Smallholder-led growth in Malawi

NUMBER 140 Revised Pr6cis Number 140 * ED Precis ) Operations Evaluation Department March 1997 Smallholder-led Growth in Malawi In more than a decade of agricultural smallholders from producing burley The project adjustment programs, the World Bank's tobacco, the most lucrative export policy dialogue in Malawi missed the crop, and forced smallholders to The project was designed to mo- main issue: giving smallholders an op- sell through the Agricultural Devel- bilize a vast reservoir of potential portunity to participate in the country's opment and Marketing Corporation export capacity and remove one of development. Handicapped by high taxes, (ADMARC). The government pur- the leading causes of rural poverty the smallholder sector was effectively sued this policy through the 1970s in Malawi by changing the role of excludedfrom export production and and 1980s (see table). ADMARC and establishing new had to rely on subsistencefarming. The rules for the production and mar- smallholder sector was used as a source ADMARC used its high profits to keting of tobacco. The project envis- of cheap labor by the estates. A Bank- subsidize the consumer prices for aged a "new deal" for smallholders, funded Agricultural Sector Adjustment maize and invest in unproductive who would obtain a substantial por- Credit, approved in 1990, was designed parts of the economy. At the same tion of market revenues from all to change all this and give smallholders time, high taxes on smallholders en- tobacco sales and gain access, on a direct and untaxed access to export sured the success of the estate sec- pilot basis, to the right to produce markets, particularlyfor tobacco. tor, which depended on an ample burley tobacco. Since burley tobacco supply of cheap tenant labor and yielded 10 times the income per The government proved reluctant low prices for the products of hectare of hybrid maize (the leading to carry out the reforms as agreed, and smallholders. subsistence crop), the reforms prom- the Bank was faced with a choice: either ised a strong attack on rural poverty. insist on thefull implementation of re- The implied taxation averaged forms before releasingfunds, or relax more than 50 percent of smallholders' The project also continued to loan conditions in the interest of con- gross revenues. This effectively ex- support macroeconomic adjust- tinued dialogue with the government. cluded half of Malawi's land and 72 ments in line with earlier opera- After a 10-month impasse, conditional- percent of its population from devel- tions, and added steps to im- ity was softened. An audit by OED * opment. The resulting low cash crop prove the efficiency of land use acknowledges that this allowed a con- production by smallholders also in- on estates; divest ADMARC of tinued policy dialogue, albeit at the cost creased the country's reliance on es- its noncommercial functions (or of delayed policy change. The audit tates for export income. ensure their proper budgetary draws attention to the rapid progress support); revise the Ministry of achieved by a subsequent bilateral The 1980s saw five Bank-sup- Agriculture's budget; and redi- project, which made policy reform a ported policy adjustment operations precondition for lending. with a total value of $200 million, but Malawi's economic performance Performance audit report: Background was disappointing. Per capita income "Malawi: Agricultural Sector and consumption declined, macro- Adjustment Credit," by Wilfred At independence in 1964, Malawi economic imbalances persisted, and V. Candler. Report No. 15641, inherited an agriculture system social indicators remained poor, May 23, 1996. Available to Bank consisting of a few large, foreign- even by African standards. In 1990 executive directors and stafffrom owned, export-oriented estates and the Bank approved the Agricultural the Internal Documents Unit and a smallholder sector of mostly poor, Sector Adjustment Credit, with the from regional information service subsistence farmers. Colonial laws goal of allowing smallholders to centers. Precis written by Wilfred allowed estates to obtain the full grow burley tobacco and obtain full V. Candler and Stefano Petrucci. value of export sales but prevented value for export sales. m - -~~~~~~~~~~~~~~~~~~  ity and reduced poverty in the small- Table: Implicit taxation of smallholder export crops (%) holder sector. Year Rice Tobacco Groundnuts Beanss Cottoni * Tobacco production. A total of 1980-81 79 84 68 69 53 110,000 tons of burley tobacco were 1984-85 60 22 26 27 73 sold at auction in 1995, compared 1987-88 80 73 13 32 50 with the initial target of 99,000 1991-92 87 55 56 29 73 tons. The 1996 target was raised to 120,000 tons, a 20 percent increase in Malawi's most important export rect maize breeding towards high- lieve they paved the way for a in one year. yielding flint hybrids. smooth transition to a more demo- cratic regime. Lessons Implementation The subsequent Fiscal Restruct- * Smallholders had to be treated as The tobacco and ADMARC re- uring and Deregulation Program well as the large estates if poverty forms were preconditions for re- supported by the Bank has several was to be reduced andfood security lease of the second tranche of the concrete achievements to its credit. strengthened. Malawi could not credit, originally scheduled for These include the final abolition of achieve its full development poten- December 1990. The government, tobacco quotas, liberalization of tial as long as the smallholder sector however, proved reluctant to dis- almost all agricultural input and was so heavily taxed. Maintaining mantle the system that granted product markets, and the creation two systems of land tenure never estates access to cheap labor. of a land commission. justified limiting the crops that could be grown or the marketing The Bank rejected the alterna- Outcome channels that could be used. tives proposed by the government, and the release of the second Actual achievements under the * The decision tofund a minimal lend- tranche was suspended. The Bank project were modest. Macroeconomic ing program in order to maintain policy held its ground for 10 months, but policy reforms were carried out with- dialogue may preclude significant prog- it eventually released the second out significant problems, but major ress towards policy reform. The Bank tranche after the government re- sectoral reforms were still on hold can choose between continuing dia- newed its promise to implement when the project closed in 1992. logue with a reluctant government the agreed reforms. The negotia- or can insist that reforms be precon- tions coincided with a sharp de- By 1996, agricultural policy in ditions for lending. In Malawi, the cline in bilateral aid, as donors Malawi was dominated by reforms Bank opted to keep lines of commu- became increasingly supportive of made under the bilateral follow-up nication open at the expense of the opposition's demands for free project. Cotton and tobacco market- slower and less complete reforms and fair elections. ing have been completely liberal- than previously negotiated, but it ized, the cap on estate payments to maintained its role of an honest bro- The Bank's action at the time tenants has been removed, a floating ker between the government, the may have been influenced by its exchange rate is in place, and limits donor community, and the political awareness that USAID, the donor on tobacco licensing and private opposition. Even-or especially- of a follow-up project, would maize trading have been removed. with hindsight, Bank staff generally demand full implementation of insist that in this instance, the deci- reforms as a precondition for dis- Two output variables highlight sion to maintain policy dialogue was bursements. Another view is that the benefits of policy changes initi- the right one. the Bank, thanks to its patient ne- ated by the Bank's project and imple- gotiation, achieved a slight relax- mented by the follow-up project: Editor's Note: The Bank's regional staff ation of constraints on the small- have a different view of the credit's im- holder sector, opening the way for * Poverty. For the first time in pact and believe that the credit made at USAID to insist, in the follow-up 1995-96, the estate sector had diffi- least as significant a contribution as project, on full deregulation. By culty in finding tenants. Demand bilateral programs to advancing dia- keeping communications with the for tenants has increased their logue on sectoral issues and policy re- government open, Bank staff be- wages, indicating increased prosper- forms for Malawi's agriculture. OED Pr6cis 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. This and other OED publications can be found on the Intemet, at http:// www.worldbank.org/html/oed. Please address comments and inquiries to the managing editor, OED, tel: 1-202/458-4497, fax: 1-202/522- 3200, e-mail: eline@worldbank.org March 1997