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Chapter 4. Mozambique’s Quest for Inclusive Growth

Author(s):
Doris Ross, Victor Lledo, Alex Segura-Ubiergo, Yuan Xiao, Iyabo Masha, Alun Thomas, and Keiichiro Inui
Published Date:
May 2014
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Victor Lledó

The pursuit of inclusive growth in which the benefits are widely shared across the population has become a central macroeconomic challenge in both advanced and developing economies. Significant increases in unemployment among advanced economies, which were at the epicenter of the global financial crisis, brought to the limelight the need for growth to be accompanied by job creation so as to be inclusive (IMF, 2013). Among developing countries, including a number of fast-growing “sub-Saharan African lions,” the general perception has been that high growth has not made a significant dent in widespread poverty or income inequality—that is, it has not been inclusive (Garcia-Verdu, Selassie, and Thomas, 2012).

This has been particularly the case in Mozambique. Results from the latest poverty survey in Mozambique in 2009 ignited a lively debate about why growth has not been inclusive and what strategy and related policies should be adopted to attain more inclusive growth. This debate helped to shape Mozambique’s latest poverty reduction strategy and, more importantly, a number of policy initiatives that are at different stages of implementation and with varied degrees of success.

This chapter illustrates how the inclusive growth debate emerged and evolved into strategies, policies, and actions in Mozambique. The focus is on the design and implementation of macroeconomic policies and macro-critical reforms conducive to inclusive growth. The chapter then identifies, on a preliminary basis, gaps in the design and implementation of such policies and reforms that need to be closed going forward.

What Is Inclusive Growth?

There is no single definition of inclusive growth. Beyond the general definition given above, there is no agreement on a more operational definition that would lead to a common metric and frequent assessment over time and across countries.1 One widely accepted operational definition is that inclusive growth reflects output growth that is sustained over decades, is broad-based across economic sectors (thus engendering structural transformation), creates productive employment opportunities for the majority of the country’s population, and reduces poverty noticeably (Commission on Growth and Development, 2008; Ianchovichina and Lundstrom, 2009).2 Reductions in excessive income inequality have also emerged as a prerequisite for inclusive growth, supported by some growing evidence that inequality undermines growth, for example by amplifying the risk of crisis or making it difficult for the poor to invest in education (Berg and Ostry, 2011; IMF, 2013). In sum, inclusive growth is about the pace and distribution of economic growth.

The economic fundamentals that have accompanied high and sustained economic growth are well known (Commission on Growth and Development, 2008). Common characteristics include (1) macroeconomic stability; (2) high rates of private and public investment (including in education and infrastructure) matched by domestic savings; (3) openness to the global economy; (4) respect for market signals but not absolute deference to markets; and (5) committed, credible, and capable governments. At the macroeconomic level, economic fundamentals entail a mix of fiscal and monetary policies, removal of distortions in the allocation of foreign exchange, and the implementation of structural reforms to (1) ensure sustainable fiscal and current account deficits, a stable debt-to-GDP ratio, low and stable inflation, and adequate international reserve levels; (2) increase public and private investment and savings rates in physical and human capital; (3) liberalize trade; (4) enforce property rights and the rule of law; and (5) foster good governance and transparency in the public sector.

The economic debate on inclusive growth is still taking shape. An overarching principle is that policies and structural reforms should provide equality of opportunity so that all segments of society can share in the growth and expanding employment; redress some of the inequalities in outcomes, particularly those experienced by poor and vulnerable segments of the populations; and preserve social cohesion. A number of elements are emerging from the debate on economic growth, as detailed below.

Macroeconomic Stability Remains a Necessary Condition for Inclusive Growth

Recent evidence indicates that moderate inflation and lower output volatility are negatively associated with inclusive growth measurements (Anand, Saurabh, and Peiris, 2013). This seems to reinforce the role of macroeconomic stabilization policies as one of the preconditions for inclusive growth.

Quality Investment in Human and Physical Capital Is Also a Necessary Condition

Case and empirical studies also confirm that education and investments in infrastructure are drivers of inclusive growth (Commission on Growth and Development, 2008). While significant investment needs remain to be filled, emphasis has also been placed on ensuring the quality of investment. On the education front, efforts need to go beyond improving enrollment rates and toward tackling gaps in the quality of education starting at the primary and secondary levels.3 Regarding infrastructure and physical capital, the priority is to foster an environment for both public and private investment in labor-intensive sectors. Reforms should also improve institutions and institutional capacity underlying the selection, approval, and execution of public investment projects.

