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Liberalization and regional agricultural trade in Southern Africa
Liberalization and regional agricultural trade in Southern Africa
Kay Muir-Leresche
Major changes in Southern Africa are anticipated from a majority-ruled South Africa. This paper argues that structural adjustment and more open economies will affect regional trade more directly than political changes in South Africa. If devaluation (an essential first step of structural adjustment) is to be effective, an environment of fiscal prudence which fosters competitiveness, improves factor productivity and encourages investment is essential. Active measures may be needed to ensure that the benefits are not narrowly distributed. However, the nature of the distortions means that deregulation may lead to immediate improvements in both growth and equity, moving the societies towards the welfare frontier. The attraction of a controlled economy is that direct transfers have greater political impact for the party in power even if it does not improve the lives of the poor. The author is Senior Lecturer, Department of Agricultural Economics and Extension, University of Zimbabwe, PO Box MP 167, Mount Pleasant, Harare, Zimbabwe (Tel: 263 4 303211; fax: 263 4 732828).
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This paper attempts to take a broad view of the impact of the recent economic and political changes in Southern Africa on the future of agriculture generally and agricultural trade in particular. The situation in South Africa (RSA) is widely assumed to be on the point of resolution, with a free and peaceful South Africa anticipated before the end of this century. Whilst there is still some doubt that full majority rule will be achieved before 2000, the probable regional impacts of a fully democratic South Africa on regional agricultural trade are considered. This paper takes the position that the structural adjustment programmes being embarked upon within countries have the potential to affect agricultural development, food security and trade flows in the region more than the political changes in South Africa. Protectionist policies, including trade policies and the artificially determined foreign currency, producer and consumer prices, have restricted regional trade far more than intercountry political barriers. Despite the political situation, South Africa dominates trade in the region. Resolving political issues will make communication easier, will allow greater market integration and will have important implications for regional stability, skills transfer and institutional development, but are less likely to directly increase or change commodity trade patterns. On the other hand, domestic politics have contributed significantly to the existing distortions, and their removal could increase the opportunities for regional trade and development. In so far as the political imperatives within the countries continue to include the appeasement of an urban elite and the desirability of maintaining a situation in which individuals can accrue high rents from the distortions, the decontrol will not actually take place. Lip-service only will be paid to the programme, with measures taken far enough to attract the necessary international finance before finding it ‘politically impossible’ to continue. There are many dedicated and determined technocrats and politicians who recognize the importance of carrying through the changes, but it is uncertain that they have the political power to ensure that barriers to competition are lifted in time to ensure success. This paper assumes, however, that the structural adjustment prog-
0306-9192/93/040366-09
@ 1993 Butterworth-Heinemann
Ltd
Liberalization and regional agricultural trade
rammes will actually go ahead and will reduce barriers to competition and trade and thus result in market prices more closely reflecting opportunity costs. If South Africa continues to effectively liberalize trade and reduce farm subsidies and the SADCC countries also liberalize trade (at the same time reducing the various indirect agricultural sector taxes), South Africa could become an important market for regional agricultural surpluses. Such policies could see agricultural production expanded. For example, Zambia has a considerable vent for surplus provided it has the markets and can attract investment into the production of maize. An effectively implemented liberalization programme could encourage the movement of capital and skills to these countries, but only if they have succeeded in creating healthy investment environments. The expansion of these export markets would in turn generate the foreign currency to purchase imports which, if directed towards inputs, could result in increased local industrialization. There is already considerable competition between the SADCC countries to attract capital and skills, and the opening of South Africa would exacerbate this situation. It would also raise questions about the role of international aid which is tied to products from the donor country, when the newly reconstituted region could fulfil these - eg competition between donor suppliers of agricultural equipment and South African suppliers.
Historical and theoretical background
‘Botswana, Lesotho,
Malawi,
Swaziland
and Zambia.
FOOD POLICY August
1993
Most of the countries in the region have in common their colonial background and the achievement of independence in the 1960s. They were characterized by poorly developed and highly skewed infrastructure and institutions. with the Portuguese-dominated countries having particularly poor records in social, infrastructural and economic development but better racial integration. Three countries (South Africa, Namibia and Zimbabwe) have had significant settler communities which promoted far more effective development of the resources in those countries than was true of British-ruled colonies,’ but this development was highly skewed towards the white populations and resulted in racial segregation and white dominance, politically and economically. This has placed a far greater burden on the emergence of independent, majorityruled governments in these three countries, involving political revolution and international economic sanctions. Zimbabwe and Namibia are now independent and South Africa is currently moving towards greater racial integration, but interpretations of majority rule and democracy differ widely between the main protagonists. Most of the countries in Southern Africa have displayed a tendency to totalitarian governments operating highly regulated, non-competitive economies. Some countries have allowed political opposition, but it has generally been ineffective because the inherited infrastructure and institutions have lent themselves to the exchange of one elite for another. Recent changes in Eastern Europe and the general move throughout the world towards liberalism in politics and laissez-faire economics have led to some questioning of the status quo throughout the region. This is expected to have positive impacts on economic growth and equity. It is uncertain whether this liberalism follows the utilitarian school which promotes liberal government, not for the sake of liberty, but
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Liberalization and regional agricultural trade
‘John Stuart Mill, ‘On liberty’ (1859), in G.H. Sabine, ed, A History of Political Theory, Harrap, London, 1937.
