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«Industrial Policy in Mozambique Matthias Krause Friedrich Kaufmann Industrial policy in Mozambique Matthias Krause Friedrich Kaufmann Bonn 2011 ...»

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In reaction to the downturn of the processing industry, in 1999 the Mozambican Congress passed a law protecting the domestic processing industry with an export tax on RCNs (to be levied at between 18 and 22 percent). Moreover, the law established that the funds raised through the export tax should be used to cover the expenses of the National Institute for Cashew Promotion (INCAJU, created in 1997), which is mandated to promote RCN production and processing.  38 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique Figure 3: The cashew value chain   Source: Technoserve Inc. (2009) Figure 3 shows the international cashew value chain. The stages: (i) RCN production; (ii) processing (the transformation of RCNs into cashew kernels): as well as (iii) domestic trade and export of RCNs and cashew kernels, take place in Mozambique. In the course of rebuilding the processing industry after its near collapse in 2001, labour-intensive Indian technology was introduced in Mozambique that uses manually operated devices to cut the outer shells of the RCNs. Apart from a small volume that is produced for the domestic final-consumer market, the processing that takes place in Mozambique excludes the final processing stage (roasting, salting, and final packaging of cashew kernels). Nevertheless, the last two stages of (a) roasting/salting/final packaging and (b) retail/distribution – that are dominated by American, European, and Indian firms – make up as much as 80 percent of the final consumer price for whole cashew kernels, whereas the earlier stages account for merely 20 percent (Technoserve, Inc. 2009; Francisco / Barrenho 2008, 7–8). One characteristic feature of the cashew value chain is that it is hardly vertically integrated (Cramer 1999, 1256).

The challenges The challenges to structural transformation of the cashew sector depend on the desired developmental goals. From the available strategic documents (INCAJU 2008a; 2008b) and

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the cashew- policy framework itself (see below), it’s clear that the Government’s goals are to promote productivity, jobs and income relying on the development of the domestic processing industry as one centrepiece of the strategy (an alternative approach would be to promote RCN production relying on RCN exports alone). This approach of extending the domestic value chain35 is coherent with the objectives stated in PARPA II (to promote the expansion of agro-industrial and labour-intensive manufacturing activities; República de Moçambique 2006a, 34–35) and the Industrial Policy Strategy (to focus on areas with major economic and social impacts, such as the food-processing industry; República de Moçambique 2007a, 4 – for more details, see Chapter 5).

Since the domestic market for cashew kernels is negligible, this strategy can only succeed if the Mozambican processing industry is able to compete in the world market and penetrate large, open export-consumer markets (those of the USA and the EU being the most important).36 This implies various challenges along the cashew value chain concerning the

upstream stages, the processing stage itself, as well as the downstream stages:

The upstream stages

Here, the crucial issue from the processing industry’s point of view is to source RCNs in sufficient quality and quantity at a competitive price. In Mozambique, however, there are problems with both quality and quantity. The outturn (pounds of sellable kernels per 80 kg bag of RCNs) in Mozambique is low (42 to 46) compared with the world’s leading producers (India and Vietnam: 50 to 56; Francisco / Barrenho 2008, 48). The low average quality of RCNs partly has to do with poor post-harvesting handling, but mostly with lowtech farming practices. RCN production levels have stagnated lasting recent years. This is due to several factors: the cashew orchard has high percentages of old trees and trees plagued with diseases and pests. Small farmers produce almost all37 of Mozambique’s RCNs. Many of these small farmers just ‘collect’ RCNs instead of actively ‘farming’ (planting, pruning, spraying and spreading manure), which results in very low productivity per tree (2 to 4 kg RCNs – less than half of the attainable levels of 8 to 10 kg; INCAJU s. a., 6; Technoserve, Inc. 2009). Consequently, the challenges consist of investing in replanting cashew trees and maintaining them to increase productivity, as well as in improving post-harvesting handling.

A further problem for the processing industry is to manage to buy RCNs on the market at competitive prices. Although the 18 percent export tax on RCNs (see more on the export tax below) gives the domestic processing industry a competitive edge, it has to compete with big traders who mainly export RCNs to India. These RCN traders possess a dense net of well-established rural trading posts.38 One challenge for processors lies in building reliable supply networks and trusty trade relations with RCN brokers or farmers’ associaMore precisely, preserving the extension of the domestic value chain that had existed since the 1970s.

36 India also has a huge consumer market for cashew kernels. However, it is highly protected against cashew-kernel imports.

37 According to a source cited by Francisco / Barrenho (2008, 48) as much as 98 percent of RCNs are produced by small farmers.

38 Insight gained in an interview with Yunuss A. Gafar (Table A4).

40 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique tions.39 (From the processing industry’s point of view, the alternatives are to invest either in contract farming schemes or in their own cashew plantations. Benfica / Tschirley / Sambo 2002 conclude that the prospects for the former’s success are poor due to a high risk of default40, and that the latter is not desirable from a povertyreduction perspective.) The other challenge for the processing industry consists in getting sufficient short-term capital at affordable interest rates to finance RCN purchases during the harvesting season.

The processing stage

Access to short-term credit in sufficient quantity and at affordable interest rates is probably one of the processors’ most important challenges, since the working-capital requirements for buying RCNs are extremely high (typically between USD 0.5 and 2.5 million, depending on the processing capacity). Compared with RCN traders and Indian processors, Mozambican processors are at a competitive disadvantage because they have to commit more working capital: They buy the whole stock during the Mozambican harvesting season and transform it into sales revenue spread throughout the year. In contrast, traders do not need to keep their stock for such a long period, and Indian processors manage to shorten stock-keeping by sourcing from several regions of the world with different harvesting seasons. Moreover, Mozambican processors typically depend on the poorly developed domestic banking sector to arrange for credit, whereas RCN traders enjoy access to commercial credit from their Indian trade partners41 and Indian processors have access to a well-developed financial sector and a dense net of trading partners.

