Liberia - Growth with development - basic economic report (Vol. 1 of 7) : Main report

CIRCUtATING COPY Report No. 426a-LBR TOVERMUMM TO WITORTSDESK Liberia Growth with Development RETURN TO REPORTS DESK a Basic Economic Report WITHIN (In Seven Volumes) ONE WEEK Volume I: Main Report March 1, 1975 F Western Africa Region Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENT The official monetary unit is the Liberian dollar, with a par value equal to that of the U.S. dollar. Apart from the Liberian dollar, the U.S. dollar is a legal tender in Liberia. LIBERIAt GROWTH WITH DEVELOPMENT A BASIC ECONOMIC REPORT TABLE OF CONTENTS Page No. Volume I - The Main Report Country Data List of Abbreviations Preface Summary and Conclusions i - vii Maps I. SOCIAL. POLITICAL AND HUMAN DEVIOtRM . A. Social and Political Background 1 B. Population 3 C. EBployment, Wages and Income Distributions 5 1. Employment, Manpower Supply and Demand 5 2. Unemployment 9 3. Migration 11 4. Wages 13 5. Income Distribution 15 6. The Future Outlook 17 II. THE NATIONAL ECONOMY A. Macro-economy and Balance of Payments 18 1. Economic Background 18 2. The Structure of the Economy 19 3. Performance of the Economy 23 4. Sources of Growth 26 5. Recent Developments 26 6. Balance of Payments 28 B. The Fiscal System 31 1. Public Revenues, 1965-1972 31. 2. Public Expenditures, 1965-1972 36 3. Public Sector Finances, 1965-1§72 42 4. Fiscal Performance in 1973 42 5. Budgetary Management 45 6. Expenditure .Control 46 7. Salary Reform 46 8. Tax Reform 47 C. The Financial Sector 51 1. Introduction 51 2. The Structure of the Financial System 54 3. Mobilization and Allocation of Resources 57 4. Tentative.Policy Recommendations 61 Table of Cdntents (Cont'd) - 2 - Page No. D. Future Prospects 65 1. General Considerations 65 2. Macro-economy and Balance of Payments 68 3. Development Strategy 70 4. Creditworthiness 75 III. PRODUCTIVE SECTORS A. Agriculture 76 B. Industrial Development 83 1. Industrial Strategy Options 83 2. Policy Issues 85 3. Implementation 90 4. Conclusion 92 C. Prospects for Mining of Iron Ore and Other Minerals 93 1. The Role of Iron Ore in the Economy 93 2. The Growth of Iron Ore Mining 93 3. The Industrial Organization 94 4. Iron Ore Export Prospects in Liberia 100 5. Potential Iron Ore Mines in Liberia 100 6. Implications of Potential Iron Ore Mines in Guinea for Libera 102 7. Is Liberia Getting a "Fair" Share out of Iron Ore Exploitation? 103 8. Prospects for Minerals Other than Iron Ore 105 D. Prospects for Rubber in Liberia 107 1. Rubber in the Liberian Economy 107 2. The Historical Evolution of Rubber Industry 108 3. World Market Outlook for Natural Rubber 114 4. Rubber Concession Policy 122 E. Forestry and Forest Industries 126 1. The Role of Forestry in the Liberian Economy 126 2. The Resource Base 127 3. Timber Concession Policy 127 4. Some Policy Issues, Proposals and Recommendations 130 5. Projected Export Earnings and Government Revenue from Forestry, 1973-1978 133 F. Tourism in Liberia 134 IV. INFRASTRUCTURE A. Transportation 136 1. Ports 138 2. Railways 139 3. Air Transport 139 B. Public Utilities 141 1. Power 141 2. Water Supply and Sewerage 143 3. Telecommunications 144 4. Postal System 146 Table of Contents (Cont'd) - 3 - Page No. V. SOCIAL SECTORS A. Housing 147 1. Urbanization Trends 147 2. The Housing Problem 147 3. Present Housing Programs and Policies 150 4. Housing for the Lowest Income Groups 152 5. Strategy Assessments 154 B. Health 157 1. Health Development Strategies 160 C. Education 164 VI. PUBLIC ADMINISTRATION AND POLICY A. Public Administration in Perspective 165 1. Problems of Inadequate Civil Service System 166 2. Poor Administrative Capacity and Organization 168 3. The Role of the Educational System 170 4. Conclusions 170 B. Concession Policy 173 1. Introduction 173 2. History 173 3. Contribution to the Economy 174 4. Equity 176 5. Reform of the Agreements 179 6. Renegotiation with LAMCO 180 7. Application of LAMCO terms to Other Concessions 181 8. Timber Concessions 181 C. Planning 184 D. The Statistical System 187 1. General Findings 187 2. Summary Recommendations 189 E. Contribution of Foreign Assistance to Economic Development 191 1. Foreign Assistance Operations in Liberia 191 2. Bank Group 191 3. The Aid Experience of Other Agencies 193 Volume II - STATISTICS Volume III - INDUSTRY Volume IV - FORESTRY Volume V - AGRICULTURE Volume VI - TRANSPORT Volume VII - EDUCATION  Page 1 of 2 pages COUNTRY DATA - LERIA AREA 2 POPULATION DENSITY 111,370 km 1.63 million (mid-1972) 14.7 per km2 Rate of Growth: 3.0 (from 1963to 1972) per km of arable land POPULATION CHARACTERISTICS (1970) HEALTH (1970) Crude Birth Rate (per 1,000) 145 Population per physician 13,59 Crude Death Rate (per 1,000) 16 Population per hospital bed 687 Infant Mortality (per 1,000 live births) 137 INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of national income, highest quintile .. owne by top 10% of owners lowest quintile .. owned by smallest 10 of owners ACCESS TO PIPED WATER ACCESS TO ELECTRICITY % of population - urban 7 of population - urban - rural - rural NUTRITION (1970) EDUCATION 1970 Calorie intake as % of requirements 94.1 Adult literacy-rate 106 of AdulT Population Per capita protein intake 41.1 Pr4imary school enrollment 50% of age group 7-12 GNP PER CAPITA in 1972 US $220 GROSS NATIONAL PRODUCT IN 19 2 ANNUAL RATE OF GROWTH (., constant prices) UST 1960-65 1965-70 1971 GNP at Market Prices 355.1 100.0 P6.0 2.8 Gross Domestic Investment 75.6 18.8 . Gross National Saving 50.5 16.16 Current Account Balance -8.6 -2.6 Exports of Goods, NFS 2147.3 65.8 10.14 ~9.5 ' .8 3/ Imports of Goods, NFS 1814.2 51.8 8.6 ~16.7 ~/8.5 OUTPUT, DAIOR FORCE AND PRODUCTIVITY IN 1972 Value Added Labor Farce V. A, Per Worker M%n of poplaio - urban% Agricultuie 96.9 23.7 . IndustryE 170.7 D1.7 servicesAa 1d41.8 3u4.6lau Unalloca_t4ed Totalp/Average I1. Pr 1s0c0 erlmn 100.- GOVERNMENT FINANCE General Government Central Government % l.)7 of GDP aVS Kl1n.) 7% of GDP 197 19n 196 -7 1972 1972 67 1971 Current Receipts 77.6 17.6 15.4 Current Expenditure stm514.8 12.4 12.6 Current Surplus Bln -8.-2 Development expenditures ....7. 4 1.6 2.2 External Assistance (net) 261.8 -0.1 1.5 Capital assistance (gross) . 188.. 3.3 0.7 1.9 Technical Assistance Vl 8.0 1.8 1.9 I/ This table reflects Information received by the February-Karch 1973 basic mission. ~/World Bank Atlas Estimate. srGoods only; in current prices. not available not applicable Page 2 of 2 pages COUNTRY DATA - UEBERIA MONEY, CREDIT and PRICES 1965 1969 1970 1971 1972 (Millions U$ outstanding end period) Money and Quasi Money 1/ 26.6 31.5 42.1 43.9 57.0 Bank Credit to Public Sector 15.9 6.9 7.4 9.9 5.5 Bank Credit to Private Sector 17.8 29.4 35.3 38.8 47.4 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 1/ .. 10.2 10.5 11.5 General Price Index (1963 = 100) 2/ 102.2 125.3 126.4 126.1 Annual percentage changes in: General Price Index 2.2 9.6 0.7 - 0.3 Bank credit to Public Sector 17.8 -37.6 7.2 33.8 Bank credit to Private Sector -14.4 22.2 20.1 9.9 BALANCE OF PAYMENTS 3/ MERCHANDISE EXPORTS (AVERAGE 1970-72) 1970 1971 1972 US$Mln % (Millions US $) Iron Ore 164.5 72.3 Rubber 32.6 14.3 Exports of Goods, NFS 216.9 228.0 207.3 Logs and Timber 7.0 3.0 Imports of Goods, NFS -159.0 -174.3 184.2 Diamonds 5.9 2.5 Resource Gap (deficit = -) 57.9 53.7 63.1 Coffee, Palm products and Cocoa 7.2 3.1 Interest Payments (net) -29.1 -29.0 -29.6 All other commodities 10.3 4.5 Workers' Remittances -18.3 -19.0 -20.0 Total 227.5 100.0 Other Fa,tor Payments (net) -42.6 -31.9 -38.6 Net Transfers 15.8 19.4 16.5 EXTERNAL DEBT, DECEMBER 31, 1972 Balance on Current Account -16.3 - 6.8 - 8.6 US $ Mln Direct Foreign Investment 4/ 28.1 20.7 18.7 Net MLT Borrowing Public Debt, incl. guaranteed 159.6 Disbursements 7.4 9.3 8.4 Non-Guaranteed Private Debt Amortization -11.3 -10.4 -11.8 Total outstanding & Disbursed 159.6 Subtotal - 3.9 - 1.1 - 3.4 Capital Grants * ., ., DEBT SERVICE RATIO for 1972- 5 Other Capital (net) - 0.9 4.6 0.1 % Other items n.e.i - 7.0- -14-2 - 6.8 Increase in Reserves (+) Public Debt, incl. guaranteed 6.4 Non-Guaranteed Private Debt Gross Reserves (end year) Total outstanding & Disbursed b.4 Net Reserves (end year) Public debt incl. guaranteed 6/ 9.5 RATE OF EXCHANGE 7/ IBRD/IDA LENDING, (August,1974) (Million US $): IBRD IDA Outstanding & Disbursed 20.4 1.3 Undisbursed 5.0 9,7 Outstanding incl. Undisbursed 25.4 11.0 1/ Demand and.time deposits. 2/ Monrovia Consumer Price Index. 3/ Final mission estimates. 4/ Iron Ore only. 5/ Ratio of debt service to exports of goods and non-factor services. 6/ As % of exports of goods and NFS minus net factor payments. 7 liberia uses the U.S. dollar. ..not available not applicable September 27,1974 EPD/PRD ABBREVIATIONS ADP - Agency for Development and Progress BMC - Bong Mining Company LAC - Liberia Agricultural Company LAMCO - Liberia-America-Swedish Minerals Company LEDI - Liberian Bank for Development Investment LBIDI - Liberian Bank for Industrial Development and Investment (now LEDI) LDC - Liberian Development Corp. LEC - Liberia Electricity Corp. LIBETH - Liberian Bethlehem Iron Mines Company LIO - Liberian Iron Ore Limited LISCO - Liberian Iron and Steel Corp. LMC - Liberian Mining Company LPMC - Liberia Produce Marketing Company LWSC - Liberia Water and Sewer Corp. MANR - Ministry of Agriculture and Natural Resources MPW- Ministry of Public Works NHA - National Housing Agency MOC - National Iron Ore Company NPA - National Port Authority PUA - Public Utilities Authority SCOGO - Special Commission on Government Operations  PREFACE 1. In the early 60's a team of economists spent twenty months in Liberia assessing its economic development and describing the structure of the economy as it then was. Their report entitled Growth Without Development was the first serious study on the economic development in Liberia in over two decades and only the second since the turn of the century. They descrited a backward country, heavy with patronage and corruption, dominated by the descendants of the first settlers, and an economy where the returns from foreign enclaves which dominated every- thing were being spent almost exclusively for the benefit of the privileged few. In many ways their Liberia was much closer to Graham Greene's depressing account in 1930 than it was to the Liberia of today. 2. In March 1973 the World Bank sent a mission to Liberia to prepare a Basic Economic Report. The Liberia we found was strikingly different from that of only a dozen years ago. Development is now widespread and there is a genuine commitment to it on the part of the government. Many of the oppressive characteristics of Liberia in 1961 have been eliminated or have faded into the background. A key change was, of course, the change of administration in 1971 upon the death of President Tubman. The Tolbert administration has made sweeping reforms, but many of the forces of change were already at work. Liberia is an evolutionary rather than a revolutionary country and during the past decade the pace of growth and change has been swift indeed. Accordingly, we feel it appropriate to title this report Growth With Development. 3. Although this report follows the standard IBRD pattern of analysis and prescription, it also contains a significant amount of descriptive material as well as numerous statistical tables. Records in Liberia are ephemeral in nature, things have a habit of being lost or forgotten. We thus feel that it is important to record a good deal of background material pertaining to the Liberia of 1973. Most of this report was prepared before the advent of the "energy crisis". We have, however, updated the major parts of the report to reflect the situations of the beginning of 1975. In general, however, we feel that the long run growth strategy for Liberia is essentially unchanged. . The mission consisted of and the report was contributed by the following: Nicholas G. Carter (Chief of Mission), Nabil Sukkar (General Economist), Emmerich Schebeck (General Economist), Manfred Levy (Statis- tical Consultant), ?er Eklund (Fiscal Consultant), Agu Anyanwu (Industry), Abiodun Adebo (National Accounts), Daniel Ngangmuta (Transportation), Walter Koch (Agriculture), kenji Takeucfi (Forestry; Rubber and'Iron Ore), and Yvonne Taylor (Secretary). During the subsequent preparation of the report, a section on Education (John Simmons) was contributed by the Bank's Washington staff.  SUMMARY AND CONCLUSIONS 1. For the past two decades Liberia has experienced an unprecedented rate of economic expansion. An annual rate of increase of national product of close to 70 stands in sharp contrast to the complete stagnation of the previous eighty years. This rapid expansion, led by the investments of foreign exploitative enclaves has allowed Liberia, for the first time in her 150 year history, to undertake the economic and social infrastructure investment, her people so desperately need. Even so, she remains far behind her neighbors not only in the obvious physical capital, but more seriously in the trained manpower which is so crucial in her development effort. 2. While a developmental effort directed towards infrastructure is clearly called for, even more essential is the need to diversify the economy. The boom depends on the enclaves, particularly those in iron ore. While the prospects in the early 1970s were for a decline to set in by the end of this decade, the outlook is now for a substantial increase in iron ore investment and output in the 1980s. Even so, such an outlook cannot be taken for granted, and without this sector, the economy would be hard- pressed to grow more than 3% per annum. This is about the same as the rate of population growth, meaning a stagnation in per capita growth. Thus the future outlook could be bleak, not only for the 40 of the population whose per capita income is above $3,000, but more seriously for the vast majority of the people whose near-subsistence livelihood brings them less than $100 per year. 3. The Liberian cornucopia has three major elements. First iron ore, accounting for 30% of GDP and three-quarters of exports; of every dollar earned in mining, only 160 stays in Liberia. Next is rubber, where the participation in the economy is more extensive and as much as 500 of every dollar stays in Liberia. It accounts for only 12% of exports and 6% of gross product and the outlook for world markets indicates no more than a 3% growth rate. Finally there is forestry, where recent growth has been phenomenal, but the contribution to exports and product is relatively small and the retained product is even smaller. Here there is a very real prospect for swift depletion, and even with careful management and good reforestation the long run outlook is not outstanding. The mission has looked carefully at other potential leading sectors and products, but under present circumstances none have the capability of producing in the magnitude of iron ore, rubber and forestry. 4. While this prospect is somewhat limited, it should be emphasized that Liberia does have a choice. She can continue the present laissez-faire economy, passively collecting tribute while her resources are depleted and possibly be faced with stagnation within a decade, or she can embark on an active all-out strategy of diversification, which should make the economy strong enough to survive by itself once the exploitative phase ends. Such a diversification strategy calls not only for the promotion of output and exports of such things as forest products, non-traditional agricultural goods, fish, and manufactures, but more important it calls for broadening of the participation of Liberians in their own economy. Such a strategy is called for not only for social reasons, but because it is the only way to create a firm economic foundation for the country. - 11. - 5. Since mid-1971 Liberia has had a new Government. Succeeding the 28 year regime of President Tubman, the Tolbert administration has moved swiftly to introduce reforms in many fields. Admittedly some reforms, such as in the civil service, are stZill largely token in nature, but in many other areas, for example, with concessions and in agricultural marketing, the changes have been significant and decisive. This action oriented Government is genuinely dedicated to moving swiftly in all fields in order to develop the economy and to involve all Liberians in their country's growth. Many of the recommendations of this Basic Economic Report were immediately considered by the Government and put into action, some even before the report was in its first draft. This is indeed strong evidence of a national will to better the country. 6. Liberia has four iron ore concessions producing about 24 million tons a year. One of them will close operations at the end of 1975 but the shortfall may be made up by greater production in two others and the volume of exports should be maintained around 23 million tons a year up to 1978. Prospects beyond 1978 are uncertain and would depend on opening of some of the new deposits currently under study by foreign firms (Bie Mountain, Wologisi Range, Putu Range and some deposits in LAMCO concession area). Bie, Wologisi, and Putu all have an annual production potential of 9 million tons and each would involve about $500 million in investment. The most optimistic scenario foresees to opening of the first two in 1981 and Putu in 1983, thus doubling the country's iron ore output within ten years. 7. The rubber industry consists of seven foreign owned concessions and 5,300 Liberian owned farms and is the most important source of employment in the country. Firestone dominates the industry, producing 50% of Liberia's rubber output and, including purchases from local farms, processing and selling 72% of nation's output. Liberian rubber growers have received considerable help from Firestone and account for about one-half of the total rubber area and one-fourth of the production. There are two main policy issues vis-a-vis the foreign rubber concessions. First, to renegotiate the tax concessions, and second to secure improved marketing arrangements, so that the Liberian producers get better prices for their produce. With respect to the former negotiations on the concession agreement have been going on between the Government and Firestone since late 1973. In the marketing field, the Liberian Rubber Corp.(owned by the Government) is erecting two processing plants,with a combined annual capacity of 900 tons, in Bong County. 8. Forestry is a growing sector in Liberia, its contribution to GDP is expected to increase from 2.2% in 1972 to 8% in 1978; and exports to grow from $8 million in 1972 to $39 million in 1978. No single large foreign concession dominates this sector. The Government with the assistance of UNDP and the Harvard Advisory Group has prescribed model concession arrangements with obligations for (i) annual cutting to be limited to sustained yield levels; (ii) scientific reforestation of the concession areas, and (iii) processing in Liberia of progressively larger percentages of its timber harvest (20% in 1973 rising to 100% in 1977). Unfortunately, - 111 - the Government lacks an enforcement machinery to supervise these obligations. Moreover, Liberia lacks capital and capacity even for the simple sawing operations and would need assistance to achieve its objectives of exporting lumber in processed form. 9. The projection of GDP depends critically on the outlook for iron ore mining. No increase in volume is contemplated for the existing mines and under such circumstances the economy would be able to do only slightly better than 3% per annum. The possibility of three new mines raises this to about 5% during the investment phase and to about 7% in the mid 1980s. In addition, the proposed five-year development plan would spend some $300 million over the period 1976-80 both increasing aggregate demand as well as creating new productive capacity in the overall economy. The most probable growth path is for a drop from the recent 5% per annum to about 3.5%, and then a gradual rise reaching 5% by the end of the 1970s, peaking in the mid 80's at over 7% and then falling back to 5% to the end of the century. Neither the balance of payments nor public sector finances are likely to encounter serious problems and external debt servicing burdens are likely to fall quite sharply, to below 6% of exports and below 15% of public revenues. Under these circumstances the country should remain credit- worthy, its chief development constraint being a severe lack of skilled manpower. 10. The capacity of public service in Liberia is limited and has been a major constraint to growth and development. In the past two decades, considerable progress has been made in improving fiscal management and institutionalizing the budgetary process, but the Government has been slow in improving the efficiency of its public administration and civil service. When the new administration took office in 1971, it placed a high priority on reforming the civil service and strengthening public administration. A Civil Service Commission was established to make a thorough and comprehensive study of the system. A Public Administration Institute, which had been talked about for many years, was finally set up. The newly appointed Civil Service Commission prepared a proposal for revising the Public Employment Act and establishing a Civil Service Agency to enforce it. This proposal is being reviewed by a Cabinet Committee. Various administrative reforms, including anticipated salary increases for key categories of government employees, would add $3-4 million annually to government expenditure; but this could be a very productive investment, given its potential impact to accelerate the public sector development effort and the quality of government service. 11. The Fiscal System is relatively Underdeveloped, passive, highly sensitive to external fluctuations, and is ill-equipped for development purposes. While fiscal performance, as measured by public sector savings, may give the impression of being very good, it must be recognized that this performance is largely due to government's conservative spending policies. Maximization of revenues and a restraint on the growth of expenditures is frequently used by the Ministry of Finance to demonstrate sound fiscal management; the surplus so generated being used to reduce debt burden and to accumulate bank balances. The Government of Liberia - iv - seems to prefer this course of action, partly to get rid of its heavy debt burden, a hangover of the early "sixktiesn and also because the planning and funding system in Liberia has not yet been geared to development requirements. The problem is compounded by inadequate project identification, preparation, and implementation. Current and development expenditures, especially for the agricultural sector, are inadequate relative to the economic and social needs of Liberia. Unless their growth is considerably accelerated, they may well form a strong constraint on the growth of the economy. 12. Very important in Liberian economic development is the intention of the Tolbert administration to encourage greater participation of the rural people in the national economy. In the past, the Government devoted very little attention to the traditional sector. Traditional smallholders, whose families make up over 70% of the population, are estimated to have a per capita income of less than $100 per annum. This low income level restricts the earnings available for investment in rural areas; in addition, traditional agriculture has virtually no access to credit from financial institutions. 13. A reorientation of agricultural policy must, among other things, focus attention on the marketing system and pricing policy (affecting the farmgate prices), both of which have unduly discriminated against the small farmer. These constraints could be alleviated if the Government took action to encourage competition in iarketing of farm products. The Liberian Produce Marketing Corporation should be changed from a foreign-controlled and highly profit-oriented marketing institution to an agricultural service corporation, and the Government should introduce a pricing policy -- backed by administrative machinery to enforce floor farmgate prices -- to offer farmers adequate incentive. Measures to extend credit and banking services to rural areas, to modify existing controls so as to encourage small entre- preneurs to improve the land tenure system, extension services, research and infrastructure (feeder roads, storage facilities) are urgently needed and should certainly form part of any new rural development. 1h. In the Financial Sector, problems are related to the lack of a national banking system and the lack of a national currency. At present there is no set of government policy instruments that will allow the public sector tap the substantial private savings that exist in the economy. There are no deposit requirements, no credit rules and no obligations on the part of the commercial banks either to lend locally, to keep currency in the country, or even to supply cash for circulation purposes. Domestic savings, whether owned by the enclaves or by Liberians typically end up in European and American banks, while in Liberia only Monrovia and some of the concession towns have commercial banking facilities. Even if the local farmer could be induced to save, there are no institutions at present to handle such funds. Likewise, there are no institutions designed to lend him money for productive investments. - v - 15. The Industrial Sector in Liberia is still small and its recent statistical growth has been largely due to investment in an oil refinery. This project, like most of the country's industry was a high cost import sub- stitution venture, and typifies the mis-direction of Liberia's industrial strategy. The entire incentive system is geared to protect import substi- tution and as a result, Liberia has only the typical industries that are found in all countries of her income level, her people pay more for such products than they would have to on the world market, the employment effect is minimal at best, and most serious, the potential for export industries lies untapped. It will be in export industry that Liberia will find the long run key to sustained development, and government policy towards industry should be redirected to achieve that end. 16. In the Social Sectors, health, housing, and education, the available infrastructure is relatively small and almost entirely directed towards Monrovia and the concessions. These are all part of the basic social capital that should be the right of all Liberians, not just urban dwellers; however, education also serves the function of providing human capital for the future. It is clear that unless the allocations of resources, both current and capital, to education are significantly increased, Liberia will simply not have sufficient human infrastructure to sustain her present rate of economic development in the coming decades. More specifically, there is a shortage of teachers at all levels, in part due to inadequate salaries. The curricula are not properly directed, particularly in the vocational and agricultural fields, and equally important, the Ministry and the sector are very poorly organized. 17. The Statistical System in Liberia is, frankly, inadequate. After a promising start under the Harvard Group in the late 60's, an ill-advised attempt to adopt the new SNA resulted in a series of national accounts for recent years which are inaccurate and badly misleading. The mission has undertaken to reestimate the acccunts on a coherent basis; the details are presented in Volume II. More serious is the general lack of organization in the statistical office and the critical shortage of qualified people. 18. In the field of Planning, Liberia is currently in a transition phase. An IBRD-USAID-UNDP sponsored team of technical assistance has just been established. Planning in Liberia is not more than a decade old. The initial efforts along this line were done under the guidance of the Harvard Advisory Group and concentrated on building the foundations; statistics, organization, budgets and training, among other things. This was a period when projects themselves could not be undertaken as there were little or no resources available and therefore almost nothing was accomplished in the field of project evaluation and execution other than an initial attempt in the late 60's to set up programLng units in several ministries. Under current circumstances with significantly more resources available for investment and with a government that places great emphasis on action, there is a significant bottleneck in the project implementation ability of the Government. - vi - 19. The long run future of Liberia will depend to a great extent on the Development Strategy that is adopted. In this report, we outline a potential strategy with five key elements: concessions, diversification, dispersion, distribution, and decentralization. 20. Given the importance of concessions to Liberia -- the concessions account for 40% of employment and 27% of government revenues -- the Govern- ment, even though moving swiftly, still maintains a relatively cautious policy towards them. While the country is vitally interested in attracting fresh investments unhampered exploitation would denude the country of high grade ores and timber, withoutbenefitting the Liberians or their economy to any significant extent. Even though in recent years there has been some improvement in the contribution of iron ore mining concessions, Liberia still gets only 16.51 (government revenue plus local wage payments) for every dollar of iron ore, while, for example, Brazil has negotiated 36J in govern- ment revenue alone. Even Mauritania seems to have done better, receiving 21% as government revenue. Liberia has been advancing rapidly in terms of improving her share from the concessions, but so has the rest of the less developed world; it is thus open to question as to whether Liberia is catching up. Liberia has always valued its "open door" policy, and clearly any precipitate moves towards the concessions would not be in consonance with this philosophy. Currently a round of renegotiations is in progress and it should be made clear that the whole process of defining the relation- ship of the concessions to Liberia is an evolutionary one and cannot be forever fixed by any particular renegotiation. The Government should move towards having concessions with more linkages to the economy, and in this respect the establishment of independent rubber processing facilities and regulations requiring local sawing of timber are steps in the right direction. Finally, the question of how much the concessions can contribute in the way of infrastructure in their local areas should be considered. Certainly this raises a serious question of sovereignty, but on the other hand the conces- sions are a source of efficient expertise which could be usefully tapped, particularly in areas where the Government is unable to mount a significant effort as yet. 21. In the area of diversification, it was stated above that the economy depends in large degree on three export products and that none of these can provide the long run dynamism that would be required for a sus- tained 5% rate of growth in GDP. By the end of the century, the economy must find additional sources of foreign exchange. This can be achieved with a combination of export diversification and import substitution. In the former area, wood based industries, coffee, cocoa, palm products, and fishing suggest themselves, while on the latter, clearly a concerted program of rice production and increased hydroelectric generation would have a significant beneficial effect on the import bill of the country. What is required on both sides is the proper incentives, particularly pricing and the availability of key infrastructure. - vii - 22. Dispersion of participation is another key element. Very few Liberians really participate in their economy; most use it only to obtain funds for fixed payments of taxes, and for the rest of their existence con- fine their activities to being self-sufficient on their farms. There are many reasons why the farmer declines to participate in the economy, among them being low prices, lack of markets where he can buy farm inputs and consumer goods, inadequate roads and other infrastructure, and lack of a financial system. These are standard development program items, and are clearly crucial to Liberia, both in terms of output as well as equity. 23. Distribution, particularly of social goods is another key element. Althouhthe arguments here are more in terms of equity, infrastructure such as health, education, roads, and water supply would have a very strong impact on the production potential of the country as well. These investments are at present crucially deficient and are just as important for the future of the country as they are for its current welfare. 2h. Decentralization must enter any development strategy in Liberia, not only in a political sense, but also because this is the only feasible way to achieve the development goals of the country vis-a-vis the large mass of the Liberian people. Far too many people, including some govern- ment officials, conceive of Liberia as being Monrovia plus uncharted wilder- ness. This misconception is very detrimental to the development of the country as other parts of the country have their own distinct identities as well as their own distinct needs. The framework for decentralization already exists, and the Government in recent years has appointed capable men to the post of county superintendent in the interior counties. This is the proper focus for the development effort, but unfortunately, the highly centralized control of expenditure in the Ministry of Finance in Monrovia, severely limits the flexibility and effectiveness of these men. 25. Finally, it is important that Liberians as well as outsiders be aware of the long run social and economic trends in their country. Liberia is typically viewed by others as being highly inefficient and as a notorious waster of foreign resources. This characterization is inaccurate and mis- leading. Until the late 1950s, Liberia had no resources whatsoever to devote to development. Thus, for example, in the 1920s, while her neighbors were receiving expenditure on education from the colonial powers at an annual per capita rate of 50, Liberia was barely able, at that time, to secure even 10% of that amount. It arrived in the post World War II era far behind, both in physical and in human investment. Thus when resources and aid finally began to arrive they had to be devoted to very basic infra- structure and had to be administered by a public sector with little or no human capital to call upon. Liberia has required more than the international average of per capita aid and will continue to do so in the future, but few, if any, of her foreign assisted projects can be deemed as having been "wasteful". The lack of a colonial period has become a favorite talking point among Liberians. As an explanation of the past weak position, it is useful, as an excuse for present and future inaction, it is invalid.-  IBRD-10254R sPA ALGER-* A ARA8 L I BE R I A n EGYPT MAURRTANLA!J TRANSPORTATION N GER GULE G A MA SIERRA LE IVORy, R9 -. AT4ANT/C OCF lpg~ _PROPOSED [MPROVEMENT HIGHWAY DEVELOPMENT PROGRAMI PROPOSED ROAD CONSTRUCTION DEVELOPMENT PROGRAM I -P PAVED HIGHWAYS ? ALL WEATHER ROADS ------ - -- DRY WEATHER ROADS IncH passabeR by a vehicles in all wEurther) C , O·· ROADS UNDER CONSTRUCTION XIINTERNATIONAL AIRPORTS - ohu M-,, AIRSTRIPS V 4ah c /L F CN AIRFIELDS ln 0 FA HARBORS 3 --- - -- COUNTY BOUNDARIES K-. 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FRE, l V O R Y C OA S T MONROVIA -GRAND AS5S A Morshail zwedru LI E EL' TV A- ELECTRIC POWER GR A N D GEDEH S Mt. Coffee Hydro-Electric Project c O N T Y L Firestone Hydro-Electric Project 4800 kW. Riv-ercesso -G8OEE T PU.A. Substations Diesel Generators 10.000 kW+ @ Small Diesel Plants - Q Proposed Hydro-Electric Scheme S O C O U N T Y --Po~er Linies Kannwi kc Water Treatment Plants - C e e an Greenvill - Public -~Pioate x- Main Roads yGoke Secondary Roads . Railroods 'MILOMETRS ARYLAND CoOnty oundaries o o o I----COUNTY P I International Boundaries ES 1U. Hi trr. SEPTEMBER 1974  I. SOCIAL, POLITICAL AND HUMAN DEVELOPMENT SOCIAL AND POLITICAL BACKGROUND 1. From the settling of Liberia in 1822, its people have had freedom to determine their own social and political order. This is in sharp contrast to Liberia's neighbors, where colonialism meant abdication of such freedoms to the metropoles. Thus Liberia has had well over a century to evolve its own particular systems and in this respect the parallels can be better drawn with the countries of Latin America. Liberia has a strong and entrenched elite group which has always dominated the country. At the founding of the country this group was the settlers, people of African origin from the U.S. who chose to return. While these people and their descendants have never amounted to more than 5% of the total population they have always controlled the economy. The people initially organized the country along the lines of the plantation systems they had experienced in the Western Hemisphere, a system which brought prosperity as long as it was viable and then brought stagnation. Whereas in the early years tribal people were used on plantations, in later periods produce was obtained from people who carried it out of the bush. When this began to be an important source of commodities, including the staple food, rice, the elite group developed its first interest in the interior and its people. As early as 1870 there were plans to develop the interior and by the turn of the century significant numbers of tribal people, particularly from the nearby Vai and Bassa tribes, began to be given some education and to be assimilated into the formal economy. 2. The early years of Liberia's history were marked by the continual external hardships of establishing a nation and by relative economic prosperity. The constant erosion of territory by the British and French brought about the formal establishment of the country in 1847 in order that the settlers might deal with this threat on a formal government to government basis. Even so the loss of territory continued to the end of the century, and today the original. boundary markers can be found deep within the borders of neighboring states. 3. The 1860's marked the high point in the economy and from then on for the next 50 years the country experienced a continued deepening depression. While her political sovereignty remained fairly much intact over this period, the economic sphere saw first the reduction of Liberia to a backwater and then the gradual takeo.3r of most of the economy by British, U.S., French, and German interests. Politically this was the period in which the monolithic True Whig party built up its power base,while socially the process of assimilation of the settlers and the native peoples began to gather momentum. 4. The late 20's saw great indignation on the part of developed countries over what was termed Liberia's slavery system. Forced labor was recruited in Liberia to work elsewhere in West Africa, particularly the Spanish island of Fernando Poo. While it seems certain that Liberia was by no means the only country participating in this type of inhumanity, her international weakness and lack of a colonial protector caused her to receive all the wrath of the reformers. In 1930 the League of Nations forced the President and Vice President of Liberia out of office insisting that these men were "slave traders". This particular incident highlighted the continuous external and internal pressure on Liberia to do more for the tribal people and during the 20's and 30's many of them were even brought into the Government. - 2 - 5. Whereas up until even the 194Os the elite could be said to have been virtually identical to the Anerico-Liberians, descendants of the original settlers, the present controlling group has much more diverse origins, and in many ways the mobility in Liberian society is greater than in the past. Previously family was the only way to be assured of success in the country; now the key is education. With education one can make money and with money one can get an education; while this still ensures the elite of a dominant role, it has allowed large numbers of tribal people to rise to prominent positions within a generation. 6. Every society has its elite ruling group and Liberia's is hardly different from any other. It is important to stress that this group is not the same as the Americo-Liberians, a surprising number of whom are now as disadvantaged as tribal descendants. They myth of Americao-Liberian dominance ceased to have much connection with reality several decades ago and it is important to note that the new government has adopted a firm policy of de-emphasis of origins 7. In looking at Liberia, the existence and strength of the elite must be taken into account. Changes in society and reforms in the economy and the government cannot take place as fast in Liberia as in newer countries. Measures for modernization must be tailored to the self interest of this group or they are doomed to failure. Liberia is by no means a revolutionary society; change will come slowly and surely. 8. The political system is a reflection of the social system. It is modelled after the U.S. tripartite organization. Although there have been a number of political parties in the history of the country, the incumbent True Whig party has been in power for the last century. Elections for president are held every four years, and although this process is full of what outside observers would term "irregularities" the contests have always been among members of the elite and have surprisingly often produced chief executives of high quality. Although tribal people were represented in government as far back as 1851, it was not until 1944 that all impediments to universal adult suffrage were removed. 9. Through the years, as suffrage spread, Liberia has had a tendancy to elect reformers, people who want to do more for the indigenous population. Certainly the monolithic William V.S. Tubman who was in office longer than any other Liberian president, from 1944 until he died in 1971, was such as a man. Although during this period Liberia had for the first time the financial resources to be able to do something concrete for the people of the interior, virtually all the economic and political gains this group has had since the beginning of the country have been due to the energy and determination of President Tubman. However the job of improving the lot of all Liberians has only just begun; as fast as he moved, Liberia still remained far behind by world standards. 10. Today the country is still lagging. Only if one realises the miserable condition of the Liberian peasant 30 years ago can one understand the tremendous strides that have been taken. However this should not be - 3 - a reaso-i for slakening the pace of change, rather the efforts should be increased. The present chief executive, William Tolbert, took office upon the death of President Tubman. By all appearances, he too is a reformer. His declared intentions all point to the direction of increased participa- tion of the rural people in the economy and increased availability of vital public goods suc,h as education and health for all Liberians. If the country can mobilize its economic, political, and administrative strengths behind the reformist zeal of its chief executive, then all Liberians will enjoy unprecedented increases in their well-being. POPULATION 11. Recent estimates have placed the Liberian population at about 1.7 million people. However, early returns from the 1974 census indicate a figure of only 1.5 million. This compares to 1.0 million in 1962 and implies that the intercensual growth rate was about 3.3% per annum. The higher figures are from the Continuing Sample Survey carried out by the Ministry of Planning, and for various technical reasons they may well be overestimates.1/ Of these 1.5 million it is estimated that 400,000 are in the urban areas, half of these in the Monrovia metropolitan region. The second largest town, Buchanan has only 25,000 people, there are several towns with about 10 thousand and the rest of the urban population is in centers averaging no more than 4-5 thousand. 2/ 12. The official rate of natural increase of population appears to be one of the highest in the world, 35 per thousand, or 3.5% per annum. This is made up of a birth rate of 51 per thousand and a death rate of 16 per thousand. 3/ In this report we have, for purposes of discussion used 1/ See footnote (1) on the next page 2/ Urban areas are defined in Liberia to be towns of 2,00 or more people, of which there are 43 in the country. This in effect means that the non-urban population is almost exclusively the subsistence farmers. 3/ A net immigration rate of 4 percent per thousand brings the apparent growth rate up to 3.9% per annum. the figures of 4$ and 15, respectively.1/ The infant mortality rate is high and measured at 160 per thousand, the characteristics of this mortality are continued cases of measles and occasional epidemics. 13. When internal migration is taken into account, the urban areas are growing about 7% per anum and the rural areas at about 1% per annum. These migration effects are fairly strong in what is a small, rather sparsely populated, country. Education statistics seem to indicate that 50% of the children in the country are enrolled in schools yet there are relatively few schools outside of the cities and towns, thus there may be considerable migration by school children inside Liberia. Moreover, when looking at the sex and age distribution of the population one finds there are virtually no males of work force age in the rural areas, except at specific times of the year. The men go to the city, to the concessions, or to the diamond mining areas, returning only when it is time to plant and time to harvest on their farms. These farms are maintained primarily for the purpose of making enough money to pay taxes and other fees and also to support one-a elderly relatives. Outside of these seasonal periods the men are just not in the rural areas, making it virtually impossible for farmers who wish to-hire labor to find workers. 1/ The official figures, derived from the continuing sample survey, may be over-estimates. The survey uses two separate investigations, a monthly interview and a six monthly interview on identical sample plots. As there is not a complete overlap, the results are con- verted, via the Chandrasekar-Deming method to arrive at the estimates. While this method is standard procedure for non-matching samples, its efficiency is best when the degree of matching is 85% or more. In the typical Liberia sample, the degree of matching is often no more than 50%. Studies have shown that if this low degree of similarity holds, then there is likely to be an over-estimate of the rate involved. A check of the raw data of the 1970 and 1971 surveys indicates that the birth rate, for example, may be as low as 30 per thousand (See Statistical Annex Table 1.1) while the official survey figure is 49. Moreover, evidence from other less developed countries shows that with a low degree of migration in a country, errors in matching fran parallel samples may be introduced because people are continually moving in and out of the sample plots and also because of different spellings on the part of enumerators. While we have no reason to believe that such has been the case, we have used in this report the figures U5 and 15, respectively, with zero net migra- tion for an overall growth rate of 3.0%. -5- 14. Liberia has an embryonic private family planning association. It seems to be dominated by idealists and does not seem to be making very much headway. There are occasional public officials, who instead of talking about the country being under-populated, talk about having a healthy population, but in most cases they want more population, not less. They point to the vast, apparently unoccupied, areas of the country and to the fact that the overall average density of population in Liberia is very low, only 3'per square mile including the cities. What is not realized, however, is that the population is of low density because the land is some of the wettest and poorest land in all of West Africa and in order to support a population in food crop subsistence a large amount of land must be used in a shifting cultivation cycle, seven to eight years being the rule. Large parts of Liberia are completely unpopulated, particularly in Lofa and Grand Gedeh counties and also in parts of Sinoe. The population is concentrated mainly on a band running from Monrovia to the north end of Nimba County on the Guinea border, with a further concentration of people in the north of Lofa County and in Maryland County. With the exception of the land around Monrovia (Montserrado) and the lower part of Bong County, the areas where people have settled in Liberia are largely the only areas of good fertile soil. Thus it is basically unwise to point to the unoccupied areas and say that Liberia needs more population. Realistically, however, it will be some years before Liberia will adopt any kind of population policy. EMPLOYMENT, WAGES AND INCOME DISTRIBUTION 15. Estimates for 1974 indicate a population of 825,OOC in the age group 15-65, or about 55% of the total population. Estimates of labor force participation rates indicate that the total labor force may be roughly on the order of 650,000 of which the non-farm labor force is estimated at 150,000 and labor in the rural sector at 500,000. Raployment - Manpower Supply and Demand 16. On the supply side, fifty percent of the population is under 19 years of age, which implies a rapid growth in the labor force for the next two decades. The labor force of Monrovia totals 68,000 workers, of these 21% are unemployed.1/ This is up from the level of 1962, even after the rapid economic growth of GNP of 7% for the period 1962-1974. In Monrovia, unemployed high school leavers and graduates are 39% of the total un- employed. Nineteen percent had had some primary, and 3% had some university. An additional 38% of the unemployed had no schooling. 17. The dependency ratio 2/ predicted for 1982 will be unchanged from the 70% of 1971 which is high for global standards. No changes in the growth of the population or the participation rate was assumed. 1/ Data from July 1974 Monrovia Labor Force Survey. 2/ Number of persons below 15 and above 65 per 100 persons age 15-65. - 6 - 18. Net migration from rural to urban areas averaged 3.1% per annum of the rural population in the early 1970s, indicating a rapid urban shift. The shift is due in part to rural/urban income differentials which average 1 to 3. For the future it is likely that the shift will continue until wage differentials narrow. 19. The supply of graduates in specialized education for blue-collar occupations in 1972 was close to 500. By 1982 this will probably double. Since most training for low and middle manpower jobs is done on the job, this supply figure seriously underestimates the size of the actual trained supply of the labor force. Tracer studies are needed to determine what percentage of these graduates are working in jobs for which they were trained, and how well they are doing in terms of occupational status and income compared to comparable workers who do not have training. 20. On the demand, side, at the middle and upper-level 4,575 jobs are held by expatriates, as measured by work permits on file. This amounts to 7.3% of the employees of the 96 largest firms. About 6,000 jobs at the lower and middle manpower level are held by African and Arab expatriates who ususally do not have work permits.1/ If the non-farm wage labor force is about 150,000 and most expatriTtes are in non-farm jobs, then expatriates hold about 7% of the non-farm jobs. About 5% of the workers in Monrovia are employed in manufacturing, indicating a modest demand for this sector for graduates of specialized training. (see Annex Table 1.13). In Monrovia, 25% of wage labor force is employed by the Government. 21. Employment in the 96 largest firms declined by 2.1% per annum in the period 1970-1972. This is consistent with the decline in the growth rate of GNP. The largest declines in employment were in construc- tion (23%) and forestry (13%), while largest increases were in electricity (19%) and commerce/transport (10%). (See Annex Table 1.12). 22. While accurate data for recent and projected agricultural demand is not available, agricultural wages give an indication of the weakening demand. For the period 1970-1972 agricultural wages fell 7% per annum. Wages for government workers which tend to pace the white-collar wage structure, since they occupy 25% of all urban jobs, increased 11.3% per annum for the period 1970-72 (Annex Table 1.16). 1/ This is a mission estimate and could be in error of plus or minus 50%. 23. It is estimated in the Manpower Plan that if the GNP grows at 5% per annum, this will yield a 2.9% employment increase. A growth of 4% will yield a 2.3% increase. These two estimates of GNP growth are closer to what is expected than the average of 6.9% experienced during the 1960s, which yielded a 5% per annum increase in employment. 24* Using a 5% rate of growth, the Manpower Plan estimates new jobs in blue-collar occupations will average 3,300 per year. "New jobs" includes the demand for both experienced workers as well as apprentices. Furthermore, an unknown percentage of these blue-collar jobs require only on-the-job training and not formal education. A demand for graduates of specialized education cannot be accurately determined from these estimates. 25. Based on a survey of Monrovia employees in February 1974, few job.openings were predicted for the next 12 months. In manufacturing, commerce and construction there were only openings for skilled and experienced accountants, personal secretaries, mechnaical engineers and vehicle mechanics. Because of the experience requirement, there was virtually no demand for recent graduates of specialized education institu- tions. Employers foresaw little future expansion of their needs in these sectors. The demand for skilled workers in the mining industry is supplied by their own schools and on-the-job training programs. This is the same for the rubber industry. The training needs of the timber industry may best be obtained by combining on-the-job training with an industry-wide training scheme organized jointly by the Government and logging companies. The expansion of smallholder rice production and other small farming activities, assuming stable or rising commodity prices from May 1974 level, should have a significant effect on the demand for agricultural laborers. These require no specialized education. 26. Using several assumptions, we can begin to understand the nature of the demand for skilled manpower in the next decade by looking at electricians. The Monrovia labor force survey estimated that the stock of electricians was 800 in January 1974. This included the full range of skills from apprentice to master electrician. Assuming that 5% of the stock are incapacitated or retire and that 3% new jobs are created every year in the electrical field, this will provide a net additional demand per annum of 8%. This means a net addition of 74 electricians are needed for the labor force in 1975 and, because of compounding, will increase by several electricians a year through 1982. Of this 74, the demand will be for some apprentices, some semi-skilled an same master electricians. If we assume about one-third in the apprentice and semi- skilled category, which are the categories that the graduates with specialized training courses enter, then this totals 27 electricians. Depending upon the type of specialized skills, it takes two to five years of experience to train a master electrician after formal education. - 8 - 27. The decline in the rate of economic growth from the high levels in the 1960s has severely affected the demand for newly-trained manpower. This has clearly revealed the dual demand structure of the Liberian labor market which includes the demand for experienced workers and the demand for school leavers. There is still a demand in most occupations for people with experience which has been one factor in the phenomenon of rapid job turnover. The thin supply of experienced workers and the lack of common wage categories across ministries are other reasons. At the same time, junior and senior high school leavers cannot find jobs for which they were trained because employment in Monrovia has fallen in the past two years. 28. The second labor market duality is the short supply of trained manpower in the social sector. The demand for primary teachers and paramedics appears great, yet the institutions supply only a trickle of graduates. This apparent disequilibrium is explained by (1) uncom- petitive wage scales, (2) low social status of rural work, (3) low government budget priority to improve the quality and quantity of these occupations, and (4) shortage of adequate training facilities and methods. Unless a package of changes is made to affect all four factors, changing one will not improve the supply of social skills. For example, trained primary teachers seek jobs in other sectors if wages are uncompetitive. 29. Social demand for formal education will continue to increase rapidly as it has done in the past 10 years. This demand will be partially met by self-help projects at the primary and secondary level, with the Government supplying the teachers. The supply of secondary school leavers from both government and private schools will far exceed the economic demand,and there is no indication that the Government is willing to take major steps, for example, to damp the social demand by narrowing wage differentials, shift educational costs to the consumers with subsidies for low-income groups, or reduce the importance of school certification in hiring. 30. The Government could continue to take significant steps in improving the quality of the school output as it has begun to do with teacher training. Specialized training for both industry and agriculture is an area that could benefit from improved management of present resources. Since 1972 the establishment of a manpower training board has been discussed. The members would include representatives from employers, workers and educators. The purpose would be to coordinate supply and demand by occupation more closely than in the past. The board would be financially independent and would subsidize both ,in-plant and school training. From our above analysis, successful training, which is defined to include the effective use of the trainees, should be seen in a systems context7of the package of necessary preconditions and complementary changes in economic and educational factors. 31. In summary, the manoower analysis suggests that expatriates should be replaced at an increasing rate, present workers should receive upgrading in their skills, and formal s:ecialized training shoulc use existing resources more efficiently and effectively than now exists. Given the rising rates of general unemployment and unemployed high school leavers predicted for the next twenty years and the increasing suprly of specialized education graduates which will be availalle from both the IDA funded schools and private schools, the expansion of the supply of specialized skill should be strictly limited to those skills where the need is fully justified. Unemployment 32. Table 1 reveals the overwhelming importance of agriculture and mining which together provide %7 of-an estimated total permanent modern sector employment of 125,000. As Liberian statistics classify urban areas as all towns over 2,000 people, virtually all permanent employment including concessions takes place in urban areas. Thus of the urban labor force of 150,000, it appears that as much as 80' are formally employed, leaving only 20% of the economically active in self-employed trade and service activities or in unemployment. 1/ 33. While the ILO estimates were constructed in such a way as possibly to overstate the extent of employment, it also seems clear that the remaining 20% represents an absolute maximum of unemployment and that open unemployment is perhaps as low as 10! of the labor force. This is low both in absolute and in West African terms and lends support to the mission's general finding that in general Liberia has a partial labor shortage. It appears that those who are unemployed are in the younger age group and among school leavers or rural migrants which generally must be regarded as unskilled laborers. It also appears as though a very large fraction of the unemployed are in Monrovia. 1/ Furthermore, it-must be considered that domestic responsibilities of some of the women and the levels of skill and education of many of the others (97Z of women between 14 and h are illiterate) does not permit a wide range of occupational choice. Unlike in rural areas where tribal women do not only perform household tasks but also a substantial part of the farming activities, in urban areas, particularly Monrovia there is no employment for illiterate and untrained femal labor other than petty marketing, which on the average may yield only 50 cents for a 12 to 1( hour day. - 10 - Table 1: ESTIMATED PERMANENT WAGE EMPLOYMENT IN LIBERIA, BY BROAD INDUSTRY GROUP, IN 1970 (From ILO Mission) (in thousands) Estimated Industry Group 1970 Permanent Wage and Salary Employment Total, All Industries 125.0 Agriculture_,Forestry and Fisheries 46.0 Rubber industry 42.0 Logging 1.2 Other Agriculture, Forestry and Fisheries 2.8 Mining and Quarrying 13.0 Manuf acturini 6.0 Construction 15.5 Electricity, Ga. and Water .7 Commerce 12.0 Transportaticn and Communication 3.5 Government 19.3 Other Services 9.0 Notes: A. Data exclude self-employed. B. Due to rounding, sur.s of individual items do not necessarily equal to totals. C. Because of the intended use of these data in analysis, estimates were constructed in a manner designed to issurc- that the total shown is the maxinum which can reaso::ably be assuned on the basis of existing information ( data may contain an upward bias). Source: ILO, Report to The Government of Liberia on Total Involvement: A Strategy for Development. Geneva, 1972. - 11 - Migration 34. The net migration out of rural areas is presently estimated at a b o u t 2%, or nearly two-thirds of the estimated natural rate of population growth. Movement to the modern, monetary economy in Liberia is not difficult. Most of the new entrants into the monetary econom are introduced to the wage-earning sector either through personal choice or by the age-old custom recruitment by tribal chiefs. Their typical first employment is on agricultural concessions (rubber, timber) and on Liberian rubber farms. Generally they are only temporary participants in the money economy. They display more clearly than any other group of workers those features of tribal society that determine the complex relationships between wage employment and traditional farming and between urban and rural secto rs, which are manifested both in the movement of labor as well as income transfers. Those who seek employment on the medium-sized Liberian owned rubber plantation receive pay and supplements which are substantially lower than on the agricultural concessions. But since management is often part-time, labor discipline is weak and there are no premiums for regular attendance and work. Yet it is this kind of employment which permits workers to continue their traditional farming and to maintain fully their links with family and tribal society. 35. For those who work in large agricultural and mining concessions, it is not as easy to combine this employment with traditional farming and the tribal traditions of the extended family. Here labor discipline is more strict; there are premiums for regular work attendance, and wage rates, supplementary payments, health and educational benefits, are the highest offered in Liberia for unskilled labor. Yet even under these favorable conditions, absenteeism is serious at the times that are critical in the traditional agricultural calendar where the man has a traditional role to play in harvesting (December) and in clearing and preparing the land for the women to cultivate (March-April). The only data available on labor turnover are those of Firestone's Harbel plantation which indicate strong seasonal fluctuations but an annual rate of turnover of only 12$ of the tapping force. 36. The third available choice for rural migrants is to move to Monrovia, to other large urban centers, to the diamond fields on the Lofa River, or to construction sites elsewhere in the hope of finding an occupation and source of income. The cash returns for those employed are high, but the chances of not immediately finding employment in Monrovia or of losing employment when the job finishes are substantial. The insecurities associated with piecing together income-generating activities make it impossible for all but a few of the rural immigrants to maintain a wife and family in the urban centers or to acquire financial security for old age. It is in these circumstances that the continuation of tribal links cannot be considered as a convenience but a material necessity. The widespread lack of commitment to steady wage employment of these workers explains partly the reluctancy of employers to incur the high costs of training. - 12 - 37. In addition, in Liberia the "extended family system" is some- what weaker than in most of the rest of West Africa. In general terms this system obliges the urban dwelling relatives of a new migrant to support him, to a certain degree, until he finds a job. In Liberia this obligation is strong only for immediate family and fades rapidly as the relationship becomes less direct. For example, a man from the same village in Liberia is only obliged to put a migrant up for one night, while in Nigeria this level of relationship would obligate the urban resident for at least a month. This may be one factor that somewhat retards the flow of migrants to the towns, especially Monrovia, and thus lessens the open unemployment. 38. Undoubtedly the strong and pervasive links between wage employees and their tribal society strongly influence the operation of the labor market and the labor supply response to wage rates offered. The frequent travels of urban workers back to their villages are necessary to fulfill their obligations to their kinsmen, to maintain their rights in the land of their tribes and to participate in the social activities of their tribes. While the high degree of labor mobility between the modern and tribal sectors in both directions greatly inhibits the formation of a national labor market with a labor force committed to urban life, it has certainly in the Liberian setting very distinct advantages. Among them is the transmission of information to rural areas regarding employment opportunities and wage rates. This tends to reduce the jobless permanent migrant, yet of even greater importance is 'the fact that the tribal link of the modern sector's labor force insures a mechanism for the redistribution of income in cash or kind, and the participation of the rural population in the fruits of development. Unfortunately no data is available which would allow a quantitative assessment of this income redistribution process. 