FEATS ProjectAGRICULTURAL TRADE, RURAL LIVELIHOODS AND TRADE FACILITATION

A Policy Study of the linkages between Agricultural Productivity and Rural Livelihoods on the one hand and Trade in Agriculture and Trade Facilitation on the other: Recommendations for Poverty Reduction and

Development for a Landlocked Country like Malawi

By Lawrence Mapemba

University of Malawi

Bunda College

6th October, 2010

LILONGWE, MALAWI

International trade coupled with the right policies can lead

to economic growth and reduce poverty There is need for better coherence between trade and

development policies Improvements in economic growth resulted in

improvements in poverty situation Number of people living below poverty line reduced from

52% to 40% Mainly attributed to the good performance of the

agricultural sector Agricultural development may lead to rural and national

economic development For a number of years there has been low investment in the

agricultural sector Lack of investment and development of the sector

poverty and productivity traps constrained input and output market development

Lack of investment and development sector inability to attain potential in trade performance

increased investment in the agricultural sector agricultural productivity increasing agricultural competitiveness and trade performance

Yet to make the economy predominantly producing and exporting

A number of literature have shown the linkage between trade, economic development and poverty reduction

Trade development alone not meaningful poverty reduction Supporting policies and strategies that aim at reducing

poverty Benefits of agriculture increased investment in

agriculture increased employment in the sector and further development of SMEs

Overall objective is to examine the linkages among agricultural productivity, trade and rural livelihoods

Collect information and analyze recent trends in agricultural productivity, agricultural trade, livelihoods, and trade facilitation measures particularly in the context of landlocked status of Malawi

Examine the key linkages and relationships between these three aspects using a holistic framework

Generate new insights and knowledge that carry practical implications including possible development of concrete projects to contribute to the finding of solutions through a coherent policy framework that will

assist Malawi in meeting the objectives of Vision 2020

Primarily relied on literature review: CUTS-GRC, MoAFS, MoDPE, MoTPSD and NSO – provided agric productivity and trade data

Field survey was conducted - farms, companies and organizations that are involved with production, processing and exporting of tradable crops were visited to collect information about their operations and constraints and policy issues that affect their operations.

Millennium Development Goals (MDGs)◦ Long term development agenda since 1990◦ Goal – eradicate poverty and hunger by 2015

The Vision 2020◦ Long term development policy since 2000◦ Medium income economy by 2020

The Malawi Poverty Reduction Strategy (MPRS)◦ 2002 for 3 years– sustainable poverty reduction◦ Promoted agriculture and business activities to empower

the poor The Malawi Economic Growth Strategy (MEGS)

◦ 2004 to complement MPRS – through investment in cotton, tobacco, tea, sugar and agro-processing of crops

The Malawi Growth and Development Strategy (MGDS)◦ 2006 took over from MPRS – link to Vision 2020 & MDGs◦ 6 key priorities - agriculture and food security as one

Growth of the estate sub-sector SAPs (1980) – price decontrol, market liberalization,

repealing of the Special Crops Act◦ Reforms met difficulties hence failed to produce expected

economic benefits 1998 subsidies in agric re-introduced with SPS 1999 APIP – provided inputs on credit to resource poor

farmers 2000 TIP – few targeted farmers on a package similar to SPS 2005 FISP – with a larger number of farmers

◦ New Era Agricultural Policy – technology driven agric sector

◦ Food and Nutrition Security Policy – promote agric productivity to ensure food security

In line with MGDS, MoAFS formulated the ADP in 2008◦ Strategy for supporting priority activities in agric sector◦ Increase agric productivity, improve food security, and

integrate S/H farmers into commercial agric ADP was developed further into ASWAp

◦ A policy framework to accelerate achievement of the MGDS at national level and CAADP at regional level

CAADP – regional agric growth and development The Greenbelt Initiative (2009)

◦ a stretch of well-managed integrated enterprises aimed at sustainably maximizing food, nutrition and income security in different localities of the nation

◦ GBI aims at irrigation scheme rehabilitation and development

◦ Ground for integrated packaging of interventions for greater efficiency by getting farmers organized for effective action in the market

Maize yield

0.00

0.50

1.00

1.50

2.00

2.50

199819992000 200120022003 200420052006 200720082009

Year

MT/

ha Maize

Linear (Maize)

