Mozambique - Agricultural sector memorandum (Vol. 2 of 2) : Main Report

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16529 MOZ MOZAMBIQUE AGRICULTTRAL SECTOR MEMORANDUM VOLUME II: MAIN REPORT April 30, 1997 5Z C Africa Region Agriculture and Environment K ;  CURRENCY EQUIVALENTS Currency Unit = Metical (Mt) US$1.00 = Mtl 1,378.00 in February 1997 FISCAL YEAR April I - March 31 WEIGHTS AND MEASURES Metric System Vice President: Mr. Callisto E. Madavo, AFR Country Director: Ms. Phyllis Pomerantz, AFCO2 Technical Manager: Ms. Sushma Ganguly, AFTA I Task Team Leader: Mr. Peter G. Moll, AFTAI ii  ACRONYMS AGRICOM - Agricultural Marketing IAM - Instituto do Algodao de Enterprise Mo9ambique (Cotton Institute of ARA - Regional Water Board Mozambique) CDA - Center for Agricultural ICM - Instituto de Cereais de Mo,ambique Documentation (Cereals Institute of Mozambique) CFA - Agricultural Training Center IDA - International Development CGIP - General Coordinator for Integrated Association Projects INDER - Rural Development Institute CITES -Convention on International Trade INIA -National Agricultural Research in Endangered Species Institute CNP - National Planning Commission INIVE - National Veterinary Institute CPFA - Provincial Center for Agricultural IPA - Animal Production Institute Training IPP - Import Parity Price DINAGECA - National Directorate for ISNAR - International Service for National Geography and Cadastre Agricultural Research DINAP - National Directorate for Livestock JC - Joint Venture Company DINAP- National Directorate for Rural MOA - Ministry of Agriculture (and Development Fisheries) DPA - Provincial Department of MOF - Ministry of Finance Agriculture Mt - Metical DPCCN - Departamento de Preven,cao e MT - metric ton Combate as Calamidades Naturais NCP - National Commission on Price and (Department of Prevention of and Wages Combat against Natural Disasters) NGO - Non-governmental agencies DRC - Domestic Resource Cost Coefficient NEPC- Net Effective Protection Coefficient EFA - Education for All NNPC - Net Nominal Protection EPC - Effective Protection Coefficient Coefficient ESRP - Economic and Social Rehabilitation NPC -Nominal Protection Coefficient Program PDP - Priority Districts Program EWS - Early Warning System PESU - Emergency Seeds and Tools FFADR - Fund for Rural and Agricultural Program Development PTIP -Triennial Program of Public FFDHA - Fund for Irrigation Development Investment FRELIMO - Frente para a Liberta,ao do PUPI - Small Unit for Intensive Production Mozambique (Mozambique Liberation PRE - Economic Rehabilitation Program Front) RENAMO - Mozambican Resistance Front GEF - Global Environment Facility ROCS 11- Second Roads and Coastal GPIE - Agency for Foreign Investment Shipping Project Promotion SEHA - Secretariat of Irrigation GUC - General Union of Cooperatives SOE - State-owned enterprises iii  TABLE OF CONTENTS CHAPTER 1. BACKGROUND ............................................1 A. The Legacy of Colonialism ............................................ 1 B. The Legacy of Socialism .......2....................................2 C. The Legacy of the War .......5....................................5 D. Economic Recovery ............................................6 CHAPTER 2. CURRENT ECONOMIC FRAMEWORK ............................................9 A. The Economic Rehabilitation Program ............................................9 B. Economic Reforms and Performance . ........................................... 0 C. Agriculture and the Macroeconomy ........................................... 15 The Shrimp and Prawn Industry ........................................... 19 CHAPTER 3. THE RURAL ECONOMY ............. .............................. 23 A. Natural Resources ........................................... 23 B. Land Use ........................................... 34 C. Rural Population and Labor Availability ........................................... 42 D. Rural Poverty and Gender Issues ........................................... 44 Rural Poverty ........................................... 44 Gender Issues in the Rural Areas ........................................... 51 E. Rural Social Infrastructure ........................................... 53 F. Rural Physical Infrastructure ........................................... 54 CHAPTER 4. THE INSTITUTIONAL FRAMEWORK ........................................... 61 A. The Legislative Framework ........................................... 61 The Land Law ........................................... 61 Water ........................................... 66 Marketing, Prices and Incentives ........................................... 66 Taxation, Tariffs and Licensing ........................................... 71 B. The Government as it Affects Agriculture .................. ......................... 73 The Agencies Dealing With Agriculture ................. .......................... 73 Agricultural Research ........................................... 74 Agricultural Extension ........................................... 75 Health and Nutrition ........................................... 77 Education ........................................... 79 C. The Financial System ........................................... 81 D. The Inputs Supply Markets ........................................... 83 E. Food Aid ........................................... 85 CHAPTER 5. THE AGRICULTURAL ECONOMY ........................................... 89 A. Aggregate Demand ........................................... 89 B. Aggregate Supply ........................................... 92 C. Comparative Advantage ........................................... 94 D. Subsectoral Conditions and Prospects .............. ............................. 100 Food Crops ............................................100 Cashew ............................................ 105 Cotton ............................................ 110 Citrus ............................................ 115 iv  Other crops ......................................................... 117 CHAPTER 6. A STRATEGY FOR AGRICULTURAL DEVELOPMENT IN MOZAMBIQUE ......................................................... 119 A. Introduction ......................................................... 119 B. Previous Sectoral Reviews ......................................................... 119 C. Government Policy Statements ......................................................... 120 D. Current Status of Mozambican Agriculture ......................................................... 121 E. Major findings of this Memorandum ......................................................... 122 (a) Raising SmallholderAgricultural Production is an Effective Way of Addressing Poverty ......................................................... 122 (b) Smallholders are the Most Efficient Farmers .............................................. 125 (c) The Private Trading System is Recovering .................................................. 126 (d) Integration in regional grain markets will dominate long-distance internal (north-south) trade ......................................................... 127 (e) Food Security is Attainable Without Government-Directed FoodAid ........ 128 (/) Local Cashew Processing Can Compete at World Standards ...................... 129 F. Constraints on Agricultural Growth ......................................................... 130 G. A Vision of Mozambique's Agricultural Development ....................................... 133 H. An Agricultural Development Strategy for Government ..................................... 138 (a) Principles of Government Intervention ........................................................ 139 (b) The Incentive Framework ......................................................... 140 (c) Rural Transport and Communication Infrastructure .144 (d) Public Services: Research and Extension .................................................... 145 (e) Regulation ......................................................... 146 69 Public Services: Health, Education, Water .................................................. 147 (g) The Public Investment Program ................................................ ......... 147 (h) The Roles of IDA, other International Agencies, Donors, and NGOs ............ 148 (i) Timing of Operations and a Short-Term Action Plan ................................... 150 0) Timing of Operations: Matrix ......................................................... 152 REFERENCES ......................................................... 153 APPENDICES ......................................................... 161 v  LIST OF TABLES Table 1. Annual Percentage Changes in Real Gross Output, 1987-96 .............................1 ]0 Table 2. Percentage Annual Growth Rates of Marketed Agricultural Output, 1989-1996 ........................................................ 15 Table 3. Regional Distribution of Production in 1992/93 ................................................ 16 Table 4. Output of the Mozambican Shrimp and Prawn Fishing Industry ....................... 19 Table 5. Land Potential and Current Use ........................................................ 