Malawi - Agricultural sector memorandum : strategy options in the 1990s (Vol. 1 of 2) : Overview

Report No. 1 280'5-MAI Malawi Agricultural Sector Memorandum: Strategy Options in the 1 990s (IIn 1 VU /lu1IVueY V'l/dulM 1: ( )V'erVi('%%' March 8, 1995 SotI lii 'n Afri .i I(a .D ri nivii Atiii lNUrv ,aI [,nvir-on1rme(w I vi%tinm Document of the World Bank  ACRONYMS ADB African Dcvclopmcnt Bank ADD Agriculture Dcvclopmcnt Division AD)MARC Agriculture Devclopmcnt and Marketing Corporalion ASAC Agricultural Scctor Adjustment Credit ASC Agriculture Scicnccs Committee ASM Agricultural Sector Mcmorandum ASP Agriculture Services Projcct ASSC Agriculturc Scctor Stecring Committce CEM Country Economic Memorandum CIMMYT International Maize and Wheat Improvcment Center CMA Credit and Marketing Assistant DAET Department of Agriculture Extcnsion and Training DAHI Departnient of Animal Hlealth and Industry DAP Diammonium phospatc (fertilizer) DAR Department of Agricultural Research DEMATT Development of Malawian Traders Trust DEVPOL Malawi Government Statemcnt of Development Policy DLV Department of Lands and Valualion DOI Department of Irrigation DREA Department of Research and Environmental Affairs DRIMP District Roads Improvemcnt and Maintenance Program EC European Community EEC European Economic Community EEST Estate Extcnsion Service Trust EP&D Economic Planning and Development EPA Extension Planning Area FA Field Assistant FAO Food and Agriculture Organization FSRP Fcrtilizer Subsidy R_moval Program GDP Gross Domcstic Product GOM Governmcnt of Malawi IDA Intcrnational Dcvelopment Association IDF Institutional Development Fund IFAD International Fund for Agriculture Development IMF International Monetary Fund LREP Land Rcsources Evaluation Project M&E Monitoring and Evaluation MFNR Ministry of Forestry and Natural Resources MIWR Ministry of Irrigation and Water Resources MMFSP Malawi Mudzi Financial Services Project M4OALD Ministry of Agriculture and Livestock Development MOE Ministry of Education MOU Memorandum of Understanding MIRFC Malhii Rural Finance Company NDDF Northern Division Dark Fired (tobacco) NEAP National Environmental Action Plan NEWS National Early Warning System NGO Non-Governmental Organization NRDP National Rural Development Project NSCM National Seed Company of Malawi ODA Overseas Development Association PIB Piofessional Interviewing Board PIPA Public Investment Program for Agriculture PSIP Public Sector Investment Program RDP Rural Development Projects RFSP Rural Financial Services Project SACA Smallholder Agricultural Credit Administration SDDF Southern Division Dark Fired (tobacco) SEDOM Small Enterprise Development Organization of Malawi SFFRFM Smallholder Farmers Fertilizer Revolving Fund of Malawi SGR Strategic Grain Reserves SSA Sub-Saharan Africa TAMA Tobacco Association of Malawi TRF Tea Research Foundation UNDP United Nations Development Program  PREFACE This report is based on the findings of the main Agricultural Sector Memorandum (ASM) mission in March/April 1992. During subsequent missions to Malawi involving the World Bank's assistance program to Malawi, various ASM team members have carried out follow-up work and discussions with Government and donor officials in order to enhance the operationai usefulness of the ASM for both Government and the World Bank (as well as to contribute to the design of several IDA- financed investment programs during the ASM period). These discussions have included fruitful reviews of selected draft ASM working papers, the building blocks of the ASM. The IDA missions have been led by R. Anson, also Task Manager for the ASM. ASM team members on behalf of the World Bank include: V. Scarborough, K. Simler, S. Hiwa. G. Donovan, A. Conroy, L. Schwartz, N. Okidegbe, R. Noronha, S. Rietbergen, E. Thigpen, D. Larson, D. Ng'ong'la, D. Fullerton, A. Yates, D. Jansen, 1. Hayes and S. Jaffee. Hallie Eakin contributed editorial assistance and Ella Hornsby/Wendy Wiltshire provided efficient word processing assistance. Useful cross-country experience and constructive suggestions to enhance the contents and presentation of the ASM were provided by P. Hazell, ASM Lead Advisor (formerly World Bank staff, currently with IFPRI), J. Coates (AF2AE) and K. Saito (AF5AG), Bank staff peer reviewers. Valuable contributions have been made by numrrerous Government and donor officials during the course of preparing the draft ASM. MOALD's Planning Division and its staff have been the main counterparts. They arranged an Agricultual2 Strategy Workshop in March 1992 at the time of initiating work on the ASM, and the ASM Strategy Workshop to review the initial draft ASM, held in Lilongwe on December 3, 1993. The ASM findings and strategy options were also presented and discussed at the Malawi Consortium Group meeting held in Paris on December 20-21, 1993. Building on the ASM work and important developments in the sector, in 1994 Government (with consultant/donor assistance) carried out several studies which contributed to key policy decisions and actions taken in 1994, including: a smallholder credit repayment study; a fertilizer policy study; and a review of the tobacco quota system. The relevant findings and recommendations of these studies are incorporated in this report. Building on the ASM and other recent sector studies carried out by ADB, USAID and EC, in 19(4, MOALD prepared a consolidated national Agricultural and Livestock Development Strategy and Action Plan, under the leadership of Mr. A. Gomani, Chief Planning Officer of MOALD, supported by a Task Force led by G. Jere (Deputy Chief Planning Officer). This draft document was discussed at a Government/donor/private sector Agricultural and Livestock Strategy Symposium, held on November 28-30, 1994. Currently, Government is finalizing its Strategy Document and Action Plan as a reference document for implementation and periodic updating. This final ASM incorporates the relevant comments and suggestions provided by Govermment in the discussion held on July 12, 1994, and relevant points arising from the Agricultural and Livestock Strategy Symposium held in late 1994. While the data collection and analysis were carried out previoulsy during 1992 and 1993, the ASM findings and reconmnendations take into account developments up to February 1995. The ASM also complements the valuable contributions being made by other donor agencies, especially the African Development Bank-financed Malawi Agricultural Sector Study, and recent studies financed by USAID, EEC. UNDP, UK/ODA and FAO.  