JOTTINGS FROM JOHANNESBURG
The cashew crisis
By Jabulani Sikhakhane
Three US economists recently published a paper in which they question the net benefits to Mozambique of the liberalisation of the cashew nut trade. They also point out that the World Bank followed textbook economic analysis in the case but paid little attention to the imperfections that existed within Mozambique's and in the world market for cashews.
They say that even under the most favourable assumptions, the magnitude of the benefits generated by removing restrictions on the cashew nut trade were small, both in economic terms and in relation to the amount of time and energy the Mozambique government spent on the matter.
Mozambique, which in the 1960s produced as much as half of the world's total cashew nuts, was the first African country to process them. After independence in 1975, the government banned exports of raw cashews to encourage domestic processing. The ban was lifted in 1991/92 and replaced with an export quota and tax.
In 1995 the World Bank prevailed on Mozambique to remove restrictions on the marketing and export of raw cashew nuts in order to qualify for $400 million loan assistance.
Margaret McMillan, of Tufts University in Cambridge, Massachusetts, Dani Rodrik of the John F Kennedy School of Government at Harvard University, and Karen Horn Welch of Harvard University say in a paper published in July that textbook economic analysis shows that a ban or tax on exports depresses the domestic price of raw cashews and effectively subsidises the domestic processors of raw cashews.
By removing such restrictions, the World Bank assumed, prices paid to the cashew farmers would increase and the Mozambique economy would benefit by shifting resources away from cashew nut processing towards raw cashew production.
The economists estimate that the efficiency gains from the removal of
restrictions on the export of raw cashew nuts could not have amounted to more than $6.6 million or 0.14 percent of the country's economic output (gross domestic product). Prices received by farmers also increased by an estimated $5.3 million.
"These are puny amounts for a policy that was a key plank in the World Bank's reform agenda, and that became a serious bone of contention between the Bank and Mozambique, requiring the personal attention of both of their presidents."
The Bank's textbook approach paid little attention to the wrinkles in the cashew nut market. Mozambique's marketing chain had several layers of intermediaries that separated cashew farmers from the export trade. This meant that increases in export prices benefited cashew traders much more than they did farmers.
Another problem was that the world market for raw cashew nuts was significantly less competitive than that for processed cashews. In effect, India was the only buyer of Mozambique's raw cashew nuts while there were several countries that were buyers of its processed cashews.
India accounts for 84 percent of all raw cashews bought between 1990 and 2000. It is also the world's biggest exporter of processed cashew nuts.
As the market for processed nuts is more competitive than that for raw cashews, moving from the export of processed to raw nuts meant a terms of trade loss for Mozambique.
It also paid dearly in terms of unemployment as many cashew nut processing factories had to shut down, and in some cases, whole towns with them.
The three economists also criticise the Mozambican government for its failure to communicate the cashew nut reform programme to farmers. The reform was viewed as something that the government did, not because it was a priority but because it was required to qualify for World Bank (and IMF) Sending. Not having ownership of the reform programme, the government did a poor job of selling it to the population.
On the economic side, the reforms took little note of important market imperfections such as the multi-layered marketing chain and the monopsony role (market situation in which there is a single buyer for all sellers) of India that reduced the benefits to cashew farmers.
The Mozambique case provides yet another example of the conflict between the World Bank and African economic reform over the past few decades. The sad truth is that while the Bank may have reformed its approach, many countries on the continent, including Mozambique, are still grappling with the fallout.
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