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simply because of its impacts on efficiency. It would appear that there is some belief that movement towards market-led economies may be desirable but that this liberalism would not necessarily be applied to the political arena. However, in order for a liberal government to operate efficiently there must be a liberal society.2 There also remains the eternal conflict between economic efficiency, which may reinforce or extend existing inequalities, and growth through redistribution. As it happens, in many of these countries the markets are so distorted that the removal of many regulations could actually increase both equity and efficiency. To what extent the new liberalism should, will or can combine the capitalist system of production with a more socialist system of distribution is still unclear. Much of the policy analysis carried out using welfare economics is an attempt, if not to reconcile these conflicts, then at least to highlight the trade-offs involved so that policy makers can make informed choices. It is unclear whether the new liberalism sweeping the world incorporates the notion that social welfare is a matter of concern to all or whether it is more egocentric. If the new liberalism looks towards the market to maximize social welfare and does include the notion that individuals have a wider responsibility to humanity, then it will have to find effective ways for the gains from the market to reach a broader spectrum of the population. It is now much more widely accepted that the pursuit of individual welfare maximizes efficiency or social welfare at the existing income distribution levels provided always that there are no market imperfections. However, at the macro level, during both depressions and inflationary spirals, the good of the individual and the good of society are often in direct conflict -with consumers saving when the economy would be better served if they were spending, and vice versa. Given the high inflation levels accompanied by high unemployment common in Southern African countries, individual behaviour often exacerbates the position. This, together with the various market imperfections, has often been used to justify the widespread and often conflicting government intervention in macro variables. In most of Southern Africa, however, these regulations (which include significant non-tariff barriers to trade) have become self-defeating and there are strong arguments for an abrupt approach to structural adjustment such as was undertaken by Germany in 1948. The main problem with the gradual approach is that the economy remains in disequilibrium. As the earlier papers in this issue of Food Policy have shown, most of the economies of Southern Africa have been very heavily regulated, and government spending and budget deficits are out of control, causing spiralling inflation made worse by severe restrictions on supply expansion. Many but not all of the regulations restricting supply arise from the shortage of foreign currency. The structural adjustment programmes in the region are an attempt to allow market forces the opportunity to reverse the stagnating or negative growth rates. Most of the countries are implementing social programmes to reduce the short-term negative impacts on the poorest sectors in the community, but effective programmes are difficult to achieve. The liberalization of both internal and external markets is an essential component of the strategy, and until barriers to entry are broken down the economies are unlikely to respond and further entrenchment of monopolies is likely to occur. As earlier papers have shown, freer trade within the region would benefit all the countries within SADCC and would contribute to increased food security in the region. FOOD POLICY August
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Liberalization and regional agricultural trade
Emergence of a democratic South Africa It is unlikely that a free South Africa will of itself make a major difference to agricultural commodity trade within the region. This premise is based upon the existing regional trade patterns, which are already heavily biased towards trade with South Africa. Within the SADCC region it is only Angola and Tanzania which have no trade with RSA. The economies of most SADCC countries are highly dependent on RSA. This is particularly true of Lesotho, Swaziland and Namibia, which all belong to the Rand Monetary Area and which together with Botswana are involved in the South African Customs Union (SACU). The countries are heavily dependent on SACU for government revenue: some 70% of government revenue for Lesotho, 60% for Swaziland and 40% for Botswana comes from SACU. Migrant labour to RSA is Lesotho’s dominant export, but otherwise South Africa accounts for a lesser percentage of national exports than imports (eg RSA accounts for some 20% of Swaziland’s exports but almost 90% of its imports). South Africa provides over 80% of the import requirements of SACU members. All these countries rely heavily on South Africa for transport, ports, electricity and oil. A majority government in power in Pretoria will ease psychological and moral barriers but is not likely to increase commodity trade, which is already at such high levels. There is a real danger that capital and skills will move out of these four countries back to South Africa as trade sanctions are lifted and manufacturers (eg Taiwanese textile manufacturers) who located in these countries to avoid sanctions relocate to South Africa. In addition there will be less moral pressure on international aid to provide assistance to regional countries. Malawi, Zambia and Zimbabwe also rely heavily on South Africa as their dominant trading partner. South Africa is Zimbabwe’s single most important trading partner. The position on exports fluctuates, with more of Zimbabwe’s exports going to the UK in some years (eg 1987), but RSA accounts for 15-20% of all imports to Zimbabwe, Zambia and Mozambique. Although the UK is Malawi’s principal export market, South Africa is the principal supplier, accounting for some 3040% of imports. It is unlikely that the change of government in South Africa would increase trade links directly. Any expansion in regional trade requires decontrol of domestic and external markets. The political changes may still have considerable indirect impacts on agricultural development in the region even if there is no market liberalization. A majority-ruled, SADCC-recognized government in South Africa would have an immediate impact on communication and skills transfers. Agricultural research would benefit considerably from communication. For example, Zimbabwe would benefit significantly from greater exposure to the agronomic practices for grain production in South Africa which are geared to lower rainfall and would therefore be suitable to the more arid regions in Zimbabwe. Another example is sunflowers, which are an important commodity in South Africa but have been virtually ignored in Zimbabwe. Better access to research and inputs for sunflower production could be particularly important for smallholders in the semi-arid regions in Zimbabwe. Equally, South Africa has had little experience with development economics, farming systems research and project development, assessment and management in rural areas, eg experience with smallholder
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credit schemes, cooperatives, market access and rural development in general. They could benefit greatly from the research and experience of the SADCC countries. Institutionally South Africa could play an important role in a number of areas including the regional food security framework, particularly through participation in the early warning system. Its potential role as a market for regional surpluses in good rainfall years is almost as important as its potential role in spreading the drought risk. South African rainfall patterns usually differ from those in Zimbabwe, Zambia and Malawi,’ which tend to be more heavily affected by the Intertropical Convergence Zone and therefore to follow more similar drought patterns. It also has a large market for grain stockfeeds which can be useful in reducing the costs of operating foodgrain reserves. As the earlier papers have shown, the large fluctuations in production, the almost totally inelastic demand and the lack of supplies of white maize from elsewhere make foodgrain reserves extremely expensive and difficult to operate. Unless the individual countries (including RSA) reduce some of the barriers to trade, however, the full potential of the gains from a politically stable South Africa cannot be achieved.