Attempts to Overvalue and Undervalue the Exchange Rate Should Be Avoided

There is ample empirical evidence that prolonged overvaluation of the exchange rate hurts growth and employment, and hampers structural transformation, particularly if it goes hand-in-hand with the “resource curse” or Dutch disease phenomenon (Rajan and Subramanian, 2011).4 An overvalued real exchange rate erodes a country’s external competitiveness, and could lead to an unsustainable current account deficit. Evidence does not support some recent views (Rodrik, 2008) that undervaluation is good to foster growth (Montiel and Serven, 2009; Anand, Saurabh, and Peiris, 2013). All in all, the evidence extends to inclusive growth the already-established view that it is business environment reforms rather than exchange rate interventions that matter for enhancing external competitiveness and sustaining growth.

Promoting Productive Employment in Agriculture: A Structural Transformation Priority in Most Low-Income Countries

In most low-income countries, the majority of the population in rural areas is trapped in low-productivity subsistence agriculture. Inclusive growth strategies prioritize job creation in commercial agriculture, while facilitating the matching of subsistence agriculture workers to jobs in these areas. Rather than picking specific winners, policies and reforms should aim to improve the business environment for agriculture as part of the overall business environment. This could be done by (1) promoting public and private investment in infrastructure and logistics to connect rural areas to markets; (2) price liberalization (e.g., dismantling of price controls, marketing, boards, and export taxes); (3) moving away from direct subsidies for certain agricultural products and toward subsidies and in-kind provision of agriculture inputs such as fertilizer and seeds; and (4) providing public goods such as basic research, infrastructure, and agricultural extension services.5

Use of Fiscal Policy to Reduce Inequality and Preserve Social Cohesion as Structural Transformation Ensues

Fiscal policy can facilitate structural transformation and mitigate income losses, prevent income inequalities from increasing excessively, and thus alleviate social tensions during the process of moving labor to more productive sectors. This is particularly the case for developing countries, given the lower progressivity of their tax and spending systems and their underdeveloped social safety net schemes (Bastagli, Coady, and Gupta, 2012). On the tax side, the focus should be on broadening tax bases by reducing tax exemptions, closing loopholes, and improving tax compliance, rather than on raising tax rates. Among resource-rich countries, there is usually scope for improving the progressivity of the fiscal regimes applied in the resource sectors.6 On the spending side, progressivity can be improved by removing general price subsidies for energy; ensuring that education and health expenditures are targeted to the needs of the poor; and increasing the coverage of social protection floors to a larger share of the population.7

How Inclusive Has Growth Been in Mozambique?8

Despite high levels of economic growth in Mozambique, growth has not been as pro-poor as in other successful countries and has become less pro-poor over time (Figure 4.1).

Figure 4.1.Growth and Poverty Reduction

Sources: Mozambican authorities; and IMF staff estimates and projections.

  • Mozambique’s economic growth in the past two decades was among the highest in non-fuel-exporting countries in the region. Real GDP per capita almost doubled after 1992. This performance has been anchored on sound macroeconomic management and structural reforms.
  • Poverty reduction was initially significant. The poverty headcount fell from 69 percent in 1997 to 54 percent in 2003, as consumption per capita grew by a cumulative 50 percent over the same period. The reduction in rural poverty was even more pronounced, declining from 71 percent to 55 percent during the same period.
  • Poverty reduction did not reach the magnitude observed in other high-growth countries. Cross-country estimates of the elasticity of the headline poverty rate with respect to the growth of real GDP per capita suggest an average elasticity close to 0.20, which is only a fraction of that observed in countries like China, Viet Nam, or even Uganda.
  • Similarly, evidence from household survey data shows that over 2002–03 and 2008–09 growth did not follow an inclusive or pro-poor pattern. In particular, the growth incidence curve shows that households in the bottom three deciles of the distribution of per capita expenditure experienced absolute declines, while the other seven deciles experienced positive growth. This sharply contrasts with the experience of other countries, such as China and especially Brazil, over the last three to four decades.
  • Not only has growth in Mozambique been less pro-poor than in other successful countries, but such pro-poor characteristics appear to be declining over time. With growth remaining relatively high, poverty numbers have stagnated in the new millennium. The latest National Poverty Report (MPD-DNEAP, 2010) suggests that the poverty rate in 2008 remained high, at about 54 percent, with rural poverty increasing slightly to 57 percent.

