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«Industrial Policy in Mozambique Matthias Krause Friedrich Kaufmann Industrial policy in Mozambique Matthias Krause Friedrich Kaufmann Bonn 2011 ...»

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Discussion Paper

Industrial Policy in Mozambique

Matthias Krause

Friedrich Kaufmann

Industrial policy in Mozambique

Matthias Krause

Friedrich Kaufmann

Bonn 2011

Discussion Paper / Deutsches Institut für Entwicklungspolitik

ISSN 1860-0441

Die deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie;

detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar.

The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;

detailed bibliographic data is available in the Internet at http://dnb.d-nb.de ISBN 978-3-88985-538-1 Matthias Krause, Economist, Inter-American Development Bank, Washington, DC E-mail: MATTHIASK@iadb.org Friedrich Kaufmann, Economist, Consultant, Bonn E-mail: Friedrich.Kaufmann@gmx.net © Deutsches Institut für Entwicklungspolitik gGmbH Tulpenfeld 6, 53113 Bonn ℡ +49 (0)228 94927-0 +49 (0)228 94927-130 E-Mail:die@die-gdi.de http://www.die-gdi.de Acknowledgements The authors would first like to thank all their interview partners for meeting with us to share their ideas and further information. For additional important contact information and logistical support, special thanks go to Ilse Fuernkranz (who was at GAPI–Norte during our field stay), Svenja Paulino and Kathrin Seelige (at GIZ Maputo at the time of our field stay). Many thanks also go to Tilman Altenburg (German Development Institute, DIE) for his comments and thorough revisions of several versions of this study. Last, but not least, we are very grateful for the comments on an earlier version of this study received from Prof. Elisio Macamo (University of Basel) and other participants of the International Workshop, “Industrial Policy in Developing Countries”, held at the DIE (Bonn, November 18–19, 2009).

Financial support for this study from the BMZ and GIZ is gratefully acknowledged.

Contents Abbreviations Summary 1 1 Introduction 5 2 A framework for analysis 6 3 The main challenges for structural transformation 9

3.1 A brief overview of Mozambique’s economic history 10

3.2 Macroeconomic development 11

3.3 The enterprise structure, business environment and competitiveness 13

3.4 Sector-specific opportunities and challenges 17

3.5 Preliminary conclusions 20 4 Governance patterns: the background of industrial policy making 20

4.1 The pervasiveness of corruption and rent-seeking 2

–  –  –

Summary Productivity growth is a precondition for increasing standards of living and maintaining competitiveness in the globalised economy. The productivity gap that separates poor and rich countries has never been as wide as it is today. Poor countries in particular need to emphasise productivity growth in order to alleviate poverty. Although the private sector is undoubtedly the main driver of economic growth, governments, too, can help accelerate structural change towards more competitive and higher-value activities. This is what industrial policy is about.

For this study, we define ‘industrial policy’ as any government measure, or set of measures, to promote or prevent structural change in ways that the government views as desirable. Industrial policy can be classified either as functional or selective. Functional policies aim at shaping the framework conditions for the whole enterprise sector – e.g. through improving macroeconomic stability, upgrading general infrastructure (like electricity generation capacity) or reforming the legal framework for business. Selective policies, in contrast, point at specific industries, sectors, regions or firms using subsidies, tariffs, taxes and tax exemptions, targeted infrastructure facilities and targeted businessdevelopment services to foster technological learning or to build up industry-specific marketing or exportservice companies.

Many scholars now acknowledge that selective industrial policy can work well in countries with strong merit-based public services and political checks and balances. Opinions diverge widely, however, with regard to the role of industrial policies – especially selective policies – in low and lower-middle income countries. These countries typically have weak institutions, poorly developed administrative capacities and a shortage of public and private financial capital. Hence, even if it is clear that low and lower middle income countries are faced with particularly severe market failures that justify applying selective industrial policies, there is a big question about the ability of governments to intervene in markets so as to increase public welfare.

There are very few empirical studies available that analyse industrial policies in low and lower-middle income countries. Most case studies focus on the old industrialised countries or on success stories from the newly industrialised countries. This study about industrial policy in Mozambique intends to help fill this gap. It is part of a comparative research project that includes other country cases from the developing world (see Altenburg 2011). The purpose of the study is to describe Mozambique’s main challenges to structural transformation, its governance structures in the field of industrial policy, and – most importantly – to assess the quality of industrial policies and industrial policy making in Mozambique.

Mozambique is recovering from the ravages of a long struggle for independence from Portugal that was followed by a protracted civil war. At the end of the 1980s the government abandoned socialism, underwent a structural adjustment programme and established a market-based economy. During the past 15 years, Mozambique’s development has been marked by peace and stability, falling poverty rates and high macroeconomic growth.

Nevertheless, it is still one of the poorest countries in the world and the government budget is largely dependent on official development assistance (ODA).