MALAWI AGRICULTURAL SECTOR MEMORANDUM TABLE OF CONTENTS Pag No. VOLUME I: OVERVIEW VOLUME II: MAIN REPORT 1. INTRODUCTION AND BACKGROUND ..........................1 A. Introduction . ........................................ 1 B. Objectives of the Study .................................. 1 C. Main Audience and Participatory Approach to Preparation .... ........ 2 D. Context of Study and Linkage with Other Related Studies .... ........ 2 E. Organization of the Report ................................ 3 F. Country Overview .......... ........................... 4 G. Macroeconomic Environment ............................. 4 2. THE AGRICULTURAL SECTOR, POVERTY, AND THE NON-FARM ECONOMY .10 A. Overview ................. ................... 10 B. Resource Base and Agricultural Potential .......... ............. 10 C. Structure of the Agricultural Sector ........... ............... 13 1. The Smnallholder Subsector .......... ................. 13 2. The Estate Subsector . ............................. 16 D. Poverty and the Human Resource Base in Malawi ....... .......... 16 E. Agriculture's Linkages with the Non-Farn Sector ......... . 19 F. Government Objectives and Strategies .......... .............. 22 G. Institutional Arrangements ................................ 23 3. PERFORMANCE OF AGRICULTURAL SECTOR 1980-1994 ............. 26 A. Overview ........................................... 26 1. Growth: Sources and Constraints ....................... 27 B. Structural Changes and Performance: 1980-1994 ...... ........... 28 1. The Estate Subsector ............................... 29 2. The Smallholder Sector ............................. 31 C. The Implications of the 1980s for Growth and Poverty Alleviation ..... 39 1. Income Effects of Estate Expansioii ..................... 39 2. Income Effects of Smallholder Burley and Hybrid Maize Production . 41 3. Multiplier Effects ........ ........................ 42 4. Linits to Growth and Adverse Effects of the 1980s ........... 42  4. THE SMALLHOLDER SUBSECTOR ............................ 44 A. Overview .44 B. Land and Natural Resources .44 C. Agricultural Inputs .50 D. Pricing and Marketing .65 E. Technology Generation and Transfer .82 F. Rural Finance .91 G. Targeted Interventions .95 H. Evaluation of Policy and Technology Options .98 5. THE ESTATE SUBSECTOR .107 A. Constraints .107 B. Strategy Options .112 6. CROSS-SECTORAL CONSTRAINTS AND STRATEGY OPTIONS .. 116 A. Agricultural Diversification .116 B. Human Resources .136 C. Rura! Infrastructure . 138 D. Public Sector Expenditure and Managemer.t .140 7. CONCLUSIONS AND RECOMMENDED OPTIONS .150 A. Overview .150 B. Summary of Principal Constraints ........................... 152 C. Recommended Strategies and Options .157 TEXT TABLES 2.1 Land Use in Malawi .11 2.2 Relative Importance of Smallholder & Estate Subsectors: Selected Indicators for 1992 .13 2.3 Typology of Smallholders on Malawi .14 2.4 Percentage of Maize Produced by Smallholders with Varying Farm Sizes .15 2.5 Typology of Estates .17 3.1 Annual Agricultural GDP Growth Rates (1973-1994) .26 3.2 Leasehold Estate Expansion 1970-1993 .29 3.3 Nominal Protection Coefficients on Smallholder Export Crop Production .32 3.4 Real ADMARC Producer Prices .35 4.1 Higher-Yielding Input Sales to the Smallholding SubSector .50 4.2 Impact of Subsidy Removal on Profitability of Fertilized Maize Production .54 4.3 Indicative Impact of Increasing Technical Efficiency of Fertilized Maize Production . 64 4.4 Ratio of A )MARC Producer Prices to Maize Producer Prices .66 4.5 ADMARC Purchases as a Share of Production .70 ii  4.6 Projected Annual Per Capita Growth Rates in Smallholder Subsector Under Five Policy Scenarios ................................. 102 4.7 Selected Variables from Aggregation of Linear Programming Models for Base Year and Three Future Policy Scenarios ..106 6.1 Agriculture Subsectors And the Agriculture Diversification Project . .118 6.2 Indicative Diversification Commodities and Key Characteristics, Market Prospects and Likely Participants ..119 6.3 Summary Indicators for Activities Analyzed (by Activity) . .122 6.4 Summary Indicators for Activities Analyzed (by Sector) . .124 6.5 Tobacco Exports Relative to Total Exports Under Different Indicative Scenarios . . . 134 7.1 Binding Constraints: Smallholder Subsector ..153 7.2 Agriculture Strategy Options ......................... 160 TEXT BOXES 1.1 Malawi's Terms of Trade Trends ................................ 9 2.1 Productivity, Nutrition, and Malawi's Labor Force of the Future .18 2.2 Farm-Nonfarm Linkages: Some Cross-Country Comparisons .21 4.1 Natural Resource Management and Sustainable Agriculture in the NEAP and the FPR 47 4.2 The World Burley Tobacco Market and Malawi's Prospects ................ 74 4.3 Burley Tobacco Reform Options .......... 75 4.4 Hybrid Flint Maize Story .......... 83 4.5 Fertilizer-Maize Recommnendations: Current Practice and Untapped Potential for improved Efficiency ................................. 86 6.1 Diversification: Insights from Selected African Experiences .117 STATISTICAL ANNEX: TABLES AND FIGURES/DAGRAMS Figures 1. Household Characteristics and Maize Production/Consumption Relationships . 2. Incremental Return to Nitrogcn Use on Maize. 2 Diags 1. Smallholder Hectarage of Local Maize, Hybrid Maize and Grcundnuts ('000). 3 2. Average Smaliholder Yields (based on MOALD crop production estimates). 4 Tables 1 . Urban and Rural Population Growth, 1966-1987 ....................... 5 2. Key Macroeconomic Indicators, 1987-95 .. .............6 3. GDP by Sector at 1978 Factor Cost, 1978-1990.............7 4. Land Resources, Customary Land and Population by Region........ 