Working Paper Number 45(3) Enhancing the Private Sector ... · internal dissent (Vines 1996; Hall and Young 1997). Externally, the unexpected independence of a black-ruled, ... (and

QEH Working Paper Series QEHWPS45(3) Page 1 of Part III

Working Paper Number 45(3)

Enhancing the Private Sector Contribution

to Post-War Recovery in Poor Countries

Tilman Brück*, Valpy FitzGerald* and Arturo Grigsby*

This paper analyses the duration and nature of post-war reconstruction in aid-dependentdeveloping countries. Part I presents a comparative analysis, Part II discusses the post-warreconstruction in Nicaragua, and Part III analyses the case of Mozambique.The main findings are that post-war reconstruction, defined as obtaining external and internalbalance and high per capita growth, is surprisingly difficult to obtain even under favourablepolitical and economic conditions. The legacy of war is a key constraint on post-war growth,especially through the damaged commercial network, the loss of trust, and the weakening ofmarket institutions. In addition, political uncertainty in the post-war period inhibits privatesector investment and significantly reduces the peace dividend. This is worsened byinappropriate stabilisation policies.

Aid policies should be modified for war and post-war economies to accelerate the reduction inforeign debt and to support small scale private producers, including those in the countryside.Military spending does not fall and social spending does not rise as quickly as is generallyexpected thus delaying a noticeable reduction in poverty. The clear sequencing but gradualimplementation of government reforms, especially in the social sectors, is important inmaintaining entitlements. Key victims of war, and especially of internal war, are civil andeconomic institutions. Their importance in post-war reconstruction has been underestimatedand they should receive priority funding by donors and governments to accelerate post-wargrowth and poverty reduction.

July 2000

* University of Oxford International Development CentreQueen Elizabeth HouseOxford OX1 3LAUnited KingdomFax: 0044-1865-273 607Email: [email protected]

[email protected]@wolfson.ox.ac.uk

Internet: http://www.qeh.ox.ac.uk/ftprc.html


Part III:

Post-War Reconstruction in Mozambique


T A B L E O F C O N T E N T S F O R P A R T I I I

Table of Contents for Part III.........................................................................................................3

3.1 Introduction.............................................................................................................................4

3.2 The Political, Institutional and Economic Legacies of the War ...................................................5The Nature and Impact of the Colonial and Internal Wars.....................................................5Political and Institutional Traditions and the Role of Reconciliation.........................................6Economic Stagnation and the Transition from Socialism.........................................................8Social Dimensions of Wartime Adjustment..........................................................................10

3.3 Reconstruction and Poverty Alleviation Policies in the 1990s ..................................................11“Emergency” versus “Development” Policies......................................................................12The Changing Role of the State… ......................................................................................13

…at the Macro Level...............................................................................................13…in Rural Development ...........................................................................................14…in the Social Sectors .............................................................................................15…and the IMF.........................................................................................................16

Rural Isolation and Rural Poverty.......................................................................................17Government Poverty Alleviation Policies.............................................................................18Agricultural and Rural Development Policies.......................................................................19Sequencing Social Spending in the Post-War Period...........................................................20Civil Institutions as a Pre-Requisite for Poverty Alleviation..................................................21

3.4 Recovery and Poverty in the Post-War Private Sector............................................................23Production and Sectoral Changes.......................................................................................23Balance of Payments..........................................................................................................23Money, Prices and Financial Markets.................................................................................25Privatisation and Enterprise Restructuring............................................................................26Investment, Savings and Credit...........................................................................................27Urban Labour and Land Markets.......................................................................................28Agriculture.........................................................................................................................30

The Nature of Smallholder Agriculture ......................................................................30Rural Labour Markets ...................................................................................................32Land Tenure and Markets ........................................................................................34Asset Poverty, Rural Savings and Income Diversification...........................................35Transport and Communication Infrastructure.............................................................36Irrigation and Drinking Water....................................................................................37Farmers’ Associations and Local Administration.......................................................38Rural Markets ..........................................................................................................39Informal Cross-Border Activities ..............................................................................39

Poverty and Inequality........................................................................................................40

3.5 External Assistance, Reconstruction and Poverty Alleviation...................................................43Patterns of External Assistance...........................................................................................43The World Bank Performance in Mozambique ...................................................................44Cancelling the Foreign Debt?..............................................................................................45

3.6 Conclusions...........................................................................................................................47Donors Share Responsibilities for Duration of the War........................................................47War Has Had a Powerful and Long-Lasting Impact in Mozambique....................................47Past State Objectives Have Been Contradictory.................................................................48Rural Post-War Stagnation and Unequal Urban Post-War Growth......................................49New Opportunities for Private-Sector Growth and Poverty Alleviation................................49

Map of Mozambique...................................................................................................................50

Key Dates in the History of Mozambique.....................................................................................51

Bibliography for Part III...............................................................................................................53


3.1 INTRODUCTION

Part III of the study “Enhancing the Private Sector Contribution to Post-War Recovery in PoorCountries” will outline the long-term interactions between war and economic policies inMozambique, and it will discuss the effects of both on private sector recovery and poverty alleviationafter the war.

It will be argued that there has been too much physical and rushed re-construction without adequateemphasis on the capacity for the management and the quality of the services to be provided throughthese re-constructed, physical infrastructures. In consequence, there was a significant delay in thepost-war resumption of growth and poverty alleviation. Instead, a fast and equitable peace dividendcould have been delivered by focussing on the well administered construction of key rural marketsinhibited by the war and the infrastructure and institutions necessary for these markets.

In addition, there has been an insufficient integration of macro- and micro-economic policies, partiallydue to the ineffective emphasis IFIs have placed on macro stabilisation, partially due to the lack ofattention paid to macro-micro interactions by non-IFI donors. High levels of aid have helped financesome government activity but this spending has not always been prioritised appropriately for a post-war context. The uncertainty of the aid flow and the poor coordination by donors have reduced theefficiency of the aid by, for example, diverting scarce government resources towards further aidprocurement.

Similarly, the government has found itself struggling to manage simultaneously the price level, thebudget deficit, the trade deficit, and pro-poor initiatives. It decided to deal with these huge problemsin that order, thereby allocating much scarce capacity to developing economic structures suited tostable macro-economic conditions. Financial sector reform, aid management, large-scale foreigninvestment projects and export-oriented cash crops have been among the policies failing to improvethe livelihoods of the vast majority of the population and creating a strongly dualistic urban-ruralwealth and power divides.

To counterbalance these post-war economic changes, donors, the government and the civil sector inMozambique need to work together and place broadly-based private sector development in therural, smallholder sector at the top of the policy agenda. By developing clear policy priorities, limitedbut effective government capacity and involving more social and economic institutions thanpreviously, there is a good chance that Mozambique will be able to see accelerated, private sectorgrowth and a related and rapid reduction in overall poverty.

Part III focuses on the smallholder sector as this represents the large majority of the Mozambicanpopulation, workforce and, above all, the poorest segments of society. The 1997 census found that81% of the workforce are employed in agriculture, forestry and fishing but only 3% in manufacturing(Mozambique News Agency 1999). 71% of all Mozambicans live in rural areas (although manyurban settlers live in very small towns and/or practice agriculture out of town) and 91% of all activewomen work in agriculture. Most importantly, almost three quarters of all poor people live in ruralareas and almost all rural people have worse social indicators than even the urban ultra poor(Government of Mozambique, Eduardo Mondlane University et al. 1998).

The strong implication for poverty alleviation policies, but also for policies aimed at raising nationaloutput, is to stimulate the efficiency and the supply of as well as the demand for rural production.However, as a result of the severity of the war, this requires the creation and strengthening of marketinstitutions, and hence a shift in donor and government policy.


3.2 THE POLITICAL, INSTITUTIONAL AND ECONOMIC LEGACIES OF THE WAR

The Nature and Impact of the Colonial and Internal Wars

The colonial war against Portugal started in 1964 in the North of Mozambique. Occasional attackson settlers and traders where sufficient to confine the Portuguese army to its barracks and allow theindependence movement Frelimo to claim the “liberation” of some sparsely populated Makondesettlements. Frelimo only made significant territorial gains after the unexpected Portuguese revolutionof 1974 left the colonial administration and army without leadership (Newitt 1995; MacQueen1997).

The unforeseen and rapid decolonisation implied that Frelimo was lacking both popular, democraticsupport and the internal know-how to rule the whole country. Furthermore, the chaotic politicalevents of this period encouraged the Portuguese settlers in Mozambique, who were providing allimportant white-collar and even most qualified blue-collar jobs in the colony, to leave the countrythus further undermining the economic viability of the newly independent state.

The nature of the internal war in independent Mozambique was shaped by external aggression andinternal dissent (Vines 1996; Hall and Young 1997). Externally, the unexpected independence of ablack-ruled, left-wing Mozambique bordering both Rhodesia and apartheid South Africa led to thesecountries funding armed opposition to the Frelimo regime in Mozambique. The boycott of Rhodesia,which Mozambique implemented to support the Zimbabwean liberation struggle, cost Mozambiquemuch needed trade and remittance opportunities. After Zimbabwean independence in 1979, SouthAfrica took over the training and funding of the Renamo rebel force.

Internally, Renamo could succeed because Frelimo increasingly followed narrow, socialist policeswhich created much dissent. In the countryside, Frelimo attempted to establish an alternative, state-based authority without building on traditional rural power structures (Geffray 1991). Communitieswere forcibly resettled in collective villages, traditional authorities removed from their communities(and degraded and embarrassed in front of their clans in the process), traditional ways of lifeforbidden, and new authorities appointed. Overall, this process did not only remove privileges from afew rural leaders but it destroyed the social identities and fabric of entire communities. Theindependent authorities thus replicated some deeply unpopular colonial policies and alienated clanspreviously critical of the colonial authorities. This caused many traditional leaders to align themselveswith Renamo thus creating spaces and providing resources for a resistance movement which wouldnot have been sustainable without domestic support.

Instead, the objectives of the two sides to this conflict were not necessarily to win the war. Frelimowas too weak militarily and politically to launch a successful offensive in the countryside, thusreplicating the military history of the colonial Portuguese forces before it. And the external sponsorsof Renamo’s war of destabilisation were intend on showing that a black-ruled country could not besuccessful and prosperous thus justifying the continued apartheid regime in South Africa.

Internally, the objective of the Renamo leadership and its forces were not that of a politicalmovement but to continue the life of its military machinery. The Renamo army had become aninstitution in its own right with its own self-replicating objective of survival. Yet Renamo was tooweak to have won military control over any significant urban settlement (unlike Unita in Angola.)Therefore the war in Mozambique was not likely to end without either a strong foreign intervention ora complete exhaustion of resources preventing both sides from continuing their respective systems ofrule.


The most obvious economic effects of the war were its huge negative effect on the capital stock,especially in rural areas where any sign of wealth or government institutions was considered alegitimate target by Renamo. However, the destruction of formal and informal institutions (in thesense of North (North 1990; Carbonnier 1998)), the high levels of uncertainty and isolation, and thehuge foreign debts were the more important, long-lasting legacies of the internal war (Brück 1997;Brück 1998). The nature of these effects was strongly shaped by the specific nature of the conflictitself. Post-war reconstruction (or, more accurately, post-war development) policies could haveaccounted for this more explicitly to have succeeded in both regenerating growth and reducingpoverty.

The peace process was made possible by external and internal changes to the political and economicenvironment faced by Frelimo and Renamo. Externally, the end of the cold war, from the negativeconsequences of which the Frelimo government had tried to escape since the early 1980s, allowed amore pragmatic focus by external actors on the domestic problems facing Mozambique. In addition,the end of the cold war meant that any pretence that Renamo was a democratic, political movementcould not be sustained any more and reduced sources of external funding for Renamo further still.Most importantly, the end of apartheid ended South Africa’s support for the war of “destabilisation”in Mozambique and increased South Africa’s strategic interest in developing Mozambique, andespecially Maputo, as a stable free-market trading partner and route.

Internally, the main cause of the peace process was an increasing lack of resources on which to fightthe war (Brück 1997; Brück 1998). The government faced an unsustainable fiscal and tradingposition and could not count on continued aid payments to finance its war efforts. Renamo also sawits resource base cut off as its campaign of terror increasingly reduced the extractable rural surplusand its foreign support. In addition, the severe drought of 1991-92 risked starvation among perhapsa quarter of the Mozambican population and finally forced the international community to exertpressure on both sides to agree to a ceasefire as precondition to rural aid deliveries. A significantobstacle to these negotiations was the lack of political objectives and practical diplomatic experienceof the Renamo leadership. This revealed the lack of a commitment by Renamo to the political,democratic process and thus foreshadowed the weakness of the Mozambican political opposition inthe post-war state (Hume 1994; Synge 1997).

Seen from a long-term perspective, the peace agreement neglected the regional balance of power,the overbearing strength of the central state apparatus versus local entities, and the role of traditionalrural authorities in the state. This implied that the future political discourse and public administrationwere going to be dominated by the central state institutions dominated by Frelimo and that Renamowas not going to develop local political and administrative experience. This in turn implies thatnational elections risk great discontinuity of policy making should Frelimo loose power and that thereis no scope beyond parliament for Renamo to benefit materially or politically from the newconstitutional arrangements of the post-war years.

Political and Institutional Traditions and the Role of Reconciliation

One key feature of the recent political history of Mozambique is the fluidity of the policies adoptedby Frelimo. It evolved from a political liberation movement to a guerrilla army with social objectivesand into the main institution of the state. It sequentially embraced broad socialism, strict Marxism,social market philosophy and free market capitalism. It changed from a pluralist political organisationinto an intolerant state party state and then into a party committed to but at first not practising multi-party democracy. Finally it also moved from being a centrally ruled to being a centrally coordinatedparty into one trying to extend decentralisation and local democracy. These changes were


undertaken by a remarkably constant set of leaders thus offering continuity to its clients and partnersinternally and externally.

Mozambique benefited substantially from this flexibility from the mid-1980s through high levels ofaid. After Mozambique’s failed bid for membership of the Comecon early in the 1980s, it was one ofthe first communist countries in the world to turn to the West for help. In doing so, the Mozambicanleadership was hoping to attract funding as a form of compensation for the severe social andeconomic hardship following Portugal’s colonial and decolonisation legacy, Mozambique’s positionas a frontline state, its position within the cold war, and its vulnerability to regular natural disasters. Atthe same time, this flexibility also made Mozambique one of the first countries in the world toundergo not only stabilisation and structural adjustment policies but also to do that in times of war.

The transformation of the Renamo rebel organisation, itself a very fragmented and diverse grouping,into a political party is not yet very advanced. It has gained its first significant experiences on theinternational circuit during the Rome peace negotiations (Hume 1994). And its parliamentary group islearning fast to work in a modern democratic setting. However, many other factions within the partyhave not yet had or have not sought the opportunity to start working as a modern political party. Thisled to Renamo refusing to participate in the 1998 local elections. It lacked the organisational skill tofield candidates and to campaign in rather hostile, urban constituencies. This also explains why onsome occasions Renamo has not yet succeeded in using a democratic language for the expression ofits political demands and why doubts persist about the extent of Renamo’s commitment todemocracy. Democracy in Mozambique generally appears quite “alive” (Weimer and Fandrych1998: 21) despite some such structural weaknesses.

Another problem with the young Mozambican democracy is its lack of internal credibility resultingfrom issues of trust, reconciliation and independent internal institutions such as an effective,independent judiciary. The disparity between the internal illegitimacy of the state and the externallegitimacy of the Frelimo party often leads external observers to misjudge the strength of domesticstability and may cause external instability should Renamo one day win national power.

The re-emergence and re-integration of cultural and traditional values and practices matters forbuilding post-war social cohesion, providing security and reducing inter- and intra-communitytensions. In areas of education, health, local administration, justice, democracy, informationtransmission and family life these issues are paramount and often provide alternative, parallelstructures to the official, state institutions. Hence the two need to be integrated in order to reach outto all sectors of the population and to build effective, well-founded institutions and policies.

For example, in Nampula most farmers attend traditional healers before or while seeking from statehealth posts. In fact they are likely to spend much more money on traditional healers and are muchmore likely to find one in their neighbourhood. Much micro-credit is demanded and suppliedinformally for this purpose. The visit to a traditional healer may well cost US $ 1 to 2 dollars thusearning an active healer up to US $ 75 to 100 a month, or perhaps twice as much per month asmany households earn in cash crops (Kottak 1998). Up to 3% of all Makua people in ruralNampula have been estimated to work as traditional healers which suggests that maybe a quarter ofall households have a healer in their immediate family. Traditional healing is thus an important butunderreported economic activity supplementing farming incomes in many households.

Other examples of traditional (or rather non-state, non-modern, etc) influences on the post-warMozambican economy include moves to teach local languages in primary schools and to standardisethese languages to enable increased written use of local languages. These efforts may allow a largershare of the population to benefit from low levels of total education per child (as less time is spent


learning Portuguese) and reportedly increase confidence and self-initiative among the students(World Bank 1998).

In Maputo especially, some neighbourhoods are dominated by ethnic, linguistic and geographiccommunities which provide alternative, non-state institutions thus creating enabling and supportingenvironments for their members (UNDP 1998: 35). Presumably this is a universal phenomenon inlarge cities but in Mozambique neither the state nor the donors are addressing the opportunitiesarising from such institutions for building development partnerships and reaching out to neglectedcommunities. Strengthening local democracy would help to provide a channel for such local groupsto express their ideas and would allow a more decentralised state to plan based on a moredisaggregated assessment of needs and capabilities. Donors could help identify local authorities howto harness organised community life and could directly assist groups with their planning where suchgroups have objectives related to donors’ activities.

Traditional Mozambican society possesses a variety of cultural norms encouraging trust building andthus reconciliation within and between communities where the social peace has been broken (UNDP1998: 36-40). This trust is a part of the social capital of society which includes social standards andinstitutions, shared beliefs and knowledge, the freedom to agree and disagree, and other forms ofinteraction across individuals and communities. Both misguided policies of past governments and thewar did not abolish these traditions. Rather they became important ways for individuals of copingwith the war in the aftermath of the peace agreement.

For rural areas in particular, the distrust between traditional communities and the predominantlyurban state was at the core of the ongoing war (Geffray 1991). In fact, given that historically wars inMozambique were primarily about denying or gaining economic opportunities, reconciliation inMozambique is a very economic issue as well (Carbonnier 1998: 51). The negative effects of thelacking inter-group trust will have future repercussions on the dialogue between parties, participatorypolicy making processes, the scope, nature and speed of decentralisation.

