial Policy

Nearly all of the newly independent countries in the region started with an import substitution (IS) approach to industrialization, where nascent industries received protection. Senegal applied these policy instruments during the 1960s primarily to preserve the industrial base inherited from the colonial era.

7.2.1 From Import Substitution to Economic Liberalization

Senegal’s first two development plans which were implemented during the period 1961 to 1969 focused primarily on promoting industrial development (p.138) to substitute for manufacturing imports. Tariff and non-tariff barriers protected large enterprises which were created through this strategy. In the 1970s, an alternative policy emphasized the development of small and medium businesses through the creation of the National Company for Industrial Research and Development (SONEPI), followed by the Dakar Industrial Free Trade Zone (ZFID), in 1969 and 1974 respectively. SONEPI is primarily responsible for technical support for private initiatives and gives substance to state industrial policy, particularly by developing industrial areas in regional capitals.

7.2.1.1 Tariff Protection

Prior to the 1979 tax reform, taxes on imports included customs duties, statistical taxes, and flat-rate taxes, making the tax system complex, benefiting firms that process primary products such as peanuts, imported wheat, textile fibres, and fish for consumption. This tariff system is intended to procure resources for the state and protect domestic firms.

7.2.1.2 Quantitative Restrictions

Quotas, prior authorizations, and prohibitions against the import of certain goods provided quasi-monopoly status to some firms. Moreover, domestic producers in certain sectors benefited from additional protection that restricted imports through special conventions and memoranda of understanding and administrative pricing (initially used to address undervaluation of declared imports). However, exporting firms had to pay a statutory tax, a transaction tax, a statistical tax, and a market research and packaging tax (only for peanuts), thus increasing the anti-export bias in import protection measures.

7.2.1.3 The Investment Code

Senegal introduced its first investment code in 1962 to help domestic firms that were set up to promote the objectives of the strongly IS-oriented development plan. Beneficiary firms had major tariff and tax exemptions that remained unchanged for a full twenty-five years. The code was amended in 1965, lowering the required investment from 1 billion FCFA to 500 million FCFA and expanding tariff and tax exemptions on replacement parts, in addition to deferred taxes on imported inputs. In 1977, a new law came into force with the goal of broadening the industrial base through promotion of small and medium enterprises (SME). With this law, there were now two tax codes: the grand code for large firms and the petit code for businessmen with initial investments under 20 million CFA francs (FCFA).

7.2.1.4 Dakar Industrial Free Trade Zone

The ZFID was established in 1974 to accommodate firms engaged in manufacturing, assemblies, and processing for export, as well as complementary (p.139) service firms. Authorized firms were exempted from taxes on corporate profits, wages, and all indirect domestic taxes on production. In terms of tariffs, they did not pay tariffs and taxes on imports of capital goods, equipment, primary materials, and other semi-finished inputs. Free trade zones were introduced in 1991, and firms benefited from all the advantages conferred upon those in the ZFID without having to set up there. Exporting firms benefiting from the free trade zone or ZFID frameworks had to face a corporate tax of only 15 per cent, starting in 1995.

7.2.1.5 Industrial Zones

The idea of industrial zones appeared in 1965, but was not the object of any financing scheme until the 1975 agreement between the governments of Senegal and Germany, which led to creation of the Dakar Industrial Zone Corporation in 1978. The government also created industrial zones in other regional capitals, albeit with varying success. SMEs operating in these industrial zones received assistance from management firms in addition to major tax advantages. In particular, they benefited from a five-year exemption from corporate taxes in Dakar and a seven-year exemption in other regions, and from other taxes on equipment and materials not manufactured or otherwise produced in Senegal, as well as from taxes on replacement parts for this equipment, activities relating to training or the expansion of firms, and services offered by management firms.

The industrial zones typically provided technical, legal, administrative, and marketing assistance to firms operating in the area. By the early 1980s, the process of industrialization had begun to show several weaknesses: (1) the IS policy had reached its limits in a small and overprotected market; (2) the process weakened benefits from natural resources and the export crisis left traditional export sectors (peanuts, phosphates, fish) with no prospects for recovery; (3) highly effective tariffs (25–300 per cent) had perverse effects through lost competitiveness and high rigidities against adaptation; (4) state intervention proved excessive and costly. Industrial growth after 1980 generally ranged from 0–2 per cent, as opposed to 4–5 per cent in the preceding decade.

