Supply response to adjustment in low-income countries : lessons from Zambia

28355 NUMBER 46 E Precis ! Operations Evaluation Department May 1993 Supply Response to Adjustment in Low- income Countries: Lessons from Zambia During the period before the supply ing was done by a parastatal agency, sponse was weak, unlike that of the response takes hold, often likened to inefficiently and at high cost. highly protected industrial sector. Over "crossing the desert", structural adjust- a two year period, only a sixth of the ment programs are at high risk of being By the mid-1980s, maize production expected imports of agricultural produc- abandoned or reversed. Zambia had was clearly being suppressed by low er goods actually took place. Even these already abandoned several attempts at prices, ineffective marketing, and a imports were mostly for crops other than stabilization and adjustment by 1985, devastating shortage of imported maize. when the Bank approved the Agricultural producer goods. Rehabilitation Project (ARP). An The depreciation of the kwacha, by important goal of ARP was to achieve a The ARP's basic goals were to about 85 percent, while maize prices less quick supply response in agriculture to liberalize agricultural prices and market- than doubled, made profitable invest- sustain consumption and elicit confidence ing and to achieve a rapid increase in ment in maize impossible; costs of in the structural reform process. maize production. Finance from IDA imported inputs (except fertilizer) had and other donors was designed to risen by much more than the maize A recent OED audit* notes that this permit enough imports of tractors and producer price. Other factors discourag- goal was not achieved. Reasons included other producer goods for commercial ing investment in maize: incompatibility with other, concurrent farmers to return to their "production reforms, and an unhelpful sequencing of frontiers." A dramatic and quick High nominal interest rates, in re- price reforms. The reform process was increase in maize production was sponse to inflation. Medium-term abandoned after a move to reduce consum- expected to follow. borrowing at fixed rates was typical er subsidies on maize meal caused food practice in Zambia, but the unpredictabil- riots that left 15 people dead. The experi- Outcome ity of inflation and maize prices made ence offers general lessons on stimulating this too rsky for farmers. a quick supply response in low-income Implementation of the ARP policy e An uncertain policy environment. The agrarian countries, reforms began with a partial reduction in regime did not enoourage the private maize and fertilizer subsidies. By the sector. 1986 saw at least two large Goals time the second tranche was released expropriations of private farms. Few (March 1986), producer prices for crops would-be investors thought the policy In Zambia, production and con- other than maize were (briefly) in line reforms would last, given the history of sumption of maize is critical to any effort with border prices, but the maize price aborted stabilization programs. at structural adjustment. Maize is the remained tightly controlled at a level far basic food staple, uses about 70 percent of below the export-parity price. Government continued its consumer cropland, and has been a very political crop. In October, 1985, two months after the ARP became effective, Zambia's new PefnianAurit Repit- In the 1980s, government set maize foreign exchange auction went into lia:APrct ra No.i1139t. prices far below the export parity level operation. The kwacha, Zambia's t ProieD report Nr. a1ilbl given by an appropriate exchange rate. currency, depreciated sharply, fuelled by 1 1 EDeut Drecrai,d Maize prices throughout the marketing accelerating inflation. Though farmers to ain txeute Doc.ment chain from farmer to retailer were held and farm-supply houses were encour- s fron tir ni constant throughout the country and aged to apply for foreign exchange at the tIoii enar-;- throughout the year. All maize market- auction-detemined prices, their re- Supply Response Zambia's experience suggests that the instruments-such as fertilizer subsi- of up to six months in payment to following are necessary for achieving a dies-that limit input prices to farmers. farmers of a price fixed at delivery, in a quick, buoyant investment response in (Input subsidies that have a high fiscal high-inflation economy, arbitrarily agriculture cost may need to be reduced before reduced farmers' incomes, increased their macroeconomic stability can be marketing risks, and depressed their * Macmo mic polcies that create achieved.) investment in maize production. favorable input-output price relation- * Private sector confildence Government * Farmer participation in planning: ships, and are stable enough for should show its commitment to the Farmers may still not undertake invest- investment outcomes tobe calculated. In reform process as early as possible ments once the reformed incentive contrast, Zambia had high and unpre- Where governments appear lukewarm, structure is in place. Letting farmers dictable inflation and a continuing ambivalent, and divided, as was the case participate in project preparation can help input/output price squeeze on maize in Zambia, liberalization is unlikely to be to highlight weaknesses before, rather production carried through, and this deters initia- than after, implementation has started. * A suitable sequence of refoms, begin- tivesby private investors. * Complementary investment projects, for ning with a predictablemacroeconomic * Markets that tou If investment is to example to restore infrastructure, environment. Within agriculture, take place, output and input markets promote exports, revitalize agricultural controls on output prices need to be need to work In Zambia, unpredictable credit, or promote agricultural process- removed before changes are made in delays by the National Marketing Board ing,may also be necessary. subsidies on maize meal, and of parast- reform program of the original ARP had depends heavily on agricultural atal marketing operations. Together, been implemented, but five years had investment. To achieve this requires these subsidies came to 3 percent of been lost. detailed attention Within the Bank, GDP, and a third of the budget deficit of this may call for more contributions 1985-87. Their contribution to Zambia's Findings from the agriculture divisions than has alarming inflation was substantial. been typical. Timing the supply resonse: Support In December 1986, the Govern- within a country for structural adjust- ment-braving public outrage-tried to ment can vary greatly within a brief Zambia's New Adjustment reduce the fiscal deficit by letting prices period, depending upon public percep- Program rise on "breakfast meal," the better tions of whether or not adjustment is Zambi's recent policy reforms quality flour that accounted for about 60 "working" and growth being rekindled. have been inline with MF/World percent of maize meal production. A Particularly in low-income countries, the Bank advice, including the freeing of week of violent and bloody food riots timing of the supply response has a prices, deregulaon, and the followed. crucial influence on these perceptions. promotion of private investment Failure to achieve a rapid improvement Maize and fertilizer subsidies have The suspension of World Bank leads to flagging support for structural been eliminated, despite the very lending in May 1987, in response to adjustment as the skeptics come serious drought of 1992. A social payments arrears, formally ended forward, and--as in Zambia in the late adjustment program has involved Zambia's mid-1980s round of structural 1980s-to reversal of policy reforms or labor-intensive public works adjustment and associated agricultural at least stalemate. programs, including food for work. policy reforms. By 1988 the fertilizer and maize meal subsidies had been fully Detailed attention to agriculture: But the entire reform program is restored and border pricing abandoned; Agriculture should feature more threatened by poor fiscal and maize and fertilizer marketing continued prominently in the design of adjust- monetary policies. Early in 1993, as public monopolies. ment programs in low-income agrarian annual inflation was 200 percent. conre.In such countries, grwhi largely because of the fiscal deficit countries. Insc onre,got n Governments second most pressing This attempt to revert to a highly exports, manufacturing (food and task is privatization; almost all the centralized command economy also export processing, textiles, farm inputs), modern economy is built around proved disastrous. A new adjustment commerce, transport, and banking parastatals, some of them extremely program was started in March 1991 (see depends closely on agricultural growth, inefficient box). By the end of 1992, much of the so that a rapid supply response OED Pricis 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, E-1204, World Bank, telephone 473-1719. May 1993