Re: query on cashews

["Patrick Bond" <pbond@xxxxxxxxxx>]

> From:          Jim Devine <jdevine@xxxxxxxxxxxxxxx>
> I don't think it's worth my time forwarding the articles on Mozambican
> cashews to Krugman, since he's already staked his reputation on the cashew
> question in the NY TIMES and is unlikely to back down.

Joe Hanlon's the english-language guru on the topic, here in two
posts dated mid 1997 and mid 1999:

***

CAN MOZAMBIQUE MAKE THE WORLD BANK
PAY FOR ITS MISTAKES?

By Joseph Hanlon, Maputo, Mozambique
Gemini News Service, September 29 1997

Cashew nut processors in Mozambique are demanding $15
million in compensation from the World Bank, in a
ground- breaking attempt to force the World Bank to
pay for its mistakes. The claim follows the release
earlier this month (September) of a World Bank study
which said that a policy the Bank imposed on
Mozambique was totally wrong and should be
"abandoned".

More than 7000 people have been thrown out of work
this year, and the newly privatised cashew industry
virtually bankrupted. Kekobad Patel, head of the
Mozambican Cashew Industry Association, warns that
even if the policy is now reversed, most of the
factories cannot be reopened without financial help.

This will be a personal test for James Wolfensohn,
president of the World Bank, and his efforts to make
the bank less macho. The new study was carried out at
his personal request after he visited Mozambique in
February (this year) when he was met by objections to
Bank policy on cashew from government, industry and
trade unions.

NOT JUST A SNACK

To Mozambique, cashew nuts are not just nibbles that
go with beer -- they are the country's second largest
export. Tens of thousands of individual peasants
cultivate cashew trees. But the cashew has a hard and
acidic outer shell which must be hit with a hammer or
cut with a saw to expose the kernel we eat.
Mozambique developed a relatively sophisticated
processing industry employing 9,000 people, mainly
women, to take the kernels from the shells.

At World Bank insistence, these state-owned factories
were privatised in 1994-5. High bidders at US$ 9
million for the cashew factories were local
businesses and not transnational corporations, as had
been expected by the World Bank and many outside
observers.

But as soon as the local business people took over,
the World Bank revealed a secret study which claimed
the processing industry was so inefficient that the
country lost money on every nut processed, and that
peasants would earn a higher price for their cashews
if raw nuts were exported.

The Bank said that raw cashew nuts should be exported
to India, where the kernels are removed from shells
by families working at home in poor conditions. In
particular, the shells contain an acid which damages
the fingers of workers, which is why Mozambique has
always used mechanical processing with large hammers
or saws rather than Indian hand processing.
Furthermore, India subsidises its industry.

Mozambique had imposed an 20% export tax on
unprocessed cashew nuts to compensate for Indian
subsidies. Government and industry had already agreed
a phased reduction down to 10% over five years, as
the new owners repaired war damage and modernised
their factories. But this was not enough for the
World Bank, which demanded that the tax be removed
over three years and exports of unprocessed nut be
"liberalised".

There was an outcry from the government, industry and
trade unions, who demanded reconsideration. They
said: 1) the study had been done without talking to
people in the industry, and had fundamental flaws; 2)
globalisation was forcing a lowering of standards of
health and safety at work; 3) it was a myth that
peasants would gain; and 4) buyers of the newly
privatised factories had been cheated because they
had an implicit (and in some cases explicit) promise
that there would be protection until they got the
industry back on its feet.

CONDITIONALITY AND WORLD BANK REFUSAL TO TALK

Despite the strong and detailed case put forward by
the industry, the World Bank refused to discuss the
subject. Instead, the Bank made it a test of
strength.

The 1995 World Bank "Country Assistance Strategy"
made free export of cashew a "necessary condition" of
its programme to Mozambique -- the only "necessary
condition" linked to such a detailed policy point.
The 1996 joint IMF-World Bank "Policy Framework Paper
for Mozambique" also required the removal of the
cashew export tax.

According to the World Bank's "World Development
Report 1997", Mozambique is the poorest and most aid
dependent country in the world. This is because
Mozambique was subject to a 12 year war waged by the
old apartheid government in South Africa. This war
killed 1 million people and did an estimated $30
billion in damage, which shattered the economy.

