When Economic Reform Goes Wrong: Cashew in Mozambique

Abstract

Brookings Trade Forum 2003 (2003) 97-151 [Access article in PDF] When Economic Reform Goes Wrong: Cashew in Mozambique Margaret Mcmillan Tufts University Karen Horn Welch Stanford University Dani Rodrik Harvard University [Comments and Discussion] In a case that has become a cause célèbre for the antiglobalization movement, the World Bank prevailed on Mozambique's government in the early 1990s to liberalize the cashew sector and remove restrictions on exports of raw cashews. The World Bank hoped that resources would be allocated more efficiently and cashew farmers' incomes would be boosted. The policy was met with fierce opposition from the domestic cashew-processing industry, which ironically had just been privatized. After a decade of political strife, international controversy, and ongoing (if hesitant) reform, the consequences remain hotly contested. Each side in the debate has its favorite statistics. The World Bank points to the rise in farmgate prices, while opponents point to the processing plants in urban areas that have been shut down and thousands of workers that remain unemployed. Historically the cashew sector has been a significant part of Mozambique's economy, providing income to several million individuals across the country. In the 1960s Mozambique produced as much as half of the world's total. The sector went into a long decline thereafter, as a combination of adverse policies and civil war (1982-92) halted new tree plantings. Following [End Page 97] independence in 1975, the government banned the export of raw cashew nuts to stimulate domestic processing. Mozambique became the first African country to process cashews on a large scale. By 1980 the country had fourteen processing factories. Following World Bank advice, the government began to loosen restrictions on raw cashew production in the late 1980s. The ban on exporting raw cashews was lifted in 1991-92 and replaced with an export quota and export tax. 1 The quota was subsequently removed, and the export tax on raw nuts came down from 60 percent in 1991-92 to 14 percent in 1998-99. From the vantage point of textbook economics, the analysis of the export restriction and its removal is a straightforward exercise. A ban (or tax) on exports depresses the domestic price of raw cashews, effectively subsidizing the domestic processors for whom raw cashews are the chief input. The policy results in an inefficient allocation of resources. Raw cashew production is discouraged, and labor and capital are pulled into cashew processing where, absent externalities, their social value marginal product is lower than in other activities. The relaxation of the restrictions is therefore expected to create a double benefit. The first benefit is an efficiency gain, arising from the reversal of the adverse resource pulls mentioned above, and the second is a distributional gain, resulting from the rise in farmgate prices for the poorest households in Mozambique. This is the sort of analysis that underlies, for example, Paul Krugman's April 19, 2000, New York Times column on the subject, which took the anti-World Bank crowd to task for overlooking the pro-poor bias of the export liberalization. We show that many of the textbook implications of export liberalization were indeed realized. Farmgate prices rose, raw cashew exports increased, and resources were pulled out of cashew processing. However, even under the most favorable assumptions, the magnitude of the benefits generated by these effects were quite small, both in economic terms and in relation to the amount of time and energy that Mozambique's government spent on this question over the years. We estimate that the efficiency gains generated by the removal of the export restrictions could not have amounted to more than $6.5 million annually, or about 0.14 percent of Mozambique's GDP. The additional income accruing to the farmers was probably no greater than $5.13 million, or $5.13 a year for the average cashew-growing household. These [End Page 98] are puny amounts for a policy that was a key plank in the World Bank's reform agenda and became a serious bone of contention between the bank and Mozambique...