39. It would appear as though over the past decade the terms of trade between agriculture and the modern sectors have moved in favor of the former. Prices of agricultural products in the urban areas have steadily risen while at the same time the relatively low level of high cost import substitution by the modern sector has, until recently, kept the price of manufactures from rising;sharply. Nevertheless, given the fact that the transport and distribution systems in Liberia are dominated by the elite and by the expatriate Lebanese, it does not appear as though the farmer has received much of these gains, and in fact the effective terms of trade may even have moved against him. This is another force that may have added to the migration during the period. 4O. Perhaps the most important fact dominating the issue of migration is the question of income expectations. On the farm there is a steady, but hard-earned income with virtually no prospects for large increases in income. In the urban areas on the other hand the diversity of income is such that there is an expectation, no matter how minute, that the individual can gain a large income. Moreover, the image of urban life is one of a "good life" where work is not particularly hard. These sociological factors are not unique to Liberia, but they tend to have a substantial impact in a country where distances are relatively short and communications are relatively good. - 13 - Wages 41. In most developing countries the traditional sector can be considered as a large labor reservoir, at least in theory and consequently manpower should be drawn into urban employment at a constant wage rate. An assessment of Liberia's labor market during the 1950s and early 1960s reveals the peculiar phenomenon that real wages increased remarkably despite an assumed large pool of low productivity workers in the traditional sector which presumably should have been available at a constant wage rate. 1/ For example, during the 1950s and part of the 1960s, despite continious raises in wage rates by Firestone, the largest single employer, the company was unable to eliminate its labor scarcity at the existing wage rates. 42. Indications are that wage increases above the expected equilibrium price were probably the result of market imperfections which caused a structural dislocation in the labor supply function. As a result, labor supply demonstrated a high degree of inelasticity, differing for all practical purposes very littlefrom a supply function reflecting a true physical scarcity of labor. There are many possible factors contributing to this distortion. First, the remission of part of the workers' income to the traditional sector, a factor common to most of Africa. Second, an uneven distribution of population and the necessity for many of the workers to return frequently to their home village particularly during peak periods of agricultural activities. With most of the labor force close to the centers of economic activity already employed in the market economy, any additional demand for labor has to be met from increasingly distant areas. Wage increases have, therefore, been related to the increasing importance of the transportation component of labor cost. The apparent scarcity of labor may therefore be regarded as a scarcity of transportation facilities. Third, tribal differences with regard to preference of workers not to work for wages and of parting with the security of life in the tribal society. Fourth, economic frictions such as inadequate and slow trans- mission 'of job information result in a supply response lag. Finally, it has been suggested that tribes differ in their response to employment opportunities and thus as modernization proceeds it becomes mere difficult to attract labor into wage employment. 43* These observations were made during the mid 60's. Since then the economy has grown at least twice as fast as population and thus even modest assumptions about productivity would indicate that the "effective" labor scarcity has increased. This conclusion was reinforced by the information, primarily of a non-quantitative nature, available to the mission. 44. Thus under any reasonable set of assumptions about labor market imperfections, some sectors of Liberia's economy still face problems of labor shortage which are not of a seasonal nature. This is particularly evident in the rubber industry and in some parts of the traditional agricultural sector. Rising wages for unskilled labor elsewhere accompanied by declining rubber prices during past years have forced an increasing number of Liberian rubber producers to cease operations. 1/ R.S. Weckstein, "Wages and Labor Scarcity", Development Policy, Theory and Practice, ed. by G. Papanek, Harvard University Press, Cambridge, Mass., 1968, pp. 319-342. - 14 - Offering higher tapper wages would not have been compatible with the state of technology of their operations, leading to production costs far greater than the gain. The substantial differences in labor productivity between Liberian owned and concession plantation arise largely from the stricter management on concession operations in all phases, from planning invest- ments to selling rubber. Although there are some large and efficiently run Liberian plantations, most are too small to carry the cost of good full time management and the medium level tight supervision that is needed to ensure high productivity for all grades of labor. Moreover, many small plantations are managed on a weekend basis by absentee landlords. Profit earnings on many Liberian plantations are, therefore, not high, and real wages which can be paid under reasonable costing are lower than the minimum wage of 8 cents per hour and substantially below the earning opportunities on conces- sions. As a result, labor which may have only some years ago been transfer- red from traditional agriculture to rubber plantations was again withdrawn to activities with apparently higher levels of productivity. A large number of mature trees are, therefore, not tapped because of the lack of available tappers at the wage rate offered by Liberian plantations. 45. Evidence of labor scarcity is also found in traditional agricul- ture particularly in areas "opened" by roads as well as in those adjacent to cities and concessions. In these areas the active male force consists of boys and old men, while the labor in its prime age is virtually absent. 46. Past increases in the cost of labor and the consequent change in the relative costs of factors of production have resulted in the reorganiza- tion of the production process of rubber towards less labor intensive methods in concession plantations, particularly Firestone. New plantings were undertaken with reduced spacing of trees within rows in order to reduce the walking distance of tappers and thereby increase the tapping task and reduce the cost of collection. To increase labor productivity, Firestone introduced a production bonus system in 1966 which enabled it to reduce the tapping force from 19,000 men in 1966 to 14,600 men in 1972. In this process substantial productivity gains per worker were achieved as evidenced by the tapping output per worker which rose from 1.89 long tons in 1966 to 2.84 long tons in 1972, implying an annual increase of 7%. In contrast, tapping output per worker on Liberian rubber plantations was only 1.19 long tons in 1972. 47. Firestone's basic daily wage for tappers is 75 cents per day, while other rubber concessions pay about 68 cents. Most of the Liberian plantations pay somewhere between 4o and 64 cents per day. Apart from the basic wage, concessions and some large Liberian plantations pay regular attendance and production bonuses which in the case of Firestone, raises the average tapper's cash earnings to $1.20 per day. In addition, all concessions provide fringe benefits (food subsidies, free medical, housing and school facilities, etc.), which amount on a daily basis to 62 cents per worker at Firestone, thereby raising the average workers cash and in- kind earnings to $1.82 per day, almost 3 time the wage (6d) required by law. - 15 - 48. At this relative wage Firestone no longer confronts a serious problem of labor shortage. A similar situation exists also at other con- cessions (rubber and iron ore), where gradual increases in wages and fringe benefits over the past few years have brought forth a substantial increase in the supply of the labor force, far in excess of available employment opportuniti.es. That the existing wage rates (inclusive of fringe benefits) offered by these concessions are probably far above "equilibrium" wage rates may be inferred from the number of registered large workers seeking employment with Firestone which is nearly three times as large as the total tapping force. In contrast is the situation of some of the Liberian plantations, paying a daily wage of only 40 to 50 cents and which are perpetually short of tappers. 49. In the urban sector evidence points to a somewhat less tight labor situation. As discussed above, there are a number of reasons why migration, without specific prospects of employment, is more limited than would be expected in a country of Liberia's level of development, particularly the weaker extended family system and the good tribal comnunication system in what is geographically a fairly snall country. To these one should add the fact that Liberian employers (including the Government in the past) ha itually do not pay workers on time. Thus although the official daily urban wage is $1.20 per day, the effective wage, after discounting, is often as low as the agricultural wage or as low as the earnings to be made on the farm. Thus the pool of unemployed in urban areas is more limited than might be expected. Nevertheless, available evidence seems to indicate that firms wanting to find urban unskilled labor have little or no difficulty doing so especially if they are willing to be reasonably prompt in payment of wages. 50. The previous discussion focused on the problems of the rural and the urban unskilled laborer. In the education section of this report we discuss the skill deficit and its historical origins. In general, industries that need skills must undertake the training themselves, and the conces- sions in particular have been quite successful in this process. Moreover, the iron ore companies have found that properly trained Liberian labor, especially those employed on heavy equipment are more productive than the expatriates they replace. In the public service the experience has not been as good. In spite of institutes and commissions and various schemes of on- the-job training, the public service remains ineffective. Income Distribution 51. There is no "hard" data available on income distribution in Liberia, but it is fairly easy to construct some rought estimates. The definition of urban areas means that virtually everyone in the rural sector is engaged in fanning, as all the iron ore and rubber concessions are included in the urban group. Population data indicates that 74% of the population in 1970 were in the rural areas and from other sources we know that the average per capita income is about $70. The remainder of the population, 400,000 people live - 16 - in urban areas and have an average per capita income of about $600 (the national average being $210). Of these an estimated 27,000 are employed on the concessions at a wage of $400 per annum. Including families the concessions account for 109,000 people at a per capita inccme of $100. 1/ Skilled labor averages about $800 per annum or about $200 per capita while unskilled wages are about $600 and $150 respectively. A rough estimate indicates that there are about 32,000 of the former and perhaps 26,000 of the latter. Of the unskilled group only about 50% actually have jobs, the remainder probably managing to earn $300 a year or $75 per capita. As a residbal the managerial, professional and other (including expatriates) group number about 60,000 (15,000 workers) but command about 60% of the national income. The estimated GINI coefficient for this distribution is 0.63 which places Liberia in a group comparable to Latin America, some- what more inequitable than the rest of Africa. Table 2 shows the estimates of this distribution. Table 2 LIBERIA: INCOME DISTRIBUTION (1970) Income Total Population % per Income % capita Rural 1,123 73.7 70 78,610 24.6 Urban: Unskilled-No jobL- 52 3.4 75 3,900 1.2 Concessions /2 109 7.2 100 10,900 3.4 Unskilled-job-- 52 3.4 150 7,800 2.h Skilled 128 8.4 200 25,600 8.0 Managerial, Professional & other 59 3.9 3,272 193,0200 1,523 100.0 210 319,830 100.0 GINI = 0.63 /1 Defined as lack of formal employment. /2 Formal employment. Source: Mission Estimates. 1/ In this analysis we use a family size of 4.0, an average that does not appear to vary between rural and urban areas. - 17'- The Future Outlook 52. Certainly one of the questions most crucial in planning Liberia's future course of development and its efficient utilization of resources is what consequences, if any, will emerge from the existing labor market phenomena as described above. There is no doubt that the planning of future public investment and the choice of techniques of production should be responsive to estimates of the prospective growth of the labor force, demands upon that labor force and its likely structure of employment. 53. Although it is far from easy to estimate future parameters of the labor market based on the available crude data base, it is nevertheless possible to derive at same rough orders of magnitude. The new entrants to the labor force in 1980 were 6 years old in 1971 and those for 1985 were 1. Thus we can derive these figures from-the 1971 data (Statistical Appendix Table 1.3). If we assume the labor participation rate is in the order of about 36% the annual number of new entrants to the labor force will grow from about 12% in 1973, to 17% in 1980 and to 19% in 1985. This implies that by 1980 the total labor force will be in the neighborhood of 700,000, an increase of about 20% above the 1972 level, and that between now and 1980 an addition of 120,000 to the labor force must be absorbed in the economy. This estimate is a minimum, as participation rates may well rise, and it is likely that participation by the younger age groups will be higher than average. $4. If net migration out of rural areas, estimated at 2% per year by the Demographic Survey, continues, the urban population could be expected to grow about 7% annually over the next decade. This would imply an annual shift of about 25,000 people from the rural to urban areas and a consequent annual entry of as much as 10,000 rural workers into the urban labor force, which itself will increase by as much as 4,000 per year, for a total incre- ment of 14,000 per year. Limited employment data available indicate an annual growth of permanent wage employment of not more than 4% annually between 1962 and 1970, at a time when the modern sector, stimulated by the growing mining activities grew at an average annual rate of 6%, a high elasticity in comparative terms. Assuming a continuation of past growth performance of the modern sector implies no more than 5,000 new jobs of 35% of the annual increment in the labor force will find permanent employ- ment each year. 55. This leads to the conclusion, that because of the age structure of the population, what has been up until recently a situation of labor scarcity may well turn into the more familiar phenomenon of massive unemploy- ment within the next decade. It may be that a number of the economic and social factors discussed above will mitigate this problem to a certain extent, but the general proposition remains unchanged. An analysis of the implied impact on incomes and other distribution leads to the conclusion that in aggregate terms the ratio of urban to rural incomes will fall from 8.5 to 7.5 during the decade, but this will be caused by the arithmetic phenomenon of the estimated migration of 2%, and given the outlook for employment the conclusion of increased income inequality in the urban areas cannot be avoided. - 18 - II. NATIONAL ECONOMY MACRO-ECONOMY AND BALANCE OF PAYMENTS Economic Background 56, In order to understand the Liberia of today, it is instructive to look back to the origins of the Liberian economy. Unlike her neighbors, Liberia has a recorded, non-colonial history stretching back more than a century. The general theme is that while political and social freedom allowed vigorous development along those lines, the economy fared somewhat less well, and in terms of infrastructure Liberia came out fairly poorly. 57. Founded in 1822, by the 1840's the economy was relatively prosperous. The early settlers set up the economy along the labor-intensive plantation lines with which they were most familiar, utilizing the local tribesmen as a source of cheap labor. Under this type of agricultural export economy the country prospered through the 1860's selling coffee, palm products, cassava, and most importantly camwood, a natural source of dyestuffs. Adding to the prosperity, Liberia even made her own sailing ships for transporting these goods. By 1870 however, most of Liberia's comparative advantage had disappeared as the industrial revolution provided the developed world with synthetic dyes and steamships, while at the same time the continued colonization of the rest of West Africa provided more efficient and dependable sources of producing agricultural products for Europe and North America. Liberia's lack of skilled manpower, her reluctance to move away from the relatively easy plantation economy and the sheer problem of organizing the economy, kept her from embracing the industrial revolution until it was too late, and seventy years of almost complete stagnation ensued. When machinery was occasionally imported it was run until it broke down, and then left to rot away for lack of repair skills. Even the few industries that were in existence by the turn of the 20th century soon faded away into the bush. E&amples of this are the brick factory at White Plains and the printing press at Harper. Both have disappeared; the only brick factory in the country at present is one owned and operated by Fire- stone for its own use, while at Harper the best that is currently available is a mimeograph machine. Ironically, attempts by Liberians to "organize" the economy along the lines practiced by the colonial powers in the neighboring territories resulted in the ostracism of Liberia by the rest of the world and the forcible removal of her president by the League of Nations in 1930. 58. About 1870 the settler community began tocbvelop a conscience about the interior tribes and the economic and social processes which today have led to the heterogeneity of the elite group and the disappearance of the Libero-Americans as the dominant power group were set in motion. These same processes also led to a prolonged regime of financial insolvency. Spurred on by the desire to develop the interior the Liberians borrowed money in London in 1871. Within three years they were in default as the money was poorly allocated and exports were physically declining. Subsequent internal loans were similarly unsuccessful and by the turn of the century paper money had been eliminated and there was no credit available to the government. The Customs Service, set up at that time, immediately became the "property" of local merchants to whom the government owed money, so bad were its finances. An external development loan in 1906 met with a similar fate and provided an excuse, several years later for the British effectively to take control both of the Customs Service and of the Frontier Force. By 1912, when a renegotiation of the loans was arranged, the entire revenue generating apparatus of the country was in the hands of Britain, France, the U.S., and Germany all of whom had stepped in, in order to protect the interests of their nationals, local merchants in Monrovia. The First World War made the situation much worse as Germany was by then the source of a substantial portion of Liberia's trade and the other three powers forced Liberia to sever relations. 59. Liberia entered the 1920's stagnant, poor, and completely bankrupt. Thus when Firestone came looking for a source of rubber outside of the British monopoly (the "Stevenson Plan" set the price of rubber at $1.25 per lb., equivalent to over $3 today), Liberia was more than willing to help out, and the fact that Firestone refinanced the entire external indebtedness and even paid the government advance royalties in the 1930s firmly cemented the relationship. Firestone built their own infrastructure, roads, schools, etc., but Liberia could not afford to do much on her own for the rest of the country. This was a period when the colonial regimes were installing heavy doses of human and social capital in the adjoining territories. As an example, Liberia spent 20 per head on education in 1926 while in the Gold Coast (Ghana) the British were spending twenty times this amount (See Table 2.13) in the Statistical Appendix). By 1960 literally all of the infrastructure in the country was at Harbel and the road from there to the capital was no more than a dirt track. The 1930s were hard times for the whole world and even the Firestone rubber could not do much for the country, but the next decade with its world war provided the genesis of modern development in Liberia. Rubber became a key commodity and Liberian output was accelerated. At the same time the strategic position of the country provided the U.S. with a convenient airport and seabase. Firestone's private airfield was transformed by the U.S. Army Engineers into Robertsfield airport while Lake Piso became a base for seaplanes. The postwar continuation of this effort led to the Monrovia Port (where there had previously been nothing but a sandbar) and the U.S. installed the first modern road system as far as Totota. American entrepreneurs such as Edward Stetinnius and Lansdell Christie stated ventures in cocoa, rubber, and iron ore, and by 1950 the country was finally on the path of real sustained economic growth. The 1950s brought more rubber and iron ore ventures and the beginning of forestry, and during this decade the revenues from these concessionbegan to amount to enough to provide significant additions to the perennially starved coffers of the government. Thus by 1960 both the private and the public sectors were growing rapidly and providing the foundations for the real development of the past decade. In 1960 Liberia was developmentally at least 30 years behind her neighbors, since that time she has been rapidly catching up. The Structure of the Economy 60. Liberia is a fairly small country, 43,000 sq. miles, most of which is covered with heavy forest. The land is at the western end of the West African massif and is mostly made up of very rough and broken hills between - 20 - these mountains and the ocean. Rainfall is very high ranging from as much as 1401" per year to somewhat below 80" in the interior and comes in one sharply demarcated six-month season. The resulting heavily leached, but mineral rich soils are suitable, in general, only for tree crops, and even so the forests are mainly the crooked trees characteristic of poorer soils. The land cannot thus support large numbers of people, particularly when their staple crop, rice, is difficult to grow and is land intensive under traditional cropping methods. These methods involve the "slashing" of forest, followed by"burning," after which a crop of rice is plannted, yielding perhaps 500 lbs. per acre, then the land is either planted with a crop of cassava or immediately let go to fallow, depending on fertility conditions. The fallow lasts between 6 and 20 years, again depending on local conditions. The density of population is thus fairly low, while it is 30/sq. mile on thp average, the typical rural area has perhaps 15-20 persons while vast areas have less than 10 per sq. mile. The population tends to be located on the coast where the early settlements were situated, and along the line from Monrovia through Bong and Nimba counties to the Guinea highlands. A further concentration is in Upper Lofa on the Sierra Leone and Guinea borders, an area that has long been a center of economic activity. 61. Of the $92 million generated in agriculture in 1972, /about 60% represents activity in the traditional rural sector. This includes some $35 million in subsistence activities. Such products are typically grown for family use or for trading within the local village, and although such exchanges invariably use cash, they are considered to be non-monetary. About $15 million of products such as rice, fruit, vegetables, meat, eggs and poultry originated in the traditional sector in 1972 and entered the monetary economy. While some of these products represent trading in the towns or in similar fashion at the village markets, substantial amount was generated by the need to have cash to pay certain fixed fees such as taxes and local assessments. Beyond this farmers were also able to generate about $5 million from the sale of coffee, cocoa, and palm products to the Liberian Produce Marketing Corp. (LPMC) or its agents, for the same type of cash need. While some of this produce, particularly palm products, originates in the Liberian plantation sector of the economy, the bulk comes from the traditional farmer. Regional data on such products is not available, but in general the palm produce comes from the coastal areas while the coffee and cocoa are grown best in the interior counties. Due to climatic conditions cattle are scarce and most of the rural protein intake comes from small wild animals and fish which abound in the underpopulated country; in general the protein awareness is higher in Liberia than elsewhere in West Africa and cases of malnutrition are not common. Although farmers have continually left the land in great numbers over the past decade for the greater allure 1/ The data for this and the following three sectors derive from the Mission's estimates of the National Accounts. The official figures published by the Liberian Government were found to be methodologically incorrect and thus could not be used for macro-economic analysis. - 21 - of the cities or the potentially greater income of the concessions, the average peasant is relatively well off, certainly more so than his counter- part in the Sahelian Zone of West Africa or in the Altiplano of Latin America. 62. About 25% of agriculture comes from rubber production. This industry is dominated by the large concessions, particularly Firestone, at Harbel about 35 miles east of Monrovia. Other plantations include B.F. Goodrich about the same distance west, on the Lofa river, the Firestone Cavalla plantation on the Ivory Coast border near Harper, and the Liberia Agricultural Company north of Buchanan. Producing about 3/4 of the rubber in the country, these concessions also buy rubber from Liberian farmers, shipping a total of some 80,000 tons of rubber annually to overseas markets. Liberian rubber farms are predominately located in Montserrado and Bong counties, close to the concessions and along the main Monrovia to Guinea corridor. Typically, these farms are owned by rich urban dwellers and are poorly cared for by underpaid farmers, yields being less than half of those obtained on the concessions in spite of continuous access to new planting material. 63. Forestry, currently accounting for $9 million (about 10% of agri- culture) has grown very quickly (over 25% per year) in recent years. Virtually, all this activity is in the hands of foreign concessionaires. The bulk of the activity is located in the vast forest areas of the southern part of the country, particularly Sinoe and Grand Gedeh counties. Employing relatively few people, the tulk of the exports are in log form, although some companies do produce sawn timber. Recent legislation calls for all exports to be sawn within the next five years. Plans are currently being formulated for the erection of a plymill at Greenville. 64. Fishing has also grown quickly in recent years (20% per annum) and currently has a value added of $5.4 million. This industry is dominated by the Measurado Company (located in Monrovia) which is owned and operated by Liberians. 65. Mining dominates the economy. With some 30% of GDP, four companies export over 20 million tons of ores and concentrates per year. The largest is Lamco,,a Swedish, American, Liberian consortium that exploits the rich Nimba mountain deposits located in the north end of Nimba county on the Guinea border. The ores are shipped by private railroad some 300 km. to the Port of Buchanan where some grading and pelletizing is done before export. Other companies are the Liberian Mining Company, the oldest in Liberia, located at Bomi Hills 50 miles north of Monrovia, the National Iron Ore Company located in Cape Mount County, on the Sierra Leone border some 100 miles from Monrovia, and Bong Mining Co. about 50 miles northeast of the capital. All three mines evacuate their ore by rail to Monrovia, the NIOC and LMC sharing the same line. Most of the catpat of the 2ong mine is shipped out as pellets while that of the others is primarily crude ore. 66. The other significant part of the mining sector is diamonds. Although there are concessions in this industry, it has traditionally been open to the small man to win whatever he could find. Growing over 15% per - 22 - year in recent years, about $6 million of value added comes from diamonds. The major areas are along the Lofa river and in Nimba county. 67. Industry, as a result of a small market, and generally passive policies, is very rudimentary in Liberia. In terms of firms with more than 20 employees, there are less than thirty in the whole country, employing some 2,000 people. In terms of gross sales some 60% originates in the petroleum refinery; in terms of value added this establishment accounts for 28% of total manufacturing. All these firms are located in or near Monrovia (the only market of any size) and include only the types of industry that are found in all less developed countries; beer, soft drinks, soap, paint, cement, nails and furniture. Unlike most of the rest of West Africa, small indigenous enterprises are not common, the typical village bicycle repair 1/ or carpentry shop is rarely found in Liberia, although goldsmiths and tailors are not uncommon. The growth rate of 10% per annum over the period for industry is a reflection of the erection of the oil refinery; leaving this out the remainder hardly grew over the period. 68. Utilities are mainly urban, especially Monrovia. The rapid growth rate largely reflects the attempts to catch up with the demands of Monrovia, the chief source of power being a hydroelectric plant 2/ at Mt. Coffee, about 15 miles north of Monrovia on the St. Paul river. The water supply for the city comes from a plant at White Plains, just below the Mt. Coffee dam. 69. The construction sector relates primarily to the contract constructior industry; such work done by the Government or by the concessions on their own account is included in those sectors. The stagnation reflects the general macro-economic conditions in the country over the past decade. Not only did most of the enclave investment phase out by the middle sixties, but the public sector, by virtue of a severe fiscal and financial crisis in the early sixties, entered a period of "austerity" and its investment retreated to half former levels by the late 60's. These cutbacks severely hit the large contract construction firms (of which there are 18, with substantial degree of foreign participation) and their output and employment dropped to S0% of former levels. The very small contract construction firms and the building of rural huts showed a slow increase over the period, about in line with the growth of population and now together account for more than two-thirds of the $15 million value added in this sector. 70. Transportation for hire is a field reserved exclusively for Liberians. In general, the enclaves have their own facilities, but the bulk of the activity in the nation is carried out by the national stock of some 6,000 vehicles for hire owned and operated by Liberians. Of these more than half are taxis, while perhaps 20'o being trucks. These vehicles 1/ This may be due to the general rarity of bicycles in Liberia. 2/ Supplemented by diesel during the dry season. - 23 - operate over the entire country regardless of road conditions, and in general represent a virtually unregulated free competition system. There are no statutory rates, the fares and tariffs appear to be determined by whatever the first vehicle over a new road wants to charge. Due to the high costs of vehicle operation and maintenance over Liberia's poor road system there is a high degree of ownership by the rich urban dwellers, but in general the day-to-day management and operation of the nation's transport facilities are in the hands of the small man. The road system follows the main Monrovia to Guinea axis from close to the Sierra Leone border to south of Buchanan. South of this the low density of population and the abundance of swamps will prevent the coastal linkage to Harper from being completed in the near future. Other forms of transport are not particularly significant for the country as a whole; the enclaves operate their own railroad lines, almost exclusively for their own cargoes, they also operate some coastal shipping. Air services are -generally employed by the concessions, but in addition have proven necessary for the Government to gain access to isolated communities both for political and for medical reasons. Communications is primarily external cable and phone services, internal services are virtually non-existent. 71. The other sectors of the economy, mainly services, trade and government, are not much different from the normal pattern for a country of Liberia's size and income. Trade tends to be dominated by the Lebanese community, especially in the larger towns; the smaller towns either have Liberian store-owners, or more commonly, no facilities at all. Performance of the Economy 72. The Liberian economy appears to have done very well over the past decade. Although data is very rough, indicationsare that the growth was even higher in the 60's than in the 50's in spite of the fact that the first decade was characterized by the iron ore investment boom while the second was dominated by austerity on the part of the public sector and the phasing out of foreign enclave investment on the part of the private. Data in current prices indicate a growth of 6.7% from 1953 to 1963 and a rate of 10.2% from 1962 to 1972. While inflation accelerated in the latter period, the difference was certainly not as much as the difference in growth rates. Moreover, the performance of the economy has been much more even in the past decade-. Year to year variation in GDP in the early period was as much as +65% and -40%, while in recent years the extremes have been no greater than 10% (in current prices) in either direction. Thus, there is Deal evidence of a broadening of the economic structure, of a growing stability, and of a lessening of the relative dependence on the enclave sectors. 73. Constant price data is only available from 1964 onwards, and such as there are resultsfrom the statistical estimates of the mission. A complete revision of the national accounts 1964-72 will be found in the statistical volume (Volume II) of this report but it should be stressed that these figures are not official. These figures indicate that over the period real gross domestic product grew at an average annual rate of 5.3% while gross national product grew at 6.9%. In a country so heavily dominated by foreign interests it is somewhat surprising to find national - 24 - product increasing faster than domestic product; over the nine-year period factor income payments were almost constant at about $80-$90 million and now amount to almost 20% of GDP. Profits of the enclaves were almost constant over the period at about $35 million, while output in both rubber and iron ore increased at a rate close to 8% per annum. International prices however steadily declined for both commodities, the capital structure of the concessions is highly levered, and profit rates have an elasticity with respect to these prices considerably in excess of unity. At the same time, a majority of the revenues of the public sector from these enclaves and the linkages to the rest of the economy are related to volume, and thus are partially insulated from such price trends. V .* Table 3 shows the distribution of economic activity in 1964 and 1972 as well as the growth rates of the sectors over the period. Table 3 Growth Rate Sector Share 1964 % p.a. Share 1972 Agriculture 23.5 5.6 23.9 Mining 23.6 8.2 30.4 Manufacturing 4.3 10.0 5.4 Utilities 0.9 17.0 2.1 Construction 6.1 -0.2 3.8 Transportation 6.5 6.3 7.2 Dwellings 5.7 2.8 4.8 Banking 0.6 5.2 0.8 Trade 12.7 3.2 10.1 Other Services 5.5 1.1 3.9 Government 10.7 -0.1 7.6 GDP 100.0 5.2 100.0 In terms of size and growth the mining sector clearly dominated the economy over the period. With the bulk of their investment completed in the previous decade, the iron ore companies virtually doubled their output between 1964 and 1972 and by the latter date had shifted their output mix from run of the mine grades to high value washed, pellets and concentrates. Agriculture, where the bulk of the population is occupied, grew slightly faster than GDP, a respectable 5.6% per annum. However, this performance resulted primarily in the rapid rate of growth of forestry and rubber, both largely dominated by foreign interests. Subsistence appears to have increased by about 2.7% per annum, possibly somewhat more than the natural growth of the rural population, less migration. The other source of growth in agriculture was fishing,characterized by a well organized commercial fleet, where output tripled over the period and is currently over $5.0 per annum in value added. - 25 - 75. Table 4 shows the behavior of the macro-economic variables on the expenditure side of the national accounts. The trends discussed above show quite clearly. Table : EXPENDITURE ON GNP ($ millions, current prices) 196 1965 1966 1967 1965 1969 1970 1971 1972 GNP 203 213 236 251 265 304 314 332 355 Resource BalanceZa 10 25 31 26 55 77 58 54 63 Consumption 200 205 220 232 235 247 279 293 305 Private 166 169 180 191 193 203 236 241 252 Public 34 36 40 41 43 44 43 52 53 Investment 61 54 58 66 47 56 67 65 76 Public - 32 31 24 13 12 16 13 17 Private - 22 27 42 34 44 51 52 59 Investment/ GDP (%) 22.5. 18.9 18.9 20.4 13.9 14.8 16.6 15.8 17.1 Public (%) - 11.2 10.1 7.4 3.8 3.2 4.0 3.2 3.8 Private () - 7.7 8.8 13.0 10.1 11.6 12.6 12.6 13.3 /a Excess of exports over,imports. 76. The export boom produced an almost continuous increase in the resource balance, both in absolute terms as well as relative (from 5 to 17% of GNP). This is also reflected in consumption where both private and public fell as a proportion of GNP. In investment the "austerityll period of the public sector clearly shows as public investment fell from over 10% of GDP to less than four; this drop is even more severe when one looks at the steady growth of the public corporations (PUA and NPA), indicating even sharper drops in central government investment. Private sector investment was more steady, the early years represent sharp drops from the investment boom years of the late 50's and early 60's where private investment was even higher than the 13% of GDP experienced in 1972. In general, the period 1964-72 represents a time of consolidation after an investment boom. The steady and high growth of GDP resulted from the earlier investments. The apparent ICOR is significantly less than 3.0 whereas on the long run this indicator is more likely to be close to 4. 77* The general picture of the economic structure of Liberia is of a poor country upon which has been superimposed a prosperous enclave sector dominated by foreign interests. Without this sector the GNP per capita would be on the order of $120 (instead of the actual $210) and the normal growth rate would be about 3-4% (inetead of the recent 5-6%). The key development problem for Liberia is to tap the earnings of the concessions while they are propperous and to use these resources to diversify the economy to the extent that a basis for long run national growth can be established. - 26 - Sources of Growth 78. It is clear that the major sources of growth of the Liberian economy in the 1960s were the foreign dominated enclaves. The spectacular growth rates experienced in iron ore and timber derive solely from foreign enclave investment. The increase in rubber (7.5% in real terms) is not so impressive, but does represent a certain degree of Liberia national partici- pation. This industry is dominated by foreign interests, particularly Firestone, but over the period rubber production from Liberians' farms grew by 12% per annum while that of the concessions increased annually by only 7%. Currently, however, only about 1/4 of the output comes from Liberians and as the concessions have a monopoly on both price and sales, future growth will depend on the ability of Liberia to have a larger say in both types of decision. Moreover, the industry, particularly the Liberian growers, shows a marked sensitivity to fluctuations in international prices. Given that the longer run outlook for this commodity indicates at best only modest improvements, it is doubtful that this industry can become a pillar of growth for the economy. Elsewhere in agriculture, the rapid growth of fishing has been impressive. While the local market is becoming saturated with the output from these modern operations, it may be quite possible that Liberia could expand into foreign markets in a significant fashion. Forestry may well provide an impetus to growth, particularly, if the local processing plans are carried out and if enforcement of current regulations could be made effective. The only other sector with impressive growth has been industry. However, it is very small (5.4% of GDP) and a significant part of the increase has come from the introduction of an oil refinery. If strenuous efforts are made to promote exports and if Liberia plays up her natural advantage in wood based industry, there may be some prospect of significant industrial growth and impact on the economy. However, it will take many years until this sector reaches a sufficient size to provide a solid foundation for growth. Recent Developments 79. At the time of the mission's visit to LiberiaL the economy was experiencing a sharp recession, particularly in the non-enclave sectors. This was partially caused by the understandable uncertainty in the private sector following the transition from the monolithic 28-year rule of President Tubman, to the new administration of President Tolbert. This was accentuated by the fact that prices for Liberia's exports, particularly rubber, fell during 1970-71. Although the linkages between the enclaves and the rest of the economy are fairly weak, they are most pronounced in the rubber sector. Large segments of the Liberian rubber sector stopped tapping their trees and the loss of income not only affected the rich land owners, but also their hired farmers. One of the first measures of the new Government waq to introduce a regime of fiscal responsibility. This meant that not only did they curtail substantial amounts of wasteful and questionable spending, but a new era of tax enforcement was introduced. Both these forces drained resources from the private sector and accentuated the recession atmosphere. Moreover, the new Government announced plans for a national bank and the eventual introduction of a Liberian currency, measures which added to the 1/ March 1973. - 27 - nervousness and apparently caused some amount of capital flight - the mission however was not able to verify this and it appears to have been over exaggerated. In the field of capital investment, the very limited absorptive capacity of the public sector and the general philosophy of wanting to avoid repeating the mistakes of the past, meant that during the first two years of the new regime, new projects were not numerous and those that were initiated gave the unfortunate and mistaken impression of being for the benefit of special interest groups. All these factors added up to a general feeling of economic malaise. 80. One of the most significant measures taken by the new government was the National Rally. This was designed to raise resources from the common man to be spent for his benefit. The goal was $10 million during the year ending in May 1973. It appears that a little less than half of this was actually raised, but that the participation was widespread and on the whole voluntary. The initial impression among the people was that this was just another tax without benefit, and the problems of project identification added to this feeling, the only known project being the 25% earmarked for moving the university. However, by the target date, all the counties had selected projects (all but two decided on feeder roads, the others wanting hospitals - a measure of the perceived needs at the local level) and work actually began. For the first time in the history of the country the common man is actually seeing a direct return on the levies he has been paying to the government throughout the country's existence. This type of local action and local benefits must be encouraged, subject,of course, to the very real problems of absorptive capacity. 81. Since the visit of the mission in March 1973, the more specta- cular events have occurred in the wer d economy and not in the Liberian economy. In general the recession in the non-enclave economy has persisted most probably because of the continued contraction in real terms of the Public Sector accompanied by a significant, almost completely imported, inflation. Three key items illustrate this inflation. First, rice; the price for a 100 lb bag in March 1973 was about $10, at the end of 1974 it was $25. This is the staple food of Liberians and it dominates the cost of living index. As a reaction to this jump there has been an increase in local rice planting including for the first time on a significant scale, swamp rice. Petroleum prices have, of course risen. However, the bulk of Liberia's imports go to the concessions, particularly those in iron ore and the companies have managed to negotiate price increases for ore, retroactive to the beginning of 1974 to compensate for energy codt increases. The impact on internal transportation of petroleum prices has been about 5-10% increase in the price for transport of goods and people. The other significant user of petroleum, the Liberian Electricity Corporation, was badly hit by a very dry 1973-74 winter on the St. Paul rivdr and the increased prices. The third key import item is machinery and equipment. Here there has been a doubling of the CIF price in the space of two years. This has seriously affected the costs of investment, particularly in agriculture and in road building. - 28 - 82. On the export side, each of the three major exports has been affected differently. Rubber prices rose during 1973 and peaked in early 1974, dropping sharply as the world wide recession set in. During the price rise many Liberian farms went back into production only to lapse again as prices fell, total output falling back to the levels of 1972. This brief spurt in production and prices pumped some money into the economy during 1974, but this was almost entirely dissipated by the end of the year. In the timber industry, demand has continued unabated for the choice primary species and has fallen off significantly for the secondary ones. Exports are still almost entirely in log form in spite of regulations requiring 40% tobe processed by the end of 1974. In the iron ore sector in addition to the energy adjust- ment obtained by the companies the relative fall of the dollar vis-a- vis other currencies has increased the unit price of exports. More significant however is the fact that a general shortage of raw materials on a world wide basis and the relative accessibility of Liberian ores have caused a very sharp increase in the contract prices for iron ore for 1975 (30% for ore, 50% for pellets) and beyond as well as serious interest being expressed in the three remaining iron ore deposits. In the most optimistic scenario all three will be producing by the mid- 1980s doubling the national output from the present 24 million tons to close to 50 million. While this is ground for cautious optimism it should not lead to an abandonment of the necessary development strategy of diversification. Balance of Payments 83. As Liberia has neither a currency of its own nor as yet a central bank, balance of payments analyses are at best tenuous conclu- sions based on impressionistic data. The Statistical Appendix presents information on these foreign transactions; in general the figures give an impression of trends, but there are still substnatial gaps in our knowledge. 84. The balance of payments is characterized by a heavy dominance (90%) by concession commodities, by private sector factor outpayments which amount to one-third of export earnings, by imports which about equal exports if the enclave sector is subtracted from both sides, and by amounts of foreign official capital investment which are greater than the investment undertaken by the public sector on its own account. More important, Liberia uses its earnings of U.S. dollars as the internal currency and medium of exchange. Thus, fluctuations in export earnings directly reflect them- selves in the money supply of the country. Table 5 presents a summary of the balance of payments, showing averages for three years and the period growth rates for appropriate items. Exports grew at close to 9% while imports (5.9%) grew somewhat less quickly than GDP (6.5%). This differen- tial reflects the general slowdown on the non-enclave economy during the period as well as the fall off in enclave investment. Undoubtedly however, the acceleration of exports has been somewhat in advance of the desire of the country to import, and this may well show up in increased imports in the near future, particularly as the increase in enclave exports slows down. As discus- sed above the remittances by the private sector showed little or no growth over the period as international prices fell almost continuously thus affecting - 29 - profits. The private interest payments represent debt obligations on the mining investments; these should taper off in the future. Workers' remittances are payments to expatriates working for the enclave companies; these grew only moderately reflecting in part a crn-itinuous process of Liberianization of the operations. Maritime revenue derives from the "flag of convenience" business, and its recent increases reflect the continuing registration of supertankers under the Liberian flag. Grants fell slightly in keeping with the general trend of the 60's where foreign aid agencies shifted away from technical assistance. At the same time the low level of public sector activity is reflected in the decline in gross foreign borrowing, a trend which was accentuated by the increase in payments necessitated by the debt rescheduling agreements of 1963. The residual item as well as representing a continuous monetization of the economy also resulted from substantial repayments totheIMF f9llowing the standbys of the early 60's. In terms of debt service ratios, the crucial indicator is the relationship to public sector revenues. This figure just about constant over the period, however, the three-year average in Table 5 disguises the fact that the ratio is sharply dropping at present (due to increases in the denominator as well as decreases in the numerator) and in future, under any kind of borrowing assumptions is expected to be less 15% of revenues. - 30 - Table 5: BALANCE OF PAYMENTS, THREE-YEAR AVERAGES AND GROWTH RATE FOR THE PERIOD 1964-1972 (In million US$ unless otherwise indicated) Rate of Growth Average Average Average during 196L-72/a 1964-66 1967-69 1970-72 () Export of Goods and Non-Factor Services 14o.1 177.9 230.7 8.73 Enclave Products 123.2 154.1 204.0 8.84 Imports of Goods and Non-Factor Services (-)118.3 (-)118.3 (-)172.5 5.94 Resource Gap (-= deficit) 21.8 52.5 58.2 Factor Payments from Abroad (Net) (-) 70.5 (-) 73.5 (-) 86.1 3.12 Interest on Public Debt (-) 5.4 (-) 5.9 (-) 5.4 -0.h4 Profits (-) 32.9 (-) 30.6 (-) 37.7 1.58 Private Interest (-) 17.8 (-) 20.3 (-) 23.8 5.24 Workers Remittances (-) 14.4 (-) 16.7 (-) 19.2 4.92 Maritime Revenue 3.0 3.8 6.1 12.09 Surplus on Current Account (-) 65.8 (-) 17.2 (-) 21.8 Grants from Abroad 29.8 23.7 22.5 -5.08 Government Borrowing (Net) 8.4 5.9 (-) 2.8 Gross 13.2 11.8 8.4 -3.77 Amortization (-) 4.8 (-) 5.8 (-) 11.2 14.66 Others (-) 5.0 (-) 23.7 (-) 9.1 Debt Service Ratio (4) 7.3 6.6 7.2 Debt Service/Government Revenues (%) 21.8 21.0 22.7 /a Current prices. - 31 - FISCAL SYSTE4 85. Unlike most of the rest of the Liberian economy, the fiscal system has been well documented elsewhere, 1/ and thus the treatment in this report is summary in nature. Here we look at the structure of the fiscal system, discuss the performance in recent years and take up some of the issues of fiscal policy. An analysis of future trends is to be found in the next section on future outlook for the economy. 86. Liberia's fiscal system has several distinction features: (1) its tax base is narrow, being dominated by revenues from iron ore, rubber and forestry cnncessions, and from import duties; (2) fiscal policy has been rather passive, at any rate until recently, in the sense that the Government has made only a limited effort to enlarge the tax base and use it as an instrument for influencing resource allocation and income distribution; (3) the powers of taxation, the mechanism for tax collection, decisions on expenditure allocation and control over disbursements are all highly centralized; and (4) decisions on expenditures, and in particular development expenditure, have a limited time-holizon. Public Revenues, 1965-1972 87. In 1972, Liberia's total tax revenues represented 13.6% of GDP - this is lower than the ratio in some other West African countries, but slightly above the expected value for a country of her size and income (Table 6). Tax revenues in the period 1965-72 increased faster than GDP, growing at a rate of 9.1% per annum between 1965 and 1972. Thus, Liberian tax revenue as a proportion of GDP rose from 12.8% in 1965 to 13.6% in 1972. Non-tax receipts, primarily revenues of the Port of Monrovia (NPA) and the Public Utilities Authority (PUA), grew at 18.8% per annum between 1965 and 72, thus the ratio of total public sector revenue to GDP rose from 15% to 17.5% in that same period., The rising trend of revenues, however, is' accompanied by considerable year-to-year fluctuation due in part to for- tuitous circumstances,2/ but more importantly to the dominance of taxes on concessions and on imports, which makes revenue sensitive to changes in international prices. The erratic fluctuations in revenues to present problems for sound budget management. 88. A rough classification of government revenues into those items which are largely determined by external influencec and those which are more amenable to control by the Government is given in Table 7. The former consists of three main items: revenue from concessions,'maritime revenues and taxes on income and dividends of non-residents. Revenue from iron ore and rubber concessions, depending as it does on the profits of these concessions, is "highly sensitive" to the behavior of world prices for 1,/ See for example: Shoup, Carl S.; The Tax System of Liberia, Colombia, New York, 1970. 2/ For example, in 1972, some $3.7 million accrued to the Government by way of extraordinary revenue: $2.1 million, sale of the President's yacht, and *$1.65 million extraordinary payment from LMC iron ore company as a result of tlhe settlement of tax litigation. - 32 - Table 6 Tax Revenue as a PercEntaqle of ODP 1965 1968 1972 Dahomey 11.2 9.4 11.8L' C. A. R. 18.3 16.1 18.1- Ivory Coast 20.6 20.2 20.2 Scnegal 16.9 15.9 18. Sierra Leone 11.3 11.1 11. Averaee 15.7 14.9 16.2 /2 Cross Section- 12.9 Liberia 12.d 13.0 1.6 /1 Refers to 1971 E2 IBRD Analysis of 101 Countries using adjustments for country size and income. - 33 Table 7 ($ millions) I.Revenue highly sensitive to external factors 1965 1968 1972 Iron ore profitsharing 7.9 9.h 11.5 Firestone corporate tax revenue 4.3 2.4 1.5 Tax on non-residents 0 0 2.0 Maritime revenues 3.6 3.8 7.2 Sub-total 15.8 15.5 214.2 II. Less sensitive revenue Austerity tax - 2.9 4.3 Taxes on property 0.3 1.1 !.b Taxes on production and domestic consumption 1/ 0.7 1.7 5.i (mainly excise) Tajqupes ternational trade and transactions(mainly import 17.1 18.6 23.5 Other taxes (general 3icens6, hut and development taxes) 3.5 b.1L 4.7 Motor Vehicle revenue 0.7 0.7 1.0 Sub-total 22.3 28.7 10.0 III.Other revenue2/ 4.7 7.5 13.3 TOTAL 42.8 51.7 77.5 1/ Stumpage tax included under less sensitive revenue because it is based on volume rpthe, than price. 2/ Items included under other revenue include taxes difficult to classify according to degree of sensitivity to external fluctuations (see next page). - 34 - iron ore and rubber. Maritime revenue, consisting of registration changes and feeL levied on vessels registered under the Liberian policy, may also fluctuate with conditions in the world shipping trade. Taxes on foreign trade (mostly import duties) are less sensitive to external influence. Though variation in import prices affects yields, the changes in import volume are an equally important factor and these depend essentially on the growth of domestic income. Other items less sensitive to external factors include taxes on local property, production, trade and services. There are also taxes difficult to classify according to degree of sensitivity. A fair amount of the individual income tax revenue is linked to earnings and profits in the concession sector, although it is not as sensitive to external condition as, for instance, profit sharing. In 1972, of the total $2.3 million collected, about half was generated from individuals employed in the iron ore and rubber sector. A large part of non-concession corporate tax revenue is derived from the operations of foreign-owned and controlled corporations in Liberia, but because of the difficulty of assigning these revenues between externally influenced and not, they have been included in other revenue. Altogether, at present (1972), revenues from sources "highly sensitive to external influences" account for some 30 percent of total government revenues. Including foreign trade duties, whose yield is affected by changes in import price, the proportion is around 60%. 89. There is considerable scope for increasing revenues from concessions by extracting a larger share of income generated by them, and by more effec- tive enforcement of the existing levies. However, since these sources are high susceptible to the volatile world market conditions, and since iron ore is a depletable resource, it is essential, in the interests of long-term fiscal viability, that Liberia should diversify its tax base. Some progress has been made in this direction since 1965: Revenues from taxes, other than concessions, non-resident incomes, maritime fees and import duties have doubled between 1965 and 1972, compared to a 79 percent rise in total revenues. Particularly noteworthy is the seven-fold rise in revenues from levies on production and domestic consumption (mostly excise duties) since 1965. The growth of non-concession revenue reflects in part a widening of the domestic tax base, both by widening this coverage and by ra sing th tax rate; and, in part, is the result of more effective tax collection. Since 1969, tax collection has improved as there has been more rigorous enforcement of excise taxes and arrears have been collected. The increase in excise revenue collections, of course. reflects improved collection effort, as well as the increased domestic production subject to excise tax (for instance, local production of beer) and the imposition of duties on goods formerly not locally produced (for instance, cigarettes). There has also been stricter collection enforcement by the Bureau of Customs. This is one reason why receipts from import duties in 1972 rose, although value of' imports subject to duties, fell. 90. The trends in revenues according to the more common classification of tax categories may be seen from Table E. Taxes on income and property havre irow at rou7hli the same rate as aggregate revenue, and their share in total revenues has remained constant around 37%; share of taxes on foreign trade has fallen appreciably sin-ce 196!; and there has been significant gains in the relutive role of indirect taxes and non-ta - 35 - Table 8s LIEERIA. GOVERNMENT REVENUE (in $1,000) 1965 1968 1972 Percent of Percent of Percent of Actual Percent Tax Revenue Actual Percent Tax Revenue Actual Percent Tax Revenue Taxes of Net Income & Profits 15,578 36.5 42.8 19,145 37.0 43.6 27,280 35.2 45.2 Taxes on Property 262 0.6 0.7 1,128 2.2 2.6 1,393 1.8 2.3 Taxes on Production, Consumption or Domestic Transactions 668 1.6 1.8 1,723 3.3 .3.9 5,079 6.6 8.4 Taxes on International Trade and Transactions 16,413 38.5 46.1 17,811 34.4 0.6 21,824 28.2 36.2 Other Taxes 3,66 8.1 9.5 4,103 7.9 9.3 4,703 6.1 7.8 Maritime Revenues 3,620 8.5 - 3,822 7.4 - 7,232 9.3 - Other Non-tax Revenue 2,637 6.2 - 4,072 7.9 - 9,957 12.9 - Total Revenue 42,634 100.0 !1803 100.0 ZL68 100.0 Tax Revenue 36,377 85.3 100.0 43,909 86.2 100.0 60,299 80.0 100.0 GDP (Market Prices) 284,500 337,500 4h3,300 Tax Revenue/GDP 12.8 13.0 13.6 Total Revenue/GDP 15.0 15.3 17.5 Source: Ministry of Finance. - 36 - revenues. Though revenues have been buoyant, the tax system still relies heavily on indirect taxes, especially import duties. Since the absence of improvements in the system of direct taxes inhibited an increase in the elasticity of the tax system, revenue growth could only be maintained by frequent adjustments in the tax system. The primary objective for tax policy in Liberia should be to raise the built-in elasticity of the over- all tax system by broadening the tax base and this will require both long-term and short-run changes in the structure of direct taxation as well as improved tax administration. Public Expenditure, 1965-1972 91. On the expenditure side, the budget consists of two components: the current and the development budgets. Both are annual in nature. In recent years, the Ministry of Finance has effectively curbed the growth of current expenditures, although, the methods used tended to be arbitrary, and left relatively little room for changes which may have been desirable in the interests of improving the quality and efficiency of the activities. On the other hand, the process for deciding the scale and composition of the development budget, and of monitoring its implementation, leaves much to be desired. Rational planning of development expenditures is not possible without a forward-looking program several years ahead; but only recently has the Government made a beginning in the direction of multi- year development budgets. 92. The quality of budget data, especially as they relate to actual expenditures, is also deficient in many respects. A major defect is that development expenditures made by foreign aid agencies are outside the budget and are in effect not known until the agencies are canvassed each on an ex post basis. The Government, in particular the Ministry of Finance, has not taken any steps to keep expenditure on a consistent basis. The concern in the Government, justifiably so, has been to ensure that the total cash position with commercial banks as reported by the Bank of Monrovia, tallies with the records of the comptrollerts and the Bureau of General Accounting. Lack of an efficient system for reporting actual expenditure, particularly for capital expenditure, also present problems. Moreover, the Government does not publish information necessary to disaggregate debt service into interest payments and repayment of principal. However, the Ministry of Planning attempts a comprehensive reconstruction of the budget and economic-functional classification of expenditures (including foreign aid components). The following discussion draws heavily on this source. 93. The rate of growth of central government recurrent expenditures was 4.3% per annum between 1965 and 1972, has been kept below the 6.3% rate of growth of GDP in current prices during this "austerity" period. This has been achieved by maintaining strict control of all expenditures. Expenditure on personnel services increased at a rate of 5.5% during the period (See Table 9). Virtually all of this increase took place betwe:en 1970 and 1972. Between 1970 and 1972 the number of employees declined by some 4% from (19,362 to 18,538), while total salary payment rose 25%. The average salary of government employees has thus risen considerably more than average, thus providing relative, improvement in their incomes relative - 37 - Table 9 GENERAL GOVERNMENT CURRENT EXPENDITURE - 1965-73 BY MAJOR GATEGORIES (CURRENT PRICES) Rate of (est.) Growth 1965 1966 1967 1968 1969 1970 1971 1972 1973 1965-72 Personnel Services1 25.0 26.9 29.0 29.2 30.4 30.2 35.9 37.9 40.0 5.5% Other 2 15.9 18.4 17.7 17.5 18.8 20.3 21.9 20.7 24.3 3.9% Debt Service (Interest) 5.1 _.9 6.4 7.7 6.9 6.3 6.0 4.6 5.7 -0.9% TOTAL 46.0 51.2 53.1 54.4 56.1 56.8 63.8 63.2 70.0 4.3% 1/ Personnel allowances included but not foreign travel. 2/ Supplementary budgets were issued in 1966 ($0.6 million), 1967 ($0.1 million) and in 1972 ($3.5 and 3.6 million). Excluding dbbt service $0.7 million and an investment in ships $2.0 million, both in 1972, this expenditure has been classified as "other". Sources External Debt Section, Ministry of Finance (Interest on national debt included). - 38 - to others. This staff reduction, done by the new government, aimed at laying off of inefficient staff who had been appointed mainly on non-merit grounds. While it marks the beginning of an effort to reform the civil service, there is still a critical shortage of skilled manpower in the public sector. 94. The slow increase in the central government's recurrent expendi- tures during this period also reflects the Government's efforts to check expenditures on items other than personnel consisting mainly of expenditures on materials. supplies and equipmnt. These checks were most pronounced in the late 60's ; since 1969, however, "these expenditures" have been allowed to rise, and have in fact risen more or less in step with salaries. 