«Industrial Policy in Mozambique Matthias Krause Friedrich Kaufmann Industrial policy in Mozambique Matthias Krause Friedrich Kaufmann Bonn 2011 ...»
Despite this rather pessimistic assessment of Mozambique’s industrialpolicy management capability, it is important to acknowledge that some progress and learning have taken place in recent years. Capacities in the State Administration (particularly at the Central Government level), business associations and think tanks are slowly improving, and along with them, the conditions for establishing coordination platforms for selective industrial German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann policies as well. The Government has, moreover, corrected some deficiencies in its policy framework, such as the extremely generous tax exemptions for large FDI projects or the state-centred top-down approach to SME promotion. Finally, as emphasised above, we have also discovered some positive experiences with selective approaches that could be replicated. Hence, in Mozambique there seem to be more prospects for a welfareenhancing industrial policy that improves the general investment climate and uses targeted interventions to stimulate competitiveness and productivity growth of enterprises.
Productivity growth is a precondition for increasing people’s living standards and maintaining competitiveness in the globalised economy. The productivity gap separating poor and rich countries has never been as wide as it is today. In developing countries, low totalfactor productivity is the main reason for persisting poverty, so to alleviate poverty these countries in particular need to increase productivity growth. The challenge is not only to develop more productive ways of doing business in the established activities but also to accelerate the structural transformation from low productivity activities in agriculture, petty trade and skill-extensive services to new activities that are knowledge-intensive and exploit the advantages of inter-firm specialisation.
The main driver of structural change is clearly the private sector. Yet governments play important roles in setting policy frameworks that allow for competition and encourage innovation and technological change, and also in correcting market failures. There may be a need for governments to encourage new activities that cannot emerge without several, simultaneous interrelated investments being made (that exceed the capabilities of individual entrepreneurs); or to support activities that do not pay off immediately for an individual investor, but are likely to produce manifold linkages and spillovers in the future. With such actions, governments can accelerate structural change towards more competitive and higher-value activities. This is what industrial policy is about.
While the theoretical case for industrial policy is not in question, there is no consensus about the proper degree of intervention. The controversy is mainly about selective interventions that favour some sectors over others, thus interfering with the price mechanism, which is normally the main signalling device of market economies. Critics argue that governments are usually not very good at identifying coordination failures or anticipating future knowledge spillovers, and that their decisions may well end up reducing allocative efficiency and creating perverse incentives for both investors and bureaucrats.
It is now widely accepted that 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 in low and lower-middle income countries where financial resources are often severely limited and core institutions need to develop administrative capacities and better incentive systems. According to all available governance indicators, most low and lower-middle income countries lag far behind with regard to government effectiveness, transparency and accountability1. Hence, even if it is clear that these countries face particularly severe market failures, there is considerable doubt as to governments’ ability to intervene in markets so as to increase public welfare.
In any case, it is unlikely that the appropriate policy mix will be the same in low and lower-middle income countries as in rich countries because their requirements and capacity for public intervention are substantially different. Yet most empirical case studies of industrial policy focus on the old industrialised countries or the famous success stories of technological catching up (such as Korea, Taiwan, Singapore, Malaysia, Brazil and Chile).
Much less is known about the quality and outcomes of industrial policies in low and lower-middle income countries.
1 For more details see Altenburg (2011).
This study of industrial policy in Mozambique – part of a comparative research project that includes other cases of countries from the developing world 2 – intends to help fill this gap. It describes Mozambique’s main challenges to structural transformation, its governance structures in the field of industrial policy, and most importantly, assesses the quality of industrial policies and industrial policy making in Mozambique.
Chapter 2 outlines the conceptual framework of the study by giving a brief overview of the issues in the industrial policy debate and introducing the concepts used here to assess the quality of industrial policy making. Chapter 3 describes the context of industrial policy in Mozambique by working out the main challenges to the economy regarding structural transformation. Chapter 4 describes the governance patterns that affect the Government’s ability and willingness to design and implement sound industrial policies. Chapter 5 describes and assesses the main industrial policy strategies put into place by the Government before Chapter 6 plunges deeper into the implementation of industrial policy by reviewing two cases: (i) the promotion of the cashew industry and (ii) the promotion of linkages between SMEs and FDI projects. Finally, Chapter 7 summarises the lessons of the preceding chapters and presents some conclusions.
2 A framework for analysis
For the purpose of the aforementioned comparative research project, 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. Two implications of this definition need to be highlighted. First, industrial policy has a normative perspective. Most policy documents address a range of targets, including productivity growth, employment creation, social inclusion and environmental sustainability. Second, thanks to this definition, industrial policies are not restricted to the manufacturing sector, but may also include policy measures that attempt to promote promising activities in agriculture or services.
