Liberia: New African Development Bank empirical study on growth diagnostics identifies, analyses and prioritizes binding constraints for growth

The findings of a recent analytical study report published by the African Development Bank and the Liberian government comprise four main thematic categories to advance the pursuit of robust development outcomes in the face of various endogenous and exogenous factors.

• Return to accumulation from a macroeconomic and sectoral perspective;
• The effect of low social return that includes low human capital development
  and inadequate infrastructure;
• The macro and micro-level risk that the private sector in Liberia is facing, and hence;
• Stifling of growth and high cost of finance, which also does the same.

The report is expected to help the government better understand the country’s problems that are impeding growth and formulate a focused development strategy, in the face of limited resources, thereby helping to maximize development impact.

Benedict Kanu, the African Development Bank’s Country Manager for Liberia, welcomed the report, indicating that “it is not only timely, given the life of Liberia’s Pro-Poor Agenda for Prosperity and Development (PAPD) but constitutes a valuable foundation for knowledge and policy dialogue”. Kanu underscored that “Liberia and its partners have indeed come a long way in promoting rapid, inclusive, and sustained economic growth and converting such growth into shared and meaningful opportunities for all, but more needs to be done.” Kanu added that the findings and recommendations of the study report will beneficially inform the efforts of the Government and its development partners as they jointly embark on the production of the National Study on the Drivers of Sustainable and Inclusive Development.  

According to the report, Liberia’s growth is significantly dependent on its external sector, in particular, on export growth, and sustained inflows of ODI and FDI. This underscores the importance of diagnosing growth, and its binding constraints holistically. Accordingly, the study employed a modified growth diagnostic approach to take conflict and political stability issues and all available official data to identify major growth constraints in Liberia. The major binding constrains identified in each category of the analysis (‘supply, demand, sectoral level’; at ‘micro and macro level’, which includes durable peace) are the following: supply, demand and sectoral sources of growth and their challenges.

From the supply side analysis in this study, it is found that at the macro and sectoral level, the major binding constraint to growth in Liberia was/is the challenge of low capital accumulation, which in turn is related to its low return. However, this is found to have a sectoral dimension. While labour productivity and hence return to labour is problematic in the service sector, it is return to capital that is found to be a significant problem in the non-service sectors at a macro level (this was more relevant for the industrial sector in particular).

In sum, from the supply side, the major challenges of growth and the policy lessons to be drawn to address them are the following. First, by addressing its major binding constraints, reversing the declining trend of per capita output and productivity growth in the agricultural sector will significantly contribute to national productivity and economic growth. Second, the result also implies that raising sectoral productivity in the service sector (and its sub-sectors), by addressing their binding constraint, is crucial to greatly impact growth in the very short run.

The findings also show that since 2005, labour has not moved to sectors with rising productivity or left sectors with low or negative productivity growth. The latter indicates a lack of dynamic productivity, especially in the agricultural, manufacturing and transport sectors. Effecting a structural transformation that changes this observed pattern is crucial to raise national productivity and achieving high economic growth in Liberia.

From the demand-side analysis, given the limitation of basing Liberia’s growth on the expansion of domestic demand that is related to Liberia’s small size, as well as given the growing negative effect of net exports on growth, addressing the binding constraints to exporting and engaging in export diversification that includes trade facilitation are very important. The import substitution of some essential goods must complement this. This will have the dual effect of increasing exports and minimizing Liberia’s dependence on primary commodities, favourable terms of trade and external assistance that make its growth
and macroeconomic stability highly vulnerable to the external sector and related shocks.

The report outlines a number of macro and micro level risks as challenged of growth in Liberia.

The first binding constraint to growth identified, related to “low social return”, is the lack of the human capital necessary to tap into the country’s growth potential, including implementing appropriate economic policy. The challenge of weak human capital could be addressed by carefully designing a comprehensive financing framework for educational investment that takes on board the dependence of the tertiary level on investment in the high school level, in particular. Investing in the secondary education level also needs to focus on producing a labour force with middle-level skills, such as through TEVT. The effort to expand and improve the tertiary sectors, which is found to be at a lower level of development,
also needs rationalization of investment (including perhaps controlling corruption). This is because relatively higher investment has been made in the tertiary than secondary level, yet the outcome is low. It is also essential to examine the possibilities of tunning the nature of the growth of the labour force to the emerging demand for labour in the economy.

Liberia’s growth is also identified as being vulnerable to external shocks, including shocks related to global commodity prices, external capital inflows, and the pandemic effect from a macro perspective. This adversely affected its macroeconomic balances and could be a risk factor to private-sector economic agents.

Related to the above, Liberia’s macroeconomic stance in the last decade was characterized by a significant gap between investment and domestic saving and a related trade deficit (and balance of payment deficit). Domestic resource mobilization (domestic saving) was deficient, especially considering the high investment-to-GDP ratio. This pattern indicates the vulnerability of the macroeconomy (including growth) as the level of total investment is very high and needs significant external financing to sustain it in the future and derive growth.

Thus, it is imperative to note that this macro vulnerability will be particularly severe if the government fails to pursue an informed and forward-looking prudent macroeconomic management and policy to cope with such vulnerability by monitoring them ahead of time. Public sector capacity building for this is a policy direction to be pursued.

In addition, economic agents in Liberia have also encountered micro-level risks/challenges that adversely affect their private appropriability, and hence, constrained national growth. The major micro-level challenges (risk factors) identified include (a) ease of access to land, (b) ease of access to finance at a reasonable cost, (c) challenges of control of corruption, (d) the challenge of low productivity and low employment creation by the majority of firms in Liberia which are very small in size, and generally, not formalized, and (e) the enclave (limited linkage with the rest of the economy) nature of the production activity of big firms engaged in mineral and exporting sectors. This has limited their potential positive effect on the broader economy, and hence, more general job creation, which is central to poverty reduction.

The study has also examined if a high cost of finance might have led to low appropriability for private sector agents and acted as a binding constraint for growth. As a result, a number of major problems that are related to the high cost of finance are identified that need an appropriate policy to address them.

Finally, the study examined public appropriability: centrality of inclusive politics and growth for growth and its sustainability and advanced some applicable policy directions.