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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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Mozambique’s international trade is not well diversified. Exports mostly consist of primary products, in particular aluminium (produced in MOZAL), electricity, tobacco, gas, prawns, sugar, cotton, cashew and timber. The major export partners in 2009 were the European Union (EU: 57.8 percent of exports, mainly aluminium), South Africa (11.4 percent), China (3.7 percent), India (2.9 percent), Malawi (2.3 percent), and the USA (2.1 percent). The main imports are fuels; manufactured goods (consumer goods, machinery, and vehicles); agricultural products (mainly cereals); and alumina (a pre-product of aluminium). The major import partners are South Africa (33.5 percent of imports), the EU (18.5 percent), India (5.9 percent), China (4.2 percent), the USA (3.3 percent) and Japan (3.1 percent) (EU 2010; International Trade Centre, no year).

Mozambique is a member of the Southern African Development Community (SADC), the World Trade Organization (WTO), the United Nations, the African Union (AU), the Organisation of the Islamic Conference (OIC) and the Commonwealth, and has signed the following major trade protocols: the SADC Trade Protocol, the African Growth Opportunity Act (with the USA), the Everything But Arms (EBA) and Cotonou Agreements (with the EU).

Due to the limited competitiveness of most domestic companies, the export opportunities of these agreements have hardly been used (República de Moçambique 2007a). The trade integration processes in the context of the SADC and globalisation are viewed as threats, pressuring the non-competitive national industries to improve quickly or exit the market.

3 The term ‘mega project’ is commonly used in Mozambique for huge investment finance with foreign capital, predominantly in the mining and energy sector.

4 Besides the MOZAL aluminium smelter, the SASOL gas pipeline and the coalmine in Tete (developed by the Brazilian Companhia Vale do Rio Doce) – each with more than USD 1 billion invested – are the most prominent mega projects.

12 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique In spite of the encouraging macroeconomic growth rates, there are concerns that the economy is developing at two speeds (EIU 2008, 33). To a large extent, growth has occurred thanks to massive inflows of FDI in capital-intensive mega projects that have little direct impact on employment and few linkages to the local economy. Improvements in export performance are also almost exclusively due to mega projects exploiting the mineral and other natural resources, without adding much value to the country (Saxegard 2008, 359).

For example, the aluminium exports from MOZAL alone account for 42 percent of Mozambique’s total export revenue; the manufacturing value added without MOZAL is as low as it was in 1971 (APRM 2009, 163–65). Development is clearly faltering in large parts of the economy where the majority of the Mozambicans earn their livelihoods, for instance in small-scale agriculture and in the SME sector.

3.3 The enterprise structure, business environment and competitiveness The enterprise structure and linkages Colonialism left a country with no entrepreneurs and little capital. After the socialist phase, therefore, a major economic-policy objective was to privatise and create a class of entrepreneurs. The core element of the 1990s reforms was privatisation of most Stateowned enterprises. In 1999, the programme for privatising and restructuring SMEs was completed, with more than 1,200 companies transferred to the private sector (SimonsKaufmann 2003, 82). Most big companies were sold to foreign investors, while smaller companies were mostly bought by domestic investors. Of the larger companies, to date only 20 companies – predominantly public-service providers and utilities, such as the airports authority, the ports-and-railways authority, as well as the water and electricity providers – continue under public ownership. Formally, all the economic institutions required for a market economy are in place (Simons-Kaufmann 2003) – except for safeguards to prevent the creation of economic monopolies and cartels, and the abuse of monopolistic market power, which from a welfare-oriented economic-policy perspective, is a major deficiency.

