Economic liberalization in Mozambique
|Topics:||💱 Macroeconomics, Minimum Wage, Tax, 🌍 Africa, 💰 Capitalism, 💵 Finance, 💳 Microeconomics|
Mozambique is one of the countries in the sub-Saharan Africa that is currently experiencing a vital phase in its economic growth that will play a major role in influencing the nation’s social and political wellbeing. This transformation is attributed to the high economic growth rates and the discovery of natural resources including gas and coal accompanied by the developing regional and global business interest. According to Hofmann (2013), the country is positioned among the top five best performing in terms of GDP in Africa. The country is also strategically located in that it is positioned within four of the six landlocked courtiers in its bounders, which implies that these countries significantly rely on Mozambique to access global markets (The World Bank Group, 2017). The World Bank Group continues to point out that Mozambique has strong connections to the region’s economic development, South Africa, highlight the significance of its political, economic, and social development to the growth and stability of the southern Africa region as a whole.
According to Castel-Branco (2014), the economy of Mozambique has been increasing at an average of 7.5% per year for the few years and can be considered as one of the most appealing economies for foreign direct investment (FDI) in the sub-Sahara Africa region. Despite this significant growth, this economy has been inefficient and ineffective in reducing poverty in this region and offering a wider economic and social foundation for growth. Castel-Branco continues to point out that the central government of this country is concentrated on three primary and interconnected developments including, the expansion of influxes of foreign capitals, the development of connections between these inflows in the capital, and the creation of national entrepreneurial classes. Thirdly, the regeneration of a labor structure in which the laborers are compensated at price beneath the social rate of existence (Castel-Branco, 2014).
Castel-Branco continues to assert that the economic growth miracle in Mozambique is founded on the elevation of a triple association between the multinational, national, and state monetary capital. The increasing capital gathering, which enlightens the craving of the government for more capital and resources regardless of their cost and the ways these resources, would be utilized. One of the major reasons the economic growth in this country has not been able to improve the lives of the residents is because of economic porosity. According to Castel-Branco, this can be defined as the inefficiency in the retention of the uncommitted excess that could be used for the renewal of the country’s budget as a whole. In the case of Mozambique, economic porosity has led to a challenge in the utilization of capitals for the broad-based economic and social growth, which underwrites, to the shared inconsistency of unequal growth of capitalism among and within economies. Castel-Branco asserts in addition to this, the direct colonialism that resulted to a large migration of Portuguese traders and setters, linked with major land expropriation and limitations in admission of resources played a role in weakening the nation’s entrepreneurial group. During the colonial era, the leading underlying forces of communal diversity were linked with refugee workers, which implies that most of the citizens the country could not get an opportunity to gain important skills. Additionally, the anti-entrepreneurial nature of the first government and the financial obstruction by the apartheid system, which influenced the employment of foreign workers, stimulated speculative accrual to occur especially in the rural trade controlled by the Mozambicans of Asian descent. These phenomena played a vital part in negatively affecting the expansion of productive capital amongst the Mozambicans.
According to Castel-Branco, the establishment of the economic rehabilitation program (PRE) in the year 1987 was a major move in the large-scale opening for the growth of state entrepreneurial classes through the substantial privatization of the country’s resources. Large and more feasible companies were sold to overseas stockholders in order to assist with the production and creation of tax income, jobs, as well as foreign currency. On the other hand, smaller and out-of-date companies were sold at a low rate to the nation’s businesspersons who mainly originated from the managers of state-owned businesses as well as traders and veterans of the liberation struggle. Castel-Branco continues to assert that there were no particular tools or policies in place to assist the development and rehabilitation of these companies, which implies that more than 40% of these companies were, broke within a few years of the privatization. This aspect is one of the major reason the country has not been able to improve the lives of its citizens despite such economic liberalization. According to Castel-Branco, the privatization of the state assets and the bank fraud was mainly a plan to accommodate the raising pressure from the economic and political leaders to enable the creation of new local groups of private property holders of economic properties. These activities were the first example of the huge expropriation of the nation, by the nation for individual improvement, which in turn has led to lack of improvement in the livelihoods of the people in Mozambique.
