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Private sector

New paradigm

by Friedrich Kaufmann, Winfried Borowczak

In depth

There is no free market in the power sector: the Cabora Basso dam

There is no free market in the power sector: the Cabora Basso dam

Where the conditions for a functioning market economy are not met, a clear economic policy needs to be implemented, including infrastructure projects, credit and various support programmes. A case in point is Mozambique, where many hurdles must yet be overcome. By Friedrich Kaufmann and Winfried Borowczak

Industrial policy is back in vogue. The term has regained respectability in development circles, at very least since 2008, when Chinese scholar Justin Lin was appointed chief economist at the World Bank, whose term recently ended. As we understand the term here, “industrial policy” relates to the entire economy. Asian examples of successful industrial policy are attractive models. The UN ­Industrial Development Organisation (UNIDO) is currently reinforcing its capacities for giving advice on industrial policy because demand is rising. Neoliberal faith in the market is waning, and the belief is growing that poverty and underdevelopment can only be tackled effectively by improving productivity in the countries concerned. Accordingly, the emerging new paradigm is about political support in strategic sectors.

Mozambique is a good example. In this country, the private sector is playing a growing economic role. Its contribution to GDP is steadily rising. But the productivity of the private sector, which is dominated by small and medium-sized enterprises, is still quite low. Exceptions are large-scale firms that depend on foreign direct investments – notably in the extractive sector.

Mozambique’s government has, with the backing of donors, been working on improving the business environment with the goal of stimulating competition, innovation and investment. But it is a major challenge to draft and implement a coherent industrial policy that serves the common good.

Functional and selective approaches

No one disagrees with what experts call “functional” policies. They aim to improve the business environment in general and by providing macroeconomic stability, infrastructure, education, vocational training et cetera. Trade fairs and other major events also fall within the category of sensible functional policy. In Mozambique, reasonable functional policy measures are underway, but their impact remains limited unfortunately (see box on next page).

One reason for failure is misguided “selective” industrial policy. Selective po­licies are about using tax incentives, low-cost loans, subsidies, protective tariffs and other instruments to promote specific enterprises, sectors or regions. Selective po­licies almost always lead to conflicts of interest, so policymakers must establisha minimum consensus on an intervention really serving the public interest. Coherent action in this area is unlikely in Mozambique because the political and business elite are closely inter-connected through – or even identical with – Frelimo, the governing party and former independence movement. These elites tend to serve their own interests rather than the common weal.

In principle, developed members of the OECD (Organisation for Economic Cooperation and Development) with strong administrations and good governance are deemed capable of implementing industrial policies successfully. However, there is no firm evidence that governments and state agencies in developing countries have the same capability. Two studies by the German Development Institute (DIE/GDI) cast some light on the issue. The first discusses what conditions make successful industrial policy possible in developing countries (Altenburg 2011); the second focuses on the reality of Mozambique (Krause and Kaufmann 2011).

Preconditions for success

There are many good reasons why developing countries need industrial policy. The most obvious is market failure. But the mere fact that industrial policy is necessary does not mean it is possible. According to Tilman Altenburg of DIE/GDI, success depends at least on four aspects:
– The government and its bureaucracy need a clear vision. They must have the strategic capacity to draft an industrial policy geared to the common good, and to fine-tune and implement it in cooperation with business, society and donors.
– The government and its bureaucracy need to be able and willing to define and enforce fair rules. They must not favour special interests and stringently regulate any cartels, monopolies and oligopolies.
– The state requires sufficiently com­petent staff to perform indispensable services and fulfil administrative pro­cedures. The administration needs transparency and integrity. It must be guided by technical criteria. Moreover, there is a need for platforms for dialogue with the business community and the general public.
– For successful selective industrial policies, moreover, the government and its bureaucracy need to be willing and able to prioritise particular sectors, industries or regions for a limited period of time, without causing long-term dependence.

Mozambican reality

Sadly, most of these criteria are not met in Mozambique at present. Government and bureaucracy have so far been unable to draft a vision for industrial policy and even less a strategy that might convince other actors. On the contrary, the leadership’s approach to industrial policy tends to be reactive: they basically accept donor proposals as well as demands by inter­national investors.

The result is a patchwork of small-scale measures in the field of industrial policy on the one hand and a resource based sector that is dominated by major players on the other hand. Poorly drafted selective policy has led to privileges that have thwarted the impact of reasonable measures in the field of functional policy.

In Mozambique, the establishment and enforcement of clear and transparent rules remain problematic. The state tends to favour special interests. For instance, major foreign direct investments enjoy special treatment such as merely token taxation, if any at all. Political decisions are non-transparent, and so is administrative action. In sectors such as transport/aviation, telecommunications and energy supply, there are public and private monopolies and oligopolies that are subject to virtually no regulation. To date, there is no cartel legislation.

Mozambique’s ministries and subordinate agencies struggle to deliver services of a high professional standard. Many civil servants are inadequately qualified or lack motivation. Moreover, state agencies are poorly equipped. Even the judiciary operates inadequately. Corruption is widespread at all levels. One reason is that the government and its agencies are permeated by Frelimo, which has run Mozambique since
independence in 1975. Decisions on personnel are generally based more on political loyalty than on objective criteria.

Today, the ruling party figures prominently in private-sector boardrooms. President Armando Guebuza is one of the country’s wealthiest business leaders. Confusion of roles and conflicts of interests obviously make it difficult to implement and seriously evaluate any kind of rational industrial policy.

The Frelimo nomenclatura, however, does not seem to be interested in coherent policy and stringent evaluation. After all, its members in the business community benefit from a booming extractive industry, financial sector activities, speculation in climate certificates, massive land-grabbing and other business opportunities.

Conclusion

Mozambique is no fertile ground for selective industrial policy at present. For the Frelimo leadership, an approach in line with the DIE/GDI catalogue would even seem counterproductive because it would restrict its room for manoeuvre. The Frelimo-led parliament and the political opposition are regarded as weak. There is no autonomous business community. Civil society organisations that express criticism of the system are mostly isolated, and so are knowledgeable scholars.

International donors find it difficult to discuss such issues with the government even though they grant it budget support. They should demand, for example, appropriate procedures for resolving conflicts of interests.

For the time being, Mozambique does not have the environment needed for an effective industrial policy. Although sen­sible functional policy measures are in place, their success is currently undermined by a selective policy that clearly serves special interests instead of the common good.