«Industrial Policy in Mozambique Matthias Krause Friedrich Kaufmann Industrial policy in Mozambique Matthias Krause Friedrich Kaufmann Bonn 2011 ...»
Agriculture Mozambique is endowed with a huge area of cultivable land. Out of the total surface area of 799,380 km2, 45 percent is considered cultivable, of which 2.8 percent is occupied by permanent, and 53 percent by shifting, agriculture (Hughes 2005, 4–5). Consequently, great potential is foreseen in the intensification of agriculture, which is now characterized by subsistence farming. According to Castel-Branco (2002, 232), “[A]gro-industry is important from the point of view of rural industrialisation, inter-sectorial linkages, employment, diversification of production and trade, and balance of the class interests that influence the manufacturing sector.” Some cash crops have done better, among them, sugar, tobacco, horticulture, and bananas.
Foreign investors are mostly driving the improvements through contract farming (tobacco) or plantation agriculture (sugar). Cashew production and processing are also slowly recovering, especially in the northern parts of the country (see the Case Study in Section 6.1).
Bio-fuel is considered to have potential, but is still insignificant. The increasing quantity of timber exports (unprocessed logs), mainly to Asia, should be regarded more as a threat to sustainable development than as an opportunity because logs come mostly from primary forests with little or no replanting and exploitation is largely illegal (EIU 2008, 35–38).
Probably the three most important barriers to the development of agriculture are (i) the difficult access to land and the insecurity of land-use rights as well as (ii) the structure and organisation of farmers, who are mostly atomised smallholders engaged in subsistence farming (there are very few commercially oriented farmers or farmers’ associations that could form the backbone of a modernization process); and (iii) the lack of efficient extension services. Regarding the first barrier, an important feature of Mozambican land law must be stressed: All land is owned by the State. However, individuals are granted land use rights for 50 years that can be renewed for another 50 years. The difficulty and insecurity doesn’t come so much from the rules themselves, as from the way they are implemented, which gives scope for extensive bureaucratic interference, creating opportunities for corruption and rent-seeking behaviour (Hughes 2005, 26).8 Furthermore, this legal situation makes access to finance more difficult (because of the resulting lack of collaterals).
Further challenges to the development of agriculture are fragmented markets, poor transport and storage infrastructure, low productivity (below sub-Saharan standards), and pronounced climatic variability. Finally, supporting institutions like research facilities are either not available or inefficient (Hanlon / Smart 2008).
Although donors have allocated substantial resources to this sector through the PROAGRI programme that was created to guide aid allocation and public expenditure in agriculture, so far the results have been disappointing.
8 Jim LaFleur (Table A4) sees the unequal and unfair access to land as the major factor limiting economic, and especially agricultural, development. See also Hanlon / Smart (2008).
18 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique Mining and energy As already described in this chapter, Mozambique is endowed with important mineral and natural resources, including gas, hydroelectricity, coal, gold, titanium, ilmenite, zircon, rutile and marbles (CPI 2006). Not surprisingly, the most important FDI projects, each involving more than USD 1 billion, have been made in this sector: MOZAL (see Section 6.2), SASOL (gas deposits), and Companhia Vale do Rio Doce (coal deposits).
The most important constraints to attracting more investments in the mining sector are insufficient information about the geology, poor infrastructure, inadequate legal and regulatory frameworks (especially regarding land tenure), and a lack of reliability and transparency in the awarding of concessions. Mozambique recognizes that it has to improve governance in this sector, and the Government has expressed its intention to accede to the Extractive Industries Transparency International Initiative (APRM 2009, 164; Hartley / Otto 2008).
However, the biggest challenge is to use Mozambique’s mineral and energy-resources wealth for broad-based development that benefits the whole economy. Mega projects in the mining sector are characterized by capital-intense investments that, apart from the construction phase, generate only modest domestic employment and typically do not create significant backward or forward linkages with local enterprises or knowledge spillovers.
In this context, the practice of granting generous tax exemptions to foreign investors in the mining sector should also be reviewed: According to the APRM (2009, 164), MOZAL has been granted tax exemptions for 50 years, Sasol for 35 years, and Vale do Rio Doce for 25 years. While tax incentives may be an important policy instrument to attract investments in the first place, excessive scope and duration of exemptions prevents the generation of tax revenue needed to build and improve market-enhancing institutions and invest in ‘basic requirements’ such as health, education and infrastructure.
The number of tourists visiting Mozambique increased fourfold between 1995 and 2004 (EIU 2008, 60). Up-market accommodations, diving, game parks and water sports are viewed as strategic opportunities for tourism development. Still, given Mozambique’s strong tourism asset base, including a long coast with beautiful beaches and islands, as well as its proximity to South Africa, the development of this sector has lagged behind expectation. The country receives only 2 tourists per 100 inhabitants, which is half the continent’s average. Apparently, Mozambique-based companies have difficulty competing on the international market, which must be considered key, given the low domestic demand for tourism services (FIAS 2006, Ch. 1).
On one hand, the constraints are rooted in the flaws of the Mozambican business regulations and public administration reviewed above, such as uncertainty regarding land access, cumbersome licensing procedures, excessive bureaucracy and corruption. Another set of factors has to do with the lack of complementary public investments and the tourism industry’s low level of organisation and development, such as unfavourable bilateral airservice agreements which, given the country’s remote location, make air connections to Europe too expensive; the lack of investment in domestic airports; weak coordination among key stakeholders and weak effort at marketing Mozambique’s image and destinations abroad; and the low quality of tour operators and ancillary-service providers (Kaufmann / Krause 2008, 234–235).