95. Interest on debt, external and internal, grew by a very low -0.9% per annum during this period. It reached a peak in 1968 when it amounted to $7.7 million, or about 14% of government recurrent expenditure. Since then it has declined to $4.6 million in 1972, when it accounted for about 7% of recurrent expenditure. This reduction in interest payments has been achieved by debt retirement and debt rescheduling including conversion of debt to longer maturity and lower interest rates. At present about two- thirds of outstanding debt bears an interest rate of 3% or less. 96. To get adequate information about the purposes for which the appropriations have been made, we need a breakdown of budgetary appro- priations according to the broad functions of Government. Since this information was not readily available, the mission attempted to reclassify the budget by major functions. In part this was a follow- up of past technical assistance, and efforts of the IRF Fiscal Affair's Department to derive a meaningful classification. A classification of expenditure actuals by major functions for years 1971 and 1972 and budget estimates for 1973 was achieved which together with previous efforts yielded a time series for 1968 to 1973 1/ (Table 10). In addition for the 1971-73 period, budgetary expenditures were broken down by current and development budgets and by the personnel services or salary component for the current budget. (Table 11). 97. In order to examine the impact of central government expenditures on the economy, they were divided into current and development expenditure, each of which were further classified into expenditures on general services, economic services and social services (Table 11). The table shows that development expenditure in 1971 and 1972 was only 10$ of the total budget, far too little and too short lived in nature to have much of an impact on the economy. However, within the category of current expenditures, expenditure on provision of economic services should be separated from these on adminis- tration as the former may have an impact on development. The expenditure on general services as a proportion of expenditure of total current expenditure has declined from 42/ in 1971 to 38% in 1972 and is expected to decline slightly to 37% in 1973. This decline is due to the smaller expenditure on defense and foreign affairs. This control of general services expenditure should free resources for development purposes; but to the extent that it 1/ In this effort the mission cooperated with the IMF budget advisor in the Bureau of the Budget. - 39 - Table10: Central Government BIdgetary Expenditure Classified by Major Functions - 1962-197 (Thousands of dollars) 1968 1969 1970 1971 1972 1973 .......... ....... ......Actual ......of..... .. . .. . Budget T, General Services .231 21sh89 2102 26218 26,010 267 a. General administration 11,306 11,750 13,158 13,597 14,h08 15,705 b. Defense 3,391 3,878 4,437 4,397 3,870 4,104 c. Justice and police 2,109 2,202 2,007 3,925 4,147 4.326 d. Foreign affairs 3,587 3,859 3,900 4,299 3,585 3,932 II. Economic Services 6,626 7.776 6 643 8,665 10,311 13,125 a. Natural -resources 395 802 539 81 744 921 b. Agriculture 1,005 1,097 991 1,901 2,4951 3,236 c. Public works/utilities 3,290 3,419 3,153 2,099 2,731 20541 d. Communications 1,807 2,106 1,624 2,539 2,51+6 4,443 e. Industry and commerce 129 352 301 353 539 433 f. Other (Liberian Development Corporation) - - 35 932 1,270 1,551 III.Social and Community Services 10,625 11,813 11,953 14877 16,094 19,153 a. Education and culture 7,039 7,886 7,931 10,299 10,073 11,027 b. Public health 3,.444 3,784 3,720 3,934 4,934 5,8k1 c. Labor and social welfare 142 173 270 492 819 1,498 d. Housing - - 32 152 268 787 IV. Unallocated 17,596 19t412 21,831 17,484 20,346 22,700. a. Public debt services 16,844 19,442 20,639 17,484 20,346 22,700 b. Other 752 - 1,192 - - - TOTAL 55,240 60,750 63,929 67,244 72,761 83,045 Source: 1/ Congress, Chief Executive, Treasury, Internal Affairs and Local Government, etc. - 40 - Table 11 Breakdown of Central Government BudgetarEpendiure into Current Bud et and Deyelopment Budet Expenditure By Personnel Services and Major Functions - 1971 - 1973 (C coo) 1971 _ 1972 Current Budget DeveJlop- Current Budget Develop- urrent Budget Develop- Peraoru l ment Grand Personnel ment Grand Personnel ment Grand Tervirps -Total Budget Total Services Total BudgetTotal Budget Total I. General Services 11,650 25 3u2 6 2,218 1110 25 045 965 26 010 12. 904 2 2840 28,067 aGeeral Administration -4,749 T1 96 - 4,615 3t,84 80519 1522 440 tt, 'tt b. Defense 1,907 4,397 - 23 0 1,941 3,704 400 4,104 c. Justice and police 2,910 3,925 - 3,925 3,155 4,103 44 4,147 3,753 4,326 - 4,326 d. Foreign affairs 2,084 4,299 - 4,299 1,485 3,585 - 3,585 2,020 3,932 - 3,932 II. Economic Services 304 4,72b .11937 8 665 3,875 5 641 4.670 10.311 ±L60 6 060 7,065 13,125 a. Natural resources 292 413 -'TU 4ol -T (' 4 537 233'~ b. Agriculture 683 759 1,142 1,901 736 840 1,611 2,451 1,095 1,277 1,959 3,236 c. Public works/utilities 1,347 2,099 - 2,099 1,531 2,428 3Q3 2,731 1,817 2,541 - 2,541 c. Communications 237 636 1,903 2,539 230 436 2,110 2,546 259 398 4,045 4,443 e. Industry and commerce 133 353 - 353 312 539 - 539 344 411 22 4.33 f. Other (Liberian Develop- ment Corporation) 402 468 464 932 465 826 444 1,270 578 745 806 1,551 III. Social and Community Services 8 458 113 1740 14,821 9.72 14,352 1_74 2 16 09 11,27 16 480 1,236 1 a. Education and culture t4T t " M8,j 5931 b719n TT62 O ' , TI, b. Public health 2,595 3,648 286 3,934 3,382 4,925 9 4,934 4,013 5,813 28 5,841 c. Labor and social welfare 182 205 287 492 407 516 303 819 522 658 0 1,498 d. Housing - - 152 152 - - 268 268 146 190 597 787 IV. Unallocated 17,484 - 17,484 20,346 - 20,346 - 22.70 - 22,700 a. Public debt service b. Other TOTAL 23202 60,651 6,593 67,244 124.52 65,384 7377 72.61 260 7 72467 10, 578 83,045 SOURCE: Bureau of General Accountinu Annual Report on Government Expenditure and Budget for 1973. (Classification by mission. - 41 - hinders improvement of the civil service by hiring qualified personnel service it is a false economy. 98. Total spending on economic services has risen from 12' of the total budget in 1968 to an estimated 16% in 1973. In 1968, the important sectors have been the communications sector, (including $4.4 million for roads in 1973) and, agriculture with a budgeted $3.2 million. Though these figures are an increase from the level in 1971 when they were $2.5 million and $1.9 million respectively, they still represent only 3% to 4% of the total budget and attest to bhe limited public sector initiative in fostering agricultural development. 99. Total spending on social and commnication services rose from 19% of the total budget in 1968, to an estimated 23% in 1973. In 1968, $10.6 million were allocated for this purpose; in 1973 $19.2 million were budgeted. As in other countries, education is the dominant sector with $11.0 million being budgeted-for 1973. But, even though this represents about 13% of the total budget expenditures in 1973, there is a decline in its share which was 15.3% in 1971. Expenditures on education on a much larger scale, and backed by better planning, is essential to provide the skilled manpower to run the economy. 100. An important element in public expenditures has been debt service (interest and repayment of principal). This was the case in 1968 and conitinues to be the case though the burden is lighter now. Of total budget expenditures in 1968, public debt service accounted for 31%, and for 1973, 28% were allotted for debt service. The payment of debt undoubtedly imposes a heavy burden on public finances. But the problem is being tackled and its importance has lessened somewhat. In 1963, for instance, debt service payments due, including interest, were roughly $33 million and total government revenue was $36 million. The situation clearly was untenable and a general debt rescheduling took place. In the 1963-72 period, the Government did not contract debt with maturities less than 12 years. A partial debt rescheduling again took place in 1967. 101. The policy followed has meant that debt amortization has exceeded disbursements of new loans in each year since 197.0. Though this might be considered detrimental in providing resources for development, it may have been a wise policy. The main restriction in development expenditures during this period was in absorptive capacity and expenditure of larger amounts may have been ineffective. 102. It is important to examine how much of the budget is devoted to development purposes, but the data make it difficult to do a thorough analysis. Given the underrecording of expenditure, particularly in 1971, but also in 1972 when against the budget actual of $7.4 million, $8.8 million on cash basis were spent, an analysis in depth of the growth and composition of budgetary development expenditure is difficult. Still, one can see from Table 6 that development expenditures have formed a very small part of the total government expenditures and that they have been concentrated in agriculture and communications with those two sectors accounting for about 60% of the development budget in 1973. - 42 - 103. Data is lacking to conduct an analysis of the incidence of the government's expenditure policies between different income classes and regions. But there is a general impression that Monrovia and the coastal area are relatively favored in the provision of economic and. sodal services as compared to the rural areas. lo. So far we have exclusively concerned ourselves with budgetary development expenditure i.e., the Liberian financed portion of public sector development projects. It is of interest to determine total capital expenditure; foreign as well as local financed, by function. This includes the inflow of net foreign investment and capital grants, as well a as locally financed capital expenditure. The available information is given in Table 12. The data suggest that there has been a falling off in investment, and that the overall focus has been on projects favoring the urban part of econor. Public Sector Finances, 1965-72 10. Table 13 shows the overall financial picture of the public sector over the period 1965-72. This analysis includes the decentralized agencies (the Public Utilities Authority and. the National Port Authority) brings in the foreign financed development expenditures and illustrates the means of financing the overall budget in that period. We have already.referred to the buoyancy of revenues, and the strict control over expenditures since the mid-oixties. This resulted in a substantial improvement in public sector savings. Nevertheless, public capital formation has been cut back sharply. Even in 1972, the first full year of the Tolbert regime, capital formation was only 2/3 of the figure achieved in the mid-sixties. Even taking out the investment of the PUA and NPA, pushed up in the early sixties by the Mt. Coffee Dam, the picture is still one of relative stagnation. That this happened despite significant increase in public savings is explained by a sharp drop in foreign assistance: Cross foreign borrowing during 1968-1973 has averaged around half the level in 1965-67. At the same time, debt service payments have risen. Assistance from the IMF was required in the early years but was repaid in the later ones. It could. be argued that foreign assistance should have been increasing rather than falling, but several factors should be taken into account. First, the levels of the early 60's were abnormally high, second some donors, for example, the Federal Republic of Germany decided to hold off future aid in the late 60's while they were evaluating the results of earlier efforts - they have now resumed significant lending. Second, the climate of the economy was not as favorable as it might have been for the public sector or for the foreign-assistance organi- zations during the latter years of the Tubman regime, and finally, as we have argued throughout this report, the absorptive capacity of Liberia was and to some extent still is quite limited, thus bringing into question the advisability of excessive public sector investment spending. Fiscal Performance in 1973 106. In the light of the above discussion, it is interesting to look at fiscal performance during 1973. Table lb shows the original estimates for that year and the preliminary actuals as recorded early in 1974. 1/ 1/ Source: IMF. - 43 - Table]2:. GENERAL GOVERNMENT CAPITAL EXPENDITURES BY FUNCTION ($ millions) 196) 196r 1466 1967 1968 1969 1970 1971 1972 Education 2.0 1.A 1.0 3.3 0.h 0.5 0.4 0.6 1.2 Health 0.2 1.2 1.4 2.5 4.3 0.7 0.7 0.8 0.4 Agriculture 0.1 0.1 - 0.3 - 0.1 0.1 0.6 2.8 Utilities 1.5 12.8 12.0 3.8 0.7 0.2 1.4 0.1 7.1 Transport' & Communication 2.3 4.1 8.2 6.h 2.8 3.8 3.6 3.4 2.6 Community Services 0.1 0.2 0.5 h.5 0.1 4.8 3.7 4.3 0.7 Other 2.5 1.5 - 2.2 2.3 0.3 4.2 2.2 2.1 Total All Sectors 8.7 21.3 23.1 23.0 10.6 10.4* 14.1* 12.0* 16 .9 Sources Public Sector Accounts, Ministry of Planning and Economic Affairs; Mission Estimates. * Mission estimates for these years are $11.8 million in 1969, $11.0 million in 1970 and $17.3 million in 1971. Table 13: LIBERIA - PUBLIC SECTOR FINANCES, 1965-72 ($ Hillions) 1965 1966 1967 1968 1969 1970 1971 1972 Current Revenue L3.7 L9.9 49.8 56.5 63.0 6a.3 70.8 80.1 Current Expenditure h6.0 51.2 53.1 54.4 56.1 56.8 63.8 63.2 Saving (-) 2.3 (-) 1.3 (-) 3.3 0.1 6.9 11.5 7.0 16.9 Gross Capital Formation 22. 26.5" 2L.0 13.3 11.7 15.9 13.1 a6.6 - of 'which: PUA & I ?A (12.9) (12.2) ( 7.7) ( 5.6) ( 6.3) (5.5) ( 4.7) ( 6.6) Ove r!ill Surplus (-)2L.7 (-)27.8 (-)27.3 (-)13.2 (-) 4.8 (-) 4.4 (-) 6.1 0.3 Financing 21.7 27.8 27.3 13.2 4.8 4.h 6.1 (-)0.3 Foreign grants 12.4 13.4 13.3 11.6 9.0 10.8 13.3 9.3 Foreign borrowing (net) 13.0 13. 13.1 3.4 (-) 0.6 (-) 3.9 (-) 1.1 (-) 3.4 New borrowing (17.7) (16.6) (16.2) ( 83) ( 8.3) ( 7.4) (9.3) ( 8.4) Amortization ( L.7) ( 3.3) ( 3.1) ( 4.9) ( 8.9) (11.3) (10.4) (11.8) IMF (net) 3.0 1.6 1.0 - (-) 3.0 (-) 3.2 (-) 2.L (-) 1.4 Drawings ( 3.0) ( 5.2) ( 5.2) (3.4) (1.4) (2.0) (1.0) ( - ) Repurchases ( - ) ( 3.6) ( 4.2) (3.4) ( 4.4) ( 5.2) ( 3-4) (1.4) SDR'S - - - - - 2.3 h.0 1.5 Other:(-)= outflow/Surplus (-) 3.7 (-) 0.7 (-) 0.1 (-) 1.b (-) 0.6 (-) 1.6 (-) 7.7 () 6.3 Source: Ministry of Finance; Ministry of Planning and Economic Affairs; and Mission Estimates. The most noticeable changes are in the revenues sensitive to external factors. Revenues exceeded the estimates by about 8%, virtually all of the increase seen to have come in the collections from the concessions. In the taxes on foreign trade, import duties actually dropped, reflecting the slackness of the economy, while export duties, reflecting the inter- national boom: in commodity prices, rose sharply. In addition it seems fairly clear that the continued tough policy on enforcement is paying dividends, the income, austerity, and per capita taxes all rising signi- ficantly. Expenditures appear to have increased only modestly, certainly less than the 20% domestic inflation in 1973. It is not clear whether development expenditures rose above the 1972 figures although the 1973 budgeted amount was 20% higher. Budgetary Management 107. Our concern with budgetary policy relates to; i) The presentation of revenue estimates. ii) The delayed presentation of the budget. iii) The method of fixing the ceiling for quarterly allotments to spending agencies. iv) The almost complete lack of coordination and change of information between the Ministry of Finance and the Bureau of the Budget. 108. Revenue estimates are always far too conservative; for example, they were under-estimated by some $10 million in 1972, an estimated $8 million in 1973 and $15 million in 1974. Though a conservative first esti- mate help to stan growth of unnecessary expenditure, this method cannot but be detrimental to any efficient planning of developmental expenditures, since in practice, although not in theory, the funding of developmental expenditure is residual and secondary to the need to provide finance for payroll and other current expenditure. 109. The yearly budget is presented, not before, but after the beginning of the fiscal year. In 1973, the budget was presented as late as in mid- February. This timing means that there are delays at least in funding new projects, if not also for other expenditures with the exception of the payroll. 110. Allotments are made on a quarterly basis and with little considera- tion to the variations in the rhythm of public expenditures. For example, in FY1973, with an expected revenue receipts from domestic sources in the magnitude of $82 million - already an underestimate - the allotment for the first quarter was fixed at about $20 million. A development-minded policy should take into account that unless projects are adequately funded in the first quarter and dry season period, actual disbursements and achievements will fall short of plan budgets. 111. Given the total allotment fixed by the Ministry of Finance, the Bureau of the Budget approved allotments by agency. In the view of the Ministries of Finance and Planning - and the Mission - this is done - [6 - arbitrarily and with little knowledge as to the real purpose of spending. With little economic expertise in its local staff, the first priority of the Bureau of the Budget is often accorded to current expenditure, and, development priorities usually suffer as a consequence. Apparently, the Ministry of Planning also seems to have relatively limited influence in shaping the development budget, which is nominally the Ministry's responsibility. Lack of trained personnel and lack of any institution arrangement for taking a multi-year view of development programs are contributive factors. Expenditure Control 112. In the Liberian environment strict expenditure control still is very necessary, as in the recent past there have been instances when expenditures recorded (the purchase of office machinery and of gasoline for government vehicles, is a good example) bore no semblance whatsoever to actual requirements. No doubt, there is room for considerable improve- ments in this area. Unfortunately, however, there is usually a trade-off between control and the speed with which disbursements can take place. Delays in funding projects, from the paying of salaries to the purchase of equipment, have been common place in the past. 1/ The Government therefore is faced with the doubly difficult task of speeding up disbursements, ^particularly for development projects, yet retaining control over the final destination of funds and purchased equipment. The Ministry of Finance has already taken several steps to speed up disbursements for projections, for example in IBRD projects payroll disbursements and the procedures for requisitioning of equipment have been simplified. 113. Considerable progress has also been achieved in reconciling bank statements of government deposits and disbursements with the Ministry of Finance Comptroller's records. Using daily bank statements a satisfactory reconciliation is possible. The expatriate adviser in the Comptrollerts section responsible for this achievement ended his assignment in November 1973. It is of vital importance that his work be carried on and that, as a second step, a reconciliation is achieved between Comptroller and Bureau of General Accounting (EGA) records. At present, project balances as reported by these two sections are often entirely unreconcilable. As a third step, assistance and strengthening of personnel is required in the spending agencies (particularly in their respective Finance Divisions). Salary Reform 114. The calibre of government depends to a certain extent on salary levels. Though total earnings of civil servants have fared better than most other households earnings in the 1965-72 period because of saary increase in 1972, which in some cases at senior levels exceeded 15 percent, this wage increase was to correct a rising cost of living, and there seems to be little provision for regular salary increases based on achievement and ability. It should be stressed that salary reform is an integral part of 1/ A case in point is the Ministry of Agriculture, where reportedly payment of salaries often has been delayed. 4 7 - overall civil service reform; it would be a wasteful gesture to raise salaries without changing the structure of the service and without introducing some procedures to ensure efficiency. Salary increases, other than compensation for inflation, should be linked to achievement, performance, and ability; this is close to impossible to achieve under present procedures. Tax Reform 115* There is a long history of advice given to Liberia in the matter of taxation policy. In 1969, a special mission under Prof. Shoup's direction submitted a report on the reform of tax system to the Liberian government. 1/ This report distinguished between revenue derived from concessionary enter- prices in accordance with concession agreements and revenue from the Liberian tax and revenue structure, and made a number of suggestions on the latter. (The potential for increasing revenue from concessions and the problems involved have been viewed by other experts and are discussed in more detail in Chapter III .) 116. The Shoup report expressed concern over the wide-spread non-payment of taxes in Liberia: Examples of non-compliance in 1969 and earlier years were numerous. a. Under the individual income tax, taxable incomes in higher brackets are grossly understated. b. Little if any investment income is reported for income tax in any of the brackets. c. Poor collection of the excise tax. d. A substantial part of the real estate tax and the real estate rentals tax remains unpaid year after year. e. Undervaluation and misclassification of goods for customs duties is so pervasive that probably as little as 40% of customs duties legally due are collected. 117. However, non-compliance still remains a problem in some fields, such as individual income taxes and real estate taxes, though it is not possible to form an exact idea of the magnitude of the problem. The degree of non-payment depends on two primary factors: # a. lack of an efficient tax administration; b. deeply rooted attitudes of non-compliance on the part of taxpayers. The mission was surprised to find that in comparison with 1969, there had been a regression in the use of technical aids for keeping accurate up-to-date 1/ The Tax System in Liberia, Report of the Tax Mission, Carl Shoup, Director Columbia University Press, N.Y. and London, 1970. - 48 - records of income taxpayers. The IBM computer formerly used in pursuit of better tax administration is no longer used. Even the office equipment in the income tax division is insufficient. (In this situation, raising tax rates without correcting administrative defects will only widen the dis- parity between taxes due and taxes paid). Tax administration is a factor responsible for non-compliance and is a variable the Government itself fully controlls. 118. While the Government may fairly easily take measures to improve tax administration, it may not as easily influence and reduce a widespread attitude of non-compliance with tax laws. Nonetheless, there are a number of measures to be taken by the Government which should improve compliance in Liberia. 119. The withholding of taxes at source is a method widely used to reduce non-compliance. Employees in the Government and in concessions pay the individual income, the austerity tax and the education levyi/ on a withholding basis. An equitable tax administration is, of course, a pre-requisite for obtaining better compliance over time. Nevertheless, difficulties in obtaining refunds when excess payments are made or double payment of the education levy by seasonal workers lead to a feeling that the tax system is inequitable, which encourages non-compliance among common taxpayers. 120. Another aspect is that in Liberia as well as in many other countries the tax system must compete with an informal, apparently voluntary but exacting system of contribution to family friends, political party, local chiefs and charitable organizations. 121. The 1969 tax mission found that such informal contribution endangered the power of the tax system to sustain the Government. The extended family and, to some degree, various secret societies obligate those who gain to share with others. However necessary this attitude might be in a non-monetary economy where the individual is so dependent on community action, it dampens individual incentives. Another example is the strong pressure on government employees to make political contributions that have on occasion amounted to as much as one month's salary. Equally serious are the informal and arbitrary levies said to be made by country officials, chiefs, and others, without statutory authority, to finance amenities for traveling officials, to defray fines incurred by the country officials, chiefs, etc. - to name but two instances. Developmental projects in a particular locality are sometimes financed in an informal manner. In the urban areas the middle class and well- to-do, of whatever ethnic or social group, are subject to a series of sub- stantial requests for contributions that cannot well be rejected. Under these circumstances it is understandable that the formal tax obligations are relegated to second place (if not lower); the social sanction for not paying taxes may often be less severe than for not participating in the informal contributions. Continuation of these contributions in their present intensity and extent, prevents meaningful reform of the formal tax system. 1/ Abolished at the end of 1972. - 49 - Table 14: FISCAL PERFORMANCE IN 1973 ($ millions) Budget Actual Total Revenues 82.0 88.7 Non-Tax 7.7 7.5 Tax 74.3 81.2 Income and Profits 28.2 31.4 of which: Income tax (8.1) (10.8) Iron ore (14.0) (14.0) Austerity tax (3.8) (4.7) Non-residents (2.2) (2.0) Property 1.5 1.4 Excise 4.8 5.2 Stumpage, 1.2 2.2 Maritime Revenues 7.5 8.6 Motor Vehicles 1.5 1.4 Trade 24.5 25.1 of which: export duties (0.8) (1.8) Licenses 3.6 3.3 Hut, Development, Education 1.0 2.1 Total Expenditures 64.8 69.7 Current 54.2 59.1 Budgetary Development 10.6 10.6 - 50 - 122. Another reason for a spirit of non-compliance with the tax laws seems to be the apparent belief of the elite that they do not have respon- sibility for paying the taxes they legally owe. Again, this attitude is observable in every country; it is once more a matter of degree. Our impression is that the degree is intense enough in Liberia to impair seriously the ability of the tax system to grow with the country. And it is an attitude peculiarly difficult for the non-tenured tax administrator to cope with. 1/ 123. We have quoted at length from the 1969 tax Mission's report since regretably much of what was written then still applies. Foremost in our mind is the widely publicized Rally Fund, to which all citizens are urged to contribute. Although collections in theory are based on voluntary con- tributions from individuals as well as enterprises, local as well as foreign- owned, in practice the degree of compulsion is strong. Particularly this is the case for government employees since their contributions are withheld at source, similar to the other taxes on income, being withheld at source. Government employees have to pay as much as one month's salary. Althugh this may impose relatively little hardship for top officials, the situation is well different for those close to the bottom scale of income, where such a tax because of the structure of the income tax becomes regressive. In sum, we regard the Rally taxation as being both regressive in incidence, and counter-productive in tems of the objective of reducing non-compliance. 1/ The Tax System of Liberia, op. cit., pp. 6-7. -51- THE FINANCIAL SECTOR Introduction 124. This section presents an analysis of the financial system in Liberia and of the role of financial intermediaries as they relate to the monetization of the economy and the mobilization and allocation of resources. Hard data on this sector is very limited and thus the focus is not on the quantitative aspects but rather on the operations of financial intermediaries and on identifying the major problems and policy issues. 125. Liberia's monetary system is unusual in that Liberia does not possess.an independent monetary system and does not have a central bank.1 Although the official monetary unit is the Liberian dollar, with a par value equal to that of the U.S. dollar, Liberia has not in modern times issued its own currency notes; the system uses the U.S. dollar2T as the principal medium of exchange. Liberia has, however, issued coins in denominations of one dollar and less. Such coins currently in circulation amount to approximately $4 million and account for about 15% of the estimated $25 million currency in circulation. 126. Since the dollar can be used for foreign as well as domestic pay- ments, and local deposits on the foreign banks can be used for international transactions, Liberia's foreign exchange reserves are basically her currency. The Government does not maintain official external reserves, nor does it need to intervene in foreign exchange markets to stabilize the exchange rate of Liberia's currency. The peculiar circumstances also imply that Liberia does not have balance of payments problems in the ordinary sense. An overall balance of payments deficit will lead to a reduction in the money supply and/ or in banks' foreign assets. Unlike other countries, Liberia's government does not have, in absence of an independent monetary system, the means to offset changes in the balance of payments, such means are entirely in the hands of the foreign-owned commercial banks. At a time of a balance of pay- ments deficit, unless the banking system is willing to increase credit expansion by drawing down its net foreign assets and thereby financing the deficit, Liberia's money supply will contract. Similarly, a required expansion of the money supply as a result of greater economic activity has to be financed entirely out of a surplus in the international payments, in case commercial banks are not willing to supplement the monetary expansion through a decline in their net foreign asset position. 1/ Other countries with similar arrangements include Panama and Botswana. A central bank was established in 1974, but Liberia still uses the U.S. dollar. 2/ A perpetual problem is the shortage of banknotes in Liberia. Freight and insurance from the U.S. make it unattractive for commercial banks to bring in currency, and the U.S. Federal Reserve,has declined to support such an operation. More recently the Central Bank has imported a limited amount of banknotes. -52- 127. Given the characteristics of the monetary system, it is clear that unlike other countries balance of payments problems are translated auto- matically into monetary and fiscal constraints. Similarly, Liberian authorities do not have the freedom to employ the usual range of fiscal and financial techniques necessary to achieve a higher domestic savings rate and to stimulate economic growth. Fiscal policy, therefore, is one of the few tools available for mobilizing savings and for ensuring the allocation of resources for productive investments. 128, Over the past decade, Liberia's savings performance has shown a steady improvement particularly in national savings. Table15: DOMESTIC AND NATIONAL SAVINGS 1964 1965 1966 - 1967 1968 1969 1970 1971 1972 Gross Domestic Savings ($m) 70.8 79.9 88.4 92.3 102.2 131.9 125.1 118.8 138.7 As % of GDP 26.1 28.1 28.7 28.5 30.3 34.8 31.0 28.9 31.3 Gross National Savings ($m) 3.0 8.5 16.0 18.8 29.7 57.4 35.1 38.7 50.5 As % of GNP 1.5 4.0' 6.8 7.5 11.2 18.9 11.2 11.7 14.2 The increase has been particularly dramatic in national savings, but this reflects a relative stagnation in the profits of foreign enclaves and is a natural consequence of the manner in which the concession agreements were written and the fact that the more recent concessions (thus those which are more favorable to Liberia), particularly LAMCO, now represent an ever increasing share of the concession business in Liberia. The increases do not represent, however, any particular pro-savings policies on the part of government; rather the public sector has taken an almost completely passive role. 129. A 14.2% national savings rate is somewhat higher than would be expected of a country of Liberia's size and income level, but the ratio of gross domestic investment to GDP, buoyed up by massive enclave projects is even more so. Savings have fallen far short of their potential and part of this is the result of the inadequate banking system with its inability to channel funds to what few potential investments exist in Liberia. Another factor is the government's conservative reluctance to borrow from the banking system to finance its investment programs. The result of such policies is that the small fraction of national savings that actually gets into the local banking system soon departs for more profitable returns in Europe and the U.S. There is also good deal evidence to suggest that investment and thus growth is constrained by the limited absorptive capacity of both the public and -53- private sectors rather than by a shortage of available resources. These constraints can be expected to diminish in the future and thus the need for domestic resources and the concomitant financial system will become much more urgent. 130. In the past the relatively high growth of GNP was fueled by foreign investment, particularly in concessions. In the future these will be less important both as the high grade ores run out and also as the economy grows in relation to the enclave sectors. This will mean that the relatively high levels of investment that have sustained the growth of the economy in the past will have to be increasingly financed from national sources and foreign assistance. Thus, the issue of resource mobilization becomes a critical one for Liberia, and failing this the economy will have to increase its reliance on foreign capital or face a decline in the growth rate. 131 In the absence of an independent monetary policy, and a national currency the Government will have to rely on fiscal policy measures to raise national savings and sustain higher levels of investment. Experience in other developing countries has shown that higher revenue performance will not necessarily lead to improvements in total savings because of a much more rapid growth in current expenditures. Moreover, given the low salaries of civil servants and the inadequate level of current expenditures for supporting investment in nearly every field, it appears rather unlikely that the govern- ment's propensity to save out of additional revenues can be assumed to be high in the future. All this-would suggest the-need to reinforce fiscal policy measures by financial policies. Yet it is difficult to envisage how this can be done given Liberia's monetary system. Moreover, commercial banks are not subject toany controls by the Government, and financial policy consists of a legal maximum lending rate of 10% and of moral persuasion by the Gcvernment to which commercial banks may adhere or not. 132. The merits of a national currency, a central bank,improvements in the banking system and an independent monetary policy, were studied by a Banking Commission in 1972-with the assistance of the IMF. While the Govern- ment decided to implemept the commission recommendation of establishing a national bank in 1973-'the Government indicated that it does not now intend to change the present currency arrangements for fear of endangering Liberia's investment climate, and also to allow time for the National Bank to become a functional institution. Current plans call for an independent currency by 1980, but clearly this will be a political as well as an institutional decision. For the time being the US dollar will continue as the principal means of exchange, and the functions of the National Bank are overall banking supervision and providing a clearing-house for government and com- mercial banks. The National Bank has the power to impose reserve requirements and to extend credit to the government and banks. 1/ A Central Bank was created at the end of 1973 and began limited operation in mid-1974. -54- The Structure of the Financial System 133. Liberia's financial structure is characterized by the fact that six commercial banks, five foreign and one Liberian controlled, as well as either wholly or partially foreign-owned, and one Liberian-owned development bank constitute the entire financial system. 134. While there are more than adequate banking facilities in Monrovia, in one coastal town and on two concessions, the rural areas have no facilities at all. Moreover, whereas in other developing countries financial intermediaries (not necessarily commercial banks) expand in non-banked areas during the course of development, the opposite has been the case in Liberia. The limited branch network outside Monrovia, has contracted in recent years, commercial banks closing a number of branches because they have not generated revenues sufficiently high to meet standards set by overseas parent banks. None of the banks are willing to undergo the costs of opening new branches in rural areas, their orientation being strongly influenced by the single bank system prevalent in the U.S. This is in contrast to the British and French systems prevalent elsewhere in West Africa, which are more attuned to the needs of rural areas. It has been argued that commercial banks should not go into rural areas because they will tend to channel deposits to urban areas; certainly this occurs in most countries. However, such resources would otherwise not be mobilized, and investment in rural areas, if so desired can be encouraged through the use of reserve requirements. 135. Commercial Banks. The commercial banking system includes the Bank of Monrovia, the Chase Manhattan Bank, the Bank of Liberia, the Liberian Trading and Development Bank Limited (TRADEVCO), the International Trust Company of Liberia, and the Commercial Bank of Liberia. 136. The Bank of Monrovia is the oldest bank in Liberia, and in terms of assets and deposit liabilities the largest commercial bank. Established in 1935 by Firestone, it took over the operation of the Bank of West Africa (British) in 1943 when Liberia shifted from sterling to dollars as the medium of exchange. Since 1955 it has been wholly owned by the First National City Bank. In the absence of a national bank it acts as a banker to the Government and also provides clearing facilities for the other banks. Since its responsibilities also include the maintenance of an adequate supply of U.S. currency, holding the government's accounts, purchase of unrefined gold, and placing Liberian coinage into circulation, it has many functions of a central bank. In December 1972, the Bank of Monrovia held about 40% of total bank deposits (or 27% if deposits of the central g3vernment and public enter- prises are excluded). The Chase Manhattan Bank which started operations in 1961, and is the only bank operating as a branch of its New York parent bank, is the second largest bank in terms of residents' deposits (23% of the total). The Bank of Liberia, the largest bank controlled by Liberian shareholders (with 49% being held by Chemical International Bank), is rapidly becoming the most important commercial bank in Liberia. The remaining three banks are of relatively minor importance. For the International Trust Company, a subsidiary of the International Bank of Washington, banking is only a minor activity relative to its maritime insurance business. The parent also handles Liberian Services Inc. which is responsible for ship and company registration. 137. The Government's intention to foster Liberian-owned investment has not yet been matched by adequate institution building in the area of develop- ment banks, although great progress has been made in recent years. Such specialized lending institutions include the Liberian Bank of Industrial Development and Investment (LBIDI), the Liberian Development Corporation (LDC), the National Housing and Savings Bank and the Agricultural Credit Corporation (ACC); the latter has been inactive for several years. Their role in providing long-term capital to industry and agriculture has in the past been only a residual one. All of these institutions are conduits for public or foreign funds and have not yet been able to mobilize own resources either through deposits, bonds or debentures. Bad management was common to all and has severely limited their operations. 138. LBIDI was established in 1965, with capital of $1 million subscribed by the LDC, the International Finance Corporation and some private share- holders. It received a $1 million interest.free loan from the Government for 30 years, a $1 ml ion loan from IBRD and a $500,000 loan from the African Development Bank, Apart from very limited financing provided by LDC, LBIDI is the only source of medium and long-term capital for industrial and agricultural development; in the latter case only if the project contributes to the development of industrial enterprises. Poor management, with little initiative, limited the operations of LBIDI. Aware of LBIDI's shortcomings, the Government, in 1973, appointed a new managing director and is currently reassessing LBIDI's role in future long-term financing. Results from the new management have thus far been impressive, but LBIDI is still relatively small in comparison to the potential need for such an institution. 139. The LDC was established in 1961 as an agency of the Department of the Treasury and was made autonomous in 1967. Its primary functions are reviewing applications for investment incentives, identifying and promoting the establishment of viable business enterprises, making equity investments and issuing guarantees of commercial loans on behalf of the Government, and providing technical assistance to LBIDI. In November 1971, LDC was merged de facto with the Bureau of Industrial and Resource Development of the Ministry of Commerce, Industry and Transportation, whose functions overlap with those of LDC in the area of industrial promotion. LDC's activities have been inhibited in the past by poorly qualified management and staff. With the exception of three UNIDO experts, technical staff is non-existent, and the remaining staff is inexperienced. Feasibility studies have, therefore, been undertaken less frequently in recent years, and even the e onomic evaluation of incentive applications leaves much to be dqsired. 140. The ACC was an unsuccessful attempt to institutionalize agricultural credit for small farmers and cooperatives drawing on government resources and funds provided through the U.S. Government PL-480 program. Established in 1957, the institution suffered problems similar to those of the other specialized lending institutions; inadequate management and staffing, very poor collection procedures and a penchant for lending to politicians and the elite. Arrears piled up rapidly, and in 1963 the ACC ceased operations. 1/ A further loan of $4 million was made by IERD in late 1974. 2/ This assessment was written in mid-1973. Subsequently, the Government has changed LDC legislation and appointed a new general manager. Since the closure of ACC, provision of credit for agriculture has been limited to LBIDI and the commercial banks, with extremely limited activity. Presently, Government is considering the establishment of a new institution specializing in agricultural credit. 141. In order to assist the low-cost housing development program, the Government established a National Housing and Savings Bank in April 1972. It is anticipated that the Bank will commence operations in the fall of 1973. Its authorized capital is $1 million of which $250,000 is paid-up capital. While the lack of housing finance has been a severe shortcoming, the importance of this bank is, however, far greater than housing finance. Presently, small savers are, for a practical purpose, excluded from saving with commercial banks; the National Housing and Savings Bank will be more geared to their needs. The establishment of this bank is a step in the right direcLion, and the Government should devote its attention to making it a viable institution. Experience in other developing countries has shown that private households are more likely to save if the savings effort can be linked to socially desirable goals (such as housing which is in reach of one's earning capacity), and if the savings intermediary is willing to grant loans in cases of need. What is particularly important, however, is that this institution does not become a conduit for public funds, but that it engages actively in seeking small savings by offering more attractive interest rates than commercial banks, and by being more accessible to the saver. 142. Other Financial Institutions. The system of financial institutions also includes eight active credit unions. Their total membership in 1972 was 1,322 people with share capital totalling $124,000. Although their membership has been growing in recent years, their role as a mobilizer of savings has been only minor as compared to commercial banks. Yet these intermediaries are the only institutions which actively seek small savings, and they have demonstrated that an increasing flow of small savings can be mobilized without impairing the financial viability of the institution. 1.3 Unlike many other developing countries, Liberia has no post office savings bankl/ and contractual savings institutions. There is as yet no pension or social security fund for the civil service, and the role of life insurance is insignificant and largely limited to expatriates. Since contractual savings are not close substitutes for other forms of savings, the development of voluntary or compulsory contractual savings institutions is more likely to lead to a net increase in household savings and not to be at the expense of other forms of savings. Efforts should be made to establish social security insurance and to foster the development of life insurance if the potential for this form of savings as a major source of long-term finance is to be realized in the long term. 1/ Such an institution is being studied. -5 7- The Mobilization and Allocation of Financial Resources by the Financial System 1)440 The direct mobilization of private savings by the financial system has, for all practical purposes been limited to commercial banks. Deposits in commercial banks have been the only non-cash financial asset available to savers. No data on the currency in circulation is available, and the data for demand, savings and time deposits available are for the period 1967-72. It is, therefore, not possible to determine the extent of the monetization of the economy nor to what extent savers have switched out of cash holdings into less liquid financial assets. 145. Table16 shows the growth in demand, time, and savings deposits with commercial banks in Liberia. In.the period 1967-72, the annual average rates of growth of real demand and eeal time and savings deposits were 10.9% and 17.3% respectively, while real GNP increased at a rate of 6.6% over the period. The growth of demand deposits, however, was mainly between 1968 and 1969 when it increased from $13 - $19 million. Since 1969 the rate of growth has been barely 5% per year, about the same as the rate of growth of GDP. The growth of interest bearing deposits seems to have been due to an increase in domestic savings, as the savings ratio has increased from 7.3% in 1967--to 13.9% in 1972, while non-resident deposits have been at an average level of $3- $4 million. The increase in savings has been both in the public and private sector, with the centralgovernment havingsubstantial surpluses. The reduced need of the government for bank credit resulted in a decline in such credit from $10 million in 1967 to $5 million in 1972. The increased resources of the commercial banks have been used to expand credit to the private sector, particularly for commercial purposes and for personal loans for purchase of consumer durables but the banks are reluctant to finance purchases of productive equipment. The expansion of credit is partly financing larger imports, and larger agricultural output, which may be held as inventories. But the larger expansion in credit to commerce combined with the increase in agricultural production might also mean the larger financing requirements of the export sector and also that increased incomes in the agricultural sector has led to increased demand for consumer goods. The supply of such goods to the rural.areas requires a larger expenditure by the distribution sector, which is financed by bank credit. 146. The growth of deposits since 1967 has been largely the result of the recovery of the economy after its stagnation during the middle 1960s. There are also indications that the growth of time deposits can largely be attributed to repatriation of funds from abroad as a consequence of adjust- ments of interest rates on large time deposits to prevailing rates in the Euro-Dollar market. Available information indicates that perhaps more than half of all demand and time deposits are owned by large companies or expatriates, while savings accounts are held predominantly by Liberian nationals. An increasing proportion of time deposits has come in 1972 from non-residents. These sources constituted at the end of 1971 about $2 million but rose sharply to $5.5 million by the end of 1972. In light of these developments, the performance of the commercial banks in mobilizing domestic savings must be considered as being poor. - 58 - Table 16: DEPOSIT LIABILITIES T'H COMMERCIAL BANKS Nominal Size ($ million) Real Size (in million of 1971 $) Size in relation to GNP Time and GNP Time and Demand Time and Demand Savings Deflator Demand Savings Deposits/ Savings Deposits Deposits (1971 r 100) Deposits Deposits GNP Deposits/ GNP 1967 13.5 12.57 96.5 14.06 13.03 0.054 0.050 1968 12.57 14.98 95.7 13.13 15.65 0.048 0.057 1969 18.86 12.62 99.9 18.88 12.63 0.062 0.042 1970 21 .16 20.93 101.0 20.95 20.72 0.067 0.067 1971 20.8 24.50 100.0 20.48 24.50 0.062 0.074 1972 22.46 28.44 103.1 21.78 27.58 0.063 0.080 Source: Ministry of Planning and Economic Affairs and Ministry of Finance -59- 147. Such performance is largely explainable by banks' easy access to c;e Euro-Dollar market to supplement their domestic resources. This reduces their need to seek actively private savings in Liberia and to offer attractive interest rates. With the rapid growth of deposits in recent years the commercial banks' recourse to foreign borrowing has remained more or less unchanged since 1969. Only during the first half of 1972, when domestic credit demand declined and .deposits rose sharply, did an outflow of about $7 million occur changing the overseas position of commercial banks to a positive balance for the first time. 148. Banks are free to set deposit rates, and generally speaking, savings deposit rates range from 4 to 5%, whereas interest rates paid on time deposits have fluctuated between 6 to 7% since 1970 and are maintained at a rate 1/2 to 1% below the London interbank rate. There is no interest payment on demand deposits. Since the determination of interest rates has been the domain of commercial banks and not of the government, it would be unreasonable to expect an interest rate policy which would be an effective instrument for the mobilization of savings in financial assets. Interest rates on financial assets are determined by the rate structure on the Euro- Dollar market and the legal maximum lending rate of 10%. As a result, the real interest rate offered on financial savings in Liberia does not reflect the scarcity of financial savings in the economy. 149. With minimum deposit requirements for savings deposits of about$40 to $50 1.! (approximately the per capita income in traditional agriculture or a worker's monthly pay in the modern sector), and for time deposits of about $5,000to$15,000, the banks cater only to the upper income groups. Commercial banks justify these minimum deposits on grounds that the mobili- zation of smaller funds is too expensive to administer. For instance, the Bank of Monrovia estimated that the annual overhead cost of administering a savings account amount to about $5. These costs are far in excess of those experienced in other countries and would suggest highly inefficient operations, even taking into account the increased costs due to Liberianization. 150. This inefficiency of Liberia's commercial banks in conjunction with their profit motivation and the unit banking mentality forces small savers to bear the costs by being denied an access to commercial banks and a return on their savings. As a result, most small savers can only save in the form of cash which, under Liberia's monetary arrangement, is of high cost to the economy, since any hoarding of cash has to be met through balance of payments surpluses. For the sophisticated, larger depositors interest rates below Euro-Dollar rates are unattractive. Moreover, since commercial banks facilitate the transfer of large savings to branches of their parent companies in Europe or in the United States, experience of commercial banks indicate that a substantial amount of savings flows abroad. .Since banks earn a commission on such transfers, they do not discourage such out- flows by offering higher deposit rates. In fact, in some banks transfer 1/ Some banks allow a minimum deposit of $25, but do not pay interest until the balance reaches $50. The Bank of Liberia pays interest at $25. -60- forms are placed side by side with deposit forms for local deposit accounts. This obvious disinclination of commercial banks to attract savings and time deposits from both households and enterprises indicates that these inter- mediaries are not overly concerned with economic development. Of course, the passive attitude of the Goverment towards the problem of private savings mobilization by commercial banks has permitted their attitude of benign neglect. Allocation of Resources 151. Perhaps more important than the mobilization of savings is the allocation of financial resources to productive investments. That the existing intermediaries have not performed adequately in this function is reflected by: (i) the ineffectiveness of existing specialized lending insti- tutions in meeting the long-term credit requirements of the industrial sector3 (ii) the absence of an agricultural-credit institution and the inadequate supply of resources for agriculture from commercial and development banks; and (iii) the fact that medium scale entrepreneurs and farmers have no access to financial institutions and are forced to rely on either self-finance or the unorganized financial market for their capital requirements. 152. Over the period 1967-69, total credit expanded at an average of 6% per year and from 1969 to 1972 at an annual average rate of 13%. Most of the increase was due to a steady (18%) growth of credit to the private sector. The allocation of resources to the various economic sectors is shown in Table 6.2 (Volume II). Nearly 80% of the incremental credit between 1967 and 1972 was accounted for by credits to commerce and for personal loans, the combined share of these categories rising from 60 to 70% of total private credit. Little or no credit was provided to the concessions, which obtain their financing either from their parent companies or from direct borrowing from banks abroad. Nearly all of the credit for agriculture has been for financing of LPMC's marketing operations and for large Liberian owned planta- tions. 153. It is estimated that about 60% of all credit to the private sector is either to foreign enterprises or to expatriates, whereas nearly allpersonal loans are extended to Liberians. Small scale business and farmers have virtually no access to bank credit, and have to rely on finance provided by the unorganized sector where interest rates of 150% per annum are common. 154. The existing usury law provides for a maximum lending rate of 10% on bank loans and advances. Banks do lend at or close to this rate, although rates vary a great deal with the financial position of the borrower, but restrict credit to favored borrowers. In cases where banks lend for personal loans and to higher risk borrowers, some violate the usury law by employing gimmicks in order to raise lending rates. 1/ The lending practices 1/ Which are as high as 36% per annum as in the case of one bank. Since the unorganized sector ignores the law and the banks evade it, it might be usefully scrapped. At present the only use the law has is to provide an excuse for banks not to lend. - 6i - of commercial banks are further aggravated by the fact that the bank loan evaluation places more emphasis on the asset position of the borrower, his credit rating, and the type of collateral he can offer, rather than the purpose of the loan. It is through these discretionary controls that small- and medium-scale entrepreneurs are denied access to the commercial banks' finance. While this is normal behavior for a comercial bank, the absence of other institution in Liberia makes it incumbent upon the system to broaden its developmental role. 155. Most of commercial bank lending is short-term, although some banks provide overdraft facilities and maturities up to a maximum of two to three years. The responsibility of providing medium and long-term finance rests upon LBIDI. Between 1967 and 1972, LBIDI disbursed only about $2.5 million to about 55 borrowers. With increasing managerial and staff difficulties, LBIDI's annual disbursement declined from its peak of $770,000 in 1969, to a low of $140,000 in 1972. Its limited lending was concentrated on a few projects: over 65% of all funds were allocated to 6 large borrowers. 1/ With the new management since 1973, LBIDI has performed considerably better both in terms of quantity and quality of loans. Action is still needed to improve LBIDI's appraisal and supervision capability. There is also a need to simplify loan procedures and to reduce the concentration of credits both with regard to total amounts and geographic areas and to free LBIDI from pressure to lend to the upper class. A phenomenon which plagues LBIDI, as well as all banks in Liberia, is the habit of this class of not repaying loans when they do not feel that they have to - a fact strongly encouraged by the legal difficulties in enforcing foreclosure procedures in Liberia. In the case of LBIDI,arrears in 1972 were about 14%; similar figures are experienced by commercial banks. Since financial institutions have to absorb these arrears in their costs of operation, it makes them, under the existing usury law, overly conservative in their lending. Tentative Policy Recommendations 156. The creation of the National Bank is of paramount importance for the development of the financial system. Every effort should be made to expedite its staffing and operations in order to implement the most urgently needed reforms in the supervision of banking activities and in assuring a smooth and adequate supply of money to the economy. It is essential, however, that the National Bank be more than just a supervisory institution and its function should include the power to establish reserve requirements, an appropriate level and structure of interest rates for both deposits and loans and to issue, if necessary, directives on banks' lending policies to ensure that they meet the government's development objective. Additional functions of the National Bank should include: the possibility to engage correspondents in and outside Liberia, fiscal agency services to the Govern- ment on a commission basis,2/ fiscal agency services to public bodies and cooperatives, and the possibility of opening branches or agencies in Liberia. 1/ All except Maryland logging (in Harper) located in Monrovia. 2/ This has been in effect since 1974. -62- 157. The focus of Liberia's development during the next decade will have to be on development of rural areas. An essential criterion for such a process is an increased monetization. Moreover, the development of a modern agricultural production sector will require credit facilities for investment, seasonal production, to finance the collection and storage of each crop and the distribution of inputs. All this requires banking services in rural areas. Branches should first be started on a trial basis limited to one or two counties; most likely Bong and Lofa Counties. Since the National Bank is likely to experience staffing and organizational problems in the initial stages, it might be expedient to have an existing bank open branches which will be designated as agents of the National Bank. The creation of a new agricultural credit institution or the revival of the ACC does not appear justified, since it would drain off the already limited experienced staff from government agencies or banks. It might be logical to use LBIDI as the National Bank's rural agent. It should be clear, however, that the need for rural banking services is independent of the needs for agricultural credit. Should it, therefore, not be possible to entrust LBIDI with rural banking functions then the National Bank should gradually expand banking services to rural areas. 158. The functions of the rural banking service should include: fiscal agent services to the overnment (receiving receipts of tax collectors and paying government cheques for the account of the Ministry of Finance); acceptance of deposits and transfer services; and, in the absence of LBIDI's branch expansion, orovide production and investment credit directly to 1/ cooperatives and commercial credit to the Agricultural Service Corporation- for the financing of marketing and input supply as well as for possible on- lending to cooperatives or groups of farmers. 159. Such a branch network should not be too costly, and could be covered amply by government commission payments to the National Bank. The use of a oart of government commissions to finance a rural banking service seems most appropriate, given the responsibility of the overnment to provide the nation with an adequate money supply and financial system. In any event the execution of these responsibilities will be costly as a consequence of the decision not to issue a national currency. Yet it should be considered that increasing the holding of U.S. banknotes by the rural population will mean a drain on available foreign exchange reserves of the country. Thus, it is important, not only from aspects of savings mobilization,to induce the rural opulation to hold their savings in less liquid financial assets. And for this reason, banking must be renderqd accessible to th'm. The result of rural banking will be a Pooling oL presently dispersed individual cash holding- whii, at the same time the monetization of that sector increases . On balance there should be a reduction in the amount of currency in circulation, which will reduce Liberia's external reserve requirements. 160. A discussion of the necessary arrangements to use LB1DI as a channel for agricultural credit is oresented in the volume on agriculture. 1/ See Volume V of this reoort. -63- Improvements are also needed so that LBIDI can take a greater role in the financing of industrial development. Some of the most urgently needed measures have been discussed above. Further issues to which the Government and LBIDI should address itself are: a greater access to credit by medium- scale industrial enterprises and a channeling of funds to those investors with high internal rates of return in oonjunction with discouraging invest- ments that do not enhance the productive potential of the economy. This will require substantial improvements in LBIDI's project identification, evaluation and supervision, and a possible reduction of collateral require- ments. In addition, an efficient resource allocation cannot be performed by financial intermediaries as long as the interest rate does not reflect the cost of capital, maturity period of loans, lending risk and administra- tive expenses of the institution. Steps should, therefore, be taken to permit LBIDI to.adjust their lending rates in accordance with these factors. 161. Ways should also be examined to increase commercial bank lending to industry, particularly to indigenous entrepreneurs. One possibility would be for the Government to create a guarantee scheme through which risk insurance would be provided for commercial bank lending to small and medium- scale industries which do not have the necessary security required by banks. 162. Greater importance must be attached by the Government to the mobilization of private savings through the financial intermediaries. Since financial assets available to savers are limited in Liberia - and a broadening of the spectrum of financial assets will be a long-term development - the focus must be, for the medium-term on savings and time deposits, which are presently the only alternatives to "savings" in cash or physical asset holdings. However, over the long-term steps should be taken to induce contractual savings and the Government should examine the possibilities of establishing a social security insurance and means to foster the growth of life insurance at least among the civil service and the urban weather. Proper policies and institutions will be required, however, to realize the potential of this form of savings as a major source of long-term finance. Equally important in this long-term development is the mobilization of savings through the specialized lending institutions. As suppliers of medium and long-term finance these institutions should be able to develop a market for medium and long-term debentures or bonds of various maturities and thus widen the spectrum of available financial assets. The importance of such a market would be that it could provide an outlet for long-term funds of contractual savings institutions and commercial banks. 163. . While the mission realizes that widening the spectrum of financial assets is a long-term development, there are actions the Government could take now to increase the mobilization of savings. The government's decision to establish the National Housing and Savings Bank is an important,step in this direction and should be followed up with the above mentioned creation of rural banking services. Equally important are actions by the National Bank to abolish the excessively high minimum deposit requirements imposed by commercial banks which presently inhibit many savers from acquiring interest earning financial assets. - 64 - 164. The establishment of the National Bank should enable the Government to exercise its right to pursue an interest rate policy. The relevance of this policy lies in the incentive effect it can provide for economic develop- ment. The level of interest rates should reflect the scarcity of savings in Liberia and should induce people to hold not only a larger proportion of their savings in financial assets but also to hold these assets in Liberia. Such policy will enable financial intermediaries to channel more funds either directly or indirectly into industry and agriculture. Of course, higher deposit rates would have to be reflected in higher lending rates of financial institutions. Banks should be free to adjust their lending rates in relation to maturity periods and risks. 