This Selected Issues paper on the Republic of Mozambique highlights that in the period 1987–97, the economy of Mozambique made impressive gains. Real GDP and exports grew on average by 6.8 percent and 15.6 percent, respectively, and the ratio of investment to GDP rose from 36.1 percent in 1987 to 45.2 percent in 1997. In the two years ended December 1996, the 12-month inflation rate fell dramatically from 70.1 percent to 16.6 percent.
III. Growth and Investment
38. In the early 1980s, despite serious economic problems, the investment-to-GDP ratio of the Mozambican economy averaged 46 percent,8 the second-highest ratio in sub-Saharan Africa. During this period, however, these high investment levels did not result in high rates of growth; on the contrary, the average annual real growth rate was negative (-1.9 percent). This means that the productivity of investment during that period was not only negative but also one of the lowest in Africa.
39. The economic results of the early 1980s highlight the fact that the investment level of a country does not by itself determine its growth performance. Several other factors, such as the wisdom and productivity of past investment decisions, the country’s ability to maintain and use the infrastructure and equipment productively, the rate of obsolescence of the country’s capital stock, and the availability of complementary factors of production, are crucial for ensuring a close correspondence between high investment levels and high economic growth.
40. Since 1987, Mozambique has been implementing a program of structural adjustment that has received support from the Fund and the World Bank, as well as the donor community. Significant amounts of foreign aid inflows have allowed Mozambique to maintain relatively high levels of investment. For the period 1987–95, the average investment-to-GDP ratio was 42.6 percent. Moreover, even though the trend in the investment-to-GDP ratio declined slightly during the period, the average GDP growth rate was 6.6 percent.
41. While the growth performance of the Mozambican economy during the 1987–95 period was impressive, it is interesting to note that during that period countries such as Botswana and Uganda, whose rates of growth on average exceeded those for Mozambique, had much lower investment-to-GDP ratios. During 1987–95, the average GDP growth was 8 percent in Botswana and 7.3 percent in Uganda, while their investment-to-GDP ratios were on average 30.0 percent and 13.8 percent, respectively. These countries were able to grow faster than Mozambique with much lower investment levels because the productivity of their investment was higher than that of Mozambique (Figure 4).9
42. The decline in the investment-to-GDP ratio in Mozambique has raised concerns that the economy may not be able to continue to grow at relatively high rates. The data provided in Figure 4 seem to indicate that there is room to compensate for the observed reduction in the investment-to-GDP ratio by increasing the productivity of investment. The productivity of investment in the 1987–95 period was 0.26 in Botswana and 0.56 in Uganda, but only 0.15 in Mozambique.10
43. On a year-to-year basis, the productivity of investment in Mozambique has, amid considerable fluctuation, generally shown a declining trend from 1987 to 1995. Under a scenario of a continuing declining trend in investment, Mozambique will need to ensure that its productivity levels rise. Two steps should be helpful in this context: (a) the gradual replacement of public investment by private sector investment, which is generally more efficient;11 and (b) more careful choice of investment projects. The latter point requires the government (and donors) to ensure that there is enough absorptive capacity in the economy to avoid wastage of resources, that budgeted resources are available to guarantee the continuous maintenance and operation of the proposed investment project, and that the most productive investment projects are given priority.
Over the period 1980–87.
The growth rate (∆Y/Y) can be decomposed into the product of the investment-to-GDP ratio (I/Y) and the productivity of investment (∆/I).
Mozambique’s national accounts are being reestimated and in this process it is likely that the average investment-to-GDP ratio will be revised considerably downward, possibly to levels of about 30 percent. If so, the productivity of investment in Mozambique (about 0.22) would be considerably higher than reported above. This reestimation would still leave Mozambique with a productivity of investment that is lower than those of countries such as Uganda (0.56), Chad (0.43), Liberia (0.37), Ghana (0.31), Botswana (0.26), Nigeria (0.25), Guinea (0.25), and Mauritius (0.23).
Clearly, some public investments, such as roads, may have an important multiplier effect, helping increase the productivity of other investments. However, governments are increasingly finding ways to successfully transfer even some investments in infrastructure to the private sector. The results of these efforts have been encouraging.