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Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

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Mozambique’s Industrial Policy

Mozambique’s Industrial Policy

Sufficient to Face the Winds of Globalization?

Chapter:
(p.92) 5 Mozambique’s Industrial Policy
Source:
Manufacturing Transformation
Author(s):

António Sousa Cruz

Dina Guambe

Constantino Pedro Marrengula

Amosse Francisco Ubisse

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0005

Abstract and Keywords

The current Mozambican industrial development pattern, a mix of private sector initiative and a public sector licensing mechanism, replaced the post-independence public sector-led industrialization of the central planning countries’ tradition. The transition to a market-driven economy in the mid-1980s followed an international trend with the collapse of the socialist bloc countries and the end of the Cold War era. Before its independence from Portugal in 1975, Mozambique had the mixed industrialization pattern of a dual society. On one hand, there was a growing colonial, urban, and industrializing population, and on the other hand, a local majority population dedicated to low-productive agriculture and other manual activities such as mining and public works. Although the rules of a market economy applied, the public sector was heavily present, distorting labour relations. This national discrimination within an international market economy system partially explained the choice of a socialist economic system after independence.

Keywords:   Mozambique, industrial development, agriculture, market economy, public sector

5.1 The Evolution of Industry

The current Mozambican industrial development pattern, a mix of private sector initiative and public sector licensing mechanism, replaced the post-independence public sector-led industrialization of the central planning countries’ tradition. The transition in the mid-1980s from a public-driven economy to a market-driven one followed an international trend with the collapse of the socialist bloc countries and the end of the Cold War era.

Before its independence from Portugal in 1975, Mozambique had a mixed industrialization pattern of a dual society. On one hand, there was a growing colonial, urban, and industrializing population, and on the other, a local majority population dedicated to low-productive agriculture and other manual activities, such as mining and public works. Although the rules of a market economy applied, the public sector was heavily present, distorting labour relations. This national discrimination within an international market economy system partially explained the choice of a socialist economic system post-independence.

Although Mozambique has undergone a series of social, political, and economic transformations since the end of the Second World War (WWII), it still is a predominantly agricultural country, with two-thirds of the population dedicated to agricultural, fishery, and related production, utilizing low-productivity traditional technology.

Currently, the country faces the challenge of choosing the most adequate strategy to transform its economic structure from an agricultural country to an industrialized one with efficient services to achieve higher standards of living.

(p.93) This chapter discusses the evolution of industry in Mozambique since the colonial era in the first half of the twentieth century to date. Based on a literature review, it pays particular attention to four sectors: mining, manufacturing, electricity and water, and the construction sector.

The study describes the evolution of industry in Section 5.1, presents the structure of the industrial sector in Section 5.2, explains the current industrial policy framework in Section 5.3, and concludes in Section 5.4.

5.1.1 Colonial Industrial Development, 1945–74

Today’s industrial development could also be understood within the framework of the colonial Portuguese development strategy. Initially the main tasks of the Mozambican economy were to be: (1) a source of raw material for Portuguese industries; (2) a supplier of cheap labour; (3) an export market for Portuguese manufactured goods; (4) a labour market for Portuguese unemployed. These elements shaped colonial government economic policies, in particular with regard to its industrialization strategy. While it promoted the production of agricultural goods such as cotton, sisal, cashew nuts, and palm oil, it also imposed restrictions on the local production of manufactured goods that posed an immediate threat to Portuguese exports to Mozambique. Because of the high rate of unemployment in mainland Portugal, Portuguese settlers were encouraged to establish themselves around the most productive areas in Mozambique and supportive measures were deliberately adopted to empower them.

In 1953, Mozambique experienced a shift in colonial industrial strategy from a colonial pact which encouraged transfer of cheap agricultural products and raw materials from the colony to the mainland to a foment plan where the colonial economy would become more integrated, with a larger proportion of the financing package coming from within the colony, coupled with an increase in supporting infrastructure investment (Wuyts 1983; Leite 1989).

The number of Portuguese settlers in Mozambique increased significantly following the first national development plan (Plano de Fomento 1953–8). Manufacturing output for domestic trade expanded significantly, creating a market for such new products as cotton articles and clothing in 1954, animal feed and shoes in 1955, paper, furniture, gas, metal works, machine repair, and transport vehicles in 1956, and glass articles in 1958 (Wield 1977). Besides diversifying the industrial base, the colonial government managed to support the emergence of a selected number of heavy industries such as metal work, vehicle maintenance, electricity, cement, gas, and water (Cruz 1994).

The national independence movements throughout Africa in the late 1950s and early 1960s put pressure on Portugal to reform its relations with the colonies. In 1961, the Angolan Liberation Popular Movement (MPLA) started (p.94) its armed struggle in that colony. The Mozambique Liberation Front (Frelimo) was created in 1962 and in 1964 started waging a liberation war. To counteract mounting pressure, Portugal adopted a more interventionist economic policy, approving the Portuguese economic space integration law, creating the escudo zone, and approving the forced labour abolition law (Portugal 1961; Wuyts 1980, 1983). These reforms and the implementation of foment plans contributed to continued industrial acceleration in the following period.