If economic growth in Mozambique is to become more inclusive, it needs to be sustained, broadened, and diversified. Mozambique’s growth takeoff started around 1992 and needs to be sustained for several more decades to match other successful growth cases. Indeed, all the countries considered by the Commission on Growth and Development (2008) to be successful cases of inclusive development have sustained high growth rates for at least three decades.

  • Growth has not been accompanied by economic diversification. Measured by the Herfindahl-Hirschman index, Mozambique’s export base has become increasingly concentrated—a reflection of the emergence of megaprojects. This contrasts with the experience of countries like Uganda, which was able to successfully diversify its exports notwithstanding its low level of initial GDP per capita, its protracted civil conflict, and the fact that it is landlocked.
  • Growth has not been translated into structural transformation (Figure 4.2). Most of the Mozambican population lives in rural areas on subsistence agriculture. Productivity gains in agriculture would be important for the structural transformation of the economy, as they endow the surplus labor released from agricultural activities with additional skills to facilitate the transition toward processing and industrial activities and eventually to services (McCalla, 2011). Mozambique is still in an early phase of this transition. In fact, the share of the population employed in agriculture experienced little change between 2002–03 and 2008–09, which suggests stagnant agricultural productivity (Fox, 2011).

Figure 4.2.Growth and Structural Transformation

Sources: Mozambican authorities; and IMF staff estimates and projections.

Note: ASEAN = Association of Southeast Asian Nations.

Mozambique’s Evolving Inclusive Growth Strategy

The publication of Mozambique’s latest poverty survey in 2010 and its finding of high but insufficiently pro-poor growth heightened social tensions and led to an intense debate on how to make growth more inclusive. The government, civil society, and development partners discussed how to adjust Mozambique’s growth model. The debate intensified after street riots by the urban poor over rising living costs in late 2010.9 A high-level conference was organized in Maputo by the government in February 2011 in close coordination with the World Bank, International Monetary Fund, African Development Bank, and bilateral donors. It attracted some 100 participants, including representatives from the private sector, civil society, and academia, and was widely reported by the media. The conference disseminated practices from other countries, including China and Brazil, which have recently experienced more successful inclusive growth episodes. The conclusions were presented and discussed in a ministerial meeting chaired by Mozambique’s Prime Minister.

Building on this, a new Poverty Reduction Strategy (Plano de Acção para Redução da Pobreza – PARP) for 2011–14 was adopted in May 2011 to foster more inclusive growth.10 It made inclusive growth its overarching objective. In particular, it recognized that in order to allow more Mozambicans to benefit from economic growth, ongoing efforts to promote human and social development needed to be complemented by an economic strategy that would boost productivity in labor-intensive sectors and unleash the structural transformation and diversification of the economy (IMF, 2011).

The PARP was based on core inclusive-growth ingredients. It had three main pillars: (1) increasing production and productivity in the agricultural and fisheries sectors; (2) promoting employment; and (3) fostering human and social development. Two supporting pillars focused on fostering good governance and preserving macroeconomic stability (Box 4.1). The PARP’s focus on improving agriculture productivity, creating jobs through improvements in the business environment and training, developing more focused and better-designed social protection programs, and preserving macroeconomic stability is clearly in line with the general recommendations to achieve more inclusive growth outlined earlier in this chapter. That said, the governance pillar would have benefited from more specific objectives. The PARP also provided mixed signals on exchange rate policy by stating the government’s commitment to promote competitiveness through the exchange rate.

Box 4.1.Pillars and Objectives of Mozambique’s Poverty Reduction Strategy for 2011–14

  • 1. Increase in the production and productivity of the agricultural and fisheries sectors:
    • Improve competitiveness and market penetration of Mozambican agricultural and fisheries products.
    • Increase private and public investments in enabling physical and economic infrastructure in order to improve storage, handling, transport, water resource management, banking and insurance services, and market information.
  • 2. Promotion of employment:
    • Create jobs through improvements in the business environment.
    • Accelerate regulatory reforms to improve the business climate.
    • Attract more foreign investment in labor-intensive industries.
    • Increase public investment in general education to augment basic skills, and in vocational and technical training to augment the employability of local semiskilled workers.
    • Increase linkages between small and medium-sized enterprises and megaprojects.
  • 3. Fostering of human and social development:
    • Achieve universal access to seven years of primary education.
    • Improve social infrastructure, including access to improved water supply and basic sanitation services, urban transport, electricity, and housing.
    • Expand the coverage of the social protection floor.
  • 4. Fostering of good governance:
    • Improve access to and quality of public service delivery, the fight against corruption, decentralization and local governance, and consolidation of democratic state building.
  • 5. Preservation of macroeconomic stability:
    • Sustain reform efforts in public financial management, tax administration, and financial sector development.
    • Increase the focus on enhancing the public investment architecture and the management of natural resources.

