Unit Labor Costs, International Competitiveness, and Exports:
The Case of Senegal*
Ahmadou Aly MBAYE
Professeur Agrégé
Faculté des Sciences Economiques
et de Gestion (FASEG)
Université Cheikh Anta Diop de Dakar
BP 16448 - Dakar (Senegal)
Tel : (221) 835 27 26
Fax: (221) 824 43 90
Email: ambaye@syfed.refer.sn
and
Stephen GOLUB
Professor of Economics
Swarthmore College
Swarthmore PA 19081 (USA)
Tel: (1-610) 328-8103
Fax: (1-610) 328-7352
Email: sgolub1@swarthmore.edu
Final version, May 2002
To appear in Journal of African Economies, Vol 11, no. 2
Abstract :
Despite some favorable conditions and a number of policy reforms, Senegal’s participation in
the global economy remains tenuous. This paper uses a Ricardian framework to study
Senegal’s international competitiveness in manufacturing. Wages, productivity, and unit
labor costs in Senegal are compared to those of other developing countries. Senegal’s labor
productivity has grown much more slowly than in successful emerging economies. The 1994
devaluation of the CFA franc has dramatically improved Senegal’s international
competitiveness but further improvements in competitiveness depend on productivity growth
given the constraint of the fixed exchange rate. We find a significant effect of relative unit
labor costs on exports, particularly of manufactured goods. Sustained export-led growth,
however, requires additional structural reforms.
*
This research was funded by a grant from the West African Research Association with some
additional support from the World Bank. We would like to thank Stephen O’Connell, Philip
Jefferson, Larry Westphal, Richard Mshomba and two referees for helpful comments.
Senegal and the Global Economy
In the 1960s, Senegal, South Korea, Malaysia, and Mauritius all had roughly the same level
of gross domestic product per capita. Despite some moderate recent growth, Senegal’s level of per
capita GDP has stagnated or even declined over the last three decades. During the same period, the
four East Asian « miracle » economies’ per capita GDP increased by a factor of about ten. A
number of other countries such as Malaysia and Thailand in South-East Asia, Chile in South
America, and Mauritius and Tunisia in Africa had impressive growth rates in the last twenty years or
so.1 (Figure 1)
In recent years, a near consensus has emerged on the positive effects of export growth and
diversification on economic development2. Perhaps most convincingly, the remarkable success of a
number of East and South-East Asia countries and a few others have all been at least partly based on
integration into the global economy and rapid export growth, particularly of manufactured goods.
(Figure 2).
There are a number of channels through which exports can foster growth in developing
countries, in addition to the static gains from trade according to comparative advantage. First, in an
environment of declining foreign aid, exports provide the foreign currency needed to finance
imported inputs. Second, labor-intensive exports can contribute to reducing unemployment and thus
poverty. Third, and perhaps even more importantly, exports can be a catalytic agent for development
through the discipline imposed by competition in the international market, the economies of scale the
world market affords, and the transfer of foreign technology and modern managerial techniques.3
Thus, in the last two decades, many developing countries have introduced economic policy
reforms aimed at export promotion, although with varying results. In Africa in general, performance
has remained quite disappointing (Collier and Gunning 1999, Ndulu and O’Connell 1999). As
Collier (1997) argues forcefully, Africa has been unable to take advantage of globalization. Senegal
is a case in point: since 1979 various programs of trade liberalization and export promotion have
been implemented, with mixed results: a free trade zone which allows exporting firms to benefit
1
The Asian crisis, however serious, does not substantially alter this conclusion. At the
height of the crisis per capita GDP declined by about 5-10% in countries such as Thailand,
Indonesia and Korea, which hardly reverses the gains of the previous decades.
2 E.g. Dollar 1992, Edwards 1993, Sachs and Warner 1995, 1997--although see Rodriguez
and Rodrik 1999 for some doubts about the econometric evidence.
3 Soderling (2000) discusses these issues in relation to Cameroon. Tybout (2000) surveys the
empirical literature on manufacturing.
2
from tax breaks; reduction of the fiscal deficit and stabilization of inflation below 5 percent; lower
and simplified tariff barriers and elimination of almost all quotas on imports.
Following the 1994
fifty percent devaluation of the CFA franc, which has been pegged to the French franc since
Senegal’s independence in 1960, the growth rate of Senegal’s exports and output picked up, but they
both remain well below the rates observed by the success stories in Asia and elsewhere.
Senegal has some advantages relative to other developing countries: political stability,
geographic location propitious for access to the European and American markets, and a work force
skilled in traditional crafts, and with a talent for and tradition of trading.4
There was considerable
optimism about Senegal’s prospects in the decades following independence.5 It is true that Senegal
is quite poorly endowed with natural resources, but this can be an additional impetus to industrial
development. Sachs and Warner (1997) among others show that a high dependence on natural
resources can be detrimental to industrial development and sustained growth. Countries like Taiwan
and Mauritius are not well endowed in natural resources either.
This paper is part of a longer-term research project that seeks to identify the sources of
Senegal’s weak integration in the global economy. Here we focus on macroeconomic cost
competitiveness. In other work, we are examining this problem from a more microeconomic
perspective, with case studies of selected industries (Golub and Mbaye 2000).
We begin with an overview of Senegal’s trading pattern and trade policies, followed by a
theoretical framework for analysis of international competitiveness. In our empirical work, we will
first attempt to assess the absolute productivity and cost of Senegalese labor in relation to other
countries, particular the successful emerging economies. We will then use a trade-weighted relative
unit labor cost indicator in a time series analysis of Senegalese exports.6
Senegalese traders’ skills are known even in the United States, particularly in New York
City. (“On the Streets of New York,” The Economist, June 19, 1999). For a description of
the international commercial network of the Senegalese Mouride brotherhood see Ebin
(1992).
5 Mann (1988) identified Senegal as a promising emerging economy.
6 World Bank (1997) also addresses these issues. Our paper differs by providing a more
precise definition of international competitiveness and relating this measure to exports.
4
3
II – Overview of Senegal’s International Trade
Senegal’s exports are characterized by slow growth and lack of diversification. This is
largely rooted in the policies of import substitution, adopted in the first two decades following
Senegal’s independence in 1960. Since 1979, however, a series of reforms, liberalizing trade and
promoting exports, have been undertaken in the context of various structural adjustment packages.
