Mozambique commodity and policy shocks: terms of trade changes, the Socialist "Big-Push" and the response of the economy (1975-86)

Mozambique's recent development has been influenced by successive and simultaneous events bound to create abrupt and major changes in the productive capacity of the economy and in the behaviour of the economic agents. These include the disruptions brought about by the decolonization process, a permanent state of war', a series of severe natural disasters, and swings in international commodity prices of both major exports and imports. In addition, the country has been subjected to radical regime changes. In the 1970s, this took the form of a wholehearted adherence to a socialist development strategy that failed to generate the expected results. Since the mid-1980s the government has been moving away from socialism and adopting the free-market economy. The analysis of this paper covers the period between the accession to independence throughout the socialist experiment, and discusses some of the major events leading to the economic crisis and the subsequent adoption in 1987 of a stabilization and adjustment program with the support of the international Monetary Fund and the World bank.. In particular, the paper deals with the commodity boom and the socialist experiment and their interactions, and assesses how these operated to generate some of the macroeconomic imbalances that continue to hamper the economic restructuring and development of Mozambique. The country gained its independence from Portugal in 1975, after ten years of nationalist war of liberation. The decolonization process was accompanied by a massive exodus of expatriate owners and managers of enterprises, as well as illegal exportation of capital (physical and financial), resulting in the disorganization of economic activity and massive losses of output. During the late 1970s through the early 1980s a consumption boom related to the populist policies of the period immediately after independence combined with the investment boom related to the socialist 'big-push' development strategy adopted in 1977 to put strong pressures on the current account and the government budget. During this period, major increases in export prices of primary commodities generated terms of trade improvements and a corresponding income windfall that concealed the underlying decline in export volumes resulting from the economic crisis that followed the decolonization process. These terms of trade gains improved the country's creditworthiness allowing the government to borrow abroad to finance consumption investment. expenditure. The coincidence in 1982 of a negative terms of trade shock and restricted access to international credit markets added to the intensification of the war to bring further decline in primary commodity production and exports, eventually sending the economy into a downwards spiral that undermined the socialist 'big-push' and forced the enactment in 1987 of a stabilization and adjustment programme under the auspices of the International Monetary Fund and the World Bank. This paper presents the preliminary results of a larger research project dealing with the economics of stabilization and structural adjustment in Mozambique. It covers the results of the first phase focusing on the impact of commodity shocks experienced by the economy of Mozambique during the period between 1975 and 1986. The paper presents a periodization and taxonomy of these shocks, the measures of their size, and discusses the responses to them by both the government and private economic agents`. The main argument in this paper is that the investment boom and the fiscal and current account imbalances that occurred in Mozambique in the late 1970s and early 1980s were a joint product of both the commodity boom and the socialist 'big-push', and they cannot be understood without a thorough investigation of each of these shocks as well as their interaction. Coming in the wake of the populist policies of the early years after independence, the socialist 'big-push' was conspicuous for its investment drive, generating resource requirements out of line with domestic income and propensities to save. In this context, the commodity price shock had a substantial effect on the investment boom. It did so by enhancing the creditworthiness of the country and thus enabling the government to borrow abroad to finance the investment boom. Thus the commodity shock made the socialist 'big-push' look like a feasible strategy. The Government intervened in way that created a highly inefficient transmission mechanism of the commodity boom. Fiscal policies were not specifically targeted to windfall incomes, and aimed at generating revenue required to finance the boom in public investment and consumption . Due to the ideological drive behind the socialist 'big-push', policies became irresponsive to changing circumstances. The private sector was driven out of the mainstream of the economy, forced to de-accumulate physical assets and to engage in unproductive rent-seeking activities. The investments initiated by the government were of long gestation periods, and imposed severe sacrifices on consumption. Further, before the investments made could generate any returns, they were disrupted by the war and natural disasters. The net accumulation of public assets was very low relative to resources manipulated through government revenue and spending polices.