Framework of Economic Resilience Analysis:

From Enigma to Solution Proposals

Revised March 2018
Kinshasa, DRC
Draft 001

By Musoko Kayembe J.‡

BSc in monetary economics

Abstract

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

‡
Musoko Kayembe J.
E-mail : yoelmusoko@gmail.com
This draft owes too much to professor Mabi Lukusa, who was my research director (this work was in fact a part of
my degree dissertation ).
I’m also grateful to professor Mabi Mulumba for skills a gained through his lectures at University.
 [2]
Endogenous Theory: First Explanation of
Cycle
The oscillator theory of Paul A. Samuelson
(Lecaillon and Lepage, 2008: 259) is one of the
theories that explain the economic cycle by the
functioning of the economic system.
Professor Samuelson explains the expansion
phase as a recovery of investments and the
recession phase as a contraction of investments.
Additional investments by the multiplier effect
increase demand. The latter can be satisfied by
entrepreneurs up to a level of full employment.
Let remind that at that level factors of
production are completely used. As a result,
there will be less investment and once again the
multiplier effect now being negative will
amplify the decrease in demand.
Endogenous Theory: Second Explanation of
Cycle
Richard Goodwin (Lecaillon and Lepage, 2008:
259) explains the cyclical behavior by two
hypotheses: firstly, it is because investment is
considered as an increasing function of profit;
secondly, the variation of wages is an increasing
function of the level of activity. Thus, the
optimism of investors and workers causes
cycles of expansions. However, if there are
more investments over a period, substantial
wage increases will reduce profits. And
knowing that the pace of investment is a
growing function of profit: they will slow down.
Then there will be recession. As economic
activity is slowed down, wages now declines.
As a consequence, profits are stimulated. The
economy gets into an expansion phase, so there
is recovery.
However, Goodwin's analysis is criticized for
neglecting the effect of wages on demand
(Lecaillon and Lepage, 2008: 259).
M. Kayembe
If the theory of Professor Paul A. Samuelson
with the multiplier effect and the one of Richard
Goodwin with the profit and wage assumptions
provide an explanation of the economic cycles
from the inner part of the functioning of the
economic system, others attempt to explain
them focus on elements outside of the system.
Exogenous theory: first attempt to explain
cycle
Milton Friedman argues that the economy left to
itself remains stable with some natural cycle.
He also says that interventions of the monetary
authorities amplify them. However, a distinction
between anticipated and unanticipated reactions
of economic actors is needed with the new
classical economists to understand origins of
cycles.
When economic actors fail to anticipate, the
increase in money supply will give them a
monetary illusion that their purchasing power
has increased and they will increase their
shopping baskets and therefore stimulate
demand for goods and services. Thus, the
economic activity will be revived if it were in
recession.
However, if economic actors anticipate, the
action of the monetary authorities will not have
met the desired effect. It will only result in
inflation (Lecaillon and Lepage, 2008: 260).
One question that might already be raised so far
is: why in the Democratic Republic of the
Congo (DRC) such a policy doesn‟t work? In
fact, the DRC‟s central bank monetary policy is
inefficient. Making the analysis of monetary
aggregates proves that it‟s because of foreign
currencies (mainly US dollar). But that just
responds to why the policy is inefficient. So
why DRC‟s monetary policy can‟t be used to
avoid recession?
 [3]
Exogenous theory: Real Business Cycle
Theory, second attempt to explain cycle
The business cycle theory known as Real
Business Cycle (RBC) explains economic
fluctuations by exogenous factors. Unlike the
first theory, it does not identify monetary shocks
but rather real shocks. For example, Long and
Plosser (1983: 41) have given assumptions that
Government does not have to intervene and that
there is no money. On the other hand, they
(Long and Plosser, 1983, p.67) show that the
consumption-production plans of economic
actors correspond so much with the features
often associated with cycles.
King, Plosser and Robelo (1988: 196) consider
shocks as coming from preferences or other
exogenous factors such as government policies
or the terms of trade. This is why public
intervention is not recommended.
Shocks that affect the economic system are
likely to weaken the gross domestic product and
then create unemployment. Considering the
Cobb-Douglas production function used in the
analysis of real business cycle theory (King,
Plosser and Robelo, 1988: 200) such that yt =
AtKt 1-α(NtXt), we note that production depends
essentially on the stock of capital (Kt) and the
effective work units (NtXt), At being considered
as temporary and unknown. In accordance with
microeconomics, firms with rational behavior
and being in a recession will change their