7.2.2 Adjustment Policies and Liberalization of the Economy

In 1979, Senegal was hit by a major macroeconomic crisis which was exacerbated by the return of the drought cycle. Faced with a growing deficit, inflation, and growth collapse, the government sought the support of the Bretton Woods Institution who in return demanded the implementation of structural adjustment programmes. The adjustment policies were based on four pillars: (1) management of aggregate demand with the twin objectives of (p.140) controlling inflation and reducing the balance of payments deficit; (2) restoration of market forces in determining allocations and prices of resources; (3) opening up the economy; (4) withdrawal of the state and consolidation of public finances.

In 1979, the year of the first stabilization programme, the state sought to simplify and reduce import tariffs and taxes, while export taxes were eliminated except on peanuts and phosphates. By 1984, after progress to stabilize the economy was deemed satisfactory, a new agricultural policy (NPA) was launched to organize the withdrawal of the state from the agricultural sector. By 1986, the new industrial policy (NPI) made substantial progress in dismantling tariff barriers. In 1986 another major decision was taken to abandon administrative pricing (used to address undervaluation of declared imports) to calculate tariffs on imports.

The NPI action plan comprised four components: revised protection for domestic industrial sectors, export promotion, revival of investment, and improvement of the environment for industrial activities. The tariff code was revised, with rates cut from 65 per cent to 30–40 per cent over two years and by reducing the number and range of applicable rates. The resulting reduction in the anti-export bias was supplemented by introducing an export subsidy amounting to 10 per cent of the free on board (FOB) value of exports over 1980–3. Eventually the rate rose to 15 per cent of the FOB value over 1984–6 and 25 per cent of value added in export activities after 1986.

The third and fourth components of the NPI provided revisions of the investment code. An industrial restructuring fund was created and assistance to investors was expanded. To improve the business environment in the industrial sector, measures aimed at liberalizing prices and simplifying administrative formalities were taken. However, these measures took place during a period of persistent domestic currency appreciation and the declining competitiveness of Senegalese firms. In 1989, in the face of pressure from firms and declining tax receipts, the government was forced to postpone implementation of the second phase of NPI. The 1989 reform plan was not implemented until 1994 and only as part of the overall adjustment initiated by devaluation of the CFA franc. The NPI remains a painful failure in the history of economic reform in Senegal, with the closure of uncompetitive firms causing significant job losses (7 per cent of permanent staff between mid-1987 and mid-1988).

7.2.3 Implementation of a Common External Tariff

The period preceding the 1994 devaluation witnessed a heated debate on the future of the West African Monetary Union (WAMU). Preservation of the (p.141) union remained a priority and ultimately provided the basis upon which an economic union was created with the goal of accelerating integration and convergence among economies in the CFA franc zone. Following this, the goal of not creating a West African Economic and Monetary Union (WAEMU) ‘fortress’ was upheld and the union proceeded with tariff reductions and established a common external tariff (CET) system. The 50 per cent reduction in the FCFA exchange rate had already made possible the substantial 1994 reduction in tariff rates and simplification of import taxes which remained up to the initiative of each member state.

A customs union made possible the movement of raw materials and goods from small-scale producers, free of tariffs or taxes among WAEMU member states. The WAEMU CET was implemented during 1996–2000 with four categories of products, subject to the following rules: public goods, the import of which was only charged a statistical tax (RS) of 1 per cent and a community solidarity levy (PCS) of 1 per cent; basic necessities, primary raw materials, equipment goods, and other specific inputs levied with a 5 per cent customs tariff plus the RS and PCS upon import; other inputs and intermediate products were levied a 10 per cent tariff plus the RS and PCS; finally, consumption goods and other products not listed elsewhere were levied at a 20 per cent tariff rate plus the RS and PCS. Two exceptional taxes, which were temporary and digressive, are the digressive protection tax (TDP) and a special import tax (TCI) which were introduced to compensate for major declines in tariff protections associated with the CET (in the case of the TDP) or with erratic variations in world prices (in the case of the TCI).

Implementation of the CET is considered a productivity shock comparable to the National Industrial Policy (NIP) except that it came in the wake of the major productivity gains associated with devaluation of the CFA franc. Between 1995 and 2005, industrial activities grew by an annual average of 3.8 per cent (International Monetary Fund (IMF) report 12/337, November 2012).