24 Table 6. Current Land Availability ........................................................ 25 Table 7. Land Suitable for Irrigation ........................................................ 26 Table 8. Area under Cultivation and Percentage of Cultivated Area Planted to Specific Crops, 1992 ........................................................ 34 Table 9. Cultivated Areas by Producer Category ........................................................ 37 Table 10. Smallholder Sector Characteristics ........................................................ 38 Table I ]. Total and Marketed Production, 1990/91 ........................................................ 39 Table 12. Estimates of Average Yields ........................................................ 41 Table 13. Estimated Population, 1992-2025 ........................................................ 43 Table 14. Basic Social Indicators ........................................................ 46 Table 15. Characteristics of Female- and Male-headed Households ............................... 52 Table 16. Second Roads and Coastal Shipping Project: Phase One Trunk Road Rehabilitation ........................................................ 56 Table 17. Price Regime of Major Agricultural Commodities, 1993 ................................ 68 Table 18. Determination of on-farm maize prices based on import parity ...................... 69 Table 19. Protection and Profitability of Major Crops ..................................................... 70 Table 20. Total agricultural lending, 1988-92 ........................................................ 81 Table 21. Cereal Food Aid Imports 1980-1993 ........................................................ 85 Table 22. Yields and Domestic Resource Cost Coefficients ............................................ 96 Table 23. Regional Competitiveness of (Unimproved) Maize Production: Domestic Resource Cost Coefficients and Farmer Earnings Per Day ........................ 97 Table 24. Domestic Resource Cost Coefficients, Smallholder Cotton in Cabo Delgado Province, With and Without Fertilizers ........................................................ 98 Table 25. Alternative Approaches to Fulfilling the Functions of a Grain Marketing Parastatal ........................................................ 103 Table 26. Farmer Price as a Share of Cashew Export Earnings ..................................... 107 Table 27. Competitiveness of Local Processing and of Raw Nut Exports ..................... 108 Table 28. Protection Required by Cashew Processors ................................................... 109 Table 29. Seed Cotton: Area Sown, Yields and Output, by Farm Type, 1993 ...............l II vi  LIST OF FIGURES Figure 1. Money supply growth and inflation, 1990-96 ................................................... 11 Figure 2. The real exchange rate, 1990-96 ........................................................ 12 Figure 3. Agricultural sector productivity ........................................................ 17 Figure 4. Commodity composition of exports, 1996 ........................................................ 18 Figure 5. Commodity exports, 1989-96 ........................................................ 18 Figure 6. Livestock ownership indices, 1995 ........................................................ 29 Figure 7. Percent of farm households which do not sell any farm output ........................ 47 Figure 8. Percentage of farm households without non-agricultural income, 1994 .......... 47 Figure 9. Patients per hospital staff, by province, 1992 ................................................... 48 Figure 10. Intra-hospital infant mortality, 1992 ........................................................ 48 Figure 11. Access to safe drinking water, by province .................................................... 49 Figure 12. Schooling of household heads, Monapo district (Nampula) ........................... 49 Figure 13. Enrollment of children in primary school, by province .................................. 50 Figure 14. Mean months of food insecurity, by farm size, as reported by rural households, 1994 ........................................................ 51 Figure 15. GNP and roads, all countries, 1993 ........................................................ 55 Figure 16. Feeder road rehabilitation ........................................................ 57 Figure 17. Road length and area under cultivation, by province ...................................... 58 Figure 18. Real prices, 1976-92 ........................................................ 67 Figure 19. Marketed agricultural production, 1975-94 .................................................... 67 Figure 20. Infant mortality rates, Sub-Saharan countries .................................... ............ 78 Figure 21. Stunting of under-5-year-olds, 1995 ........................................................ 79 Figure 22. Real interest rates for agriculture, and the implicit subsidy for agriculture as a percentage of total government expenditure, 1988-1994 .................. 82 Figure 23. Food aid maize as a percentage of total cereals available .............................. 86 Figure 24. Real price of maize, Maputo, 1990-1995 ........................................................ 90 Figure 25. Marketed output of raw cashew in Mozambique, 1955-96 ........................... 105 Figure 26. Seed cotton production, by farm type, 1955-94 ............................................ 111 vii  LIST OF APPENDICES APPENDIX 1: TABLES ........................................................ 161 Appendix Table I. Selected Macroeconomic Indicators ................................................ 161 Appendix Table II. Commodity Composition of Exports, 1989-96 ............................... 162 Appendix Table III. Shrimp and Prawn Exports by Mozambique, 1990-1995 .............. 163 Appendix Table IV. Nominal and Real Producer Prices, 1976-92 ................................ 164 Appendix Table V. Marketed Agricultural Production, All Crops, 1975-94 ................. 165 Appendix Table VI. Sources of Income of Rural Households ....................................... 166 Appendix Table VII. Marketing of Principal Food Crops: Percent of Farming Households which Sell Maize, Rice, etc . ........................................................ 167 Appendix Table VIII. Percent of Households which Own Livestock, and Mean Numbers Owned ........................................................ 168 Appendix Table IX. Distribution of Land Area Possessed by Households .................... 169 Appendix Table X. Classification of Vulnerability of Communities, by Diet ............... 170 Appendix Table XI. Mean Months of Food Insecurity Reported by Rural Households ........................................................ 171 Appendix Table XII. Percentage Moderately and Severely Undernourished Under Five Year Old Children, in Terms of Wastedness, General Malnutrition and Stundedness ........................................................ 172 Appendix Table XIII. Land Concessions, 1986-93 ........................................................ 173 Appendix Table XIV. Land Tenure Among Smallholders: Sources of Acquisition of Machambas ........................................................ 174 Appendix Table XV. Ownership, Renting and Use of Tools of Agricultural Production ........................................................ 175 Appendix Table XVI. Marketed Production, Processing, and Export of Raw Cashew in Mozambique from 1980 to 1994 ........................................................ 176 Appendix Table XVII. Price Structure and Profit Margins of Cashew Nuts, 1993-1995 ........................................................ 177 Appendix Table XVIII. Competitiveness of Local Processing and of Raw Nut Exports ........................................................ 178 Appendix Table XIX. Seed Cotton: Area Sown and Output, by Firm and Farm Type (Outgrowers, Medium, Large-Scale), 1993 ..................................................... 180 APPENDIX 2: Domestic Resource Cost Coefficients ................................................ 