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Framework of Economic Resilience Analysis

From Enigma to Solution Proposals
Revised March 2018
Kinshasa, DRC
Draft 001

By Musoko Kayembe J.‡
BSc in monetary economics


Paul Samuelson and Richard Goodwin were figuring out explanation for cycles in an economy
and they suggested that they had their origin in the economic system itself. But Milton Friedman
didn‟t see it that way. He evoked the concept of “natural cycles”, arguing that monetary policy
would just result in disequilibrium when the Government intervenes. Thus, economists are
engaged into a theoretical discussion and researches on what might be the explanation of
economic cycles. It will also be important to identify and analyze economic shocks and
economic resilience through the AS / AD model. A special analysis is here for the specific case
of the DR. Congo being a developing country with features completely different from other
developed countries. The enigma is why the country has not yet been diversified knowing that
this need was known for years? You will see that one of the reasons is because there are still
some obstacles to diversification. Fact is, monetary policy might be inefficient due to that, since
the economy will run as if in full-employment of production factors while not true.

Musoko Kayembe J.
E-mail :
This draft owes too much to professor Mabi Lukusa, who was my research director (this work was in fact a part of
my degree dissertation ).
I’m also grateful to professor Mabi Mulumba for skills a gained through his lectures at University.
[2] M. Kayembe

Endogenous Theory: First Explanation of If the theory of Professor Paul A. Samuelson
Cycle with the multiplier effect and the one of Richard
Goodwin with the profit and wage assumptions
The oscillator theory of Paul A. Samuelson provide an explanation of the economic cycles
(Lecaillon and Lepage, 2008: 259) is one of the from the inner part of the functioning of the
theories that explain the economic cycle by the economic system, others attempt to explain
functioning of the economic system. them focus on elements outside of the system.
Professor Samuelson explains the expansion
phase as a recovery of investments and the Exogenous theory: first attempt to explain
recession phase as a contraction of investments. cycle
Additional investments by the multiplier effect
increase demand. The latter can be satisfied by Milton Friedman argues that the economy left to
entrepreneurs up to a level of full employment. itself remains stable with some natural cycle.
Let remind that at that level factors of He also says that interventions of the monetary
production are completely used. As a result, authorities amplify them. However, a distinction
there will be less investment and once again the between anticipated and unanticipated reactions
multiplier effect now being negative will of economic actors is needed with the new
amplify the decrease in demand. classical economists to understand origins of
Endogenous Theory: Second Explanation of When economic actors fail to anticipate, the
Cycle increase in money supply will give them a
monetary illusion that their purchasing power
Richard Goodwin (Lecaillon and Lepage, 2008: has increased and they will increase their
259) explains the cyclical behavior by two shopping baskets and therefore stimulate
hypotheses: firstly, it is because investment is demand for goods and services. Thus, the
considered as an increasing function of profit; economic activity will be revived if it were in
secondly, the variation of wages is an increasing recession.
function of the level of activity. Thus, the However, if economic actors anticipate, the
optimism of investors and workers causes action of the monetary authorities will not have
cycles of expansions. However, if there are met the desired effect. It will only result in
more investments over a period, substantial inflation (Lecaillon and Lepage, 2008: 260).
wage increases will reduce profits. And One question that might already be raised so far
knowing that the pace of investment is a is: why in the Democratic Republic of the
growing function of profit: they will slow down. Congo (DRC) such a policy doesn‟t work? In
Then there will be recession. As economic fact, the DRC‟s central bank monetary policy is
activity is slowed down, wages now declines. inefficient. Making the analysis of monetary
As a consequence, profits are stimulated. The aggregates proves that it‟s because of foreign
economy gets into an expansion phase, so there currencies (mainly US dollar). But that just
is recovery. responds to why the policy is inefficient. So
However, Goodwin's analysis is criticized for why DRC‟s monetary policy can‟t be used to
neglecting the effect of wages on demand avoid recession?
(Lecaillon and Lepage, 2008: 259).
[3] M. Kayembe

