The Impact Of Structural Adjustment Programmes In Africa Finance Essay
Published: Mon, 5 Dec 2016
“Illustrating your answer with specific examples, evaluate the impact of structural adjustment programmes on agriculture in southern Africa.”
The impact of Structural adjustment programs (SAPs) on the performance of Sub Saharan Africa (SSA) has been deeply investigated and, despite what the International Monetary Fund (IMF) and the World Bank claimed, adjustment policies have often had a negative impact on the poorest and most vulnerable sections of the region’s population. In particular, The SAPs in Africa have certainly contributed to some changes in the agricultural sector: in a continent where more than 70 percent of the population is involved in agriculture, the last two decades have seen a relatively poor sector’s performance, opposed to the post-independence condition of self-sufficiency of most of the region’s countries (Mkandawire and Bourenane, 1987). This essay will look more deeply into some of the impacts of SAPs on agriculture, focusing on the experience of Zambia as an example of IMF adjustment programs which failed to fully address the nature of the country’s economic crisis, caused by both external causes and domestic policy shortcomings. After a brief introduction on the economic situation of the country and the factors that led to the adoption of SAPs, the essay will proceed by evaluating some of the main ways in which agriculture has been affected by structural adjustment programs, looking in particular at the consequences on production patterns as well as on the people involved in agriculture. The last section draws conclusions.
During the last century, the role of agriculture in the Zambian economy and the policies associated to it have greatly varied. The country went from a flourishing self-sufficient agriculture of the pre-colonial period, to a neglected rural sector and a copper-dependent economy during the colonial period, to a return to agriculture as a way out of the economic crisis. During the colonial period (1890-1964), agricultural activity was divided among two classes of farmers: European settler farmers, supported by the state through advantageous policies, and African subsistence peasant farmers, used mainly as a labour reservoir, and to which access to good land was restricted (Mwanza, 1992). At this time, the role of agriculture was especially supportive to the provision of low priced food and cheap supplies of labour to the expanding industrial economy (ILO, 1987). Maize was the principal commodity constituting 90 percent of all marketed cereals, accompanied by secondary export commodities such as coffee, cotton, tobacco and groundnuts. At independence, the United National Independent Party (UNIP) attempted to diversify the economy by developing agriculture to secure food self-sufficiency and reduce the dependence on the copper industry. A single-channel marketing system, fixed agricultural producer prices, and subsidies in the maize area are examples of the policies put in place to offset the damage caused by an already declining mining industry (Mkandawire and Bourenane, 1987). However, such policy experiments did not reach their objectives, and Zambia went through economic deterioration in the 1970s due to both external shocks (oil crises and falling prices of copper), and inefficient domestic economic policies (e.g. a static and inflexible economic structure) (Seshamani, 1990). The government started to borrow in order to maintain the same levels of import, increasing the country’s indebtedness that reached unacceptable levels, for a total of almost $4.5 billion at the end of 1982 (Jansen and Rukovo, 1992). With no significant recovery of the economy, the increasing budget deficit obliged the government to start getting conditional loans within the framework of the IMF/WB SAPs.
A first series of SAPs was adopted in Zambia between 1983 and 1987, with the aim of restoring the country’s financial stability through trade liberalization, currency devaluation, and reduction of government spending, including the removal of food and input subsidies (Saasa, 1996). Preliminary liberalization took place in the years 1983-1985, when a foreign exchange auction system was introduced. The IMF/WB program collapsed in 1987, mainly due to the unsustainable depreciation of the domestic currency (the Kwacha) that fell from a pre-auction rate of K 2.20 per US$ to K 21 per US$ of the last auction (Wulf, 1988). After a brief attempt by the Kaunda government to put up its own New Economic Recovery Programme between 1987- 1989, Zambia went back to the IMF/WB SAP starting from 1989, and the reform periods went on with the following government.
In agriculture, the SAP aimed at promoting agricultural exports, improving food production and limiting government intervention in the market (Simatele, 2006). Before the introduction of SAPs, the government put in place highly subsidized measures to assist agricultural production growth such as crop-marketing depots that reached the entire country, the introduction of fixed crop prices, and provision of tractor ploughing services, credit and fertilizer (Jansen and Rukovo, 1992). Such measures were replaced by agricultural adjustment policies that included the removal of subsidies, food prices decontrol, abolition of “equity pricing”, and liberalization of agricultural marketing (Mwanza, 1992). During the short period of the New Economic Recovery Programme, the Kaunda government failed to support agricultural development, and not surprisingly, given the fact that the same measures which undermined agricultural production and which led to foreign borrowings were re-adopted: revaluation of the kwacha, food subsidies, and price controls. But let’s look at the consequences of reforms in more detail.
The introduction of SAPs in Zambia affected agriculture in a number of ways. This essay will focus on the consequences on food production (in particular on changes in the cropping patterns), and on the people that practice agriculture, especially smallholders. The reforms had an impact on food production and cropping patterns due to two main factors: first, an increase in agricultural production costs, and second, a decrease in access to credit.