7.2.4 Deepening Economic Liberalization and Other Measures to Promote the Private Sector

In the first couple of decades following independence, price control, the predominance of public and mixed enterprises, and the prevalence of a restrictive regulatory environment all severely hindered the development of private enterprise with the exception of a certain number of privileged entrepreneurs. But price control was eased following the privatization programme initiated during the 1980s which extended to sectors previously considered as strategic, such as infrastructure services and the financial sector. Notable examples are the disappearance of the first public banks and the 25 per cent (p.142) limit on the state’s share of bank capital (Programme d’ajustement du secteur financier, 1989–91, Ministère de l’Économie et des Finances, 1988). Concerning the labour market, the reforms carried out over 1994–7 allowed firms to resort to economic lay-offs and also reduced restrictions on fixed-term labour contracts. The dynamics of reform and consultation with employer organizations accelerated following devaluation of the FCFA in 1994, culminating in a private sector development strategy adopted between parties in April 1999.

Implementation of this strategy began in 2000 with the creation of the Investment Promotion and Major Projects Agency (APIX), and in 2001 of the Agency for the Development and Supervision of SMEs (ADEPME). This was followed in 2002 by the transformation of the Senegalese Standards Institute into an association in order to encourage professionals to be more accountable in product quality certification. In 2003 the creation of the Modernization Office and in 2005 creation of the Senegalese Export Creation Agency (ASEPEX) and the introduction of the Accelerated Growth Strategy (SCA) also helped this process.

The SCA offers a common framework to establish an environment conducive to business with international standards to benefit all sectors. The SCA action plan also includes development of special economic zones and other dedicated sites such as incubators and community agriculture areas as well as tourism zones. The industrial redeployment strategy launched in July 2005 is perfectly consistent with the SCA by aiming to rebalance industrial sites to correct for regional disparities and to reorient the productive apparatus of the country towards sectors with high value added.

However, real GDP growth slowed considerably during 2006–11; the economy has proven rather vulnerable to the exogenous shocks of the energy, food, and financial crises of 2007–9—industrial activity growth rate fell to 3.2 per cent during this period.1

7.2.5 The Industrial Policy Framework and Emerging Questions

The industrial sector is entrusted to a department which is also responsible for trade, SMEs, and the informal sector. The industrial zones are key features of the industrial sector policy validated in 2005. The objectives are: a rebalancing of industrial facilities across the country, which continue to be concentrated in the Dakar region; reorientation of the productive base towards new promising sectors; and strengthening of managerial capacities required to promote highly productive competitive industries.

(p.143) The industrial redeployment policy (PRI) is thus part of the orientations and objectives of the SCA which, in turn, is part of the action plan to reach the productivity and growth objectives of the National Social and Economic Development Strategy (SNDES), which is Senegal’s third generation poverty reduction strategy document. Thus, the PRI rests on the stability of the macroeconomic environment, the policy of external openness and regional integration, the option to establish a business environment with international standards, and the development of economic zones.2 The competitiveness cluster approach is symbolic of opportunities for innovation within the SCA as well as for collaboration between actors along the value chain, which create the conditions for better positioning of Senegalese products in both domestic and foreign markets.

The observed advantages of an effective industrial redeployment policy are: (1) the presence of important measures to increase value added in industrial sectors; (2) increased accountability in the private sector; (3) the ongoing process to develop infrastructure; (4) access to foreign markets. Complicating factors include: (1) the strong concentration of industrial activity and population in Dakar, which may be a source of agglomeration effects and positive external economies of scale but could make the redeployment less beneficial; (2) the lack of synergies between the industrial sector and small-scale producers; (3) backwardness in entrepreneurial spirit and technological innovation; (4) the cost of developing industrial sites.

With respect to industrial policy in Senegal, emerging issues involve: (1) the lack of adequate infrastructure, notably energy; (2) limited human resources, including entrepreneurial spirit; (3) overvaluation of the real exchange rate which hindered competition.

7.3 The Structure of the Industrial Sector

Despite relatively early industrialization, Senegal is characterized by a poorly developed industrial sector with the majority of firms concentrated in Dakar. The industrial sector is very heterogeneous in terms of age and firm size. Besides a small number of large firms established before or during the first years of independence and controlled by foreign interests or by the state, there are numerous small-scale firms. While large firms made up only 10 per cent of firms operating between 1992 and 1995, they contributed almost three-quarters of total investment, jobs, and revenue. Small firms (p.144) count for three-fifths of the total number of industrial firms, and less than one-tenth of jobs and revenue (Republic of Senegal-UNDP 1997).

Furthermore, the industrial sector contributed 30 per cent of the value added of Senegalese business enterprises. This has declined from 46.4 per cent in 1999 to 28.35 per cent in 2010. However, in 2011 its value registered a slight increase to 30 per cent. On the other hand, the contribution from trade and services increased from 44.8 per cent to 63.54 per cent over the same period. In 2011 its value stood at 62.2 per cent (see Cissé et al. 2014: Figure 2).

