Developing a Sustainable Economy in Cameroon

18 - Fiscal Policy Coordination and Economic Performance: Cameroon Case Analysis with a CGE Model

18 Fiscal Policy Coordination and Economic Performance: Cameroon Case Analysis with a CGE Model Ernest Bamou Introduction Faced with a sharp fall in macroeconomic performance and production in the national economy in the early 1980s, Cameroon adopted in the mid/late 1980s a new strategy of economic development within the framework of Social Adjustment Programmes (SAP) in place of its previous import-substitution strategy. Gabon did the same. The objective of the SAP was to revamp national economies through efficient resource allocation. Despite the trade liberalization option in accordance with the first SAP in the African countries, it was not until the beginning of 1994 that a substantial reform in fiscal policy within the Regional Fiscal Reform Program (RFRP) in the Central African Customs and Economic Union (UDEAC) was noticed.1 Later UDEAC was replaced by CEMAC. Considering, on the one hand, that the budgets of Developing Countries (DCs) depend largely on fiscal revenue and, on the other, the importance of these budgets in the regulation of the productive systems of the countries, one can rightly pose the following questions: (i) will this reform guarantee a reasonable level of fiscal revenue to Cameroon?, and (ii) can it induce supply/demand and welfare effects in conformity with the macroeconomic objectives of the countries concerned? The answers to the above questions suggest an analysis of the macroeconomic and sector repercussions of the reform in Cameroon as well as the coordination of trade policy within the CEMAC zone. For the purpose of comparison we take Cameroon and Gabon. This analysis is all the more necessary as existing literature has not clearly established the global macroeconomic and sector impact of fiscal reform measures (Loo and Tower 1990). The complexities of reallocations that follow such an intensive reform recommend an analysis of its repercussions within the micro-, meso- and macro-economic contexts. To this end, the computable general 362 Developing a Sustainable Economy in Cameroon equilibrium (CGE) model is the most appropriate. This approach is all the more appropriate as it makes it possible to attenuate the difficulties, mentioned by Shafaeddin (1994) and Collier et al. (1997), of disentangling the effects of fiscal reform from other economic policy influences. This chapter proceeds as follows: we briefly describe the performance of Cameroon and Gabon, the CGE model is then specified, the results are presented and discussed, and recommendations offered. Economic Performance in Cameroon and Gabon From the early 1960s, Cameroon and Gabon went through a period of economic growth as a result of global stability in the terms of trade and rapid expansion in agricultural and oil exports, respectively. In Cameroon, the oil boom of the mid1980s accelerated this growth. However, behind this good global economic performance lay great sector disparities. In Cameroon, long before the oil boom of 1982, agriculture was the main economic activity, providing more than one-third of GDP and representing more than 90 per cent of total exports (FAO 1996). From 1982, the so-called ‘Dutch Disease’, which already characterized Gabon’s economy, was also seen in Cameroon. There was stagnation in the industrial and agricultural sectors and a boom in the oil and services sectors, which until 1985 provided more than two-thirds of GDP. From 1985, there was a slight recovery in the primary and secondary non-oil sectors, thereby permitting Cameroon to barely escape this syndrome (as described by Benjamin and Devarajan (1985)). In Gabon, on the other hand, the syndrome was exacerbated. The first external shocks in the mid-1980s signalled the end of the boom period and the start of the economic crisis in these two countries. Gabon’s economy was in decline from 1986 as a result of the fall in the price of oil (almost 50 per cent), which constituted the country’s main resource (85 per cent of exports in 1984) as well as the fall in exchange rate of the US dollar, the main currency in the payment of exports. Between 1985 and 1987, the Gabon government’s oil revenue, by far the source of national revenue, fell by more than 80 per cent. This reduction also brought about a decline in public investment, and the labour sector was severely affected. Between 1985 and 1992, there was a reduction of 25 per cent and about 50 per cent in employment in the public and modern private sectors, respectively. In Cameroon, as from 1985/86, the economy was faced with several simultaneous negative external shocks. While world prices of its main exports (oil...