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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized JUNE 2013

2 Acknowledgments This report was prepared by a team lead by Punam Chuhan-Pole and comprising Mapi M. Buitano, Vijdan Korman, Aly Sanoh, and Beatrice A. Berman. Gilberto de Barros, Andreas Blom, Paul Breton, Xiaofeng Hua, Daniel John Kirkwood, Stephen Ling, Waleed Haider Malik, Victoria Monchuk, Peter Pojarski and Karima Saleh prepared various parts of the report. Other contributors included Patricia Geli and Kokeb Misrak Workeneh. Rui Coutinho, Shantayanan Devarajan and Deon Filmer provided valuable comments. ii

3 Contents Results for Africa. 3 Africa: Compare your country. 20 Country Tables. 21 Angola Benin Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo, Democratic Republic Congo, Republic Côte d Ivoire Eritrea Ethiopia Gambia, The Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Mozambique Niger Nigeria Rwanda São Tomé and Príncipe Senegal Sierra Leone South Sudan Sudan Tanzania Togo Uganda Zambia Zimbabwe Appendix A: Components. 61 Appendix B: Country Groups. 62 Appendix C: Guide to. 63 1

4 List of Figures Figure 1 Correlation between and Non-income Human Development Index in Sub-Saharan Africa, Figure 2 s of Sub-Saharan African Countries, Figure 3 and Change in for Selected Countries, Figure 4 s by Cluster, Figure 5 s in Sub-Saharan Africa, by Cluster and Country Group, Figure 6 s for Health and Education in Sub-Saharan Africa, 2006 and Figure 7 Changes in s for in Sub-Saharan Africa, Figure 8 s for Components of Cluster D in Sub-Saharan Africa, Figure 9 s for in Sub-Saharan Africa, by Country Group,

5 RESULTS FOR AFRICA 3

6 Results for Africa Summary u The overall quality of policies and institutions in Sub-Saharan African countries showed resilience in amid difficult global economic conditions. u There was considerable divergence across countries. Several countries strengthened their policy environment. In some others, especially countries affected by conflict or political instability, the policy and institutional environment deteriorated. u More countries saw a weakening in their overall Country Policy and Institutional Assessment () score than an improvement; the score declined in more than twice as many countries in as in u The public sector management and institutions score edged lower, on continuing deep governance challenges in the region. u The quality of policies and institutions in Africa s nonfragile countries is comparable to that of nonfragile countries elsewhere. By contrast Africa s fragile countries generally lag fragile countries in other regions in all categories of the. Recent s and Analysis This report is the second in a series of annual reports describing the progress African countries are making on strengthening the quality of policies and institutions that underpin development. It presents Country Policy and Institutional Assessment () scores for the 39 African countries that are eligible for support from the International Development Association (IDA). 1 The scores are an indicator of the quality of these countries policy and institutional framework across 16 dimensions, grouped into 4 clusters: economic management (Cluster A), structural policies (Cluster B), policies for social inclusion and equity (Cluster C), and public sector management and institutions (Cluster D). 2 The scores are on a scale of 1 6, with 6 the highest. scores are calculated by World Bank staff and are based on quantitative and qualitative information. The assessment also relies on judgments of Bank staff. scores are used in determining IDA s allocation of resources to the poorest countries. As an indicator of the strength of a country s policies and institutions, the is useful for monitoring country progress and benchmarking it against progress in other IDA eligible countries. 3 The development literature identifies the components of the as being broadly relevant for sustaining growth and reducing poverty. 4 The data provide some support for this association. For example, the correlation between overall score and GDP growth is fairly strong (correlation coefficient of 0.52), indicating that countries with better policies tend to enjoy higher economic growth. The correlation between the pace 1 See appendix B for a list of IDA countries. 2 For detailed information, see Criteria at: See appendices A and C. 3 In most cases, changes in scores reflect actual changes in a country s underlying policy landscape, sometimes with a lag. In some cases, the changes reflect recalibration or revision of the criteria. The criteria were revised in Special attention was given to ensuring continuity in the criteria to avoid unwarranted changes in scores. 4 Independent Evaluation Group, 2010, The World Bank s Country Policy and Institutional Assessment: An Evaluation. 4

7 of poverty reduction and the overall score (correlation coefficient of -0.21) is weak, however. The correlation varies by cluster, being higher for policies for social inclusion and equity, structural policies, and public sector management and institutions than for macroeconomic policies. A similar pattern is observed for the association between and human development. For example, the correlation coefficient between the nonincome Human Development Index (HDI) and the overall score is 0.22; the correlation is stronger with structural policies (0.29) and policies for social inclusion and equity (0.28). The score for IDA eligible countries in Sub-Saharan Africa was in, unchanged from 2011 (figure 2). This stability indicates that despite difficult global economic conditions and policy uncertainty in the major world economies, countries in the region generally opted to maintain prudent policies. African countries scores were in the range of , with almost an equal number of countries above and below the. Cape Verde and Kenya had the highest scores, although Cape Verde saw a decline in its, for the third year in a row. South Sudan, which faces deep policy and governance challenges, and Eritrea had the lowest scores (2.1). More than half of the countries in the region saw a change in their overall score in. The scores of 11 countries rose by 0.1 point or more, reflecting a strengthened policy agenda, and the indexes of 12 softened by at least 0.1 point. 5 Half of these declines were concentrated in fragile countries or those seeing political instability. The fact that the score declined in more than twice as many countries in as in 2011 attests to the more difficult enabling environment in some countries., there continues to be considerable variation in the quality of policies and institutions between country groups, 5 The typical movement in a country s overall score is 0.1 point (in absolute terms). Larger changes are less common. Non-income HDI, Correlation between and Non-income Human Development Index in Sub-Saharan Africa, ZWE SDN ERI COM CAF GNB TCD ZAR TGO AGO CIV CPI score countries LBR GIN STP BDI MDG Fitted values GHA TZA CMR MWI SEN UGA ZMB MRT LSO RWA GMB BEN ETH MOZ NER KEN MLI BFA Source: African Development s database, database, and staff estimates. Note: The poverty headcount is the percentage of the population living on less than $1.25 a day (purchasing power parity). Figures are for IDA eligible countries in Sub-Saharan Africa. COG s of Sub-Saharan African Countries, Cape Verde Kenya Burkina Faso Ghana Rwanda Senegal Tanzania Mozambique Uganda Benin Lesotho Niger Nigeria Zambia Ethiopia Gambia, The Mali Sierra Leone SSA-IDA Burundi Cameroon Malawi Mauritania Côte d'ivoire Liberia São Tomé and Principe Congo, Rep. Guinea Madagascar Togo Comoros Angola Central African Republic Congo, Dem. Rep. Guinea-Bissau Chad Sudan Zimbabwe Eritrea South Sudan Source: database. SLE CPV FIGURE 1 The correlation coefficient between the non-income HDI and the score is low; the correlation is strongest with structural policies and policies for social inclusion and equity. FIGURE 2 The score for IDA eligible countries in Sub-Saharan Africa was in, unchanged from