Production costs rose in Zambia following a decrease in (i) the exchange rate, and (ii) agricultural subsidies. The country’s food production is dependent on the exchange rate especially in terms of input prices. The newly adopted foreign exchange auction system (1985) made it difficult for the government to plan a consistent pricing policy, and agriculture, as a priority sector for the economic restructuring, was uncompetitive in the foreign exchange auctions. As a consequence of the auctioning, the local currency (Kwacha) depreciated, increasing the prices of imported goods and inflation. “Whereas a 50kg bag of fertilizer cost K26.75 during the 1984/5 season, it rose to K48 during the 1985/6 season” (Sano, 1988). This had a strong impact on the very import sensitive Zambian farming. First, the production of the main crop, maize, is heavily dependent on imports of fertilizers and other items such as empty grain bags. Even though Zambia needs less fertilizer than other countries, as Malawi, due to the abundance of good arable land, such input is by far the most important and most costly used, especially by small farmers. Second, petrol and trucks for the transport of agricultural produce must also be imported. These inputs are highly necessary in a country with a low level of population density and a skewed pattern of urbanization. As a consequence of exchange rate auctioning, production costs rose, and farm gate maize prices became less favourable, especially for small-scale maize producers in peripheral areas of the country (Jansen and Rukovo, 1992). With increasing input prices, the government, in order to maintain production, was obliged to augment producer prices correspondingly: maize reached K55 per bag in the1985/6 season (Sano, 1988). This, together with good weather conditions, contributed to the rise of agricultural output at a level of 9 percent of GDP in 1985 (Wulf, 1988). However, due to a higher rate of population growth, GDP was still declining. The rise of producer prices has been certainly beneficial, but the absence of infrastructural improvements and other consequences of liberalizations such as high inflation undermined output improvements.
Before the reform period, the government both delivered inputs to, and collected outputs from farmers, even in the more remote areas. However, with the introduction of the SAPs in the 1980s, subsidies connected to agricultural production were severely reduced. Removal of food subsidies, previously put in place mainly to provide cheap food for urban residents, did not affect poor farmers (Sahn, 2004). However, the removal of other subsidies such as those on transport and on inputs did have an impact on agriculture, and especially on smallholders. The reduction of transport subsidies undermined farmer’s access to markets and increased the cost of production. Both small and large farmers were adversely affected by transport subsidy removals, but while large scale farmers suffered less from the price increase due to their closeness to markets and roads, the remoteness of many smallholders further increased their costs of production. Village processing was replaced by large-scale mills, adding extra transportation costs that, together with the absence of subsidies, made the food system highly inefficient, negatively affecting rural residents and their produce. Agricultural production was also affected. Being maize the major and most commercialized food crop in the country, its dependence on factors such as distance to markets and credit is higher than for other crops. As a study by the African Economic Research Consortium shows, maize has a negative response to distance from the market (Simatele, 2006). On the contrary, other crops such as cassava have mainly local basic markets, and their production is not as much affected by the removal of transport subsidies. The de-subsidization of agricultural inputs, as for example input credit or less costly fertilizer, also had an impact on agriculture. Their removal entailed a credit squeeze and caused an increase in production costs, negatively affecting especially small-scale food production.
A second factor that had an impact on food production was the decline of access to credit. Before the introduction of SAPs, agricultural credit was provided by government-owned companies such as the Agricultural Finance company (AFC), and by commercial banks. Although commercial farmers have mainly financed their operations through private banks, smallholders have relied mostly on government loans, because of the low repayment rates connected to it. With the liberalization of the financial markets, credit and its pricing was no longer controlled, and farmers had to compete with other potential borrowers to get it. Credit provision was left mainly to the private sector, that failed in filling the gap. For smallholders it has been very difficult to obtain loans from financial institutions, both because of their exposition to high risks (i.e. physical conditions of the environment, health problems), and because of their isolation (poor transportation and communications). Because the private sector often refused to serve the rural areas, the opportunity was left to local moneylenders, if present, to exploit their monopolistic positions and charge the small farmers high interest rates. In any case, interest rates escalated, causing a problem for loan repayment: from 43 percent in 1990, to 46 percent in 1991 (Geisler, 1992). “In Solwezi District in the North Western Province, the progression of interest rates charged by Lima Bank during the 1993/94 cropping season reached 120% in September,1993” (Kajoba, et al,1995, p.9). Attempts to solve the problem of credit access, included those leaving smallholder credit provision to the private sector, most of the times resulted inefficient and failed. An example of such attempts is the launch of the Agricultural Credit Management Programme (ACMP) in 1994, which was meant to support the private sector in credit provision by giving fertilizers and seeds on credit through credit managers who would in turn provide these inputs to farmers through local credit coordinators (Pletcher, 2000). The ones that mostly benefited from this system have been the stockists and traders at the expense of smallholders. The problem of credit provision with liberalization continues to exist, and will probably persist as long as the private sector and the government do not reach an agreement on the development of efficient input supply networks.