Another challenge is the low productivity of Mozambican workers. This is partly due to high rates of absenteeism, which in many cases is caused by malaria (Technoserve, Inc.

2009). According to one factory owner, absenteeism is around 30 percent42; according to Francisco / Barrenho (2008, 66) it is as much as 50 percent. One factory owner reported that because of low labour productivity, he was starting to mechanise. An additional challenge to factories’ competitiveness is the relatively rigid labour legislation.43 Finally, weaknesses in the business environment such as poor transport, water and communications infrastructures, tend to increase production costs.

The downstream stages

The international trading environment for cashew kernels is highly imperfect. According to Cramer (1999, 1255) the competitive assets of successful exporting firms are quality standards and management, market and technical information, as well as established input supplies and final output-buyer networks. A precondition for supplying the high-end conIn recent years, more and more farmers’ associations have emerged (in many cases with the support of development cooperation), but they are still not widespread and typically have weak institutional capacities. Interview with Martin Mason (Table A4) and with representatives from the Fórum Naihava, a union of various farmers’ associations in the district of Mogovolas, province of Nampula (Table A4).

Cf. also Francisco / Barrenho (2008, 47) and Hanlon / Smart (2008, Chapter 3).

40 Farmers can always sell their production to RCN exporters if they offer better prices than the processors.

41 The trade relations between Mozambique-based RCN traders and Indian traders are reinforced by ethnic ties.

42 Interview with Felipe Miranda (Table A4).

43 On this topic, cf. also Krause et al. (2010, 98).

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann sumer markets in the USA and the EU is to build trustful relations with the huge output buyers that command the supply of retail markets, and to invest in quality management so as to comply with the high standards of product quality and quantity, timing and reliability that these buyers demand. With international development cooperation support, a group of Northern Mozambican processors founded a jointly owned export-service company, Agro Industrias Associadas (AIA), and have been successful in penetrating this high-end market through a cashew-kernel broker based in the Netherlands (Technoserve, Inc, 2009). Despite this success, other processors still do not enjoy well-established quality management systems and final output-buyer networks. An alternative, or complementary, final consumer market to be explored is South Africa, which imports cashew kernels in significant quantities. Mozambican exports enjoy duty-free access to the South African market. Nevertheless, just as for Europe and the USA, good buyer relations have to be built up, and the required quality standards have to be met, in order to take advantage of this potential market.

Moreover, at least theoretically, there is potential to further enlarge the domestic-cashew value chain. Given the significant value added in the final processing (roasting/flavouring) and packaging stage, this market is attractive to the Mozambican cashew industry. However, this market has even higher entry barriers (additional standards like food safety and hygiene standards, timing, sales management).

6.1.2 Assessment of the cashew policy and the industrial policy management The cashew policy framework and its main actors The GOM’s current cashew-policy framework can be characterized by the following

measures at the macro (a) and meso levels (b and c) (INCAJU 2008a):

a. An export tax of 18 to 22 percent on the FOB export price of RCNs (currently 18 percent), with tax revenues used to finance the promotion activities mentioned below b. Promotion of RCN production: research, nurseries for improved varieties, pests and disease management and extension services (80 percent of export-tax revenues) c. Promotion of the cashew processing industry: credit guarantees (20 percent of export-tax revenue), as well as business and technical advisory services.

From a formal perspective, the National Institute for Cashew Promotion (INCAJU) is the key cashew-strategy actor, since it is responsible for designing, monitoring and, in some cases, implementing the promotional activities. INCAJU, which depends on the Ministry of Agriculture, was created in 1997 and has its own legal identity and budget.44 The strategy for the promotional activities was set out in a master plan for the period from 2000 to

2005. By August 2009, this master plan had not yet been actualised, which means that INCAJU’s recent work has been based on an outdated strategy.45 Further Government acSee also the institutional information on INCAJU’s website: http://www.incaju.gov.mz.

45 Information gained in interviews with Jake Walter and Raimundo Matule (Table A4).

42 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique tors involved in cashew-policy making are the Ministry of Agriculture and the MIC (the latter only concerning the export tax).

Donors play an important role in supporting the promotion of the cashew industry through technical and financial assistance, the most important being United States Agency for International Development (USAID), the African Development Bank, the EU, and the Swiss, Dutch, and French Cooperations.46 Important NGOs, consulting firms and banks that are engaged in promotional activities include Technoserve, Inc., GAPI (a business and financial services provider), CLUSA (an NGO that promotes farmers’ associations and provides extension services), and BCI Fomento (one of Mozambique’s major commercial banks that implements two subsidised credit lines for processors, see below). Another organisation worth mentioning is the AICAJU, the national association of the Mozambican cashew processors and traders, which mainly engages in lobbying. (Smallholding cashew farmers lack a significant lobbying organisation.) With regard to the promotional activities aiming at the RCN production stage, research is conducted by the Mozambican Institute for Agricultural Research (IIAM), which has focused on growing improved varieties of cashew trees (with increased tolerance of pests and diseases and precocious production) and has certified several clones for replanting and propagation. INCAJU, with its own staff and facilities, grows seedlings of the improved varieties in several nurseries located in the main cashew-producing regions and distributes them to farmers. Seedlings are sold at cost price, and smallholders and farmers associations enjoy special discounts. Moreover, INCAJU sponsors a subsidised spraying scheme of self-employed small operators and service providers who charge a fee to farmers for spraying their cashew trees.

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