Exogenous theory: Real Business Cycle The neglected importance of Government can
Theory, second attempt to explain cycle be explained by the fact that Long, Plosser,
Kydland and Prescott (Mishkin, 2008: 261)
The business cycle theory known as Real attribute fluctuations in economic activity to
Business Cycle (RBC) explains economic supply shocks, which are unpredictable or
fluctuations by exogenous factors. Unlike the random disruptions and may correspond to
first theory, it does not identify monetary shocks abrupt changes in relative prices.
but rather real shocks. For example, Long and
Plosser (1983: 41) have given assumptions that AS-AD model
Government does not have to intervene and that
there is no money. On the other hand, they Professor Frédéric Mishkin (2013: 936) states
(Long and Plosser, 1983, p.67) show that the that this model is an extremely useful tool for
consumption-production plans of economic understanding fluctuations in economic activity.
actors correspond so much with the features Thus, to better understand the theoretical
often associated with cycles. foundation of economic resilience we must
King, Plosser and Robelo (1988: 196) consider analyze aggregate demand (AD) and aggregate
shocks as coming from preferences or other supply (AS).
exogenous factors such as government policies
or the terms of trade. This is why public AS-AD model: theoretical analysis of
intervention is not recommended. economic shocks
Shocks that affect the economic system are
likely to weaken the gross domestic product and Globalization has constrained economies to
then create unemployment. Considering the open themselves and thus be exposed to
Cobb-Douglas production function used in the competition, which would be likely to reduce
analysis of real business cycle theory (King, the production costs companies. However, they
Plosser and Robelo, 1988: 200) such that yt = suffer from shocks that can create
AtKt 1-α(NtXt), we note that production depends disequilibrium in their trade balance and
essentially on the stock of capital (Kt) and the weaken their economic growth, which can be
effective work units (NtXt), At being considered analyzed in the AS-AD model. Let's take an
as temporary and unknown. In accordance with example:
microeconomics, firms with rational behavior Imagine an economy whose main resources
and being in a recession will change their come mainly from the export of commodities
amount of short-term work factor. listed on the stock exchange Market such as
For example, companies may give technical Cobalt, for example. A negative shock
leave or even fire workers. This situation creates (downward trend in its price) in the financial
unemployment. However, real business cycle market would affect the activities of an
theorists do not see the importance of economy.
Government intervention. At present, if there is It is also important to know, as pointed out by
to be economic resilience, in other words Lecaillon and Lepage (2013, 251), that prices of
resistance to shocks affecting labor markets, commodities are more cyclical than those of
goods and services and the capital markets, the industrial products (...).
state must intervene, but effectively. We mean In order to better understand, let us recall the
by implementing sound policy in the long-run. global demand function: y = C + I + G + XN,
where XN is the trade balance. Thus, a
[4] M. Kayembe

