A Mozambique Paradox

Hello Shanta,I do not believe that access to finance is an absolute constraint. Of course, if you start completely from zero, for the purchase of machinery and equipment you need credits. But if you have a history of agricultural enterprise and your enterprise is not formed a year ago - you should have some resources to grow and develop gradually and steadily.Regards,
Vifer

Thanks Shanta for bringing Mozambique to the debate.

You are right. Mozambique has been growing faster without access to credit and finance in general by firms. That leads us to the obvious conclusion that growth has been driven by something else, not by a normal process of wealth generation through improved competitiveness of the firms, employment generation, technological innovation etc. This is what you would expect under normal circumstances.

So, where does this credit-neutral growth comes from?

It comes from two main sources:

First, massive inflows of ODA. Donors have consistently increased their aid to Mozambique. Not surprisingly, the country is highly dependent on aid. In 2006, Mozambique received approximately $1.5 billion in ODA, which accounted for 23% of its Gross National Income. Presently, and for the last ten years or so, ODA finances 50% of the state budget. Therefore, under these circumstances, Mozambique does not need a vibrant private sector to grow, and credit is less important. What is important is the capacity to spend more and more aid, building schools that some end up not having teachers, hospitals and roads.

Second, FDI inflows. Following the end of civil war in 1992, Mozambique has bee receiving a considerable amount of FDI, mainly in form of megaprojects (Mozal, Sasol, Moma Havey Sands, etc). These megaprojects have played a critical role in economic growth and exports, despite their poor performance in terms of job creation and linkages with the rest of the economy. Do megaprojects borrow from local banks? No! They bring their own capital, and they access capital markets at lower transaction costs and lower interest rates. So, does local credit matter to this source of growth? Again, the answer is No.

As to why banks are not lending to business, it is correct that part of problem is the lack of managerial skills by business. But I think the main problem is that banks have alternative ways of making money: buying Treasury Bills which yield 10-15 real return a year, and charging customers exorbitant fees for every transaction (including checking balance in an ATM). At the end of day, banks have no incentives to take risk by lending to business.

Concluding, there is no paradox in Mozambique. The recipe is clear: get aid, spend it and grow. Cost: dependency and vulnerability.

Banks in Mozambqiue as elsewhere in SSA don't take up risks -and invest their liquidity in treasury bills. Their credit technology is not appropriate for the context. have a look at microfinance institutions - partially also lending to SMEs - and the good performance (growth rate, portfolio quality) they have. finally, I also think that a large share of this strong growth rate is related to mega-projects and big companies.

clearly the growth has come from use of natural reosurces (75% of all exports in Mozambique 2007). Aluminium 61%, Electricity 10% and Gas 5%. I assume companies who, to date, have benefited from large tax concessions have no problem getting access to international credit.

It seems high cost of finance is the constraint. But, within it, it is unclear whether bad international finance is a cause for this constraint. It also seems that low domestic savings is not a problem because the economy is growing at such an impressive rate and banks have liquidity but don't want to lend it. This leaves one possible explanation in the finance story: poor intermediation. Coordination problems and sharing of risk by the state on the credit extended to the private sector seems to be a good option.

What's the story on private appropriability of investment and taxes? Also, could lack of human resources be the constraint? Is there a very high rate of return for high skilled workers? More fleshing out of the Mozambique economy is needed!

Shanta,

No paradox here. While financial development has been shown to help growth, no-one said it was indispensable. The process is not simply an additive one.

Also, the evidence indicates that finance is a more effective driver of growth when a country has reached lower-middle income level.

There are many examples of rapid growth unsupported by financial sector development, China being the most conspicuous case.

But note also that a good financial system shapes an economy for the long run in favorable ways, even if other factors (such as bounce-back from conflict) may for a while be dominant in driving spurts of growth.

Even if Mozambique had had a more developed financial system, its growth rate in this post conflict growth period might not have been higher. But with the right kind of financial development, growth might have been broader-based both in terms of economic sectors (and hence in building foundations for sustained move to middle-income status) and in its contribution to reducing inequality.

Patrick

I would really like to know the source of the growth. Once that is determined, it may be possible to use the same principle to help non-credit-worthy countries get to the point where they are able to establish lines of credit.

My (perhaps simplistic) explanation would be that much of the high growth rates has come from foreign investments (the mega-projects, expansion of the sugar sector etc), most of which do not rely in any way on access to domestic finance. Meanwhile, the domestically-owned manufacturing sector isn’t contributing much to growth and has little credit access, as reported in the survey. Bruce

Good site! Interesting information.. )