The privatisation process of the 1990s was far from ‘perfect’: In order to build up local entrepreneurs and firms, the Caixa de Crédito Agrário e de Desenvolvimento Rural started to hand out credits (also using donor funds) to freedom fighters, militaries and party members – without any intention of getting the money back (Hanlon / Smart 2008, 106). World Bank-sponsored SME programmes that aimed at assisting the privatised SMEs also faced serious repayment problems. In 1998 the World Bank stated that of the USD 30 million spent in SME restructuring programmes, 90 percent would never be paid back (Landau 1998, 62). Loans financed out of the State budget that were handed out to companies owned by the party elite didn’t perform much better (Hanlon / Smart 2008, 107). The unfavourable track record of such interventions is one of the reasons why donors oppose the creation of a State-owned development bank in Mozambique.

Today, the enterprise structure is marked by (i) a few big enterprises, some of which are owned by foreign investors, some are State-owned, and some are private Mozambican enterprises owned by the political and business elite; (ii) formally registered SMEs, a few owned by international, but most owned by Mozambican, investors; and (iii) a vast universe of informal SMEs, mostly micro enterprises (Kaufmann 2007). According to the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann Ministério da Indústria e Comércio (MIC) (2008a, 34) SMEs5 make up 98.6 percent of all enterprises, employing 43 percent of the workers and accounting for 76 percent of the total sales. In terms of the number of business units, the SME sector is clearly dominated by the trade and service sectors (see Table A1 in the Annex). Commerce and retail businesses account for nearly 60 percent of all units, followed by restaurants and accommodation (20 percent). Manufacturing, with less than 10 percent of business units, nevertheless accounts for almost 40 percent of the total sales volume. Most of these industries (about 80 percent) are located in Maputo and Beira, respectively the capital and the second largest city.

An influential strand in the literature regards SMEs in general as important drivers for growth and poverty reduction (Lledo 2008, 330). But in Mozambique at present, no such role is discernible for the SME sector, which mainly consists of micro-enterprises that are oriented towards the local market and are not competitive. In general, they lack growth perspectives (Kaufmann and Parlmeyer 2000). In an empirical study Krause et al. (2010) found that the formalisation and development of SMEs are hampered by the entrepreneurs’ and workers’ poor education and training, burdensome and non-transparent regulations, the high cost of credit and the poorly developed infrastructure.

A further important feature of the SME sector – which can be regarded both as a symptom, and a cause, of its lack of dynamism – is the fact that inter-firm linkages are not well developed, either amongst the SMEs or between SMEs and large firms (República de Moçambique 2007b, 29). Only in rare cases have Mozambican SMEs managed to establish and benefit from industrial linkages with, for instance, FDI projects. Strategic clusters or networks do not exist, and subcontracting and outsourcing services to local SMEs is not a common practice of big enterprises (Kaufmann 2008).

Most national companies do not have any competitive advantage in terms of technologies, processes, products or marketing strategies (República de Moçambique 2007a). Mozambique’s manufacturing sector is small, with production highly concentrated in a few sectors. It also exhibits a low degree of intra-sector linkages: With the exception of agroprocessors, most producers source their raw materials from abroad rather than from the local economy. At the same time, manufacturers are overwhelmingly inwards oriented;

very few firms export a substantial part of their outputs.

The business environment and competitiveness

Mozambique can be classified as highly bureaucratic, with cumbersome regulations that are inefficiently and inconsistently applied (KPMG 2008; World Bank 2009b6).

According to the World Bank’s 2010 ranking in the ‘Ease of Doing Business Index’, Mozambique is 135th out of 183 countries (see Table 2). Although the indicator for ‘Starting a Business’ has recently improved, other indicators in areas that are directly linked to the process of starting a business, for instance, ‘Dealing with Construction Permits’, ‘Registering Property’ and ‘Employing Workers’ are highly problematic. In 5 The National Institute of Statistics’ (INE) definition of an SME: An enterprise that employs up to 99 workers (MIC 2008a, 5).

6 See also Eberherr / Kaufmann / Simons-Kaufmann (2009) for the province of Inhambane, and Krause et al. (2010) for an analysis of the impact of business regulations on the formalisation and development of SMEs.