As a result of this huge destruction, Mozambique is
now receiving more than $500 mn per year in aid. But
all of this aid is "conditional" on Mozambique having
programmes with the IMF and World Bank. With no World
Bank programme, there is no aid. So when the Bank
makes closure of the cashew industry a "necessary
condition", it is a powerful demand. If that action
is not carried out, then the World Bank programme
stops, and then all aid is halted because it is
conditional on having a World Bank programme. If aid
stops, people starve. So a World Bank "necessary
condition" is an order which cannot be refused.

Nevertheless, the outcry grew from civil society,
particularly the trade unions and the press -- who
argued that the Bank policy was based on false
premises.

The World Bank response was to raise the ante again.
In October 1996 a World Bank delegation led by vice
president for Africa Callisto Madavo visited
Mozambique. Madavo was firm: "We have an agreement
with government on cashew, and we expect that
agreement to be followed. We believe the export tax
on cashew should be removed," he told a press
conference.

In closed meetings, the Bank team went further. One
Mozambican official said privately "the World Bank
told us we must say this is our policy and to stop
staying it is imposed by the Bank. We know aid is
conditional on World Bank approval, and now we must
lie to get World Bank approval. And we will. But we
remain totally opposed to a policy that will destroy
our cashew industry."

WOLFENSOHN TO THE RESCUE?

But when President Wolfensohn visited Mozambique in
February 1997, he responded more favourably to the
same demands from government and industry. He totally
reversed Madavo's line. Wolfensohn ordered a new
study, and suspended the demand for further cuts in
the export duty on raw nuts, which at that point
stood at 14%. And the demand for further cuts did not
appear in the 1997 IMF-World Bank "Policy Framework
Paper for Mozambique" which was issued in May.

The new study was carried out by international
consultants Deloitte & Touche and released in early
September. It says the World Bank's previous policy
"should be abandoned". It agrees with the industry
and trade unions and "disagrees with the previous
finding".

The new study makes several key points: 1) Indian
subsidies to its industry "tilt the playing field"
and make competition unfair. 2) Peasants did not gain
anything from liberalised exports; extra profits were
all held by the traders. 3) "Improved management
practices continue to contribute to factory
efficiency" in the newly privatised Mozambican
factories. 4) Mozambique earns an extra $130 per
tonne by processing its own cashew kernels, in
contrast to earnings exporting raw nuts. This extra
earning "alone is sufficient reason to support the
processing industry against competition from India."
The study calls for an increase in the cashew export
tax.

BUT IS IT TOO LATE?

But is it all too late? The export tax was cut to 14%
this year and more than half of Mozambican raw nuts
were exported to India. Factories ran out of nuts and
by mid-year began to shed staff. Most of the 14
factories are now closed; 7000 of the 9000 workers
(most women) are now out of work.

"In the past two years we have lost more than $15
million," said Kekobad Patel, head of the Cashew
Industry Association. "The government still expects
us to pay the next instalment on the privatisation,
and we need to invest millions of dollars to
modernise the factories. But we now have big debts to
the banks from the past two years on which we are
paying 30% interest. We cannot pay everything."

The industry wants two things. First, it needs a
commitment to a long term policy with at least some
protection. Second, the World Bank or the government
must provide a long term low interest loan to allow
the industry to clear its debts and modernise. "We
are actually prepared to assume these losses, but in
the long term, not immediately," says Patel.

The buyers of the factories have only paid the first
installment on the purchase price, and only started
rehabiliation. "So if the World Bank or the
government cannot give us the conditions to work, we
will just hand back the factories," and they will
never open again, Patel said.

"Mozambique has one of the best privatisation
programmes in Africa," according to Phyllis
Pomerantz, World Bank country operations manager for
Mozambique, speaking last year in Maputo. Yet the
Bank's -- and Pomerantz's -- own policies may have
destroyed one of the best parts of one of its best
privatisation programmes.

WHAT RESPONSE FROM WOLFENSOHN'S BANK?

The test is what happens now. Will the World Bank
hide behind Madavo's line that this was government
policy and nothing to do with the Bank? Or will the
Bank accept that the policy was based on its study
and was imposed by the Bank? If so, is the Bank
prepared to pay compensation? James Wolfensohn has
taken a personal interest in this case, and it was
only his intervention that led to Bank acceptance
that it was pushing a wrong policy. Can Wolfensohn
bite the bullet and compensate for past errors?