181 viii  ACKNOWLEDGEMENTS An initial mission to Mozambique took place in November 1993, led by Mr. Jean-Paul Chausse (then AF6AE). Participants included: Ms. Paola Agostini (forestry), Mr. Amos Ben Mayor (extension and research), Ms. Christine de Voest (food aid and food security), Mr. Pierre Haas (farmers' associations), Mr. Peter G. Moll (comparative advantage and farm efficiency), Mr. Augusto Moreno (the institutional environment), Mr. Raymond Noronha (land management), Ms. Adelina Paiva (pricing and incentive policy), Mr. Gale Rozell (privatization and the private sector environment), Mr. Lloyd Strachan (input supply and marketing), Mr. Jorge Tembe (farming systems and sub-sector notes). The first draft was prepared by Mr. Jean-Paul Chausse; the report was completed by Mr. Peter G. Moll. Thanks are expressed to Messrs. Jean- Paul Chausse, Inacio Manecas and Luigi Marcuccio for their assistance and to Mr. James Coates for his guidance. The Peer Reviewers were Mr. Graeme Donovan and Mr. Gene Tidrick. The work was carried out under the supervision of Mr. Jean-Paul Chausse (then Chief of the AF 1AE Division), and subsequently under Ms. Sushma Ganguly (Technical Manager for AFTAI, Agriculture and Environment, Eastern and Southern Africa). The Country Director is Ms. Phyllis Pomerantz. ix  Chapter 1. BACKGROUND 1. Mozambique's structural development problems are deeply rooted in its colonial past and the impact of this colonial legacy on post-independence policies. Economic and social dualism under the colonial power, Portugal, a long war of independence, post-independence policies aimed at promoting the fast government-led industrialization of the economy and a profound restructuring of a "backward" peasant society imposed devastating human and economic costs on the country. A. The Legacy of Colonialism 2. The problems facing Mozambique since independence are intertwined with its colonial history because of the particular nature of Portuguese colonial administration. Portuguese economic activity has from the outset been based on various forms of forced labor. The colonial system rested at first on slavery-based plantations and after the abolition of slavery in 1869, a system of forced and contract labor continued to guarantee an ample supply of cheap labor and raw material for Portuguese enterprises. Local populations were required to supply contract labor to former owners and there was extensive use of forced labor for plantation and public works. Taxes were levied to induce populations to seek employment on plantations and in mines, in Mozambique or in neighboring countries, in order to eam the cash needed for tax payment. This system helped force rural populations into production of cash cops such as cotton and rice. Mozambique developed essentially as a supplier of agricultural raw material to Portugal (cashew, copra, cotton, tea), though there was some industrial development, essentially for the import substitution of basic consumer goods. Owing to its unique geographical position, Mozambique also generated substantial income from transit services for South Africa and land- locked British colonies to the West. Over time, the Mozambican industrial sector became dependent on South Africa for spare part and services. The sources of foreign exchange (agricultural exports, transit services and workers remittances) and the trading partners (Portugal, South Africa and the neighboring British colonies) were therefore few. This excessive external dependence became a severe liability after independence, with the drastic deterioration of Mozambique's relations with its traditional partners. 3. After the Second World War, there was a renewed push by Portugal to extend its occupation of the overseas territories. Thousands of peasants and unskilled workers were sent to Mozambique to work as agricultural settlers or fill public and service sector jobs that in other colonial systems were usually open to the local population. Between 1940 and 1974, the Portuguese population rose from 27,000 to 200,000. There was a lack of investment in social infrastructure, particularly in rural areas. Africans were denied access to education (only mission schools provided schooling for a few Mozambicans) and the economy became totally dependent on a non-African labor force for all but the most menial tasks. The mass exodus of expatriate settlers at independence (about 90 percent departed within 18 months) left Mozambique confronted with a critical shortage of skilled labor: medical personnel, teachers, managers, technicians, traders and semi-skilled workers. 4. Colonial Mozambican agriculture had three distinct sectors: large plantations, medium scale settler farms and small African family farms. The commercial sector included 2,000 farms, including the few large plantations, and cultivated about 175,000 hectares or around 7 l  percent of the country's total cultivated area of about 2.5 million hectares. The average size of commercial farms' concessions (not freehold but long-term usufruct rights that could be transferred and inherited) was about 45 hectares. The farms produced mainly export crops (cotton, tea, cashew, coconuts and sugar) and also food for the market. There were about 1.5 million African smallholder farms cultivating 2.3 million hectares (1.5 hectares per farm). They practiced shifting cultivation, essentially for subsistence on land allocated through the customary land tenure system. The colonial government did not provide support services to smallholders who, because of the lack of resources and secured markets followed a risk-averting strategy, producing a low but reliable output. However, the smallholder sector was not technologically static. Work on commercial farms was a source of exposure to new opportunities. Also, the rural commercial network provided consumer goods and agricultural inputs, marketing services for output and some (very limited) credit. This sector consisted primarily of Portuguese and Asian merchants and was a vital component of the rural economy. The smallholder sector, in spite of being undercapitalized, not having access to essential services and being subject to unfavorable terms of trade, produced in the early 1970's an estimated 70 percent of total agricultural production and contributed more to total exports than the commercial farms (30 percent against 27 percent). 5. It is important to note the lack of interconnections between the regions of the country during the colonial era. Taken as a whole, Mozambique has ample land and food production potential to be self-sufficient. However, this fact obscures the regional differences persisting from the colonial period to the present. Though there is ample grain production potential in the North and Central highland regions, these areas have never been large suppliers to the large population centers of the arid South. Marketing networks to move surplus grains in this way were never developed, and the South has historically always been a food deficit region, exporting labor and transport services in return for food needs. Thus, development of the country's natural comparative advantage in food production will require not only the rehabilitation of infrastructure and marketing systems destroyed by the protracted war, but the development of entirely new interregional linkages and marketing channels. B. The Legacy of Socialism 6. After 10 years of nationalist war, Mozambique won its independence in 1975. FRELIMO, the Frente para a Libertasao do Mozambique (Mozambique Liberation Front), assumed control of a country where the administration and most of the economic infrastructure was left abandoned after the mass exodus of the Portuguese population. During the first few years of independence, the Government's primary concern centered on avoiding the collapse of economic activity and preserving urban food supplies, foreign exchange earnings and jobs. In line with the prevailing Marxist economic philosophy of the ruling party there was a strong tendency toward centralized control of large production units in a system envisioned as an industrialized command economy. In the agricultural sector, the State took over the 2,000 abandoned commercial farms. Due to the acute shortage of technical and management skills, settler farms were regrouped into larger units. Parastatals were set up to undertake the marketing and trade functions left vacant by the departing traders. This initial drive for State control, partly dictated by urgent practical considerations, was further reinforced by ideological factors, underpinning a socialist development strategy based on a rapid "modernization" of the Mozambican society. Following the third FRELIMO Congress in 1977, the Government consolidated its role in the economic and social life of the country. Under a centralized management system, output targets 2  and resource allocation became increasingly determined by administrative fiat. Prices were fixed for most commodities, at all stages of the production and distribution chain, with little reference to markets. External dependence was increased further by the adoption of a development strategy based on heavy (public) investments in imported capital intensive technologies. The foreign exchange and technical assistance requirements for the operation and maintenance of these investments further aggravated the country's dependence on external resources. In addition, the low capacity of most of these investments to generate the expected value added and foreign exchange earnings quickly created severe balance of payments problems and made the development strategy unsustainable. 