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Sunday, 21 February 2010

Liberalisation of food exports?

It was wonderful to hear Finance Minister Situmbeko Musokotwane reveal that the Government plans to revise agricultural policy to allow the export of grain surpluses :

"The government is becoming flexible to consider the export of food as part of the diversification programme because the Zambian market is small"
We have previously discussed the importance of eliminating "export restrictions" as part of a broader reform package for agriculture - see A better vision for agriculture.. and The problem of expediency..

9 comments:

  1. It is indeed encouraging that the government is to liberalize food exports. The possibility that maize exports would be banned has been a major discouragement to production, as farmers had serious doubts that they would be able to export surpluses.

    But removing restrictions is by itself not enough. Exporting agricultural produce and other non-mineral products must again become attractive. At present unfavourable exchange rates are a strong discouragement because they result in low kwacha proceeds.

    That should be obvious, but when discussing this question it is often ignored. I had the good fortune to be taught by the famous development economist, Peter Bauer. His favourite saying, which he used to intone constantly, was, "Supply and demand are functions of price; supply and demand are functions of price."

    So we cannot talk about exports without considering the PRICE the exporter will get. And that will be governed by the exchange rate.

    Today's kwacha/dollar exchange rate is extremely unfavourable to would- be exporters. During 2004 the rate averaged K4,800 = $1. Five years later the rate has actually fallen by some 10%. That is in total disregard of inflation, which over the 5 years 2005/09 amounted to 67% in Zambia and only 16% in the US, a difference of 51%. This means that Zambia's exporters now receive, in real value, one third less for their produce than they did 5 years ago! It is hard to imagine a greater discouragement.

    This masive setback has been caused by huge volumes of US dollars coming into Zambia from mineral exports, foreign investment, loans and aid. All this income was beneficial, but not for the exchange rate, where it has done great harm by discouraging non-mineral exports. That harm could have been prevented had Zambia followed the example of Chile, another large copper exporter, which decided to 'sanitize' copper income by building up a large foreign reserve as an insurance against future hard times.

    Had we done this, it would have protected the kwacha against over- valuation, and, by increasing kwacha receipts from exports,would have done much to boost agriculture and tourism. It would also have encouraged local manufacture by making imports cost more. That, of course, would have been unpopular, and it would have caused some hardship. But it would have boosted all export activities, including tourism, and created much employment.

    It is still possible to take this kind of action. We must hope that the government will have the wisdom to do so.

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  2. Murray,
    The so called unfavourable exchange rate will be offset by the fact that the exporters of maize will be able to get a much higher price than what obtains in Zambia. The FRA comparatively sets a very low Maize producer price in relation to other countries in the region. Zambia's maize price is always lower by anything from $2 to $5 per 50KG bag in comparison with countries as diverse as Malawi, Kenya, Zimbabwe, South Africa etc. If indeed this export restriction is lifted; I foresee a lot of more capitalised South African farmers relocating to Zambia because this is what they have been asking for. They want to farm and make money by selling their produce across and beyond the region.I just hope in doing so the govt also doubles up on its efforts to improve small scale agricultural production.
    By the way, Murray, what would you consider to be a 'favourable exchange rate'?

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  3. Actually Murray is right, though our regional agricultural uncompetitiveness is not soley a function of exchange rate. Costs of production and finance are also high in Zambia, pricing our agricultural commodities out of regional markets. In those years when GRZ has permitted exports of grain, the pricing is often unfavourable and as a result Zambia has lost out on some big export deals.

    Why is it that South African grain passes through Zambia en route to the DRC where it can land cheaper than Zambian commodity? Because South African maize, even with commercial yields lower than ours, is cheaper.

    Why is it that when Kenya needs a million tons of maize, Zambia meets none of that demand? Because it costs as much to transport grain from Durban to Mombasa as it does to transport it from Mkushi to Lusaka.

    Incidentally, one of the reasons why Zambia is price uncompetitive is because of the local purchase price 'set' based on non-market related parameters by a relatively small but incredibly influential buyer, the FRA.

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  4. The answer of course is that ALL of the above is important. We have touched on the importance of a competitive exchange rate as well the problems with FRA. The issue of high transports costs and associated problems with fuel policy and poor infrastructure are well rehearsed.

    I guess the fundamental question is : should our agriculture policy be specific to agriculture or generic? I favor treating agriculture like any market. So I would not pursue a competitive simply to help agriculture, but as part of general economic competitiveness or effective revenue management (if real appreaciation was driven by mining windfall).