8 5. Agroclimatic Suitability for Rainfed Production .. ...........9 6. Volume of Agricultural Exports..................10 7. Value and Average Price of Agricultural Exports .. ..........10 8. Summary Data on Value of Agricultural Exports .............I iii  9. Aggregated Household Production Levels by Holding Size Calculated from the 1987/88 Annual Survey of Agriculture ........ ..................... 12 10. Cropping Pattern by Holding Size 1987/88 ASA ....................... 13 11. Smallholder Crop Hectarage Estimates ............................. 14 12. Smallholder Cropping Mix, 1992/93 (Chart) ................ I .. . . . . .15 13. Smallholder Crop Production Estimates .16 14. Annual and Three-Year Average Smallholder Yields for Selected Crops .17 15. Cropping Mix by Estate Size Categories .17 16. Estate Cropping Mix (Chart) .18 17. Estate Crop Exports as a Share of Total Malawi Exports .19 18. Human Resource Indicators, 1990 ...................... ......... 20 19. Social Indicators of Development, 1990. 21 20. Labor Force, Functional Distribution of Income and Income per Worker by Sector . 22 21. Average Budget Shares and Estimated Marginal Budget Shares and Expenditure Elasticities 23 22.(a) Agriculture GDP in 1978 Constant Terms .24 22.(b) Agricultural GDP (Smallholder and Estate Subsector Shares) ............... 25 23. Burley Tobacco Prices .6 24. Export Crop Production from the Estate Subsector, 1974/75-1987/8 .27 25. Changes in Land Tenure, 1964-1988 .28 26. Wage and Salarv Emplovment in the Estate Subsector. 1969-1992 .29 27. Ratio of ADMARC Producer prices to Maize Producer Prices .30 28. Nominal and Real Smallholder Producer Prices .31 29. ADMARC Maize Trading Account .31 30. ADMARC Profit and Loss Data .31 31. Fertilizer Sales to Smallholder Farners .32 32. Real Fertilizer Prices. 33 33. Estimate of Gross Income Effects of Selling Burley to Estates and to Auction Floors 34 34. Estimated Incremental Income Effect of "Burley Boom", 1980-92 .34 35. Estimated Average and Total Tenant Incomes .35 36. Average Smallholder and Tenant Gross Margins (1989) .35 37. Indicative Average Real Income for Tenants, Rural Wage Laborers and Smallholders 36 38. Indices of Tenant Profits, Minimum Rural Wages and Smallholder profitability .. . .36 39. Gross Margins on Maize Production at ADMARC Prices (trial yields) .37 40. Gross Margins on Maize Production at ADMARC Prices (survey yields) .37 41. Real Gross Margins in Maize Production (trial yield assumptions) .37 42. Real Gross Margins in Maize Production (survey yield assumptions) .37 43. Fertilizer vs. Seed Subsidy: Cost-Effectiveness .38 44. Indigenous Fruit Trees Found on Farms in Lilongwe and Mchinji Districts and Their Reported Uses 39 45. SACA: Seasonal Credit Uptake and Participation 1982/83-1990/91 .40 46. Nominal and Real (1980) Commercial Bank Interest Rates .41 47. Cross Country Comparison of Burley Tobacco Yields .41 48. Licenced Weight of Burley Tobacco by Category .42 49. The Costs and Returns to Agricultural Production on Different Types of Tobacco Enterprise 43 50. Regional Market prospects .................................. 44 51. Malawi Indicative Scenarios for Horticulture Exports .45 52. Medium Term Public Sector Investment Program for the MCA .............. 46 iv  MAIN WORKING PAPERS (AVAILABLE ON REQUEST) 1. Sources of Growth in Malawi: Past Trends and Future Prospects (by K. Simler, Consultant) 2. Prospects for Expanded Burley Production in Malawi (by E. Thigpen and D. Larson, World Bank) 3. Poverty Profile of Rural Households in Malawi: A Summary of Recent Findings (by K. Simler and A. Quisumbing, Consultant and World Bank, respectively) 4. Economic Reform and Agricultural Strategy (by G. Donovan, World Bank) 5. Household Expenditure Behavior and Farm-Non-Farmn Linkages in Rural Malawi (by K. Simler, Consultant) 6. Inputs Sector: Fertilizer and Seeds (by A. Conroy, Consultant) 7. Agricultural Pricing and Marketing !ssues (by V. Scarborough, World Bank) 8. Agricultural Diversificatinn: Issues and Strategy Options (by D. Jansen and I. Hayes, with inputs from L. Schwartz, Consultants, and MOA Diversification Working Group) 9. Public Expenditure Review of the Agricultural Sector: Issues and Options (by S. Hiwa) 10. Coping Strategies for Smallholder Households and Scope for Targeted Interventions to Improve Food Security (by K. Simler, Consultant) 11. Available Technology for Malawian Smaliholders (by S. Carr, Consultant) 12. Agricultural Market Liberalization and Technological Innovation in Malawi: Modeling Responses and Outcomes in the Smaliholder Subsector (by K. Simler, Consultant) OTHER WORKING PAPERS (AVAILABLE ON REQUEST) 1. Land Quality and Strategy Implications (by A. Yates, World Bank) 2. Womr.en in Agriculture: Issues and Strategies (by L. Schwartz, Consultant) 3. Agricultural Research (by A. Yates, World Bank) 4. Agricultural Extension: Issues and Strategies (by L. Schwartz, Consultant) 5. Land Issues and Strategies (bv R. Noronha, World Bank) 6. Estate Sector Issues .nd Strategy Options: Case Studies of Burley Estates in Malawi (by D. Ng'ong'la, Bunda College and Consultant) 7. Estate Sector Issues and Strategy Options (by L. Schwartz, Consultant) 8. Natural Resource and Environmental Management Issues and Strategies (by S. Rietbergen, World Bank) REFERENCES MAP: IBRD No. 24575 v  A. SUMMARY 1. Malawi 's agricultural sector is performning far belowa ius potential, primarily due to deficient policies, inadequate institutional arrangements and capacities and inefficient investments. Although its performance and prospects improved significantly over the past six years as a result of the increased use of hybrid maize and expanded smallholder access to cash crops, only a small part of the population has benefitted. and unfavorable weather patterns in recent years have suppressed the potential benefits. Thus, to increase the productivity of the land and labor and expand employment and income-earning opportunities in an environmentally and economically sustainable manner. rlie country needs a multidimnensional strategy that would use existing resources and techrrologies more efficiently and rap liew sources of g?owzh int a ivay that will also reduce poverty. The latter will require investments in physical infrastructure and human resources, which, if not developed, will constrain growth and thwart attempts to reduce poverty. 