amount of short-term work factor.
For example, companies may give technical
leave or even fire workers. This situation creates
unemployment. However, real business cycle
theorists do not see the importance of
Government intervention. At present, if there is
to be economic resilience, in other words
resistance to shocks affecting labor markets,
goods and services and the capital markets, the
state must intervene, but effectively. We mean
by implementing sound policy in the long-run.
M. Kayembe
The neglected importance of Government can
be explained by the fact that Long, Plosser,
Kydland and Prescott (Mishkin, 2008: 261)
attribute fluctuations in economic activity to
supply shocks, which are unpredictable or
random disruptions and may correspond to
abrupt changes in relative prices.
AS-AD model
Professor Frédéric Mishkin (2013: 936) states
that this model is an extremely useful tool for
understanding fluctuations in economic activity.
Thus, to better understand the theoretical
foundation of economic resilience we must
analyze aggregate demand (AD) and aggregate
supply (AS).
AS-AD model: theoretical analysis of
economic shocks
Globalization has constrained economies to
open themselves and thus be exposed to
competition, which would be likely to reduce
the production costs companies. However, they
suffer from shocks that can create
disequilibrium in their trade balance and
weaken their economic growth, which can be
analyzed in the AS-AD model. Let's take an
example:
Imagine an economy whose main resources
come mainly from the export of commodities
listed on the stock exchange Market such as
Cobalt, for example. A negative shock
(downward trend in its price) in the financial
market would affect the activities of an
economy.
It is also important to know, as pointed out by
Lecaillon and Lepage (2013, 251), that prices of
commodities are more cyclical than those of
industrial products (...).
In order to better understand, let us recall the
global demand function: y = C + I + G + XN,
where XN is the trade balance. Thus, a
 [4]
downward trend in the price of commodities
will therefore reduce exports and the curve AD
moves to the left:
Fig.1.2. Negative shock of demand
LRAS
π AS
π E
π‟ E‟
AD‟
AD
Y Yp Y The
Economic resilience will consist in moving back
aggregate demand AD' to the equilibrium level.
This can be done by increasing G public
spending which will however lead to some
inflationary pressures but the economy will be
expanding and unemployment will decrease.
These theories related to economic resilience
and economic fluctuations, whether endogenous
or exogenous theories, have shown themselves
to be useful. The multitude of research on
shocks and economic fluctuations, economic
resilience, the issue of diversification is a proof.
However, we mainly use scientific books and
other useful sources dealing with Africa in
general and the DRC for the most part, in this
draft.
Empirical analyses of cycles and economic
resilience
As economies are constantly having negative
(and positive) shocks, there is a need to make
M. Kayembe
them more resilient. Economic resilience has
two main aspects that we should outline: first, it
is the ability to resist to shocks, which means
that actors should foresee danger before being
affected by it; second, it is the ability to bounce
back after being affected by shocks.
In 2008, the DRC after being affected by the
financial crisis managed to survive. But what if
the country makes sound policies that can even
prevent the country from being affected by a
shock instead of making the economy
vulnerable and then bounce back? It is exactly
in this context that diversification is often
mentioned. But that is since the 1970s. It is
known since a long time through researches and
economic and political papers that not relying
on a certain category of a goods or commodity
would make a country less vulnerable. Then, if
the solution is known why countries in Africa
are still suffering from severe crisis?
analysis of resilience and its
operationalization, from a historical perspective,
has been and remains a concern for researchers
in economics. More than three decades in the
past, in the 1980s, to now papers, books and
economic journals, have contributed to the
development of processes that maintain growth
to its long-run potential level and suggested
measures that may facilitate its implementation.
From Pierre-Yves Hénin (1983) to the World
Bank's report (2015), analyses are made to
achieve growth with resilience.
Few years ago, following the persistent
macroeconomic disequilibrium that economies
were facing regarding oil shocks of 1973 and
1979, Hénin P-Y. (1983: 893), using a simple
macroeconomic model, concluded that
macroeconomic adjustments by interest rate and
wages can contribute, together with the use of
fiscal policy, to restore macroeconomic
equilibrium.
Economic growth is, in fact, far from linear, as
noted by Richemond A. (2003, pp. 4 and 7). He
explains it by the fact that an economy is made
 [5]
of cycles and that the lack of anticipation
increases financial, human and social cost.
Let mention here, for example that IFRS 9 (in
application since January 1 st, 2018) was made
