Interplay of adjustment and investment operations : agriculture in Madagascar

NUMBER 64 *Precis Operations Evaluation Department May 1994 Interplay of Adjustment and Investment Operations: Agriculture in Madagascar During the 1980s the success of to increase cash crop production had few technical risks, were sup- adjustment operations supporting in- for export-the government ported by bilateral and multilat- stitutional changes and policy reforms adopted a strategy designed to: eral assistance, and were to be in Madagascar had adverse effects on implemented by well-established, ongoing investment projects in agri- ensure adequate producer efficient parastatals. Each of the culture. Policy-based lending opera- prices and incentives; projects supported important sec- tions changed the prices, marketing tor policy reforms and each was and institutional arrangements, and improve rural infrastructure, designed as a vehicle for innova- financial flows on which the projects particularly access and feeder tive institutional changes. depended, with severe consequences roads; for operational performance and flows The institutional changes in- of benefits. The failure of these invest- reduce state marketing ventures cluded: ment projects, much more apparent and support private enterprises; now than at the time they were com- * Reinforcing the financial au- pleted, illustrates the need for close disengage government from tonomy and efficiency of the coordination and coherence between unprofitable and redundant parastatal executing agencies, adjustment and investment opera- parastatals while reorganizing and through a combination of com- tions supported by the Bank.* strengthening some of the govern- mercial activities, cost recovery, ment agencies; and government subsidies. The Madagascar, with a population agencies were to be restructured of 12.5 million and annual per improve agricultural services to capita income of $230, is one of the farmers. poorest countries in the world. In the late 1970s and early 1980s, the Other goals were to expand basic Performance Audit Reports, country's agricultural sector con- agro-industries to process local "Madagascar, Agricultural tracted while the population con- raw materials, and to increase ru- Sector Adjustment Credit", tinued growing. Madagascar had ral employment. Report No. 12544, November been a net exporter of rice in the 1993 and "Madagascar, Aangoky 1960s, but became a net importer Investment projects Agricultural Development in 1980. Important reasons were Project, Lac Alaotra Rice Intensi- the low financial priority of agri- To support this strategy, IDA fication Project, Cotton Develop, culture in the government budget, approved four investment projects ment Project, Second Mangoro controls that stifled economic ac- in quick succession in 1979-83 (see Forestry Project", Report N tivity, and inefficiency and poor Box 12646, December 1993. OEDr- management in agricultural public ports are available to Bank E institutions. When the projects were identi- tioe Directors and stam the fied and appraised, all four IInternal Documents Unit and.4 - In an attempt to restore the pro- seemed to have a good chance of fron Regional information duction of key crops-both to pro- success: they all built on earlier 'c n mote self-sufficiency in food and successful projects, apparentlyo *Strengthening agricultural re- Investment Projects search and extension through technical assistance, equipment, Mangoky Agricultural Development nals have silted up and water is and funding. (total cost $29 million) supported ir- scarce at the field level. In the two rigation for cotton and rice grown by years following project completion, All four projects achieved some settlers. It provided for land clearing the project-irrigated area shrank by success in institution building and and levelling; irrigation, drainage, about 20 percent and crop yields fell policy dialogue. The restructuring and roads: construction of -chools far below the estimates made at of the parastatals began well; their for children of the 3,200 migrant project completion. functions were trimmed, redun- families; provision of farm inputs; dant personnel laid off, and per- and applied research. Soil salinity The Cotton Development Project formance indicators clearly de- and drainage problems resulted in (total cost $34 million) was designe fined. Profits from input supply lower yields than anticipated, farm- to increase cotton production and rice marketin allowed the ers' failure to pa% their service through a combination of area ex- g charges. and subsequent financial pansion, increases in yields, and difficulties for SANIANGOKY, the producer price policy. The project cover a significant part of its oper- project authority. When the credit supported a major restructuring of ating costs. Establishing efficient closed, only 60 percent of the project HASYMA, the national cotton com- farmers' organizations was the area was full% equipped. pany. The project was implemented most successful institutional as planned, except for its rural roads achievement of both the Lac SAMANGOK1 %as de 'iclo abol- component. Research and training Alaotra and Cotton projects. ished in 1991. Lack of maintenance activities were successfully com- has resulted in the siltation of the pleted. Under the project, HASYMA Research and extension resulted main canals: water availability has was to lose its monopoly and open in the successful introduction of been reduced, and irrigable area and processing and marketing activities two high-yielding