SA agriculture has some valuable lessons for struggling Malawi
Good governance and institutional reform will result in fairer prices and enable farmers to make long-term business plans.
In recent decades, donors have poured billions of dollars into boosting agricultural production in Southern Africa. But the results remain mixed. For example, maize and soya bean production have increased somewhat over time in countries such as Zambia and Tanzania, while Mozambique and Malawi have experienced rather more volatile output.
Though donor funds have assisted with training farmers, providing inputs such as seeds and machinery and building agriculture-related infrastructure, the sector has experienced limited growth. Ultimately, it is institutional reform, not funds alone, that lies at the heart of sustainable agriculture development in Southern African.
If we zoom in on Malawi, about half of its population lives below the poverty line and, as a result, it has become a hotspot for donor-funded projects. Though 85% of Malawi’s population is employed in the agriculture sector and agriculture contributes a third of total GDP, the country’s total value production is small: R12bn compared with SA’s R268bn.
Lower production has prevented Malawi from becoming an important player in global agricultural markets. Data from Trade Map shows that Malawi accounted for a mere 0.05% of global agriculture exports in 2018. For perspective, SA accounted for 20 times that, with 1% of global agricultural exports in the same year.
A cross-country analysis by agricultural economists Antony Chapoto and Thomas Jayne found that of the seven countries studied in Southern and Eastern Africa, Malawi has one of the highest degrees of maize price unpredictability and is the most volatile in the region. This partly stemmed from government policy interventions, which have left farmers and agribusinesses uncertain of whether there will be buyers for their produce. And if there are buyers, whether they will receive a fair value.
The Malawian government typically uses nontariff barriers on maize and soya beans. In the recent past, maize export bans were used to address food security, while soya bean export bans have been used to satisfy a local manufacturing lobby that has advocated for it to ensure it is the sole procurer of farmers’ produce. This has mitigated regional competition, depressed prices and contributed to production fluctuation as farmers have scaled back production due to the uncertainty.
This market failure has given way to a vibrant informal sector and increased smuggling to neighbouring countries. We recently visited the informal market in Lilongwe’s Area 25 and observed that for many smallholder farmers, soya bean and maize nontariff barriers to the formal market have proved an immense burden.
In addition, extensive paperwork, a withholding tax and impending rejection if crops fail to meet a narrow set of quality criteria have disincentivised participation in the formal market. These smallholder farmers are often selling one or two bags and need immediate payment. It is unsurprising that estimates place the informal market at upwards of 70% of the market share for grains.
There is now a dualistic agricultural sector in Malawi: commercial (formal) and informal. The informal market prices are lower than the depressed commercial market, and farmers are severely affected by these nontariff barriers.
For example, a 2013 USAID simulation found that an export ban on soya beans could reduce farmers’ net revenue by 56% in a given year. Such policy interventions have forced many farmers to operate at margins below national poverty thresholds, preventing the eradication of extreme poverty.
In recent decades, donors have poured billions of dollars into boosting agriculture production in Southern Africa. But the results remain mixed. For example, maize and soybean production have increased somewhat over time in countries such as Zambia and Tanzania, while the likes of Mozambique and Malawi have experienced a rather volatile output. Since the deregulation of agricultural markets in 1997/98, South Africa has had an open market, encouraging competition and promoting a stable regulatory environment. This has created a strong sense of confidence. - South African farmers and agribusinesses are almost certain that the government wouldn’t abruptly close borders for exports, even when commodity prices are rising as we witnessed during the 2015/16 drought. The confidence and stability have served as a catalyst for investments, which has contributed to the notable growth over the past two decades, with output nearly doubled in the commercial sector. In 2018, South Africa’s agricultural exports were almost half of the value of agricultural production. It is clear then that potential growth in the coming years will be export-dependent, making favourable trade policy key to boosting South Africa’s agricultural fortunes. Graphic: KAREN MOOLMAN
Though donors have played a key role in supporting the provision of seed varieties and fertilisers, the coexistence of a vibrant agriculture sector and severe poverty have made Malawians realise that institutional reform is central.
There is frustration that a few agricultural companies continue to exert substantial influence over the government at the expense of smallholder farmers. In some ways, it feels like an insurmountable lobby. Since the recent election, thousands of people have taken to the streets of Lilongwe to protest against the re-election of President Peter Mutharika, which they believe was fixed. Though Mutharika made some progress in boosting the economy during his first term, he attracted substantial criticism for failing to address corruption. The protests have become violent at times, and the cry for transparency and institutional reform has been clear.
A few lessons on institutional reform within the agricultural sector can be learnt from neighbouring SA. Since the deregulation of agricultural markets in 1997/1998, SA has had an open market, encouraging competition and promoting a stable regulatory environment. This has created a strong sense of confidence. SA farmers and agribusinesses are almost certain that the government wouldn’t abruptly close borders for exports, even when commodity prices are rising, as we witnessed during the 2015/2016 drought.
The resulting confidence and stability have served as a catalyst for investment, which has contributed to the notable growth over the past two decades, with output nearly doubling in the commercial sector. In 2018, SA’s agricultural exports were almost half of the value of agricultural production. It is therefore clear that potential growth in the coming years will be export-dependent, making favourable trade policy key to boosting SA’s agricultural fortunes.
Though there is still work to be done on supporting SA smallholder farmers, who have been producing in the margins since the years of oppression, there is an institutional will to support their inclusion in markets.
The new economic transformation, inclusive growth and competitiveness strategy document recently released by Treasury has highlighted priorities: improving access to financing for farmers, improving extension services for smallholder and emerging farmers, investing in establishing innovative market linkages for smallholders, and improving market access. These interventions are also relevant to other markets, such as Malawi.
Another important factor is that SA has avoided the price distortions that have become commonplace in the region. Price caps have often been used to support food security during production shortfalls. This practice is common not only in Malawi but also in other African countries such as Zambia, where the government recently placed a price cap of $199 per ton on maize (about R3,000) and has justified its actions by noting its concerns over rising maize prices and the need for food security. However, distorted agricultural prices will disadvantage Zambian farmers and, in the long run, weaken agricultural investment.
Billions of dollars of donor funding have not sustainably improved Southern Africa’s agriculture sector. Our sense is that intervention requires more than what donors alone can do — institutional reform and good governance are central to ensuring farmers receive fair prices for their harvests and are able to make long-term business plans. In this way, governments can regulate the market efficiently and earn stable tax revenue streams, and consumers can benefit from lower prices through increased production competition.
Ultimately, food security will also be improved as regional markets start to function efficiently. Improving a harvest without favourable market policies is like pouring water into a bottomless bucket and wondering why the bucket isn’t filling up.