During this period, the colonial government implemented two additional development plans: Plano de Fomento II (1959–64) and Plano de Fomento III (1968–73), with an intermediate plan for 1965–7. A fourth plan was designed to be implemented from 1974 onwards. The objectives of both plans differed only slightly from each other; ultimate targets remained more or less similar.

The colonial government’s sustained efforts for industrialization can be deemed a success story, with the combined industries being the largest sector contributor to GDP. Moreover, in 1964, industrial production for the domestic market became greater than industrial production for the external market (Leite 1989). In the 1960s, the financial system in Mozambique improved (Wuyts 1983), and industrial development benefited from the increase in capital flows and led to increased investment in more capital intensive industries, thereby creating (1) a laminated iron and steel sector; (2) a construction and assembly of railways transportation materials industry; (3) a petroleum refinery (Brum 1976).

By the end of the 1960s, external finances came under pressure (Wuyts 1983). Consequently, import substitution strategies were strengthened, leading in the 1970s to the creation of several new sub-industries (Brum 1976). Dominant sub-sectors remained within the industry processing of cashew, sugar, tea, timber, flowers, tobacco, cotton, textiles, refined oil, soap, different types of acids, and cement. In 1973, the textile, cashew, and sugar industries’ share in total exports was over 50 per cent, and together they created over 85 per cent of manufactured exports (Castel-Branco 2002).

Following the 1973 international oil prices crisis, the 25 April 1974 military coup d’état in Portugal, and the negotiations on 7 September 1974 between the Portuguese Government and Frelimo, Mozambique entered a transitional period ending with independence on 25 June 1975. In the time to come significant structural changes would face the industrial sector in Mozambique, affecting the previous years of successful expansion.

5.1.2 Post-independence Industrial Development, 1975–86: Central Planning Economy

In 1975, Mozambique was the eighth largest industrial producer in sub-Saharan Africa (SSA) (Biggs et al. 1999). Manufacturing value added was above 10 per cent of GDP, and including mining, water, energy, and (p.95) construction, the industrial sector was the main GDP contributor. Mozambique had developed one of the largest hydropower plants in Africa (the Cahora Bassa Dam), and the manufacturing sector had diversified within a context of highly effective protection.

Shortly after independence in 1975, the new Mozambican Government adopted a series of nationalist and socialist policies. Besides taking over top government positions, Mozambicans progressively occupied most of the medium-level positions in public administration and in major enterprises. There was basically a massive exodus of Portuguese settlers out of Mozambique, and these were replaced by Mozambicans and expatriates. The latter were called cooperantes, and came mainly from other socialist countries, African countries, and Western countries with a similar ideology.

The third and fourth Frelimo Congresses (Frelimo 1977, 1983) outlined the basic industrial strategies to be pursued by the new government of Mozambique. The congress resolution stated the following main objectives for the industrial sector, to:

  • set up appropriate bureaucratic structures for steering industrialization, following a centrally planned model. This includes preparing a 10-year industrialization plan;

  • turn abandoned private companies into state owned ones;

  • ensure the satisfaction of people’s needs in terms of food, hygiene products, and other household goods, clothes, footwear, and fuel/energy;

  • provide raw materials, fuels, and means of production for all sectors, particularly for agriculture;

  • contribute to balance of payments stability;

  • improve skills and build a pool of technical manpower.

In line with Congress decisions, during 1980–3 the government allocated about 58 per cent of total investment funds for agriculture and industry, both defined as priority sectors for satisfying people’s needs (DNE-CNP 1985).

The global social product (GSP), an indicator of the material product of a country, increased from 71.1 billion meticais in 1975 to 83.7 billion in 1981, at 1980 constant prices. During 1975–84 agriculture and industry contributed on average 76 per cent to GSP (DNE-CNP 1985). Hence, at a first glance initial investment strategies seemed to have paid off. Major contributors to growth of the manufacturing sector included: petrol, rubber, metal works, textiles, oil, soaps, and fisheries.

Gains from the third Frelimo congress were, however, short lived as in 1983 the country suffered a major drought. On top of this, the government failed to mobilize the much needed international funds for sustaining its ten-year development plan for 1980–90. Internal war was spreading throughout (p.96) the country, besides increasing a rural–urban exodus and expanding the informal market.

The fourth Frelimo congress, in 1983, took place amid increased social tension and discontent. The congress resolution stressed the need to ensure provision of basic goods, again through investment in agriculture and industry as the main drivers for structural transformation. It called for greater emphasis on import substitution and the development of small and medium enterprises (SMEs). To open up space for other actors, in 1984 it introduced the first generation of liberalization measures in Mozambique, removing government control over prices of selected goods, including vegetables. It also encouraged government retreat from retail businesses.