downward trend in the price of commodities them more resilient. Economic resilience has
will therefore reduce exports and the curve AD two main aspects that we should outline: first, it
moves to the left: is the ability to resist to shocks, which means
that actors should foresee danger before being
affected by it; second, it is the ability to bounce
Fig.1.2. Negative shock of demand back after being affected by shocks.
LRAS In 2008, the DRC after being affected by the
financial crisis managed to survive. But what if
the country makes sound policies that can even
π AS
prevent the country from being affected by a
shock instead of making the economy
π E vulnerable and then bounce back? It is exactly
in this context that diversification is often
mentioned. But that is since the 1970s. It is
π‟ E‟
known since a long time through researches and
economic and political papers that not relying
AD‟ on a certain category of a goods or commodity
would make a country less vulnerable. Then, if
the solution is known why countries in Africa
are still suffering from severe crisis?
Y Yp Y The analysis of resilience and its
operationalization, from a historical perspective,
Economic resilience will consist in moving back has been and remains a concern for researchers
aggregate demand AD' to the equilibrium level. in economics. More than three decades in the
This can be done by increasing G public past, in the 1980s, to now papers, books and
spending which will however lead to some economic journals, have contributed to the
inflationary pressures but the economy will be development of processes that maintain growth
expanding and unemployment will decrease. to its long-run potential level and suggested
These theories related to economic resilience measures that may facilitate its implementation.
and economic fluctuations, whether endogenous From Pierre-Yves Hénin (1983) to the World
or exogenous theories, have shown themselves Bank's report (2015), analyses are made to
to be useful. The multitude of research on achieve growth with resilience.
shocks and economic fluctuations, economic Few years ago, following the persistent
resilience, the issue of diversification is a proof. macroeconomic disequilibrium that economies
However, we mainly use scientific books and were facing regarding oil shocks of 1973 and
other useful sources dealing with Africa in 1979, Hénin P-Y. (1983: 893), using a simple
general and the DRC for the most part, in this macroeconomic model, concluded that
draft. macroeconomic adjustments by interest rate and
wages can contribute, together with the use of
Empirical analyses of cycles and economic fiscal policy, to restore macroeconomic
resilience equilibrium.
Economic growth is, in fact, far from linear, as
As economies are constantly having negative noted by Richemond A. (2003, pp. 4 and 7). He
(and positive) shocks, there is a need to make explains it by the fact that an economy is made
[5] M. Kayembe

of cycles and that the lack of anticipation climate, volatility of export earnings as a result
increases financial, human and social cost. of downward fluctuations in commodity prices
Let mention here, for example that IFRS 9 (in are constant, ... This vulnerability of economies
application since January 1 st, 2018) was made creates macroeconomic disequilibrium shown
by the International Accounting Standard Board by the increase in unemployment, inflation and
(IASB) to provide pattern for expected loss for the deterioration of the terms of trade.
enterprises regarding criticism on the fact that From the outset, the DRC's exposure to
companies using rules that existed recorded „far exogenous shocks manifested itself in the labor
less or far late‟ loss recording (Deloitte, 2014, market. First, during the war years of 1996-
1). Thus anticipation of shocks should not be 2002, the contribution of labor to growth was
underestimated and it has to be in time. the lowest recorded. Secondly, Professor
Kabuya Kalala F. et al (World Bank, Vol 1,
However, Lecaillon J. and al (2008: 228) point 2012, 132) point out that the fall in mining
out that it is "cyclical fluctuations" that weaken output and the slowdown in investment, as a
the progression of production. However, the result of the 2008-2009 financial crisis affected
author highlighted the role of diversification economic growth and about 200,000 jobs were
through the transformation of comparative lost in Katanga. As a result, the unemployment
advantages, which was the experience of rate between almost the second half of 2007 and
Mexico and Argentina in the nineteenth and the first in 2009, as illustrated by the BCC
twentieth centuries. (2013, p.30), showed an upward trend.
Duval R. and Vogel L. (2008: 213) argue for The goods and services market is also suffering
countering the strength and persistence of from weak economic resilience. In the DRC, for
exogenous external shocks by the structural example, war-related spending accounted for 70
policies on which macroeconomic stabilization percent of total revenue, and the public deficit in
policies depend. However, the question is: does 2000 was about 120 percent, according to data
action on the labor market, on the goods and from the World Bank (Vol1, 2012). The same
services market and on the financial market source reports that "this deficit was entirely
depend on the size of shocks? This question left financed by monetary expansion (...). The role
by the authors is relevant in the context of our of the central bank was reduced only in printing
research in that the dimension of a shock can be currency to finance deficit. As a result, inflation
misjudged and in this context it can cause rose and in 2000 consumer prices rose at an
economic disequilibrium. average annual rate of 554%. "Economic actors,
In addition, the IMF (Oct. 2010, 1-2) analyzed having faced these instabilities, had a distrust of
the resilience and risk of African countries the fiduciary currency, hence the strong
where the DRC was identified as a fragile state. dollarization also making the economy
A part from mentioning policies against shocks, vulnerable.
says that medium-term financial considerations Exogenous shocks weakened the terms of trade
should be the focus of fiscal policy. There is of the DRC. Indeed the subprime crisis,
also improvement in public services, manifested in the second half of 2008 in the
infrastructure and the climate of economic country, had weakened them. The BCC (2009,
activities mentioned for economic resilience. In 115) reported that: "Following the deterioration
the DRC, as in other economies, output growth of the international environment, the country's
remains erratic: comparative advantages can be trade has shrunk (...). Thus, the balance of
lost in a crisis, wars can harm the business payments deficit increased in 2009, standing at
[6] M. Kayembe

