Grabbing Cape Verde's economic cat by the tail

Cape Verde avoided an economic calamity during the last global economic crisis of 2009-2010. The local economic growth dropped from around 7% per year to 4% but has since improved to a level closer to 5-6% per year. In addition, tourism numbers keep climbing at a pace of over 20% per year.

Cape Verde, which initially had received a negative ratings outlook from Standard & Poors, was upgraded not to neutral but to a positive ratings outlook earlier in 2011. It had also been promoted from the ranks of Lesser Developed Country (LDC) to a lower middle-income country.

This is a remarkable performance and mimics the best economies of Africa, despite the brewing worldwide economic trouble that stems from the Euro-crisis and the faltering performance of the economic giant - the United States. The BRICS and a newly emerging economic collective in Africa have not yet been seriously affected by these developments, but the developments in Europe and America should be warning signs for emerging economies such as Cape Verde's.

Cape Verde must be extremely cautious at this stage of its economic evolution. Formerly as an LDC, Cape Verde was provided with hundreds of millions of dollars of aid by high-income economic powers. That money did not have to be repaid. However, as a consequence of the promotion to lower middle-income country in the world economic order, Cape Verde is now expected to stand on her own two feet. It is like when a child grows from a baby that has to be fed by its parents to the young-adult stage and is expected to be self-reliant.

In addition, Cape Verde's perennial European "god father", Portugal, has severe economic challenges of its own and can hardly afford to lend Cape Verde any more money. Cape Verde owes Portugal around €200 million. But it owes more to other countries. Cape Verde's total external debt is about €1 billion and climbing.

With this level of external debt and no more "free lunch", the Cape Verde economy has reached a major cross-road and the current Minister of Finance, Cristina Duarte, surely has her hands full so to speak. On the one hand, the country is running a significant budget (current) deficit which has to be financed with external borrowing. On the other hand, she has to service the increasing external debt reducing available revenues while reducing government spending at the same time. This puts a big squeeze on the social issues as the government finds itself with less capacity to spend on social items such as subsidizing food, fuel, electricity, water and so on. The challenge is akin to carrying a cat by the tail ... you can receive a serious bite or a clawing!

So what's the solution? It's the top line, not the bottom line. Cristina has to lay the seeds for Cape Verde's economy to grow at an even faster pace! How is this possible you ask? Here are five ideas to get it done:

1. Cape Verde has to leave behind all vestiges of socialist governing tendencies. The government cannot continue to see itself as the solution to all the countries problems. Having been trained in the United States, Cristina knows this. Essentially, she must convince the government leadership that a complete embrace of the free market philosophy is necessary.
2. In a free market, one looks to investors and consumers to replace a substantial portion of stimulative spending that the government is currently engaged in. In other words, the government must redirect resources to make it easier for private investors to do business, to facilitate increased domestic demand, and to increase exports!
3. It is still not easy enough for foreign companies to do business in Cape Verde even though the situation has been gradually improving. Greater improvements must be made ... and faster. Every possible obstacle must be sought out and struck down. Cabo Verde Investimentos (Cape Verde's relationship manager with foreign investors) must engage in a new active program of serious outreach to international investors especially those in the United States where Cape Verde is unkown. This is the key to FDI - foreign investors have many choices competing for their attention and their dollars. You cannot just sit at home (in Cape Verde) and expect these investors to come to you. FDI must be wooed.
4. Domestic demand can be massively increased if the nine inhabited islands of Cape Verde can be better connected. It is a very simple and seemingly obvious idea whose time has come. Cape Verde must increase the economic linkages between the islands. If products produced on one island cannot reach consumers on another island, or if workers on one island cannot reach the jobs on other islands, this clogs the domestic economic growth engine. Since the islands are separated by water, the answer is very clearly a national fast-ferry service run by private investors! There is already one such ferry company, Cabo Verde Fast Ferry, currently connecting just 3 of the 9 islands, one of which was previously completely isolated from the rest of Cape Verde. The government needs to do everything in its power to facilitate the expansion of these kinds of services, e.g,. build the facilities to receive the ferries on the smaller islands.
5. The government is currently pouring money into two failed public companies: Electra, the water and power utility company, and TACV, the national airline. These companies are sucking valuable government resources with negative returns on the investments. These companies must be replaced by private or partially-private companies as soon as possible. All attempts at resuscitation on these companies are futile. These patients are DOA (dead on arrival) ... virtually bankrupt.

These are my thoughts about what Cape Verde must do to avoid the "trap of middle income countries."

I would very much appreciate your thoughts and ideas. Please use the comment section to share your reactions.