8 FIGURE 3 More than half of Sub-Saharan African countries saw a change in their score. Côte d Ivoire saw a 0.2 point increase, while the score in Guinea-Bissau, Madagascar and Mali fell by 0.2 point. FIGURE 4 The governance cluster, which covers public sector management and institutions of accountability, lags all other clusters, reflecting the deep governance challenges in the region. Change in overall score, and Change in for Selected Countries, Source: database. score Below SSA and catching up Source: database. Note: Fragile countries are in orange ( )color. s by Cluster, Above SSA and increasing -0.2 Below SSA GNB MDG MLI and Above SSA decreasing and decreasing SSA = score, ERI TCD SDN COM CAF GIN CIV LBR BDI MWI GMB LSO NER Cluster A: management Cluster B: policies Cluster C: for social inclusion and equity Cluster D: Public sector management and institutions ETH NGA UGA TZA GHA particularly between the region s fragile and nonfragile countries. 6 Poor governance, weak public sector capacity, and civil conflict helped to keep the score for fragile countries at a low well below the for nonfragile countries. With an of, the region s resource-rich countries lag its non resource rich countries (), although the gap narrowed in. More than half of the region s fragile states exhibited movements in scores, some quite large (albeit from a very low base), reflecting rapid improvement or deterioration in their policy environments. Côte d Ivoire, for example, experienced a 0.2-point increase in its overall score in both 2011 and, thanks to implementation of wideranging reforms as the country transitioned from the political instability triggered by the 2010 elections. By contrast, the score in Guinea-Bissau fell by 0.2 point, as that country s policy and institutional environment deteriorated following the April coup. The pattern of larger gains in fragile states is also evident. For example, in Comoros a strengthening of policies was reflected in increases of 0.2 point in 2011 and 0.1 point in (figure 3). Conflict and political instability can set back policy gains and weaken institutions in nonfragile countries as well. Madagascar, for example, witnessed a decline of 0.2 point in both 2011 and, following a protracted political crisis, and Mali saw a decline of 0.2 point in, as a result of conflict and political instability. Although countries with high scores typically show slow but steady improvement in scores (examples include Kenya, Rwanda, and Senegal), a few have seen policy slippages in recent years (examples include Cape Verde in 2010, 2011, and and Ghana in 2010 and ). Across the four clusters, performance in the economic management cluster (Cluster A), which covers monetary and exchange rate policy, fiscal policy, and debt policy and management, generally lead that of all other clusters (figure 4). This pattern reflects consensus among local stakeholders of the importance of macroeconomic stability for facilitating a vibrant private sector, as well as the fact that changing macroeconomic policies (such as tightening monetary policy or reducing the fiscal deficit) is not as lengthy, complex, or politically contentious a process as changing institutions (such as the judicial system). Thus, at the country level, changes in macroeconomic management can be more pronounced than in other areas. 6 Of the world s 35 fragile states (based on the FY13 harmonized list of fragile situations), 18 are in Sub-Saharan Africa, the largest number of any region. See appendix B. KEN CPV 2.9 6

9 score Fragile countries in Sub-Saharan Africa s in Sub-Saharan Africa, by Cluster and Country Group, Fragile countries outside Sub-Saharan Africa 3.8 Nonfragile countries in Sub-Saharan Africa 3.7 Nonfragile countries outside Sub-Saharan Africa Cluster A: Cluster B: Cluster C: for Social Inclusion Cluster D: Public Sector FIGURE 5 Poor governance, weak public sector capacity, and civil conflict kept the score for fragile countries at well below the for nonfragile countries. Source: database. Social reforms have also taken hold in Sub-Saharan Africa. scores on social inclusion policies (Cluster C) show a slow upward trend, with scores similar to those on structural policies (Cluster B). The governance cluster (Cluster D), which covers the quality of public sector management and institutions of accountability, lags all other clusters, reflecting the deep governance challenges in the region s countries. Low governance scores indicate that policy gains can be tenuous and vulnerable to shocks. The governance score for the region edged down on weaker performance in a fifth of the region s countries. The results are a reminder of the difficulties of implementing and sustaining reforms in a weak enabling environment. All country groups exhibit similar patterns across the four clusters. The gap in scores between the macroeconomic management cluster and the governance cluster is just as pronounced for fragile as for nonfragile states. In contrast, the gap between the economic management cluster and the social policies and structural policies clusters is small. The country-level data show a faster pace of change on macroeconomic management as well as a broadbased approach to reforms. Of the 11 IDA eligible countries in which the overall score rose, nearly threequarters saw a strengthening in economic management and an equal number saw progress in social policies. Only about a third saw improvement in governance. Of the 12 IDA eligible countries that experienced a decline in their overall score, three-quarters saw a weakening on the economic management front, half saw slippage in social policy, and an equal number saw a decline in governance. The region s nonfragile countries continue to compare well on quality of policies and institutions with similar countries elsewhere. For example, nonfragile countries in Africa display slightly stronger performance on economic management (3.8) than nonfragile countries outside the region (3.7). The performance on macroeconomic management reflects the generally prudent policies that African countries pursued over the past decade or so, policies to which they remained committed even in the wake of the global economic crisis of 2008/09. A small gap on structural policies, social policies and governance dimensions of the remains between nonfragile states within (,, and, respectively) and outside Sub- Saharan Africa (,, and, respectively) (figure 5). By contrast, Africa s fragile countries continue to lag those in other regions on all categories of the. For the region as a whole, the overall score for African countries () remains below that of IDA eligible countries outside of Africa (). 7