7. In the agricultural sector, absolute priority was given to the development of the State Farm Sector as the most effective means - through rapid intensification, mechanization and expansion of the area under cultivation - to quickly increase production and provide employment opportunities. Massive purchases of 1,200 tractors and 500 combines were made in 1977, with additional purchases in the following years. Between 1978 and 1982, 90 percent of Government's investment in agriculture was allocated to the state farm sector. The latter's performance was, however, disappointing. State farms relied on mechanized and input intensive technologies which required experienced managers and technicians, who were in critically short supply, and substantial imports of equipment and inputs. The central planning process imposed excessive rigidity on a production process - agriculture - that requires great flexibility to adjust to the uncertainties of farming. The Government lacked the capacity to plan and coordinate the various support services necessary for these complex enterprises, and inputs were often not available at the right time to sustain efficient production. Production targets were generally set without taking agronomic or financial viability into consideration. Worker motivation was low. Although state farms' yields were higher than in the smallholder sector, their contribution to the economy was low and sometimes negative, on account of technologies not well suited to the country's endowment and the low efficiency of their operations. As a result, many state farms were not even able to cover their operating costs and accumulated large debts to the (public) banking sector. 8. The departure of the Portuguese traders left large areas without any network for the distribution of goods and marketing of produce. The void was filled by the creation of a network of government stores (lojas do povo) while the remaining private traders were authorized to operate at retail level. The government retained a monopoly at the wholesale level, however, and marketing margins were tightly regulated. Exclusive responsibility for crop marketing was granted to parastatals. In 1981, all marketing of crops (except cashew and cotton) and the distribution of goods to rural areas were consolidated under AGRICOM, a state enterprise under the Ministry of Internal Commerce. In 1994 AGRICOM was abolished and replaced by the Instituto de Cereais de Mo~:ambique (ICM), which took over the staff and physical assets of AGRICOM. The ICM purchased maize from farmers and from the commercial trade network and sold it chiefly to aid donors such as the World Food Programme. 9. As in colonial times, the new Government considered the smallholder sector - which accounted for 95 percent of the total land under cultivation and for a slightly lower share of total agricultural production - as economically inefficient and a constraint to the "modernization" of rural life. Government's strategy to "socialize the countryside" focused on grouping smallholders in "Communal Villages" along the lines of the Ujaama village developed in neighboring Tanzania. Besides offering a tool for the collective organization of smallholder production, the communal villages also facilitated political mobilization and provided a focal point for the delivery of social and agricultural services to scattered rural communities. People 3  mobilized in communal villages had to accommodate Government-sponsored schemes for collective work. The stated objective was to speed up the transfer and adoption of improved technologies for increasing the productivity and production of smallholders. 10. The impact of Government's rural socialization policy was uneven but had some positive results. It helped supply education and health services to rural populations in an effective, low- cost manner; the effort was ultimately unsuccessful, however, on account of the war, and infant mortality fell by only 15 percent (from 171 per 1000 in 1970 to 146 in 1993) compared with the drop of 29 percent for Sub-Saharan Africa (from 141 to 100) . The Government's policy promoted the emancipation of women by weakening some traditional male-dominated social structures. The efforts in literacy and schooling were considerable. For instance, the percentage of primary-age children registered in school rose from 47 percent in 1970 to 60 percent in 1992.2 11. The negative results of the rural socialization policy were far greater. Stable patterns of rural subsistence were replaced by poorly managed and unsustainable enterprises. Government- appointed managers had little experience and the supply of inputs necessary to support intensified agriculture did not materialize. The high concentration of farming families reduced the possibility of shifting cultivation and led to soil degradation while fuelwood scarcity increased rapidly around the villages. Currently, fifteen years after the villagization drive, many of these villages still remain, despite the fact that they were not barred from leaving. Although their survival is partly due to the increased security they provided to populations during the war, it is also evidence of the useful role they played in the provision of essential services. Collective production schemes, however, have been abandoned and families cultivate their own plots, albeit sometimes at considerable distance from the villages. The socialization of rural life, besides its negative impact on the management of the natural resource base and on the production of the smallholder sector, also alienated part of the rural population, as people lost land rights they had maintained during the colonial period and traditional leaders were stripped of their authority by the new Government. Discontent fueled underground domestic opposition and provided an opening for the destabilization strategies of the then hostile Rhodesian and South African regimes. 12. Agricultural cooperatives were established on farms abandoned by their pre- independence owners. While present in almost all regions of the country, these cooperatives are concentrated in the southern provinces and in particular in Maputo and Gaza. Their importance has markedly declined over the years and they are currently responsible for less than I percent of the total marketed output. Many of these cooperatives have spontaneously evolved into service cooperatives. Most have survived or emerged as a result of external support and are still significantly dependent on this support. The survival and importance of this sector lies essentially in its potential role in promoting the access of smallholders to basic services, as a representation of smallholder sector's interests, and as a countervailing power in the negotiations with the Government and other types of farns. ISource: World Development Indicators 1995, Table 27. This is the under-two mortality rate per one thousand live births. 2 Source: World Development Indicators 1995, Table 28. 4  C. The Legacy of the War 13. After a dramatic fall in economic activity following the abrupt departure of the colonists (1975-77), there was a partial recovery in economic activity and agricultural production until 1981, by which time production in many sectors had recovered to 1975 levels. (These were still well below 1970 levels.) The guerrilla war waged by the Mozambican Resistance Front (RENAMO), supported by Rhodesia in response to Mozambique's adherence to the UN sanctions following the unilateral declaration of independence in 1965, intensified after the independence of Zimbabwe in 1980, when RENAMO support was assumed by South Africa. The combined effect of the war, misguided development policies and a severe drought in 1982/83 were dramatic, amounting to a virtual collapse of the Mozambican economy. Over the 1981-86 period, GDP fell by an estimated 30 percent (and GDP per capita by about 45 percent); in real terms, GDP fell at an annual rate of about 6 percent. Exports declined by 75 percent. With fiscal and foreign exchange resources declining with the level of economic activity and escalating military expenditures3 the Government's capacity to provide even basic services became severely restricted. 14. The impact of the war on the agricultural sector was devastating. Insecurity in the countryside forced a massive displacement of populations toward safe areas near the cities, along the coast, and to neighboring countries. By 1990, there were about 1.0 million dead and close to 5.0 million displaced persons. A large part of the country's economic infrastructure (roads and railways, marketing depots and shops) had been destroyed. The number of private traders declined from about 6,000 at independence to fewer than 2,000 in 1990. The conflict also destroyed or forced the closure of about 1,000 clinics and health posts, and 3,000 schools. Some 400 teachers were killed. The destruction of the transport infrastructure and the pervasive insecurity cut producers off from markets for their output, inputs and essential consumer goods. Agricultural GDP fell by 5 percent p.a. in real terms. By 1986, cotton and sugar production had collapsed to 9 percent and 16 percent respectively of their 1980 levels. Production of tea and cashew, which together contributed about a third of the country's total exports, fell to 30 percent of 1980 levels. Livestock herds and wildlife were decimated. Although it is difficult to assess the total food production of smallholders, it is estimated that the overall food production may have fallen by as much as 30 percent between 1981 and 1986 as smallholders focused on ensuring their household food security and survival. The marketed production of maize and rice declined by about 50 percent. As a result, there was a severe deterioration of the food availability situation at the household level, both urban and rural. The country became dependent on food aid to meet the minimum needs of its population. 