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Mozambique: Cashew Policy
Mozambique: Cashew Policy
Date distributed (ymd): 971119
Document reposted by APIC
+++++++++++++++++++++Document Profile+++++++++++++++++++++
Region: Southern Africa
Issue Areas: +economy/development+
Summary Contents:
This posting contains an article documenting World Bank errors which have
devastated Mozambique's cashew industry. It also contains a commentary
from the Africa Groups in Sweden reflecting on the case and suggesting
that the Swedish government set an example for other donors by setting
up a mechanism by which donors would be obliged to pay compensation for
damage caused by mistaken advice to developing countries.
+++++++++++++++++end profile++++++++++++++++++++++++++++++
Africa Faith and Justice Network (AFJN),
401 Michigan Ave. NE, P.O. Box 29378
Washington, D.C. 20017
Tel. 202 832 3412; Fax. 202 832 9051;
Email: [email protected]; Web:
http://www.afjn.org
Can Mozambique Make the World Bank Pay for Its Mistakes?
October 1997
By Joseph Hanlon, Maputo, Mozambique
Cashew nut processors in Mozambique are demanding $15 million in compensation
from the World Bank, in a ground-breaking attempt to force the World Bank
to pay for its mistakes. The claim follows the release earlier this month
(September) of a World Bank study which said that a policy the Bank imposed
on Mozambique was totally wrong and should be "abandoned". More
than 7000 people have been thrown out of work this year, and the newly
privatised cashew industry virtually bankrupted. Kekobad Patel, head of
the Mozambican Cashew Industry Association, warns that even if the policy
is now reversed, most of the factories cannot be reopened without financial
help. This will be a personal test for James Wolfensohn, president of the
World Bank, and his efforts to make the bank less macho. The new study
was carried out at his personal request after he visited Mozambique in
February (this year) when he was met by objections to Bank policy on cashews
from government, industry and trade unions.
NOT JUST A SNACK
To Mozambique, cashew nuts are not just nibbles that go with beer --
they are the country's second largest export. Tens of thousands of individual
peasants cultivate cashew trees. But the cashew has a hard and acidic outer
shell which must be hit with a hammer or cut with a saw to expose the kernel
we eat. Mozambique developed a relatively sophisticated processing industry
employing 9,000 people, mainly women, to take the kernels from the shells.
At World Bank insistence, these state-owned factories were privatised
in 1994-5. High bidders at US$ 9 million for the cashew factories were
local businesses and not transnational corporations, as had been expected
by the World Bank and many outside observers.
But as soon as the local business people took over, the World Bank revealed
a secret study which claimed the processing industry was so inefficient
that the country lost money on every nut processed, and that peasants would
earn a higher price for their cashews if raw nuts were exported. The Bank
said that raw cashew nuts should be exported to India, where the kernels
are removed from shells by families working at home in poor conditions.
In particular, the shells contain an acid which damages the fingers of
workers, which is why Mozambique has always used mechanical processing
with large hammers or saws rather than Indian hand processing. Furthermore,
India subsidises its industry.
Mozambique had imposed an 20% export tax on unprocessed cashew nuts
to compensate for Indian subsidies. Government and industry had already
agreed a phased reduction down to 10% over five years, as the new owners
repaired war damage and modernised their factories. But this was not enough
for the World Bank, which demanded that the tax be removed over three years
and exports of unprocessed nut be "liberalised".
There was an outcry from the government, industry and trade unions,
who demanded reconsideration. They said:
- the study had been done without talking to people in the industry,
and had fundamental flaws;
- globalisation was forcing a lowering of standards of health and safety
at work;
- it was a myth that peasants would gain; and
- buyers of the newly privatised factories had been cheated because they
had an implicit (and in some cases explicit) promise that there would be
protection until they got the industry back on its feet.
CONDITIONALITY AND WORLD BANK REFUSAL TO TALK
Despite the strong and detailed case put forward by the industry, the
World Bank refused to discuss the subject. Instead, the Bank made it a
test of strength.
