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Slow-motion modernisation

Encourage entrepreneurs

by Winfried Borowczak, Friedrich Kaufmann
Mozambique’s government embraces the concept of a market-led economy, and it is making efforts to achieve good governance. Accordingly, the country has become a “donor darling”. However, not everything is running smoothly. In this article, two German development experts bemoan a rent-seeking mentality that continues to stand in the way of real entrepreneurship. [ By Winfried Borowczak and Friedrich Kaufmann ]

For several years, donor policy in Mozambique has been emphasising institution building in the public and private sector alike. “Good governance” is considered a prerequisite to economic success. This approach stems from a rethink after neoliberal structural adjustment in the 1980s and 1990s. In Mozambique as elsewhere, there is ample evidence of extreme market radicalism having failed. In many developing countries, enduring poverty provided evidence of this fact well before the outbreak of the current global economic crisis.

Mozambique is still one of the world’s poorest countries. The UNDP’s Human Development Index ranks it 175nd out of 179 countries. In terms of per-capita income, Mozambique was also a poor performer. The figure per person and year is of only $350.

Such data are bewildering, as Mozambique has been enjoying high economic growth since the mid-1990s. After peaking at 13 % in 2001, annual growth rates in recent years have fallen to a still impressive level of seven to eight percent. Private investments have flowed into the country, and the international donor community is active, providing advice and funds. Nonetheless, wide-spread poverty stubbornly persists. So the question arises: what has gone wrong?

Difficulties of regulation

Statutory regulations are inherently problematic in any country that is unable to enforce them. Unless they are implemented by capable institutions, even the most well-drafted laws cannot lead to economic and socio-political prosperity. Where state capacities are too weak to do the job, it often makes more sense to have only few regulations, or none at all, rely on voluntary self-regulation instead.

Formal rules that are not enforced do not help. In fact, they often serve as virtual incentives to behave uncooperatively (Wentzel, 2003). Regulation will remain counter-productive until an independent judiciary, well-run state agencies and the fight against corruption become more than catchwords. Mozambique is no exception in this regard (Kaufmann, 2007).

Beyond the question of appropriate and coherent legislation, there is another challenge that has not really been the focus of discussion so far. Where do entrepreneurs come from? Market-oriented economic policies are supposed to create spaces and opportunities for enterprises. This goal has certainly been achieved to some extent – but that is of little use if there are too few people who are willing and able to take advantage by setting up businesses, and preferably successful ones.

Donors agree that Mozambique’s macroeconomic policy looks good and is successful. Nevertheless, the private sector has not flourished as expected. So far, most of the few successful small and medium-sized companies in Mozambique are foreign-owned. It is very rare to find company founders from within the country, and even rarer for them to succeed.

There are several reasons, including the difficult socio-cultural conditions after colonialism, socialism and civil war. Anyone who enjoys economic success faces a barrage of demands. There is no culture or mentality of commercial investments, and the informal sector is a manifestation of a tough struggle for survival rather than a shelter for undeveloped business ideas (see text box beyond).

The attitude of the ruling party and the political elite hardly do anything to correct this culture.
– Some decisionmakers’ practice of rent-seeking continues undeterred. For these leaders, everything is about special interests, personal enrichment and retaining power. Some members of the political elite focus on the status quo, rather than on pushing for development and change.
– Many Mozambican “entrepreneurs” acquired a business overnight, as a result of privatisations during structural adjustment. While these people have limited entrepreneurial expertise at best, they are in close contact with the political elite. They remain dependent on protection and goodwill – for example, with regard to licenses, public contracts or land allocation. For many years, the government and state-owned banks granted preferential loans to members of the political elite. Only a small share of that money has been payed back.
– The few existing industry associations are typically “infiltrated” by the governing party or led by “party entrepreneurs”. The division of roles between the state, the private sector and civil society is very hazy. These spheres remain blurred, and the dominant actors remain interdependent in some way or another. Participative fora for discussion would require a clearer differentiation of interests.
– The climate for entrepreneurship remains unfavourable despite laws which largely make sense. The poorly functioning judiciary is hardly able to enforce property rights or contracts, and there are too few alternatives for settling disputes, such as self-organised arbitral bodies, for instance. As a result, real entrepreneurs without political ties shy from long-term investments.
– A handful of Mozambican companies (and some foreign companies too) comand such powerful influence that they basically define their own regulations. This is a case of “state capture”. Again, the basis for such action is affiliation or access to the political elite.
– The economy is increasingly being dominated by extractive industries. Relevant companies have foreign management, work with foreign capital and are privileged by the state. The most striking example is MOZAL; an aluminium smelter near Maputo. It accounts for about 60 % of the country’s industrial output. Gas extraction comes in second at about eight percent. Industrial monostructures of such an insular nature do little towards spawning a class of local entrepreneurs.
– Criminal cartels dominate monopolistic and oligopolistic black markets such as the drug trade and money laundering. The state does not take a consistent approach to combating them.

The outlook for cooperation

Obviously, the basis is very weak for the emergence of a dynamic class of entrepreneurs, which would thrive on competition. There is no simple solution to this predicament. It is clear, however, that donor institutions must take sociological factors into account and be prepared to interfere in political disputes.

Donors must make the issues listed above the topic of debate. In order to diversify and pluralise powers in Mozambique, it is necessary to address the country’s socio-cultural reality. Programmes and instruments geared only to creating well-regulated freedom for entrepreneurs will simply not do. Unless this is understood and tackled, there is a real risk of official development assistance compounding problems rather than solving them.

Unless donors consider the political economy of Mozambique, involve civil society and deal with the issues discussed in this essay, their action is likely to only reinforce conditions unfavourable to development. A new, more complex strategy will necessarily be a conflict strategy. It would be useful, for instance, to establish an anti-trust authority and pass a law against unfair competition, but once such reforms are implemented in a meaningful way, they will affect powerful interests.

Continued technical cooperation to reduce transaction costs makes sense, of course. But there are a number of other issues donors must also deal with.
– They must insist on a strict separation of official and private interests and on disclosure of conflicts of interest. This is the only way to give private entrepreneurship a chance. The negotiations on donors’ grants to Mozambique’s national budget (“budget support”) provides an opportunity for doing so. In the past, however, donors were not sufficiently willing to tackle the issues.
– Civil society (independent entrepreneurs’ associations, trade unions and other interest groups) must become stronger. The country therefore needs a free and critical press. Because of the state’s disposition to curb development, this process must be driven, at least in part, by independent organisations outside the state apparatus. Germany’s Christian Democrat Konrad-Adenauer-Foundation, it’s Social Democrat Friedrich-Ebert-Foundation and other party-political foundations could play a prominent role in promoting civil society.
– The lack of entrepreneurial talent must be tackled in schools and, at the very latest, in institutions of higher education.
– Though it is absolutely essential that state institutions – and in particular, an independent judiciary – be strengthened to improve the business enviroment, rapid success should not be expected. Instead, parallel systems and procedures for self-regulation and arbitration of conflicts should be encouraged.

These recommendations definitely apply to Mozambique. The extent to which they apply to other countries with a similar history, society and political structure should be examined case by case.