These reforms have had limited success. The financial and economic recovery plan of 1980-85 and
the medium- and long-term structural adjustment program (PAMLT) of 1985-1992 included various
measures to liberalize the economy but did not modify the fixed parity of the CFA franc to the
French franc, given Senegal’s membership in the West African Franc Zone. Only with the
devaluation of the CFA franc in 1994 did export growth pick up. The devaluation was shortly
followed in 1994-95 by the most far-reaching structural adjustments to date, with the World Bank
PASCO program of trade, labor market, and other reforms. Even after 1994, however, export
growth and diversification have been insufficient to fuel sustained growth. The growth rate of export
volume jumped to 8.2 percent in 1994-95, much improved over the 2.5 per cent rate in 1960-1979,
but then fell back to just 3 percent in 1996-98. In comparison, world export volume grew 8.7 per
cent in 1994-95 and 6.7 percent in 1996-98 so most of the slowdown in Senegalese export growth
cannot be attributed to the disruptions associated with the Asian crisis.7
II- 1- A weak and poorly diversified export sector8
Senegal’s most important exports are currently:
--groundnuts and their derivatives (oil, oilcake, and edible peanuts)
--fishing and fish products
--phosphates and their derivatives (fertilizer, phosphoric acid)
--tourism.
These four industries accounted for about 80 percent of exports in the 1990s. Overall
growth has been sluggish (Figure 2). Labor-intensive manufactured goods are largely absent despite
All developing countries’ exports grew even more rapidly during this period: 11.2 percent
in 1994-95 and 11.0 in 1996-98 (IMF World Economic Outlook, October 2001, p. 223).
7
4
the abundance of underemployed labor earning subsistence incomes in agriculture and in the urban
informal sector. In fact the textile and clothing industries have contracted sharply since the 1970s.
Here we briefly summarize some of the issues arising in our case studies of the groundnut, fishing
and textile-clothing industries. (Golub and Mbaye 2000)
Groundnuts. From the colonial era until the middle of the 1970s, groundnuts were
the mainstay of the Senegalese economy; the sector’s contribution to GDP was about 20
percent, and it accounted for more than 70 percent of employment. Most exports are in the
form of unrefined oil and oil cake. A government parastatal, the SONACOS, has until
recently controlled all stages of production and marketing. Towards the end of the 1970s, a
steady decline set in. Senegal’s world market share of peanut oil exports declined from 23%
to 14% between 1961-65 and 1986-1988, while that of Asian countries increased from 8% to
32%. The causes of this weak performance can be classified into two categories : exogenous
shocks and government policies. The main exogenous shocks have been the decline of
rainfall since the 1970s and the fall in demand for peanut oil in European markets, partly
connected to fears about aflotoxin, a carcinogen in peanuts. But government policies seem
to have been even more important, notably the inefficiency and corruption of the SONACOS
financing and distribution of seed grains, and collection and processing of output. The
SONACOS oil processing facilities operate at very low capacity and hence high unit cost, but
they have not been consolidated for political reasons. Two attempts to privatize the
SONACOS have failed due to the unattractive conditions specified by the government.
Nonetheless the role of the private sector, both formal and informal, has expanded at the
margin in recent years. Informal traders as well as the firm NOVASEN are purchasing,
distributing, and processing a larger share of the crop although the SONACOS still plays a
dominant role.
Fishing. The artisanal (informal pirogue) sector is booming but industrial fishing,
particularly on-shore processing, is experiencing grave difficulties, notwithstanding Senegal’s
coastal region being one of the richest of the world in terms of fish stocks. The problems of
the tuna-processing industry are particularly acute and symptomatic of the difficulties of
Senegalese industry. There are only three firms of moderate capacity, down from seven in
1960, and even these three firms face chronic problems of excess capacity and have been
8
See also World Bank (1997).
5
intermittently closed in recent years. Senegalese canned tuna has steadily lost market share in
Europe to East Asian tuna despite exemption from import duties of 24 % that the Asian
countries must pay. Senegalese tuna processors have high costs even relative to those in
Abidjan, and have accordingly seen a further erosion of market share, as tuna boats operating
off West Africa tend to prefer to unload their catch in Abidjan, all else equal. Other large onshore industrial fish-processing enterprises are also facing severe difficulties. The problems
of the fishing industry are numerous: dwindling stocks of some species due to over-fishing
and pollution, problems of conforming to international norms of hygiene, insufficient capital
investment in boats and processing facilities, confrontational labor relations and poor
management in some cases.
Textiles-Clothing. Towards the end of the colonial era and in the decades following
independence, Senegal developed a sizable but inefficient import-substituting textile industry.
Extremely high protection and pervasive government intervention characterized this industry, as for
most manufacturing. The textile industry nearly collapsed in the 1980s under the twin pressures of
smuggling and trade liberalization. The formal clothing industry has all but disappeared, with only
the booming informal sector remaining. The 1994 devaluation had a short-run positive effect on
this sector, but mostly for the relatively capital-intensive sub-sectors (weaving and spinning) rather
than the labor-intensive apparel sub-sector. To this date there is little or no foreign outsourcing of
clothing production in Senegal by global manufacturers such as occurs in Asia, Latin America, and
North Africa. Senegal exports some raw cotton but little else, and the textile industry as a whole
incurs a large trade deficit. Exports of clothing are almost nonexistent, while imports of used and
new clothes (some of which continue to be smuggled despite the devaluation and trade liberalization)
constitute a large part of domestic consumption.
International competition in the clothing industry is fierce. Nonetheless, several
studies indicate that Senegal has some key advantages: a decline in labor costs thanks to the
devaluation of 1994, a location close to Europe and the USA, highly skilled producers in the
informal sector (weavers from the Casamance, tailors who custom make beautiful clothes for
relatively well-off local consumers). The possibility of sub-contracting from countries like
Morocco where labor costs have risen relative to Senegal, could help jump-start production.
Unfortunately, Golub and Mbaye (2000) show that there remain grave institutional
impediments to progress: the lack of training of personnel and management, unreliable and
6
expensive infrastructure, especially transport and electricity, lack of access to credit, and
costly and cumbersome customs and investment procedures, often associated with corruption.