It is clear that SAPs in Zambia had a negative impact primarily on the smallholder subsector, that between 1980 and 1994 contributed about 40 percent of the agricultural output (Chiwele et al., 1998). The increase of production costs and the decrease in access to credit have introduced new difficulties for smallholders disposing of less means to overcome adverse conditions than commercial farmers. Moreover, while commercial farming systems are concentrated along the rail line, remote farmers, once relying on support of the state, have been cut off as the private sector was not able to fill the gap caused by liberalization. The new private sector-led marketing system initiated in 1992, in fact, has not so far been successful in carrying out its functions to the same extent as the cooperatives previously did. Most traders own very little transport and storage facilities and tend to depend on hired material. The bigger constraint, however, has been trader’s lack of access to capital. As a consequence of the marginalization of remote farmers, volatility and desperate selling right after the rains have increased, leading to a decrease of selling prices and a affecting of the market (Chiwele et al., 1998).
Concerning cropping patterns, the adoption of SAPs and the cost increase have contributed to the rise in production of other crops as millet, sorghum, and cassava. In fact, even though today maize is still grown in large quantities in Zambia, from 1980 to 2005 Cassava production went from 360’000 to 1’056’000 tons, while millet production from 20’000 to 29’583 tons (FAOSTAT, 2010). “The area planted to maize declined 43 percent between 1989 and 1999. During the same period, the area planted to cotton increased by 65 percent, and the area for groundnuts grew by more than 100 percent” (Mukherjee, 2002, p.27-28). Smallholder’s withdrawal from maize cultivation might be considered as a threat, in the sense that it would negatively affect the policy of self sufficiency in maize, leading to the need of importing the crop from the neighbouring countries (Sano, 1988). “In mid-1987, only about 6.5 million bags of maize were expected from current harvest, necessitating large and costly imports of the staple once again” (Good, 1988, p.45). However, the introduction of maize as the main commercial crop was a post-independence policy that encouraged inefficiency and lack of differentiation by giving incentives to the farmers to move away from the production of other crops into maize. But the ecology of the country makes it more suited for certain crops than others, according to the area of cultivation. “Maize is ecologically suited to less than half of the country, and requires new skills and large labour and capital inputs in comparison to other starch staples” (Mkandawire and Bourenane, 1987, p. 292). The dominance on one crop partially explains why less than 20 percent of the country’s arable land was under cultivation (Saasa, 1996). In the period pre-SAPs, the government introduced rural development programs that promoted the cultivation of maize as a cash and food crop. Rising subsidies have coincided with the rapid advance of maize production, even in areas where it previously had a minor role (i.e. parts of the Northern Province). Such policy made small-scale farmers dependent on the government, on both subsidies provision (as those on fertilizers, transport, marketing and credit), and on a single cereal (Kajoba, 2009). Adjustment reforms have shifted the attention to competing grains and tubers – i.e. millet, sorghum, and cassava – for a number of reasons. First, these crops are generally cultivated with little or no chemical dressings, requiring much less inputs (Kydd, 1988). Second, they have mainly local basic markets, and their production is not so much dependent on transport services, and therefore subsidies. This also affects the issue of access to markets, which has been decreasing for smallholders with the liberalization reforms. Third, these crops are drought resistant and more traditional in some parts of the country than maize, and their production might contribute to an increased efficiency on the food system, as harvest fluctuations might be reduced and marketed food supply might be more regular. Also, alternative crops sometimes have non-monetary credit available, allowing easier forms of repayment by farmers. For these reasons, a gradual move away from maize might even be beneficial to agriculture to some extent, as it could contribute to an increased efficiency of the food system. Moreover, in the long term, an increase in the production of cheap un-subsidized food could provide a more sustainable solution.
This essay has looked at some of the main consequences on agriculture of policy reform measures undertaken through structural adjustment programmes in Zambia. Both production patterns and smallholder farmers were affected by the reforms. Production costs rose following a decrease in the exchange rate and in agricultural subsidies, and access to credit decreased following liberalization. These patterns negatively affected especially small-scale farmers, unable to cope with increasingly adverse production conditions, while left the bigger, commercial farmers closer to the market better off. Improvements in the small-scale sector have further been undermined by problems in the provision of agricultural support services by private actors. Alternative crops are increasingly grown as a consequence of rising production costs related to maize, and this pattern might provide a solution for a more sustainable and more efficient food system. Certainly, the country’s situation pre-SAPs and the inefficiency of its agricultural policies required some kind of reforms: a food system focused on maize, a structure of production and consumption along the line of rail and in the copperbelt, a transport system sustained by subsidies and an export agriculture affected by an overvaluation of the exchange rate (Sano, 1988). However, the enforcement of a ‘standard’ package of policy measures has proven unsuccessful in addressing the nature of Zambia’s economic crisis. SAPs focused excessively on price policy reforms, that have been not able to induce agricultural growth alone. Price stabilisation programmes need to be carefully designed so as not to turn into a fiscal drain and an obstacle to production diversification. Reforms in agriculture are still taking place and policies are therefore still changing. Credit access, input markets design and the way through which institutions can enhance smallholder agriculture are areas that require a particular attention when formulating policies that will enhance the country’s agricultural potential.
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