Structural adjustment, agricultural development and the poor : lessons from the Malawian experience

MADIA DISCUSSION PAPER 9 8324 AA LELE /_ MANAGING ______ AGRICULTURAL _____ DEVELOPMENT_____ IN _ _ _ _ _ _ _ AFRICA \\ _1/ II, ~~~  FOREWORD The MADIA study and the papers comprising this MADIA Discussion Paper Series are important both for their content and the process of diagnosis and analysis that was used in the conduct of the study. The MADIA research project has been consultative, nonideological, and based on the collection and analysis of a substantial amount of concrete information on specific topics to draw policy lessons; it represents a unique blend of country-oriented analysis with a cross-country perspective. The conclusions of the studies emphasize the fundamental importance of a sound macroeconomic environment for ensuring the broad-based development of agriculture, and at the same time stress the need for achieving several difficult balances: among macroeconomic, sectoral, and location-specific factors that determine the growth of agricultural output; between the development of food and export crops; and between the immediate impact and long-run development of human and institutional capital. The papers also highlight the complementarity of and the need to maintain a balance between the private and public sectors; and further the need to recognize that both price and nonprice incentives are critical to achieving sustainable growth in output. The findings of the MADIA study presented in the papers were discussed at a symposium of senior African and donor policymakers and analysts funded by USAID in June 1989 at Annapolis, Maryland. The participants recommended that donors and African governments should move expeditiously to implement many of the study's valuable lessons. The symposium also concluded that the process used in carrying out the MADIA study must continue if a stronger, more effective consensus among donors and governments is to be achieved on the ways to proceed in resuming broad-based growth in African agriculture. The World Bank is committed to assisting African countries in developing long-term strategies of agricultural development and in translating the MADIA findings into the Bank's operational programs. Stanley Fischer Edward V K. Jaycox Vice President Development Economics Vice President and Chief Economist Africa Regional Office :'~~  IMADIA DISCUSSION PAPER 9 STRUCTURAL ADJUSTMENT, AGRICULTURAL DEVELOPMENT AND THE POOR LESSONS FROM THE MALAWIAN EXPERIENCE UMA LELE THE WORLD BANK__ _____- WASHINGTON, D.C. _ _  Copyright $ 1989 All rights reserved The International Bank for Reconstruction Manufactured in the United States of America and Development/THE WORLD BANK First printing November 1989 1818 H Street, NW. Washington, D.C. 20433, U.S.A. MAD!A Discussion Papers are circulated to encourage discussion and ment, at the address shown in the copyright notice above The World Bank commen- and to communicate the results of the Bank's work quickly to the encourages dissemination of its work and will normally give permissior development community, citation and the use of these papers should take promptly ard. when the reproduction is for noncommercial purposes, 'Ath- account of their provisional character. 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Department F The its Board of Executive Directors or the countries they represent. World Bank. 1818 H Street, N.W, Washington. D.C. 20433. U.S A.. or from The material in this publication is copyrighted. Requests for permission Publications. The World Bank, 66, avenue d lena, 7 51 16 Paris France. to reproduce portions of it should be sent to Director, Publications Depart- Uma Lele is the manager of Agricultural Policy in the Africa Technical Department at the World Bank. Library of Congress Cataloging-in-Publication Data Lele, Uma Structural adjustment, agricultural development, and the poor: lessons from the Malawian experience / Uma Lele. (MADIA discussion paper; 9) Includes bibliographical references. 1. Agriculture-Economic aspects-Malawi. 2. Malawi-Economic policy. 3. Poor-Malawi I. Title. II. Series. HD2133.5.L44 1989 338.1'096897 89-22766 ISBN 0-8213-1325-8  Contents Introduction ............................. 4 Evolving Dualism. 6 Estates and Smallholders. 6 Structure of the Smallholder Sector. 6 External Shocks and Structural Adjustments. 7 External Shocks .........7 . Nature of the Structural Adjustment Effort .7 Macroeconomic Impact of Initial Adjustment Efforts and Subsequent Shocks. 8 Impact of Structural Adjustment on Smal1holder Sector. 9 Subsistence Production, Food Security, and Risk Aversion. 9 Producer Pricing Adjustments. 9 Grain Marketing Liberalization and Role of ADMARC Buffer Stocks . 