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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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Warren-Rodriguez (2008, 11–19) takes a closer look at the linkages built between local firms from the metalworking (metallurgical) sector and MOZAL. The author confirms the improvement of the skill and technological base of the SMEs subcontracting with MOZAL, thanks to the quite intense training courses, which included a quality-assurance module based on a simplified, adapted version of ISO-9000 that was developed in partnership between MOZAL and the Mozambican Institute for Quality and Standards. Moreover, the close interaction between the suppliers and MOZAL’s engineers to ensure the required standards of products and services contributed to technological learning. In addition, several Mozambican firms established joint ventures with foreign specialised suppliers in order to qualify to do business with MOZAL, a factor that in some cases further contributed to technological learning and even opened access to new markets, such as the cases of COMETAL, Agro-Alfa and METECH described by Warren-Rodriguez (2008, 16–18). Nevertheless, the author emphasises that these results cannot be attributed to the promotional measures of the linkage programme alone. Since the screening process held prior to the promotional activities ensured that only firms with high businessdevelopment potential participated in the training and further measures, arguably a good portion of the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann results is attributable to the skill and development level already acquired by the firms before the programme began. Overall, Warren-Rodriguez (2008, 21) concludes that the effects of the linkages between MOZAL and SMEs on the technological development of local firms in the metalworking sector have been positive but limited and that “beyond this very specific experience, the general institutional setting for industrial (technology) development in place in Mozambique remains weak, with poor coordination mechanisms between the different institutions working in this area, as well as between these and other relevant government agencies”.

Beyond the specific promotional programme, the overall local development effects through linkages of the MOZAL mega project must be assessed as modest, particularly when judged in relation to the huge investment of USD 2.4 billion. According to Robbins / Lebani / Rogan (2008, 27) MOZAL directly created only slightly more than 1,100 fulltime jobs (the capital cost of a direct MOZAL job is 26 times higher than elsewhere in the manufacturing sector; Castel-Branco 2004, 27). An additional estimated 2,500 jobs were created through linkages. During the construction and expansion phases, 15,000 temporary jobs were created. These figures make very clear that it is not mega projects like MOZAL that will generate the much-needed jobs for the Mozambican economy. Indeed, MOZAL’s positive net contribution to Mozambique’s balance of payment amounts to USD 100 million per year (Castel-Branco 2004, 28). Nevertheless, in its assessment, APRM (2009,

164) underlines that only 10 percent of MOZAL’s revenues remain in the Mozambican economy, that tax revenues are minimal60 due to the extraordinary tax benefits granted by the GOM, and concludes that “while MOZAL’s contribution to Mozambique’s economy as a whole is important and it makes an important contribution to Mozambique’s GDP, its impact is limited. The result is an isolated economic enclave that uses large quantities of scarce resources without returning revenue or jobs to the economy”.61

Industrialpolicy management

In the context of a mega-FDI investment like MOZAL, which has a powerful and resourceful group of investors, it is most relevant to analyse the strategic capability of the GOM’s industrialpolicy management.62 To structure the analysis, it is useful to conceive of the relation between the group of investors and the GOM as a bilateral negotiation, where the materialisation of the project and thus of the expected gains for the country (jobs, linkages, balance-of-payments contribution, tax receipts, etc.) depend on the package of investment incentives and obligations offered by the GOM.

At first glance, it seems that the GOM’s bargaining position was very weak: There had been no precedent to such a big investment since the end of the civil war and the GOM had little to offer besides generous tax exemptions.63 As far as the Government’s straAccording to Thomas (2005, 7), around the year 2004 MOZAL generated an estimated government revenue of USD 4.1 million per annum in tax revenues and USD 5 million per annum in dividends.

61 See also Section 3.2 and Castel-Branco (2004).

62 See Chapter 2 for a definition.

63 Not even cheap electricity – which is the most important production factor besides capital for alumu nium production. Although with the Cahora Bassa dam on the Zambezi River Mozambique possesses a huge elecricity generation capacity from hydropower (around 2,000 MW), the dam is not intercom nected with Southern Mozambique and sells almost all of the electricity generated to South Africa. The 52 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique tegic competences are concerned, these must be judged particularly low in the mids: at that time there were almost no industrialpolicy strategies in place that could have provided a conceptual framework for the Government to deal with the project (as discussed in Chapter 5, the relevant strategies are all quite recent and a linkage concept only began to be developed in 1997). Therefore it is plausible to explain the outcome by the fact that the GOM overstated the development effects due to a lack of analytical capability and judged the reputational effect of the project as very high (an increase in investor confidence, future FDI projects, etc.) which caused it to offer an extremely generous tax incentive package without any major obligations (such as localcontent clauses).

