Global Policy Forum

By Jon Jeter

The cashew factory here closed three years ago, but the old man still shows up every day at 7 a.m. sharp, just as he did for 34 years. The owners left him the keys to keep an eye on things, but there's nothing to watch, really, so Moises Siuta opens a window or two, arranges the few remaining office chairs into neat rows - the secretary wouldn't stand for an untidy office and spends a solitary first shift sitting in the half-light of a shuttered plant.

A slender man with an almost courtly air, Siuta, 59, started as a driver at the factory in 1963, when Mozambique was still a Portuguese colony. He worked his way to the processing floor, where he shelled and sorted nuts, and eventually landed a management job. "I made a lot of friends here. I raised 10 kids working here. . . . We would get breaks during the day, and when we went outside it was like all the children in the village would be waiting to ask their parents for money, to buy candy and things. That always made me very proud." The memory brings a smile, but the smile dissolves as his thoughts return to the present. He takes a last drag from his cigarette. "We're all unemployed now. No one has much money to spend anymore. Manjacaze just shut down when the World Bank forced Mozambique to liberalize its [cashew export] market."

This southern African country's gutted cashew-processing industry is Exhibit A in the case against the World Bank and the International Monetary Fund by critics who argue that the two global financial institutions widen poverty rather than reduce it, by using the promise of loans to force governments of developing countries to adopt policies that often favor the rich while exploiting the poor. After 16 years of civil war ended in 1992, Mozambican officials sought the World Bank's help to rebuild the shattered country. They dropped their Marxist economics of the Cold War years for the free-market policies required by the bank and the IMF.

The exception was Mozambique's cashew-processing industry. With the country's cashew groves damaged by war, the government put a tax on the export of raw nuts to ensure a supply for local factories. But World Bank officials said they would not offer Mozambique loans unless the government removed the tariff. Bank officials said the tax subsidized factory workers at the expense of the peasants by preventing peasants from selling their crops overseas and thus depressing prices. Threatened with losing millions of dollars in loans, Mozambique began phasing out the tax in 1996. Four years later, the policy has almost killed off the industry. Ten of the largest cashew-processing factories--which were owned by a diverse group of mainly foreign investors--have closed. Half of the industry's 12,000 workers have lost their jobs, and another 1,500 are to be laid off when another factory closes this month.

Peasants who were supposed to benefit from an opened market say the only people who have profited from liberalization are scores of new middlemen - many of them foreigners - who now roam the country buying up nuts to sell abroad. World Bank officials acknowledge they may have tried to do too much too fast. Last year, the bank allowed Mozambique to restore the export tax in part, but the industry has shown no sign of recovery. "The Mozambique case clearly shows that not only did the World Bank's policies fail to promote economic growth, they undermined it," said Robert Naiman, senior policy analyst for the Center for Economic and Policy Research in Washington. "And in this instance, they clearly forced the government to accept a policy that it neither wanted nor agreed with. This is the case where we have the smoking gun."

Until floods devastated Mozambique's infrastructure this year, the country's economy had been growing at a rate of almost 10 percent annually since the end of its civil war, and U.S. and other Western diplomats have praised it as a model of what sub-Saharan Africa can achieve with free-market policies. Still, Mozambique is wrenchingly poor, and government officials had hoped to resurrect an industry that had been gravely injured by the war. The fighting forced peasant farmers to flee the countryside for years at a time. When they returned, they found their cashew trees diseased and barely able to produce enough nuts to permit the processing factories to turn a profit. Most of the factories were deserted during the war, and, with outdated equipment, few were able to match the buying power of competitors in India, Brazil or Vietnam. So the government agreed to protect factory owners while they modernized their facilities. It placed tariffs as high as 70 percent on the export of raw nuts to discourage foreign buyers from gobbling up homegrown cashews. The tariff was to decline each year until it reached 8 percent in 1999.

