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Has the Business Environment in Mozambique Improved During the Past 10 Years?

December 2012

Rand, J. and Schou, S. 2012. Has the business environment in Mozambique improved during the past 10 years? GREAT Insights, Volume 1, Issue 10. December 2012. Maastricht: ECDPM

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Private sector expansion remains one of the main key development objectives of the Mozambican government, while economic competitiveness is a stated concern of President Armando Guebuza. As such, in 2007 a Presidential International Advisory Board was set up to advise the government on changes needed in the business environment in order to improve international competitiveness. So the question is: have Mozambican entrepreneurs experienced any changes/improvements in the conditions for doing business in the last 10 years?

Although efforts have been made to improve the Mozambican business environment it still has a relatively low ranking in international comparisons. Mozambique dropped 7 places in the latest Doing Business report of the World Bank and now holds a global 139th place, below the average for Sub-Sahara Africa. Moreover, early studies have shown that many inefficient firms are nonetheless able to survive in the manufacturing sector in Mozambique (1). At the same time, data from the late 1990s showed that Mozambique also lagged behind in terms of absolute productivity, questioning the regional competitiveness of the Mozambican economy. Eifert, Gelb and Ramachandran (2005) confirm this result showing that Mozambican productive efficiency is among the lowest in Africa (2).

However, several studies suggest that productivity has improved since the first post-war productivity studies. DNEAP (2006) suggests that capacity utilization improved significantly between 2003 and 2006 within manufacturing (3). The growth accounting exercise done by Jones (2006) also concludes that the annual average contribution of Total Factor Productivity (TFP) to economic growth has been significant and that these changes in TFP were largely driven by improvements in productive efficiency (4). Finally, a recent case study (Warren, 2010) reveals that important industries are producing relatively efficiently given the skill-level and technology at hand and are improving productivity, but the limited level of knowledge and simple production systems are insufficient to support a process of sustained technology and industrial development (5). 

These results highlight that late 1990s/early millennium productivity improvements are largely explained by changes in capacity utilization and not technological advancement. Concern has therefore been raised about sustaining strong industrial productivity growth as Mozambique approaches its production frontier. Moreover, efficiency dispersion has recently been shown to be high emphasizing that a large set of relatively inefficient firms are still able to stay in business alongside highly efficient ones (6). This questions whether the current business environment provides an equal playing field for firms in the manufacturing sector and ensures that natural firm turnover mechanisms are allowed to take place.

The Research Project: early findings

To shed some light on these problems, the Confederation of Mozambican Business Associations (CTA) in collaboration with the National Directorate for Studies and Policy Analysis (DNEAP) in the Ministry of Planning and Development (MPD) and the National Statistical Office (INE) in 2012 conducted an industrial survey covering 800 manufacturing SMEs in 7 provinces, 220 of which were also interviewed in earlier surveys, creating the possibility of panel data analysis (7).

To facilitate a discussion of how industrial policies may help improve firm level productivity, Tables 1 and 2 provide summary statistics on constraints to doing business available in previous surveys data (8). All constraint variables take values {0, 1, 2, 3, 4} where 0 = no obstacle, 1 = slight obstacle, 2 = moderate obstacle, 3 = major obstacle, 4 = serious obstacle. Table 1 shows the percentage of firms answering 3 or 4 to each constraint for each survey without considering whether we are following the same firms over time (unbalanced panel) whereas Table 2 shows the results of following the same firms over time (balanced panel).

The main conclusion from the tables is that creditaccess to land and corruption are perceived to be the most serious constraints to growth in Mozambican manufacturing.

Access to land has moved from not constraining businesses to being among the most pressing constraints. This result is driven by firms in Maputo, Matola and Beira, while the issue seems to be far less pressing in smaller cities. This is probably due to a combination of rapid urbanization, inadequate urban infrastructure and land speculation. Moreover, access to credit remains a very serious constraint to doing business, but comparing results in Tables 1 and 2 suggests that financing problems are more serious for younger and newly established firms. The Mozambican Central Bank has recently cut its interest rates quite significantly (falling from 15 % at the beginning of 2012 to less than 10 % in November), but this has failed to pass through to commercial lending. Corruption remains a serious obstacle to growth – tentative results from the survey indicate that some 50 % of manufacturing companies pay bribes and that bribes are often very high – to the tune of 10 % of revenue.

Limits to perceived business environment as an indication of productivity constraint

Although perceptions from business people regarding constraints to doing business are an important policy tool, Bila and Rand (2011) show that only a few of these perceived constraints are significantly associated with firm efficiency, when applying appropriate estimation techniques. Research therefore needs to go beyond traditional doing business indicators in order to understand what improves firm level productivity (9) .

