Long-lasting trade terms for agricultural commodities, industrialization


The need for industrialization in Africa and the developing world is real, although a debate about the means through which it may be achieved, has never been settled and may not be settled anytime soon. Fortunately, it appears that whatever the sources of industrialization may be, in practice they depend on the context such that each nation’s nature and degree of resource endowments are likely to help in dictating the feasible paths for industrialization for individual economies.

This is perhaps one case where the concept of ‘one size fits all’ does not appear useful. Although the actual debate on the possible options for routes to industrialization for different African nations is being considered in a future article, effort is made herein to say something that could be useful for the Malawi economy.

As we may already know, the lifeblood of Malawi’s economic growth and development is mainly the Agricultural sector so that policy changes in the agricultural sector are extremely crucial to the lives of the poorest many. This is why such changes need to be well-thought through to avoid any unnecessary human suffering of greater proportions.

This post purports to consider the current agricultural subsidy policies in Malawi in the context of world agricultural development and Malawi’s own goals of poverty reduction. It also flags the importance of launching an agricultural-led industrialization program to offset the effects of any future decline in agricultural terms of trade for Malawi.

Some development pundits in Malawi and outside Malawi seem to be at unease with the recent crucial DPP Government-led policy changes in the agricultural sector. Specifically, some opponents to the policy changes do argue that agricultural subsidies are inefficient, they should be stopped or they will sap the morale of farmers to look for their own solutions to their liquidity constraints. They also argue that agricultural subsidies are unsustainable and are counter to the ideals of international trade that must be met in this world which is increasingly becoming a global village.

Nonetheless, as a point of departure, I would like to bring to the attention of such opponents, one or two brute facts about subsidies as follow: let it be known that the West (developed world) spends more than 380 billion US dollars on agricultural subsidies annually to bolster the incomes of their farmers in order that they maintain an artificially high level of prosperity. This is a substantial amount of money that cannot even be compared to the total aid that flows to Africa or developing world annually! For instance in 2007, the total official development assistance from the West to all poor countries amounted to circa US$123 Billion, which is less than half their spending on subsidies.

Again, some research centres within the developed countries for example Michigan State University’s

Agricultural research centre working to support only less than 20 thousand part time and full time farmers in the state of Michigan spends over 80 million dollars annually in agricultural research. Regardless of how you interpret these figures, one role they play is to alert us appreciate that regardless of the nature and stage of an economy, agricultural production is of vital importance and any though that it shouldn’t be subsidised where necessary and possible, in a nation where a majority of the farmers are laden with poverty and liquidity constraints is unreal.

Further, the arguments about the need to remove all barriers to international trade are at best quixotic and far from pragmatic because of the fact that Malawi’s as well as Africa’s trading partners in the West do subsidise their agricultural sectors to a great deal, and moreover, even if they stop today, removing subsidies by 100 per cent from agricultural sectors of developing economies such as Malawi would be meaningless because the Western governments, having benefited from the same over a longer period of time, would have an unfair advantage over nations like Malawi in production and trade.

And again, the arguments concerning sustainability in terms of financing need to be crafted more intelligently than how they are being advanced presently where it is implicitly assumed that by receiving subsidies, the agricultural sector is posing a burden on other sectors.

This argument needs some thorough analysis before it can be bought because although the agricultural sector is receiving some subsidies, it is again the largest contributor to taxes and foreign exchange which are important ingredients in any country’s daily operations. In fact I do not see the subsidies as waste, but rather an important tool that is working to relieve the nations of pressures in various ways. We need to understand that a hungry rural population will, likely be less educated over time and could impose more pressure on the health sector through endless ailments.

Given what I have said, perhaps it is not surprising that I am of the opinion that the DPP government and its leader Professor Bingu wa Mutharika are on the right track as far as the agricultural subsidy and the general agricultural development policies are concerned. While I agree with the subsidy policies, I would further like the government to consider the following: Revolutionising agriculture sustainably and for the good of the whole nation both now and intertemporally requires another step beyond subsidizing agricultural inputs.

There is a need to subsidise those inputs while endeavouring to take advantage of the strong backward and forward linkages that the agricultural sector has with the other sectors to avoid being stuck in the agricultural sector alone, while exporting unprocessed commodities. There is need to launch what we may call ‘agricultural-led manufacturing rebirth’ or more simply ‘agricultural-led industrialization’.

The problem with solely relying on the agricultural sector in the long run emanates from the very nature of agricultural commodities and trade. Even in our households, we would appreciate that we rarely proportionately increase nsima consumption when our incomes go up or when the price of maize goes down, or to be precise, any increase we may register would be less, relative to the change in our incomes or prices of maize flour. At the macroeconomic level of course that implies that expenditure on agro-goods does not rise at the same pace as the expenditure on manufacturing goods and services. In other words, when world incomes go up, economies that rely on agricultural exports alone or primarily are likely to come out as losers of international trade.

In addition to the implied income inelasticity of demand for agricultural goods alluded to above, the terms of trade for agricultural goods in the absence of processing do deteriorate dynamically/overtime, sometimes due to oversupply. In the absence of an active manufacturing sector that draws its resources from the agricultural sector, in some cases agricultural growth could be immiserising.

To ensure this does not happen at any point and to ensure that subsidies have a lasting positive impact, there is need to rebuild the manufacturing sector which would get its inputs from agriculture. This would further imply that even in the event of a decline in agricultural unprocessed goods’ Terms of Trade, Malawi would have all the incentives to increase productivity in the agricultural sector as the nation would be exporting processed products, and there would be no immiserising growth.

As a point of exit therefore, let me state that I think for Malawi and nations that see agriculture as the mainstay of their economies, it is pertinent that they wisely subsidise and restructure agriculture such that they can produce beyond subsistence while not ignoring the manufacturing sector which itself must be set up to take advantage of the agricultural sector’s strong backward and forward linkages.

Although farm parcels are smaller in some areas, we must try where possible to reclaim marginal land including wetlands to try and expand total farmland. We should then seriously think about taking advantage of transgenic technology and irrigation possibilities to increase total factor productivity. This is why I am in total support of the DPP Government’s Greenbelt Project which focuses on irrigation.

To avoid immiserising growth and ensure intertemporal sustainability, we should invest the gains from agriculture into the manufacturing sector hoping that in future the share of the manufacturing sector will be larger than that of agriculture in the overall economy, at which point we will be a developed nation.

The other importance of a vibrant manufacturing/industrial sector is that by providing jobs to both skilled and unskilled personnel, the manufacturing sector has the potential to meaningfully depopulate the rural areas and thereby freeing up more land per capita.

*Dr Greenwell Matchaya, Berkshire, United Kingdom

Send any feedback to greenwelmatchaya@yahoo.co.uk

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