by the International Accounting Standard Board
(IASB) to provide pattern for expected loss for
enterprises regarding criticism on the fact that
companies using rules that existed recorded „far
less or far late‟ loss recording (Deloitte, 2014,
1). Thus anticipation of shocks should not be
underestimated and it has to be in time.
However, Lecaillon J. and al (2008: 228) point
out that it is "cyclical fluctuations" that weaken
the progression of production. However, the
author highlighted the role of diversification
through the transformation of comparative
advantages, which was the experience of
Mexico and Argentina in the nineteenth and
twentieth centuries.
Duval R. and Vogel L. (2008: 213) argue for
countering the strength and persistence of
exogenous external shocks by the structural
policies on which macroeconomic stabilization
policies depend. However, the question is: does
action on the labor market, on the goods and
services market and on the financial market
depend on the size of shocks? This question left
by the authors is relevant in the context of our
research in that the dimension of a shock can be
misjudged and in this context it can cause
economic disequilibrium.
In addition, the IMF (Oct. 2010, 1-2) analyzed
the resilience and risk of African countries
where the DRC was identified as a fragile state.
A part from mentioning policies against shocks,
says that medium-term financial considerations
should be the focus of fiscal policy. There is
also improvement in public services,
infrastructure and the climate of economic
activities mentioned for economic resilience. In
the DRC, as in other economies, output growth
remains erratic: comparative advantages can be
lost in a crisis, wars can harm the business
M. Kayembe
climate, volatility of export earnings as a result
of downward fluctuations in commodity prices
are constant, ... This vulnerability of economies
creates macroeconomic disequilibrium shown
by the increase in unemployment, inflation and
the deterioration of the terms of trade.
From the outset, the DRC's exposure to
exogenous shocks manifested itself in the labor
market. First, during the war years of 1996-
2002, the contribution of labor to growth was
the lowest recorded. Secondly, Professor
Kabuya Kalala F. et al (World Bank, Vol 1,
2012, 132) point out that the fall in mining
output and the slowdown in investment, as a
result of the 2008-2009 financial crisis affected
economic growth and about 200,000 jobs were
lost in Katanga. As a result, the unemployment
rate between almost the second half of 2007 and
the first in 2009, as illustrated by the BCC
(2013, p.30), showed an upward trend.
The goods and services market is also suffering
from weak economic resilience. In the DRC, for
example, war-related spending accounted for 70
percent of total revenue, and the public deficit in
2000 was about 120 percent, according to data
from the World Bank (Vol1, 2012). The same
source reports that "this deficit was entirely
financed by monetary expansion (...). The role
of the central bank was reduced only in printing
currency to finance deficit. As a result, inflation
rose and in 2000 consumer prices rose at an
average annual rate of 554%. "Economic actors,
having faced these instabilities, had a distrust of
the fiduciary currency, hence the strong
dollarization also making the economy
vulnerable.
Exogenous shocks weakened the terms of trade
of the DRC. Indeed the subprime crisis,
manifested in the second half of 2008 in the
country, had weakened them. The BCC (2009,
115) reported that: "Following the deterioration
of the international environment, the country's
trade has shrunk (...). Thus, the balance of
payments deficit increased in 2009, standing at
 [6]
8.2% of GDP against 5.3% a year earlier,
following the amplification of the current
account deficit. ". In addition, the mining sector
supported economic growth at 15%, 33%, 26%
and 48.4% for the periods 1996-2000, 2001-
2005, 2006-2010 and 2010-2014.
Remaining the main driver of production, a
contraction in the demand for mining
commodities can significantly deteriorate the
terms of trade.
More recently, Professor Briguglio L. (2003)
has made operationalization of economic
resilience. He measured resilience and
vulnerability index of an economy for nearly
180 countries, including the DRC.
The World Bank (September 2015, pp. 6-7)
noted that geographic product concentration and
reliance on capital intensive mining industries
generate significant vulnerabilities for the DRC
economy. Economic diversification is seen as
the ideal solution. However, as reported, poor
infrastructure hinders economic activity.
Globalization implies a dependence on
international trade. Although it has been
beneficial for some economies, international
trade has not been good for others. However,
states are constrained to open outwards in view
of the tendency of the global economy, where
no state can survive in autarky. On the flip side,
openness can foster increased vulnerability,
creating a need for resilience to different
economic shocks due to the interdependence of
economies, particularly in terms of exported and