The fourth Congress policy objective for the manufacturing sector aimed at ‘[i]ncreasing industrial production by 12–15 per cent from 1980 to 1985, focusing on growth within textiles, fisheries, metal works, mechanic constructions, metallurgic and ship maintenance’. Particular focus was set on improving capacity utilization. It was the first time since independence that the ruling party officially considered private investors a relevant partner.

The fourth Congress decisions and the significant state interventions turned out to be insufficient to circumvent the internal conflicts’ destructive toll. By the mid-1980s the industrial sector was operating at 10 to 30 per cent of its capacity. Average labour productivity had declined by more than 60 per cent. The agricultural sector was reduced to subsistence level. Production of tea, cashew, cotton, and sugar, the country’s main exports at independence, dropped to 30 per cent of the 1980s levels, while exports declined to one-third of pre-independence levels (Castel-Branco 2002).

The combined effects of a reduced supply of raw materials, limited demand for final goods, and the failure of the export oriented agricultural sector left the country near collapse. War and natural disasters added to the problem through the sabotage of infrastructure and disruption of road networks. Colonial era logistics, learning expertise as well as market intelligence broke down, after the massive exodus of skilled labour that followed independence and the destabilization from civil war. These factors and the collapse of the central planning economy led to a declining/stagnant economic performance, reaching in 1986 its lowest GDP level since the late 1960s.

5.1.3 Transitional Industrial Development, 1987–96: Towards a Market Oriented Economy

Mozambique’s Industrial PolicySufficient to Face the Winds of Globalization?

Figure 5.1 From 1992 onwards, the economy steadily increased its per capita GDP, with a Gini coefficient of around 0.42

Source: Authors’ illustration based on Sulemane 2002; INE various years a (Anuário Estatístico 2008, 2010); INE 2012 (Serie de Contas Nacionais); MPD 2010.

Mozambique introduced the Economic Rehabilitation Program (PRE) in 1987, the Social and Economic Rehabilitation Program (PRES) a few years later, and a more market oriented constitution in 1990. In 1992, Frelimo and Renamo signed a peace agreement, marking the end to sixteen years of destabilization (p.97) and civil war. This removed the most important barrier to industrial development, and allowed the country to access much needed international funding. State-owned operated entities were no longer seen as the main driver for industrialization and economic development. Instead, emphasis was on developing the private sector as the main source for growth and market forces as the appropriate mechanism to guide resource allocation. From 1992 onwards, the country followed a long period of economic recovery and expansion (Figure 5.1).

When PRE was implemented, industry had been collapsing. The introduction of liberalization measures and the inflow of much needed donor funds were instrumental in launching industrialization. Interventions resulting from the PRE are reported in the policy matrix in Box 5.1.

Mozambique’s Industrial PolicySufficient to Face the Winds of Globalization?

Figure 5.2 After its dynamic role in GDP growth between 1995 and 2004, from 2005 the manufacturing sector ceased to be the main driver of growth

Source: Authors’ illustration based on INE 2012 (Serie de Contas Nacionais).

After the peace agreement in 1992, the industrial sector resumed its post-war positive growth trend (Figure 5.2). The World Bank (WB) during the mid-1990s confirmed the positive revenue growth episode of manufacturing firms (Biggs et al. 1999). The growth in employment was, however, limited, suggesting that the reported revenue growth was as a result of increased capacity utilization (increasing labour productivity), rather than a general expansion of existing firms.

With the structural adjustment programme (SAP) and the privatization process, in 1995 the share of manufacturing in total GDP reached its lowest point, with 7.4 per cent, increasing gradually afterwards. Besides better capacity utilization and productivity growth, liberalization increased the (p.98) availability of foreign exchange, improved access to strategic raw materials, and significantly reduced production bottlenecks. Moreover, new private investment (on average 2–3 per cent of GDP per annum over 1992–7) in manufacturing showed renewed trust and interest in the industrial sector. The period also saw a much needed shift/reallocation in resources towards more efficient firms, which contributed to aggregate productivity improvements (Biggs et al. 1999). However, the average efficiency of manufacturing (p.99) firms in Mozambique remained below the average among South African Development Community (SADC) members, impairing the country’s ability to compete with imported goods and in world export markets.

5.1.4 Current Industrialization Pattern: IPS 1997 and IPS 2007

Five years after the 1992 peace agreement and three years after the first multiparty and democratic elections, the government approved the 1997 Industrial Policy and Strategy (IPS97), (MIC 1997). Ten years later the 2007 IPS07 was developed from IPS97, but was now built upon a more articulated and multi-sectoral industrial dynamic approach (MIC 2007). As such it was an improvement over IPS97, as it promoted a more coordinated industrial system.

(p.100) The overall objectives of the IPS were to ensure the emergence and development of a modern and competitive industrial base that was less dependent on external resources, including factors of production. For this purpose, the government called for: (1) value addition to natural resources; (2) industry contribution to the balance of payments; (3) supply of basic goods; (4) promotion of labour-intensive technologies.