165. The extent to which higher deposit rates should be passed on to lending rates is difficult to evaluate, and will depend on whether the existing large spread of 4 to 6% between average borrowing and average lending rates of commercial banks can be reduced. Based on experience of other developing countries the spread is excessive and indicates to some extent the high profitability of banks. One must, however, also bear in mind that banks are faced with high default rates. By and large, however, the large spread reflects the high cost of intermediation and the ineffi- ciency in the process of intermediation to the economy. 166. To a large extent the problems facing banking institutions wishing to lend are similar to those in most developing nations. Borrowers are un- sophisticated and lack the necessary knowledge of modern business techniques to make them good credit risks. The tendency of the well-to-do to be casual about repayment requirements exacerbates the problem, but one could expect that the higher moral standards of the Tolbert regime will gradually eliminate this problem. The main point of our fairly critical stance vis-a- vis the financial sector is that nothing significant will happen unless the Government plays an active rather than passive role in the sector. Key elements in this will be the establishment of a national bank, the use of deposit requirements to direct loans to the appropriate sectors and the establishment of banking institutions in the rural sector. -.65 - FUTURE PROSPECTS A. General Considerations 167. The rest of this report describes in some detail the present position of the Liberian economy and the historical as well as external factors that have shaped this picture. A number of points are brought out which have a direct bearing on the future outlook of the economy and which suggest the outlines of a set of policies which need to be implemented if Liberia is to make best use of her resources to produce the maximum benefits for all Liberians. These points can be summarized as follows: a. The economy is dominated by the foreign enclave sector. Accounting for 30% of GDP and about one-third of public sector revenues; this sector is the "engine of growth" in Liberia. It seems probable that without it the economy could not at present-grow faster than about 3% per annum. b. It is also clear that the long run prospects for the enclave sector may be limited. While there is a possibility that Bie, Wologisi, and Putu may be opened up, thus doubling the country's iron ore output, this is by no means certain, and at best will lead to a decade delay in the eventual stagnation and decline of the sector. Liberia's ore reserves are attractive, in spite of their general low grade, because they are relatively close to the'o6ean, because Liberia has a stable and responsible Government, and because the world in general has a current scarcity of raw materials. A prolonged world recession could easily postpone indefinitely the exploitation of these new deposits. Liberia would do well not to count too heavily on new iron ore production to generate the development thrust between now and the turn of the century. Rubber faces a world market that is unlikely to grow more than 3% per annum and where prices, after the single shift upwards to account for the increased petroleum-derived cost of SBR, are likely to be lower in real terms at the end of the decade. Forestry has some good short run prospects, but the sector is relatively small and is being rapidly depleted. c. Clearly, this prospect calls for a strategy of diversifica- tion of the economy. However, a realistic assessment of the prospects outside the enclave economy is not particularly promising. Both coffee and cocoa have market limitations, although as a marginal producer Liberia could make signifi- cant gains. Industry, especially wood processing, is currently only a minor source of future growth and tourism has little or no future. The sheer size of the enclave sector is such that its partial or complete replacement cannot simply be by "new products" with rapid growth rates. These products must also be of significant size to begin with, or their impact - 66 - will be delayed for at least a decade. However, if new iron ore investments provide this time and if such products are started now they can be of significance. Moreover, as these products begin to be of significant magnitude they may well face market limitations. Lacking certain and specific prospects for an "engine of growth" the best strategy would seem to be an overall diversification of the economy, a widening of the participation of the ordinary Liberian in the economy, and a focus on the promotion of exports. d. Such a diversification strategy has a number of key elements; i) intensive concentration on a program of agricultural and rural development; ii) restructuring of the marketing and distribution systems; iii) restructuring and broadening of the financial system; iv) spreading of social goods, particularly roads and education throughout the country. e. For such a program to be successful an intensive effort on the part of the public sector is required,first on the policy end, but more importantly on the investment program. The investment program depends upon: i) the ability to identify, organize and carry out projects; ii) the overall administrative and absorptive capacity of the public sector; iii) the availability of public sector savings; iv) the availability of foreign capital and technical assistance; v) the degree to which all Liberians can be mobilized to support and carry out the investment program. f. On the policy end, the key is the wil2ingness of the public sector to move from a passive to an active role in the economy. In the past the Government has been content to sit,back and collect revenues from the largely autonomous economy. In the future it must move to an active management of the economy. In this part of the report we look first at the prospects of the economy and the balance of payments through the end of the decade. We then turn to the question of the finances of the public sector for the same period. It should be emphasized that this is not a forecast, but rather an extrapolation of the qualitative and quantitative trends we now see present in the economy and the public sector and thus an indication of the types of issues that will have to be faced in the next few years. We have selected a set of what we feel are likely assumptions, many others could be used, however, the general - 67 - Table 17 LIBERIA - NATIONAL ACCOUNTS 1972-80 (1971 Constant Prices) $ million Growth 1972 1973 1974 1975 1976 1977 1978 1979 1980 1974-80 Gross Domestic Product 429.9 452.3 474.7 5oo.7 507.8 548.4 572.9 598.5 628.1 4.8 + Terms of Trade Adjustment -11.4 -40.2 -68.2 -88.3 -66.9 -48.8 -33.8 -29.2 -26.2 - Gross Domestic Income 418.5 412.1 406.5 412.3 440.9 499.6 539.1 569.2 601.8 6.8 Imports 175.7 170.7 144.6 151.5 172.4 200.9 216.3 232.1 251.1 9.6 Exports -269.4 -288.8 -294.9 -299.2 -281.4 -294.8 -299.1 -303.4 -307.8 0.8 Exports adjusted for Terms of Trade -258.0 -248.6 -226.8 -210.9 -214.5 -246.0 -265.3 -274.2 -281.6 3.7 Resource Gap -82.3 -77.9 -82.2 -59.4 -42.1 -45.1 -49.0 -42.1 -30.5 - Consumption 264.9 263.7 257.9 273.8 287.6 305.7 321.4 338.6 355.7 5.5 Investment 71.3 70.6 66.4 79.2 111.2 148.8 168.7 188.6 215.7 4.7 Resource Availability 336.2 334.3 324.4 353.0 398.8 454.4 490.1 527.2 571.4 9.9 Gross Domestic Saving 153.6 148.5 148.6 138.5 153.4 193.9 217.6 230.6 246.1 8.8 Factor Service Income -96.5 -71.9 -46.2 -37.5 -35.3 -34.9 -33.6 -32.3 -31.5 - Net Current Transfers 15.2 10.5 7.0 6.0 6.2 6.4 6.6 6.7 6.8 - Gross National Saving 72.3 87.1 109.5 107.0 124.3 165.4 190.6 205.0 221.5 12.5 Gross National Product 33..4 380.5 428.5 463.1 472.5 513.5 539.3 566.1 596.6 5.7 Gross National Income 322.0 340.3 360.4 374.8 405.6 464.6 505.5 536.9 570.4 8.0 - 68 - trends and conclusions would not markedly change. Moreover, the proportions are intended to be illustrative and have no specific relation to current efforts in the Ministry of Planning to write a plan for the 1976-80 period. B. Macroeconomic and Balance of Payments 168. In order to make a macroeconomic projection of the Liberian economy it is useful to construct a very simple model. Such a model relates the accounts of the economy to the basic production variables underlying it, in this case iron ore, forestry and timber for the most part, with additional output being generated as the result of investment activity. The outlook for iron ore, rubber and timber is presented in detail elsewhere in the report. Iron ore should fall at the end of 1975 when LMC ceases to produce and then should rise slightly in 1977 when the new Bong pelletizing facility comes on line. Not until 1981 at the earliest should there be an increase in production from the possible new mines. Rubber output, although it may fluctuate from year to year is not expected to increase more than 3% per annum. Forestry output may well increase by over 10% per annum, but it will still be relatively small in the overall total. Investment is projected on the basis of a fairly healthy public sector investment program in the 1976- 1980 period and on a sharp increase in iron ore investment in the same period once the decision is taken to go ahead on at least one of the new mines. This means that investments might well triple over the 1974-1980 period, and it is this which will give the economy its dynamism over the next few years. Overall GDP, as indicated in Table 17, should be able to achieve an average of 4.8% growth per,annum between now and the end of the decade. In real terms the prospect is for a period of slower growth than in the recent past and for a time of consolidation and for laying the foundations for the growth of the 1980s. 169. Table 18 shows the balance of payments projections for the same period. This utilizes the same relationshipsas the national accounts projec- tion, but adds the dimension of international commodity prices and inflation rates. In the case of iron ore, the prices have been extracted from existing contracts as well as estimates of the probable course of such prices towards the end of the decade. Also included are projections of foreign capital inflows, both private and public. The balance of payments appears to be healthy, but as in the past, this type of presentation tends to be overly optimistic. Exports are buoyed by high iron ore prices, while at the same time imports, although subject to international inflation relate to an economy that is growing somewhat more slowly than in the past. Towards the end of the period, if the new iron ore investments materialize, imports should rise signifi- cantly, but these investment imports will be almost completely financed by foreign investment. Factor payments are projected to fall in real terms as the Government retains a larger share of earnings and as Liberianization reduces the number of foreign workers in the country. Thus, in nominal terms factor payments may well remain approximately constant. The overall balance of payments indicates a significant surplus, but as in the past, this will in general not be available in the country but will instead accumulate in Earope and North America reflecting the fact that export contracts do not call for the proceeds to be paid in the country, the only requirement being the payment to the Government of its share. In theperiod 1974 to 1980, the projec- tion indicates exports of iron ore worth some $2.7 billion with a surplus - 69 - Table 18 LIERIA - BALANCE OF PAYMENTS 1973-1980 (current prices) 1973 1974 1975 1976 1977 1978 1979 1980 Exports 330.6 472.3 540.0 554.5 657.8 739.7 799.5 860.6 Iron Ore 197.5 280.3 336.6 321.0 391.3 434.9 458.9 484.9 Rubber 40.7 72.8 63.0 72.5 83.4 98.7 110.2 119.5 Forestry 16.5 23.3 29.9 35.3 41.7 47.3 52.8 58.5 Other 75.9 95.9 10.5 125.7 141.4 158.8 177.6 197.7 Imports 251.6 326.8 414.7 473.4 . 566.2 633.4 708.3 800.3 Resource Balance 78.9 145.5 125.3 81.1 91.6 106.3 91.2 60.3 Net Factor Payments of which: -95.6 -96.2 -96.1 -91.3 -93.4 -93.6 -94.3 -96.1 Interest on Public Debt -5.4 -5.2 -5.1 -5.2 -5.4 -6.0 -6.9 -9.1 Direct Investment Income -69.7 -70.7 -71.2 -68.2 -70.0 -70.2 -70.4 -70.6 Workers Remittances -20.6 -20.9 -21.1 -19.9 -20.6 -20.7 -20.8 -20.8 Maritime Revenues 7.5 8.1 8.8 9.6 10.4 11.3 12.2 13.3 Current Account Balance -9.2 57.4 38.0 0.6 8.6 24.0 9.1 -22.5 Grants 8.5 8.5 8.5 8.5 8.8 9.0 9.2 9.5 Direct Investment (net) 36.0 32.5 36.3 67.5 97.5 117.5 132.5 160.0 Government Borrowing (net) -0.2 -1.2 7.2 14.8 15.8 21.4 26.8 31.6 New Borrowing 12.6 13.9 21.6 28.9 29.2 30.8 34.6 40.3 Amortization -12.8 -15.1 -14.4 -14.1 -13.4 -9.3 -7.9 -8.7 Other (- outflow/surplus) -35.1 -97.2 -90.0 -91.4 -130.7 -171.9 -177.6 -178.6 - 70 - on the overall balance of payments of about $g00 million. Payments to Government are projected at about $300 million in profit sharing and the maximum amount of local expenses associated with the extraction and export of the ore would be no more than $1.1 billion. Thus, over $1.0 billion is iron ore earnings that are not available in Liberia except by voluntary remittance and will not be so unless and until Liberia has her own monetary system and currency. This is substantially more than the surplus in the balance of payments and could easily turn the $900 million surplus into a significant deficit. Similar considerations in other sectors would even further reduce the apparent positive balance of payments surpluses over the 1974-B0 period. 170. Table 19 indicates the rough dimensions of the public sector finances over the projection period. As the result of high iron ore prices and profits-sharing as well as the revenues to be collected as import duties on price inflated goods, the revenue budget looks quite good. At the same time the Government is actively pursuing a policy of fiscal efficiency and responsibility which should keep current expenditures from inflating too quickly. Moreover, investment has been projected in line with reasonable absorptive capacities rather than according to financial availability. 171. The projections in Tables 17-19 reflect two key assumptions about the Liberian economy in the 1974-80 period. First, they use the high prices for iron ore that are already reflected in the contracts with European purchasers and they assume that the entire Liberian output will always be sold. Second, they assume that the investments in Bie, Wologisi and Putu will be initiated in the latter half of the 1970s. In order to present a balanced perspective we have also looked at an alternate scenario in which we assumed that none of the three iron ore investments materializes and in addition that as a result of slack economic conditions the existing mines operate at only 90' of capacity during 1975-80. Such projection indicates a growth of GDP between 1974 and 1980 of only 2.6/ per annum. This implies a fall in real per capita incomes and underscores the necessity of diversification away from the enclave sectors. C. Development Strategy 172. Although the threads of a development strategy appear throughout this report, it is useful to attempt to tie them together into a coherent and consistent whole. It should be kept in nind however that there is no clear and easy path which would ensure the long run continuation of economic growth at the pace that Liberia has been experiencing in the past two decades. Here we discuss the dimensions of the development problem and present the strategy which seems to us to be most likely to guide Liberia in the right direction. 173. In the simplest of terms, Liberia is a small country with a bare minimum of human and physical capital. The prosperity of the past two decades derives almost entirely fria allowing foreign enclaves to establish themselves in Liberia and to exploit her limited natural wealth. As these commodities have flowed abroad, there has been only a limited linkage to the rest of the largely subsistence economy, and the public sector has assumed a generally passive role in collecting what amounts to minimal royalties. The revenues so derived have allowed the Government to survive, have given -71 - Table 19 Public Sector Finances - 1974-80 $ million 1974 1975 1976 1977 1978 1979 1980 Total Revenues 118.0 138.1 143.8 170.1 188.7 221.2 243.5 Iron ore profit sharing 22.3 37.7 35.5 45.3 51.4 54.8 58.4 Stumpage , 4.5 6.2 6.5 6.8 7.1 7.4 7.4 Trade taxes 34.6 44.0 5o.2 60.0 67.1 75.1 84.8 Maritime revenues 10.2 11.1 12.0 13.0 14.1 15.3 16.6 Excise taxes 5.2 5.7 6.0 6.8 7.3 7.9 8.6 Other revenues 38.4 33.4 33.6 38.2 41.7 60.7 67.7 Recurrent Budget 88.5 89.0 95.6 102.9 108.9 120.0 137.1 Wages and salaries - - 49.5 53.9 58.8 64.3 70.7 Other current expenditure - - 20.6 21.5 22.7 24.0 25.4 Debt service 1/ 20.3 19.5 19.2 18.6 14.9 14.1 16.3 Other recurrent budget - - 6.3 8.9 12.5 17.6 24.7. Development Budget 14.5 17.0 18.8 29.8 41.2 51.7 66.9 Total Budget 103.0 106.0 114.4 132.7 150.1 171.7 204.0 Total Public Sector Investment 25.4 35.6 42.2 57.0 68.2 80.7 99.5 of which externally financed 11.9 18.6 23.4 27.2 27.0 29.0 32.6 1/ Medium and long term only; short term included in "other recurrent". - 72 - it some latitude to invest in infrastructure, and have provided most of the income generating linkages with the enclaves. The real impact of all this on the 60-70% of the population still in subsistence existence, has been small and mainly derived fran a "trickle down" effect. 174. There is no question that the present levels and distribution of income could continue almost indefinitely. Constant per capital income to, at least, the next century could be achieved with little or no effort on the part of Liberia and her people, but this would mean that a majority of her people would be condemned to the present levels of absolute poverty generally below the bare minima for health, education, nutrition and general welfare. Liberia should and does want better for her people, and the people expect better from their country. A coordinated attack on the problem can and must be made. 175. The first element of any-strategy involves the concessions. Elsewhere in the report we argue that Liberia does less well vis-a-vis the concessions than do most other less developed countries. It is true that Liberia has been advancing rapidly on this front, but so have other countries, so it is questionable as to whether Liberia is catching up. Moreover, Liberia has always believed strongly in the open door policy and rightly feels that any precipitate moves towards the concessions would destroy this policy. The present round of negotiations is very healthy, but Liberia should make clear that the agreements should be organic documents, changing and growing with shifting world practices, moving continually towards more equity for Liberia, but at the same time never jumping abruptly. At the same time the trend should be towards concessions which have a greater degree of linkage with the Liberian economy. In this respect the local processing requirements in the forestry industry and the introduction of rubber processing concessions are clear steps in the right direction. Further- more, Liberia should look closely at the extent to which the concessions can be persuaded to contribute to the social and public infrastructure in their local areas. While this may raise serious questions about sovereignity, there is no denying the fact that the concessions are generally willing to do this kind of "good work" and moreover they possess a degree of financial and admniistrative capacity that Liberia does not yet have and are thus often far more efficient at road-building, education and other infrastructure. 176. Diversification. The current prosperity of Liberia is based on three commodities: iron ore, rubber and forestry of which the first is by far the most important. Over the long run the real price of these products should not markedly change and may in fact go down. In terms of volume, the general conclusion of the mission is that all three commodities are nearing constant, sustained yield, outputs - the exception perhaps being forestry where some expansion can be foreseen, and of coarse iron ore where there may well be a rise to a new plateau of production inthenext ten years. Rough macroeconomic calculations indicate that these products would support a long run growth rate of 3% indefinitely, i.e. a stagnation in per capita incomes, but that in order to sustain the desired 5%, export earnings (or import savings) must be generated preferably outside the enclave sectors. - 73 - Iron ore would have to double its anticipated modest growth in order to fill the gap, while for other commodities the required growth is even -greater. Other products, other sources of output, must be found. Wood based industries may be feasible. Coffee, cocoa and palm oil; the latter in coastal estates may well prove to be profitable. Certainly in terms of rice production a considerable import saving can be had, and even more can be obtained by shifting taste toward "country" rice. The products and activities exist, at least in potential, in Liberia. 177. Dispersion of participation is the third key element of a develop- ment strategy. Far too few Liberians participate in their economy. Most of the economic activity is concentrated in foreign and a few local hands, while 60-70% of the people participate only insofar as they must sell produce to meet fixed levies such as taxes. To them the money economy is a wealth rather than an income vehicle. The Liberian farmer is, under present conditions, discouraged fran participating on several counts. First, he gets a very low price for his crop and excessive transport costs make it even lower. Second, even if he gets a reasonable price for his goods, he has nothing to spend his money on, and nowhere to purchase key agricultural inputs such as fertilizer. Markets are few and far between and village stores, where they exist, are either Lebanese-owned or the private monopolies of rich Monrovians. A good deal has been made of the "enterprising farmer of Upper Lofa", yet an extremely important factor contributing to his desire for improvement and his response to new techniques is the existence in that area of a well stocked local market system that has spilled across the border fromSierra Leone. Third, there is a relatively low level of infra- structure available to the farmer. Most noticeable is the lack of roads, but just as important are the lack of a financial system,the lack of health, the lack of education and the absence of convenient markets for his produce. If, through the provision of adequate prices, local markets and infrastructure, the average Liberian farmer were attracted into the market economy, the -amount and value of produce that would be available in Liberia would easily be able to cover any export gap as well as creating a substantial local market for the vastly under-utilized Liberian industries.. The exact sequence of growth need not be spelled out, but the key and certain elements are linked closely to the diversification of participation in the economy. 178. Parallel to diversification is, of course, distribution, particularly of social goods. Whether one subscribes to income growth or not, one cannot avoid the simple proposition that all Liberians are entitled to a minimum of social goods. This means that all Liberians, no matter how poor or how remotely located, should have convenient access to such things as education, health, roads, potable water and satisfactory nutrition. Most of these things are the responsibility of Government to provide, and the focus of any development plan should be on the provision of such facilities broadly across Liberia. The income side of distribution should arise from the increased participation in the economy and thus depends more on public policy than public investment, but the social goods can only come from public investment. Moreover, it is clear that even the productive aspects of rural development must in large part be provided by public investment. When making an assess- ment of the investment needs of Liberia the list of desirables reads like - 74 - that of most other countries of Liberia's level of development. The striking difference, however, is that Liberia has so much less infrastruc- ture both on an absolute and on a per capita basis. While this is the result of her unique history, it means that she must try harder than others to catch up, and if faced with financial and absorptive capacity limitations may have to make some choices among sectors. 179. In an absolute sense, education is parhaps the most urgent need as the human capital in Liberia is far less than the country needs for its long run development and the lead times involved are very long. Beyond this, perhaps the most universally useful infrastructure investment is in the transport system as this will facilitate the spread of markets and the economy as well as the spread of social goods. Clearly however, the key element in the provision of public investment lies in the first develop- ment strategy point, the extent to which the concessions will provide a more equitable share of the wealth they exploit. 180. The final element is decentralization. It is far too easy for Liberians and foreigners to take for granted that Monrovia is all that matters in Liberia and that the rest of the country is simply uncharted bush dotted with a few foreign concessions. While this may have been the case many decades ago, it is far from the truth today and the persistence of such a misconception is a positive detriment to the development of the country. For far too long the rest of Liberia has been used for the benefit of the capital and it is not uncommon to find senior officials of the Government who never leave Monrovia even though their decisions and actions affect masses of people they neither see nor know. With the advent of the Tolbert administration this style of government is rapidly being replaced by an honest effort at decentralization, but a far more concentrated effort must be made if true and lasting development is to be achieved in Liberia. Moreover, given the chronic lack of administrative talent in the central government and the extremely poor communications within the country, active decentralization becomes a very attractive proposition offering a potential for substantially increased efficiency. 181. In theory, the mechnism and framework for decentralization already exists. Some years ago Liberia instituted a system of county government, headed by a superintendent. With the advent of the Tolbert regime several of the counties now have very competent superintendents and these men have been given power over the entire spectrum of government in their particular counties, including functional supervision over the employees of central government ministries who are posted to the particular counties. In reality, the power of these men is severely limited by the power of the central purse and they only manage to make progress by continual lobbying with the Ministry of Finance in Monrovia. The system needs to be bolstered by the assignment of more capable people to the counties and by the decentralization of some of the items of expenditure. While it may not be feasible to decentralize the entire country, there is no reason why this cannot be done immediately with the remote interior counties. The mission was particularly impressed with the administrations in Bong and Gedeh and feels that these counties already possess the political, social and adinistrative cohesiveness that would be required. It is interesting to note that the progress towards true rural development made in Bong county is largely the result of the energy and determination of that country's superintendent. - 75 - D. Creditworthiness 182. The preceding parts of this future prospects section have focussed on the economic outlook for Liberia and the development policies that we feel should be initiated in order to ensure the long run economic and social well-being of Liberia's people. These parts have been directed at Liberia and at the view point of her policy makers. In this last section we address the future prospects of the economy from the point of view of external financing agencies. In this respect the two key questions are: first, can Liberia make productive use of foreign resources that are channelled to it by official assistance agencies; and second, will she be in a position to repay the foreign exchange indebtedness thus incurred? It is the general thesis of this report that Liberia has and will continue to use foreign official capital in a productive fashion and that she could usefully absorb somewhat more than she is receiving especially if such aid was accompanied by project-attached technical assistance. The needs are clear and probably more important, if certain key infrastructure in invest- ments are not made in this decade Liberia may experience serious bottlenecks in the crucial decade of the 80's. In terms of the ability to repay the obligations of such assistance, the analysis indicates that until about 1980 the balance of payments will be in a very strong position and that debt servicing will be no problem. Although beyond that point some weaknesses may begin to emerge particularly if new iron ore investments are not forth- coming, these are by no means insurmountable, particularly if diversification is successful. In general, however, Liberia should continue to enjoy a high degree of creditworthiness The projections presented above assume a continuation of currently foreseen assistance trends with an average of $40 million in commitments each year to the end of the decade, a total which is assumed to grow at about 6% in nominal terms thereafter. During this period the Bank group share is estimated to be about 20%, with about 50% coming from government to government loans and the balance from suppliers and financial institutions. Under such circumstances, the debt service ratio, currently at about 6% of exports should fall continuously over the period. Even under the most adverse of circumstances it would be difficult for this ratio to again reach 6% much before the end of the 1980's. Similarly, debt service now requires about 20% of government revenues and this ratio should fall continuously reaching perhaps 10% by 1980. Such a low level of debt service burden points out the fact that even given a potential weakness in the balance of payments in the 1980s that would arise from a complete lack of investment in new mines and a slackening of demand for present output, the risk of debt servicing difficulties is extremely low. Moreover the present government has since early 1973 been freed from'the IMF imposed restriction on short term and suppliers credits. In the intervening period it has shown significant restraint in the incurring of such new debt. Such responsible management is a strong indication of Liberia's strong and continued credit- worthincs. Finally we conclude that from the point of view of productivity and from the point of view of debt servicing capacity, increased borrowing from official assistance agencies might be in Liberia's best interests. Such additional borrowing might usefully be as high as $15-$20 million per year and should be at intermediate or blend terms. - 76 - III. PRODUCTIVE SECTORS AGRICULTURE 183. Volume V of this report contains the main analysis of Liberia's agricultural sector and the discussion of a development strategy aimed at improving the income earning capacity of the rural poor and of increasing the production of export crops. The following paragraphs focus on the main issues arising from that discussion. 184. In the past, the goverment's policies towards agricultural development in Liberia have to a large extent centered around efforts to attract foreign investment into plantations, especially rubber plantations. While this policy was successful in promoting aggregate growth, providing limited foreign exchange earnings and creating employment opportunities, it resulted in the creation of enclaves which had only limited impact on the rest of the economy. Apart from foreign concessions producing rubber and timber, there ia a significant number of Liberian commercial farms - owned almost exclusively by an urban elite - less well-capitalized and managed, and working at lower levels of efficiency. Their principal pro- duction is rubber, coffee, oil palm and cocoa. 185. The traditional agricultural sector is still generally outside the monetized economy and contains roughly 70% of the total population.1/ As in many other developing countries, the Government has devoted very little attention to this sector in the past. It has failed to provide the physical and institutional infrastructure necessary to permit the large mass of people to move into a modern and monetized economy. Moreover, there is strong evidence that the development of concessions and commercial farms has impinged upon the development of the traditional small-holder sector by displacing tribes from good farming land to areas remote from existing roads and marketing facilities. Traditional agriculture has contributed very little to economic development, nor has it shared in the benefits of growth experienced by the rest of the economy. The average income of traditional small-holders is estimated to be about $70 per capita compared with a national per capita income of about $200 in 1972. This sharply limits the earnings available for self-investment in that sector. 186. Over the past eight years (1964-72) agricultural output has grown at an annual rate of about 5% in real terms. This growth has mainly been a result of expanded acreage, employment of additional manpower, intensive commercial exploitation of forestry and fishery resources, and a partical shift from subsistence crops to higher-values export crops. While this growth performance has been remarkable it has been concentrated primarily outside the traditional farm sector whose own output grew only 1/ Preliminary results from the Agricultural Census (which was not available at the time of the mission's visit to Liberia) indicate this sector may only include 50-60% of the population. This is still large enough to demand serious attention. - 77 - at a moderate annual rate of 2.4%. Food marketed for cash by the tradi- tional sector is estimated to have grown at 3% per annum and at such a rate fell far short of the demand generated in the modern sector by its popula- tion growth of 7-9% and its rising income levels. Liberia increased its dependency on food imports from $15.9 million in 1964 to $26.6 million in 1972. Besides reflecting an increased demand for meat, sugar and wheat flour, the import figure reflects also an increasing deficiency in rice. The deficit is presently on the order of 45,000 tons, has been growing more than 15% per annum for the past 25 years 2/ a rate that more than matches urban growth in that period. 187. The most important factor in this situation has been the lack of an organized marketing system for traditional products and thus the non- existence of adequate incentives for the farmers. In 1972 a start was made with the establishment of buying stations. Their number is still very limited and a rapid increase would be required to achieve the desirable impact on rice production for the market. Moreover, government's price policy until recently was not in favor of the small Liberian farmer. Until 1972 price control was restricted to consumer prices for milled rice. In 1972 a buying price for unprocessed-rice was set. 188. A significant part of agriculture's growth problem is a reflection of government policies toward that sector in the past. Prior to the present administration, little if any attention was given by the Government to non-rubber agriculture. 'Programs to develop traditional agriculture which have appeared over the past century were generally only an expression of intention, a fact clearly reflected in budgetary allocations. Agricul- ture accounts for 25% of GDP. Yet total public expenditures (current and investment) for this sector were 3 to 4% of total budget expenditures, less than either defense or foreign affairs, and totally less than one percent of GDP, over the five-year period during 1972. Although a modest increasing trend, both in absolute and in relative terms has been apparent in the past few years, the level, which is clearly constrained by the Ministry's absorptive capacity, is far from adequate. 1/ This estimate is derived from an assumption of constant technology and the natural population growth rate - to the extent that outmigration caused a population decline in the traditional sector the output would also decline. 2/ Liberia has never, since its founding, been able to supply Monrovia with sufficient rice. Recent trends are only a continuation of this pattern. As rice eaters are more vocal than producers, the "food problem" is always a "crucial" one in Liberia. Moreover, the situation is complicated by the "status" preference for the more costly imported parboiled (rice) over local "country rice". - 78 - 189. Few public sector investments were undertaken during this period, and the impact of those which were carried out was only minimal. In an attempt to accelerate the drive towards an efficient agricultural sector and thereby tackle the rural income problem, the new aduinistration focused its investment program on two large-scale projects in the Foya and Cape Mount areas emphasizing tree crop and irrigated rice production. One can sympathize with the desire of the Government to obtain quick results in agriculture, particularly rice production. However, realization of the production potential will take time and can only be fully exploited if supporting services and inputs are made available and farmers show receptiveness toward adopting modern produc- tion techniques. Relying solely on a spontaneous "demonstration effect" will not be sufficient. Given high costs for mechanised land development, slow adoption of modern technology, and poor project preparation and execution, the overall cost of these projects may be excessively high, even if the optimum demonstration potentials of such projects are all taken into account. Concentrating large resources on a small segment of agriculture, where increase in production appear more likely achievable, is a sound strategy if it is the aim solely to increase marketable output as quickly as possible. Yet such a policy would not be consistent with the Government's stated objective or rural development. Given the existing problems of income disparity, a policy which would combine the limited financial and human resources of govern- ment with expanded use of labor and new technological know-how over a much larger proportion of farms is to be preferred. At present, those who are not in the special development areas of Foya and Cape Mount, suffer from the fact that the Government devotes its resources and attention elsewhere, while those in the development areas seem to resent the forcible change in their way of living - in having Government, justified or not making investment decisions for them for which they have to bear the full cost. 190. The Ministry of Agriculture is however executing two nationwide programs, which are oriented to large numbers of traditional smallholder farmers. Both are modest programs of the extention type and are not res- tricted to a few isolated and selected areas. Moreover, investment per farmholding is small. They are: a. The Extended Rice Program which has the objective of assiting small farmers in reclaiming swamps for the establishment of irrigated and bottomland rice cultivation. The program was started in 1972 and at present mobile teams are operating in Bong, Lofa and Nimba Counties. In 1973 a hundred farmers with over 3,000 acres of bottomlands, in a number of farm communities, participated in the program. b. The Tree Crop Development Program has the objective of promoting the development of tree crop plantations for small holders. In 1972, 155 nurseries were established. About 1,300 acres were planted with 1.3 million cocoa and coffee seedlings, 900 acres with oil palm and in addition some tens of acres with fruit trees. 191. Due to the nature of both programs, no spectacular effects can be expected in the short run. The swamps for rice cultivation and the gardens for tree crops are small and dispersed. No sophisticated methods are - 79 - envisaged and most of the reclamation and establishment works are being carried out by hand labor. Consequently national agricultural production through these projects will only rise slowly. The impact of these programs on farm communities and individual small holders may prove to be important. 192. A frontal attack on agriculture and rural poverty will be indis- pensable for Liberia's development for the decades to come. Regardless of what takes place in the modern sector, much of future growth, employment and foreign exchange earning will have to depend on the development of agriculture. As noted earlier, reducing existing income inequalities between rural and urban populations will not only be called for, purely on the grounds of equity but also in order to reduce migration from rural areas and the concomitant urban unemployment. 193. If the potential for growth in the agricultural sector is to be fully realized, a number of constraints which presently hamper development of the sector must be overcome. The most critical constraints identified by the mission relate to: (i) the absorptive capacity of the public sector to carry out projects effectively; (ii) the price incentive to producers; (iii) the marketing of produce, input supply, and agricultural credit; (iv) extension, training and research; and (v) land tenure policy. Provided these overriding constraints can be overcome and the effective utilization of large investments can be achieved through better preparation and imple- mentation, Liberia's agriculture should be capable of making an increasing contribution to economic growth in the medium to long run.1/ 194. The major policy issues arising from the analysis presented in Volume V relate to a strategy the Government could foreseeably undertake to deal effectively with the above mentioned constraints in the medium run. The report recammends a strategy based on a set of action programs which focus on: (i) improvements of the institutional structure to plan and carry out projects more effectively; 1/ Since the mission's visit to Liberia, some significant steps have already been taken. (a) A price incentive to producers is being applied through L.P.M.C. for export produce (coffee, cocoa, palm kernel) and for rice. (b) Marketing of produce is handledbyL.P.M.C., and input subply and agricultural credit are being channelled through the fanner's cooperatives; other alternatives are being tried for individual farmers. (c) The Ministry of Agriculture is making serious efforts to strengthen extension, training and research; further improve- ments in these fields should result from the new UNDP Project scheduled for 1974-78. - 80 - (ii) ways to provide better price incentives for increased production by adopting an active price policy and improving the marketing and infrastructure; and (iii) insUtuitonal and organizational changes necessary to ensure that the complementary effects of package measures - extension, input supply, credit and marketing - necessary for a widespread adoption of new technology can be fully realized by traditional farmers in order to raise their level of productivity. 195. A principal focus in any successful development strategy in Liberia will need to be regional, partly because constraints and ecological conditions differ between the rural interior and the coastal belt. Over the long-term, efforts should be directed at integrating the isolated rural areas where the majority of the population live, and which are cut off from coastal cities into a national market. The immediate development policy for the rural areas of the interior must be based upon.the recognition that these areas should be treated as landlocked areas, and efforts should be made for more or less self-contained development. The report suggests that the development of coastal areas should be on large scale commercial farms and plantations producing palm oil, coconut and possibly sugar cane, irrigated rice and vegetables. This development could largely be left to the private sector although some government involvement and guidance may be necessary. In contrast is the interior which contains large numbers of traditional farmers and where institutions and infrastructure are very much lacking. Development of the interior can most effectively be undertaken by integrated rural projects based on a regional approach. 196. On the production side, rural development should aim at motivating farmers in order to utilize their production potential effectively and to induce new capital formation by the farmer himself. The success of this effort is, however, contingent upon the public sector's provision of a minimum package of essential services, such as improved seeds and planting materials, fertilizers,farm implements, provision of credit, extension services reinforced by applied research, and processing and marketing facilities, all of which should be designed to reach a large number of farmers. To ensure effective implementation of rural development programs the report suggests that the Government shoud consider establishing a Rural Development Council at the cabinet level and County Development Councils, which would coordinate the work of project units in the field of agriculture, education and health. 197. The following action program would be essential for such developmet: (a) Improvement of the institutional efficiency of the Ministry of Agriculture as well as its absorptive capacity to implement projects. The shortage of qualified Liberian staff imposes a real problem in such efforts, and the strengthening of the Ministry will be a long-term effort. Nevertheless there are actions the aovernment can take. One is to expedite the reorganiza- tion of the Ministry for which finance is provided under the ongoing IDA project. The other action would be to reexamine the terms of reference of - 81 - foreign advisers in light of real needs, and possibly convert the status of some to fully responsible officers within the hierarchy of the Ministry, with full supervisory power and responsibility. Qualified Liberian staff should be assigned to assist foreign staff with the purpose of replacing these people according.to a planned training and selection program. The Ministry should seek 'to obtain quality rather than quantity when accepting foreign advisers. (b) The provision of price incentives to producers in order to (i) ensure full utilization of Liberia's agricultural resources and (ii) to reduce existing income inequalities between the rural and urban population by providing adequate farm incomes. LpMC's pricing policy and the oligop- sonistic price setting by the rubber concessions have not insured adequate price incentives. 198. Future world prices for exportable cash crops are not expected to improve the long-term real price inqentives for producers. Efforts should, therefore, be made to fix producer prices at appropriate levels, but more importantly to organize marketing and transport in such a way as to reduce the wide margins between export and producer prices. Improving farm incomes and incentives can certainly be achieved more effectively through the pricing system than through designing of fiscal measures to redistribute income through various forms of farm subsidies. Considerations should be given to the establishment of a price stabilization scheme for all export crops, oil palm and rice. To ensure that the full benefits of the marketing system reach farmers in the form of fair produce and input prices, the employment of buying agents should be discontinued. The Lebanese traders have been replaced either by cooperatives or Liberian buying agents. Yet commission charges of Liberian agents are high, and they are not much of an improvement over the Lebanese traders. Every effort should be made to assure that,LPMC bases its marketing operations directly with cooperatives, and encourages and guides the formation of farm groupings in those areas where cooperatives are not existent. At the wholesale level, LPMC functions should include: (i) domestic wholesale of locally produced farm products, i.e., rice; (ii) international selling of export crops; and (iii) procurement and import of agricultural inputs, i.e. seeds, fertilizer, chemicals, and tools. 199. Government actions are also called for in the case of rubber pricing. In order to ensure that producers obtain a fair price for rubber, the Govern- ment should establish the following principles during the negotiations with the rubber concessionaires: (i) the legal obligation by the concessions to provide a ready market for Liberian producers; (ii) the right of the Govern- ment rather than the concessions to announce each month the average producer price for each grade of rubber. The processing, marketing and profit margins charged by the concessions should be reviewed periodically with the Govern- ment, but should as a principle bear some resemblance to margins deducted by similar operations in Asia. 1/ 1/ Since the visit of the mission, the Government is establishing its own rubber processing plants, thus hopefully providing the farmers with a real alternative to the concessions for the sale of rubber. - 82 - 200. Although government action in pricing policy is urgently called for, it must be realized that a sole reliance on pricing policy to reduce income disparities between rural and urban incomes cannot yield a successful solution to the problem. Raising rural incomes will largely hinge upon productivity increases. There is also need to increase the resource transfer to the rural sector through substantially higher allocation of public sector investment for improving the rural infrastructure - i.e. feeder roads, transport and marketing facilities, etc. - and for providing social services such as schools and hospitals. (c) The third major issue is how to ensure the adoption of improved technology among large segments of traditional farmers. Unless substantial improvements in input and plant distribution, credit, extension service and farm management practices can be made, raising productivity in traditional farming may be remote. Fertilizers and pesticides are not used on traditional farms nor are there any supply channels or farm credit facilities for these inputs. Steps should, therefore, be taken to establish a distribution system for farm inputs, seeds and planting materials. LPMC should be responsible for the procurement and import of seeds, planting materials, fertilizer, pesticides, other agricultural chemicals and agricultural tools and their subsequent distribution through cooperatives and farm groupings. In addition, a seed and plant multiplica- tion scheme, monitored by the Suakoko Research Station, should be initiated as soon as is feasible. The scheme should cover not only tree crops, but also the production of base seed of improved rice varieties. 201. The transformation of traditional agriculture into a modern production sector will also require credit facilities. With the emphasis on tree crop planting and rice production by the traditional sector and possible rehabilitation and replanting of rubber farms, annual credit requirements of $1.5 to $2 million may not be an implausible estimate and seasonal short-term finance requirements for crop purchases by cooperative would run an additional $3.5 to $46. million. The mission recommends the creation of a special budget-financed Trust Fund which LBIDI could administer on the government's account. For the short to medium run it would neither be advisable nor administratively feasible to suggest direct lending to individual small farmers. Therefore, lending should primarily be directed to (i) cooperatives for on-lending to individual farmers in areas of integrated rural development programs; (ii) farm groupings, farmers, and large individual plantations (for own capital needs and for on-lending to individual outgrowers); and, (iii)LPMC for own finance needs for marketing, transport, and distribution and storage of crops and inputs, and for possible on-lending to cooperative and groups of farmers in areas outside those of integrated rural development programs. 202.. Measures are also called for to improve the extension service and research. Since Liberia does not have the staff nor the resources to carry out all applied research required to support agricultural development, a national research program should be initiated in order to link Liberia's research activities to other national and regional institutions. Research and extension are clearly the keys in the long run growth of Liberian agriculture, but in the immediate future, faced with a continuing shortage of staff and resources, a higher priority is necessarily placed on the first three points of the action program. - 83 - PROSPECTS FOR INDUSTRIAL DEVELOPMENT IN LIBERIA 203. Throughout the mission's analysis of Liberia it has been clear that when the natural resource exploitation as a basis for growth starts to phase out, Liberia must seek alternate foundations for the economy. While most agricultural based options appear to have limited outlooks, it is clear that industry has significant potential. However, this cannot be a development along the common path of high cost import substitution, but must instead be directed towards the promotion of exports, making use of Liberia's competitive advantages. It is also clear that the outcome depends not only on a significant shift in public sector policies towards the sector, but in addition a genuine commitment on the part of those who run the country and control its economy towards this type of development strategy. 204* As a separate volume (Volume III) of this report the mission has presented its detailed findings and analysis of the sector. The discussion in this main report is based on the work of the mission as well as the work of a somewhat earlier (November 1972) industrial mission by the Development Economics Department of the IBRD. The following pages are largely from the findings of that mission while the volume on industry presents the detailed follow-up carried out with the Basic Economic Mission in March 1973. Industrial Strategy Options 205. Liberia is fortunate in being a small country so that a relatively small effort in processing for exports, which would not affect world market supplies significantly, could have a marked impact on export earnings and revenues, not only replacing the prospective decline in the importance of iron ore to the economy, but providing a higher per capita level of foreign exchange and government revenues than has been hitherto available. It is reasonably well situated in relation to both the European and North American markets, and it has some prospects of acting as an entrepot for West African trade. The critical factor is, of course, the government's commitment to development. 206. The policies followed vis-a-vis industry in the past are not compatible with a vigorous development strategy. In the past,Liberia has had high cost import replacement policy in agriculture and manufacturing. In both raw material production and manufacturing the benefits offered to investors have been excessive in relation to the country's potential gain; in manufacturing the result has sometimes been a net loss of foreign exchange and a high cost in domestic resources. Industrial planning has centered on such unrealistic projects as a .tire factory and a steel plant. Motor car tire production is largely based on synthetic rubber, and requires an output of some 70,000 to 100,000 tires a year to be economic. - 84 - Iron and steel plants require a demand of at least 1-1/2 million tons of fairly simple, uniform products to be economically viable. No such markets are in sight in West Africa, and in the world market,tires and steel are sold at marginal prices. Steel production requires high quality fuel, and it has to be situated on a good, deep water harbor. Drojects such as these are very capital intensive, they provide relatively little employment, and they have a long gestation period. 207. The development strategy proposed here is more prosaic but it concentrates on good business prospects. It is centered around the development and regeneration of timber, on timber and other raw material processing, and on other labor intensive production which will create an income not only for the country as a whole and for its business community, but also for the common people, This would in turn of course create new business opportunities. 208. The central feature would be the development of timber resources to create a strong market for Liberian timber products. This would require a new approach to forestry. Not only would the prime species be harvested, but.secondary species would be cut and treated to provide a cheap, indi- genous building material. This approach would raise returns from initial timber cutting, and provide a base for orderly replanting of prime and secondary timbers for future harvesting for high grade timber product exports, for pulp, and for further domestic use. Such a timber farming approach would greatly reduce the long term costs of rural infrastructure, and enable stable rural communities to be created. Primary processing would include saw mills, drying kilns, and treating plants. At a further stage there would be plywood and veneer manufacturing using a relatively labor intensive technology based on Taiwanese rather than industrialized country practices to minimize investment costs and maximize employment. Building timber, manufacturing and package furniture production would be initiated. The timber farming and final processing stages would be very labor intensive. It is envisaged that the joint venture form of business organization with experienced foreign firms would ensure that Liberian ownership, control and management would grow with the industry. As furniture production develops, foam rubber based upholstery, using indigenous textile patterns could be developed as a complementary labor intensive manufacturing activity. 209. A subsidiary export orientation would concentrate on developing new agricultural products for export. The possibilities of cassava chip production for feed seem considerable, and there may be some opportunities for cassava starch exports. Fresh product markets - notably for cut flowers and tropical fruit - should be explored. A market for Liberian style clothing, stimulating local tie-dyeing, could also be developed. 210. The prices of locally produced manufactured goods are generally higher than imported prices. This is not so much the result of excess profits, though there is indubitably some "fat" in manufacturing, and more particularly in distribution, but because the Liberian market is too small for an economic scale of production for most products. Equipment, therefore, tends to be used at less than full capacity (one rather than two or three shift rates), capital costs per unit of production are high, and little employment is created. The tendency to high costs has been exacerbated by the Investment Code which favors capital investment over the employment of labor by making capital good imports duty free. The prospects for even such high cost industrial production are severely limited by the smallness of the market. This would not be significantly relieved by a common market with Sierra Leone. For most products even a population of some 4 million at less than US$300 income per head provides too small a market. But although cooperation with Sierra Leone cannot provide the basis of an economic domestically oriented industrialization strategy for either country, there is scope for expanding trade in agricultural and manufactured products if tariffs and import prohibitions are mutually reduced. 211. Most of the processing and manufacturing activities can only be undertaken economically on a small scale. The encouragement of small scale industries is also necessary to develop Liberian entrepreneurship, management ability and technical skills. The emphasis in manufacturing for the domestic market should therefore be on opportunities for small Liberian entrepreneurs. The established, larger Liberian entrepreneurs should be encouraged to look to export markets where much greater profits are in any case to be made. 212. High prices for essentials have already made Liberia one of the highest wage countries in West Africa, and they threaten to price it out of export markets if the present high cost import substitution policies are continued. Liberia therefore has a choice before it. If it wishes to pursue a vigorous, expansionist de'velopment policy it needs growing foreign exchange resources and rising government revenues as well as healthy private profits. This means the development of new export industries. Such an export oriented strategy is not compatible with high cost import substitution, which, though it may lead to high profits in the short run, will result in national stagnation within a decade. The policy and implementation changes discussed -in the following pages are therefore those needed to re-orient the Liberian economy toward export growth and economic import substitution. Policy Issues 213. The incentive framework is shaped by the following policy instru- ments: a. Import duties. The tariff is revenue oriented in origin, but tariff and other import duties have a protective effect. This has been heightened by increases in duties granted to protect domestically produced import substitutes. The tariff nomenclature is outdated, and many of the tariffs are specific rather than ad valorem. This complicates customs collections unnecessarily. b. Import restrictions. These are of recent origin, having been imposed to give additional protection to domestic producers. c. High effective protection benefits granted under the investment code. In addition to providing for additional protection through raising tariffs and imposing import embargoes, the Investment Code has provisions for raising effective protection, that is) protection on value added in produc- tion in Liberia, through: - 86 - i. exemptions of import duties on capital. ii. exemptions of import duties on raw materials. These provisions make capital equipment unduly cheap and thus stimulate capital intensive production unnecessarily. They also encourage the use of imported inputs rather than of locally produced substitutes. iii. exemptions from excise duties. d. Exemptions from income taxes. The tax holidays provided in the past have been unduly generous. There is a great deal of evidence to suggest that tax holidays do not greatly influence foreign investment. In Liberia the absence of clearly defined loss carry forward provisions and the length of tax holidays granted has meant very serious revenue losses without commemsurate benefits to the economy. e. Production licensing. The licensing of productive enterprises has, together with high effective protection, led to the establishment of highly profitable monopolies. These are a strong contributing cause to high prices and hence relatively high labor costs. In countries with comparable minimum effective wages for unskilled labor, that is, about US$1 a day, the prices of basic foods and other commodities are significantly lower than in Liberia. It is true that high costs are partly due to the nature of the import and retail trade network. High costs of production and monopoly prices in local production cannot, however, be ignored, particularly if a rapid expansion of domestic production is desired. f. The "open door policy." The absence of exchange controls has created a favorable investment climate. However, combined with the income tax holidays, it also has important negative aspects. Foreign and local investors have had little incentive to re-invest in Liberia for production for the small Liberian market, and no push from financial institutions to look for export opportunities. A policy retaining the encouraging aspects of the "open door" attitude, but avoiding the losses of capital outflows would be much more favorable to development. 214. In addition to being conducive to capital intensive rather than labor intensive investment, the investment incentive framework serves mainly medium and large enterprises. Small enterprises tend to be neglected. They do not benefit from the monopoly of production from which large enterprises reap high profits, and their costs of establishment are disproportionately high. This has, of course, been recognized as a world-wide problem, but it is particularly acute in Liberia, and particularly important because of Liberia's need to stimulate indigenous entrepreneurship. 215. The changes in the investment incentive framework are intended to: a. Encourage Liberian enterprise and employment, with a particular emphasis on creating new opportunities for both small and large entrepreneurs. - 87 - b. Stimulate the growth of competitive exports, and of efficient, low cost and low price production for the domestic market. Such industrial growth would be based on comparative advantage and specialization and it would pay attention to the development of an appropriate ownership struc- ture and to the appropriate choice of technology. It would utilize domestic resources effectively both for domestic and export markets. 