In each of these industries, the formal sector faces grave difficulties while the
informal sector is booming. Despite endowments and location suggesting potential
comparative advantage in these industries, Senegal has severe competitiveness problems,
particularly vis-a-vis Asian producers. Our interviews as well as other studies show that
there are a number of general features of the business environment in Senegal that contribute
to low productivity, high unit costs or uncertainty, all of which discourage investment in
formal industry: lack of transparency and corruption, infrastructure deficiencies, lack of
access to credit, inadequate training, and confrontational labor relations.
It is also important to note that much of Senegal’s exports such as groundnut oil, fish
products, and phosphate products are not readily classified as either manufactured goods or
primary products. For the most part, they are lightly processed primary products. Certainly,
they are mostly not homogeneous primary products for which the law of one price is likely to
hold closely. For example, for fresh and processed fish, prices depend on the species,
freshness, extent of processing, etc. Product differentiation also characterizes some goods
where Senegal has a potential comparative advantage such as clothing and Afro-centric
products. Thus, models assuming homogeneous tradable goods are not likely to be
appropriate for Senegal.
II-2- Trade Reforms with Meager Results
Senegal has had few direct barriers to exports, with the exception of some export taxes on
groundnuts and gold which were eliminated in 1985. Instead, the impediments to exports arose from
the general anti-export bias of the import-substitution regime. Weak export performance has
continued in spite of a number of reforms instituted since the 1970s, aimed at trade liberalization and
export promotion.9
Senegal instituted one of the first free trade zones in Africa in 1974 in order to encourage
assembly and processing of manufactured goods for export, as well as related service activities.
9
See Mbaye (1998) for further details.
7
Firms that secured free-trade status benefited from total exemption of corporate income taxes and
other direct taxes. Their imports of capital goods and intermediate inputs entered free of duty.
In addition, the tax code was reformed to create a more favorable environment for exports. A
number of taxes were eliminated as early as 1979 (including the taxe statistique, the taxe intérieure,
and the taxe forfaitaire). With the New Industry Policy of 1986, a uniform customs duty of 15
percent was instituted, and the variable customs duty rates (droit fiscal) were shifted down as
follows: d.f. réduit unchanged at 10%, d.f. normal lowered from 40 from 30%, d.f. supérieur
lowered from 50 to 35% and d.f. spécial lowered from 75 to 65%. By 1988, the uniform customs
duty rate was further reduced to 10 percent and almost all import quotas were eliminated.
Nonetheless, the following year, the basic customs duty rate was raised back to 15%, and some
products were shifted to a higher droit fiscal rate (taux supérieur) from the reduced rate (taux réduit).
Concurrently, preferential exemptions of taxes and import duties were extended to firms outside the
free trade zone to increase their competitiveness. In particular, temporary duty-free admission of
imports was permitted for firms processing imported inputs, as long as 80 percent of their production
is re-exported.
On the institutional level, as early as 1981 the government created l’Agence Sénégalaise
d’Assurance et de Crédit à l’exportation (ASACE), which insures Senegalese exports against
political and commercial risks. In addition, the Centre Sénégalais du Commerce Extérieur (CICES)
was established in 1986, to help exporting firms participate in commercial fairs and missions abroad.
Finally an export subsidy was instituted, equal to 10% of the value of exports from 1980 to 1983,
rising to 15% of export value in 1983-86, and starting in 1986, 25% of value added. This subsidy
was eliminated in 1991, however, when it became clear that it was not significantly contributing to
export diversification, despite the ever-rising fiscal burden it entailed.
In 1994, the CFA franc was devalued 50 percent and a number of accompanying measures to
liberalize labor and product were enacted.10 The extent of implementation of these structural
reforms was erratic, however. (Berg, 1997)
Recently, in January 1999, the common external tariff (TEC) of the West African Economic
and Monetary Union (UEMOA), has been put in place. The TEC has considerably reduced and
10
The CFA franc is also the currency of other West and Central African nations, including
the West African Economic and Monetary Union (UEMOA) of which Senegal is a member.
The share of Senegal’s exports going to other CFA franc countries, however, although rising,
is only about 20 percent.
8
simplified the system of import taxation of the member countries, including Senegal. Prior to the
TEC Senegal’s tariffs and other import duties could cumulate to about 70%. Now, the ceiling is in
principle 22% (20 percent customs duties, 1% statistical tax and 1% prélèvement communautaire de
solidarité. This higher rate is limited to final consumer goods; for socially essential goods, the tax
rate is zero, for necessities, it is 5%, and for intermediate inputs it is 10%. Nonetheless the
application of the TEC has been accompanied by offsetting measures such as the taxe dégressive de
protection (TDP) and the taxe conjonturelle à l’exportation (TCI). The TDP only concerns
industrial and agro-industrial products, and is supposed to cushion temporarily (for four years) the
impact of reduced protection. The TDP has a “reduced rate” of 10 percent for those products
suffering a cut in the effective rate of protection of 25 to 50%, and a higher 20% rate for those
products having even larger reduced effective protection. The TCI is applied in cases of foreign
dumping or when the UEMOA commission judges that there has been an important decline in the
world price of the product in question. Also, it seems that the timbre fiscal and other small taxes are
still applied.
While these reforms have been far-reaching, the effectiveness of these measures was
compromised by lack of credibility due to abrupt and frequent changes in policies, erratic
implementation, the failure to adopt accompanying measures such as deregulation of the labor
market, and administrative hurdles. These problems handicapped firms’ abilities to adjust to the
liberalized trade regime through lower costs and higher productivity. For example, it can take years
to receive free trade status, and even for firms with such status, the procedures for duty exemptions
and other benefits can be lengthy and cumbersome.11 Perhaps most importantly, prior to the
devaluation, the increasing overvaluation of the CFA franc, which had been pegged to the French
franc since independence in 1960, may have doomed any such microeconomic reforms.
Overvaluation is equivalent to a uniform tax on exports and subsidy on imports, thus tending to
offset any improvements of other policies on export competitiveness while exacerbating pressures on
the import-competing sectors.