The industrial sector was mainly made up of electricity and water (22.4 per cent) and construction (22.4 per cent) sectors in 2011, followed by the chemical industry which accounted for 10.38 per cent and the glass and pottery sector accounting for 8.16 per cent of the industrial value added. These four sectors accounted for more than 65 per cent of the total industrial value added.

The 1980s showed a slightly different picture, with the dominant role played by electricity and water (30 per cent), manufacturing (13.8 per cent), construction (12 per cent), and the chemical industry (7 per cent). The first four sectors accounted for 63 per cent of the total industrial value added.

Table 7.1 Share of industrial sectors in total industrial value added on a five-year basis, 1980–2010

Industrial sectors

1980–5

1986–93

1994–9

2000–4

2005–10

1980–2010

Processing and preservation of meat and fish

7.29

8.31

7.47

4.79

2.59

6.27

Edible fats

2.87

1.90

2.60

-0.21

0.56

1.62

Grain milling and manufacture of grain products

1.91

2.80

2.73

1.32

1.57

2.14

Manufacturing of cereal foods

0.35

0.47

0.51

0.28

0.34

0.40

Manufacturing and processing of sugar

12.51

8.18

5.52

4.92

3.88

7.15

Manufacturing of other foods

0.99

1.80

2.19

1.44

1.71

1.64

Manufacturing of beverages

2.23

1.99

2.16

2.01

3.81

2.43

Manufacturing of tobacco products

1.34

1.19

1.29

1.62

1.35

1.34

Cotton and textiles manufacturing

3.52

3.29

3.28

2.32

1.45

2.82

Leather processing and manufacturing

0.20

0.23

0.27

0.28

0.12

0.22

Woodworking and manufacturing of wooden products

0.38

0.53

0.62

0.34

0.06

0.40

Paper and stationery

3.33

3.92

4.20

4.82

5.82

4.37

Petroleum processing and coking

0.28

0.22

1.21

3.21

2.66

1.38

Chemical industry

7.24

8.79

13.99

14.75

11.09

10.90

Production of rubber products

2.70

2.73

2.44

3.54

3.55

2.96

Glassware and pottery manufacturing

4.10

3.41

3.95

6.21

9.10

5.20

Metallurgy, foundry, and foundry services

3.66

4.07

4.57

4.81

5.22

4.43

Manufacturing of machines

0.48

0.56

0.64

0.88

0.81

0.66

Manufacturing of equipment and devices (appliances)

0.00

0.00

0.00

0.00

0.00

0.00

Manufacturing of transportation equipment

0.33

0.41

0.30

0.32

0.50

0.38

Manufacturing of various products

1.72

1.70

1.58

1.40

1.07

1.51

Electricity, water, and gas

29.30

26.86

20.34

19.12

22.09

23.90

Building industry

13.27

16.64

18.15

21.84

20.62

17.89

Total

100.00

100.00

100.00

100.00

100.00

100.00

Source: Authors’ calculations based on data from Agence Nationale de la Statistique et de la Démographie (ANSD various years).

One can conclude that over the last thirty years the production structure of the industrial sector in Senegal has been concentrated in a few sectors with little diversification. While some sectors diminished, others have grown in importance (see Table 7.1 for details).

Table 7.2 Share of the modern industrial sector and the informal sector of the total industrial value added on a five-year basis, 1980–2010

Period

Modern

Informal

Total

1980–5

44.79

55.21

100.00

1986–93

44.28

55.72

100.00

1994–9

44.22

55.78

100.00

2000–4

44.45

55.55

100.00

2005–10

46.22

53.78

100.00

1980–2010

44.77

55.23

100.00

Source: Authors’calculations based on data from Agence Nationale de la Statistique et de la Démographie (ANSD various years).

It is also interesting to note that despite the limited role of the manufacturing sector in overall value added, the share of the formal modern industrial sector in total industrial value added has remained more or less stable at 45 per cent (see Table 7.2).

7.3.1 Employment

According to Table 7.3, at the beginning of the 1980s a significant share of the labour force was employed in the manufacturing and processing of sugar (19 per cent), followed by the production of rubber products (about 10 per cent), utilities, and production of machines (about 8.5 per cent each). In 2010 the distribution of the labour force among the industrial sectors changed significantly. Over a third of the active labour force worked in the construction sector (almost 36 per cent), while 10 per cent worked in utilities. The manufacturing sector, including fisheries, sugar processing, and others together accounted for only 15 per cent of the active labour force.