Nevertheless Castel-Branco (2004, 26–35) shows that by offering fewer tax exemptions Mozambique probably could still have closed the deal. Apparently the investors had a high preference for building the aluminium smelter near Maputo – not because of any comparative advantages or tax incentives that Mozambique had to offer, but rather due to the South African mineral-energy-complex’s strategic interests: first, BHP-Billiton wanted to avoid having a competitor – Kaiser had first approached the GOM with plans to build an aluminium smelter – succeed in expanding its production, so BHP-Billiton pursued an aggressive investment strategy; second, the South African electricity utility, Eskom, was very keen to provide the energy for the smelter and, by interlinking its grid with the Mozambican grid, to establish itself as a player in the Mozambican electricity market. The Government of South Africa supported this strategy by offering an attractive incentive package to MOZAL that included cheap electricity tariffs through Eskom, which is Government-owned. This analysis suggests that – given the project’s high priority for South African investors – the GOM could have made a better deal for the country by offering less generous incentives.

This Case Study shows that the GOM lacked the vision and the negotiating capacity to take greater advantage of the FDI project so as to have a greater development impact on the local economy or to generate much-needed tax revenues. However, it also illustrates the enormous imbalance in capacity and bargaining power when an alliance of leading multinationals backed by the Government of South Africa negotiates with one of the poorest governments of the world.

However, there appears to be another factor besides lack of capacity that explains the relatively low profile of the Government’s linkage-promotion activities. According to Nuvunga (2009, 29) the political elite is not interested in an orderly and transparent approach that promotes business opportunities for local SMEs. Instead, according to a manager interviewed by Nuvunga, several politicians prefer to keep discretion over upcoming business opportunities and to use them for their private profit (by channelling them to their own firms or by earning commissions, etc.).

electricity for the smelters – which consume more electricity than the rest of the country combined – is imported from South Africa (Castel-Branco 2004, 14).

–  –  –

This study has analysed the quality of Mozambique’s industrial policy and industrial policy management capability as one case in the context of a larger research project that aims at building evidence on the actual state of selective industrial policy in low and lowermiddle-income countries and the conditions for its success.64 In what follows the main conclusions from the Mozambican case are presented.

Mozambique needs policies that foster broad-based sustainable economic development and generate income and jobs for its population. Despite the stable and remarkable macroeconomic growth rates over the last 15 years – that are in great part explained by huge capital-intense FDI projects as well as ODA inflows and by the very low initial GDP level – the vast majority of Mozambicans are disconnected from the few profitable and high value-creating economic enclaves, and work in subsistence farming or in mostly informal or non-competitive SMEs. Therefore, well-designed and coordinated industrial policy along the terms outlined in Chapter 2 could serve as a crucial instrument to foster the much-needed, broad-based economic growth, in addition to policies in areas such as education, training and health care. Nevertheless, in Mozambique’s case there is a huge gap between the need for welfare-enhancing industrial policies and the ability of the Government and the private sector to design and implement them. The results of the two case studies on selective industrialpolicy approaches (the cashew industry in Section 6.1, and linkage promotion in Section 6.2) are mixed, and show that failures are partly due to weaknesses in industrialpolicy management.

Regarding the programmatic orientation of industrial policy it must be noted that both on paper and in practice, non-selective approaches are more elaborated and more prominent – for instance trade liberalisation and privatisation reforms; general FDI promotion; reforms to make regulations more business-friendly and to improve the general business climate, including access to finance. Selective industrial approaches are less palpable, and in practice, the GOM does not yet follow a clear strategy that would outline and guide targeted selective policies in order to foster the competitiveness of local enterprises, for example, by supporting technological learning or the creation of agglomeration economies and other spillovers, so that local enterprises would be able to take advantage of the market enhancement achieved through the non-selective policies. The partial successes found in the two case studies – for instance, the establishment of the AIA export-service company and the successful penetration of overseas consumer markets in the case of cashews, as well as the establishment of a number of backward linkages between MOZAL and local SMEs and the associated learning and upgrading of these SMEs regarding linkage promotion – are fairly limited in scope, and are substantially due to the strategic advice and practical support of specific donors’ projects.

We therefore conclude that the GOM’s strategic capability for industrialpolicy management is characterized by a lack of means, vision and leadership regarding the definition of an appropriate mix between improvements in the investment climate to create the proper conditions for private investment and market competition, and targeted interventions to accelerate productivity growth and enhance the competitiveness of Mozambican firms.

64 See Altenburg (2011) for an overview of, and lessons learned from, this research project.

54 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique The donors cannot compensate for these weaknesses in the GOM’s strategic capability because they are not a homogeneous group that would advocate for one main strategic line of action. Moreover, many of them have followed an approach inspired by the ‘Washington Consensus’ that disregarded selective measures; for them, industrial policy is not a priority field of intervention. 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.

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