The IPSs followed a typically liberal approach to industrialization. The state was to orient, regulate, and supervise industrial development, while building appropriate conditions for robust industrial activity. The channel of intervention included the establishment of several different industrial policy instruments, ensuring promotion of an appropriate business environment for producers and investors. The IPS also maintained that the state had the responsibility to set up a system of transparent incentives, including complementary investment, in order to attract private (foreign) investors. However, central to the IPS was also ensuring a quick and painless privatization process (Campbell White and Bhatia 1998; Castel-Branco et al. 2001).

The government adopted several strategic approaches for implementation of the industrial policy including: (1) setting an enabling environment for private sector development; (2) development of micro, small, and medium enterprises (MSMEs); (3) creation of training and skill acquisition programmes; (4) establishing incentives for investment; (5) promotion of foreign investment with focus on industrial development and exports.

The implementation of IPS97 and IPS07 led the country to a new stage of industrial development. The policies managed to establish institutions for sustaining industrialization, including: (1) the Beluluane Export Processing Zone, hosting the Mozal Smelter Project and its suppliers with investment amounting to more than US$2.3 billion; (2) the Nacala Rapid Development Zone; (3) the Institute for the Promotion of micro, small, and medium enterprises (IPEME); (4) the statute for MSME; (5) the district development fund; (6) the Maluana Technology Park; (7) a one-stop electronic window for clearing imports.

However, IPS97 and IPS07 left the manufacturing sector in a bipolar state. On the one hand, private manufacturing was left to liberalize market forces and on the other hand, state administration focused on supporting and ensuring joint ventures with local representatives operating especially within the mining sector (Castel-Branco et al. 2001).

Mega-projects (especially within the mining sector) have been under public scrutiny, owing to the low contribution to state revenues and the low degree of integration with the rest of the economy (Castel-Branco 2008, 2010; CIP 2013). However, these projects are also considered to have increased the country’s visibility among international investors; to have exposed local institutions to large investing companies; to contribute to state revenues in the longer run, in particular since the 2007 law approval. Currently and in the (p.101) near future, until mid- and end 2020s, the expected growth in coal and natural gas exports should continue to have an accumulated significant impact on GDP growth.

At the same time, light manufacturing, producing mostly for the domestic market, has been developing from 1995 onwards. Several types of these light manufacturing firms have emerged during this period. The first are larger-scale entities started with 100 per cent foreign capital, for example Coca-Cola and SABMiller. A second type, although smaller, were operating by exploring activities from thousands of cotton farmers, or through large sugar cane companies. A third category was feeding the construction industry which was booming on account of public investment in infrastructure and private housing investment. And finally, a fourth type were smaller-scale formal and informal manufacturing SMEs with very mixed production portfolios.

Evidence from two rounds of manufacturing enterprise surveys (Byiers and Rand 2006; MPD 2013) revealed an improvement in the business environment between 2002, 2006, and 2011 for these types of manufacturing SMEs. However, while employment growth rates between 2002 and 2006 were over 30 per cent (Byiers and Rand 2006), the period from 2006 to 2012 saw stagnating employment figures in surviving manufacturing firms (MPD 2013). Moreover, comparing census data for Nampula, Zambezia, Manica, Sofala, and Maputo Byiers and Rand (2006) and Schou and Cardoso (2014) document that the growth rate in the number of manufacturing firms between 2002 and 2012 was relatively limited: from 2,018 registered manufacturing firms in 2002 in the five provinces to 2,490 in 2012, corresponding to an annual increase of 1.9 per cent.

This weak role and growth of the private-led manufacturing industry is in line with evidence on the limited structural transformation taking place in Mozambique (Castel-Branco 2003; Jones and Tarp 2012; MPD 2013). Moreover, low levels of diversification and lack of inter-industrial linkages (Newman et al. 2014) are additional signs of an unsustainable industrial growth path. Despite this industrial trend, the domestic economy has revealed strong and persistent growth rates since 1993, which are not well explained in the literature. We look deeper into the current structure of the industrial sector in what follows.

5.2 Current Structure of the Industrial Sector

5.2.1 Industrial Output

Mozambique’s Industrial PolicySufficient to Face the Winds of Globalization?

Figure 5.3 The intra-industrial structure stabilized between 2005 and 2011, although the mining industry is expected to increase significantly in the 2010s and 2020s

Source: Authors’ illustration based on INE 2012 (Serie de Contas Nacionais).

The industrial sector is divided into four major sub-sectors: mining, manufacturing, electricity and water, and construction. Figure 5.3 shows each sub-sector’s contribution to total industrial production post-civil conflict. Generally, the (p.102) industrial sub-sector structure has stabilized since 2005: manufacturing is the largest sub-sector with a contribution of 60 per cent of total industry value added, followed by electricity and water (21 per cent), construction (13 per cent), and mining (6 per cent). However, this pattern is expected to change significantly in the future in favour of mining, given the recent coal and natural gas initiatives approved by the Mozambican Government.