In the 1990s, the decline of the apartheid system, as well as the political triumph of the liberty movement in South Africa, played a role in the pulling out of global sanctions against South African capital. This move allowed the country to globalize and the interaction between Mozambique and South Africa changed from a transport service provider and migrant workers to a recipient of foreign direct investments. South Africa became a major facilitator of this investment and by far a major trade partner. While this change was good for the country in boosting its economic growth, it placed major challenges on the Mozambique entrepreneurs. For instance, they faced major rivalry from the goods and services that came from South Africa, which was better in quality, cheaper, timely delivered, and with advanced customer service. Secondly, there was a major penetration of South African capital through the foreign direct investment in all vital sectors of the Mozambican economy. According to Castel-Branco, this included the energy and mineral industrial subdivisions with oligopolistic traits in the state and major economies of scale, the tourism, the construction retail trade as well as the financial division. The accomplishment of the South Africa foreign direct investments in this country motivated more foreign direct investments from other countries, which began to develop fast in line with an expanding perception of a resource success in this country. Castel-Branco argues that foreign direct investment became a major influence on the Mozambican economy. In order to change these issues and threats into economic prospects, the Mozambican regime began the subsequent phase of expropriation of the nation, which maximized the desirability of foreign direct investment for individual gain.
The reason this move never played a role in improving the livelihood of the Mozambicans was that the process of expropriation was for private gain. According to Castel-Branco, the process was highly subsidized and involved the high transfer of the state properties and shares to internal economic and political leaders,; which mostly shaped an uncreative group of property holders with little industrial, capital, and decision-making knowledge. The welfares of these political and economic elites were then threatened and challenged by the infiltration of the foreign direct investments mostly from South Africa. In response, the Mozambique government engaged in the second more multifaceted upsurge of expropriation of the state with an aim of maximizing the inflows of FDI as well as the engagement of a share of profits from these investments by the class of political and economic elites. The consequence of this move was an economy that was extractive, narrowly founded, and leaky (Castel-Branco, 2014).
The other major issue that contributed to lack of improvement of the livelihoods of Mozambicans despite economic growth of the country is the lack of effective policies to tax the multinational companies operating in the country. According to Castel-Branco, these companies benefited from major fiscal incentives including corporate tax incentives, negligible surface taxes, as well as an allowance for an accelerated depreciation. Additionally, the time that these inducements are granted for could be prolonged past the limits established in the initial contract. These multinational corporations contributed to a small percentage of the total tax revenue the Mozambican government collected in relation to their total sales. This implies that despite the major profits these companies were making in this country, these profits did not translate to major improvements or developments that could help in improving the lives of the citizens in this country.
Castel-Branco continues to point out the issue of an increasing public debt is also a contributing factor to this problem in Mozambique. In this country, debt is used to fund large-scale projects in groundwork, which are openly linked to the extractive center of the economy. Additionally, the schemes are linked to the development of the property marketplace as well as the attainment of stocks in large organizations. Castel-Branco such activities are aimed at promoting profitability for privately owned businesses, which raises the concern about the future payment of this debt. Such activities are aimed at economic developments that do not improve the livelihoods of the majority in this nation. Castel-Branco continues to assert that the lack of a competitive financial system in this country also contributes to the issue of poverty in this nation. In Mozambique, the commercial banks are accountable for about 90% of credits and loaning in the formal financial system. Additionally, apart from the commercial banks, there are only two companies in the stock markets, which implies that the underlying forces of the commercial banks play a major role in determining the behavior of the financial sector in this country.
Furthermore, the reasons this country, despite its economic liberalization, is not able to improve the lives of its citizens is that the banking sector is not competitive. According to Castel-Branco, banks in this country control above 70% of the deposits and lending in this country’s and thus they maintain a socially unproductive price structure. Foreign bank shareholders especially from South Africa who hold more than 70% of the share in the top four banks in Mozambique also control these banks. Castel-Branco asserts that these shareholders are unprotected to the direct impacts of the global predicaments and the issues of financialization, which implies that they are more concerned in responding to their international productivity. Additionally, these shareholders are focused on adjustment activities than the reference charges of the nation’s central bank. Castel-Branco continues to point out that the main banks in Mozambique are mainly focused on loaning to other financial institutions and transacting on debt bonds, which are assured by the administration and with higher revenues. This implies the banks are the most lucrative business in this country, yet they cannot help in supporting local economic activities such as lending to local businesses, which would help in improving the lives of the Mozambicans. The country’s economy is mainly reliant on external cash flows from debt, foreign aid as well as foreign direct investments, which leads to restrictive monetary measures, which influence the amount of money in circulation in this country. According to Castel-Branco, the financial institutions in this country are therefore organizing the economy in line with their benefits. Furthermore, the conditions of the Mozambican economy are taming the banks’ opportunities for outlining and following these benefits (Castel-Branco, 2014).