Our aim is to provide an organizing framework to understand these problems. We have
proceeded in two steps. First, we use a Ricardian approach to assess macroeconomic
competitiveness that involves comparing Senegal’s unit labor costs to other developing countries.
11
FIAS (1999) documents the various procedural problems confronting a prospective
investor.
9
Relative unit labor costs depend in turn on labor productivity, labor costs, and exchange rates.
Second, we have undertaken case studies, as summarized above, to further grasp the structural
factors that lie behind the slow growth of productivity and exports of tradable goods. The remainder
of this paper focuses on the former issue, while a companion paper (Golub and Mbaye 2000)
addresses the latter.
III.
A Ricardian Framework for International Competitiveness
In this section, we argue that a Ricardian focus on relative unit labor costs provides a
powerful framework for analyzing international competitiveness. Unit labor cost is the cost of labor
per unit of output, i.e. the ratio of wages to productivity. Relative unit labor cost is the key relative
price in a Ricardian model of trade. International price competitiveness, also known as the real
exchange rate, can be alternatively defined as the relative price of domestic and foreign tradable
goods (the “external” real exchange rate) or the relative price of domestic tradables and domestic
non-tradables (the “internal” real exchange rate). In practice, however, there is often less difference
between these two approaches than appears at first. Many empirical models use some ratio of
foreign and domestic prices to proxy for the domestic relative price of tradables/nontradables.12
Also, the two models boil down to a similar result: exports and imports depend on the real wage in
terms of tradable goods.13 Furthermore, in a world where capital is mobile and production is
footloose between countries, it is the relative price of non-tradable inputs, notably labor, rather than
outputs that matters.14 Firms will tend to source production in countries where unit costs of nontradable inputs are low. It is therefore of interest to compare both levels and rates of change of labor
costs and labor productivity between countries. Hinkle and Nsengiyumba (1999) also observe that
external real exchange rates tend to be appropriate when foreign and domestic goods are imperfect
substitutes. In the case of Senegal, as noted above, exports are mostly lightly processed primary
12
See Edwards (1988) for example. Hinkle and Nsengiyumba (1999) note the widespread
use of external real exchange rates as proxies for internal real exchange rates.
13 See Dornbusch (1980, Ch. 9) for an analysis of the Salter-Swan model. The domestic
price of nontradables is a markup of domestic nominal wages (given the productivity of labor
in nontradables). On the other hand, the foreign-currency price of tradable goods is
exogenous. Thus, the relative price of tradables is inversely proportional to the real wage
expressed in terms of tradables.
10
commodities that are likely to be imperfect substitutes for other countries’ products due to quality
differences. For these reasons and others, Turner and Van’t Dack (1992) and Turner and Golub’s
(1997) surveys of the literature conclude that relative unit labor costs in manufacturing are the best
single indicator of competitiveness. Where data are available, Hinkle and Nsengiyumba (1999) also
endorse the use of unit labor costs, both for analysis of levels and rates of change of competitiveness.
More generally, the Ricardian model provides an appealing framework for the analysis of
trade flows (see Golub (1994), Golub and Hsieh (2000) and Carlin et al (2001) for further
discussion). This model provides an integrated framework for understanding the macro- and
microeconomic factors determining trade flows, as most elegantly shown in Dornbusch, Fischer and
Samuelson (1977) (DFS). The basic idea is that relative unit labor cost is influenced both by sectorspecific variables (productivity and wages) as well as the real exchange rate.15 On a micro level, the
Ricardian model has both advantages and disadvantages compared to the Heckscher-OhlinSamuelson (HOS) model, in which comparative advantage is derived from factor endowments. The
main advantage is that the Ricardian model allows for technological differences between countries,
which in practice seem very significant. There are large and persistent gaps in labor and total factor
productivity by industry across countries. Moreover, the HOS model has received lukewarm
empirical support (Bowen, Leamer, and Sveikauskas, 1987). It has recently been shown that a key
reason for the failure of the HOS model is the failure to incorporate international differences in
technology and that when such differences are allowed for the HOS model improves (Trefler 1995,
Davis and Weinstein 2001). The main disadvantage of the Ricardian model is that it implies that
countries specialize completely in tradable goods production. In practice, import-competing
industries contract but rarely disappear completely in the face of foreign competition. To allow for
incomplete specialization in a Ricardian context, one would have to introduce other considerations,
such as differentiated products. Also, unit labor cost may be an imperfect gauge of competitiveness
if quality differences are not measured accurately or if labor is not the only non-tradable factor of
14
Jones (1980) analyzes the implications of footloose factors in a Ricardian model. See also
Caves, Frankel, Jones (1999, Ch. 9).
15 Most expositions of the Ricardian model assume perfectly competitive labor markets and
hence a uniform wage rate across sectors. But this assumption is easily relaxed in empirical
work.
11
production. Despite these limitations, previous applications of the Ricardian model have been quite
successful, although they are surprisingly few in number.16
Let ai represent the unit labor requirement (the inverse of productivity), for sector i:
(1)
ai =
Li ,
Qi
where Q is value-added, and L is labor employment. Marginal productivity and hence ai are
assumed to be constant with respect to variations in Li. Let w denote the wage and e the exchange
rate between home and foreign currencies.
If labor is the only factor of production (or that other factor costs do not differ across
countries), average costs of production are equal to unit labor costs wi.ai. Expressed in domestic
currency, foreign unit labor cost is e.wi*.ai*. International competitiveness in sector i then depends
on relative unit labor cost ci:
(2)
ci =
aiwi
.
ai * wi * e
Alternatively, equation (2) can be written
(3)
ci =
ai . wi .
ai * wi * e
Equation (3) illustrates the decomposition of relative unit labor costs into relative productivity and
relative wages converted into a common currency. Thus Senegal’s competitiveness vis-à-vis
Thailand could weaken when some combination of the following conditions hold: 1) Labor
productivity in Thailand rises relative to labor productivity in Senegal, 2) Senegalese wages increase
16The
classic articles are MacDougall (1951), Balassa (1961) and Stern (1962). For a
discussion of this earlier literature see Deardorff (1985). Golub (1994) and Golub and Hsieh
(2000) are more recent empirical applications of Ricardian model.
