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This document is from the archive of the Africa Policy E-Journal, published by the Africa Policy Information Center (APIC) from 1995 to 2001 and by Africa Action from 2001 to 2003. APIC was merged into Africa Action in 2001. Please note that many outdated links in this archived document may not work.

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: afjn@afjn.org; 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:

  1. the study had been done without talking to people in the industry, and had fundamental flaws;
  2. globalisation was forcing a lowering of standards of health and safety at work;
  3. it was a myth that peasants would gain; and
  4. 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:

  1. Indian subsidies to its industry "tilt the playing field" and make competition unfair.
  2. Peasants did not gain anything from liberalised exports; extra profits were all held by the traders.
  3. "Improved management practices continue to contribute to factory efficiency" in the newly privatised Mozambican factories.
  4. 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: epost@afrikagrupperna.se
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 (epost@afrikagrupperna.se).


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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