10 Analysis of Components CLUSTER A: ECONOMIC MANAGEMENT The quality of three closely related policy areas are covered under this cluster: monetary and exchange rate, fiscal, and debt., the macroeconomic policy stance in Sub-Saharan Africa was supportive of growth, with monetary policy focused on managing inflation and fiscal policy focused on pro-poor spending and infrastructure development. Inflation declined in, thanks to a moderation in food and fuel prices and prudent monetary policy. However, an expansive fiscal policy translated into a weakening of fiscal balances. Debt levels also edged up, although they remained moderate. There was some worsening of the current account, and the level of international reserves remained at about four months worth of imports., there was little progress toward rebuilding policy buffers, constraining countries ability to respond to shocks. The regional score for Cluster A remained unchanged at, although more than two-thirds of countries saw either an increase or a decrease in their score for this cluster. As the policy areas in this cluster are closely related, there tends to be co-movement in the scores for monetary and fiscal policy. Côte d Ivoire, Guinea, Kenya, and Nigeria saw strengthening in both monetary and fiscal policy areas, for example, whereas Eritrea, Ghana, and Guinea-Bissau saw declines. Monetary and exchange rate policy. The score for the monetary and exchange rate policy component held steady at. On balance, countries pursued prudent monetary policy, with a focus on managing inflation. In eastern Africa, monetary tightening that began in late 2011 continued through part of. In Kenya, a strong monetary policy response helped reduce inflation from a peak of 19.4 percent in November 2011 to percent in December, the government maintained the policy rate at 18 percent through June. Effective management of inflation lifted the country s score for this component by 0.1 point. A similar improvement was seen in Guinea, where the central bank maintained the policy rate at 22 percent and the bank reserve requirement ratio at 22 percent, up from percent and 7.5 percent, respectively in early Countries in which inflationary pressures were low were able to ease monetary policy. For example, the West African and Monetary Union (WAEMU) reduced its policy rates by 25 basis points to percent in. Fiscal policy. A weakening of fiscal balances and little progress on rebuilding policy buffers reduced the score for the quality of fiscal policy to in, down from in Fiscal policy scores rose in six countries (Comoros, Côte d Ivoire, Guinea, Kenya, Niger, and Nigeria) and fell in eight (Cape Verde, Eritrea, Ethiopia, Ghana, Guinea-Bissau, Malawi, Sierra Leone, and Togo). Some countries improved their fiscal balance by adopting measures to mobilize additional revenues or contain expenditures. Comoros reversed its imbalances in thanks to adequate revenue collection performance, an increase in nontax revenue, and containment of the wage bill. Côte d Ivoire returned to a normal budget cycle in as a result of better budgeting of fiscal performance, programming of budget overruns, management of expenditure, and financing of public investment. Guinea s public finance reforms tightened public expenditure through a cash-based expenditure management system, enabling the government to reach its targeted budget deficit of 3.7 percent despite losses in fuel tax revenues. Nigeria restored fiscal discipline through budgetary consolidation, the reduction of fuel subsidies, and a crackdown on corruption related to fuel subsidies. It also ended the ad hoc distributions of fiscal reserves and put a governance structure in place for its sovereign wealth fund. Kenya avoided fiscal stimulus in the face of election year pressures and the high cost of security operations in Somalia. 8

11 The fiscal position deteriorated in some countries because appropriate fiscal measures were not adopted. In contrast to Kenya, Ghana significantly increased its fiscal deficit during the electoral cycle: lower than expected revenue and higher current expenditure pushed the provisional fiscal deficit to 12 percent in. Likewise in Togo, the deterioration of fiscal balances was driven largely by increases in current expenditures which went from 15.9 to 19.7 percent of GDP with mostly spending on goods and services as well as transfers and subsidies. Cape Verde s deficit increased slightly, largely as a result of the drastic fall in tax revenues and donors grants. In Guinea Bissau, the fiscal situation deteriorated following the April coup: There has been a reduction in domestic revenues stemming from lower tax on cashew nuts and lower revenues from fishing compensations. Debt policy. The regional score for the debt policy component of the held steady at in. Several countries strenghthened their debt management and reduced their debt levels. s improved in seven countries (Benin, Burundi, Cameroon, Comoros, Côte d Ivoire, Guinea, and Senegal) and declined in three (Malawi, Mali, and Togo). In, Côte d Ivoire, Comoros, and Guinea reached the completion point of the Heavily Indebted Poor Countries (HIPC) Initiative and qualified for additional debt relief under the Multilateral Debt Relief Initiative (MDRI), sharply reducing their debt burdens. According to the latest Debt Sustainability Assessment (DSA), the risk of debt distress remains low or moderate in most countries in the region. Authorities are also improving public debt management systems and making progress in debt recording and reporting capacity. Côte d Ivoire set up a national debt management committee to implement the MDTS. Guinea increased the capacity of its debt unit with the introduction of modern software and stronger control mechanisms. In Senegal, where the legal framework of public borrowing is well defined, the government crafted a medium-term debt management strategy for , which captures the need to coordinate debt management with macroeconomic policies. CLUSTER B: STRUCTURAL POLICIES Cluster B covers policies affecting trade, the financial sector and the business environment. The regional score for Cluster B was stable at. Trade. The trade component assesses how the policy framework fosters regional and global integration in goods and services, focusing on the trade policy regime and trade facilitation. Assessment of the trade regime covers tariffs, nontariff barriers, and barriers to trade in services. African countries significantly reduced their external tariffs in the 1990s and 2000s; since the mid-2000s, tariffs for Sub-Saharan Africa have remained fairly constant. They remain higher than in all other regions except North Africa and the Middle East. The unweighted most favored nation (MFN) tariff of 11.6 percent is higher than the in East Asia (7.2 percent), Latin America and the Caribbean (9.5 percent), or South Asia (10.6 percent). Tariffs are also more dispersed. In some countries, the tariff regime remains complex, with a larger number of tariff bands and rates than in other countries. There is thus considerable scope for African countries to increase efficiency by bringing their external tariffs closer to those of other developing country regions, improving their scores in the process. As tariffs have fallen, other nontariff barriers including import and export bans, quantitative restrictions, costly and difficult-to-obtain permits and licenses, poorly designed technical regulations and standards, and restrictive rules of origin have become increasingly apparent as significant constraints to trade. Inefficiencies in transport; customs (including delays at road checks, borders, and ports and poor governance); and logistics also raise trade costs. These barriers impinge particularly heavily on intra-african trade, and the costs are 9

