III. ECONOMIC TRENDS AND OUTLOOK 1. Major Trends and Outlook Economically and politically, 1994 is a year of unprecedented change for C te d'Ivoire. The December 7, 1993 death of President Houphouet-Boigny, after forty years at the center of power, was followed by the January 12 devaluation of the CFA franc, after more than forty years of a fixed parity with the French franc. Together, these events brought an end to a period of drift in the country's economic and political management, while opening avenues of opportunity that had been blocked by the overvalued exchange rate. With the currency devalued, cooperation resumed with the major multilateral lending institutions, which in turn opened the way for substantial new concessional credits. Official creditors then agreed at the Paris Club to a substantial rescheduling and reduction of the country's crushing debt burden. Private interests, meanwhile, contributed by reversing the capital outflow which had been driven by the inevitability of the CFA franc's devaluation; commercial banks, which before were facing liquidity crises, are now flush with funds and short of high quality borrowers. Providentially, over the same period, the prices for key Ivorian commodities (cocoa, coffee and cotton) started rising to levels that had not been seen for years; it was the collapse of those prices which had most contributed to the economy's poor health. As all of this was occurring, an American firm announced oil and gas discoveries that promise to make C te d'Ivoire self-sufficient in petroleum and electrical power by as early as the end of 1995. The country, in effect, has been dealt a new hand; the challenge will be to use the new opportunities wisely over the months and years ahead. 2. Principal Growth Sectors In the short term, agriculture and agro-industry stand to gain the most from the new conditions. The traditional cash crops, which are mostly exported, are not only rebounding on world markets, but have also doubled in value in local currency terms as a result of the devaluation. Demand for local food crops, meanwhile, should strengthen significantly: with urban wages rising, on average, by only about ten percent in nominal terms after the devaluation, Ivorian consumers can be expected to turn from expensive imports toward local alternatives. Prospects are similar in certain light manufacturing industries, notably in textiles where devaluation has -- virtually overnight -- rendered a troubled industry competitive throughout the region. Over the longer term, the more competitive macroeconomic environment is likely to lead to new investment in sectors that were previously overlooked or where production did not employ modern technologies. Good examples would be rice production and food processing. The new competitiveness in the economy (or, put differently, the lower real cost of doing business) should also add to Abidjan's attractiveness as a regional center for foreign businesses operating in the area; there is already some evidence of an increased interest on the part of major multinationals in relocating their regional management operations from Europe to Abidjan. Regulatory reform could also lead to growth. The arrival of new American investment in gold mining and in petroleum extraction could well be followed by more. The new government has made reform of the mining and hydrocarbon codes a high priority; and the new activity underway has helped pioneer a new way of thinking about the future development of underground resources. The available evidence points to significant deposits of oil, gas, gold, diamonds, nickel, and other minerals; given the right regulatory framework, rapid growth could follow. 3. Government Role in the Economy At the time of its independence, C te d'Ivoire -- unlike most new African states -- chose deliberately to promote the export of cash crops produced by private planters and to maintain close ties with the former colonial power. The country subsequently learned to pride itself on its liberal market approach to economic development; its neighbors, meanwhile, produced a string of disasters by applying eclectic neo- marxist theories. Observers, in turn, often cited C te d'Ivoire during the sixties and seventies as the "African miracle" due to its sustained growth rate of seven percent, important gains in educational and social indicators, and the increasingly impressive skyline and infrastructure of Abidjan. Behind all of the fanfare, however, was a government deeply involved in almost every facet of the economy. In many respects, the system can trace its roots to French dirigiste traditions under which the best and the brightest joined the civil service, paid themselves handsomely, and set about planning and controlling the development from their various government offices. For the key coffee and cocoa sectors, financing, transport and marketing were tightly controlled by a government agricultural marketing board and a system of export quotas. A similar structure was created to handle the cotton crop, and another was established to control the marketing and pricing of imported staple grains. In the beginning, the level of government involvement probably contributed to C te d'Ivoire's success, providing support to rural populations ill-prepared for the rough and tumble environment of selling into competitive world markets. Over time, however, the burden of the civil administration on productive activity grew at the same time that falling prices made that burden harder to bear. Also over time, the complicated and pervasive system of controls and quotas created a whole series of incentives for avoiding the system which, in turn, lead to an escalating level of corruption and fraud. Peasants, meanwhile, saw their incomes diminish as those who administered the marketing apparatuses held on to their fixed salaries. Some decided it was no longer worth harvesting their crops. The Ivorian government was slow to recognize that it was not as liberal a market economy as it thought. It had avoided the excesses of some other African countries but had not kept pace with liberalizing competitors elsewhere in the developing world (notably, Southeast Asia and Latin America). There are now encouraging signs of change as a new generation of Ivorians takes charge. The IMF and World Bank are actively encouraging the government to do more to trim the civil service and liberalize the agricultural marketing and the maritime transport sectors. New and more modern mineral and hydrocarbons codes are under review. A new investment code is being developed to simplify the process of setting up new businesses. Progress will take time, but the trend is in the right direction. 