imported goods and services (the balance of
payments).
However, an ability to withstand shock may be
possible but still at a low level. This includes
the composition of the gross domestic product
of an economy. If conditions driving to
economic resilience, in the way Professor
Briguglio (University of Malta) sees it, i.e.
macroeconomic stability, microeconomic
efficiency, good governance and human
development are effective, this will allow a
M. Kayembe
good evolution of the economy. Shocks can
persist in the case of relatively high economic
vulnerability. Vulnerability, measured by him
through economic openness, concentration of
exports and dependence on imports, must also
be given special attention.
The concentration of exports and the
dependence on imports, which are a
consequence of economic openness or
globalization, are determining factors in an
economy's ability to withstand shocks. At
present, DRC's exports remain concentrated,
which helps to accentuate the index of
vulnerability. It is precisely in this perspective
that economic diversification is evoked so much
in the context of the long-term economic growth
of the DRC.
Constraints of economic diversification in the
DRC
Government inefficiency
Main implication: the State of the DRC has few
resources that can enable it to meet the
expenses; the country cannot act alone. But it is
said to observe that does not give the private
sector means to
Act, by failing to better ensure its economic
functions. A public-private partnership (PPP) is
seen as a good alternative, it will still need a
strong public responsibility, i.e. it is necessary
to limit the risks affecting the investors.
The lack of stability in the country does not
allow financial institutions, commercial and
industrial enterprises to better operate; as a
result, they may relocate their activities or be
obliged to take drastic decisions. Justice,
diplomacy and security are among the sovereign
functions of the state. It‟s important to make a
safe environment for business.
The DRC, with a production of 180,000 tons of
cotton in its provinces (Province Orientale,
Katanga and South Kivu), was the largest
African producer (WorldBank, 2012, Vol 2, 7).
 [7]
Sadly, wars in the nineties brought about
security problems, not at all stimulating
economic operators of textiles; As a result, only
CODENOR in Kisangani remains active. In
2006, cotton production did not exceed 1 000
tons (World Bank, 2012, Vol 2, 7), following
the increased competition of Chinese fabrics,
says the World Bank (2012, vol 2, 7).
According to the World Bank, before the
turmoil in South Kivu, the province's exports of
Arabica coffee reached 20,000 tons (World
Bank, 2012, vol 2, 38). However, between 1996
and 2010, exports averaged 4,235.87 tons.
In many contexts, especially, it is up to the
Government to allow the economy to return to
its long-run equilibrium point. However, it does
not always have means to enable it to act and
this therefore weakens the effectiveness of the
DRC in its economic roles (World Bank, Sept.
2015, 18).
This observation suggests that the state alone
cannot make the economy of the DRC resilient;
it must give economic actors the ability to be
resilient so that the country can cope in the time
of crises (World Bank Vol 1, 228). However, in
practice the state does not always allow them to
act effectively.
The constitution of the DRC in its explanatory
memorandum specifies provinces and central
power share the national revenues at the rate of
40% and 60% (Official Journal of the DRC, 18
Feb. 2006, 4). However, Herdeschee J., Kaiser
and Prof. Mukoko (World Bank, vol 1, 2012, p
27) Samba pointed out that the law says that
such revenues should be withheld at source and
that this topic has been debated at because of the
term "at the source": does it refer to the location
of the collection or the location of production /
consumption? (...) provincial governments,
deprived of what they see as a constitutional
revenue right, have begun to set additional taxes
and additional local taxes, placing additional
burdens on private operators.
M. Kayembe
Also, in such circumstances the development of
other economic activities (diversification) is
likely to be difficult. On one hand, it is because
of bad business climate, yet it is not supposed to
be so as to serve as a springboard for capital
attraction. On the other hand, it is because
public revenues are still low, reducing the roles
of the Government.
Let also say that legal and regulatory
framework, taxation and access to finance can
all be mentioned as obstacles (World Bank,
2012, Vol 3, 346). As private investors face
these different constraints, theoretical corollary
is that there is a great risk of crowding out.
Hence, more PPPs are needed (World Bank,
2012, Vol 1, 252).
Indeed, a PPP will enable the government,
which already has low incomes, to achieve its
goals at an affordable cost and, above all, with
better quality (see: World Bank, 2012, vol 3),
considering the technical and management
expertise of the private sector.
The Government must be responsible for its
operational and financial responsibilities (World