Furthermore, this emerging dis-association of Mozambicans from their state will reinforceinequalities, as it will be traditional, rural, and poor people who have tried to cope within theircommunities to reconcile themselves with their past while the modern, urban and richer members ofsociety are failing to do the same within their state-dominated social environment. The reconciliatoryand compensatory measures likely to be taken by the state will, out of ignorance and self-interest,hence benefit the latter group. Yet poorer members of society may find themselves more and moredistanced and distrustful of the state which may increasingly be seen as predatory once more. Thismay be a future cause of underdevelopment, political and security instability, and increasingineffectiveness of state attempts to introduce effective policies.

Economic Stagnation and the Transition from Socialism

In the 1960s, the GNP of Mozambique grew by almost 5% p.a. with an annual output growth in themanufacturing, construction and transport sectors of 6.6%, 24.4% and 11%, respectively, whileagriculture only grew 2.1% p.a. in that decade (UNDP 1998: 49). For 1973, the last year of normalcolonial rule, GNP p.c. has been estimated at US $ 200 (International Monetary Fund 1998: 7). Inthe 1970s, most economic indicators declined drastically as a result of the world economic crises,decolonisation and the subsequent, inadequate administration of the economy. GNP fell by over 2%p.a., investment decreased by over 6% p.a. and only population growth doubled to 4.2% p.a.,despite the large outflow of Portuguese settlers before independence (UNDP 1998: 49).


In the early 1980s, the government increasingly regulated most areas of economic and civic lifewithout considering local traditions and its own ability to implement the new economic order. Incombination with the resurgent war, the 1980s saw an accelerated decline of GDP with negativegrowth rates of 4.3% p.a. Crucially, in this decade it was agriculture which contributed significantlywith annual output reduction of over 11%. With gross investment being very vulnerable to war, itdeclined by over 23% p.a. in the 1980s. In fact, the productivity of investment in the early 1980swas negative and one of the lowest in Africa (International Monetary Fund 1998: 24).

In 1987, the government introduced the Economic Recovery Programme (PRE) which wascompatible with World Bank, IMF and bilateral donor demands to restructure and stabilise theeconomy (Abrahamsson and Nilsson 1995). In the short term, these changes were supposed torestore the minimum levels of income and consumption required for the survival of the ruralpopulation. In the long term, these policies were supposed to lay the foundation for sustainable post-war growth. The stabilisation policies were slow to achieve the intended changes but they did boostgrowth to the real annual rate of 4% p.c. in the period 1986-92 despite the ongoing war. The growthwas achieved by encouraging small scale, urban, and non-tradable activities and through increasingaid as a share of GDP from 8.7% in 1986 to 118.2% in1992 (Brück 1997). However, given tehnscale of aid increases, the growth effect was quite small. Furthermore, the large agricultural sectors,both subsistence and export-oriented, were largely unaffected by these policies and the warcontinued to inhibit these activities (Lopes and Sacerdoti 1991: 8).

Most of these structural adjustment policies were necessary and helped improve the allocation ofresources in the economy and within government spending. However, the speed and sequencing ofreforms and, most importantly, the lack of important complementary policy initiatives revealed a lackof understanding of the nature of the war economy and a lack of concern for the poorest and mostvulnerable members of society. Most importantly, Mozambique has always been lacking very basicmarkets. Most of these have not been constrained by socialist policies but were stifled by the effectsof the war or by the extreme, long-term under-development of the rural Mozambican economy. Bothinternational organisations and the Mozambican government failed to recognise the importance ofthese factors during the war period.

Overall, the 1980s were characterised by an extremely early start of transition from socialismcompared to other socialist countries. While progress in some policy fields were encouraging, otherinitiatives were neglected or forgotten. Hence Mozambique witnessed supply-side reforms in thehope of stimulating markets into growth and poverty alleviation. However, this response nevermaterialised on the scale envisaged as the continued war and the extreme poverty in the countrysideprevented supply responses from taking place. This applied both to urban, non-tradable activitiesbeyond a phase of initial output rises and, more importantly, to rural agricultural output. While foodaid may also have reduced the rural supply response, levels of aid were not as generous as issometimes portrayed in the literature. Complementary policy reforms were thus required urgently andwould have been possible even in times of war and scarce public finance. These should haveincluded institutional, legal and administrative reforms which would have given further impetus to theongoing macroeconomic and privatisation reforms.

In addition, the poverty focus of the government and particularly of donors should have been muchsharper, including in the field of the social effects of privatisations, thus helping to improvecontemporary and future poverty alleviation initiatives to be more effective. Most importantly, thegovernment, rebels and donors failed to realise the vast importance of bringing the war to an end inorder to create suitable conditions for growth. Outside agencies showed little understanding of thenecessity for peace or interest to force an end to the conflict in the 1980s.


By the time the main domestic agents finally ended the war themselves, economic expenditureplanning by the government focused on the three core areas of smallholder production, health andeducation services, and infrastructure rehabilitation. The shift from state to smallholder agricultureonly occurred towards the end of the conflict and was too late to allow a concentrated effort ofsmallholder support to commence soon after the war. The lack of government legislative andadministrative capacity at all levels aimed at supporting smallholders was thus going to be one of thereasons for the late increase of post-war production.

Social and infrastructure spending policies in place at the end of the conflict had a too narrow focusand a too limited view of development to be the best supportive package for a quick post-warrecovery. The spending programme did not prioritise market-creating and market-enhancingmeasures, legal and civil institution-building programmes, or social and distributive issues. Instead, itfocused primarily on consumption-oriented, short-term, expensive and narrowly defined incomegeneration activities thus reducing the scope of an early post-war peace dividend as measured byincreased government social spending or output growth.

Social Dimensions of Wartime Adjustment

The liberalisation of prices caused a huge increase in the prices of rationed goods. An index of theprices of such goods (including maize, cooking oil, sugar, beans, soap and salt) increased from 100in 1986 to 1,667 in 1989 while the CPI for the same period increased from 100 to only 562. Thenominal value of total price subsidies earmarked in the budget dropped from meticais 5.9 billion in1987 to meticais 3.5 billion in 1989, which reflects a real cut of circa three quarters from 1987 to1989 (Lopes and Sacerdoti 1991: 12). While for example the wages of non-agricultural workersincreased circa 33% more than the CPI for the period 1986-89, the prices of rationed consumergoods increased more than twice as much as these workers’ wages for that period thus causing asignificant drop in the standard of living for the poorer workers who depend proportionally more onsuch consumer goods. Thus the urban unemployed and even the urban employed but with low wagessuffer the greatest burden of this particular adjustment policy. Given the virtual absence of effectivesocial safety nets in Mozambique to date, the speed and scale of the price and subsidy reformscaused a direct and strong increase in poverty in urban Mozambique.

In rural areas, agricultural workers’ wages increased much more than either the (mainly urban) CPIor their expenditure-weighted price index in the period 1986-89 (Lopes and Sacerdoti 1991: 13).This was the positive result of the reform programme where higher producer prices permitted anincrease in real agricultural wages. However, this effect was limited geographically and by economicclass as agricultural employment would have been concentrated in some relatively safe green areasnear larger cities and as wage employment in agriculture was quite low in the late 1980s. Farmerswith remaining assets and near safer trading routes benefited from these reforms causing a newdifferentiation in rural society.

Those farmers not selling surplus produce in the market, probably the majority and the poorest of allfarmers in the late 1980s in Mozambique, did not benefit from the higher output prices. In areas withhigh insecurity there could not have been a supply response to improving prices as transaction costs(ie the costs of conducting business (North 1990)) were excessively high. In addition, the definitionof urban households in Mozambique is very broad and includes 86 cities and towns, most of themsmall district capitals which are predominatly rural. Hence people moved top these government held,slightly safer locations but continued to be employed or working in agriculture.

Remittances helped households supplement their income on a significant scale in the war period.Recorded remittances in the period 1988-90 were US $ 71 million a year compared to annual


commodity exports of US $ 108 million (Lopes and Sacerdoti 1991: 5). The benefits of remittancesare limited though. Remittances were mainly confined to Southern Mozambique where men migratedto South Africa to work in the mines there. And remittance earnings were more useful for urbanfamilies which had better access to consumer goods.

This incidence of absolute poverty during the war was much higher in rural areas (68%) than in urbanareas (32% to 52%). Of all those below the poverty line in Mozambique in 1988-89, 83% wereresident in rural areas and only 17% in urban areas (Lopes and Sacerdoti 1991: 2-3). The poorestof the absolutely poor in this period were displaced farmers in strongly war-affected and henceinaccessible rural areas suffering from the lack of farming opportunities, military attacks and naturaldisasters. Within this groups, old people, children and individuals without strong social links were themost vulnerable to starvation but also the most difficult to reach for relief organisations. Being able todepend on family members or the local community for walking to or queuing in food aid distributionpoints was an important asset. In comparison, the urban poor were much easier to target with aidand needed fewer help in finding and obtaining food aid. These factors help explain why extremepoverty and starvation was so much more prevalent in rural areas during the war and how it was thewar which prevented an adequate aid response to the problem of malnutrition.

At least 60% of the population spent at least half of all income on food (for adults) or suffered fromgrowth faltering (for children) and were hence below the absolute poverty line (Lopes and Sacerdoti1991: 1). The system of food rations in place in the 1980s at best provided 60% of the population’sbasic calorie requirements (Lopes and Sacerdoti 1991: 2). Food aid and food imports together havebeen estimated to have accounted for over 80% of total food supplies in this period. Distributedfood was 57,000 tons in 1985, 180,000 tons in 1988 and circa 170,000 tons in 1989 (Lopes andSacerdoti 1991: 18-19). While domestic food production increased marginally in the period 1987-90, food imports contiued to be important.

However, the estimated food requirements always exceeded the food arrivals in the period 1987-90and the marketed food aid (i.e. in towns) was always larger than free (i.e. rural) food aid althoughlarger and perhaps needier share of the population lived in rural areas even during the conflict. Thisperiod also saw increasing estimated food aid requirements but decreasing food aid arrivals thussuggesting that Mozambique did not suffer an excessive supply of aid. Consequently the marginalvalue of the delivered aid must have been high to the government and to the population. Moreimportantly, the vulnerability of the government to aid conditionality must have been very high.

Government spending in the war period deepened inequality further as most social spending favouredsafer, urban areas. At the same time, hospital user fees and school fees were raised in 1987 and1988. School fees alone accounted for about 5% of the minimum wage in the late 1980s (Lopes andSacerdoti 1991: 16). While social spending on capital projects in rural areas would have beenpointless in the face of ongoing warfare targeted at such infrastructure, the lack of capacity andinstitutional development of the civil service also represented a major and obvious developmentobstacle in Mozambique at that time.

3.3 RECONSTRUCTION AND POVERTY ALLEVIATION POLICIES IN THE 1990S

The government’s primary policy objectives after the end of the war were to increase growth, toimprove financial indicators, and to reduce poverty (Government of Mozambique 1992: 3). This wasgoing to be achieved by encouraging private sector activity, reducing domestic market and externaltrading disequilibria, and increasing public sector capacity while following restrictive fiscal andmonetary policies. The poverty objective was going to be achieved by increasing agricultural,


marketed output, facilitating agricultural input markets, rehabilitating rural, social infrastructure,supplying food aid in rural areas if necessary, and targeting income support in urban areas. Thefollowing sections will address rationale and effectiveness of such post-war policies.

“Emergency” versus “Development” Policies

The planning for the post-war period started in February 1991. Much of the planning effort wasfocused on quantifying physical needs and aggregating these at the national level for future donordiscussions. There was some verbal commitment to building social and political institutions but thesecomments appear ad hoc and are not specific. On a positive side, much of this early reconstructionplanning in the early 1990s formed the basis of increased decentralisation and provincial- anddistrict-level capacity building in the mid to late 1990s. Overall, the government could havecommenced planning for the post-war period much earlier and should have placed a strongeremphasis on the construction of market and civil institutions and administrative capacity than on there-construction of previous physical infrastructures.

In late October 1992, just weeks after the signing of the peace agreement, the IMF, the World Bankand the government of Mozambique agreed the sixth annual PFP setting out the government’splanning framework for the forthcoming three years (Government of Mozambique 1992). The paperjustifies much of the high spending and aid needs not with previous economic mismanagement butwith the severe negative effects of the war. The paper therefore concludes that there is a strong caseand a strong need for significant, additional debt relief exceeding that previously arranged.

However, the references to the negative effects of the war are not based on a clear understanding ofwhat these effects actually are. Both successive PFPs and the government’s national reconstructionplan (Government of Mozambique 1992) do not justify their policies with any analysis of the war’simpact on the national economy. Given that there is a credible social science research capacity withinMozambique, such lack of knowledge must have been based on a lack of funding to address theseissues.

The government believed that the huge scale of the expected resettlement after the war wouldnecessitate a corresponding effort in rebuilding economic and social services very quickly. Thegovernment distinguished between the “resettlement and reintegration” and the “reconstruction anddevelopment” phases of post-war planning (Government of Mozambique 1992: 6-7). NGOs inMozambique often use the corresponding terms “emergency” and “development” programmes forthese two phases. In either case, these programmes are distinct and sequential in theirimplementation. The first phase of the government’s programme consisted of humanitarian andemergency aid to returning and vulnerable households and the development of commercial, economicand social infrastructure by the government. The second phase was going to include the above andall other government objectives for the post-war years with a special emphasis on capacity building.

However, the majority of the population in rural areas and most displaced people had succeeded tosurvive despite the government’s and the rebels’ policies in the previous years. In many ways, war-affected households in Mozambique had lived in a completely deregulated economy for such a longperiod of time, trying to escape the negative effects of authority, that they appreciated the end of thewar and the absence of state or rebel interference more than the badly planned and executeddelivery of fragmented rural services. The majority of Mozambican displaced households were thuslikely to return to what they considered the safest and best suited area of settlement even with aminimum of government or donor assistance. Similarly, there was little need for the government toallocate land to households as much land had been left unused during the war or traditionalauthorities succeeded in directing the allocation of sparse land. This increase in extensive margins


was the cause of the post-war, short-term growth in agricultural output which will have to beaccompanied by improved intensive margins if it is to be sustained.

While rural infrastructure and services matter to the long-term development of the whole economy,the priorities in the immediate aftermath of the war should have been, first, the maintenance of peaceincluding the appeasement of potentially destructive social groups, second, assistance with transportand the delivery of food and input aid to returning or otherwise vulnerable households, and third, thebuilding of long-term development planning and implementation capacity, especially after thecompletion of the returning programme and the first subsequent harvest. The large number ofimmediate post-war policy objectives was likely to diminish their overall effectiveness and weakenthe building of long-term administrative capacity (Government of Mozambique 1992).

The one post-war priority that the government intended to tackle in its first phase of planning but didnot was road rehabilitation. There would have been very high, immediate returns to a fast,decentralised and labour intensive road demining, rehabilitation and maintenance programme. Itwould have provided employment opportunities (thus helping to distribute positively priced tools andseeds) and local demand, reduced significant trade barriers, lowered the costs of humanitariandeliveries, and allowed the development of local decision making and administrative capacitiesinvolving both Frelimo, Renamo and independent members of the communities to work together.

Overall, the distinction between seemingly separable emergency and development programmes in theaftermath of internal war is not only analytically unsatisfactory but also empirically intractable.Instead, a post-war government should prioritise its policy programme based on a carefulassessment of its individual circumstances.

The Changing Role of the State…

…at the Macro Level

The dominant theme of the government’s policy documents in the late 1990s is not the long-termeffects of the war but the extreme poverty of the majority of its population (Government ofMozambique 1995; Government of Mozambique 1998). The government ceased to attempt to usethe still visible and significant legacies of the war either for obtaining more aid or for justifying specialexpenditures. The government instead proposed to reduce poverty by promoting economic growthand employment opportunities across all sectors. Lately, the government has also been addressingnon-smallholder, agricultural growth opportunities such as natural resource exploitation and variousmega-projects in an attempt to mobilise external resources and thus reduce trade and budgetaryimbalances. However, the government does not currently view macroeconomic stability as a primarypolicy goal. Instead, it sees the maintenance of such stability as a precondition for continued growthand thus poverty reduction. This reflects the success in macroeconomic stabilisation of the previousyears.

The direct role of the state in the economy has been much reduced and instead the role of the statehas been reoriented towards regulating private sector activities where important public policy issuesare at stake. Most importantly, the financial sector has been both privatised ad regulated withimportant benefits for other sectors, too. The largest current challenge is to prioritise within thesectoral policies, to negotiate effective donor support for these programmes, and to implement theseprogrammes at local levels. The government thus followed many of the right policies though there hasbeen a lack of priorities and a wrong sense of emphasis at times. Unfortunately, donors did little tooffer strategic or analytic advice, which should have been their comparative advantage.


The government realised throughout this period that it must prioritise its policy making andimplementation process. However, in 1995 these concerns did not yet translate into an effective listof priorities either at the overall or the departmental level. The scale of the problems in the economyprevented the government from deliberately neglecting some policy areas for the benefit of others.Furthermore, donors, who were increasingly being drawn into detailed and effective policynegotiations in Maputo, did not realise the need for prioritising policies and thus continued to expressconditions for the granting of aid.

…in Rural Development

In the area of public and private sector cooperation in agriculture, for instance, the World Bankwould like to see the government relinquish its shares in the cotton joint ventures. The World Bankargues that such ownership only reduces the efficiency of the cotton companies (as they know theyare protected by the government), that it reduces also the efficiency of the Ministry of Agriculture(which must oversee its investment), that it reduces the regulatory effectiveness of the firms as theministry has a conflict in interest (it should prioritise the development of smallholders who aredependent on the joined ventures), and that it reduces the government’s incentive to abolish themonopoly cotton companies.

Initially, there may have been a case for join venture monopolies when the government share in thesefirms signalled a commitment by the government to the development of the cotton sector and whenthere may have been a natural monopoly in that business due to the very thin markets in theimmediate post-war period. Yet in terms of efficiency and equity, developing a competitive cottongrowing and trading sector will help smallholders most and there is no longer any justification foreither the government holding a share in these firms or for them to enjoy a legal monopoly. Instead,the government should improve its regulatory capacity of the cotton sector, including an improvedmechanism for determining, influencing or liberalising annual cotton prices. The government shouldthen determine if there is a need for a publicly funded extension service in cotton if cotton inputtrading becomes more competitive and ceases to provide such services.