Potential role of structural adjustment4 3This was not the case in 1991/92, when the worst drought of the century affected all the countries in Southern and Eastern Africa. Parts of South Africa were less affected, but these were not the grainproducing regions. 4Readers are referred to the other papers for details of the proposed structural adjustment programmes and for the potential gains from trade. This paper simply introduces South Africa into consideration. It is an attempt to highlight some of the issues which may arise. ‘There is further evidence of this taxation in K. Muir-Leresche and D. Jansen, ‘Trade, exchange rate policy and agriculture’, paper prepared for the Conference on Zimbabwe’s Agricultural Revolution, Victoria Falls, July 1991; D. Jansen, Trade, Exchange Rate and Agricultural Pricing Policies in Zambia, World Bank Comparative Study, Washington, DC, 1988; and K. Muir-Leresche, ‘Crop price and wage policy in the light of Zimbabwe’s development goals’, unpublished DPhil thesis, Department of Land Management, University of Zimbabwe, 1984. ‘Wheat subsidies were still 12% of the value of marketed output in 1990 even after the commitment to reduce subsidies. 7K. Muir-Leresche, ‘Reflections on the impacts of recent trade and political liberalization in Southern Africa’, in A. Valdes and K. Muir-Leresche, ed, Agricultural Policy Reforms and Regional Market Integration - Malawi, Zambia, and Zimbabwe, International Food Policy Research Institute, Washington, DC, 1993.
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As the earlier papers have shown, agriculture has been heavily taxed in most of the countries in the SADCC region.’ Assuming, therefore, that structural adjustment programmes go ahead they will involve improving the terms of trade for agriculture and in particular improving them for labour-intensive export and import-substituting commodities. South Africa is facing relatively similar problems to many of the countries in the region except that since its currency has been less overvalued it may have actually subsidized producers of wheat, maize, stockfeed and grazing. Direct producer subsidies and rebates peaked in the 1987 harvest year at R583 million, with maize subsidies at 19% of the value of output (maize and wheat count for over 80% of the subsidy in most years). No opportunity-cost pricing analyses appear to be available, and border price comparisons would be interesting. Despite the subsidies granted to wheat farmers,” it is possible that since capital equipment is very much cheaper in South Africa than it is in the rest of the region, South Africa may have a comparative advantage in wheat production. Tractors, combine harvesters and other mechanical equipment are freely available to South African farmers and cost almost five times less than they do in Zimbabwe.7 South Africa is also able to produce non-irrigated summer wheat as it does not have the rust and lodging problems experienced in Zimbabwe and Zambia. This makes the wheat cheaper to produce and probably more economic, despite lower yields. South African wheat does not need to compete for scarce water resources for irrigation, nor does it require the capital investment in irrigation facilities. It would appear, therefore, that South Africa may have a comparative advantage for wheat production. It is possible that the region would benefit from South Africa moving away from maize and into wheat if there is greater investment in maize production in Zambia and the surplus areas of Tanzania. It would be interesting to have a preliminary analysis to assist in determining
FOOD POLICY August
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Liberalization and regional agricubural trade
regional comparative advantage in the major commodities under different internal market, trade and exchange rate regimes. Normalizing access to foreign exchange would reduce the price of capital inputs in most countries in the region but it would be unlikely to reduce them to the South African price levels because of both the larger market in South Africa and the lower transport costs involved. It is likely that South Africa will continue to have comparative advantage in capital- and skill-intensive commodities. Zambia, Tanzania and in due course Angola and Mozambique will have comparative advantage in land- and rainfall-intensive commodities, whilst Zimbabwe, Malawi and Swaziland are likely to have greatest comparative advantage in labourintensive commodities. However, local demand, infrastructure and management capacity will also affect these, and it is difficult to determine comparative advantage a priori. Zimbabwe, Botswana and Namibia would appear to have an advantage in beef and other livestock exports to South Africa. There appears to be a large vent for surplus if South Africa removes non-tariff restrictions and does not place high tariffs on livestock imports from the region. Meat consumer prices in South Africa are considerably higher than they are in most of the region, with prime beef cuts selling at US$6.50 per kg compared to US$2.50 per kg in Zimbabwe in October 1991. Other areas where realigned prices and deregulation may stimulate exports from SADCC countries to South Africa include dry beans, cotton, oilseeds and stockfeeds. This assumes that South Africa will eliminate non-tariff barriers to trade and avoid replacing them with excessive tariffs. The opening up of domestic markets to South African imports may, however, negatively affect horticulture since South Africa probably has a strong comparative advantage in the production of most horticultural commodities arising from the capital and skill intensities of these processes and South Africa’s long tradition of exporting horticultural products. Horticulture accounts for almost 40% of the value of total arable production in South Africa. Competition for exports to the EEC if South Africa is included in the Lome Convention may also reduce opportunities for the continued expansion of horticulture exports from SADCC countries. On the other hand, the South African market may be very useful for regional exporters of tea, coffee, cashew nuts and various tropical products, and here Tanzania would benefit from the changes in the political situation which have effectively closed South Africa as a trading partner in the past. Table 1 presents the output and value of South Africa’s principal commodities in 1990. Also indicated are the producer prices for these commodities at intervals during the last decade. It is obvious when the US dollar prices are compared with those given for maize in other countries in the region in Table 2 that South African farmers have been paid higher prices than farmers in the rest of the region. Since these have been converted at official exchange rates they do not reflect the real position, and a comparison of adjusted parity prices in the four countries would be most useful.