Bank, vol 3, p.87). While the DRC has an
economic resilience, the downside is also
showing signs of vulnerability. The State should
assume its contractual obligations to protect
private promoters from possible economic
shocks. These are the risks associated with civil
wars, for example.
Finally, another risk for private promoters is
income-related. In fact, we are talking here
about revenues that do not cover the costs of
infrastructure built by the private sector. Given
the insolvency of the Government, a PPP may
be harmed and yet very important (World Bank,
2012, vol 3, p.88).
Infrastructures
Energy remains a determining element to the
development of all sectors of the DRC.
However, the potential for electricity generation
is still very high at 100,000 MW in hydropower,
 [8]
but the current capacity is only around 2,400
MW (World Bank 2012, Vol 3: 6).
Thus, the weak development of energy has a
pernicious consequence for different sectors that
can participate in the construction of a strong
economic resilience and help reduce the
country‟s vulnerability. Indeed, Sotexki in
Kisangani in one example among others. The
textile company, which had only 170 workers in
2007, whereas it had more than 2000 in the
nineties, and the textile sector collapsed, in
particular because of the problems of electricity
supply (World Bank, vol 2 2012: 189).
A 2010 survey of private companies in the
World Bank reports that several companies
reported having suffered power shortage, which
would have reduced sales by 25% (World Bank,
2012, vol 3, pp. 86-87). However, the national
electricity company (SNEL) should ensure a
better supply of energy that could create training
effects in the economy.
Regarding the country's capital-city, Kinshasa,
the World Bank (vol 3, 2012, p.7) reports that
the capacity available at Inga 1 and 2 totals
about 800 MW. Taking into account the fact
that at peak times the demand exceeds the
available capacity and that SNEL delivers 95%
of the country's electricity, there are regular
shedding in the capital and the gap between the
generating capacity and the demand continues
to grow, says the World Bank (vol 3, 2012, p 7).
This also implies that business costs increase,
which can increase prices accordingly.
However, note that energy is not the only
obstacle to infrastructure, roads are other
challenges.
Indeed, as indicated by the World Bank (2012,
Vol 1, p.42) most roads remain a handicap
preventing accessibility to the provinces. In
addition, only four provinces are connected to
Kinshasa by road (World Bank, Vol 3, p.20).
The high agricultural potential of Bandundu
province would have improved prices in local
M. Kayembe
markets in other DRC provinces if they are
good roads.
In Katanga there is the strong presence of the
mining sector, which creates a strong economic
concentration in the province (World Bank, Vol
1, p.232). However, the agricultural sector,
which could sell its products, including food
crops (maize and cassava) in the other provinces
and abroad, since these crops accounts for 80%
of the agricultural GDP, only provide them to
market nearby due to the lack of infrastructure
(World Bank, vol 2, p.3). We must also favor
the labor-intensive sector: agriculture.
Province Orientale had Robusta coffee exports
of more than 100,000 tons before periods of war
(World Bank, 2012, vol 2, p.46). Following the
deterioration of infrastructure and insecurity,
exports remained at +/- 5 000 tons on average,
i.e. only 1 / 20th of a year between 2001 and
2010 (see: BCC Annual Report 2007, page 37;
56).
Market concentration: oligopoly of the
cement industry
Another recommendation for the development
of other sources of growth is to avoid the
concentration of the construction sector market.
Despite the potential of cement production in
Katanga thanks to limestone, the DRC has not
yet benefited from that.
Thus, it would be good for the State to allow a
better flexibility of the market by improving the
regulation and by privileging the competition by
eliminating certain obstacles related to the
development of the construction sector: high
cost of transport of cement, low profit margin
for importers only 10% versus double for local
industries in general and 25% for resellers (see:
World Bank Vol 2: 283). The direct corollary of
the oligopoly is the high purchase price
(fig.1.2).
 [9] M. Kayembe

Banque mondiale (2012), résilience d’un

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

éd. Elsevier Science Publishers B.V, In

“journal of monetary economics, Vol 21”,
pp. 195-232

Lecaillon J-D et Lepage J-M Ottavj C.

(2008), économie contemporaine : analyse
et diagnostics, Belgique, éd. 3ème De Boeck.

Long J. et Plosser C. (1983), real business

cycles, Chicago, éd. The university of
Chicago, In “journal of political economy,
Vol 91, pp 39-69

Mishkin F. (2013), monnaie, banque et

marchés financiers, Paris, éd. 10ème
Nouveaux horizons.

Richemond A. (2003), la résilience

économique, Paris (France), éd.
D‟organisation.

Banque centrale du Congo, rapport annuel

2007

Banque centrale du Congo, rapport annuel

2009

Banque centrale du Congo, rapport annuel

2013