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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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4. The capability to create or remove protection when needed, while avoiding political capture. Certain levels of protection and other targeted support may need to be provided by the state to encourage economic diversification and upgrading, but they should be phased out as soon as these targets have been achieved. This requires close observation of learning processes and the independence to withdraw or reallocate rents before they become unproductive. The transparent, predictable and rules-based formulation and implementation of policies are important to prevent the abuse of incentive systems by politicians, bureaucrats or beneficiaries in industries. Governments must be held to account for their interventions, such as through general checks and balances in the political system – including electoral competition, an independent judiciary, and critical feedback from independent media – as well as monitoring and evaluation mechanisms built into all major industrial policy programmes.” (Altenburg 2011, 21) Well-developed capabilities in these areas will favour that industrial policy process be based on knowledge rather than on wishful thinking, and more oriented towards the broad public interest than towards narrow special interests.

In addition, it is possible to distil some lessons from the policy-oriented literature regarding “principles of successful industrial policy making” (Altenburg 2009). These principles complement the concept of industrial policy management capability when the quality of

Mozambique’s industrial policy is analysed here. Regarding the implementation of industrial policies, Altenburg (2009, 19) emphasises the following key design principles:

• “ … [I]mplementing agencies need to have a good understanding of markets and the way private enterprises operate. To collaborate effectively with the private sector, customer orientation and business-like behaviour are essential. […] Contests that allow private sector firms to bid for public resources can be particularly useful. Another possibility is demand-side financing via grants or voucher systems.

• Policy instruments should be as simple and low-cost as possible, especially when the administrative capacity of implementing agencies is weak. Self-targeting of beneficiaries is a good way to avoid political capture. Likewise, compulsory co-financing by customers ensures that these will only utilise services which they actually need.

8 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique

• Support should only be provided on a temporary basis as long as market actors need to adjust to a changing environment. Credible exit strategies need to be formulated early on to signal that support is given for adapting to new challenges – not as an indefinite subsidy for inefficient rent-seeking industries.

• Finally, industrial policy should be designed as a systematic process of experimental learning. For this purpose, independent monitoring and evaluation (M&E) is essential. It serves the dual function of learning from trial and error and safeguarding against political capture.” The remainder of this report describes and assesses the quality of industrial policy making in Mozambique, using the concepts outlined above. It should be noted that, as in other low-income countries, the availability of reliable data is a major problem there. Policy performance is hardly ever monitored and evaluated. While this report also uses quantitative data sources wherever available, many judgements rely on qualitative information gathered from experts. The interviews (see Table A4) were conducted in 2009; literature and data from January 2010 was used.

3 The main challenges for structural transformation

Several analysts consider Mozambique to be one of the few economic success stories in sub-Saharan Africa. The country is recovering from the ravages of a long struggle for independence from Portugal and a protracted civil war. Over the last decade, Mozambique has been characterized by peace and stability, falling poverty rates and high macroeconomic growth rates, and benefits from large-scale financial and technical international assistance (Clement / Peiris 2008, 11).

Nevertheless, Mozambique is still one of the poorest countries in the world, ranking 172nd out of 182 countries, according to the latest United Nations Human Development Index (UNDP 2009: life expectancy at birth is 47.8 years, the adult literacy rate is 44.4 percent, GDP per capita in purchasing-power parities is USD 802, and 74.7 percent of the population survives on less than USD 1.25 a day). The literacy rate and higher education provision are well below sub-Saharan standards (EIU 2008, 17). According to the United Nations report on the global AIDS epidemic (UNAIDS 2006, 412), 16.1 percent of adults between 15 and 49 years of age are HIV (Human Immunodeficiency Virus) positive.

The world’s 36th largest country in terms of landmass, Mozambique has a total population of approximately 21 million people who are concentrated in the capital, Maputo, and in the Northern provinces, Nampula and Zambezi; the rest of the country is sparsely populated. The country is rich in natural resources. Of the total 799,380 square km, 45 percent is considered cultivable (Hughes 2005, 4–5). Mozambique also has mineral resources, including gas, coal, gold, titanium, ilmenite, zircon, rutile, and marbles (CPI 2006). The country benefits from three East–West ‘development corridors’ – connecting Malawi with the port of Nacala (Northern Mozambique), Zimbabwe with the port of Beira (Central Mozambique), and South Africa with the port of Maputo (Southern Mozambique) – which makes Mozambique a potentially important transport and logistics hub for the region (Kaufmann and Simons-Kaufmann 2008). The high cost and the low reliability of transport have prevented Mozambique from taking greater advantage of this potential (Wide 2010, 24).





German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann The remainder of this chapter reviews Mozambique’s main challenges to structural transformation. After a brief summary of Mozambique’s economic history (3.1), it summarises the country’s recent macroeconomic development (3.2). The chapter then characterizes Mozambique’s enterprise structure, reviews the available indicators for the business environment and competitiveness levels (3.3), and examines some sector-specific opportunities and challenges (3.4), before presenting some conclusions (3.5).

3.1 A brief overview of Mozambique’s economic history To provide a point of reference for the sub-chapters, a brief overview of the Mozambique’s economic history is given here. Economic policy making in Mozambique can be

divided into three major phases:

• Under colonialism, economic policy was dominated by Portuguese home-country interests and characterized by a mercantilist trade policy, few investments in public infrastructure and education, and a strategy of settler colonisation (Cahen 1993, 49).

