Once the eastern gem in Portugal’s colonial empire in Southern Africa, Mozambique has emerged from the chaos of decolonization to become one of Africa’s steadily growing states.
This is largely due to sound leadership of the country’s second president, Joaquim Chissano, and the important reforms carried out under his administration in the 1990s and early 2000s.
In this AFKInsider series, we explore Doing Business in Africa: Mozambique.
Before Chissano, Mozambique’s fortunes reflected those of the rest of post-colonial Africa, especially its twin to the east – Angola. Like Angola, Mozambique gained independence in 1975 as a result of a military coup and political revolution in Lisbon. The coup removed the right-wing authoritarian government there and ended Portugal’s bid to retain its African colonial empire by military force.
Also like Angola, the Mozambican independence movement that took power after Portugal’s retreat was a Soviet-aligned, Marxist government. In Mozambique, FRELIMO – the Front for the Liberation of Mozambique – almost immediately fell into armed conflict with an internal, anti-communist opposition and its external supporters – principally South Africa and the U.S.
This meant that Mozambique was engaged both in war and socialism in the decades following independence, which further impoverished its people. The civil war, which lasted until the end of the Cold War in the early ’90s, led to the death of 1 million Mozambicans, the creation of another 2 million-or-so internally and externally-displaced Mozambican refugees, the mass exodus of Portuguese nationals and Mozambicans of Portuguese decent, and the near-complete destruction of the country’s already primitive infrastructure.
Needless to say, Mozambique in this period become one of the poorest, most strife-ridden countries on Earth, and the damage caused by the civil war was rivaled only by the similarly terrible conflicts in Angola, Ethiopia, and Afghanistan.
Prospects immediately brightened, however, with the collapse of the Soviet Union and the end of the U.S.-Soviet Cold War in December of 1991.
Repeating the Angolan experience, Mozambique’s ruling party shifted ideological focus and the country’s president – Joaquim Chissano – not only ended the civil war through negotiations with the armed opposition, but opened the door to capitalism via significant liberalizing reforms.
There, however, the similarity with Angola ends.
Whereas in Angola the opposition led by Jonas Savimbi continued fighting for another decade, in Mozambique Chissano’s leadership led to reconciliation with FRELIMO’s enemies. Huge numbers of refugees from neighboring countries were repatriated and the opposition’s armed forces were fully incorporated into the Mozambican military as a result of a peace agreement signed in 1992. What’s more, peace led to democratization and presidential elections in 1994 and 1999 – both which Chissano won easily.
During his time in office, Chissano led a successful effort to get the G8 countries to write off significant portions of the country’s massive foreign debt.
His sound stewardship of Mozambique’s finances resulted in nearly 15-percent of the country’s population being lifted out of extreme poverty, with a corresponding 35-percent decrease in the under-5 mortality rate and a 65-percent increase in primary school attendance.
Then, to cap off his performance as one of Africa’s most competent leaders in decades, Chissano left office after his second term – though he could have remained on – and as a result received the inaugural prize for Achievement in African Leadership by the Mo Ibrahim Foundation in 2007.
Given such a legacy, post-Chissano Mozambique has not surprisingly entered an era of (mostly) peace, (mostly) stability, and growth. Companies are flocking in, resources being invested, and trade – the lifeblood of commerce – is beginning to blossom. With all this going on, what are business conditions like on the ground?
According to the World Bank, Mozambique currently ranks 126th out of 183 countries on its Ease of Doing Business Index – a measure created by the bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the U.S. ranks fourth for overall ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. The bank defines business-creation costs as the time and money involved in the series of legal steps an entrepreneur must take to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process to establish in-country averages.
When this metric is applied to Mozambique, the bank finds that Mozambique ranks 65th out of 183 in ease of starting a business, making Mozambique a somewhat difficult place to start a commercial enterprise, but not so hard as in many other countries. To start a business in Mozambique, one has to complete nine bureaucratic procedures that take a total of 13 days at a total cost of about $60, with no minimum capital requirement imposed by the government for the start-up. Clearly, this is inexpensive for the average Westerner and even by African standards the cost of opening a business in Mozambique is very low.
Figure 1:
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the bank ranked Mozambique in a number of other areas.
To obtain a construction permit, Mozambique is ranked 155th out of 183 as it takes the completion of 17 procedures, which takes on average 381 days to complete at a cost of $2,332 – around five times the national income. Clearly, this ranking stands in stark contrast with the relative ease with which a business can be started and constitutes a major hurdle to overcome for those seeking to develop commercial property in the country.
For ease of obtaining and registering property, Mozambique ranks 144th out of 183 countries measured. To register property in Mozambique, it takes the completion of eight bureaucratic procedures that take, on average, 42 days and cost 9.9-percent of the property’s financial value in fees and other costs. Not insurmountable for foreigners, but, again, a steep price to pay for most Mozambicans and an indicator of just how hard it is to develop property in country.
Mozambique does marginally better when it comes to obtaining credit. It ranks 128th out of 183. The index examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges. When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. Unfortunately, in Mozambique creditor rights are weak and there is scant coverage of the adult population by credit information bureaus.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders, Mozambique does much better. Here, the country ranks 44th out of 183 countries. It received this score because Mozambique is a very easy place – one of the best places in the world – to bring shareholder lawsuits. Company directors are also moderately liable for firm performance under Mozambican law while the legal disclosures of conflicts of interest are also mandated by statute.
Mozambique unfortunately does less well in the area of taxation. The World Bank estimates that pleasing the tax man in Mozambique requires a total of 37 payments over the course of a year which take up to 230 hours to complete and can consume up to 34.3 percent of a company’s profits. Accordingly, Mozambique’s tax burden is ranked 101st out of 183 nations.
