Jul 12, 2012
Center for Democracy and Civil Society

Stiglitz in Mozambique

 

Stiglitz speaks to a packed room in Maputo

The renowned economist Joseph Stiglitz talked to a fully packed conference room in Maputo this morning about challenges presented by recent mineral discoveries in Mozambique. During more than two hours, he repeated the harsh warnings that are becoming familiar here: those about the risks of disadvantageous contracts with foreign companies, poorly managed foreign direct investments and deindustrialization, all of which could turn the blessings of mineral wealth into a curse.

One of the first things he said was that exploring natural resources is not an activity that necessarily creates many jobs. A country that is concerned with development should be very mindful of how to use its extractive industries to generate high demand for local labor. In the case of Mozambique, the employment situation is extremely important; big companies from China, Brazil and others are accused of bringing thousands of their own nationals to the country totake over managerial positions, while locals workers are kept locked at low skilled jobs. I’ve also heard rumors that Mozambicans themselves engage in several corrupt activities when a new project starts, “selling” jobs at the new plants. Both these schemes are facilitated by bad contracts signed by the national government and poor oversight.

To make matters worse, in Mozambique, “the ownership and control over mineral and energy resources, as well as natural resources (land, water and forests) and infra-structure (roads, bridges, communications, energy, etc) associated with the mineral-energy complex are increasingly concentrated at the hands of large multinationals and their domestic partners”, as says economist Carlos Nuno Castel-Branco in the book “Challenges for Mozambique – 2011”. Not only that, but there is little control and very low taxation over the activities of these foreign companies. According to Castel-Branco, the six or seven mega-projects that are already operating in Mozambique have, due to cumulative fiscal incentives, and untapped taxation potential of a third of the current national budget. The debate heated up recently after the sale of a big coal project in the Tete province to the anglo-australian giant Rio Tinto without any participation by or gain to the national government.

Moreover, the Mozambican government opens the window to unfavorable conditions by an abysmal lack of knowledge of its own resources: In general, the only source of information about the quality of the minerals, their market prices, reserves, operational costs and others are the companies themselves. To many critics, the problems created by these conditions is not just about taxation: there must be a discussion about the extractive model itself. The current one, focused on mere exportation of raw minerals, benefits the companies, but not the country. The production process is incapable of absorbing and distributing the income generated by the sector and does not add as it could to the larger economic growth.

But let’s go back to Stiglitz. He urged Mozambicans to demand transparency in the contracts between foreign companies and the government, and defended a renegotiation of the ones that do not benefit the Mozambican people. “That is quite common and a feature of capitalism”, he said. “Botswana success, for example, began with a contract renegotiation.” He gave other examples, including that of Bolivia, who more than once sent troops over to gas projects to force renegotiations, including with Brazil.

Another big focus of his speech was that countries that find themselves sitting on vast reserves must maximize the gains of extractive activities by investing in industrial policies. It’s important to “create a dynamic economy for the future” and not one that “loses comparative advantage over the years”. In order to do that, he defends linking the extractive industries to investments in infrastructure and to the training of local labor. Watch out, he said: the Dutch disease can arrive before the revenues of the mineral activities do. And Africa is already less industrialized now than it was ten years ago.

Stiglitz warned also against too much optimism with recent gas discoveries, pointing out that the gas prices are plummeting all over the world. Finally, he said all his warnings about transparency, good contracts, ownership and etc should also be applied to land, which is being sold without much care.

All in all, it wasn’t anything we have not heard before. There are many questions yet to be asked (let alone answered), including the role of the UN and the World Bank in helping regulate extractive activities in developing countries. They are involved, yes; teams of WB experts are a common scene in Mozambique. But what are they actually accomplishing? All in all, it seems amazing how little the world learns over time. Hopefully Mozambique will not wait to long to prevent the mistakes others made before.

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10 Comments

  • Given what you have previously written, it would seem that Stiglitz’s remarks are closer to wishful thinking than a realistic scenario of how the Government of Mozambique is likely to handle extractive industries.

  • Joseph Stiglitz is making some good points. And it is precisely because of those challenges that the World Bank is engaged in resource-rich countries like Mozambique. One of our primary roles is to ensure that mineral-rich countries seize the development dividend from the wealth generated by the current commodities boom.

    We are doing this by working with governments to improve their ability to effectively manage their extractive industries, making sure that revenues are invested in much-needed roads, electricity, schools and hospitals that will benefit local communities. We are also helping countries implement the Extractive Industries Transparency Initiative principles of accountability and transparency. Some of our other policy interventions focus on:

    • Improving geological and mining information systems

    • Building human and institutional capabilities to better manage and regulate the sector, including the negotiation of better contracts

    • Promoting the formalization of artisanal and small-scale mining into the overall economy

    • Establishing links from mining to other economic sectors and promoting local procurement of services and products as a way of boosting employment.

    For more, please visit: http://www.worldbank.org/mining

  • Mauricio, these are all good ideas. Do we have evidence that the bank is able to increase transparency and accountability in extractive industries?