Tobacco Yield

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

MT/

ha Tobacco

Linear(Tobacco)

Cotton Yield

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

MT/

ha Cotton

Linear(Cotton)

Tea Yield

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year

Mt/HaTea

Linear(Tea)

Sugar Yield

98.0100.0102.0104.0106.0108.0110.0112.0114.0116.0118.0120.0

2004 2005 2006 2007 2008 2009 2010

Year

Mt/

Ha

Sugar

Linear(Sugar)

Soyabean Yield

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Year

Mt/H

a

Malawi considered high-cost crop producing country, due to◦ landlockedness◦ Government policies (especially tax policy)◦ low rates of adoption of good crop husbandry practices

Low input usage◦ Most farmers do not apply the recommended rates of

fertilizer and chemicals - yields and quality highly compromised

Constraints to smallholder increased tea productivity include:◦ Gaps (vacancies) in tea fields – low yields and weed

infestation◦ Lack of improved varieties: high-yielding, drought-resistant

and disease and pest resistant ◦ Tea bushes established in 1965 - high cost of tea uprooting

and establishment

Constraints to smallholder increased tea productivity continued:◦ Poor crop husbandry skills such as picking schedule, trimming

skills, plant spacing◦ Most smallholders are low input use. They look at the cost of

the inputs not at the output they will get in the end, hence they put one-third of the recommended rate

Constraints to sugar productivity include:◦ Unavailability of land for expansion◦ Inadequate local labour with good skills◦ Difficult to obtain foreign currency – Illovo uses a lot of

fertilizer and petroleum products◦ High cost of transportation

Constraints to cotton productivity include:◦ Low inputs usage among farmers◦ Poor farm incomes due to poor markets for cotton

Govt efforts to integrate the country into the global economy through trade

Undermined by structural weaknesses in the economy including the country’s landlocked position◦ Malawi’s exports less competitive on the international market ◦ High transaction costs ◦ depends on road and railway transport for its international trade ◦ exports have to travel a minimum of 948 Km to the nearest sea

port ◦ high transport cost associated with the long distance to the ports

and the administrative requirements that the cargo is subjected to while in transit makes Malawi one of the high cost producer

◦ Malawi railway system is unreliable making road transport to be the preferred mode of transportation

◦ private sector in Malawi use longer trade routes which are easily accessible by road

Aggravated by the country’s lack of diversification of exports and imbalances between imports and exports◦ seasonality of the country’s exports, it is difficult for

transporters to arrange return load which would help to reduce the transport cost

◦ For example, it costs $35 per tonne to transport sugar to Beira with backhaul as compared to $60 without back haul

Shortages of vehicles during some periods of the year particularly during tobacco marketing period ◦ vehicles are committed to transporting tobacco ◦ Industries like cotton have complained of lack of vehicles

as the industry cannot offer competitive rates as those offered by the tobacco industry

Estimated by TERA International Group Inc. that in 2003 Malawi paid US$60.7 million for transportation of exports ◦ Time costs add about 3% - total transaction cost to be US$

78.9 million ◦ transport cost for imports was estimated at US$129.3

million For these reasons, government has put trade facilitation as a

major element of its economic policy ◦ Under the World Trade Organisation (WTO) negotiations –

Doha Round ◦ Under the regional trade agreements (RTAs) that Malawi is

a party to

Malawi’s exports dominated by agricultural commodities constitute about 84% of the value of the country’s export trade ◦ Despite government’s frantic effort to promote the manufacturing

sector contribution to export trade 14% ◦ In volume terms, from 2002 to 2008 Malawi's exports increased

on average by 14.7 percent per year while imports increased on average by 15.1 percent over the same period

For these reasons, government has put trade facilitation as a major element of its economic policy ◦ Under the World Trade Organisation (WTO) negotiations –

Doha Round ◦ Under the regional trade agreements (RTAs) that Malawi is

a party to

Government has also identified other new corridors which are considered to be more efficient than the existing ones ◦ Mtwara Corridor and the Shire - Zambezi waterway ◦ Mtwara corridor is a multi-modal transport corridor

which seeks to link Malawi to the Indian ocean by rail from the port of Mbamba bay on Tanzanian side of Lake Malawi to the port of Mtwara