12 borne disproportionately by the poor, especially small traders, many of whom are women. In many countries, for example, the documentation (licenses and permits) and approvals needed to export or import have to be obtained in capital cities. The out-of-pocket and time costs of transportation prohibit poor women traders in border areas located far from the capital from obtaining the documents, forcing them to use informal trade channels to facilitate their business. Addressing the barriers to trade in goods and services in Africa remains critical to reducing the transaction costs of moving goods, services, people, and capital across borders and supporting more diversified exports, such as food, basic manufactures, and services. Reforms would allow trade, especially regional trade, to drive broader and more inclusive growth. The score for trade across Africa has remained relatively unchanged in recent years at. The quality of trade policy and trade facilitation changed little, indicating that little change took place on tariffs and that progress on dealing with the regulatory issues that typically underlie nontariff barriers to trade was limited. The static scores also reflect slow progress on reforming customs procedures and other trade facilitation measures and the continuing lack of implementation of commitments (typically at the regional level) to remove nontariff barriers. Although the overall picture shows little change, some progress was evident in fragile states, particularly in strengthening trade facilitation. Burundi, Chad, Comoros, the Democratic Republic of Congo, the Republic of Congo, Côte d Ivoire, Guinea, Guinea-Bissau, Sierra Leone, and Zimbabwe all saw improvement, although these countries still lag far behind the region s nonfragile countries on the quality of trade facilitation. Financial sector. The measures policies and regulations that affect financial stability, efficiency, and access. The score for the region dipped slightly in, to 2.9, down from in The financial systems of the countries surveyed remained relatively stable between 2010 and. Most systems were well capitalized, with high levels of liquidity. Reported nonperforming loans as a percentage of total loans decreased, as a result of either proactive regulatory actions (such as the closure of the largest banks in the Democratic Republic of Congo) or credit expansion (the volume of credit grew 24 percent in Rwanda). Banks reported strong profits, probably as a result of low-cost nonlending activities, comfortable net interest margins, or both. Regulators across the region are making efforts to comply with international prudential supervision principles (Basel Core Principles I or II). In several countries, the authorities raised the minimum capital requirement (in Zambia, for example, the requirement for local banks increased by a factor of eight). Financial deepening is taking place in the region, albeit slowly. Following the suit of Nigerian and South African banks, banks from other relatively dynamic markets established footholds in neighboring countries over the past few years (10 Kenyan banks established their presence in East African Community partner states and South Sudan, for example). At the same time, their local peers expanded their branch networks. Once closed markets were opened up to international investments, improving conditions for consumers (four international banks helped push down interest rates in Mauritania, for example). Laws and regulations were adopted to lay the legal foundation for the diversification of financial markets. Amendments to the Uniform Act on Security of the Organisation pour l Harmonisation en Afrique du Droit des Affaires (OHADA) affected more than a dozen Western and Central African countries, for example. Many countries modernized their payments systems, and widespread efforts were made to improve the institutional framework and technological basis of financial infrastructure (credit information reporting, property registration, and so forth). These improvements notwithstanding, the level of financial intermediation in Sub-Saharan Africa is low, particularly with respect to credit to the private sector. The main sources of commercial banks income is holding government debt or engaging in foreign exchange transactions, not lending; in Liberia, for example, nonlending activities account for 58 percent of banks earnings. The asset structure of foreign banks is not 10

