Economic Growth in Mozambique

Experience & Policy Challenges

Crispolti, V. (AFR)Vitek, F. (SPR)

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Objectives of the presentation

• Take stock of Mozambique’s growth experience over the last fifteen years by looking at the factors contributing to growth and identifying parallels with the experience of other countries.

• Distill possible areas that could help raise economic growth in equitable and sustainable way, enhance external competitiveness, diversify the export base, and strengthen economic policy making going forward.

• Develop appropriate policy recommendations to achieve economic development while safeguarding macroeconomic stability.

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Structure of the presentation

• Part 1: Mozambique’s Growth Experience in Perspective (Crispolti, V.)o Factors contributing to economic growtho International comparisons

• Part 2: Empirical Evidence on the Determinants of Economic Growth (Vitek, F.)o Measuring capital abundanceo Investment growth nexuso Policy recommendations

Part 1: Mozambique’s Growth Experience in

Perspective V. Crispolti

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Real GDP and per capita GDP growth rates(in percent)

Real GDP Real per capita GDP

Strong postwar expansion

Since the early 1990s, real output has grown by 8.2 percent per year on average, resulting in a significant improvement of living standards in Mozambique (PRSP, 2007)

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Sources of growth:Production

Economic expansion has been spread across production sectors, with megaprojects determining the patterns of economic activity in the secondary sector.

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Contributions to Output Growth by Production Sector(in percent)

Tertiary sector

Secondary sector

Primary sector

Real GDP growth

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-40

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Contributions to Output Growth by Demand Component(in percent)

Net exports

Public investment

Private investment

Consumption

Real GDP growth

Output growth was supported by robust domestic demand, including for investment related to megaprojects.

Sources of growth:Expenditure

80.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

1995-99

2000-04

2005-09

16.1

26.7

46.2

45.8

53.6

Openess(imports plus exports in percent of GDP; period averages)

megaprojects

other -1.00

1.00SSA

non-fuel exporting SSA

WorldAdvanced economies

Emerging economies

Correlation among economic cycles(correlations between growth in Mozambique and growth in other regions)

1995-99

2000-04

2005-09

Greater integration into the global economy accompanied growth

Growth was accompanied by increasing openness to international trade, which favored greater synchronization with the economic cycles in other regions of the world.

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Other factors affecting growth

o Supportive factors: Prudent macroeconomic policy management; The implementation of key structural reforms; Protracted period of political stability following the civil war.

o Untapped potentials: Measures to improve the business climate; Regional Integration.

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More recently, however, the economy has been gradually loosing steam, reflecting the downward trend of potential output growth.

Recent trends: Growth

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2001 2002 2003 2004 2005 2006 2007 2008 2009

Actual versus Potential Output Growth(in percent)

Actual

Potential

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1995-99 2000-04 2005-09

Mozambique

MozambiqueMozambique

GDP per capita at PPP in SSA countries(ranked according to percentiles)

Recent trends: Poverty

Moreover, poverty remains high as suggested by Mozambique’s low level of GDP per capita, in 2008 still below the 25th percentile of the distribution for SSA countries.

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International comparisons

Mozambique’s growth performance may be better understood once compared with the experience of similar countries in different regions of the world.

This would help shed light on the important challenges faced by the authorities going forward.

Mozambique’s accomplishments are compared with the achievements attained by several non-fuel exporting SSA countries, as well as comparable economies in Asia.

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Real GDP growth in Non-Fuel exporting SSA countries(averages 1995-2010; in percent)

average of the non-fuel SSA

International comparisons:Sub-Saharan African countries

Mozambique’s growth performance stands out in a regional context…

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SSA(1973)

Tanzania(1995)

Uganda(1986)

ASEAN-5(1973)

Vietnam(1989)

India(1982)

Mozambique(1992)

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years after takeoff

Takeoff events(growth index, 0=100)

International comparisons:Asian countries

… and with respect to the successful experience of peer countries in Asia.

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International comparisons:Recent trends

However, growth is gradually loosing steam, partly reflecting the recent decline in investment rates…

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Total investment(period averages; in percent of GDP)

1995-99 2000-04 2005-09

International comparisons:Total investment

…which, on the contrary, are increasing among peers…

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Private investment(period averages; in percent of GDP)

1995-99 2000-04 2005-09

International comparisons:Private investment

… mainly reflecting higher private investment.