Within the manufacturing sector, metal works (dominated by aluminium processing) generate the largest share of manufacturing value added (43 per cent), with the food and beverage industry currently coming second, generating around 36 per cent of manufacturing sector production. This means that manufacturing is relatively concentrated within two 2-digit International Standard Industrial Classification (ISIC) production sectors, making this sub-sector relatively vulnerable to international price fluctuations within a relatively narrow segment of goods.

5.2.2 Firm Size in the Industrial Sector

As already highlighted, the number of industrial firms in Mozambique is only modestly increasing. Moreover, the size distribution of firms has remained almost constant over time (Byiers and Rand 2006; MPD 2013). The Instituto Nacional de Estatística (INE)’s annual survey of companies revealed that firms with fewer than ten employees (micro-establishments) are in the majority (p.103) (INE various years). Almost 80 per cent of enterprises in manufacturing (responsible for 88 per cent of industrial firms) are micro-enterprises; 12 per cent are small (between 10 and 30 employees); 5 per cent are medium (between 31 and 100 employees); and 3 per cent are large (more than 100 employees). Almost 90 per cent of the combined industrial sector is composed of micro- and small enterprises (MSEs). Most larger firms are found within the mining, and electricity and water sectors, as these tend to be capital intensive and demand high levels of recurrent investment.

MPD (2013) also documents that most Mozambican manufacturing companies produce relatively homogenous products using basic technology and sell almost exclusively to private individuals locally. Diversification of manufacturing production is very weak and the MPD (2013) found it questionable whether these small-scale craftsman-type firms can be drivers of industrialization.

5.2.3 Contribution from the Industrial Sector to Employment

Table 5.1 Employment in industry and its sub-sectors, 2006–9

Industry/sub-sectors

2006

2007

2008

2009

Total employment in industry

81,388

96,004

87,498

109,507

Sector contribution as a percentage of total employment

36.65

40.83

33.13

37.31

Sub-sector contribution to industrial sector (%)

Mining

2.64

2.72

2.79

2.56

Manufacturing

66.9

71.3

71.6

68.5

Electricity and water

6.3

4.5

3.0

6.2

Construction

24.2

21.5

22.6

22.8

Total

100

100

100

100

Source: INE various years b (Inquérito Anual as Empresas 2009–2011).

Industrial sector contribution to total employment averages around 37 per cent (Table 5.1). Manufacturing is responsible for approximately 70 per cent of industrial employment, with construction being the second largest employer at around 22 per cent. The mining and electricity sectors are relatively unimportant in terms of direct job creation, with share averaging 3 per cent and 5 per cent, respectively.

5.2.4 Ownership of Industrial Firms

The largest share of employees are engaged in privately owned companies (76 per cent). Foreign owned firms comprise 21 per cent, whereas only 3 per cent of workers are employed in state-owned enterprises (SOEs).

(p.104) The MPD (2013) found a positive relationship between foreign ownership and employment growth, even when controlling for firm size and other relevant firm attributes. This is in line with Ramachandran and Shah (1999), who found that minority (or non-indigenous) entrepreneurial companies grow significantly faster than indigenously owned firms in Mozambique.

5.2.5 Sunset and Sunrise Industries

The mining, energy, and construction sectors have been especially attractive in the 2000s. However, in terms of job creation potential it is clear from Subsection 5.2.3 that manufacturing should be given special policy priority.

The metal, machinery, furniture, and textiles/apparel sub-sectors have shown particularly adverse potential (MPD 2013). On the other hand, wood and paper, publishing and printing, and chemicals appeared to have done better than average. Especially, textiles have for some time been considered the main sunset industry of Mozambique. However, it still remains to be seen whether this sub-sector is overcoming its slump.

From the MPD (2013), ‘sunrise’ industries are found within food and beverages, and the non-metal minerals sectors, when evaluated in terms of employment generation, labour, productivity improvements, and increasing manufacturing revenue shares. However, it was noteworthy that while firms in the non-metal minerals sector have very high survival probabilities, firms in the food and beverages sector are among the least likely to stay in business. This clearly signals that the food and beverages sector is competitive and dynamic, and is a sector where creative destruction processes have been allowed to take their toll.

5.3 Industrial Policy Framework

After the introduction of the PRE in 1987, and the peace agreement in 1992, the government embarked on privatization and liberalization programmes aimed at enforcing the role of market forces as the main engine for growth. The degree to which the reported reforms were successful in putting the country on the right track towards industrialization remains a contentious issue. While market friendly reforms were successful in reopening the space for private sector development, a number of issues from a policy perspective remain unsolved.