In addition, the World Bank recommends the privatisation of the Cereals Institute of Mozambique(ICM), the successor to the state-owned, monopoly marketing firm Agricom. Given its underfunding,the broad liberalisation of agricultural pricing and the generally improved market integration inMozambique (Donovan 1996), the case for privatising the ICM’s warehouses or the organisation inits entirety is strong.

Otherwise, it is not clear which government objectives could be effectively carried out by the privatesector. There may be some services which the government could contract out to private firms.However, there are few areas of necessary policy intervention where private sector activity will beable to recoup its costs through user fees or sales, other than in export agriculture, trading andtransport. Smallholder-focused initiatives will remain a privately loss-making but socially verybeneficial policy area in the long-term.

Furthermore, there are serious actual and potential inequalities of wealth, information and power inrural Mozambique which may well justify new, pro-poor government regulations. Essentially, duringthe war the power imbalance lay between smallholders versus soldiers or armed rebels. The end ofthe war has reduced the threat from physical violence but left households without physical, financialor human capital. These unproductive smallholder households are thus vulnerable to better funded,better informed and more productive farmers, firms, or public administrators. In addition, theeconomic dynamic of the first post-war years has lead to a strong differentiation among the ruralpopulation which will deepen with time.


Thus there is a very strong case for the government to not only prioritise smallholders generally butespecially the smaller and more vulnerable smallholders among the large rural population. Withoutactive support from the government or NGOs, there will be many households who for no fault oftheir own will face diminishing chances of escaping economic poverty and power dependency. TheWorld Bank is failing to acknowledge this process of differentiation, instead preferring to think ofrural Mozambique as a monolithic group and even encouraging the future emergence of increasinglyproductive and successful private farmers, at the expense of a majority of poor smallholders.

In the area of foreign tourist developments, e.g. in the cases of beach or wildlife tourism, there aredangers that liberalised FDI laws, the need to earn foreign exchange, the international competitionamong tropical tourist destinations and the lack of bargaining powers of local residents will lead tosmallholders being marginalized or even displaced from their land without having a chance toparticipate in the process of the project approval (as is common in planning laws of developedcountries) and project implementation (e.g. by obtaining employment or training opportunities). In themanagement of other natural resources and in approving mega-projects, it is also important toinvolve all sectors of society to make the exploitation of these resources sustainable and the controlof that exploitation accountable.

It is not sufficient for the central government in Mozambique to address these issues and formulate anabstract law on natural resource exploitation by the private sector. At the political level, a democraticsociety, a free press and freely organised civil institutions must ensure that planning laws take intoaccount the needs of various social groups and that these laws are adhered to. Within the districts, acompetitive political process and functioning law enforcement are thus two of the prerequisites thatensure sustainable natural resource exploitation. At the economic level, these prerequisites will onlywork with proper funding and a clear understanding by the local population and by the officialsstaffing these institutions what their purpose is. This is another reason why a sustainable, anti-povertyeconomic policy must also aim to build an active democracy as well as legal, judicial and civilinstitutions. Given the lack of experience with all of these under colonial, socialist and war conditionsin Mozambique, there will have to be explicit development projects addressing these issues.Unfortunately, the World Bank and other institutions operating in Mozambique do not yet understandthe importance of getting these fundamentals right in a poor, post-war economy.

A further cause of diminished living standards may arise from the asymmetries in information andpower in the storage and application of fertilisers, pesticides and other agrochemicals. With increasesin the use of these products as especially cotton cultivation increases and farmers can increasinglyafford such products, there is a real danger that the least informed, most illiterate and most vulnerablefarm households will either misuse these products or be the indirect victim of their misuse. Forexample, many Mozambican farmers live near or even in between their plot, including cotton plots.Yet recently some cotton firms have started spraying cotton fields by plane thus also subjecting theresidents to these often very harmful chemicals. Given the asymmetry of information and powerprevalent in the application of agrochemicals, the government should regulate their use and thusprotect powerless and vulnerable households, workers and consumers.

…in the Social Sectors

Government spending in the post-war period has been under strong pressure due to the hugebudgetary imbalances. Given the extreme poverty in the country, the government has chosen agradual approach to reforming the deficit. However, this also implied that much government socialspending may not have been spent very effectively and that crucial capacity building steps wheretaken much later than desirable. Also, the role of civil and legal institutions has remained undervalued


and private sector obstacle to economic growth and increasing economic inequality may beaccentuated as a result of this.

Social sector spending is the most direct though perhaps least targeted way of affecting the livingstandard of, especially, the poor in Mozambique. Social institutions provide one of the few directopportunities, apart perhaps from good weather, to maintain (via the health service) or to improve(through education) the livelihoods of rural smallholders. However, as argued elsewhere in thisreport, it is important also to consider the cost effectiveness of these services and to recognise theneed for complementary civil and economic institutions required for long-term development. Inremote rural areas, for instance, providing poor quality education services will not improve livingstandards as much as building and maintaining a road or providing clean, reliable and accessibledrinking water. And given the current government finances and the human resource capacity of itsplanning and teaching personnel, it is likely that most remote rural schools are neither equipped norstaffed to a high standard. Yet as poor people and rural areas in Mozambique are net recipients ofpublic resources, they are the most vulnerable to the poor funding and management of publicservices.

The data on government budgetary current expenditure in the social sector is the most reliableindicator of the level of human capital investment opportunities offered by the government. The mostnotable trend in recent social spending in Mozambique has been its sharp decline in the immediatepost-war period, 1993-94, due to the costs of the peace. Total health and education spending by thegovernment as a share of GDP dropped from 5.6% in 1990-92 to 4.5% in 1993-94 before rising to4.9% in 1995-97 (International Monetary Fund 1998: 54). Expressed as a share of currentexpenditure, total health and education spending by the government dropped from 20.4 % in 1990-92 to 16.6% in 1993-94 before rising to 24.9% in 1995-97.

In parallel, the recurrent budgetary expenditures for the army (excluding spending for the ministries ofsecurity and interior) fell from 5.1% of GDP in 1993 to 3.9% in 1994 and 1.6% in 1995(Government of Mozambique 1995: 1). Yet the government needed to finance resettlement,demobilisation, and demining programmes as well as the voter registration and the nationalparliamentary and presidential elections in 1994. Other reasons explaining this trend in spendinginclude the slower than possible post-war growth (thus reducing taxable resources), the pressure tokeep overall public spending low as part of the ongoing stabilisation programme, and the need tocontinue to finance the foreign war-time debt. By 1997, the importance of the post-war specialprogrammes in the social spending budget had declined significantly, with 91% of all social spendingand net lending being directed towards health and education in 1997.

…and the IMF

Until this year, the financing of the budget deficit faced constraint imposed by the IMF. It has beenconcerned about the levels of aid flowing into Mozambique and thus contributing to inflation. TheIMF first set targets for the level of the budget deficit and later controlled net lending to thegovernment (Hanlon 1996: ch. 3). In the most recent PFP (Government of Mozambique 1999),which was agreed between the government, the IMF and the World Bank after the negative rate ofinflation was published for 1998, the IMF did not demand such cap on aid. Hence seven years afterthe war and twelve years after first adopting IMF reforms, the government is finally raising itsdomestic, aid-financed spending and is increasingly setting its own spending preferences.

However, it is not inconceivable that in future PFPs, when the rate of inflation may again exceed theplan, such demand will resurface. Furthermore, the economic effects of the war could have justified amuch higher level of spending in all post-war years. From that point of view, the IMF may have


inhibited reconstruction, growth and poverty alleviation in Mozambique when it insisted on a cap onaid to finance the budget deficit (Hanlon 1996: 134-6).

Rural Isolation and Rural Poverty

Rural poverty in Mozambique is strongly influenced by an exogenous set of structural constraints.These constraints suggest that even with pro-growth macroeconomic policies, there will be little ruraldevelopment in Mozambique. And with slow rural development, absolute poverty in Mozambiquewill persist even in the absence of war, socialism and drought. Hence the government shouldintervene in nascent rural markets with pro-poor, supply-side policies aimed at reducing thesestructural constraints to increase marketed output and thus poverty.

The main structural constraint of rural Mozambique is the degree of geographical and economicisolation in which most households and communities exist (Desai and Chávarri 1996). Geographicalisolation refers to the small number of urban communities, the low density of rural communities, andthe low density of households within these rural communities. Economic isolation refers to the smallnumber of market-based or other economic transactions in which households trade inputs, outputsand consumption goods. Geographically isolated households could be seen as being “remote” whileeconomically isolated households are subsistence households and likely to be poor. Poor urbanhouseholds, on the other hand, are not geographically isolated and need not be economicallyisolated.

These forms of isolation result from both the exogenous and endogenous structural features of theeconomy. The former include the country’s large size stretching along the Indian Ocean for about2,500 km from North to South, its many large rivers cutting across the country from West to Eastthus inhibiting North-South transport, the varied geographic and climatic features of the country, andthe diverse linguistic traditions of its peoples. Viewed over the long-term the latter includes the lowpopulation density in Mozambique but the high fertility rates of the population, the colonial and post-colonial division of domestic and international administrative areas, the small number of urban areas,and the populations’ migratory responses to colonial and post-colonial wars of control resulting inarbitrary yet significant social dislocation. These factors thus result in communities being located farapart from each other, the size of these communities being small and, from an economic point ofview, each household in these communities having little to demand from or supply to other, equallypoor households. Furthermore, isolation in rural Mozambique has been reinforced by the negativeand lasting effects of the country’s internal war.

The production of crops is strongly geared towards obtaining food self sufficiency in the face of poormarkets and periodic droughts and floods. Only 29% of farming households in 1993-94 weremarketing any food crops and of these a large proportion of households did not buy in any foodcrops (Desai and Chávarri 1996: 6). Risk avoidance is a paramount consideration leading to thecommon practice of inter-cropping, thus further reducing the yield of farming activities. The storagetechnology of households is often poor, too, thus reinforcing the prevalence of hunger at the end ofthe growing season and reducing the scope for anti-cyclical marketing behaviour.

This isolation also entails poor and monopolistic trading, transport and information infrastructure(further aggravated through the departure of many Portuguese traders at independence and of manyAsian traders during the war and the general war destruction), an absence of rural financialinstitutions, much trading related red tape, and the fragile protection of property rights in the absenceof formal state institutions in much of rural Mozambique. These factors cause transaction costs to behigh thus creating adverse terms of trade for rural farm households. This explains the low level ofmarketing of agricultural outputs in much of rural Mozambique.


In addition, the negative effects of isolation are further reinforced by the low level of assetaccumulation in the absence of large livestock rearing, traditional land allocation mechanismsdiscouraging individual land rights or permanent tenure, the lack of non-agricultural employmentopportunities within most communities, the lack of materials for the construction of solid houses, therepeated food security crises forcing a reduction of remaining assets, the destructive effects of thewar for assets, and some local cultures where individual asset accumulation may not be encouraged.The poor provision of consumer goods further reduces the incentive to increase marketed productionfor smallholders. Remittances and aid, however, have a role to play in this regard. Such transfers canincrease the purchasing power of even remote areas and thus bring about an increase in the marketdensity and thus increase the incentives for marketing output as well.

Despite the potential but unexplored gains from specialisation, there are therefore few opportunitiesfor households to work their way out of poverty given the isolation of rural Mozambique. Instead,the majority of the Mozambican population is born into a situation where, given the structuralconstraints, they have little choices for improving their own or their children’s welfare. TheMozambican rural economy is thus geared towards obtaining food security through subsistenceactivity. The resulting social organisation in each community is quite homogenous, especially the moreisolated the community is. Some limited demand policies and more importantly supply side policiescan help overcome the negative effects of isolation and thus end the structural poverty of a majorityof the Mozambican population.

Overall, ignoring the implications of structural and war-induced isolation will lead to an increasingdifferentiation and income inequality even between rural areas. Instead, public policy should aim toreduce isolation and hence transaction costs and thus increase growth and reduce poverty.

Government Poverty Alleviation Policies

These examples of demand and supply-led poverty alleviation policies suggest that there are fourgeneral types of policies which will reduce poverty: First, indirect enabling policies encourage generaleconomic growth through favourable macroeconomic policies and institutions. Second, directenabling policies help poor people to acquire and make use of individual skills which will allow themto earn higher incomes. Examples include education, health and agricultural extension servicesbenefiting poor people. Third, general transfer policies provide income or consumption transferswhich also benefit poor people, such as food for work, credit, school food or food price subsidies.Fourth, targeted transfer policies benefit specifically poor people by focusing payments only at thosein greatest need, for example through means tested scholarships, social security payments etc.Different donors pursue some or all of these four types of policies in Mozambique, although there hasbeen a general decline in the number of general transfer policies as they are often expensive and notvery effective as poverty alleviation policies.

Poverty reduction policies can be part of more general policy initiatives (for example setting the levelof user charges in the health sector will affect poor people but is not per-se a poverty policy) or theycan be explicitly poverty-oriented (for example cash transfer programmes for the urban poor). Thereis a danger that it is assumed that social sector initiatives will benefit the poor when in fact theypredominantly benefit urban infrastructure (for example large hospitals) and higher income groups(for example secondary schools). This includes social spending in district capitals which will notbenefit the majority of the rural population but which will be classified, for project purposes, ashaving been spent in rural areas. Programmes need to be targeted carefully to reach poor people,their needs and where they live.


While the government specified macroeconomic targets for the post-war period, it did not commititself to quantifiable, poverty-related targets. In part this was due to the lack of detailed dataconcerning rural poverty in times of conflict. This implied that future donor negotiations would not beconducted on the basis of measurable policy objectives thus reducing the importance of theseobjectives and the government bargaining power to improve loan and aid conditions.

In the 1992 PFP, the government committed itself to implement 114 specific policies. Theseconsisted of 87 general economic policy measures and 27 broadly pro-poor policy measures, ofwhich eleven were aimed at general rural development, nine specifically to benefit the poor and sevento improve social services for the poor (Government of Mozambique 1992: 17-25). However, someof the general policy measures were likely to increase poverty, for instance by increasingunemployment following privatisations, increasing user fees and increasing urban food prices. Thisillustrates that while the government was committed to pro-poor policies in principle, its main policypriority was to increase macroeconomic stability and private sector growth.

The broadly pro-poor policies included increasing agricultural export prices, a few selected foodprice subsidies and income targets, increased spending on health, education and rural development,improvements to land, trading and transport regulations to encourage rural production and trade, andto continue some emergency resettlement and food aid measures related to the end of the war. Thisapproach to poverty alleviation did not change substantially during the 1990s except that theresettlement of rural households ceased soon after the general elections of 1994 and that pricecontrols and free, emergency food aid deliveries were phased out in the late 1990s.

The main planks of the government’s poverty alleviation policy today are still to promote ruraldevelopment through increased agricultural competition and rural infrastructure, to improve humancapital through basic health and especially primary education, and to increase safety nets, includingdisaster safety nets, for poor and vulnerable people (Poverty Alleviation Unit 1995: 29; InternationalMonetary Fund 1998: 46). Given the extent of poverty, the lack of resources and the capacityproblems of the public sector, however, the third component of this strategy has not been widelyimplemented to date.

Agricultural and Rural Development Policies

The single biggest poverty alleviation success in Mozambique has been the increase in smallholders’agricultural output and the improved competition in agricultural markets. In the continued absence oflarge natural disasters, this is the biggest guarantee against acute malnutrition or starvation though itwill be not be enough for increasing average rural household incomes. Further government povertyalleviation initiatives will thus be needed.

The government has started to introduce sectoral planning in the areas of roads, water, health,education and agriculture (Government of Mozambique 1998: 5). The latter policy programme iscalled Proagri and its objectives are to work towards poverty alleviation, food security, job creation,and improving the balance of payments through institutional modernisation, strengthening extensionservices, and improving the sustainable management of natural resources. Specifically, Proagri willfocus on seed and input delivery through a variety of partnerships, setting up environmental earlywarning systems, controlling crop pests and diseases, improving post-harvest activities, andpromoting cash crops in partnership with the private sector. Proagri is thus defining a new strategicrole for the Ministry of Agriculture at a time when on the one hand the end of the war makesagricultural policy implementation feasible once again but when on the other hand the underlyingrationale for intervention in agricultural markets is increasingly being questioned.


The most notable absence from the above list of Proagri priorities is the discussion of land. With thereturn of peace and the displaced population, there was a general expectation of land conflicts inmost of rural Mozambique. This was not borne out in the years after the general election. However,specific social, ethnic, spatial groups of smallholders, in particular female headed households, findthey are land constrained. In addition, the access to fertile and accessible land is increasinglycompetitive while several government backed schemes have recently granted high quality land tocommercial farmers. Given the underfunding and ineffectiveness of the land registry, it is likely thatland conflict will become an economically and politically important issue in the near future.

Another issue absent from the above list of Proagri areas of involvement is the area of managerialknow how for small farmers. It appears as if there are still significant advances to be made in theunderstanding and utilisation of the market economy in rural Mozambique. Due to the absence ofmarkets during socialism and the war, cultural reasons and the still low density of markets even in thecurrent period of liberalisation and the consequent market power of the frequently monopsonistictraders, farmers will have had and have few opportunities to learn market economics and managerialskills.

While the quantity and the quality of traded produce may still be low for many farmers as yields arebelow regional averages and most peasant households still depend on significant shares of homeproduced output for home consumption, much value added and a better negotiation position can beachieved through farmers better versed in the basic rules of the rural economy. The effects can behigher revenues for farmers, more domestic and international trade and a higher market density thuscreating linkage effects in the trade of consumer goods. Such projects differ from the usual extensionservices in that they do not focus on inputs or techniques, that they are better provided by non-government agents and that they can either establish profitable marketing cooperatives or simplywithdraw from the project area after a certain degree of market density has been reached. Examplesof such programmes should thus studied and possibly adopted by the ministries and other agencies(Cooperative League of the USA 1997; UNDP 1998: 55).

Sequencing Social Spending in the Post-War Period

An immediate post-war policy area which should perhaps not be considered a priority is the area ofsocial and especially educational service delivery. Conventional wisdom suggests that these are thekey areas of government involvement in the economy for their own sake, for their positive productiveimpact on the poor, and due to the absence of private sector involvement in these sectors. Much ofFrelimo’s and the donors’ international and internal legitimacy derives from the provision of theseservices. Conversely, Renamo’s failure to provide social services in its areas of control during theconflict has consistently undermined its appeal to Northern donors.