12
relative to Thai wages, or 3) The CFA franc appreciates relative to the Thai baht. As Senegalese
cost competitiveness deteriorates, exports are predicted to decline.
In addition to cost competitiveness, exports could be affected by changes in global demands
associated with cyclical movements of foreign aggregate output and by changes in domestic supply
unrelated to relative prices. This justifies the inclusion of world demand and domestic supply shocks
as explanatory variables in the empirical analysis of trade flows.
IV.
Labor Costs and Productivity in Senegalese Manufacturing
This section present empirical measures of Senegal’s relative unit labor costs in
manufacturing, using the decomposition of equation (3) into relative productivity and relative wages
measured in a common currency in manufacturing.
To compare levels of real outputs and labor compensation across economies, they must be
converted to a common currency. Productivity is calculated as manufacturing value added per
employee, deflated by the manufacturing value-added deflator and converted to $U.S. at an
equilibrium or purchasing power parity exchange (PPP) rate. Wages are defined as total labor
compensation per employee, converted to $U.S. at the market exchange rate.17 As is accepted in the
literature on international labor productivity and unit labor cost comparisons, PPP exchange rates are
used for international productivity comparisons to eliminate the effects of exchange-rate volatility on
measures of real output, which should be invariant such exchange-rate fluctuations. But deviations
of exchange rates from PPP do affect relative labor costs, so it is appropriate to use the market
exchange rate in converting wages. 18 Currency depreciation consequently tends to improve
international competitiveness by reducing labor costs relative to labor productivity.
Data are annual, 1974-1996. Sources and methods are described in the Appendix.
17The
UNIDO INSTAT database used for these calculations defines labor compensation as all
payments in cash to employees but excludes social insurance payments by employers.
18 See Hooper and Larin (1989) for further justification of the use of PPP exchange rates for
productivity comparisons but market exchange rates for labor-cost comparisons.
13
Figure 3 shows the time path of Senegal’s relative labor productivity and wages vis-a-vis
selected competitor countries: Korea, Malaysia, Thailand, India, Mexico, South Africa and
Mauritius. Figure 3 is best suited for looking at the evolution over time of Senegal’s wages and
productivity of Senegal vis-à-vis other countries, as the scale of the various figures is not held
constant. Figure 4 below is better suited for international comparisons of levels of wages and
productivity at a point in time. Several patterns emerge from Figure 3.
•Prior to the 1994 devaluation, Senegal had an obvious competitiveness problem : in the
early 1990s Senegalese relative wages exceeded relative productivity in all cases, implying that
Senegal had higher absolute unit labor costs than any of the other countries examined.19 The 50
percent devaluation in 1994 substantially reversed this situation, with Senegalese relative
productivity now surpassing Senegal’s relative wages with respect to some but not all competitor
countries. Based on Figure 3, the 1994 devaluation approximately returned Senegalese unit labor
costs to parity vis-à-vis developing country exporters of manufactured goods. The devaluations of
Asian currencies following the 1997-98 crisis undoubtedly offset some of the effects of the CFA
franc devaluation, but data to assess this was not yet fully available at the time of writing.
•The importance of the peg to the French franc is also apparent. A strong French franc,
particularly vis-a-vis the U.S. dollar, as in the late 1970s and late 1980s, entails a real appreciation of
the CFA franc, i.e., Senegalese relative unit labor costs tend to rise against countries not pegged to
the French franc. Conversely, during periods where the French franc is weak against the dollar, as
in the early 1980s, Senegalese relative unit labor costs decline.
•Senegalese labor productivity has stagnated since at least 1978. This is manifested by a
general decline of Senegal’s relative productivity vis-à-vis the countries shown in Figure 3.
Moreover, this poor productivity performance has been accompanied by a stagnation or decline in
manufacturing employment, so the slow productivity growth cannot be ascribed to diminishing
returns due to rapid growth of employment, as may be the case in Mauritius and Malaysia, for
Thus we confirm Devarajan’s (1997) and others’ findings of overvaluation of the CFA
franc, although our concept of overvaluation is quite different. It is also consistent with
Rama’s (2000) finding of misaligned labor costs in CFA countries.
19
14
example. The slow growth of Senegal’s manufacturing productivity is also studied in Berthelemy et
al (1996) and Latreille and Varoudakis (1996).
Figure 4 condenses the information in Figure 3, showing Senegal’s competitiveness before
and after the 1994 devaluation relative to some of the same developing countries. These calculations
reveal wide divergences in Senegal’s relative productivity levels. Senegal’s labor productivity
exceeds that of some developing countries such as India and Mauritius, but fall well below those of
Korea and Chile. In all cases, however, Senegalese relative wages exceed relative productivity prior
to 1994. Despite a generalized decline in Senegalese relative productivity in 1994-96 compared to
1991-93, the reduction in relative wages occasioned by the devaluation entails a substantial
improvement in competitiveness.
The fundamental dilemma in Senegal suggested by our analytical framework is that slow
productivity growth has collided with the fixed exchange rate and labor market rigidities. Low
productivity and high labor costs are both in part attributable to labor market rigidities, according to
our case studies (Golub and Mbaye 2000).20 In Senegal, unions have been unusually strong, and
protected by restrictive labor legislation modeled after France’s. Consequently, unions have to some
extent succeeded in blunting the effects of the structural adjustment programs on labor markets. In
the context of the structural adjustment program of the early 1980s, the government timidly modified
the labor code, in particular article 35 to allow short-term contracts, and article 199 to break the
monopoly of the Labor Department in job placement. At that time, however, the unions obtained
wage increases in flagrant violation of agreements with the World Bank and the IMF, which led to
the suspension of credits. In 1994-95 labor laws were further relaxed, and enforcement has also
become more lax. At the present time, our interviews (Golub and Mbaye) as well as other studies
(Rama 2000) suggest that the unions’ power has diminished considerably. Despite these changes,
some employers cite continued difficulties in shedding redundant labor and the adverse effect of
union work rules on productivity.
20
Rama (2000) also analyses labor market rigidities and other causes of wage misalignment
in CFA countries.
15
Given these labor-market rigidities and the difficulties of raising productivity rapidly, the
lack of exchange-rate flexibility associated with membership in the CFA franc zone is a serious
constraint on international competitiveness. Exchange-rate changes can be a less contentious and
more effective way of altering relative unit labor costs than nominal wage reductions.
