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Private-sector development

Unfavourable investment climate

by D+C | E+Z

In depth

Child selling bananas in Maputo / Bananenverkauf in Maputo

Child selling bananas in Maputo / Bananenverkauf in Maputo

The institutional environment in Mozambique does not favour small to medium-sized enterprises. Because of weak economic governance, the national economy is dominated by the informal sector, on the one hand, and large firms with well-established links to the state, on the other hand. Growth opportunities are not taken advantage of. [ By Friedrich Kaufmann ]

At first sight, Mozambique’s economic data is rosy, and the transformation from a planned economy to a market economy seems to have been a success. Growth rates in recent years have been high. The International Monetary Fund (IMF) has acknowledged macroeconomic stability from 1996 on.

Nevertheless, Mozambique does not enjoy broad private-sector development, which should be based on the division of labour among many formally-organised small to medium-sized enterprises (SMEs). On the whole, manufacturing companies are rare in Mozambique, and trade dominates. Official statistics record just under 25,000 private companies with about 300,000 employees. These numbers are very low for a country with a population of nearly 20 million. The government explicitly describes this state of affairs as problematic in its national poverty reduction strategy.

Large-scale enterprises with direct links to the state, or in which the state is itself involved, are typical of Mozambique’s economy. Sometimes, companies obtain such connections through bribes and personal contacts. In any case, businesses need to have good relations with the authorities. Otherwise, fees are not waived, waiting times are not reduced and other favours essential to their existence are not done. In Mozambique, laws on taxes, labour relations and operating licenses are only in theory uniform for all.

The informal sector therefore remains extremely important. Businesses in the informal sector rely on family and other personal relationships, as they cannot rely on the rule of law. As an obvious consequence, their opportunities for growth remain limited – and so do those of the entire economy.

Besides coherent and fairly implemented laws, there are other prerequisites for a flourishing economy. They include unwritten rules and conventions. Properly operating state institutions also matter, such as land registry offices, chambers of commerce, technology-transfer offices, courts or governmental export promotion. The way these institutions operate has an impact on how trade associations and unions work as well as on the prevalent culture inside individual businesses.

In addition to the production costs, the competitiveness of companies (and, consequently, national economies) depends on transaction costs. This is the technical term for the costs that arise from coordinating production processes and selling the products. The worse the environment, the higher the transaction costs turn out.

Successful national economies make full use of the division of labour. They benefit from clear, transparent and dependable action by the state as well as the actors in the private sector itself. To achieve such a state of affairs, efficient and neutral rules and regulatory bodies are needed. On this basis, transparent and fair tax regimes can be implemented, which in turn fund state activities, with the result of governments being able to fulfil their public duties (such as providing infrastructure, education and health systems et cetera). There are, thus, several feed-back effects. A favourable business environment encourages growth. In turn, the income generated by a strong private sector is useful for establishing good governance.

However, investors have no trust in a market system, unless the institutional cornerstones are reliably in place. In Mozambique, unfortunately, that is not yet always the case. Consequently, many private-sector activities are not undertaken at all. Under these conditions, it would be foolish to expect individual private-sector-development programmes or projects to succeed. Rather, it is urgent to get the institutional framework right. In this respect, macroeconomic stabilisation with its emphases on low inflation and solid national budgets does not suffice.


Adverse trend

Mozambique’s economy is not developing as it should. On the one hand, the informal sector is growing while, on the other hand, there are flourishing private businesses, mainly in the commodities sector. In this context, the state negotiates individually with large-scale companies over its natural resources (“state capture”). SMEs are under the greatest disadvantage in the current situation. Unlike the large-scale enterprises, they are not in a position to break out of institutional difficulties.
Huge obstacles face anyone who wishes to set up a formally registered company in Mozambique. Moreover, official inspections of companies are often conducted more as arbitrary harassment rather than to ensure that laws and statutes are being observed. Transparency in official action is urgently needed.

The reasons for the currently sad state of the institutional environment are complex. Old insider relationships play a significant role. But inadequate training of civil servants, low salaries in the civil service and strong political-party influence also matter. Furthermore, corruption is rampant, which is not surprising given that, in local tradition, the perception of personal favours is firmly rooted in reciprocity. In contrast, the idea that the office and the person are to be separated is not at all common after colonialism and years of civil war.

The World Economic Forum’s African Competitiveness Report includes Mozambique among the least competitive places in southern Africa. In its “Doing Business” report, the World Bank ranked Mozambique in 140th place this year, an even worse ranking than in 2006. There are obvious shortcomings in Mozambican law, notably in the areas of employment, tax, property, and trade and industry. Even the police leave something to be desired. In general, the capacities of public authorities are quite weak, and they do not perform well. That is also true of the judiciary. Studies and anecdotal reports show that such institutional shortcomings create considerable difficulties both for domestic companies and for potential foreign investors.

Local large-scale enterprises, however, which are satisfied with the current situation, are not interested in extensive reform. They thus are no promoters of change. Businesses in the informal sector and regular SMEs, in contrast, are too weak to form any effective lobby. Accordingly, the government needs determination and the courage to engage in disputes, if it is to create the necessary environment. The GTZ (German Technical Cooperation) is supporting the government as best it can. For example, it is bringing together representatives of the government and the private sector, so that the government takes into consideration the realities of SMEs in legislative projects.

If an efficient, generally accepted environment were successfully created, then the business sector would have greater trust in the government. As a result, the transaction costs of businesses would fall, and the economy as a whole would become more competitive. These changes would be good for small to medium-sized enterprises, and would provide an incentive for informal businesses to take on a formal legal structure. This could set in motion a positive growth spiral.