However, providing schools and hospitals in the immediate post-war period is hugely expensive,difficult to manage, primarily benefits the already better off social classes, and may only generate fewshort-term economic and social benefits. The majority of the rural Mozambican population facedsevere disruption and extreme food insecurity during the war and in the first few years after the war.Hence their priority most certainly was to improve their food security and then to rebuild their verylow asset base. In 1997, five years after the end of the conflict, male residents in rural areas aged sixyears and above had attended on average six months of school in their lives while females residentsin rural areas aged six years and above had on average not attended school ever in their lives(UNDP 1998: tables 30-31). Given that instruction is typically in Portuguese and that Portuguesefluency rates in rural areas are very low, the marginal benefit of attending another year of primaryschool are negligible. Recent household surveys from Nampula province suggest for example that


there is no correlation between previously completed schooling and current economic welfare forpost-war rural households (Brück 1999).

Instead, it would appear much more effective to improve the overall planning and administrativecapacity of the Ministry of Education and its local subsidiaries, to develop and agree funding for anintegrated education investment plan, to strengthen the teacher training staff and facilities, to adjustthe training, career and incentive structure of the teaching profession and then to slowly expand thequantity but also the quality of primary schools across the country. Under such cautionary plan,access to primary education in some area of the country may have been slower. But households willnot send their children to school if they cannot afford the opportunity cost of them attending school.And the net private returns to the household of sending their children to school are more likely to bepositive in a growing rural economy where additional skills will have a higher value than in a completesubsistence post-war economy. And once the exogenous conditions for children attending schoolhave improved, other children or adult members of the household may start school, too, not justthose aged six years.

The government has repeatedly attempted to introduce social safety nets, especially in urban areas.Such nets are supposed to protect specific and identifiable population groups from absolute poverty.Social safety nets do not aim to remove the underlying cause of the poverty. Instead, they providetheir beneficiaries with enough money or non-cash benefits to increase the household’s entitlementsto the intended level. Given the Mozambican government’s constrained finances and the wide scaleof absolute poverty in Mozambique, there has been a strong emphasis on only funding thosebeneficiaries who also do not have any informal safety net to rely on, for instance nearby extendedfamily, relatives working abroad, or religious or other communities. However, this increasedemphasis on targeting easily increases the costs of the schemes thus trading off cost effectiveness inadministration with the accuracy of the targeting.

Overall, there is a strong case in a very poor, post-war economy which is lacking most rural marketsfor postponing the delivery of some social and economic services in order to create conditions wheretheir supply will be of a much higher quality, sustainably managed and funded, and where there islikely to be a significant demand, too. Social safety nets may have to be delayed until more urgentsocial policies, the institutional capacity and appropriate funding have been implemented successfully.

Civil Institutions as a Pre-Requisite for Poverty Alleviation

The Mozambican poverty alleviation debate has been dominated by addressing low absolute levelsof income and consumption and ways of raising these. However, equally important are the relativedistribution of these resources and non-financial social and economic rights and opportunities (Sen1999). With the recent increase in data surveying poor households in Mozambique and the obviousemergence of a small elite of very rich Mozambicans, there will be increasing attention paid to theissues of income inequality. In particular, the policy debate will have to address the link betweeninequality and growth in Mozambique. It is likely that the economic losers of the war are already alsoloosing out in the post-war economic recovery as they lack the assets and the opportunities toimprove their well-being. Poverty alleviation policies must therefore also address those civilinstitutions and their relation to poor people which can provide and expand opportunities and thusreduce absolute and relative poverty in Mozambique.

The uncertainty and human upheaval after the war and the corresponding macroeconomic instabilityin Mozambique prevented policy makers from establishing institutionalised poverty alleviationstructures in the early 1990s. There is a danger that seven years after the war, it is increasinglydifficult to re-adjust public policy design with poverty alleviation as its first priority. Instead,


Mozambique has seen the establishment of many important economic and political institutions in themeantime which may suggest that the country is moving in the direction of a free market, liberaleconomic system where poverty alleviation remains an official but not a de facto objective of stateinstitutions.

The long and brutal internal war, the double legacy of colonialism and socialism as well as the highlevel of economic isolation prevalent in rural areas severely impede market, social and politicalinstitutions in Mozambique from developing rapidly. While the government and donors have paidsome lip-service to the encouragement of such institutions, in effect there are only few examples ofwide ranging institutional developments in post-conflict Mozambique. These include the financialsector, civil service, local democracy and the land law, in decreasing order of success.

Many more economic, public and civil institutions require urgent attention if Mozambique is toachieve the objectives of significant private sector growth coupled with poverty reduction in the nearfuture. Alternatively Mozambique may witness the rapid development of the large urban economiesin Mozambique dominated by natural resource exploitation, capital-intensive industries andinternational trade and benefiting a small local elite with little adherence to rural poverty alleviationobjectives.

There are also many policy areas where institutional development has not even been commenced.These include the dismantling of inhibitory red tape, the financial accountability of the public sectorand the aid resources, the integration of traditional political authority in local decision making, and thedevelopment of general political, economic and civil attitudes in Mozambique conducive tosustainable growth. The range of examples shows that institution-building, especially important in thecontext of a post-war economy, is not yet a core objective of government or donor policies.

The government is increasingly recognising the need for legal, regulatory and institutional reforms andis winning some donor support for these (Government of Mozambique 1999: 8-9). Such reforms areseen as generally beneficial for economic growth or, rather, the lack of these reforms is increasinglyinhibiting private sector development. Unfortunately, many of these initiatives have a reactivemotivation and are geared towards the defence of narrow property rights, not the establishment ofwider civil rights or institutions.

The extreme poverty and the problems of geographic isolation will reinforce the dependence of poor,rural people on arbitrary decisions by powerful agents. The future increase of rural markets and theprovision of credit may cause new dependencies for the poor in Mozambique. If they are to avoidthe potential loss of freedom associated with structural and wise-spread poverty (see for example theexperience of near slavery for many poor in India), then the provisions of legal rights and someinstruments for the enforcement are crucial poverty alleviation measures. Given the scale of theproblems and the variety of possible measures to preserve individual and commercial freedoms usinglegislation and law enforcement agencies, there is a very strong case for a sectoral investmentprogramme in law-enforcement in Mozambique.

Finally, the war has left a legacy of distrust which must be overcome for informal institutions tosucceed in Mozambique. NGOs working in rural areas for example find that communicationsbetween social groups is very difficult. Hence some NGOs try to build groups, for instance offarmers or traders, to assist groups defending their self-interest against those of other groups, and tohelp groups realise what common interest they share with other groups (Cooperative League of theUSA 1997). In the area of health policy, for instance, it is important that various actors such asparents, medical staff, teachers and bureaucrats, work together to realise their common goal with theleast effort. In rural areas, meanwhile, there is a strong case to develop the role of traditional


authorities to complement state authority while there is a lack of sense of mutual obligation resultingfrom the absence of rural, local elections and rural, local taxes.

Overall, the peace accord and the move to democracy did not encourage rural or critical citizens toengage with the state but instead fostered divisions and reduced the trust of the public in the state asan agent of change for the better. Clearly, the divisions of the war period and the nature of thetransitional period 1992-94 are still shaping the public perception of the government specifically andthe state generally. Perhaps a government of national unity incorporating both Frelimo and Renamoand a stronger emphasis in the peace accord on institutions building may have prevented some of thethis disintegration of public confidence in the state.

3.4 RECOVERY AND POVERTY IN THE POST-WAR PRIVATE SECTOR

Production and Sectoral Changes

Overall output in the period 1987-89 rose by 5% p.a. due to the increased levels of foreign aid. Thenext two years, growth was below 2% p.a. as aid flows diminished, the war intensifies and a droughtaffected Southern Africa adversely. In 1992, the economy shrunk by 1.4% while the populationgrowth was still high despite the war. This finally encouraged the peace negotiations and helpedestablish a ceasefire thus permitting increased humanitarian aid inflows.

The partial recovery of the early 1990s can be explained by the end of the capital destruction and ofthe high levels of uncertainty caused by the war, a credible peace agreement and peace process, thehigh inflow of resources with the factual two-year UN occupation of the country, the return of thelarge number of displaced people, related increases in the total land cultivated, favourable weatherconditions, continued high levels of aid, continually improved macroeconomic management,increased competition in many markets, and increasing inflows of foreign direct investment.

Persistent constraints in the early 1990s include the low levels of physical infrastructure, the fragilityof civil and state infrastructures, the subsequent high levels of transaction costs as well as thegeographic, economic and social isolation of many peasant households, their low agriculturalproductivity, the poor domestic and regional integration of the economy, the continued high levels offoreign debt, the high budget deficit, the balance of payments disequilibrium, the correspondinglyovervalued exchange rate, high real interest rates, and still low levels of government policy makingcapacity. These developments in Mozambique in the period 1993 to 1999 will be assessed in moredetail in the sections below.

Balance of Payments

Mozambique has improved its competitiveness vis-à-vis most of its trading partners since the end ofthe conflict. One the one hand, the depreciation of the rand in 1996 and the rand’s recentdevaluation pose a threat to the Mozambican competitiveness given that Mozambique conductsalmost a third of its trade with South Africa. On the other hand, Mozambique has gained muchlabour productivity with its recent privatisations which reduced the workforce of most formerlypublicly owned firms but improved the productivity of the remaining workers significantly. Andprevious increases in the Mozambican rate of inflation were generally not matched by increases in thenominal wage rate so that this, too, helped improve Mozambique’s international competitiveness.Overall, Mozambique has improved its competitiveness by 113% 1987-96 and by 24% since the


end of the war alone while South Africa has worsened its competitiveness by 163% 1987-96 and by28% in the period 1992-96 (International Monetary Fund 1998: 44).

Mozambique’s merchandise exports increased by 42% in the period 1996-98 (Government ofMozambique 1999: 3). However, much of this increase was based on an exogenous improvement inexport prices such as prawns, cotton and cashew, and on the start of electricity exports from theCahora Bassa dam to Zimbabwe in 1998. Overall, merchandise exports are still below the level ofthe early 1980s while in 1997, exports only grew by about 3.7%. This was due to the temporaryappreciation of the metical vis-à-vis the rand and the low level of cotton and cashew exports (Falck1999: 24).

Currently, agriculture and renewable natural resources account for three quarters of all Mozambicanexports (World Bank 1997: 1). Shrimps and prawns alone account for over one third of all exports.Other important agricultural export commodities include, in decreasing order, cashew nuts, cotton,sugar, copra, citrus fruits and timber. With the notable exception of cashew, most of these productsare being farmed by commercial, large scale farms or plantations in Mozambique. While export-oriented plantations may offer increasing employment opportunities to poor landless or landconstrained farmers (Cramer and Pontara 1998), such income opportunities are likely to beseasonal, insecure, transferring few skills, and badly paid. Given the current weaknesses with theimplementation of the land law, the low agricultural minimum wage, and the absence of strong judicialand civil institutions supporting the rights of rural workers, traditional export crops, except forcashew, do not offer a significant hope for the majority of rural smallholders to escape their structuralpoverty.

Further increases in the value of exports will depend primarily on higher export commodity prices,favourable weather conditions in agriculture, and the completion of the mega investment projects.Increased export earnings do not, however, seem to depend on increasing investments by or insmallholder farming agriculture, especially as diminishing returns to land are being increasinglyexperienced in fertile, centrally located farmland. In addition, the contribution of the prawn industry,the leading export sector to date, may decline in absolute terms if the government continues to grantlarge numbers of fishing licences while neglecting the environmental protection of the mangroveswamps, which are crucial in the life-cycle of prawns. Furthermore, improvements in the externalcompetitiveness may not translate into broadly based, poverty-reducing agricultural output growth ifstructural problems and a lack of institutional development continue to inhibit the supply response ofsmallholder farmers comparably more than the supply response of large, multinational investmentconsortia.

In the area of manufacturing exports, the challenge for the Mozambican policy makers is to maintaintheir cost advantage in a period of low or even negative inflation. One possible strategy is toencourage employers and trade unions to agree low real wage gains but to expand employmentinstead thus spreading the benefits of Mozambique’s export-oriented growth strategy across theincome divide. This should be accompanied by various forms of education and training opportunitiesfor future and current workers to allow real wage growth to be based on better labour productivityand increasing industrial value-added. In addition, the government must maintain its macroeconomicpolicy record as this is one aspect on which Mozambique will be able to differentiate itself fromalmost all its neighbouring countries (especially South Africa) without such strategy requiring large,direct financial commitments by the government or donors.

Imports in the period 1996-97 reacted to lower import prices and increased import substitution andhence increased only marginally. The overall current account deficit excluding grants narrowed 1995-


97. It increased in 1998 by 2.7 GDP percentage points only because of increased imports for theconstruction of the Mozal plant. However, these imports were entirely funded by increases in FDI.

Money, Prices and Financial Markets

Mozambique had high levels of inflation from 1989 till 1995, with 70% and 54% annual increases inthe Maputo CPI in the last two years of that period, respectively (Ubide 1997; InternationalMonetary Fund 1998: 12-23). Since then, inflation has decreased sharply to -1.3% in 1998. Thischange in the trend for inflation has been caused by tighter monetary policy following the restructuringof the banking sector, by the depreciation of the exchange rate (which in turn was helped by thetighter monetary policy), and by the favourable weather and increased agricultural production. Pricechanges in Mozambique are still dominated by agricultural seasonality although it appears that thispattern has recently stabilised thus becoming more predictable (except for major natural disasterssuch as floods). While a loose fiscal policy caused inflation in earlier years, better macroeconomicmanagement has helped reduce the inflation rate. However, the recent devaluation of the SouthAfrican rand will put pressure on the metical, as Mozambique conducts almost 30% of its trade withSouth Africa.

After a monetary policy which was expansionary for many years, the recent privatisations,liberalisation and institution-building in the financial sector has encouraged the central bank to apply atighter monetary policy. The commercial banks have considered this recent change as too restrictive.However, this policy also exposes the high real interest rates the commercial banks have beenenjoying and which are expected to decline with increasing competition. From that point of view, it isnot the tight monetary policy but the lack of efficiency by the banks which causes the high interestrates and which are merely exposed by the current monetary policy. Given the lack of low levels ofinflation in Mozambique, the dependency of the price level on exogenous climatic and world tradepatterns, and the still young track-record of the central bank, the high real interest rate alsorepresents a risk premium which will only decline with deepening financial markets, improvedfinancial regulation and the diversification of investment, production and trade opportunities inMozambique.

The data used to calculate price changes is only based on data from Maputo or, in more recentyears, Maputo, Beira and Nampula (the three largest cities). The experience of smallholders in thecountryside, who face large transport costs in buying and selling products, who may trade withneighbouring countries other than South Africa, and who have a much lower standard of living, maywell differ systematically from the experience of urban consumers. However, there are no systematicstudies of rural price levels available so all macroeconomic data in Mozambique continues to use theurban CPI as a guide to price changes in the whole country (Cruz 1999).

Financial market reform in Mozambique has taken place in two main phases: First, the legalframework for restructuring and stabilisation of the sector was established before the end of the war.Also, this work in the financial sector was a prerequisite for restructuring and privatising non-financialstate-owned enterprises (World Bank 1992). With more favourable security conditions and theongoing strengthening of the regulatory and supervision functions of the central bank, the actualprivatisation of most banks was undertaken since approximately 1995. This may be an example ofsequencing policy reform in a war economy so that during an ongoing war future, peace-time reformscan be planned and prepared thus accelerating the post-war peace dividend. However, the initialfinancial sector reforms were slow and ineffective at first. In addition, much bureaucratic interferencehas persisted in the economy and this increases private sector transaction costs significantly


(International Finance Corporation, Italian Ministry of Foreign Affairs et al. 1996). Much could havebeen done to eliminate such barriers to investment and growth in earlier years, even during the war.

Current challenges in the financial sector include the consolidation of the role and performance of thecentral bank as the regulatory and supervisory authority of the financial markets. Competition in thefinancial sector should be maintained and strengthened following the privatisation of the bankingsector so that the cost of and the access barrier to credit is lowered throughout all sectors andprovinces. Particular bottlenecks include rural finance and emerging entrepreneurs with little othersources of funding, for example mobile rural traders of agricultural commodities. Finally, the domesticsavings rate and thus savings opportunities, including for poor, rural farmers, should be increased toallow households to build up their assets, to ease access to credit at a later stage, and to smoothconsumption across economic or seasonal cycles.

Privatisation and Enterprise Restructuring

The government of Mozambique restructured large and small or medium-sized state-owned firms intwo separate programmes which together are considered to be among the most ambitiousprivatisation programmes in Africa. The former programme was completed in September 1998 andthe latter in June 1999. Of all the firms in both programmes, over half were in industry andcommerce, one fifth in agriculture and fishing, and 16% in construction (Falck 1999: 6). Of over1,200 state-owned firms, 33 will remain with the government as the majority or sole owner. Forexample, almost all agro-processing firms and state-owned farms have been privatised except for theAgricom successor ICM, which operates agricultural warehouses and is still owned by thegovernment. The scale of these privatisations has been such that about 75% of Mozambican GDP iscurrently being produced by the private sector.

Even the state-owned firms have undergone significant management changes to increase theirefficiency and reduce their burden on public finances (Government of Mozambique 1999: 6). Thegovernment is currently working on the regulatory framework for these remaining enterprises and onits policy concerning possible future divestitures, for example via the future Maputo stock exchange.Some of these remaining state-controlled enterprises operate significant public utilities or services sothat their regulation or divestiture has significant implications for poor Mozambicans (e.g. regardingthe access and cost of urban water or transport) or for businesses (e.g. those of the publicly ownedelectricity monopoly EDM).

The negative experiences with privatisation in, for instance, Russia and South-East Asia has shownthat the ownership of firms need not be the main characteristic of their economic performance. Inaddition, programme of privatisation will not necessarily create markets or competition where thesewere previously absent. Instead of starting to privatise firms in an economy with underdevelopedfinancial markets and only feeble trust expressed by foreign investors at the end of the war, policymakers could have introduced entrepreneurial management structures, performance-relatedcontracts, and improved regulatory frameworks to achieve efficiency gains and reduce thedependence on state subsidies. In addition, they should have assessed more carefully the minimumconditions required for each market to function so that state-owned enterprises could have been soldoff when these markets were starting to function properly. Alternatively, the government might havewished to maintain its control over firms which were operating in markets without the level ofinstitutions necessary to support competition. In the financial sector, the government followed suchpolicy, albeit slowly, and only privatised the main commercial bank in Mozambique, BCM, aftermuch institutional development in the financial sector. In the end, the government ended up with a set


of significant but financially weak firms where it is now forced to address the underlying problems oftheir markets (for instance in the area of transport, electricity and telecommunications).

