III. Economic Trends and Outlook Over the past three years, the Capeverdean economy has undergone a period of transformation and restructuring characterized by a shift in the government's role in the economy. The new government is hoping to achieve its role of effective policy maker and provider of basic social services through: 1) streamlining public administration; 2) reforming the public enterprise sector; 3) promoting the role of the private sector in the economy; 4) developing the government's policy making and analytical capability; and 5) limiting government investment to developing basic infrastructure to facilitate the expansion of private sector activities and basic social services. This new course the government has embarked upon will hopefully lead to a private-sector-led economy. This will be based on sound economic and sectoral policy reforms aimed at attaining macro-economic stability and creating market conditions. Its objective is to build a strong economic base which can bring about sustainable growth, new jobs, increased export-earning capacity, and, in turn, reduce a high dependence on foreign savings. In the medium term, economic growth is likely to continue to come mostly from increasing efficiency in the existing domestic and export services and activities following an increase in investment. Growth is expected to result from: 1) demand related to public investment in infrastructure (ports, airports, roads rehabilitation, and maintenance) and modernization of telecommunications; (2) private investment in fisheries, tourism, services (including banking), and export processing (light manufacturing);(3) an increase in agricultural output with better use of irrigated land; (4) steady growth in private investment in housing; (5) continued growth of commerce; and (6) growth in services to international air and maritime transport. Over time, a better established and dynamic export-oriented economy led by the private sector is expected to be the engine of growth and employment creation. Balance of Payments Cape Verde's balance of payments is characterized by structural imbalance on the trade account, substantial surplus on the service account, significant net private transfers, and considerable net ODA inflow. Foreign trade is characterized by modest merchandise export earnings, significant service exports, and high merchandise imports. The merchandise export base is very small in value and diversity. Export earnings come predominantly from exports of fish and bananas. Traditionally Cape Verde's most substantial export earnings have come from non-factor services to international maritime transport, which have increased recently as a result of rising services to international air traffic. The economy is highly dependent on imports of food, capital and intermediary goods. Recently net factor income has been positive because of substantial interest earnings on external reserves. Private transfers have increased greatly in recent years and have become the most important source of foreign exchange since 1988. Trade and Investment Barriers Major trade and investment barriers include: - lack of access to credit as a result of inadequate financial system; - weak and small domestic market with a structure dominated by the public sector; - underdeveloped private sector which lacks organization and leadership; - growing informal sector; - inadequate infrastructure and telecommunications. Labor Force The active labor population in Cape Verde was estimated in 1991 at 122,000. The government has been the biggest employer (in 1990 the central government and the public enterprise sector employed about 18,000 persons). Most evident in the existing labor force is the severe shortage of skilled middle-level workers. However, this problem has been recognized by the GOCV and this has led to the development of a professional education project assisted by the World Bank. With the recent increases in internal competition, the private sector has started to attract scarce managerial and skilled labor from the public sector in spite of lower job security. Although there is no minimum wage, labor legislation allows for flexibility in hiring and firing, administrative procedures for their enforcement are a major constraint to the labor market. Major Third Country Competition Due to language affinity and longstanding relations, Portugal is the single most important competitor, followed by other European countries, namely, Netherlands, France, Germany, Spain and Sweden. Portugal is present in all sectors, particularly in consumer goods and consulting services. In recent years, Brazil has made a noticeable effort in getting into the Capeverdean market, becoming in 1993 the fourth most important trading partner with an official GOCV market share of 6.2%. Infrastructure Situation The country's inadequate physical infrastructure has been a major roadblock to development. The transport sector was the subject of a World Bank study which has been updated in the context of a transport and infrastructure project promoted and co-financed by the World Bank. Limited port and airport facilities, and infrequent and costly air and maritime transport are serious constraints to the development of an outward-looking economy. Ports and airports in urgent need of repair and expansion are covered by the above mentioned project. The largest airport is in Sal, which is able to accommodate large international aircrafts (747s). A new and longer runway is being built in Praia, and will be able to accommodate airbuses. Other islands too are having their facilities upgraded. Mindelo's Porto Grande will be modernized under the new project. Equipment at the port includes three forklifts with 1.5 To 3 ton capacities. Vessels' own gear is used for loading and unloading. The port authority, ENAPOR, owns an "engine park" with two 8-ton cranes, one 12-ton crane, one 25-ton crane, a 25-ton forklift for container operations and other equipment. The telecommunications system is saturated and substandard. Major Infrastructure Projects Underway A major transport and infrastructure project co-funded by the World Bank is now underway. The total cost of the project is about us$87 million and it has the participation of IDA, Kreditandstalt Fur Wiederaufbau, the Netherlands, African Development Fund, Government of Cape Verde and others. The project has four components: 1) port sector investments, including modernization at porto grande on the island of S.Vicente, and port rehabilitation at Vale dos Cavaleiros on the island of Fogo; 2) reorganization of shipping activities; 3) highway sector improvement and maintenance; 4) establishment of an institutional framework to develop teleports by private investors. Estimated completion date is 1998.