Cabo Verde's Path to Sustainable Growth: Reforms to Boost Productivity and Reduce Poverty

The small island nation of Cabo Verde has achieved remarkable social and economic progress since its independence in 1975. Despite geographical challenges and limited resources, the country has experienced economic success driven by structural reforms, political stability, high tourism flows, and sustained foreign direct investment and remittances.

However, challenges remain. Since the global financial crisis in 2008, Cabo Verde's development model has shown signs of fatigue. Economic growth remains stubbornly volatile, and the country remains highly vulnerable to external economic shocks and climate-related events, which require careful planning and preparedness. Additionally, the low productivity of the private sector and high internal markets fragmentation are key constraints to achieve a sustained and inclusive economic growth.

The year 2022 was marked by a strong economic growth of 17.7%, with sectors such as tourism, transport, and commerce leading the way. The surge in economic activity contributed to a reduction in poverty rates. Still, some challenges remained. With inflation rising, food insecurity became a reality for many. The war in Ukraine and climatic shocks posed significant risks that could derail the economic progress achieved so far, including fiscal consolidation. These are the key findings of the Economic Update, a comprehensive overview of Cabo Verde’s economy in 2022 produced by the World Bank.

To support Cabo Verde in meeting its long-term development goal of more sustained and inclusive economic growth, the World Bank published a Country Economic Memorandum (CEM). 

This report highlights the need to boost productivity and to reduce internal transportation costs to support emerging sectors and maximize the development impact of tourism in the economy. Low productivity is a significant concern, especially in the agriculture sector. Addressing resource misallocation, improving firm capabilities, supporting startups, and increasing access to finance are identified as key areas to improve productivity over the medium-term.

The report also identifies challenges in the inter-island logistics and shipping sector that are critical to tackle to reduce the fragmentation of internal markets. The performance of inter-island shipping hinders the integration of domestic food production with large hotels, while inefficient port logistics contribute to high costs. Addressing these challenges is crucial to boosting internal trade, supporting local producers, and enhancing overall productivity.

In addition, the CEM addresses opportunities on how to foster resilience of growth to climate and disaster risks  in Cabo Verde . The country is exposed and highly vulnerable to natural hazards. While climate change would exacerbate some of these risks it will bring unprecedent impacts associated with sea level rise and ocean warming threatening the sustainability of the growth model. To foster resilience, the country needs to address structural factors, strengthening the management of climate-related fiscal risks, improve inter-island connectivity, and actively implement measures to reduce the impacts of climate change on natural capital and tourism.

By implementing the recommendations outlined in the CEM, Cabo Verde can diversify its economy, improve productivity, and mitigate the impacts of climat e and disaster risks, ultimately fostering the sustainability and inclusiveness of long-term growth, reducing poverty and promoting shared prosperity.