The 1995 World Bank "Country Assistance Strategy" made free
export of cashew a "necessary condition" of its programme to
Mozambique -- the only "necessary condition" linked to such a
detailed policy point. The 1996 joint IMF-World Bank "Policy Framework
Paper for Mozambique" also required the removal of the cashew export
tax.
According to the World Bank's "World Development Report 1997,"
Mozambique is the poorest and most aid dependent country in the world.
This is because Mozambique was subject to a 12 year war waged by the old
apartheid government in South Africa. This war killed 1 million people
and did an estimated $30 billion in damage, which shattered the economy.
As a result of this huge destruction, Mozambique is now receiving more
than $500 mn per year in aid. But all of this aid is "conditional"
on Mozambique having programmes with the IMF and World Bank. With no World
Bank programme, there is no aid. So when the Bank makes closure of the
cashew industry a "necessary condition", it is a powerful demand.
If that action is not carried out, then the World Bank programme stops,
and then all aid is halted because it is conditional on having a World
Bank programme. If aid stops, people starve. So a World Bank "necessary
condition" is an order which cannot be refused. Nevertheless, the
outcry grew from civil society, particularly the trade unions and the press
- - who argued that the Bank policy was based on false premises.
The World Bank response was to raise the ante again. In October 1996
a World Bank delegation led by vice president for Africa Callisto Madavo
visited Mozambique. Madavo was firm: "We have an agreement with government
on cashew, and we expect that agreement to be followed. We believe the
export tax on cashew should be removed," he told a press conference.
In closed meetings, the Bank team went further. One Mozambican official
said privately "the World Bank told us we must say this is our policy
and to stop staying it is imposed by the Bank. We know aid is conditional
on World Bank approval, and now we must lie to get World Bank approval.
And we will. But we remain totally opposed to a policy that will destroy
our cashew industry."
WOLFENSOHN TO THE RESCUE?
But when President Wolfensohn visited Mozambique in February 1997, he
responded more favourably to the same demands from government and industry.
He totally reversed Madavo's line. Wolfensohn ordered a new study, and
suspended the demand for further cuts in the export duty on raw nuts, which
at that point stood at 14%. And the demand for further cuts did not appear
in the 1997 IMF-World Bank "Policy Framework Paper for Mozambique"
which was issued in May.
The new study was carried out by international consultants Deloitte
& Touche and released in early September. It says the World Bank's
previous policy "should be abandoned". It agrees with the industry
and trade unions and "disagrees with the previous finding". The
new study makes several key points:
- Indian subsidies to its industry "tilt the playing field"
and make competition unfair.
- Peasants did not gain anything from liberalised exports; extra profits
were all held by the traders.
- "Improved management practices continue to contribute to factory
efficiency" in the newly privatised Mozambican factories.
- Mozambique earns an extra $130 per tonne by processing its own cashew
kernels, in contrast to earnings exporting raw nuts. This extra earning
"alone is sufficient reason to support the processing industry against
competition from India." The study calls for an increase in the cashew
export tax.
BUT IS IT TOO LATE?
But is it all too late? The export tax was cut to 14% this year and
more than half of Mozambican raw nuts were exported to India. Factories
ran out of nuts and by mid-year began to shed staff. Most of the 14 factories
are now closed; 7000 of the 9000 workers (most women) are now out of work.
"In the past two years we have lost more than $15 million,"
said Kekobad Patel, head of the Cashew Industry Association. "The
government still expects us to pay the next instalment on the privatisation,
and we need to invest millions of dollars to modernise the factories. But
we now have big debts to the banks from the past two years on which we
are paying 30% interest. We cannot pay everything."
The industry wants two things. First, it needs a commitment to a long
term policy with at least some protection. Second, the World Bank or the
government must provide a long term low interest loan to allow the industry
to clear its debts and modernise. "We are actually prepared to assume
these losses, but in the long term, not immediately," says Patel.
The buyers of the factories have only paid the first installment on
the purchase price, and only started rehabiliation. "So if the World
Bank or the government cannot give us the conditions to work, we will just
hand back the factories," and they will never open again, Patel said.
"Mozambique has one of the best privatisation programmes in Africa,"
according to Phyllis Pomerantz, World Bank country operations manager for
Mozambique, speaking last year in Maputo. Yet the Bank's and Pomerantz's
own policies may have destroyed one of the best parts of one of its best
privatisation programmes.
