Economic Growth in Mozambique Experience & Policy Challenges Crispolti, V. (AFR) Vitek, F. (SPR)

Objectives of the presentation Take stock of Mozambique’s growth experience over the last fifteen years by looking at the factors contributing to growth and identifying parallels with the experience of other countries. Distill possible areas that could help raise economic growth in equitable and sustainable way, enhance external competitiveness, diversify the export base, and strengthen economic policy making going forward. Develop appropriate policy recommendations to achieve economic development while safeguarding macroeconomic stability. 2

Structure of the presentation Part 1: Mozambique’s Growth Experience in Perspective (Crispolti, V.) o Factors contributing to economic growth o International comparisons Part 2: Empirical Evidence on the Determinants of Economic Growth (Vitek, F.) o Measuring capital abundance o Investment growth nexus o Policy recommendations 3

Part 1: Mozambique’s Growth Experience in Perspective V. Crispolti 4

Strong postwar expansion Since the early 1990s, real output has grown by 8.2 percent per year on average, resulting in a significant improvement of living standards in Mozambique (PRSP, 2007) 5

Sources of growth: Production Economic expansion has been spread across production sectors, with megaprojects determining the patterns of economic activity in the secondary sector. 6

7 Output growth was supported by robust domestic demand, including for investment related to megaprojects. Sources of growth: Expenditure

Greater integration into the global economy accompanied growth 8 Growth was accompanied by increasing openness to international trade, which favored greater synchronization with the economic cycles in other regions of the world.

Other factors affecting growth o Supportive factors: Prudent macroeconomic policy management; The implementation of key structural reforms; Protracted period of political stability following the civil war. o Untapped potentials: Measures to improve the business climate; Regional Integration. 9

More recently, however, the economy has been gradually loosing steam, reflecting the downward trend of potential output growth. 10 Recent trends: Growth

Recent trends: Poverty Moreover, poverty remains high as suggested by Mozambique’s low level of GDP per capita, in 2008 still below the 25 th percentile of the distribution for SSA countries. 11

International comparisons Mozambique’s growth performance may be better understood once compared with the experience of similar countries in different regions of the world. This would help shed light on the important challenges faced by the authorities going forward. Mozambique’s accomplishments are compared with the achievements attained by several non-fuel exporting SSA countries, as well as comparable economies in Asia. 12

International comparisons: Sub-Saharan African countries Mozambique’s growth performance stands out in a regional context… 13

International comparisons: Asian countries … and with respect to the successful experience of peer countries in Asia. 14

International comparisons: Recent trends However, growth is gradually loosing steam, partly reflecting the recent decline in investment rates… 15

International comparisons: Total investment …which, on the contrary, are increasing among peers… 16

International comparisons: Private investment 17 … mainly reflecting higher private investment.

Part 2: Empirical Evidence on the Determinants of Economic Growth F. Vitek 18

Measuring capital abundance The fundamental drivers of long run growth in living standards are: o Productivity advancement o Capital deepening Measures of capital abundance can help prioritize economic development objectives. 19

We construct capital stock depth indexes with principal components analysis 20 We aggregate observed indicators of the abundance of private physical capital, public physical capital, and human capital relative to other factors of production. o Cross sectional data set covers 182 economies

Principal components estimation results for Mozambique 21

Capital abundance in Mozambique lies near bottom of global distribution 22

23 Capital abundance is also low compared to peers

The investment growth nexus We conduct an empirical analysis of the determinants of growth in living standards in Mozambique. o Theoretical framework is neoclassical growth model o Empirical framework is panel error correction model 24

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

Growth in living standards was driven by productivity advancement, not capital deepening 26

Estimated expansionary effects from scaling up investment are large 27 A one percent increase in the rate of private investment is estimated to raise output growth by 1.3 percent on impact. A one percent increase in the rate of public investment is estimated to raise output growth by 0.5 percent on impact.

Estimated expansionary effects of infrastructure investment are consistent with existing results 28 A one percent increase in the rate of grant financed infrastructure investment is estimated to raise output growth in low income countries with prudent macroeconomic policies by: o 0.4 percent by Burnside and Dollar (1997, WB) o 0.3 percent by Spinetto, Teresa and Moll (2005, WB)

Public investment in infrastructure should be well targeted to maximize expansionary effect 29 The persistence of the expansionary effect of public investment will depend on the degree to which it promotes future private investment. o Should be well targeted to raise the benefits and reduce the costs of private investment. o Building “bridges to nowhere” will not yield a sustained increase in economic growth.

Conclusion Since the end of the civil war, Mozambique’s output has expanded at an impressive pace, nearly doubling living standards. However, despite the positive contribution of megaprojects growth has been gradually decelerating and poverty remains high. International comparisons suggest that there is scope for Mozambique to rise its economic growth and reduce poverty over the long run. Given the need to preserve macroeconomic stability and debt sustainability, broad- based economic growth should be promoted by: o Targeted public investment in infrastructure that will help stimulate private investment; o Sequenced structural reforms of institutions; o Focused efforts to improve the business environment and enhance regional integration; o Prudent monetary and fiscal policies. 30

31 Thank you