15. In 1983, at the Third Party Congress, the Government recognized that its policies were a contributing factor in the economic collapse and that, among the farming population, small family plots were the preferred and most efficient units. One of the first steps toward the liberalization of pricing and marketing arrangements was to free fruit and vegetable prices from administrative controls in 1985. This liberalization resulted in a substantial increase in In 1993, total recurrent budgetary expenditure for the Army, excluding expenditures in the Ministry of Security and Interior, were 280 billion meticais. This figure is one-and-one-quarter times larger than the combined current budgetary expenditures for health and education (221.0 billion meticais), and constituted some 24% of current budgetary expenditures and 5.1% of GDP. Military expenditure increased to 337.0 billion meticais in nominal terms in 1994 (compared to 284.7 billion meticais for health and education), but these now amounted to only 3.9% of GDP. 5  Box 1. Impact of the war on the environment The war has forced rural populations to seek refuge around the cities, and in narrow strips of land along the protected railway corridors and the coast, including the easily accessible islands. In these areas, population densities have vastly exceeded the carrying capacity of the natural resource base. For example, the Manica District had a population of more than 200,000 at the end of 1992, compared with fewer than 30,000 at the beginning of the 1980s. Soils have been heavily over-used and deforestation for fuelwood has led to serious soil erosion and the possibility of land slides during heavy rains. Coastal and island environments are being heavily degraded with wide-spread "dunification" and destruction of mangroves. Land conflicts are also frequent in the areas where displaced populations have sought refuge and try to eke out their minimum food requirements from the small plots allocated by local councils. On the other hand, the war forced the abandonment of economic activity from large tracts of land, which as a result of having been left idle may have recovered some of their fertility. In areas without active military operations, wildlife may also have been given a respite from the dangers of human advances. production, in particular in the relatively secure "Green Zones" surrounding the principal urban centers. The success of this initial experiment paved the way for the more radical reforms undertaken after 1987 to gradually move toward a market-based economy. D. Economic recovery 16. Mozambique has made significant progress in the management of its economy since 1987. Large devaluations have substantially reduced the overvaluation of the metical, and improved the overall competitiveness of the economy. There has been progress in liberalizing external trade and rationalizing the tariff structure. A major restructuring of the banking system has been initiated. Lending to non-performing state enterprises has declined significantly and increased resources should now be available to finance private investments. Great strides were taken to dismantle price controls, with the proportion of GDP subject to price controls dropping from 70 percent to less than 10 percent since 1987. However, fiscal deficits and inflation are still high and domestic savings and investments are negligible. Import, export and domestic trade licensing are still pervasive and there remains substantial room for improvement in the coherence and transparency of the trade regime. Government's intervention in the market remains pervasive as well. Price controls are still extensive: 20 agricultural products and most inputs are still subject to some kind of administrative prices. The producer prices of essential agricultural products are effectively depressed by Govemment's policies, by leakages in the distribution of emergency food aid, and by current policy with regard to the sale of "commercial" food aid. The monopsony situation enjoyed by the cashew agroprocessing enterprises up to mid-1995 imposed heavy costs on farmers. The ban on exports of the raw product has been scrapped in favor of a 20 percent tariff which is barely an improvement from the point of view of the peasant farmer at whose expense this unnecessary protectionist policy is pursued. The ineffectual regulation mechanisms applied to the cotton monopsonies (Jvcs) result in unnecessary implicit taxation of smaliholders. 6  17. Further efforts are required to consolidate macroeconomic stabilization and increase the amount and efficiency of investment. Macroeconomic management will need to focus on maintaining a realistic exchange rate and reducing fiscal deficits and inflation. Fiscal policy should enlarge the tax base, reduce tax distortions, improve collection, continue the rationalization of expenditures, and improve the management of foreign aid. Monetary policy should focus on the strengthening of the Central Bank, the improvement of adequate monetary policy instruments, the restructuring of the banking sector to restore monetary control and reduce the rate of inflation, and the establishment of an effective domestic payments system. Forceful public enterprise reform is urgently needed as certain of these enterprises are a drain on Government and banking sector resources. 18. Trade and market liberalization must be vigorously pursued. In particular, remaining Government involvement in the setting of agricultural prices must be removed. It is clear that in nearly all cases the interventions work to the disadvantage of smallholders even where they may be the intended beneficiaries. This is particularly true, for example, where floor prices in staple crops operate as defacto maximum prices at the farm gate. Interventions on food security grounds, and particularly the rules and procedures for acquiring and disposing of food aid, must be done in such a way as to create positive (rather than negative) price and market incentives for the agricultural sector. Reducing Government's intervention in the marketing system should be viewed as a complement to, and not a substitute for, investments in infrastructure, farmer education, etc. Farmers will respond more rapidly to incentives if the physical and institutional rural infrastructure is good. Policy reforms and investments need to go hand in hand if the desired agricultural supply response is to materialize. 19. Urgent measures must be taken to improve the private business environment. In spite of Mozambique's evident advantages and resources, the interest of investors, and of the much needed foreign investors in particular, cannot be taken for granted, as investors make a decision only after a careful comparison of how the business environment compares with that of other countries competing for their business. Mozambique suffers from a series of structural handicaps that hamper its ability to attract foreign investors. The lack of a skilled labor force, which reduces labor productivity and flexibility; the dearth of middle and upper level managerial talent; and a relatively poor physical (transport, storage, telecommunication) and institutional (banking and other services) infrastructure reduce Mozambique's attractiveness. 20. Removal of government intervention in those areas where it is counterproductive must not, however, prevent recognition of the legitimate and essential role of government in the promotion of long term sustainable private sector growth. Among the necessary conditions for growth which the private sector cannot be expected to provide under any reasonable circumstances are investments in public health, education, and the infrastructure needed to support a modern economy. In the agricultural sector the public sector is key to the development of not only educational systems but also research and extension to the smallholder sector which comprises the vast majority of Mozambican producers. 21. These constraints to development will continue for some time and will be corrected only slowly. They make it all the more urgent for the Government to correct the imperfections in the investment climate that are within its control or influence. Of critical importance are the current complexity and lack of transparency of the legal and institutional environment, which make it difficult to clearly grasp the rules of the game and to ensure that they will be consistently applied and upheld. This is particularly the case with respect to access to natural resources (mineral resources, tourism sites, arable land) for which long-term, undisputed access is necessary. Of equal importance, although more difficult to overcome, is the Government's still prevailing 7  ambivalence toward the private sector, which translates into a strong propensity to regulate private activity and foreign investments, with constant pressure for Mozambican interests to be partners of any new investment. Removing price and trade controls should allow private agents to compete with parastatals and among themselves on a fair footing, reduce costs, and improve farmers' incentives. 