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Friday, 28 November 2008

To import or not to import, 2nd Edition

I have been reviewing that fantastic FRSP paper blogged in the 1st edition, on the short term policy options available to GRZ in face of rising maize prices. That paper helpfully set out four broad objetives to keep in mind :

  1. Avoid the very high costs to GRZ and consumers of delayed imports. Decisions to import late would involve greater competition for transport with other countries and thereby entail higher transport costs. Late importation could produce the more extreme result of widespread hunger if local scarcity starts to manifest before needed imports arrive.
  2. Maintain incentive prices for farmers to stimulate supply response in the 2008/2009 production season.
  3. Keep maize grain supplies available in rural markets during the lean season for rural grain consumers and traders, and thereby help protect urban/rural net buyers of maize against much greater than normal seasonal price increases for maize meal.
  4. Find options for positive roles for both GRZ and private traders/importers.
It then goes on to articulate three possible policy responses :
  • Policy 1 : The GRZ would allow private maize imports by issuing permits now or decontrol maize imports for this season so traders can lock in relatively lower grain and transport prices to be in a position to supply millers later in the season. Public sector (FRA) maize imports would not be needed if GRZ and private traders can work together to produce sustainable solutions.
  • Policy 2 : GRZ would reserve/dedicate a major part of FRA stocks to sell to local traders and custom milling clients with maize grain in the outlying provinces during the lean season. FRA could also contract with Zambian commercial farmers for “early maize”.
  • Policy 3 : GRZ and Donor partners would work together to create a workable special emergency fund to subsidize the cost of grain or perhaps roller meal in the months of November 2008 through March 2009 in order to allow millers to pay traders/importers market prices but not pass these full costs on to low income consumers in Zambia.
It turns out that GRZ has opted for Policy 4! Policy 1 was the idea, but the weak currency has forced the government to purchase the maize from abroad. This in turn reduces the incentive for further private imports. I guess thats academic now because the Kwacha is not about to rebound significantly any time soon to reduce the cost of imports. An important footnote of course is we are very much in a worst case position. The "second best world" would have seen the FRA buy the maize imports shortly after the RB victory, when the Kwacha appreciated significantly. So not only has the public sector forked out significant cash for imports, its subsidy is now significantly larger than it could have been in a second best world. We can say with confidence that objective 1 (avoid the very high costs to GRZ and consumers of delayed imports) has not been fulfilled.

4 comments:

  1. The perennial problem of maize production has a lot to do with the control govt exerts through FRA and its pricing mechanism. The ZNFU have always indicated that they would grow more maize if only they were allowed to sell the produce at a price reflective of farmers' cost structures. They have been echoed by South African farmers who have identified Angola and Zambia as two countries most suited for growing maize for the whole subregion but they are discouraged by the quasi govtal organisations that control the pricing.

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  2. Frank,

    I couldn't agree more!
    I would add that export restrictions also act as a huge disincentive, because it has not allowed the domestic market to grow and reap enormous economies of scale.

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  3. Frank,

    You have a point on the yearly problems we face as a result of government's control through FRA. By the way I have a strong conviction that we do not really need FRA; not in its current functional structure.

    That is probably another reason I have questioned on this blog why we have been targeting a lot of resources at areas we are very sure yield not much in terms of economic development - I mean agriculture in the Zambian context. May be the reason could be because we suffer from what I now call "the Nyirenda Phenomenon" ( simply expalined by "bushe ninkanda iyafita nangula mano ayachepa"). We have tended to gloss over agriculture issues and probably thinking all we need to do is pump more and more money through FRA into this perenial social activity and a wrong notion of agriculture.

    If I had a choice I would transfer all that FRA does to ZNFU because that is the organisation which seems to be appropriate to cover the productive side of agriculture. The only thing that I would change is to have ZNFU focus more on commercial farmers then leave these other activities like FSP to relevant ministries to take care of small-farming communities' needs. By other ministries I mean local government (to take care of infrastrcture i.e. silos, feeder roads, power supply etc), community and social welfare ( to take care of acquisition and distribution of inputs as well as extension services). I am sure we know how effective farmer-community outreach by Ministry of Community Development and Social Wefare would be if implemented. For instance it would at least cut down on ghost beneficiaries (some of whom are prominent figures who just get agro inputs and sell them in neighbouring countries) since target communities would know who really belongs to that particular community.

    By attempting to address needs of commercial and small-scale farmers we would indirectly be stimulating industries that would manufacture farming equipment, spares for machinery, irrigation equpment, fertilisers etc( I know MrK does not like chemicals but they are essential) . And the net result may lead to job creation by the manufacturing industry. Not only will we stimulate job creation but also the knowledge economy where industry will be encouraged to undertake research and development in areas like machine tool technologies (to make tools, machines and spares for agro-machines etc), material science and engineering, and other new technologies.

    So that is why I have persitently been saying we should not think of job creation when we give farmers inputs because that just keeps them busy for some time and does not create jobs. In any case what benefit does government get from the-so-called jobs that have been created by this annual social activity? You will find that becauses the "Zambian agriculture" is rain-fed, the period between October to April is a spending period (on inputs that have been manaufactured in RSA or China),then the farmers get some money from sales of their produce from say May to July. After which they go broke and start writing you letters requesting for money for fataleza. Surely, are we creating jobs through such a cycle?
    It is industry that is supporting agriculture which does that, hence the one that needs a lot of attention. Just take an example of an industry which would support agriculture like Nitrogen Chemicals of Zambia. When NCZ was fully operational it created a lot of jobs, some indirectly by attracting other job creators ranging from service providers like lodges, clinics, schools, banks etc to spare part suppliers for its machines. These industries will be a support to NCZ but NCZ is turn a support industry to agriculture. It is a cascading effect we need to consider rigorously.

