ReSAKSS Regional Analysis on Agricultural Expenditures and Agricultural Policy Bias: Southern Africa_2009

ReSAKSS Regional Analysis on
Agricultural Expenditures and
Agricultural Policy Bias:
Southern Africa
Babatunde Omilola and Melissa Lambert
April, 2009

Contents
• Zambia: Reaching MDG1 and Agricultural
Policies
• Mozambique: Reaching MDG1 and
Agricultural Policies
• Malawi: Reaching MDG1
• Madagascar: Agricultural Policies and Rice
• South Africa: Agricultural Policies
• Zimbabwe: Agricultural Policies

Agriculture in Zambia
• Agriculture contributes 20% of GDP and foreign exchange earnings, and employs two-
thirds of the population
• Zambia’s economy has performed relatively well since 1999 with national GDP growing
at 4.8% per year
– But, the agricultural sector has had a growth rate of only 1.5% per year
• The incidence of poverty has remained high at 67.9% as of 2004, despite having
declined by 5% from 1998 to 2004
• Historically, agriculture has been neglected in favor of the mining and manufacturing
sectors
– A ReSAKSS study shows that an agriculture-led growth strategy would be more pro-poor than
growth led by the mining sector
• The country has the natural resource endowments to be a potential agricultural
producer for the Southern African region, according to AfDB
1990s 2000s Current Period
Indicator Proportion Proportion Proportion Year
National Poverty Rate (%) 69.7 68.0 66.6* 2008
Dollar a Day Poverty Rate (%) 62.8 64.3 65.5* 2008
Child Malnutrition Rate (%) 24.7 25.0 18.3* 2008
Undernourished Population (%) 48.0 47.1 44.9* 2008
Average GDP growth (%) -0.5 5.1 5.8 2008
Average Agriculture GDP growth (%) 5.1 1.7 1.9 2007
Agriculture Spending in National Spending (%) 2.9 3.3 8.0 2006
Agriculture GDP in Total GDP (%) 15.6 19.9 15.6 2007

Reaching MDG1 in Zambia
• The country currently is not on track towards achieving
MDG1
• Achieving the CAADP 6% agricultural growth rate target
would still not be sufficient for the country to halve its
poverty and hunger by 2015
– But this level of growth would increase overall GDP growth
from 4.6 to 5.3% per year and lift an additional 780,000
people above the poverty line by 2015, reducing the
national poverty to 51.9% in 2015 from almost 70% in 1990
• Investment in staples would contribute more to pro-
poor growth than would investment in cash crops alone
– Especially if accompanied by investments in rural roads and
agricultural R&D

Agricultural Policies and Distortions in
Zambia
• Agricultural policies have evolved over time, but the overall
the pattern of public expenditure has reflected misplaced
priorities
– Increasingly negative assistance to agriculture during the
periods of dirigiste control over the economy, which were also
years of significant overvaluation of the exchange rate
– Focusing on subsidies requiring large recurrent expenditures
and delivering restricted benefits instead of productive
investments with more widespread developmental
consequences
– Channeling resources into long-term investments in
infrastructure, extension services, and market development
would have had a larger payoff
– As a result, rapid decreases in poverty have been measured in
some rural areas resulting from rapid growth in output, but that
growth has been very unevenly distributed

Agriculture in Mozambique
• Agriculture contributes more than 20% to GDP and 20% of
export earnings in Mozambique

1 Dollar a Day Poverty Rate (%) 81.3 74.7 69.4* 2008
Average GDP growth (%) 6.6 7.7 6.5 2008
Average Agriculture GDP growth 4.3 5.3 6.8 2007
(%)
Agriculture Spending in National - - 9.1 2005
Spending (%)

Reaching MDG1 in Mozambique by
Investing in Agriculture
• In order to achieve MDG1 the country will need to realize
agricultural growth rates of at least 6% per year
• By increasing investments in the sector, the country could
achieve this level of annual agricultural growth which would:
– increase overall GDP growth rates from 6.3 to 7.0% per year
– reduce national poverty to 32.6% by 2015, (compared to 36.9%
projected under the current growth path)
– lift an additional 1 million people above the poverty line by 2015
• Investments in food crops, such as maize and other cereals,
will be the most pro-poor
– a 1% increase in maize GDP will cause the national poverty rate to
decline by 0.73%, while growth in existing export crops will only
cause the poverty rate to decline by 0.29%

Agricultural Policies in Mozambique
• 1975-1986
– Characterized by an intensification of regulation in what was already a highly regulated sector
– Private initiative was suppressed
– Policy bias existed in favor of larger farms
– Prices were fixed at all stages of the supply chain, and producer prices were set low to subsidize
consumers which encouraged the emergence of parallel black markets
• 1987-1994
– Price liberalization
– Entry of private traders causing a sharp increase in consumer prices in formal markets (by 182 percent
in 1987 alone) to align with prices in parallel markets
– Privatization of state farms and other parastatal enterprises
– Increase in the production of staple crops
• 1994-present
– Average reduction of assistance rates and an increase in their volatility
– High economic and agricultural growth, despite the destruction of major infrastructure and marketing
channels
– An extremely fragmented agricultural policy that is still without a clear prioritization of objectives
– Interventions which seem to be more the heritage of past policies than the result of a new forward-
looking strategy

