Volume 31, Number 1, September 2013
Answers
Development profile: Country F
(p. 34)
Peter Smith
The latest in the series of development profiles featured a low-income/low human development country that has made very slow progress in development terms.
I would guess that this country was not one of the more straightforward to identify in this series of country profiles. From its extreme poverty and lack of development, you would probably think that it was located in sub-Saharan Africa, and you would be entirely correct. A civil war lasting more than
20 years may have narrowed the possible country options, but unfortunately Country F is by no means unique in this respect. Continued heavy dependence on agriculture is also not uncommon in the continent.
In fact, Country F is Mozambique, which is located in the southeastern corner of the continent with South Africa to the southwest and Tanzania to the north.
The importance of education
One of the questions in the profile asked you to discuss the importance of education for a country such as Mozambique. The data reveal that Mozambique has the lowest value for the mean years of schooling (1.2 years) of any country listed in the UNDP’s Human Development Report 2013. The way that this is interpreted is that the average years of education received by people aged 25 years or over was just 1.2 years. Education is important in so many ways. For example, if farmers cannot read or write then they cannot understand written instructions, and if they cannot undertake simple calculations then they cannot work out doses for fertiliser use, or work out total spending or understand prices. This can significantly affect productivity.
Education also helps in many other ways — for example, making people better aware of what is meant by good nutrition and how to stay healthy. Apart from anything else, education adds directly to the quality of life and allows people to make the best use of resources. The importance of education is thus crucial, underpinning the capacity to live a fulfilling life.
For Mozambique, it is possible that the prolonged civil war may have affected people’s attitudes towards education. Education is an investment for the future, and in a period of civil conflict, people may not perceive that they face a future, so they may not decide to invest in education.
A more encouraging sign for the future is in the statistic for the mean expected years of schooling. This indicator estimates the number of years of schooling that a child of school entrance age can expect to receive given current enrolment and drop-out rates. For Mozambique in 2012, this was 9.2 years. This reveals an enormous improvement, and suggests that investment in education today has increased dramatically.
The discovery of a natural resource
Large reserves of natural gas were discovered off the coast of northern Mozambique in 2011. The final question in the profile asked you to discuss how such a discovery could affect the economic development of a country. You might think that such a discovery could only be beneficial for the economy. It gives access to world markets for a good known to be in scarce supply, and offers a new income-earning opportunity for the country. The revenues from exporting gas could be used to transform the economy of a country like Mozambique.
However, are we absolutely sure that this is bound to be good news?
The Dutch disease
In 1959 a natural gas field was discovered in the Netherlands. The country then experienced a phenomenon that became known as the Dutch disease. What happened was that the discovery of natural gas reserves had an effect on the exchange rate. This occurs through a sequence of things. First, there is an increase in demand for labour in the gas extraction sector, so labour is drawn away from other sectors of the economy. This direct effect may not be very substantial, given that the extraction of gas is not a labour-intensive sector.
However, the revenues generated by the new ‘booming’ sector cause an increase in demand for other goods. These other goods can be separated into traded and non-traded goods, the former being goods that are traded on international markets. The increase in demand is unlikely to affect the prices of traded goods, which are set in international markets, but the price of non-traded goods will increase, again inducing an increase in the demand for labour in the non-traded goods sector. Effectively, what this means is that there will be upward pressure on the real exchange rate, reinforced by expectations of foreign investors, who will see the future expected flow of revenues, even before the gas is being exploited. This appreciation of the exchange rate causes the traded goods sector to become less competitive. In the context of the Netherlands economy, what this meant was a decline in the manufactured goods sector, a process that became known as deindustrialisation.
What this shows is that the effect of a discovery of a natural resource may not necessarily be beneficial for the economy, especially if the reserves are finite, because when the reserves are used up, it may be difficult to rebuild the manufacturing sector.
Challenges for the future
Will this happen in Mozambique? This is difficult to say. Apart from anything else, Mozambique does not have much of a manufacturing sector, so the Dutch disease is unlikely to produce deindustrialisation. However, a similar phenomenon could affect agriculture, which accounts for about 20% of Mozambique’s merchandise exports. It is also important to be aware that with low levels of human capital in its population (especially in education, as we have seen), Mozambique is likely to need substantial help if it is to be able to find the technical knowledge and the resources in order to extract the gas. This suggests an inevitable reliance on foreign investment, and could mean that resources will be diverted from other priorities in order to ensure that the gas can be extracted.
Also important is whether the revenues can be used to promote poverty alleviation and human development. Mozambique has enjoyed rapid economic growth in the past decade, but to date this has not been matched by reductions in poverty or widespread job creation. The challenge for the future is to be able to marshal the resources generated by natural gas to produce human development, as well as economic growth.
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