14 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique the area of labour regulations, a recent reform instituted some slight improvements, especially for SMEs, by reducing the cost of severance payments. For ongoing businesses, Mozambique’s low rankings for ‘Trading Across Borders’, ‘Getting Credit’ and ‘Enforcing Contracts’ – the latter directly linked to the poor performance of the legal system – are still major concerns that induce high transaction costs, thereby reducing the competitiveness of existing companies and compromising the motivation for start-ups. Overall, although there has been some modest progress with regard to business regulations, no significant improvements have been made in recent years.

This is explained by the lack of trained administrative staff; the tradition of a bureaucracy that considers its main function to be controlling the business sector; problems with inter-ministerial coordination; and insufficient drive for ‘radical’ reforms.

The Doing Business Index basically attempts to measure the cost of business regulations.

An alternate approach to describe the business environment is to take the entrepreneur’s perspective and ask what they consider to be their major constraints. In this vein, Figure 1 shows the top 10 constraints according to the World Bank’s Enterprise Surveys. Amongst the most pressing constraints named by entrepreneurs are access to finance, informal or illegal competition, physical infrastructure (electricity and transport), tax rates and crime, theft and disorder.

The Mozambican Business Confidence Index (KPMG 2008), published by KPMG Mozambique and the umbrella business association, Confederação das Associações Económicas (CTA), is also based on an enterprise survey that includes a significant number of SMEs in the provinces outside Maputo. According to this source, entrepreneurs’ greatest concerns are corruption, crime, and excessive bureaucracy. Interestingly, the results vary significantly between regions and sectors, suggesting a need for differentiated analysis and policy action (Kaufmann / Krause 2008).

The Global Competitiveness Index (GCI) of the World Economic Forum takes an even broader perspective on the business environment (see Table 3). It assesses a broad variety of ‘pillars’ that enhance an economy’s competitiveness, ranging from basic requirements (e.g., infrastructure and macroeconomic stability) to enhancers of innovation and sophistication (e.g., the intensity of innovations). After the review undertaken so far, it comes as no surprise that Mozambique ranks very low in the GCI: 130th out of 134 countries. The country’s economy can be characterised as being purely factor-driven.

As can be seen in Table 3, for most pillars Mozambique is ranked at the very low end of the scale. An exception is labour-market efficiency (rank 98), which has improved since the recent labour-law reform. Still, the ‘basic requirements’ are weak, with infrastructure, health and primary education ranked particularly low. With regard to transport infrastructure – despite the significant investments since the end of the civil war – Mozambique has the lowest road coverage in Southern Africa: 32 km of roads per 1,000 km2 in 2003, compared to an average of 135 km. Out of the classified road network, only 57 percent is maintained, – again the lowest rate in Southern Africa where in 1997 the average was 71 percent (World Bank 2003).

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Figure 1: Main constraints to firm investment according to World Bank’s enterprise surveys Source: The World Bank Group (2011) 16 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique

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The GCI assesses Mozambique’s potential transaction-cost-reducing institutions, like ethical business behaviour, effective and reliable police and court services, intellectual property protection and effective company boards, as being ‘weak’. Business development services are rarely available for SMEs, particularly outside Maputo. All the sub-factors of ‘business sophistication’ – which include factors like local supplier quantity, local supplier quality, state of cluster development, value-chain breadth, and production-process sophistication – are ranked below 100. Altogether, the poorly developed ‘pillars’ result in a very low factor productivity, which constitutes a big challenge for Mozambique’s economic development (Jones 2008; World Bank 2009a).

3.4 Sector-specific opportunities and challenges According to several experts, Mozambique’s main opportunities for economic development are its natural endowments and the production of primary products.7 The African Peer Review Mechanism (APRM 2009, 169) supports this view in a recent publication 7 For more details see, e.g. Wide (2010).

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that identifies the following key sectors with growth potential: agriculture, mining, and tourism. The opportunities and specific challenges in realising the potential in these sectors are briefly summarised below.

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