◦ The plans are that goods destined for Malawi will be offloaded at Mtwara port and transported to Mbamba Bay by rail then ferried by ship to various destinations along Lake Malawi

◦ there has not been much policy talk about the project

Shire Zambezi waterway which is expected to link Malawi to the India Ocean through the rivers of Shire and Zambezi to the port of Chindi in Mozambique ◦ used to be the communication and trade route for the

white settlers during the colonial era ◦ Goods destined to and from Malawi will be transported

from the ports of Beira and Nacala by bulges all the way to Nsanje from where goods will be transported by rail to various destinations including Zambia, Democratic Republic of Congo, and Zimbabwe

◦ It is expected that the route will reduce Malawi’s cost of production by over 50%

◦ The success of this project largely depends on the cooperation of the Mozambican government

Favourable agronomic conditions for production of a range of tradable agricultural commodities

Realizing the high risk associated with the dependence on a narrow export base ◦ potential for production and export include cotton, coffee,

ground nuts, pigeon peas, beans, macadamia nuts, cashew nuts, soya beans and paprika

◦ Although maize food security also a crop with export potential

their production volumes still remain low ◦ productivity problems◦ problem of competitiveness at regional and international

markets

Agricultural exports from Malawi compete for the same buyers Being a small producer of these commodities, Malawi is a price

taker on international market ◦ the high transaction costs which the country faces due to its

landlockedness cannot be factored into the price of its exports ◦ These costs are transferred to the producers by the intermediaries ◦ the low returns, the producers are less motivated to produce these

crops This could be a reason maize, beans, soya beans, and ground

nuts have not been taken up significantly by the estate subsector

Therefore important to address the problem of high transport cost ◦ through improvement in transport efficiency ◦ exploration of cheap transport routes ◦ would increase the returns to the farmers and therefore motivate

them to produce and export more

Malawi’s trade policy is oriented towards addressing the disadvantages that the country faces as a result of its landlockedness

Based on the Malawi Growth and Development Strategy (MGDS) which is Malawi’s medium term development strategy crafted to meet the Malawi Vision 2020

The main thrust of the MGDS is to create wealth through sustainable economic growth and infrastructure development as a means of achieving poverty reduction

expected to transform the country from being a predominantly importing and consuming economy to a predominantly manufacturing and exporting economy ◦ There are six thematic pillars ◦ trade policy issues are handled under sustainable

development pillar

Trade policy builds on the market oriented policies implemented under the WB/IMF sponsored SAPs adopted in later 1980s

Some of the trade policy reforms undertaken under SAPs include: ◦ Reduction of tariffs to 25% as a maximum tariff that can

be levied on imports ◦ Streamlining the tariff bands to only four ◦ Removal of quantitative restrictions such as quotas and

import and export bans ◦ Elimination of multiple customs documentation◦ Removal of controls on foreign exchange

Implementation of these reforms has made Malawi to be among most liberal economies in Southern Africa

Through the MGDS government seeks to address this imbalance while consolidating the trade liberalisation drive

Specifically government seeks to promote sectors with high potential for growth ◦ include tourism, mining, agro-processing, manufacturing

and integrated cotton industry ◦ traditional sectors of tea, sugar, tobacco are considered to

be important sub-sectors on which to launch diversification of the economy

◦ address supply-side constraints that the private sector is facing such as poor utility supply, high transport cost, erratic power supply and high cost of doing business

◦ The policy also seeks to address impediments that Malawi’s exports face in international markets

Will these trigger a positive supply response from the private sector

Agricultural commodities are by their nature highly perishable ◦ requires a good handling system including efficient

transport system to markets ◦ long distance to seaports as outlets to international

market puts Malawi at a big disadvantage ◦ In transit the cargo is subjected to checks and inspection

which further contribute to long delivery period of the cargo

◦ only export products which are less time sensitive On a number of occasions Malawi’s nuts have been

denied entry into the European Union market allegedly due to high aflotoxin levels

According to Illovo Sugar Company, the costs of sending sugar consignment to Beira and Nacala averaged US$60/ton in 2006/7 and the cost has since increased to US$70/ton