2. To raise productivity and reduce poverty, this report focuses on six key actiolls necessary for growth. These include: v Further liberalizing produce pricing and marketing policies, including a staged phased-out of burley tobacco production quotas and improving the policy environment and supporting measures to encourage expanded competition in the input and produce markets (involving especially fertilizer and maize); - Expanding the supply o,, and effective demand for, available improved seeds and fertilizers with an emphasis on expanding competition in the supply and increasing purchasing power of smailholders; - Generating and disseminating a more suitable menu of imprcved technologies th'rough improved research and extension services. with emphasis on stronger research-extension- farmer linkages, low cost technologies (especially soil and water conservation), improved efficiency in fertilizer use, increased maize yields, promotion of drought resistant crops and varieties, and risk management under drought prone conditions; * Promoting the cultivation of underutilized land and improved access to land (especially in the estate subsector) and natural resource management and conservation, all in a manner that promotes environmental sustainability; * Accelerating private sector-led diversification away from maize and tobacco, which means expanding food production and exports in commodities in which Malawi has a comparative advantage, supported by restoring and expanding access to sustainable financial services; and * Developing human resources by improving access to education, health services and population planning. 3. To launch the proposed strategy, key policy distortions will need to be removed, the private secter will need to be enlarged and strengthened (primarily through market-based incentives and measures), and broad participation and empowerment of women should be promoted. all in a manner that would stimulate environmentally sustainable development. 4. This said, it is important to note that Malawi's farmers fall into four main groups that have different capacities and face different constraints; thus, different strategies will be needed for each I  group. Given the structural constraints, rigidities, market imperfcctions and failures facing Malawi's agricultural sector, and diversity of constraints involving various groups of farmers, the indicative quantitative analysis of various liberalization scenari( suggest that agricultural market liberalization is not a simple matter that will generate unambiguous supply response and poverty reduction. The analysis suggests the need for Malawi's policymakers to consider carefully a number of important tradeoffs and phasing of the different strategies and roles of different types of households. And, even if the full agenda of reforns is introduced, the very large group of poor smallholders (who are chronically food deficient) will still be impoverished over the medium-term. Thus, the Government will need to provide them with additional assistance because these farmers do not have enough land or resources to take advantage of the measures this report recommends to stimulate production. The report also suggests various strategies for this group. 5. Given the limits of agriculture development in eradicating Malawi's pervasive poverty, a long term growth and poverty strategy should also consider the following important aspects: * agriculture is the dominant sector of Malawi's economy for the next 10-15 years (or more), and therefore, will remain as the main source of future growth; * given the lack of much available new land and rapid population growth, an increasing share of the population will have to find employment in the non-farm sector; * insufficient effective deinand is a major constraint to the take-off of non-farm enterprises, * increasing that demand will have to come mainly from increasing agricultural incomes; * raising agricultural incomes is necessary, but not sufficient, to develop the non-farm sector. There is a need to develop human capacity (especially through expanded education and training, health) and infrastructure to provide an enabling enviromnent for these enterprises. B. BACKGROUND 6. Purpose of the Study. The aim of the Agricultural Sector Memorandum (ASM) is to help the Government of Malawi (GOM) formulate, in close collaboration with participating donors, a strategy that will trigger broad-based agricultural growth of at least 4% a year and help reduce pervasive rural poverty in a sustainable manner. Also, the Ministry of Agriculture and Livestock Development (MOALD) prepared in mid-1994 an Agricultural and Livestock Development Strategy and Action Plan, to which the findings of this report and other donor-funded studies are providing contributions (especially the USAID Agricultural Sector Assistance Program/ASAP II, ADB-financed Malawi Agricultural Sector Study and EC Sector Review). On November 28-30, 1994, Government convened a national Agricultural Strategy Symposiurn, which included representatives from GOM Ministries, donor agencies, private sector/farmner representatives and NGOs. Based on the outcome of this successful Symposium, MOALD is currently finalizing its Strategy Document and Action Plan as a reference document for implementation. The ASM covers the following three areas: * The main constraints to achieving faster and sustained agricultural growth and reducing poverty; * The main policy, institutional and investmert measures that could remove these constraints and help realize Malawi's agricultural potential; 2  * The likely outcomes of various strategies, with special emphasis on the smallholder subsector. 