10 Fertilizer Policies .11 Subsidy Removal under Structural Adjustment .I Consequences of Dualism for Fertilizer Use. 11 Price and Nonprice Factors .12 Subsidy Options .13 Role of National Rural Development Program .13 Complementary Policies and Recurrent Expenditures .14 Domestic Policies .15 Strategies for Increasing Production .15 Land and Taxation Policies .15 Summary and Conclusion .16 Notes ....... 17 Bibliography .19 Acknowledgments The author is grateful for the helpful comments of a large number of colleagues inside and outside the World Bank and of officials in the Malawian government. In particular she wishes to thank Messrs. Stephen O'Brien, Bela Balassa, Stephen Carr, Robert Christiansen, Richard Clough, Michael Collinson, Peter Hall, Fred King, Michael Lipton, J. S. Magombo, M. L. Muwila and Roy Southworth for their valuable comments on previous drafts. Thanks also go to Peter Bocock and Suzanne Wood for editing the present draft and Steven Stone and Ann Mitchell for excellent research work. The views expressed in this paper do not necessarily represent those of the World Bank or any other agencies collaborating in the MADIA study.  Introduction This article examines the complex problems faced by an cultivate less than I hectare-and therefore rely substan- economically well-managed but small, poor, and landlocked tially on wage employment for income and on the market country-Malawi-in trying to achieve equitable growth for food. while coping with formidable external shocks. It argues that This dualism-within-dualism has had major conse- agricultural and rural sectoral policies will be crucial in quences for the process of structural adjustment, which determining Malawi's future growth, and explains the initially did not take it adequately into account, especially reasons why. the ability of the smallholder sector with its widespread Relative to its neighbors, Malawi adjusted well to adverse poverty to respond to or withstand the effects of macroeco- external shocks in the 1970s.' Since the second oil shock in nomic adjustment. As the folldwing discussion will show, 1979, however, it has faced numerous other external structural adjustment has addressed restoration of macro- problems-including a drought, a major decline in external economic balance, but it has not been able to improve terms of trade, higher interest rates on externally borrowed aggregate supply response; furthermore, because of higher capital, a sharp increase in external transport costs, and a food and fertilizer prices, it has had an adverse impact substantial influx of refugees (the latter two resulting from upon the poor. political strife in neighboring Mozambique). These factors This article will argue that the lack of supply response is have in turn contributed to structural imbalances, leading rooted in the historically precarious economic situation of the government to seek to restore macroeconomic balance the majority of Malawi's smaliholders, and that the adverse through one of the most ambitious programs of structural impact of higher food and fertilizer prices serves to adjustment in Africa. The adjustment process, however, has exacerbate this precariousness and further inhibit ecc- been complicated by the dualism of Malawi's agricultural nomic growth. On this view, in a country like Malawi where sector.2 a large proportion of the population lives in poverty, it is Partly because of conditions inherited at independence,' not possible to generate sustained, overall growth by and partly because of policy choices made in the 1970s, pursuing short-term opportunities that penalize the poor or Malawi's agricultural sector divides into a rapidly growing exclude them because of their inability to participate. On estate sector accounting for 95 percent of the country's the contrary, in a two-sector model of economic develop- exports,4 and a smallholder sector living for the most part ment, Lele and Mellor I 1981 ) have demonstrated that the in extreme poverty, experiencing sharply increasing land way in which the benefits of agricultural growth are pressure, and overwhelmingly dependent on agriculture for distributed toward low-income producers has a profound employment.5 The smaliholder sector itself divides into two effect on the overall structure of demand, and, through the parts: whereas (1) nearly 45 percent of smallholder house- latter's effect on growth linkages, on the development of holds have enough land-I hectare or more-for either the rest of the economy. Translated into terms of growth actual or potential self-sufficiency or surplus production for and equity, this model supports the view that these goals the market, (2) over 55 percent do not have enough land- do not stand in mutual conflict. Rather, they are