8  Chapter 2. CURRENT ECONOMIC FRAMEWORK A. The Economic Rehabilitation Program 22. In 1987, the Government launched a structural adjustment program - the Economic Rehabilitation Program (ERP) - which was supported by Bank policy dialogue and lending, and the IMF structural adjustment facilities (sAF and ESAF). The ERP, renamed the Economic and Social Rehabilitation Program (ESRP) in 1989 to emphasize the social aspect of the adjustment program, aimed at stemming the economic decline, reducing macroeconomic imbalances, and reducing the role of the state in production and in regulating private economic activity. On the macroeconomic side, the ERP/ESRP has been focused on creating a sound macroeconomic environment - a competitive exchange rate, sustainable budgetary deficits, and low inflation- favorable to private saving and investment. The Government is gradually pulling back from direct intervention in the economy and improving its capacity to provide basic services to private businesses. The price system was progressively liberalized; the exchange rate system has progressed from a severely overvalued official rate to a market-determined rate now; the trade and banking systems were streamlined, permitting the entry of two foreign banks; a policy of maintaining positive real interest rates was implemented; and the effort to restructure public enterprises resulted in the privatization, conversion to joint ventures, or leasing of 500 small and medium-sized public enterprises, concentrated in the manufacturing, commerce and fishing sectors. A new, more liberal foreign investment law was enacted in June 1993. 23. One fundamental shift in development strategy has been to view agriculture not as a backward sector but as the central engine of growth and the primary mean for reducing poverty. The new agricultural development strategy focuses on increasing incentives to production in the smallholder ("family") sector through the gradual liberalization of marketing and prices and improved access to productive assets and basic services. 24. Considerable progress has been achieved under the ERP/ESRP, as is shown in Table 1. After a 30 percent decline between 1981 and 1986, the GDP grew at an annual rate of 5.4 percent between 1987 and 1989. Economic growth slowed in 1990-91 and GDP fell by 2.7 percent in 1992 owing to the drought which severely affected agricultural production. In 1993, the Mozambican economy grew by 14 percent, the highest rate since independence, reflecting good rains and improved security, but also the liberalization of the economy and increasing demand for services. Per capita income in real terms increased for the first time since 1989. Growth rates continued to be buoyant, on the whole: 7.7 percent in 1994, 2.1 percent in 1995, and 8.7 percent in 1996. Agriculture has grown swiftly (21 percent in 1993, and 5.0-9.4 percent in 1994- 96). as increased agricultural marketing and improved security led to more commercial activity in the rural areas. Notwithstanding the gains achieved since 1987, Mozambique's economy continues to be hampered by less than satisfactory economic policies. Further work remains to be done to reinforce macroeconomic stability and complete the transition from a centrally planned to a market economy. 9  Table 1. Annual Percentage Changes in Real Gross Output, 1987-96 1987-89 1990 1991 1992 1993 1994 1995 1996 Agriculture 6.2 1.1 1.9 -7.5 21.3 5.0 6.9 9.4 Industry and fishing 7.6 -8.3 -0.5 -9.5 -6.7 -3.3 16.3 11.6 Construction -4.5 1.5 3.0 -1.8 7.0 7.5 7.0 8.0 Transport 2.1 19.3 13.2 13.6 16.7 5.8 13.3 7.6 Commerce 3.5 2.5 2.0 4.0 16.7 5.8 -12.1 7.4 Gross output 5.4 0.9 2.7 -2.7 14.3 7.7 2.1 8.7 ............................... ........................................................ . ...... ............... . .............. .................. . .............................. ............................................................... Agriculture's share of GDP - 38 36 31 31 29 31 32 Sources: 1987-94: Southem Africa Department (1995), Annex A.5. 1995-96: Republica de Movambique (1997). Shares from World Bank (1996a), Annex 1. p 1. aIncludes inputs (value added by sector not available) B. Economic Reforms and Performance 25. Fiscal policy. Under the ERP/ESRP, the Government attempted to reduce the country's fiscal deficits. The emphasis was on increasing fiscal revenues through expanding the tax base and improving collection perfonnance. The government succeeded moderately: fiscal revenues increased from 13 percent of GDP in 1986 to 20 percent in 1993, falling slightly to 18 percent by 1996. Total expenditures at first rose from 42 percent of GDP in 1986 to 51 percent in 1990, but fell by 1996 to 35 percent4 . Aid came to play an increasing role. External grants and loans were 3 and 5 percent respectively of GDP in 1986, and peaked at 21 and 9 percent respectively in 1994, before falling to 11 and 8 percent in 1996. 26. Inflation and the real interest rate. With increased fiscal and monetary discipline, the inflation rate was brought down from more than 160 percent in 1987 to 33 percent in 1991.5 But Figure I shows that inflation ballooned to 63 percent in 1994, before falling to 17 percent in 1996. The 1992-5 inflationary spurt was accompanied by a bubble in M2, which varied between 37 percent and 63 percent, before being forced down to about 22 percent in 1996. These percentages may be overestimated due to the likely underestimation of GDP. See the data series and sources in the Appendix Tables. 10  70 60 i 50 - 40 20 10 0 1990 1991 1992 1993 1994 1995 1996 F- 4 - M2 Growth Inflation Figure 1. Money supply growth and inflation, 1990-966 27. The real interest rates faced by agricultural borrowers were strongly negative in the 1980s and even in 1990 stood at -27 percent. Between 1989 and 1994 the bank rediscount rate was raised steadily, from 10 percent (1989) to 70 percent (1995). But the rediscount rate and the lending rates to enterprises were one step behind the inflation rate, so that the real interest rate faced by firms was most often a small negative. As the inflation rate fell, the real rediscount rate rose to 14 percent in 1995 but then fell to 8 percent in 1996. It is anticipated that real interest rates will continue to decline.7 28. Investment. Total investment increased from 46 percent of GDP in 1990 to a spectacular, and not really credible, 60 percent in 1994 and 48 percent in 1996. The increase is due to: (a) understatement of GDP (unofficial foreign trade, poorly measured agricultural production); (b) improving conditions for private investment; (c) increased donor contributions; and (d) confusion of investment with consumption, such as certain nonperforming loans, which were recorded as investment but are properly viewed as consumption. The inaccuracy of the data precludes any sentient judgments about the efficiency of the country's investments at the present time. 6 Sources: see the Appendix Tables. 7A further decline would be of especial importance for small borrowers Until recently the banks required them to pay the interest in full in advance, and repay their capital in equal monthly installments. With more frequent amortization and with higher listed interest rates, the effective interest rate increases exponentially. If in 1995 a small firm took out a loan at 40 percent (below 1995 inflation of about 55 percent) and had to pay the interest immediately and the capital in monthly installments, the effective interest rate was 178 percent, making the real interest rate 126 percent. 8 See the data series and sources in the Appendix Tables. 11  100 1 Real e.r. 9o 0 index (US$ per 80 local currency 70 unit) 60 1990 1992 1994 1996 Figure 2. The real exchange rate, 1990-969 29. Exchange Rate and Trade Policies. A remarkable achievement of the ESRP has been the substantial improvement in foreign exchange rate policy. The grossly overvalued official exchange rate was devalued from Mt 929/USD in 1989 to Mt 3,723/USD in 1993, and to Mt 11,378/USD in February 1997). The parallel market premium for foreign exchange decreased from an average of 2,100 percent in 1989 to 10 percent in late 1994, where it has remained up to the present. There proved to be enough price "stickiness" for the nominal devaluation to have real effects: the real exchange rate index depreciated from 100 in 1990 to 60 in 1993, though it subsequently rose to 69 (Figure 2). The international competitiveness of the Mozambican economy has improved markedly, incentives for rent-seeking activities have been curtailed, and the allocation of foreign exchange was moved from an administrative to a market-based mechanism. Trade reforms were undertaken. The Govemment rationalized the tariff structure, reducing the number and dispersion of rates and assigning these rates according to objective criteria. The tariff code was updated and simplified in 1991 and again in November 1996, so that there are now five rates of between zero and 35 percent. Export duties, including those for agricultural products (except cashew) were reduced to 0.5 percent and then to zero. To become an exporter one now has to do no more than fill in a simple form. For registration as an importer, however, there is still an array of requirements to be fulfilled (amounting to a check on creditworthiness), which slows down the process of licensing and creates scope for opportunistic action by the administrators. One remaining problem is that licensing procedures restrict entry and competition in the domestic trade of agricultural commodities. 