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Development Strategies: Study Questions for Mozambique

1. At independence in 1975 (and again circa 1988), Mozambiques starting point for development was

exceptionally unpropitious: a highly fragmented society and economy; weak human capital (the

Portuguese had run their colony almost entirely with expatriates); collapsed public institutions. Yet its

subsequent performance has been strong. What accounts for the countrys ability (so far) to defy the

odds?

Foreign-owned mega-projects have been important contributors to economic growth, butprivate sector growth in other sectors has been limited. The Mozambican economy has madeimpressive progress since the conflict ended in 1992. As indicated in Table 7 (chapter 3), GDPgrowth has averaged around 8 percent per year over the past decade, substantially above theSSA average (5 percent).1 Growth has been export-led with export of goods and servicesincreasing from 17.5 percent of GDP in 2000 to 39 percent in 2007. Over the same period, netforeign direct investment (FDI) increased from 3.3 percent of GDP to 5.4 percent. However,several mega-projects account for most of the growth in output, exports, and FDIfour mega-projects account for about 13 percent of GDP, 71 percent of exports, and 0.4 percent of

employment.2,3 The rest of the private sector has seen modest growth. The incidence ofpoverty remains high, and private sector capacity is low.

Private sector development has been severely constrained by a weak business enablingenvironment. Mozambique has considerable natural and mineral resources and is close toSouth Africa, the largest market in Africa. The countrys natural endowments offer potential forgrowth in the tourism, agriculture, transportation, mineral, and mining sectors. A majorchallenge to realizing the countrys growth potential is the poor investment climate, includingrigid labor laws, limited access to finance, and excessively bureaucratic procedures toestablishing and operating businesses.4 As discussed in chapter 3, access to finance,particularly for small and medium enterprises (SMEs) has been limited and costly. There have

been some reforms to improve the investment climate, but these have not yet resulted insignificant improvement in the business regulatory environment. According to the InstitutionalInvestor Country Credit Risk Ratings, the country is rated high risk, although its rating hasimproved in recent years. Much remains to be done on the investment climate to improve theconditions for private-sector growth.

2. How would you characterize Frelimo as a political party? How would you characterize the political

system within which it embedded? How have these evolved over time?

Authoritarian

Military roots to institutionalisation

3. Mozambiques current growth trajectory is based on large-scale foreign investment, linked to the

development and exploitation of a variety of natural resources (hydropower, gas, iron ore, forests,

commercial agriculture). What are the risks and limitations of this growth trajectory? What are the

prospects for re-shaping the pattern of growth? How?

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4. International donors finance upwards of 50 percent of the national budget, with the majority of this

aid taking the form of budget support. What role has this massive (relative to country size) inflow of aid

had on the development of Mozambiques public institutions?

5. There are emerging signs that the LAO equilibrium that has underpinned stability in Mozambique over

the past fifteen years may be loosening. The President may be using his unprecedented electoral

mandate to consolidate control and increasingly mandating that shell companies linked to his family

members be incorporated into deals with foreign investors. How, if at all, should the international

donor community respond to this trend?

while moving from a one-party state to a multiparty democracy and from a socialist, commandeconomy to a market-based economy.

Mozambique acquired independence from Portugal in 1975, after 10 years of a guerillacampaign led by the Front for the Liberation of MozambiqueFRELIMO (Frente de Libertao deMoambique). The first national government, led by FRELIMO, was soon faced by a militaryopponent (ResistaniaNacional do MoambiqueRENAMO), and a violent civil war ensued.