5.3.1 Macroeconomic Policies

Mozambique’s fiscal and monetary policies have followed the standard International Monetary Fund (IMF) and WB supported programmes. Since 1987, (p.105) the government objective has been to ensure a sustained reduction in the government primary deficit, money supply, and inflation control. Initial fiscal policy instruments included privatization of state assets, removal of price controls and subsidies, and tax reforms such as the introduction of VAT in 1999. To ensure inflation control, the Central Bank (Bank of Mozambique) introduced direct monetary controls, besides privatization of the banking sector and liberalization of interest and exchange rates.

By the end of 1999 Mozambique had privatized more than 1,200 state companies (Andersson and Sjöö 2002), and at the beginning of the 2000s, Mozambique was regarded as one of the most appropriate economies for doing business in southern Africa. Real GDP growth averaged 8 per cent between 1992 and 2000. From 2001 it increased to 12 per cent per annum, setting the country among the fastest growing economies in the world. Inflation dropped from a level as high as 62 per cent between 1987 and 1996 to 14 per cent in 2003. In 2012, the average inflation and exchange rate depreciation were 7 per cent and 3 per cent, respectively.

Following fiscal reforms such as the introduction of a new personal income and corporate taxes in 2003, in 2006 the government set up the Mozambique Revenue Authority, merging in the same entity the tax collection activities of different units within the Ministry of Finance. The country’s fiscal stance improved as a result. The tax to GDP ratio increased from around 11 per cent in 2000 to 23 per cent in 2012. Despite this improvement, the tax system is still considered inefficient for industrial development. Various discussions on the tax system report that it is not conducive to manufacturers because of the following problems: (1) uneven application of tax regime; (2) lack of guidelines to fully comply with tax requirements; (3) complicated and time-consuming procedures; (4) delays in VAT refunds; (5) breaks in the VAT chain.

5.3.2 Trade Policies

Since the adoption of PRE in 1987, the government has taken measures to free international trade from unnecessary barriers. Export taxes have been removed and import duties for most goods were scheduled to drop to zero by the year 2015, when the SADC common market becomes operational. Currently the top tariff is 20 per cent, the average applied tariff rate is 12.1 per cent, and the trade weighted average tariff is only 9 per cent.1 Despite offering some form of protection in selected sectors, such as the sugar industry, the effective rate of protection in most sectors is lower than that of most other SADC members.

(p.106) For attracting investment, in 1994 the government established the Investment Promotion Centre. Through the investment code of 1998 and the subsequent amendment in 2004, the government created free export processing and rapid development zones, where investors enjoy generous tax incentives, including tax exemptions and profit repatriation.

Since the introduction of the first generation of reforms in 1987, trade and capital flows have been increasing as a result of the reported wave of reforms. However, the country is still lagging behind due to limitations associated to the way it manages its exports and imports: corruption, high rate of inspection of both export and import shipments, limitations of the duty drawback/duty suspension, and the VAT rebate system (FIAS 2008).

AIMO (2010) estimates that, on average, a typical industrial importer has to spend MT55,473 for each import made through the Maputo cargo terminal, in addition to the required expenditures. This adds to the average cost of inputs, reducing profit margins as well as the competitiveness and performance of local industry (ANEMM 2000; Marrengula et al. 2012).

5.3.3 Institutional and Regulatory Framework

Mozambique has introduced business environment reforms and as well as commercial law in order to improve the protection of property rights. Initiatives include: (1) opening a centre for arbitration; (2) establishing public risk evaluating bureaux; (3) introduction of modern regulation regarding industrial licensing and company insolvency.

For investors, besides being a member of the Multilateral Investment Guarantee Agency (MIGA), the Overseas Private Investment Corporation (OPIC), and the International Convention and Centre for settlement of investment disputes, Mozambique also offers a number of guarantees, including: (1) guarantees over security and legal protection of property rights; (2) rights to import own-equity capital or loans to carry out investment; (3) entitlement to just and equitable compensation in the event of expropriation based on absolute necessity and weight, reasons of public interest, health, and public order.

The introduction of a market based economy in the late 1980s and in the 1990s brought incentives for a more entrepreneurial society, but Mozambique continues to lag behind other SADC members in both Global Competitiveness and Doing Business rankings.

Focusing specifically on industrial development, a number of government bodies have been created to support specific industries, but their roles remain limited and it is not clear whether the government considers this approach a valuable asset for industrial development (Marrengula et al. 2012).

(p.107) 5.3.4 Current Constraints for Future Industrial Development

5.3.4.1 Skills and Education

Mozambique’s labour force qualifications are limited, illustrated by the fact that 52 per cent of the population is illiterate. According to the National Institute of Professional Training and Employment, 80 per cent of illiterate Mozambicans have no professional qualifications (MITRAB 2006). Around 90 per cent of those applying for their first job have not completed basic education. Among them the majority (62 per cent) have no work experience or qualifications.

The situation is no different among those sectors with high growth potential (ANEMM 2000; AIMO 2010). For example, within the building materials industry, more than 60 per cent of employees hold only a primary school certificate (ANEMM 2000; AIMO 2010). The same percentage holds for employees among contractors and only 9 per cent have finished secondary school. While the supply of unskilled labour is in excess, contractors argue that there is a considerable scarcity of mid-level managers, project directors, supervisors, and headmasters for building, carpentry, metal work, electricity, welding, and water pumps (Marrengula et al. 2012).

