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NBER Working Paper 16552, November, Jorge Braga de Macedo and Luís Brites Pereira (2010).

This study examines the interaction between globalization and governance in two of Africa’s success stories, Cape Verde and Mozambique.

This paper examines the relationship between globalization, governance, and income convergence in Cape Verde and Mozambique.  Specifically, the authors “want to determine whether the interaction between globalization and governance is positive or not in Cape Verde and Mozambique so as to assess the extent to which they represent development successes in West and Southern Africa” (59). 

In Western Africa, which is more diversified, they find that trade openness drives convergence and export diversification.  However, in more specialized Southern Africa, convergence is driven by economic and political freedom.  Cape Verde and Mozambique are adopting market strengthening reforms and policies to improve education and poverty reduction.  They outperform their regional peers in terms of GDP per capita, financial reputation, and good governance.  Overall, the authors conclude that there is a positive interaction between trade and financial globalization and good governance and democracy in the two countries.

The global financial crisis exacerbated regulatory failures in many African economies.  The authors argue that regional cooperation is important as an “intermediate step” in developing countries’ integration into the world economy.  In particular, “In addition to benefiting from regional economies of scale, their participation in reform programs within regional organizations also facilitates domestic authorities’ work when implementing politically difficult measures” (3). 

Surveillance and peer pressure are important for developing “mutual knowledge” about economic conditions and stable national economic policies.  For example, surveillance among Francophone West and Central Africa promoted policy coordination and economic integration.  The African Peer Review Mechanism involving 30 countries has been successful as well.  A positive step would be better cooperation between the ECOWAS and SADC secretariats and the Commission for the African Union and local branches of the United Nations, International Monetary Fund, and World Bank.  The authors conclude that “With peer pressure, better information on the 15 partners in each one of the sub-regions and beyond would probably be available, facilitating business development and a more active role for civil society” (5). 

Having surveyed the state of globalization and governance in Africa, the authors focus on Cape Verde and Mozambique as models of successful governance.  These countries are compared to the 15 members of ECOWAS (established in 1975) and the 15 members of SADC (established in 1980), as well as Sub-Saharan Africa and PALOP.

What is successful governance?  The authors argue that “economic success under globalization entails, necessarily but not exclusively, positive market perceptions regarding outcomes such as export diversification and narrowing of the income gap with respect to the frontier. Success thus defined must, in turn, be underpinned by good governance and the freedoms that citizens and residents enjoy” (7).  Methodologically, the authors assess political and civil rights with Freedom House scores and economic freedoms with Fraser Institute and Heritage Foundation data.

Cape Verde won its independence in 1975.  Its one-party government implemented a development policy of central planning, protectionism, and public sector dominance in banking, transportation, insurance, and energy.  Exports and foreign direct investment were discouraged, which became “major constraints for sustainable long-run growth” (21).  Reforms in 1988 decreased government control of the economy but not the political system.  Public discontent ushered in free elections and a constitutional amendment instituting multi-party democracy in 1991.  The authors note that since the Movement for Democracy party replaced the ruling African Party for the Independence of Cape Verde, economic liberalization has gained ground, three free and fair elections have taken place, and two non-violent schanges in government have occurred.

Mozambique won its independence in 1974 but fell into civil war from 1975 to 1992.  Pre-independence growth had been respectable, and in particular investment in infrastructure, health, and education.  However the civil war destroyed these gains and led to nearly one million deaths.  War-era governments also promoted Marxism and state control of the economy, further depressing prospects for growth.  In the 1980s and particularly with the 1987 Economic Rehabilitation Program, liberal reforms were adopted but conflict continued to depress growth.  Peace accords in 1993 led to rapid capitalization on the economic reforms of the previous years, in particular exchange rate stabilization, trade liberalization, privatization, and tariff and banking reforms.  The UN guns-for-vouchers program was especially effective in facilitating a transition to peaceful economic activity.  The adoption of a democratic constitution further built confidence.  Since then, Mozambique “has again become one of the attractive economies in the sub-region,” on par with Mauritius and South Africa and with impressive mega-projects like the MOZAL aluminium smelter plant and the Witbank highway linking Mozambique with South Africa (24).

It is important to consider the economic policies and institutional variables that set the stage for Cape Verde and Mozambique’s export diversification and sophistication strategies.  To approach this question, the authors employ an econometric study of the two countries’ monetary and exchange rate policies and evaluate their MDG attainment.  Economic data for 1960-2004 is unavailable, therefore they estimate economic convergence with the distance between US GDP per capita and that of the country in question and export diversification with the inverse of the Herfindahl Index.  Taken together, these two variables portray the level of diversification and convergence in a country.

They identify the regional determinants of diversification and convergence.  They then explore countries with high diversification and convergence as well as those with low diversification and convergence.  In the first group, economic and political freedoms are found to drive convergence, “suggesting effective institutional arrangements” (60). 

The authors conclude that Mozambique and Cape Verde represent positive examples of globalization and governance interaction.  In particular, they bring to light “the potential for cooperative governance and peer-review mechanisms outside of its usual domain among OECD and EU member countries” (61).