The role of competition Japan and other Asian countries are particularly effective in moving capital and labour out of industries subjected to increasing competitive
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1993
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Liberalization
and regional
agricultural
trade
Table 1. South African output and agricultural Commodity
Maize Wheat Sunflowela Tobacco Cotton Dry beans Barley Groundnuts Sorghum Soybeans Horticulture Beef” Sheep/goatsa Pork” Mrlkb Total agriculture Exchange rate (US$IR)
commodities
equivalent
output (1990) Value (US$ million)
Weight (‘000 mt)
prices. Harvest year (US.$/mt) 1961
1985
1969
\ 1990
948 334 153 131 65 62 39 34 31 25 1 499
9 442 2 005 609 32 135 113 291 80 368 110
140 256 315 295 609 631 210 528 109 350 _
98 122 136 206 318 340 101 262 75 150
102 172 224 367 398 348 124 332 81 210
101 193 246 412 478 352 133 382 78 222
823 316 141 361
587 170 127 2 430
240 232 183 30
87 97 82 13
188 207 142 21
181 201 129 22
1.09
0.38
0.39
0.38
7 422 0.38
a US cents/kg. b US cents/l. Source: Effecive Farming Directory, Vol 6, January 1991, Effective Farming Publications, Pietermaritzburg, RSA
The Western industrial nations are less effective, and developing countries find it particularly difficult. There is some scepticism of the benefits of liberalizing in the light of an increasingly protective international environment. ‘If trade policy in the rest of the world is increasingly protectionist” . . . is this tactically an appropriate time to liberalize our own trade policies through unilateral action?‘9 However, it is important to retain international competitiveness and there is an urgent need for all Southern African countries to find a means to assist the movement of capital and labour from industries (or firms) with low competitiveness to those with strong prospects, using the market to identify products and processes in growth and decline. New advanced technologies require an extensive research and development base which South Africa’s small population and shortage of skills did not warrant, but for political security heavily protected industries abound. However, with South Africa integrated into a larger SADCC region it may be possible to develop the necessary depth. Even if there is a reluctance to liberalize unilaterally it may make sense for an emergent South Africa to participate in the regional structural adjustment and market liberalization programmes. The current government has begun the process by reducing agricultural subsidies and reducing some of the quantitative restrictions on imports of certain agricultural commodities (eg dry beans and beef). The question is, how will the new South African government view these issues? If South Africa is to play an effective role in regional development, trade barriers and market interventions will have to be reduced, but the underlying philosophy of the revolutionary parties pressure.
‘There has been little real change in trade and agricultural policies in the EEC, for example, and throughout the world nontariff restrictions upon trade have been
increasing despite all the GATT negotiations and talks about reducing distortions. ‘J.C. van Zyl, ‘South Africa in world trade’, South African Journal of Economics, Vol 52, No 1, 1984, p 55; see also P. Strydom, ‘South Africa in world trade’, South African Journal of Economics, Vol 55, No 3, 1987.
Sources: U. Koester, ‘Agricultural trade between Malawi, Tanzania, Zambia and Zimbabwe: competitiveness and potential’, in A. Valdes and K. Muir-Leresche, ed, Agricultural Pa/icy Reforms and Regional Market integration - Malawi, i’ambia, and Zimbabwe, International Food Policy Research Institute, Washington, DC, 1993; Effective Farming Directory, Vol 6, January 1991, Effective Farming Publications, Pietermaritzburg, RSA.
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Table 2. Maize producer prices in Malawi, South Africa, Zambia and Zimbabwe (US$/mt).
1982 1983 1984 1985 1986
Malawi
RSA
Zambia
Zimbabwe
World US Gulf Port
95 102 87 72 61
203 179 120 98 117
142 113 91 89 128
120 100 100 87 112
126 126 130 133 107
FOOD POLICY August
1993
Liberalization
‘@The devaluation of the Zimbabwe dollar since March 1991 resulted in an increase of around Z$l billion being distributed between some 1500 farmers - assuming that the full effect of the devaluation was passed on to producer prices. Tax revenues will increase and it is possible that some of the farm labour will benefit where bonuses are paid, but the largest proportion of the windfall increases the demand for urban property and luxury consumer goods. This is particularly true in an environment which does not encourage investment because of the shortage of materials for on-farm investment, barriers to entry in industry and the anticipation of continued high inflation. “K.L. Truu, ‘Economics and politics in South Africa today’, South African Journal of Economics, Vol 54, No 4, 1986.
FOOD POLICY August
1993
and regional agricultural
trade
favours the command economy and the need for self-sufficiency. Even if these were to be replaced with a more laissez-faire approach, it is uncertain that the government will have the confidence to allow liberal forces the freedom from regulation necesary to allow the competition so essential for efficient markets. The new government will be under enormous pressures to move towards redistribution and more egalitarian structures by state decree. The removal of regulations on marketing, trading, land size, etc, would in most cases lead to greater social justice, but deregulation does not have the same political impact as direct transfers. The new government will need to be seen to be meeting the aspirations of its various ethnic groups. Deregulation also reduces the opportunity for the nepotism and corruption which is often considered a reward after years of struggle. Although the SADCC country structural adjustment programmes emphasize the reduction of all tariffs (eg Zimbabwe is supposed to reduce all tariffs to between 0% and 30% by 1994) it is uncertain whether these tariff reductions will, or indeed should be, achieved. Given the very high income disparities which exist in Southern Africa, opening access to foreign currency would result in very strong demand for luxury commodities not produced in Zimbabwe or even South Africa. There is a very high marginal propensity to import luxury commodities in the region - particularly where the main initial beneficiaries of devaluation (the first step in the Economic Structural Adjustment Programme - ESAP) are in the highest income brackets. “I There are currently very high rents earned on luxury commodities. It would seem sensible for the government to remove quantitative restrictions but place very high tariffs on these commodities, earn the rents and reduce the demand for foreign currency which would normally follow reducing such restrictions. This is one of the major constraints faced by countries in the region wanting to free access to foreign currency. Restricting demand for luxuries would assist in moving away from controls and licences for foreign currency and encourage more expenditure on production inputs. Tariffs on videos, microwaves, etc, in Zimbabwe would need to be over 1000% if they were to have any impact on reducing demand! To the extent that tariffs are not reduced on products which are, or could be, produced within the SADCC region, the regional ‘pie’ is reduced. However, a much slower phasing out of tariff barriers on luxury goods would seem a small sacrifice if it enables governments to reduce, with confidence, the controls and licences which have stifled investment and development in the region for so long. Whilst it is true that successful macroeconomic policy helps to make sectoral competitive problems easier, relatively low factor productivity and lack of competitiveness are among the underlying microeconomic causes of the macroeconomic malaise. The main problem with most of the Southern African economies is that they do not produce enough goods and services to meet demand. They are not addressing the problem of relative scarcity. In South Africa the ratio of capital to labour has increased steadily but capital productivity has declined since 1970, thus reducing both employment and growth.” Truu goes on to point out that in South Africa this reduced efficiency has not been balanced by more equity since the economy ‘has not been so concerned with distributing the
Liberalization
and regional agricultural
trade
desirable things in scarce supply as with actually reducing their availability’. Whilst this statement was made with respect to the effect of sanctions, it is equally true of all the countries in the region, including South Africa, that the heavily regulated economies have in fact resulted in inefficiencies which have reduced growth, equity and employment.