In the context of this study it is worth mentioning that the colonial government had a quite successful selective industrial policy for the cashew sector in the 1960s and 1970s (see Case Study 6.1 for more details on the cashew industry).

• After independence in 1975, the Government followed a central planning approach to economic policy, nationalizing certain social and economic sectors (such as schools, hospitals, and banks) and promoting production cooperatives in rural areas (Cahen 1993, 51). This policy offered few incentives to the private sector and entrepreneurship.

• The latest phase, which began in the late 1980s, is characterized by the transition to a formally democratic, multi-party political system and a market-based economic system largely built on private ownership. The Government follows an open policy regarding foreign trade that eases foreign investment and prioritizes free trade over the promotion of local manufacturing and processing. Because of Mozambique’s aid dependency, donors and multilateral institutions like the International Monetary Fund (IMF) and the World Bank have a say in all major policy areas, including economic policy.

Until the 17th century, the territory that today makes up the Republic of Mozambique was mostly under Arab–Swahili influence. With the arrival of the first Portuguese in the 17th century, trading posts were opened along the coast. Portugal kept a relatively low profile in the area, although this was raised significantly in the 1950s under the dictatorship of Salazar (EIU 2008). Even so, Portugal invested relatively few resources in Mozambique, particularly with respect to health and education. Mozambique was considered to be a ‘province’, where almost all the qualified employees in both the private sector and the public administration, were Portuguese (Hodges / Tibana 2004, 19). Even in reference to that era, the Portuguese colonial administration can be qualified as old-fashioned and strongly bureaucratic (Simons-Kaufmann 2003, 77).

In 1962 the Frente de Libertação de Moçambique (FRELIMO) was founded and started to operate from Tanzania, beginning a war of liberation under the leadership of Samora Machel. Independence was granted in 1975, after the end of the dictatorship in Portugal and the transition of power to a FRELIMO Government led by Machel. In 1977 a single-party Marxist state was announced at the 4th FRELIMO Congress. Mozambican nationalism 10 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique grew and FRELIMO gained political supremacy (EIU 2008, 5). The new Government followed a centralised planning approach to economic policy, nationalizing key industries and promoting production cooperatives in rural areas. But this approach was not successful and led to a severe social crisis (Cahen 1993, 51–54).

After 1975 most Portuguese left Mozambique. Most private companies and the public administration were barely functioning, and many assets were useless or obsolete as a result of damage during the war for independence or their deliberate destruction by former owners before they left the country. A counter-revolutionary rebel group, the Resistência Nacional de Moçambique (RENAMO), founded in 1975 was supported by Rhodesia and South Africa. The civil war between FRELIMO and RENAMO (from 1977 to 1992) further destroyed Mozambique’s infrastructure and economy, bringing the country to the brink of collapse.

Between 1980 and 1986, national production decreased by 30 percent and exports by 75 percent (Simons-Kaufmann 2003, 80). Under pressure from international creditors, Mozambique joined the IMF and the World Bank in 1984 and started its structural adjustment program in 1987. In order to reverse the negative economic development, the Mozambican Government aimed at reducing State control over the economy by privatising public companies; promoting the ‘family sector’ in agriculture; improving the marketing of agricultural products; adjusting trade imbalances; improving resource distribution; and expanding the private sector’s responsibility for economic activities. Since instituting these reforms, Mozambique has enjoyed strong donor support. It remains one of the most aid-dependent countries in the world, with more than 50 percent of the State budget funded through external assistance (Bertelsmann Foundation 2008). It is therefore no surprise that donors took, and are still taking, an important role in setting Mozambique’s agenda and influencing its economic and social policies.

In addition to the economic reforms, in November 1990 Mozambique adopted a new constitution that formally separated the executive, legislative and judiciary functions, and contained a commitment to multiparty democracy. It provided for an electoral system based on a proportional representation, with a majority voting system for presidential elections and a proportional system for legislative elections (EIU 2008, 9). The country has been politically stable since the Rome General Peace Accords ended the civil war in 1992. In 1994, democratic elections gave a majority to FRELIMO (under President Chissano).

With the 2004 elections, President Guebuza (also FRELIMO) came into power, and basically continued the Chissano Administration’s economic and social policies, although he also adopted a strategy with more pronounced nationalistic accents that aims at enhancing party influence at various levels of government (EIU 2008, 8).

3.2 Macroeconomic development In spite of frequent natural disasters and economic shocks, between 1996 and 2005, Mozambique was able to achieve stable average economic growth of 8.5 percent per year, which is among the highest on the African continent (EIU 2008, 33). Table 1 gives an overview of macroeconomic indicators for the period from 2002 to 2008.

Mozambique’s robust macroeconomic performance has been driven by recovery in a range of sectors that were devastated by war and poor economic policy – including agriculture, transport, manufacturing, tourism and banking – as well as by large inflows of German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann

–  –  –

foreign aid and foreign capital. The showcase ‘mega project’3 MOZAL (an aluminium smelter located close to Maputo; for more details, see Case Study 6.2) started in 1998, was an important milestone in Mozambique’s development because it opened the doors to FDI in the late nineties (Wells / Buehrer 2002). Since then, Mozambique has begun to be considered a ‘success story’ by some observers (Clement / Peiris 2008, 11) and various capital-intense mega projects financed with private capital have been started, particularly in the mining sector4.



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