8.2% of GDP against 5.3% a year earlier, good evolution of the economy. Shocks can
following the amplification of the current persist in the case of relatively high economic
account deficit. ". In addition, the mining sector vulnerability. Vulnerability, measured by him
supported economic growth at 15%, 33%, 26% through economic openness, concentration of
and 48.4% for the periods 1996-2000, 2001- exports and dependence on imports, must also
2005, 2006-2010 and 2010-2014. be given special attention.
Remaining the main driver of production, a The concentration of exports and the
contraction in the demand for mining dependence on imports, which are a
commodities can significantly deteriorate the consequence of economic openness or
terms of trade. globalization, are determining factors in an
More recently, Professor Briguglio L. (2003) economy's ability to withstand shocks. At
has made operationalization of economic present, DRC's exports remain concentrated,
resilience. He measured resilience and which helps to accentuate the index of
vulnerability index of an economy for nearly vulnerability. It is precisely in this perspective
180 countries, including the DRC. that economic diversification is evoked so much
The World Bank (September 2015, pp. 6-7) in the context of the long-term economic growth
noted that geographic product concentration and of the DRC.
reliance on capital intensive mining industries
generate significant vulnerabilities for the DRC Constraints of economic diversification in the
economy. Economic diversification is seen as DRC
the ideal solution. However, as reported, poor
infrastructure hinders economic activity. Government inefficiency
Globalization implies a dependence on Main implication: the State of the DRC has few
international trade. Although it has been resources that can enable it to meet the
beneficial for some economies, international expenses; the country cannot act alone. But it is
trade has not been good for others. However, said to observe that does not give the private
states are constrained to open outwards in view sector means to
of the tendency of the global economy, where Act, by failing to better ensure its economic
no state can survive in autarky. On the flip side, functions. A public-private partnership (PPP) is
openness can foster increased vulnerability, seen as a good alternative, it will still need a
creating a need for resilience to different strong public responsibility, i.e. it is necessary
economic shocks due to the interdependence of to limit the risks affecting the investors.
economies, particularly in terms of exported and The lack of stability in the country does not
imported goods and services (the balance of allow financial institutions, commercial and
payments). industrial enterprises to better operate; as a
However, an ability to withstand shock may be result, they may relocate their activities or be
possible but still at a low level. This includes obliged to take drastic decisions. Justice,
the composition of the gross domestic product diplomacy and security are among the sovereign
of an economy. If conditions driving to functions of the state. It‟s important to make a
economic resilience, in the way Professor safe environment for business.
Briguglio (University of Malta) sees it, i.e. The DRC, with a production of 180,000 tons of
macroeconomic stability, microeconomic cotton in its provinces (Province Orientale,
efficiency, good governance and human Katanga and South Kivu), was the largest
development are effective, this will allow a African producer (WorldBank, 2012, Vol 2, 7).
[7] M. Kayembe

