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Mozambique’s economy is like a soap bubble

While the whole world celebrates the soaring economic growth in Mozambique, one of the country’s best-known economists, Carlos Nuno Castel-Branco, argues the country’s economy is like a soap bubble, a fallacy that breaks easily before the slightest current of air.
Minna Tuominen
22.4.2015

In a recent seminar organized by three most prominent civil society organizations (IESE, CIP and Observatório de Meio Rural), Castel-Branco entertained his audience by blowing soap bubbles while showing staggering statistics of how the development of the country’s economy has actually stagnated.

Some ¾ of the apparent growth is determined by a dozen large-scale foreign investors focused on energy and mineral resources. Another aspect contributing to the fallacy is the public external debt that has grown 20% faster than the GDP over the past decade.

Excluding these factors from the equation, there is no growth.

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So, what is an economic bubble? The concept refers to a pattern of economic growth that is created through speculation and financed through loans. Although the growth happens at a record-high rate, it depends heavily on the demand of a few commodities sold to the external market. Thus, the basis of the economy remains very thin.

This also explains why the employment rates are not stepping up at the same pace with the growth; this type of economy does not need labor, only capital investments. Therefore, it is not able to reduce poverty.

According to Castel-Branco, the pattern will culminate in a crisis which will affect the credibility of the financial system and will require the State to intervene in order to save the speculator, i.e. the foreign investor.

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Castel-Branco sees two possible scenarios there. Either the State will continue the speculative economic expansion so as to keep the expectations high, or it will apply harsh social austerity measures and increase consumer taxes so as to be able to (further) reduce the taxes on the profits of large corporations.

Ultimately, both scenarios will lead to the explosion of the bubble leaving the country with weighty debts, unemployment and a fading domestic private sector.

In order for the country to avoid the gloomy future, the government should immediately step away from the dangerous path, reverse the loan taking pattern and, instead, increase the mobilization of domestic resources. This should be done essentially through renegotiation of the contracts with the foreign investors, and by focusing on problem solving rather than wasting unrenewable resources, says Castel-Branco.