congruent 4  in the long run: a strategy for long-term, sustained growth enough to provide employment and satisfactory income must necessarily also be a strategy for broad-based, growth for all of Malawi's rapidly growing smallholder equitable growth. population.6 Whereas this article focuses on the agricultural Devising such a strategy is the key to meeting the aspects of rural growth and income, development of challenge facing Malawi's government and its donor sup- nonfarm income-generating activities through growth in porters: how to improve economic conditions among the other sectors of the economy will be of paramount impor- bulk of the very poor rural households, while also resuming tance in relieving poverty among Malawi's smaliholders. the high overall growth rates achieved before the onslaught The detailed discussion of the encounter between of external shocks that began in 1979. Structural adjustment, structural adjustment and Malawi's agricultural sector and however, appears to militate against the goals of growth the need for complementary policies explains and des- and equity in the case of Malawi, insofar as it has been cribes the dualism within the agricultural sector. The next neither sufficient for resuscitating growth nor, in its pure section recounts the external shocks that impinged upon form, able to avoid adversely affecting the poor. On the Malawi's economy beginning in 1979, and the structural other hand, it is necessary for macroeconomic health. This adjustments instituted to restore macroeconomic balance article will therefore propose that, unless the goal of long- in their wake. Then the paper examines the effect on the term, equitable growth is to be abandoned, or unless smallholder sector of structural adjustment measures most macroeconomic soundness is to be jeopardized, additional immediately relevant to agricultural and rural development: measures must be joined to the structural adjustment producer pricing adjustments, fertilizer policies, grain process to promote overall growth in production and, what marketing liberalization, and withdrawal of donor support is inseparably connected to it, protect and promote from the National Rural Development Program. The need consumption and production levels among the poor. To this for complementary policies to offset the adverse impact of end, a wide range of what can be called "complementary" structural adjustment and foster equitable growth through- agricultural and rural sector policies need to be imple- out the smallholder sector, with an emphasis on programs mented on a coherent basis. Some of these policies affect requiring recurrent expenditures is addressed. Next is a donor assistance strategies and the speed with which discussion of policies directly addressing Malawi's dualism, structural adjustment reforms can be accomplished; others including licensing, pricing, land, and taxation policies, involve internal, domestic reforms directly aimed at mitigat- which the government would need to adopt in support of ing the sharply (and doubly) dualistic structure of Malawi's equitable growth. Finally, the paper summarizes the agricultural sector. Together, and in phased conjunction with encounter between structural adjustment and Malawi's the ongoing structural adjustment process, these policies dualism and the argument that complementary policies are constitute a strategy for long-term, broad-based growth. needed for promoting equitable growth. Pursuit of such a strategy, however, must also include the recognition that agricultural production cannot grow fast 5  Evolving Dualism Estates and Smaliholders reported to be cultivated'"-and population growth in The government's pursuit of an estate strategy to achieve customary areas has resulted in a rapid decline in the rapid growth in the 1970s can be explained by Malawi's average size of holdings and area cultivated." By the year extremely low income levels, and the need to achieve fiscal 2000, per capita land availability is expected to fall to 0.26 self-reliance and export growth relatively quickly. This hectare nationally, and in the Southern region, where over policy has had consequences for the contemporary dilem- 50 percent of Malawi's population lives, to a minuscule 0.18 mas of growth and equity. hectare." These various factors explain the increased Malawi's estate-based agricultural sector evolved from a dependence of smallholder households on the market for combination of factors. These included the need to reduce wage employment and food purchases, the declining soil the economy's dependence on British grants in aid,7 fertility, and the drop in the real wages of unskilled labor; Rhodesia's Unilateral Declaration of Independence in the they also point to the pressing