There are plans to rehabilitate the rail way system including the 77 Km section of the rail to Nacala

The customs documentation has been streamlined such that currently importers/exporters use a single customs document

The Malawi Revenue Authority (MRA) has also computerised some of its border posts (Mwanza and Kamuzu International Airport) in an attempt to speed up clearance of goods - plans to computerise all key border posts

SADC and COMESA are implementing trade facilitation schemes as part of their regional integration programmes

Volume of Tobacco Exports (in MT)

0

20000

40000

60000

80000

100000

120000

140000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

YEAR

MT Tobacco

Value of Tobacco Exports (in Million USD)

-

50

100

150

200

250

300

350

400

450

500

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

YEAR

Mill

ion

USD

Tobacco Value

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

1994 1996 1998 2000 2002 2004 2006 2008

YEAR

Tobacco Exports By Types (Million USD)

Burley

Flue Cured

NDDF

SD FIRED

S/Air

Oriental

All Types

05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

2004 2005 2006 2007 2008 2009

YEAR

Number of Registered Tobacco Farmer Clubs by TCC

BURLEY

FLUE

NDDF

0

5000

10000

15000

20000

25000

30000

35000

2004 2005 2006 2007 2008 2009

YEAR

Number of Registered Burley Tobacco Farmer Clubs by TCC by Region

SOUTH

CENTRAL

NORTH

0100200300400500600700800

2004 2005 2006 2007 2008 2009

YEAR

Number of Registered Flue Tobacco Farmer Clubs by TCC by Region

SOUTH

CENTRAL

NORTH

0200400600800

1000120014001600

2004 2005 2006 2007 2008 2009

YEAR

Number of Registered NDDF Tobacco Farmer Clubs by TCC by Region

SOUTH

CENTRAL

NORTH

Agriculture mainstay of the economy Main livelihood of majority of rural people Provides 87% of the total employment Provides 64% of the total income of rural

people

Value of Sugar and Sugar Confectionary Exports (Million US$)

-10.0020.0030.0040.0050.0060.0070.0080.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

YEAR

VALUE (Million US$)

Volume of Sugar and Sugar Confectionary Exports (MT)

-

50,000.00

100,000.00

150,000.00

200,000.00

250,000.00

300,000.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

YEAR

QUANTITY (MT)

About 282 smallholder farming households currently grow cane sugar in Nchalo.

Between Oct 2008 to Sept 2009 annual average gross for a sugarcane farmer was US$2,155.

Dwangwa outgrower scheme has 200 smallholder farming families – five villages

The farmers are part of Dwangwa Cane Growers Limited (DCGL) which has shares belonging to the management employees and farmers

A study done by Chirwa et al. reported that smallholder farmers under DCGL experienced unreasonable deductions for some of the services, high interests rates, lack of transparency in sugar pricing and staggering of payments of their net proceeds

This in turn reduced the incomes of the farmers Elite shareholders who manage the company

take advantage of the smallholder farmers (who holds the majority shares) due to high illiteracy levels and powerlessness

Tea production and exports (Mt)

-

10,000

20,000

30,000

40,000

50,000

60,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Year

Prod

uctio

n/ex

ports

(Mt) Production (Metric Tones)

Exports (Metric Tones)

Value of Tea Exports in Million USD

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

YEAR

US$ Tea Exports

0500

100015002000250030003500

ThyoloSouth

ThyoloNorth

MJ East MJCentral

MJ West TOTAL

BLOCK

Eastern Outgrower Trust Number of Outgrower Farmers and their Hectarage

OUTGROWERS

HECTARAGE

Tea is the third major export of Malawi: tobacco is the leading export industry while sugar is in second place

The tea sector employs about 42,000 people in commercial estates and about 8,000 smallholder farmers produce tea as their main economic activity

Using the average household size, it is estimated that that about 300,000 people in Malawi directly rely on the tea industry as a major source of income

For most smallholder tea growers, tea farming is their primary source of income and livelihood

The tea sector employs about 42,000 people in commercial estates and about 8,000 smallholder farmers produce tea as their main economic activity

Tea sector is very significant since it provides incomes, stable livelihoods to growers, other community benefits such as business activities and more importantly labour market by hiring of villagers to work on the smallholder tea farms as well as commercial estates.

