Trickle down needs trickle up

Trickle down needs trickle up

Seventeen miles outside the Mozambique capital of Maputo sprawls the Mozal aluminium smelter - a huge industrial complex that cuts into the red earth and scrub woodland of the Boane district. Delivering more than 500,000 tonnes of aluminium a year, Mozal is the largest aluminium producer in Mozambique and the second largest in Africa.

The company is a joint venture between BHP Billiton, which owns a 47.1 per cent share, Mitsubishi Corporation with 25 per cent, the Industrial Development Corporation of South Africa Limited with 24 per cent, and the Government of Mozambique with 3.9 per cent. It makes up 42 per cent of Mozambique’s exports, a large part of its manufacturing output, and earns 53 per cent of the foreign exchange entering the country.

At an investment value of $2.1 billion, Mozal is one of Africa’s largest recipients of foreign direct investment and, to date, a great commercial success.

Foreign direct investment, or FDI, can be a marvellous thing – it is massively important for the flow of capital into developing nations, it brings with it new technologies, skills and ways of working and offers people access to larger, more profitable markets.

According to the BHP Billiton website, ‘Mozal 1…was the biggest single project investment ever made in Mozambique. The smelter was successfully completed six months ahead of schedule and more than US$100 million under budget. It was officially opened on 29 September 2000.’ That sounds outstanding. And you’d expect to see some pretty big economic benefits for the people of Mozambique from a $2.1billion investment, wouldn’t you?

But the reality of FDI, more often than not, is that the profits earned from large-scale investments are sucked straight out of the developing country, barely touching the sides. That means very little benefit to the local and national economies, despite the fact that in many cases these profits often quickly match, and exceed, the initial capital investment.

During its first phase of production, Mozal failed to benefit the majority of Mozambique’s population. This was due in part to an incentives package that meant the company paid corporate tax on just one per cent of its turnover, and also to the capital intensive nature of the industry that led to the creation of only 800 permanent jobs.

Mozal also underperformed in relation to expected benefits for local firms. Only 2,500 jobs were created indirectly via links between Mozal and local suppliers and contracts.

FDI is often presumed to benefit local communities and the poorest through trickle-down economics, or rather more prosaically described in the 19th century as the horse-and-sparrow theory. As Canadian-American economist John Galbraith described it: “If you feed the horse enough oats, some will pass through to the road for the sparrows.”

CAFOD’s economist Tina Weller points to the fact that for FDI to work it must be accompanied by support for the local small-scale sector made up of often poor men and women running micro and small enterprises. What this means in practice is that trickle down must be accompanied by trickle up. In the case of FDI there needs to be small-scale strategies to complement the large-scale investment model. Foreign firms establishing themselves in a developing country will become more rooted and provide more widespread benefits through “spill-over and linkages effects” if they have a network of local suppliers and clients. Technology and learning is more likely to be shared and passed on if local small firms are not too far behind foreign counterparts.

With this in mind, let’s get back to Mozal. During the plant’s second phase of development, strenuous efforts were made by the International Finance Corporation, Mozambique Government and donors to implement a series of small business programmes to specifically support local small enterprises so that they could benefit from Mozal’s presence. These programmes improved and shared knowledge, developed capacity to supply, and trained small businesses up to have the skills to win contracts. Mozal, itself, was also encouraged to “unbundle” its contracts going out to tender so that smaller contractors could fulfil the demands.

None of this was a mean feat. And the considerable efforts made to help small firms increase the skills and capacity needed to link into the aluminium smelter operation has meant that Mozal has now generated an estimated $35 million for local companies.

The economic crisis has highlighted the vulnerability of many developing nation economies and many of the worst impacts have been and continue to be felt by men and women working in the small and micro business sector. Putting the needs of the poorest at the heart of economic development and growth strategies is not anti-export, anti-growth or anti-foreign investment. Mozal is just one example of how local businesses and the economy can be strengthened by a new “think small” approach to private sector development. This shift in approach by the richest nations could well deliver growth that is fair, resilient and sustainable, protecting the poorest from the shattering impacts of global financial crises and market volatility. It is surely time for the developed world to move to a better strategy than over-feeding the horse.

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(c) Pascale Palmer is Media Advocacy Officer at CAFOD (http://www.cafod.org.uk/).

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