Agriculture in Malawi
• Agriculture in Malawi –
– contributes about 40% of the GDP
– comprises 60% of foreign exchange earnings
– employs three quarters of the population
• The country’s erratic GDP and agricultural growth rates over recent
periods have had important implications on overall rural welfare,
including incomes, poverty, and food security
– e.g., national poverty rates have increased since the 1990s to 65% in 2000
Agriculture Spending in National Spending (%) 11.1 5.7 12.2 2007

Reaching MDG1 in Malawi
• Given Malawi’s current high rate of poverty, even
achieving the CAADP target of 6% agricultural growth
will not be sufficient to halve poverty by 2015
– To do so, both agriculture and non-agriculture will need to
grow at about 6.9 and 7.6% per year, respectively
– Yet, with increased investments to the agricultural sector,
the CAADP target is feasible and would increase annual
GDP growth from 3.2% to 4.8% and reduce national
poverty from 47.0 to 34.5% by 2015
– Higher agricultural growth would also lift almost 2 million
additional people above the poverty line by 2015 and
further increase food security
– Investments in maize and pulses will be more pro-poor
than export-oriented crops

Agriculture in Madagascar
• Agriculture is a key economic sector in Madagascar, but its performance
since the 1950s has been insufficient to cope with demographic pressures
or to contribute to a significant reduction of poverty or food insecurity
• Agriculture continues to have low productivity and high vulnerability to
climatic conditions as well as to world price fluctuations
• Several periods of civil unrest and political uncertainties have disrupted
the rural economy and discouraged investment
• Natural conditions for farming are relatively favorable, however, and
Malagasy agriculture is quite diversified relative to other African countries
Agriculture Spending in National Spending (%) - 8.0 8.0 2007

Agricultural Policies in Madagascar
• Economic and financial policies have not
provided much support to the agricultural
sector
• Key agricultural exports and inputs have been
taxed, and marketing chains have been heavily
regulated
• The government has also allocated less than
10% of total budgetary resources to the sector
(8% per year 2002-2005)

Agricultural Policies in Madagascar by
Major Period
• Post-independence
– Favorable to farmers – government “hands-off” towards agriculture
– Country was net exporter of rice and sugar
• 1970s-mid 1980s socialist structure
– Producers’ incentives increasingly distorted in favor of urban consumers
– Indirect taxation on farmers through export taxes, licensing, and
marketing boards which eroded farmers’ revenues
– Export duties became one of the principal sources of government
revenue in the early 1980s, providing 30% of total revenue in 1983
– Producer prices were not allowed to rise with international prices,
causing the NRA to fall from zero to -60% and -70%
• Mid-late 1980s to present
– Degree of taxation on farmers at late 1960s level (-25%) and then to zero
by early 2000s
– Antitrade bias on agriculture remained with the NRA for exportables at -
30% compared to NRA for import-competing agricultural products at 7%

Rice in Madagascar
• Despite being Madagascar’s main staple crop, productivity has been
low and stagnant for the past 40 years
• The country became a net importer of rice in 1972 and the majority
of rice farmers are net buyers
• Rice has low input costs, but due to remoteness it incurs large
transaction and marketing costs, which make it internationally
uncompetitive
• In the 1970s, the parastatal set a minimum price on rice below
import parity which, combined with a lack of government support
for inputs, discouraged production
• The official domestic price was further distorted because of the way
the government regulated import quantities and domestic
marketing
• Rice marketing was liberalized in 1988 and distortions reduced,
even leading to a positive NRA for the crop by 2000

South Africa: Agricultural Policies by
Major Period
• 1980s (last decade of apartheid regime)
– Internal market deregulation
– The agriculture sector was thought to need special financing and assistance facilities to support
production and increase confidence in the industry
– Funds were made available through the Land Bank, other banks and private financiers to help
poorer farmers acquire land and to provide production loans
– Macroeconomic policies cause the rand to decline, which raised input costs to farmers as output
prices were falling
– This was accompanied by migration from rural to urban areas, and from other Southern Africa
countries to South Africa
• 1990s (transition to democracy)
– Liberalization of trade
– Fast-tracking of deregulation
– Land reform initiated in 1994
– State support to agriculture fell to less than 50 percent of what it was 10 years earlier
• Distortions
– Direct support to farmers was at its peak in the 1970s, 80s and early 90s
– Assistance to agriculture reflect changes in policy from antitrade in the 1970s and 1980s to more-
liberal markets in the 1990s
– Distortions in the agricultural tradable sector were high relative to nonagricultural tradables
during the 1960s, the late 1970s, and the 1980s
– During the 1990s, distortions declined

Zimbabwe: Agricultural Policies
• Agriculture in Zimbabwe has been highly taxed, due to:
– agricultural policies that have driven down producer prices, offset at various
times to some extent by direct subsidies to agriculture;
– market imperfections, particularly monopsonistic buying practices, which
deprive farmers of the returns they should be receiving;
– macroeconomic mismanagement, notably a persistently overvalued exchange
rate
• Before the structural adjustment period beginning in 1990, the taxation of
agriculture can be largely attributed to direct interventions
• After liberalization, indirect interventions explain the persistence of low
prices for producers, including particularly monopsonistic buying of
agricultural outputs and credit market restrictions
• In response to the steep decline in agricultural output following the 2000
land reform program, the government provided huge levels of subsidies to
farmers (equivalent, in 2004, to 19 percent of GDP)
• However, distortions in the overall economy mean that items such as
subsidized fuel and credit are likely to have been used for highly profitable
arbitrage purposes rather than for agricultural production

ReSAKSS Regional Analysis on Agricultural Expenditures and Agricultural Policy Bias: Southern Africa_2009

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