216. The following changes are required: a. Tariffs. The present tariff structure is out of date from both the revenue and protective point of view, and requires a thorough overhaul to remove anomalies now present. Tariffs on final goods are sometimes lower than tariffs on inputs, making for negative protection for some products. This is true for example of clothing, where cloth has a higher tariff than finished clothing. For revenue and protective purposes, the tariff should be as uniform as possible, divided at most into a few categories, or bands. Widely differentiated tariffs, specifically designed to meet the needs of individual firms, should be avoided. They subsidize inefficiency, misallocate resources and discourage exports. It is assumed that a revision of the tariff which would take place in the near future would arrive at something like 1% for revenue, as distinct from a protective, component of the tariff. A protective component of, say, 10 to 30% would be added in two or three bands for those products for which Liberia has a potentially economic domestic market. Industries already established would receive special consideration to enable them to become competitive within this tariff structure. A charge to the Brussels nomenclature and to ad valorem tariffs now under consideration, makes the consideration of tariff reform particularly timely. b. Dumping and import restrictions. Dumping is likely to be a problem from time to time. It is suggested that anti-dumping import restric- tions be used to protect domestic manufactures where appropriate. The onus of proof of dumping taking place would be on the manufacturer, and import restrictions would be ended. c. Import duty exemptions. Import duty exemptions are necessitated by the present structure of the tariff, and as already indicated they lead to undue revenue losses as well as to excessive effective protection, unduly capital intensive production and discrimination against local inputs. Once the tariff structure is revised, all import duty exemptions should be ended. In the meantime the Incentive Code should be amended to ,limit duty exemptions for raw materials and capital goods to say 10% for a period of five years from the first importation. The 10% duty payable would represent the revenue tariff. This figure can at present only be based 3n rough estimates and the experience of other countries, but it can serve.as an interim measure which would be superior to the present total exemptions without being unduly burdensome. d. Excise duties. Excise duties and other internal indirect taxes also have to be considered in relation to the protective structure. The need for domestic indirect taxes rises as import substitution takes -'88 - place, but unless care is taken, there is a danger of creating negative protection for products on which domestic taxes on inputs are high. There is also danger in an undue "cascading" of indirect taxes which is likely to lead to uneconomic vertical integration of production and so discriminate against the small scale supplier of intermediate inputs. Indirect domestic taxes are of two types: i. Revenue taxes, which should be kept uniform and low, and have as little cascading effect as possible. ii. Luxury taxes such as those on alcoholic beverages and tobacco products, and on goods such as motor cars. These should be high both for revenue purposes and to discourage the consumption of luxury goods or at least penalize it, but they should be levied on both imported and locally produced goods to avoid undue losses of revenue and undue profits on domestic manufacture. As they would be added to a given tariff they would also protect manufacturers against consumers preference for imported luxury goods. e. Incentives to exporters. It is suggested that special new incentives should be introduced to stimulate exports as follows: i. Manufactured goods destined for exports should be entitled to drawback of all direct taxes - that is, import and export duties and excise taxes on inputs and on final goods. ii. Exporters should be entitled to purchase inputs into export goods regardless of import bans which might other- wise apply. iii. Exporters should be entitled to special tax holiday treatment as indicated below. f. Income tax incentives. Foreign investors from countries which have, in effect, ndouble tax" agreements with Liberia, do not benefit from the current 5 to 10-year tax holiday provisions in Liberia. There is instead a transfer of revenue from the Government of Liberia to the Govern- ments of the investors' home countries. Some Liberian entrepreneurs have in the past transferred windfall profits from income tax holidays abroad rather than reinvesting them in Liberia. A reform of the income tax system is long overdue. It should bear in mind that if corporation taxes are lower than in the principal developed countries, transfers of revenue to the governments of those countries will continue even when tax holidays expire. Well documented international experience suggests that prolonged income tax holidays are not particularly important in stimulating sound investment, and that the costs generally exceed the benefits. The following steps are therefore suggested: - 89 - i. Liberia should adopt a corporate tax structure commensurate with that of developed countries. ii.- Income tax holidays should be limited to profits re- invested in Liberia, and they should only be of 5 years duration. iii. An exception should be made for profits on processed exports, which should be entitled to a full 5 years tax holiday. iv. Loss carry forward provisions of limited duration, say, 2 years over the 5-year tax holiday period should be allowed. v. All firms should Vdbmit income tax returns from their first year of operation. vi. Investment incentives should be industry wide. Thus, all firms in an industry, regardless of size should be entitled to the limited income tax holiday. g. Production licensing. Licensing of entry into manufacturing should be restricted to cases in which economies of scale are important and there is therefore a danger of the fragmentation of production which could lead to high production costs, and hence pressure for protection. All other firms, say those with a capital investment of less than one million dollars, should be granted production licenses automatically and without delays on payment of the license fee. Small firms should become formally exempt from. license fees following on the Ministry of Commerce's commendable practice of granting such exemptions. h. Foreign exchange and banking controls. Foreign investors should continue to be free to repatriate capital and dividends from their investments in Liberia, but appropriate exchange and banking control measures should be introduced to monitor such movements and ensure the proper payment of income taxes. Local investors should be encouraged to re-invest their profits in Liberia as already indicated. i. Training for Liberians. To encourage the training of Liberian workers and technicians, a payroll tax could be introduced for all enter- prises with more than, say 50 workers. A firm with an approved training scheme would be exempted from the tax. 217. Some of the policy reforms suggested are already under consideration by the Government of Liberia. Thus, plans are already in hand for a reform of the income tax structure and for the introduction of foreign exchange and banking controls. The Investment Code is being re-examined. Tariff reform is being proposed. The difficulties created by the lack of co-ordination between the tariff and excise taxes have been recognized. The formulation of a detailed legislative program integrating these reforms into a cohesive policy framework is now required. -90- Implementation 218. The adoption of an appropriate policy framework can only be the first step toward industrial development. A vigorous implementation program is essential, and it is here that Liberia has found the greatest difficulty in the past. The Liberian Development Corporation and the Liberian Bank for Industrial Development and Investment have failed to stimulate industrial growth, the provision of infrastructure has been inadequate, and the relevant Ministries have not been able to meet the demands of industrial development. The effect of inappropriate policies has thus often been exacerbated by inefficient and even arbitrary administration. This has failed to create the atmosphere of sound, orderly and forward looking government which is essential to industrial development. 219. Liberia is fortunate in having at least a small group of well trained and dedicated public officials, and a relatively large educated elite. Below the top and service level, there is however a great lack of trained and capable public servants. The various agencies which have attempted to assist Liberia's economic development in the past have failed to tackle this critical problem. It is therefore suggested that as a general principle, the emphasis in implementation should be on on-the-job training in Liberia rather than education abroad. Public servants must be exposed to the exigencies of practical situations if the level of administrative capability is to improve rapidly. Training abroad would be reserved for a high degree of specialization. Liberians currently abroad would be attracted by the possibilities of a career of public service with promotions based entirely on merit. Able public servants in responsible positions would receive appropriate remuneration so that they could concentrate on their public service careers instead of having to conduct a private business as well. 220. Within this general framework, the following steps, pertaining specifically to industry are proposed. a. Training of government employees. A rejuvenation of the School of Business of the University of Liberia to turn the degree course from a liberal arts to a professional orientation is urgent. It is envisaged that a one-year bridging course, concentrating principally on English and mathematics, would prepare students for three-year professional courses in economics and economic statistics or accounting and commerce. The strength- ening of the faculty would be used to create a professional school whose graduates would be ready to undertake responsible profes"sional tasks without further training abroad, and to strengthen existing government departments by part time on-the-job training. It is suggested that the United Kingdom be approached for assistance in this respect. Such a program would of course mean that the School of Business Administration would have to continue to be situated in Monrovia to give part-time students easy access to lectures, and to enable faculty members to work with government departments. b. Industrial promotion. Increased attention to economic analysis is required in the newly combined Bureau of Industrial Research and Development -91 - and the Liberian Development Corporation in the Ministry of Commerce to speed the preparation of appropriate legislation. In additioh, the Bureau would: i. Concentrate on the preparation of timber processing projects. ii. Take steps to explore foreign irvestmfeft sources and markets by contacting the UNCTAD-GATT Trade Centre and the EEC's center for assistance to developihg countries wishing to increase exports of manufactures. iii. Find suitable industrial land in appr6priate locations to simplify land acquisition problems for potential investors. iv. Streamline government regulations regarding business entry and the receipt of investment benefits. v. Continue to improve its commercial vigilance activities to ensure that Liberian products are not handicapped vis-a-vis imports. c. LBIDIi/role in export promotion. It is proposed that LBIDI play a more vigorous role in the promotion of industry, particularly in.seeking out foreign partners for export oriented projects. It is envisaged that with the introduction of exchange 'bchtrols, and in the prom6tion of joint venture enterprises, LBIDI would have a more meaningful role to play in Liberian industrial development than it has in the past. d. Assistance to small scale industries. It is recommended that the Government assist small entrepreneurs by providing credit. Credit should be,available at the same interest rates as for large enterprises, entailing a subsidy element to cover the high costs of administering small programs and the relatively high risks involved. Term finance should be made available for small entrepreneurs' productive equipment needs. It is therefore suggested that LBIDI open a second suitably subsidized "window" for small entrepreneurs in manufacturihg, agricuiture and service industries. Such a facility would begin to formulate plans for other technical forms of assistance to small entrepreneurs in due course. e. Low cost,housing. Housing is inadequate with an estimated shortage of some 30,000 houses in Monrovia currently, and the market for low cost building materials is undeveloped. The housing program would develop the use of indigenous construction materials, particularly secondary timber species, and bricks, and lower construction costs by enabling new, small contractors to come into business. Improved availability of local building materials and lower construction costs would facilitate a tourist program which would provide "second homes" and other facilities at competitive prices. 1/ Liberian Bank for Industrial Development and Investment. In 1974 this organization changed its name to Liberian Bank for Development and Investment (LBDI) - 92 - f. The free port. The functioning of the free port requires improvement for entrepot purposes and to serve local manufacturing and exports. The purpose of the free port requires re-definition if short-term measures to improve fiscal collections are not to damage the development role it could play. As the discussion of strategy options indicates, Liberia's development prospects are closely linked to the maintenance of an open economic outlook. Conclusion 221. It is extremely unfortunate that Liberia failed to benefit adequately from its natural resources in the past, and that it began to proceed on a high cost import substitution path rather than to pursue export processing with its large potential returns. Unlike many other developing countries in which cost import substitution has gone a long way so that large vested interests prevent economic reorientation, Liberia can, however, still change its policies relatively easily, and it is in a good position to implement changes quickly. The government's commitment to rapid and broadly based development is critical to such a policy. - 93 - Prospects for Mining of Iron Ore and Other Minerals The Role of Iron Ore in the Economy 222. The mining sector is the most important single sector in Liberia's economy. The sector is dominated by iron ore (which accounts for 95% of GDP originating in the sector) but significant amounts of diamonds and gold are also produced. 223. The importance of iron ore mining in Liberia's economy is evident in its contributions to GDP, export earnings and government revenue. GDP originating in iron ore mining in 1972 is estimated at US$19.7 million, about 30% of total GDP. Exports of iron ore (including pellets) reached 23 million tons, valued at US$182.1 million in 1972, and accounted for three- quarters of total merchandise exports in that year. Iron ore's contribution to government revenue amounted to US$15.6 million, about 20% of the govern- ment's current revenue in 1972. 224. The contribution of iron ore mining to Liberian employment is relatively unimportant despite its large influence in other respects. In 1971, employment in the entire mining sector is estimated to have been 11,248 as compared to the total employment in all sectors of 110,o5. 225. Despite the quantitative importance of iron ore mining in the Liberian economy, the significance of this sector to the development of the rest of the economy has been relatively small because of the enclave character of the activity.1/ The Growth of Iron Ore Mining 226. The growth of iron ore mining in Liberia in the post-war period has been truly phenomenal . The Liberian Mining Company (LMC) started operations at Bomi Hills, 40 miles northwest of Monrovia, immediately after the Second World War. LMC made its first shipment in 1951, during which it produced 180,000 tons in total. LMC's annual production then rose steadily to over 3 million tons by the early 1960s. At that time LMC was still the only iron ore mining company in production. In the first half of the 1960s, however, three other companies jointed the production of iron ore: National Iron Ore Company (NIOC), Liberian-American-Swedish Minerals 1/ Mention should be made, however, of the development efforts of LAMCO, the largest of the mining companies. Spurred by public opinion in their home country (Sweden), the company continues to be a leader in social and educational development in Liberia. The most recent innova- tion is the Rural Enterprise Development Company (REDCO) which has two aims: (a) To assist their larger spin-off contractors in the fields of transportation, building construction, electrical maintenance, laundry, etc. to solve their business problems; and (b) To encourage and assist in the formation of private enterprises in the fields of agriculture, animal husbandry, forestry, saw- milling, petroleum distribution, etc. Mention should also be made of LAMCO's school system where, in conjunc- tion with the educational authorities, some 3,316 students are trained. Total amounts spent yearly on the school and other training programs and scholarships amount to US$1.5 million. - 94 - Joint Venture, and Bong Mining Company (BMC or DELIMCO) in 1965. As a result of these new operations, total annual production rose to 15.5 million tons by 1965 and it further rose to 22.2 million tons by 1972. The growth in production from 1962 to 1972 was at a rate of over 20% per annun. Today Liberia is the eighth largest iron ore producer in the world (excluding CPE's) and the fifth largest exporter. The Industrial Organization 227. The largest of the four companies is LAMCO. In 1972, its output accounted for 48% of total production, followed by Bong (24%), NIOC (16%) and IMC (12%). All four iron mining companies are foreign-owned and operated companies. A brief description of each of these is provided below. 1/ a. Liberia Mining Company (LMC). The equity for LMC was provided by Republic Steel Co., a U.S. steel company, and a group of American inves- tors. Production started in 1951. Its annual output increased to a level of about 3 million tons by 1960. Since 1960, annual output has stabilized at around 2.7-2.9 million tons. Seventy percent of the ore has an iron content of 62% while the remaining ores are upgraded from 37% to 68% through a concentrator. The output is transported to Monrovia over the company- owned railroad for export. It is expected that in 1975 the mine will be played out and operations will close. b. National Iron Ore CoMpany (NIOC). NIOC started production in 1962 at its mining site on the Mano River near the Sierra Leone border. Equity capital was provided by the Liberian Governent (50% fully paid in) LKC (15%) and Liberian Enterprises Ltd. (35%), the last of which in turn is owned by private Liberians (57%) and private Americans (43%). A sub- 2/ stantial (minority) control of NIOC, however, is in the hands of Christies-/ estate and family as they have a substantial minority interest in LMC, account for at least 25% of the American-owned part of the Liberia Enterprises Ltd., and own 100% of Mine Management Associates Ltd. which manages NIOC operations. Of the present 3.7 million tons of annual output, production of washed lumpy and fines amounts for approximately 70%. In the Mano (II) phase all production would be reduced to minus 3/8 with up to 15% minus 200 mesh, the finished grade being a more saleable 58% grade. The operation would result in the conversion of an ore washing plant into a complete concentrating plant and is expected to increase the operational life of NIOC by some 13 to 15 years. However, the plant is still not operational due to a number of major mechanical problems. Proven and probable reserves at Mano River are 112.5 million tons. There are serious questions about the long run viability of this operation. The ore is currently under a long-term contract at US$6 per ton, about half of the world market price. Moreover, Mine Management receives 3% of gross sales, tax free, as its fee without regard to profitability. Under such conditions annual losses are currently about US$1 million and no profits can be foreseen in the near future. 1/ See also Table 20 and Charts 1, 2, 3 on organization of the iron ore companies. 2/ Lansdell Christie who was instrumental in the establishment of both LMC and NIOC. - 95 - Table 203 Liberia: PRINCIPAL FEATURES OF OPERATIO)B OF IRON ORE CNCESSIONS Tate of Tenure Ownership Total assets First Year Production Total Sales Estimated Taxing or Profit 1/ Location original (Period at end of of produc. in 1972 in 1971 Reserve sharing arrangement- Company of Mine Agreement to run) 1971 tion or 1972 Lib a Mining Co. Bomi Hills, 1946 Co. ill Republic $25 million 1951 2.7 million $20 million negligible "Profit sharing" equivalent of 50% of net L hO miles NW run out of Steel, USA tons as of 1973 profits 2/ 1/ of Monrovia ore by 1975 National Iron Ore Mano River 2958 80 yeare 50% 004; 15% L20; 35% 1962 3.7 million $2 million originally 60 001 receives dividends on its 50% share- C ) near Guinean private American and tons million tons; holdlng in lieu of other income taxation I/ border Liberian investors now 25 million tons. Bong Mining Co. (BMC) Bong Range 1958 70 years 67.5% German consor- 1965 5.5 million $ho million 334 million Profit-sharing 50% of net profits or 250/ 50 miles north tium, of which August tons tons; ton of royalty whichever is higher 1/ 4/ of Monrovia Thyssen 37.5%; 32.5% Fe 38.7% Italian Finsider Group Liberian-American- Nimba 1953 .70 years 25% LIIETH anid 75% IAM- LAMcO J.V. 1963 10.9 million LAMCO $70 Reserves of LIBETH: Net profite subject to Liberian Swedish Minerals Co. County CO; of which 50% GOL total as- tons million; LIBETH LAMCO J.V. es- tax at 50% rate. (LAMCO) Joint Venture 50% LIO; LIO consists sets $186 $20 million; timated at, 290 LAMCO: GOL receives dividends on its 50% of Swedish (majority), million LAMCO J.V. as million of shareholding ar a minimum payment of 50 US and Liberian inves- a whole $90 which 190 mil- cents per ton exported whichever is tors. million lion Fe 6L% higher j/ k/ Liberian Iron and Steel The Wologisi 1967 75 years 80%.Liberian Interns- Project not yet "firm" 606 million No arrangement made yet. Steel Corp.(LISCO) Range tional American Corp. tons averag- (in which, Japanese ing Fe 35.6% consortium has 11%, L.E. Detwiler has a major interest). 1/ Excluding rental fees and other minor taxes, and excluding taxes paid in Liberia by employees of the concessions, or subsidiary activities. N.B. All concessions receive duty free entry of imported supplies and equipment related to their operations; most are specifically exempt from export cuties and other indirect levies. 2/ Was raised from 35% in 1965, by agreement be4ween Government and compare; the earlier agreement provided for this increase to take place in 1969. 1/ In the case of NIOC, Gbvt. subscribed its equity in cash (5 million), and LMC received its $1.5 million equity partipipation in return for relinquishing its rights to the iron ore properties. In LAMCO and BMC, the Government's shareholding was received in return for the grant of the mineral rights. I/ Per ton payments, where applicable, are troated as an advance against future dividends. Source: IMF: SM 68/67. -IBRD, AW-5 (March 1969) Informetion provided by the Liberian Government and companies. 96- Chart 1 IAMCO JOINT VENTURE GROUP STRUCTURE CONCESSION FROM LIBERIAN GOVERNMENT LAMCO J.V. Management LAMCO JOINT VENTURE Agreement Opr AgreementOprntg Comipany LIBETH LAMCO (Liberia Bethlehem (The Liberian Shipping and :ron Mines Company American-Swedish Sales Agreement Minerals Company 25% 75% IncomeTax Liberian Liberian Iron Government Ore Limited 50% 50% American, Liberian The Swedish LAMCC and other Syndicate shareholders 25.2% 74.8%_ SENTAB I Atlas Copco Grtgesborg Skanska Cement Nordstrums I feverke.I Linbancr 4/28 9/28 15/28 -97 - - 97 -Chart 2 NATIONAL IRON ORE CCMPANY GROUP STRUCTURE a.t. least 25% PRIVATES H OLDERS ESTATE AND F JEILY MINEIT R?RIE ICL LIBERIANT Substaitial 43% . 57% min or it y (approx.) (approx.) interest , LIBERIA LILERIAN GOV E r2' NENT MINING CO. ENTERPRISES LTD OF LIB1ERIA 15% 35%50 100%. 100% . NTOA IRON ORE CO. ASSOCIATED MINE MINE SPRVICES J- - WAGMENT ' LTD ASSOCIATES LTD Delegation of duties BONG nAIてCl三PROJLC’「 ―ー一一…―～■一吻円円島d■い嶋→国1中■国h→dヤい Schこ口2 …―&- - 99 - c. Bong Mining Company (BMC). BMC operates the DZLIMGO conces- sion in the Bong Range, about 50 miles north of Monrovia. It started produc- tion in 1965 and has since increased the annual capacity up to over 5 million tons. In 1972, production reached 5.5 million tons. The ore is relatively low grade and is concentrated up to 65% before being shipped over the company's railroad to Monrovia. Equity investment was provided by German and Italian investors. BMC is 67.5% owned by KONSORTIUM LIBERIA, a German consortium headed by August Thyssen Riette AG (55.5% of the consortium or 37.5% of BMC). The remaining 32.5% of RMC is owned by FINSIDER Group involving two Italian consortia based in Luxembourg and Rome. Government receives 50% of profits as profit-sharing or UU25 per ton of ore produced as royalty, whichever is greater, through German-Liberian Mining Company (DELIMCO) which administers the BMC concession. BMC has been engaged in an expansion program, which has expanded the annual capacity from 3 million tons of concentrate in 1966 to 6 million tons in 1972 and, upon completion in 1973, 6.1 million tons. The investment program has also included a cam- pletion of a 2 million ton/year pelletizing capacity in 1972. The Bong con- cession, covering 19,385 acres, has an estimated total reserve of 440 million tons of 38.7% iron ore. d. Liberian-American-Swedish Minerals CompanX (LAMCO). LAMCO started production in 1963 and has since been the largest producer in the country. The concession area is in the Nimber mountains, about 280 miles northeast of Monrovia, close to the Guinean border. The ore is generally of high quality (average of 65% Fe content). The annual capacity, which was 8 million tons per year in 1964-1967, was increased to 11 million tons level in 1968-1972. The company' increased production to 12 million tons n 1974. Present reserves are 149 million tons at 64% Fe, 99.1 million tons at 53% Fe, both proven, and 33 million tons probable at 64% Fe. IAMCO began pelleting operations in 1967. Its pelletizing capacity has now reached a 2-million ton/year level. 228. The IAM00 concession is operated as a joint venture, IAMCO Joint Venture, 25% owned by Liberian Bethlehem Iron Mines Co. (LIBETH) and 75% owned by LAMCO. LIBETH is a 100% owned subsidiary of Bethlehem Steel Co. LAMCO., for the purpose of profit-sharing, is now 50% owned by the Liberian Goverment and 50% by Liberian Iron Ore Ltd. (LIO). LIO in turn is 74.8% owned by the Swedish IAMCO Syndicate consisting of SENTAB (4/28), Atlas Copco (9/28) and Grangesberg (15/28). The whole operation, however, is done through LAMCO J. V. Operating Company by Grangesberg. 229. Gross investment in iron ore mining up to 1972 is estimated at US$601 million, while net investment as at 1972 was estimated at US$400 million. Between 1967 and 1971, gross investment increased by US$116 mill-ion or 24% per annum. The installation of a pelletizing plant by Bong (1970) accounted for most of the increase in gross investment since mid-196os. 230. As a result of the establishment of pelletizing plants by LAMCO and Bong, exports of pellets, which were non-existent in 1966, have increased sharply amounting to 4 million tons in 1972. Since pellets have a higher degree of processing than ores, concentrates, fines, etc., foo.b. unit price of pellets is substantially higher than that of other forms of iron ore. - 100 - Iron Ore Export Prospects in Liberia 231. Despite a subdued optimism for world iron ore market outlook, the phenomenal growth that has been experienced by the Liberian iron ore industry in the last two decades seems temporarily to have come to an end. The country's total production will increase from about 22 million tons in 1972 to about 25 million tons in 1975 but it will decrease to 22 million tons in 1976 will rise to 23 million in 1977 and will stay at that level until at least 1981. LMC's Bomi Hills mine is expected to be finished by end-1975 at the latest, the increase in 1977 will come from a new facility at Bong. Table 32 shows projected volume (and value) of iron ore exports in the period up to 1980. 232. Liberia's export earnings from iron ore are projected to rise from US$181.1 million in 1972 to US$484 million in 1980. The growth in earnings is mainly due to price increases as the volume is expected to remain the same. A large increase in earnings is expected in 1977 when part of the Bong concentrate output is shifted to more valuable pellets. 233. Prospects beyond 1980 are uncertain. However, there are several potential iron ore mines that could be brought into production in the 1980's. They are the Bie Mountain, the Wologisi Range, the Putu Range and several medium sized deposits in the LAMCO concession area. The common features of the first three of these potential mines mentioned above are: (a) the relatively low grade of ore and (b) the large size of reserves. Potential Iron Ore Mines In Liberia Mount Tokadeh 234. The ore body falls within the LAMCO concessions. Proven reserves are estimated at 160 million tons, of which 100 million tons are 535 Fe content magnetite ore and are amenable to treatment in the existing LAMCO washing plant located in Buchanan. The remaining part (50 million tons) of these proven ore reserves can be processed by gravity methods in a concentration plant. The feasibility of this process is being studied. 235. In June 1971, the LAMCO Joint Venture started the preparatory construction work of the Tokadeh mine, which began producing on schedule in January 1973. The annual capacity of this first phase operation is 1.5 million ton of crude ore or about 1.0 million ton of washed fines. Total investment in this project is estimated at US$7.2 million. This mine will be responsible for most of LAMCO's production when Nimba is depleted, and will be phased in so as to keep the total output at LAMCO at about 24 million tons per annum. Bie Mountain 236. Bie Mountain deposit is located in the western part of Liberia and about 95 km north by northwest of Monrovia. 237. Reserves are estimated to be 455-1,364 million tons involving three types of ore as follows: - 101 - Table 21: BIE MOUNTAIN DEPOSIT Ore Type Fe Content Estimated Quantity Remarks (percent) (million tons) Weathered 40-6 23.5-35.3 confirmed/assumed Semi-weathered 35-40 66.5-90.9 confirmed/assumed Non-weathered 30-35 366.0-1,237 inferred (taconite) 238. Despite the relatively low grade of ore, Bie Mountain project has an advantage in the area of transportation because of its location. The ore body is situated between the Bomi Hill mine of LMC (about 35 km) and the Mano River mine of NIOC (about 30 km) and could take advantage of an existing railroad. The Mano River railway running between the Mano River mine site and Monrovia (210 km, single track) passes immediately to the east of the Bie Mountain ore deposit, which carl be linked with a new 12 km extension. The existing railway has a transport capacity of 8-9 million tons per year, currently hauling 4-5 million tons of Mano River ore and 2.8 million tons of Bomi Hill ore each year. Since the Bomi Hill mine will go out of produc- tion at the end of 1975, there will be no problem in hauling up to 5 million tons per year of Bie Mountain ore. As to the port capacity of Monrovia, the port facilities may have to be expanded to accommodate 150,000 tons vessels. As the sea-bottom is either sand or mud, dredging will not be a problem. 239. At the request of the National Iron Ore Co. (NICO), which holds the mining rights on Bie Mountain deposit, the Liberian Mining Co. (LMC), which owns 15% of NIOC, has done a considerable amount of-prospecting and exploration work. Pursuant to an agreement between the Liberian Government and LMC relative to the Bie Mountain Deposit, LMC initiated a drilling program early in 1974. A decision as to whether to go ahead with a US$450 million investment in Bie will be made in early 1975. This would result in a pellet operation with an eventual capacity of 8.5 million tons per annum. Lofa County 240. . The Wologisi deposits are located in Lofa County, about 180 km (or 130 miles) from Robertsport. Total reserves are estimated at 600 million tons averaging 34.6% Fe content. The Liberia Iron and Steel Corp. (LISCO) holds the concession rights over the Wologisi Range area. Details of the deposit and the intended products are as follows: Table 22: WOLOGISI DEPOSIT Reserves Fe Content (c) (million tons) Crude Concen- Concentra- Ore Body Proven Probable Ore trates tion Ratio Main Ore Body 692 50 35.2 66.1 2.93 Balagisi (Inferred) 200 100 38.1 66.8 2. 3 Total 892 150 35.6 66.2 2.93 - 102 - 241. A detailed report was prepared by a group of interested Japanese companies on the possible development of the Wologisi mines. According to the report, a feasible plan is to mine both the main and Balagisi ore bodies at the same time to produce 10 million tons of con- centrates per year. This would require about US$500 million in invest- ment. A decision as to whether to proceed, with America Metals Climax as management, will be taken in 1975, and if positive the plant could produce by 1982. The Putu Range 242. The Putu Range, located in Grand Gedeh County, has been known to have a large iron mineralization. Although the extent of reserves has not yet been determined, on the basis of drillings so far, approximately 580 million tons of possible mining reserves of low grade iron ore with the average iron content of 41% are indicated. It is estimated that exploration will last until at least 1978 and that if a decision to invest is made at that point (current estimates are for a cost of US$500 million) a 10 million ton operation would be producing by 1985. Mount Gangra, Mount Yuelliton and Mt. Beeton 243. LAMCO has been continuing prospecting work within its concession area, concentrating on the Mt. Yuelliton - Mt. Gangra area and the Mt. Beeton area. The company reports that a considerable iron mineralization (about 150 million tons so far) of the same type as in Mt. Tokadeh has been indicated in the Mt. Beeton area. Total reserves in these areas are indicated at 348 million tons of soft are and 550 million tons of hard ore. Implications of Potential Iron Ore Mines in Guinea for Liberia 244. There are two important potential iron ore mines in Guinea which may have significant implications for Liberia. The two deposits are so-called "Guinea Nimba" and "Guinea Shimando" deposits. 245. The "Guinea Nimba" deposit is only 28 km from Liberia's LAMCO Nimba mine. Reportedly, the "Guinea Nimba" has reserves of over 1,000 million tons averaging 68% Fe content. The proposed plan is to complete the construction of the mine and a railroad connecting to LAMCO's Nimba Buchanan railroad so as to utilize LAMCO's railway for exporting the Guinean mines output (7.5 - 10.0 million tons a year). If this materializes it will contribute to Liberia's government revenue through increased profits of LAMCO. - 103 - 246. The "Guinea Shimandol deposit, whose reserves are said to be several times larger than Guinea Nimba, is located to the northwest of the "Guinea Nimba". The Guinean Government's proposal is to develop a railroad system connecting the mine to Konakry (port) and later extending it to the Guinea Nimba. Economic feasibility of this railroad is not certain. Another possibility, although slight at the moment, is to construct a railroad starting from the Guinea Shimando going through the Wologisi range in Liberia to reach Robertsport on the Liberian coast, and develop both the Guinea Shimando and the Wologisi mines at the same time. This would probably make an economic sense, however, at the present time, the Guinean Government has declined to consider this possibility. Is Liberia getting a "Fair" Share out of Iron Ore Exploitation? 247. Another important issue relating to the iron ore mining sector in Liberia is the question whether Liberia is getting a "fair" share out of the existing iron ore concessions. The efforts of the Liberian Government to improve the share of Liberia's take in this important enclave sector are discussed in the fiscal section. The recent renegotiation of the LANCO concession agreement has improved the situation. However, considering the possibilities of further improvemenis in this direction requires a clearer understanding of basic concepts involved. 248. What Liberia gets out of foreign-owned concessions may be measured by the "returned value". The "returned value" is defined as the resources made available to the national economy directly by concessions and it is measured in terms of payments made to local factors of production and the local government by concessions. Or alternatively, it may be defined as that part of output (in value terms) which is retained by the local economy. In any case, in the context of Liberian rubber and iron ore concessions, it consists largely of (a) taxes and other payments to the Government (including land rents and import duties paid on the goods used by concessions) and (b) wages and salaries earned by Liberian (i.e. non-expatriate) employees. Expenditures by concessions and their expatriate staff on locally produced goods are believed to be rather small and do not make much difference for the present purpose of rough comparison. 249. Table 23 shows available data relating to the "benefits" accruing from foreign investments in primary industries to host -.-:lLries. It compares the ratios of returned value, and components thereof, to sales or gross product in various enclave sectors in several courtries. Because of the rough nature of underlying data and the definitional discrepancies involved, no more than very rough conclusions should be drawn on the basis of the ratios shown in the table. 250. Comparing, first, rubber and iron ore in Liberia, points can be made. First, Liberia is getting much more out of rubber concessions than out of iron ore concessions. Roughly 40% of gross product of rubber concessions is "returned" to Liberia, while only less than 20% of gross product of iron ore concessions is "returned" to Liberia. Secondly, in case of rubber, the main contribution of concessions is based on the - 104 - Table 23% International Comparison of Benefits from Foreign Investments in Primary Industries to Host Countries Rubber Iron Ore Bauxite Copper Copper Petroleum Petroleum Liberia Liberia Jamaica Chile Zambia Nigeria Venezuela 1966 1971 1965 1972 1961 1956 1968 1956 1964 I. Government Revenue as a fraction of sales or gross product .165 .086 .096 .130 .243 .406 .336 .235 .143 II. Local Wages/Salaries as a fraction of sales or gross product .271 .308 -na- .035 .106 .136 .122 .099 .030 III. Returned Value as a fraction of sales or gross product .436 .394 -na- .165 .349 .542 .458 .334 .189 Source: Rubber in Liberia - A. Ghoshal, The Impact of Foreign Rubber Concessions on the Liberian Economy 1966-1971 (Mimeo, 1972); Iron Ore in Liberia - IBRD mission estimates; Bauxite in Jamaica, Copper in Chile, Petroleum in Nigeria - S. R. Pearson, Petroleum and the Nigerian Economy (Stanford, 1970); Copper in Zambia - Copperbelt of Zambia Mining Industry Yearbook 1968 and IBRD Economic Report on Zambia (4-ZA, October 1972); Petroleum in Venezuela - R. F. Mikesell, Forei4n Investment in the Petroleum and Mineral Industries (Baltimore, 1971). - 105 - relatively large component of local wages and salaries in the total gross product of rubber concessions, while the share of local wages and salaries in the gross product of iron ore concessions is relatively small - say, less than 5%. 251. Focusing on the issue of government revenue from iron ore concessions, data shown in Table23 appear on the surface to indicate that Liberia is getting out of iron ore far less than other countries are getting out of "similar" enclave operations on mineral exploitation. However, one important difficulty with this type of comparison is that it tends to ignore the relative profitability of each case involved. The concept of a fair share of government's take should relate to the rent portion of each productive activity rather than to the gross sales value. Therefore, data presented in the table are not sufficient to draw any definitive conclusion on this issue. However, this type of comparative analysis, if extended to take account of rent elements in various enclave operations, is useful to better define what would be the fair share of the government's take in such operations. Secondly, the international standard of a fair share of govern- ment's take in natural resource exploitation in developing countries has been changing rapidly in the last several years. Therefore, any analysis of this problem should be carried out on the basis of reasonably up-to-date data. In any event, it is our conclusion that Liberia, in spite of recent renegotiation, is probably not receiving her "fair share" from iron ore. Prospects for Minerals Other than Iron Ore 252. The geological survey of the whole country is far from complete. Recent geological explorations have identified the existence of heavy mineral beach sands involving rutile, ilmentie, monazite, zircon, chromite, etc. In August 1973, a concession agreement was signed between the Government and the Liberian Beach Sands Exploitation Company to exploit these heavy minerals along the beach between the Cestos and Cavella Rivers. A team of geologists has already commenced preliminary studies. Costs of exploration and feasibility studies are reportedly estimated at about US$1 million and, if feasibility is proven, this may lead to a possible investment of US$4 million for exploitation. 253. Diamonds are exploited in the Lofa River area. Diamondsexports in 1972 amounted to some US$5.7 million accounting for 2.6% of total exports in that year. They are exploited on a small scale, principally by individual prospectors. Data on total production are unreliable as there is reportedly considerable smuggling from Sierra Leone into Liberia. In the 16-month period ending December 1972, some 1.1 million carats of diamonds valued at US$8 million were exported from Liberia. However, only a portion of this total is believed to have been produced in Liberia. The Government recently cancelled five concession agreements with diamondscompanies and awarded the most of the mining areas to 157 small prospectors. 254. A new company,Globex Minerals (Liberia) Inc., has been granted a diamondsconcession along the Lofa River. Mechanical equipment has been purchased and the company's total commitment so far is over US$500,000. A concession for the mining of barite is also being negotiated, as well as three concessions for diamonds and two for gold. An option agreement to - 106 - Universal Mineral & Oil Ltd. is also in process of ratification. The option period is for two years and the company undertakes to spend US$250,000 on exploration work. During the option agreement the company has the right to apply for a concession to explore for and to produce petroleum. Previous petroleum exploration (off share) has not been productive in spite of favorable geological formations. Finally, LAMCO has begun intensive survey of the mineral deposits in the areas immediately adjacent to its line of rail. - 107 - PROSPECTS FOR RUBBER IN LIBERIA Rubber in the Liberian Economy 255. Liberia is an important producer of natural rubber in Africa, having accounted for 2.7% of world production and 44% of African production in 1971. All rubber produced in Liberia is exported. 256. The relative importance of rubber in Liberia's export earnings, however, has been declining over the last 15 years or so. From 1934, when Firestone started tapping the rubber trees in the Firestone con- cessions area, until 1958, when the Liberian Mining Company (LMC) Bomi Hills iron ore mines came into full production, rubber accounted for an average of well over 50% of the total export earnings of Liberia Rubber exports as a proportion of total exports have declined steadily since 1951 when the LMC started iron ore exports. This was partly due to the rapid growth of iron ore and timber exports and partly due to the long- term declining trend in rubber prices. In 1972, rubber exports amounted to US$29 million and accounted for about 12% of Liberia's merchandise exports. 257. The relative contribution of rubber sector to GDP has also tended to decline in the recent few years. It accounted for 5.6% of total GDP in 1972, as compared to the 9.1% in 1964. Rubber accounted for 25% of GDP originating in agriculture in 1972 as compared to the 34% in 1964. 258. The relative contributi6n of rubber concessions to total government revenue in the forms of direct taxes and other payments to government has also been falling in the recent few years, down from 10.1% in 1966 to 3.6o in 1971. 259. Despite the declining relative importance in its contributions to export earnings, GDP and government revenue, rubber still is the most important source of employment and income for the Liberian worker. 260. Currently, the rubber industry in Liberia consists of seven foreign-owned concessions 1/ and some 5,300 Liberian owned farms. Six of the foreign firms have their own plantations as well as processing plants while one, Alan Grant, has only processing facilities to process raw rubber purchased from Liberian farms. In 1972, of the total production of 173.7 million lbs., the six concessions (excluding Alan Grant) accounted for 76% (132.2 million lbs.) and Liberian farms the remaining 24%. 261. Firestone Plantations Company is the largest of all the concess- ions, having produced 92.2 million lbs. from its own pl?ntations in 1972. 1/ These are: Firestone Plantations Comp4.ny, B.F. Goodrich Liberia, The Liberia Company, Liberian Agricultural Company, African Fruit Co., Salala Rubber Corporation and Alan Grant. - 108 - Thus,_it alone accounts for 53% of Liberia's total production. In addition, Firestone purchased some 34.8 million lbs. from Liberian farms and 3.2 million lbs. from Salala. Firestone thus processed and sold some 72% of the rubber produced in Liberia in 1972. Despite the growth of other foreign concessions over the last 10-15 years and the growth of Liberian farms over the last 30 years, Firestone still is indeed the single dominating factor in Liberam rubber industry today. 262. The problems of the rubber sector in Liberia at the present time are: (a) the unexciting long-term outlook for world natural rubber market; (b) the pending renegotiation of concession agreements; and (c) the low returns for most of the Liberian-owned farms compared to those for conces- sions. The last mentioned problem in turn involved three distinct issues: (i) the low yield per acre in Liberian farms; (ii) the high cost of internal transportation; and (iii) the farmgate prices which are very low in compari- son with world market prices. The Historical Evolution of Rubber Industry 263. Compared with iron ore mining which started in 1951 in Liberia, rubber production has a much longer history in the country. The first rubber plantation was established in 1910 by the British Mount Barclay Rubber Plantation Co. The company planted about 2,000 acres, at Mt. Barclay, 20 miles north of Monrovia. The plantation was abandoned due to falling prices on the world market during the 1920-1921 depression. Prior to 1910, there had been two other companies, the Liberian Rubber Company and the Monrovia Rubber Company but they were engaged only in the collection and marketing of wild rubber.1/ 264. The "Stevenson Plan" of 1921, an attempt by British rubber interests to mopolize the world rubber market (based on their extensive Malayan holdings), and its announced price of US$1.25 per lb. (equivalent to over US$3 at today's prices), prompted American interests to seek their own sources. This led Firestone to Liberia where, in 1924, negotiations were started with the Liberian Government. They first rented the abandoned plantations at Mt. Barclay and began the rehabilitation. The company imported seedlings from Sumatra and employed a Dutch specialist for budgrafting. In 1926 the company obtained a 99-year lease of a concession area of 1 million acres (405,000 ha.) near Harbel on the Farmington River.2/ By 1928 some 25,000 acres (10,000 ha.) were planted including 7,000 acres (2,800 ha.) on the Cavalla River. Planting continued at a rapid rate for four more years. 265. With the advent of the Great Depression in 1919, rubber prices began to fall and eventually reached a low of US/3 a pound in June 1931. By that time, Firestone'.s rubber trees planted in 1926 and 1927 were 1/ Mainly Landolphia; Hevea is not native to Liberia. 2/ The concession agreement was, by the standards of the time extremely generous to Liberia. Forty years of world-wide evolution in such agreements make it seem regressive only by today's standards. - 109 - nearing tapping age but tapping was not started and planting was stopped. In 1934, demand for rubber increased and prices began to rise again, and the acres already in rubber were soon rehabilitated and tapped. During the remainder of the 1930's, additional acres were cleared and more rubber trees planted. By 1940, some 72,500 acres (29,000 ha.) had been planted, and about 16 million lbs. of latex were being produce ifrom the 39,200 acres (15,700 ha.) which were by then of tapping age.- Table 24 shows the growth of rubber acreage in Liberia and Table 25 the growth of rubber production. 266. During World War II, production by Firestone was expanded very rapidly, especially after Malaya came under Japanese control. Trees were tapped before they reached the customary age, and mature trees were over- tapped by double panelling, shortened resting period, etc. In 1945, Firestone's production was about 50 million lbs. a year. 267. After the war, over-tapping-was stopped and production tempo- rarily declined. However, since planting had continued during the war, new acreage was coming into production by the late 1940's. Thus, Firestone's production increased to over 70 million lbs. by the early 1950's. In the meantime, in response to the continued strong demand due to the world-wide economic boom based on the post-war reconstruction and .the outbreak of the Korean War, Firestone kept on expanding its planted acreage until the end of the Korean War. Firestone also made further progress in the development of higher yielding clones and of improved cultivating and tapping methods. 268. Major acreage expansion by Firestone was stopped around 1953, but in 1954 Firestone began a long-range replanting program, replacing old, low-yielding trees with the new, high-yielding varieties. Thus, despite the fact that the acreage was not being expanded, Firestone's total production, after having levelled off at the level of around 80 million lbs.per year for a decade, began to increase again from the mid-1960's. Firestone's production increased from 77 million lbs. to 95 million lbs. in the 1964-1971 period during which its acreage was virtually unchanged (Table 25). Average yield per acre at Firestone plantations increased from about 1,000 lbs. in the early 1950's, to 1,200 lbs. around 1960 and to about 1,00 lbs. in the early 1970's (Table 26). 269. Liberian owned rubber farms were not established in any sig- nificant scale until the outbreak of World War II when prices sky- rocketed. 270. Early Liberian growers of rubber were mostly members of the urban elite which was aware of the opportunities offered but later local farmers also planted rubber. A rubber "belt" quickly developed around the road between Monrovia and Firestone's plantation at Harbel. 1/ W.C. Taylor, The Firestone Operations in Liberia, National Planning Association, 1956, p.59. - 110 - Table 24: LIBERIA: GROWTH OF RUBBER ACREAGE, 1928-1972 (Unit: thou8and acres) Year planting started 1928 1940 1956 1957 1960 1961 1965 1970 1971 1972 Concessions Firestone Plantations 1926 25.0 72.5 87.5 87.9 87.5 n.a. n.a. 88.5 88.9 92.1 Other Concessions Liberia Company 1956 - - 0.1 0.3 2.4 3.0 n.a. 5.4 5.4 5.6 African Fruit Co. 1957 - - - 1.7 3.9 (4.4) n.a. 5.4 5.4 5.4 Liberia Agriculture Co. 1960 - - - - n.a. 7.0 n.a. 18.1 18.2 18.2 Salala Rubber Co. 1961 - - - - - 1.0 n.a. 5.1 5.1 5.1 B.F. Goodrich 1960 - - - - n.a. 10.0 n.a. 11.o 1.0 14.0 Sub-total - - 0.1 2.0 15.6 (25.h) n.a. h8.1 48.1 [8.3 Total Concessions 25.0 72.5 87.6 89.9 103.2 110.6 132.4 136.6 137.0 140.4 Liberian Fanns 1940's - n.a. n.a. n.a. 115.0 118.6 135.0 147.8 149.3 150.8 Country Total 25.0 n.a. n.a. n.a. 218.2 229.1 267.4 285.9 286.4 291.2 Source: Rubber Planters' Association of Liberia Clower, Dalton, Harwitz and Walters, Growth Without Development, 1966 W.C..Taylor, The Firestone Operations in Liberia, 1956 - 111 - Table 25: LIBERIA: RUBBER PRODUCTION, 1937-1972 Unit: lbs. million Total Liberian Country Year Firestone concessions Farms Total 1937 5.2 5.2 - 5.2 1938 6.8 6.8 - 6.8 1939 10.7 10.7 - 10.7 1940 15.8 15.8 - 15.8 1941 18.3 18.3 - 18.3 1942 25.6 25.6 - 25.6 1943 33.1 33.1 - 33.1 1944 34.8 34.8 0.7 35.5 1945 51.2 51.2 0.8 52.0 1946 48.3 48.3 0.9 49.2 1947 46.7 46.7 1.1 47.8 1948 53.6 53.6 1.3 5h.9 1949 57.6 57.6 1.8 59.3 1950 63.9 63.9 2.7 66.6 1951 72.6 72.6 4.4 76.9 1952 72.7 72.7 5.4 78.1 1953 72.5 72.5 5.9 78.4 1954 75.8 75.8 6.3 82.1 1955 78.5 78.5 7.6 86.1 1956 80.5 80.5 8.3 88.8 1957 73.3 73.3 9.0 82.2 1958 83.8 83.8 11.1 94.9 1959 83.0 83.0 12.2 95.2 1960 80.8 80.8 13.9 94.7 1961 79.6 79.6 15.5 95.1 1962 77.2 77.2 17.0 94.2 1963 77.6 78.7 18.3 97.0 1964 76.9 78.9 19.0 97.9 1965 80.2 83.3 27.4 110.7 1966 80.9 87.1 33.7 120.8 1967 90.1 100.3 35.4 135.7 1968 91.0 104.h 36.7 141.1 1969 87.9 106.1 41.3 10.4 1970 92.8 118.7 53.4 172.1 1971 95.2 127.7 52.3 180.0 1972 92.9 132.2 48.1 180.3 Source. Basic sources are Rubber Planters Association, Fire- stone Plantations Co., Alan L. Grant Co. and B.F. Goodrich Co. Secondary sources used are Clower, Dalton, Harwitz and Walters, Growth Without Develop- ment (Evanston, 1966); I14F, Liberia - Recent Economic Developments (SM/73/104; May 1973); and Animesh Ghoshal, The Development of the Rubber Industry (mimeo May 1973) - 112 - Table 26: LIBERIA: RUBBER AVERAGE YIELDS, 1951-54 and 1960-1972 (1bs. per acre) Average All Liberian Firestone Salala Goodrich L.A.C. Afric. Fruit Liberia Co. Concessions farms 1951-54 1,004 1,004 n.a. 1960 1,163 1,163 293 1961 n.a. 1,166 296 1962 n.a. 1,120 300 1963 n.a. 1,080 297 1964 n.a. 1,035 300 1965 n.a. 1,065 398 1966 n.a. 1,054 465 1967 1,298 51 813 153 493 756 1,164 473 1968 n.a. n.a. n.a. n.a. n.a. n.a. 1,162 483 1969 n.a. n.a. n.a. n.a. n.a. n.a. 1,127 529 1970 1,414 645 1,o47 515 806 859 1,210 643 1971 1,489 950 1,183 640 712 1,168 1,286 608 1972 1,525 1,151 1,263 949 762 1,289 1,362 547 Source: Rubber Planters' Association of Liberia. - 113 - Liberian rubber growers were given considerable help from Firestone in all aspects of rubber growing, including soil testing and credit for opening up a rubber farm (not in the form of cash but in equipment). 271. Even after Firestone stopped expanding its acreage in the early 1950's, Liberian owned rubber farms kept on growing in number, both in total acreage and in total production. This trend continued right up to the early 1970's. The number of rubber-producing Liberian farms thus increased steadily from about 150 in 1940 to over 2,000 in 1960 and to an estimated 5,300 in 1972, total acreage planted by Liberian farms rdaching 115,000 acres by 1960 and 150,000 acres by 1972 (Table 24). Total production of Liberian farms increased from about one million lbs. in the immediate post-war years to over 10 million lbs. by 1958, to over 50 million lbs. by 1970. 272. The average per acre yield of Liberian farms has always been far below that of Firestone. The average yield of such farms, however, has tended to improve during the last 10-15 years; rising from about 300 lbs. per acre in the early 1960's to about 600 lbs. in the early 1970's (Table 26). 273. Until 1956, Firestone was the only foreign concession growing rubber. However, five other "new" foreign concessions started growing rubber in Liberia between 1956 and 1961 and their total acreage reached over 25,000 acres by 1961, accounting for over 11% of total rubber acreage at that time. First, the Liberia Company, which is owned and financed by American-German capital, was granted a concession agreement in 1947. The agricultural development of the Liberia Company took place within a 25,000 acre area situated about 15 miles from Ganta. The devel- opment area is known as Cocopa. Having planted 600 acres in cocoa and 1,400 acres in coffee by the end of 1955, the company began planting rubber in 1956. The company's total area in rubber reached about 3,000 acres by the end of 1961, and about 5,400 acres in 1971. 274. B.F. Goodrich Corporation, a U.S. corporation, obtained an 88-year concession agreement in 1954 and started planting rubber in 1956, in an area west of Monrovia on the IDfa River. The German-owned African Fruit Company was granted an 80-year agricultural concession agreement in 1952 and began to plant bananas on a development site ten miles from Greenville on the west bank of the Sinoe River. In 1955, the company's banana plants were struck by Panama disease and the company soon decided to switch to rubber production. The company started planting rubber in 1957. The Liberian Agricultural Company owned by Uniroyal, concluded a 70-year concession agreement with the Liberian Government in 1959, and started planting rubber in 1961. Finally, the Dutch-German-owned Salala - 114 - Rubber Corporation started planting rubber in 1961 on the basis of a 70-year agreement concluded in 1960. 275. During the 1960's, total planted acreage and production of the five "new" foreign concessions increased steadily from slightly over 25,000 acres in 1961 to 48,o00 acres in 1970-1972, while their output rose from zero in 1962 to almost 40 million lbs. in 1972. World Market Outlook for Natural Rubberz/ 276. One of the most important problems for the future of Liberia's rubber industry is the question of world market outlook for natural rubber: Whether or not the slowly declining trend in the prices of natural rubber during the last two decades is likely to continue in the coming decade and beyond (Table 27 and Chart 5). The answer to this question will have a decisive influence over the prospects of Liberia's rubber industry. 277. Production of natural rubber is highly concentrated in the Southeast and South Asia regions, but nearly all natural rubber produced is consumed in non-producing developed countries. More than 90% of all exports are shipped from four Asian countries - Malaysia, Indonesia, Thailand and Ceylon - and Malaysia alone accounts for 45% of world exports. The remainder is exported by a group of some 15 minor exporting countries. Liberia accounts for 2.7% of world production of natural rubber (See Table 28). 278. On the demand side, by far the single most important source of elastomer consumption is the automobile and related industries, where apart from tires and tubes rubber has several other uses: in car seats, hoses, gaskets, etc. Since rubber forms a rather small element of cost in the manufacture of a vehicle, the demand for rubber is not sensitive to its own price. Other uses, such as furniture, carpeting, and con- struction are significant, but small compared to the automobile industries. 279. The essential feature of the natural rubber market is that it faces keen competition from synthetic rubbers. During the post-war period the world market for elastomers, that is, synthetic as well as natural rubbers, has been growing rapidly at an average rate of about 7% per annum, with a slower growth rate in consumption in the major consuming countries (the United States and the United Kingdom) being offset by an above-average rate of growth in all other countries (Table 29). However, the overall buoyant demand for elastomers was associated with a slow growth of natural rubber supplies (2.6% per annum between 1950-52 and 1970) and a rapidly rising supply of synthetic rubber (about 10% per annum). Consequently the share of natural rubber in the market for new rubber outside the centrally planned countries declined from 65% 1/ This section was written before the world-wide commodity price increases of 1973-74. The analysis and long-run conclusions are however, essentially unchanged. The "energy crisis" resulted in a permanent USJ12/1b. increase in the price of synthetic rubber, thus an equilibrium long run prices for natural rubber should be about US030 (in 1974 dollars). - 115 - Table 27: PRICE OF NATURAL RUBBER - RSS1 11EW YORK, 1920-1974 (US cents per lb./US cents per ka.) Actual US 0/lb. US 0/kg. 1920-29 36.8 81.1 1930-38 12.6 27.8 1948-54 31.7 69.9 1948-67 38.1 83.9 1955-59 h2.3 93.3 1960-64 36.9 81.4 1965-69 23.1. 50.9 1950 41.4 91.3 1951 60.7 133.8 1952 38.8 .85.5 1953 2h.2 53.4 195h6 23.6 52.0 1955 39.2 86.14 1956 34.2 75.4 1957 31.2 68.8 1958 28.1 61.9 1959 36.6 80.7 1960 38.1 83.9 1961 29.5 65.o 1962 28.6 63.0 1963 26.2 57.8 1964 25.3 55.8 1965 25.7 56.7 1966 23.6 52.0. 1967 19.9 43.9 1968 19.9 43.9 1969 26.2 57.8 1970 21.0 46.3 1971 18.2 40.0 1972 18.2 40.2 1973 35.6 78.5 1974 39.3 86.6 - 116 - Chart 5 10- 9· 7- 9. RUBBER éf . <.b... i GOODaICN 2 F IiE 5 TONE 3 SALALA RUDBE R CORP. 4 T.HE PRESIOE NT'S FARM 7. 5LIBER IA COMPANY t LAc 7 AFRICAN FRUIT CO. yFiESTONE C A VA LLk A RUBBER PLANIATION4 RUBBER FARM SLOW BUSK AND AGRICULTURA L LAND RA INFORØES - 5. 4. 0 25 50 75 100 KILOMETRES 0 25 50 75 100 MILES SiI I i SCALE 1:3000000 7 i - 117 - Table,281 NATURAL RUBBER: PRODUCTION BY REGIONS AND COUNTRIES AND SHARE OF REGIONS AND COUNTRIES IN WORLD TOTAL Yearly Production Rate Share in World Region/Country of Total 1955-57 1966-68 M99 Change 19-19-6 (... 1,000rnmetric tons...) ........... percent...........) Developed Countries None None None None None None None Developing Countries Asia: Malaysia 705.h 1,032.2 1,267.9 3.5 36.4 41.0 43.9 Indonesia 714.0 713.2 790.4 0.4 36.9 29.5 27.4 Thailand 135.0 226.7 ?81.8 4.8 7.0 9.0 9.8 Ceylon 97.3 141.0 150.8 3.4 5.0 5.6 5.2 Vietnam 68.7 39.7 26.2 4.9 3.5 1.6 0.9 Cambodia 30.5 52.1 51.8 5.0 1.6 2.1 1.8 India 23.6 61.5 80.0 9.1 1.2 2.4 2.8 Other Asia 2/ 19.6 24.2 24.8 1.0 0.9 Total Asia 21,79h.1 2,320.6 2,73.7 292.7 92.2 92.7 Africa: Liberia 38.8 59.8 66.9 2" 4.0 2.0 2.4 2.3 Nigeria 36.6 58.3 56.8 2/ 4.3 1.9 2.3 2.0 Zaire 31.0 30.4 35.0 0.2 1.6 1.2 1.2 Others 21.5 22.8 14.4 0.3 0.8 0.8 Total Africa 111.3 1'0.0 181.3 3.9 .7 Latin America: Brazil 23.0 22.8 24.0 0.1 .1.2 0.9 0.8 Other Latin America 6.1 7.0 7- 1.3 0) 0.3 0.2 Total Latin America 29.1 2 31.0 0.2 1.5 1.2 Total Developing 1,934.5 2,520.4 2,886.2 2.4 100.0 100.0 100.0 Wbrld (excluding centrally planned countries) 1,934.5 2,520.4 2,886.2 2. 100.0 100.0 100.0 Centrally Planned Countries None None None None None None None World (including centrally planned countries) 1.,934.5 2,520.4 2,886.2 2.4h 100.0 100.0 100.0 I/ Excluding centrally planned countries. 2/ Includes Oceania. 3/ Net exports data have been taken because of non-availability of production figures for 1969. Source: International Rubber Study Group (IRSG), Rubber Statistical Bulletin, Various issues; FAO, Production Yearbook, various issues. - 118 - 1/ Table 29: WORLD- RUBBER CONSUMPTION & STOCKS NR Stocks: Totzl NR NR Share in Total Consumption NR Synthetic Total Stocks Actual Estimated/ Ratio (---------000 metric tons------------ ---------Percentage------------ 1950 1,557.5 590.3 2,147.8 L55 72.5 68.9 29.2 .1951 1,367.3 825.5 2,192.8 81 62.3 67.0 35.2 1952 1,291.6 899.2 2,190.8 508 58.9 65.1 39.3 1953 1,51L.4 886.5 2,400.9 521 63.0 63.2 3h.h 195L 1,694.9- 751.7 2,h"6.6 S01 69.2 61.3 29.6 1955 1,778.8 1,079.4 2,858.2 523 62.2 59.3 29.4 1956 1,630.2 1,152.7 2,782.9 523 58.5 57.6 32.1 1957 1,61.9 1,279.5 2,921.4 538 56.2 55.5 32.8 1958 1,586.8 1,263.9 2,850.7 ,518 55.6 53.6 32.6 1959 1,705.3 1,583.0 3,288.3 k65 51.8 51.7 27.3 1960 1,65.7 1,798.8 3,53.5 520 7.9 9.7 31.3 161 1,593.6 1,893.3 3,486.9 L98 45.7 47.8 31.3 1962 1,681.6 2,172.5 3,854.1 533 43.6 45.9 31.7 1963 1,721.6 2,365.3 4,086.9 L93 42.1 43.9 28.6 1964 1,812.2 2,723.3 4,535.5 563 39.9 42.1 31.0 1965 1,371.7 2,952.0 4,823.7 563 38.8 40.2 30.0 1966 1,955.6 3,252.5 5,208.1 603 37.5 38.2 30.1 1967 1,917.7 3,322.8 5,240.5 670 36.5 36.3 3L.9 1968 2,133t2 3,860.8 5,994.0 633 35.5 34.4 29.7 1969 2,232.0 4,318.8 6,550.8 673 34.0 32.5 30.2 1970 2,288.7 4,462.8 6,751.5 765 33.9 30.6 33.4 1/ Excludes Centrally Planned Countries. 2/ Linear trend estimated by simple least squares. The regression equation was estimated to be: Y - 70.839 - 1.917 t r2 - 0.94 (71) Sourcet Rubber Study Group, Rubber Statistical Bulletin, Various issues. - 119 - in 1950-52 to 32% in early 1970's. The share of natural rubber in the United States, where the synthetic rubber industry was established during World War II for strategic reasons, has dropped to 23% from 44% in 1950-52. In most other countries, natural rubber's share in the demand for elastomers falls in the range of 35 to 45%. Regarding the technical superiority of natural rubber, about a quarter of the elastomer demand, under the existing technology, is believed to be specific to natural rubber, and not to be easily displaced by the available synthetic rubbers. 280. Styrene-butadiene rubber, commonly known as SBR, has so far been the closest competitor with natural rubber in tire-use. It is the most widely used synthetic rubber, accounting for some 60% of synthetic rubber production in the world,including centrally planned countries. How- ever, it is its ready availability rather than its technical superiority which was primarily responsible for this. If natural rubber had been available in sufficient supply, SBR would probably have failed to replace natural rubber in the end-uses. 281. The stereo-regular rubber, polybutadiene and polyisoprene, were discovered some two decades ago, but began to be commercially produced only in the early sixties. They are continuing to find their way into the markets of natural rubber as well as SBR. Polyisoprene could success- fully replace natural rubber under the existing conditions in the remaining uses, provided it could be produced more cheaply, and/or the price of natural rubber were to exceed a certain level. It is unlikely that the long-run price of natural rubber would exceed that of polyisoprene in the current decade. 282. As a fair degree of substitutability exists between natural and synthetic rubbers, price formation in the natural rubber market is not independent of the state of the market for synthetic rubbers. Indeed the following characteristics of the market suggest that the long-run natural rubber price is set (though not in a formal fashion) by the synthetic producers: (a) Supply of natural rubber in the short run is quite price inelastic. Output cannot be expanded sig- nificantly because of the limits imposed by the existing tree capacity. On the other hand, a de- cline in rubber price does not result in a sig- nificant reduction in output since resources de- voted to rubber production are quite "use-specific". Where producers do have a choice to move to more profitable pursuits, the decline in supply is off- set by an increase from intensive tapping by those producers who have no such alternatives available to them but who wish to maintain their subsistence income from rubber,/ 1/ For details, see Irfan ul Haque, "Efficiency in Resource Allocation: The Case of Natural Rubber", EC-179, IBRD, July 13, 1971, Chapter II. 120 - (b) Supply of synthetic rubber is price elastic. Not only is gestation period in the synthetic industry relatively short, but also a substantial excess capacity usually exists in the synthetic industry. (c) Since almost the entire elastomer demand is in the nature of derived demand, it is not very price elastic. (d) A fair degree of price competitiveness exists among various types of rubber, particularly between SBR/ polyisoprene and natural rubber. A change in the price of natural rubber relative to the prices of substitutes encourages substitution within limits. 283. The implications of the above propositions are that synthetic producers as a group more readily adjust their supplies to the existing state of the elastomer demand and supply than producers of natural rubber. Natural producers dispose of their supplies at a price which is largely determined by the synthetic producers. 