WHAT RESPONSE FROM WOLFENSOHN'S BANK?
The test is what happens now. Will the World Bank hide behind Madavo's
line that this was government policy and nothing to do with the Bank? Or
will the Bank accept that the policy was based on its study and was imposed
by the Bank? If so, is the Bank prepared to pay compensation? James Wolfensohn
has taken a personal interest in this case, and it was only his intervention
that led to Bank acceptance that it was pushing a wrong policy. Can Wolfensohn
bite the bullet and compensate for past errors?
Joseph Hanlon is author of "Peace Without Profit: How the IMF Blocks
Rebuilding in Mozambique" (James Currey, Oxford, 1996) and is editor
of the "Mozambique Peace Process Bulletin."
Africa Groups, Sweden
Barnangsgatan 23
116 41 Stockholm
SWEDEN
Tel: 46-8-442-7060; Fax: 46-8-640-3660
E-mail: [email protected]
Web: http://www.afrikagrupperna.se
SWEDISH PROPOSAL TO INTRODUCE DONOR WARRANTS AGAINST MISTAKES
AND POOR ADVICE
The Africa Groups of Sweden has in early September commented on a report
published by the Swedish Ministry for Foreign Affairs. The Africa Groups'
comments included a proposal with relevance to the article on the Mozambican
cashew industry,
The report has the title Partnership Africa, and is a contribution to
formulating a new policy for Sweden's relations with Africa. It has been
circulated for comments to a number of Government Agencies, business organisations
and NGOs. The report advocates a more long term perspective of the development
cooperation and other relations (10-15 years). It suggests measures to
promote equity and partnership in relations, to support African countries
and actors to increase their influence in international fora and institutions,
and to develop and adjust the instruments of development assistance to
fit this new policy.
The comments from the Africa Groups of Sweden included the following
section, which we quote in full:
" Partnership with warrants?
The history of development assistance gives a lot of examples where
the donor, of self interest or unintentionally, has embarked on projects
that have been unproductive or counter productive for the receiving country,
which has had to carry the consequences and cost for the failures. The
conditionality has been a key word in the development debate the last few
years. After a long discussion and tough criticism, the World Bank has
reassessed its position on the state and the public sector (the report
The State in a Changing World). This has in turn consequences for the controversial
structural adjustment programs (SAPs). Now, the policy of the Bank and
other donors might gradually be adjusted, hopefully to benefit the developing
countries in the future.
But damages to the weak and vulnerable economies in Africa will remain.
If the mistakes are the wrong diagnosis, the wrong medicine or simply the
wrong dose is less important. Damages can probably have effects many years
to come.
For brokers and financial advisors, there are rules and codes protecting
their clients against unprofessional advice and transactions. In severe
cases, considerable compensation can be imposed. A corresponding warrant
or insurance should exist also in the development assistance world. We
think it should be part and parcel of the proposed Partnership principle.
Details about its mechanisms and where violations can be tried can be worked
out later. It is not necessary to opt for a comprehensive scheme or absolute
fairness, if this proves to be difficult to implement. Rather it is important
to create a possibility to act against gross and obvious mistakes or exploitations
of a situation of dependency.
We do not suggest this because we think that Swedish actors often misuse
their position or give grossly misleading advice. But it would be an important
policy signal, that can challenge other donors and financial institutions
to make a corresponding undertaking. It will set a price on conditionality
also for the donors. Ex post analysis' of the development policies that
has been implemented can be an important contribution to the fact material
necessary for scrutinizing cases of such violations."
Note: The full commentary by the Africa Groups, and the original Swedish
report, are so far only available in Swedish.
For more information, contact the Africa Groups ([email protected]).
This material is being reposted for wider distribution by the Africa
Policy Information Center (APIC), the educational affiliate of the Washington
Office on Africa. APIC's primary objective is to widen the policy debate
in the United States around African issues and the U.S. role in Africa,
by concentrating on providing accessible policy-relevant information and
analysis usable by a wide range of groups and individuals.
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