About one million people were killed, close to two million took refuge in neighboring countries,several million were internally displaced, and an already poor infrastructure was furtherweakened.1.3 The first national government adopted a policy of radical changes. Ties were establishedwith the USSR and East Germany. Private land ownership was replaced with state farms andpeasant cooperatives. The government adopted a command-and-control approach to economicmanagement and put in place a vast nationalization program. By the mid-1980s, Mozambiquewas virtually bankrupt, and the country turned to the West, including the IMF and the WorldBank, for financial aid to help transform it into a market economy.1.4 Following 17 years of internal conflict, a peace accord was signed in 1992, and since thenthere has been an uninterrupted process of political competition, democratization, and elections

every five years. The first elections were held in 1994. FRELIMO won the presidential andlegislative elections with more than 60 percent of the popular vote in December 2004, and withover 70 percent in October 2009.

1.5 Real GDP growth has hovered about 7- 8 percent since 1996, higher than the previousdecade, when growth averaged 4 percent per annum (Figure 1). Strong growth can beattributed to macroeconomic stability and policy reforms, growth in agriculture, postwarinfrastructure rehabilitation, and increases in exports aided by mega-projects in themanufacturing sector. Part of this growth can be attributed to a post-conflict catch-up effect thatcannot last indefinitely. Sustaining the morepermanent component of growth remains achallenge necessitating a deepening of reforms, including governance reforms, improvements

in the business environment, and strengthening of human and institutional capacity as well asincreased investment.

Public sector reform and governance issues remain high on the agenda. Support topublic sector reform and key institutional development is stressed and repeated by allstakeholders as a critical aspect in association with the various pooled and government-ledfinancing arrangements. Central and decentralized institutional reform, financialmanagement reform, judicial reform, and anticorruption efforts are among the key aspects

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2001 2002 2003 2004 2005 2006 2007

of public sector performance where there is a need for continued country and developmentpartner focus. Mozambiques PARPA emphasized the need for reform of public institutionsYear

at the central level as well as for capacity development in decentralized institutions, which areimportant for actual service delivery. However, public sector reform and capacity developmentare not moving rapidly.

ox 1. Overall Agricultural Growth and Productivity

From the mid-1990s, average growth rates in the agricultural sector were substantially lowerthan those for the industrial sector, but the sector held its own against the growth of the largeservice sector (Figure 4). Although agriculture employs at least 60 percent of the nations laborforce, it has the lowest labor productivity of any sector in the economy. It also has the highestincidence of poverty because, with only 20 percent of GDP, it supports about 70 percent of all ofMozambiques households, and hence public and private investments in the sector are critical toreducing poverty.It has been widely accepted that achieving a high sustained growth rate in agriculture will

depend heavily on a major increase in productivity rather than increases in area harvested,which result from the regular expansion of agricultural production by many small-scale farmersinto virgin forests.13 Low productivity in maize production (the most important grain crop inMozambique)14illustrates the challenges for achieving growth.15 Figure 5 shows how poorlythe yields of maize compare with those in neighboring countries where maize is grown undersimilar agronomic conditions. Looking at the situation in the context of the two CAS programs,both of which emphasized improved agricultural support services, average yields for maizebetween 2000 and 2003 declined slightly by 1 percent per annum. This occurred despite aproduction increase by an average rate of about 5 percent per annum, which was driven by a 6percent annual increase in the area of maize harvested. Subsequently, average yield did rise in2004 and 2005 during two drought years as area harvested declined, only to drop back again in

2006 and 2007 to about the same level as in 2000 (Figure 6).because support services remain weak and access to markets for increased production is verylimited. Farmers are highly unlikely to use improved technologies to produce a surplus withoutassured markets.Even if increased productivity in agriculture is achieved, marketing facilities and access tomarkets and transport systems in Mozambique will need to improve. These improvementsmainly will need to be structural and institutional with a balance of responsibility for actionbetween the role of the public sector (transport infrastructure) and the private sector(progressive farmers, marketing facilities, and transport services). To illustrate the possibilitiesfor improved access to markets, Zimbabwe andZambia currently have significant maize deficits on a regular basis and are therefore important

international markets for Mozambiques surplus maize, but much of the trading activity isrudimentary. There is inadequate information on market prices, and on in the largely informaltrade that frequently uses bicycles to transport maize long distances from farms to border areas.