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Local Content Policies as a Panacea? The Politics of Extractive

Resource Sector Reforms in Mozambique

by Christina Saulich1

24th World Congress of Political Science

International Political Science Association

23-28 July 2016 in Poznan, Poland

Panel RC51.05: Civil Society and Political Economy: A Comparative Perspective

First Draft: Please do not quote without the author’s permission

Abstract Recent discoveries of natural resources have drawn attention to hitherto peripheral

economies in Sub-Saharan Africa. Growing pressure from civil society and international actors

and the fear of a ‘resource curse’ have put resource politics at the top of the national agenda

of new resource exporters. Unequal distribution of resource wealth causes serious threats to

a country’s stability and development. Local content policies (LCPs) have thus been framed as

the most important energy policy innovation in the Global South securing resource rich

countries a higher share of the value from resource projects. At the same time LCPs increase

the power of national governments to promote local and national participation in extractive

industries that are highly dependent on international market dynamics – at times provoking

conflicts over free trade and with international resource companies.

In how far does local content offer new potential for resource exporters in Sub-Saharan Africa

to achieve inclusive resource-led development? Moving beyond the resource curse literature

this paper seeks to shed light on this practically highly relevant topic. By developing a theory-

based framework for the systematic analysis of LCPs the author further aims to contribute to

the neglected field of resource policy research in developing countries. With growing levels of

inequality and poverty and enormous resource wealth Mozambique is an exciting new case

for the study of Local Content Policies.

1 Christina Saulich is a Research Fellow and Lecturer at the University of Koblenz-Landau, Germany and an

Associate Fellow at the Peace Academy Rhineland-Palatinate.

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1. Introduction Recent discoveries of vast natural resource reserves have drawn the attention to Sub-Sahara

Africa. In the past five years approx. 30% of the world wide hydrocarbon discoveries were

made in Sub-Saharan Africa (ENI 2015). In the centre of the resource boom are traditional

producers, such as Nigeria and Angola, as well as a number of hitherto peripheral economies

in East Africa, many of them highly dependent on foreign aid, such as Mozambique. The

current resource boom has sparked a controversial debate on how to achieve maximum

profit from natural resources. On the one hand, natural resource endowments are perceived

as a unique opportunity for economic growth and broad-based development. On the other

hand, cases of the resource curse (Auty 1993, 2001; Sachs & Warner 1995; Ross 1999, 2003;

Le Billon 2001; Frankel 2012) or paradox of plenty (Karl 1997) revealed that the nexus

between resource abundance and development is not obvious. According to this strand of

literature, resource abundance has negative effects on the development of resource rich

countries; more specifically on their socio-economic development; the state, institutions and

governance; democracy and human rights; and peace and security (Basedau 2005: 9ff.).

Against this backdrop, resource rich developing countries have started to place a stronger

emphasis on deriving more benefits from their resource wealth. A series of (industrial) policy

reforms aim to capture more gains from extractive resources – and avoid possible negative

effects of a resource curse. These reforms were accompanied by a policy debate on “Africa’s

new industrial revolution” (UNIDO 2012a) and the prospects for resource-driven structural

transformation (e.g. Morris et al. 2012; UNECA 2013, 2014; AfDB et al. 2013, 2014; UNIDO

2011, 2012b). This reflects a global trend towards a timid return to state-oriented extractive

resource governance after decades of neoliberal privatisation which is fuelled by debates on

inclusive development and social concerns (Bourgouin, France & Haarstad, Havard 2013;

Velasco 2014; Lin 2012; Noman et al. 2012).

Industrial policies that target the extractive sector have the potential to leverage

development in resource-rich African countries if the “unsustainable comparative minerals

advantage [is transformed] into a sustainable competitive advantage” (Jourdan 2013: 365). A

key element of resource-based industrialisation is to stimulate value addition or beneficiation

by deepening the resource sector through linkages2 into the local economy.

Typically, linkages between natural resource industries and other economic sectors, e.g.

learning spill overs from mining, are weak. Industrial policies, however, have the potential to

overcome the enclave nature of extractive industries: “Even if much of resource extraction

technology itself is not closely linked with other technologies that might provide the basis of

broader growth and learning, many of the sub-activities entailed in the long and complex

process of removing natural resources do.” (Greenwald & Stiglitz 2013: 39) Hence, promoting

resource linkages – and ultimately economic diversification – can form the core of industrial

policies in resource-rich countries.

An industrial policy tool that has gained momentum in Sub-Saharan Africa throughout the

past decade is local content. Based on the assumption that commodity extraction alone does

not automatically fuel development in resource rich countries, local content policies (LCPs)

2 The concept of sector linkages draws on Albert O. Hirschman’s (1958) analysis of industrial structure.

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are designed to promote local and national participation in extractive industries, economic

diversification and the development of linkages (Ramdoo 2015; Ovadia 2015, 2014; Esteves et

al. 2013; Tordo et al. 2013). LCPs are expected to bring added value to host nations and

specific regions within a country through the activities of the oil, gas and mining industries.