Sadly, wars in the nineties brought about Also, in such circumstances the development of
security problems, not at all stimulating other economic activities (diversification) is
economic operators of textiles; As a result, only likely to be difficult. On one hand, it is because
CODENOR in Kisangani remains active. In of bad business climate, yet it is not supposed to
2006, cotton production did not exceed 1 000 be so as to serve as a springboard for capital
tons (World Bank, 2012, Vol 2, 7), following attraction. On the other hand, it is because
the increased competition of Chinese fabrics, public revenues are still low, reducing the roles
says the World Bank (2012, vol 2, 7). of the Government.
According to the World Bank, before the Let also say that legal and regulatory
turmoil in South Kivu, the province's exports of framework, taxation and access to finance can
Arabica coffee reached 20,000 tons (World all be mentioned as obstacles (World Bank,
Bank, 2012, vol 2, 38). However, between 1996 2012, Vol 3, 346). As private investors face
and 2010, exports averaged 4,235.87 tons. these different constraints, theoretical corollary
In many contexts, especially, it is up to the is that there is a great risk of crowding out.
Government to allow the economy to return to Hence, more PPPs are needed (World Bank,
its long-run equilibrium point. However, it does 2012, Vol 1, 252).
not always have means to enable it to act and Indeed, a PPP will enable the government,
this therefore weakens the effectiveness of the which already has low incomes, to achieve its
DRC in its economic roles (World Bank, Sept. goals at an affordable cost and, above all, with
2015, 18). better quality (see: World Bank, 2012, vol 3),
This observation suggests that the state alone considering the technical and management
cannot make the economy of the DRC resilient; expertise of the private sector.
it must give economic actors the ability to be The Government must be responsible for its
resilient so that the country can cope in the time operational and financial responsibilities (World
of crises (World Bank Vol 1, 228). However, in Bank, vol 3, p.87). While the DRC has an
practice the state does not always allow them to economic resilience, the downside is also
act effectively. showing signs of vulnerability. The State should
The constitution of the DRC in its explanatory assume its contractual obligations to protect
memorandum specifies provinces and central private promoters from possible economic
power share the national revenues at the rate of shocks. These are the risks associated with civil
40% and 60% (Official Journal of the DRC, 18 wars, for example.
Feb. 2006, 4). However, Herdeschee J., Kaiser Finally, another risk for private promoters is
and Prof. Mukoko (World Bank, vol 1, 2012, p income-related. In fact, we are talking here
27) Samba pointed out that the law says that about revenues that do not cover the costs of
such revenues should be withheld at source and infrastructure built by the private sector. Given
that this topic has been debated at because of the the insolvency of the Government, a PPP may
term "at the source": does it refer to the location be harmed and yet very important (World Bank,
of the collection or the location of production / 2012, vol 3, p.88).
consumption? (...) provincial governments,
deprived of what they see as a constitutional Infrastructures
revenue right, have begun to set additional taxes Energy remains a determining element to the
and additional local taxes, placing additional development of all sectors of the DRC.
burdens on private operators. However, the potential for electricity generation
is still very high at 100,000 MW in hydropower,
[8] M. Kayembe