German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann 3.5 Preliminary conclusions In 2002, Castel-Branco (2002, 231) described the Mozambican economy as characterized by the following basic features: “semi-processing of primary products for export”; the production of internationally uncompetitive goods for the domestic market; and the provision of migrant labour force and transport services for the Southern African region.
The review in this chapter suggests that this concise summary is still accurate. Consequently, one important challenge to structural transformation is increasing the value added to the exported (mineral and agricultural) products by linking the domestic enterprises to these export processes, and by gradually diversifying production, both for export and for the domestic market.
In order to master these and further challenges, industrial policy has to deal with a complex set
of structural deficits that together result in the Mozambican economy’s extremely low productivity and competitiveness. The most important deficits can be summarised as follows:
• The lack of management knowledge and the labour force’s low level of training and skills (80 percent of the labour force is inadequately trained);
• A badly trained and ineffective public-administration staff, combined with cumbersome regulations and corruption, that result in high costs of doing business and exporting;
• The lack of access to credit and the high cost of capital;
• The lack of businessdevelopment services;
• Insufficient norms, standards and quality checks;
• High costs and irregular supply of water and energy;
• High costs and the low predictability of transport;
• Obsolete technology and the shortage of spare parts (50 percent of all companies use technology that is more than 15 years old);
• The lack of coordination between different State institutions promoting industrial development – which results in the absence of systematic and consistent approaches.
4 Governance patterns: the background of industrial policy making This chapter characterizes some basic governance patterns of Mozambique that arguably influence the country’s industrialpolicy management capability. By way of introduction, Table 4 provides an overview of the World Bank Governance Indicators for the years 1996, 2000, 2004 and 2008. While the upward tendency of the indicator for ‘political stability’ clearly reflects the post-war achievements of peace and the orderly succession of governments, as shown in a comparison of the years 2000 and 2008, the remaining indicators have stagnated. The lowest rankings in 2008 are registered for ‘rule of law’ (percentile rank 32.1), ‘regulatory quality’ (37.7) and ‘control of corruption’ (38.2).
20 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique
Source: World Bank; online: http://info.worldbank.org/governance/wgi/ (accessed 27 Nov. 2010) We discuss below a set of governance features and actors that we regard as important context factors influencing or shaping the industrialpolicy-making process in Mozambique.
These are the pervasiveness of corruption and rent-seeking (4.1); the dominance of FRELIMO and the weakness of checks and balances and the rule of law (4.2); and the main industrialpolicy players, such as the economic interest groups linked to the political elite and the donors (4.3).
4.1 The pervasiveness of corruption and rent-seeking
Besides the World Bank Governance Indicator ‘control of corruption’, several other sources point to the pervasiveness of corruption in Mozambique (e.g., USAID 2005;
Bertelsmann Foundation 2008; Transparency International 2008; APRM 2009). For instance, Transparency International (2008) characterizes Mozambique as ‘endemic corrupt’, with a score of 2.8.9 Corruption takes a variety of forms, all of which are common in Mozambique: (i) state capture by particularistic or narrow interests in order to influence laws, regulations and policies; (ii) patronage and nepotism resulting for example in contracts that are awarded based on favours or in unmerited appointments to public office;
and (iii) administrative or bureaucratic corruption, which refers to the intentional distortion of regulatory implementation to the advantage of individuals (APRM 2009, 294). The pervasiveness of corruption constitutes a handicap to successful industrial policy because it increases the likelihood that industrial policy measures will be misused for rent-seeking activities and the exclusive benefit of a narrow, privileged class of businessmen and politicians.
Although the Government has launched an anti-corruption strategy, there is no evidence of a decline in corruption, and corrupt practices appear to be socially tolerated (APRM 2009, 98). According to United States Agency for International Development (USAID) (2005, 5–8), some features of Mozambique’s governance make it particularly difficult to fight corruption. First, there are the social legacies, in particular the lack of democratic culture and the dominant role of the extended family in social and economic life. The view that citizens have the right (and obligation) to hold elected governors accountable for their actions is not yet developed in the young Mozambican democracy. Moreover, it is the extended 9 On Transparency International’s scale, the worst possible score is 1 and the best possible score is 10.
family above all that provides Mozambicans with social security and income opportunities. “As a result, much behaviour that might be viewed as conflicts of interest, nepotism, and favouritism is not generally judged as corrupt practices. Instead, Mozambicans who achieve positions of authority and influence, are often expected to use their position to help family members and friends to get jobs, avoid red tape, and circumvent the system” (USAID 2005, 8). Second, checks and balances and the rule of law are weak in the Mozambican system, which means that horizontal accountability mechanisms are poorly developed and impunity is common. These latter two features are further elaborated below (4.2).
The view that corruption is very deeply rooted in Mozambique and practically constitutes a part of its ‘culture’, is put into perspective by Hanlon / Mosse (2009, 3) who state that “[t]he late 1970s had been an era of exceptional integrity; the leadership under Samora Machel was quite puritanical and any corruption was harshly punished, while the enthusiasm for independence and building a new country created a collaborative spirit that militated against private enrichment.” The authors argue that corruption started to spread because of the civil war, which made controls impossible, and the opaque way in which privatisation was carried out (see Section 3.3), which was tolerated by donors because they were so anxious to promote privatisation (Hanlon / Mosse 2009, 4).
4.2 Single-party dominance, weak checks and balances and the rule of law