Development economists argue that such (protectionist) measures distort trade and foreign

direct investment and ultimately reduce welfare (e.g. Grossmann 1981; Kolstad & Kinyondo

2015; Hufbauer et al. 2013). More “optimistic” scholars stress that a nexus between local

content and development is possible; however, it presupposes specific conditions which are

not met in many developing countries. These conditions include clear and unambiguous

policies, sound institutions, a local industry that is capable to seize the opportunities local

content offers, and finally the willingness and ability of multinational companies to outsource

their activities to local firms (Hansen et al. 2015: 5f.).

Despite this gloomy forecast, many countries in Sub-Saharan Africa have recently introduced

local content policies in their extractive sectors, partly supported by international donors and

development institutions, such as the United Nations Development Programme (UNDP) and

the African Development Bank. Among these countries is Mozambique. In 2014 the country

adopted a new Mining Law, a Natural Gas Master Plan and a Petroleum Law that include local

content requirements.

While literature on local content policies from an economic perspective primarily focuses on

the contents and outcome of these policies only few studies address LCPs from a political

point of view (e.g. Hansen et al. 2015; Whitfield et al. 2015). This paper seeks to fill this gap by

exploring the political processes behind the introduction of local content policies using the

example of Mozambique.

I argue that it is crucial to understand the political context within which policies and reforms

are played out: “When policy is based strictly on economic considerations, it often misses the

mark, as politics will always intervene.” (Hancock & Vivoda 2014: 209) This implies taking a

closer look at power relations between national elites, the strength of domestic capitalists in

the extractive sector and state-business relations (and possibly also state-labour relations).

Resource sector reform implies altering the distribution of economic benefits. Not only are

reforms like local content policies by nature contested, they also offer ample possibilities for

powerful elites to capture gains. The study of local content policies from a political

perspective thus helps to identify dominant power relations that shape elites’ industrial policy

choices in the extractive sector. These insights have important implications for the actions

and strategies of national and international actors and their practices in the field of industrial

policies in the extractive sector. “For international development agencies wishing to engage in

these processes, understanding the significance of power relations within the sector, vested

interests, and the links to national political processes can be critical to being an effective actor

in policy dialogue.” (World Bank 2008: i)

The aim of this paper is to develop a research framework for political dynamics of local

content policies. This framework is based on the assumption that policy-making/policy reform

in developing countries takes place in a context of constraints. Drawing on the literature on

political settlements (Khan 2010; Whitfield et al. 2015; Ingram 2014) and the concept of

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policy space (Mayer 2009; Howlett 2011; Booth & Golooba-Mutebi 2014; Chang 2013;

Williams 2015; Uribe & Mohamadieh 2016; Asche 2016), it explores how a combination of

international and domestic constraints produces different resource sector policy choices in

Sub-Saharan African countries.

The first section of the paper touches upon the rationale of industrial policies in the context

of developing countries and gives an overview of the aims and scope of local content policies.

In section two I develop a research framework for the study of local content policies from a

political perspective, drawing on the political settlements approach and the concept of (legal)

policy space. Section three gives a brief outlook on the politics of local content policies in

Mozambique with a focus on the evolution of the country’s ruling coalition and the role of

foreign engagement and dependency on foreign aid.

2. The Promise: Industrial Policy and Development Industrialisation latecomers such as Mozambique face a variety of disadvantages in contrast

to their international competitors: they do not benefit from economies of scale, have no

advanced technological capabilities and need to establish business relationships from scratch

(Altenburg & Lütkenhorst 2015: 68). Their initial conditions are shaped by a combination of

restraints on the supply and on the demand side: On the supply side, a lack of technical and

entrepreneurial skills results in higher costs and lower quality. On the demand side,

developing countries are characterised by low incomes, a small market size, and little

diversified consumer demands that limit available business opportunities. As a result of the

low level of economic diversification downstream industries import specialised inputs at a

higher price or produce in-house – both hinders the creation of backward linkages (Altenburg

& Lütkenhorst 2015: 74 ff). Furthermore, the enterprise structure of industrialisation

newcomers is often polarised, consisting of a large number of small firms with little

contribution to the GDP and only few large firms (usually foreign or state-owned) which

account for the major share of the GDP. The gap of medium-sized productive firms limits the

capacity to produce on scale and to supply specific goods and services (Ramdoo 2015b: 9).

The underlying rationale of industrial policies is that these disadvantages can be addressed

through specific government policies that foster sustainable development. As a matter of fact,

industrial policies were an essential component of growth in all so-called developed countries

and of the functioning of markets (Di Maio 2009: 107).3 Rodrik (2004: 2) broadly defines

industrial policies as “policies that stimulate specific economic activities and promote

structural change. As such, industrial policy is not about industry per se. Policies targeted at

nontraditional agriculture or services qualify as much as incentives on manufactures.”4 In this

sense, industrial policies are designed to correct market failures and remove obstacles, not

only in manufacturing but in all non-traditional activities (Rodrik 2004: 2). Selective policy

3 For a summary of the debate on industrial policies s. Rodrik 2004 and Chang 2009.

4 Structural Change or economic transformation, respectively, refers to “a process that leads to the narrowing of

the gap between SSA [Sub-Sahara African] countries and the industrialized countries in the following key variables: technological capabilities, productivity, economic diversity, competitiveness in exports, incomes per capita, and the share of the labor force having formal employment” (Ansu 2013: 492).

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measures promote specific industries or sectors with the aim to increase a country’s

economic welfare (Chang 2005: 70).