but the current capacity is only around 2,400 markets in other DRC provinces if they are
MW (World Bank 2012, Vol 3: 6). good roads.
Thus, the weak development of energy has a In Katanga there is the strong presence of the
pernicious consequence for different sectors that mining sector, which creates a strong economic
can participate in the construction of a strong concentration in the province (World Bank, Vol
economic resilience and help reduce the 1, p.232). However, the agricultural sector,
country‟s vulnerability. Indeed, Sotexki in which could sell its products, including food
Kisangani in one example among others. The crops (maize and cassava) in the other provinces
textile company, which had only 170 workers in and abroad, since these crops accounts for 80%
2007, whereas it had more than 2000 in the of the agricultural GDP, only provide them to
nineties, and the textile sector collapsed, in market nearby due to the lack of infrastructure
particular because of the problems of electricity (World Bank, vol 2, p.3). We must also favor
supply (World Bank, vol 2 2012: 189). the labor-intensive sector: agriculture.
A 2010 survey of private companies in the Province Orientale had Robusta coffee exports
World Bank reports that several companies of more than 100,000 tons before periods of war
reported having suffered power shortage, which (World Bank, 2012, vol 2, p.46). Following the
would have reduced sales by 25% (World Bank, deterioration of infrastructure and insecurity,
2012, vol 3, pp. 86-87). However, the national exports remained at +/- 5 000 tons on average,
electricity company (SNEL) should ensure a i.e. only 1 / 20th of a year between 2001 and
better supply of energy that could create training 2010 (see: BCC Annual Report 2007, page 37;
effects in the economy. 56).
Regarding the country's capital-city, Kinshasa,
the World Bank (vol 3, 2012, p.7) reports that Market concentration: oligopoly of the
the capacity available at Inga 1 and 2 totals cement industry
about 800 MW. Taking into account the fact Another recommendation for the development
that at peak times the demand exceeds the of other sources of growth is to avoid the
available capacity and that SNEL delivers 95% concentration of the construction sector market.
of the country's electricity, there are regular Despite the potential of cement production in
shedding in the capital and the gap between the Katanga thanks to limestone, the DRC has not
generating capacity and the demand continues yet benefited from that.
to grow, says the World Bank (vol 3, 2012, p 7). Thus, it would be good for the State to allow a
This also implies that business costs increase, better flexibility of the market by improving the
which can increase prices accordingly. regulation and by privileging the competition by
However, note that energy is not the only eliminating certain obstacles related to the
obstacle to infrastructure, roads are other development of the construction sector: high
challenges. cost of transport of cement, low profit margin
Indeed, as indicated by the World Bank (2012, for importers only 10% versus double for local
Vol 1, p.42) most roads remain a handicap industries in general and 25% for resellers (see:
preventing accessibility to the provinces. In World Bank Vol 2: 283). The direct corollary of
addition, only four provinces are connected to the oligopoly is the high purchase price
Kinshasa by road (World Bank, Vol 3, p.20). (fig.1.2).
The high agricultural potential of Bandundu
province would have improved prices in local
[9] M. Kayembe

Banque mondiale (2012), résilience d’un
géant africain : synthèse, contexte historique
et macroéconomique, Volume 1, Kinshasa,
Fig. 1.2. International comparison of cement
Banque Mondiale (2015), renforcer la
Price per bag (USD) of 50 résilience de long terme de la RDC : le rôle
Countries Kg, 2007/2008
de la dédollarisation, de la prospection
Vietnam 3,46
Bangladesh 5,61 artisanale et de la diversification
Ghana 9,34 économique, rapport No. 99991, 3ème
Kenya 10,31
RDC 13,84
Zambie 18,57
Source : Banque mondiale (2012, p. 266). Briguglio L., Cordina G., Bugeja S. et
Furrugia N. (2003), conceptualizing and
This analysis has plunged us into the measuring economic resilience, Malta,
understanding of the origins of economic cycles
followed by an empirical analysis that has university of Malta.
indicated to us the crucial place that economic
diversification must take to serve as a Duval R. et Vogel L. (2008), résilience
springboard for the resilience of the DRC.
However, a case study was needed to better économiques aux chocs : le rôle des
understand the context of the country. Thus, we politiques structurelles, éd. revue
managed to identify obstacles to diversification
(government inefficiency, infrastructure économique de l‟OCDE, No 44.
challenge, and Cement market concentration).
Hénin P-Y. (1983), l’impact
macroéconomique d’un choc pétrolier, In
« revue économique, Volume 34, No 5 », pp
Banque mondiale (2012), résilience d’un
865-896 .
géant africain : études sectorielles, Volume
2, Kinshasa, Médiapaul. Journal officiel de la RDC (2006),
constitution de la RDC
Banque mondiale (2012), résilience d’un
géant africain : sujets transversaux, Volume King R., Plosser Robelo S.(1988),
3, Kinshasa, Médiapaul. production, growth and business cycles : the
basic neoclassiclal model, Rochester (USA),
[10] M. Kayembe

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Banque centrale du Congo, rapport annuel

Banque centrale du Congo, rapport annuel

Banque centrale du Congo, rapport annuel