Mozambique - the price of diversification

*DR ROMAN GRYNBERG | Friday July 1, 2011 00:00

Is there really anything that Botswana, a peaceful and relatively prosperous nation can possibly learn from our still relatively impoverished SADC partner?  In the area of economic diversification, a question now vital to Botswana's future, there is much to learn from the willingness to undertake bold measures in order to transform itself and diversify its economic base. At the end of the civil war Mozambique was a shell-shattered economy, based largely on cashew nut exports.

What followed in Mozambique in the last two decades is little short of miraculous. Like Botswana, Mozambique experienced one of the highest rates of growth of any country in Africa. This is always the case for countries that begin from a low base- their growth rates always look impressive at first. In the period 1995-2009 Mozambique experienced the second highest growth rate in Africa over eight percent per annum. The only country to do better, and it shows a great deal about growth rates, was Rwanda which was recovering from an even lower base following the genocide in 1994.

What changed Mozambique from a country that exported a narrow range of low value agriculture crops to an industrial exporter was one 'mega-project'; the huge Mozal Aluminum refinery located just south of the capital, Maputo. This refinery now exports about USD 1.5 billion worth of aluminum from Mozambique per annum, accounts for 60 percent of the country's exports and creates 1, 300 permanent and relatively well paid jobs. It is by far Mozambique's dominant export, much like diamonds in Botswana.

Those who criticise the Mozal project which was initially a joint venture between BHP Biliton, Mitsubishi Corporation, Industrial Development Corporation of South Africa and the Mozambique government argue that the project provides very little direct economic benefit for Mozambique even though it changed the export base of the economy.  Its defenders argue that in 1998 when BHP began making its USD1.4 investment in Mozal I Mozambique's credit rating was what financial analysts call 'radioactive' and no-one wanted to go anywhere near it.

When the government of Mozambique negotiated to establish the plant with the help of the International Finance Corporation, the investment arm of the World Bank and the IMF it was desperate to establish a credit rating and attract a big name investor. What the government and people of Mozambique had to pay to get the BHP investment was a very low price for the electricity from the huge Cahora Bassa hydro-electric dam which supplies Mozal indirectly through South Africa. In the end BHP paid no tax to Mozambique except a 1 percent turnover tax, no import duties and no corporate tax.  More importantly than the tax concessions was the very low price of electricity that Mozal paid and the shortages that Mozambique consumers experienced.

Mozambique has continued to implement one 'mega-project' after another since Mozal I and II.  These include the US1.2 billion gas pipeline from Temane to South Africa in 2004, the Mona titanium mine and in 2007 the huge Moatiza coal project with a total USD1.4 billion investment. According to recent economic assessments these mega-projects, because of their high import content have contributed relatively little to the growth of Mozambique - about 1 percent of GDP.  Mozambique is now one of the world's largest exporters of aluminum but this alone does not guarantee a successful transformation of their  economy.  Mozambique has cheap electricity, aluminum, labour and lots of water, too much water in many years.  But the irony is of course that Mozambique imports aluminum boats from Botswana (Aliboats in Maun) which is, as we well know, is arid landlocked which has no aluminum.

So what does the rest of Africa have to learn from the Mozambique?   Mozal pays little taxes, creates only a relatively small number of jobs and gobbles up a large portion of the electricity output of Cahora Bassa dam at very low prices and has no substantial forward linkages to rest of the economy.  The answer is that the big price of getting BHP in the country was worth it because it created a perception of Mozambique as a place where serious people can invest profitably.

This Botswana already has but only in the mining  and energy sector. But the Mozambique experiment with economic diversification is very much a work in progress. It will only be a real success if takes a portion of that aluminum and uses it's gas and hydro power and establishes links with other sectors of the economy. What Mozambique has shown the rest of Africa is that the initial steps of transformation are possible, if one is willing to pay the high price for them. The interesting question is whether Mozambique will be able to eventually 'connect the dots' and integrate its economy. This is a much harder task than getting the mega-projects. Only then will there be a successful model of industrial diversification in Africa.

*These are views of Dr Roman Grynberg and not necessarily those of BIDPA where he is employed.