The aims of industrial policies are manifold: Altenburg and Lütkenhorst (2015) name

diversification, upgrading and social inclusion as the principal objectives. Inclusive industrial

policy shapes structural change “in a way that enhances competitiveness and productivity

growth while increasing the incomes of the poor more than proportionally” (Altenburg &

Lütkenhorst 2015: 79). Greenwald and Stiglitz (2013) further add creating jobs, leveraging

foreign direct investment, and promoting learning and knowledge transfer (Greenwald &

Stiglitz 2013: 27). The tools of industrial policies comprise external market interventions, such

as trade-related instruments (e.g. local content policies) and measures to promote exports,

product market interventions and factor market interventions (Ramdoo 2015b: 2).

2.1. The Potential of Resource-Based Industrialisation in Africa Industrial policies that target the extractive sector have the potential to leverage

development in resource-rich African countries if the “unsustainable comparative minerals

advantage [is transformed] into a sustainable competitive advantage” (Jourdan 2013: 365). A

key element of resource-based industrialisation is to stimulate value addition or beneficiation

by deepening the resource sector through linkages into the local economy.

Typically, linkages between natural resource industries and other economic sectors, e.g.

learning spill overs from mining, are weak. Industrial policies, however, have the potential to

overcome the enclave nature of extractive industries: “Even if much of resource extraction

technology itself is not closely linked with other technologies that might provide the basis of

broader growth and learning, many of the sub-activities entailed in the long and complex

process of removing natural resources do.” (Greenwald & Stiglitz 2013: 39) Hence, promoting

resource linkages – and ultimately economic diversification – can form the core of industrial

policies in resource-rich countries.

Jourdan (2013: 378 ff.) differentiates between five types of mineral sector linkages. Fiscal

linkages refer to the use of resource rents to ameliorate the physical and knowledge

infrastructure of resource-rich countries. Spatial or horizontal linkages comprise opening up

the infrastructure established for the production of high-rent resources to economic

industries with lower-rents, such as tourism, agriculture or forestry. These industries do not

have the means to build up their own infrastructure but have a high socio-economic impact.

Forward linkages (downstream value addition) concern the establishment of resource-

processing industries that could deliver feedstocks for manufacturing and industrialisation.

Backward linkages (upstream value addition) relate to developing the supply or input sector,

e.g. capital goods, services or consumer goods. Finally, knowledge linkages refer to

developing technology or investing in R&D and human resource development.

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2.2. Promoting Resource-Based Industrialisation through Local Content Policies

An industrial policy instrument that has gained momentum in Sub-Saharan Africa throughout the past decade are local content policies (LCPs). Based on the assumption that commodity extraction alone does not automatically fuel development in resource rich countries, these policies are designed to foster economic diversification, forward and backward linkages, and spill over effects to the local economy. Local content policies refer to a set of policy measures that are applied in the pre-establishment and establishment phase of investment projects.

Potentially “the single most important innovation in energy policy in the Global South in

recent decades” (Ovadia 2014: 138) local content policies (LCPs) not only enjoy growing

popularity among governments but also among international institutions, e.g. the United

Nations Development Programme (UNDP) and the African Development Bank. They are

considered as an entry point for addressing a range of resource-related issues such as elite

accumulation, growing inequality, economic growth, and ultimately the resource curse. If

properly implemented, local content assumedly offers new potential for current and future

resource exporters in Sub-Saharan Africa.

Generally defined, local content is “the extent to which the output of the extractive industry sector generates further benefits to the economy beyond the direct contribution of its value-added, as through links to other sectors” (Tordo et al. 2013: 1). In other words, it is “the share of employment – or of sales to the sector – locally supplied at each stage of [the value] chain” (Tordo et al. 2013: 2). Kazzazi & Nouri (2012: 2165) emphasise that it primarily refers to “value addition in a local country (by local staff, local materials, local services and facilities) rather than in terms of ownership of the company performing the value added activities”. This includes purchasing domestic inputs (goods and services) by multi-national companies at different stages of the investment cycle (Hansen et al. 2015: 4).

Next to local procurement requirements, LCPs comprise production sharing agreements, local

employment rules and local ownership requirements (Hansen et al. 2015: 5). The extent and

nature of local content varies in the course of the life cycle of the extractive sector. According

to Tordo et al. (2013: 2-3) it covers five principle dimensions: 1) the percentage of local

employment, including the training of the local labour force; 2) local ownership of supply

firms; 3) job creation or value added in the domestic economy or – more narrowly defined –

in the neighbourhood of a production plant; 4) the provision of infrastructure through multi-

national companies that benefits the local population, e.g. health care or schools; and 5) the

creation of linkages. Ramdoo (2015: 2) further adds the dimension of technology transfer and

research and development (R&D).

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Box 2.2.1.: Objectives & Instruments of Local Content Policies

The motivation to seek local content varies strongly depending on the respective actor. With

respect to the extractive industry, LCPs are highly contested and often criticised by orthodox

economics scholars for setting unrealistic quotas and in turn inviting corruption (e.g.