Joseph Hanlon is author of "Peace Without Profit: How
the IMF Blocks Rebuilding in Mozambique" (James
Currey, Oxford, 1996) and is editor of the
"Mozambique Peace Process Bulletin".

***

From: J.Hanlon@xxxxxxxxxx
MOZAMBIQUE GAINS
AN EXTRA $28 MN PER YEAR
FROM HIPC DEBT RELIEF
  but
    IMF IMPOSES NEW CONDITIONS
    ON CASHEW AND
    RURAL WATER

              Joseph Hanlon, 5 July 1999

Contents:
1. HIPC debt relief
        $41 million a year
        Money for health & education
        More negotiations & more relief due
        Unions & government call
             for 100% cancellation
2. PFP and conditions
        How conditions are imposed
        Cashew nuts & water
        Higher taxes but more spending
3. Technical notes
        Actual debt service payments
        HIPC terms
        Why is debt relief larger?
        Transparency and web references
        What is Mozambique's GDP?

+++++++++++++++++++

1. HIPC DEBT RELIEF
=================

$41 MILLION PER YEAR

Mozambique's debt service payments have been cut by
$41 million per year -- $28 million more than
expected -- under the HIPC debt relief announced by
the IMF and World Bank on 30 June.

The ostensible reason for the increase is inaccurate
projections made by the IMF when debt relief was
first considered last year (see part 3, below).

But the unexpectedly generous deal is also a reaction
to public pressure from the Mozambican and British
governments, the Mozambique debt group, and Jubilee
2000. Mozambique's President Joaquim Chissano has
repeatedly called for total debt cancellation. Clare
Short, the British International Development
Secretary, said in April that "HIPC has failed to
free up resources for spending on anti-poverty
programmes" and cited the example of Mozambique where
"there will be no significant reduction in actual
debt service paid."

For the four years 1995-98, Mozambique paid an
average of $114 million per year in debt service. The
IMF and World Bank estimate that for the six years
1999-2005, the average will be $73 million, a saving
of $41 million per year. This is compared to the $13
million saving that had been predicted by the IMF and
World Bank when the decision was made to grant debt
relief in April last year. (Annual figures are given
in part 3, below.)

This year (1999) debt service payments will be 17 per
cent of the government budget and will be larger than
spending on health. By 2001, however, debt service
payments will be down to 11 per cent of the budget
and will be similar to government spending on health.

But the IMF used the debt relief to impose two new
free-market conditions: + Mozambique is to be
prevented from rescuing its cashew nut processing
industry, ensuring the continued unemployment of
10,000 workers, half women.  + The government will
not be permitted to provide clean water to many of
the poorest people in rural areas. (See part 2,
below)

MONEY FOR HEALTH & EDUCATION

The money saved due to reduced debt service payments
will be spent mainly on health and education. Prime
Minister Pascoal Mocumbi announced in December 1998
that health spending would rise from $40 million in
1998 to $57 million in 1999, and education spending
from $80 million to $96 million.

But these large increases are still short of what the
government needs to spend; there is a shortfall of at
least $16 million per year in health and a larger gap
in education, according to the government. The extra
debt relief will fill the gap.

MORE NEGOTIATIONS & MORE RELIEF DUE

Mozambique needs to go back to the Paris Club of
bilateral (government) creditors, which is expected
to increase the amount of bilateral debt to be
cancelled - to at least 90% of eligible (i.e. not
all) debt. The World Bank assumes this will be
agreed, but this is not guaranteed.

None of this includes any of the agreements made by
the G7 in Cologne (Koln) on 18 June. When
implemented, this could cut debt service payments by
another quarter - to an average of $55 million per
year, half the pre-HIPC level.

The "Koln Debt Initiative" will be applied
retrospectively, after the package is agreed at the
autumn meetings of the World Bank and IMF in
September. The World Bank in particular is discussing
how to apply what it sees as the new conditionality
outlined in the G7 Koln communique - namely that debt
relief must be linked not just to traditional IMF
macroeconomic conditions, but also to new poverty
reduction targets. Mozambique will have to jump
further hurdles before obtaining relief under the
Koln Initiative.