284. Historically, the producers have not only found ways to produce synthetic rubbers more cheaply but also, indeed more importantly, have improved their technical attributes to match, and in certain respects surpass, those of natural rubber, The rubber users also in expectation of a rather slow expansion in natural rubber supplies gradually began to orientate their plants to the use of synthetic rubber. Thus, the natural rubber's share of the market on purely technical grounds has gradually diminished over the last couple of decades. 285. Table 30 gives the probable course of world natural rubber supply and elastomer demand in the current decade. As a result of ex- tensive replanting and new planting of rubber areas with the new high yielding clonal material, rubber output expanded rapidly in the last few years; it increased from 2.4 million tons during 1964-66 to 3.8 million tons in 1971. The rate of expansion is expected to be further stepped up in the next few years, when, according to the estimates prepared by the International Rubber Study Group (IRSG), output would reach 3.9 million tons in 1975 and 4.8 million tons in 1980. These estimates exclude the possible effect of an extensive use of a recently developed yield stimulant called Ethrel, which, if successfully applied, would probably add another 100,000 tons and 500,000 tons respectively to the supply in the two benchmark years. 286. The new high yielding clones have been mainly responsible in improving the productivity of land and labor employed in natural rubber production and maintaining it,not only a viable but also a reasonably profitable avenue,for investment in the face of declining rubber prices. Recent researches in Malaysia promise yields of 3,000 - 4,000 lbs. per acre (with a possibility of even reaching 6,000 lbs. eventually) as against the current average of 1,200 lbs. in that country. Under current cultural practices, yields of up to 2,000 lbs. are fairly common in lands planted with the new material. - 121 - Table 30: PROJECTIONS OF DEMAND AND SUPPLY OF NATURkL RUBBER (thousand tons) Actual Projections 196h-66 1967 1968 1969 1970 1975 1980 Production 2,437 2,487- 2,632 2,885 2,898 3,900 4,800 Exports to centrally planned countries 556 584 709 752 706 800 1,000 Supplies to market economies 1,881 1,903 1,923 2,133 2,192 3,100 3,800 World consumption of all rubbers 1/ 1,846 5,2L0 6,ol1 6,550 6,750 9,200 12,200 Share of natural rubber in world production 1/ 38.8 36.3 32.0 32.6 31.5 33.7 31.1 1/ World excluding centrally planned countries. Source: International Rubber Study Group and Commodities and Export Projections Division, Economic Analysis & Projections Department, IBRD; cited from Irfan ul Haque, Analysis of Natural Rubber Market. - 122 - 287. World (excl. CPE's) consumption of rubber is expected to grow from 6.8 million tons in 1970 and 7.7 million tons in 1972 to 12.2 million tens in 1980 - i.e. at 6% per annum during the 1970-1980 decade. 288. From a purely technical point of view, the share of natural rubber in total elastomer consumption could remain at the current level (31,5 - 32%) or could further decline to 25"1' - i.e. the current share in the U.S. However, in view of the expected rapid expansion in natural rubber supplies and the expected continuation of the past growth trend, in elastomer demand, the declining trend in the share of natural rubber in the rubber market is likely to be halted at the current level. (This means that world consumption of natural rubber will increase at about per annum.) The sale of the larger volume of natural rubber would require, more than ever, the price of natural rubber to remain competitive with the prices of synthetic substitutes. 289. The future trend in the price of natural rubber thus depends on the future trend in the price of synthetic rubber, which in turn depends on the future trend in the cost of producing synthetic rubber. 290. The developments in the costs of producing synthetic rubber, however, are very difficult to predict. The most important single element of cost of production is the cost of the basic monomer. The synthetic producers have devoted most of their research efforts to finding means of reducing its cost. This has been successful in the past and some further decline in this element of cost is anticipated in the case of polybutadiene and SBR. Also, cost reduction in the raw material input of polyisoprene may result from some further economies of scale in the manufacture of J Vprene. On the other hand, rising costs of labor, capital, petroleum,-and other raw materials as well as added costs of pollution control should tend to increase the cost of synthetic rubber. On balance, the costs in current dollar terms are expected to rise over the coming years, although not fully in step with the rate of general inflation. 291. The price of natural rubber, RSS1 in New York, rose from USW18.2 per lb. in 1971-1972 to US136 in 1973. The price is forecasted to average USe5b per lb. in current terms arouna 1980. In real terms the price is expected to decline to a 1973 equivalent of US/32 per lb. 2/ Rutber (Concession Policy 292. Currently, a little over 70' of total rubber production comes from concessions' plantations, while Firestone alone accountsfor 70% of total concession production. The six rubber plantation concessions account for almost half of the country's rubber acreage. It is estimated that the 1973-74 rise in petroleum prices added USJ12 to the cost of SBR. 2/ Estimate made late-1974. - 123 - 293. Now that renegotiation of LAMCO and Bong concession agreements has been completed, the Government is slowly renegotiating the Firestone rubber concession agreement the first in that sector. A model agreement for rubber concessions has not been prepared. This is in contrast to the cases of iron ore and forest utilization for which model agreements have been prepared. The Government does not yet have any clear idea as to the "targets" it wants to attain in renegotiating the existing agreements in the case of rubber. 294. In the prospective renegotiation of rubber concession agree- ments, the following points should be considered: (a) The land rent of Usd6 per acre was fixed in the 1920s in the case of Firestone and has never been changed. (b) The income tax holiday periods range from 14 to 164! years and can be shortened without much loss of equity if judged by present-day standards. (c) The scope of import duty exemptions is excessive and should be more limited as it has been done in the latest model concession agreement for forest utiliza- tion. 295. While the inequities in the existing concession agreements must be corrected, it must be realized that the background for renegotiation of these agreements is not particularly favorable. The Government has not been approached with any new application for a rubber concession in the last decade. Due to the declining trend of natural rubber prices in the past two decades and the uncertain market prospects for natural rubber in the long term, rubber growing in Liberia simply. has not been an attractive proposition for potential foreign investors. Therefore, the bargaining position of the Government vis-a-via the existing rubber concessionaires is not very strong in so far as the world market background is concerned. 296. An important cause for the generally low returns to Liberian owned farms is the fact that they do not have their own processing facilities and are forced to sell their rubber to foreign concessions which buy the rubber at low prices. Firestone, B.F. Goodrich and Alan Grant (and recently the Liberia Agricultural Company as well) are the purchasers. There is a typical oligopsonistic - or rather, monopsonistic - situation - i.e. (a) a large number of sellers, (b) only a few purchasers who always act as if in collusion, 1/ and (c) the low price elasticity of supply. 1/ Firestone is so dominant that it sets prices and the others have to follow suit. - 124 - 297. The purchase prices set by Firestone are related to world market prices. However, margins between the prices in the end markets and the purchase prices set by Firestone and others in Liberia are unjustifiably large. Table 31 compares the purchase prices in Liberia, f.o.b. unit values for Liberian rubber exports and world market (New York and Singapore) prices. Thus, during the last 7 years, the average "spread" between the New York RSS3 price (USJ20.5/lb.) and the average purchase price in Liberia (USjl11.4/lb) was US9.01/lb., or b4% of the average New York price. "Marketing and processing" deductions in Liberia are about US3.5 - 4.5/lb. higher than in Malysisa, allowing for the differences in freight costs (Singapore to New York vs. Monrovia to New York 1/) and for sizeable ceases and export duties in Malaysia. 298. Part of the problem is that Firestone honors a number of moral obligations such as free housing, medical attention, education, light and water, subsidized food etc. not only to its workers but also to a vast number of worker's dependants. As a normal commercial practice this must be costed against production. The cost amounts to USJ2 per lb. based on the entire throughout at Firestone, and to this extent the Liberian farmers are subsidizing the employees of Firestone. If based on Firestone's own production the cost would. be US/lb. and this combined with the antiquated, high cost plant at Harbel, would mean that should the Liberian farmer have an alternate, more attractive market for his product, then the working conditions, and thus the output of Liberian largest rubber producer might deteriorate. 299. In order to correct the above situation the Government is establishing two small-scale processing facilities, following the patterns of similar schemes already in operation in Malaysia. One of 300 tons will be located at Gbanga and the other 600 tons at Kakata. Processing should begin in 1975. 300. Of the two main issues relating to the rubber concessions, the renegotiation of existing concession agreements and the question of Firestone's purchase price policy, the latter question should command a greater attention than the former. 301. Recent Development. Since the visit of the Mission in early 1973 the rubber industry in Liberia has experienced both the 1973-74 rise in prices and the subsequent fall in 1974. While there is evidence to suggest that for a brief period of time a substantial increase occurred in the number of trees being tapped, it is fairly clear that the price boom was too short to elicit much in the way of increased production and that at present the returns to many Liberian rubber farmers are again below the costs of production. Thus the long run outlook for the industry is essentially unchanged from the above analysis. 1/ 70J of Liberian rubber exports is shipped to the U.S. and 30' to Europe. - 125 - Table 31: PRICES OF RUBBER IN LIBERIA, CORPARED WITH NEW YORK AND SINGAPORE PRICES, 1960-1972 Unit: U.S. cents per pound Liberia: Purchase Prices Liberia: FOB Export New of Locally Produced Rubber Unit Value York Singapore Latex Specific Non-spec. Average Latex Crepe All Coagul. Coagul of (2)& (3) exports RSS #3 RSS #3 1960 n.a. n.a. n.a. 31.2 n.a. n.a. 39.4 1961 n.a. n.a. n.a. 21.5 n.a. n.a. 28.5 1962 n.a. n.a. n.a. 19.1 n.a. n.a. 26.9 27.9 24.8 1963 n.a. n.a. n.a. 16.0 n.a. n.a. 26.0 25.6 23.1 1964 n.a. n.a. n.a. 14.3 31.7 30.6 31.1 24.9 21.9 1965 n.a. n.a. n.a. 15.9 28.4 21.9 25.0 25.2 22.4 1966 n.a. n.a. n.a. 14.1 24.0 20.6 22.1 23.3 20.7 1967 n.a. 11.6 9.6 10.6. 21.5 17.4 19.5 19.5 16.8 1968 n.a. 11.4 9.4 10.4 19.5 16.1 18.0 19.5 16.7 1969 19.1 17.3 15.3 16.3 21.5 21.6 21.3 25.8 22.2 1970 15.8 12.9 11.3 12.1 20.6 19.1 19.7 20.6 17.6 1971 1.7 10.0 8.1 9.1 18.6 16.4 17.4 17.6 14.5 1972 13.1 8.4 7.5 7.9 15.9 17.3 14.2 Source: Rubber Statistical Bulletin; Rubber Olanters' Bulletin; Economic Survey of Liberia ITMF and TRD economic reports; Quarterly Statistical Bulletin of Liberia A. Ghoshal, The Supply Response of Liberian Rubber Farmers (memo July 1973) - 126 - FORESTRY AND FOREST INDUSTRIES 302. As the forestry sector promises to be one of the potential bases for development the mission placed particular emphasis on analyzing the current p sition and future prospects of this econic activity. The findings of the mission are presented in Volume IV of the report. In this section of the main report we present a brief description of the sector and an out- line of the policy recommendations. It must be emphasized that this is a rapidly developing part of the economy and at present the government's position towards it is undergoing a fast evolution. Thus much of what is said here may well be already outdated. The Role of Forestry and Forest Industries in the Liberian Economy 303. Despite the phenomenal expansion of timber production in recent years, the role played by the forestry sector in the Liberian economy is still relatively small if compared with the importance of iron-ming and rubber production. However, under a proper set of government policies, forestry and forest industries could play a vital role in the development of the Liberian economy in the future. In the face of the expected leveling- off in the production of iron ore and rubber, at least, in the near-term a continued rapid expansion of timber exploitation over the next few years and the immediate establishment of a sizeable timber processing industry could play a key role in mitigating the likely slowdown of the economy's overall growth. In the longer term, in view of the bright demand prospects for forest products, forest resources, which are renewable, could form a permanent resource basis for the development of an increasingly sophisticated timber processing industry in Liberia with the possible benefits of "linkages for the rest of the economy. 304. Forestry's contribution to GDP at current factor cost is estimated to have been about $8.7 million in 1972, accounting for 2.3% of the total estimated GDP in money economy in that year. 305. Export earnings from forest products were $8.2 million in 1972, accounting for 3.3 of total merchandise exports in that year. Export earnings from forestry have increased very sharply in the last five years, rising from less than $1 million in 1967 to over $8 million in 1972 and quite probably to about $15 million in 1973. 306. "Direct" contribution of the forestry sector to government revenue, has also been increasing sharply in recent years. The sum of the surface rents charged on forest concession areas and the stumpage fees collected on the timber felled increased from less than $300,000 in 1968 to $460,oo in 1972; the latter is to be compared with the $1.9 million revenue from rubber concessions during the same year. In 1972, the "direct revenue" forestry accounted for only 1.5% of the overall government revenue and 5.5% of the total revenue from iron ore, rubber and forestry concessions.1/ 1/ No significant amount of corporate income tax has been collected by the Government from.the forestry concessions, either because of tax holidays or because of lack of reported profits. - 127 - 307. There are no official estimates of total employment engaged in forestry and sawmilling. However, based on a very limited number of inter-, views with large timber companies, the mission estimates that, as of March 1973, 2,500-3,000 workers were engaged in forestry utilization and sawmilling activities inclduing transportation of logs and sawnwood by timber companies' trucks. The Resource Base 308. Liberia has a total area of 11.1 million hectares (ha.) of which about 2.5 million ha., or 6.2 million acres, are covered by areas of closed tropical rain forest. Two-thirds of the closed rain forests are located in the southeast of Liberia, nearly one-third in the northwest and only 2% in the north around Nimba. 309. A complete inventory work covering all National Forests was carried out from 1960 to 1967 by a German-Liberian team under the bilateral technical aid program of the Federal Republic of Germany. In the opinion of the inventory team, of 25,000 sq. km. (2.5 million ha.) available, about half is exploitable, while the other half is either too poor in marketable timber or inaccessible due to rough terrain. In the southeastern region of Liberia, the major portion of the closed forest is exploitable (1.1 million ha.) with 40% being accounted for by territory outside the National Forests. As for the northwest region, the major portion of forests is inaccessible and only the southern forests are exploitable, perhaps only 1,000 sq. km. Furthermore, the exploitable forests in the northwest are expected to have disappeared within a few years, due not so much to logging operations as to increasing shifting cultivation. 310. Total volume of exploitable marketable timber of above-cut-limit sizes in the southeast has been estimated at 31.9 million m3. The same timber areas are believed to contain at least an equal volume of the same species in the below-cut-limit sizes. Although annual average increments of various species involved are not known in any degree of accuracy, the maximum annual exploitation of all Liberian timber areas on a sustained- yield basis may be presumed to be around 500,000 m3, assuming that it takes an average of 65 years for the major marketable species to grow to above- cut-limit sizes. 311. However, since the exploitation timber areas include "unprotected forests" which could and would be exploited more rapidly than assumed under a sustained-yield logging program, total volume of logs to be removed annually could easily exceed 500,000 m3 during the rext several years; depending on market conditions and government poltcies. 312. The forest utilization activities of Liberia are geared to the export of logs. Only a small portion of those logs which are'processed in the local sammills is exported. There is no production of plywood or veneer sheets in Liberia today. - 128 - 313. The production of logs has been increasing sharply in the last five years as the exports of logs have expanded rapidly. The production of logs (roundwood intended to be used for industrial purposes; excluding fueldwood) increased eightfold, from 48,000 m3 to 406,000 m3, in the 1967- 1972 period. According to the Ministry of Agriculture, the production of "export logs" increased from 18,000 to 315,000 m3 in the same period, while the exports of logs as reported by the Customs Authorities increased from 32,000 mJ to 222,000 m3 in the 1968-1972 period. 1/ 314. The sudden increase in export (hence production) of logs since 1968 can be attributed to the following circumstances. First, by 1967, merchantable timber resources in the most accessible areas of the traditional exporting countries in the region -- Ivory Coast, Nigeria, Ghana, Gabon, Cameroon, etc. -- had been largely depleted as a result of the intensive exploitation in the preceding decades. In the face of rising costs of exploiting the tropical hardwood resources in the less and less accessible areas of these countries, the timber companies (mostly European) operating in these countries were looking for alternative forest areas. Second, the work of the German-Liberian forest inventory team was completed in 1967 and it became clear that a large part of Liberian forests could be exploited very profitably. These factors, coupled with the well-recognized "open door" policy of the Liberian Government resulted in a large number of forest utilization concession agreements around 1967-1968. Third, a boom in import countries, particularly in construction took place in 1968-1973. Fourth, Liberia stumpages were extremely low. As a result of the explosive increases in log exports, Liberia now ranks as the fifth largest exporter of tropical hardwood in West Africa -- after Ivory Coast, Gabon, Nigeria and Ghana. 315. Both the number of concessionaires and the total area assigned to concessionaires have been growing since early sixties, especially after the mid-sixties. Concessions were granted to two timber companies in 1960, and the first export shipment of logs began in 1961. As of December 1963, there were 9 companies which had forest products utilization contracts and the area under the contracts totaled some one and a quarter million acres (half a million hectares). Also, 905,000 acres (365,000 hectares) were under forest survey permits. By the end of 1972, the number of timber com- panies operating had grown to 17 and the area under concessions totaled around 4.18 million acres, or 1.7 million hectares. 316. As of March 1973, there were 15 companies applying for new con- cessions totaling 3.5 million acres (1.4 million ha.) in area. This, if approved, would bring the total forest area under concessions to 7.7 million acres or 3.1 million hectares and exhaust virtually all of the closed forest areas in Liberia. 317. The Government of Liberia has been attempting to improve the concessions policy and administration since 1965. Generally, the efforts have been directed toward two areas: (a) the improved administration of 1/ The differences between these figures are due to variations in coverage and purpose. Neither set should be literally interpreted as representing production. - 129 - existing concession agreements; and (b) the negotiation of new agreements in more favorable terms and in more comprehensive and unambiguous terms, The latter has included renegotiation of already existing agreements as well as drawing up a model concession agreement. Timber Concession Policy 318. In accordance with the tradition of the open door policy, timber exploitation in Liberia has been and probably will be carried out entirely by private timber companies -- in many cases, foreign owned -- on the basis of concession agreements with-the Government of Liberia. Therefore, the terms of the timber concession agreements are of vital importance to the Government in the pursuit of its policy in the forestry sector. The terms of concession agreements also affect other aspects of the national economy. 319. The Government of Liberia-has long been seeking improvements in concession agreements and, with the initial help of the Harvard Development Advisory Group, has been making significant progress since the mid-sixties. A model timber concession agreement was completed at the beginning of 1973 by the Concessions Secretariat. The recent concession agreement with Macars Timber Corp. is the first agreement based on such a model agreement. Future negotiations of timber concessions will be based on the model agreement. Furthermore, the Government intends to renegotiate the earlier agreements with the timber companies before long,in order to standardize all timber concession agreements. The Concessions Secretariat has recruited, through FAO, a forestry economist to advise and assist the Government in the negotia- tion or renegotiation and administrationlof forest concession agreements. 320. The two basic objectives of the current forestry policy are: (i) the maximum utilization of the existing timber resources from the viewpoint of national economy and (ii) the conservation of the timber potential on a perpetual basis. These are reflected in the obligations of the forestry concessionaire as stipulated in the model agreement. They relate to (a) fiscal obligations (payment of surface rents, stumpage fees, income and other taxes), (b) participation of Liberians in ownership and management, (c) processing of timber in Liberia, (d) preference for Liberian state and private shipping companies in shipping the products, (e) minimum standards of employment conditions with respect to health, safety, education, labor training, etc., (f) "good forestry practices", (g) reforestation and prevention of damage to forests, (h) proper disposal of wastes and (i) periodic reporting on operations. These obligations are discussed in detail in the separate volume on forestry. 321. Under the model agreement, the concessionaire is required to pay a stumpage fee "in keeping with existing rules and regulation governing the harvesting of timber for the local market or for export as specified under the Forest Law." In view of the fact that the income tax revenue to be collected from timber concessions is not likely to amount to much, the stumpage fee policy is the most important policy in the forestry area. The Minister of Agriculture is authorized by law to determine - 130 - the levels of stumpage fees, which usually differ whether the logs cut are to be exported as logs or to be processed locally and, in case of export logs, depending on species. 322. -,umpage fees for export logs are more important than those for "local logs" and the levels of the former (and, in principle, those of the latter as well, for that matter) are changed from time to time in the light of changing market conditions. In view of the prevailing high market prices for export logs, the Ministry of Agriculture announced a revised schedule of stumpage fees to be applied to all export logs, effective June 1, 1973. 323. With the June 1, 1973 increases in the export stumpage fees, the average level of stumpage fees on export logs iucreased by 150%. Stumpage fees on 20 significant species now average $6.90/m3 as opposed to the previous average level of $2.79/m . 1/ 324. The stumpage fee on "local logs" (logs to be processed in Liberia whether to be exported or to be used locally after processing) was announced to remain at $3.00/MBF or $0.86/n3; this rate applies to all local logs regardless of species. 325. While announcing that, unlike the export stumpage fees, the local log stumpage fee should remain at the previous level, the Ministry announced for purposes of registration, totally new levies on processed timber; (a) a levy of 3% on the sale value of all forest products, other than round logs, being exported from Liberia, and (b) a levy of 1% on the sale value of all forest products, other than round logs, sawdust, bark and sawmill waste, being sold within the country. These are in the nature of excise taxes. These are bad taxes from the viewpoint of the nation's interest in encouraging the establish- ment of a large timber processing indastry, as they amount to more than the equivalent export stumpages on all but the most valuable species. Some Policy Issues, Proposals and Recommendations 326. There are four key issues in the forestry sector of the Liberian economy at this time: (a) increasing the government revenue from timber concessions; (b) encouraging the development of mechanical wood processing industry in Liberia; (c) carrying out an adequate program of reforestation; and (d) establishment of pulp and paper industry. 327. These issues relate to policy objectives involving somewhat different time dimensions, although all of them except for the last one are equally urgent. 1/ These averages are based on the 1971-72 exportmix. Actual experience in 1973 and 1974 put the averages at $3/m3 prior to June 1973 and $10/m) after that date. The Government subsequently raised stumpages on some primary species so that at the beginning of 1975 the average was $18/3. By way of contrast, Ivory Coast tariffs applied to the Liberia mix-.qould yield $25/m3. - 131 - It may be said that the government revenue policy involves the next five years, the issue of timber processing the next 20 years and the problems of reforestation and pulp and paper industry the next 50 years. 328. The development of mechnaical wood processing industry in Liberia at this time is desirable and: (a) it will contribute to the industrialization of the economy; (b) increase the value added; (c) increase the export earnings; (d) increase the opportunities to utilize "secondary species" very little of which is currently being exported, and (e) have favorable employment effects in some parts of the country. Mechanical wood processing is an ideal vehicle to help industrialize the economy because: (i) it requires relatively simple technology and easy- to-learn skills; (ii) it requires relatively small capital in setting up an economic unit in comparison with many other lines of industrial activities such as the production of fertilizers, petro-chemical industry and automobile industry; and (iii) it is a typically weight-losing (hence freight-cost- saving) activity and provides a good opportunity to industrialize "remote areas" on the basis of locally available resources. In view of the difficult experience of other major timber-exporting countries in West Africa (and elsewhere), utmost effort should be con- centrated on the development of timber processing industry now. This is urgent because, in a few years, it will become increasingly difficult due to the rapid depletion of the preferred species (as it happened in other countries). On the negative side it should be noted that proces- sed timber faces a stiff external tariff in the EEC and thus the long run viability of such an industry in Liberia may depend onits ability to negotiate around this wall. 329. The recent increases in stumpage fees on export logs are a step in the right direction both because they would tend to increase the government revenue and because they tend to discourage the exports of wood in the form of logs thus indirectly encouraging the timber comoanies to go into processing for export sales. 330. The present policy of the Government is to require each timber company to process locally 100% of its timber harvest by 1977. This policy is to be gradually introduced, 20% increase per annum starting in 1973. If a company fails to comply with the regulations, the Government can deny the issuance of export permits for the sale of round logs to the company until the company has complied with the policy and regulations. - 132 - 331. Whether this policy works or not will have to be seen in the next year or so. This policy is rather difficult to administer and some problems are anticipated. Timber processing is not a very attractive business at the moment in Liberia, while log exporting is. This policy therefore, goes against the principle of private profit motive. So long as the business of exporting round logs remains lucrative, timber companies will do everything to concentrate on log exporting and do the least on local timber processing. The new levies on processed timber sales -- 3% on exports and 1% on local sales -- may not help the situation either. A substantial export levy based on value of sales is likely to encourage the practice of under-invoicing export sales for the purpose of customs clearance. 332. Despite the recent sharp increases in the export stumpage fees in Liberia, the average burden of payments to the Government per cubic meter of export logs is still too low compared with the prevailing very high prices of major species. In fact, under the new system, the levels of exports stumpage fees are geared to the levels of f.o.b. prices; the ratio of stumpage fees to f.o.b. prices ranges around 6-9% except for extreme price ranges. Of course, the Goverment also collects surface rents on the basis of the number of acres involved in concessions; but these are minor at the moment (10V per acre per year). At present, income tax payments do not amount to much either, because: (a) many companies are new and still on tax holidays; and (b) even the old ones which are no longer on tax holidays tend to under-report profits. Thus, the average burden of the payments to Government per cubic meter of export logs does not exceed 15% of f.o.b. prices at the most. 333. In order to discourage log exports and to encourage processed timber exports, the export stumpage fees should be raised even higher, perhaps to the point where the profits from log exporting become so thin that timbe-r companies will have to decide either to go out of business or to take timber processing very seriously. Of course, this is not a sufficient condition but this is an essential and necessary condition for promoting a rapid growth of processed timber exports in Liberia. 334. The problem of reforestation is just as urgent as the issues of government revenue and timber processing. Liberia's forests are rapidly being depleted, and not only is the replacement minimal, but more important, most of the Liberian land is not suitable for anything but forest, and if simply left after cutting it will rapidly deteriorate to the point where it is useless for anything. Obviously one cannot talk of economic reforestation with hardwoods. The time required is such that rates of return are effectively zero. However teak has a significantly shorter growing period and more important, Gmelina can be grown in only eight years. 335. In an attempt to ensure that the obligations of the concessionaires to carry out adequate reforestation, the Bureau of Forest Conservation, in cooperation with foreign experts sponsored by the German Government, FAO - 133 - and CARE, has created an independent organization to carry out the required reforestation program on behalf of the concessionaires in exchange for the payment of fees by the concessionaires. 336. The establishment of pulp and paper industry in Liberia is not urgent at thisstage, but such a possibility is being studied by LACO with a plan of using Gmelina. Projected Export Earnings and Government Revenue from Forestry, 1973 - 1978 337. Export earnings from forest products should expand rapidly (22% per annum) from $7.2 million in 1971 to $38.8 million in 1978. The volume of log exports will continue to rise sharply in 1972 - 1975, from 222,000 m3 to oo,ooo m3, and then will increase only slowly up to 425,000 m3 by 1978. 1/ 338. Processed timber exports have so far been negligible. These exports, however, can be expected to rise in the next few years as a result of continuing efforts on the part of the Government to encourage local timber processing. The total value of processed timber exports is projected to increase from $30,000 in 1972 to $9 million in 1978. 339. Government revenue from forestry, based on stumpage, fees on log production, surface rentals and sales levies, is expected to increase from $1.2 million in 1972 to, at least $7 million in 1978. In addition to the items listed above, the government revenue based on corporate and personal income taxes is also expected to increase. Revenue from corperate income in forestry should increase in the next few years as many of the existing companies go off their tax holidays. 1/ See Statistical Appendix (Volume II) Table 3.16 - 134 - TOURISM IN LIBERIA 340. Although its general accessibility and its political and social stability provide a favorable atmosphere for tourism development, Liberia has few physical attractions to offer the potential international tourist. The climate is hot and humid, particularly during the rainy season which extends from May to November and especially so along the sea coast. Liberia's long stretches of sandy beaches are attractive, but swimming is not always safe and many are polluted from tar and oil discharged by tankers off the Liberian coast and from industrial wastes (e.g. the beach near Buchanan where the water is orange red in color as a result of pollution from the nearby pelletizing plant). The possibilities for game-viewing or hunting are limited. The folklore and traditional way of life of Liberians are of interest, but by themselves provide a rather fragile basis for long- term tourism development. Moreover, the areas with the best long run tourist potential are at the extremes of the country; Lake Piso, Harper, and Mt. Nimba. 341. The adverse effects of these handicaps are exacerbated by some of the same problems which hinder the development of tourism in other West African countries, namely, their distance from the main tourist markets and the high transportation costs involved and the limited availability and high cost of tourist services. 342. Statistics on the number of non-residents who visit Liberia are not systematically collected. The Ministry of Information, Cultural Affairs and Tourism estimates that in 1972, about 1,300 tourists visited Liberia, but the basis for this estimate is unclear. Many of these were special interest groups (e.g. educators, scholars, etc.) although it can probably be safely assumed that businessmen made up the bulk of the total. 343. Hotel capacity in Liberia consists of one first-class hotel with about 200 rooms and 275 beds and a number of second and third-class hotels with some 200 rooms and 400 beds. Most of these are located in Monrovia particularly in the area between Roberts International Airport and Monrovia. The 200-room Ducor Intercontinental Hotel located on a hill with a good view of ,Monrovia and the sea, was completed in 1964 and is now quite run-down. L/ This hotel caters primarily to business and official visitors. The other hotels cater to mixed clienteles of resident and non-resident tourists and business visitors. Because of Liberia's position, some airlines have crew changes at Monrovia and a number of rooms are reserved year-round to accommodate these crews, thus ensuring at least partial occupancy for some of the )hotels through- out the year. 344. Monrovia's international airport is capable of accommodating aircraft of the Boeing 707 type, and about 10 international airlines fly there regularly. Beaches in the vicinily of Monrovia are fairly easily accessible from Monrovia on generally good roads. Electricity and water supply do not pose much problem in Monrovia, but, may be problematic else- where in the country. There. is at present no sewerage system in Liberia, except in Monrovia, where a sewerage system is under construction for the city and its suburbs. 1/ The Government plans to renovate it in 1975. - 135 - 345. Efforts to promote tourism in the past have been limited. The Ministry of Information, Cultural Affairs and Tourism has a small tourism division, which is charged with devising and carrying out suitable policies and. programs for tourism development in Liberia. In addition, a recent Act of the Legislature created a National Tourist Board, consisting of public and private sector agencies concerned with tourism, to act in an advisory capacity to the Ministry. 346. No public sector plan for tourism exists in Liberia. The Government is apparently anxious to develop three areas to begin with, namely: a) the beaches in and around Monrovia, where some development has already taken place in response to local tourist demand; b) the Lake Piso area in view of the therapeutic qualities of the water of the lake and the possibilities for swimming and other water sports facilities available there; and c) the beaches around Buchanan. 347. The priority accorded to the beaches in and around Monrovia appears relatively sound, since these are the most easily accessible and are the ones likely to require the least infrastructural investments. The attractions of these beaches and particularly of the other two areas are, however, not such as to warrant optimism about their ability to draw substantial flows of international tourists to Liberia. Business visitors will, of course, continue to come to Liberia, as will special-interest groups, and some of these can probably be induced to stay a bit longer, if facilities are available, as is not the case now. Prospects for holiday visitor traffic growth are less bright, although some black Americans and other tourists on circuits of Africa may include Liberia as a stop. Presently available facilities are probably sufficient to accommodate such increases in the number of these visitors as may occur in the next two or three.years. Domestic tourism growth may, however, warrant additional facilities or expansion of existing ones, but no statistics are available to enable one to gauge the present or potential importance of domestic tourist traffic. -136 - IV. INFRASTRUCTURE Transportation 348. A detailed analysis of this key sector is contained in a separate volume (Volume VI) of this report. Here we present a brief summary of the sector. 349. Liberia's strategic geographic location at the Western edge of the African continent on the Atlantic coast makes it an ideal transit point for international aircraft and ships to and from the Americas and Europe, however domestically, Liberia has thick inland deciduous forests, coastal mangrove swamps, heavy seasonal rainfall and poor road-making soils - each of which contributes to a comparatively high cost of ground transportation. 350. The nation's transport system is focused on Monrovia, the capital and largest city, which is served by a modern deep-water port; two inter- national airports, a skeletal trunk road network and two short stretches of railway line. Other centers are Buchanan with its modern port and railroad, and Harper in the extreme south of the country. 351. The highway sector, although not well developed, is the predominant domestic transport mode for moving passengers and non-enclave products from the hinterland to Monrovia and other seaports. The movement is mostly from the hinterland to the seaports and vice versa, with relatively little move- ment between interior points. Good statistics do not exist but a growth of about 5% per annum in recent years is consistent with the available evidence. With the increased concern,for,.and planned economic activities in the interior, with the concomitant emphasis on road improvement, domestic passenger and freight volumes are expected to grow slightly faster in the near future. 352. The number of registered vehicles more than doubled in the five- year period 1966-1970, from 11,732 to 23,210. Assuming the trend has been maintained, Liberia should now have a total of over 35,000 vehicles. About one-third of the vehicle fleet consists of heavy vehicles (mainly trucks), the rest being taxicabs and passenger cars. Liberia is relatively well supplied with vehicles although there tends to be an. over concentration of traffic in the major cities to the detriment of the hinterland and small villages. 353. The road transport industry, with free entry to all Liberians, is dominated by owner-operator or single vehicle companies. The fares and other charges although non-regulated, appear to be fairly reasonable and competitive with other West African countries. Poor highway regulation and enforcement, and lack of data on road user charges, road construction and maintenance costs, make it difficult to determine the extent to which operators rather than consumers are being subsidized by the Government (which appears to be the case). In spite of the fairly high ratio of 17.9 vehicles per 1,000 of population in 1972(compare 9.6, 8.3 and 10.5 vehicles for Cameroon, Dahomey and Ivory Coast respectively), it is extremely difficult for the average Liberian to finance an automobile purchase. . - 137 - 354. Of Liberia's 4,200-mile road network, 290 miles or about 11.6% is paved. The rest is all-weather laterite and dry-weather farm-to-market roads. In a comparative sense Liberia is very deficient in roads. Paved roads are relatively few and historically are connected to enclaves. Out- side of Monircia and Harbel, Liberia's first pavcd trunk road was not built until the late 1940s. Many major arteries, with vehicle counts far in excess of that necessary to justify paving, are a morass of mud in the wet season and heavy with dust in the dry period. Even in crucial areas, with more than 100 inches of rainfall per annum, arteries are not paved. Main- tenance is very inadequate and the deterioration of the vehicle fleet is particularly rapid. A comparison with other West African countries is illuminating: Table 32: ROADS IN WEST AFRICA Actual km/1000 Expected/1 Country People km/1000 people Ratio Ivory Coast 7.1 4.4 1.61 Liberia 1.9 3.9 0.49 Senegal 4-.l 3.8 1.06 Ghana 3.9 3.4 1.15 Sierra Leone 3.3 3.1 1.06 Guinea 3.3 2.6 1.27 Nigeria 1.4 1.4 1.00 /1 Derived from an analysis of IBRD member countries taking into account income and density of population. This is based on total miles of roads; an analysis of paved roads indicates even more glaring shortfalls. The primary network requires intensive and adequate maintenance and upgrading to cope with current and forecasted traffic. The $40 million current five-year road development and maintenance program may result in an improved network. 355. The Ministry of Public Works (MPW) is responsible for highway administration. The continued inadequacy of road maintenance activities has resulted in reorganization of the ministry to reflect greater emphasis onMain- tenance. Under the current five-year program, maintenance activities would be programed, new equipment acquired and maintenance supervisors and other technicians trained. 356. Although the g.overnment's policy has not been explicitly stated, the road developmeu win -maiiteniiact progl-aw aims at upgradii,8 a6 maintaining the main primary road from Monrovia to Cape Palmas and construc- ting other vital missing links in Montserrado and Lofa counties within the next five years. - 138 - 357. Subsequent road programs should be feeder road projects and road components of integrated rural development;such roads are the key to genuir Liberian development. 358. By statute, all national transportation policies are supposed to be handled by the Ministry of Commerce, Industry and Transportation, but in fact most transport development activities, especially civil construction and planning, are carried out by the Ministry of Public Works. The develop- ment of most rural and farm-to-market roads is carried out by the Ministry of Agriculture in connection with rural agricultural development projects, by the Ministry of Local Government, Rural Development and Urban Reconstruc- tion, and by the Action for Development Progress Agency. All these ministries act in a virtually independent fashion. 359. Besides the fact that "transportation" is a new appendage onto an already large ministry (Commerce and Industry), the skeleton and inexperienced staff, and the lack of operational policy account for the ineffective transport regulation in that Ministry. 360. With the Ministry of Public Works already doing most of the planning and execution of transportation in the nation it would be much easier to consolidate all transportation activities, including sector planning, in the Ministry of Public Works under a "Bureau or Department of Transportation." The skeleton staff now in Commerce and Industry could be transferred to MPW to augment the manpower requirement. It is more practical and feasible to concentrate all transportation activities in the existing MPW than to build up a first-rate efficient transportation section within the present Ministry of Commerce and Industry. 361. The Ministries of Agriculture and Rural Development would continue to provide the low standard roads they now do in full cooperation with MPW and in time, given traffic and other favorable economic indicators, the MPW would take over and upgrade or maintain these roads. Ports 362. Liberia's four main seaports - Monrovia, Buchanan, Greenville, and Cape Palmas-handle the nation's entire foreign trade and some transshipment to other countries. There has been a substantial increase from 16.1 millionton" in 1965 to 23.0 million tons in 1971, of total tonnage handled at the ports (representing a compound growth rate of 5.3% per annum). The major growth occurred in iron ore and has offset a steady decline since 1972 in general imports and transshipment. This decline is attributable to new customs regulations which adversely affect the transshipment and the holding of stock at the Freeport of Monrovia. The decline has been reflected in the port incomes of the National Oort Authority (NPA) which manages the port! of Monrovia, Greenville and Cape Palmas and in stevedoring services. 363. Port traffic is expected to gradually increase, mostly from iron ore and timber. There is sufficient capacity at Monrovia and Buchanan to handle this increase, but capacity at Greenville and Cape Palmas is limited - 139 - and neither can they efficiently handle much increased traffic; nor can they be significantly expanded or improved on their present sites. In view of t[te timber and iron ore potential of the area, there is a strong case for a new port in the southeastern region of Liberia. 364. NPA's administration of the ports (except Buchanan) is reasonably efficient although there is continuing need for professional personnel. Moderate profits were made from port operations during the past three years. 36$. Further investments in the ports, beyond maintenance and rehabilitation of existing facilities, must await the results of a comprehen- sive port development study in 1973-1974. This study aims at emphasizing the southeastern region whose development prospects hinge on a deep water port with good road or rail access to the hinterland. Railways 366. Liberia's 300 miles of railway line are owned and operated by four iron ore concessionaires (Liberia Mining Co., National Iron Ore Co., Bong Mining Co., and LAMCO Joint Venture Co.), almost entirely for transporting ore from the mines to the ports. Iron ore transported by the railways has increased from 12 million tons in 1964 to over 22 million tons in 1972. 367. Iron ore is Liberia's most important natural resource, accounting for 75% of foreign trade and 25% of public receipts. Production is expected to increase at about 5% per annum through 1974 and would result in a high efficient utilization of the railway capacity. There is practically no demand for railway services outside the enclave sector. Liberia's general transport needs could best be served by a road network system rather than by a common carrier railway network. Thus, any future expansion of the railway network in Liberia would be strictly in connection with iron ore mining activities, although possible future demand of railway services cannot be completely discounted at the moment. Air Transport 368. Liberia is served by 14 international airlines from two major airports, Roberts International and Spriggs Payne. International passenger traffic has grown from 42,000 in 1966 to about 59,000 in 1971 - an annual growth rate of about 7%. Most of these passengers, however, are in transit. Similar moderate increases have been registered over the same period in air cargo and air mail. Traffic forecasts indicate that this rising trend will continue. Some major improvements have been and are being carried out at the two international airports, but it is questionable as to whether both can be economically justified. 369. wiiv6 c air transport has either Oagtd or dclined cvcr the past six years. The government-owned Liberian National Airlines share of the domestic market has.declined at an annual rate of about 15% for the past six years. Among the possible reasons for this decline are: competitors by three non-scheduled charter companies; opening of new roads; limited service (LNA flies only to four of Liberia's more than 30 airports and strips); and variable demand for air services. The tourist - 140 - industry, a major user of domestic air transport services in most developing countries, has not been developed. There are no prospects for increased capacity by either the LNA or non-scheduled charter companies in light of the current and forecast demand conditions. 370. However, because of the lack of road access to many of Liberia's widely dispersed localities and the high cost of roads to such villages, the Government will have to continue opening and upgrading bush strips as this is the only means of transport in case of emergency. - 1141 - Public Utilities 371. The Public Utilities Authority (PUA) of Liberia was established in 1962 as an autonamous agency of the Government responsible for power, water supply and sewer services. PUA was reorganized in the beginning of 1972 anu its responsibilities were expanded to include radio/TV broadcasting and telecommunications; new legislation was passed establishing PUA as a holding company with four subsidiaries - the Liberian Electricity Corporation (LEC), the Liberia Water and Sewer Corporation (LWSC), the Liberia Broadcasting Corporation and the Liberia Telecommunications Corporation. Under this legislation, each subsidiary will have its own management and be given suffi- cient autonomy to carry out its day-to-day operations. Power 372. Power consumption in Liberia currently runs at about 700 million KWh per annum, about half of which is used by the mining companies. Consump- tion per capita is high by African standards even after discounting electri- city used by the enclaves. Virtually all the electricity available to individuals is in Monrovia and half of the power supplied to that city comes from the Mt. Coffee dam on the St. Paul river, the only hydro-electric plant in the country. Although this river has the second largest basin (8,500 sq. miles) of Liberia's rivers, this basin is very narrow, thus sub- jecting the river to extreme variations in levels. Other rivers with hydro- electric potential include the Cavalla (11,500 sq. miles), the St. John (6,600 sq. miles) and the Cestos (4,800 sq. miles) but they are generally located far from the centers of consumption and are thus likely to remain untapped for some time to come. At present studies are underway for a joint Liberia-Sierra Leone project on the Mano river (3,200 sq. miles) and may soon begin for the Cavalla with Ivory Coast. All non-hydro power in Liberia is generated from imported petroleum or its derivatives. 373. LEC supplies about 40% of the power consumed in Liberia, the remaining 60% being supplied mainly by the iron ore mining companies. LEC's presently installed generating capacity is 149 MW, consisting of 69 MW hydro capacity (46%) and 81 MW thermal capacity (5h%). The mining companies, together with small privately-owned installations. have a capacity of about 150 MW. 374. LEC's Monrovia system serves an area 70 miles x 125 miles in extent, from Totota in the northeast to Buchanan in the southeast and Bomi Hills in the northwest. The main centers of population and power load are Monrovia (the capital); Buchanan (an important port); Robertsfield; and Bong Mines and Bomi Hills (mining centers). The Monrovia system is the main source of public power, although LEC also operates seven secondary centers in rural towns/villages as an agent of, and with funds provided by the Government. These secondary centers generate 5% of total output, and separate accounts are kept for them. 375. The Bank has given two luais to FUA for power facilties. Th Bank projects consist of the expansion of the Mount Coffee hydro-electric power plant, addition of two gas turbines to the Bushrod themal power - 142 - station, provision of 69 kV transmission lines with substation facilities, and provision of distribution facilities in Monrovia and outlying areas. In addition to the Bank loans, LEC has recently received a credit from the German Goverment (US$h million equivalent) for further extensions of the distribution system which will meet LEC's requirements up to about 1985. 376. LEC experienced a very high load growth in the ten-year period up to 1970 with annual grcwth rates of between 15 to 20%. In this period, the Mount Coffee power plant was inaugurated, giving LEC a reliable public power system with adequate spare capacity which enabled LEC to supply power to industrial consumers previously operating their own captive power plants. Because of the relatively low cost of hydro generated power, LEC could also enter into contracts with two of the four mining companies for supply of sizeable quantities of power. In the years since 1970, however, the load growth has slackened considerably to an average annual growth rate of about 7%, a rate which is expected to be maintained over the rest of the decade. This lower load growth is caused by the fact that there are no more large industrial consumers with captive power plants, which could be economically supplied by LEC and that higher electricity rates have made the consumers reduce their consumption. At this forecast load growth, LEC's present installed capacity would be sufficient until 1982. 377. LEC is faced with a difficult problem regarding provision of future generating capacity. The utilization of the installed capacity at the Mount Coffee power plant, which is a run-of-river plant, is not possible during the dry season because of insufficient river flow. The St. Paul river basin, although convenient to Monrovia, is very narrow and thus subject to extreme fluctuations. Full utilization of the Mt. Coffee site will require upstream storage facilities. LEC has, therefore, to supple- ment the hydro power with thermal power generated on the gas turbines during long periods of the year. Because of recent sharp increases in fuel prices, this energy generated on the gas turbines has become very expensive. It is no longer feasible to installthe final two units (Nos. 5 and 6) at the Mount offee plant as originally planned, as they would operate only a limited period each year,- being replaced by gas turbines during the dry season and preli- minary investigations into possibilities of upstream storage reservoirs to firm the capacity at the Mount Coffee power plant show that the investment cost would be prohibitive at this stage. 378. In view of these developments, LEC will now have to re-examine previously established long-range power development plans and seek cheaper generation alternatives. LEC therefore intends to undertake studies to investigate the potential hydro sources within Liberia and along the border rivers to neighboring countries. In this connection, Liberia and Ivory Coast recently made a joint request to African Development Bank for financing a study of the Cavalla River. If promising hydro sites are found, it is possible that LEC can provide hydro power to new mining operations in a more economical way than if the mines would install their own thermal plant; this would also benefit LEC's present power system. - 143 - 379. Because of very rapid expansion, LEC has been in a very tight financial position, aggravated by difficulties with collections of revenues from customers. Because of recent droughts, which reduced hydro output and the sharp increases in fuel prices, LEC's financial position has deterio- rated further in spite of two tariff increases in 1974. The Government has assisted LEC by contributing equity, thus making it possible to delay another tariff increase until late 1975. 380. LEC's management is to a large extent occupied with day-to-day operations, with little time left for future planning. Investment decisions are taken without proper evaluation of their economic financial implication. This is particularly true for small investments, for which LEC does not employ engineering consultants. More attention should be given to forecasting and.planning. LEC is aware of these deficiencies and intends to employ a management assistance team to systemize planning procedures and to establish a unit exclusively responsible for forecasting and investment planning. The team would also give extensive training to Liberians and assist in improving LEC's efficiency. water Supply and Sewerage 381. At present under 15% of the population in Liberia has access to piped water and that is confined to the major towns and the concession areas. Smaller urban and rural areas depend upon surface water, ponds, wells and springs, all of which are unreliable and liable to pollution. 382. The present supply to Monrovia is provided by a work constructed on the St. Paul River in 1969 with USAID financing. The work is already overloaded and there is a water shortage in Monrovia. LWSC 1/ is experiencing problems with one of the two transmission mains unable to sustain its design pressure and with salt water intrusion at the intakes during the dry season. African Development Bank approved a loan in the beginning of 1973 for improvements to the transmission main and immediate expansion of the capacity of the treatment works. The loan also provides for improvements to the distribution system and for engineering of a long-term development program. 383. Water supply systems have been constructed in two country towns (Harper and Greenville) with technical assistance and soft-term financing provided by the German Government. Water supply systems for six more towns are under study. It is expected that the German Government will finance the construction of these schemes, to commence shortly. 386. Less expensive and simpler schemes for rural areas are planned by other international agencies. A UNDP/WHO project for developing a national water supply program, including pilot schemes in selected rur6l areas, has been under consideration since 1970. However, because of over-budgeting of UNbP funds, this project has been continuously delayed. 1/ Liberia Water and Sewerage Company. 385. LWSC is supposed to cover the full cost of supplying water to Monrovia from water charges, while the Government gives a subsidy for operating systems in rural towns. Because of inadequate financial control and high system leakages, LWSC is presently able to collect revenues for less than 40% of the water produced at the Monrovia works. 386. Staffing is the most immediate problem in LWSC. The number of qualified staff is limited and the staff generally show low motivation. This has resulted in deficient investment planning and relatively low operating efficiency. 387* Sewerage is provided only in Monrovia. Almost all of Monrovia is now served by a system financed by a USAID loan. This system was commis- sioned in 1971 and consists of 13 miles of sewers, 4 miles of force mains, 5 pumping stations and a 6 mgd treatment plant. Although only a few of the planned new house connections have been made, the system is already over- loaded in the wet season. System expansion was originally planned for 1975, but the difficulties in the wet season, probably due to storm water intru- sion, might make it necessary to increase the capacity at the treatment works earlier. 388* No new sewerage schemes are currently being constructed by LWSC. It is po§sible that the German Government will provide assistance for construction of sewerage schemes in those towns where it has financed water supply systems. The UNDP/WHO study includes an investigation of possible means of providing rural sanitary services. Telecommunications 3b 9 Liberia's telecommunicationssystem is characterized more by its non-existence than by the few facilities that do exist. Moreover, the concentration has been, and continues to be, on external communications. Telephonecalls can more easily be made to small towns in Europe and the U.S. than to the capitals of Liberia's counties. County superintendents cannot telephone Monrovia and are reduced to conducting their business by radiogram (when the system is actually working). This, in a country where power and control are so highly centralized in the capital, means that it is very difficult to maintain administrations outside Monrovia. Such a set of key links ought to have high priority in any investment plan particu- larly if the focus is to be on rural development and decentralization, but the mission was unable to find any plans for such projects. The only such investment in recent years has been a set of links between Monrovia, Bentol, and Belefunai all residences of the President. 390. Liberia's telecommunications network consists of telephone, radio, television and an international microwave. The network was completed in 1965 at a cost of about $8.5 million. The L.M. Ericson Company of Sweden installed and equipped the central, branch and outstation offices or - 145 - exchanges. A U.S. firm, RCA, was responsible for installing and equipping the radio network with transmitter, receivers, towers, antennas and power supply. The Monrovia Central Office has 2,000 telephone.lines and the Sinkor branch office has 1,000. This is essentially an urban system. Total capacity of both exchanges was reached within the first year of operation and there has been no expansion since then. 391. The transmitter site for the international communications is located in Paynesville. French Cables Co., equipped with two transmitters, provides telephone and telegraph circuits to Paris. Other equipment of the system consists of five Technical Material Corporation (TMC) 10 kw transmitters, one RCA and one TMC 1 kw transmitter, all of which are used on international circuits. There is also a Wilcox transmitter serving ship-to-shore communications. Established international circuits provide telephone links to New York, Rome, Frankfurt, Stockholm, Freetown, and Lagos. Current demand and traffic growth forecast indicate need for additional links to New York and Beirut, Lebanon. 392. Most of the operational problems of the network result from aging and outmoded technology of the physical equipment. The RCA tube-type radio equipment currently in use is no longer being manufactured. It is very intolerant of voltage fluctuations, which are very common at most of the radio sites. Tube failure is common and their supply is uncertain and expensive. There is no road access to five of the radio sites and mainte- nanae and servicing must be carried out by chartered aircraft at a very high cost. The transmitters, except the Wilcox, are early 1950 versions and their maintenance is difficult because of a long supply line, frequent malfunctions and lack of standby units. 393* The receiving station is equipped with a variety of manufacturers' equipment, most of which are incompatible or incapable of independent side- band reception. The RCA M1202, the backbone of the station, is the early 1940 late 1950 vintage which has been slightly updated. Replacement tubes for these receivers are almost impossible to secure and sensitivity within technical specifications cannot be maintained. Other technical difficulties result from lack of portable lineup equipment and poor links between receiver and transmitter in the Multiplex (MUX) equipment coordinating room. 394. There are other problems common to the whole telecommunications subsector. There is a general need for technical anJ professional staff. A more than 50S backlog demand exists for telephone service. Provisional forecasts indicate that this demand would more than quadruple quadruple from 3,000 telehone lines (1972) to 13,000 lines by 1980. Radio and TV require substantial investment in equipment and personnel, but with a limited market, these last two services might not pay for themselves and would require some subsidy if they must be provided. The Government is the chief beneficiary from the services of mass media in Liberia. Postal System 395* Another part of the-country's communications a.etwork should be its postal system. Here again Liberia is very deficient. This system has, in theory, existed for over a century, but,now as then, it spends most of its energies selling pretty labels to stamp collectors and in fact was one of the pioneers in this darker side of philately. Monrovia has a new post office, but it is still impossible to get regular delivery within the city. Special delivery does not exist, even though Liberia regularly accepts such mail from abroad; the letters are simply retained in the post office and perhaps several weeks later the recipient is notified that it is waiting for him. Private and public addressees pick up their mail on a regular basis at the post office; most of the concessions maintain their own facilities at Robertsfield airport,dealing as little as possible with the Liberia system. Mailing letters is hazardous, even at the post office; oftenstamps are peeled off by underpaid employees and the letters discarded. Although Liberia has 18 branch postal offices covering most of the major towns, plus postal agents in 11 other locations, the system is for all practical purposes non-functional. No one seriously expects mail to get from one town to another via the system, and those wishing to send letters usually find a friend who is making the journey and entrust the mail to him. Thws, in Liberia the system functions largely on private initiative and it might well be that such a system should be legitimized. 