Hufbauer et al. 2013; Kolstad & Kinyondo 2015). Newer generation LCPs, e.g. in Ghana, try to

address this shortcoming by a realistic assessment of potential of the domestic supply of

products and services (Asche 2016: 15). Multi-national companies partly pursue local content

as part of their CSR or community outreach strategy and partly as a means to increase value

chain efficiency by outsourcing activities to local firms. This, however, implies that

multinational companies are willing to outsource and that there is a local industry which

provides goods and services of sufficiently high quality (Hansen et al. 2015: 7).

National governments strive to increase domestic value added5 and local employment

opportunities through LCPs. Neither the market itself nor the large flow of rents to the

government automatically seems to entail increased levels of local value added and job

opportunities. Another source of motivation is closely linked to the political economy of local

content policies. In this light, LCPs can also serve as a means to address growing societal

5 The value added through extractive operations in developing countries is almost zero in some developing

resource-rich countries and reaches up to 45-75% in more developed resource-abundant economies (Hansen et al. 2015: 4).

Objectives:

Increasing national and local participation in extractives & domestic value added

Developing domestic manufacturing and service provision through linkage creation

Economic diversification

Mitigating and managing social and political risks due to rising expectations for a

better and more equitable distribution of wealth

Counter the resource curse/paradox of plenty

Creating more local employment

Instruments (selection):

Number of local staff to be employed by multinational companies (MNCs)

Quotas for foreign employment

National participation in management

Number of contracts to be awarded to local suppliers

Percentage of spending on local procurement

Licensing & concessions conditioned by capacity to create local content

Taxes and pricing aimed at favouring local content over imports

Local equity participations

Transfer of technology & training of staff

Training & certifying local suppliers

Reporting and justifying foreign labour or inputs from abroad

Sources: Hansen et al. (2015); Esteves et al. (2013); Ramdoo (2015a); Ovadia 2014, 2015; Tordo et al. (2013)

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pressures, especially from communities that are directly affected by resource extraction.

(Tordo et al. 2013: 14).

3. Industrial Policy Reform in a Context of Constraints The political dynamics that shape local content policy-making in Mozambique must be

understood within the country-specific context. Historical factors, such as civil wars or

hitherto policy interventions, locational factors, a country’s resource endowment, the level of

economic diversification, existing state capacities, and the orientation of the political elite

play important roles that affect a country’s political settlement and its resource-based

industrialisation strategy (Whitfield et al. 2015: 111; Altenburg & Lütkenhorst 2015: 64).

This theoretical framework is based on the assumption that resource sector policy-making in

Mozambique takes place in a context of national and international constraints that shape the

policy choices of the country’s ruling coalition. On the one hand, these constraints encompass

the domestic political settlement, i.e. the distribution of power among powerful elites within

the society (Khan 2010; Whitfield et al. 2015; Ingram 2014). Political settlements contribute

to creating stability and legitimacy, however, at the same time they limit the possible options

for industrial policy reform. On the other hand, constraints refer to external factors, such as

conditions of international donors, multi- and bilateral trade agreements and the

predominance of western, liberal-democratic norms, practices and development debates that

limit Mozambique’s policy space (Mayer 2009; Howlett 2011; Booth & Golooba-Mutebi 2014;

Chang 2013; Williams 2015; Uribe & Mohamadieh 2016; Asche 2016).

3.2. Political Settlements Approach Political settlements scholars argue that politics6 determine a country’s institutional

performance and not formal institutions. Following this logic, every political regime is based

on a political settlement7 among its elites. This political settlement – rather than formal

institutions – determines a country’s political and developmental outcomes (Ingram 2014: 1).

Put differently, the policy choices of ruling elites that together form the ruling coalition are

primarily driven by the national political settlement. Khan defines political settlements “as an

interdependent combination of a structure of power and institutions at the level of a society

that is mutually ‘compatible’ and also ‘sustainable’ in terms of economic and political viability”

(Khan 2010: 20).

6 Drawing on Leftwich (2006) I understand “politics” as a process or set of processes “consisting of all the

activities of cooperation, conflict and negotiation involved in decisions about the use, production and distribution of resources, whether these activities are formal or informal, public or private, or a mixture of all” (Leftwich 2006:10). 7 Political settlements as a scientific has different meanings, depending on the discipline.

7 International relations

and peace and conflict scholars refer to political settlements as negotiated settlements to bring intra- or interstate violent conflicts to an end. Comparative politics scholars use the concept to describe a transformation of the political order after crisis that was achieved through an elite settlements. In contrast to the political economy definition used in this paper, both strands of literature view political settlements as an event that results in a formal institutional arrangement, e.g. a peace agreement, a constitution or a signed pact (Ingram 2014: 3 ff.).

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Political settlements ensure a sufficient level of political stability8, legitimacy and economic

outcome for a society to function – and at the same time limit the possible options for

resource sector reforms. Their institutional structure implies that benefits are distributed

among elites according to their relative power (Khan 2010: 20). To create a minimum level of

political stability and economic performance political settlements need to be inclusive

enough. Inclusive enough political settlements provide privileges and rents to those power

holders with credible violence potential to maintain the status quo and exclude those with

less ‘holding power’ (Khan 2010: 20). Hence, the access and membership to the ruling

coalition is limited. It is determined by the level of productivity and, more importantly, by the

violence potential of a group or of individuals, respectively. Members of the ruling coalition

are able to pose a credible threat to the country’s social order and use this fact to improve

their bargaining position (Melia 2015: 21). The ruling coalition is at the top of a pyramid of

patron-client networks; it is an organisation of organisations (North et al. 2013: 5).