For the sake of simplicity, measures from the field of industrial policy can be classified either as functional or selective (see Altenburg 2011, 12–13). Functional policies aim to shape the framework conditions for the whole enterprise sector in a non-discriminatory fashion, for example, through improving macroeconomic stability, or supplying the infrastructure or the legal framework for doing business. Selective policies, in contrast, address specific industries, sectors, regions, or firms through subsidies, tariffs, taxes or tax exemptions, targeted infrastructure facilities, etc.
As indicated above, there is a lot of debate about the justification and effectiveness of selective industrial policies (see Altenburg 2011 for a more thorough discussion of the pros
and cons). In this debate, there are basically two points at issue:
1. Dissent over the magnitude and practical relevance of market failures that justify targeted government interventions from a welfare-economics perspective. While one line 2 The DIE research project, “Industrial policy in low- and lower-middle-income countries”, includes Egypt, Ethiopia, Namibia, the Syrian Arab Republic, Tunisia and Vietnam – in addition to Mozambique.
For an overview and lessons from the seven country studies, see Alternburg (2011).
6 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique of argumentation regards the typical market failures being discussed (coordination failures, dynamic economies of scale, knowledge spillovers and information externalities) as being exceptions to the rule of perfectly functioning markets, the other line of argumentation emphasises the pervasiveness of market failures in real-world economies or goes so far as to dismiss using welfare theorems based on neoclassical theory as a benchmark – due to their underlying unrealistic assumptions (such as perfect competition, perfect information, the absence of external effects, etc.).
2. Dissent over governments’ ability and willingness to design and implement welfareenhancing (selective) industrial policies. The debate on ‘ability’ focuses on information requirements and government effectiveness, while the debate on ‘willingness’ centres around shortcomings regarding the accountability of governors and the transparency of the industrialpolicy making process – features that determine whether industrial policies serve broad public, or narrow special, interests. Pessimists argue that governors face severe information constraints that make it nearly impossible to base policy decisions on objective facts. This increases the probability that governments will be captured by special interests, and pass measures based on grounds like favouritism and rent-seeking, rather than on the struggle for broad-based welfare enhancement. Most proponents of this school of thought favour a clear separation of government and the private sector when it comes to political decisions. Optimists, in contrast, argue that information constraints in the field of industrial policy are no stricter than in any other policy field, and that depending on the governance features of policy making, policy outcomes may very well be beneficial for the general public. Proponents of this line of argumentation often call for an intense exchange of information between the government and the private sector when it comes to industrial policy making (in order to overcome information constraints). Governments should be embedded with the private sector in an institutionalised exchange, yet at the same time be autonomous in their decision taking so as to avoid political capture (see Evans 1996).
As mentioned in the introduction, there is a growing body of empirical studies on issues facing industrialised and newly industrialising countries. However, much less empirical research has been done on low and lower-middle income countries. We suppose that both the scope of market failure, as well as the capacity to design and enact sound selective industrial policies, differ in low and lower-middle income countries. This report, therefore, seeks to help fill this gap in the research.
Although this study deals with the first point at issue alluded to above – particularly when describing the challenges for structural transformation faced by the Mozambican economy (Chapter 3) – it places more emphasis on the second point. As a basis for assessing the Government’s ability and willingness to design and implement sound industrial policies that sustainably improve the economy’s competitive performance, we introduce below the
concept of industrial policy management capability (Altenburg 2011), in four major components:
1. “Strategic capability refers to the ability to design policies conducive to sustainable and inclusive productivity growth. This presupposes a good understanding of the changing requirements of the global economy as well as the ability to monitor industrial development at home; in addition, it assumes an analytical ability to translate the observed phenomena into a strategy of socio-economic transformation; to set tar
gets and identify incremental steps towards their achievement; and to create a social contract in support of this strategy. Where external actors play key roles (large foreign investors, donor agencies, etc.), it is important to align them with the strategy.
2. The capability to establish clear rules for market-based competition that facilitate contract enforcement and easy entry or exit for firms and provide safeguards against monopolies and cartels.
3. The capability to deliver services effectively. Where markets fail to deliver the necessary services, governments must be able to set up service agencies and devise incentive schemes and verifiable performance measurement systems that ensure effective and customer-oriented service provision. Meritocratic recruitment and promotion systems are key to ensure that the agency staff has a good understanding of the opportunities and constraints faced by the private sector. Close interaction and feedback loops between service providers and those affected by their decisions are important to maintain ’embedded’ relationships.