13 very different from that of their local peers, with some of them engaged mainly in mobilizing local funding (placed with the parent banks in the home countries). In some countries, there are reports that high levels of public debt or huge infrastructure investment needs have increased the crowding out of financing for private sector growth. Concentration is another problem. In Ethiopia, 70 percent of total banking sector assets are held by a single bank; in Senegal, five borrowers account for 58 percent of banking assets. Many banks are funded mainly by deposits of the public sector and urban residents. It will take years for the nascent capital markets in these countries to become important sources of financing for economic growth and poverty reduction. The challenge for the region is to enhance competition for increased financial intermediation. Access to finance is improving across the region, in particular for urban households and retail payments. East Africa continues to lead the world in serving the unbanked population through mobile money transfers, such as MTN Mobile Money and TIGO. The rest of Sub-Saharan Africa is catching up. Members of the West African and Monetary Union (WAEMU) are working to improve cross-border payment channels. Microfinance institutions are active in most of the region s countries, increasingly meeting households demand for consumption credit and microbusinesses demand for working capital. Some microfinance institutions (such as Equity Bank in Kenya) have scaled up and become important commercial banks. Others have teamed up with private sector partners to reach customers through agent banking. Financing of small and medium-size enterprises (SME) has been the missing middle ground of Sub-Saharan Africa s financial landscape, as large companies obtain finance through trade relations or commercial banks and microfinance institutions service mainly households and microenterprises in urban areas. In almost all countries in the region, SMEs report difficulty obtaining start-up and working capital. Some governments are testing various support programs for SMEs. Solutions for SME finance in the region need to be developed. Business regulatory environment. The business regulatory environment component of the assesses the extent to which the quality of the policy, legal, and regulatory framework for business is conducive to attracting private investment and fostering private economic activity. In, this rating edged up to 3.1 from 3 in The majority of countries in Sub-Saharan Africa have embarked on reforms to improve their business environment, which they recognize to be critical to attracting private investment, a key driver of long-term growth. Between 2009 and, most countries in the region made strides in reforming regulations affecting entry, exit, and competition. During this period, 9 of the 38 countries for which scores were measured improved the regulations affecting entry, exit, and competition. In most of these countries, the most successful reform was reducing the time and cost of starting up a business. Policy advances took place in several countries, with Ghana (4.5) and Rwanda (4.0) revealing the strongest business environments. However, the promising beginnings in business environment reform were not sustained or broadened sufficiently to generate the momentum needed to achieve greater impact. At the other end of the spectrum, four countries had scores of 2.0 (Angola, the Central African Republic, Eritrea, and Zimbabwe). Not surprisingly, countries that have experienced prolonged conflict have low business environment scores., much remains to be done to improve the investment climate in the region, including easing infrastructure constraints, reducing corruption, strengthening regulatory quality, and improving security. Given their cross-cutting nature, reforms to improve the business environment imply the involvement of several ministries; representatives from the private sector; and, at times, civil society. Undertaking successful business environment reforms therefore requires strong champions who can operate in an interactive process and build consensus. 11

14 It is important that African countries first focus on the most binding constraints jointly determined through public-private dialogue and sustain a process of ongoing improvements over the medium and long terms. Priorities need to be determined in each country on a case-by-case basis rather than through adoption of a one size fits all strategy. One approach that could help bring about important improvements in the business climate is to adopt changes in the rules and regulations established at a regional level that are applicable in several countries. An example of this type of business environment reform is the revision of the OHADA Commercial Uniform Act, which affects 17 member countries. CLUSTER C: SOCIAL INCLUSION AND EQUITY A wide range of policy areas such as gender equality, equity of public resource use, human development, social protection, and environmental sustainability are covered under this cluster. The regional score for Cluster C was stable at. Gender equality. The gender equality component assesses the extent to which a country (a) gives men and women equal status and protection under the law and (b) has enacted and put in place institutions and programs to enforce laws and policies that promote equal access for men and women to human capital development and productive and economic resources. The score for this component since 2005 reflects not only the large gender inequalities in Sub-Saharan Africa but also the sticky nature of many gender issues. Many countries are performing particularly poorly with regard to gender equality in human capital development. National indicators suggest that there are also significant differences in the magnitude of gender inequalities in urban and rural areas. The region s best performer on gender equality is Cape Verde. Its score of 4.5 reflects the low levels of gender disparities, especially in human capital. Several countries with scores of 4.0 Burundi, Ghana, Lesotho, Mauritania, and Rwanda have laws and policies to promote gender equality, as well as mechanisms to enforce them. At the low end of the range are seven, mostly fragile, countries, each scoring 2.5: the Central African Republic, Chad, Comoros, the Democratic Republic of Congo, Guinea-Bissau, Niger, and Sudan. These countries have extremely high rates of maternal mortality, low percentages of births attended by skilled health staff, low prevalence of contraceptive use, high rates of adolescent fertility, and large gender disparities in secondary school enrolment. Throughout the region, women s access to productive and economic resources is low and lags that of men. Women s labor force participation is lower than men s in almost all countries in Sub-Saharan Africa (exceptions are Burundi, Malawi, Mozambique, and Rwanda). Although the ratio of female to male participation rates does not drop below 80 percent in most countries, there are significant disparities in employment status, with women tending to be more concentrated in the informal sector, more likely to work as unpaid family workers, and less represented in technical and senior management positions. Factors contributing to these outcomes include women s lower skills and education, greater time poverty (thanks to unequal domestic work burdens), and restrictive social attitudes regarding women s economic roles. However, women often lack equal economic opportunities even when they have their educational outcomes are equal to or higher than men s. In recent years, the share of parliamentary seats held by women in Sub-Saharan Africa has increased, with the across the region rising from 11.6 percent in 2000 to 21.4 percent in (compared with a world of 20.8 percent). Rwanda has the world s largest proportion of parliamentary seats held by women (more than 56 percent in ). Its constitution mandates that at least 30 percent of members of parliament be women. Other countries have also successfully used quotas to increase women s representation. In Senegal, for example, women s representation rose from 23 percent to 40 percent in after quotas were introduced. 12