  • Prof. Stiglitz talk in Mozambique was great. He made the right points about mineral resource rich countries, need for transparency and accountability, possibility of real appreciation of the currency and impact on tradables and development possibilities (resource curse), and the absorptive capacity of government institutions. He stressed sovereign wealth funds as the instrument for deceleration of the real appreciation (also mentioned need for stabilization fund as these are commodities) and mentioned that countries cannot believe they will be able to convert the resources in wealth by investing them through government investment expenditure at the same speed as they are generated. Absorptive capacities are weak, inefficiencies will grow fast, corruption will degrade the economy and the results of these revenues, frustrations among the citizens will increase as jobs and income possibilities do not grow as resources are dilapidated. In Mozambique, the central bank believes that can manage the inflow of foreign exchange and see no need for sovereign wealth funds. Still a long way to go for setting the common ground understanding on impacts and policies needed as these huge revenues flow into the economy but contracts are already being signed.

  • Unfortunately, the fate of resource endowment is determined by politics. It really doesn’t matter how many WB consultants or tax lawyers you employ. Without political will and a well-intentioned ear in government, all of those ideal structures and good ideas stand little chance of being realised. Similarly, contractual infringements and wheel greasing won’t be championed without independent institutions that have a free mandate to enforce. Even in some of the most advanced and developed democracies this is a distant prospect. (Read: corruption, but I hate using that buzz word).

    Business is business. Short cuts will always be attempted in search of profit. And labor and goods sometimes has to be imported for the sake of quality and time. So what can be done? Well, sometimes one is left with no chance but to make the best out of a skewed situation (and not renegotiate contracts for fear of investor exodus). That begins with ensuring that the extractive sector a) employs Mozambicans and b) creates added value to the local economy. Contrary to what is so often touted Mozambique does have well qualified people and the government should take no prisoners when it monitors the foreign labour quotas that investors are contractually obliged to provide. Moreover, Mozambicans who are fortunate to be employed – skilled or unskilled – must gain their employers’ trust. High levels of absenteeism is a huge deterrent for investors. It is of little wonder why investors prefer to import Philippine workers, for example – just ask any investor worldwide: they are low cost but also immeasurably more disciplined and productive. So how do you create that working culture. “Education, education, education” (the famous words of Tony Blair). Come President Guebueza, here’s your chance to leave office with a lasting legacy other than your plethora of enterprises. As for the local economy: why does agriculture only provide for 25% of GDP and almost 80% of employment. Why are all these foreign investors importing almost all food produce when this country is so fertile? If David Ricardo were alive today he would be horrified by the violation of this comparative advantage. Protect it just like Malawi recently did if you have to. Mozambique faces many development challenges but the disregard for the development of its agricultural sector over the years in inexcusable with all the donor money that has and continues to pour in.

  • Hi Mauricio,

    Good points. How much has been achieved so far by WB? What are the concrete results so far, especially as far as EITI principles and their implementation in Mozambique are concerned?

    The bigger the risks for foreign companies which enter Mozambique, the more short-term, aka profit/revenues, they think.

    Unfortunately, Mozambique is a country where those risks are mostly associated with lack of infrastructure, legislature and long term vision. When a company comes to Mozambique, the government tells it, “we don’t have railway, so you need to build one,” or “we don’t have roads, so you need to build those” and alike.

    Thus foreign companies, especially those in extractive sector, translate those risks into short-term strategies aiming to make a quick buck and without much concern for long-term development of the country.

  • Hi Mauricio and all,
    Every single point you mentioned about the work the World Banks is doing is crucial and a movement in the right direction. However, like Frit said above, i suspect most efforts hit a big wall called lack of good will. There is always someone benefiting from every situation, and in this case, it is not only the foreign companies. There is profit to the government too. Companies do not count only on local ignorance – according to most accounts, there are plenty of gov. sectors eager to have their share of the advantages even if that is in detriment of a long term investment in development. As everybody knows, two Transparency International reports from 2011 see Mozambique as having the highest incidence of bribery among countries in southern Africa, with corruption perceived to be on the rise in the last three years by the majority of the public.
    We would all love to hear more about what the WB efforts have achieved so far. Keep participating!

  • I agree. I don’t think statements such as, “we can achieve X as long as politicians have the political will to do Y” when Y is something that goes against the interest of those very same politicians. One of the worst assumptions we can make is to think that politicians will act against their self-interest. Sure, the Government of Mozambique could probably develop the capacity to use revenue from extractive industries in socially useful ways. The more important question is do they have the incentive to do it. If the answer is no, is there anything outsiders can do to change those incentives. If you can’t give a good answer to that question, then there isn’t much hope.

  • […] All of these could be improved by political will. Do the politicians here have the right incentives to do so? It is hard to be optimistic of anything that depends on political will here. It is certainly an exciting time, and there is lots of hope about the future in Mozambique due to new discoveries and investments in mineral resources. Indeed, megaprojects would offer a window of opportunity for employment and development, but only if well managed, which is not the case today. […]

  • […] charts on FDI to the percentage of investment that is tied to the booming extractive industries (an incredible 84%). I met the author, Alejandra Bujones, in Maputo, and I witnessed her efforts to obtain accurate […]

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