Political settlements encompass four core elements: 1) They address the organisation and

exercise of political power; 2) they involve elites; 3) they emerge out of conflict or crisis; and

4) they shape formal and informal institutions that form the basis of a political regime (Ingram

2014: 8). Khan (2010: 26 ff.) particularly emphasises the importance of informal institutions

for developing countries’ institutional structures. He argues that a formal institution that

implies a distribution of rents and benefits that is not compatible with the actual distribution

of power among the groups that run this institution results in poor enforcement and a

sustained level of latent conflict. Through informal institutions, i.e. resource allocation or

accumulation through patron-client networks, the social and political stability is maintained:

“They help to generate distributions of economic benefits that are more in line with existing

distributions of power and in doing so they also sustain these distributions of power.” (Khan

2010: 27). In clientelist political settlements “significant sources of holding power are not

aligned with formal institutions” (Khan 2010: 48). As a consequence formal institutions do not

function in impersonal and rule-following ways – as suggested by Max Weber – but are

constrained by an informal system of personal relations (Khan 2010: 48).

Political settlements function along two levels of interaction (s. graph 3.2.1.). On the one

hand, horizontal relations among the elites of the ruling coalition and on the other hand

vertical relations between the ruling elites and their clients (patron-client networks), i.e. lower

levels of the ruling coalition (Whitfield et al.: 97 ff.; Laws 2012: 9). In order to maximise their

respective shares of the resource rents elites require privileged access to natural resources,

e.g. through mining concessions, land rights or entry to restricted job markets. Hence, elites

need to invest in both, their vertical relations, i.e. their own patron-client network, and their

horizontal relations, i.e. within the elite coalition where the allocation of privileges and rents

is negotiated. In this context, elite groups may use industrial policies, including local content

policies, as a means to support their own clients and co-opt potential competitors or rivals

(Altenburg & Lütkenhorst 2015: 91). Investing in economic diversification could give rise to

8 This argument follows on the logic of limited access orders. North et al. (2009; 2011; 2013) argue that rents are

allocated among powerful societal groups with a credible violence potential. Access to rents reduces the incentives to fight because this would decrease the level of rents and in turn increases political stability and ultimately enables development.

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new powerful groups that seek access to privileges and rents. This in turn poses a risk to the

country’s political stability and might entail renegotiations of the current political settlements.

Graph 3.2.1.: Levels of interaction in political settlements

Source: the author, based on North et al. (2013: 5).

In order to understand why some ruling elites pursue specific types of resource sector policies

and reforms it is crucial to understand the distribution of power within society. The

distribution of power, in turn, needs to be understood in relation to the country’s history, i.e.

how societal groups were organised during the pre-colonial, colonial, and post-colonial

periods (Whitfield et al. 2015: 90). Based on these observations Whitfield et al. develop two

core arguments: First, variations in the distribution of power explain variations in clientelist

politics in developing countries. Second, the configuration of clientelist politics affects the

outcome of industrial policies (Whitfield et al. 2015: 95).

Four variables determine the implications of the distribution of power for clientelist politics:

1) the distribution of power outside the ruling coalition; 2) the degree of contestation within

the ruling coalition; 3) the relative power of domestic capitalists within a specific industrial

sector; and 4) the technological capabilities that are relevant for promoting this sector

(Whitfield et al. 2015: 96 ff.). Due to the limited political power of African capitalists, “the

pace and extent of economic transformation was mostly shaped by how struggles over

forming and maintaining ruling coalitions played out among political elite factions that

emerged during colonial rule and the decolonization period, as well as the different means of

financing the ruling coalition and the state that ruling elites could draw on” (Whitfield et al.

2015: 111).

Depending on the distribution of power outside and within the ruling coalition Khan (2010: 64

ff.) and Whitfield et al. (2015: 105 ff.) identify four types of ruling coalitions (s. table 4.1.1.).

This typology takes into account the strength of factions that are excluded from the ruling

coalition, the degree of contestation within the ruling coalition (horizontal relations) and the

strength (bargaining power) of lower level factions of the ruling coalition (vertical relations).

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Table 3.2.2.: Types of Ruling Coalitions

strength of excluded factions of ruling

coalition

level of contestation within ruling coalition (horizontal relations)

strength of lower levels of the ruling coalition

(vertical relations)

strong weak fragmented cohesive strong weak

competitive clientelism

x x x

vulnerable authoritarianism

x x x

weak dominant party

x x x

strong dominant party

x x (some frag-mentation)

x

Source: the author, based on Khan (2010: 64ff.) & Whitfield et al. 2015 (105 ff.).

3.3. International Constraints on the Policy Space of Developing Countries Despite the pivotal importance of national political dynamics it is important to take into

account the implications of international constraints on developing countries’ policy space.9

The concept of domestic policy space takes into account the tensions between international

economic integration and the autonomy of nation states to pursue domestic policies that

foster their economic development.

