Mozambique - An introductory economic survey

Report No. 5610-MOZ Mozambique An hntroductory Economic Survey June 6, 98S Eastem and Southem Africa Region Country Prograrns 1 FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents mnay not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Heticais/USS* (yearly average) 1950/59 28.90 1976 = 31.41 1960 = 28.83 1977 = 32.22 1965 = 28.70 1978 = 32.88 1970 = 28.59 1979 = 32.71 1971 = 28.20 1980 = 32.40 1972 = 27.01 1981 = 35.35 1973 = 24.67 1982 = 37.77 1974 = 25.00 1983 = 40.18 1975 = 27.24 1984 = 42.44 *The metical replaced the Mozambique escudo as the official currency in June 1980. However, all textual references to amounts in local currency are denominated in meticais. Sources: World Bank, World Tables-1983; official government calculations after 1973.  FOR OFCUL USE ONLY PREFACE The People's Republic of Mozambique became the 148th member of the World Bank in September 1984. This report presents the findings of the first World Bank economic mission to Mozambique, which took place in November 1984. The mission was comprised of: David G. Greene (mission chief), Dennis J. Mahar (economist and principal author), Denise Williamson (economist). Martin J. Staab (agriculture), Michael N. Sarris (industry), Jan de Weille (transport), Laurence Wolff (education), Michel Del Buono (energy), and John E. Besant-Jones (energy). The discussion of the energy sector has since been updated to reflect the preliminary findings of a World Bank Energy Assessment Mission (led by John E. Besant-Jones) which visited Mozambique during April/May 1985. The report was discussed with Government authorities during the period May 13-23, 1985. The report is intended to provide a broad overview of the principal economic developments in Mozambique since Independence in 1975. The prospective analyses concentrate on short and medium-term adjustment issues and prospects. This emphasis reflects the gravity of the current economic situation, the high priority given by the government to emergency rehabilitation and economic recovery efforts, and the critical need for major institutional and policy reforms. In one respect, the content of the report diverges from that of a typical Country Economic Memorandum. Owing to the newness of the Bank-country relationship, a greater than normal amount of background material has been included on Mozambique's physical and human resource bases, political and institutional framework, and economic history. I This document has a resticed dinbution and may be sed by recpiets only in the efoanes @Of tbhi offia dutieIts cosnents may not otberwe be dodkwithout Wodd Bok authorzaton.  TABLE OF C0FIEN Page No Abbreviations and Acronyms Summary and Conclusions ..... ............... ....... 0...... i-xiii 1. COUNTRY BACKGROUND I...............***..* 1 The Natural Environment ....... 0.0-... ....... 0. I History ............. ....................... e 3 Population and Human Resources ............ .......... 6 Political Conditions .............. ...... .......... 10 2. DEVELOPMENT PRIORITIES AND INSTITUTIONS .................. 15 Development Priorities ........... ........ 15 The Institutional Framework ....................... 20 Evaluation of the Economic Management System ........ 28 3. MACROECONOMIC PERFORMANCE ...... o.. ..................... 31 Evolution of GDP by Sectors ...................... .. 31 The Public Finances ... . .. ...... ................. ... 33 Money and Credit .... ........ . . ...................... 37 Ewployment, Wages, and Prices ....................... 39 Balance of Payments ..... o ..............o .......... 42 4'. AGRICULTURAL DEVELOPIMENT ..o ...... o .................... 48 Agricultural Resource Base ... ...................... 48 Performance .... oo . . .. ....... . 49 Agricultural Policy ................................. 51 Institutional Frame-work ............................ 54 The Main Subsectors: Characteristics and Issues .... ..o ........ .................. o ........... 59 Constraints to Recovery and Development ...o......... 64 5. INDUSTRIALIZATION ..... ............................ 67 Structure of Output and Employment ...... .. o.. 67 Performance .... o .......... . .......... . 70 I'idustrial Policy ................ ............ 72 Institutional Framework ........................... 73 Constraints to Recovery and Development ............. 73 6. PROSPECTS FOR ECONOMIC RECOVERY .......................... 75 Short-Term Measures ...... ............................ 75 A Medium to Long-Term Agenda ...................... 84 Annex I: The Colonial Economy ...............* ............ 87 Annex II: Tranaport Sector ............... .................. .. 112 Annex III: Energy Sector ................ ...... .. . ........ 143 Annex IV: Assumptions Underlying Balance of Payments Projections ..... o... ...................... 161 Statistical Appendix ... o....... . .............................. 163 Maps  LIST OF TABLES Table Page No. 2.1 Distribution of Ownership in Industry . . . . . . . . . 16 3.1 Evolution of GDP by Sectors, 1973-83 . . . . . . . . . . 32 3.2 Summary of the State Budget, 1980-84 . . . . . . . . . . 34 3.3 Distribution of Investment Expenditure by Sector, 1980-84 . . . . . . . . . . . . . . . . . . . . . . . 36 3.4 Investment Financing by Source, 1980-84 . . . . . . . . 37 3.5 Factors Affecting Changes in the Money Supply, Distrbutio .o.f . . . . . . . . . . . . ..9 ..l .3 3.6 Distribution of Bank Credit by Sector, 1981-84 . . . . . 38 3.7 Labor Force by Economic Sector, 1980 . . . . . . . . . . 39 3.8 Selected Consumer Prices in the City of Maputo, 1973-83. . . . . . . . . . . . . 41 3.9 Balance of Payments, 1980-84'. . . . . . . . . . . . . . 43 3.10 Composition and Growth of Exports, 1978-84 . . . . . . . 45 3.11 Imports by Major Category, 1978-84 . . . . . . . . . . . 46 4.1 Marketed Agricultural Production at Constant 1980 Prices, 1973-83 . . . . . . . . . . . . 50 4.2 Official Producer Prices for Selected Agricultural Commodities, 1980-84 .. . . . . . . . . 57 4.3 Distribution of Cultivated Area, Production, and Marketed Surpluses by Sector, 1983 . . . . . . . . . . 60 5.1 Manufacturing Output by Subsector at Constant 1980 Prices, 1973-83 . . . . . . . . . . . . . . . . . . . 69 5.2 Capacity Utilization in Selected Industries, 1983 . . . 71 6.1 A "Base Case Balance of Payments Scenario . . . . . . . 81 6.2 An Alternative Balance of Payments Scenario . . . . . . 83 LIST OF FIGURES Figure 1.1 National and Provincial Party and State Structures . . . 12 LIST OF MAPS Map 1. Mozambique 2. Mozambique: Relief and Rainfall 3. Mozambique: Population Density by District, 1980  Abbreviations and Acronyss AGRIOMI State enterprise for trade in rural areas Aldeias comunais Communal villages BOROR State agricultural input supply enterprise BPD People's Developaent Bank CAIL Limpopo Agro-Industrial Complex Chibalo Forced labor system during colo- nial period CNP National Planning Commission CNSP National Wage and Price Commission KDK Mozambique Electric Company KNACOHO State agricultural export enterprise mm National Hydrocarbons Enterprise FRKLID Front for the Liberation of Mozambique (Official government party) HCB Cahora Bassa Electric Company INTKHQUIK[CA State enterprise for the import and export of chemical products and plastics NECAANGRO State agricultural machinery enterprise Netiza; pi. Meticais Unit of currency introduced in 1980; worth approximately US $.02 at official exchange rate (1984)  -2 - Ministry of Construction and Water MAUNININ Ministry of Finance MDA Ministry of Agriculture MODBAN0 Bank of Mozambique (Central Bank) MONAP Mozambique/Nordic Agricultural Program UPRE Ministry of Ports, Railways and Merchant Marine OJM Mozambican Youth Organization OMM Mozambican Women's Organization ONJ Mozambican Journalists' Organization ONP Mozambican Teachers' Organization OTK Mozambican Workers' Organization PAR Government Economic Action Program, 1984-1986 PETRO-DC State petroleum enterprise PPI Ten-year Indicative Plan Prazos Hereditary estates awarded during early colonial period SERLI Secretariat of State for the Accelerated Development of the Limpopo and Incomati Regions VNLA Witwatersrand Native Labour Association  2;~11 b;|[ |t{''''iF' WN F' -~ ~ ~ ~ t *1 51:0~ X. 0! 0! 00 0 lM~~~~~~~~~~~~~~~~ Ph0 I Ph~~~~~~~~~ Ph  &mr and Cdit d/ 1980 1981 1982 1983 1984 a/ -f biLLon, end of period) ly vad Qasi ey 35,317 45,660 59,481 72,491 80,976 Ba Credit to Central memnumt -2,211 2,452 -29 11,381 17,851 Otbtr 1zi (kdit e/ 51,810 59,866 73,017 91,534 100,812 ( ecn acm or Nuxbers) tmy as Z of GIP 44.4 56.0 69.2 93.5 94.8 Arnal Percent # Charie In: Baik oedt to Central Gven .. 110.9 -101.2 293.4 56.8 Ottr ak Credit e/ * 15.5 22.0 25.4 10.! Balanoe of Eayn1t 198 1981 1982 1983 1984 a/ Mecxlise Ecports (US$ miNlion) (Average 1979-84) Xpwrts (g & nfs) 394.4 387.5 332.7 219.7 153.9 US$ M1u1i n iaports (g & afs) 838.9 852.7 887.5 688.8 564.2 esource Balarane -444.5 -465.2 -554.8 -469.1 -410.3 Csshew Nuts 38.6 17.8 Prawns 36.3 19.9 Net Factor Inae 22.0 -0.9 -22.1 -36.2 -65.7 Petrolen Products 36.1 16.0 Qirent Accont Tea 18.8 9.8 Palance -422.5 -466.1 -576.9 -505.3 -476.0 Cotton 15.0 8.1 SuLar 14.6 6.8 Official Transfers OthEr 44.1 21.6 (net) 56.0 57.5 79.5 89.6 165.7 Total 203.5 100.0 Public M & LT Borraeirg (net) 364.2 409.0 395.3 68.9 -144.3 Otber f/ -30.1 -69.4 -43.0 -17.6 170.9 External Debt, Dtecemer 31, 1984 US$ BiLion Camge in Peserves g, - incresse) 32.4 71.3 150.9 83.1 25.3 Total Outstandiz & Disbursed 2.4 i/ Bilateral Payments greeents - -2.3 -5.8 -3.6 -1.7 Net Qaqge in Arears After Reschl uIM - - - 284.9 260.1 Net Official Reservs (end of period) h/ 252.3 183.4 38.2 -41.4 -67.7 Debt Service Ratio for 1984 z Total Outstading DIsbirsed 174 J/ IaMD/IDA lendirg Not applicable.  198D 1981 1982 1983 1984 US$1.00 - Mt32.400 US$1.00 - Mt35.350 Us$1.00 - Nt37.770 US$i.00 - ?40.183 US$1.00 - Mt42.443 Mt1.00 - US$0.0309 MtI.0O - US$0.0283 Lt.0 - US$0.0265 Wtl.0o - US$0.0249 Wl.0O - US$o236 Note: All cmvesior to dollars in this table are at the averag excwhe rate prevailirg during the perid comered. a/ PrleLdnary estimtes. b Trend rates based on least squares estinmtes. c/ Includes cetral, proviacial, and district goverrmmnts. T here are no coprehensive data on Cotumr prices or other indicatots of inflation in Mbambique. e/ lwxuxes credit to state enterprises and to the private sector. f/ Incwlues Net 9rt-Ten Capital and Errors asn Onmsislsa, and in 1984, Paris Club Debt Reltef. B elzy of Payments data. h/ Data fron Mbnetary Acoomts. T Includilng arrears. A7 kfter rescheckIUng. Not available. June 1985  SUAURY AND CONCLUSIONS Socioeconomic Conditions at Independence I. The FRELIMO Party (Frente de Libertacao de MoQambigue) assumed power in 1975 after a ten-year armed struggle to liberate the country from Portuguese rule. Despite the country's well-endowed and diversified resource base, it inherited an economy largely geared to the servlce needs of South Africa and other neighboring countries, and an incipient high-cost industrial sector based on imported raw materials and spare parts and which depended for survival on a steady supply of easy credit. The economy was also full of inequities. In agriculture, the land was divided between some 1.7 million traditional African farms averaging 1.4 hectares and 4,500 European commercial farms averaging over 500 hectares. Non-Africans dominated modern sector employment by force of superlor educational opportunities and prevailing racial attitudes. ii. The development of Mozambique as a service economy to South Africa was initiated by the surge of coal and gold mining in the Transvaal region during the late 1890s. This event greatly expanded South Africa's demand for cheap labor and for a convenient port through which to export its mineral output. Mozambique was in a good position to satisfy both these requirements. It provided an average of more than 80,000 Mozambicans per year to work in South African mines, and the transshipment of imports and exports via the railroad linking the Transvaal with the port of Lourenho Marques (now Maputo). Under agreements with the Portuguese Government, 60 percent of the workers' wages were withheld, and an equivalent amount in gold, at the official price of US$34.13 per ounce, was credited to Portugal, which sold the gold at the higher market rate. As workers received the deferred wages in escudos at the official rate of exchange, the difference between the official price of gold and its free market price represenLed a profit for Portugal. These profits, along with revenues from transit services to South Africa, Rhodesia, Zambia, and Malawi, were usually sufficient to offset chronic deficits in Mozambique's merchandise trade account. iii. Mozambique was extremely vulnerable to the mass exodus of Portuguese settlers that occurred at Independence. It is estimated that between 1974 and 1976, the number of Portuguese permanent residents fell from 250 thousand to 15-20 thousand. This population movement decimated whole sectors of the economy. For example, the critical port and railway sector lost some 8,000 skilled and semi-skilled workers. Gone were also most of the plantation and factory owners, settler farmers, shopkeepers, government administrators, and professionals. To make matters worse, departing settlers destroyed factories and farms, depleted inventories, and either slaughtered livestock herds or transferred them to South Africa.  - ii - Exogenous Constraints Service Exports iv. Mozambique has found it difficult to maintain its traditional exports of services since Independence. Trade flows have been diverted from Maputo since the completion of the South African ports of Richards Bay and Saldanha Bay in the mid-1970s. Mozambique's earnings remittances have also been reduced because South Africa cut back the number of Mozambicans working In its mines starting in 1976. Two years later, South Africa unilaterally stopped paying a part of the expatriate miners' salaries to the Mozambican Government in gold at below-market prices, an agreement that had been in effect for 50 years. Moreover, from 1976 to 1980, Mozambique closed its borders with Rhodesia in support of United Nations sanctions. This action is estimated to have cost Mozambique about US$150 million per year in foregone foreign exchange earnings. Internal Security v. In addition to the direct losses from the border closure, Mozambique's support for the liberation movement in Rhodesia led to the formation of anti-FRELIMO armed bands. Over the years, these armed bands have focussed their attacks on economically vital targets: the transport network, the transmission lines of the Cahora Bassa dam, the oil pipeline, and rural stores. Despite the Nkomati Accord between South Africa and Mozambique signed in 1984, the conflict has not abated. Today, armed bands are present in most of the country's provinces, although the level of conflict varies by region. Natural calamities vi. Rainfall in Mozambique is generally favorable for crop production. However, the country has suffered greatly from erratic rainfall patterns in certain regions since the mid-1970s. Severe flooding in 1977-78, followed by prolonged drought and cyclones starting in 1982 and extending into 1985, have devastated large areas in the central and southern regions of the country. The recent droughts have substantially reduced the water flow in several rivers in the South, contributed to shortfalls in agricultural production, and caused huge human and financial losses. According to UN sources, as many as 100,000 people may have died in the southern provinces of Gaza and Inhambane alone during the worst 12-month period of 1982-83. Progress in the Social Sectors vii. The Government has attempted to pursue its stated objectives for the country under difficult conditions. But some notable successes have been achieved, particularly in the social sectors. Today the country's literacy rate is 28 percent as compared to only 7 percent in 1975. The effects of the high priority given to education are apparent in the 1980 census data, which show literacy rates for the 15-24 years cohort reaching  - iii - 40-50 percent, as opposed to less than 8 percent for the over-60 population. However, much still needs to be done to eliminate the vacuum left by the departure of the Portuguese. viii. The Government has also given a high priority to upgrading health services. The proportion of central government expenditures now devoted to health - about 7 percent in recent years - is slightly higher than the norm (about 5 percent) for Sub-Saharan Africa. Some 3,250 workers (the majority paramedics) have been trained since 1975. Moreover, Mozambique has been a pioneer among developing countries with regard to the establishment of a broad-based primary health care system, and the use of a restricted list of essential drugs. It is estimated that today about 50 percent of all Mozambicans have access to preventive health care, and about one-third to curative care. Average life expectancy has been raised to 44 years of age. The supply of high level personnel has not yet regained pre-Independence levels. Despite the Government's efforts, there are still only 404 physicians in Mozambique, yielding an average population per physician ratio of 33,300. Economic Policies ix. Development priorities in Mozambique are determined by FRELIMD. Two Party congresses - of the four held to date - have taken place since Independence. The Third Congress, held in 1977, directed the State to: (i) develop and consolidate its role in the economy; (ii) promote socializatioc of the agricultural sector; (iii) accelerate the industrialization process, with emphasis on heavy industry in the medium and long term; (iv) prepare a Ten-Year Plan for the 1980s; (v) train Mozambican nationals; and (vi) improve economic management. Faced with the deterioration of the economy - which it recognized was due to a combination of external factors, a lack of trained personnel and to policy errors - the Fourth Congress, held in 1983, took a more pragmatic approach to Mozambique's development problems. The directives of the Fourth Congress called for greater private sector (domestic and foreign) participation in the economy; proposed a slowdown of the socialization of the agricultural sector and increased support, iastead, to samllholder family farmers; directed that resources for the industrial sector be allocated to rehabilitation needs, rather than to new investments; and postponed the completion of development projects started within the framework of the Ten-Year Plan. Third FRELIMO Congress N. Development of the state sector. Prompted by the need to keep activities going after the mass departure of Portuguese residents, the Government assumed the management of many private enterprises during the immediate post-Independence years. After the Third Congress, this process continued, in part because of continued abandonment and economic sabotage. The Government also nationalized coal mining and petroleum refining on grounds of strategic importance to the country, and created new enterprises. Today, state-owned and managed enterprises dominate the  - iv - economy. The only activities which are predominantly private are retail trade, smallholder family agriculture, road cargo transport, and petty services. The performance of the state enterprises has been generally disappointing. This is due not only to the state enterprises' own organizational and human resource constraints, but also to shortcomings in macroeconomic management. xi. Socialization of the agricultural sector. At the Third Congress, the move toward construction of socialism war stated to require, in the agricultural sector, the accelerated development of state farms and of producer cooperatives, around which communal villages (aldeias comunais) would be established. State-owned enterprises were considered the quickest means to satisfy the country's export requirements and the raw materials needs of industry, as well as urban food requirements. The establishment of producer cooperatives, and of communal villages, was meant to facilitate the provision of agricultural training and social services and to help resolve transport and marketing problems. The attempt to socialize the agricultural sector has so far succeeded only in the limited sense that the State has come to dominate marketed production. However, production of state farms has been hindered by a number of factors, including management difficulties, chronic shortages of spare parts, fuel and other agricultural inputs, and poor maintenance of equipment. xii. Although the Third Congress held that the development of cooperative farms was to be actively supported, this objective was clearly In a distant second place to the development of the state farms. During the four years following the Congress, only 2 percent of agricultural investment was allocated to cooperative farms as compared to 90 percent allocated to state farms. The smallholder family subsector, which accounted for the bulk of the rural population, was neglected except for the Government's attempt to develop People's Shops- to stimulate trade in rural areas. These shops, for lack of managerial skills, mismanagement of warehouses, inadequate transport infrastructure and vehicles, and corruption, were transferred to the private sector in 1979. xiii. Acceleration of the industrialization process. For industry, the Third Congress determined short-term priorities to include: State assumption of control over the sector; production increases coming mainly from existing capacity; and promotion of both export-oriented and import- substirw.i!ag industries. However, agriculture as well as other sectors was unable to generate sufficient foreign exchange to accommodate purchases of imported raw materials, spare parts and capital goods. As a result, the industrial sector today operates at only a fraction of installed capacity. xiv. Ten-Year Plan (PPI). Directed by the Third Congress, the Government prepared a PPI which expressed the determination to achieve three main objectives by 1990: (i) development of a powerful and efficient state sector, particularly in agriculture; (ii) collectivization of the countryside, where communal villages would include ten million people (60 percent of the population projected for 1990); and (iii) the effective launching of heavy industry, particularly iron and steel. Projects related to the achievement of these objectives were to absorb a large proportion of  - v - the public investment program's expected resources. Other objectives included increasing production of consumer goods and improving training. xv. The investment program included projects to produce agricultural commodities, textiles, iron and steel, machinery, aluminum, gas, basic chemicals, coal, electricity, construction materials; building of dams, bridges, roads; and the initiation of oil prospecting. Some agricultural, textile, electricity, and dam and road projects have been concluded, and others, including oil prospecting, are underway. Among these projects, high priority has been given to developing a powerful state sector in agriculture to produce export crops and substitute for food imports consumed in urban areas. xvi. The priority given to the state sector in the allocation of resources in agriculture has implied a continued scarcity of resources for producer cooperatives, which in the PPI were expected to produce the bulk of the foodcrops consumed by the rural population. This, combined with successive natural calamities, continuing warfare, and the nearly total neglect of family farms, has contributed to the critical food shortage in the countryside today. Moreover, the emphasis on state farms has pushed the achievement of the plan's second main objective (rural collectivization) -- which depends on the spontaneous movement of families into communal villages - well beyond 1990. Achievement of the third objective, acceleration of the industrialization process, is also threatened by the poor performance of state farms, which were counted upon to generate the additional investment resources. Fourth FRELIMO Congress xvii. The Fourth Congress acknowledged that policy errors had been made in the early post-Independence years. It criticized, in particular, the general inefficiency of the state farms. It also faulted the Government for the low priority given to the cooperative subsector, as well as the absence of support for smallholder family production. On the basis of its diagnosis of conditions in agriculture and in other sectors, and a reassessment of macroeconomic policies, the Fourth Congress set forth a number of broad directives which, along with the Economic Action Program for 1984-86, are expected by the Government to stem and reverse the country's economic deterioration. xviii. Agricultural and industrial policies. The Fourth Congress directed that the state subsector was to be consolidated and restructured with a view to improving its