The low investments by foreigners in restructured and privatised firms in Mozambique also suggeststhat their restructuring might have been too timid or that their sale may have taken place too early togenerate significant foreign interests. Such foreign ownership may have attracted entrepreneurial andtechnological know how into the country, helped bring foreign capital into Mozambique and reducedthe budget deficit. In fact, over 90% of all privatised enterprises were purchased by Mozambicanfirms who frequently lacked the capital or the skills to improve their performance (Falck 1999: 6).This also indicates that the emerging entrepreneurial class in Mozambique is not only small but alsounderfunded and inexperienced compared to other countries with longer, local capitalist traditions.Yet the emerging Mozambican capitalists are nevertheless reinforcing high ratios of income inequalitywithin the country.

Investment, Savings and Credit

According to the data published in the war and early post-war period, Mozambique has experiencedinvestment to GDP rates of between 16% and 54% (see appendix). Yet growth in many of theseyears was low. One explanation may be the definition of investment in the national accounts aspublished in most post-war years where much public and aid spending falsely counts as investment.If actual investment had been lower, the productivity of investment would have been much higher fora given growth rate (as ∆Y/Y = I/Y x ∆Y/I). The IMF has estimated that the true productivity ofinvestment may be up to 50% higher than current values suggest (International Monetary Fund 1998:24-26).

One reason for the low productivity of investment is Mozambique’s commercial law which datesfrom 1898 thus making it unsuitable for many current business practices (International FinanceCorporation, Italian Ministry of Foreign Affairs et al. 1996; Falck 1999: 9). The process ofmodernising the code has been slow even though this would have been a policy area in which areform-minded government even in times of war could have demonstrated its commitment to changesas well as laying the foundations for increased private sector activity and legal institution-building.Currently, the government and parliament are debating a new commercial law after failing at firsteven to agree on a timetable for changing the law. Meanwhile a temporary commercial code hasbeen adopted but the upcoming parliamentary elections are likely to delay the adoption of the finalversion of the new commercial law further still.

In addition, making new laws may not help, either, as the law making process itself does not alwaysensure an efficient output. For example, the visa law was modified recently but continues to be themost vocally complained about pieces of legislation for foreign firms operating in Mozambique. Muchcorruption and inefficient bureaucracy is involved in applying and extending visas without this processapparently leading to a significant screening, for law enforcement purposes, of applicants nor to aviable revenue collection procedure.

Mozambique has attracted a number of large foreign investments over recent years (Muchine 1999).Currently active projects include the construction of the Mozal aluminium smelter near Maputo worthUS $ 1,300 million, the construction of the Maputo Development Corridor worth US $ 400 million,the almost completed rehabilitation of the Cahora Bassa electricity generation and distributionsystem, and the Beira Development Corridor. Various planned schemes which may materialise in thenear future include the Maputo Iron and Steel Project worth US $ 2,500 million, the Titania SlagSmelter in Maputo worth US $ 500 million, the Maputo Conservation Project worth US $ 800million, the Beira Iron Ore project worth US $ 620 million, the Moatize Coal Mine in Tete worth US


$ 1,300 million, the Heavy Sand Mine in Nampula worth US $ 100 million, the Mpanda UncuaHydroelectric Power Project on the Zambezi worth US $ 2,000 million, and the exploitation of theTemani Natural Gas Fields worth US $ 60 million. The total value of these current or plannedinvestments is US $ 9.58 billion, distributed over a period of several years. The potential benefits ofthese projects include higher tax revenues, exports earnings and further investments, all of whichMozambique needs to increase to escape its dependency on foreign aid for funding imports andgovernment spending.

One of the major criticisms of these projects relates to their use of government fiscal and humanresources. In the extreme, these projects attract such significant tax concessions that they cost thegovernment more in regulation and coordination efforts than they contribute to fiscal revenues. Thisimplies that the government is giving up a precious opportunity for taxation in exchange for capitalintensive and possibly low linkage projects unsuitable to increasing incomes or employment,particularly for the low skilled. In addition, the mega projects create precedents which subsequentinvestors will claim for their projects as well thus generally reducing the benefits Mozambique willderive from FDI in the future. Mozambique’s dependency on aid as a substitute for missing domestictax revenues is thus unaffected by such projects.

Urban Labour and Land Markets

Data on employment and wage patterns in Mozambique are very poor. Two exceptions are theinformation on the labour force provided by the 1996-97 national household survey (known as IAF)(Instituto Nacional de Estatística 1998) and data on minimum wages, as they have been set by thegovernment since collective bargaining was agreed in 1990. Also, some broad trends in employmentin privatised enterprises, in manufacturing and in the public sector can be observed in the post-warperiod.

IAF shows that 84% of the labour force is working in the family sector of agriculture, while 6% and4% are working in the public and the informal sectors, respectively (International Monetary Fund1998: 28). The unemployment rates extrapolated from IAF are 3.8% excluding the informal sector,26.2% including the informal sector among the unemployed and 35.5% including the informal sectorand the likely hidden unemployment in over-staffed public enterprises. (It is not clear if the group ofhidden unemployed may include seasonal agricultural workers whose average annual labourproductivity may still be significant.)

Given that Mozambique has practically no social security system, unemployed people will undertakeany work with a net positive return. That is the reservation wage in Mozambique is very low aswould be expected given the country’s excess of unskilled labour. This data therefore suggests thatabout one third of the labour force are unemployed or underemployed and that outside of agricultureonly around 11% of the labour force have productive employment in the formal sector. Of these,over half work in the public sector.

Real minimum wages have depended strongly on the level of inflation. With low inflation in the earlyyears of adjustment from 1987-89, real minimum wages increased significantly. With higher inflationin the period 1990-95 the value of minimum wages declined strongly. Since 1996, when inflation wasdecelerating, real minimum wages started increasing again (International Monetary Fund 1998: 29).The minimum wages of non-agricultural workers in those years were on average 50% more thanthose of agricultural workers for whom separate agreements are made by the minimum wagecommittee consisting of the government, employers and the trade unions.


It is not known what percentage of employers voluntarily paid higher wages for the least qualifiedworkers than required by the minimum wage law (coverage) and if all registered companies whohave to accept the agreed minimum wages actually implemented them (compliance). The challengefor the committee deciding future rates of the minimum wage will be to set a level which will maximiseemployment, will enable workers to live above the poverty line, will allow companies to staycompetitive internationally, and will anticipate correctly changes in the relevant level of prices forworkers.

The effects of the privatisation programme in Mozambique has been a marked improvement in thelabour productivity of the remaining workforce in the privatised firms and a corresponding increase inreal wages (World Bank and Government of Mozambique 1996; International Monetary Fund1998: 33). The challenge of the remaining privatisations is to create similar effects there and to try tofind alternative employment or training for the workers who will not be able to continue in theirprevious jobs. In parallel, the newly privatised firms will have to learn how to improve theproductivity of the retained workers and how to effectively make us of the collective bargainingsystem.

In the early post-war years, 1992-94, employment in the manufacturing sector declined but outputincreased thus suggesting that real productivity gains were made. This permitted a rise of real wagesdespite the high inflation in these years. Consumption for some sections of the workforce thus rosedespite the ongoing structural adjustment policies. Yet only workers who kept their job andemployers who stayed in business benefited from these changes. In the absence of social securitysystems, newly unemployed workers depended on their families for their basic consumption needsthus further reinforcing the dependency ratios in these families and decreasing these families’ realincomes per capita. Overall income inequality in these years can thus be expected to have increased(UNDP 1998: 55-58).

Since 1994 there has been an increasing concern over too high levels of real wages in manufacturingwhich may force businesses to close or to adopt more capital intensive production technology thanappropriate given the high level of unemployment in Mozambique. This rising level of real wages mayin part be due to a government worried of loosing core urban voters, of declining living standards intimes of adjustment, of trade unions mainly concerned with the position of their employed members,and of privatising and liberalising the remaining state controlled sectors of the economy too slowly. Inaddition, FDI in Mozambique seems to create mainly large, capital intensive firms manufacturing withlittle employment opportunities. Increasing the social component of structural adjustment, increasingthe skills in the workforce through education, and encouraging trade unions to take account of theinterests of the unemployed should all moderate real wages and help reduce unemployment. Thegovernment may like to support small businesses in the formal and informal sectors which also wouldcreate more employment.

While the Mozambican public sector is quite small by African standards, it has to face similar issues.Especially public administration may still have individual employees or entire departments orinstitutions who are not productive. There seem to be strong political motives for continuing toemploy or operate these, as the public sector is very pro-Frelimo. In addition, since 1993 the lowersalary scales in the public service have seen faster rising wages than the higher scales thuscompressing public sector wages. While this may be desirable in order to attract better applicants,increase productivity and reduce incentives for corruption, the need to pay more competitive salariesat all pay scale levels, compared to the aid and private sectors, is very acute and is currently beingaddressed by the government.


One legacy of the colonial period is the large stock of urban buildings which was nationalised atindependence and still serves large numbers of people as increasingly inadequate housing. In fact, thegovernment has failed to utilise or maintain the value of this capital by letting houses at near zerorents, by granting long-term leaseholds for the best land and the best properties to their clientele as areward for low-paid public service, and by not investing in the maintenance of property. Instead, thegovernment has permitted a selected few lease-holders to charge market rents when letting stateproperty to usually foreign organisations or individuals. This literal case of rent-seeking has thussubstantially benefited a select group of politically well-connected, urban members of high socio-economic standing. While some poorer households may have benefited from below market rents instate-owned (apartment) houses, the quality of the housing stock, the health of public finances, andthe pattern of private incentives all deteriorated.

In the future, the government could accelerate the privatisation of the housing stock, start chargingmarket rents especially for non-privately-used or sub-let housing, link rents with the ability to pay,use these proceeds to maintain the remaining housing stock, and lay down clear guidelines for thefuture allocation of state property rights as leaseholds or freeholds. Such policy need not underminethe rights of the poorest tenants to affordable rents but would be generally more equitable by raisingpublic revenues, by encouraging the rehabilitation of very depleted housing assets, by creatingtransparent and fair property rights, and by decreasing corruption.

Agriculture

During 1996-98, overall growth in the economy was 10% p.a. but agricultural growth was below9% p.a. while population growth was very high with the return of the international refugees toMozambique. The agricultural growth was based on new land being cultivated and on favourableweather (the extensive margin). But yields in Mozambique are very low by international comparisonand they may decrease further as returnees are starting to exhaust previously fallow land. Given theimportance of agriculture for Mozambique’s economy, a large share of the post-war boom is thusbased on a short-term, unsustainable exploitation of only partially renewable resources. Thefollowing sections will outline key aspects of the Mozambican rural economy thus indicating past andfuture opportunities for sustainable, poverty-alleviating growth.

The Nature of Smallholder Agriculture

The World Bank has calculated that smallholders are efficient producers of most crops inMozambique, including food crops such as maize, groundnuts, cassava, rice, sunflower, and beansand cash crops such as cotton and cashew (World Bank 1997: 7). In fact, smallholders in 1996 onlyused half as many domestic resources than commercial farmers to produce one dollar worth ofcotton, while only smallholders could produce maize at internationally competitive prices. Theseresults are driven by the low cost of on-farm labour in smallholder agriculture in comparison to thehigh cost of mechanised agriculture in Mozambique.

Yet these calculations assume flexible markets and exclude the negative effects of policy distortions.As larger farmers have more opportunities to overcome market imperfections and are more likely toimpress their demands onto government, they improve their comparative advantage vis-à-vissmallholders while imperfect markets and imperfect government decision making and implementationpersist in Mozambique. These findings imply that resources, for example those of the Proagriinitiative, spent on smallholders will have the highest returns and that policies should addressconstraints faced by smallholders on-farm and in the way farmers are negatively affected byimperfect markets and government actions.


A key issue in the post-war period has been the changing nature of the objective of rural, farminghouseholds. During the war, practically all smallholders beyond peri-urban, relatively safersettlements practised a form of agriculture which only focused on harvesting enough to allow thehousehold to survive till the next harvest season (a safety-first approach). Households then faced,and currently many still face, several months of hunger during the physically demanding planting andweeding season when food stocks would run low. Since the end of the war, farmers have hadincreasing opportunities, on both the demand and the supply sides, to sell the surplus part of theiroutput while predominantly relying on non-marketed calories for their survival (a food self-sufficiencyapproach).

Most recently, households have increased their output grown for marketing and are increasingly alsopurchasing food in which they themselves do not have a comparative advantage in production (aprofit-maximisation approach). This change of household objective depends on the resource base,climate, market opportunities, risk attitude, uncertainty, technology, labour constraints, the gender ofthe household head, and other social aspects. On of the reasons why household are shifting to moreprofit-oriented agriculture is that the household needs for cash income have increased with increasedstructural adjustment, which for example leads to higher school and hospital fees.

The change of objective might lead to growing pure cash crops such as cotton, planting trees forharvesting in several years’ time, specialising in the most profitable and appropriate crops, becomingmore dependent on purchased inputs, investing in conservation of local resources (especially land),storing products for sale at a time when prices have risen, increasing the size of the land farmedbeyond that strictly necessary for the household’s survival, employing more off-household labour onthe plots, selling output further away to maximise revenue etc. In 1999 most farmers are probablyincome maximisers but there is no exact data available on this aspect of Mozambican agriculture.

During the war, either there were no buyers for the produce (a demand constraint) or it was notfeasible to produce surplus output (a supply constraint) thus forcing farmers into pure subsistenceproduction focused on survival only. Since the end of the war, however, these constraints have beenincreasingly relaxed and more farmers now have the supply and the demand opportunities to act asprofit-maximisation farmers. Many farmers, however, continue not to follow the profit-maximisationway of farming thus reducing their own incomes and the overall market density. For the design ofagricultural policy, therefore, it is important to differentiate why some farmers continue to actaccording to safety-first principles. There are three main reasons.

First, there are still war-related demand and supply constraints operating in many districts inMozambique (the post-war factor). For example, there are districts which are still economicallyisolated due to war-related damage of their infrastructure thus reducing the amount of trade feasiblein that area. Land mines still reduce the size of the fertile land available for agriculture even in areaswith restored transport infrastructure.

Second, some smallholders may continue to farm as they did during the war because even the liftingof the war-related demand and supply constraints has not eased these constraints entirely (thevulnerability factor). Especially in geographically isolated areas, where droughts or floods arerecurrent, or when households are very poor, farmers may act more risk-aversely.

Third, people may have been acting in war-like situations for so many years that even the arrival of alocal market does not easily induce farmers to change their familiar routines of farming (the culturalfactor). Another explanation for this factor is that many people in the countryside still expect that thewar will resume, perhaps after the next general elections should the loosing side not agree with thefinal result. Hence many people do not bother to accumulate assets or to invest in slow-growing


cashew trees. All three factors are still important in Mozambique today and may even be operationalat the same time.

There may be idiosyncratic reasons at the district or village level why smallholders still farm only forsubsistence. Similarly, some areas may need little or much more advanced forms of help if mostfarmers in that area already farm according to profit-maximising principles. In addition, thedifferentiation according to assets and incomes will proceed more quickly and more severely withsome farmers still following a safety-first or self-sufficiency approach while others are already profit-maximisers.

It is thus very difficult to generalise about the policy priority for Mozambican agriculture even at thesmallholder level. However, a main concern should be to understand the legacy of the war, ofgeography, geology and climate, and of local culture and tradition, to differentiate between demandand supply constraints faced by the smallholder farming household, and to encourage, whereappropriate, a voluntary move towards profit-maximisation agriculture. Such differentiated set ofpolicies will yield the highest returns for a limited amount of funding and is compatible with bothprivate sector reconstruction and poverty alleviation objectives in Mozambique.

Rural Labour Markets

Depending on local circumstances, smallholder farmers in Mozambique are facing a variety ofconstraints. Most importantly, smallholders are constrained by the quality and the quantity of thelabour available for production. The quality of the labour is restricted by the low levels of educationprevalent in agriculture, especially for the older and the female members of the households who do alarge share of the fieldwork. On average, women aged above six years resident in rural areas havenot even completed six months of schooling (UNDP 1998: table 30). The only age group of ruralwomen who completed more than one year of school is that aged 15 - 19 in 1997 who attendedschool for 18 months. Extension services during the war were practically absent in the more war-affected areas thus preventing the dissemination of improved agricultural practices in the countryside.Low calorie intakes during the planting and weeding season, a poor nutritional balance, and theabsence of suitable healthcare facilities physically weaken people in rural areas thus furtherdiminishing their labour productivity.

In addition, illness and death have an indirect impact on the quantity of labour available through thecultural obligations relatives have towards the affected families. In Nampula, for example, thematrilineal Makua culture requires men to assist their sisters in such times of need although many menleave their village after marriage for some time. Thus the brothers of women whose families are ill orhad a death often need to travel to their home villages and stay extended periods of time with theirsisters thus reducing the labour available on their own farms. Given the short windows of opportunityin which many agricultural tasks have to be performed, absences at those seasonal peak times canhave significant negative impacts on overall yields.

The low availability of tools such as hand-hoes and machetes, their poor quality and the generalabsence of mechanised tools in most of rural Mozambique further diminishes the productivity oflabour (Filipe and Penninkhoff 1998). There seems to be a shortage of tools in many rural areas eventhough smallholders have started to improve their houses and show other signs of low level assetaccumulation. It appears as if the marketing system failed to provide tools at the right time of theyear. Farmers, who may be worried that the proceeds of their harvest sale could be stolen, oftenspend their cash soon after the harvest. If the tools are not available at that time of the year, then itmay not be possible to buy them later in the agricultural cycle. Instead, farmers invest their cashproceeds in assets less vulnerable to theft, for example in the improvement of their homes damaged


during the war. In addition, traders may not find it profitable to stock tools which they are unlikely tosell during most of the year. Hence there remains a lack of suitable tools in rural areas with manyfarmers still using the much depleted tools handed out after the war by the first emergency andresettlement programmes.