According to World Bank Group, Mozambique’s main development, the issue is transforming its impressive economic growth into activities that could help in the reduction of poverty in the country and improve the development outcomes. The rapid growth in terms of economy in this country has led to a major reduction of poverty immediately after the civil war. The issue is that despite the multiple economic liberalizations the government has taken the rate of poverty reduction slowed after 2003 (The World Bank Group, 2017). According to the World Bank, the reason behind this move was that the partners of economic growth in Mozambique, which have been, attributed to large capital-intensive private and public investment activities with a restricted connection to the rest of the country’s economy. This move has benefited a few people living in the city centers and has led to the creation of little viable formal employment. The outcomes of this move by the government include an increasing inequality and uneven distribution of poverty. Additionally, this move has led to the concentration of poverty in the rural areas, especially among the uneducated female-headed families. The World Bank continues to assert that the issue in this country is to drive away from the current focus on low productivity subsistence farming and capital-intensive projects towards a more inclusive and competitive economy. Additionally, there is a need for the government to consider strengthening the key factors of inclusion, which include the quality of health care delivery and education in this country (The World Bank Group, 2017).
Even though this country has undergone major political, social and economic transformation in the last two decades, the country is still a largely agricultural country. According to Cruz et al (2014), a large population in Mozambique is dedicated to agricultural activities including fishing, farming, and related production activities using low productivity traditional technology. This nation faces the issue of selecting an adequate strategy to develop the economic framework and attaining high standards of living for its people. According to Cruz et al., based on the previous established industrial projects in this country, which include the creation of an industrial free zone, specific economic zones, the attraction of mega-projects to harvest natural resources, as well as the development of light manufacturing in food processing. There is still no evidence to indicate that this trend represents a transformation from a largely agricultural country to a commercial nation with efficient services. Most of the people in this country are still languishing in poverty despite the establishment of these projects.
According to Fauvet (2000), despite the economic growth in this country, a large percentage (69%) of Mozambicans live below the poverty line. Poverty is dominant especially in the rural regions were a large number of the country’s population live. The reason behind this rural poverty is that most of the people in these regions employ undeveloped agricultural methods and only a small percentage of these farmers use tractors, fertilizer, and pesticides. Fauvet continues to point out that despite the increased grain harvest in this country, due to an increase in the areas under cultivation, most of the local farmers cannot build up a backup of money or food that would see them through the harsh economic and harvest times. Furthermore, delicate marketing networks and poor road networks in the country contribute to the instability of the small-scale farming in Mozambique. The main marketing body in this country, the Mozambique Cereal Institute does not help in improving the lives of the farmers in that it has never secured enough credits from the commercial bank to fulfill its role of paying attractive prices for any crops from the farmers.
Fauvet continues to point out in the cities; the economic and social safety nets that were established under the formerly centrally planned economy have been removed. This implies that the city residents cannot continue enjoying the ration of sponsored foodstuffs for all as well as health services cannot be provided without charges. In most of the companies, workers are cannot be paid the minimum wage or the employees are paid weeks or months later. In some situations, the companies are swindling their employees by cutting the social security contributions from their compensation and then failing to provide the money to the social security organization (Fauvet, 2000).
According to Cruz et al., the other reason the country has failed to improve the livelihoods of its people despite the major economic growth is a result of ineffective trade policies. For a country like Mozambique, trade in the global markets represents the best method against poor investments, lack of human and physical resources as well as a small dimension of the domestic market. Cruz et al. continue to argue that since the adoption of the PRE the government in this country has put in place multiple incentives that help in improving international trade. Such practices have opened flows for development of big projects into Mozambique, but in regards to world rankings, the nation still lags behind due to the restrictions linked to the methods employed the management of its imports and exports. The poor management of imports and exports is associated with the inefficiencies in the customs administration, which include practices such as poor physical infrastructure, corruption, lack of human capacity and technology among customs. Additionally, the high rate of inspection of both the imports and export shipment, limitation on the duty shortcoming, suspension as well as a VAT repayment system, and reliance on pre-shipment inspection on imports. Such inefficiencies imply that the resources collected from such activities cannot be utilized to make major economic developments that could improve the lives of the people in this country. Additionally, Cruz et al. argue that importers face delays and have to incur extra expenses and time loss, which compromises an already limited capability to import while contending with international and regional giants.