productivity. The present medium-term objectives for this subsector are: to maximize the use of land presently under state farms, minimize new investment, and use existing equipment more efficiently. Current policy gives greater attention to the smallholder family and private commercial subsectors. According to the economic and social directives established by the Fourth Congress, in order to promote the family subsector, the Government should -mobilize means and resources (farm implements, industrial consumer goods, improved seeds and the transfer of better production techniques), [and] guarantee the marketing- of production. It is further stated that these measures should be combined  - vi - with producer prices that would provide a real financial return to the farmer and thus stimulate the production of both food and export crops. xix. With regard to the private commercial subsector, the stated policy is to provide sufficient rural credit, and to pursue fiscal and price policies that would enable such operations to increase production profitably. In line with the new focus on the smallholder family subsector in agriculture, industrial priorities have been redefined to emphasize production of basic consumer goods. The Fourth Congress also reiterated the Third Congress' directive that increases in industrial production must come from rehabilitation of existing capacity, which is to receive top priority in the allocation of available resources. xx. Macroeconomic policies. The Party directed that measures be adopted regarding public finance, credit, employment, wages, and prices, to address balance of payments and budgetary difficulties. Current expenditures of the State are to be reduced. New investments may be under- taken, but only if they pass tests of technical and financial viability, bring a positive contribution to the balance of payments, and are assured of having the necessary human, material, and financial resources. The focus in the short to medium-term is to be on improving the efficiency of investment, and on completing ongoing projects which will have a positive impact on the balance of payments. The state enterprises are to be restructured into more manageable units, are to adopt accounting practices appropriate to effective management, and be given administrative and financial autonomy to facilitate response to new incentives. Institutional and Policy Framework Basic Characteristics xxi. A distinguishing feature of Mozambique's institutional framework is its well-organized, multi-level structure, which is also closely integrated with the political structure of the country. Additional distinguishing features include: its well-specified assignment of tasks, which could facilitate discipline and accountability; and its provisions for coordination at the top level of management, which provide a forum for ironing out conflicts and reaching consensus on economic policies. Most importantly, the economic institutions are managed by a dedicated group of government officials. xxii. Other important characteristics of the institutional and policy framework in Mozambique may be summarized as follows: (i) centralization of economic decisions, with regard to both the macro and micro-allocation of resources; (ii) strictly hierarchical planning and administrative structure, dominated by vertical, rather than horizontal, linkages, with comunications from above mostly in the form of commands and from below in the form of proposals; (iii) passive role of money and limited role of prices in resource allocation; and (iv) state monopoly of foreign trade and insulation of the domestic price structure from the world market price structure.  - vii - Efficiency issues xxiii. The National Planning Commission, the Ministry of Finance, and the Bank of Mozambique, in coordination, define the financial and physical inputs required for the achievement of targets established in the central state plan. Prices, including the exchange rate, play only a limited role in resource allocation. This system is meant to ensure efficiency in resource use. In principle, it also facilitates control over the economy. However, neither has the efficiency objective been achieved, nor has control of the economy been effective. xxiv. The ability of the resource allocation process to achieve its objectives has been undermined by the implementation of investments in the past without: (i) a realistic assessment of .Le country's short to medium-term physical and financial resource availabilities; (ii) an adequate evaluation of their benefits and costs; and (iii) an examination of whether they were the cheapest means to achieve output objectives. Partly as a result of the above, the Government has launched new investments while existing equipment deteriorated and/or was utilized below potential capacity for lack of maintenance, spare parts, and raw materials. xxv. The state enterprise sector has experienced other problems: some enterprises are too large to be managed effectively; there is a shortage of management skills; adequate accounting practices have not been developed; enterprises have had no autonomy, as their activities have been integrated along a vertical chain of command; rewards have not taken productivity into account; prices have been set below actual costs of production; there has been no effective limit on the amounts of credit from the banking system which the enterprises have been able to obtain to finance their operating losses; and enterprises have only very limited freedom to hire and fire workers. Macroeconomic Performance Economic Growth xxvi. Mozambique's GDP is estimated to have declined at an annual average rate of about 2 percent in real terms between 1973 and 1983. Except for a halt in this downward slide during 1976-80 -- when GDP expanded at a real average annual rate of about 2.5 percent mainly as a result of a resumption of economic activities disrupted by the war for liberation and the mass departure of the Portuguese following Iudependence -- GDP is estimated to have declined, by 1983, to about two-thirds of its level in 1973, or a fall of 50 percent in real GDP per capita. The production of both food and export crops has declined dramatically. The industrial sector today operates at about 20-30 percent of installed capacity. Consumer goods are in short supply in cities and unavailable in rural areas. Transport between rural areas and cities is handicapped by lack of fuel and operable vehicles, and poorly maintained roads. The Government has started to adopt new policies to address these problems, but it is hindered by adverse exogenous factors, manpower shortages, and the country's serious financial difficulties.  - viii - Monetary and Fiscal xxvii. In recent years, government expenditures have consistently exceeded revenues, and state enterprises have suffered persistent operating losses. This has had as a counterpart substantial recourse to credit from the banking system, and external borrowing. As a result of substantial credit expansion in recent years, the money supply rose from 44 percent of GDP in 1980 to nearly 95 percent of GDP in 1984, inevitably leading to sustained pressure on domestic prices. There are no comprehensive statistics on consumer prices or other indices of inflation. The National Wage and Price Commission has estimated that the official prices of traded goods doubled between 1974 and 1983. However, official prices are not representative of prices actually prevailing in the economy. The existence of extensive black market transactions at substantially higher prices reflects the problems of too much money chasing too few goods, and price controls associated with rationing. Balance of Payments xxviii. High levels of imports, combined with a collapse of commodity and service exports, have led to current account deficits averaging 23 percent of GDP in recent years. Foreign borrowing has not been sufficient to close this gap. As a result, Mozambique has experienFed nearly a total loss of reserves. In spite of debt relief obtained in 1984, the debt service ratio at end-1984 was equivalent to about 174 percent of exports of goods and services, and payments arrears accumulated to US $545 million. Many factors have contributed to the deterioration of the country's balance of payments. Exogenous factors mentioned earlier - the colonial legacy, actions by South Africa leading to declines in Mozambique's service revenues, continuing warfare, and natural calamities - have obviously played an important role. But so too have misconceived development priorities (for example, the early focus on the development of state farms), institutional weaknesses, and highly distorted prices. The domestic currency (metical), for example, reportedly trades on the parallel market at up to 1,500 per US dollar while the official rate is maintained at 42. External Debt xxix. At end-1984, the country's outstanding (disbursed) debt reached US$2.4 billion, including arrears, equivalent to 120 percent of GDP. Over 92 percent of the debt is bilateral public debt, of which 36 percent is owed to OECD member countries, 30 percent to centrally planned economies and 16 percent to OPEC countries. External borrowing, though substantial, has not been sufficient to close the resource gap -;hich, during 1980-84, averaged about 21 percent of GDP. xxx. At a Paris Club meeting in October 1984, it was agreed to provide debt relief on arrears accumulated as of June 30, 1984 as well as debt service payments (principal and interest) falling due between July 1, 1984 and June 30, 1985. Ninety-five percent of these service payments have been postponed to 1990-95. However, this still leaves an estimated US$550  - ix - million in payments due in 1984-86 to be rescheduled, an effort in which the Government has been engaged in the past year. xxxi. In addition to efforts to improve the maturity structure of the debt, the Government is relying on official sources for the bulk of the external resources required to support its program to rehabilitate the economy. Moreover, given the country's extremely difficult economic conditions, future debt service obligations will have to be kept as low as possible. Consequently, Mozambique will have to depend on assistance at concessionary terms, including IDA resources, over the next few years. Prospects for Economic Recovery The Government's Program xxxii. Assuming that peace can be restored, albeit only partially, the Government's Economic Action Program (PAE) for 1984-86 - which served as the basis for the 1984 debt rescheduling under the auspices of the Paris Club - constitutes a promising effort to reverse the deterioration of the Mozambican economy. The PAE is aimed primarily at increasing production and trade in rural areas. In achieving this objective, more emphasis is to be given to supplying the smallholder family subsector with agricultural inputs and basic consumer goods. Upward adjustments in official prices for food and export crops are also proposed. Complementary fiscal, credit, wage and price measures included in the PAE would specifically address balance of payments and budgetary difficulties and the large deficits of the state enterprises. xxxiii. The findings of this report support the general thrust of the Government's Economic Action Program. Although the Government has recently (May 1985) introduced a package of wage, price and administrative reforms, the implementation of the measures contemplated in the PAE is still far from complete. This reflects, in addition to the difficulties presented by the ongoing war, the acute shortage of managers, technicians and semiskilled workers relative to the requirements of the country's centralized economic management system. It therefore seems clear that as a part of any economic recovery and development program the Government should start to withdraw from the direct control and management of a large number of activities in which it is presently involved. Short-Term Measures xxxiv. The Government's first priority in the short-term should of course be to address the country's immediate rehabilitation needs. In this regard, scarce foreign exchange should be preferentially allocated to those sectors and enterprises in which a quick production response can be expected, and where increased production would result in substantial foreign exchange savings (through import substitution) or increased export earnings. Sectors clearly satisfying these criteria would include agriculture, the consumer goods industry and