Mayer defines policy space as a combination of de jure and de facto domestic policy

autonomy (Mayer 2009: 376). Involvement in international regimes reduces the de jure

formal authority of national policy-makers over policy instruments. In addition, economic

integration “weakens de facto control over national economic development by allowing

foreign actions and conditions to influence national macroeconomic policy targets” (Mayer

2009: 377). Participation in economic integration, however, not only restricts, but also

enlarges the domestic policy space. For weaker countries multilateral rules guarantee better

protection than they could obtain on their own or through bilateral agreements.

Booth & Golooba-Mutebi (2014: 1) argue that global systems have the power to provide

political and economic incentives that influence political leaders and their decisions. This is

particularly important for developing countries that are highly dependent on foreign aid. Even

though international donors actively support and provide advice to resource-rich countries in

Sub-Saharan Africa that aim to adopt local content policies, some conditions that are attached

to multilateral or bilateral aid and loans may limit their industrial policy space (Chang 2013:

12). In fact, many industrial policy programmes are largely funded by foreign donors

(Altenburg & Lütkenhorst 2015: 98).

WTO agreements, and particularly more restrictive Bilateral Investment Treaties (BITs),

International Investment Agreements (IIAs), and Preferential Trade Agreements (PTAs) make

it more difficult to implement local content policies (Di Maio 2009: 127; Altenburg 2015: 103

f.). “[a] range of either multi- or plurilateral agreements (TRIM), bi-regional, regional or

9 This concept is also referred to as policy design space (Howlett 2011) and development space (Wade 2005).

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bilateral treaties expand prohibition of performance requirements for foreign investments to

almost everything.” (Asche 2016: 16) More specifically, the principle of national treatment

embodied in Article III in GATT is enshrined in the Economic Partnership Agreements (EPA)

between African regions and the European Union – without the differential treatment clauses

provided in GATT (Art. XVIII).10 National treatment requires equal treatment of domestic and

foreign firms and thus prohibits all regulations that increase the competitive position of

domestic vis-à-vis foreign firms (Asche 2016: 16 f.).

So far, there have been no cases at the WTO Dispute Settlement Body (DSB) related to LCPs in

the extractive sector in Sub-Saharan Africa. BITs and IIAs disputes have extensively focused on

the extractive sector (Ramdoo 2015; Mohamadieh & Uribe 2016). Investment disputes in oil,

gas and mining industries now make up a large percentage of cases before the International

Center for Settlement of Investment Disputes (ICSID) & International Chamber of Commerce

(ICC) (Cameron 2014). Chang argues that “the range of industrial policy measures that

developing countries can use has become considerably smaller, compared to the 1960s and

the 1970s because of the changes in global rules of trade and investment. However, there is

still room for manoeuvre […] especially for the poorest economies, including most African

economies, that are subject to less systemic restrictions” (Chang 2013: 128f.).

The increase in investment disputes in the oil, gas and mining industries role of international

companies in the extractive sector can pose further constraints on Mozambique’s policy

space. According to Jesse Ovadia “with time, international capital has found new ways of

organising and watering down the aspects of LCPs it deems most unfavourable” (Ovadia 2015:

40). Indeed, the approaches Sub-Sahara African countries have taken towards local content

vary greatly. While local content requirements in Angola and Nigeria are rather rigorous,

including relatively clear definitions of a local or indigenous company, employment and

expatriate worker quotas, and the measurement of local content; more recent local content

legislation seem to favour a pro-business agenda that avoids important issues regarding

definitions and measurement.

Booth and Golooba-Mutebi (2014: 4f.) distinguish three possible areas of international

constraints. First, the authors point to constraints on policy contents, i.e. limits to the

selection of (interventionist) policies through global trade and financial institutions. Second,

developing countries face external constraints on internal policy processes, i.e. adopting a

problem-solving and adaptive approach to policy-making. Although it is not a given that high

dependency on foreign aid automatically leads to imitation, “[…] development assistance

generates incentives for policy-makers to adopt policies that signal good faith to donors, even

when they do not address any real problem” (Booth & Golooba-Mutebi 2014: 9). Copying

globally accepted policies hinders the evolution of country- and context-specific policy-tools.

Third, and most importantly, international constraints can affect a country’s political

settlements, e.g. through ‘naïve liberalism’ that defines development in terms of liberal-

democratic practices and norms. The authors therefore argue that “[p]rotecting the political

settlements of emerging developmental regimes should be a prime candidate for joined-up

10

GATT (Art. XVIII) exempts countries with economies “which can only support low standards of living and are in the early stages of development”.

13

action by Northern governments committed to ‘doing no harm’ in partner countries” (Booth &

Golooba-Mutebi 2014: 21f.).

3.4. Framework for Analysis

Both, the political settlements approach and the concept of policy space provide useful tools

for determining domestic and international constraints that shape policy-making in the

extractive sector in Mozambique. Table 3.4.1. summarises the scope and sources of national

and international constraints identified in the two theoretical approaches.

Table 3.4.1. National and International Constraints on Local Content Policies

NATIONAL CONSTRAINTS INTERNATIONAL CONSTRAINTS

SCOPE OF CONSTRAINTS

limits to the selection of resource sector policies/policy reforms & policy formulation

limits to the process of policy-making/reform

limits to the selection of resource sector policies/policy reforms & policy formulation

limits to the process of policy-making/ reform

limits to the political settlement

SOURCES OF CONSTRAINTS

composition and evolution of the political settlement

type of ruling coalition

power and technological capabilities of domestic capitalist class

state-business relations (in the extractive sector)

legal: global, regional and bilateral trade agreements

international extractive companies

conditions attached to multilateral or bilateral aid/loans

ideational: internationally accepted (Western) ideas about liberal-democratic development

Source: the author.

