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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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There are also a series of donor-financed activities underway, mainly carried out by NGOs such as the Cooperated League of the United States of America (CLUSA), which include extension services and technical assistance for cashew farmers, especially with respect to the promotion of farmers’ associations. Some of these approaches – such as those of CLUSA and GAPI – have been inspired by a value-chain perspective that seeks to strengthen linkages between farmers, traders and processors.

With regard to promotional activities targeting the cashew processing stage, two credit lines are available for processors, both offered by BCI Fomento. The first credit line, guaranteed by INCAJU, is for long-term investment in fixed assets such as land, buildings and machinery. In 2007, a total of USD 1 million was disbursed under this credit line (INCAJU 2008a, 19); the overall default rate since the creation of the credit line is 15 percent. The second credit line, with annual disbursements of USD 10 to 12 million, is guaranteed by USAID. It aims at providing much-needed working-capital financing for processors during the harvesting season. This credit line has shown a default rate of 3 percent since its creation in 2003.47 46 According to information obtained in an interview with Carlos Costa (see Table A4), aid for the cashew sector in recent years totalled ca. USD 250 to 300 million.

47 Information on the default rates (as of 2009) was obtained in an interview with a representative from BCI Fomento who is not listed in Table A4 for reasons of confidentiality.

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann There have also been a series of programmes, mainly financed by donors (USAID and the Dutch and Swiss Cooperations, among others), that aim at rebuilding the processing industry after its almost complete collapse around 2001. Technoserve, Inc. (and to a lesser degree, GAPI) played major roles in designing and implementing these programmes by engaging in processor start-up assistance and finance, business and management training, definition and establishment of industry standards, Government lobbying, institutional support (for example, with respect to the creation of the export-service company AIA) and attempts to link processing to RCN production (Technoserve Inc. 2009; Simonetti / Wuyts / Wuyts-Fivawo 2007). Technoserve, Inc. also provided the GOM with strategic policy advice and advocated for the introduction of the labour-intensive Indian processing technology in Mozambique.

An assessment of the cashew strategy and the industrial policy management The cashew strategy Is the GOM’s cashew-policy framework successful at creating jobs and income for farmers, workers and factories, promoting the expansion of the processing industry, and addressing and overcoming the main challenges outlined above? When Mozambique’s present production and job figures are compared with the historical peak in the mid 1970s, or with the figures of today’s leading cashew producers (see Section 6.1.1), it appears that the cashew strategy is not successful. The picture changes when the year 2001, which coincides with the almost complete collapse of the processing industry, is used as the benchmark. Technoserve, Inc. (2009) provides an analysis of the economic impact48 of the redevelopment of the processing industry at several stages of the cashew value chain for the period from 2001 to 2008. The study concludes that this redevelopment has had a positive net-economic impact. The growth of the processing industry in this period (from one factory in 2001 to 16 factories in 2008) implies net economic benefits for the processing firms (profits), for the workers employed in the factories (wage income), for the RCNproducing farmers (through higher demand for RCNs, which resulted in higher farm-gate prices), and for local communities (as a result of the cash income generated by farmers and workers). It has implied net losses for RNC traders (slimmer spread of farm-gate and export prices due to competition from processing factories) and for the Government (foregone tax income because of a decrease in RCN exports). Nevertheless, according to the study, the net effect is positive (USD 4 million for the period from 2001 to 2008; Technoserve Inc. 2009, 62).

Another way of assessing the cashew-policy framework is to analyse whether or not it addresses the main challenges outlined in Section 6.1.1 and helps tackle them. In general, the framework does address several of the challenges, for example, those regarding replanting and intensification of maintenance, or the provision of working-capital financing for processors. Another question, however, is if cashew policies effectively tackle these challenges. This is assessed below.49 48 The study is limited to the private economic benefits and losses and does not consider social benefits and losses, such as the price effect of the RCN export tax, the cost of the promotion activities themselves etc.

49 Based on interviews and in the literature cited.

44 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique Given the high entry barriers to the consumer markets of the EU and the USA, the establishment of the AIA export-service company, the introduction of the cashew-kernel brand ‘Zambique’ (owned by AIA), the introduction of quality standards for producing and handling cashew kernels, and the establishment of stable buyer relations with a broker based in Rotterdam can be considered a success. Donor-financed technical assistance has contributed to these achievements, whereas the involvement of INCAJU and other Government agencies in these activities was rather marginal.

The effectiveness of the financial services provided to processors can be assessed as ‘mixed’. The credit line guaranteed by INCAJU to provide investment financing has repayment problems. According to several interview partners, one reason for this is that in several cases INCAJU has intervened so that loans were assigned according to political and not technical criteria. The other, much bigger credit line guaranteed by USAID that is intended to finance working capital, shows no significant repayment problems. Nevertheless, two interview partners stated that despite the latter credit line, processors enjoy less favourable financing conditions than some RCN traders and exporters, a factor that constituted an unfair competitive disadvantage. They claimed that, in addition to the RCN traders’ and exporters’ advantages mentioned in Section 6.1.1 (challenges to the processing stage), there was a scheme of illegal RCN exports to India that evaded the export tax and foreign exchange control, which in turn was linked to illegal imports of consumer goods from India (evading the import tax and the value-added tax – VAT), as well as to illegal exports of the national currency.50 Such a scheme would give the traders and exporters involved access to foreign exchange and to commercial credit at much more favourable rates than the ones offered by the special credit line for Mozambican processors.