UNIONS & GOVERNMENT  CALL FOR 100% CANCELLATION

It is "essential" that government and civil society
"continue to struggle for the total cancellation of
Mozambique's debt, within the framework of Jubilee
2000," declared Mozambique's largest trade union
federation, OTM, in a statement responding to the
debt relief granted on 29 June under HIPC.

Although a "substantial" amount of debt has been
cancelled, the remaining debt is still "a heavy
burden," OTM continues. "The country will never have
the capacity to repay the present debt, nor the new
debt which is being taken on from the international
financial institutions", notably the IMF and World
Bank.

The Maputo faxed business daily "Metical" suggests
that the government agrees. On 5 July it reported
that on 2 July "the Prime Minister invited
representatives of Mozambican institutions which had
fought for the cancellation of debt to a modest party
-- without foreign ambassadors. This was a signal
that the government wanted to applaud the work of
these groups rather than express contentment with the
gains. The signal from the government to these groups
was to keep up the battle for total debt
cancellation."

"So far, there is nothing to celebrate," concludes
"Metical". Instead, "leave the celebrations for the
day when the whole debt is cancelled -- and for the
day when new loans are decided by us and channelled
intelligently for the creation of development and
well being here.

"For the time being, we continue to get deeper into
debt to enrich international bureaucrats, largely
parasitic industries like consultants, and
transnational corporations, and to generate costs
that only require more loans."

====================

2. PFP AND CONDITIONS =====================

HOW CONDITIONS ARE IMPOSED

Under the Heavily Indebted Poor Countries (HIPC)
Initiative of the World Bank and IMF, a country only
receives debt relief after jumping two hurdles.
First, it must have completed six years of structural
adjustment under the IMF's Enhanced Structural
Adjustment Facility (ESAF). Second, debt relief
itself is a two-step process -- a decision is taken
to grant debt relief, subject to meeting certain
additional conditions. When these are met, the debt
is actually cancelled.

For Mozambique, the "decision point" was 8 April
1998, and the "completion point" was 30 June 1999.
Among the conditions Mozambique had to meet before
completion were the introduction of Value Added Tax
and a several-fold increase in health service charges
(the latter was a "social development performance
indicator"). Another condition was that Mozambique
agree a new three-year ESAF programme before
completion point (meaning, in reality, 9 years of
ESAF instead of 6).

Thus IMF directors met first on 28 June to approve a
new ESAF programme before they met the next day to
approve debt cancellation. The ESAF programme
includes a "Letter of Intent" and a "Policy Framework
Paper" which lay out the structural adjustment
conditions, and which were published 2 July.

Mozambique has had an adjustment programme since
1987, so it has already completed the privatisation
programme and the other normal IMF requirements.

CASHEW NUTS AND WATER

The ESAF includes two important new free-market
conditions. Mozambique is to be prevented from
rescuing its cashew nut processing industry and the
government will not be permitted to provide clean
water to many of the poorest people in rural areas.


The cashew saga is long and complex. Cashew kernels
are inside hard and acidic shells, and in Mozambique
these nuts are shelled in large factories, which were
Mozambique's largest industrial employer, with 10,000
workers. In 1994 they were privatised, and the
government agreed to maintain a temporary export tax
on unprocessed nuts to allow the new owners time to
modernise their factories. In 1995 the World Bank
forced Mozambique to reverse this promise, and allow
the free export of raw nuts to India were they
shelled by hand by children. The World Bank argued
that the free market will impose efficiency and if
children in India will work for less than women in
Mozambican factories, then the factories should
close. A World Bank-funded study said that the
competition was unfair because India subsidised
cashew processing, and Mozambique should have a 20
per cent export duty to create a "level playing
field". The World Bank rejected its own study, duties
were not increased, and all the factories are now
closed. The Mozambican parliament had been expected
at a special session in July to consider a new law to
impose a 20 per cent duty or some other export
restrictions and thus allow the factories to reopen.
But the new ESAF agreement prevents this. The "Letter
of Intent" says that "the government will not adopt
new, or increase existing, general import surcharges
or export taxes and restrictions."