need not only for agricultural mid-1960s (which created a major opportunity for increasing intensification, but also for creating nonfarm sources of Malawi's tobacco exports), the government's objective of income for a smallholder population outrunning the ability creating a landed middle class, and finally its skepticism of agriculture to support it even with intensification. about the ability of the smallholder sector to respond c quickly and reliably to economic opportunities.8 Structure of the Smalholder Sector To establish estates, private individuals have been issued Malawi has about 1.3 million smallholder households, leases and then granted licenses to grow burley and flue- comprising about 90 percent of the total population. cured tobacco and to sell their products in domestic Roughly 85 percent of these households grow maize for auctions (and internationally) at market prices offered by their own consumption, although the majority are not self- private buyers.9 Smallholders, on the other hand, have not sufficient. As discussed earlier, somewhat over half of the been allowed to grow either burley or flue-cured tobacco smallholders cultivate less than I hectare. Only a third of (except as tenants of estates), and must sell the varieties the income of these farmers comes from cropping, with the they grow (dark-fired, sun-cured, and air-cured) to Malawi's remainder earned by selling their own labor. This group of marketing board, ADMARC, at fixed prices. (For perspective, smallholders is thus nearly landless and depends on the it must be understood that only about 20 percent of the market for food. As food-deficit, low-income households, smallholder sector produces a marketable surplus of crops.) they spend between 44 and 48 percent of their household Unlike most other African countries, Malawi has not taxed cash income on food, compared to 25 percent for the its agriculture through an overvalued exchange rate; on the population as a whole. The better-off smallholders with other hand, smallholders have tended to receive a relatively larger land holdings are generally self-sufficient.16 small proportion of the revenues obtained by ADMARC Of the smallholder sector taken as a whole, only about 20 from the final sales of their output, resulting in a tax on percent-those with the largest holdings-have access to smallholders of upwards of 50 percent, whereas the estate credit and produce a marketable surplus. Only an esti- sector has remained largely untaxed. mated 25-30 percent-again, for the most part those with The differential rights to grow and sell export crops have the largest holdings-have access to and use any fertil- had a powerful adverse impact on smaliholder agricultural izer.'7 In view of Malawi's growing internal demand for food growth. Despite substantial investments in the smaliholder and need for agricultural intensification, this fact assumes sector by donors and the government, and despite Malawi's critical importance, especially when it is understood that relatively superior record in the implementation of rural although the smaliholders cultivating less than I hectare development projects, marketed output of most small- have almost no access to fertilizer, their collective holdings holder crops, with the exception of maize, has stagnated or account for 25 percent of the total land area under fallen.'0 As aggregate subsistence requirements have risen cultivation.'8 These factors place severe restrictions on the with population growth, and with increased land pressure, smallholder group as a whole in responding to economic the area under smaliholder maize has expanded. The incentives to increase production, and effectively exclude growth in maize output, however, has been well below the the food-deficit, low-income majority from responding. growth in population; thus per capita maize production has The estate strategy of the 1970s thus fostered a sharply in all likelihood declined." I divided agricultural sector, with a prospering estate sector The greater return accruing to estate operators has also given preference in the production and sale of major export led to increased demand for establishing tobacco lespe- crops, and a stagnating smaliholder sector producing mostly cially burley) estates, and a higher incidence of tenancy. subsistence maize. The strategy succeeded, however, in Although the average size of estates has declined over spurring a rapid increase in exports and strengthening time, their numbers and share of total arable land have Malawi's macroeconomic performance. But in 1979, a series increased while customary land area for smallholder of overwhelming external shocks began, starting with the cultivation has declined.'2 A substantial portion of the second oil price increase; within two years, an era of estate land remains underutilized-only 6 to 8 percent is structural adjustment had also begun. 