Cape Verde Macro-Economic Analysis

Cape Verde| â€Å"Most Improved Country†| Introduction Cape Verde is a small country that spans ten islands and is 570 kilometers off the coast of Western Africa. There is very little rainfall per year and the land on most of the islands are of volcanic origin. On several of the islands the land is fairly flat, sandy and dry, whereas the rest of the islands are covered in rocky land. It, therefore, lacks in natural resources and has experienced severe droughts. Agriculture is made difficult by lack of rain and is restricted to only four islands for most of the year.It is ironic that the country is called â€Å"Verde† meaning â€Å"Green,† even though most of the land is not green. Due to the scarcity of agriculture, most of the nation's GDP comes from the service industry; more specifically tourism, light manufacturing industries, and fisheries. Cape Verde's economy has been steadily growing since the late 1990s, and it is now officially considered a country of a verage development. Through an economic analysis of Cape Verde, we will see the connections between its economy, society, and government.The analysis will recognize not only the flaws and struggles of the country, but will pose possible solutions to its problems. Government: Past and Present Learning about a country’s government is essential to figuring out their economic details. Uninhabited on their discovery in 1456, the Cape Verde islands became part of the Portuguese empire in 1495. Portuguese people began establishing settlements throughout the islands, especially along the ports. They were still governed by the Portuguese government and abided by all the same laws; however, the Portuguese government did not have much involvement with the settlements.Therefore, without strong sustainable investment from the homeland’s government the people grew increasingly discontent with them. However, the Portuguese continued to refuse to provide the local authorities with mor e autonomy, or self-governing. This discontent aggravated and culminated in 1956, when a movement led by Amilcar Cabral laid the stepping stones for independence for Cape Verde. Cabral and a group of fellow Cape Verdeans and Guineans organized the African Party for the Independence of Guinea and Cape Verde (PAIGC), which demanded improvement in economic, social and political conditions in Cape Verde and Portuguese Guinea.The PAIGC began forming armed rebellions against the Portuguese government in Guinea, but were more passive in Cape Verde. In 1974, following the coup in Portugal, after which Portugal began abandoning its colonial empire, the islands were granted a transitional government comprising of Cape Verdeans and Portuguese officials. Eventually, the Cape Verdeans elected a national assembly which drafted a declaration of independence on July 5, 1975. Their government became known as the African Party for the Independence of Cape Verde, or the PAICV.Until 1990, the PAICV rul ed Cape Verde as a one party democratic system; however, opposition began building up towards a multiparty government. On Jan. 13, 1991, the first multiparty elections since independence resulted in the ruling PAICV losing its majority to the new Movement for Democracy Party (MPD). This was a major event in Cape Verde’s history because it sealed their intentions to become a self-reliant country. The only problem now was how could they stabilize their economy? GDP: A Breakdown What is Gross Domestic Product (GDP)?GDP is defined as the overall goods and services produced within a country’s boarders during a given year. The GDP of a country is an important piece of data which measures the size of the economy of a country. To calculate GDP, you add the amount of money spent on consumption, investments, government expenditures, exports, and imports. Once you find out what the GDP is, you can change it into dollars by using purchasing power parity (PPP) or exchange rates and then you can find out the growth rate and GDP per capita.Cape Verde’s economy is relatively small compared to the rest of the world. Their economy has always primarily been a service economy, meaning that most of their income and GDP is from services rather than agriculture or industrials. Cape Verde is consistently in the bottom half of the GDP spectrum. It is pretty obvious how underdeveloped their economy truly is when comparing it to that of countries with similar size and geography. For example, Senegal, Cape Verde’s eastern neighbor, also is primarily a service economy.Their economy, however, is much stronger than Cape Verde’s. Senegal has a Purchasing Power Parity of $23. 86 billion, which is almost 23 times the size of Cape Verde’s! The magnitude of this difference is probably due to the fact that Senegal has a bigger population and geographic size. A positive sign for Cape Verde over Senegal is that its GDP real growth rate is 4. 5% as opposed t o Senegal’s 3. 9%. This shows that Cape Verde’s economy is slowly improving as inflation rises. GDP (2010)| Amount (in US $)| World Rank| GDP (PPP)| $1. 861 billion| 186th |GDP official exchange rate| $1. 573 billion| 162nd | GDP per capita| $3,700| 160th | GDP real growth rate| 4. 5%| 71st | Is Cape Verde Growing? When figuring out the growth of Cape Verde, the Consumer Price Index (CPI) helps determine the rate of inflation. The CPI is a measure of the overall goods and services bought by a typical consumer. It is the primary method to monitor the changes in the cost of living over time. To calculate the CPI you compare a basket of goods’ prices to a certain base year, where the prices are set as $100.The inflation rate is based on the increases or decreases in price of the basket of goods. In other words, you take the current price and subtract the previous price and then divide the whole equation by the previous price. If you multiply that by 100, you get th e rate of inflation. I have chosen to compare three countries’ CPI to show how Cape Verde’s economy has grown over the past decade. As seen in the chart below, the costs of goods in 2007 was 15 percent higher than it was in 2000. The CPI increase reflects the high inflation that occurred over this time period.By using the CPI, you also can see that Cape Verde and Senegal were equally susceptible to inflation in comparison to the larger, more economically stable United States. When relating back to GDP, these numbers make sense, due to the fact that the growth of the U. S. is significantly greater than these countries. Country| 2000 Prices (US$)| 2005 Prices (US$)| 2007 Prices (US$)| Cape Verde| $95| $100| $110| Senegal| $93| $100| $108| United