One important challenge, the low productivity of workers, is not addressed in the cashewpolicy framework. Important issues here are training and alphabetisation of workers as well as improvements of the rural health care services. Schooling, training and health care services attached to processing factories could play an important role for improving the situation.

Despite the big efforts made and the substantial resources invested by INCAJU in seedling production, replanting and maintenance of trees as well as in disease control and extension services (INCAJU 2008a), the measures aiming at increasing RCN production and RCNfarming productivity have not been effective. This is not to deny partial achievements, such as IIAM’s successful growing of improved varieties, but the bottom line is that RCN production in Mozambique has been stagnating for years (Technoserve, Inc. 2009, 80).

This means that assuming RCN exporters are able to maintain their market share, the growth of Mozambican processors is constrained by the scarcity of domestic RCNs.

A major bottleneck is the distribution and successful replanting of the seedlings grown in INCAJU-managed nurseries: only a small share of the seedlings grown is successfully replanted and survives the first few years (here logistics and timing/coordination with the rainy season, as well as know-how and maintenance, are key). The problem is compounded by the factors of a poor rural-transport infrastructure and a farm structure that is 50 Information from two interview partners is not listed in Table A4 for confidentiality reasons. However, this information has been cross-checked and confirmed with other interviewees. Regarding the evasion of the export tax and the involvement of customs authorities, see also Maculuve (2006).

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Matthias Krause / Friedrich Kaufmann characterized by an abundance of dispersed smallholders engaged in subsistence farming and a scarcity of productive associations or commercial farmers. Moreover, according to some interview partners, the INCAJU management has used seedling distribution to farmers to gain political support for FRELIMO several times, particularly before elections, without regard for the negative impacts on the effectiveness of replanting measures.51 Consequently, Technoserve, Inc. (2009) recommends that replanting schemes should be led by the private sector. This would probably result in more targeted replanting efforts near existing processing factories, in collaboration with farmers’ associations or commercial farmers. Individual commercial farmers as well as farmers’ associations can play important roles as multipliers of knowledge and best-farming practices, and help to increase RCN producers’ bargaining power and create linkages with traders and processors.52 Still other factors hamper investments in farming and replanting: In general, the investment climate for farming is poor, in particular in what refers to the difficult access to, and the insecurity of, land and property rights, the widespread theft of RCNs (particularly when grown in plantations), the lack of rural credit, and poor transport and irrigation infrastructure (see also Section 3.4). It is difficult to imagine that many effective farmers’ associations and commercial farmers will be able to develop without an improvement in the investment climate for farming activities.

Finally, the export tax has an ambiguous effect. While it gives Mozambican processors – as compared with RCN exporters – a competitive edge, for farmers, it also means a loss of income because it reduces farm-gate prices and constitutes a disincentive for investing in RCN farming. From a welfare perspective, this can only be justified if the benefits associated with cashew processing exceed the losses that accrue to farmers.53 In any case, as the processing industry grows in competiveness, the Government should gradually reduce the tax so as to reduce the burden on smallholders. Alternatively, the tax should be abolished right away and a substitution found for less distortive promotional measures.

Industrial policy management Overall the GOM’s capability in industrial policy management with regard to cashew promotion is judged as weak.

First, it is striking to note that the GOM, mainly through INCAJU, has been less involved in the more successful promotional activities – for instance, those related to promoting downstream linkages, which have been basically donor-driven – and more involved in the less successful, such as the promotion of investment financing for processors and RCN production.

Second, INCAJU does not possess the intellectual leadership as far as cashew policies in Mozambique are concerned. Instead, intellectual leaders are the specialized businessI.e. factors like coordination with the rainy season and capacity of farmers to replant seedlings successfully were disregarded.

52 Effective farmers’ associations or commercial farmers are, however, scarce (see above), which means that in many cases, associations and farmers will need assistance to become effective.

53 McMillan / Rodrik / Welch (2002) assess the welfare effect of the liberalisation of the cashew sector in the 1990s, and conclude that positive and negative effects more or less outweighed each other.

See also Box 2.

46 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique services providers such as Technoserve, Inc. and GAPI. Moreover, INCAJU does not appear to have a clear strategic vision for the cashew sector, as is illustrated by the fact that in August 2009, the GOM was still working with the old 2000 to 2005 Master Plan, and had not managed to update its strategy.

Third, the way seedling distribution is managed indicates that INCAJU has been partially directed by FRELIMO party interests, and that some of the promotional activities follow political rather than technical rationales. This is corroborated by the fact that some interview partners perceive INCAJU’s top management as politicized and driven by party interests.54 Fourth, indications were given in interviews that there is a scheme of RCN export-tax evasion and of illegal exports of the national currency that damages the competitiveness of the domestic-processing industry and lowers tax revenues. It is inconceivable that such a scheme could operate without being backed by powerful actors from the political elite.55 This means that the Government’s official cashew-promotion policy seems to be undermined by corrupt activities apparently backed by the political elite.

Fifth, the GOM shows weaknesses in coordinating the policies that affect the cashew value chain (which often involve sub-national levels of government) and in establishing effective platforms to engage with industry representatives. For example, the Government undertakes hardly any coordinated efforts to improve the local investment climate for cashew farming and processing (health care, training and education, access to land-use rights, local infrastructure, etc.). Although INCAJU facilitates a cashew-policy dialogue with the processing industry that is represented by AICAJU and other important stakeholders like the cashew-workers union and farmers’ representatives, interview partners from the processing industry maintain that tangible results from these policy dialogues have been scant (in one case, it was not possible to improve enforcement of the RCN export tax).

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