Table 7.3 Employment rates by sector on a five-year basis, 1980–2010

1980–5

1986–93

1994–9

2000–4

2005–10

1980–2010

Processing and preservation of meat and fish

7.96

6.95

8.06

6.75

7.32

7.40

Edible fats

5.72

6.91

4.96

7.36

6.80

6.35

Grain milling and manufacture of grain products

0.92

1.17

1.31

1.41

1.33

1.22

Manufacturing of cereal foods

2.01

1.74

1.46

1.00

0.70

1.42

Manufacturing and processing of sugar

18.85

17.34

11.80

11.84

8.69

14.00

Manufacturing of other foods

1.42

2.59

2.95

3.59

4.74

3.01

Manufacturing of beverages

0.93

1.23

1.15

1.19

1.64

1.23

Manufacturing of tobacco products

1.32

1.08

0.66

0.50

0.42

0.82

Cotton and textiles manufacturing

5.62

6.30

5.95

5.06

5.38

5.72

Leather processing and manufacturing

0.11

0.20

0.44

0.60

0.90

0.43

Woodworking and manufacturing of wooden products

0.24

0.29

0.43

0.38

0.26

0.32

Paper and stationery

5.24

5.05

4.32

3.45

2.65

4.22

Petroleum processing and coking

3.38

2.00

1.19

1.34

0.31

1.68

Chemical industry

8.02

8.73

7.92

7.33

6.81

7.84

Production of rubber products

8.34

5.37

4.98

4.19

1.05

4.84

Glassware and pottery manufacturing

0.49

0.88

1.00

1.71

2.48

1.27

Metallurgy, foundry, and foundry services

4.45

3.37

5.43

4.22

1.04

3.66

Manufacturing of machines

6.04

2.37

1.16

0.84

0.12

2.17

Manufacturing of equipment and devices

0.00

0.00

0.00

0.03

0.15

0.04

Manufacturing of transportation equipment

1.50

1.83

0.96

1.89

1.88

1.62

Manufacturing of various products

1.01

1.45

1.48

1.97

2.34

1.63

Electricity, water, and gas

9.12

10.76

11.84

11.29

10.10

10.61

Building industry

7.31

12.39

20.55

22.05

32.87

18.51

Total

100.00

100.00

100.00

100.00

100.00

100.00

Source: Authors’ calculations based on data from Agence Nationale de la Statistique et de la Démographie (ANSD various years).

In past years, the most significant increase in the number of employees over the last thirty years was recorded in the leather processing and manufacturing sectors, followed by the glassware and pottery sector and the building sector. The fourth sector in terms of the number of employees was the manufacture of other foods. These sectors have also seen the most important growth rates in (p.145) (p.146) number of employees during the last decade (between 2000 and 2010). However, except for the construction sector, the contribution from other sectors to the total industrial value added was quite low, amounting to 7 per cent for all three sectors over the thirty-year period. Out of the three sectors the glassware and pottery producing sector was the most important accounting for 5.2 per cent of the total industrial value added.

7.3.2 Foreign Direct Investment

In the case of Senegal, the flow of FDI originates mainly from Europe, with France being a leading source. While the share of FDI to GDP in Senegal was low in early 2000 (about 1 per cent), recently it has shown remarkable growth reaching an average of 2.5 per cent of GDP in 2010. The impact of FDI on growth varied greatly from country-to-country, because of the existence of (p.147) technological spillover contingent on the absorptive capacity of the recipient countries.

7.3.3 Profile of Firms

According to a firm survey conducted in 2011, close to 28 per cent of firms were engaged in construction related activities, 8 per cent in the paper production industry, 8 per cent in the chemical industry, and about 5 per cent in agro-processing industries.

Between 1998 and 2011, the number of firms operating in the country decreased by 50 per cent, with the largest number recorded in 2006 reaching 594. The evolution of the number of firms during the period has been highly variable with many firms appearing and disappearing over the years. For example, in 2006 over one hundred firms were set up, but in 2007 the number of firms that exited was higher than the number of firms set up in the preceding year.

7.4 Patterns of Industrial Productivity

A simple way to assess the return on investment is to analyse TFP. The level of aggregate TFP is generally low and also declined steadily up to 1994 then rose slightly up to 2006, the year which marked the beginning of the crisis. TFP growth rate does not reflect any stable improvement. On the contrary, it is very uneven, a characteristic that could be explained by fluctuations in rainfall.