Conclusion
“An example of changes to crop price and wage policy in Zimbabwe which would increase equity, employment and efficiencv is given in Muir-Leresche. OD cit. Ref 4. “F. horande and K. Schmidt-Hebbel, Macroeconomics of Public Sector Deficits: The Case of Zimbabwe, WPS 688, World Bank, Washington, DC, 1991.
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The Southern African economies have been operating so far within the welfare frontier that there are many measures which could be taken which would not necessarily result in the classic efficiency/equity trade-off. l2 A reduction of the large rents accruing to those with access to foreign currency, licences, etc, in the region would go a long way to increasing growth and equity. The progress in Zimbabwe’s structural adjustment programme, whilst severely restricting the supply of money, is lagging seriously behind in any measures to reduce government spending or to reduce rents by deregulation. Unless government deficits are reduced the only means of reducing inflation is to severely restrict the money supply, resulting in very high interest rates which in turn reduce investment. Morande and Schmidt-Hebbel show that there is a significant Correlation between fiscal policy and private investment in Zimbabwe.” Unless the barriers to competition can be removed, the recent devaluations will not achieve the desired impact on growth and could simply act as fuel for inflation. The devaluation will encourage exports and import-substitution but the multiplier effects which are such an important part of the strategy will not be achieved until the barriers to entry have been removed and access to inputs (foreign currency), competition and the investment environment are improved. The inflationary impact of devaluation depends on institutional factors and is particularly likely in monopoly situations with barriers to entry. With respect to employment, agricultural exports tend to have higher labour intensities than the non-traded commodities, and to the extent that the devaluation encourages these exports there will be positive effects on employment. As unskilled labour has a high propensity to consume locally produced goods, if the supply constraints have been lifted this could have very strong multiplier effects throughout the economy. The problem arises when the supply constraints have not been lifted and the increased employment simply results in higher inflation. These problems must be addressed or the programmes will fail entirely and the devaluations could result in an uncontrolled devaluation/inflation spiral. The devaluations are certainly an essential condition for growth, but they are not a sufficient condition. In conclusi&, most of the countries, including South Africa, have very distorted economies with prices rarely reflecting opportunity costs. Until domestic markets are freed, barriers to trade have been lifted and the region becomes more attractive to investors, a politically acceptable South Africa will have only a limited impact on agricultural trade and development within the region.
FOOD POLICY
August
1993
Kay Muir-Leresche
Major changes in Southern Africa are anticipated from a majority-ruled South Africa. This paper argues that structural adjustment and more open economies will affect regional trade more directly than political changes in South Africa. If devaluation (an essential first step of structural adjustment) is to be effective, an environment of fiscal prudence which fosters competitiveness, improves factor productivity and encourages investment is essential. Active measures may be needed to ensure that the benefits are not narrowly distributed. However, the nature of the distortions means that deregulation may lead to immediate improvements in both growth and equity, moving the societies towards the welfare frontier. The attraction of a controlled economy is that direct transfers have greater political impact for the party in power even if it does not improve the lives of the poor. The author is Senior Lecturer, Department of Agricultural Economics and Extension, University of Zimbabwe, PO Box MP 167, Mount Pleasant, Harare, Zimbabwe (Tel: 263 4 303211; fax: 263 4 732828).
366
This paper attempts to take a broad view of the impact of the recent economic and political changes in Southern Africa on the future of agriculture generally and agricultural trade in particular. The situation in South Africa (RSA) is widely assumed to be on the point of resolution, with a free and peaceful South Africa anticipated before the end of this century. Whilst there is still some doubt that full majority rule will be achieved before 2000, the probable regional impacts of a fully democratic South Africa on regional agricultural trade are considered. This paper takes the position that the structural adjustment programmes being embarked upon within countries have the potential to affect agricultural development, food security and trade flows in the region more than the political changes in South Africa. Protectionist policies, including trade policies and the artificially determined foreign currency, producer and consumer prices, have restricted regional trade far more than intercountry political barriers. Despite the political situation, South Africa dominates trade in the region. Resolving political issues will make communication easier, will allow greater market integration and will have important implications for regional stability, skills transfer and institutional development, but are less likely to directly increase or change commodity trade patterns. On the other hand, domestic politics have contributed significantly to the existing distortions, and their removal could increase the opportunities for regional trade and development. In so far as the political imperatives within the countries continue to include the appeasement of an urban elite and the desirability of maintaining a situation in which individuals can accrue high rents from the distortions, the decontrol will not actually take place. Lip-service only will be paid to the programme, with measures taken far enough to attract the necessary international finance before finding it ‘politically impossible’ to continue. There are many dedicated and determined technocrats and politicians who recognize the importance of carrying through the changes, but it is uncertain that they have the political power to ensure that barriers to competition are lifted in time to ensure success. This paper assumes, however, that the structural adjustment prog-
0306-9192/93/040366-09
@ 1993 Butterworth-Heinemann
Ltd
Liberalization and regional agricultural trade
rammes will actually go ahead and will reduce barriers to competition and trade and thus result in market prices more closely reflecting opportunity costs. If South Africa continues to effectively liberalize trade and reduce farm subsidies and the SADCC countries also liberalize trade (at the same time reducing the various indirect agricultural sector taxes), South Africa could become an important market for regional agricultural surpluses. Such policies could see agricultural production expanded. For example, Zambia has a considerable vent for surplus provided it has the markets and can attract investment into the production of maize. An effectively implemented liberalization programme could encourage the movement of capital and skills to these countries, but only if they have succeeded in creating healthy investment environments. The expansion of these export markets would in turn generate the foreign currency to purchase imports which, if directed towards inputs, could result in increased local industrialization. There is already considerable competition between the SADCC countries to attract capital and skills, and the opening of South Africa would exacerbate this situation. It would also raise questions about the role of international aid which is tied to products from the donor country, when the newly reconstituted region could fulfil these - eg competition between donor suppliers of agricultural equipment and South African suppliers.