7. Malawi is at an important turning point. Over the past five years, the GOM introduced significant macroeconomic and agricultural reforms and carried out various investment programs and studies. These generated some promising results: Farmers increased their use of hybrid maize varieties and somc smallholders were allowed to produce burley tobacco. Further, the country recently adopted a multi-party system, which broadened the debate on development, and a new Government was elected in r1iid-1994. However, economic growth is still well below its potential and population growth rates, and the economy depends excessively on tobacco exports. Moreover, poverty is widespread: many children are malnourished and stunted, and there are extremely low levels of education and health by the majority of the rural population. If these conditions are not corrected, they will affect the productive capacity of Malawi's future labor force. 8. The political and economic reforms that continue today need to be intensified so as to give more of the rural population access to greater income earning and employment opportunities. This report recommends various options for the Govermnent to consider. C. AGRICULTURAL SECTOR PERFORMANCE 9. Macroeconomic Environment. Given the dominant role of agriculture in the economy, the performance of this sector greatly affects the whole country. Likewise, policies and reforms involving the macroeconomy, agricultural and financial sectors continue to influence the capaciLy of agriculture to generate a positive and sustainable supply response. For example, the decision to float the M Kwacha in 1994 was intended to enhance Malawi's export competitiveness; however, to achieve such a supply response, the move will have to be supported by further agricultural reforms and investments (consistent with the macroeconomic reforms). The continued deterioration of the macro- economic variables in 1994 underscore the urgency of addressing and implementing the recommended policy and institutional reforms suggested in this report, although increased attention needs to be placed on careful prioritization and sequencing of the needed actions. 10. Performance of the Agricultural Sector. Agriculture is the main source of employment: over 80% of the workforce is employed in the smallholder subsector and about II% in the estates. From 1980 to 1994, agricultural GDP grew at only about 1 6% a year, about half the growth rate of the rural population (which is 90% of total population). In two of the last 3 years, the agricultural sector has experienced negative growth rates, largely due to two major droughts (in 1992 and 1994). Exciuding these two drought years, agricultural growth during the period 1987-1994 has been about 5% per year. This reflects a potential for high growth, but subject to Malawi's drought-prone conditions. 11. Until the early 1980s, agriculture showed a marked duality: estates (especially the privileged few, with most tenants living in poverty) were thriving and smallholders were impoverished. Since then, the dualistic structure has diminished, partly because some of the better-off smallholders moved into the estate subsector and thie legal and institutional structures are in the process of being unified with expanding smallholder access to burley tobacco production. Many aspects of the institutional structures are fundamentally the same, but recent trends toward liberalization in all markets suggest major changes in the 1990s (e.g., land tenure, access to formal credit, extension systems, inputs, market choices). From 1980-94, estate GDP grew at an annual average rate of 5.0%, and smallholder GDP grew at just 0.36% (again, reflecting the effects of two major droughts with a disproportionate 3  effect on sinalldolers); thus, the gap is still substantial. Tablc 1 slimmarizes thcsc growth trends atid tlicir variability. Table 1: Annial Agricultural GDP Growhil Rates (1973-1994) SECTOR 1973-94 1973-80 1980-87 1987-94 1987-94* 1980-94 Estate 5.6% 8.6% 4.1% 5.3% 7.8% 5.1% Subsector Smalliholder 0.7% 4.0% 1.8% -1.0% 4.1% 0.4% Subsector Agricultiural 1.8% 4.7% 2.3% 0.7% 5.0% 1.6% Sector Excludes drouglit years 1992 and 1994. 12. Estate Expansion. Much of the growthi in the estate subsector was due to an increase in the area cultivated under leasehold tenure, primarily to produce burley tobacco, given that it is by far the most profitable cash crop, even with fluctuating world prices. Until 1990, smallholders cultivating land under customary tenure were not legally able to grow burley tobacco. Thus, to obtain a license to do so, many of the larger smaliholders converted their land-use rights to leasehold tenure (estates). As a result, the area of land under leasehold tenure increased four and a half times between 1979-93. The number of estates was about 8,000 in 1989, reached 24,000 in 1992, 30,000 in early 1994 and a reported 37,000 by February 1995. However, it is important to note that although many of the new farms are classified as estates, they are close to the 10-hectare minimum and still managed as before. This process of traiisferring land and other resources from one sector to the other, together with the monopoly granted to the estates on the production of burley and flue-cured tobacco, is the major cause of the difference between the growth rates of the two subsectors. 13. As the estate subsector expanded, tobacco production increased from 43,000 tons in 1980 to nearly 143,000 tons in 1992. Due to this increase and rising burley prices, the contribution of estate tobacco sales to total export earnings rose from about 30% in 1980 to over 50% in 1993. Thus, Malawi is more vulnerable to shifts in tobacco markets than it was during the late 1970s and early 1980s, and there is even a greater need for diversification. 