The rural water restriction is buried in the "ESAF
Policy Framework Paper for April 1999 - March 2002".
It says that by 2002 the government must have
completed "transforming the planning and delivery of
rural water and sanitation services from a
supply-driven model to a sustained demand responsive
model, characterised by community management, cost
recovery, and the involvement of the private sector."
Translating the IMF jargon, this means that
government must stop giving clean water to those who
need it (the supply-driven model) and only give it
those who can afford to pay a private company.

HIGHER TAXES BUT MORE SPENDING

In a statement on ESAF issued on 28 June after their
meeting, the IMF "directors recognised the scale of
the challenges facing Mozambique, above all to reduce
the high incidence of poverty", with 70 per cent of
the population living below the poverty line. But the
directors also stressed the need to address "poverty
and developmental needs without sacrificing
macroeconomic stability". In particular, they called
for a further increase in taxation, but with a
reduction in the rates of tax that have most impact
on the better off.

Anti-poverty programmes have a relatively small place
in the PFP and Letter of Intent. Perhaps even more
significantly, there is only one requirement for more
transparency and publication of data, and no demands
for additional consultation with civil society.

In practice, the IMF is letting its star pupil off
easy, and imposing few stringent new demands on
Mozambique. One mark of reduced IMF control is the
number of "policy measures" Mozambique is required to
carry out. In the new 1999-2002 PFP there are only
71, compared to 85 in the previous 1998-2000 PFP. The
reduction comes about because some completed
measures, for example relating to privatisation, have
been met and dropped from the PFP, while few
significant new demands have been added.

In general, more growth and economic expansion will
be permitted -- recognising that efforts to reduce
inflation had reached a counterproductive level, and
that inflation in 1998 was negative, at -1.3%,
leading to the danger of Mozambique joining the
global deflationary trend. The IMF assumes
Mozambique's inflation will rise to 5.5% this year
and remain at 5% a year in future.

The IMF has also allowed a substantial increase in
foreign aid and in government spending, in part
reflecting the cost of national elections and the new
government salary scale, but also allowing some new
spending.

Whereas the previous PFP had called for an increase
of 22.1% in government current spending for this
year, the new one calls for a 24.2% increase this
year. Similarly, the previous PFP limited the
increase in capital spending to 13% while the new one
allows a 33.7% rise. Finally, the cap is lifted on
"deficit before grant" -- the amount of aid money
which can be spent.

And the IMF has ended its effective tax on aid. Until
now, donors had been forced to "sterilise" part of
their aid, roughly $80 million per year, by putting
it in the bank to build up international reserves
rather than spending it on health and education. Last
year's PFP projected that reserves of nearly $590
million would have to built up by the end of 1999.
The new Letter of Intent calls for reserves of only
$518 by the end of this year, effectively releasing
an extra $72 in aid money.

With IMF agreement, the government has removed credit
ceilings. This should end the credit shortage. The
IMF says it expects the end to credit limits "to
intensify competition among banks" and to lower
interest rates on loans.

The national airline LAM is to be allowed to keep its
monopoly on national trunk routes until the end of
2003. Legislation to allow competition in
telecommunications need not be submitted to the AR
until June 2000.

The IMF has made a few other new demands: + a
reduction in the top import tariff rate to 25% by
2002 (the top rate was cut from 35% to 30% earlier
this year); + the probable extension of the Crown
Agents contact with the customs service; + by
December 1999 prepare new civil service regulations;
+ by January 2000 identify all outstanding
applications for land use titles, and announce a
timetable to deal with those applications; + develop
and approve a medium-term expenditure framework and
make the information public; + by June 2000 develop
a plan for the distribution of shares in privatised
companies which were reserved for workers; and + by
March 2000 establish a system to report to the
Council of Ministers on the impact of major policy
changes on poverty.

===================

3. TECHNICAL NOTES ===================

ACTUAL DEBT SERVICE PAYMENTS

The World Bank estimates the following debt service
payments for Mozambique:

Actual debt service paid, before HIPC

  Year             $ mn

  1995             128   1996             135   1997
             90   1998             104
      average = $ 114 mn/yr

Debt service to be paid, after HIPC

  Year             $ mn

  1999             86   2000             76   2001
          67   2002             65   2003
 67   2004             71                     average
= $ 73 mn/yr

HIPC TERMS

HIPC is the Heavily Indebted Poor Countries (HIPC)
Initiative of the World Bank and IMF. Up to 41
countries are eligible to be considered, but not all
will receive debt relief. If a country qualifies, the
Paris Club of bi-lateral creditors agrees to apply
all previously available debt cancellation (Naples
terms) and then, under HIPC, all creditors make
proportional cancellations to reduce the debt to a
level which is "sustainable". By definition, this is
the level at which a country is unlikely to default
on future debt service payments, and has nothing to
do with development criteria.