But a 1995 study commissioned by the World Bank concluded that eliminating the tariff would drive prices up and increase peasants' earnings on cashew sales from $4 million in 1993 to nearly $70 million by 2008. The higher prices would encourage many of the country's 1 million cashew farmers to plant new trees and take better care of their old ones, increasing production. With the tariff removed, bank officials said, competition from foreign buyers would force inefficient factories to close, but the ensuing job losses would be more than offset by the dramatic rise in peasants' income and productivity. Government officials said the bank's study was irrevocably flawed, its predictions based on incorrect figures and a particularly bad harvest in the difficult season immediately following the end of the war. Moreover, Mozambican officials said, the bank overlooked unfair advantages held by India, the world leader in cashew production. India's cashew industry was heavily subsidized by the government, and it depended more on manual labor--notably of peasant children--to shell raw nuts, a system that was cheaper but exposed workers to a toxic fluid contained in cashew shells. How could Mozambique's factories possibly compete without some protection of their own?

Bank officials met Mozambique's resistance with a threat to cancel more than $520 million in loans it had planned to make available over a three-year period, according to government officials here. That likely would have killed the IMF's $120 million loan package as well. "Sometimes," Prime Minister Pascoal Manuel Mocumbi told reporters at the time, "we have to accept things that are not in our interest because there is no other way out." Grudgingly, cabinet ministers and lawmakers abolished the tariff. The World Bank's regional director in Mozambique, James Coates, denies that the bank coerced government officials to go along with its proposal. "We only offer advice to these countries. It is up to them whether they accept it," he said. But Michael Weber, a professor of agricultural economics at Michigan State University who is the co-author of a study on Mozambique's cashew industry and who supports the bank's effort to liberalize it, said the bank "played hardball, no doubt about it."

The World Bank has lent Mozambique nearly $2 billion over the past 15 years to hire teachers and build bridges, health clinics and aluminum smelting factories, among other things. Apart from cashews, the bank has been involved in scores of development issues without generating prominent public complaint. "The World Bank has done more good than bad in Mozambique," said Jose Antonio Justino Nhalungo, director of the Foreign Ministry. "We agree that liberalization is generally a good idea. But this was a complicated issue, and the bank believed they knew better than us how to deal with this issue, and we never had a real dialogue on the matter. They just did not want to listen to us. We did not go to Harvard, I suppose."

In 1997, facing criticism from Mozambique's media and trade unions, World Bank officials commissioned a new study by the accounting firm Deloitte & Touche. That report supported Mozambique's argument that the first study was flawed and that an export tax actually increased the country's income and revenue from the cashew industry. The new report concluded that, while cashew prices had risen slightly following the tariff's removal, the benefit had gone to the new middlemen, not to Mozambique's poor farmers. Bank officials relented and agreed to an export tax of no more than 14 percent, lower than what Mozambique trade officials and lawmakers generally proposed. "We continue to believe that our policy advice was correct," Coates said. "But . . . it maybe takes more time and effort than we estimated at first. The policy was not meant to close Mozambique's factories. We are in dialogue mode more now than we were before."

In Manjacaze and other rural areas, the bank's retooling is too little, too late. At the open-air market in the center of this idled village of grass huts and nameless dirt roads, business has dropped dramatically since the cashew factory closed. "No one has money to spend anymore. . . . All the vendors are hurting," said Alberto Alfonso Boma, 57, who has owned a beer stand here for almost a decade. Boma was also a cashew farmer until he quit this year. When Mozambique liberalized its cashew exports, the price of cashews jumped from about 18 cents a pound in 1994 to about 24 cents last year, according to the Michigan State University study. But the farmers in Manjacaze saw little of that, Boma said. "The farmers might get a few [pennies] more, but if you're a producer, it's not enough," he said, pouring a beer for one of the few customers he had that afternoon. "We never know what the real price is. We've got all these new faces who come and offer you one price, and then you find out that they sold it for twice that. They're the ones who are driving [luxury cars], not us." That has persuaded Boma to try his hand as a buyer. He sold his cashew trees and plans to buy raw nuts from his neighbors and sell them to the highest bidder. Boma paused for a moment, sizing up the rows of empty snack stands and the young men who amble aimlessly along the dusty streets. "I would like to see us return to the old ways of doing business before the World Bank took it upon themselves to change it," he said. "Things were much better before."

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