In fact, the free distribution of tools then might be the cause of the widely held belief that thegovernment or aid agencies ought to distribute more free tools, rather than farmers having to buythese tools themselves. In 1993, the government planned to satisfy 95% of the demand for tools and49% of the demand for seeds with free handouts as part of its emergency programme (Governmentof Mozambique 1992: 10-11). Agencies executing such programmes should perhaps haveconsidered charging nominal or in kind amounts for these tools when they were first distributed toavoid such attitudes from forming. In addition, rural development programmes should look at theviability of encouraging local, small-scale producers of and repair shops for tools to reduce thedependency on imported and potentially inappropriate tools, to increase their lifetime, and to providelocal income diversification opportunities. At least, extension services should address issues of toolsmaintenance and their best use to improve the benefits of even simple, hand-held tools when used inthe fields or at home.

Hiring-in or hiring-out of labour are further ways for the smallholder household to expand productionor to earn extra income, respectively. However, the rural labour markets in Mozambique appearvery fragmented, weak and disrupted by the war (O'Laughlin 1996; Cramer and Pontara 1998;Pitcher 1998; Melamed 1999). There are few non-agricultural employment opportunities and evenfew agricultural employment opportunities, for example on plantations, where cash is being paid.Instead, there are a number of local customs governing the hiring of casual labour.

At one extreme, people work in groups on each other’s farms without payment, mainly to utiliseeconomies of scale, to exploit comparative advantages between farmers, to share tools, and toencourage work effort by monitoring and entertaining one another. Other farmers help each other,especially within narrow localities or clans, on the fields in exchange for food or a feast. This is oftennot seen explicitly as payment. In fact, during the hungry season, poorer farmers may ask to helpricher farmers on their fields knowing that they will be given food for their token help thusprogressively redistributing resources among farmers. Interestingly, this practice is sometimes citedby farmers as a reason for not changing from a safety-first approach to a profit-maximisationapproach as some of their surplus would thus be taxed by their poorer neighbours.

Some farmers may hire in labour on cash-basis but this is more likely to occur in the more accessibleareas with lower transaction costs and with cash-crop fields where the need for weeding andapplying pesticide (as with cotton) will be much higher. Such employment usually is quite informaland most people working on other farms are likely to have their own plots of land, too, but perhapsfewer opportunities for earning cash with their farm. Given the increased need to earn money in orderto pay for transport, school fees, medicines, certain food stuffs such as salt or fish, and basicconsumer goods one should expect an increasing number of people looking for such form ofemployment.

The high costs of coordinating and supervising such informal on-farm employment suggest thatinformal, non-monetary forms of working together and particularly the household’s own labourresources will continue to dominate the nature of rural labour allocation. This also suggests that birthrates are likely to remain high unless there is a marked improvement in the quality of householdlabour which smallholders can reliably expect to have available for their own production. Rural healthand extension policies are thus closely related and need to be addressed jointly for rural developmentto succeed.


One example of a lack of such integration of projects is the field of smallholder income diversificationand household nutrition. There are a number of government and NGO-led projects in Mozambiqueaiming to increase the variety of crops grown locally to reduce farmers’ dependency on their maincrops maize and cassava and to open up the market for income-generating but sustainable crops. Atthe same time, other projects are addressing the lack of nutritional variety in most rural diets whichcan cause growth deficiencies in children. Yet these programmes often fail to integrate even whenthey are run by the same NGO and in the same district. Instead, the crop diversification and incomegeneration project assists men to increase their cash incomes while the public health project focuseson women to help them improve their families’ diets. Instead, such projects could integrate muchmore closely and show the whole family how some crops, say sunflower oil, could offer both incomeand nutritional benefits. Donors funding these problems share part of the blame for failing toencourage such synergies when agreeing to fund these proposals.

Land Tenure and Markets

Land tenure in Mozambique is ruled by a variety of modern, traditional and ad-hoc institutions thuscreating uncertainty, reducing investments, and prohibiting loans requiring land as a collateral.Generally, Mozambique is considered to be a land abundant country. However, there are strong landinequalities in semi-urban areas, where land is very fertile, where there is low-cost access to trading,for people of minority ethnic, religious or social backgrounds such as refugees or widowed women,and near large-scale plantations or large-scale investment projects. Furthermore, the governmentafter the war has granted substantial land concessions to firms and large investors thus creating a newgroup of displaced farm households and new uncertainty (Myers 1994). Uniquely, the newMozambican land law allows for entire communities to register their land thus preventing individualsor firms from claiming property rights instead (Tschirley and Weber 1994; O'Laughlin 1995; Westand Myers 1996; Gengenbach 1998; Kloeck-Jenson 1998; Negrão 1999).

However, the implementing institutions and the awareness of this law are very weak thus deliveringexcessive bargaining strength to larger, richer, better informed, and better connected farmers,investors and speculators. The government, NGOs and donors should help strengthen the bargainingpower of smallholders in the process of formally registering property rights thus supporting poorerfarmers. Given that smallholders are the more efficient producers of most crops, this will help reducepoverty and increase exports simultaneously while protecting land access for the most vulnerablefarmers. At the same time, larger investors will benefit from a more systematic and predictableimplementation of the land law.

In the context of the immediate post-war period, it was difficult to predict if there were going to beserious land conflicts with such a large proportion of the population displaced by the end of the war.The return of the refugees was quite smooth and was one of the key factors for the peace agreementto hold so well. Among civilian Mozambican, there seemed little interest in restarting the long conflict.

However, many Mozambican refugees did not return to their origins after the war thus exasperatingexisting land pressure near social infrastructure. The provision of social infrastructure in urban areashad been a key ideological promise by Frelimo during the war. Yet by binding refugees beyond theend of the war, it also helped accelerate urbanisation and determined new patterns of settlement. Theimmediate post-war period thus saw a strong demand for land but also a strong and complementarydemand for one-off building materials and construction tools which was in conflict with the apparentasset poverty of both returning refugees and the resident population. The higher concentration ofdisplaced farmers near coveted social infrastructure also implied that productivity gains by thesefarmers had to be achieved through intensification, rather than through the extension of area farmed,as was the case for many farming households in more isolated areas.


Finally, the colonial legacy of Mozambique as a cheap source of agricultural raw materials and as arevenue source for neighbouring countries implies that much transport infrastructure has been biasedtowards serving commercial farms or international trading routes. The quality of land dependscrucially on the ability of farmers to transport the produce to markets. In designing new roadinvestment policies, the government and donors should also consider the distribution of fertile landand existing farming communities. This will avoid replicating past inequalities in the provision ofaccess to markets.

Asset Poverty, Rural Savings and Income Diversification

One of the obvious effects of the war in the countryside was the almost total depletion of largelivestock through attacks, disease and hunger-related slaughter (Brück 1997; Filipe and Penninkhoff1998). This deprived many smallholders of a traditional form of saving thus increasing theirvulnerability to droughts and other crop failures. In addition, it reduced their agricultural productivityand, given the scale of the losses, extinguished cattle herds and markets thus reducing the ability ofindividual households to restock cattle in the post-war period.

Agricultural policy should thus aim to provide some assistance with the rebuilding of cattle herds, forexample by selectively selling some young cattle on credit and by providing veterinary services.Cattle markets are thus another example of where the post-war government needs to activelyrecreate markets as they may otherwise not come back into existence themselves due to the lowdensity of potential market transactions.

Given the seasonality of most of Mozambican agriculture, farmers receive most of their cash incomeonly once a year and thus face the problem of how to store their money. With weak modern lawenforcement in rural areas, diminished social cohesion following the displacement and the nature ofthe war, and no rural banking opportunities, cash often is turned into assets or consumptionimmediately. If there is lack of products (e.g. tools) at harvest time, it may mean that farmers areunable to buy them later in the year, too.

Hence farmers would benefit from simple, rural savings associations, from improved consumptionchoices at harvest time, and from storage facilities which would allow farmers to sell some output,perhaps even at higher, counter cyclical prices, year-round. Complementary policies should addressalternative forms of rural savings, especially for the Northern provinces where tsetse flies preventcattle rearing, encourage rural savings associations, and enforce the maintenance of rural law andorder to prevent the theft of cash, livestock or other assets.

Many aid agencies helped returning refugees after the end of the war by providing agricultural toolsand seeds as part of their emergency programmes. However, it may have been more useful todistinguish between one-off needs and recurrent needs and only to provide the latter in times ofimpending humanitarian disaster to prevent a household-level aid dependency from being started. Atthe same time, by getting the private sector involved in the distribution of free or commercial aid,there was a chance to start rebuilding the local trading systems and to start some economic activityby funding a local demand expansion in the countryside. It is not clear what the local multiplier ofsuch programmes was. Yet they do offer a chance to inject some initial resources and to buy outlocal discontent thus increasing local confidence in the peace process. Hence aid agencies acting outof a humanitarian concern in the immediate post-war period have an important role to play inmaintaining a young and potentially fragile peace process. The agencies observe the reintegration ofrefugees and the nutritional and health status of the population, assist with one-off donations tophysically shelter and feed the former refugees, and re-ignite local trading and thus the localeconomy.


Furthermore, rural agricultural development in Mozambique cannot be addressed in isolation fromother income-generating activities that allow households to diversify their income and asset base. Atthe moment there is a strong lack of these activities, which is partly related to a general lack ofdemand in rural areas. Increasing infrastructure investment, apart from the actual income opportunityof the construction process, will help increase demand by reducing transaction costs and thusreducing economic isolation. Yet the World Bank and the government should be addressing thecreation of such income diversifying activities directly.

Agricultural processing (e.g. the making of sunflower oil), fishing and drying fish in coastal areas,carpentry, tool making, micro-trading (e.g. by bicycle), market-based trading, sewing, brewing,providing alternative healthcare, bicycle and radio repairing, char-coal production, and maintainingirrigation and well facilities, are all potentially valuable activities which could be expanded. Educationfacilities should help build practical skills in these fields and ease potential administrative entryconstraints. In particular, these activities are important as they allow land constrained vulnerablehouseholds to expand their income base and thus protect households which may not have optimalstarting conditions in agricultural activities for health, social or economic reasons. Incomediversification is thus also an important gender and poverty alleviation policy.

Transport and Communication Infrastructure

The most easily identifiable obstacle to post-war recovery in agriculture is the continuing poor stateof Mozambique’s roads. Given the seasonally occurring strong rainfalls and occasional flooding inmost parts of the country, roads in Mozambique require regular maintenance work to allow vehiclesto pass year round and without depreciating them too much. With the high insecurity, landmines,bombed bridges, and a lack of funding during the war, many roads fell into disrepair and wholedistricts ceased to be accessible some or all times of the year by road.

A number of different projects since the end of the war have addressed the inadequacy of thetransport infrastructure but the rehabilitation of the road network has been slow, inadequate, costlyand badly planned thus continuing to date to inhibit regional and local marketing (Hanlon 1996: 39-43). For instance, planning for the World Bank’s first road rehabilitation programme (ROCS) startedduring the war but did not take account of the actual state of the roads after the war and theprojected future needs. Many roads were built to too high a specification or for unrealistically hightraffic volumes, with foreign capital-intensive contractors, and without consideration for the futuremaintenance costs and maintenance capacity, both of which are still lacking in Mozambique.

Only recently have more and smaller roads been rehabilitated to a less ambitious standard, with moreappropriate technology, using local workers, and within a framework of ongoing maintenance work.Instead of upgrading entire roads, often it is more efficient to first rehabilitate transport bottlenecks,say a damaged bridge or a very poor section of road. This can open up routes to some form oftransport at least, reducing travel times and vehicle depreciation. In addition, maintenance workshould have started on those roads which were still passable at the end of the war to at least preventa further deterioration of road conditions, which can occur very quickly in the rainy season. Alsothere should not be too much of a focus on large roads as the majority of the population lives in moreremote areas thus requiring the gradual establishment of reliable farm-to-market tracks across thecountry to generate regionally evenly distributed development. These measures could have reducedthe actual delay in road rehabilitation, which cost many farmers and the entire economy much lostoutput, trade and tax revenues.

However, there are other forms of transport and communication infrastructure which were badlydamaged during the war, both directly and indirectly, too. The railways, air transport, coastal


shipping and the harbour facilities all required investment and possibly a new regulatory framework atthe end of the war. Of particular importance are the international transport corridors linking the mainMozambican harbours with their landlocked neighbours in Johannesburg, Swaziland, Zimbabwe,Zambia and Malawi. Given the scale and the strategic importance of these projects, their slowerplanning framework is perhaps understandable. However, the importance of these projects for theadjacent smallholders will be enormous and detailed attention needs to be paid to their long-termanti-poverty impact.

Electricity distribution, telecommunications, postal services, TV and radio broadcasting and otherinformation networks depending on road transport or rural transmitter stations have similarly beendeveloped in the post-war period. For traders, telecommunications and perhaps the postal networkare of importance and basic telecom services are currently being expanded into at least every districtcapital in Mozambique. For isolated smallholders, the radio has a huge importance and is a significantstatus symbol. Radio services can reach out at fairly little cost to very remote areas thus entertainingand informing areas otherwise inaccessible due to the cost of transport or the lack of a literateaudience.

Yet there are also institutional barriers still to information transmission which the war prevented frombeing broken earlier. There is, for example, a lack of communication between producers and tradersabout the quality of the good and other aspects of their dealings which could help develop markets inthe future. Part of this results from the short time span that producers and traders have been workingtogether so that no long-term, mutually beneficial trading arrangements have yet been established.Part of this may result from cultural differences between Indian, urban-based traders and African,rural and quite illiterate producers who do not usually meet or engage in any other contexts. Alsomany farmers were displaced during the war so that little interaction was possible then. Thedevelopment of producers’ associations could be a step forward as could the increasing number ofsmaller traders who would form a link between these two economic groups.

Irrigation and Drinking Water

There is a shortage of water for irrigation and for human consumption in Mozambique. Someprovinces in the South face less than 600 mm of rainfall per year and several larger rivers are belowtheir usual capacity due to the increasing use of upstream water resources in neighbouring SouthAfrica and Zimbabwe. Droughts and floods occur regularly especially in Southern Mozambiquewhile irrigation facilities are not widely used or not well maintained. Yet there are significantunderground water resources in some of Mozambique’s coastal plains which could be used for localirrigation schemes.

In addition, the number of wells for drinking water and their management need to be improved toreduce the time burden for women fetching water and to improve key health indicators. In urbanareas, too, there is a need to target a larger share of the population with the delivery of safe waterwhile increasing the quality and the reliability of the water distribution network. Access rates to safewater have been 2% and 82% in the period 1980-85 and 17% and 44% in the period 1992-97 forrural and urban areas, respectively (Government of Mozambique 1999: table 3). These rates areroughly half of those for the whole of Sub-Saharan Africa. These issue of safe water delivery and thepossible need for increased user charges have been addressed in the most recent policy frameworkpaper which generated much controversy (Government of Mozambique 1999; Hanlon 1999). Apartfrom the financial sustainability, it will also be necessary to improve the management of irrigation andwell facilities. Local authorities and associations may increasingly wish to take on these functionswhile providing some income opportunities for people maintaining such facilities.


Farmers’ Associations and Local Administration

The colonial and post-independence experiences of state action have created a large amount ofdistrust among the rural population towards modern authority, forced cooperation andcollectivisation. Subsequently, there are currently only a small number of farmers’ associations apartfrom those that have been created with NGO assistance since the end of the war. This reduces theopportunities for farmers to learn from each other, for knowledge of business and economics totransmit itself, for farmers to jointly bargain with traders thus obtaining higher prices, or for farmers topool their resources to exploit economies of scales, for instance in building improved storagefacilities. Given the weak capacity of the state administration and its clear dependence on ordersfrom above, i.e. from the provincial capital or from Maputo, there is little belief that local governmentis intend on or capable of helping farmers develop their businesses and improve living conditions.

Much of this distrust stems from the years of war and one-party rule. The best way towardsovercoming such lack of faith in the state and other forms of collective systems is through settingexamples of functioning associations and useful state initiatives and through increased localdemocracy and appropriately devolved authority. The former can assist in creating a link betweenlocal communities and their administrations while the latter can create scope for that authority to leadto useful policy initiatives.

There are generally two objections to increased democratic control and increased local autonomy.On the one hand, rural communities are considered less able to understand and control thedemocratic process. Yet this seems a weak argument used by those keen to maintain centralisedpower in Mozambique. Instead, it appears that rural communities, perhaps even because of theirremoteness, are keen to discuss issues of their immediate concern and are well aware of localconstraints and problems. If anything, rural populations are less informed at what is happening at thenational political level where they do already have the right to vote for parliament and president.

On the other hand, the capacity of local government is considered to weak to even cope with itscurrent workload. In most districts, this is likely to be an accurate representation of reality. Yet themain question should be how to overcome this constraint. The post-war period has seen muchphysical government infrastructure restored so that the current bottleneck is human capacity. Whiledonors should consider much more intensive and wide-spread training schemes for civil servants,recent moves to encourage civil servants to take up posts outside Maputo and the provincial capitalsshould help make these jobs more attractive. In addition, there is a need to allow more qualifiedpersonnel posted to rural areas to take up increased responsibility.

Local administrators should also be encouraged to continue to integrate their administration withtraditional community leaders thus overcoming one of the main political causes of the war inMozambique and creating further synergies between their own capacity and that of traditional elders.Finally, local authorities in consultation with their communities should prioritise their actions as limitedbudgets and overall weak capacity will not allow them to tackle many issues at once. This should beintegrated with increased prioritisation of the line ministries in Maputo who will continue to lead manypolicy initiatives in the areas of agriculture, health, education, roads, law and order, and other issuesrelevant at local levels.

A phased programme of simultaneously increased training, improved financial incentives andincreased responsibility coupled with more local democracy and thus accountability would helpovercome these problems and would start creating credibility for the state and collective action inrural areas in the long run. Meanwhile the on-going NGO activities in the area of farmers’ andtraders’ associations will help disseminate an awareness and appreciate for complementary localinstitutions in rural Mozambique.


Rural Markets

The World Bank believes that the main stimulus to rural and agricultural markets is stablemacroeconomic conditions. Yet given the post-war context of Mozambique, stable macroeconomicconditions are only necessary but not sufficient conditions to encourage or even create such markets.The scale of the capital destruction, uncertainty, dislocation and subsistence in the countryside hasbeen such that active market-creating policies are necessary to complement the positive effects ofother government achievements in achieving monetary, fiscal and external stability.