V. Relative Unit Labor Costs and Exports
In this section we use our calculated relative unit labor cost indicators to study the
effects on Senegal’s exports. Senegal’s relative unit labor costs are calculated in terms of a
simple average of 9 competitor countries. 21
Figure 5 displays the time series of real exports/real GDP and the index of relative
unit labor costs, inverted for ease of visual comparison. Thus, an increase in this variable
means improved competitiveness. As expected, there appears to be positive correlation
between the two series. Note that the 1994 devaluation sharply improves competitiveness
initially, but much of this improvement is eliminated by 1996, reflecting some increases in
wages and continued decline in productivity in Senegal, as well as currency depreciation in
some of Senegal’s competitor countries. Figure 6 is similar to Figure 5 except that
manufactured exports replace total exports. The relationship between relative unit labor costs
and competitiveness appears somewhat stronger for manufactured exports than total exports.
We have estimated the following baseline equation, loosely based on the Ricardian model in
section III and close in spirit to the elasticities approach to trade flows:22
(4)
LEXTOT = a0 + a1 LRULC(-1) + a2 LWGDP + 
Where LEXTOT is the log of the ratio of real export to real GDP, LWGDP is the log of
world GDP, and LRULC is the log of the index of Senegal’s relative unit labor costs. We
also used as an alternative dependent variable the log of the ratio of real manufactured export
21
The countries are Korea, Malaysia, Thailand, Singapore, Hong Kong, India, Mauritius,
South Africa, and Mexico. These countries are Senegal’s most important competitors,
particularly in the European market.
16
to real GDP (LEXMAN). The relative unit labor cost variable is lagged one year to reflect
order and delivery lags. A rise in LRULC means a loss in competitiveness of Senegalese
products on world markets, so that the sign of coefficient a1 is expected to be negative. The
second variable (LWGDP) is meant to capture the effects of world demand on exportables
and is a2 expected to be positive.
We also considered a number of other variables in alternate specifications. For the
total export equations we tried measures of rainfall and dummy variables for years of drought
as measures of output shocks. To capture the effects of the shifts in the trade regime
discussed above, we used the log of the average duty on imports (LTARIFF) as well as a
dummy variable for the 1994-98 post-devaluation period (D9498).
Table 1 lists the variables in the model and presents descriptive statistics and a
correlation matrix. The data are annual, 1970-1998 for total exports and 1974-1976 for
manufactured exports.
Table 2 reports regressions estimates of variants of equation (4), alternatively using as
dependent variables the ratio of total real exports to real GDP (models 1-4), and the ratio of
manufactured real exports to real GDP (models 5-7), as well as error-correction
representations for total exports (model 8) and manufactured exports (model 9).
Lagged relative unit labor costs have the expected effect and are statistically significant in all
cases, both for total exports and manufactured exports. Overall, however, the equations for
manufactured exports (models 5-7) are markedly more successful than those for total exports
(models 1-4). For manufactured exports, the R-squared is much higher and the coefficient on
relative unit labor costs is higher and more precisely estimated. That is not surprising since our
Ricardian framework is more applicable to manufactured exports than primary products. The
variable representing world demand has the wrong sign in all equations and is sometimes significant.
This probably reflects the fact that Senegalese exports have declined over time, while world GDP has
increased. In models 2 and 6, we have introduced the average tariff rate to capture the effect of the
trade regime discussed in section II. While this variable has the expected negative sign, it is not
statistically significant. The weak effects of the average tariff variable may be due to erratic
implementation of tariff reforms, the frequent reversals of policies in response to budgetary and other
22
See for example Soderling (2000) and Sekkat and Varoudakis (1998) for similar
econometric tests applied to African exports.
17
pressures, and complex exceptions. In addition, in spite of the structural adjustment programs,
quantitative restrictions on imports were not eliminated until after the 1994 devaluation. We also
tried a dummy variable for the 1994-98 period, to capture the more profound nature of the reforms in
the post-devaluation era, but this variable had the wrong sign and was insignificant, and the
explanatory power of the model did not improve (model 7)23. In model 3, we introduced rainfall as
an independent variable, but the coefficient had the wrong sign and was insignificant. This
surprising result could be due to the existence of a threshold effect on rainfall of 400-500 mm per
year that is necessary for a successful harvest in grains, oilseeds, and cotton, with any excess above
this level having little impact on output. However, when we used a dummy variable equal to 1 for
drought years and zero for other years, the sign is still wrong and statistically insignificant (model 4).
This result could reflect the declining share of agriculture in Senegalese exports (Golub et Mbaye
2000, Mbaye 1998).
In all equations, Durbin-Watson and Breusch-Godfrey tests rejected autocorrelation of the
residuals. Most importantly, the results show that the effect of relative unit labor costs on exports is
robust with respect to the addition of other variables in the model.
Unit root tests (using ADF method) reveal that all our series are integrated of order 1.
It is well known that in the case of non-stationarity, inferences using OLS can be spurious
(Granger and Newbold 1986). Thus we tested for cointegration using the two-stage
procedure of Engle and Granger (1987) which showed that these series are cointegrated and
thus have a long run relationship. When variables are cointegrated, they can be represented
in error-correction form (Engle et Granger 1987). We therefore estimated error-correction
models (models 8 and 9), based on models (1) and (5) respectively in Table 1.
These results confirm that RULC is an important determinant of exports, as the
lagged residuals (RESID) are significant at the 1 percent level, in both cases; moreover,
LRULC(-1) is significant at 5% and 10% level in (8) and (9) respectively. We can thus infer
a causal effect of RULC on exports. CUSUM stability tests on the residuals confirm the
stability of the parameters (not shown to conserve space).
While the importance of cost-competitiveness is thus confirmed, the equations leave a
substantial proportion of the variance of exports unexplained. As figures 5 and 6 show, the
response of exports to the 1994 devaluation has been modest. The devaluation roughly
23
Similar results were obtained for total exports and are not shown to conserve space.
18
restored competitiveness to its 1ate 1970s level, but real export/GDP ratios remain well
below those of earlier decades.