15 Some statutory legal discrimination, especially against women as wives, still exists in constitutions and in statutes governing marital property, inheritance, land, and labor. But many countries have made progress in recent years. Kenya, which introduced major legal and regulatory changes to remove barriers to women s economic inclusion, is the leading global reformer in this regard, according to the International Finance Corporation report on women, business, and the law. Legal and regulatory changes are important, but women s ability to take advantage of their statutory legal rights is often complicated by a number of factors, including (a) the influence of customary law, which tends to discriminate against women and is sometimes recognized by statutory law, even when it violates the gender equality provisions of the former; (b) a lack of capacity or will on the part of the police, the judiciary, and other agencies to enforce certain gender equality provisions, especially provisions related to sensitive areas such as gender-based violence; and (c) women s relative lack of human and financial capital, which prevents them from knowing their rights and effectively defending them. Equity of public resource use. The regional score for equity of public resource use in the region s IDA eligible countries remained unchanged in, at. Twenty-eight percent of the countries (11 of 39) had scores of at least 4.0. Rwanda, which registered the highest score (4.5) in this category, saw a sharp drop in rural poverty, from 61.9 percent in 2005/06 to 48.7 percent in 2010/11. Its government is implementing a comprehensive strategy to address the needs of the poorest groups, including equitable access to services and productive resources. In Burkina Faso, the government increased funding for its Priority Actions Program (PAP), aimed at reducing poverty through public investment, by 20 percent (to $1.2 billion). In Ethiopia and Kenya, governments increased pro-poor expenditures by almost 50 percent in. In Uganda, the government allocated about 40 percent of total spending to the ringfenced Poverty Action Fund, to ensure that poverty programs are protected in the event of a shortfall in revenues. Cape Verde and Burundi made significant progress in building a strong monitoring and evaluation system. Human development. The human development measure assesses the quality of national policies and public and private sector delivery in health and education. The human development score rose steadily in recent years from in 2009 to in reflecting strides in both health and education (figure 6)., progress in building human resources is comparable to that in other regions. Substantial improvement in the quality of human resources in fragile countries moved their score closer to that of fragile states in other regions. African countries health systems have improved in recent years, particularly in fragile countries. More than half of fragile states showed consistent improvement in their health systems between 2006 and, with the greatest improvements occurring between 2009 and Among the countries registering the largest improvement are Burundi, Côte d Ivoire, and Zimbabwe-- all fragile countries. Burundi developed a medium-term development plan with a strong results framework. It allocated additional budgetary resources to the health score for human resources, Source: database. s for Health and Education in Sub-Saharan Africa, 2006 and Fragile countries in Sub-Saharan Africa Note: Figures includes IDA eligible countries only. Sample size is countries. 3.8 Nonfragile countries in Sub-Saharan Africa 2.9 Fragile countries outside Sub-Saharan Africa Nonfragile countries outside Sub-Saharan Africa FIGURE 6 The human development score rose steadily in recent years from in 2009 to in reflecting strides in both health and education. 13

16 sector and introduced results-based financing, which was associated with a reduction in out-of-pocket health spending and improved efficiency in spending. It also strengthened its health information systems. Seven out of 13 countries, including Chad, Madagascar, and Mauritania, showed some deterioration in health systems. These countries face challenges in providing equitable access to service delivery, have relatively high out-of-pocket health expenditures, and are unable to provide timely and reliable information for decision making. Several health system challenges remain. 7 Although most countries have crafted health policies and strategies, many have not operationalized them (that is, they do not have costing or operational plans). Most countries rely on household-level surveys, such as the Demographic Health Survey, to validate sector performance, but few are making efforts to strengthen their institutional health management information systems. Ensuring access to service delivery and (particularly) providing good-quality services remain challenges, and governance and accountability mechanisms are still weak. African countries made considerable progress in education between and. Efforts to increase enrollment, enhance the quality of teaching, better track outcomes, and increase financing of education programs are improving outcomes. In, eight countries including Burundi, Côte d Ivoire, Liberia, Malawi, Togo, and Senegal recorded substantial improvement in education. In Mali, by contrast, the country s political and security situation is threatening recent gains. Schools in the north are operating on a limited basis, and displaced children in the south are overcrowding schools there. Efforts to increase school enrollment rates and improve gender parity are paying off. African countries have implemented policies aimed at achieving universal coverage for basic education and gender equity, partly to meet the Millennium Development Goal (MDG) targets. As a result, the primary completion rate in Sub- Saharan Africa increased from 61 percent in 2005 to 71 percent in The secondary enrollment ratio also jumped, from 31 percent to 40 percent. Burundi doubled its secondary enrollment ratio to 32 percent between 2005 and is also evident on gender parity in education. A number of countries, including Burundi, have already reached 100 percent parity at the primary level. Additional efforts are needed to bring the combined primary plus secondary gender parity index to 100 percent by 2015, but progress to date has been solid, with the index rising from 86 percent in 2005 to 90 percent in More needs to be done to improve parity at the tertiary level, where progress is not observed. Although enrollment is increasing, teacher training is lagging. The ratio of trained teachers at the primary level declined slightly over the last five years, to 72 percent in Increased resource allocation to priority areas such as health and education has played a key role in improving outcomes in these sectors. Burundi steadily increased public spending on education from less than 5 percent of GDP in 2005 to 10 percent of GDP in. It also targeted more than half of its education budget to improving access to and the quality of primary education a higher level than the 50 percent threshold set by the Global Partnership for Education (a multidonor fund for education). At the same time, the level of transparency and efficiency in budget management at the school level is improving, which helped increase nonsalary allocations aimed at improving learning outcomes. Significant challenges remain in addressing learning outcomes in many countries. In Liberia in 2008/09, for example, the primary completion rate was just 58 percent, and 35 percent of students could not read a 7 The does not capture nonhealth system related functions, such as demand-side constraints, or the roles, functions, and performance of nongovernmental organizations, civil society organizations, and the private sector. Women are often constrained from visiting health facilities, especially for deliveries, because the facilities are far away and travel costs significant. Cultural expectations are not often fulfilled within the modern health delivery system. Community-based interventions that target malnourished children and birth deliveries are not necessarily captured within the health system. 14