States| $88| $100| $106| | | | | In the graph below, notice the relation between the growth rate and the inflation rate.Over the past decade, GDP growth has pretty constantly exceeded inflation, excluding 2008. This implies a pos itive real GDP growth rate. Therefore, the GDP of Cape Verde represents positive growth, and when you take inflation into account, the economy is growing at a positive rate. The reason the inflation rate outgrew the GDP growth rate in 2008 was because the World Trade Organization approved a deal that would see Cape Verde become part of the WTO. This brought their inflation rate up above their growth rate because Cape Verde had to abide by the regulations set by the WTO.However, this was not necessarily a bad thing because it strengthened a multilateral trading system for Cape Verde and allowed them to continue to integrate into the world’s economy. How Do They Sustain Themselves? Due to their lack of natural resources, Cape Verde has resorted to heavy trade between countries. This is why their recent entry into the World Trade Organization has been so pivotal. The graph below shows a breakdown of the GDP of Cape Verde by sector. As previously mentioned, the economy of Cape Ve rde is mostly made up of services. The services include: commerce, transport, and public services.Recently, the government has primarily focused on the development of tourism and fisheries. They hope to take advantage of their geographic location by luring tourists in to their exotic resorts. Also, due to the fact that they are an island country off the coast of Africa, they can capitalize on the development of their fisheries. Cape Verde’s agriculture is made difficult by the lack of rainfall during the year and only four of the ten islands are fertile. Therefore, they have to resort to importing most of their food. About 82% of food is imported into Cape Verde annually, causing them to run a high trade deficit.This means that they have to receive a heavy amount of foreign aid in order to sustain themselves. The industry part of Cape Verde’s economy mostly consists of refining minerals such as clay and salt. The other industrial part of Cape Verde is made up of shoes and garments. Even though the industrial sector does not play a major role in the GDP of Cape Verde, it still supplies jobs for the citizens of the country. Are Too Many People Unemployed? Labor is an essential factor of a country’s economy. In order for an economy to be sustainable, it has to have enough people that are able to work and produce GDP for the country.To determine the participation of the labor force of a country, you must figure out how many people in the labor force are employed and unemployed. Simply put, the labor force participation rate is number employed plus unemployed divided by the total adult population. To calculate the unemployment rate, you take the total number unemployed and divide it by the labor force. In other words, the unemployment rate tells us how much of the labor force is being utilized. In 2000, Cape Verde had an unemployment rate of 21%, with a total of 155,981 people in the labor force.The unemployment rate is pretty poor compared to the rest of the world; however, considering that it is a developing country, there is a lot of room to improve. Another interesting data point is that in the same year 2000, 30% of the population was below the poverty line. This begs the general question: is there a connection between the unemployment rate and the percentage of people in poverty? In my opinion, there is a correlation between the two. I believe that in poor economic times, or in the case of Cape Verde poor economic strength, people feel down on their luck and are less inclined to work.For example, prior to 2000, Cape Verde was heavily reliant on foreign investments, stunting GDP growth and creating an unstable economy. People became reliant on foreign aid rather than finding jobs to support themselves. However, in 2001, there was a new President, Pedro Pires, who primarily focused on bringing up the economic status of Cape Verde. He looked to capitalize on the strengths of the country, such as its touristic appeal an d fishing capacity. This gave people a positive outlook for the future of their economy and they began searching for jobs.The GDP of Cape Verde began increasing while the unemployment rate steadily decreased. As the unemployment rate went down so did the poverty levels. According to the United Nations’ Millennium Development Goals, Cape Verde is â€Å"on track to halving its 1990 poverty level. † This shows that when economic growth is stimulated, people begin finding jobs and the poverty levels decrease. Conclusion Throughout my research, I have seen a positive trend for Cape Verde’s economic growth. For such a small country and the amount of time it has been independent, Cape Verde has been through a lot, both economically and politically.Both the politics and economics of Cape Verde have played influential roles in the development of the country. When it first declared its independence from Portugal, Cape Verde was under a single party democracy, however, it soon became a two party system, the PAICV and MPD. Each party has had a chance to preside of the country; however, it is the current president, Pedro Pires of the PAICV party, who has lifted the country out of its economic slump. As mentioned above, Pires has changed the focus of the economy to be more self-reliant and take advantage of the country’s strengths.Under Pires’ presidency, GDP growth and inflation has steadily increased while the unemployment rate has steadily decreased. The government has had a major influence on the economy of Cape Verde and because of that, in 2008, Cape Verde officially attained the status of a â€Å"Middle Income Country,† a step up from â€Å"Least Developed Country. † However, the question must be raised: Can Cape Verde, whose economic growth is heavily based on the growing trend of tourism, continue to be carried to higher economic statuses or will the country slump back down again to where it started?As the saying goe s: Only time will tell. Works Cited CIA World Factbook: https://www. cia. gov/library/publications/the-world-factbook/geos/cv. html UN Millennium Development Goals: http://www. un. org/en/mdg/summit2010/debate/21092010. shtml World Databank – WDI: http://databank. worldbank. org/ddp/home. do? Step=2&id=4&DisplayAggregation=N&SdmxSupported=Y&CNO=2&SET_BRANDING=YES Enterprise Surveys: http://www. enterprisesurveys. org/ExploreEconomies/? economyid=36&year=2009 U. S. Department of State – Republic of Cape Verde http://www. state. gov/r/pa/ei/bgn/2835. htm