When it comes to engaging in cross-border trade, Mozambique’s favorability rating plummets. It is one of the worst countries in the world in this area. One is required to have 10 documents for customs officials to inspect. On average, it takes a total of 30 days to import goods into Mozambique and costs $1,475 (excluding tariffs) per container shipped in.
The cost to export goods is somewhat lower as Mozambique requires only seven documents to be inspected by customs officials, while the total cost (excluding tariffs) is $1,100 per container, with delivery taking up to 23 days from point of origin. Compared to global averages this nets Mozambique a ranking of 133rd out of 183 countries for ease of engaging in cross-border trade.
Mozambique is also a generally poor place to do business when it comes to contract enforcement. It ranks 132nd out of 183 countries. On average, report World Bank analysts, it takes 30 legal procedures to take a contract from dispute to resolution, over a period of 730 days, or two years, spent in court or otherwise attending to legal issues. The financial cost of pursuing a contract claim is about 142.5-percent of the value of the claim – clearly a huge deterrent to the legal enforcement of contracts.
Finally, in terms of closing or liquidating a business, Mozambique ranks 129th out of 183 countries. Here, it takes nearly five years to close an estate at a cost of 9 percent of the value of the estate, for a recovery rate of 17.7 cents on the dollar.
Table 1 presents a summary of these rankings as well as Mozambique’s overall ease-of-doing business rating. By these measures, Mozambique is at best a middling place to do business in Africa. It does best at starting businesses and protecting investors, but the steep costs of obtaining permits and enforcing contracts make the business environment a difficult one. Clearly, more reform of the country’s legal institutions and property law are needed.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: Mozambique
Modern Mozambique is in many ways a miracle in the making. Political stability (most of the time) and significant economic reform have resulted in consistently high growth rates since the end of the civil war there in 1992. Unlike many African states, which have seen significant, commodity-driven boom-bust cycles, Mozambique has racked up years of steady, impressive growth. As Figure 3 below shows, growth for the last 10 years was a consistent 6-to-8 percent, and for the decade averaged just over 7 percent with no wild swings one way or the other. Mozambique is, by all accounts, a steady achiever.
Figure 3:
Mozambican Economic Growth,
Percent Increase, 2003 – 2012
What’s more, this country of 24 million inhabitants can only grow.
While the vast majority of Mozambique’s citizens work as subsistence or small-scale farmers, huge swathes of the country’s arable land remain fallow.
In part this is due to unexploded ordinance left over from the country’s long civil war, but the lack of rural infrastructure is another reason land lies fallow. And refugee resettlement in urban areas – attracted by job growth in Mozambique’s cities – pulls workers away from rural areas. This means that Mozambique has a huge, untapped agricultural potential that has drawn interest from around the world.
Mozambique is also rich in other important resources. Coal and aluminum are important mineral resources, while the recent discovery of significant offshore gas deposits and the potential discovery of even more valuable offshore petroleum resources have lured the world’s largest energy firms to the country. Additionally, the country is experiencing record-low inflation and growth is beginning to set off secondary and tertiary sectors such as tourism, banking, and telecommunications.
Still, not all is bright in Mozambique. The country is still pitifully poor by world standards, and while democracy has taken root, a return to civil war is not completely out of the question.
The continued success of FRELIMO in democratic elections has alienated the formerly-armed opposition, RENAMO, or Mozambican National Resistance. RENAMO, like FRELIMO, transitioned from civil war to electoral politics by forming a political party aimed at contesting free and fair elections, but has had little success. Unfortunately, this lack of success in ousting FRELIMO from power in the post-Chissano era has heightened tensions.
Mozambique, after all, is still a place where connections to government are a huge aid in wealth creation, and the steady growth of the economy has whetted the opposition’s appetite for more than just political power. In October, for instance, RENAMO’s unhappiness with the status quo was made apparent when some of its leaders announced that “peace is over.” The group, or at least parts of it, could resort to violence if demands for economic inclusion and electoral reform are not met.
Since FRELIMO has held power in Mozambique in one way or another since independence in 1975, RENAMO’s demands for political inclusion are not without cause and the country has seen an uptick in violence and kidnappings carried out by a militia loyal to RENAMO. At present the country is holding steady, but investors should be aware that political conflict, if not armed violence, could once again rear its head.
If these troubles were not enough, the country’s increasing fiscal deficit is also cause for concern. According to the African Development Bank, the country’s fiscal deficit has recently worsened, going from 8.2 percent in 2012 to an expected 9.5 percent in 2014. This could put downward pressure on the currency, which sank 0.85-percent against the U.S. dollar in 2013, though low inflation has so far kept currency depreciation mostly in check. At the very least, concern over the deficit could make spreading the wealth – key to Mozambique’s continued political stability – more economically difficult as time goes on.
Finally, another concern is the degree to which Mozambique’s legal institutions hamper growth. Contract enforcement – a cornerstone of capitalist development – is far too time-consuming and expensive in Mozambique. In part this is due to a lack of human capital – the raw numbers of lawyers and judges necessary to keep the system going – but also the degree to which corruption is and is likely to remain a significant problem. Likewise, continuing legal restrictions on the buying, selling, and development of land that date back to the socialist era also pose significant threats to the country’s continued prosperity.
Still, despite all that, peace, reform, liberalization, and democracy have produced significant growth that lifted many Mozambicans out of poverty. Combined with a laser-like focus on poverty reduction by Mozambique’s second president, the country made much progress remaking its image from a poor, war-torn place during the late 20th century to one where its people stand a good chance of making good on the opportunity and promise of a globalized, 21st-century economy.
Mozambique has great potential – if, that is, politics doesn’t get in the way.