    But because someone knows that if NCZ becomes fully operational they will be affected somehow since they will not be involved in the "inflated" import of fertiliser; and that if we support local manufacturing of equipment they will no more benefit from inflated imports of agro-equipment and sacs from RSA and China since FRA will be getting these from local manufacturers; they would rather maintain the status quo - pretending to have the interest of masses at heart yet chewing peoples' money through FRA.

    So. That it is why they control the agriculture market the way you have rightly made reference to

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  4. Anonymous,

    So that is why I have persitently been saying we should not think of job creation when we give farmers inputs because that just keeps them busy for some time and does not create jobs.

    That depends on how much land they farm, if they hire labourers, tractor drivers, etc. It is a matter of scale.

    We should distinguish between agrobusinesses, medium sized farms (100 hectares, which is also the average size of a farm around the EU) and subsistence farmers (usually the 2-3 hectares that can be worked by hand).

    They're all farmers, but they are all doing something very different.

    In any case what benefit does government get from the-so-called jobs that have been created by this annual social activity?

    Unless I'm getting you wrong, farming is not an annual social activity.

    What would it benefit the government? Lower food prices, increase in tax revenues, reduced probability of social unrest.

    You will find that becauses the "Zambian agriculture" is rain-fed,

    Which it doesn't have to be. It is only rainfed, because no one has created the earthworks which would catch and store rainwater (and by the way prevent the highly destructive annual floods), making it available throughout the year and doubling the number of potential harvests.

    the period between October to April is a spending period (on inputs that have been manaufactured in RSA or China), then the farmers get some money from sales of their produce from say May to July. After which they go broke and start writing you letters requesting for money for fataleza.

    Are you saying that they are spendthrift, or that they aren't making enough money from their small plots to see them through the year, which I would agree with?

    Surely, are we creating jobs through such a cycle?

    I would guess not as many as could be created if the government was serious about governing and agriculture.

    It is industry that is supporting agriculture which does that, hence the one that needs a lot of attention.

    What you're saying is that farming isn't prestigious enough, but that working in a factory is?

    There is only so much industry that can support agriculture. I hope you're not taken in by the agribusiness model of farming.

    It forces people off the land, puts money into the pockets of a tiny few, creates huge monocultures which are susceptible to any disease that comes along, and depletes soil life and fertility through the use of chemical fertilizers.

    One disease can plunge the entire country into famine.

    One theory is that bee colonies are collapsing, because they are becoming malnurished from eating only pollen from maize. Bees happen to pollinate 90% of foodcrops out there, so if they're gone, the human race (that's all of us) that survives is back to rubbing sticks together for heat.

    Contrast that with the use of small plots (say 25 hectares per crop). You have lots of small plots, crop rotation, organic fertilizers which add to the soil and it's life. There is no opportunity for one disease to sweep anywhere. Beneficial insects and plants keep any kind of crop pest to a minimum. You can use neem oil as an anti-feedant for pests, etc. You use dried blood (bloodmeal), dried bones (bonemeal), seaweed, fish, decayed organic matter (compost), nitrogen fixing plants (like legumes) for fertilizer.

    If you build a 1 acre greenhouse, you can employ 20 people at a more than living wage. You can create tree plantations to sustainably plant and harvest wood (like teak trees, which go for $20,000 per log at 20 years of growth).

    You could legalize hemp and create literally thousands of products that can be made from it's fibers (also see here).

    It creates a way of life that can be sustained for many centuries to come.

    The job opportunities for a hugely diverse workforce in a diversified organically based agricultural sector are huge.

    Just take an example of an industry which would support agriculture like Nitrogen Chemicals of Zambia. When NCZ was fully operational it created a lot of jobs, some indirectly by attracting other job creators ranging from service providers like lodges, clinics, schools, banks etc to spare part suppliers for its machines. These industries will be a support to NCZ but NCZ is turn a support industry to agriculture. It is a cascading effect we need to consider rigorously.

    Which in my opinion has little to do with the state of agriculture.

    There are much better ways for hoping to benefit from agriculture, than that it could stimulate the petrochemical industry.

    Chemical based agriculture is an assault on the land, on water resources through runoff, and on public health.

    What I am saying is that medium sized farms which use organic methods, create a much superior product, create many jobs because they are more labour intensive than agrobusiness type farming, accumulate savings and will generate much higher incomes than subsistence farmers have currently.

    But because someone knows that if NCZ becomes fully operational they will be affected somehow since they will not be involved in the "inflated" import of fertiliser; and that if we support local manufacturing of equipment they will no more benefit from inflated imports of agro-equipment and sacs from RSA and China since FRA will be getting these from local manufacturers; they would rather maintain the status quo - pretending to have the interest of masses at heart yet chewing peoples' money through FRA.

    I agree that central control can stifle local initiative, and if the FRA is stifling actual business of farmers, it has to be reformed or have it's mission restated.

    However, this has in my opinion little to do with whether there should be support for small farmers.

    I agree with decentralisation, but your diffusion of support for small scale farmers to all kinds of different institutions doesn't seem to be about focusing efforts to me.

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