396- The current world-wide system of government postal monopoly arose many centuries ago as a means of raising public sector revenues while ensuring corresponddnts some degree of security. In the 19th century the ghen developed countries wished for social reasons to spread their inte;nal commnications systems and thus the posts evolved into a system characterized by a uniform cheap rate within the country and by pick-up and delivery in every place, no matter how remote. This type of a communication system will be vital to any real development effort in Liberia, but the Government lacks the human and financial resources to carry it out effectively. Since the most efficient system in Liberia is currently the private individual on an ad hoc basis, and since the Liberian public.,system is neither cheap nor does it spread to the remote places of the country, Liberia might well contemplate relinquishing the postal system, at least outside of Monrovia, to private concerns. If, on the other hand, the Government wishes to pursue the ideals of the Universal Postal Union on its own, then it will need to make a substantial investment in its system - it will need to reform its postal civil service and will have to redirect its efforts away from philatelic pursuits. Even if the philatelic business is accepted as legitimate1!, Liberia has a history, a national character, and a natural beauty that is all her own, and does not need to depict other people's trains, butterflies and spacemen on her postage stamps. 1/ The returno to the Government are very modest. In recent years the payment by the Philatelic Agency to the Treasury has been less than $50,000 per annum. - 147 - V. SOCIAL SECTORS Housing Urbanization Trends: 397.- The 1971 population survey estimated the urban population to 434,000, constituting 28% of the total population. However, this estimate is somewhat inflated, since all.localities of more than 2,000 persons are defined as urban. Even small rural centers were hence classified as urban. 398. Urbanization has occured along the coastal plains, where the early settlers landed-in the 19th century, and in the mining centers in the interior with the exploitation of iroh ore in the past decade. The main urban centers, on the coast are Monrovia (with 200,000 people), Buchanan (25,000), Greenville and Harper,,and in the interior Yekepa, Bong Town, Bomi Hills and Mano River. .The interior towns, with populations between 6,000 and 14,000, will probably diminish in importance once iron ore is exhausted, but could well become foci of regional development. Due to the priority the Government has in the past given the coastal areas, no other significant urban center has developed in the interior, although Foya, Gbanga, and Sanniquelle willrin the long run become quite-important. 399* Monrovia is the dominant urban center. Government and commercial activities are concentrated tiere. It is the only city experiencing rapid urbanization with a population estimated to have been growing at an annual rate of 9%. If this trend were to continue, Monrovia's population would reach about half a million by 1985 and 1.5 million by the.year 2000. 400. As Monrovia has been growing without any formal plan, the city suffers from traffic congestion, an acute housing shortage, and inadequate economic and social services. Its growth is far in excess of the ability of the public sector to provide these services. Thus, living conditions have been deteriorating. Slums and squatter settlements, without water supply and sewerage facilities, have been spreading rapidly. 401-. In recent years the Government has became increasingly concerned with the housing problem. In 1970 a National Housing Authority (NHA) was established to prepare and administer public housing policies and programs. A five-year housing program for 1973-77 was prepared by the NHA. In 1972 a National Housing and Saving Bank (NHSB) was set up to extend both construction credits and mortgage financing. Thus fa; these institutions have had little or no effect. The Housing Problem, 402. Housing is the most serious of Monrovia's urbanization problems. There are two main aspects. First, 60% of the population (-,-MO people) have an income so low that they cannot afford to buy or rent even a minimum standard house. A family earning, say, $50 a month, and willing to pay 20% of its income on housing can only afford a $1,075 house (assuming a 25-year loan at 10% interest), while a minimum standard NHA design house costs about $2,200. Thus,no matter how much conventional housing construction is accelerated, the market cannot satisfy the needs of 60% of the population. Second, a shortage of conventional housing due to (i) construction bottlenecks, (ii) the limited availability of land, and (iii) the absence of mortgge finance institutions. As a result, a modest two-bedroom house in Monrovia costs about $7,500, which only the wealthiest part of the population can afford.. 403. In the absence of the reliable data on income levels and distribu- tion it is difficult to estimate housing needs for various income groups. However, about 30% of the city population (about 15,000 families) earn over $100/month, the pinimum income necessary to afford a conventional house. A recent survey 1' indicated an actual effective demand for about 5,500 housing units from families in this income group. The demand profile indicates that 38% is generated from lower middle-income groups earning $101-10 a month, 30% from middle-income groups earning $150-250 a month, and 32% from upper-middle and high-income groups earning over $250 a month. Table.-'3 Profile of Housing 1eand Monthly Estimated No. Average % of Effective % of Cumulative Income of Employees Rent Paid Renters Demand Total Percentage $101-150 2,257 33 93 2,092 38.1 38.1 151-200 1,060 46 82 689 12.5 50.6 201-250 1,085 50 88 955 17.4 68.0 251-300 902 73 80 722 13.1 81.1 301-above 1,384 101 75 1,038 18.9 100.0 TOTAL 5,496 100.0 404. The housing needs of the 60% of the urban population who cannot afford standard housing (120,000people) would best be satisfied through self-help housing. 2/ The key to this is available land and beyond this is a site and service scheme. In addition provision of building materials at reasonable prices would encourage self-help building. Also the considerable technical expertise now present in the NHA might be usefully made available to people wanting to build their own housing. Finally, general precautions about housing, even in the poorest families make it difficult to promote satisfactory but partial solution such as core housing. 1/ The survey was conducted by the NHA and the USAID housing team which visited Liberia in March-April 1973, and covered families with income starting at $75 a month. 2/ Half of these people (60,000) live in crowded squatter settlements with no sanitary facilities. This poorest part of the population has been growing at about 20% a year, compared to a population growth of 9% for the whole city. -149 - 405. There are no data on the production of housing. Much of the housing for low and middle-income families is constructed on a self-help basis with personal savings, and, when available (rarely), short-term loans from commercial banks. These houses are usually built in successive stages. Due to the shortage of funds, many are left only partially finished. Sometimes several rooms are built, the builder occupies one or two rooms and rents the rest for about $8-10 a month per room. Houses for upper-middle and high.income groups are mostly commercial built single houses. 406. Several serious bottlenecks on the supply side have limited housing production: (i) the scarcity of land available for construction, (ii) the shortage of credit for housing construction and for mortgage financing, (iii) excessively high relative costs of building materials. 407. Most land in Monrovia is owned by a small wealthy minority -.ho either inherited it or purchased it many years ago from public authorities at nominal prices. Land hoarding for speculative purposes is common. Much of the short supply of housing is in fact due to a withholding of land from the market to force up prices. There are about 700-800 acres of vacant land in the center of the city and about 3,000 acres around the city. Until recently, the Government has made no attempts to acquire this land, either for the purpose of initiating public housing programs or for making it available to private builders and developers. Recently, efforts have been made to acquire land to implement the five-year housing program. 408g l Land litigation caused by overlapping claims of ownership either among individuals or between Government and private citizens is another reason for the short supply of land for house construction. A project for conducting a cadastral survey and improving land registry was initiated in 1974. 409. The absence of mortgage finance institutions and the difficulty of obtaining construction credits have been the other major obstacle to house construction. Most of the housing for low and middle-income families is financed with personal savings. Commercial banks have a small home mortgage program accessible only to certain preferred customers. Commercial banks also extend personal loans for purchase of materials at about 8% interest but the short repayment period (up to one year) and the requirement of a collateral limit the accessibility of this financing. 410. In 1972 the National Housing and Saving Bank (NHSB) was established to extend short and medium-term credits for house construction and long-term credits for mortgage financing. The Bank has an initial authorized capital of $1.0 million. 25 percent of this capital is voting shares and held totally by the Government. However, the NHSB's ability to mobilize savings will be constrained, at least initially, by the low rate of savings. Since the pension funds of concession companies and the investment funds of insurance companies are maintained abroad, and since there is no government social security system, the bank would have to rely on the relatively small savers. Until such savings are generated, the NHSB will have to rely on borrowed capital. USAID has authorized a -5 million loan under its Housing Guarantee Program. The NHSB can also borrow domestically by issuing bonds and debentures. Building materials costs are high as a result of the fragmented small scale nature of the industry. Recent trials by the NHA have shown that with proper organization, dramatic reduction in costs can be obtained. Present Housing Programs and Policies 411. A UNDP-financed team of experts is assisting the NHA in preparing housing programs and policies and building 30 experimental and 300 demon- stration houses. About 100 demonstration houses have already been built, which range in price between $2,000 for a two-room house to $4,000 for a three-room house. A number of experimental core houses are also expected to be started shortly. (In a core house the NHA would build the foundation, the roof, and the latrine, and the prospective occupant would build the rest). 412.. The five-year housing program for 1973-77 consists mainly of public acquisition and development of 850 acres of land and construction of 1,250 new dwellings per year at an estimated cost of $3 million a year.1/ About 55% of the houses (700 units a year) are to be built through self- help methods for the poorest 60% of Monrovia's population earning less than $100 a month. Site and service, and core type houses are proposed and are estimatedto cost between $500-1,000 (excluding cost of land and urbanization). The remaining 45% of the houses would be built through conventional methods for the 25% of Monrovia's population earning about $101-150 a month and will cost between $2,000-3,500 (excluding cost of land and urbanization). 413. Housing construction for higher income families is handled by the private sector whose housing investment is expected to rise from $2-million to $4 million a year.2/ Part of the land to be acquired by the Government will be made available for private housing construction and the NHSB will contribute the required financing. 414. Although the housing program is realistic, its implementation is seriously constrained by limited administrative and executive capacities. In fact, the program is already behind schedule. The NHA, responsible for administering the program, is a newly established organization and has limited experienced staff. Though it is assisted by a competent team of UN experts, it needs supporting planners, surveyors, economists, statisticians, architects, and other middle level Liberian personnel. The NHA also lacks the necessary political influence to expedite its program. Furthermore, efficient coordination is necessary, since housing programs also involve dealing with land, finance, public,utilities, community f4cilities, etc. and thus cut across many lines of government authorities. Such coordination is practically non-existent and is another factor slowing down the implementation of the program. 415. Another obstacle may be the speed with which the Government can acquire the land from private owners. Quick acquisition is necessary since it takes time to survey the land, chose the most efficient layout for it, 1/ The program also includes improvement and completion of 900 housing units over the five-year period. 2/ Estimate from Five-Year Housing Plan. - 151 - and provide it with the necessary facilities. Asking prices are too inflated and the Government is reluctant to use the power of eminent domain, since the land usually belongs to fairly influential families. In acquiring one of th( sites, a compromise formula was suggested according to which the Government would return 40% of the land to the original owners on a pro-rata basis after its development, and the owners would pay their share of the development cost. It remains to be seen if even this generous a formula can be effected. 416. Three housing sites have initially been identified for the housing program, the first (278 acres) at Mataly, 13 miles from the center of the city, the second (125 acres) on the Monrovia Freeway near the cement factory, and the third in Gardnersville, 7 miles from the center of the city. The first two sites are still in private hands while Gardnersville is already public land. 417. The Mataly site, the most advantageous of the three sites, is practically vacant and is in the proximity of public utility connections. Potable water supply and electricity are there and a municipal sewerage plant is only one mile away. The cost of the land is high (about $3,000 per acre) which makes it more suitable for conventional rather than self- help housing development. The area would be developed with participation from both the public and private sector and is planned to have community facilities such as schools, shopping centers, health clinics, etc. 2,500 housing units can be constructed at Mataly at an overall density of 9-10 houses per acre. The cost of land and urbanization is estimated at about $2 million most of which will be charged to the house buyers. 418. While the need is most urgent for providing self-helping housing for the poor, priority has so far been given to conventional housing schemes for middle-income groups. This may be a matter of expediency since there is more experience with conventional type housing and external assistance was readily available for such a housing scheme. A pre-fabricated house scheme, not envisaged in the five-year program, has been proposed with supplier credit financing. This scheme would only meet the housing needs of middle and upper-income groups. No efforts have yet been made to prepare housing programs for the lowest groups. 419. USAID has authorized a loan under its Housing Guarantee Program to assist constructing 1,200 housing units at Mataly over a three-year period. The houses will be in three price categories between $2,800-6,700 (including cost of land and urbanization).l/ The funds will be lent at about 8-8.5% interest and 25 years maturity and the houses w0ill be sold on terms not exceeding 25 years repayment and about 10% interest. The monthly mortgage payments are estimated at $24, $39, and. $55 after 10% down payment. No interest rate or urbanization subsidy is provided. ,1/ The houses will consist of: 350 units of 2-room row houses $2,800 500 units of 3-room duplexes 4,800 350 units of 4-room duplexes 6,700 - 152 - 420. Most of the houses cost more than the level envisaged in the five- year program for conventional housing.1/ Only 30% of the houses can be afforded by low-middle income families, earning $100-150 a month (assuming families cannot afford to pay more than 25% of their income on rent). Another 42% can be afforded by families earning $150-250 a month,and the remaining 30% would be suitable for families earning $251-300 a month. According to the five- year plan, houses for the latter two income groups were to be provided by the private sector. 421. The pre-fabricated scheme would consist of constructing 500 houses at Gardnersville, with $2.5 million supplier credit. The houses are in the price range $3,000 - $8,000 (excluding cost of land and urbanization). The funds would be borrowed at 13 years maturity (including three years of grace period) .and 8% interest. The project is to be the first of a large scheme to build a total of 2,000 pre-fabricated houses at a cost of $11 million. The initial agreement was reached with the supplier against the advice of the NHA, but the Goverment is now reconsidering the scheme. 422. Although pre-fabricated housing schemes are easier to administer and provide quick construction, they tend to be costly. Therefore only higher income groups can afford them. Furthermore, relying on imported material, they do not stimulate domestic economic activity. In addition, at this time, Liberia cannot afford to contract supplier credits given its heavy debt service burden. Finally the scheme requires substantial work on the part of the already over-burdened NHA. This scheme implies a de facto shift by Government away from low income housing, and as such is not consistent with the five-year housing program. Housing for the Lowest Income Groups 423. No efforts have yet been made either to prepare housing schemes for the lowest income groups or to improve living conditions in slums and squatter* settlements. As mentioned above approximately 60% of Monroviats population are low-income people earning less than $100 a month, and half of these (about 45,000 people) live in slums and squatter settlements. idth the continued migration and the acute housing shortage, the population in these settlements has been growing at about 20% a year (compared to a 9% growth in the overall city's population). If the present trend continues, slum and squatter settlements population may dominate city population in 7 to 8 years.2/ [24. Two approaches have either been attempted or are under consideration by the Government to deal with the growing problems of slum and squatter settlements. The first is a slum clearance approach (Clara Town, Buzzi Quarter, Slip-Way) and the second is an urban renewal approach (West Point). Both approaches, however, call for re-examination. 1/ When the costs of land and urbanization are excluded, the house cost would be $2,600; $4,450 and $6,200 respectively. 2/ West Point is the largest of the slum and squatter settlements with a population of about 20,000. It is the only one in the center of the city. The othersare Buzzi Quarter (15,000), Slip-Way (14,000), Vai Town (2,000) and a newly emerging settlement Fanti Town (3,000). - 153 - 42$. Clara Town - a squatter settlement with 3,500 people - was demolished in 1971. No alternative housing was provided for those who were displaced. So they quickly formed a new settlement in another area - Fanti Town. Other settlements, such as Buzzi Quarter and Slip-Way, are marked for eventual demolition. In West Point, the largest of the settlements and the one with more durable houses, the Government is however considering an ambitious renovation plan. The plan, which is still in a preliminary form, is in two stages. The first stage is to reduce the congestion in the area by opening it up tovehicular traffic, to build public latrines and to construct play- grounds for children. This requires the demolition of at least 1,400 housing units affecting 5,200 individuals, one-fourth of West Point's population. 1.' The second stage is to demolish all the dilapidated housing structures, which constitute about 50o of the total housing in West Point. New housing accommodations would have to be built for these people. 426. However, both the slum clearance approach to demolish settlements and the urban renewal approach to renovate settlements do not appear to be the most efficient alternatives. 'Both involve destruction of sizable housing stocks and require enormous amounts of capital to relocate inhabitants and provide new houses. The Government cannot afford such outlay at this time. 427. Given the financial and administrative constraints, improving settlements rather than tearing them down would be a more realistic and efficient approach. Programs to provide settlements with minimum utilities and services, such as water supply, sewerage, health facilities and street lighting are urgently needed. Excessive congestion must be handled with minimum demolition of existing housing, no matter how poor the quality. It is more realistic to conserve dilapidated housing until the housing shortage is reduced. 428. In addition to initiating self-help housing schemes and improving living conditions in slum and squatter settlements, it has been suggested. that the housing needs of the poor may also be met through encouraging the private sector to construct single room dwellings for rent, under government supervision. This however may be somewhat unrealistic. -The existing houses in West Point are built to poor standards. The rents are disproportionately high; the owner recovers the entire cost of the property within 2 or 3 years by way of rent. If he has to build houses to proper standards, the cost would be considerably higher. Since the rents cannot be allowed to be raised proportionately to enable the owner to get the quick returns he is accustomed to, no builder would be interested in such houses. Housing of the poor most likely will have to remain a governmental responsibility, at least in the foreseeable future. 1/ No organized scheme has yet been prepared to house those people during the renovation process. But a number of houses (10 houses) are being built in Gardnersville for this purpose by individuals, ministries and organizations in response to a personal appeal from the President. This is intended to be a first step until a housing scheme is prepared. However, these houses are beyond the paying capacity of the majority of people in West Point (they are in the price range $2,500-3,0C) and Gardnersville is too far (7 miles) away from Iest Point, as most ople work within 2-3 miles radius of their present resicence. - 154 - Strategy Assessments 429. The implementation of the present housing schemes will tax the administrative and executing capacities of the NHA for the next two to three years, thus making it difficult to initiate housing schemes for the low income groups. The Government must therefore take immediate steps to bolster the administrative and executing capacities of the NHA so that it can undertake housing programs for the poor as well. The budget of the NHA must be expanded to recruit competent Liberian planners, researchers, surveyors, engineers, economists, and statisticians and middle level personnel. Such strengthening must, of course, be accompanied by government wide reforms such as the civil service, if it is to be effective. The NHA also needs strong logistic and political support. 430. Slum and squatter settlements differ in income level, social characteristics, type of dwellings, availability of sanitary facilities, degree of'congestion, etc. Each one therefore requires a different approach for its improvement. Considerable socio-economic information must be obtained on the population and living conditions in each settlement to determine the most efficient approach to improve each settlement. 1/ 431. Self-help housing scheme should be prepared. First, careful examination must be given to the specific target population's ability to pay. Whether pure site and service or core houses or a mix should be planned depends on the income level of the target population. Second, the site for the scheme must be within short distance of the target population's places of employment. Experience has shown that low cost housing projects located far away from employment centers will soon turn into a new ghetto. A third criteria for the infrastructure standards and housing designs is to minimize subsidies. One way to minimize subsidies is to build self-help houses in the proximity of middle-income houses or better mix them so that much of the cost of infrastructure facilities are included in debt-repayment of the higher-income people's higher ability to pay. 432. A key feature of the overall housing needs of the country where the annual amount available for housing is no more than $70 per year per family, is the feasibility of providing technologies for "no cost" housing. This applies not only to the rural areas, but also large part of the urban center as well. One should realize that the typical Liberian house is a design that has been used for several thousand years and has been adapted to local conditions. Two major problems arise with it, however, first the matter of hygiene and second the problems of durability. Both however are technical questionswell within existing technologies and more important, can be adapted locally without using non-traditional materials. Experimr=.ation in such housing has been continuing in both East and West Africa and liberia Authorities should look closely at the work going on at Kumasi University in Ghana. Such "no cost" housing can go a long way towards alleviating the housing problem in Liberia, both rural and urban. It should be viewed as an attractive investment towards solving tomorrow's housing problem. 1/ Some socio-economic data about slums have been collected, but it is by no meanssufficiat of essence. If the collection of data takes time, action would meanwhile have to be taken to procure land and process scheme for sites and services and core houses as the need is great. Otherwise, perhaps, the sites considered suitable by the survey may no longer be available by the time the survey is completed. - 155 - 433. Two important constraints for both private and public sector housing remain the shortage of funds and the short supply of urban land. Establishment of the NHSB was a first step for coping with the shortage of funds, but considerable efforts must be made to mobilize resources. One alternative is to institute a compulsory investment regime according to which commercial banks,concessions, and insurance companies are obliged to invest part of their funds in securities issued by !NHSB, and guaranteed by the GDvernment. This has been done successfully in other countries. 434. A bold policy for advance public acquisition of land on a large scale must be adopted. Acquiring land only when the need arises is too expensive since land speculation escalates once housing and urbanization starts. Land should be acquired by Government both for public use and for eventual sale to private individual or/and to commercial builders. The GovernMent must provide the necessary infrastructure to make the land ready for priva..e building. 435. About 700-800 acres of land are suitable for housing construction inside the city, and nearly 3,000 acres exist within six mile radius of the city. Where possible, land should be acquired through negotiated purchases. Public domain proceedings must be used if necessary. When land acquisition is delayed by confusion concerning the title, the Government should take possession of the land first and deal with legal proceedings later. 436. While not yet a constraining factor, local building material industries need stimulation. Modular coordination and standardizing building components contribute to lower unit construction cost and facilitate the undertaking of large-scale housing schemes to significantly lower costs. There is also a need to train masons, carpenters, plumbers, and other building trades in vocational schools. Liberia has the potential for a successful building materials industry. It has abundance of sand and brick clay and is rich with timber species suitable for housing construction. In fact, stimulation of the local building material industry may be a more efficient route to industrialization than encouragement of import substitution industries which, in a small country like Liberia, tend to be costly and inefficient. Pre-fabricated housing schemes which rely on imported building material should be avoided. But if such houses yet were to be constructed with public administration and financing resources, the houses must be sold at prices that. would subsidize low-cost housing. 437.. In.the final analysis any solution to the housing problem must be viewed within a broader context of an urban plan for the city and a develop- ment strategy for the whole country. A broad framework for the desired growth of Monrovia in the next decade should be drawn up. The location of housing must be coordinated with the planned location of industry, commerce, utility extensions, public transport facilities, etc. This coordination would reduce the haphazard growth of the city, make an efficient use of available space, and minimize the long-run cost of urbanization. Land use regulations, zoning laws, and land tax policies need to be legislated. Further, they must be strdngly enforced to guide the growth of the city according to this framework and to bring vacant land into productive use. Similar urbanization plans must also be prepared at an early stage for other growing cities, such as Buchanan, to avoid some of the problems that Monrovia na, faces. -.156 - 438. Considering the rate at which the population of Monrovia is growing, the strong urban pressure, and the acute housing shortage, the proliferation of squatter settlements must be tackled also by attempting to reduce migration from the countryside. Therefore, Monrovia's urban problem must be viewed in the context of the country's overall development strategy. The recent gpvernment intention to emphasize the development of rural areas - justified on its own merit - may not go far enough in checking migration. In fact, improving education, transport facilities, national information media, etc. at the-countryside might stimulate the migration to large urban areas. Thus, rural development must include a regional strategy to develop small and medium size towns. Liberia's pattern of internal migration facilitates this regional approach, since the migration to Monrovia is generally not direct. Monrovia is rather at the end of a migration stream moving gradually from farms, to small villages, to intermediate towns and on to the major city. To stop the migration at the intermediate "satellite" towns, keeping it away from the crowded city must have the strongest priority in both urban and rural developmenit policy strategies. 439. Thus, rural development must be viewed in the broader aspect of regional development involving the promotion of small and intermediate urban growth centers related to their hinterland. Regions must be developed to self-contained units providingemployment opportunities and social services to their population. The infrastructure must be planned on a regional basis linking farms, local market, servicing centers, villages, and the regional main urban center. Small and medium size industries (especially for processing of agricultural, products) must be stimulated by given localization support in these regions. 44O.. In conclusion, the housing problem of Monrovia cannot be solved by building new houses and improving living conditions for the poor alone; it must be solved both within a master plan for the development of the city and an overall development strategy for the entire country. - 157 - Health 441. Health conditions in Liberia are generally poor. There is high incidence of infectious and debilitating diseases; environmental sanitation is inadequate,-and malnutrition is a signifcant problem. Health services are limited and concentrated in urban areas (see Table 34). 442. The most serious diseases are malaria and, diarrhea. There is no effective program to control malaria, it is prevalent throughout the country. Mosquito spraying and distribution of anti-malarials in the rural areas exist on a limited scale with almost no sanitary water supplies, about 87% of the population have to satisfy their water needs from streams and rivers, which are badly contaminated. Thus diarrhea and other water borne diseases are common. Only Monrovia and four other towns have a potable water supply. Monrovia is the only city that has a sewerage system. h3. Health services are concentrated in urban areas, reflecting the urban bias which has characterized Liberia's development. Of the $5.8 million appropriated by the Government for health in 1973, $3.2 million (55%) were allocated to the J.F. Kennedy Medical Center serving the Monrovia area. Of the 49 physicians employed by the Government, 39 (80%) work in and around Monrovia, leaving each county with only one government physician. 1/ 4g2, Government health posts and clinics in rural areas are in a poor condition, lacking adequate facilities, supplies and proper staff. As a reflection of the imbalance in health services, the crude death rate in 1971 was 23 per 1,000 in riural areas compared to 15 per 1,000 in urban areas. The infant mortality rate in 1971 was 171 per 1,000 in rural areas compared to 126 per 1,000 in urban areas. 2/ 445. Concession and mission facilities supplement government medical facilities, especially outside Monrovia. Of a total of 33 hospitals in the country, concessions and missions and other private institutions operate 19% (constituting 50% of the hospital beds). They also operate a number of clinics. Although concession and mission hospitals are largely located in urban areas, they usually also serve the surrounding rural population. 46. The shortage of medical personnel, at all levels, is the most serious bottleneck in the health care system. There are 115 physicians (only 30 of whom are Liberians) and 1,000 para-medical personnel (nurses, midwives, laboratory technicians, health assistants, and inspectors, etc.) 3/ For 1972 the physician to population ratio is estimated to 1:13,800, whereas the para-medical personnel to population ratio is 1:1,600. 1/ Except Maryland which has three government physicians. This imbalance is gradually lessening somewhat, the 1973 Monrovia percentage has dropped to 73% and 6 of the 10 government hospitals now have at least 2 physicians. 2/ Urban areas are defined, in the population survey, as those localities having 2,000 inhabitants or more. 3/ 1973 figures indicate 132 and 1,500 respectively. - 158 - Table4: POPULATION, POPULATTON/HOSPITAL BED RATTO, POPULATION/DOCTOR RATIO AND POPULATION/CLINIC RATIO BY COUNTY (1972 estimates) Estimated Con- Other Pop. Population Popu- Govern- cession Mission Private Population Govern- to Exist- to lation ment Hos- Hos- Hos- Total to Hospital ment Private Total Doctor ing Clinic County 1972 Hospitals Beds pitals Beds pitals Beds pitals Beds Hospitals Beds Be4 Ratio Doctors Doctors Doctors Ratio Clinics Ratio Monteserrado 408,000 5 76h 3 371 1 86 2 55 11 1,276 320 39 18 57 7,158 52 7,81,6 Maryland 99,200 1 170 1 77 - - 2 247 402 3 5 8 12,oo 19 5,221 Grand Bassa 208,000 1 39 2 72 - - 3 111 1,87h .1 7 8 26,000 11 18,909 Cape Mount 49,600 1 50 1 h7 - - 2 07 511 1 5 6 8,267 9 5,511 Sinoe 88,000 1 35 1 13 - - 2 68 1,833 1 5 6 14,667 2h 3,667 Nimba 252,800 1 25 1 10 1 62 - 3 191 1,32h 1 5 6 b2,133 26 9,723 Grand Geden 92,800 1 - - - 2 1 3 L 23,200 12 7,733 Bong 208,000 1 22 1 65 - 1 46 3 133 1,56h 1 6 7 29,714 29 7,172 Lo)fa 193,6oo 2 90 - b 243 - - 6 333 581 1 12 13 lht892 i0 4,840 1,592,000 li 1,195 10 749 6 391 3 101 33 2,436 65h 69 66 115 13,803 222 - 159 - Table 35: NUMDER OF HOSPITALS, HOSPITAL BEDS, DOCTORS, AND CLINICS IN PUBLIC AND PRIVATE HEALTH SERVICE BY URBAN VERSUS RURAL AREA (1972 estimates) Public Hcalth Service - rivate Health Service Total H-a'th Service Population % Hospital % Beds % o Flinics Hospitals % B Doctors 3 go8Pitals '3Beds % Dlinics Urban Are.l 507,200 31.9 8 42.9 93h 78.2 42 85.7 71 32.0 7 36.8 589 h7.5 23 36.8 13 39.h 1,523 62.5 71 32.0 Rural Area 1,084,800 68.1 8 51.1 261 21.8 7 14.3 151 68.0 12 63.2 652 52.5 43 65.4 20 60.6 913 37.5 151 68.0 Total Liberia 1,592,000 100.0 14 100.0 1,195 100.0 49 100.0 222 100.0 19 1oo.0 1,241 100.o 66 100.0 33 100.0 2,b36 100.0 222 100.0 Table 3. POPULATION PER HOSPITAL, HOSPITAL BED, DOCTOR, AND CLINIC IN PUBLIC AND PRIVATE HEALTH SERVICE BT URBAN VERSUS RURAL AREA (1972 estimates, absoulte figures) Public Health Service. Private Health Service * Total Health Service Pop./posp.io.Bed ?op./Doctor op.Clinc Pop./Hosp. Pop./Bed Pop./Doctor Pop./Hosp. Pop./Bed Pop./Doctor Pop./Clnic Urban Area/l 84.533 513 12,076 7,164 72,h57 861 22,052 39,015 333 7,803 7,166h Rural Area 135,600 6,156 15L,971 7,184 90,400 1,66 25,228 54,240 1,188 21,696 7,184 Total Liberia 113,71 1,332 32,90 7,171 83,789 1,283 2h,121 48,242 65 13,843 7,171 Table I.: POPULATION PER HOSPITAL, HOSPITAL BED, DOCTOR, AND CIJNIC IN PUBLIC AND PRIVATE HEALTH SERVICE BT URBAN VERSUS RURAL AREA (1972 estimates, percentage and relative distribution) Public Health Service rivate Health7 Service Total Health Service ,_ _ _ _ _Pop./Hosp. Poo./Brd Pop./Doctor Pop./Clinic Pop./Hosp. Pop./Bed Pop./Doctor Pop.7osp. Pop./Bed Pop./Doctor Pop./Cllnic T&ral Area 160.1 765.4 1,283.3 100.6 124.8 193.3 114.4 139.0 356.8 278.0 100.6* / Since only Xohtenerrado and part of Maryland counties have a dense population, they are theonly two counties classified as urban areas. - 160 - h7. USAID and IHO are the two major sources of health assistance. USAID provided capital assistance for constructing the J.F. Kennedy Hospital, and continues to provide $1.5 million annually for current expenditures to support the hospital. Both agencies provide another $1.5 million each annually for personnel training, medical supplies and technical advice. This amount is not likely to increase significantly in the next few years. 448. While it is clear that the health situation is poor by absolute or by developed country standards, some clarifying points should be made. First, in terms of the overall, unquantified level of health and nutrition, Liberia gives the impression of being somewhat better off than her neighbors. Next, when looking at the comparative figures (Table36), it appears that Liberia is generally better endowed than other West African countries. It should, however, be pointed out that the supply of health services often has little or no real bearing on the health level of the population, real impact in a West African context being limited to a very small distance around a facility. Moreover, the relatively high service ratios for Liberia may well arise from the low density of population and thus not indicate the real levels of services. Finally, as in other sectors, health in Liberia has been growing and improving rapidly. Thus absolute figures are no more than imperfect guides, the key points being the direction and speed of public sector involvement in the sector. Health Development Strategies 449. Although Liberia has a general strategy to deal with its health problems, embodied in the Ten-Year Health Plan for 1968-1976, prepared with the assistance from tHO and USAID, this plan has rarely been used as a guide for action and has generally been forgotten. Health decisions have usually been undertaken on an ad hoc basis with no regard to priorities. For example, the J.F. Kennedy Hospital, constructed at a capital cost of $8.7 million, produced a decided imbalance in health facility. The resources could have been better utilized for expandizg existing health facilities and improving sanitary environmental conditions in rural areas. However, with the Ministry continually short of funds and in a weak bargaining position in the natural development budget, the desires of foreign aid agencies tend, as in the case of JFK, to override any and all plans. 450. To improve Liberia's health care, a systematic effort must be made to update the National Health Plan. Execution of this plan will, however, be possible only if the Government makes a firm commitment to translate it into concrete action. To do this it is necessary that the government future expenditure on health services be substantially increased from the current 7% of public sector budget. It is clear that Liberia's strategy for health development must focus on: (1) redressing the imbalance in health services between rural and urban areas; (2) emphasizing preventive services;and (3) training medical personnel. 451. Efforts to promote rural development require simultaneous improve- ment in rural health care to reduce morbidity rates and raise labor productivity. On such improvement is an "Outreach Program" for the J.F. Kennedy Medical Center - 161 - Table 36: SELECTED HEALTH STATISTICS FOR WESTERN AFRICA11 COUNTRIES Population Population Population Population/l Nurse/ Crude Crude Total General Local & Population Nurse/ idwife- Birth Death Infant Life Hospital Hospital Rural Doctor Midwife Doctor Rate Rate Mortality Expect. Beds Beds Beds Cameroon 480 1,470 769 26,300 9,230 2.85 40.4 22.0 - 41.0 Dahomey 862 1,887 - 29,400 8,240 3.57 49.9 23.0 110 41.0 Guinea 813 2,564 1,887 50,000 5,920 8.45 46.6 22.8 - 41.0 Ivory Coast 676 - - 13,900 2,210 6.29 45.6 20.6 410 43.5 Liberia 526 676 - 10,400 3,350 3.10 50.7 22.3 159 43.5 Mali 1,389 8,333 3,704 41,700 3,650 11.41 46.7 23.5 120 39.0 Niger 2,222 4,347 9,091 50,000 16,340 3.06 49.6 23.5 - 41.0 Pigeria 1,851 2,500 LOO,000 20,400 1,990 10.24 49.3 22.7 150-175 .41.0 Senegal 730 1,351 5,556 T4,9oo 5,560 2.68 47.3 22.2 - 42.0 Sierra Leone 1,041 - - 17,200 4,490 3.83. 41.9 20.2 - 43.5 Togo 820 1,351 2,083 28,600 4,280 6.69 50.5 23.2 127 41.0 Upper Volta 1,667 4,167 8,333 90,900 38,190 2.38 48.5 24.9 180 39.0 /1 This is an approximate figure calculated by dividing the "Population per Physician, 1970" figure by the "Ratio of Nurses/ Midwives to Physicians." Some lack of precision results where data from different years are combined in one figure. These figures differ from WHO data since WHO includes assistant nurses and assistant midwives in total. /2 Total number of nurses/midwives (excluding assistants) divided by the total number of physicians. Source: IBRD; WHO. Note: These figures may not agree exactly with those in Tables 34 and 35 for Liberia, as those above have been selected on a standard real basis. - 162 - now being considered by the Government. The program intends (1) to upgrade and expand existing health clinics in rural areas; (2) to coordinate the work of the various medical facilities; (3) to establish an effective communication network between them,and (4) the training of manpower- to make the system work. As a first step, the health clinics in Lofa County will be upgraded. USAID will assist in providing technical assistance, medical supplies, mobile units, and radio communication between the clinics and the J.F. Kennedy Center. 452. Since para-medical personnel are urgently needed and capital is scarce, it is better to expand and upgrade the existing rural health clinics so that they can offer adequate preventive and curative services. The cost of reconstructing and equipping these clinics would not be very high and they could be operated by middle level technicians. The Ministry of Health estimates the need for the reconstruction of 100 of the 220 existing health posts, and for the construction of 130 additional ones as well as 40 health centers (larger posts) over the next 10 years. These are estimated to cost about $6.7 million. 1/ Only 26 (11%) of the health posts and 8 (19%) of the health centers would be built in Montserrado County. The main constraint will be staffing these clinics in view of the critical shortage of para-medical personnel. 2/ 453. Preventive measures should focus on (1) improving health education; (2) instituting vaccination and other disease control programs (particularly malaria); and (3) establishing rural water supply and sewerage systems. 454. Proper health education must be disseminated through new and better clinics and effectively incorporated in the school system. Mobile vaccination units and a comprehensive program for mosquito spraying and for distribution of anti-malarials at subsidized prices throughout the country is necessary to control malaria. Due to the widespread of water-borne diseases, provision of sanitary water supply and sewerage systems must be given high priority. 1/ The construction cost of an economic size post is estimated at $8,000 and of a health center at $15,000 (at current market prices), but the total cost including construction, equipment, and staffing is estimated at $21,200 and $44,000 respectively. 2/ With the re-organization of the Ministry of Health & Social Welfare, especially the re-activation of the Bureau of Medical Services in 1973, the course is set for further improvement of the health care delivery system. The Bureau of Medical Services has establithed and is implementing a systematic procedure for the continuous supervision of the hospitals, clinics and health centers. Communication links among the clinics, county hospitals and the JFK Medical Center are being improved. For example, with the donation of radio sets from the Christian Medical Council, it will be possible in 1974 to communicate with the county hospitals from the JFK Medical Center and the Ministry. 163 - Fbr the past few years, plans have been discussed to extend piped water supply to six towns (with German assistance) 1/ and to study rural water supply and sanitation problems with WHO/UNDP assistance. Initially, these studies were given low priority, but the WHO/UNDP studies to identify pilot projects in four rural communities were started in 1973. 455. Physicians are trained at the A.M. Dogliotti College of Medicine in Monrovia which was opened in 1968. Para-medical personnel are trained at the Tubman National Institute of Medical Arts (TNIMA). Both institutions have the physical capacity to expand their training programs but are experiencing various problems. 4*6. The medical college is having difficulty in recruiting both staff and Liberian students because of the shortage of doctors and qualified applicants. The shortage of qualified applicants is due to high entry requirements and poor science education in high schools. Only 33 students are currently enrolled in the collage, and only 8 of them are Liberians. Considering this and the high cost of operating a good medical school, it may be worth considering closing the college and instead relying on training Liberian physicians abroad. 2/ However, if the college continues its operations, it should produce physicians with a general orientation and avoid training in specialty medicine. Physician training must include field practice in rural areas. At present, only the J.F. Kennedy Medical Center is used as a training hospital, and part of this training ought to be moved to the county hospitals. [57. Current enrollment at TNIMA is only 120 students, which is below capacity. Since the need is most urgent for lower level skills, entry requirements could be lowered to 10th grade. Increased salaries of para- medical personnel, with an added premium as an incentive for working in rural areas, should also help to get rid of the main bottleneck in Liberia's health care system. 458. In conclusion, rural health services have been extremely neglected. Aside from humanitarian aspect, health has a direct bearing on labor productivity. With the recent emphasis on rural development, the need for improving health services in rural areas becomes imperative. 1/ It is not entirely clear whether these water supply systems are not in fact overdesigned given the size and income levels of the communities involved. 2/ A strong argument against this is the difficulty of attracting foreign trained Liberian physicians back to Liberia once their schooling is completed. I - 164i.- Education 459. Throughout this report we have stressea the importance of eduuation to Liberia, both as an investment in-future human capital as well as its role as a central part of the package of social goods all Liberians should receive from their Government. Accoraingly, we have devoted a separate volume (Vol. VII) to the subject, here we present a summary of that work. 460. Historically, most education in Liberia has been the result of the efiorts of the private sector, particularly the missions. The few people that were educated came from the elite and the coastal dwellers and their number has been too small to fill the needs of the modern Liberia. The Govern- ment aid not begin to treat education seriously, nor did it have the funds to do so, until President Tubman's "Unification and Integration" policy enunciated in the early 1950's. Since then enrollment has increased seven-fold and teachers six-fold.: Presently, about 50% of the primary age school children and 12% of the-secondary age children are in school, but the drop-out rates are such that, of every 100 children entering the first grade, only 14 will finish high school. 461. School facilities are modest and usually concentrated in the urban areas. There is also, in spite of the recent rapid growth rates, a general shortage ol teachers. Equally important however is the fact that the curricula are derivea from the U. S. and necessitates the importation of expensive and irrelevant texts. Such materials, which are always scarce, represent a seriously high cost compared to the income of the average family, and when added to the cost of required uniforms place serious impediments in the way of many chilaren even if they have the desire and ability and are located near to a school. At present, pupil teacher ratios are L0:1 and with the recent growth in enrollment, it is estimated that some 6,000 new teachers will be required between 1972 and 1980. It is clear that existing facilities will only be able to supply about 15% of that amount by the end of the decade. The situation in secondary educa- tion is not quite as critical at present, but only because the enrollment ratios are still low and the absolute numbers of teachers required is small. Vocational training is limited compared to employer needs. 462. On the financial side, highur education continues to receive a dis- proportionate share of government expenditures. Capital anu maintenance expenditures are ad hoc and very limited. Teachers' salariesdo not appear uo follow any particular scales and like most public sector salaries they are often unequally applied. This encourages high turnover and low morale. 463. The education plan of the Government is currently being prepared. Its objectives include improvement of the quantity and quality of education as well as focusing on the deficiencies of rural areas. It would be wise to look at the question of making the education process more efficient and equitable. Manpower and employment projections for the 1980's suggest that given present trends in education there may be a serious skill imbalance in the coming years. Technical training should be linked to specific job openings and skill require- ments. Mechanical schemes to put schools in each town, clan, and chiefdom ignore the ootential of new ideas such as the community school concept. - 165 - VI. PUBLIC ADMINISTRATION AND POLICY Public A-]iinistration in PerspectiVe '"It is axiomatic that an inadequately trained and underpaid civil service without a system that allows for security of tenure and for meritorious selection and promotion, must of necessity breed inefficiency, graft and corruption that the Nation cannot afford". 6. Compared to other African countries the capacity of public service in Liberia is very limited and has been a major constraint to growth and developpent. No statement characterizes the state of public administration and civil service in Liberia better than the above statement by the President himself. One reason for this poor capacity is that Liberia, unlike other African countries, had no colonial rule to set up an administrative system to train civil servants and to educate an administrative class. Nor did the Government itself make serious efforts to build up these functions. Thus, as late as the mid-1950s, the Government was operated on a personal basis. There was no government budget in the modern sense. There were few records and accounts and no procedures to allocate and control govern- ment operations. Appointments to the civil service were a form of patronage and reward for loyalty to the President. 6. This administrative set-up was not a constraint 30 years ago when Liberia was a one-crop, one-firm economy, and the size of government opera- tions was only about $3 million a year. However, when iron ore was discovered in the early fifties, the economy grew suddenly and rapidly with a concomitant expansion in the size and scope of government operations. The archaic system of administration was not able to cope with these new circumstances. In the past two decades, considerable progress has been made to improve the fiscal management and institutionalize the budgetary process, but the Govern- ment has been slow in improving the efficiency of its public administration and civil service. With this long history of running government affairs on a personalized basis, it was difficult, if no impossible, to switch suddenly to a modern administration with institutionalized procedures, and decentralized decision making. Some attempts to reform the old system were undertaken but were never campleted. 466. In 1960, a Special Commision on Government Operations (SCOGO) was set up to strengthen the administration of government agencies and to improve personnel management in the civil service. Technical assistance was obtained through USAID. The Commission prepared extensive reform proposals, some of which were enacted into legislation. However, little progress was made to these reforms beyond some structural changes in a few agencies (especially - 166 - the Ministry of Public Works) and some improvements in general procurement and supply management. Three reasons accounted for this slow progress: the President's interest and support slackened, operational departments resisted the reform, and there was a shortage of financial resources. 467. When the new administration took office in 1971, it placed high priority on reforming the civil service and strengthening the public administrative capacity. A Civil Service Commission was established to make a "thorough and comprehensive study" of the civil service. A Public Administration Institute, which had been talked about for many years,was finally set up. Also, the new administration made considerable progress in improving work attitudes and instilling a sense of responsibility among civil servants. The President is insistent that civil servants go to work on time, do a fair day's work, and minimize absence from the office. Several top officials, including Cabinet members, have been dismissed for not being a good example to their.subordinates. A number of energetic and competent people have now been appointed to key positions of government including new county superintendents. Nevertheless, much effort in this field still remains to be made. 468. The problems of public service can be grouped under two broad categories: problems of an inadequate civil service system and problems of poor administrative capacity and organization. Problems of an Inadequate Civil Service System 469. The Public Employment Act of 1956 regulates the present civil service system and personnel management. The Act is outdated and is not enforced. The main deficiencies of present practices are lack of a uniform salary scale; lack of a meritorious system of selection and promotion; lack of pensions; and lack of security of tenure. As a result of these deficiencies the civil service system provides no incentives to efficiency. Qualified professionals do not find government service attractive. Many officials, especially those in high positions, seek outside sources of income. Since official working time is frequently used for various outside activities, interest conflicts often arise. 470. The newly appointed Civil Service Commission prepared a proposal for revising the Public Employment Act and establishing a Civil Service Agency to enforce it. This proposal, which is being reviewed by a Cabinet Committee, mainly regulates leave, vacation, and retirement and other pensions, but it does not tackle the main deficiencies in the system. a. Lack of a Uniform Salary Scale 471. There is no equity of pay in government service. Essentially, this is because salaries are not based on a job classification plan. The Public Employment Act classifies positions on the basis of a pay scale rather than on the basis of job requirements. As a result there are vast differences in pay for the same type of work and level of responsibility. - 167 - There is no systematic connection between job duties and responsibilities and rates of pay. These problems are most evident in jobs requiring higher education and skill. The need for a uniform salary scale based on a job classification plan is a matter of highest priority in the civil service and public administration reform. 472. In 1966, a plan for classification of jobs was prepared by the technical team which assisted SCOGO but the plan was never put into effect, partly due to the cost involved, estimated to be $3.4 million. The plan needs to be brought up to date to include positions created since its inception; and positions in all government service need to be grouped into cadres according to the nature of the work and the level of responsibility. A hurriedly prepared salary scale proposal was formulated by the Civil Service Commission, as part of the revised Public Employment Act, but that scale was rejected by the Cabinet Committee both on the grounds of its inadequacy and the lack of financial resources to implement it. b. Lack of Meritorious System of Selection and Promotion 473. Public service positions are not filled on the basis of merit. Although the law stipulates that recruitment to the civil service should be made through a competitive process, the majority of the appointments are made directly by the ministries and government agencies without competi- tive examination. Instead they are often based on political, personal or family grounds. The law also requires that promotion in the civil service be based on efficiency and qualifications, but no criteria has been set for this purpose either in thp Act or by the Civil Service Bureau. 474. The proposed revision in the Public Employment Act emphasizes that recruitment and promotion should only be undertaken through competitive examination. But the problem lies not in the law but in the practice. Unless the proposed Civil Service Agency is equipped to conduct effective examinations, and unless it has strong political backing from the President, ministries and other government agencies will continue to bypass it in their recruitment and promotion practices. It is distressing to note that a paragraph emphasizing objectivity and impartiality in government personnel management was deleted from the final version of the revised Public Employ- ment Act. This paragraph stated that: "No person in the civil service or person seeking admission to the civil service shall be appointed, promoted, reduced, removed or in any way favored or discriminated against because of his/her political, tribal or religious opinions or affiliations." This deletion comes as a surprise in the light of the new regime's expressed interest in undertaking a serious public service reform. c. Lack of Pensions and of Security of Tenure 475. So far, there has not been any terminal and other social benefits in the civil service. However, there are advanced plans to establish a 1/ National Social Security Scheme for both government and private employees.- 1/ In the private sector, the scheme will initially cover only employees working in establishments employing 50 or more workers. - 168 - The scheme provides for a retirement pension (at age 60), an invalidity pension, survivorst benefits, and a compensation for employment injury. It is proposed that employers and employees contribute 5 and 3% respectively of the employee's salary to a fund for this purpose. Given the present size of the civil service, the cost to government would be from $750,000 to $13million a year. This social security scheme is a notable step in the right direction, but there is still a need for security of tenure in the civil service. Such security should be granted to all civil servants (after a probationary period of one or two years) until retirement age or until a continuous period of service of about 35 years. Poor Administrative Capacity and Organization 476. . In addition to the poor service conditions, the inefficiency of the public administration stems from deficiencies in administrative capacity and'organization. There are four main areas of weakness: shortage of skill, over-staffing, excessive centralization of authority, and poor organization and communication. a. Shortage of Skill 477. There is an acute shortage of competent civil servants at all levels - from the filing and bookkeeping personnel to the department directors. There is not much capacity to prepare, organize, and disseminate information. Capacity to identify, evaluate, prepare, and administer projects is even more lacking. Although there is a general shortage of trained and skilled manpower, the poor employment conditions, and the recruitment and promotion methods have contributed to the presence of unqualified personnel in the civil service. The solution to the problem therefore lies both in initiating training programs of civil servants as well as in improving the civil service system. 478. A Public Administration Institute was established in 1972 to provide training for civil servants. The Institute will also provide consultative service to government agencies on organization and administra- tive matters. USAID will provide a four-man team to assist the Institute in its initial stage of operation.l/ The Institute will concentrate on pre-entry and in-service training for government personnel but will also attempt to develop managerial and supervisory skills at senior and middle management levels. The Institute deserves the strongest financial and political support from the Government. Its efforts must be supplemented by improving the training of lower levels of skills in secondary and tech- nical schools (e.g. at Booker Washington Institute). The Institute should also enlist strong cooperation from the School of Business and Publio Administration at the University. 1/ USAID has a subcontract with the Institute of Public Administration in New York to provide the required assistance. - 169 - b. Over-Staffing 479* There is considerable over-staffing in almost all branches of Goveriment. There are about 20,000 government employees, perhaps twice what is actually needed. This over-staffing results from the fact that government employment was, until recently, a form of patronage, and that employment has continued to be conducted on a non-merit basis. When individuals have not performed sufficiently, they have been kept on while additional personnel have been recruited. The absence of a job classification plan also contributes to this situation. 480. In 1963, a freeze on recruitment to the civil service was established as a part of an austerity program under IMF supervision. Within three years, however, the freeze crumbled in the face of political pressure. It is desirable that the freeze be enforced again, at least at the lower grade jobs, and a program for training and redeployment of redundant personnel be undertaken. Only recruitment of highly trained personnel should be undertaken in the next few years, and these people should go only to activities required to support the social and economic phases of the development budget. c. Excessive Centralization of Authority 481. There is excessive centralization in decision making in the civil service. This centralization is caused by two reasons: senior officials, including Cabinet members, are reluctant to delegate authority, and there is a shortage of qualified personnel to whom responsibility could be delegated. As a result, senior officials spend too much time on petty details and junior officials develop an attitude of indifference and lack of involvement in their work. The Ministry of Finance, under its new business-background leadership, has recently made significant progress in decentralizing decision making. The other ministries should make similar efforts and seek assistance from the new Public Administration Institute. The problem is not an easy one. But it can be solved gradually through management training programs for supervisors, and a general upgrading in the competence of the civil service. d. Poor Organization and Communication 482. The organization structures, administrative procedures, and communication within and between government agencies are other weaknesses hindering the efficiency of the civil service. Agencies are fragmented into numerous departmental units with no defined respondlbilities. Public administrative units at the local level practically do not exist. Record- keeping and information flow within and among agencies are extremely poor. Ministries tend to be isolated from each other, with only sporadic, usually personal, lines of communication. 