The contribution from each factor to growth is computed on the basis of the average growth rates of labour and capital. Thus over 1995–2004, 38 per cent of growth was due to the accumulation of physical capital, 43 per cent to labour, and 16 per cent to an improvement in TFP. Between 1995 and 2009, these figures were respectively 49 per cent, 47 per cent, and only 3 per cent for TFP.

Industrial Policy in SenegalThen and Now

Figure 7.2 Contribution of labour reallocation to TFP

Source: AfDB 2012 report.

Note: The effect of the impact of labour mobility is estimated as the sum of the growth rates of the sectoral share of total employment weighted by the sectoral share of total value added. The contribution of labour is calculated by multiplying the Syrquin effect by the output elasticity of labour, i.e. 0.65.

Therefore we can conclude that the Senegalese growth model is evolving towards a change in the respective weights of labour and capital in growth, with a significantly more important role played by capital than in the previous period (1960–90). By applying the same methodology, Berthélémy et al. (1996) found the following percentages: 22 per cent attributable to capital, 58 per cent to labour, and 20 per cent to TFP. TFP contribution to growth remains therefore stable and small. The computation of the Syrquin effect suggests that 16 per cent of growth due to improved TFP mainly stems from the reallocation of labour from the agricultural sector to the secondary and tertiary sectors, characterized by higher labour productivity (Figure 7.2). The (p.148) slow progress of TFP can only partially be attributed to technical progress or to the streamlining of production. These patterns stem from the simple mechanical impact of the migration of labour, which leads to the conclusion that the Senegalese growth model still remains highly fragile.

We utilize a database from annual surveys conducted by the CUCI (Centre Unique de Collecte de Information) of the National Agency of Statistics and Demography (ANSD) of Senegal. The surveys record the information, which is needed for the collection and calculation of taxes. Registration is mandatory for firms in the formal sector, with sales above 50 million FCFA. However, firms can choose to pay a flat tax and in that case they are not required to complete and return the CUCI questionnaire. Therefore, there are biases in the CUCI database, which does not contain information about all companies in the manufacturing sector. Major Senegal firms are registered.

The database gathers information about 1,599 firms in the Senegalese manufacturing industry between 1997 and 2010, including sales, output, value added, revenues of capital, staff load, consumption of intermediate inputs, the identification of the sector in which the firm operates, and the classification code that allows large, medium, and small businesses to be distinguished from each other. However, this size categorization may change over time. Thus, a firm listed as small in a given year may change its status over the following years. The data cover all the major two-digit (p.149) manufacturing industries according to ISIC. Maurel and Seghir (2014) estimate a Cobb Douglas production function. Imposing constant returns to scale, the estimated elasticity of output with respect to capital is statistically significant and ranging at 0.46.

The sectors that had the highest TFP in 2011 were manufacturing of other foods, various products, and processing of sugar, as well as metallurgy, foundry, and foundry services. It is interesting to note that the most dynamic sectors do not play an important part either in terms of number of employees or in terms of value added. At the beginning of 1998, the highest TFP was recorded in manufacturing of other foods, various products, production of rubber products, and processing and preservation of meat and fish.

During 1998–2011 the highest average TFP was registered in the manufacturing of other foods (16.84), various products (16.63), production of rubber products (16.12), and metallurgy, foundry, and foundry services (15.79). The sectors prominent in value added and number of employees do not fare very well in terms of TFP. The average TFP over the same period was only 13.87 for the construction sector, 14.40 for the energy producing sector, and 14.25 for the chemical industry.

7.4.1 Factors Affecting Firm Productivity in Senegal

7.4.1.1 Lack of Skilled Labour

According to the 2001 Senegalese Household Survey (ESAM II), 68 per cent of migrants are between 15 and 34 years old and 94 per cent between 15 and 54 years old. Skilled workers represent 24.1 per cent of the migrant stock (Dia 2006). Also in 2001, 17.7 per cent of the population with a higher education level emigrated (Docquier and Marfouk 2005). Clemens and Pettersson (2007) confirm the brain drain feature: 51 per cent of Senegalese doctors and 27 per cent of nurses emigrated over the 1995–2005 period, mainly to France.

Literacy levels of the adult population remain low especially among the rural population, despite a significant achievement between 1988 and 2009, a period during which the literacy rate rose from 26.9 per cent to 49.7 per cent for the adult population. Illiteracy continued to affect half of the population in 2009 and women in particular are affected by this phenomenon (61 per cent). Special efforts should be made to improve literacy levels for women in rural areas.