Drawing on these theory-based sources of constraints, the following guiding sub-questions

will structure my analysis of the political dynamics of local content policies in Mozambique:

National Constraints

a. Political settlement/elite structure: limits to the selection of policies and policy

processes

Who are the powerful elites that form part of the ruling coalition?

Which factions are excluded from the ruling coalition?

How did this elite structure emerge?

b. Ruling coalition: limits to the selection of policies and policy processes

What type of ruling coalition is currently in place in Mozambique and how does it

affect industrial policy outputs and the process of industrial policy-making in the

resource sector?

o How strong are the factions that are excluded from the ruling coalition?

o What is the level of contestation within the ruling coalition (horizontal

relations)?

14

o How strong are the lower levels of the ruling coalition (vertical patron-client

relations)?

c. State-business relations: limits to the selection of policies

Is there a domestic capitalist class within the extractive resource sector?

What is the degree of political influence of the domestic capitalist class?

o Is the domestic capitalist class an important source of government revenue?

o Does the ruling coalition need the financial support of powerful capitalists?

What is the degree of technological capabilities of domestic capitalists?

International Constraints

a. Domestic policy space: limits to the selection of policies, policy processes and the

political settlement

In how far do global, regional or bilateral trade agreements affect Mozambique’s legal

policy space?

o What is the degree of political influence of international companies in the

extractive sector?

In how far do conditions attached to multilateral or bilateral aid and/or loans affect

the domestic policy space in the extractive sector?

In how far do internationally accepted (Western) ideas about liberal-democratic

development affect Mozambique’s domestic policy space and resource-based

development strategy?

4. Outlook: the Politics of Local Content Policies in Mozambique This outlook seeks to provide first insights into the politics of local content policies in

Mozambique. It forms part of a desk study in order to prepare field research in Mozambique

during which I am planning to conduct interviews. Due to the limited scope of this paper this

outlook will focus on two aspects of my framework for analysis: the evolution of the ruling

coalition since independence and effects of foreign engagement in Mozambique and the

country’s high dependency on foreign aid.

4.1. Context and Scope of Local Content Policies in Mozambique Mozambique’s vast natural resource endowments include gas, coal, gold, titanium and

precious stones – to name but a view. Since 2012 Mozambique is Africa’s second-largest coal

producer. With proven natural gas reserves of over 100 trillion cubic feet the country is

further expected to turn into one of the world’s largest suppliers of liquefied natural gas

(LNG) to Asia (EIA 2016; Hansen et al. 2015: 10).

In 2014 Mozambique introduced local content requirements in the mining and in the oil and

gas sectors. These requirements concern a number of areas, including licensing requirements,

local equity requirements, increased ownership of state owned enterprises in concessions,

and requirements regarding the employment and technical training of local staff (Ramdoo

2015a: 11). The most important regulatory frameworks are the 2014 Mining Law (Law No.

15

20/2014 of 18 August), the Natural Gas Master Plan 2014 and the Petroleum Law 2014 (Law

No. 21/2014 of 18 August). Generally the level of local content requirements with regards to

the legal framework, employment requirements, procurement requirements, and ownership

requirements is medium. There are currently no penalties for non-compliance and reporting

requirements are low (Ramdoo 2015a: 18).

In the mining sector, specific local content provisions are also included in contracts. The coal

companies Rio Tinto Coal Mozambique and Vale Coal, for instance, are currently setting-up

linkage programmes that are directed towards small and medium-sized enterprises (SMEs).

Rio Tinto Coal Mozambique’s budget for local procurement was USD 160 million in 2012,

excluding corporate social responsibility (CSR) activities. The market for local content

provision (backward linkages) has skyrocketed within the past five years offering vast

opportunities for local businesses (Buur 2014: 17).

4.2. Evolution of the Ruling Coalition in Mozambique The political settlement in Mozambique underwent significant changes since independence in

1975. In the post-independence period the Mozambique Liberation Front (FRELIMO) emerged

as the “strong dominant party”. At the end of the civil war the Mozambican National

Resistance (RENAMO) had emerged as a strong excluded faction that received 33.7% of the

votes in the first multiparty elections in 1994. In the 1999 elections RENAMO was even able to

mobilise 47.7% of the votes – only slightly less than FRELIMO with 52.3% of the votes. To

ensure their political survival FRELIMO’s ruling elites reverted to authoritarian means.

Coercive measures, such as the imprisonment of RENAMO-members, served to expand their

position of power. President Chissano and President Guebuza monopolised and controlled

the access to economic accumulation opportunities. Lower level factions of the ruling

coalition were weak and did not contest the access to and distribution of rents and benefits.