The PARP, however, stopped short of delivering a fully implementable inclusive-growth strategy. Beyond general objectives, most of the pillars lacked specificity about priorities, sequencing, and measurable actions. In other words, underlying strategies were mostly unfinished and needed to be consolidated. Channels for interministerial coordination to ensure that consolidation delivered a coherent strategy and to ensure accountability in cross-cutting areas were also missing, and the data available to measure some of the proposed performance indicators were of a low quality and frequency. Shortcomings with poverty and agriculture productivity measures were particularly noticeable. The lack of a proper performance budget framework has also been a common complaint among donors, as it prevented budget allocations to specific PARP objectives to be identified and tracked.

Aware of these shortcomings at an early stage, government officials designed the PARP as a dynamic and flexible document. In contrast to previous poverty reduction strategies, PARP III allowed the government to adjust priorities and targets in light of changing economic and social conditions and international developments, and in tandem with the implementation of sectoral strategies. The objectives and indicators would be updated in the annual Economic and Social Plan and reflected in the Performance Assessment Framework agreed upon with development partners providing budget support.

Progress in strengthening the design and implementation of the PARP has been broadly satisfactory. Key strategies have been finalized in the agriculture and employment pillars, but actions have yet to be translated into a clear increase in the production and productivity of small-scale agriculture or in meeting the increasing demand for technical and vocational skills.11 Significant progress has been observed in increasing the coverage and scope of social protection through the implementation of new programs and increases in budget allocations.12 Progress has also been strong on improvements in school enrollment and infant/maternal mortality rates. On the macroeconomic front, a sustained strengthening of tax administration has helped broaden the tax base and improve revenue mobilization. On the other hand, the expenditure system could be more progressive (e.g., by abolishing energy subsidies), and efforts to improve the selection and prioritization of infrastructure projects will need to be stepped up in order to safeguard their economic and social returns.

Looking ahead, a number of steps can be taken to improve the inclusiveness of Mozambique’s growth strategy. Developing a strong monitoring system with results-based indicators could measure and assess progress more frequently. The next household survey is planned for 2014–15, and the results should be available by 2016. The next poverty reduction strategy will be approved by the new government slated to take office in 2015. More progress in reforming the business environment and public investment management would help accelerate public and private investments and create jobs. Above all, Mozambique needs to develop a clear vision of how to leverage the country’s largely unexplored resource wealth in order to transform and diversify its economy.

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1See Anand, Saurabh, and Peiris (2013) for a recent study.
2This definition is in line with the absolute definition of pro-poor growth. Under the absolute definition, growth is considered to be pro-poor as long as poor people benefit in absolute terms, as reflected in some agreed measure of poverty (Ravallion and Chen, 2003). This is in contrast to the relative definition, whereby growth is pro-poor if, and only if, the incomes of poor people grow faster than those of the population as a whole, that is, inequality declines (Dollar and Kraay, 2002).
3In some countries, there is still significant scope to increase enrollment rates for girls.
4See Chapter 10 for a more detailed discussion of policy frameworks to promote inclusive growth in resource-rich countries, and Chapter 12 on Dutch disease.
5For more on agriculture, see Chapter 6.
6The level of progressivity should not render existing and future projects unviable, so as not to compromise government revenue in such projects.
7By protecting people rather than jobs, these policies will not only improve equity, but also lead to a more efficient allocation of resources.
8This section draws on an annex by Victor Lledó and Rodrigo Garcia-Verdu prepared for Mozambique’s 2011 IMF Article IV consultation (IMF, 2011).
9Similar riots also occurred in Maputo and other large cities in Mozambique in 2008.
10The PARP is Mozambique’s third poverty reduction strategy. It followed the Action Plan for the Reduction of Absolute Poverty (PARP) for 2002–05 and its successor, PARP II, for 2006–10.
11The strategies for agriculture are the Sector Development Strategy (PEDSA) and Investment Plan (PNSA). For employment, they are the Financial Sector Development Strategy (FSDS) and a new business environment strategy.
12See Chapter 9 for a more detailed account of developments in the social protection area.

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