It seems clear that other adverse structural factors, not fully
captured by relative unit labor costs, are blocking export growth.
Conclusion
In this paper we have studied the macroeconomic determinants of exports to shed
light on Senegal’s weak integration into the world economy, despite substantial trade
liberalization and export incentives. To do so, we used a conceptual framework based on the
Ricardian model of trade. In this model, international competitiveness is measured by
relative unit labor costs, which in turn are a function of wage rates, labor productivity and
exchange rates. We evaluated the level of Senegal’s wages and productivity in
manufacturing compared to those of emerging economies in Asia, Latin America, and Africa.
In the years before the 1994 devaluation, Senegal’s competitive position was very weak, i.e.,
Senegalese wages relative to other countries were uniformly higher than Senegalese relative
productivity, implying very high unit labor costs for Senegal. These high unit labor costs
reflected low Senegalese productivity growth, the fixed exchange rate of the CFA franc, and
the rigidity of Senegal’s labor market. The 1994 devaluation roughly returned Senegalese
relative unit labor costs to parity vis-à-vis other emerging countries’ levels. Given very high
relative unit labor costs until 1994, it is not surprising that prior to 1994 Senegal had low
export growth and did not attract much new investment in export-oriented manufacturing
either from local or foreign investors. Using a composite index of Senegalese unit labor
costs, relative to a basket of competitor countries, our econometric tests show a significant
and robust effect of relative unit labor costs on exports.
Our results point to the importance of macroeconomic competitiveness and its
underlying determinants, particularly exchange rate policy, labor market flexibility, and labor
productivity. The most sustainable and desirable way to improve competitiveness is to raise
labor productivity because this raises the standard of living, whereas devaluation and wage
19
reductions lower it. Given the difficulties of raising productivity or adjusting nominal wages
quickly, however, it is important to obtain some degree of exchange rate flexibility. While a
pegged exchange rate has some advantages, such as providing nominal anchor and reduced
uncertainty, this is offset by the danger of overvaluation. In the case of Senegal,
overvaluation can arise either because Senegal’s labor costs rise relative to France (and now
Europe), or the French franc (Euro) appreciates against other major currencies.
Our analysis also suggests that liberalization and tax breaks by themselves are
unlikely to be effective if the real exchange rate is overvalued, productivity is low and the
general business environment is poor. Complex tax incentives may even be
counterproductive by diverting managerial efforts and fostering corruption, thus lowering
productivity and increasing uncertainty (FIAS 1999).
Senegalese labor productivity has stagnated in the last 25 years. Future research
should attempt to determine the sources of Senegal’s low productivity growth and poorly
functioning labor market. In related research, we are studying these structural problems
through case studies. Our preliminary conclusions based on these case studies are that
Senegalese policymakers should focus on structural bottlenecks such corruption, inadequate
training, a weak judiciary, and a shortage of credit for small and medium enterprises. These
structural barriers affect competitiveness both by lowering productivity and thus raising unit
labor costs, and also by contributing to a generally dissuasive environment for investment.
20
APPENDIX
Data Sources and Methods
Labor Costs and Productivity in Manufacturing:
Labor productivity is defined as real value added per employee, and wages are labor
compensation per employee. Real value added is obtained as nominal value added deflated
by a manufacturing value added deflator. Two alternative methods of computing equilibrium
exchange rates for use in productivity comparisons between countries were tried: 1) the
average bilateral real exchange rate over the sample period and 2) relative prices of producer
durables as a proxy for manufacturing PPPs derived from the International Comparison
Project (ICP). In practice, the two methods yielded similar results, and only the results based
on the average real exchange rates are reported here.24
The primary data source is the United Nations Industrial Development Organization
(UNIDO) INSTAT database, supplemented by the World Bank World Development
Indicators on CD-ROM (WDI). Value added, employment, and labor compensation data are
taken from INSTAT. The market exchange rate and manufacturing value added deflators
were obtained from WDI. In addition, for Senegal, the UNIDO data were supplemented and
checked against the CUCI database obtained directly from the Senegalese Département de la
Statistique.
The UNIDO INSTAT data have several drawbacks. First, the value added data
follows the census definition rather than the national accounts compatible definition, used by
the United States Bureau of Labor Statistics (BLS). The main difference is that census value
added does not deduct some service inputs from gross output in deriving value added.
24
There are no comprehensive international data on manufacturing PPPs. The best-known
and most comprehensive PPP information comes from the Heston-Summers International
Comparison Project (ICP) as obtained from World Bank "Stars" diskettes.24 In other work,
Golub (1999) used the producer durable PPP from Although producer durables are not
necessarily representative of all manufacturing, they have several advantages, at least relative
to other readily-available options.
21
Second, labor compensation as reported by UNIDO includes fringe benefits such as maternity
pay and payment in kind, but excludes employer contributions to social insurance funds and
is thus an incomplete measure of labor costs.
The UNIDO database is the most
comprehensive source of available data, however, especially for developing countries.
Other Variables
Total exports, exchange rates and world and Senegalese real GDP were obtained from the
World Bank’s World Development Indicators. The average tariff rate was provided by the
Senegalese Département de la Statistique. Senegal’s exports of manufactured goods are derived
from the CUCI database. Rainfall data were provided by Stephen O’Connell.
22
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25
Table 1
Descriptive Statistics and Correlation Matrix of Variables
Annual Data, 1970-1998a
LEXTOT
LEXMAN
LWGDP
LRULC(-1)
lrainfall
LTARIFF
Mean
2.40
4.10
13.33
0.92
8.72
-1.72
Median
2.41
4.10
13.33
0.92
8.84
-1.72
Maximum
2.53
4.41
13.50
1.15
9.04
-1.40
Minimum
2.11
3.83
13.13
0.71
5.82
-2.12
Std. Dev.
0.07
0.16
0.11
0.14
0.59
0.17
Skewness
-2.09
0.12
-0.14
0.00
-4.55
-0.41
Kurtosis
10.76
2.08
1.89
1.68
22.79
2.88
Jarque-Bera
93.83
0.87
1.57
2.04
533.55
0.80
Observations
29
23
29
28
27
28
Correlation matrix
LEXTOT
1
LEXMAN
0.56
1
LWGDP
-0.32
-0.76
1
LRULC(-1)
-0.47
-0.47
0.56
1
LRAINFALL
-0.04
-0.22
-0.048
-0.15
1
LTARIFF
-0.31
-0.64
0.6
0.63
-0.16
1
ADF unit root stat on first
differences
-4.49
-3.77
-4.08
-4.28
-11.53
-4.41
a
1974-1996 for manufactured exports.