The government has supported the emergence of mid-level and higher education institutions geared towards the study of business and management. Enrolment rates have as a result increased among higher education institutions. The average growth rate in enrolment among public institutions was close to 19 per cent between 2009 and 2012.

Towards the beginning of the implementation period of industrial policy, besides advocating reforms to the education system, the government and the donor community adopted a more proactive approach towards the development of the local private sector and entrepreneurship. Following this shift, three institutions were set up, namely: United Nations Development Programmes (UNDP)’s Enterprise Mozambique; UNIDO (United Nations Industrial Development Organization) and the Associação Industrial de Moçambique (AIMO)’s Industrial Development Advisory Centre (CADI); and the WB’s Private Sector Development Program (PODE).

More recently, due to the high rate of unemployment, IPEME introduced the SME promotion strategy, paying particular attention to the entrepreneurship promotion programme, access to finance, business services, removal of regulatory constraints, and tax burdens. IPEME is currently working to set up its first network of incubators. The education ministry initiated two major entrepreneurship education programmes, including curriculum reforms aimed at developing entrepreneurship skills among teachers as well as primary and secondary school graduates.

At secondary school level, the education ministry is implementing an entrepreneurial programme financed by UNIDO for students to learn how to start (p.108) and run a small-scale business. Since its inception in 2007, in a pilot phase, the programme has involved 255 schools and 1,521 teachers and created 52,309 secondary school graduates. This is by far the biggest entrepreneurship education programme in Mozambique.

5.3.4.2 Access to Energy and Water

The energy market in Mozambique follows a monopolistic structure in terms of both production and distribution. PETROMOC, a state owned company, remains the dominant player in the petroleum market, and in the electricity market the state owned company Electricidade de Moçambique (EDM) supplies more than 90 per cent of the electricity distributed in Mozambique. Recent reforms have allowed for concessions, public–private partnerships, and entry of private sector players within both production and distribution of energy. A significant increase in access to the public grid has been recorded between 2000 and 2010, but with the southern part of Mozambique benefiting more from the public grid expansions.

The long-term implication of these improvements for the industrial sector will depend on additional government policies and how the electricity market itself will evolve. So far the available conditions remain unfavourable for industry in terms of access, in comparison with other SADC countries (World Bank 2014). Close to 70 per cent of the members of the Federation of Industry (AIMO-FI) interviewed in 2011 considered lack of access to a reliable and regular supply of electricity a fundamental constraint against doing business. Businesses also experience frequent power cuts; on average five to ten times per week, lasting at times more than thirty minutes. This situation worsens when one moves from the Maputo metropolitan area to the north.

In terms of cost, van Eeden (2009) also reports that EDM charges a higher price for electricity as compared to equivalent charges in Malawi, Tanzania, Swaziland, Zambia, and South Africa. For small businesses, EDM recently charged a 38 per cent higher unit price for delivering electricity to small businesses than Eskom in South Africa. In Malawi and Tanzania electricity charges were even lower.

Turning to access to water for production purposes, van Eeden (2009) highlights that inefficient distribution is significantly constraining the productivity of water intensive industries. Moreover, water is not cheap. The payment for up to 50 cubic metres for industrial use is US$35/month, almost the value charged for mines in South Africa. Following the water reform process initiated with the creation of the national fund for water (FIPAG) during the second half of the 1990s, water production and coverage have increased. However, the system is still considered inefficient and exposed to frequent interruptions. As a result, companies have to hire private water supply agents and invest in water distribution and conservation equipment.

(p.109) 5.3.4.3 Financial Resource Access

Mozambique’s financial system has made significant progress since the introduction of the PRE in 1987. The number of banks went from three at the beginning of the PRES to eighteen in 2012. The country obtained the first stock exchange in 1999, while the number of insurance and micro-finance institutions has also expanded. As a result, financial savings, captured by the volume of term deposits, tripled from 9 per cent as a percentage of broad money (M3) to 31 per cent in 2008 (Navalha 2009). However, the liberalization of the financial sector has increased demand for collateral and on average raised interest rates; and for local industries, the improvements in M3 did not expand access and the availability of funds, particularly for long-term investment (ANEMM 2000; AIMO 2010).

The availability and access to the necessary project finance is constrained by: (1) banking sector market concentration; (2) low levels of financial savings in the face of high public sector demand, with deposits to credit ratio reported to be below the average for SSA (IMF 2010; Banco de Moçambique 2007).

Recently, the Bank of Mozambique introduced policy measures meant to improve the state of economic conditions in Mozambique. In the last five years a reduction in the capital requirement ratio led to the emergence of new financial institutions, hence increasing financial inclusion. It also led to financial innovations, particularly within the micro-finance segment, with indirect effects on interest rates (which have resulted in a reduction in the gap between the deposit and credit interest rates, although they remain high by SSA standards) and the degree of competition. The challenge of more targeted intervention with a view to supporting the sustained growth of Mozambique entrepreneurs through long-term investment, however, still remains to be achieved (ANEMM 2000; AIMO 2010).

