provides economic analysis and policy advice with the aim of promoting sustainable and equitable development. The Institute began operations in 1985 in Helsinki, Finland, as the first research and training centre of the United Nations University. Today it is a unique blend of think tank, research institute, and UN agency-providing a range of services from policy advice to governments as well as freely available original research. The Institute is funded through income from an endowment fund with additional contributions to its work programme from Finland, Sweden, and the United Kingdom as well as earmarked contributions for specific projects from a variety of donors.

This study has been prepared within the UNU-WIDER project on 'Natural resources, structural change, and industrial development in Africa' as part of a larger UNU-WIDER research project on 'Jobs, poverty, and structural change in Africa'; and also within the project on 'Inclusive growth in Mozambique-scaling up research and capacity', implemented in collaboration between UNU-WIDER, University of Copenhagen, University Eduardo Mondlane, and the Mozambican Ministry of Economics and Finance. The project is financed through specific programme contributions by the governments of Denmark, Finland, Norway, and Switzerland.

Mozambique has achieved incipient but still fragile socio-economic development since 1975. The public financial management system has been reformed and improved, but its performance has weakened since 2013. Applying an institutional economics approach, we have identified the economic growth strategy, the separation of powers principle, and the degree of decentralization as key factors affecting the public financial management system. As the current strategy based on natural resources seems to be failing, we suggest an alternative balanced growth strategy in the context of an effective democratic political system. It would entail the identification of policy priorities required for fostering sustainable and inclusive development.

Under the current international economic conditions, where Asian countries are strong competitors in the manufacturing commodities, low-income countries like Mozambique could attempt to compete in industries without smokestacks. Fruits and vegetables, agro-processing goods, and various tradable services are estimated to have contributed 1.9 per cent to annual average gross domestic product growth in 1993–2015, when the aggregate growth was 7.8 per cent. Around 80 per cent of the total labour force is dedicated to primary activities, producing 25 per cent of the aggregated value added in 2013–15. The share of services in total exports was only 17 per cent in 2012–14. Although still relatively small, these industries have potential for growth, if Mozambique follows a diversified growth strategy.

This study has been prepared within the UNU-WIDER project on 'Industries without smokestacks', which is part of a larger research project on 'Jobs, poverty and structural change in Africa'.