List of Variables
LEXTOT: log of total real exports
LEXMAN: log of real manufactured exports
LWGDP: log of world real GDP
LRULC(-1) : log of relative unit labor cost index, lagged one period
LRAINFALL: log of annual rainfall
LTARIFF: log average tariff rate
DROUGHT: dummy variable for years of drought
D9498: dummy for the years following the 1994 devaluation (1994-1998)
26
Table 2
Regression Equations for Total Exports (Models 1-4), Manufactured Exports (5-7), and
Error Correction Models for Total Exports (8) and Manufactured Exports (9)
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Model 7
Model 8
Model 9
LEXTOT
LEXTOT
LEXTOT
LEXTOT
LEXMAN
LEXMAN
LEXMAN
D(LEXTO
T)
D(LEXMA
N)
Intercept
3.67
(1.90)
3.36
(1.49)
0.32
(1.57)
3.23
(1.29)
17.72
(4.96)
16.68
(4.06)
13.54
(2.30)
-
0.036
(0.71)
LRULC(-1)
-0.22**
(-1.98)
-0.23***
(-1.77)
-0.22***
(-1.97)
-0.23***
(-1.76)
-0.558*
(-3.18)
-0.51*
(-2.56)
-0.71*
(-2.88)
-
-
LWGDP
-0.08
(0.54)
-0.058
(-0.39)
-0.046*
(-2.94)
-0.042
(-0.21)
-0.98*
(-3.57)
-0.91*
(-3.03)
-0.65
(-1.44)
-
-
-0.014
(0.18)
-
-
-
-0.08
(-0.53)
-
-
-
-
-
-
-
-
-
-0.082
(-0.89)
-
-
-
-
0.020
(0.71)
-
-
-
-
-
-
-
-
-
-0.005
(-0.24)
-
-
-
-
-
-
-
-
-
-
-
-
-0.28**
(-2.02)
0.39***
(-1.89)
-
-
-
-
-
-
-
-0.087
(-0.10)
-3.74
(-0.93)
-
-
-
-
-
-
-1.05*
(-5.08)
-0.92*
(-4.06)
0.26
2.05
4.46
0.21
1.53
0.26
2.04
2.73
0.23
1.58
0.27
2.15
3.08
0.30
0.O3
0.72
1.75
26.42
0.26
1.72
0.72
1.69
17.09
0.48
1.67
0.73
1.80
17.71
0.26
1.52
0.53
1.99
13.67
0.11
3.16
0.55
1.93
7.55
0.52
1.95
Dependant
Variable
Estimates
LTARIFF
D9498
DROUGHT
RAINFALL
D(LRULC(-1))
D(LWGDP)
RESID(-1)
-
-
Statistics
R2
DW
F-stat
B-G(nR2)b
MAPEa
0.26
2.05
2.60
0.20
1.62
a=Mean Absolute Percent Error
b=Breusch-Godfrey Statistics
t stats in parentheses
*significant at 1% level, ** at 5% level, *** at 10% level.
27
Figure 1
Real GDP per Capita, $1995
12000
10000
8000
1960
1985
1997
6000
4000
2000
0
Korea
Malaysia
Chile
Mauritius
Tunisia
Senegal
Figure 2
Export Growth, Annual Average Percentage Change
25
20
15
19 60-84
19 85-97
10
5
0
Korea
Malaysia
Chile
Mauritius
Tunisia
Senegal
28
Figure 3
Senegal’s Labor Productivity and Wages, Relative to Selected Competitors,
Manufacturing Sector
Senegal/Thailand
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1978
1980
1982
1984
1986
1988
1990
1992
1994
Senegal/ Malaysia
2.50
2.00
1.50
1.00
0.50
0.00
19 78
19 80
19 82
19 84
19 86
19 88
19 90
19 92
19 94
19 96
Senegal/Korea
1.60
1.20
0.80
0.40
0.00
19 78
19 80
19 82
19 84
19 86
Rela tive Pro ductivity
19 88
19 90
19 92
Rela tive Wages
19 94
19 96
29
Figure 3, continued
Senegal/South Africa
1.20
1.00
0.80
0.60
0.40
0.20
0.00
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
Senegal/Mexico
1.80
1.50
1.20
0.90
0.60
0.30
0.00
1978
1980
1982
1984
1986
1988
1990
1992
1994
Senegal/Mauritius
4.00
3.00
2.00
1.00
0.00
19 78
19 80
19 82
19 84
19 86
Rela tive Pro ductivity
19 88
19 90
19 92
Rela tive Wages
19 94
19 96
30
Figure 3, continued
Senegal/India
6.0 0
5.0 0
4.0 0
3.0 0
2.0 0
1.0 0
0.0 0
197 8
198 0
198 2
198 4
198 6
Relative Productivity
198 8
199 0
199 2
Relative Wages
199 4
199 6
31
Figure 4
Senegal 's Wages and Producti vity,
Manufacturi ng Sector
Relative to Sel ected Competitors
1991-93
5.0
4.0
3.0
2.0
1.0
0.0
Malaysia
Mexico
Korea
Mauritius
India
1994-96
4.0
3.0
2.0
1.0
0.0
Malaysia
Mexico
Korea
Productivity
Mauritius
Wages
India
32
Figure 5
Senegal
Real Exports/Real GDP v. Inverted Relative Unit
Labor Cost Index
120
35
100
30
80
60
25
40
20
20
0
15
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996
Relative Unit Labor Cost Index
real exports /Real GDP
33
Figure 6
Senegal
Real Manufactured Exports/Real GDP v.
Inverted Relative Unit Labor Cost Index
120
30
100
25
80
20
60
15
40
10
20
5
0
0
197 4 197 6 197 8 198 0 198 2 198 4 198 6 198 8 199 0 199 2 199 4 199 6
Relative Unit Labor Cost Index
real mfg X/real GDP