17 single word of a simple paragraph at the end of grade 2. In Nigeria, the few available surveys indicate very low learning outcomes, primarily as a result of poor learning environments, inadequate learning materials, ineffective teacher training, and outdated curricula. Social protection and labor. Social protection comprises social safety net programs (such as cash transfers, school feeding, and targeted food assistance); social insurance (such as old-age and disability pensions); active unemployment labor market programs and unemployment insurance; and community-driven development efforts. Social protection and labor systems help people and families find jobs, increase their productivity, cope with shocks, invest in the health and education of their children, and protect the aging population. Given the low level of formal employment in Africa, pension systems and labor market insurance tend to cover only a tiny share of the population namely, civil servants and people employed in the small formal sector. The main form of social protection is safety nets (or social assistance), which provide protection for the poorest and most vulnerable people and help them improve their livelihoods and participate productively in society. The score for the region dipped slightly in, to 2.9, down from in The strengthening of safety nets in a number of low-income countries (Benin, Kenya, Rwanda, Tanzania, and Togo) helped improve these countries scores. In contrast, in some countries affected by instability and conflict, such as Burundi and Madagascar, weak safety nets reduced their scores over the last two years. Few countries in Africa have well-planned safety net systems that take a strategic approach to reducing poverty and vulnerability. Instead, a multitude of fragmented, often donor-driven interventions exists that does not effectively target the poor. In low-income countries in West Africa, for example, safety nets focus on emergency relief and food-related issues. Few programs provide continuous support to the large number of chronically poor people. The most common interventions are school feeding programs, public works programs, emergency and categorical transfer programs, and general subsidies. Safety net coverage of the poor and vulnerable is low. In Benin, for example, all safety net programs together cover only 5 6 percent of the poor. In Kenya, cash transfers reached only about 9 percent of the poor in Safety nets cannot reach all of the poor in Africa: the needs are simply too great. These programs therefore need to focus on the poorest and most vulnerable. But targeted programs are still not widely available. The landscape of social protection in Africa is quickly changing, however, as social safety nets evolve from scattered stand-alone programs to systems. 8 Until the global economic crisis, many African countries approached social protection on a largely ad hoc basis. After the threat that crisis posed to recent progress in poverty reduction, policy makers in the region began to view them as core instruments for poverty reduction and risk management. Some countries, such as Ghana, Kenya, Mozambique, Rwanda, and Tanzania, are now planning to consolidate programs into national systems. They are making progress toward articulating national social protection strategies, which will serve as the basis for effective safety net systems. Ethiopia, Kenya, Mozambique, Rwanda, and Tanzania are moving to harmonize programs in order to increase efficiency and broaden coverage. Several countries are developing more effective safety net systems. Some are actively increasing the effectiveness and the scale of existing programs, including some that are relatively well targeted (such as the programs run by the Tanzania Social Action Fund). Several countries including Cameroon, Guinea, Mali, Mozambique, Niger, and Senegal are moving toward building safety net systems and programs that are predictable but flexible enough 8 Human Development Department, World Bank, Africa Region Social Safety Nets in Africa: A Review of the Experiences in 22 Countries. 15

18 to respond to crises (Ethiopia s Productive Safety Net Program is a pioneer in this respect). Data collection and the monitoring systems that support safety net programs need to be improved systematically across Africa. Very little information is available about the effectiveness of food distribution and emergency relief programs that are common in West Africa. Basic data on the number of beneficiaries reached and program outcomes are needed in order to improve the design and coordination of programs, keep decision makers informed, and attract financial resources. More and more impact evaluations are being conducted, contributing to a growing body of evidence on safety net programs in Africa. In the past, most impact evaluations were for small donor pilots for research purposes. Today, larger programs, such as those in Ethiopia, Kenya, and Tanzania are benefitting from impact evaluations. Environmental sustainability. The environment and natural resources component of the relies on a standard scoring tool that measures (a) the appropriateness and implementation of policies across a range of environmental topics (air pollution, water pollution, solid and hazardous waste, freshwater resources, marine and coastal resources, biodiversity, commercial renewable resources [mainly forests and fish], commercial nonrenewable resources [mainly minerals], and climate change) and (b) the strength of cross-cutting institutional systems, including the quality of the environmental impact assessment system, and a range of environmental governance factors (access to information, participation, coordination, and accountability). The regional score for this component was 3.1, the same as in Individual country scores ranged from 2.0 to 4.0, with two-thirds of all countries (26 of 39) scoring either or. s in the range for this component generally reflect situations in which environmental policies are relatively comprehensive but gaps remain in implementation. The gap between policy development and implementation is evident in almost every country. The score changed in 13 countries, improving in 8 of them. 9 The score in Mozambique and Tanzania rose thanks to progress on developing national climate policies and improvements in coordination and access to information associated with those initiatives. In Madagascar, weakened implementation and protection of natural resources, as a result of the protracted political crisis, caused the score to fall. Some progress was evident on biodiversity (many countries depend on nature-based tourism for a significant share of foreign revenue). In contrast, progress on air and water pollution was low, with assessment of solid and hazardous waste only marginally better. CLUSTER D: PUBLIC SECTOR MANAGEMENT AND INSTITUTIONS Cluster D covers governance and public sector capacity issues: property rights and rulebased governance, quality of budgetary and financial management, efficiency of revenue management, quality of public administration, and transparency, accountability and corruption in public sector. The goals of ending poverty and promoting shared prosperity require effective governance and public sector institutions that promote environmental, social, and fiscal sustainability on the one hand and reliable and affordable public service delivery mechanisms that are closer to the people, businesses, and other stakeholders on the other. Low levels of security, justice, and governance structures weaken protection of property and contract rights in fragile and conflict-affected areas (in the Sahel and Horn of Africa, for example). Deficient public administration at the central, regional, and local levels affects policy 9 Changes in some countries ratings reflected a reevaluation of the situation (sometimes related to the availability of additional information) rather than a significant change in circumstances on the ground. 16