Historical and theoretical background
‘Botswana, Lesotho,
Malawi,
Swaziland
and Zambia.
FOOD POLICY August
1993
Most of the countries in the region have in common their colonial background and the achievement of independence in the 1960s. They were characterized by poorly developed and highly skewed infrastructure and institutions. with the Portuguese-dominated countries having particularly poor records in social, infrastructural and economic development but better racial integration. Three countries (South Africa, Namibia and Zimbabwe) have had significant settler communities which promoted far more effective development of the resources in those countries than was true of British-ruled colonies,’ but this development was highly skewed towards the white populations and resulted in racial segregation and white dominance, politically and economically. This has placed a far greater burden on the emergence of independent, majorityruled governments in these three countries, involving political revolution and international economic sanctions. Zimbabwe and Namibia are now independent and South Africa is currently moving towards greater racial integration, but interpretations of majority rule and democracy differ widely between the main protagonists. Most of the countries in Southern Africa have displayed a tendency to totalitarian governments operating highly regulated, non-competitive economies. Some countries have allowed political opposition, but it has generally been ineffective because the inherited infrastructure and institutions have lent themselves to the exchange of one elite for another. Recent changes in Eastern Europe and the general move throughout the world towards liberalism in politics and laissez-faire economics have led to some questioning of the status quo throughout the region. This is expected to have positive impacts on economic growth and equity. It is uncertain whether this liberalism follows the utilitarian school which promotes liberal government, not for the sake of liberty, but
367
Liberalization and regional agricultural trade
‘John Stuart Mill, ‘On liberty’ (1859), in G.H. Sabine, ed, A History of Political Theory, Harrap, London, 1937.
366
simply because of its impacts on efficiency. It would appear that there is some belief that movement towards market-led economies may be desirable but that this liberalism would not necessarily be applied to the political arena. However, in order for a liberal government to operate efficiently there must be a liberal society.2 There also remains the eternal conflict between economic efficiency, which may reinforce or extend existing inequalities, and growth through redistribution. As it happens, in many of these countries the markets are so distorted that the removal of many regulations could actually increase both equity and efficiency. To what extent the new liberalism should, will or can combine the capitalist system of production with a more socialist system of distribution is still unclear. Much of the policy analysis carried out using welfare economics is an attempt, if not to reconcile these conflicts, then at least to highlight the trade-offs involved so that policy makers can make informed choices. It is unclear whether the new liberalism sweeping the world incorporates the notion that social welfare is a matter of concern to all or whether it is more egocentric. If the new liberalism looks towards the market to maximize social welfare and does include the notion that individuals have a wider responsibility to humanity, then it will have to find effective ways for the gains from the market to reach a broader spectrum of the population. It is now much more widely accepted that the pursuit of individual welfare maximizes efficiency or social welfare at the existing income distribution levels provided always that there are no market imperfections. However, at the macro level, during both depressions and inflationary spirals, the good of the individual and the good of society are often in direct conflict -with consumers saving when the economy would be better served if they were spending, and vice versa. Given the high inflation levels accompanied by high unemployment common in Southern African countries, individual behaviour often exacerbates the position. This, together with the various market imperfections, has often been used to justify the widespread and often conflicting government intervention in macro variables. In most of Southern Africa, however, these regulations (which include significant non-tariff barriers to trade) have become self-defeating and there are strong arguments for an abrupt approach to structural adjustment such as was undertaken by Germany in 1948. The main problem with the gradual approach is that the economy remains in disequilibrium. As the earlier papers in this issue of Food Policy have shown, most of the economies of Southern Africa have been very heavily regulated, and government spending and budget deficits are out of control, causing spiralling inflation made worse by severe restrictions on supply expansion. Many but not all of the regulations restricting supply arise from the shortage of foreign currency. The structural adjustment programmes in the region are an attempt to allow market forces the opportunity to reverse the stagnating or negative growth rates. Most of the countries are implementing social programmes to reduce the short-term negative impacts on the poorest sectors in the community, but effective programmes are difficult to achieve. The liberalization of both internal and external markets is an essential component of the strategy, and until barriers to entry are broken down the economies are unlikely to respond and further entrenchment of monopolies is likely to occur. As earlier papers have shown, freer trade within the region would benefit all the countries within SADCC and would contribute to increased food security in the region. FOOD POLICY August
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Liberalization and regional agricultural trade
Emergence of a democratic South Africa It is unlikely that a free South Africa will of itself make a major difference to agricultural commodity trade within the region. This premise is based upon the existing regional trade patterns, which are already heavily biased towards trade with South Africa. Within the SADCC region it is only Angola and Tanzania which have no trade with RSA. The economies of most SADCC countries are highly dependent on RSA. This is particularly true of Lesotho, Swaziland and Namibia, which all belong to the Rand Monetary Area and which together with Botswana are involved in the South African Customs Union (SACU). The countries are heavily dependent on SACU for government revenue: some 70% of government revenue for Lesotho, 60% for Swaziland and 40% for Botswana comes from SACU. Migrant labour to RSA is Lesotho’s dominant export, but otherwise South Africa accounts for a lesser percentage of national exports than imports (eg RSA accounts for some 20% of Swaziland’s exports but almost 90% of its imports). South Africa provides over 80% of the import requirements of SACU members. All these countries rely heavily on South Africa for transport, ports, electricity and oil. A majority government in power in Pretoria will ease psychological and moral barriers but is not likely to increase commodity trade, which is already at such high levels. There is a real danger that capital and skills will move out of these four countries back to South Africa as trade sanctions are lifted and manufacturers (eg Taiwanese textile manufacturers) who located in these countries to avoid sanctions relocate to South Africa. In addition there will be less moral pressure on international aid to provide assistance to regional countries. Malawi, Zambia and Zimbabwe also rely heavily on South Africa as their dominant trading partner. South Africa is Zimbabwe’s single most important trading partner. The position on exports fluctuates, with more of Zimbabwe’s exports going to the UK in some years (eg 1987), but RSA accounts for 15-20% of all imports to Zimbabwe, Zambia and Mozambique. Although the UK is Malawi’s principal export market, South Africa is the principal supplier, accounting for some 3040% of imports. It is unlikely that the change of government in South Africa would increase trade links directly. Any expansion in regional trade requires decontrol of domestic and external markets. The political changes may still have considerable indirect impacts on agricultural development in the region even if there is no market liberalization. A majority-ruled, SADCC-recognized government in South Africa would have an immediate impact on communication and skills transfers. Agricultural research would benefit considerably from communication. For example, Zimbabwe would benefit significantly from greater exposure to the agronomic practices for grain production in South Africa which are geared to lower rainfall and would therefore be suitable to the more arid regions in Zimbabwe. Another example is sunflowers, which are an important commodity in South Africa but have been virtually ignored in Zimbabwe. Better access to research and inputs for sunflower production could be particularly important for smallholders in the semi-arid regions in Zimbabwe. Equally, South Africa has had little experience with development economics, farming systems research and project development, assessment and management in rural areas, eg experience with smallholder