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Part 2: Empirical Evidence on the Determinants of

Economic GrowthF. Vitek

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Measuring capital abundance

• The fundamental drivers of long run growth in living standards are:o Productivity advancemento Capital deepening

• Measures of capital abundance can help prioritize economic development objectives.

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We construct capital stock depth indexes with principal components analysis

• We aggregate observed indicators of the abundance of private physical capital, public physical capital, and human capital relative to other factors of production.o Cross sectional data set covers 182 economies

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Principal components estimation results for Mozambique

Capital stock depth indexes

Index Weight Percentile Rank

Private physical capital stock

Tractors, number per square kilometer of arable land 0.437 22.4

Vehicles, number per kilometer of paved road 0.109 2.2

Computers, number per worker 0.455 17.7

Public physical capital stock

Mobile and fixed line telephones, number per worker 0.392 13.1

Electricity distribution, kilowatt hours per worker 0.299 23.0

Paved roads, kilometers per square kilometer of land 0.309 11.3

Human capital stock

Life expectancy, years at birth 0.500 0.3

Literacy rate, percent of adults 0.500 8.3

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Capital abundance in Mozambique lies near bottom of global distribution

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Private physical capital Public physical capital Human capital

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Capital Stock Depth Indexes

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Capital abundance is also low compared to peers

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Capital Stock Depth Indexes(Percentile rank)

Private physical capital

Public physical capital

Human capital

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The investment growth nexus

• We conduct an empirical analysis of the determinants of growth in living standards in Mozambique.o Theoretical framework is neoclassical growth modelo Empirical framework is panel error correction model

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Panel error correction model estimation results for 182 economies over 1980 through 2008

Estimation results for panel error correction model of output per capita growth

Advanced Economies Included Advanced Economies Excluded

Short run dynamics: Coefficients

Lagged output per capita 0.035 0.034

Foreign output per capita 0.042*** 0.042***

Real interest rate −0.201** −0.225**

Real effective exchange rate −0.005 −0.006

Long run disequilibrium −0.280*** −0.274***

Long run trend: Parameters

Productivity growth rate 0.018*** 0.016***

Private physical capital intensity 0.160*** 0.164***

Public physical capital intensity 0.060* 0.059*

Human capital intensity 0.030 0.024

Diagnostics:

Observations 2155 1967

R Squared 0.206 0.197

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Growth in living standards was driven by productivity advancement, not capital deepening

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

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Contributions to Output per Capita Growth by Structural Determinant

Productivity advancement Labor force participation Private capital deepening

Public capital deepening Human capital deepening Labor force growth

Output per capita Capital deepening

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Estimated expansionary effects from scaling up investment are large

• A one percent increase in the rate of private investment is estimated to raise output growth by 1.3 percent on impact.

• A one percent increase in the rate of public investment is estimated to raise output growth by 0.5 percent on impact.

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Estimated expansionary effects of infrastructure investment are consistent with existing results

• A one percent increase in the rate of grant financed infrastructure investment is estimated to raise output growth in low income countries with prudent macroeconomic policies by:o 0.4 percent by Burnside and Dollar (1997, WB)o 0.3 percent by Spinetto, Teresa and Moll (2005, WB)

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Public investment in infrastructure should be well targeted to maximize expansionary effect

• The persistence of the expansionary effect of public investment will depend on the degree to which it promotes future private investment.o Should be well targeted to raise the benefits and

reduce the costs of private investment.o Building “bridges to nowhere” will not yield a

sustained increase in economic growth.

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Conclusion

• Since the end of the civil war, Mozambique’s output has expanded at an impressive pace, nearly doubling living standards.

• However, despite the positive contribution of megaprojects growth has been gradually decelerating and poverty remains high.

• International comparisons suggest that there is scope for Mozambique to rise its economic growth and reduce poverty over the long run.

• Given the need to preserve macroeconomic stability and debt sustainability, broad-based economic growth should be promoted by:o Targeted public investment in infrastructure that will help stimulate private

investment;o Sequenced structural reforms of institutions;o Focused efforts to improve the business environment and enhance regional

integration;o Prudent monetary and fiscal policies.

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Thank youThank you