4. Balance of Payments Situation As commodity prices and the economy declined through the eighties, C te d'Ivoire's external accounts came to depend increasingly on the continued generosity of official lenders (notably France, the IMF and the World Bank) and on the accumulation of unpaid debt arrears. By the early nineties, the total stock of government and government-guaranteed debt had reached approximately double the amount of the gross domestic product. Under normal circumstances, C te d'Ivoire's balance of payments and debt record would suggest a grave problem of convertibility and availability of foreign exchange. However, C te d'Ivoire belongs to the West African Economic and Monetary Union, whose currency -- the CFA franc -- is guaranteed by the French Treasury to be convertible at a fixed rate against the French franc. The French Treasury, in turn, requires strict controls on the creation of new money (i.e., members cannot simply monetize their deficits). Under these circumstances, the poor balance of payments performance does not imply a convertibility risk for the CFA franc; it does suggest, however, that the government might not have sufficient local currency holdings with which to obtain the foreign currency it needs to honor its obligations. 5. Trade and Investment Barriers Formal barriers to trade and investment are minimal and do not discriminate between Ivorians and foreigners. Nevertheless, outsiders can find themselves at a significant disadvantage if they are not fluent in French or not thoroughly familiar with local business customs and practices. Regulatory processes can be tedious and not particularly transparent, which can deter those who lack sufficient patience or those whose competitors have inside access to people with influence over the process. There is also significant customs and tax fraud, which can be used by the unscrupulous to gain unfair commercial advantages. As we have noted elsewhere, there is evidence that the new government is seeking to simplify the rules and crack down on fraud. 6. Labor Force By regional standards, C te d'Ivoire has a highly-trained and highly-capable work force. Labor laws are relatively rigid and make it hard to separate workers for cause, but a process of labor code reform has begun, and more changes are expected. 7. Major Local and Third Country Competitors in Specific Sectors While French firms have exploited their country's special relationship with C te d'Ivoire to maximum advantage, others have successfully penetrated certain key markets. Japanese car makers, for example, have taken over more than half of a market which was once dominated by France's Peugeot and Renault. Progress is being made by U.S. firms as evidenced by Chrysler entering the Ivorian market in June, 1994. In shipping, France's Delmas is the largest operator, but other lines also share in the traffic. In petroleum retailing, Texaco recently overtook Total as the biggest single supplier; Elf, Mobil, Shell, and Agip are also present. In construction, the French Bouygues group has won a number of big contracts, but an Israeli firm appears to have won even more. Entering the Ivorian market requires careful planning and knowledge of the market, a good degree of commitment and patience, a willingness to conduct all business and label all products in French, personal cultivation of one's Ivorian counterparts, and often a willingness to provide generous credit terms. Usually, any applicable technical or regulatory standards are copied from those that apply in France. In all of these aspects, long-established French businesses have a natural advantage; indeed, many American products are marketed in C te d'Ivoire through the American company's French subsidiary or representative. 8. Infrastructure re: Goods/Service Distribution With its two ports, over 8,000 miles of paved primary and secondary roads, and a rail link to Burkina Faso, C te d'Ivoire has by far the region's best distribution infrastructure. 9. Major Infrastructure Projects Underway Following a decade of economic hardship, C te d'Ivoire's investment budget has dwindled to a near-negligible amount. A major goal of the government and of the multilateral lenders is to reverse that situation over the coming years; for the interim, however, major new projects have been discouraged so as not to exacerbate the problem of inadequate maintenance budgets. One exception was a program to expand radio and television coverage over all but the remotest portions of the country. That project, being implemented by Comsat of the United States, is by far the largest single project in the budget for 1994. With changes in the leadership of the telecommunications company, more aggressive efforts -- particularly for cellular telephony -- are likely. In addition, the development of offshore oil and gas by an American-led consortium (United Meridien) is likely to lead to the installation of new gas turbines for power generation within the next twelve months.