USAID SPEED2025-06-042025-06-042023-11https://repositorio.up.ac.mz/handle/123456789/348Mozambique is among the poorest countries in the world, with a GDP per capita of US$492 USD(1354 PPP) in 2021, the fifth lowest in Sub-Saharan Africa (SSA). Nevertheless, it’s largepopulation, lengthy coastline along the Indian Ocean, key access to six landlocked countries,fertile agricultural land and the abundant mineral and energy resources create economic potential.Admirable success was registered between 2000 and 2015, when economic dynamism driven byits extractive industries made per capita income grow at 4.7% every year on average, double therate recorded in comparable countries and SSA (2.2%). Since then, a series of domestic andexternal shocks have limited growth below the previous long-term trend. But even beforestagnation set in, growth in Mozambique moved fewer people out of poverty than many othercountries in the region, which worsened even more after 2015. The share of people living inpoverty jumped from 48% in 2014/15 to 62.8% in 2020, according to most recent estimates bythe World Bank, with large urban-rural and north-south gaps in access to basic services, with therural areas in the north and center of the country lagging the furthest behind. Moreover, incomeinequality has worsened, reaching levels comparable to the most unequal countries in the worldand region, such as Namibia and South Africa. s such, Mozambique’s development challenge has been to find ways to convert the describedpotential into growth, and especially into growth that is spread equitably across the population.This challenge is now more acute because of demography. Delayed demographic transition hasresulted in still relatively high rates of population growth at 2.8% every year, which in turn requiresthe economy to expand fast enough to employ today’s labor force and newcomers. However,labor has been unable to reallocate into more dynamic urban and peri-urban areas. 74.7% of thelabor force still works in agriculture, livestock farming and fishing (INE, 2023), sectors that arelargely dominated by small-scale, subsistence producers, with low and stagnant productivity andhighly exposed to climate change. And although far fewer Mozambicans work in the services andindustrial sectors, they have also recorded productivity losses over the last years. This happened because sometimes impressive capital formation and foreign investment levelscomparable to larger extractive economies such as Chile and South Africa were channeled tocapital-intensive export industries with limited links to the rest of the economy. As a result,Mozambique’s economy has not been able to generate employment, increase labor productivity,and become more sophisticated. What binding constraints hold back investment in more complexand diversified activities, activities that can harness Mozambique’s natural resources in a way thatpromotes and sustains inclusive growth? To address this question, this study deploys the Growth Diagnostics Framework (Hausmann,Rodrik, and Velasco, 2005) to prioritize reforms that address the most pressing constraints(immediate challenges) preventing growth. Essentially, under this framework investment andeconomic growth are determined by access to finance, the returns to investment, and theappropriability of these returns. In a world where production factors tend to be more complementsthan substitutes, the factor in the shortest relative supply – the most binding constraint – is theone with the highest estimated growth payoff and should be a priority for policy attention andgovernment resources. This exercise is better conceived as an iterative process with activecollaboration from domestic government, private stakeholders, and technical experts. As such,this study has held several interviews with 64 stakeholders, which has complemented data-driveninsights and findings derived from econometric and statistical analysis that aims at reaching acommon diagnosis with an internally consistent policy plan for Mozambique. Throughout this report, we will refer to the immediate challenges as those that were identified as the most binding constraints to sustainable growth in Mozambique.en