For most countries, including Mozambique, an export
criterion of sustainability it used, based on the
ratio of total "net present value" of debt (NPV) to
annual earnings from exports of goods and services
(XGS). NPV is defined as the amount of money that
would need to be invested now in order to pay off the
debt; for concessional loans with low interest rates,
NPV is less than total debt, and for poor countries
like Mozambique their NPV debt is roughly half their
total debt.

Before HIPC was established, the World Bank estimated
that an NPV of one-and-a-half times annual export
earnings would be sustainable:      NPV/XGS < 150%
but when the World Bank and IMF considered HIPC in
1996 they felt it would be too expensive to cancel
this much debt, so they selected      200% < NPV/XGS
< 250% even though the World Bank knew this was not
really "sustainable". For Mozambique and most HIPC
countries, the sustainability level was in fact
selected at       NPV/XGS = 200%. The "Koln Debt
Initiative" returns to the level that the World Bank
had called for in the first place,      NPV/XGS <
150% This must be approved at the September meetings
of the World Bank and IMF, and it will be applied
retrospectively to Mozambique.

HIPC debt relief is a two stage process requiring 6
or 9 years of structural adjustment under the IMF
Enhanced Structural Adjustment Facility (ESAF). A
country must have successfully completed 3 years of
ESAF to be considered for HIPC. The "decision point"
is when the IMF and World Bank agree that a country
will be granted debt relief, subject to conditions.
For Mozambique, the decision point was 8 April 1998.


Some debt is actually cancelled at a "completion
point", when the IMF and World Bank establish that
the country has completed another 3 years of ESAF and
satisfied the decision point conditions. For a
country like Mozambique which had done more than 3
years of ESAF before decision point, this is taken
into account, so Mozambique's completion point was 30
June 1999. However, one condition of reaching
completion point was that Mozambique agree a new 3
year ESAF programme, leading to a total of 9 years of
ESAF under HIPC.

Under the Koln Debt Initiative, these timings are
changed somewhat, but this will not have any effect
on Mozambique.

WHY IS DEBT RELIEF LARGER

The unexpected gain for Mozambique comes from three
causes. Two relate to the formula:     (NPV/XGS) <
200%.

The NPV of Mozambique's debt is larger and exports of
goods and services lower than predicted by the IMF
last year:

+ NPV is the "net present value" of debt, the amount
that would need to be invested now to pay off the
debt. Falling world interest rates mean a present
investment earns less, so NPV of debt increases. + As
was widely believed, the IMF over-estimated the
growth of    Mozambique's exports, so XGS is at least
7% lower than expected.

Taken together this means more debt must be cancelled
just to do what the IMF and World Bank promised to do
at Mozambique's decision point in April 1998. Thus
these unexpected gains are really due to the correct
application of the already agreed HIPC formula.

One other change has also been made. Money from the
HIPC Trust Fund will be used to pay off debt from the
African Development Bank and from the World Bank's
own IDA. Many of those loans were coming due now, so
cancellation reduces debt service payments in the
short term. This was done at the Mozambique
government's request, as it wanted to cut debt
service as quickly as possible.

TRANSPARENCY AND WEB REFERENCES

In a new wave of transparency, the IMF has moved
quickly to put on the web all but one of the key
documents relating to actions on Mozambique taken on
28 and 29 June. These are:

IMF press statement on HIPC debt relief
http://www.imf.org/external/np/sec/nb/1999/NB9935.H
TM

IMF statement on ESAF
http://www.imf.org/external/np/sec/pr/1999/PR9925.HTM

ESAF letter of Intent
http://www.imf.org/external/np/loi/1999/061099.htm

Policy Framework Paper
http://www.imf.org/external/np/pfp/1999/Mozam/index
.htm