14. The Smaliholders. During the 1980s, a number of important changes within the smallholder subsector occurred as well. Due to the conversions noted above, along with the expansion of public lands for national parks, garie and forest reserves, the area under customary land tenure declined from about 8.2 million ha in 1964 to 6.6 million ha in 1993. This transfer, combined with a high rate of population growth, reduced the average size of sniallholder landholdings from about 2 ha in 1970 to I ha in 1990, and forced them to increasingly cultivate marginally fertile land. 15. However, since the inid-1980s, this decline in farm size has been accompanied by the beginning of intensified production of maize, facilitated by the recent development of maize hybrids and credit and fertilizer uptake. Nonetheless, yields of all smallholder crops have fluctuated quite widely over the past ten years. There have been variations of up to 70% largely due to climatic factors. One exception to this was in 1992/93, when there was a striking increase in maize yields. Favorable rainfall, a big boost in credit allocations and fertilizer usage, and increased soil nitrogen 4  resulting from a drought induced "fallow" in 1991/92 accounted for much of this increase (a record harvest of 2 million tons and average yields of about 1,500 kgs/ha). There was, however, also a significant contribution from an expanded use of hybrid seed and fertilizer. Less favcrable climatic conditions and a reduction in smallholder credit and use of purchased inputs in 1993/94 have resulted in a sharp decline in yields according to their long term average (about 900 kgs/ha). 16. The uptake of hybrid maize seed had grown from 3% of the maize area in 1986 to nearly 25% in 1992/93. It has dropped back to less than 10% in 1993/94, and has exceeded 25% in 1994/95 (largely due to an emergency drought recovery inputs program). Both the increase and the decline can be linked to farmer access to fertilizer. The majority of smallholders will not purchase hybrid seed if they cannot afford fertilizer (or get access to credit). A small proportion of farmers have naturally fertile soil or farmyard manure to profitably use hybrid seed without fertilizer. The message of using hybrids without fertilizer has yet to be accepted. While the hybrid will ultimately lead to a greater reliance on inorganic fertilizer to obtain the full potential benefits and use of scarce land, hybrid maize can still be attractive for many resource-poor smallholders who use traditional fertilizers (manure, and over time, agro-forestry). For the majority of smallholders farming on poorer soils, it is the lack of purchasing power and access to credit which has limited their uptake of fertilizer, which in turn has limited the number of farmers using the hybrids. It is this fundamental lack of purchasing power by the majority of smallholders which has resulted in stocks of seed being carried over from one season to the other in recent years. In the current 1994/95 crop season, it appears that the delayed onset of the rains (as part of the "El Nino" pattern) is likely to result in another low maize harvest and yields. Analysis of available niaize production data indicates that the variability of maize production increased substantially during the past five years, and highlights declining maize productivity and increased variability of national production reflects two underlying constraints to sustained maize production in Malawi: declining soil fertility and increased variability due to drought (e.g., 1992 and 1994). Thus, notwithstanding the encouraging developments observed in the 1992/93 crop season, the above factors demonstrate that the subsector has not yet achieved a sustained breakthrough in increasing maize yields. This report discusses the underlying reasons (apart from the weather factors) and how they could be addressed as part of a broader-based agricultural strategy which reduces production and marketing risks. 17. In 1987, the Government liberalized most smallholder produce markets by allowing traders other than ADMARC (the Agriculture Development and Marketing Corporation parastatal) to purchase from the farmers. Also, it temporarily abandoned the timetable for completely removing fertilizer subsidies and substantially increased the nominal producer pricc of maize, both absolutely and in relation to that of export crops. These moves, together with increased supplies of fertilizer, credit and hybrid maize seed, contributed to an estimated 44% increase in maize production between 1986-93. Between 1986-90, much of the hike was because more of the land was cultivated with maize, which was substituted for groundnuts. Further, in the early 1990s, some smallholders (about 1%) were permitted to grow burley tobacco. The profits from this crop raised their purchasing power, and thereby enabled them to buy m.ore fertilizer and hybrid seeds. More importantly, this experience illustrates the potential benefits of this cash crop, as the smallholder burley program continues to spread (even beyond the "legal" quota). As a result, use of hybrid maize has become a means of increasing food supplies, as well as generating cash income. Nevertheless, the use of improved and current surplus seed supplies are still limited (except in 1992-3) due to a lack of credit, and hybrids require fertilizer in order to sustain yield (although some farmers will still be able to use traditional fertilizers). 18. ADMARC'sfertilizer sales more than doubled during the 1980s, from 49,000 tons in 1980 to over 138,700 tons in 1993, and showed a particularly rapid increase after 1987 (exceeding 15 % per 5  year). In 1994, sales dropped to h.bout 80,000 tons, due to the credit "crisis". This growth occurred even though real retail prices for fertilizer increased and real produce prices either fell or remained constant. Despite such rapid growth, more smallholders would have used fertilizer if it had been available. As it was not, ADMARC rationed it to those who were able to obtain credit: About 65 % of fertilizer was sold on credit through farmers' clubs. Conversely, it is reported that buying supplies through cash purchases, in a timely manner, was difficult. Moreover, recent field surveys suggest that while the supply constraint was problematic for higher-income smallholders, it is low incomes that continue to lirnit its use among the poorer ones (about 55% of the total). Primarily due to the collapse of the credit system, in 1994 there was a major change in the pattern of input marketing, with a majority being financed by informal sources of credit and farmer's own resources. Continued liberalization ol the input and comunodity markets is likely to expand this trend, especially during the period of the credit system's recovery. 