19 implementation, regulation, and service provision (in parts of the Great Lakes region, for example). Weak statistical agencies make it difficult to make evidence-based decisions or track results. Deficiencies in revenue collection and budgetary and financial management reduce the predictability of public investment and their expected outcomes. Lack of transparency and corruption are reducing the integrity of the use of public resources and its effectiveness in a variety of countries, including fragile and resource-rich states. Recognizing the importance of governance and public sector capacity as the basis for sustainable growth and effective service delivery, some countries in the region are addressing these development challenges. Six countries Comoros, Côte d Ivoire, Ethiopia, Kenya, Mauritania, and Zambia improved their Cluster D scores in, raising them by an of 0.1 point (figure 7). But a larger number (8) of countries saw their scores decline. The Republic of Congo and Togo experienced a 0.1-point decline in their Cluster D scores; the Central African Republic, The Gambia, Madagascar, and Uganda saw declines of 0.2 point; and Guinea-Bissau and Mali saw a drop of 0.3 point. In the Central African Republic, Guinea-Bissau, and Mali, the declines reflected the negative impacts of political and military unrest on property rights, security, and public administration systems. In Madagascar, the decline reflected the deterioration in the rule of law and accountability systems. In Uganda, the decline reflected weaknesses in financial management and control. Changes in s for in Sub-Saharan Africa, Change in score Source: database. Comoros Côte d'ivoire Ethiopia Kenya Mauritania Zambia Congo, Rep. Togo Central African Rep. Madagascar Gambia, The Uganda Guinea Bissau Mali FIGURE 7 Six countries Comoros, Côte d Ivoire, Ethiopia, Kenya, Mauritania, and Zambia improved their Cluster D scores in by an of 0.1 point. But eight countries saw their scores decline. Weaker performance in a fifth of countries in reduced all but one component of Cluster D, lowering the score by 0.1 point to 2.9. There was some dispersion across the five dimensions of this cluster (figure 8). The weakest performance was in property rights and rule of law and transparency and accountability/anticorruption, each of which d. The quality of public administration was low, at 2.8, as well. Performance on resource mobilization () and the quality of budget and financial management () was stronger. Increased attention to judicial strengthening and public sector transparency for example, statistics and access to information could help strengthen public service provision. s for Components of Cluster D in Sub-Saharan Africa, Property rights and rule-based governance Transparency, accountability and corruption in public sector Source: database. Quality of public administration Quality of budget and Financial management Efficiency of revenue mobilization Cluster D: Public sector management and institutions 2.8 Note: Cluster D measures public sector management and institutions FIGURE 8 The weakest measure of Cluster D was in property rights and rule of law and transparency and accountability/ anticorruption, each of which d. 17

20 Differences in performance on the various components of Cluster D reflect variations in the pace and composition of reforms. Reforms in property rights protection and judicial strengthening are highly political, resisted by elites, and naturally incremental. These reforms tend to be implemented slowly in fragile and resource-rich countries. Modernization of civil service and administrative systems that are fraught with vested interests and other political economy concerns are handled more effectively by nonfragile countries than fragile countries and by non-resource rich countries than resource rich ones. Peace, security, and stable governance reduce sustainability risks and yield economic dividends, as the World Development Report 2011 notes. Cluster D scores are higher in nonfragile countries with relatively stable institutional arrangements and developed public sector capacity () than in fragile countries (2.5). Nonfragile countries also tend to mobilize more revenues, because their budget and financial management and public administrations perform better (figure 9). They provide better checks and balances and accountability and control corruption more consistently, with a coefficient of variation for the governance score for of 0.08, compared with 0.11 in fragile countries. FIGURE 9 s for in Sub-Saharan Africa, by Country Group, Nonfragile countries tend to mobilize more revenues because their budget and financial management and public administrations perform better. They also provide better accountability and control corruption more consistently. score Source: database. 3.1 Property rights and rule-based governance Quality of budget and financial management Efficiency of revenue mobilization Quality of public administration 2.2 Transparency, accountability and corruption in public sector Fragile countries in Sub-Saharan Africa Fragile countries outside Sub-Saharan Africa Nonfragile countries in Sub-Saharan Africa Nonfragile countries outside Sub-Saharan Africa Nonfragile countries in Sub-Saharan Africa s compare well with nonfragile countries elsewhere. In contrast, fragile states sharply lag fragile states outside the region. The gaps are particularly wide for property rights and rule-based government and transparency and accountability/anticorruption. Although weaker performance in several countries pulled down the Cluster D score to a low 2.9, some countries saw visible gains in. Ethiopia, Kenya, Mauritania, and Zambia ranked at the top on the property rights and rule of law-based governance indicator, with scores of ; Comoros and Côte d Ivoire had scores of 2.5. Kenya s score rose from 2.5 to, based on its constitutional reforms (namely, the appointment of an independent Supreme Court and progress toward modernizing its court system). Ethiopia continued its efforts to strengthen the operation of federal and regional courts and justice agencies. Côte d Ivoire raised its score from 2.0 to 2.5 by enhancing security protection and public sector justice services. Comoros maintained its rating of 2.5 by continuing to improve its business environment (adopting a new urban code and procurement code, for example). In the area of efficiency of revenue mobilization, Ethiopia and Mauritania upgraded their tax administration functions and policies. Ethiopia modernized and automated its tax institutions; reinforced human resources, taxpayer education, and awareness campaigns; and expanded its coverage of computerized tax identification 18

21 numbers (TIN) to all regions, bringing to about 2 million the number of biometric TIN certificates in use. As a result, tax collections increased at an rate of 22 percent a year between 2008 and, and the cost of federal revenue generation declined from 86 cents to 61 cents for every Br 100 collected. In the area of quality of budgetary and financial management, Comoros recorded steady improvement. Its National Assembly adopted a budget execution law (Loi de Règlement), improving transparency and establishing a general treasury system. Comoros also strengthened payroll management, by installing a computerized salary payment system for civil servants. Regarding the quality of public administration, countries with overall gains in Cluster D maintained their scores. They include Ethiopia and Kenya (), Mauritania and Zambia (), and Comoros and Côte d Ivoire (2.5). Regarding transparency, accountability, and corruption in the public sector, Zambia improved its score by promoting transparency and citizen information. 19

22 Africa: Compare your country 20