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

31st March, 2010

CUTS GRC, GENEVA

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 lonkages among agricultural productivity, trade 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

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 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

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 tradeable 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

Questions?