The political determinants of diversification in resource-rich countries: The case of Mozambique

• Political constraints hinder ruling coalitions from supporting diversification. • Diversification drives growth but risks creating independent power centers. • Mozambique's ruling coalition limits private sector growth to retain political control. • The country is rapidly de-diversifying as resource extraction intensifies. Natural resources have the potential to drive much-needed growth across Africa if they are used as the foundation for diversifying the economy, which is essential for economic development. The promotion of resource-based diversification goes hand in hand with ruling coalitions support for the growth of competitive local industries, enabling domestic businesses to either leapfrog into the value chain of resource sectors or develop capabilities in sectors unrelated to the commodity-leading sector. However, in most resource-rich countries across Africa, ruling coalitions support for diversification is often minimal, if it exists at all, leaving local and infant industries exposed to the vagaries of the market. This raises the question of why ruling coalitions refrain from supporting diversification despite its long-term benefits, and instead choose to maintain dependency on natural resource extraction. This article argues that, while pursuing diversification is economically beneficial, ruling coalitions in resource-rich countries face conflicting incentives that hinder the realization of diversification goals. They must balance providing autonomy to various economic groups and supporting them in developing the capabilities required for diversification, with the political risk of fostering independent centers of economic power that could potentially challenge the regime or support the opposition. Findings suggest that this is the case in Mozambique, where the ruling coalition, in its efforts to secure political longevity, has incentives to keep the private sector under control and underdeveloped, at the expense of using the resource sector to develop a more diversified economic structure.