The percentage of annual sales lost as a result of a power outage by sector of activity is given in Cissé et al. (2014: Figure 20). The average loss is 4.6 per cent with 7.5 per cent for small enterprises and 7 per cent for large enterprises. The worst affected firms are in the electronics sector. Successive power outages and cuts lead to the installation of electric generators by firms. These are much more expensive than grid-supplied electricity. Thus, to offset the shortfall in (p.150) electricity, over 61 per cent of manufacturing enterprises in Senegal (35.3 per cent in Uganda and 38.2 per cent in Zambia) have had to acquire generators to offset this shortfall.

7.4.1.2 Poor Infrastructure

Table 7.4 Average electricity rates in West Africa

Côte d’Ivoire

Togo

Burkina Faso

Mali

Niger

Senegal

Nigeria

Benin

The Gambia

Liberia

Ghana

Price (US cents: KWh)

13.11

14.92

30

19.9

14.07

22.7

4.2

14.28

27.33

43

8.93

Source: Authors’ calculations based on Africa Infrastructure Country Diagnostic (AICD various years).

Between 2000 and 2009, electricity generation capacity grew from 365 MW to 510 MW, while demand kept growing at a rate of 25–30 MW per year. This was undoubtedly a significant increase in generation achieved by Senegal National Electricity Company (SENELEC) but it still does not meet the ever-rising demand. SENELEC is faced with other problems in addition to the high demand for electricity which it is unable to meet. Its power generation and transmission facilities are obsolete and consequently this prevents the company from effectively meeting the growing demand and power disruptions. To solve this, electricity rates rose in 2006 to the highest levels in West Africa (Table 7.4) and sub-Saharan Africa (SSA): almost 60 per cent higher than in Côte d’Ivoire: CFAF 46/KWh in high voltage compared to CFAF 29 in Côte d’Ivoire.

Filling Senegal’s infrastructure gap would require US$1.8 billion per year over the next ten years—about 20 per cent of GDP. The highest allocations should be to electric power generation infrastructure (Torres et al. 2011). These needs are high in relation to those of other countries in the region (see Cissé et al. 2014: Figure 24). At present, Senegal allocates US$911 million per year to its infrastructure (11 per cent of GDP). The control over electric power wastage because of frequent power outages (representing US$312 million per year) would certainly enable the country to improve the infrastructure situation. In this respect, cost recovery in the electricity sector is one of the challenges to be taken up.

7.5 Industrial Policy

7.5.1 Trade Policy Reforms and Manufacturing Performance

Industrial policy in Senegal following independence has been marked by the state’s strong desire to counter divestment pressures associated with the (p.151) shrinking domestic market. In fact, ex-French colonies were engaged in processes to industrialize their economy. Typical IS industrialization policy instruments (tariff and non-tariff barriers) were established, along with complementary measures (creation of free trade zones and investment codes) to step up the still-nascent private sector.

Starting in the mid-1980s, the arrival of structural adjustment programmes (SAPs) led to economic liberalization processes, which resulted in the closure of many firms that faced competition pressures in the environment of an overvalued FCFA. The liberalization process stalled in 1989 and did not pick up significantly until 1994, following a 50 per cent devaluation of the FCFA. However, this massive devaluation occurred after a long period of currency overvaluation and thus cannot be explicitly interpreted as part of a programme to implement an export promotion policy.

The second half of the 1990s saw the establishment of a new economic and monetary union with the goal of accelerating the convergence and integration of West African countries, with the FCFA serving as a common currency. In summary, Senegal implemented an IS policy during 1960–86, followed by a policy of private sector development in a liberalized economy.

7.6 Sunrise and Sunset Industries

In this section we present an estimation of the Imbs and Wacziarg (2003) equation. This equation consists of a non-linear model that links diversification indicators like the Herfindahl Index and the level of development as measured by GDP per capita. According to this model, poor countries tend to diversify only after reaching a certain income threshold and specialization dominates once again in the development process. The estimation proposed below (AfDB 2012) covers a sample of fifty-three African countries between 1980 and 2010. The dependent variable is the Herfindhal Index, which varies between 0 and 1; lower values indicate greater diversification of exports of goods.

The negative (positive) sign of GDP per capita (GDP per capita squared) indicates that the Herfindahl Index initially falls to a critical threshold of GDP per capita of US$6,313 in constant 2005 US dollars and increases from that threshold. The computations give a result very close to that of Imbs and Wacziarg (2003: 74), where the threshold is estimated at US$9,000 in 1985 dollars, i.e. US$10,500 in 2000 US dollars.