19. In total, less than 45 % of all smallholders employ fertilizer; its use is high!y correlated with income, size of landholding and access to credit. Application rates average about 23 kg of plant nutrient per hectare, which compares poorly with neighboring countries. Thus, it appears more farmers would apply it if supply and effective demand (i.e. purchasing power) constraints were addressed. 20. The number of smallholders who received credit rose by 15 % a year during the 1980s, but they still represented only a small part of the population. And, as the Smallholder Agricultural Credit Administration (SACA) expanded its disbursements, recovery rates dropped from an average of about 96% from 1982-84 to 81 % from 1986-90. Since then, recovery rates have continued to fall, although the very low rates in 1993-94 (about 16%) were heavily influenced by an unusual political situation that amplified some of the system's underlying weaknesses. Nonetheless, the sustainability of the credit supply needs to be urgently addressed; the Government must restore credit discipline and the 100% recovery rule. In this regard, the group joint-liability principle, which facilitates cost-effective recoveries without collateral, will be re-vitalized, and the Government is now working on a strategy to restore credit discipline. It will also be important to promote strategies that will encourage informal sources of credit and expanded role of stockists as input suppliers and traders. D. IMPLICATIONS FOR GROWTH AND POVERTY ALLEVIATION 21. The changes that occurred in agriculture over the 1980s had a number of positive and negative implications. Among the positive were: (a) increased on-farm employment opportunities due to expanded burley and hybrid maize production; (b) increased opportunities for income due to estate expansion, the smallholder burley tobacco program, and the attractiveness of hybrid maize; (c) the potential for increased food security as hybrid maize changed from a cash to a food crop; and (d) the petential to diversify away from maize as higher yields allowed other crops to be grown on the same amount of land. 22. Among the most encouraging outcomes of the new burley estates were the additional income- generating anid employment opportunities. Althougb small estates employ fewer tenants and laborers than large ones in absolute terms, they are more labor-intensive per unit of land. And, while estimates vary, the numbers of tenants and permanent laborers employed rose from about 200,000 in 1978 to about 500,000 in 1993. While most of these tenants live in poverty, they are responding to extremely limited income and employment generating activities in the smallholder subsector and some pressures on customary land, given estate land expansion during this period. One of the key points 6  here is the important role of burley in enhancing tenant and smallholder incomes, especially as they are given increased access to growing and marketing it. a 23. Smallholders, who were granted access to burley production quotas, also increased their income. Between 1990-93, about 29,000 smallholders produced roughly 14 million kgs under a new burley program. The incremental income from this, assuming that tobacco replaced hybrid maize, was estimated at MK 3.5 million, MK 8.0 million and MK 9.3 million (at current prices) respectively, in each of the three years. And, although the 29,000 represent only about 2 % of rural households, the pattern could be expanded, which would help raise rural incomes significantly and trigger broad- based growth. 24. Also, income-earning opportunities were enhanced by the improved maize technology and increased supply of fertilizer and credit. In fact, those moving to fertilized hybrid maize could triple their per hectare gross margins (assumes sufficient labor, optimal practices and favorable rainfall). While this may be a generous estimate, there is no doubt that significant increases in income (from higher maize sales or reduced maize purchases) could be attained. 25. Despite these benefits, some results were negative. The most important were: (a) agricultural production concentrated more on maize and tobacco, which left the Malawian economy more vulnerable to shifts in world markets and other extemal shocks; (b) significant and sustained productivity increases have yet to be achieved by the estates (particularly for tobacco) and smallholders (although maize yield increases have made an initial breakthrough); (c) the efficiency of estate production remains suboptimal (with yields about 60% of those in neighboring countries), cultivable land is underutilized and the return to capital is low; (d) the production of high-value export crops is still highly concentrated, despite the new entrants into the burley industry, since their number is still small (but growing quickly); (e) the cost of imported agricultural inputs (mostly fertilizer) remains very high, because the cheapest extemal transport routes have been disrupted, and will take some years to be fully restored; and (f) a significant portion of smallholders do not directly benefit either from liberalized policies or the inproved maize technology, and about two thirds of estate employees (tenant farmers and laborers) are still impoverished. 