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Tuesday, 28 October 2008

A Mozambique Paradox ?

Shanta Devarajan (Chief Economist, World Bank Africa Region) is puzzled by the recent growth in Mozambique, despite its undeveloped financial system :

There is widespread consensus that financial development is critical to economic growth, globally, and in Africa. Yet Mozambique, a country with very low levels of financial development (in a recent survey, only 13 percent of firms had obtained credit from the banking sector, rural credit is almost nonexistent), registered a GDP growth rate of over 8 percent a year over the last decade.

On a
recent visit to Mozambique, I tried to understand this apparent paradox, but ended up with even more puzzles. A group of prominent bankers said the problem was that enterprises lacked managerial and accounting skills, which is why they didn’t want to lend to them. They insisted that subsidizing credit will not solve this problem. In a separate meeting, one of the most successful entrepreneurs in Mozambique said that even he has trouble getting credit; he needs to put up his factories as collateral, and even then it takes about seven months. Finally, the government’s plan to stimulate agricultural production includes a program of credit subsidies to farmers to buy tractors and other inputs.

So, while everybody seems to agree that access to finance is a constraint (which begs the question of how Mozambique grew so fast), there are different views on how to relax that constraint.

I fail to see the paradox here. There's nothing special about Mozambique, that you don't see in DRC or Angola. All of these are countries posting higher growth rates, without a developed financial system. The simple point surely is that all of these countries have started from very low positions - previously ravaged states. Simply put, when you at the bottom, even minimal macroeconomic stability is enough to propel you forward (since it makes it an attractive destination for investment). The question is whether Mozambique can sustain the growth without further financial development. Much will depend on what is propelling the growth. As we have chronicled many times on this blog, Mozambique is investing heavily in infrastructure, fuelled by innovative partnerships between the State and foreign investors. As these continue to pour in, we are likely to see the economy expand, and with good policy interventions "credit access" may follow.


  1. The finance for big projects such as MOZAL (aluminium smelter) and the natural gas pipeline came from overseas, thereby enabling growth, so there is no paradox here.

  2. The same in Congo and Angola. Big mining investors get credit from international branches so an undeveloped local banking sector isn't necessary in a first fase. Initial grow also comes from a diminishing informal sector in a post-conflict situation.

  3. I am not saying there should be no foreign investment at all in large scale, long term infrastructure projects.

    However, so far the policy has been that all economic activity must be run by foreign corporations, when in fact we need to generate hundreds of thousands of SMEs to create a sustainable economy that actually benefits the people and massively reduces unemployment, instead of benefiting a small economic elite.

    It isn't enough to 'bring jobs' - especially when that happens at the expense of billions of dollars lost to 'foreign investors'.


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