transport. In order to help ensure a quick production response, there would need to be close intersectoral coordination so that inputs and consumer goods become  - x - available on time and in areas with good agricultural potential, and that agricultural output in turn flows smoothly to domestic and international markets. This further implies that particular attention will need to be given to upgrading maintenance and repair facilities for the country's truck fleet, locomotives and ships. Moreover, individual enterprises receiving foreign exchange would need to be selected on the basis of demonstrated managerial capacity and the ability to operate effectively. xxxv. While emergency rehabilitation efforts proceed, the Government should also undertake measures that would help to set the stage for sustained economic development in the future. Such measures should include: (i) improving the institutional and economic policy environment generally, and for smallholder agriculture in particular; (ii) the carrying out of a critical assessment of public enterprises; and (iii) a review of the country's current and future manpower and training needs; and (iv) developing a public expenditure program that would facilitate a more efficient allocatio.. of resources and a reduction of deficits. xxxvi. It is clear that, without additional external assistance, Mozambique will be unable to import the consumer goods, raw materials, and spare parts needed for recovery. Instead, baseline projections indicate that such imports would decline at an average annual rate of 20 percent in real terms even if the Government cuts imports of equipment -- as it has proposed to do -- and the country's dependence on imported food is reduced as a result of favorable climatic conditions. Under an alternative scenario, which assumes that import growth of consumer goods, raw materials and spare parts is sustained at a real average annual rate of 8 percent over 1984-87, and that debt service payments amounting to US$550 million are rescheduled, the financing gap would average about US $150 million per year over the three-year period 1985-87. The cumulative financing gpp of some US $h50 million estimated for this period would have to be financed by concessionary loans and grants, so as not to aggravate further Mozambique's critical external debt situation. xxxvii. The Government has already appealed to the international community -- including the World Bank -- to provide concessionary loans to finance imports of intermediate goods needed to increase production quickly, both for domestic consumption and export. An additional effort to ease the foreign exchange constraint has been the Government's attempt to improve the maturity structure of the debt. Aid donors will undoubtedly be more forthcoming if they are persuaded that the Government on its part is making a maximum effort toward implementing the Economic Action Program and related measures, so that the additional resources that may be forthcoming for the rehabilitation of the economy in the next few years pave the way for more self-sustaining growth in the medium and longer term. A Medium to Long-Term Agenda xxxviii. Support for smallholder agriculture. As in the past, the medium and longer term trajectory of development in Mozambique will be closely tied to the level and nature of support provided to agriculture. In this regard, the Government should maintain an agricultural policy in which the smallholder family subsector receives the highest priority. Such a policy  - xi - stance would make good sense on both social and economic grounds. Most recent literature on African economies suggests that poverty is still concentrated primarily in rural areas. Thus efforts to increase the production and income of smallholder farmers can be an effective way to meet basic needs. Moreover, increasing support for the smallholder subsector is usually a more economically efficient way to raise output than other alternatives. xxxix. Industrial development. It is clear that the industrial structure inherited from the colonial era -- oriented toward imported inputs and domestic consumption -- continues to thwart the objectives of economic independence and supplying the needs of the lower-income population. But the pace at which industry can grow and diversify in Mozambique will to a large extent depend on the performance of other sectors in the economy which must be counted upon to generate surplus material inputs, investment funds, and foreign exchange. In other words, sustained industrial growth in the medium and longer term will require the maintenance of a favorable economic environment including, inter alia, a prospering agricultural sector to provide both inputs and expanding markets; an adequate supply of managers and technicians; and transport, power, industrial services, and other infrastructure. xl. Transport and energy. The transport and energy sectors have in the past and will continue in the future to play an important role in the development of Mozambique, both as direct earners of foreign exchange and as support services for domestic agriculture and industry. In transport, the medium to longer term objective should be to start maintenance of the country's roads, with a special emphasis on improving access to high-potential agricultural regions. The rehabilitation of fixed transport facilities in the ports and railways sectors should also receive high priority in this time frame. In energy, careful decisions must be taken on w-hether or not to go ahead with projects which together would cost several billions of dollars. Preliminary studies have already been made of aluminum production, ammonia, gas utilization, a second stage for Cahora Bassa, and a sizeable expansion of coal mining and export capacity. Many of these proposals merit a closer look. Put only the Moatize coal project seems capable -- assuming that long-term sales contracts can be arranged and world coal prices are reasonable -- of earning sizeable foreign exchange receipts for Mozambique over the next five or six years. Hydroelectricity projects, on the other hand, are very intensive in capital and foreign exchange, have long gestation periods, and even longer payback periods. Cahora Bassa illustrates these points well. Therefore, massive exporr-oriented hydroelectricity investments should not be given priority in Mozambique's energy development. xli. Human resource development. In the medium and long term, as in the short-run, every country's most valuable resource is the human one. Mozambican authorities are well aware of this, as evidenced by the important strides already made in increasing the coverage of the health and education systems. The high priority given to the social sectors must be maintained in the years to come, if the present huge gap in manpower needs is to be filled by Mozambicans. This will not be an easy task. Resources are limited and it will probably take years just to repair the damages to  - xii - health and education facilities caused by the armed bands. But the returns on investments in human capital can be high, not only in social welfare terms but in economic terms as well.  CHATER 1 coUNm GD 1.1 The People's Republic of Mozambique occupies a wishbone-shaped territory located on the southeastern coast of Africa. It is bounded on the north by Tanzania; on the south by Swaziland and the Natal province of South Africa; and on the west by Malawi, Zambia, Zimbabwe and the Transvaal of South Africa. To the east lies the Indian Ocean (Mozambique Channel) which separates the mainland from Madagascar (see map). Hozambique has a total area of 799,380 square kilometers (including approximately 13,000 square kilometers of inland waters)--larger than England, France and Portugal combined. Its lengthy coastline of 2,470 kilometers is dotted with ideal port sites, providing numerous natural outlets for the trade of neighboring landlocked countries. The Natural Environment Physical Features 1.2 Mozambique is situated on sbuthern Africa's largest coastal plain (see map). The lowland or coastal belt, which varies in altitude from sea level to 20 meters, comprises about 42 percent of the country's land area. This belt is widest in the south where it covers the entire width of the country and narrows in a northward direction. Other coastal features include Delagoa Bay-east Africa's best natural harbor and site of Maputo, the capital city-in the extreme south; sandy and swampy areas stretching from Delagoa Bay to the Zambezi River delta; and sandy areas interrupted by rocky cliffs and headlands to the north. Central and northern Mozambique is characterized by an interior plateau with altitudes ranging between 200 and 500 meters above sea level. About 29 percent of the country's land area is included in this geographical zone. The balance is comprised of highlands with altitudes reaching over 2,000 meters in the northwest near the Malawi - Zambia border in Tete province. Nearly all of these higher elevations are located north of the Zambezi River. 1.3 Because Mozambique's topography generally rises to the west, rivers and stream have an eastward orientation. There are almost 100 river basins in the country, the most important being (from south to north) the Limpopo, Save, Zambezi, Lurio and Rovuma. Many of these rivers have considerable potential for hydroelectric power generation and irrigated agriculture. Of the country's major rivers, the Zambezi is the largest and most significant historically and economically. The 820 kilometer section in Mozambique is navigable for over half its length and was a main route of Portuguese penetration into the interior during the early colonial period. The hydroelectric facility on the Zambezi at Cahora Bassa -- with a potential at full implementation to generate 18 billion kilowatts of power -- is by far the largest in Africa.  -2- Mineral Resources 1.4 Mozambique appears to have sizeable mineral resources, although geological surveys are still incomplete. Few mineral deposits have been exploited so far. Coal is the most abundant mineral with reserves estimated at 7.5 billion tons. Production has been centered around Moatize in Tete province since the 1850s. The capacity of the Moatize mines has doubled in the past five years but exports of coal amounted to only 17,000 tons in 1983 as a result of disruptions in the transport system. Tantalite -- a rare mineral used for hardening steels -- is mined in small but valuable quantities and is the country's only other significant mineral export. There are also deposits of iron ore, bauxite, zinc, tin, copper, manganese, asbestos, fluorite, uranium, graphite, marble, precious and semi-precious stones, and natural gas. In-shore and offshore petroleum exploration is presently being carried out by foreign firms under risk contracts. Vegetation 1.5 Mozambique's vegetation is predominantly tropical forest and savanna. A recent FAO assessment identified some 5 million hectares (6 percent of the national territory) of medium to high productivity forest, and 15 million hectares of low productivity forest. Open forest occurs throughout the country and is widespread north of the Zambezi River. Denser forest, which includes stands of ironwood, ebony and senegal khaya, occurs on well drained slopes and river valleys in limited areas of Sofala, -anica, Zambezia, Niassa and Nampula provinces. The volume of high-value commercial timber is relatively low in Mozambique but according to the FAO there is considerable scope for increasing the use of secondary species. Savanna vegetation is characteristic of plateau and highland areas and of the drier zones of the center-south. Along the coast, particularly in Zambezia and Sofala provinces, the coconut palm is common. Mangrove is also found on the coast, especially in the Zambezi delta. Bamboo and spear grass are abundant along rivers and in marshy areas. Rainfall Patterns 1.6 Rainfall is generally favorable for crop production (see Chapter 4). However, Mozambique has suffered greatly from erratic rainfall patterns in certain regions since the mid-1970s. Severe flooding in 1977-78, followed by prolonged drought and cyclones in starting in 1982 and .extending into 1985, have devastated large areas in the central and southern regions of the country. The recent droughts have substantially reduced the water flow in the main rivers in the South, contributed to shortfalls in agricultural production, and caused huge human and financial losses. According to UN sources, as many as 100,000 people may have died in the southern provinces of Gaza and Inhambane alone during the worst 12-month period of 1982-83.  - 3- History 11 Early Settlement and Development 1.7 Little is known about the original inhabitants of present-day Mozambique. Starting about 200-300 AD, however, Bantu-speaking peoples started entering the region, gradually absorbing or displacing nomadic bands of hunters and gatherers. The new immigrants brought with them a knowledge of iron working and hoe culture which permitted the establishment of permanent agricultural communities. Some of these communities engaged in commerce with Arab and Swahili traders as early as the tenth century. By the mid-fifteenth century, a string of Arab-Swahili commercial centers stretched from Angoche and Mozambique Island in the north to Sofala in the south. 1.8 The first Portuguese visitor to Mozambique was Pero da Covilha in 1489. Initial colonial interest in the region stemmed from Mozambique's strategic location along the Indian Ocean trade routes. In order to exploit this locational advantage, the Portuguese in the early 1500s established settlements on offshore islands to serve as supply depots for ships en route to India and the Spice Islands. A fort -was also built at Sofala in an attempt to monopolize the gold trade along the upper Zambezi River. But Portugal's colonial aspirations were from the beginning constrained by a lack of sufficient domestic manpower and financial resources. Thus, for a share of the profits, Portugal by and large entrusted the development of Mozambique to a series of surrogates: in effect metropolitan authorities sought the material benefits of color-ial rule without the accompanying costs. 1.9 For two centuries, starting in the 1600s, the favored mode of colonial development was the prazo system. Under this system, Portuguese nationals were given long-term leases over large tracts of land. The lessees, (prazeiros) in turn, were expected to exploit their holdings to the maximum, pay taxes to the Crown and extract additional land from African chiefs. Most prazeiros in fact took little interest in developing their holdings, preferring instead to collect head taxes from tribal chieftains, and to raid neighboring African settlements for livestock and slaves. 1.10 By the time of the Berlin Congress (1884-1885), the traditional prazo system had fallen into an advanced state of decay, beset by interfamily rivalries and competition from Cecil Rhodes' newly-formed British South Africa Company. Tc replace the prazos, the Portuguese 1/ A more extensive discussion of the colonial economy is presented in Annex I.  government decided to auction off 25-year, renewable land concessions to private investors. Three giant companies (the Mozambique Company, Niassa Company and the Zambezia Company), largely controlled by foreign interests, came in this manner to assume responsibility for the development of the northern two-thirds of Mozambique. Particularly in the central part of the country, these concessionaires developed an extensive plantation economy -- mainly copra, sisal, sugar and tea -- based on super-cheap forced (chibalo) labor. 1.11 In the meanwhile, the economy of the southern third of Mozambique became increasingly dependent on South Africa. The proximate cause was the development of coal and gold mining In the Transvaal region. This event greatly expanded South Africa's demand for cheap labor and for a convenient port through which to export its mineral output. Mozambique was in a good position to satisfy both these requirements. It provided an average of mare than 80,000 Mozambicans per year to work in South African mines, and the transshipment of imports and exports via the railroad linking the Transvaal with the port of Lourenio Marques (now Maputo). The workers' remittances (partially paid in gold directly to Portugal) along with revenues from transit services were usually sufficient to offset deficits in Mozambique's merchandise trade account. Late Colonial Period 1.12 Beginning in the 1930s, the new Salazar regime in Portugal enacted a series of authoritarian, neomercantilistic measures designed to reduce the foreign domination of the Mozambican economy. Under Salazar the role of Mozambique would be to provide the metropole with cheap primary commodities and to serve as a market for Portuguese manufactured goods. To this end, the administrative authority of the chartered companies was ended, the establishment of local industries was discouraged, and compulsory cropping schemes for cotton and rice were imposed on the African population. The chibalo forced labor system (which had been abolished in 1930) was reintroduced in 1942 in order to help ensure an adequate supply of workers on the plantations. 1.13 Salazar's policies enjoyed considerable success from the production standpoint, though at a high social cost. By 1945, it is estimated that over 1 million Africans were producing enough cotton to satisfy the bulk of Portugal's needs. Plantation crops also prospered, with the output of sugar, sisal and copra doubling or tripling between 1940 and 1960. By colonial design, little industrial development took place in Mozambique before 1960 aside from the preliminary processing of export commodities such as sugar, vegetable oils and natural fibers. Goods produced for the internal market were mainly comprised of building materials and simple consumer items -- foodstuffs, beverages and cigarettes -- destined for the Portuguese settler population. 1.14 Events of the early 1960s -- principally the international condemnation of forced labor practices and the rise of insurgent movements in its African colonies -- led Portugal to reverse policies followed during the Salazar years. Forced labor and compulsory cotton and rice cropping  - 5 - were officially abolished in 1961 and other policy changes set the stage for a period of sustained economic growth. Included among these were a gradual liberalization of the Mozambican economy, a reopening of the country to foreign investment, significant new infrastructure development, and the promotion of import-substitution industrialization. Moreover, through the establishment of large land settlement (colonato) schemes, a greater effort was made to attract Portuguese immigrants. 1.15 Although their reliability may be questioned, national accounts data indicate that the Mozambican economy grew rapidly during the 1960s: GNP increased by an average annual rate of 4.8 percent (8.1 percent per year in the period 1965-70), increasing per capita income from US S130 to US $230. Reflecting the infrastructure development (in particular, the initial stages of the Cahora Bassa hydroelectric project) and urban expansion of the period, economic growth was led by the construction, transport and comminications sectors. Industry also performed well largely due to the easing of colonial restrictions on trade and investment. 1.16 Agriculture was the lagging sector during the late sixties and early seventies. The relatively poor performance of agriculture was related to the disruption of the subsistence economy caused by the abolition of compulsory cropping and the increasing level of insurgent activity in the north of the country. To some extent, however, the stagnation of subsistence agriculture was offset by an expansion of plantations and settler farms. The land under cultivation by commercial farm establishments grew by some I million hectares between 1960 and 1970 and major increases were recorded in the production of rice, sugar and cashew nuts. Socioeconomic Conditions at Independence 1.17 Mozambique officially gained its independence from Portugal on June 25, 1975 after a ten-year armed struggle led by FRELIMO (Frente de fbertagao de Mogambigue). The nes government inherited an economy still largely geared to the service needs of South Africa and other neighboring countries. The domestic economy was highly distorted and full of inequities. In agriculture, the land was divided between some 1.7 million traditional African farms averaging 1.4 hectares and 4,500 European commercial farms averaging over 500 hectares. Although the European farms had carried out some limited modertization, the traditional subsector had been completely neglected by the colonial government. Industrial development only really started during the last decade of colonial rule. Most of the industries that emerged were high-cost ventures, highly dependent on imports of raw materials and spare parts and a steady supply of easy credit. 1.18 Non-Africans clearly dominated modern sector employment by force of superior educational opportunities and prevailing racial attitudes. This segmented labor market made the Mozambican economy highly vulnerable to the mass exodus of Portuguese settlers which occurred after Independence. It is estimated that between 1974 and 1976, the number of Portuguese permanent residents fell from 250,000 to 15,000-20,000. This population movement decimated whole sectors of the economy. The critical port and railway sector, for example, lost some 8,000 skilled and  - 6 - semi-skilled workers. Gone also were most of the plantation and factory owners, settler farmers, shopkeepers, government administrators and professionals. To make matters worse, departing settlers destroyed factories and farms, depleted inventories, and either slaughtered livestock herds or transferred them to South Africa. 1.19 Despite attempts by the colonial authorities to stem the growth of imports during the early 1970s, Mozambique's external position was precarious on the eve of Independence. The .ountry's foreign debt had risen to an estimated US $640 million by the end of 1974 and foreign exchange reserves, which had totalled about US $50 million in 1972, were entirely drawn down as a consequence of trade deficits, reduced earnings on the service account, and capital flight. According to official sources, the closing transfer of foreign exchange and gold from the Banco Nacional Ultramarino (the bank of issue in Mbzambique during the colonial period) to the new Bank of Mozambique in June 1975 amounted to only 39.7 million meticais, or the equivalent of less than US $1 million. Population and Human Resources Ethnic grcups 1.20 Mozambique's 2opulation is extremely diverse. There are at least ten distinct ethnic clusters and many more subgroupings. Although the various ethnic groups share some historical and cultural experiences, each differs in heritage, identity, material conditions, and language. Twenty-five distinct languages are spoken in the country. Portuguese is the official language, but, according to the 1980 census, it is spoken by only one out of four Mozambicans - just 1 percent of the population considers Portuguese to be its mother tongue. 1.21 The cultural axis of the country is the Zambezi River. North of the river, the groups are predominantly matrilineal in reckoning descent and are engaged in shifting agriculture supplemented by hunting and fishing in coastal areas. The largest ethnic cluster in the North is the Macua- Lowve, of which more than one-third of all Mozambicans are members. Other major clusters in the North include the Yao, an Islamized agrarian people who were the principal intermediaries in the slave and ivory trade of the eighteenth and nineteenth centuries, and the Makonde, a traditionally conservative people known for their artistic ability. 1.22 In the South the largest ethnic cluster is the Tsonga, whose territory occupies most of the country south of the Save River. Members of this cluster have constituted the bulk of migrants to Maputo and the South African mines. The other important southern ethnic cluster is the Shona-Karanga, a pastorilist people descending from the Kingdom of Muenemutapa which ruled central Mozambique and adjoining Zimbabwe five centuries ago. To the north of the Shona-Karanga, in the lower Zambezi Valley, live a number of fragmented groups - for example, Sena, Tonga and Chuabo - strongly influenced by centuries of contact with Portuguese and Arab tr3ders.  - 7- Population growth and age composition 1.23 According to the national demographic census, Mozambique's population totalled 12.1 million on August 1, 1980. The official estimate for January 1, 1985 is 13.6 million inhabitants. Population growth aver- aged 2.6 percent per annum in the period 1975-80, up from 2.4 percent in 1970-75, and 2.0 percent in 1960-65. Basic demographic indicators are sharply differentiated by region with the lowest birth, fertility and mortality rates observed in provinces located south of the Save River (Inhambane, Gaza and Maputo). Population projections for the year 2000 vary between 20 and 24 million. The government has no policy of interven- tion to modify fertility or the overall rate of population growth. 