    On the specific practical question regarding the rate - I fail to see how BoZ can intervene. All the political pressure points to the need for a stronger Kwacha. Zambians have been led to believe a stronger Kwacha is correlated with the wellbeing of the economy.

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  5. Frank asks what I would consider a favourable exchange rate. Good question!

    One can also ask of any service or commodity, What is a favourable price? Buyer and seller may well give different answers, though for a transaction to take place both must be satisfied.

    Exchange rates, of course, are rather different, since they concern international currencies (especially the US dollar), and therefore have a great effect on international trade - imports and exports.

    One should also ask, What is a good currency? Here the criterion is stability. To be 'good' a currency must be dependable, which requires a constant buying power - in other words negligible inflation.

    The US dollar has in recent years been very dependable with annual inflation averaging under 3%. But the Zambian kwacha, with high levels of inflation (16.6% in 2008, 9.9% in 2009) is not dependable. To have to subsist on a fixed kwacha pension is a disaster.

    If the kwacha/dollar exchange rate remains constant despite much higher kwacha inflation, the result is that our commodities and our tourism will cost the Zambian producer much more in kwacha each year. Copper can manage on this at present high prices, but agriculture, tourism and manufacturing cannot.

    Chola points out that the government has ill-advisedly promoted the idea of the 'strong' kwacha and that to correct the present situation by having kwacha inflation reflected in the exchange rate would be impossibly unpopular - a very sad situation.

    Unfortunately, as public choice theory makes clear, the concern of politicians is not the national interest, but solely to get re-elected.

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  6. If fuel, fertilizers and machinery are imported, it seems to me that labor costs are the only major farming input that would have an adverse effect on farmers if there was an appreciation of the Kwacha.

    What would be the impact if farmers were authorized to pay labor costs in dollars, and labor in turn were authorized to pay their expenses in dollars? Would a partial dollarization strategy be a solution to an appreciating currency?

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  7. Finance Minister Situmbeko Musokotwane reveal that the Government plans to revise agricultural policy to allow the export of grain surpluses

    I guess Zambia has too much food. Remember that happened when Malawi was advised by the IMF to sell off it's maize stocks to reduce government debt, leading to famine.

    As far as minister Musukotwane and other neoliberals goes. One definition of intelligence is the ability to learn from experience. Doing the same thing over and over again and still believing it can work must be the exact opposite. Even the World Bank has admitted that Structural Adjustment was an abject failure. I quote:

    Destroying African Agriculture
    By Walden Bello
    Global Research, June 5, 2008
    Foreign Policy in Focus

    Unable to deny the obvious, the Bank has finally acknowledged that the whole structural adjustment enterprise was a mistake, though it smuggled this concession into the middle of the 2008 World Development Report, perhaps in the hope that it would not attract too much attention. Nevertheless, it was a damning admission:

    Structural adjustment in the 1980’s dismantled the elaborate system of public agencies that provided farmers with access to land, credit, insurance inputs, and cooperative organization. The expectation was that removing the state would free the market for private actors to take over these functions-reducing their costs, improving their quality, and eliminating their regressive bias. Too often, that didn’t happen. In some places, the state’s withdrawal was tentative at best, limiting private entry. Elsewhere, the private sector emerged only slowly and partially-mainly serving commercial farmers but leaving smallholders exposed to extensive market failures, high transaction costs and risks, and service gaps. Incomplete markets and institutional gaps impose huge costs in forgone growth and welfare losses for smallholders, threatening their competitiveness and, in many cases, their survival.

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  8. MrK is good at making ideological points. However, mistakes are made not only by doing the wrong thing, but also by doing the right thing in the wrong way or with wrong timing.

    Government regulation in economic matters tends to stifle initiative. But to remove regulation suddenly before there is a free market alternative can be disastrous. There is a world of difference between suddenly exporting apparent surplus stocks and giving advance notice of freedom to export.

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  9. Finance Minister Situmbeko Musokotwane reveal that the Government plans to revise agricultural policy to allow the export of grain surpluses

    I didn't know the food reserve had already been taken care of - either through increasing storage facilities or having actual reserves.

    So I don't know what 'surpluses' the minister is referring to. My guess is that he is referring to accidental surpluses, like for instance from years of greater rainfall. Not surpluses over and above what the country's silos can store and need to create food security for more than a few months.

    Murray wrote,

    Government regulation in economic matters tends to stifle initiative.

    Now that is an ideological point.

    Government regulation can also create transparancy and equal access to markets. And if it stifles some business, perhaps that business deserves stifling. And of course government (or rather the state) makes the laws and regulations that allow business to exist in the first place.

    I would say that it is the quality of government involvement that matters, not involvement versus absence.

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