Policy Reforms

Policy Reforms

Throughout this text, a number of instances have been quoted of
government successes and failures in framing economic policies.
Governments can protect infant industry or promote inefficiency;
can promote competition or promote corruption; can stimulate a
declining economy or stimulate inflation. Get the policies right and
sustainable growth is possible; get it all wrong and wild swings in
economic fortune result.

Chapter 4 describes the supply-side paradigm shift that captured
mainstream economic thought and policy-making in the 1970s
and 1980s. The early post-war, interventionist stance was rejected
in favour of a liberalising, privatising, free trade economic philosophy,
actively promulgated not only by academic economists but
also by institutions such as the IMF and World Bank – which had
the power to tie financial strings to such policy recommendations.
(see Box 7.3).
Cashew production in Mozambique has been an important
income earner for the country since Portuguese colonisation.
With independence in 1975 however, following the strategy of
many other developing countries, the incoming government
banned the export of raw cashew nuts as a measure to stimulate
the domestic packaging and processing industry.
Mainstream neoclassical economics disapproves of such
practice. A ban or export tax on raw materials depresses their
internal price and effectively subsidises the domestic processors.
Cashew farming is discouraged and labour and capital are
drawn into urban industry which is protected and inefficient in
world terms. Urban employment and incomes are propped up
whilst poor farm incomes are depressed. That is what theory
dictates.
The World Bank became involved and insisted that (in a
country torn apart by civil war) if the Mozambique government
wanted to qualify for much needed World Bank and IMF financial
support then it had to liberalise the cashew nut export trade
and reverse the trends outlined earlier. In spite of fierce opposition
from the government and domestic industry, the World
Bank got its way. The ban on exports was removed in 1991/1992
and related tax restrictions were reduced from 60 per cent down
to 14 per cent in 1998/1999.
As a result, farm prices rose, raw cashew exports increased
and resources were pulled out of the domestic processing
Box 7.3 Cashew nuts in Mozambique: an example of World Bank
influence
© 2004 Tony Cleaver
industry. The benefits for the farmers were, however, very small
whilst the costs imposed on the infant packaging industry –
which went into steep decline – were substantial. Recent analysis
(published by the US National Bureau of Economic Research,
see following paragraph) shows that, so far as Mozambique’s
overall development was concerned, the World Bank got it
wrong.
Estimates have revealed that the extra income benefits
farmers stood to gain from liberalisation were probably ‘no
greater than . . . US$5.30 per year for the average cashewgrowing
household’ and 50 per cent to 60 per cent of this gain
was anyway siphoned off by urban traders and middlemen. The
actual benefits were thus described as ‘puny’ compared to the
enforced unemployment of 11,000 processing-industry workers
in 2001. Neoclassical theory dictates that resources made redundant
in ‘inefficient’ industries that are forced out of business by
free trade should thus relocate in sectors in which the country
does possess a comparative advantage. But poor countries have
inefficient markets constrained by lack of transport, information,
and credit needed to aid the mobility of labour and capital.
Mozambique’s urban workers stayed unemployed.
Worse, the export trade in raw cashew turned out to be less
competitive, less beneficial than that for processed cashew.
(India is the dominant buyer – a monopsony – of raw cashew
and is thus able to keep its price, and Mozambique earnings,
down . . .) Had the government’s strategy of supporting an
infant industry been left to follow its course, therefore, the
nation’s overall earnings would certainly have been greater, and
dynamic gains would have been realised in domestic processing
technology and also in government economic management.
The real world is always more complicated than theory
presumes. The World Bank’s world view had been captured by
the ‘Washington Consensus’ – the policy paradigm of supplyside
economics – and this clouded its vision of what specific
measures were appropriate in a particular instance.
Source: McMillan, Rodrik and Welch (August 2002) ‘When Economic
Reform Goes Wrong: Cashews in Mozambique’ NBER Working Paper 9117.
© 2004 Tony Cleaver
There is no doubt that some developing countries’ policies have
been inflationary, destabilising and financially unsustainable. Others
have been protectionist, isolationist and anti-growth. Essential
reforms in some cases were necessary. But to insist on cutbacks
in all public spending, to tar all government intervention with the
same brush, is to fall foul of the fallacy that one extreme is better
than the other. The late 1980s and 1990s, in particular, has seen
the rise of a consistent challenge to the free market, neoclassical
paradigm.