1.24 The average age of Mozambique's population has become progres- sively younger - from 19.9 years in 1950 to 17.6 years in 1980 - as a result of high natural gronth rates. In 1980, about 45 percent of the population was under 15 years of age. The current growth rates and age composition of the population have already translated into rapidly expanding school-age and working-age populations. Fifteen years from now, according to Government projections, there will be 1.7 million more children to educate, and almost 4 million more persons to find jobs for, even if the overall population growth rate does not rise appreciably above present levels. Population density and geographical distribution 1.25 Compared to its land area, Mozambique's population is still relatively sparse. Its 1980 average population density of 15 inhabitants per square kilometer is slightly below the norm for Sub-Saharan Africa. The most densely populated areas of the country, with average densities greater than 50 inhabitants per square kilometer, are found in the coastal areas of Maputo, Zambesia and Nampula provinces, parts of the Zambezi Valley, and the Angonia district of Tete province. Very sparsely populated areas, with an average of less than 5 inhabitants per square kilometer, are common in northern Niassa and Cabo Delgado, northwestern Tete, and northern Gaza provinces (see map). 1.26 Mozambique remains overwhelmingly agrarian, with 87 percent of the population residing in rural areas as of 1980. However, urban growth has been rapid in recent years. The country's urban population grew at an average annual rate of 7.6 percent between 1970 and 1980 - triple the national rate - and has probably accelerated since. About half of the urban population of Mozambique resides in Haputo, which increased in size from 385,000 in 1970 to an estimated one million today. There are only two other cities with more than 100,000 inhabitants: Beira (230,744) and Nampula (156,185). 1.27 Dissatisfaction with prevailing patterns of population distribution has led the Government to adopt explicit redistribution policies in both urban and rural areas. Official concern over the rapid growth of Maputo was manifested shortly after Independence as large numbers of workers (unemployed because of reductions in South African labor recruitment in Mozambique, floods in the South, and inadequate labor absorption in agriculture) entered the city in search of employment. In  -8 - response, the government issued resident cards - required to use buses, health clinics, schools and to obtain ration cards - only to those who could demonstrate that they held a steady job. Tens of thousands of workers unable to prove employment were encouraged to leave Maputo to work in the -green zones- surrounding the city, or to help with the harvest on plantations in the central and northern regions of the country. 1.28 The dispersal of the rural population, largely observed in the North, was perceived by the Government as a major constraint to the dissemination of social and economic infrastructure and services, cooperativization, and political mobilization. To address this problem, communal villages (aldeias comunais) - each intended to contain its own Party cell, school, health clinic, craft and agricultural cooperatives and so forth - were established throughout Mozambique. They had their origins in the villages organized by FRELrNo in the liberated zones during the war for Independence, in the reorganization of the former strategic hamlets (aldeamentos) set up by the Portuguese, and in the situations created by natural calamities and the return of migrants from neighboring countries. As of mid-1982, communal villages contained about 15 percent of Mozambique's rural population. Although communal villages have been established in every province, 45 percent of village members are located in the northern province of Cabo Delgado. Health 1.29 Although substantial progress has been achieved during the past decade, health conditions in Mozambique are still extremely poor. This is particularly the case in rural areas. The existence of widespread poverty constitutes both a cause and effect of prevailing low health standards, but the general neglect of preventive health services during the colonial period, the departure of expatriate medical personnel following Independence and, more recently, the destruction of rural health posts by armed bands, have also contributed to the problem. 1.30 Some basic indicators of health conditions - including life expectancies and mortality rates - may be derived from the 1980 census. Though the usual caveats with respect to data reliability and comparability apply, it would appear that general health conditions in Mozambique are poorer than those observed in other countries with similar per capita GNP levels. In 1975-80, for example, average life expectancy was about 44 years. This represented a gain of three years as compared to the previous five - year period, but it was still 13 years below the weighted average for all low-income countries in 1979. Mozambique's average infant mortality rate of 159 (per 1,000 live births) estimated for 1975-80 also compares unfavorably with international standards. It is about 70 percent higher than the 1980 group average for low-income countries, and is surpassed in only six other developing countries (Afghanistan, Burkina Faso, Malawi, Sierra Leone, Guinea, and Yemen Arab Republic). In seven provinces, the infant mortality rate is above 200. 1.31 Since Independence, the Mozambican government has given a high priority to upgrading health services. The proportion of central government expenditures now devoted to health - about 7 percent in recent years - is now slightly higher than the norm (about 5 percent ) for  -9- Sub-Saharan Africa. Moreover, Mozambique has been a pioneer among developing countries with regard to the establishment of a broad-based primary health care system, and the use of a restricted list of essential drugs. It is estimated that today about 50 percent of all Mozambicans have access to preventive health care, and about one-third to curative care. The government's objective is to reach full coverage by the year 2000. 1.32 Some 3,250 health workers (the majority paramedics) have been trained since 1975, but the supply of high-level personnel has not yet regained pre-Independence levels. There are still only 404 physicians in Mozambique, yielding an average population per physician ratio of 33,300. This may be compared with analogous ratios of 27,607 and 5,772, respectively, for the low-income countries of Sub-Saharan Africa, and for all low-income countries in 1980. And despite the government's efforts to redress the urban bias of the colonial health system, only 19 percent of the country's doctors practiced in rural areas as of 1982. In rural Zambesia province, for example, there are 286,000 persons per physician. A similar situation exists with respect to the supply and geographical distribution of nursing persons. Education 1.33 As in the health sector, the Portuguese left behind an education system strongly biased in favor of the urban European population. Schooling in rural areas, where the overwhelming majority of Mozambicans liv,e, was limited to that provided by religious missions. The result was an overall low average level of educational attainment, and a highly unequal distribution of education and skills. These problems were brought to the forefront with the mass exodus of expatriate residents after Independence, leaving Mozambique with a critical shortage of professionals, technicians, managers, shopkeepers, and skilled and semiskilled workers. 1.34 Since Independence, Mozambique has made important strides in improving educational standards, although much still needs to be accomplished. In 1980, the country's literacy rate was 28 percent, about the same as the average for Sub-Saharan Africa in 1976. However, at Independence the country's literacy rate was only 7 percent. More than one million adults achieved functional literacy in 1975-78, and primary level enrollments increased from 672,000 to 1.4 million as all schools went on double and triple s..ifts. Enrollments in secondary general education almost tripled in the same period-from 23,000 to 67,000-and have since increased by an additional 50 percent. Enrollment gains in secondary technical schools have been more modest, rising from 10,000 in 1974 to 12,000 in 1983. The effects of the high priority given to education are apparent in the 1980 census data, which show literacy rates for the 15-24 years age cohort reaching 40-50 percent, as opposed to less than 8 percent for the over-60 population. 1.35 At the time of the census, gross enrollment rates at the primary and secondary general levels were 100 percent and 5 percent, respectively. The primary enrollment ratio compares favorably with the 74 percent average for eastern and southern Africa but this is partly a result of the fact that in Mozambique primary school is four years in length compared to six or seven years in most other African countries. The country's  - 10 - secondary enrollment rate is among the two or three lowest in the region. Because of large numbers of overaged students, Mozambique's net enrollment rates are much lower than the gross rates. In 1980, only one in three persons of primary-school age, and less than one in a hundred persons of secondary-school age, were actually enrolled in school at the proper levels. Moreover, while the proportion of central government expenditures presently alLocated to education (11-12 percent in 1982/83) is much higher than pre-Independence levels, it is still below the 16 percent average for Sub-Saharan Africa. 1.36 The Government is now gradually installing a new educational structure. The present system, which has four years of primary education, seven years of secondary education (divided into three levels), and three years of higher education, will be replaced by a 7-5-4 system, with secondary education divided into three years of general education and two years of pre-university education. The purpose of the reform is to upgrade quality at all levels. A seven year primary school system will put Mozambique at the level of most other African countries which have six or seven year cycles. Teacher training will also be lengthened. Political Conditions Party and State Structures 1.37 A new national Constitution came into force at Independence, and was subsequently revised in 1978. In this document, responsibility for policymaking and administration is divided between FRELEMO - which in 1977 was transformed from a mass liberation movement into a Marxist-Leninist vanguard party - and a State apparatus (see Figure 1.1). In practice, the government is highly centralized and the distinction between the Party and the State is blurred by overlapping functions and leadership. 1.38 According to the national Constitution, FRELIMO is responsible for defining the country's political line and for guiding the State and society. The President of Mozambique, who also serves as President of FRELIMO, has a wide range of powers, including authority to create and dissolve ministries and commissions and to appoint ministers, provincial governors and the central bank governor. The highest Party organ is the FRELIMO National Congress which defines Mozambique's general policy, direction and ideology. The National Congress is supposed to meet every five years and has met twice since Independence: in 1977 and 1983. Between sessions of congress, overall responsibility for carrying out the Party program rests with the 130-member Central Committee and 11-member Political Bureau. 1.39 To assist with the carrying out of FRELIMO directives at the local level and at workplaces, 427 local committees and 4,244 Party cells are scattered throughout the country. Each state enterprise, for example, has a Party representative on its collective management board (-colectivo de direccao"), and every factory has its own Party cell. Total FRELIMO Party membership in 1983 was 110,323, or about 2 percent of Mozambique's adult population. For the majority of the population not in the Party, there are mass organizations' for women (Organizagao da Mulher Morambicana - OMM), students (Organizaplo da Juventude Mogambicana - OIM), workers  - 11 - (Organizaca dos Trabalhadores Mopambicanos - OTM), journalists (Organiza;Wo Nacional de Jornalistas - ONJ) and teachers (OrganizaZao Nacional de Professores - ONP). The function of these organizations is to report to FRELIMD on the needs, problems, opinions and suggestions of various segments of society. The Party provides these organizations with general guidelines and direction.  - 12 - Figure 1.1 National and Provincial Party and State Structures FRELIMO STATE Congress Central Committee People's Assembly Permanent Commission of the People's Assembly Political Bureau President and I 1 Party Chairman Secretariat of the Central Committee Council of Ministers Provincial Conference Provincial Assembly] Governor and 7 E . l 1 |Provincial Secretary Provincial Council Provincial Committee Provincial Government (District, local, circle and cell structures)  - 13 - 1.40 The supreme body of the State apparatus is the 227-member People's Assembly. Members of the assembly are elected after being nominated by FRELIMO's Central Committee. Proposed candidates, however, are first presented In public meetings and may be rejected by the population. Constitutionally, the People's Assembly has many important functions, including the approval of legislation, the state economic plan, and national budget; and the setting of tax policy. In recent years, however, the People's Assembly has met less then its prescribed two times per year, and responsibility for the formulation of laws has effectively passed to the Permanent Commission of the People's Assembly, comprised of six Political Bureau members and nine high government officials. 1.41 The other major component of the State apparatus is the 22-member Council of Ministers (cabinet). The cabinet, convened and presided over by the President of Mozambique, is responsible for determining and implementing the national budget and state economic plan, and for ensuring interministerial coordination. It is also empowered to initiate legislation, along with the Permanent Commission of the People's Assembly and FRELIMO's Central Committee. Most cabinet members are a'so members of FRELIMO's Central Committee or Political Bureau. The structures and functions of the principal ministries, commissions and secretariats under the Council of Ministers will be discussed in subsequent chapters. 1.42 Although organized as a unitary state, Mozambique is divided administratively into 11 provinces (Maputo, Gaza, Inhambane, Sofala, Manica, Tete, Zambezia, Nampula, Niassr, Cabo Delgado and the City of Maputo), 110 districts and some 860 localities. The national Party and state structures described above are for the most part mirrored at these lower levels (see Figure 1.1). Provincial governors, who wield considerable power in their territorial jurisdictions, are responsible to FRELIMO, the President of the Republic and the Council of Ministers. They are frequently Party officials who may concurrently hold a ministerial or other high government post. Other provincial officials are appointed by ministers to whom they are responsible, or by the Governor. Provincial, district and local assemblies are responsible for passing legislation relevant at these levels. External Factors 1.43 An unfavorable external environment has constituted an important constraint to Mozambique's post-Independence development efforts. The Mozambican economy - like that of many other countries - was severely disrupted by the successive petroleum crises and ensuing worldwide reces- sion. However, the country also suffered from policy changes in South Africa and from military aggression. In 1976, for example, the number of Mozambicans working in South African mines was reduced by two-thirds, or by approximately 70,000 workers. Two years later, South Africa unilaterally stopped paying a part of the expatriate miners' salaries to the Mozambican government in gold at below-market prices, an agreement that had been in effect for 50 years. During the same period, South Africa began to divert a growing portion of the Transvaal's rail and port traffic away from Maputo. Considerable foreign exchange earnings have been foregone as a result of these actions.  - 14 - 1.44 Mozambique incurred further financial losses following its decision in 1976 to boycott Rhodesia in support of UN - sponsored sanctions. This action denied Rhodesia the use of its principal port of Beira, but it also further cut Mozambique's foreign exhange earnings from rail and port fees and workers remittances. The diversion of scarce food supplies to feed refugees from Rhodesia added to Mozambique's financial burden. Though Western countries had promised aid to compensate Mozambique for its losses, little was actually forthcoming. In retaliation for the boycott, Rhodesia intensified its direct military actions against Mozambique. It also organized, trained and equipped armed bands reportedly comprised of former colonial collaborators, administrators and soldiers; and deserters from the FRELIMO armed forces. 1.45 These armed bands destroyed substantial economic and social infrastructure during the late 1970s. But it was only after the independence of Zimbabwe in 1980 that the insurgents became an important destabilizing force with the aid of South Africa. Vital economic infrastructure -- particularly the transport network, power stations and transmission lines, and the oil pipeline -- has continued to be the principal target of the armed bands. In 1981 alone, they disrupted traffic on the Maputo-Beira higbway and the railway between Zimbabwe and Beira, and took credit for cutting the marker buoys in the port of Beira. Such attacks have persisted, resulting in the destruction of some 1,000 rural commercial establishments, 40 locomotives and numerous trucks and automobiles, 20 sawmills, cotton gins, tea factories and hundreds of villages. Today, armed bands are operating in most of the country's provinces, although the level of fighting varies considerably by region. 1.46 There have been some recent attempts to reach a negotiated settlement of tne ongoing war. In March 1984, Mozambique signed the Nkomati Accord with South Africa through which the latter agreed to end its support of the armed bands and to increase bilateral cooperation in the areas of electric power, transport, tourism and technical assistance. Mozambique, for its parc, prohibited all acts of violence emanating from its territory and restricted the number of African National Congress (ANC) members residing in the country. Starting in August 1984, bilateral talks between the governments of Mozambique and South Africa took place in Pretoria. The preliminary outcome of these talks (the -Declaration of Pretoria of October 1984) was encouraging: the armed bands agreed to recognize the present government of Mozambique, an end of violence was called for, and arrangements were made for continuing discussions. However, the armed conflict has not slackened in the ensuing months and planned follow-up discussions have reportedly broken down. The main sticking point seems to be the Government of Hozambique's refusal to share political power with the armed bands.  - 15 - CBAPTER 2 DEVELOPMENT PRIORITIES AND INSTITUTIONS 2.1 At Independence, President Samora Machel declared the elimination of poverty and economic dependence to be the Government's main objectives for the country. Although a comprehensive strategy to achieve these objectives had not yet been developed, Articles 9 to 14 of the new Constitution suggested the course: "The State promotes and plans the economy with a view to guaranteeing the correct development of the country's wealth and its use for the benefit of the Mozambican people. In the People's Republic of Mozambique the State economic sector is the leading and driving factor in the national economy. State property is given special protection, its development and expansion being the responsibility of all State organs, social organizations and citizens. The State encourages individual peasants and workers to organize themselves in collective forms of production, whose development it supports and guides. The State recognizes and guarantees personal property. Obligations are attached to private property. Private property cannot be used to the detriment of the interest defined in the Constitution. Income and private property are subject to progressive taxes, established on the basis of social justice. Foreign capital shall be authorized to operate within the framework of the State's economic policy. 1/ 2.2 The basic objectives set forth in the Constitution have been vigorously pursued over the past decade: the State has assumed control over the economy; socialization of the countryside has been encouraged; and the economy is managed through central planning. Yet today, ten years after Independence, poverty and economic dependence have not been alleviated. This apparent lack of economic progress is due in no small measure to external and exogenous factors -- for example, the ongoing war, de facto economic sanctions imposed by South Africa, and various natural calamities. However, inadequate economic management has also played a role. The evolution of priorities in the allocation of resources and of policy making institutions since 1975 is reviewed below. Development Priorities Third FRELIMO Congress 2.3 Development priorities in Mozambique are determined by FRELIMO, which is assigned this task in the Constitution. Priorities followed during the late 1970s and early 1980s were established at the Third FRELIMO Congress, held in 1977. 2/ In addition to emphasizing the need to expand training opportunities and improve economic management, the Third Congress directed the State to: (i) develop and consolidate its role in the economy; (ii) promote socialization of the agricultural sector; 1/ 'The Constitution of the People's Republic of Mozambique," non-official translation provided by the Mozambican authorities. 2/ 'Directives of the Third Party Congress," Maputo, 1977.  - 16 - 'iii) accelerate the industrialization process, with emphasis on heavy industry in the medium and long term; and (iv) prepare a Ten-Year Plan for the 1980s. Each of these directives is discussed briefly below. 2.4 Development and consolidation of the state sector. Intervention in the private sector had already been going on since Independence, prompted by the need to keep activities going after the mass departure of Portuguese residents. After the Third Congress, this process continued, in part because of continued abandonment and economic sabotage. The Government also nationalized coal mining and petroleum refining on grounds of strategic importance to the country, and created new enterprises. Today, state-owned and managed enterprises are responsible for all (or almost all) activity in transport, communications, and foreign trade; 65 percent of industrial production; and 50-60 percent of marketed agricultural production. As suggested in Table 2.1, the bulk of state intervention, at least in the industrial sector, seems to have occurred after the Tlird Congress. The only activities which are predominantly private are retail trade, smallholder family agriculture, road cargo transport, and petty services. About 80 percent of retail trade is presently carried out by private firms. The balance is accounted for by parastatals and consumer cooperatives. Table 2.1: Distribution of Ownership in Industry (percent of national production) 1977 1982 State-owned 15 25 "Intervened, a/ 5 37 Joint Ventures 9 11 Private 71 27 TOTAL 100 100 a/ "Intervened' enterprises are those private enterprises over which the Government has assumed control because of abandonment or economic sabotage on the part of their former owners. Source: Ministry of Industry and Energy. 2.5 Through assuming the management of private firms and creating new public enterprises the Government succeeded in bringing the economy under its control and laying the basis for a planned economy. However, the state sector is yet to achieve the economic development objectives envisaged in the Constitution. This is due in part to the state enterprises' organizational and human resource constraints, but also to shortcomings in macroeconomic management. 