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credit schemes, cooperatives, market access and rural development in general. They could benefit greatly from the research and experience of the SADCC countries. Institutionally South Africa could play an important role in a number of areas including the regional food security framework, particularly through participation in the early warning system. Its potential role as a market for regional surpluses in good rainfall years is almost as important as its potential role in spreading the drought risk. South African rainfall patterns usually differ from those in Zimbabwe, Zambia and Malawi,’ which tend to be more heavily affected by the Intertropical Convergence Zone and therefore to follow more similar drought patterns. It also has a large market for grain stockfeeds which can be useful in reducing the costs of operating foodgrain reserves. As the earlier papers have shown, the large fluctuations in production, the almost totally inelastic demand and the lack of supplies of white maize from elsewhere make foodgrain reserves extremely expensive and difficult to operate. Unless the individual countries (including RSA) reduce some of the barriers to trade, however, the full potential of the gains from a politically stable South Africa cannot be achieved.
Potential role of structural adjustment4 3This was not the case in 1991/92, when the worst drought of the century affected all the countries in Southern and Eastern Africa. Parts of South Africa were less affected, but these were not the grainproducing regions. 4Readers are referred to the other papers for details of the proposed structural adjustment programmes and for the potential gains from trade. This paper simply introduces South Africa into consideration. It is an attempt to highlight some of the issues which may arise. ‘There is further evidence of this taxation in K. Muir-Leresche and D. Jansen, ‘Trade, exchange rate policy and agriculture’, paper prepared for the Conference on Zimbabwe’s Agricultural Revolution, Victoria Falls, July 1991; D. Jansen, Trade, Exchange Rate and Agricultural Pricing Policies in Zambia, World Bank Comparative Study, Washington, DC, 1988; and K. Muir-Leresche, ‘Crop price and wage policy in the light of Zimbabwe’s development goals’, unpublished DPhil thesis, Department of Land Management, University of Zimbabwe, 1984. ‘Wheat subsidies were still 12% of the value of marketed output in 1990 even after the commitment to reduce subsidies. 7K. Muir-Leresche, ‘Reflections on the impacts of recent trade and political liberalization in Southern Africa’, in A. Valdes and K. Muir-Leresche, ed, Agricultural Policy Reforms and Regional Market Integration - Malawi, Zambia, and Zimbabwe, International Food Policy Research Institute, Washington, DC, 1993.
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As the earlier papers have shown, agriculture has been heavily taxed in most of the countries in the SADCC region.’ Assuming, therefore, that structural adjustment programmes go ahead they will involve improving the terms of trade for agriculture and in particular improving them for labour-intensive export and import-substituting commodities. South Africa is facing relatively similar problems to many of the countries in the region except that since its currency has been less overvalued it may have actually subsidized producers of wheat, maize, stockfeed and grazing. Direct producer subsidies and rebates peaked in the 1987 harvest year at R583 million, with maize subsidies at 19% of the value of output (maize and wheat count for over 80% of the subsidy in most years). No opportunity-cost pricing analyses appear to be available, and border price comparisons would be interesting. Despite the subsidies granted to wheat farmers,” it is possible that since capital equipment is very much cheaper in South Africa than it is in the rest of the region, South Africa may have a comparative advantage in wheat production. Tractors, combine harvesters and other mechanical equipment are freely available to South African farmers and cost almost five times less than they do in Zimbabwe.7 South Africa is also able to produce non-irrigated summer wheat as it does not have the rust and lodging problems experienced in Zimbabwe and Zambia. This makes the wheat cheaper to produce and probably more economic, despite lower yields. South African wheat does not need to compete for scarce water resources for irrigation, nor does it require the capital investment in irrigation facilities. It would appear, therefore, that South Africa may have a comparative advantage for wheat production. It is possible that the region would benefit from South Africa moving away from maize and into wheat if there is greater investment in maize production in Zambia and the surplus areas of Tanzania. It would be interesting to have a preliminary analysis to assist in determining
FOOD POLICY August
1993
Liberalization and regional agricubural trade
regional comparative advantage in the major commodities under different internal market, trade and exchange rate regimes. Normalizing access to foreign exchange would reduce the price of capital inputs in most countries in the region but it would be unlikely to reduce them to the South African price levels because of both the larger market in South Africa and the lower transport costs involved. It is likely that South Africa will continue to have comparative advantage in capital- and skill-intensive commodities. Zambia, Tanzania and in due course Angola and Mozambique will have comparative advantage in land- and rainfall-intensive commodities, whilst Zimbabwe, Malawi and Swaziland are likely to have greatest comparative advantage in labourintensive commodities. However, local demand, infrastructure and management capacity will also affect these, and it is difficult to determine comparative advantage a priori. Zimbabwe, Botswana and Namibia would appear to have an advantage in beef and other livestock exports to South Africa. There appears to be a large vent for surplus if South Africa removes non-tariff restrictions and does not place high tariffs on livestock imports from the region. Meat consumer prices in South Africa are considerably higher than they are in most of the region, with prime beef cuts selling at US$6.50 per kg compared to US$2.50 per kg in Zimbabwe in October 1991. Other areas where realigned prices and deregulation may stimulate exports from SADCC countries to South Africa include dry beans, cotton, oilseeds and stockfeeds. This assumes that South Africa will eliminate non-tariff barriers to trade and avoid replacing them with excessive tariffs. The opening up of domestic markets to South African imports may, however, negatively affect horticulture since South Africa probably has a strong comparative advantage in the production of most horticultural commodities arising from the capital and skill intensities of these processes and South Africa’s long tradition of exporting horticultural products. Horticulture accounts for almost 40% of the value of total arable production in South Africa. Competition for exports to the EEC if South Africa is included in the Lome Convention may also reduce opportunities for the continued expansion of horticulture exports from SADCC countries. On the other hand, the South African market may be very useful for regional exporters of tea, coffee, cashew nuts and various tropical products, and here Tanzania would benefit from the changes in the political situation which have effectively closed South Africa as a trading partner in the past. Table 1 presents the output and value of South Africa’s principal commodities in 1990. Also indicated are the producer prices for these commodities at intervals during the last decade. It is obvious when the US dollar prices are compared with those given for maize in other countries in the region in Table 2 that South African farmers have been paid higher prices than farmers in the rest of the region. Since these have been converted at official exchange rates they do not reflect the real position, and a comparison of adjusted parity prices in the four countries would be most useful.