26. About 55% of Malawi's population cannot meet basic needs (or minimal caloric requiremernts) and have extremely low levels of education and health. About 90% of this group are smallholders who have less than I ha of cultivable land. A disproportionate number are female-headed households. These farmers generally run out of food reserves about four months before the next maize harvest; also, they lack the resources for inwensive fanning and often resort to practices which degrade the soil and deplete the woodland. In addition, although underemployed for much of the year, they face severe labor shortages during critical stages in the agricultural cycle, such as during planting and weeding. Further, they are severely constrained in the yield-augmenting inputs they can afford or in their ability to engage in other sources of income generation (such as off-farm work during their own crop season). Thus, they are caught in a poverty trap. E. ISSUES AND STRATEGY FRAMEWORK 27. It is crucial, given a 3.4% population growth rate and the relative size of the sector, that agricultural growth is maximized in a way that it will be sustainable, both environmentally and in the face of shifting world markets and external shocks. This means not only lifting the constraints to increased land and labor productivity and income-generating opportunities, but also encouraging diversification away from maize and tobacco. The recent droughts (and uncertain harvest in 1994/95) 7  also underscore the urgency of promoting drought-resistant technologies to help stabilize and widen the range of food production. 28. To achieve these objectives. a multidimensional strategy is needed for the various groups of farmers. One group is the large estates, some of which have the resources and capability to spearhead new crops and technologies, while others are primarily set up to extract rents from tobacco quotas. A second group consists of small estates and larger smallholders (the latter making up only about 15% of smallholders). These farmers were transformed over the last decade through increased production of tobacco and fertilized hybrid maize. Still, they cannot maximize their returns due to a shortage of inputs and marketing restrictions. A third group are the emerging commercial smaliholders, who could comprise about 22% of all smallholders and have the land and agricultural potential to generate marketable surpluses. A fourth are resource-poorfarmers who constitute 63% of the smallholders, whose land cannot meet subsistence needs from local maize varieties, and who lack the resources to invest in high-productivity maize. 29. Given the population density among the smallholders and the impossibility of moving large sections of the rural population into off-farm jobs, the main alternatives in the medium term are to increase smallholder land and labor productivity, and improve estate efficiency and land use. These ends could be achieved through (a) further liberalizing input and produce mnarkets, which would also stimulate labor and land markets; (b) increasing the use of organic and inorganic fertilizers and hybrid maize varieties; (c) investing in improved technologies, which should give special emphasis to promoting drought-resistant food crops; and (d) encouraging smallholder ouitgrower arrangements (with estates) as part of a broad-based diversification strategy. The means to achieve these ends are discussed below. 30. One critical activity will be mobilizing support for restoring the use of fertilizer/hybrid rraize seed with those who have used it in recent years, and expanding usage among the majority of non- users of these inputs. This will increase their food security and reduce the amount of land allocated to maize, which would allow them to plant the remaining land with cash crops and secondary food crops. 31. At the same time that these households are encouraged to grow hybrid maize, tVey should also be encouraged (mainly through liberalizing markets and increasing incomes) to grow cther food crops, especially since rural households already like beans, greens to eat with their maize. Failure to diversify, coupled with widespread adoption of maize hybrids, could lead to excessive maize production, which could lower prices, and ultimately lead to a cycle of reduced production, increased prices, increased production and a fall in prices. The potential for maize price instability is largely inherent in Malawi's rainfed agriculture system, a factor which justifies an appropriate form of price stabilization, which could increasingly be undertaken by private traders. However, some of the alternative crops are unattractive, due to the maize-pricing policy and the production and marketing restrictions on other crops. These obstacles have to be addressed along with the hybrid maize/fertilizer package and technologies to promote drought-resistant food crops (e.g., cassava, sweet potato). 32. Second, the cost-benefit ratios of fertilizer and hybrid maize have to be attractive enough to convince smallholders to adopt them on a sustained basis; this will depend on the price of both and the efficiency with which these inputs are combined and used. Thus, relative prices between inputs (seed, fertilizer) and outputs, as well as the quality of the seeds and extension advice (especially concerning site-specific fertilizer recommendations and farmer application and crop husbandry practices), are critical factors. 8  33. Third, the availability of credit (formal and infornal, linked with increased savings mechanisms) and infrastructural support (which depend on the creation of efficient financial institutions and public investment in transport, irrigation, electricity and other infrastructure) will influence the rates at which fertilizer, hybrid maize and other food and cash crops are adopted and become profitable. 34. Given the nature of the remaining constraints, various investment instruments have to be reevaluated and new measures introduced for both smallholders and estates. These will address the following components of a comprehensive agricultural strategy: * Land utilization and natural resource management; * Pricing and marketing of agricultural produce, including reforms of the burley tobacco quota allocations; * Key Inputs: Improved seeds and fertilizers; * Rural financial services; * Generating and disseminating agricultural technology;