Furthermore, Imbs and Wacziarg (2003) compute a theoretical or potential specialization indicator as well as the effective specialization to potential ratio. It stood at about 20 per cent between 2000 and 2006 (dates for which data are available), which means that Senegal is above its natural diversification (p.152) potential, and not much can be expected of a proactive policy. This result illustrates the non-linearity between growth and specialization in an African context: first there is an increase in diversification; then a specialization process sets in for the most advanced countries. Whereas Botswana, Mauritius, the Seychelles, South Africa, and Tunisia are beyond the critical threshold, Senegal with a GDP per capita in 2010 of US$1,700 in 2000 US dollars is below the threshold from which growth leads to specialization. It is situated in the area where growth leads to continuing diversification.

The trend of the indicator in Cissé et al. (2014: Figure 6) shows a slight fall which is increased export diversification. There was an 80 per cent drop for the first ten products in 2004 and 60 per cent in 2010. The figure shows that there was not a real diversification trend over 1980–2010, and that exports remain highly concentrated.

The main exporting industries have seen many fluctuations over the last thirteen years, with the share of the processing and preservation of meat and fish diminishing from 34 per cent in 1997 to only 9.85 per cent in 2011. The lowest share of this branch of exports fell below 8 per cent in 2008. The share of the main exporting branch, the chemical industry, was over 33 per cent in 1998 and reached only 14 per cent in 2006, while petroleum processing and coking attained the highest level at 47 per cent of exports in 2000, before dropping and growing again. The most impressive evolution over the period was registered by the glassware and pottery industry, which accounted for only 0.5 per cent of exports in 1997 to reach almost 12 per cent in 2010. However, one can conclude that Senegalese exports are unstable and volatile. They are also poorly diversified with three sectors accounting for more than 55 per cent of exports and another three for more than a quarter of the remaining exports.

Following our analysis we identified three sunrise industries: building, chemical, and glassware and pottery. By contrast, the processing and preservation of meat and fish and other food industries constitute sunset industries.

7.7 Conclusion and Emerging Policy Issues

Senegal registered persistently slow growth rates, including during periods of major policy shifts including the deregulation of the 1990s, the 1994 devaluation of the CFA franc, and the recent debt relief programmes. The TFP trend shows the dependence of Senegalese growth on agriculture, which employs the vast majority of the population. Dualism in the economy is perpetuated by inadequate economic diversification, institutions that are too weak and do not motivate workers to leave the informal sector.

A key policy intervention that follows from our analysis is the much needed improvement of infrastructure and particularly the improvement of electricity (p.153) supply. Frequent power outages impose significant costs on doing business. While infrastructure spending has grown recently reaching 11 per cent of GDP, the share allocated to the electricity sector is insignificant. Industry is largely concentrated in Dakar and close to consumer markets that are not lacking in transport infrastructure. Weak supply and frequent outages are, however, immediate obstacles to the development of the country’s industrial growth and require immediate attention.

Privatization might be a possible solution provided that electricity rates are sufficiently attractive for investors. Improving the supply and financial performance of SENELEC, whose costs are too high, should be a main issue. The increase in private management in the infrastructure sector has appeared as a logical response to several constraints: search for enhanced efficiency, limited public resources, and the desire to attract foreign investors. This strategy has experienced considerable success especially in the transport and water supply sectors. For the time being, partial privatization of the electricity sector has not produced the expected results. The reasons need to be analysed before undertaking further privatization.

Another key issue is the educational drive. Its focus should be on primary education, and technical training, the returns to which are higher. The returns to higher education are, on the other hand, low. The job market in Senegal is more open to job seekers with primary, secondary, and technical levels of education than to university graduates: the job market seems to favour labour with low or intermediate qualifications, such as a primary school certificate or a technical diploma.

The mismatch between supply and demand (too many overqualified graduates) resulted in a high unemployment rate and a brain drain. The Senegalese educational system is suboptimal as it offers training that does not meet the requirements of the labour market.

Considerable efforts are required in order to improve Senegalese human capital, especially in the areas of secondary and university education, in order for Senegal to rapidly achieve a quality of human capital comparable to that existing in emerging countries. Also, human capital in Senegal would improve faster if the large increase in the number of young dependents slowed down.

References

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Notes:

(1) Rapport du FMI 12/337, November 2012.

(2) Loi d’Orientation 2008–03 du 08 janvier 2008 sur la Stratégie de Croissance Accélérée, article 2.