For instance, rural financial institutions are required to encourage savings, the rebuilding of assetstocks, rural trading and thus food security, and the effective farming of input-intensive crops such ascotton. Yet they will not be created simply due to the persistence of low inflation. Rather, thegovernment in conjunction with other agencies must provide a stimulus to cattle markets, farmers’associations and credit cooperatives by providing appropriate laws in the area of credit and land, bydesigning appropriate fiscal instruments, by setting up rural development projects, and byencouraging urban financial institutions to cooperate with new rural institutions. Without such newrural institutions, new forms of dependency on, e.g., the cotton companies or traders are likelyemerge along the experience of rural India.

Another example concerns rural trading (Buhr and Xavier 1997; Filipe and Penninkhoff 1998;Tickner 1998; Tickner 1998). At the moment, there is little effective cash crop or input trading ofsmall quantities in remoter areas. At the same time, the more lucrative market niches dealing withlarger farmers in more densely populated areas is dominated by a group of oligopolistic traders whocan depend on alternative sources of finance to maintain their profitability. Macroeconomic stability isnot sufficient to establish competitive rural traders who will also reach smaller and more remotefarmers. Thus there is a strong need to encourage cheaper credit for small new entrants into themarket (e.g. to fund vehicles or small warehouses), unlike what the World Bank believes. At thefarm-level, extension services should improve storage facilities to reduce post-harvest losses and toencourage farmers to trade counter-cyclically. Also cumbersome bureaucratic regulations restrictingretailers need to be streamlined and their proper implementation more systematically enforced. Thisis not a case of reducing the role of government but rather of prioritising its objectives in the area ofrural trading and then strengthening its local capacity to deliver the fair and prompt delivery of theremaining functions.

Informal Cross-Border Activities

There is a long tradition of cross-border trade in Northern Mozambique (especially in the provincesof Niassa, Nampula, Zambezia and Tete) with Southern Malawi. This trade focuses especially oninformal labour, food, and consumer goods, with formal trade and regional government cooperationfor example in the area of food security more hampered by protectionist attitudes and red tape.Mozambican smallholders, being mainly labour constrained, contract in poor Malawian farmers tohelp on their land in exchange for money and food. This trade is also driven by the high incomeinequality and food insecurity at the household level in Malawi. Up to 75% of all households inMalawian border villages occasionally work on Mozambican farms (Whiteside 1998).

Mozambican farmers and small traders also sell maize and beans in Malawi in exchange for basicconsumer goods such as bicycles and household wares. It has been estimated that up to 80% ofconsumer goods sold in Zambezia originate from Malawi (Whiteside 1998). Much of this trade isinformal and not accounted for in official statistics. Given the higher food prices in Malawi, there is astrong incentive for Mozambican farmers to intensify their production with purchased inputs.


In addition, there is permanent migration to Mozambique to exploit the land abundance of someareas thus increasing the density of the market in remote Mozambique and offering a spread ofagricultural knowledge across the region. Immigrants often have family networks on both side of theborder thus facilitating their integration and future trade. A negative feature of the cross-border tradeis the unsustainable exploitation of Mozambican forests caused by the higher demand for wood inMalawi.

Informal cross-border trade hence increases food security and smallholder household income in bothcountries by offering employment opportunities for Malawians, by increasing yields and output inMozambique, by reducing population pressure in Malawi while reducing economic and geographicisolation in Northern Mozambique, and by providing incentive goods in rural areas of Mozambique.Overall, this trade is still restricted by official attitudes placing national food sufficiency abovehousehold food security, by bureaucratic or corrupt border regulations, high import tariffs, theabsence of bilateral or regional trade agreements, by the absence of government or civil institutionspromoting information flows and local coordination across the border, and by established, large-scale traders who see informal cross-border trade as a threat to their oligopolistic tradearrangements.

Government policy could aim to spread an awareness of the benefits of this type of trade among itsown representatives, address the reduction of legal and illegal trade barriers through internal reformsand international agreements, improve cross-border coordination and information flows at the locallevel, and encourage an increase in competitive trade structures within Mozambique. Such policieswould all help to improve local and regional food security at the household level and at the nationallevel, increase incentives, yields and production, and help generate growth in previously poor andremote rural areas.

Poverty and Inequality

The most detailed and accurate estimates of poverty in Mozambique have been collected in the1996-97 national household survey (IAF). IAF revealed that 69% of the Mozambican populationlives below the poverty line (Government of Mozambique, Eduardo Mondlane University et al.1998: 422). One of the key findings of the survey has been the strong variance of poverty across thecountry. 71% of rural and 62% of urban Mozambicans live in poverty with the less denselypopulated central provinces suffering the highest rate of poverty (88% in Sofala province) and thetwo Northern provinces Nampula and Zambezia accounting for almost 40% of all poor people.Rural communities are economically much more marginalized than urban areas as even the rural non-poor households are worse off than ultra-poor urban households for a series of welfare indicatorssuch as nutrition, immunisation, and educational attainment. Another characteristic of rural poverty isthat while 90% of households own some agricultural land, the level of investment in agriculture isextremely low. Only 4% of households use irrigation, 2% of households use fertilisers and 85% ofrural women (the main agricultural workers) are illiterate (Government of Mozambique, EduardoMondlane University et al. 1998: 423). However, these data also indicate the scale of the agriculturaloutput potential that investments in human capital, technology and infrastructure will be able to reveal.

There is limited data available to compare changes in poverty and inequality in Mozambique overtime. The data derived from two urban household surveys of Maputo/Matola and the provincialcapitals both undertaken in the early 1990s allow some very tentative intertemporal comparisons.The proportion of absolutely poor households in Maputo may have decreased from 28-52% to 17-32% from 1991 to 1996 (International Monetary Fund 1998: 47-49). There has been acorresponding increase in average incomes across the income distribution in Maputo, with a one


third reduction in the number of households spending less than 150,000 meticais per month 1991 to1996 (allowing for inflation) (International Monetary Fund 1998: 48). Alternative assessments ofchanges in poverty over time conclude that while there appears to have occurred a modest reductionin urban poverty in Mozambique in the 1990s, there is little methodological support for suchcomparisons and that these conclusions are thus not valid analytically (Government of Mozambique,Eduardo Mondlane University et al. 1998: 59-61).

Some indicators of human development in Mozambique have recently shown signs of improvementalthough the scale of the change has probably been overestimated (UNDP 1998: 24-27). The humandevelopment index, HDI, increased from 0.281 in 1995 to 0.350 in 1997 and an estimated 0.357 in1998. Much of this improvement is due to an estimated increase in the adult literacy from 40% to63% and in the gross school enrolment rates from 25% to 42%, 1995 to 1996. However, the morerecent survey found overall literacy to be only 39.5% of those aged 15 and above (MozambiqueNews Agency 1999). It is thus very doubtful “that the HDI has increased at an annual average rateof 12% between 1995 and 1997” and that this increase “should in large measure reflect reality”(UNDP 1998: 27). In addition, this evidence does not include any indication of income distributionby economic, gender or regional categories, all of which are likely to have persisted or worsened.Furthermore, most social indicators show that Mozambique is lagging far behind comparable Africancountries despite years of emphasising social sector spending by the government and internationaldonors.

The data on social achievements and deficits hide the huge income inequality across Mozambiqueand the fact that much of the Maputo economy is based on aid-generated and informal-sectoractivities. The proportion of households in all of Mozambique spending less than 50,000 meticais percapita a month in 1996 is over ten times larger than the corresponding proportion in Maputo alone.Essentially, at least a fifth of all rural households in 1996 are not participating in the modern economyand are highly unlikely to command enough calories for a healthy survival. 64% of all Mozambicanslive in food-insecure households, 41% of all Mozambican children are growth-stunted, and about225,000 children suffer from acute malnutrition (Government of Mozambique, Eduardo MondlaneUniversity et al. 1998: 214, 221). Furthermore, about two thirds of rural households spend less than150,000 meticais and over four fifths spend less than 250,000 meticais per capita a month in 1996(International Monetary Fund 1998: 48). Given that consumer prices are higher, incomeopportunities fewer, producer prices lower and social services both more sparse and moreexpensive to access in rural areas, poor households in rural areas are more vulnerable and have lessopportunities for reducing their poverty than the urban poor.

The 1996 Gini coefficients for Maputo and Mozambique were 0.47 and 0.52, respectively, and 0.48for Maputo in 1991 (International Monetary Fund 1998: 50). This suggests that within Maputo thereis a larger middle class and more gradual differences between the poorer and the richer populationgroups than elsewhere in the country. In addition, the data suggest that there has been no change inthe income distribution within the capital since the last years of the war. This may be based on thefact that in Maputo there are more public sector jobs (which have a low wage compression acrossthe pay scale resulting in a Gini coefficient for the civil service of 0.22), more formal sector jobs,more aid-dependent service sector jobs, a more buoyant informal economy and more accessible andbetter functioning public services than anywhere else in the country. This will help reduce the negativeimpact of structural changes in the economy for the most vulnerable households. However, it alsosuggests that the situation in the countryside may be very different structurally, with less fewer downeffects emerging from the smaller rural output growth in the post-war economy.


There is a large divergence of poverty, underdevelopment and social structure across Mozambique.For example, the proportion of households cultivating less than one hectare ranges from 20% in theNorth to 40% in the South (International Monetary Fund 1998: 56). Northern households suffer onaverage 2.5 months of food insecurity per year compared to five months for Southern households.And 12% of all households are headed by women in the North compared with 30% in the South.These differences stem from different patterns of migration and settlement, different ethnic, religiousand linguistic composition of the population, different climatic and agronomic patterns, and from adifferent colonial and war-time experiences.

The national Gini coefficient of 0.52 is high in comparison with other African countries which reportGini coefficients between 28.90 and 63.18 with an average of 44.88 in the period 1988 to 1996,based on 41 different surveys taken from 25 countries in Sub-Saharan Africa (InternationalMonetary Fund 1998: 51). The most recent, available social indicators for Mozambique do notcompare well with average Sub-Saharan indicators, either. The life expectancy at birth inMozambique is 42 years (versus 52 years in Sub-Saharan Africa), infant mortality per 1,000 livebirths is 146 (versus 92), and maternal mortality per 100,000 births is 1,100 (versus 700). Grossprimary enrolment is 62% of the relevant age group (versus 71%), and the female share of grossprimary enrolment is 45% (versus 64%). Overall, illiteracy is 60.5% among those aged 15 andabove (versus 43%) while 85% of rural women are illiterate (International Monetary Fund 1998: 53;Mozambique News Agency 1999).

In 1997, about 40% of the Mozambican population had access to the basic state medical facilities,though many of these facilities would have been of a poor quality and many of its users to poor totravel to the better equipped urban hospitals. In particular, 14% of health centres are only staffed byunskilled health workers and about 60% of patients and other users of health centres are not satisfiedwith their services. About 20% of all children die before their reach their fifth birthday. The coverageof the completed course of the diphtheria, whooping cough and tetanus (DPT3) vaccination is 61%and thus still lower than in the early years of independence (all these data: (van Diesen 1999: 41) and(UNDP 1998: T23)). These data indicate that both the quantity of health care and the quality of thedelivery are insufficient for maintaining a healthy population and supporting complementarygovernment policies, for instance in the area of family planning, water supply or nutrition.

In education, both the quantity and the quality of services provided are poor, too. While there were5,689 lower primary schools in 1997, not all of these provided education up to fifth grade, the thenhighest grade in the lower primary school. And in the whole of Mozambique, there were only 336upper primary schools, 63 lower secondary schools, and 12 upper secondary schools in 1997.Female school enrolment is lower than male enrolment at all levels and especially in the central andNorthern provinces. The pupil-teacher ratio in lower primary school is 61 nation-wide (the highestfor ten years), a quarter of teachers at that level have no training, and many have only completed oneyear of training after six years of primary school. While many districts have aid-funded or NGO-builtschools, there is still a lack of well-built, well-maintained and well-equipped school rooms given thehigh population growth, the increasing enrolment rates and the expanding education system. Schoolsand educational authorities also suffer from a lack of management capacity. Only 6% of studentsstarting school complete the upper primary school under these conditions (all these data: (van Diesen1999: 41-42) and (UNDP 1998: T32)).

The war-induced isolation and poverty of the population was enormous at the end of the conflict andcan still be observed in Mozambique. The government estimated in 1992 that about 107,000soldiers and rebels would have to be demobilised after the completion of the merger of the two


armies (Government of Mozambique 1992: 3). (By early 1995, about 80,000 soldiers were actuallydemobilised (Government of Mozambique 1995: 5).)

Further domestic victims of exogenous political changes, who represented possible opponents to thepeace process, included returnees from the former East Germany and former miners in South Africa.The former were dismissed by the German federal government very quickly after the fall ofcommunism and without much economic support while the latter were important in the South ofMozambique where most of them were recruited and where they thus represented a potential sourceof discontent. The returnees from East Germany also could have been potential opponents to thepeace and economic reform programmes as they often worked in comparatively skilled positions inEast Germany and failed to find matching employment upon their sudden return to Mozambique.

Much higher than the numbers of demobilised soldiers were the numbers of international refugees,internally displaced refugees and non-displaced but highly vulnerable people including about half amillion orphans and traumatised or unaccompanied children (Government of Mozambique 1992: 3).There were approximately 200,000 directly war-affected children requiring assistance and about62,000 disabled children in 1995 (Poverty Alleviation Unit 1995: 13).

The returnees suffered from poor transport and communication infrastructure, lack of social securitysystems and land mines. Land mines primarily blocked transport and infrastructure rehabilitation, notrural production. Mine accidents have been declining since the end of the war and since the return ofrefugees. They decreased from 127 cases in 1996 to 61 cases in 1997. This compares with a totalestimated number of mines currently planted in Mozambique between 500,000 and one million(UNDP 1998: 34).

3.5 EXTERNAL ASSISTANCE, RECONSTRUCTION AND POVERTY ALLEVIATION

Patterns of External Assistance

The total level of aid to Mozambique has declined since the end of the war. In part, this is based onthe declining levels of aid disbursed world-wide, the declining need for aid in Mozambique seen bydonors as war-related reconstruction is being completed, and the control of total aid allocated toMozambique which has been enforced by the IMF in an attempt to reduce inflation (van Diesen1999: 9). In 1992, the largest amount of aid ever was allocated to Mozambique, which amounted toalmost US $ 1.5 billion.

Some bilateral donors have reduced their contribution to Mozambique significantly in recent years,among them Italy, Sweden and Norway. The United States and the UK have meanwhile increasedtheir aid to Mozambique, so that the USA in 1998 was the largest bilateral donor (van Diesen 1999:10). Among the multilateral donors, the IDA of the World Bank Group is the most important actor,contributing almost a quarter of all aid to Mozambique in 1996. The EU is increasing its programmesin Mozambique, its contributions being predominantly grant aid. The UN agencies, on the otherhand, account for a declining share of aid to Mozambique.

The contributions by international NGOs are difficult to assess as no coherent data is being collected.Estimates range from US $ 7 million to US $ 75 million with the most recent estimates by theMozambican government being US $ 40 million per year being spent as aid by approximately 150international NGOs (van Diesen 1999: 10). The most important roles of international NGOs are asservice providers executing projects on behalf of the government or donors and as campaigningorganisations in Mozambique and abroad.


Aid in Mozambique is being spent in a geographically very uneven way. A UNDP estimate of thispattern showed that in 1997 aid spending per province and per capita ranged from US $ 16.6 inNiassa in the North to US $ 207.6 in Maputo Province (excluding Maputo City) in the South(UNDP 1998: 18). These data mirror a political debate in Mozambique about the ruling Frelimoparty favouring Southern provinces and people from these provinces. Indeed, the results from thefirst national elections in 1994 confirm a party-political North-South divide where Renamo is muchstronger in the North and Frelimo much stronger in the South. This has a strong impact also oneconomic expectations with many people in the North believing a Renamo victory in the next nationalelections is inevitable and thus causing war once again. The important implication for donors is thatNorth-South rivalries in Mozambique matter hugely, have a party-political slant, and are evenexpressed in the allocation of donor funds. Aid may thus be contributing to a political destabilisationand increasing economic inequality across the country which will not benefit the development of thecountry nor that of its poorest citizens.

While donors have increased their capacity building programmes and helped improve theperformance of a large number of organisations in Mozambique, they should focus their attentionincreasingly to institutional development (ECON Centre for Economic Analysis 1998: 7-8). A keyaspect of this approach includes strengthening not just the executive arm of the state but thelegislative and judiciary branches as well. In addition, civil society through the press, local NGOs,business and civic associations, civic education, increased local democracy, reduced corruption,stronger public-private partnerships for instance in supervising public administrations and enterprisessuch as schools, hospitals etc need to interact with the state and with each other to help improvepolicies, their implementation and the public trust and perception of these.

From the donor point of view, they need to engage in such dialogue, make their decisions in partresponsive and accountable to these actors and most importantly respect and follow local rules andinstitutions in their own projects. Otherwise, donors not only reduce the effectiveness of their ownoperation but inhibit local development.

One prominent example is the imposition of donor rules on local projects, where the rules may evenbe in direct conflict with local conventions and laws, a form of “micro-conditionality”. This requireslocal project staff to learn and adopt a whole new set of instructions without this learning having anylong-term human capital benefit as all other donors have different rules. And the project itselfreceives less time from its employees while the donor’s negotiating position with local authorities ismuch diminished due to their own imposition of inappropriate rules.

Another example is the “fragmented” nature of aid to Mozambique where each ministry is defined byhundreds of projects all requiring intensive attention by the authorities. In total, the EC and the EUmember states were supporting 694 separate projects in 1997 in Mozambique (van Diesen 1999:14). The competition between projects and between a project and non-project work in ministriescauses a brain drain to better funded activities, coordination difficulties and a further weakening ofthe government’s capacity.

The World Bank Performance in Mozambique

Mozambique joined the IMF and the World Bank in September 1984, many years before the end ofthe internal war and before other socialist countries attempted the transition to a market economy.Early Bank lending focused on the government’s macro reform agenda with 80% of lendingdesignated for this policy area. Presumably, this reflected the need to implement key macro policy toestablish a market economy, the Bank’s comparative advantage in macro policy reform, and thelimitations of the ongoing war preventing sectoral development programmes. Hence the Bank


followed a traditional “stabilisation, growth and improved resource allocation” programme (WorldBank 1998: 5). The programme only accounted for the war by disregarding sectoral economicpolicy and by accepting that reform was more selective in scope and slower than otherwise possible.Furthermore, the overall objectives of these programmes did not include poverty alleviation explicitly.