varieties of ields ha% e considerably declined. to the private sector. Most growers paddy. continued to rely on HASYMA for Lac Alatra Rice lonen -yicat ion (to- the import and supply of inputs. Adjustment operations tal cost $38 million) rehabilitated an irrigation system benefiting about Second Mangoro Forestry (total 35,000 families. Water users' associa- cost $30 million) supported the con- Wle the rjc t r i tions and other forms or tarmer or- tinuation of a large planting pro- ganization were successfull% estab- gram started in the late 1970s for cess gained momentum in lished. The project helped improve producing woodpulp. The project Madagascar and the government the efficiency and financial au- provided for maintenance of pine moved to a broader agenda of tonomy of SOMALAC. its executing and eucalyptus plantations, new policy reforms. These reforms agency, until changes in government plantings of pine, construction of were supported by the Bank policy removed the latter's market- roads and villages, research, and through a series of structural and ing monopoly. marketing studies. Planting went sectoral adjustment operations ap- well until an economic and market- proved in 1982-88 and totaling SOMALAC was abolished in ing study concluded that sawn- some $250 million. January 1991 betore full completion wood would be a better alternative of civil works; its equipment was than woodpulp. Project components Four structural and sectoral ad- sold and its personnel laid off. The and scope were changed accord- irrigation sN stem has not been main- ingly; implementation took twice tained; thesmain and econdary ca- the time originally planned. policy reforms (see Box). Agricultural sector adjustment credit and strengthened through injection gradually take over the running The second of these, the Agri- of government funds or capital in- and maintenance of the irrigation cultural Sector Adjustment Credit creases, and training for staff. The systems. They were to obtain and (CASA, approved 1986), sup- two irrigation agencies were to be- guarantee agricultural credit for ported several sector policy come financially autonomous their members, and organize seed changes. Its main goal was to lib- through exploiting their marketing cotton collection, packing, and eralize rice marketing, to encour- monopoly and recovering their loading at the village level, age the growth of supply and re- costs. duce the need for imports. Other spIntroducing producer price set- changes supported were: HReducing somewhat the ting and cost recovery mecha- government's role in agriculture. nisms. Adequate producer prices Gradual elimination of subsi- Farmers' associations were to were to be set for rice and cotton. dies on agricultural inputs, and May a1994 transfer of responsibility for input supply to the private sector. Adjustment Operations * Better pricing and marketing Industrial Assistance (IDA $20 mi- Facility for Africa $67 million) sup- systems for export and industrial lion, Special Facility for Africa $40 ported liberalization of the trade crops. million) supported policy changes to and exchange rate regimes, import increase efficicncy and productivity tariff reform, price decontrol, fur- * Improvements in public invest- in industry: import liberalization, ther rationalization of the public ments in agriculture. export promotion, reform of the investment program, restructuring public investment program (PIP), and privatization of public enter- CASA achieved its main goal of and encouragement of the private prises, and reforms in the banking rice liberalization. This resulted in sector. The operation was designed system. free trading, more efficient mar-pave the way for a more compre- kets, tradingorefent mar- hensive reform process, supported The core objective of increasing ket, lwergovrnentsubidis, by the sectoral adjustment opera- the efficiency of industry via trade higher producer prices, a produc- tions that followed, policy reforms was substantially tion increase, drastic reduction in achieved. Public enterprise reforms rice imports, highly competitive The quality of the PIP was en- were less successful, partly for lack market situations, and rapid ex- hanced, an investment code was of a clear shared view of the proper pansion of private mills. prepared to encourage private sec- role of the state and of public en- tor development, some import pro- terprises in the economy. Other components were less hibitions were removed and re- successful. In coffee, improvement placed by tariffs, and a few export- Public Sector Adjustment Credit of the pricing and marketing sys- promoting measures were imple- (IDA commitment $125 million), tem for export did not evoke a mented. But substantial distortions now being implemented, is de- production increase because of the remained in the trade regime. signed to promote growth with in- dilapidated state of rural roads creased social equity via measures and the collapse of international Agricultural Sector Adjustment to accelerate the supply response coffee(IDA $20 million, Special Facility for to the new market-oriented incen- cofee rics.Africa $33 million) was designed to tive structure. It is designed to liberalize the rice market, rationalize build on the earlier adjustment op- The government started disen- the public investment program in erations by strengthening the pub- gaging from the direct distribution agriculture, provide better incen- lic expenditure budgeting and allo- of fertilizers and other inputs, but tives,to farmers, and formulate strat- cation