2.6 Socialization of the agricultural sector. At the Third Congress, the move toward construction of socialism was stated to require, in the agricultural sector, the accelerated development of state farms and of producer cooperatives, around which communal villages (aldeias comunais)  - 17 - would be established. State-owned enterprises were considered the quickest means to satisfy the country's export requirements and the raw materials needs of industry, as well as urban food requirements. The establishment of producer cooperatives, and of communal villages, was meant to facilitate the provision of agricultural training and social services and to help resolve transport and marketlng problems. 2.7 As will be shown in Chapter 4, the attempt to socialize the agricultural sector has so far succeeded only in the limited sense that the State has cowe to dominate marketed production. However, production of state farms has been hindered by a nunber of factors, including management difficulties, chronic shortages of spare parts, fuel and other agricultural Inputs, and poor maintenance of equipment. 2.8 Acceleration of the industrialization process. For industry, the Third Congress determined short-term priorities to include: State assumption of control over the sector; production increases coming mainly from existing capacity; and promotion of both export-oriented and import- substituting industries. Increases in capacity utilization have been hindered by the inability of the agricultural sector to produce adequate quantitici of raw materials. Most importantly, agriculture as well as other sectors have failed to generate sufficient foreign exchange to accomodate purchases of imported raw materials, spare parts and capital goods. As a result, the industrial sector today operates at only a fraction of installed capacity (see Chapter 5). 2.9 Ten-Year Plan(PPI). This plan wats approved in October 1981 by the People's Assembly. Its general theme Is reflected in a 1979 statement to the People's Assembly by President Samora Machel: -We refuse to remain eternally suppliers of raw materials. We refuse to allow the old colonial relations to remain, even under a new guise. We tefuse to participate in the international division of labor in a subordinate position, paying more and more for finished goods and selling our labor power for less and less. We refuse to sell the ore and be left only with the holes.' 2.10 The PPI expressed the Government's determination to achieve three main objectives by 1990: (i) development of a powerful and efficient state sector, particularly in agriculture; (ii) collectivization of the countryside, where communal villages would include ten million people (60 percent of the populatiou projected for 1990); and (iii) the effective launching of heavy industry, particularly, iron and steel. 3/ Projects related to the achievement of these objectives were to absorb a large proportion of the public investment program's expected resources. Other objectives included increasing production of consumer goods and improving training. 2.11 The investment program included projects to produce agricultural commodities, textiles, iron and steel, machinery, aluminum, gas, basic chemicals, coal, electricity, construction materials; building of dams, bridges, roads; and the initiation of oil prospecting. Some projects envisaged in the agricultural sector, textiles, electricity, and dam and road projects have been concluded, and others, including oil prospectiag, are underway. Among these projects, high priority h-s been given to 3/ Rep4blica Popular de Mopambique, Linhas Fundamentais do Plano Proseectivo Indicativo para 1981-1990 (Maputo: Imprensa Nacional, n.d.).  - 18 - developing a powerful state sector in agriculture to produce export crops and substitute for food imports consumed in urban areas. 2.12 The priority given to the state sector in the allocation of resources in agriculture has implied a continued scarcity of resources for producer cooperatives, which in the PPI were expected to produce the bulk of the foodcrops consumed by the rural population. This, combined with successive natural calamities, warfare, and the nearly total neglect of family farms, has contributed to the critical food shortage in the countryside today (see Chapter 4). Moreover, the emphasis on state farms has pushed the achievement of the Plan's second main objective (rural collectivization) -- which depends on the spontaneous movement of families into communal villages -- well beyond 1990. Achievement of the third objective, acceleration of the industrialization process, is also threatened by the poor performance of state farms, which were counted upon to generate the additional investment resources. Fourth FRELIMO Congress 2.13 The Fourth FRELIMO Congress, held in April 1983, reiterated the importance of agriculture as the base of development and industry as the dynamizing factor. Export promotion and import substitution in these sectors was counted upon to generate the foreign exchange requirements of rehabilitation efforts. The Fourth Congress also determined the broad directives for macroeconomic policy. The priorities set by the Fourth Congress are summarized below. 2.14 Agriculture. The Fourth Congress expanded the earlier, virtually exclusive, focus on state farms and collectivization to include the private farms and the smallholder family subsector (see Chapter 4). The state subsector was to be consolidated and restructured with a view to increasing its productivity. State farms were instructed to avoid expanding the area under cultivation, and to ensure the efficient utilization of tehinical personnel, existing equipment, and imported fuels and agro-chemicals. Further collectivization efforts were to be postponed temporarily. In the meantime, private commercial farmers were to b- given support, and the smallholder family subsector was to be provided inputs and consumer goods to stimulate production. 2.15 Industry. In line with-the greater attention paid to tlt smallholder family subsector in agriculture, industrial priorities have been redefined to emphasize the production of incentive goods. The Fourth Congress also reiterated the Third Congress' directive that increases in industrial production must come from the rehabilitation of existing capacity, which is to receive top priority in the allocation of available resources. 2.16 Macroeconomic policies. The Party directed that measures be adopted regarding public finance, credit, employment, wages, and prices, to reverse the economic and financial deterioration of the economy. Current expenditures of the State were to be reduced. New investments could be undertaken, but only if they passed tests of technical and financial viability, contributed to the balance of payments, and were assured the necessary human, material, and financial resources. The focus in the short  - 19 - to mediun-term was to be on improving the efficiency of investment, and on completing those ongoing projects which would have a positive impact on the balance of payments. In order to improve the performance of state enterprises, these were to be restructured into manageable units, to adopt accounting practices appropriate to effective management, and be given administrative and financial autonomy to facilitate response to new incentives. 2.17 The Fourth Congress considered urgent the need for adoption of measures to eliminate excess labor both in the state apparatus and in state enterprises. It stressed that w-ages and prices could not be allowed to reflect a lack of organization, discipline and responsibility. Emphasis was to be placed on improving productivity through strengthening management, linking wages to the quantity and quality of the output produced, and implementing norms which would discourage absenteeism. On prices, black markets were to be eliminated. 2.18 To ensure the implementation of its directives, which were designed to correct the existing distortions in the economy, the Party considered it necessary to adopt concrete measures to strengthen and broaden the leading role of the State in the mnagement of the economy, as well as use policy instruments in an integrated and consisteat manner. Norms, procedures and deadlines for the preparation, implementation, and control of the Central State Plan would be decreed; and planning would be extended to include local governments.4/ Economic Action Program (PAE) 2.19 In May 1984, an Economic Action Program for 1984-1986 was prepared by the Government as part of the 1984 debt rescheduling with the Paris Club. The Government expects that the measures contained in this program will lead to the economic and financial recovery of the economy. The content of this program is summarized below. 2.20 Agricultural and industrial policies. In agriculture, the family subsector is to receive, in addition to farm implements and consumer goods, training in appropriate agricultural techniques, and in technical and economic management. The Government is also to complete the analysis it is undertaking of the prices of certain consumer products in order to adjust them, axid producer prices, in a manner which will provide effective benefits to farmers (see Chapter 4). Rehabilitation in industry would focus on firms producing textiles, shoes, garments, tools, household goods, and agricultural implements. 2.21 Public finance. There is a general call for increased efficiency in the collection of tax and nontax revenue. In order to reduce the State's current expenditures, the Government would, regarding the wage bill: vi) sustain effective expenditures at existing levels; (ii) restrict and control new recrui.ments; (iii) exercise strict discipline in promotions and professional reclassification; and (iv) compensate warranted salary increases with reduced employment of less skilled labor. 4/ Directivas Economicas e Sociais, Coleccao IV Congresso, Maputo, 1983, pp. 75-77.  - 20 - 2.22 Expenditures on materials would be governed by rules on expenditures which aim at greater rationality and austerity, particularly in the use of imported materials. Subsidies to state enterprises would be reduced as the measures proposed at the Fourth Congress are implemented. The PAE proposed an additional measure to improve the performance of export enterprises: a foreign exchange retention system, whereby export enterprises would be allowed to retain a portion of their foreign exchange earnings for purchases of imported inputs. 2.23 Emplo ymns, wages, and prices. In addition to the measures proposed at the Fourth Congress, the PAE states that the Government would transfer workers from the state apparatus to the productive sectors. Prices would be linked to the normal costs of production and enterprises would be encouraged to reduce costs. The Economic Action Program also anticipates the introduction, in 1985, of a statistical system on prices of raw materials and equipment, and consumer goods and services. 2.24 Money and credit. The Bank of Mozambique would continue the analysis of its credit portfolio and reschedule enterprises' debts in line with assessments of the enterprises' recovery possibilities. Lending, limited to the real needs of the enterprises, would be strictly controlled, and consumer credit would remain suspended. The banking network is to be expanded to encourage private savings. The PAE also revealed that a study would be undertaken in 1984 to evaluate the possibility of adjusting interest rates for the purpose of influencing and encouraging better management of enterprises. A study is also said to be under way to update the basket of currencies to which the metical is linked. The Institutional Framework 2.25 Mozambique's institutional framework developed as determined in the Constitution, which assigned to FRELIMO the tasks of -guiding and supervising the activities of state agencies in order to ensure that the State policy is in conformity with the people's interests,-5J proposed the state structures to implement the Party's directives, and determined that the State promote and plan the economy with a view to guaranteeing the correct development of the country's wealth and its use for the benefit of the Mozambican people." 6, 2.26 As discussed in Chapter 1, Party and State are thoroughly intertwined. Leaders and other Party members are ministers, provincial governors, or district executive counselors. Party committees and their secretariats must always ensure -- at the central, provincial, district and local levels - the leadership of the Party over the State and society, respect for the Party's political line, and implementation of its 5/ "The Constitution of the People's Republic of Mozambique,-