The Political Economy of Industrial

Policy in Mozambique

By Epifania Langa

Institute of Social and Economic Studies - Mozambique

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Day 2 Paper SC3

Presented at REPOA’s 22nd Annual Research Workshop

held at the Ledger Plaza Bahari Beach Hotel, Dar es Salaam, Tanzania;

March 29 - 30, 2017

This preliminary material / interim, or draft research report is being disseminated to encourage discussion and critical

comment amongst the participants of REPOA’s Annual Research Workshop. It is not for general distribution.

This paper has not undergone REPOA’s formal review and editing process. Any views expressed are of the author(s)

and do not necessarily represent the views of REPOA or any other organization

Draft – Strictly Not for Quotation

1. Introduction

‘Africa Rising’ narrative VS Premature de-industrialisation

scenario in most African countries;

The case of Mozambique: rapid economic growth with inability

to reduce poverty;

Calls for urgent rethinking of the role of industrial policies (IPs)

Studies on the political economy of IPs in Africa: narrow focus

on specific factors either economic, political or institutional

need for a comprehensive approach investigating how the

market, economic structures and agents interact and influence

each other;

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1. Introduction

Main objectives: - Analyze how the productive base of the Mozambican economy has

evolved, focusing on industrial dynamics;

- Use a political economy approach to interpret the current state of the industry, emphasizing on factors shaping orientation, implementation and outcomes of IP in Mozambique;

The research is based on a desk-study and secondary data research, surveying existing academic publications (including IESE’s own primary research), databases, documents and reports.

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2. Theoretical Framework

2.1 Structural transformation and the role of industrial policy

How to trigger structural transformation in Africa with industrial, particularly manufacturing development?

- IPs to facilitate exploitation of latent comparative advantage (Lin, 2013);

VS

- IPs to accelerate learning and technological capabilities accumulation – the distinctive feature between developing and developed economies (Amsden, 2001, 2009; Chang, 2013; Khan, 2013; Lall, 2004);

IPs in developing countries:

- Correcting market imperfections;

VS

- Generating decent employment, improve skills, qualifications and wages across all socio-economic strata;

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2. Theoretical Framework

2.2 Conditions for successful industrial policies

Developmental State (Evans 1995; 1997);

Business-state relations – Embedded autonomy (Rodrik, 2007);

Reciprocal control mechanism – rent management (Amsden, 2001);

Yet, whether the state can act as developmental, ensure embedded

autonomy or enforce reciprocal control mechanisms depends on the

political economy context;

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2. Theoretical Framework

2.2 Conditions for successful industrial policies

Politics matter: implementation of IPs involves allocative and

institutional changes affecting the current distribution of economic

benefits (Khan, 2010);

Overcoming social contestation with different degrees of

distribution of power within and outside the ruling coalition;

Formation of new social classes and underlying interests;

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3. The Mozambican economy and its industrial sector

Rapid economic growth (average annual real GDP growth between 1995 and 2014 of 7%) driven by large inflows of foreign capital (ODA, FDI and loans)

Graph 1: Evolution of resource flows to Mozambique 1995-2014, current millions US$

Source: WDI, 2017

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0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Net official development assistance Foreign direct investment Loans (official and private creditors)

3. The Mozambican economy and its industrial

sector

Concentrated and extractive productive base: primary commodities dependence

Discoveries of large reserves of oil will increase concentration

Graph 2: Mozambique’s export structure 2001-2015, US 000’

Source: Trademap

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0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Aluminium Coal and coke Electrical energy

Gas Tobacco Ores

Sugars and sugar confectionery Wood and articles of wood Fruita and nuts

Machinery and parts Cotton Fish and crustaceans

Beverages, spirits and vinegar Mineral oils All products

3. The Mozambican Economy and its industrial sector

Small and stagnated industrial production excluding FDI megaprojects

Graph 3: Mozambique’s industrial production in 1996-2015, constant 2009, millions LCU

Source: National Institute of Statistics

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0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Total industrial production

Total industrial production excl. gas and coal

Industrial production excl. extractives and aluminium

3. The Mozambican Economy and its industrial sector

Concentrated industrial production excluding FDI megaprojects

Table 1: Main industrial products share on sub-sector and on total manufacturing output

Source: National Institute of Statistics

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Share on sub-sector

1997 2006 2015

Cement 63% 87% 96%

Beer and Soft Drinks 64% 96% 68%

Sugar and Wheat 54% 71% 47%

Tobacco 29% 100% 72%

Share on total

manufacturing

44% 75% 60%

3. The Mozambican economy and its industrial sector

Graph 4: Manufacturing sector value-added in Mozambique 1995-2015 (% annual growth)

Source: WDI

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-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Sugar, beverages

and cement

Aluminium smelter (first

phase)

Aluminium smelter (second

phase)

3. The Mozambican economy and its industrial

sector

Premature de-industrialisation in Mozambique:

Manufacturing production increasingly concentrated: shrinkage of the variety of existing products and industries, and new products are not emerging (Castel-Branco, 2010);

On-going technological obsolescence combined with simplification of productive processes (Cruz et al, 2014; Warren-Rodriguez, 2008)

Consequently, backward linkages between SME and FDI megaprojects (Langa & Mandlate, 2015):

Are short-term and limited to basic services provision;

Reproduce the same patterns of concentration, fragmentation and instability;

Business growth for domestic firms is sustained through diversification but with loss of industrial specialization, undermining structural transformation;

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4. Understanding industrial policy dynamics in

Mozambique

IP orientation restricted to:

Macroeconomic stability and business environment

improvement;

‘Horizontal’ interventions ;

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4. Understanding industrial policy dynamics in

Mozambique

Fragmentation and lack of coordination of instruments of IP

and between sectors, government levels and different actors:

Donors diverging interests and discoordination Outcomes

are limited in scope and short-term (ex. Fragmented

intervention around linkage promotion) (Krause & Kaufmann,

2011; Langa 2015);

Power fragmentation within the national ruling elite Effective

enforcement of policies requires high political support to

overcome internal contestation (ex. sugar industry) (Whitfield

et al, 2015);

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4. Understanding industrial policy dynamics in

Mozambique

Small, weak and emerging domestic private sector

Earlier emergence of a black domestic private sector prevented

before independence and by state-led development adopted

after;

Emerged from the privatization process in the 1990s;

Weak capabilities and absent firm rehabilitation and

development mechanisms Most firms traded, turned into

warehouses or became bankrupt within five years after

privatization (Cramer, 2001; Castel-Branco et al, 2001);

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4. Understanding industrial policy dynamics in

Mozambique

Emerging domestic private sector dynamics

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Weak productive capabilities

Limited and disarticulated

markets

Financial system discriminating against SME

Restrictive IP, neglecting learning and technological

upgrading

Incentive structure of

the economy gearing

firms to seek links with

international capital for

the generation of quick

payoffs

Vicious cycle of low capabilities reproduction

5. Final Remarks

Reverting premature de-industrialisation trend in most African

economies, including Mozambique, requires IP shift from

reliance on comparative advantage to effectively ensuring

learning and technological capabilities accumulation;

Key drivers of IP outcomes in Mozambique: the interplay

between dominant policy orientation, degree of attainable

strategic coordination and power dynamics, and the

characteristics of the domestic private sector;

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