process, rationalizing the a program to promote private sec- egies for the next phase of adjust- parastatal sector, liberalizing bank- tor participation was not pre- ment. Rice liberalization was suc- ing, removing the remaining ad- pared. The result was an abun- cessful; other objectives, less so. ministrative restrictions on exter- dance of private traders and in- nal trade and finance (notably on puts at the village level, but also Industry and Trade Policy Adjust- coffee exports), and addressing the severe product falsification. ment Credit (IDA $16 million, Special social aspects of adjustment. Policy advice on the content of the public investment program down CASA's disbursements and depended. The overall perfor- had little impact; the seven led to a two-year delay in releas- mance of the projects seriously de- projects which the Bank advised ing the second tranche. dined-to the extent that stopping against were eventually funded by the decline is now an urgent ne- other agencies. Interplay of adjustment and cessity for the government. investment operations Contradictions between succes- At completion, one of the four sive adjustment operations be- The adjustment operations pro- projects (Lac Alaotra) had been came evident: the major devalua- moting institutional changes and judged satisfactory, two unsatis- tion of 1987 concurrent with the policy reforms had adverse effects factory, and one uncertain. Industry and Trade Policy Adjust- on the four agricultural invest- But a few years later (1993), the ment Credit (CASPIC) sharply re- ment projects. The institution audit concluded that none of the duced farmers' demand for fertil- building goals of these projects be- four had sustained its benefits. izers imported under CASA. came obsolete when the policy- CASPIC also introduced a non- based lending operations started An important reason was the discretionary licensing procedure changing the fundamentals- political unrest in 1991-92, which for allocation of foreign exchange price, marketing and trade policy, resulted in criminal fires in the alongside CASA's more cumber- institutional arrangements, finan- forestry project, theft of crops in some procedure. This slowed cial flows-on which the projects the cotton project, and vandalism OED Pr&cis of civil works in the irrigation and farmer organizations have not place to ensure a smooth transition schemes. survived the withdrawal of sup- toward new public or private insti- port from project agencies. With tutional arrangements. But another reason was the det- the departure of agency personnel, rimental effects on the projects of the effects of training have been Coordination and consistency the policy changes promoted by dissipated, and research and ex- within adjustment programs: In a the adjustment operations-in tension activities have stopped. large policy-based lending pro- particular, the abolition of the gram, contradictions, competition, marketing monopoly on which in- Lessons, recommendations and conflicting objectives may eas- vestment projects depended, and ily arise among adjustment opera- the untimely liquidation of the Careful coordination between in- tions. Ideally, the government and two irrigation agencies: vestment and adjustment operations: the Bank should agree beforehand In preparing adjustment opera- on a basic framework for adjust- * Liberalization of rice marketing, tions there is a need to analyze the ment, carefully identifying and se- supported by CASA, ruined the possible impact of the proposed quencing the intended policy two irrigation project agencies economic and institutional adjust- changes. whose financial autonomy de- ments on ongoing investment pended on monopoly rents in rice projects. If these adjustment op- Interagency cooperation: Coopera- marketing. erations are expected to affect the tion is needed on policy reforms fundamentals-price, marketing among the government, the Bank, * Government divestiture and liqui- and trade policy, institutional ar- and other assistance agencies. dation or privatization of rangements, financial flows-on While cooperation with bilateral as- parastatals were important ele- which investment projects de- sistance was excellent during the ments of the Bank-supported pend, explicit consideration first implementation years of the structural adjustment process. But should be given to concurrently four investment projects, different the hasty, unilateral, and untimely revising the scope or design of the views emerged in the late 1980s on dismantling of the irrigation agen- investment operations that will be adjustment policies and priorities, cies was disastrous for the affected. resulting in the government, the projects. In both Lac Alaotra and Bank, and donors losing interest in Mangoky, operation and mainte- No abolition without transition ar- the investment projects. Poor dia- nance of irrigation facilities was rangements: Before planning to logue among bilateral and multilat- not taken up by other agencies, abolish a government agency, the eral agencies did not reconcile di- public or private. Water distribu- possible effects of abolition need vergent opinions and attitudes re- tion has become chaotic, water to be carefully assessed. Before garding Madagascar's public in- charges are no longer collected, abolition, measures need to be in vestment program in agriculture. OED Precis is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. Please address comments or enquiries to the managing editor, Rachel Weaving, G-7137, World Bank, telephone 473-1719. May 1994