483. Much of the groundwork for the needed organizational and administrative change was done by SCOGO in the 1960's. Several reports and law recommendations were prepared or enacted but were never implemented. -.170 - These recommendations must be re-examined and updated as needed. The Public Administration Institute should.advise government agencies on these organiza- tional and administrative matters. Much progress could be achieved relatively fast, provided there is a strong political will. The Role of the Educational System 48. During almost a century there was no urgent need for an administra- tion in modern terms for development. Consequently, the educational system was not oriented to meet development requirements. Without this educational and attitudinal reorientation, it is extremely difficult to build up an efficient administration. One should bear in mind that this calls for not only administrators at various levels but also statisticians, researchers, fieldworkers, planners, etc. The fact that qualification in those fields still is a very scarce commodity therefore, is due not only to the inadequate administrative system but also deficiencies in the educational system. However important the role of the Institute for Public Administration may be, its activities per -a with regard to pre-entrance and in-service training will probably not be sufficient in filling this "quality gap." The University of Liberia and Cuttington College are the obvious sources from which Government will draw its future professional (junior) civil servants. In order to meet government's future requirements, the curricula should be more practice- oriented. 485. In particular, in the fields of social science, e.g. sociology, economics, and statistics the syllabus should provide for a mix of scientific disciplines and practical work in the field as appropriate. This means that the "workshop" should become an intrinsic part of the curriculum. Now, field research carried out by students is only possible during the annual long holidays. Of course Government could facilitate the realization of the above suggestion through the development of a multi-annual research program and an internship scheme. It would ensure the continuity of the work at the University and the College. Simultaneously, the results of the workshops would contribute to the improvement of the overall data situation. Finally, the scholarship program should be appropriately oriented-to government's most urgent needs. Such improvements are currently being worked out by a special ad hoc committee on all aspects of the program. Conclusions 486. While a study of Liberian history can easily explain the reasons behind the current inadequacies of the civil service, there is an urgent need for serious reform. The new administration seems to be much more serious about civil service and public administrative reforms than its predecessor. It has placed these reforms among its high priorities which is imperative, given the desire to embark on an ambitious development effort in the next few years. It is relatively easy to formulate development plans and programs, but it is more difficult to implement them. No plans, programs, or projects can be carried out effectively without an efficient public administration to carry them out. Thus, to remove this obstacle to develop- ment is as urgent as to form new capital. The mission feels that such reforms - 171 - are the key element if Liberia is to make progress that benefit its people. Recent pronouncements by the President provide impetus for this reform. However, even the strongest will of Government in enforcing the new system including all of the above recommendations with regard to the civil service cannot avoid the fact that such a fundamental change of attitudes, let alone upgrading of the image of the civil service can only be the result of a time consuming process. In these circumstances the direct, continuous and personal support of the President is necessary to ensure reforms even on an evolutionary basis. In the past, efforts at public administrative reform have faltered as soon as the President's support declined. 487. Improvement in the general attitude to work, establishment of the Public Administration Institute, and the introduction of a social security scheme are necessary and important measures for improving the efficiency of the public service but are only first steps towards a much more complex reform. Other crucial issues have not been tackled yet. Indeed, the whole required reform cannot be undertaken at one time. It requires careful planning and phased-out programs over a number of. years. However, there are two aspects of the reform that deserve immediate consideration especially as their implementation is time consuming. These are: a. Establishing a freeze on hiring in the civil service (except for essential requirements), and initiating programs for training and redeployment of redundant personnel. This training could be conducted by the Public Administration Institute. b. Updating the job classification and pay plan undertaken by SCOGO, and preparing a practical and phased-out plan for putting it into effect. 488. While the first reform would save considerable public funds in the long run, the second reform would promptly add $3-4 million annually to government expenditures.i/ This is an "investment" that would pay off handsomely, given its impact on accelerating public development effort and on improving the quality and quantity of government services. 489. A problem of cooperation and coordination seems to be emerging between the Public Administration Institute entrusted with the training and the administrative and organizational aspects of the reform and the Civil Service Commission (OSC) entrusted with the task of reforming the civil service. This problem results from some overlapping functions of the two institutions and their unclear status vis-a-vis each other. Having two teams advising on problems so closely inter-connected may result in conflicting advice which would be a retarding factor to the needed reform. 1/ Moreover, an analysis of potential public sector resources indicates a relative abundance of resources in the short run, and availability to support such extra costs over the larger term. The cost of civil service reform has been built into the mission's fiscal projections beginning in 1974. - 172 - 490. The problem of cooperation and coordination between the two institutions must be resolved promptly. The best option would be to entrust the whole aspects of the reform to one institution, but if this is not desired, one institution should be clearly established as superior to the other. If this problem of cooperation is not handled at an early stage the desired civil service and administrative reform may never get off the ground. - 173 - CONCESSION POLICY A. Introduction 491. In many ways the policies of the Government of Liberia towards the existing concessions and to enclaves in general are at the heart of the development strategy. This activity involves the extraction of Liberia's natural wealth, a richness that will not last forever. It is crucial therefore that the country gain the maximum possible consistent with orderly exploitation in order to invest the proceeds in the future of the country. This investment must be focused not only at the expansion of the productive bases of the economy and the participation of Liberians in it, but must also be aimed at increasing the stock of public goods available to each and every citizen. Therefore concession policy becomes a crucial issue. 492. The question can usefully be addressed from a number of different aspects; the function and role of the concessions, the foreseen revenues from these operations, the current renegotiations, the question of equity, and the outlines of concession policy. It should be stressed that this is a particularly sensitive and vital area of the economy and that the comments of the mission are intended as observations rather than policy prescriptions. 493. Concessions are essentially a remnant from an age when the international economic and political system was very different. The system worked well, particularly in colonial situations where some of the proceeds could be siphoned off, either locally or in the metropole, to be invested in "native welfare". Large parts of the infrastructure of Africa were financed in this fashion. Rarely however was the situation as poor as in Liberia. Without concessions there was nothing but stagnation and the country chose the limited benefits available from these enclaves rather than having nothing. More important was the fact that the early concessions also involved paying off the accumulated burdens of international debt that Liberia habitually contracted in order to undertake even a modicum of development. lp rec_nt_de adesthe conpeasions in Liberia have periodically been brought up to date in terms of their relationship and contribution to the country, but they still lag somewhat behind current world standards. Their most important benefit at present is in the supply of scarce sklils, both managerial and technical to exploit Liberia's natural wealth. They are, at present by far the most efficient means of transforming this wealth into physical and financial development assets. Liberia'p policies must be directed towards a maximization of returns to the country subject to the constraint of not impairing the efficiency of the exploitation process. Her progress towards this goal has been impressive in recent years, but even after the current renegotiations there still remains substantial room for improvement. B. History 494. The history of concessions in Liberia date as far back as at least to the turn of the century with ill-fated Liberia Development Company of Harry Johnston in 1904. This company intended not only to extract the natural - 174 - wealth of the country, but also to build ,banks and roads" and at the same time to manage the country's customs receipts. This gained Liberia nothing but a substantial debt. A decade later a more serious concession (British) attempted to grow rubber at Mt. Barclay (near Monrovia). This too failed. Through the period 1910-25 there were a number of other ideas, but the first real project was the Firestone concession of 1926. The company was motivated by the necessity of breaking the British rubber monopoly, with its $1.25 per lb. price (worth about $3 in today's prices), and thus it was prepared to do somewhat more for Liberia than would otherwise have been the case, particularly in refinancing all of Liberia's debt, in paying advance rent when the country was short of cash.during the 30's, and in asking for somewhat less in the way of incentives than was normally the custom. During the years this agreement has been brought up to date, and although currently in need of another revision, it has in sum, definitely been to Liberia's advantage to have it. For example, the airfield that Firestone built for its own use is now Robertsfield International Airport and its existence during World War II helped to attract massive amounts of U.S. infra- structure aid both during and after the war. 495A In the post-war period other concessions arrived in Liberia, including the disappointing Liberia Company, then the iron ore companies, and the never rubber concessions, and finally the timber interests. It was not until the 1950's however that the amount gained from the concessions began to have a significant impact on the governments revenues and thus its ability to undertake development investment. C. Contribution to the Econony 496. Under present arrangements the contributions of concessions to the Liberian economy fall into four categories, a) contributions to public sector revenues, b) the employment of Liberians by the concessions, c) the linkages to the rest of the econony, including particularly the purchases of rubber from Liberian farmers, and d) the concession companies' contributions to local development through the supply of education, health, services and other infrastructure. 97, Revenues from concessions, including taxes paid by non-residents now amount to about $12 million, or about one-quarter of total government revenue (see Table 37). However, this revenue has been growing at less than 4% per annum while government revenues have increased almost twice that pace. This reflects both the relative decline in the importance of the concessions as well as the fact that the typical capital structures are highly levered (high debt, low equity), and thus the profits are overly sensitive to international price fluctuations. Prices were fairly soft over the past decade while those in rubber actually fell until late 1972. Measured against value added in the particular sectors, total revenues were only 14%, with the direct take in the rubber sector being as low as 7%. 8-8 In terms of employment, ILO estimates indicate about 56,000 persons, about L5% of the permanently employed labor force, work on the concessionl with the vast majority being employed in the rubber industry. -175 - Table 37 Value Added Contribution to Liberia from Concessions $ (millions) 1965 % 1968 % 1972 % Iron Ore Government revenue 7.9 9.5 9.h 10.5 13.1 11.2 (all sources) Liberian salaries and 8.8 10.5 9.5 10.6 :t. 11.9 wages 1/ Other dividend income, 0.h 0.5 O. 0Jh 0.4 0.3 etc. Total Value added by 17.1 20.6 19.3 21.5 28.1 23.5 Liberian factors in iron ore sector TOTAL VALUE ADDED 83.2 89.7 119.7 (iron ore) (100) (100) (100) Rubber Government revenue 4.3 20.5 2.5 13.4 1.9 10.2 (all sources) Liberian salaries and wages 1/ 7.2 34.3 8.2 43.9 9.2 49.2 Other 0.1 0.4 0.1 0.5 0.1 0.5 Total Value added by 11.6 55.2 10.8 57.8 11.2 59.9 Liberian factors in rubber sector TOTAL VALUE ADDED 21.0 18.7 22.8 (rubber) (100) (100) (100) Forestry Government revenue 0.1 5.0 0.3 10.0 1.1 12.6 (all sources) Liberian salaries and wages - - - - - - Total Value added by Liberian factors 0.1 5.0 0.3 10.0 1.1 12.6 TOTAL VALUE ADDED 2.0 3.1 8.7 (forestry) (100) (100) (100) 1/ Salaries,and wages before taxess in the rubber sector salaries and wages are those of.Firestone and other concessions. Source: Ministry of Finance and mission estimates. - 176 - Adding to this the large number of Liberian farmers who depend on the rubber industry for their livelihood, the industry is clearly the most important to the country as a whole. Moreover, when one calculates the total returns to Liberia (see Table 38), it is close to 60% of value added, while in iron ore the ratio is over 20% and in forestry less than 15%. These returns, which however should be compared to world "norms", clearly suggest the priorities for the Government in terms of increasing the take from the concessions. 499. The other area of contribution to the economy is in local infrastructure. The older concesoions have always had a policy of providing education for employees' children and health facilities, the latter now being a requirement based on minimum size of work force. The facilities of Firestone, for example, are outstanding and in recent years have been used by more than just employees and their families. Children are often sent to live with relatives in Harbel just to take advantage of the facilities. Similar high quality facilities exist atYekepa and Buchanan, but LAMCO is a bit more strict in limiting the use of schools and clinic to employees. Similarly, im roads and telecommunications, Nimba County, especially between Yekepaand Sanniquelle is much better endowed than usual, as a result of the efforts of LAMCO. Both Firestone and LAMCO have experimented in "spin- offs" i.e. setting up Liberians in business that supply particular goods or services to the concession. The success along their lines has been disappointing, mainly due to skills shortages, but whereas Firestone appears to have ceased this type of activity, LAM"O has redoubled its efforts and has recently brought in a small industry ..dvisor from Kenya. Soo. Most concessions would clearly like to "do more" for the country, particularly in infrastructure. Some are motivated solely by public relations, while others are genuinely altruistic. Moreover, some are under heavy pressure from home governments to contribute more to Liberia. At this stage in Liberia's development, it is probably more efficient to have the concession undertake infrastructure, but there is clearly a conflict with Liberian self esteem and feelings of nationalism. The whole of Nimba County, for example, could be quickly and efficiently developed if LAMCO did not feel inhibited by such sentiments. The key will be for Liberia to allow the concessions to contribute significantly more infra- structure without coming into conflict with Liberia's own social and political values. D. Equity 5o1. The question of equity is not as straight forward as it might appear. An initial analysis would look at the amounts that accrue to Liberia, both public and national private sectors, and compare them to that received by other countries for similar industries. This type of analysis has been done in the section of the report on production covering the concessions. It was shown there that Liberia probably does as well as most in rubber, retaining about 40% of sales or gross product. Iron ore on the other hand returned to Liberia only 16.5% in 1972 and with the LAMCO renegotiations this figure is only about 3% higher. -177 - Table 38 GOVERM91T PEVE4TT! FROM IRON ORE, RUBBER AND FORESTRY CONCESSIONS (U.S.$ 1000) 1965 1968 1972 Iron Ore 7,977 9,447 15,558 Profit Sharing(1) 7,938 9,408 13,450 Surface Rental 39 39 39 Individual Income Tax n.a. n.a. 883 Austerity Tax(2) n.a. n.a. 1,186 Value Added(3) 83.200 89,700 119,700 Revenue from the Iron Ore Sector/Value Added (M) 9.5% 10.5% 11.3% -including taxes on individuals/value added () - - 13.0% Rubber 4,280 2,157 1,933 Corporate Income Tax(4) 4,262 2,439 1,542 Surface Rental 18 18 19 Individual Income Tax n.a. n.a. 97 Austerity Tax(2) n.a. n.a. 275 Value Added(3) 21,000 18,700 22,800 Revenue from the Rubber Sector/Value Added (%) 20.4% 13.1% 6.9% -including taxes on individuals/value added (%) - - 8.5% Forestry 121 286 1,136 Stumpage Tax 21 86 820 Rental ) 100 200 316 Corporate Income Tax(6) - .... - Value Added(3) 2,000 3,100 8,700 Revenue from the Forestry Sector/Value Added (%) 6.1% 9.2% 13.1% 4 Concessions Total Revenue(7) 12,378 12,190 18,627 Profit Sharing & Coroorate Income Tax 12,200 11,867 14,836 Rental 157 257 374 Stumpage Tax 21 86 820 Individual Income Tax n.a. n.a. 980 Austerity Tax(2) n.a. - n.a. 1,461 Tax on ?on-Residents(B) n.a. n.a. 1,968 Concession R-venues Excluding Taxes on Individuals 12,378 12,190 16,186 Concession Revenues Incluriine Taxes on Non-Residents 2I.,743 12,736 20,595 Values Added from Ore, Rubber & Forestry(3) 106,200 111,500 151,200 Concession Revenue/Value Added in Concessions (%) 11.7% 10.9% 12.3% Concession Rvenue Z-cludine Taxes on Tndividuals/Value Added in Concessions 11.7% 10.9% 10.7% Concession Revenue Including Tax on Non-Residents/Value Added in Concessions 11.7% 10.9% 13.6% Value Added Concessions to Total GDP (at Factor Costs) 40.8% 35.7% 37.2% (Value Added Concessions to Total GDP (at Market Price) 36.5% 32.8% 34.8%) (1) In this table, for comparative purposes from iron ore profitsharing 1972, we exclude an extraordinary payment from LMC of $ 1,a5 million. Revised IPRD revenue, actual from LMC $ 3,486, net of extraordinary payments. (2) Tax on gross salary. (3) Value added at current factor costs of extractive concessions approximates market prices since very few indirect taxes (no import duties are paid). (4) Exclusively Firestone in 1965; an estimate of $ 35,000 in 1972 from Goodrich Rubber Company. (5) Som-wsht less than $ 100,000 in 1965. (6) No corporate ircore taxes paid; either because of non-existent profits or tax holidays. (7) Tax on non-residents not exclusively from extraction concessions. (8) Fxcludes education, hut, anl development taxes and some minor revenue; e.g. vehichle licenses which are paid by all concessions. In timber the figure is very much lower than international standards, and even with the increase of stumpage fees for specific species in 1973 the inequity is still apparent. 502. However, the questions of equity must be looked at also from the point of view of the ability to pay, specifically taking into account the commodity involved, its world market, and Liberia's strength vis-a-vis other exporters. In iron ore Liberia would clearly have difficulty in increasing its share-much beyond present levels. Her high grade reserves are very limited and most of the companies are now at a point where they are deciding whether to open new deposits or to close down completely. Pressure to increase the take at this point in time may well cause closures and the concomitant loss of economic livelihood, not only for the mine workers, but for all the people whose living depends on their earnings. In rubber, although the "take" by Liberia is high, there is scope for increases. Firestone, as well as other concessions, enjoys certain privileges, such as import duty relief, which are holdovers from earlier eras, and are now not in keeping with the times. There are limits to this however as rubber is not particularly strong as a commodity. The question of the government's take from the rubber companies is nowhere near as important as the problem of the returns to the independent farmer. The concessions buy all his rubber and do 3o at a price that is probably a good deal lower than it need be. The key factor is then the right of the concessions to determine the amount purchased and the purchase price; this should be the prerogative of the Government and if necessary-should be done independently of the concessions. 1/ 503. With timber the question is fairly clear. Liberia does not get as much as other countries, and in addition she is in real danger of depleting. this resource. Both factors call for much higher stumpage and export fees and if necessary an embargo on the export of logs. Given the state of the world market and of Liberian public finances only small fiscal harm would ensue from a timber moratorium while the concession agreements are completely overhauled and strongly redirected towards local processing. Current plans for a phased nrogram of local processing may well fail for lack of enforcement. Whatever the timber policy is, it should be directed towards improving the capacity of Liberia to control and police the industry. It may well be that the funds received should be earmarked for strengthening the ability of the Forestry Department to manage the industry. With timber being perhaps the best hope for the medium to long-run growth of the economy, it is sheer folly to continue the present high offtake, low returns, and underenforced policies. 1/ The decision of the Government to invite Guthrie to set up local ec2cing is a step in the right directicn. 179 - E. Reform of the Agreements 504. The importance of the enclave sector in Liberia led the Government several years ago to seek external assistance for the administration of concession agreements. The Development Advisory Service of Harvard University identified a number of areas in regard to the operations of concessions in Liberia where there was a need of closer inspection and the setting of guidelines. There were delays in setting up a Secretariat with competent technical staff to administer and supervise concession agreements, however in the beginning of 1973, with the assistance of the UNDP, the concession secretariat became operative. This is not to say that in the past there had been no review of the operations of concessions. In 1969-70 for instance, an extensive audit was carried out of all the major companies in the iron ore sector. When anomalies in bookkeeping have been found, e.g. overstating depreciation charges, the Government has asked for compensation in the form of additional revenue. 505. To protect Liberia's interest, a number of guidelines now have been set for future policy: 1. Participation (equity/or taxation) It has been decided that continued equity participation by the Government would preserve the "Partnership in Development" concept. Taxation !hould be imposed to clearly distinguish between the rights of the state as a partner, and the state as a sovereign nation. 2. Royalty A minimum royalty should be paid to the Government as a compensation for the use of its resources, just as the concessionaire is compensated for his capital. 3. Debt to equity ratio The concept of a limiting debt to equity ratio has been approved. There is a caveat in the sense that this concept, as well as any others which may be adopted, would only be imposed upon the concessionaire in-so-far as it does not impose undue hardship on existing legal arrangements entered into by the concessionaire. 4. Exemption from taxes and duties All concessionaires will be subject to taxation, but with the government's total participation from equity and taxation remaining at 5O%. Blanket duty free privileges are not justified, although there is justification for duty exemption on capital equipment and some materials and equipment of high replacement value. - 180- 5. Liberianization Program To assure more than token compliance with the government's desire to see upward mobility as well as broader employment of Liberians within the concessionaire's operations, there is a necessity of government approval of training programs proposed by the concessionaire. 5o6. These points have all been incorporated into a model concession agreement for iron ore mining. The model intends to describe an ideal solution. In practice, however, it is unlikely that any agreement in its entirety will duplicate the model. As conditions change, the model will be modified and in practice any agreement with a concessionaire entered into by the Government reflects the bargaining position of both parties. The government's position, particularly in the case of primary commodities and mineral resources, is a function of world market supply and demand. To ensure against the present situation where agreements are signed for long periods with no provision for review, the model contains provisions for reviews on a regular basis. F. Renegotiation with LAMCO 507. The first test case of the administration's new policies was the renegotiation with LAMCO. As a result of this renegotiation, total net additional revenue accruing to the Government from 1973-74 onwards will be derived from: 1. tax on non-residents ($0.96 million); 2. iron ore profitsharing/corporate income tax ($0.89 million); 3. consular fees ($0.11 million) and surface rental ($0.04 million). These yield a total of $2 million. 508. Most of the revenue is derived from the application of the tax on non-resident dividend income, and raised corporate income tax (taxation of management fees and other items). The company will continue to be exempt from customs duties and excises. Although this is in consonance with ideas reflected in the model concession agreement; the mission is in doubt whether this is necessary. Admittedly, this issue is linked to the pending revision of the tariff schedule, however with a proper revision of tariffs, there should be less hindrance in eliminating duty free privileges. 509. In addition, agreements were reached on a number of issues of great importance, particularly for the definition of profits. Thus there was agreement on a debt-equity ratio of 3.6:1 for LAMCO and the definition of equity was established. Related to this issue is the agreement that there will be no mortgaging or assigning of any part of the concession - 181 - without the government's approval. In regard to reserves, it was agreed that both parties will agree on a certain amount each year. Moreover, all infraEtructural development will be undertaken in consultation with the Government. 1/ In regard to Liberianization, LAMCO agreed to include ancillary acTivities to reflect current spinning off activities. G. Application of LAMCO Terms to Other Concessions 510. Renegotiations with other concessions in the iron ore sector have not yet started. 2/ The additional revenue which can be extracted from other companies is a function of their present profitability, and to a very minor extent of past windfall profits. The profitability of the other companies is not reported to be as high as that of LAMCO. Moreover some $0.8 'million of the additional revenue from LAMCO is related to the present tax treaty between Sweden and Liberia; Liberia gains at the expense of the Swedish Treasury. The items applicable therefore for extracting additional revenue from other companies are mainly: 1) taxation of management fees; 2) payment of increased surface rental; 3) payment of consular fees. There is little information to judge how much additional revenue the Govern- ment may receive; at a minimum,however,it should be at least $0.5 million per annum. 511. In such renegotiations, the principles for the definition of profits and for the obligations of companies to local development should be of paramount importance. It is the mission's view that with an improved definition of profits, a sizeable share of the additional income accruing to the iron ore sector from the 1972-73 price increases in the world market would be captured in the form of government revenue. H. Timber Concessions 512. The model timber concession agreement pursues the same objectives as laid out in the model agreement for iron ore concessions. Yet the framework is somewhat different. In the case of iron ore, what is at stake for the Government is to maximize its and Liberia's share of value added from a riore or less given volume of production. Once the plant is set up and in operation, net investment is small or negligible. 513. In the case of forestry, the primary objective for the Government must be to raise value added through encouraging local processing. The model timber concession agreement also wisely reflects this: 1/ Hopefully this provision will be used by Government to ask for more, not less, local infrastructure. 2/ Since this writing Bong and Firestone have both entered renegotiations. 182 - 1) For a period of five years commencing on the date of first marketable production, tax on profits shall not be paid on retained earnings used for reinvestment, 2) After the expiry of the five-year period, the concessionaire may retain up to 20% of any net profits in each year for investment or reinvestment within Liberia and this amount is exempted from income tax. 3) During the five-year period of exemption from income tax the concessionaire shall file with the Government full information on returns on earnings, income and profits, and therefore, the concessionaire shall file complete tax returns. The mission wholeheartedly supports this provision. Not enough importance can be put on the provision that companies are required to supply the Government with full information on its operations, already during the five-year exemption period. 4) Another improvement in the model agreement pertains to the payment of surface rental. From now on companies are required to pay rental for all land held; at present rental only is paid for the usually minor development area, whereas.the holding of option areas is free of charge. 5) In addition to surface rental, stumpage fees on cutting of timber for the local market or export shall be paid as specified under the Forest Law. 6) The concessionaire is given import duty free privileges but limited to the first five years of operation. This provision in our view makes much more sense than any blanket exemption. 7) Recent legislation provides for the phasing in of local processing of export timber with the aim of 100% processed timber by the end of 1977. This is a general forestry law outside of the concession agreements, but nevertheless impinges rather strongly on all such agreements, present and future. 514. Concession policy is a key to Liberian development, Liberia needs the resources the concessions can provide and deserves a better share of the return from her natural wealth. The agreements must be allowed to keep up with world conditions and must allow Liberia to catch up to the standards enjoyed by other countries. The present concession secretariat is doing an excellent job, but it should be viewed as a permanent institution, not just a special one-time renegotiation team. Periodic review must become -183 - an established principle and the desire for equity should be allowed to balance what has been in the past an excessive tendency to avoid change in order to protect the "open door". Foreign investors like stability and are generally willing to honor clearly stated, well thought out, policies towards them. Liberia can well afford to be more forceful and direct with the concessions without appearing to be quixotically jumping about. 515 In terms of the sectors of importance, rubber appears to have the most equity at present, the issues there concern price setting and the need to update some of the older agreements. In iron ore equity needs to be advanced a considerable distance, but world.market conditions and Liberia's relatively poor reserves may Wl limIt'theprogress_ beyond fthe LAMCO settlement.-Fi IIf, In~7restry, the situation is very muhaaibst ibeFraMs-favor. Agreements.could be easily improved, but the key to significant long-run equity lies in the ability of Liberia to administer and police the sector. Any and all investments the country makes along this line will yield many times their cost in current and future revenues. PLANNING 516. Planning as a public sector function in Liberia is still at a relatively young and unsophisticated stage. In a formal sense it has only been around for about fifteen years, and in terms of really functioning, it has only just begun to have the necessary foundations to make it a sensible proposition. Elsewhere in the report it is stressed that not until the 1950's was the country able to produce enough wealth to allow the public sector a significant amount of resources for development. Until about 1960 laissez-faire reigned supreme and little or no thought was given to nation building or to a coherent effort at raising the well being of all Liberians. Planning was not a part of the public sector expenditure process, projects being contracted, generally with external suppliers, at the whim of public sector officials. 517. By the early sixties this process had increased the public sector's indebtedness far faster than the still quite small concession revenues, could accumulate. A financial crisis ensued which was settled by, among other things,a debt rescheduling and by the intervention of the IMF. This led to a long period of enforced austerity and the realization that if the public sector was gping to take an active role in development, then some kind of coherence would have to be introduced into the capital expenditures of Government. However, Liberia had neither the human expertisenorthe information flows necessary for such an undertaking, thus in 1962 a continuous effort on the part of external aid agencies to set up a planning capability in Liberia and to assist her in the judicious expenditure of her. still scarce resources was begun. 518. The work of the Harvard Advisory Group (1962-69) can be regarded as laying the foundation. Among other things, they set up a statistical system, worked with the IMF on the public sector accounts, and on a budgeting system, set up a planning organization, and began the vital process of training public sector technicians and administrators. They also carried out an informal "Four-Year Plan" exercise which served not only as a training device, but also to identify the institutional deficiencies and potential bottlenecks. Much of the planning facility that Liberia now has,results from the groundwork of the Harvard Group. 519. Following this group there was a transition period (1969-71) involving both the Harvard Group and the UN/OTC. In this period the early gains were consolidated, a strong approach was made toward sectoral planning in the several ministries and planning was brought to t1fe public in the form of a conference in 1969. More important, 1971 saw the first develop- ment budget, a process which was unfortunately not continued. Finally it was in this period that the entire process of concession review was set in motion. 520. From 1971-74 planning was assisted by the UN/OTC alone. While this effort built to some extent on that of its predecessors, in general the results have been less than might have been hoped for. Many of the - 185 - reasons were due to circumstances beyond the control of the U.N. team and the Planning Ministry, but others resulted from what was probably a misdirection of effort on their part. First, in 1971 the Tolbert Governr wnt came to power. In most countries the Planning Ministry reflects directly the development philosophies of the group in power, and Liberia is no exception. Within a year the Minister had been replaced and a significant number of the staff of Planning had been taken by other parts of Government. Moreover, the Government clearly placed a higher priority on the fiscal system, on the enforcement of revenue collection and on a tighter control of revenues than it did to long-run planning. Some of the best staff members of Planning were moved to Finance as was the Concession Secretariat, reflecting the change in priorities. Under the present management, Planning is rapidly regaining its proper place in the Liberian Government, but it is clear that the function and the Ministry-were for some time left out of the mainstream. 521. Another problem arose from a serious deterioration of the national accounting system. As the result of poor technical assistance and a misguided attempt to install the revised SNA, the national accounts of Liberia were at the time of the mission's visit, badly in error and badly misleading as guides for planning; the problem is discussed in the next section. Finally, as the result of the change in Government and philosophy, the able advisors provided by the U.N. turned out to be some- what too sophisticated for the real needs of Liberia and as a result found themselves misinterpreted and somewhat wasted. In particular, the focus of their efforts had over the years shifted in the natural direction of integrated development with a rural focus. Meanwhile, the advent of the new Government and the availability of sufficient revenues to end the long period of austerity had shifted the focus of the public sector to projects and their execution. It was quickly found that the capability in this direction had never been properly established either in Planning or in the responsible ministries,and that ministries with ideas simply bypassed Planning and went directly to the source of funds, Finance. 522. It should not be assumed that "integrated rural development" as a planning philosophy in Liberia is wrong or inappropriate. It is entirely correct. However, it may be somewhat ahead of the capacities of Liberia to use it; it seems to be very badly understood by those who need to use it, and it requires certain foundations which are not yet firmly in place in Liberia. In its simplest form "integrated rural development" assumes that development efforts should be directed to the rural rather than the urban areas, and that, more important, projects should be part of an overall philosophy for an area and that each project should be checked out with the ministries operating in the particular area to see first how it fits in and second if there are any conflicts either materially or temporally. This does not require input-output tables (for one thing the linkages are usually minimal), nor does it require a lot of data. What it does require is strong planning units in the relevant ministries with communication between them and the Ministry of Planning, which body should act as a co- ordinator rather than a censor. It also requires that each planning unit be well grounded in project evaluation and execution and be staffed with people who take the initiative to talk to their counterparts in other ministries and in Planning. Finally, it requires a fundamental change -186 - in the fiscal policy towards planning and the adoption of regular multi- year development budgets that include not only domestic resources, but also those supplied by foreign assistance agencies. 523. The key to Liberian planning would appear to be to get back to basics and to forget advanced techniques for the time being. The first concentration should be on the re-establishment of the flow of information about projects, both on a grass roots level and also higher up. Thus Planning could be informed before the fact and could help the ministries instead of the present where they are informed ex post and thus appear only as impediments. The second step is to improve the evaluation units in the ministries so that when the Minister gets an idea it can be "vetted" before he gets overly committed and Planning can at the same time know of the idea and can assist the particular units. With these two steps Liberia would at least avoid the most costly problem, the lack of coordination. This is the simplest form of balancing or integrating, just making sure that different ministries are not doing the same thing at cross purposes and ensuring that the actions of one ministry which affect another are at least anticipated and provided for. After this the next step is to strengthen project analysis, and then, only when the system is very solid will it be desirable to get into things such as linkages and balanced growth. These last two concepts are very badly understood in Liberia and the losses from not encompassing them are miniscule compared to the losses from delay and from the neglect of the previous basics. Parallel to these efforts, the statistical system must be strengthened and a development budget must be established. 524. In late 1974 and *early 197' a new planning team was established with the IBRD as executing agent and with financial support from the IERD, USAID, and the UN. This team consists of four persons, a team leader, a project specialist, an agricultural specialist, and a statistical expert. At the present time their focus is the preparation of a five- year development plan, scheduled to begin in January 1976 and cover the years 1976-80. It is clear that the plan document, although important, will only be the written expression of an intensive collaborative planning process not going on in Liberia. W,Thether in fact the country will finally begin to approach a rational planning process remains to be seen, however, the present direction of the efforts is along the lines suggested above and thus would seem to be correctly focused. -187 - THE STATISTICAL SYSTEM 525. The statistical system in Liberia is unfortunately much less adequate than might be expected. The original intention of the Basic Economic Mission was simply to update and organize the data that was available. However, once in the field it quickly became evident that the published statistics were almost entirely unreliable and that the national accounts had been compiled in a fashion incompatible with accepted techniques. Therefore, the mission undertook to revise the entire national accounts, linking them backwards to those prepared by the Harvard Advisory Group, thus arriving at series for the period 1964-72. These estimates are presented in the statistical appendix (Volume II). In this section of the main report we present the summary findings and the recommendations with respect to the system. 1/ In general, there is a lack of reliable statistics and this is manifested in poorly staffed and organized units both in the Ministry of Planning as well as in other major ministries. General Findings 526. The large bulk of statistical work in Liberia is carried out in the framework of the Ministry of Planning under the overall direction of the Deputy Minister for Planning and Statistics. Immediate supervision is in the hands of an Assistant Minister for Statistics. Data collection is restricted almost exclusively to the Monrovia area, and except for the concessions little is known of activity in other parts of the country. Apart from demographic statistics and the national accounts, the principal series compiled are the following: Foreign Trade - quantity and value of commodity exports and imports. Prices - Monrovia Consumer Price Index and Unit Price indexes of commodity exports and imports. Quarterly Survey - production, employment, and wages in 96 establishments with 20 or more workers. 527. Given the structure of the Liberian economy, particularly the concessional arrangements and the concentration of modern sector activity in the Monrovia area, it should not be over-difficult to gather and compile reasonably reliable statistics covering comparatively wide fields of economic activity. In the course of its work, the mission ascertained that a considerable volume of statistical information is indeed potentially available. The actual situation, however, is not particularly good. 528. In general, statistical operations in Liberia are characterized by a distressing lack of professionalism. With very few exceptions, the persons in charge of statistical projects are very inadequately trained for these jobs. 1/ These findings relate to the situation in early 1973. Since that time there has been a modest, but significant improvement in the system. - 188 - 529. Editing and checking procedures are largely non-existent. In the case of the Quarterly Survey in particular, gross inconsistencies in the data reported by establishments fail to be picked up, and compilation and publication are carried out mechanically with little reference to the reasonableness of results. 530. During the course of reestimating the national accounts (see Annex on statistics), the mission worked directly on the individual establishment questionnaires. In many cases there was little resemblance between the data contained in the questionnaires themselves and those actually published in the Quarterly Statistical Bulletins, and it proved impossible to effect a reconciliation. 531. The Quarterly Survey covers, in principal, most branches of the monetized econovy. Properly designed and implemented, it could provide invaluable information on current trends and developments. As it is, the tabulated results cannot be used with even a minimum degree of confidence. Apart from the lack of effective editing and checking, the 96 establishments covered were not selected on a probability basis and the percentage coverage of total production or employment in each branch is not known. There is no provision for the systematic incorporation of new establishments, while the method of replacement employed for establishments closing down or not responding is highly arbitrary. Not infrequently, no replacement is made at all. Since no imputations are made for non-response, the published totals simply relate to a smaller number of establishments. The implicit trend over time may therefore be quite misleading. 532. The weighting pattern underlying the Monrovia Consumer Price Index was not derived from a comprehensive household expenditure survey but from limited sample of Bureau of Statistics employees. Many of the sub-index price movements appear implausible; it is apparent that little serious checking or analysis is carried out prior to publication. 533. The standard of operations in the field of Foreign Trade Statistics appears to be somewhat better than in other areas. However, despite an alleged improvement during the past 12 months, import smuggling is apparently still very much a problem, as also underpricing and/or misclassification of goods. Problems also exist with regard to the registration of key exports such as iron ore, rubber, and logs. For some years, the export quantities and values of these commodities may differ significantly as regards both level and trend from the production figures reported to the Ministry of Finance, producers associations (the Rubber Manufacturers Association), and the Ministry of Planning (Quarterly Survey of Industrtal Establishments). 534. At the level of publication, the Quarterly Statistical Bulletins are full of typing and other errors and it is risky to use the data without first checking totals and testing feasibility. 535. Fragmentary statistical operations are carried out by a number of other government ministries. In nearly all cases, the quality of the data compiled is low. For purposes of national incane estimation, the mission - 189 - requested data on the number of motor vehicles from the Motor Vehicle Division of the Ministry of Finance. The figures supplied for 1971 were between 3-5 times greater than those submitted by the same Division to the Ministry of Planning some few months earlier. Tabulations were likewise obtained from the Ministry of Commerce of a limited 1971 Survey of Industrial Establishments in Monrovia. They proved largely unstable. For many establishments, reported wage and salary payments alone were several times larger than the reported figures for production of sales. 536. It is the mission's view that the main deficiencies of the Liberian statistical system lie in an inappropriate organization structure and a lack of qualified manpower. Summary Recommendations 537. The key to an improvement of Liberian statistics lies with the Government of Liberia itself. At the risk of appearing trite, the Government must first decide whether it is interested in reliable statistics or not. 538. If the answer is negative, then the present staff assigned to statistical work could and should be reduced drastically. This would have little effect on the present extremely poor quality of data produced and would release funds for other purposes. Assuming, however, that the Government is indeed interested in reliable statistics, it will be essential to draw the necessary conclusions with regard to both organization and staffing. 539. The present arrangement whereby both Planning and Statistics are under the direction of a single Deputy Minister is entirely untenable. The organization, direction, and development of statistical activities, especially under Liberian conditions, is more than a full-time job in itself and cannot be combined with responsibility for Planning. It is imperative that a qualified economist-statistician be appointed, at least 1/ at the level of Deputy Minister, to head statistical activities in Liberia. So. It will likewise be necessary to increase the status and prestige of statistical work in the government framework, in order both to attract and retain competent personnel and to facilitate effective data gathering. To this end, and irrespective of its administrative location, the Statistical Bureau should be accorded special independent status in all matters relating to statistics. The Minister in charge of statistics should be officially designated Government Statistician, thereby ensuring his independent professional status vis-a-vis other Ministers. This should.be provided for in a special Statistics.Law. 541. The salaries of statistical staff should be raised to a level at least comparable with that in other government agencies. This will facilitate the replacement of inefficient and unqualified staff by more proficient 1/ Since the visit of the mission, this recommendation has been adopted. Statistics is now under a separate Deputy Minister in MPEA. -190 - personnel. At the present time, those staff members with a minimum proven competency tend to leave for better paid positions in other ministries. 542. Parallel with the proposed reorganization, statistical branch offices should be established in each of the principal counties. They could be initially staffed by perhaps one or two persons only, who would focus mainly on the collection of basic information such as the number and type of establishments, employment, etc. Their activities could subsequently be expanded in the light of needs and experience, so as to provide the basis for comprehensive data gathering on a national scale. 543. Pending the implementation of these reforms, the mission does not see any prospect for an improvement of Liberian statistics in the foreseeable future. Specifically, it is the mission's opinion that no amount of outside technical assistance will be of any permanent avail, until such time as the above mentioned reforms are 4qplemented. - 191 - CONTRIBUTION OF FOREIGN ASSISTANCE TO ECONOMIC DEVELOPMENT IN LIBERIA A. Foreign Assistance Operations in Liberia 544. The role and relationship of foreign assistance agencies in Liberia havebeen somewhat different than that in many developing countries. By reason of its tremendous deficiency in human capital and the fairly straight- forward nature of its infrastructure needs, Liberia has in the past allowed a considerable degree of autonomy to foreign assistance. The initial infra- structure investments of the 1940's were carried out almost entirely by American public and private concerns and they were probably directed more to the needs of the U.S. than to those of Liberia. Through the mid-1960s foreign aid projects were usually identified and executed by the agency concerned with little more than rubber stamp participation by Liberians. In recent years, however, there has-been a sufficient accumulation of skilled executive manpower and sufficient-progress in institution building to allow Liberia to take a significant degree of initiative and control in project selection and execution. Even today, however, the expenditures on such projects are placed in an "extraordinary budget" and are often not fully known until the budget year is completed and an accounting can be obtained from the agency in question. The general point to be made, however, is that like most things in Liberia, the foreign assistance relationship has been evolving fairly quickly, continually changing for the better and that in the future,significantly increasing numbers of projects will be appropriate. The following two sections examine the historical relationships of particular foreign aid agencies. B. Bank Group 545. Over the past decade Bank and IDA involvement in Liberia has amounted to eight projects. Of these, the first was in 1964 while subsequent loans did not start until 1969. Thus, there is only a limited amount of experience in lending to Liberia from which to judge the Bank Group's contribution to Liberian economic development. It was only in 1972 that loans were made in the more difficult sectors of Liberia, agriculture and education. Previous loans were for heavy infrastructure mainly benefiting the urban areas of the country. 546. The first project, in 1964, was a loan for two roads plus some small roads inside the city of Monrovia. The first road ran from Monrovia to the airport and cut a good number of miles off the distance required to travel to the airport. This road was paved and there seems no doubt about the economic justification for this, although it is not at all clear that it had any benefits in terms of agriculture or rural development. The land through which the road passes is generally unproductive. The main benefit seems, therefore, to have accrued to those who travel on foreign airlines, the taxi fare from the airport having dropped substantially. The other major road was in the western part of Liberia from the town of Kle to the town of Tiene. It goes through Cape Mount County and the country through which it -192 - cuts is among the most deserted in Liberia. The original idea was that this road would open up that area for agricultural development and in fact one of the covenants of the loan was that the Government would prepare a five- year agricultural plan for the area. This was never done. In addition, the Government had indicated that were the road to open up, a logging concession would start operations in the area. However, when the road was opened, the concessionaire declared that the area had only secondary species and, there- fore, it was not worth exploiting. Recent travel over this road indicates there are only two places of economic interest along the entire 45-mile stretch. The first is the foreign-owned B.F. Goodrich rubber plantation, and the other operation is the West African Agricultural Company (a plantation owned by a Liberian) at the end of the road. More recently a link has been opened from the middle of this road to the town of Robertsport, thus opening up this town, one of the original settlements, for the first time in the his- tory of Liberia; this has significantly increased traffic on the road. Moreover, a road going from Tiene to the Sierra Leone border, thus completing the link with Sierra Leone, and a bridge over the Mano are now being built. With the opening of this new link, the road which was financed in 1964 would seem finally to have a substantial economic and social justification. Perhaps the most important lesson that was learned from this operation was the significant problems which are encountered in the question of road maintenance. Liberia is particularly hard on heavy equipment and the expertise for its repair is very scarce. The final supervision report on this loan (1969) noted the vast amount of equipment purchased which was then lying useless. This problem has led to the inclusion in recent highway loans of a strong maintenance organization. 547. The next operation was in 1969, a loan of $3.6 million to the Liberian Ports Authority. This loan was carried out successfully, not only in a physical sense, but also in terms of the building of an institution. There is still a small amount of undisbursed funds from this loan which is being used to study the overall strategy of port developnent in Liueria. This loan, like most of the loans to Liberia, primarily benefits the modern sector. 5h8. The next loan was in 1970 to the Public Utilities Authority for power in the amount o: $7.4 million. This loan and a suosequent loan in 1971 of $4.7 million to the same Authority were for the purpose of expanding the electrical system in and around Monrovia including adding more generators, and for putting two more penstocks in the dam at Mount Coffee. These loans, are still being aisbursed and give indication of being effectively carried out. One or the key provisions of these loans was the reorganization of Public Utilities Authority in order that it might operate more effectively, this is currently being carried out by the Liberian Government. In view of the fact that the IBRD got into power in Liberia after the high cost decision to go into Mount Coffee had been made,1/ the loans to ne Public Utilities Authority have been effective and successful, and will have the effect oi lowering the average cost of electricity to the country. 1/ See paragraph below. - 193 - 549. Loans in 1972 for education and for agriculture, both IDA in the amounts of S7.2 and 1.2 million are much more directed towards the rural people of Liberia rather than towards the urban infrastructure. It is much tio early, however, to make an assessment as to their impact on Liberian economic development. 550. A loan was made in 1972 to the Liberian Bank for Development and Investment, a Develooment Finance Company. A loan was made in May 1973 for the purpose of rebuilding several main roads and studying still others, and finally a second loan was made to LBDI in December 1974.. 551. In sum, it is somewhat premature to make very much a judgment on the Bank Group lending program in Liberia, in view of the fact that only one of the loans was made before 1969. However, it seems clear that the earlier efforts were focused on the modern sector and only recently has the focus begun to shift to the traditional sector. C. The Aid Experience of Other Agencies $2. In the previous section we discussed the experience of the Bank and IDA in Liberia. The general conclusion was that the projects have been well intentioned and have been reasonably productive. The experience of other suppliers of development assistance has been similar. In general, projects have been well thought out and have been significant parts of the development program. Nowhere can one find much evidence for the common idea that Liberia is a waster of foreign capital assistance. Virtually all projects have been reasonably sound and the grant aid has mainly gone for technical assistance. Of course, one can point to projects such as Mt. Coffee and the Gbedin rice scheme, but the errors are small and Liberia's record is generally better than other countries. A possible argument is that the aid released funds that the Liberians could spend on palaces and yachts, which was what they bought in the late 1950s and early 1 960s. However, it should be remembered that this was the first period in Liberia's long history when she had sufficient funds for such luxuries and that this type of expenditure would have occurred with or without the presence of foreign aid; certainly foreign aid itself was not spent for such frivolities. Finally, there is the macro-economic argument where one measures the aid per capita (which was, and still is to some extent, high by international standards) and compares it to the rate of economic development achieved. While the growth was fairly high by comparative standards, it was not due particularly to the aid, and the relative aid was even higher. However, as is argued elsewhere in this report, Liberia is a country seriously deficient in itfrastructure. During the three decades 1920-c0 her neighbors were receiving their only benefits from the colonial system, infrastructure, particularly education, while Liberia could afford nothing. Thus, when foreign aid appeared - 194 - on the scene in the late 1940s it had to begin with the basics of development; ports (Lagos by way of contrast was opened for shipping in 1974) roads,' health, etc. Moreover, the lack of education in the preceeding era meant that Liberia had (and still has) a significant deficit in human capital. This easily explains the apparent necessity of a technical assistance program that in 1960 was as high as $10 per capita. Today the picture is not much different. As outlined in previous sections of this report, the education deficit is still substantial,health is underdeveloped, and the road system will only begin to have the basic all-weather trunk-system at the end of the coming five years. Thus, in general, Liberia still needs the basic time-honored infrastructure invest- ments. 553. Table 5.11 in the statistical section (Volume II) of this report presents a detailed listing of the projects by non-Bank Group sources for Liberia over the past 30 years. As can be seen, the vast majority, both in terms of number and cost, came from the U.S. Government. Over the 30-year period about $100 million was lent to Liberia by the U.S. for various pieces of basic infrastructure. Not included in the list is some $4 million in grant funds that represented the cost of converting Robertsfield into an international airfield during World War II. Of the $100 million,two-thirds was spent on four large projects; the Port of Monrovia ($19.3 million) in 1941, roads ($20.9 million) in 1951, JFK Hospital ($6.6 million) in 1963-65, and Mt. Coffee_Hydroelectric scheme ($24.3 million) in 1963-68. The first, the port, a vital addition to the infrastructure of Liberia, came about because the U.S. heeded a port to supply its war effort, but it was not finished until after the war and the real benefit went entirely to Liberia. The roads were essentially the entire trunk road system that Liberia now possesses, including the paved road from Monrovia to Totota. The JFK Hospitalwas discussed above in the health section. A product of an era when it was thought that large- facilities were optimal, it has produced a decidedly imbalanced health situation for Monrovia vis-a-vis the rest of the country, and even in an absolute sense it is perhaps too large in a technical and administrative sense for Liberia. However, it is to become the focal point of a health outreach program and in the long run may well prove to have been a wise investment. Finally, Mt. Coffee. This is discussed elsewhere in the report; it comes from the era of large hydro schemes and in that light it was inevitable, particularly considering its proximity to Monrovia. What was not fully appreciated was the fact that the St. Paul river is not a very full river and it undergoes periodic dry extremes when only one penstock can be used.!/ From a purely hydrological point of view the Cavalla and the Cestos rivers are better sources, but their very remoteness would have ruled them out at the time. The end result is that electric power is more costly in 1/ This site suffers from extreme variability of water level such that in the dry season only about 20% of the hydro capacity can be used. More- over, the decennial variation is much more extreme than had been expected; the most significant impact of the Whst African drought in Liberia has been on the Monrovia power system. - 195 - Liberia than it might be, and this places somewhat of an impediment on over- all development. In the longer run this will be much less of a problem. The remaining U.S. loans were for obvious pieces of infrastructure, primarily in the Monrovia area. This urban bias is common to most aid agencies, and like the Bank Group, the U.S. has begun to shift to rural projects. 554. The other significant aid source has been the German Government. During the 1960s they built three roads in Liberia, all of them essential parts of the national system. One was part of the Monrovia road system and there is no question about its usefulness, the second was from Tchien to Greenville, a road that has had a very large payoff by opening up the entire southern region of Liberia. The third road, from Harbel to Buchanan, including a bridge over the St. John would have appeared to have been an obvious invest- ment, but in reality the actual traffic, a large part of which is related to LAMCO operations, has been considerably less than anticipated. In time this road will generate more traffic, but it seems to indicate that a coastal road, even when the physical engineering problems are discounted, would not be particularly fruitful as an investment. 555. Other aid donors - Israel, Sweden and the U.K. - have had programs that were too small to have been significant. 556. In the field of technical assistance there may be grounds for an argument of aid wastage. Significant amounts have been spent in this field to purchase foreign experts whose usefullness has been often questionable. Not only do they represent foreign assistance expenditure, but also they require significant local expenditure, itself a budgetary drain. Liberia is not unique or any worse than other less developed countries in its receipt of such low productivity assistance, but the general lack of Liberian counter- part personnel and the low level of productivity of experts who "think" rather than "do" has significantly lowered the actual impact of such assis- tance. Liberia probably needs for less technical assistance that it now receives and the Government should be far more selective in accepting such aid, looking for operational results rather than for image. 557. In general, however the foreign assistance programs in Liberia, particularly the capital ones, have been well intentioned and for good sound projects. There has been very little in the way of poor investments, certainly no more than other countries. While the emphasis has been on Monrovia in the past, it should be and is now shifting to the rural areas. In sum, there seems to be only limited justification for terming Liberia a "large waster of aid".