Value of Cotton Exports (Million US$)

-

5.00

10.00

15.00

20.00

25.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

YEAR

VALUE (Million US$)

Volume of Cotton Exports (MT)

-

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

YEAR

QUANTITY (MT)

Unlike tobacco, sugar and tea smallholder farmers, cotton farmers have suffered loss

The drop in cotton prices on the international market and the increased price floor for cotton buying in Malawi resulted in lack of market for cotton in the country

In general, cotton farming has suffered loss of profits in the last few years

A study by Chirwa et al. reported that a high proportion of smallholder farmers in chillies, paprika and cotton revealed that profitability in these crops had slumped over the years, and the proportion was particularly high among the smallholder cotton farmers

Most farmers of these crops reported that their socio-economic status was worse off than a few years back due to the increase in inputs costs and low output market prices

The construction of the cotton Ginnery by the Chinese may improve the market prices farmers face

There has been an increase in productivity of major agricultural tradable crops in the past decade although in some years, yield was affected by unfavourable rainfall

The increased productivity has been due to government’s effort through the introduction of different interventions that aimed at increasing land productivity by smallholder farmers such as farm input subsidy program, promotion of organic manure, intensive extension methods and promotion of high yielding varieties

The availability of policies and strategies that targeted smallholder farmers and the agricultural sector as a whole, have influenced the increase in crop productivity

The constraints to increased productivity include: increased costs of agricultural inputs, lack of access to credit and to some extent negligence by smallholder farmers

Productivity of tea is mainly constrained by: termites attack on tea plants of most smallholder farmers due to field gaps (vacancies) that also give room to weed growth, high cost of clones that are unaffordable by smallholder farmers and lack of modern tea crop husbandry skills

The availability of policies and strategies that targeted smallholder farmers and the agricultural sector as a whole, have influenced the increase in crop productivity

High transaction costs have been singled out as one of the major factors that contribute to uncompetitiveness of Malawi’s exports on the international market

The high transport cost contributes to Malawi’s high production costs

With regard to export markets, the European Union and the Southern Africa Development Community (SADC) constitute Malawi’s major export destinations

The country has also intensified cooperation with regional partners within the framework of SADC and COMESA

The challenges that Malawi is facing as a result of its landlockedness are aggravated by institutional constraints

It is clear that improved agricultural productivity that Malawi has attained in the last few years has improved its agricultural trade performance

For crops that have direct benefits to rural livelihoods, the trade has improved the livelihoods of smallholder farmers

For some cash crops there has been no improvements in incomes of smallholder farmers due to poor market systems and lack of value addition in the value chain

There still reports of exploitation of smallholder farmers by some institutions that warrant further research

Deliberate policies by government may help improve farmers livelihoods especially among smallholder tea farmers

The threat of burley tobacco necessitates extensive policy research in feasible alternatives NOW◦ Biofuel crops like jatropha◦ Other tradable crops that have an expanding market

Institute studies on exploitation of farmers Value-addition necessary for some tradable crops Identify financing agency to loan tea farmers to

uproot old tea and establish plantations of hybrid tea Extension-Research-Farmer linkages should be

strengthened at a platform level Promote irrigation in tea farming to improve land

productivity on both commercial and smallholder farmers

Malawi’s trade can take advantage by investing in research and development of producing more of those commodities that it has a competitive advantage or has a niche e.g. Kilombero rice which is a speciality of Malawi

Government to work on improving the railway between Malawi and Mozambique port of Beira since it is cheaper.

On the Shire-Zambezi waterway the government should put in place mechanisms to ensure that siltation of the waterway is highly controlled. All the catchment area should be planted to trees to curb soil erosion

The government should work hand in hand with countries in COMESA and SADC regions in coming up with ways of dealing with port and rail related problems that delay off and on loading of ships at the ports . Coming up with efficient and effective means of clearing goods at borders since this process is delayed at the borders and it is also prone to abuse by custom officials.

There is need for a sample survey of large scale and smallholder farmers that are involved in cultivation of tradable crops to study their levels of production, extent of involvement in trade, livelihoods and general constraints. This would provide more detailed information that will be used to substantiate the large body of information obtained using desk research as largely done in this study

Questions?