In 1991, the Bank proposed a plan for future lending which shaped most of its subsequent work inMozambique. The Bank considered weak local capacity and high political uncertainty as keyobstacles to the design and implementation of a fast reform programme. Hence it aimed to addressthe former problem by establishing projects building economic and administrative capacity, by tryingto limit the number of new projects, and by internally supervising its own projects more stringently.However, the Bank did not attempt to address the latter problem through its direct work. Thecontinued high level of political and military insecurity, while harming the Bank’s and the wholeeconomy’s efficiency, was considered exogenous to the Bank’s development efforts.

With the end of the war, the World Bank also increased its involvement in poverty reduction, ruraldevelopment and sectoral planning, which by 1994 accounted for almost half of all lending of US $1,127 million. The government, while in broad agreement with the Bank on most policy issues,objected to the speed of reforms and to individual components of the proposed reform packages. Inpart, this reflected different assessments of economic developments and political constraints. But inpart they resulted from a desire by the Bank to accelerate the reform process beyond the capacity ofthe government and indeed of the Bank itself to implement and monitor projects efficiently.

The World Bank has pursued poverty alleviation policies in Mozambique since 1987, and thereduction of poverty has been its official primary objective in Mozambique since November 1995.Credits by the Bank supported all four possible poverty alleviation policies, though few targetedtransfer programmes and a decreasing number of general transfer policies have benefited from Bankfunding. The main emphasis was on direct enabling policies especially in the social sectors, transportand agriculture. An increasing share of funding has also been aimed at indirectly enabling policies inrecent years (World Bank 1998: 23-24).

While the Bank has increasingly emphasised its commitment to poverty alleviation, its involvementwith projects primarily designed to reduce poverty is rather limited. Furthermore, its stance onindirect enabling poverty policies would possibly not be very different if it were not concerned withpoverty alleviation at all. The Bank’s main contribution in that policy area is its participation withpoverty policy research and policy making capacity. However, this is a very indirect approach toreducing Mozambique’s extensive poverty.

A related example of this approach is the Bank’s policy record in the field of gender. While verballycommitted to pursuing gender policies, in practice there are no specific and consistent World Bankprojects benefiting women (who are very likely to be vulnerable and poor). Furthermore, the WorldBank in Mozambique seems to view women as passive, needy recipients rather than recognising theirdisproportionately large role in agricultural production. Any agricultural based poverty reductionpolicy should hence address explicitly and improve the role of women in the rural economy (WorldBank 1998: 24-26).

Cancelling the Foreign Debt?

Mozambique is a member of the highly-indebted, poor countries (HIPC) programme of the WorldBank and the IMF. Nominally, Mozambique’s recent debt service amounted to almost US $ 380million per year, approximately 150% of its annual export earnings. Due to its inability to pay suchlarge amounts, the debt service was re-negotiated with the Paris Club of bilateral donors to around


US $ 114 million per year 1995-98 in real terms, which is still almost three times as much as theMozambican government spent on health in 1998 (Hanlon 1999).

The HIPC process then offered further debt reductions conditional on the implementation overseveral years of a set of agreed policies and the completion of another ESAF structural adjustmentpackage. Mozambique thus qualified for a reduction of its debt payments to about US $ 73 millionper year 1999-2005 in real terms (Hanlon 1999). With the recent Cologne G8 agreement on furtherdebt reduction for HIPC countries, and the latest round of Paris Club negotiations, Mozambique canexpect to pay around US $ 55 million per year in debt relief once these changes have beenimplemented (Hanlon 1999). Yet these agreements will require further years of contentiousconditionality, for example in the area of cashew processing. In addition, individual creditor countriesmay cancel Mozambique’s bilateral debt as a result of the formers’ internal political preferences. TheUK has considered writing off “virtually all Mozambique’s debt” (White 1999), if it did not diminishits chances of persuading the IFIs and other donors of doing likewise.

The proponents of the current HIPC initiative are suggesting that Mozambique can best demonstrateits creditworthiness by adhering to policies agreed with the IMF and by continuing to borrowinternationally. Instead, a consensus is emerging in Mozambique which is calling for a total andunconditional debt forgiveness beyond that negotiated in 1999. This side argues that the still highlevels of debt, which continue to constrain the government’s expenditure and prevent an optimal anti-poverty strategy, create uncertainty and thus raise the country’s risk premium in international capitalmarkets.

Another argument for increased debt cancellation is that responsibility for the poor quality of somelending offered to Mozambique ought to be shared. Even with optimal domestic capacity, the waysome money has been administered and allocated by donors is contrary to growth objectives thusleading to unsustainable debt levels for which only Mozambique is currently responsible. Examples ofpoor project design are given by various authors (Hanlon 1991; Hanlon 1996; ECON Centre forEconomic Analysis 1998; World Bank 1998; van Diesen 1999).

In addition, the monopoly of the lending process (with the IMF and the World Bank jointly regulatingthe ESAF conditions and most bilateral donors and commercial banks making such agreement a pre-condition of their own lending) is likely to be less efficient and incomparable to developed financialmarkets (where a client wishing to arrange, for instance, a mortgage contract also agrees certainconditions but is free to choose her lender). Some bilateral donors thus argue for an improved andaccelerated but not a complete debt forgiveness but refuse to unilaterally reduce Mozambique’s debtfor fear of loosing bargaining power in international negotiations.

Analytically, there is no case for Mozambique not contracting some debt. For a fast-growing, pooreconomy it must optimal to borrow some amount in order to invest in future growth. (Incidentally,many people arguing for a debt write off for Mozambique on grounds of its poverty are also arguingfor poor Mozambicans to be given increased access to small scale credit.) However, the caseagainst a full debt write-off seems contradictory, too, given that donors continue to fund the budgetshortfall in, for instance, the social sectors with aid while insisting on Mozambique honouring itsforeign debt service which worsens its budgetary position. A combined deal involving both debt andaid reduction under a forward-looking, poverty-focused conditionality would increase certainty forthe Mozambican government, increase its control over its own policies, and diminish the negativeeffects of aid such as Dutch disease effects and coordination and capacity problems.

Furthermore, there is a special, moral case for above average debt reduction for Mozambique givenits long internal war and its war-related debt. This argument has two sides. On the one hand, the warin Mozambique commenced and continued for exogenous racial, ideological and strategic reasons. In


addition, donor countries failed during the war to work towards a resolution of the underlying causesof the conflict hence prolonging the human suffering needlessly (Brück 1997; Brück 1998). Northerncountries (including Russia) and South Africa hence have a moral obligation to compensateMozambique for a conflict whose consequences in the form of war-related, long-term debt continueto be severely felt across the country. Along similar lines, the level of Portuguese economic supportfor Mozambique is surprisingly low given its responsibility for the devastating colonial rule and the ill-conceived decolonisation process. Thus the war-time debt should be seen in its historical context anda war-time debt forgiveness agreed as part of a national Marshall plan.

On the other hand, the economic legacy of the war is costly to overcome even with debt forgiveness.Capital needs to be replaced, transaction costs reduced and certainty rebuild in a situation of distrustand suspicion characteristic of internal war. Government and donor objectives of poverty reductionand macroeconomic stability in Mozambique will require levels of funding above the level of revenuesthe government is likely to generate in the foreseeable future. Especially poverty reductionprogrammes in the aftermath of war will not be able to depend only on “cheap” legal reforms.

Instead, they will require large and costly projects aimed at rehabilitating infrastructure,reconstructing markets, reducing war-related isolation, reducing the poors’ vulnerability andincreasing safety nets. Thus donors genuinely concerned about poverty will have to continue to funda share of the government’s budget for years to come. The government might manage to maintainmacroeconomic stability without much more financial assistance but to achieve real povertyreduction, it will require significant net aid inflows for many years.

Finally, with improvements in domestic financial markets in Mozambique, there will be a role for civilsociety and donors to monitor the government’s planned use of treasury bills to increasingly financeits budget deficit. It is important that Mozambique will not replace unsustainable and unproductiveforeign debt with unsustainable and unproductive domestic debt, for which there will be no reliefavailable in later years.

3.6 CONCLUSIONS

Donors Share Responsibilities for Duration of the War

The war could only have had such strong and lasting impact on Mozambique because donors didlittle to help end the conflict or to prepare for economic policy making in the post-war period. Threekey lessons for donors to other, poor conflict-affected economies result from this experience. First,donors can influence the duration of a conflict and should exert an influence to end conflict both forhumanitarian and economic growth and efficiency reasons. Second, there are large returns frompreparing for the post-war period. Such preparations should include research into the nature of thewar economy, legal and institutions reforms in the war-time economy, and prioritising anticipatedpost-war policies. Third, the absence of a commitment by donors to end conflict creates anadditional moral argument for fast debt relief in a post-war period.

War Has Had a Powerful and Long-Lasting Impact in Mozambique

The powerful legacies of the war shaped Mozambique’s post-war economic developments morethan the government, donors or the formal private sector ever realised. Only smallholders and ruraltraders are aware how the last war continues to inhibit their activities, thus impoverishing many


innocent households and reinforcing the precarious macroeconomic position of the Mozambicaneconomy.

The most obvious legacy of the internal war was its capital destruction, the resulting drop in privateinvestment, both foreign and domestic and the low level of savings in the poor, insecure and uncertaineconomy. Much government and donor activity in the immediate post-war period focussed onliterally reconstructing this damage, especially in what were considered to the key social sectors ofeducation and health. However, much private sector, small scale investment in the post-war periodwent unreported and unrecognised, thus creating a mismatch between the aim of official policies andthe actual activities of the private sector, especially in the informal, rural sectors.

The less obvious but structurally more important legacies of the war included the increases in policyand market uncertainties, the reduction of transaction efficiency, the breakdown of key civilinstitutions, the inhibition or destruction of many markets, and the extreme persistence of subsistenceagriculture for a huge majority of the population. These effects caused Mozambique’s trade balanceand output to decline severely thus making the economy aid dependent for many years beyond theend of the war. In addition, these changes massively increased dislocation, urbanisation, and povertyand hence favoured service sector activities especially in the informal economy. Most of thesechanges, with the notable exception of the return of the international refugees to Mozambique, havebeen permanent thus creating an economy radically different from only ten or fifteen years ago.

The third and final legacy of the war concerns the long-term deterioration of the government’s fiscaland debt position as a result of many years of war and war-time adjustment. The budget constrainthas placed a strong and sometimes underestimated limit on the policy options available to thegovernment despite the high levels of aid already received. This has not been helped by the level offoreign debt the government nominally had to service, and which had not been reduced in time toencourage a post-war peace dividend led by the private sector.

Even with the end of the war itself, there have been strong, war-related influences in the Mozambicaneconomy which have affected its nature in the 1990s. The extensive UN presence helped to stabilisesome sectors by increasing demand, helped to stabilise political developments but also prevented theevolution of key Mozambican institutions. In addition, the fast return of the huge number of refugeeshelped boost agricultural output but did so by drawing on the extensive margin. There has been littleproductivity increase in smallholder agriculture and there is a strong danger that current economicgrowth rates are a short-term, unsustainable occurrence aided by very favourable weatherconditions.

Past State Objectives Have Been Contradictory

The role of the state has undergone many, often simultaneous and sometimes contradictory changesin Mozambique. It has been shaped by colonialism, socialism, the war, stabilisation, structuraladjustment, the free market, democracy, and poverty alleviation. These fluctuating demands on thestate have rarely led to the optimal policy mix for peace, growth and poverty alleviation.

On the positive side, there has been a strong consensus at each time between donors and thegovernment and among donors about the role of the state. Some differences persisted about thesetting of priorities and some individual policy issues remain controversial. But overall different actorshave been consistent in their demands for government actions. Shortcomings in post-war policydesign are often the joined responsibilities of donors and the government.

On the negative side, too much emphasis has been placed on the short-term stability of the macro-economy since the mid-1980s. This has often distracted from or even hindered the construction of


markets, the growth of democracy, government capacity building, and poverty alleviation. Too littleattention has been paid to the preconditions for smallholder output growth, rural and regional trade,and the improving living standards of less privileged actors. Instead, much economic growth has beengenerated through the exploitation of short-term production opportunities, aid-dependent and urban-based service sector activities, low-linkage foreign direct investments in services or natural resourceexploitation, and the investment activities of political or economic elites.

Rural Post-War Stagnation and Unequal Urban Post-War Growth

The peace dividend in Mozambique has not taken the form of a rapid improvement in thegovernment budget deficit due to the post-war spending commitments of the government and thecontinued low level of revenue collection. Instead, there has been some increase in output inresponse to increased security, increased labour supply and safer trading after the war. Yet sustainedand rapid per capita increases in GDP have only been observed five years after the war and arepartly dependent on urban activities where they disproportionately benefit the higher income groups.There has therefore been a less than expected increase in especially rural living standards with theend of the war. This is potentially a cause for future political instability.

The emerging divergence between slow rural and rapid urban growth is not only a short-termphenomenon but appears to be the result of the structural shift of the economy resulting from theurban-based pattern of war-time development. This emphasises the need for careful war-timeplanning of post-war recovery taking into account the emerging economic structures of the warperiod. Furthermore, it emphasises the need for a clear policy preference for broadly based ruraldevelopment, rather than years of emergency planning, in the immediate post-war period.

New Opportunities for Private-Sector Growth and Poverty Alleviation

There exist post-war supply side policies which could further enhance growth and reduce povertyeven while the budget constraint will continue to reduce the scope for demand enhancing policies orsocial safety nets. These supply policies are not only consistent but will actually create synergies asaccelerated poverty alleviation in rural areas will also strengthen the foundation for sustainable output,export and government revenue growth. Such policy mix would hence complement previous macro-stabilisation polices which on their own were never sufficient to achieve these objectives.

Such initiative does not necessarily require increased donor funding but would benefit strongly fromswift post-war debt relief and predictable, stable and well administered aid flows. In addition, boththe government and donors should increasingly involve civil institutions in their consultation anddecision making processes. Such tri-partite consensus has not yet been built in Mozambique butwould be valuable in overcoming the divisive legacies of the internal war.

Finally, constructing civil institutions by expanding decentralisation, local democracy, the press, thelegal system, and local NGOs such as smallholder and local trader associations would counter thenegative legacies of the war, improve the pressure and incentives for high quality decision making andpublic administration, and increase the internal credibility of state action especially in strongly war-affected, rural areas. The post-war supply side package in Mozambique should hence include a “civilsector investment programme” akin to those of agriculture, transport, water, education, and health.


MAP OF MOZAMBIQUE


KEY DATES IN THE HISTORY OF MOZAMBIQUE

800 AD Sofala (today Beira) emerges as a Muslim-ruled port, integrated into Africanand Indian Ocean trading networks.

1498 Vasco da Gama arrives in Northern Mozambique via Cape of Good Hope.

1878 Slavery is formally ended in Portuguese colonies.

1891 Moçambique Company is granted charter to pacify and manage centralMozambique. Its operation ends 1941.

1891 Anglo-Portuguese treaty establishes borders of modern Mozambique.

1894 Nyassa Company is granted charter giving it almost full government powers toexploit Northern Mozambique until 1929.

1895 The Rand railway connecting South Africa to the port of Lourenço Marques isopened.

The last Gaza king Gungunhana is captured and sent into exile in the Azoresafter his army is defeated by Portuguese forces. This opens the way for thecolonial exploitation of Southern Mozambique, including the sending of labourto South African mines.

1902 The colonial capital moves from Mozambique Island in the North to LourençoMarques (now Maputo) in the South.

1926 A military coup in Portugal leads to the establishment of a fascist dictatorshiplasting till 1974.

1932 António Salazar, the architect of the “new state”, is appointed Portugueseprime minister.

1962 Mozambican Liberation Front (Frelimo) is formed in Dar es Salaam.

1964 The war of independence starts in Northern Mozambique.

1970 Portugal is granted associate status of the EEC.

April 1974 The armed forces lead the peaceful but politically uncertain Portugueserevolution.

September 1974 The Lusaka Accord negotiated between the Portuguese revolutionaryleadership and Frelimo arranges the transfer of political power to Frelimowithin nine months but fails to address many economic or legal aspects of thechangeover.

June 1975 Mozambique becomes independent.

1977 Frelimo converts itself into a communist political party.

1978 P.W. Botha takes over as South African leader thus establishing South Africanpolicy of destabilisation in frontline states, including Mozambique.

Rhodesia helps to set up Renamo as a mercenary rebel movement launchingstrikes against Mozambican and pro-Zimbabwean targets.

1979 Zimbabwean independence ends Mozambican participation in costly embargoof Rhodesia and withdraws Rhodesian support from Renamo.

The South African defence forces take over the support for Renamoorganisation, training and supply.


1980 Afonso Dhlakama becomes the new leader of Renamo.

1981 Mozambique’s application for entry into the Comecon trading bloc is rejected.

1981 - 1983 A severe drought is affecting the whole country.

1982 The Mozambican government decides to apply for membership of theInternational Monetary Fund.

1984 South Africa and Mozambique sign the Nkomati Accord in which they pledgemutual non-aggression.

Mozambique joins the IMF.

1986 Founding president Samora Machel dies in a plane crash and is succeeded byJoaquim Chissano.

Renamo is expelled from Malawi but greatly intensifies its war withinMozambique.

1987 The first IMF structural adjustment programme is introduced.

1990 Nelson Mandela is released from prison in South Africa.

The peace negotiations start with the first meeting between government andRenamo in Rome leading to a partial ceasefire in the Zimbabwean-Mozambican railway corridors.

A new constitution paves the way for a multi-party democracy.

1991 - 1992 A severe drought is affecting the whole of Southern Africa, threatening overthree million Mozambicans with starvation.

October 1992 A ceasefire between Frelimo and Renamo is signed in Rome.

March 1993 The UN peacekeeping forces arrive in Mozambique.

October 1994 The first free parliamentary and presidential elections are held under UNsupervision. The Frelimo party wins a narrow majority in parliament on 44.3%of the vote versus Renamo’s 37.8%. The incumbent president JoaquimChissano of the Frelimo party is elected with 53.3% of the vote while theRenamo candidate Afonso Dhlakama polls 33.7%.

December 1994 The inauguration of president Chissano and the end of the ONUMOZmandate.

1998 The first free local elections are being held in thirteen cities and municipalities.As Renamo is boycotting the elections, Frelimo and independent candidateswin the vote.

December 1999 The second free parliamentary and presidential elections are held. Frelimomaintains its narrow majority in parliament with 133 seats versus 117 seatsheld by the Renamo-led opposition coalition. President Chissano is re-electedwith 52.3% of the vote while the Renamo candidate Dhlakama polls 47.7%.


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