6  External Shocks and Structural Adjustment External Shocks Nature of the Structural Adjustment Effort The second oil price increase in 1979 was followed by a fall To address Malawi's macroeconomic problems the World in the price of tobacco (Malawi's major source of export Bank, together with other donors,20 financed three structural earnings) and a drought (which required food imports), adjustment loans (SALsi totaling $224 million since 1981.21 resulting in an increase in the current account deficit and The conditions attached to the loans were designed to the debt service ratio (see Table 1). The war in Mozam- improve the balance of payments, cut the budget deficit, bique raised Malawi's external transportation costs by $50 and give market mechanisms greater influence in determin- million-clc,se to 20 percent of the value of exports and 3 ing prices, wages, resource allocation, and the structure of percent of GDP by 1984-and produced an influx of production.22 In particular, they involved raising producer refugees that by mid-1988 was estimated to be 450,000 to prices for smaliholders, eliminating consumer price subsi- 500,000, or approximately 6 percent of the population.'9 dies, an ill-fated effort to eliminate the fertilizer subsidy, More generally, the decline in Malawi's dollar-adjusted exchange and interest rate adjustments, higher fees for international terms of trade from a base of 100 in 1980 to a public utilities and services, cuts in public expenditures mere 28 in 1987 has required it to produce ever larger (together with intersectoral shifts in public investment away volumes of exports to maintain its real income. Finally, from transport and government buildings, and toward whereas the rapidly expanding estate sector had been the agriculture, health, education, and housing), and, within source of Malawi's impressive macroeconomic performance agriculture, a shift away from the National Rural Develop- in the 1970s, the collapse of world prices of flue-cured ment Program (NRDPI, toward agricultural research and tobacco in 1980 led to growing bankruptcies of tobacco extension. Programs for restructuring and improving the estates. management (and in some cases redefining the objectives) of parastatals included liberalization of the grain market and divestiture of public holding companies owned and operated by Malawi's elite. Table 1 Macroeconomic indicators: Real GDP growth, deficits, and debt management, 1978-1988 (in million Kwacha) Item 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988e GDP Currenti Prices 853.4 873.1 937.5 1103.8 1242.4 1434.9 1706.9 2021.7 2301.5 2871.1 3484.3 GDP 1978 Market Prices 853.4 850.1 835.7 792.3 813.0 843.9 890.1 930.0 940.6 935.9 954.2 Real Growth in GDP (?'/ Annual Increase) na -0.4% -1.7% -5.2% 2.6% 3.8% 5.5% 4.5% 1.1% -0.5% 2.0% Budgetary Deficita 73.4 84.2 116.1 129.6 114.3 112.3 109.4 122.2 252.7 213.9 158.1 (%of GDP) 8.6% 9.6% 12.4% 11.7% 9.2% 7.8% 6.4% 6.0% 11.0% 7.5% 4.5% Current Account Deficit 105.7 167.6 142.3 139.1 113.9 178.5 191.7 167.9 139.4 149.2 200.7 (% of GDP) 12.4% 19.2% 15.2% 12.6% 9.2% 12.4% 11.2% 8.3% 6.1% 5.2% 5.8% Total External Debtb 195.1 274.0 366.7 426.9 630.0 798.7 915.3 na na na na (% of GDP) 22.9% 31.4% 39.10% 38,7% 50.7% 55.7% 53.6% Debt Paymentsc 18.5 32.9 47.1 88.0 39.8 87.6 118.0 155.6 214.6 213.6 na (% of GDP) 2.2% 3.8% 5.0% 8.0% 3.2% 6.1% 6.9% 7.7% 9.3% 7.4% Debt Service Ratio 9.9% 15.1% 17.0% 22.0% 16.0% 15.0% 18.0% 24.0% 43.0% 32.0% na Exchange Rated (Kwacha per Dollarl 0.84 0.82 0.81 0.89 1.06 1.17 1.41 1.72 1.86 2.21 2.53 Use of IMF Creditf 5.53 26.94 47.89 75.28 73.58 97.52 114.92 121.94 101.35 77.74 74.96 (Net Flow, million SDR) -3.63 21.41 20.95 27.39 -1.7 23.94 17.4 7.02 -20.59 -23.61 -2.78 Source: Government of Malawi, Economic Reports, except where indicated in notes. Notes: a Includes revenue, grants, recurrent and development expenditure, and extra-budgetary items. From IMF (1987). Includes payment on principal and interest for all internal and external debt. Includes debt relief measures, e.g. in 1982, from K59.8 million to K39.8 million. d Market Rate (period average) from IMF (1987). Most recent estimate. For IMF data, Febuary 1988: for Government of Malawi data from 1988 edition. Net inflow of IMF funds (negative sign indicates outflow) from IMF (1987). 7  Macroeconomic Impact of Initial Figure 2 Adjustment Efforts and Subsequent Smaliholder production of major crops, 1982/83-1987/88 Shocks Million metric tons Smaliholder production index As a result of the policies adopted by the government and V3 j the loans provided by donors, Malawi's current account -4