The other important factor that contributes to the country’s inability to improve the livelihood of its citizens despite the economic growth is the business environment. According to Cruz et al., according to the World Bank rankings, Mozambique is 139 out 183 in the year 2012 in doing business. The factors that contribute to this position include a limitation on access to credit, and lack of a reliable infrastructure, additionally, the administrative obstacles linked to the access to land, getting the required licenses and import barriers. Cruz et al., continue to point out that the country’s labor force suffers from a limited access to skilled workers. Half of the country’s population is uneducated and about 80% of the illiterate citizen have no expert skills. Additionally, a major proportion of the individuals applying for their first positions have not completed their basic education and have no work qualification or experience. Such factors limit the creation of jobs for the residents in the high growth sectors such as the tourism, construction, and agriculture. Cruz continues to point out that while the supply for untrained workers is high in this country, contractors assert there is a major scarcity of mid-level managers, supervisors, project directors, metalwork, carpentry, electricians, and welders in this country. Cruz et al., continue to assert the economic liberalization in this country has increased the demand for collateral and raised interest rates, and alienated the companies that cannot comply. The reason this liberalization has not helped in improving the livelihood of the people in this nation is that the local entrepreneurs cannot invest in long-term projects because they do not have the financial resources to pay for project insurance. Additionally, there is a scarcity of long-term credits in the markets and thereby limiting such investments. Secondly, the banking sector market concentration and the low levels of financial savings limit the availability and access to the required project financial resources.
Cruz et al., continue to assert that the business management practices in this country are weak due to factors involving the massive post-independence migration, the privatization of the state assets and the state intervention in the second half of the 1970- mid-1980s. The effects of colonialism and attempted collectivism were the underdevelopment of homegrown capabilities, limited market intelligence as well as fractured logistics. In order to change this, there is a need for measures to back the training of the people and establishment of education institutions geared towards the study of business administration and management. Cruz et al., continue to assert that the reason for lack of improvement in the livelihoods of the people in this nation despite the economic growth is the lack of integrating technology in the country’s systems. The country is poor in terms of absorption of new technology; there are low levels of innovation, as well as a reduced private sector investment in research and development due to its small size and undercapitalization.
In conclusion, it is evident that Mozambican economy has grown significantly in the last two decades mainly because of foreign direct investment from South Africa and other origins. The problem is that the country has been unproductive in reducing poverty, improving the livelihood of its people and providing a broader economic and social foundation for development. The problem in this country in achieving this lies in the pattern or economic growth, which has been mainly driven by huge, capital demanding public and private investment project with restricted associations to the rest of the country’s economy. Additionally, the economic liberalization exposed the country’s domestic markets and industries to the winds of globalization. Most importantly, the country lacked the human capital and skills to support development, local entrepreneurs lacked the access to financial resources, as well as access to technology in their systems. In addition to this, the country trade policies in regards to the regulation and practices for both exports and imports, as well as the tax policies are ineffective and thus could not help in creating the resources that could help improve the livelihoods of the people in this nation. In order to bring the development in the quality of life for the people in this country, there is a need to increase the wages of the workers and social rate of survival and regeneration of the labor force among other reforms.
- Castel-Branco, C. N. (2014). Growth, capital accumulation and economic porosity in Mozambique: social losses, private gains. Review of African Political Economy, 41(sup1), S26-S48.
- Cruz, A. S., Guambe, D., Marrengula, C. P., & Ubisse, A. F. (2014). Mozambique’s Industrialization’ (No. 059). World Institute for Development Economic Research (UNU-WIDER).
- Fauvet, P. (2000). Mozambique: Growth with Poverty. Africa Recovery.
- Hoffmann, K. (2013). Economic Transformation in Mozambique: Implications for Human Security. Friedrich-Ebert-Stiftung (FES).
- The World Bank Group. (2017). Country Overview. Retrieved from http://www.worldbank.org/en/country/mozambique/overview
- Sousa Cruz, A., Guambe, D., Marrengula, C. P., & Ubisse, A. F. (2014). Mozambique’s industrialization (No. 2014/059). WIDER Working Paper.