Mozambique is a success story in sub-Saharan Africa. It has benefited from sustained large foreign aid inflows, strong and broad-based growth, and deep poverty reduction. Since its civil war ended in 1992, Mozambique’s growth record has been impressive, and its growth has especially benefited the poor: consumption among people below the poverty line has grown strongly, thanks to an expanding agricultural sector, increased nonfarm activities in rural areas, and higher wages. Today, Mozambique has one of the lowest levels of income inequality in Africa, and its absolute poverty and the poverty gap (which takes into account the distance separating the poor from the poverty line) have decreased substantially. (See Figure 1.1.) This remarkable growth performance was made possible by prudent macroeconomic policies, structural reform, and substantial donor assistance. On the political side, Mozambique has succeeded in bringing about reconciliation and solidifying its nascent democracy through three general and presidential elections.1
Mozambique has experienced impressive economic growth over the past decade. GDP growth has averaged about 8 percent a year, which compares favorably with the growth takeoffs of Indonesia, Malaysia, the Philippines, and Thailand (the four members of the Association of Southeast Asian Nations referred to in this book as the ASEAN-4) and other Asian countries in the mid-1970s (see Chapter 1).
Mozambique has been remarkably successful in reducing poverty over the past decade. Sustained, broad-based growth resulted in a 25 percent decline, equivalent to 4 percentage points a year, in the poverty head-count between 1996 and 2002. Mozambique’s impressive poverty reduction performance was driven not only by the high rate of economic growth but also by the character of this growth. At the macro level, achieving growth without an increase in inequality was key, since this allowed a modest private consumption growth to efficiently reduce poverty, leaving room for a strong increase in investment to generate future growth. At the micro level, broad-based, labor-intensive growth in the nonagricultural sectors diversified household incomes, which underpinned the pro-poor growth performance. This chapter draws lessons on the linkages between growth and poverty reduction and analyzes the major factors associated with poverty reduction in Mozambique during 1996–2002. It uses both macro-level and nationally representative expenditure and income household survey data to illustrate those relationships in recent years and project future performance. The case of Mozambique also offers important lessons for other low-income sub-Saharan African countries, and we summarize these in our conclusions.
The question of how to achieve rapid and sustained growth has challenged economists for generations. As Robert Lucas (1988) has famously remarked, “the consequences for human welfare involved in questions like these are staggering: once one starts to think about them, it is hard to think about anything else.” The potential contribution of economic growth to well-being has been demonstrated by the achievements of various East Asian countries over recent decades. At the same time, it is patent that not all countries have been able to replicate these successes, with economic performance in sub-Saharan African countries being of particular concern. The World Bank, for example, remarks that global poverty is increasingly coming to assume an African face owing to the “slow and erratic” rates of economic growth across the continent over the last thirty years (Ndulu, 2007). Thus, although experiences of individual countries have been diverse, the importance of understanding what may be required to promote robust economic growth in Africa cannot be overstated.
After years of very high inflation prior to the mid-1990s, Mozambique has succeeded in stabilizing inflation, albeit with some lapses. A key factor in bringing inflation under control has been the implementation of a firm money-based stabilization program supported by prudent fiscal policies under successive IMF-supported arrangements. Financial liberalization and bank restructuring at early stages were also important in this regard. There have been, however, bouts of inflationary episodes driven by both domestic shocks (for example, droughts, floods, and banking crises) and external shocks (for example, inflows of foreign aid and fluctuations in oil prices). Thanks to monetary and financial sector reforms, Mozambique’s financial system, once government owned, has come a long way since the end of the civil war, evolving into a full-blown market-based system.
Macroeconomic conditions in a number of sub-Saharan African countries have improved markedly in the past decade (IMF, 2005a), providing greater scope for stabilization policies. Higher economic growth rates have been associated with lower inflation rates, healthier public finances, and higher international reserves in a group of countries dubbed “mature stabilizers” (Selassie and others, 2006) or post-stabilization economies. Mozambique is one of these countries.
The Commission for Africa (2005) and the United Nations (UN) Millennium Project have identified a need for donors to scale up aid flows to well-governed low-income countries, including Mozambique, to enable them to meet the Millennium Development Goals (MDGs). While large aid inflows can play an important role in helping countries achieve the MDGs, they also pose a number of macroeconomic challenges. Scaling-up scenarios are intended to illustrate a potential medium- to long-term macroeconomic outcome and to identify some of the key mea-sures and policies that would help countries absorb larger amounts of aid and use it efficiently (Gupta, Powell, and Yang, 2006). In practice, donors might be less likely to offer more aid, and recipient governments might be less likely to accept it, on a sustained basis if either party started to observe significant macroeconomic absorption problems—such as rising inflation, crowding-out of the private sector, or a serious loss of international competitiveness—and microeconomic capacity constraints, such as severe skill shortages, a deterioration in the quality of services, or other bottlenecks.1
Mozambique’s model of donor coordination has considerably improved aid effectiveness, holding lessons for sub-Saharan Africa. In 2006, the Mozambican government formulated its second poverty reduction strategy (PRS)—entitled in Portuguese the Plano de Acgão para a Redugão da Pobreza Absoluta (PARPA II)—which sets out goals and performance indicators for 2006–09.1 Since 2000 an increasing number of donors have agreed to common financing schemes that support the government’s poverty reduction strategies in an efficient, predictable, and noncumbersome way. This chapter sheds light on how this framework, referred to as the “Mozambique model,” has evolved into an institutional setup that is often praised internationally as a best practice.