30. Resource Mobilization and Growth Prospects. Gross domestic saving was negative in 1990, and has since become positive but remained low (7 percent in 1993, 5 percent in 1994, 12 percent in 1995). With lower inflation and positive real interest rates, and growth of disposable income, the savings rate is expected to rise. However, as remarked above, Mozambique's economic recovery program has been dependent on a substantial flow of foreign aid. The bulk of resources for domestic investment comes from the extemal sector. In 1996, official capital grants totaled some 19 percent of GDP (see para. 25). This dependency on foreign aid raises concerns about the prospects for growth and sustainability. Continued public investments will be needed to rehabilitate the country's basic infrastructure, and substantial private investments will be necessary to renew and expand an ageing productive capital stock. In the medium term, Sources: see the Appendix Tables. 12  however, the economy will not be in a position to generate sufficient domestic savings to sustain the required rate of investment, even assuming accelerated economic growth, nor the foreign exchange receipts necessary to finance essential imports. Mozambique will therefore remain dependent on foreign aid. But long-term economic growth will primarily be based on private investment and, given the low domestic saving rate, on a large inflow of private foreign capital. The importance of foreign investment is underscored not only by the severe constraints on domestic savings and the prospects of declining foreign aid, but also as a source of the technologies and management skills essential to growth that are in short supply. 31. Since external aid is set to decrease in the medium term, it is essential to ensure that it is used more efficiently. Improved management of foreign aid should bring about significant additional benefits. There are currently more than 500 donor assisted projects in Mozambique. Most are donor-driven and heavily dependent on long-term foreign technical assistance. Many are implemented outside of existing institutions. They crowd out local capacity-building. Project fragmentation also imposes a heavy burden on local technical and managerial skills. This fragmented, donor-financed approach needs to give way to integrated sector-based programs such as those in health and road-building. The program approach implies the preparation, by Government and local stakeholders, of coherent national policies and strategies and of sector-wide programs that can be supported by all donors. Examples of this are the Priority Districts Program (PDP), and the so-called Pre-Program. 32. Liberalization. Sustained growth requires a high rate of investment and an efficient allocation of available resources. This, in turn, requires getting the price signals right and creating a climate that allows businesses to respond to those signals. Macroeconomic reform provides the essential framework for private investment but the deregulation of domestic prices and markets is also necessary to create a supportive business environment. In 1987, the commercial sector was extensively state-owned and there were pervasive price controls. This sector produced according to the dictates of the national plan; large subsidies, amounting to 8 percent of GDP, were provided through the budget or via credit from the (state-owned) banking system. Since then, there has been a gradual price liberalization. The prices of a number of essential consumer and intermediate goods are still determined administratively, but only a few products and services are currently subject to a fixed price regime: transport, communications, oil products, utilities, housing rents, medical services and four basic food staples - maize, maize flour, wheat flour and bread. The other main crops are now subject only to minimum producer prices (and the minimum price for maize was suspended during the 1995/6 season owing to the glut in the southern African region). The Government wants to keep the consumer price of those food staples affordable to poor consumers. In the case of yellow maize, widely available in plentiful quantities from food aid, the consumer price has been kept significantly below border-parity price for humanitarian reasons. However, this has also depressed the price of (white) maize produced locally and has a negative impact on domestic production and farmer incomes. l 33. Business Environment. Improving macroeconomic policies and the rehabilitation of the country's physical infrastructure should provide a firm basis for rapid private sector development. Mozambique has assets that offer significant potential for private investments: its location next to higher-income land-locked countries and the availability of good ports (Maputo and Beira) with established transportation corridors to their borders; extensive foreign investor relationships with Mozambican interests both in the private and public sectors; extensive natural 0 Note that wholesale and retail margins uncontrolled, but the price of cotton ginning is set. 13  resources, including arable land, minerals, wildlife, timber, fisheries, and tourism sites. The attraction of these assets is demonstrated by the interest shown by potential investors, particularly in the mineral, energy, fishing, and tourism sectors. However, actual - as opposed to proposed - investment has been slow to materialize. The restoration, at last, of a credible, lasting peace; a new investment code, and the divestiture of the ubiquitous State enterprises should now remove the remaining obstacles to private sector development. The Investment Code of 1993 is a step in the right direction as it provides a straightforward incentive package and equal treatment for local and foreign investors. However, a number of cumbersome features still remain (registration, licenses, etc.) that raise costs and create uncertainty for investors. The rate of approval of foreign investments has increased since its introduction, but the increase is due more to the new-found political stability than to the effects of the 1993 Code. 34. Privatization has proceeded swiftly. Some 500 small-and medium scale enterprises have been privatized through ownership transfer, management contracts, conversion into joint ventures, or leasing arrangements. In addition, 29 large-scale companies have been privatized since the state firm privatization legislation was passed in 1991. Almost all offers in the privatization of large-scale companies have received an acceptable private sector response. On the other hand, the State continues to play a role in some sectors (transport, banking ) and certain large state-owned enterprises such as the electricity company continue to impose a heavy drain on Government's budget. In the agricultural sector, practically all of the 82 state farms covering 520,000 ha have been privatized defacto; they have either been officially distributed to private interests, or been taken over by former employees, or been reclaimed by local populations with traditional use rights. To date, only a fraction of these have been divested de jure. Nearly all the major agro-industrial parastatals, including the 14 cashew processing factories, have been privatized. Only a few sugar estates (e.g. Incomati Sugar) remain in state hands, and these are in the process of being sold. 35. There remain, however, a number of constraints on private investments in the agricultural sector, in particular for investors outside the smallholder sector. Mozambican property law remains restrictive. According to the Constitution, all land belongs to the State. The law permits the State to lease land for up to 50 years, but does not allow for freehold ownership. The right of private parties to transfer leasing rights and title to the buildings established on the land is subject to discretionary approval. In addition, traditional rights apply to all land outside of the urban areas, and leases granted by the State to private investors without prior consultation with traditional right-holders do not offer long-term tenure security to the lease holders. Thus the incentive of private entrepreneurs to invest and their ability to mobilize credit is reduced. The low level of land taxes, and the even lower level of their actual collection, has also led to growing pressure from Mozambican nationals to have (low-cost) access to agricultural land, often not for productive but for speculative purposes. 36. Foreign Private Investment. The Center for Promotion of Investment (CPI) reports that since 1985 it has authorized projects representing nearly $1.2 billion, mainly in agriculture, agro-industry, tourism and mining. Though there is inevitably a gap between approved and actual investments, the gap has been particularly large in the case of Mozambique. This reflects uncertainties related to the peace process, as well as difficulties in the legal and regulatory environment for private investors. One of the state banks has been privatized and another is in the process of privatization. 