“It is the first time in the history of the Frelimo political organization that party, state and

economic power have been concentrated in one faction.” (Buur 2014: 20)

From 1990 until the mid-2000s Mozambique’s ruling coalition was characterised by

“vulnerable authoritarianism”. By the mid-2000s RENAMO had lost significant power as well

as its access to state resources and FRELIMO re-emerged as a “strong dominant party” under

the rule of Guebuza. Guebuza centralised the management of rents and invited foreign

investors. High inflows of foreign direct investment in the extractive sector and of donor aid

increased state resources and opportunities of elite accumulation. The government used

these resources strategically to keep societal grievances under control (Whitfield et al. 2015:

106 f. & 117 f.) and hindered accumulation by factions that were not part of the ruling

coalition. FRELIMO elites and FRELIMO-related business elites controlled point resources as

well as central service domains. These elites captured the market for local content provision

during the first generation of investments and linkage programmes11 (Buur 2014: 19). Linkage

formation was highly politicised and resulted in “linkage patronage” (Buur 2014: 22).

11

The first generation of investments and linkage programmes refers to the construction of the aluminium smelter MOZAL in 1998 – the country’s first mega-investment. Further mega-projects of the first generation include the SASOL gas-pipeline from Pande and Tamana to Inhambane (2002) and a heavy sand plant in Mapula by Kenmare/Moma (2003) (Buur 2014: 10). The second generation of large investments refers to investments

16

There is a strong link between Mozambique’s resource extraction-oriented economy and the

Guebuza faction of FRELIMO (Whitfield et al: 129). “Through the recentralization of rents, and

because of it, the Guebuza faction within Frelimo was able to concentrate state and economic

power in itself and thus dominate over the other elite factions.” (Whitfield et al. 2015: 128)

Under the rule of Guebuza “contracts [where] allocated preferentially to domestic companies

even if this violate[d] the rule, or to companies linked to Frelimo or to local elites” (Hanlon &

Mosse 2010: 14). Hanlon and Mosse (2014: 1ff.) argue that this is not per se negative, but has

the potential to produce positive development outcomes. Guebuza’s new type of “elite

development capitalism” promotes productive rent-seeking where rents are (at least partly)

used to create a Mozambican industrial and commercial group. Elites use their access to the

ruling coalition to receive contracts and licences and boost their businesses – not for

unproductive rent-seeking. Following this logic, local content policies serve as a tool to

maintain legitimacy and generate benefits, e.g. by creating jobs in local companies or

awarding contracts (Hansen et al. 2015: 8f.).

Since 2013 the tensions between FRELIMO and RENAMO have increased dramatically. Violent

clashes between the two parties caused numerous casualties on both sides. More than

10.000 people fled to Malawi because of violent RENAMO attacks and ongoing military

operations by FRELIMO to disarm RENAMO fighters. RENAMO leader Dhlakama has

threatened to take control over six northern RENAMO-dominated provinces where most of

the country’s natural resources are concentrated (International Crisis Group 2016). The

prospect of extraordinary revenues once the new resource boom takes off has played a role

in the re-emergence of the conflict and has implications on the current political settlement:

“The bright thread running through the country’s politics is mineral wealth. It helps explain

both the return to armed conflict as well as the ending of that conflict.” (Manning 2015)

In the 2014 elections RENAMO received 36.6% of the votes (compared to 16.4% in 2009)

while FRELIMO’s share of the votes decreased from 75% in 2009 to 57% in 2014. The

country’s new president, Filipe Nyusi, seeks to maintain dialogue with RENAMO-leader

Dhlakama while at the same time taking a hard line on RENAMO, in particular with regards to

the disarmament of RENAMO fighters. Given RENAMO’s renewed strength and violence

potential, the ruling coalition led by Nyusi might have to at least partly accommodate

RENAMO’s demands in order to secure stability (and foreign investments in the resource

sector and future resource revenues). Whether FRELIMO will be able to maintain its strong

dominant party ruling coalition or revert to a phase of vulnerable authoritarianism remains to

be seen.

4.3. Foreign Engagement in Mozambique and Dependency on Foreign Aid High inflows of foreign aid have been crucial for the survival of the FRELIMO ruling coalition

until today. Direct, mostly bilateral budgetary support helped to fund the state and

consequently to expand FRELIMO’s power. Foreign budget support to the government

currently makes up 40% of the government’s budget (Bertelsmann Stiftung 2016: 39).

According to Castel Branco & Ossemane (2010: 163 ff.) dependency on foreign aid is a

and linkage programmes in the fields of oil, gas and coal, e.g. by Rio Tinto Coal Mozambique, Vale Coal, Ncondezi, Beacon Hill Resources or Minas de Revuboe (Buur 2014: 17).

17

principal characteristic of economic growth in Mozambique. The Mozambican government

follows a „reactive policy approach“ (Altenburg und Lütkenhorst 2015: 120) that responds to

interests and expectations of donors and foreign investors at the expense of the needs of the

national population. Tax incentives for international investors and the high dependence on

foreign aid limit the country’s fiscal revenues and its autonomy (Pérez Niño & Le Billon 2014:

89). „[…] Mozambique represents a quintessential case of a natural resource-, foreign

investment- and donor-dependent economy with poorly developed domestic capabilities and

dynamism” (Altenburg & Lütkenhorst 2015: 119). International actors are likely to co-

determine the framework for Mozambique’s resource-based industrialisation strategy.

Recent developments in Mozambique highlight this point. In April 2016 the World Bank, the

IMF and the British government decided to suspend aid after the Mozambican government

lifted the lid on debts of more than $1bn (BBC 2016).

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