5.3.4.4 Access to Suitable Technology

The government’s industrial strategies for 1997–2012 highlighted the technology gap as one of the main factors behind indigenous companies’ inability to compete. The strategy called for urgent measures, but in a recent survey, AIMO (2010) found that the situation had not changed despite the fact that the implementation period of the industrial policy and strategy paper is reaching its end. Over 62 per cent of the companies surveyed in the course of the AIMO 2010 study had not made major acquisitions of new technologies since the 1990s; their machinery was over twenty years old and they were finding it hard to maintain the equipment and replace spare parts (ANEMM 2000; AIMO 2010).

Mozambique’s poor performance in terms of industrial technology upgrading is a result of the following factors: (1) reduced degree of absorption of new technology associated with a lack of skills; (2) low levels of innovation; (p.110) (3) weakness in protecting intellectual property rights; (4) reduced private sector investment in R&D, due to the sector’s relatively small size and undercapitalization (ANEMM 2000; AIMO 2010).

Around 42 per cent of companies complain about the lack of finance and the costs of acquiring new technology. Moreover, few companies report to having had access to new technology, unless often through ties with foreign investors and exposure to external markets through exports. It is this linkage that is believed to ensure access to new technologies and allows for constant upgrading and maintenance in a Mozambican context (AIMO 2010; Marrengula et al. 2012). This is supported by a recent finding in Cruz et al. (2014a) showing that firms in Mozambican manufacturing learn by exporting, but that this learning process is significantly limited by significant external market access constraints.

5.4 Conclusion

Mozambique’s post-independence industrial development background can be divided into two phases. The first eleven years of the socialist experiment came with strong state activism, a destructive war, and a failed economy. This was indeed a lost decade for industrialization. The country failed to sustain and maximize the gains to industry that resulted from the colonial era’s active industrial policies. The country lost export markets and the industrial base.

The introduction of liberalization measures, starting in 1987, a new constitution in 1990, and a peace agreement in 1992, brought new economic opportunities and access to donor funds. This was indeed the beginning of the second phase, with a growing economy and the emergence of new industries. Over the last twenty years the country’s average growth rate is estimated at 7 per cent.

Recent government industrial policy interventions follow a typically liberal approach, relying on the private sector to steer economic growth, and until 2004 leaving the state with a hands-off stance, but more proactive thereafter. In both of these sub-periods, the public sector role has been perceived as provider of an enabling environment for the private sector, with both drawbacks and advantages.

The main drawbacks were a hands-off approach from 1994 onwards, and an oligopolistic approach that worsened after 2005. The extreme liberal approach regarding the industrial sector led to significant deindustrialization of the cashew nuts, food processing (tomato, fruit juices, milk products, wheat, and other cereal products), textile, construction materials, chemical, metallurgical, and equipment industries. At the same time, other processing (p.111) branches were expanding, such as beverages, grain milling, sugar, tobacco, cement, and tyres.

Licensing procedures ensured that selected interests linked to the ruling government conditioned private investment. This tradition became severe and centralized to a limited number of interests even after 2004. At the same time, public companies or enterprises with public capital ensured management places for this oligopoly.

Two consequences came from this approach: there was marginalization of thousands of potential local entrepreneurs among young people and others, from business opportunities in industry; and after 2004 manufacturing expansion lost momentum. The construction sector developed, but failed to create larger local companies to participate in the booming infrastructure phase. Although most sectors were growing, the economy became dominated by a profitable financial sector of banks and insurance companies, as well as large public natural monopolies and opportunistic large construction and commercial companies.

On the advantages side, with the implementation of the first and second industrial policy and strategy papers from 1997 and 2007, the country moved to a new stage of pseudo-industrial development. The country has managed to establish some of the necessary institutions for sustaining industrial sector progress. There is also evidence of efforts to invest in developing the national standard and quality control framework as well as the country’s skill and entrepreneurship profile. Liberalization, however, exposed the domestic industry to the winds of globalization. To be successful a number of challenges need to be addressed, including: (1) skills development; (2) improving access to financial resources; (3) improving access to technology; (4) improving access to cheaper and more reliable electricity and water; (5) fine tuning tax policy; (6) improving regulations and practices for both imports and exports; (7) maintaining macroeconomic stability, preventing unsustainable debt increases, and managing significant inflows of external revenues from natural resources; (8) promoting development and linkages between agriculture, industry, and services. However, global players are investing billions of dollars into exploitation of mineral resources, including coal, gas, iron, and gold. How income from these resources is used in future will be of the utmost importance for the success (or failure) of Mozambique’s structural transformation.

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Notes:

(1) Mozambique uses ad valorem duties.