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann In Mozambique there is an urgent need for policies that foster broad-based sustainable economic development and generate income and jobs for its population. The remarkable macroeconomic growth rates are in large part explained by huge capital-intensive foreign direct investment (FDI) projects that add very few jobs to the economy, by the inflow of ODA and by the very low level of initial gross domestic product (GDP). The vast majority of Mozambicans are not connected to the few profitable and high-value-creating economic enclaves, and instead work in subsistence farming, or in mostly informal or noncompetitive small and medium enterprises (SMEs). Linkages between firms are poorly developed and there are very few domestic firms that succeed in supplying high-end domestic markets or export markets. Well-designed and well-coordinated industrial policy could thus constitute a crucial instrument to foster much-needed, broad-based economic growth. Among the sectors that are regarded as potential growth sectors are agriculture and agro-industry, tourism, mining and energy.

Our results, however, show a huge gap between the need for welfare-enhancing industrial policies and the capability of the government to design and implement them.

Several governance features weaken the government’s industrialpolicy management capability: The strong dominance of a single party Frente de Libertação de Moçambique (FRELIMO) blurs the boundaries between it and the government, and weakens checks and balances. This is compounded by very close ties between party cadres and leading businesses (several party cadres direct important business groups that they acquired during the privatisation process); weak civil-society organisations; the lack of an independent judiciary; and corruption. Moreover, either business associations are weak or they lack strong bases; only now are think tanks being developed. Finally, there are only a few very weak cross-sectoral coordination platforms to coordinate policies between line ministries and different levels of government, and between the private sector and the government.

Both on paper and in practice functional industrial policies are more elaborated and more prominent than selective industrial policies, for instance, trade liberalisation and privatisation reforms, general FDI promotion, and reforms to make regulations more businessfriendly and improve the general business climate, including access to finance. In contrast, selective industrial approaches are less palpable. The Government of Mozambique (GOM) does not follow a clear strategy of outlining and guiding targeted selective policies to foster the competitiveness of local enterprises, such as developing specific technological capabilities or creating agglomeration economies and other spillovers that would enable local enterprises to take advantage of the market enhancement achieved through functional policies.

Two selective industrial policies that do stand out are analysed in greater detail in this study: the promotion of the cashew industry and the promotion of linkages between a huge FDI project, the MOZAL aluminium smelter, and local SMEs. Although we have found partial successes, no far-reaching development effects are discernable from these approaches. Our investigation confirms several of the structural deficiencies of the economy and of governance weaknesses that have already been pointed out. The partial successes found in the two case studies – for cashews, they involved the founding of an exportservice company and the supply of overseas markets, and for linkage promotion they involved the establishment of a number of backward linkages between MOZAL and local SMEs, along with (technological) upgrading of these SMEs – are limited in scope and substantially due to the strategic advice and practical support of specific donor projects.

2 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique We conclude that the GOM’s strategic capability for industrial policy management lacks the vision and leadership needed to define an appropriate mix between investment climate improvements – to create the conditions for private investments and market competition – and targeted interventions – to accelerate productivity growth and to enhance firms’ competitiveness. The donors are crucial policy players in Mozambique, but they are unable to compensate for these weaknesses because they are not a homogeneous group that advocates for one main strategic line of action. Many of them have followed an approach inspired by the ‘Washington Consensus’ that disregarded selective measures: For them, industrial policy is not a field of intervention with priority. In most cases in which donors support selective measures in particular projects, these are limited in scale, scope and time, and often do not incorporate government planning and learning cycles.

The Government’s attitude towards industrial policy is more reactive to the interests of big investors and donors than it is proactive or strategic. We base this assessment on our observation that the policy measures and projects that are enacted and implemented are those backed by the coherently and clearly articulated interests of investors (such as investment promotion law, big FDI projects in the energy and mining sector) or of donors (liberalisation, privatisation and Doing-Business-style reforms, which were supported by a coalition of powerful donor organisations). In contrast, more complex industrial policy approaches – such as regarding SME promotion – that demand an active government role in providing strategic direction, building coalitions with enterprises, financial institutions, local governments and donors, facilitating or building coordination platforms, etc. only exist on paper and don’t have the drive needed to be implemented on a relevant scale. This pattern can partly be explained by the low technical capacity and institutional development of the State Administration, the weak formal organisation of the local private sector – especially small enterprises – and high aid-dependency. The latter creates incentives for the Government to focus primarily on keeping high levels of aid flows in order to secure political legitimacy by high spending levels in the social sectors, and thus to neglect – in relative terms – engaging in an active industrial policy.

Furthermore, widespread corruption leads to poor enforcement of measures intended to foster local industry (such as the tax on raw cashewnut exports), in the lack of transparency in awarding contracts, or in the intentional distortion of the implementation of business regulations to the advantage of inspectors and at the expense of businesses. The FRELIMOparty’s dominance and weak checks and balances run the risk of selective interventions and service providers being misused to transfer resources to constituencies before elections in order to secure votes (as interviewees reported in the case of cashew promotion). Finally, the fact that top FRELIMO cadres simultaneously hold public office and command powerful business groups creates considerable conflicts of interest. This situation makes industrial policy and economic policy vulnerable to non-productive misuse for the special benefit of enterprises owned by FRELIMO and its cadres.

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