In particular, the fact that skills and education of workers does not appear as an important constraint should be interpreted with caution. The average education level in Mozambique remains very low, meaning that firms that require highly skilled workers are less likely to set up business in Mozambique. A higher education level among Mozambican workers could attract highly productive firms that for good reasons cannot answer this survey, as they are not part of the population.

One area that is currently receiving attention is the promotion and expansion of export-oriented agro-industrial and labor-intensive manufacturing activities, seen as having the greatest potential for enhancing overall industrial productivity and creating new jobs. However, the manufacturing sector is relatively small and production is highly concentrated in a few sectors. Most manufacturers source inputs from abroad, and the industrial sector in Mozambique is generally characterized by having a relatively low degree of sector linkages. Excluding megaproject exports, the contribution of the export sector to the Mozambican economy has been modest. The lack of diversity in manufacturing exports therefore raises concern about whether potential learning effects from exports (if present) have the necessary conditions for “spilling over” to the remaining economy.

A new drive for industrial policy?

What is the reason for the continued “under-development” of the manufacturing sector in Mozambique twenty years after the end of the internal conflict? Arguing that a well-designed and well-coordinated industrial policy is one of the most crucial instruments to foster inclusive economic growth, Krause and Kaufmann (2011) conclude that past industrial policies have lacked the necessary vision and leadership (10). This has prevented the development of a policy mix aimed at both (i) improving the overall competitive level of the nation and the general investment climate and (ii) providing specific targeted interventions to accelerate productivity growth and enhance firms’ competitiveness.

However, the Government of Mozambique (GoM) may be taking past critiques seriously in its new industrial strategy. This is fortunate, since a well-defined industrial policy may be even more important for Mozambican development in the next 10-20 years, since it will have a serious impact on how the giant coalmines in Tete and the gas off the shore of Cabo Delgado will transform the Mozambican economy. While mining projects most likely will bring a lot of money to the state coffers, history tells us that they are unlikely to create many jobs. Moreover, the potential Dutch Disease problem needs to be taken seriously, if the competitiveness of the manufacturing sector is not to suffer from the great natural resource adventure. It is thus as important as ever to get industrial policy right in Mozambique.

In our view, research is fundamental for getting these policies right. For example, behind current policies to improve firm level productivity by promoting and expanding export-oriented industries lies two implicit assumptions; (i) some kind of learning by exporting (LBE) actually takes place and (ii) there are significant productivity spillover effects from exporters to the local industry. Whether conditions for LBE are present or whether value chain conditions enable spillover effects from exporters to the local industry still needs to be explored in detail and is some of the work to be done using the new DNEAP (2012) database.

John Rand is Professor at the Institute of Food and Resource Economics, Department of Economics, University of Copenhagen, Denmark, where Søren Schou is a teaching assistant.

Footnotes
1. RPED (1999). “Structure and Performance of Manufacturing in Mozambique”, RPED Paper No. 107, World Bank, Washington D.C. and ICA (2003). “Mozambique Industrial Performance and Investment Climate 2003”, Investment Climate Assessment World Bank/IFC, Washington D.C.
2. Eifert, B., Gelb, A. and Ramachandran, V. (2005). “Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data”, CGD working paper number 56, Washington DC.
3. DNEAP (2006). “Enterprise Development in Mozambique: Results Based on Manufacturing Surveys Conducted in 2002 and 2006”, DNEAP discussion paper 33E, Mozambique. 
4. Jones, S. (2006). “Growth Accounting for Mozambique”, DNEAP Discussion Paper 22E, Mozambique.
5. Warren, A.N. (2010). “Uncovering Trends in the Accumulation of Technological Capabilities and Skills in the Mozambican Manufacturing Sector”, Oxford Development Studies, 38(2), 171-198.
6. See Bila, S. and Rand, J. (2011). “Reconsidering the Association between Firm-Level Technical Efficiency and Constraints to Doing Business: The Case of Mozambican Manufacturing”, DNEAP discussion paper 71E, Mozambique.
7. Cleaning processes of the data are still taking place, so in the following we only present very preliminary results related to perceived doing business indicators. 
8. ICA (2003). “Mozambique Industrial Performance and Investment Climate 2003”, Investment Climate Assessment World Bank/IFC, Washington D.C., DNEAP (2006), op. cit., and DNEAP (2012). “Enterprise Development in Mozambique: Results Based on Manufacturing Surveys Conducted in 2012”, forthcoming DNEAP discussion paper, Mozambique. 
9. Bila and Rand (2011), op. ct. 
10. Krause, M. and Kaufmann, F. (2011). “Industrial Policy in Mozambique”, Discussion Paper 10/2011, German Development Institute.

This article was published in Great Insights Volume 1, Issue 10 (December 2012)

 

African institutionsEconomic Transformation and TradeMozambique

External authors

John Rand

Søren Schou