Global Policy Forum

by Dani Rodrik *

Why does Africa continue to perform poorly, despite two decades of structural reform? Most African governments have liberalized their trade regimes, deregulated their economies, and (by most measures) improved the quality of their policymaking. Yet the results are anemic.

Western economists and aid agencies complain about inadequate implementation and lack of commitment by African governments. But shortcomings in the blueprints of reform play a greater role. Reforms designed without adequate regard to local realities and domestic politics have often produced unintended consequences or backfired.

The case of Mozambican cashews clearly illustrates this. Historically, the cashew sector constituted a big part of Mozambique's economy, providing income to several million individuals. In the 1960s, Mozambique produced half of the world's total. The sector went into long decline thereafter, as a combination of adverse policies and civil war from 1982-1992 brought new tree plantings to a halt. Following independence in 1975, the government banned the export of raw cashew nuts to stimulate domestic processing. Mozambique became the first African country to process cashews on a large scale. By 1980, the country had 14 processing factories. When the government began to loosen restrictions on raw cashew exports in the late 1980s, workers and employers in these factories took a big hit.

In the early 1990s, the World Bank prevailed on Mozambique to liberalize the cashew sector and to lift the remaining restrictions on exports of raw cashews. The World Bank hoped that resources would be allocated more efficiently and that the incomes of cashew farmers would grow.

The policy was met with fierce opposition from the domestic cashew-processing industry, which had just been privatized. The case soon turned into a cause celebre for the anti-globalization movement. While the World Bank points to the rise in prices as evidence of the gains that accrued to farmers, its opponents point to the processing plants in urban areas which have been shutdown and the thousands of workers who remain unemployed.

Export liberalization did produce many of the consequences expected from it. However, even under the most favorable assumptions, the magnitude of the benefits was small--both in economic terms and in proportion to the amount of time and energy that Mozambique's government spent on the issue, at the expense of other pressing problems.

In research that I carried out with Margaret McMillan and Karen Horn Welch, we estimated that the efficiency gains generated by the removal of the export restrictions could not have amounted to more than $6.6 million annually, or about 0.14% of Mozambique's GDP. The additional income accruing to farmers was probably no greater than $5.3 million, or $5.30 per year for the average cashew-growing household. These were puny amounts for a policy that was a key plank in the World Bank's reform agenda, and that became a bone of contention between the Bank and Mozambique.

Moreover, these numbers overstate the benefits. The gains from liberalization must be set against the losses that resulted from idling processing plants. In theory, these plant workers should have found alternative sources of employment. In reality, many remain unemployed, perhaps because they believed that liberalization would be reversed. We estimate the annual loss in real income to urban workers to have been around $6.1 million, or 0.12% of Mozambique's GDP, which is roughly equivalent to the direct efficiency gain generated by liberalization.

What went wrong? The reform paid little attention to some key realities. First, traders and intermediaries rather than farmers captured most of the benefits. Second, since the world market for raw cashews is less competitive than that for processed cashews, Mozambique suffered a loss in its external terms of trade. Third, poor political management of the reform undercut the dynamic gains that could have resulted.

The key to securing dynamic gains was a credible commitment to a new pricing regime--possibly complemented with compensatory programs--that would have made it worthwhile for farmers, entrepreneurs, and workers to undertake costly investments. Liberalization could have reinvigorated the rural sector by reversing the collapse in cashew tree planting. In the urban sector, it could have heralded a restructuring of production by promoting more rational investment.

The main failure was that liberalization did not send credible signals about future policies. So farmers refused to plant trees, cashew processors refused to take their resources elsewhere, and urban workers refused to look for other jobs.

Mozambique's cashew story illustrates several themes now dominant in analyzing development. First, it highlights the importance of credibility and the need to manage expectations. The supply responses that will make reform successful are likely to be forthcoming only when a policy change seems lasting. This underscores the need for creative thinking on credibility-enhancing mechanisms as an integral part of reform.

Second, reform is a "political" problem as well as being a "technical" one. Had the opposition of urban groups been anticipated, compensatory mechanisms and side-bargains could have been agreed. Finally, policy reforms that are imposed by multilateral lenders are rarely conducive to desirable outcomes. The credibility problems that the Mozambique program faced were created in part because liberalization of the cashew sector was viewed as a "World Bank policy"--something the government was doing to qualify for World Bank (and IMF) loans. Not having full "ownership" of the reform, the government was in a poor position to sell it to a skeptical public.

*Dani Rodrik is Professor of political economy at the John F. Kennedy School of Government, Harvard University.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C íŸ 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.