14  C. Agriculture and the Macroeconomy 37. During the first half of the 1980's, agricultural output fell sharply as a result of the spreading armed insurgency, rigid administered prices, and the institutional neglect, if not repression, of the smallholder sector. The latter, without access to basic services, and heavily taxed by a vastly overvalued exchange rate and official producer prices, was also increasingly cut off from markets to sell their products or buy essential consumer goods. As a result, the marketed production of smallholders plummeted as they adopted a strategy aimed essentially at food self-sufficiency and survival. Under the ERP, Government strategy to revitalize the agricultural sector has been essentially based on the improving macroeconomic enviromnent and the gradual liberalization of the pricing and marketing policies. 12 38. Table 2 presents growth rates of marketed agricultural output for the period 1989-1995 Subject to the natural variability imposed by the rainfall regime, it took some time for the liberalization and reforrns under the ERP to become wide and deep enough to make a difference. After a satisfactory 4.0 percent growth rate in 1989, agricultural production grew at only 1.1 percent in 1990, and dropped by -4.0 percent and - 11 percent in 1991 and 1992, respectively, mostly on account of the extended drought. When rains returned to nornal in 1993, marketed output by the sector grew by a substantial 21 percent; it grew by 5.0 percent in 1994, 6.9 percent in 1995 and 9.4 percent in 1996. The behavior of the crop sector is very similar to the overall sector pattern. Table 2. Percentage Growth Rates of Agricultural Output, 1989-1996 2 1989 1990 1991 1992 1993 1994 1995 1996 Crops N/A N/A N/A -11.2 22.7 4.9 7.0 9.8 Livestock N/A N/A N/A -13.5 3.0 7.8 4.3 3.3 Sector 4.0 1.1 4.0 -11.3 21.4 5.0 6.9 9.4 Source: National Plan Commission, Revised February 2, 1995; Republica de Mocambique (1995b), pp. 24, 29 and 3 1; and Republica de Mocambique (1997), table "Quadro Global da Agricultura e Pecudria". a Production of the commercial sector plus marketed production of the smallholder sector plus "autoconsumo" or non-marketed production of the smallholder sector. 39. Marketed volumes have grown faster than the totals mentioned in Table 2. For instance, 13 marketed food crop output grew by some 34 percent in 1996 . Marketings of export crops, on the other hand, declined in 1993 (-19 percent, led by a dramatic -56 percent fall in cashew nut 14 production), but recovered in 1994 (21 percent), in 1995 (7.5 percent) and in 1996 (23 percent) The leader was cashew, which grew at 14 percent in 1995 and 99 percent in 1996. Copra performed well in 1993 (39 percent) and 1994 (27 percent), but then declined (5.2 percent in 1995, -16 percent in 1996). Sugar production grew swiftly, at 34 percent in 1995 and 49 percent in 1996. 12 Estimates of total agricultural production are presented in Chapter 3. 13 Republica de Mocambique (1995b), p. 30, and RepuTblica de Mocambique (1997), p. 6. 14 Republica de Mocambique (1995b), p. 29, and Republica de Mosambique (1997), p. 6. 15  Table 3. Regional Distribution of Production in 1992/93 (tons) Region Maize Cassava Sorghum Rice Beans Northern 181 2,480 77 22 46 Central 287 723 59 31 19 Southern 65 313 7 13 15 Total 533 3,500 143 66 79 Source: National Plan Commission, Revised February 2, 1995. Regions: Northem: Cabo Delgado, Nampula, Niassa; Central: Zambezia, Tete, Manica, Sofala; Southerm: Inhambane, Gaza and Maputo. 40. There is little doubt about the strong short-run response of agricultural production to real price increases. The real price of beans rose 100 percent between its nadir in 1986 and 1992, and the marketed output of beans increased correspondingly by about 300 percent. The real price of maize increased by 50 percent between 1986 and 1992, and marketed output increased by about 1 5 100 percent . This supply response was achieved in spite of punishing structural physical and institutional constraints. Indeed, the removal of physical and institutional barriers to production and resource flows have received much less attention than the improvement of price incentives and the dismantling of administrative controls. There are several reasons for the heavy emphasis on price incentives. First is the sheer magnitude of the distortions between administered and market prices, and the fact that it was in Government's power to decide the changes. Second, the war prevented the Government from undertaking any significant program of infrastructure construction or maintenance, or the private traders from reestablishing their network and stores, in most of the countryside. Finally, the stabilization program imposed a severe constraint on Government's public expenditures and investment programn. 41. Figure 3 presents the evolution of productivity of the agricultural sector as a whole. The results must be interpreted with extreme caution as tne numbers - agricultural GDP, the CPI and the rural population - come from different sources and cannot be regarded as any better than rough estimates. It appears that the productivity of the sector increased somewhat between 1987 and 1989, as one would expect, since the agricultural markets were being freed up during that period. Since then there have been fluctuations, for instance a dip in 1992 owing to the drought, but no obvious trend. Similarly, in the case of foodgrain production per rural inhabitant, there was a deep reduction in the 1992/3 production season. Preliminary figures for the 1995/6 season, in which the rains were excellent, suggest further increases in per capita foodgrain output. 5 See the discussion about prices and incentives in Chapter 5. 16  60000 - 70 U, 0 ~~~~~~~~~~~~60 ~ 50 _ 40 & 250000 - 30 0 ~~~~~~~~~~~20 20 40000 0Co 1987 1988 1989 1990 1991 1992 1993 1994 1995 Figure 3. Agricultural sector productivity: Agricultural GDP in constant 1990 Meticais per rural person, and foodgrain production (kg) per rural person16 42. Further progress in the short tern requires the pursuit of incentive reforns and the removal of the most binding physical and institutional constraints: the rebuilding of the rural physical infrastructure; the restoration of security and the resettlement of displaced population in productive activities in rural areas; and the effective liberalization and decentralization of economic decision-making. In the longer term, sustainable development will require establishment of a viable national transport system for rural/urban movements of food and industrial crops as well as marketing inputs and consumer goods in return. Establishment of a national research and extension system will also be key. Exports 43. Total registered exports of all sectors (agriculture and other) grew from $105 million in 1989 to $226 million in 1996, with an average growth rate of about 12 percent p.a. Agriculture and renewable natural resource exports constituted 76 percent of all exports. Prawns constitute the single largest export item in Mozambique, accounting for over a third of total registered exports (Figure 4). 16 Sources: Population from UNICEF, total GDP from International Financial Statistics On-Line, ratio of agricultural GDP to total GDP from World Bank (1 996a), cPI from International Financial Statistics On- Line. The official exchange rate for 1990 (period average) was Mt929/$, so that the productivity levels are about $50 per rural inhabitant. Foodgrain production (white maize, rice, sorghum and millet): from Tschirley et al. (1996), Table 1, p. 4; the table year "1992" refers to the production season April 1992 to March 1993. 17 See further detail in the Appendix Tables. 17  Note: Total exports in 1996 Shrimp & were US$226 million. Prawns 35.5% Miscellaneous 31.7% Petroleu ~Cashew Nuts 1.2% Copra Sugar Cotton 19.2% 1.1% 5.7% 5.7% Figure 4. Commodity composition of exports, 1996 (percentages) 18 44. Export crops contribute some 33 percent of total exports (Figure 5). The largest export crop was cashew nuts which comprised almost one half of total exports up to 1992. The sub- sector declined dramatically in the subsequent two years, falling to just two percent of total exports in 1994, but rose to 19 percent of exports in 1996. The second largest export crop is cotton, with an average value of exports close to 10 million dollars in the period 1989-1996. Sugar is in third place, with average annual exports valued at 13 million dollars in 1996. Copra and citrus are the other exported crops of any importance. Timber exports accounted for 8 million dollars in 1996, though this figure is likely to be significantly under-reported. Crop exports without cashew nuts grew, albeit irregularly, from $18 million in 1989 to $32 million in 1996, or some 8.4 percent p.a. on average. 240 200 0 Other U Petroleum 160 mill. 120 _____ Cotton so S~~~~~~~ Cashew Nut 4 I . I {o w I | | l _ 1 g s1 Prawns _ _ 1l I I