The role of competition Japan and other Asian countries are particularly effective in moving capital and labour out of industries subjected to increasing competitive
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agricultural
trade
Table 1. South African output and agricultural Commodity
Maize Wheat Sunflowela Tobacco Cotton Dry beans Barley Groundnuts Sorghum Soybeans Horticulture Beef” Sheep/goatsa Pork” Mrlkb Total agriculture Exchange rate (US$IR)
commodities
equivalent
output (1990) Value (US$ million)
Weight (‘000 mt)
prices. Harvest year (US.$/mt) 1961
1985
1969
\ 1990
948 334 153 131 65 62 39 34 31 25 1 499
9 442 2 005 609 32 135 113 291 80 368 110
140 256 315 295 609 631 210 528 109 350 _
98 122 136 206 318 340 101 262 75 150
102 172 224 367 398 348 124 332 81 210
101 193 246 412 478 352 133 382 78 222
823 316 141 361
587 170 127 2 430
240 232 183 30
87 97 82 13
188 207 142 21
181 201 129 22
1.09
0.38
0.39
0.38
7 422 0.38
a US cents/kg. b US cents/l. Source: Effecive Farming Directory, Vol 6, January 1991, Effective Farming Publications, Pietermaritzburg, RSA
The Western industrial nations are less effective, and developing countries find it particularly difficult. There is some scepticism of the benefits of liberalizing in the light of an increasingly protective international environment. ‘If trade policy in the rest of the world is increasingly protectionist” . . . is this tactically an appropriate time to liberalize our own trade policies through unilateral action?‘9 However, it is important to retain international competitiveness and there is an urgent need for all Southern African countries to find a means to assist the movement of capital and labour from industries (or firms) with low competitiveness to those with strong prospects, using the market to identify products and processes in growth and decline. New advanced technologies require an extensive research and development base which South Africa’s small population and shortage of skills did not warrant, but for political security heavily protected industries abound. However, with South Africa integrated into a larger SADCC region it may be possible to develop the necessary depth. Even if there is a reluctance to liberalize unilaterally it may make sense for an emergent South Africa to participate in the regional structural adjustment and market liberalization programmes. The current government has begun the process by reducing agricultural subsidies and reducing some of the quantitative restrictions on imports of certain agricultural commodities (eg dry beans and beef). The question is, how will the new South African government view these issues? If South Africa is to play an effective role in regional development, trade barriers and market interventions will have to be reduced, but the underlying philosophy of the revolutionary parties pressure.
‘There has been little real change in trade and agricultural policies in the EEC, for example, and throughout the world nontariff restrictions upon trade have been
increasing despite all the GATT negotiations and talks about reducing distortions. ‘J.C. van Zyl, ‘South Africa in world trade’, South African Journal of Economics, Vol 52, No 1, 1984, p 55; see also P. Strydom, ‘South Africa in world trade’, South African Journal of Economics, Vol 55, No 3, 1987.
Sources: U. Koester, ‘Agricultural trade between Malawi, Tanzania, Zambia and Zimbabwe: competitiveness and potential’, in A. Valdes and K. Muir-Leresche, ed, Agricultural Pa/icy Reforms and Regional Market integration - Malawi, i’ambia, and Zimbabwe, International Food Policy Research Institute, Washington, DC, 1993; Effective Farming Directory, Vol 6, January 1991, Effective Farming Publications, Pietermaritzburg, RSA.
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Table 2. Maize producer prices in Malawi, South Africa, Zambia and Zimbabwe (US$/mt).
1982 1983 1984 1985 1986
Malawi
RSA
Zambia
Zimbabwe
World US Gulf Port
95 102 87 72 61
203 179 120 98 117
142 113 91 89 128
120 100 100 87 112
126 126 130 133 107
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Liberalization
‘@The devaluation of the Zimbabwe dollar since March 1991 resulted in an increase of around Z$l billion being distributed between some 1500 farmers - assuming that the full effect of the devaluation was passed on to producer prices. Tax revenues will increase and it is possible that some of the farm labour will benefit where bonuses are paid, but the largest proportion of the windfall increases the demand for urban property and luxury consumer goods. This is particularly true in an environment which does not encourage investment because of the shortage of materials for on-farm investment, barriers to entry in industry and the anticipation of continued high inflation. “K.L. Truu, ‘Economics and politics in South Africa today’, South African Journal of Economics, Vol 54, No 4, 1986.
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and regional agricultural
trade
favours the command economy and the need for self-sufficiency. Even if these were to be replaced with a more laissez-faire approach, it is uncertain that the government will have the confidence to allow liberal forces the freedom from regulation necesary to allow the competition so essential for efficient markets. The new government will be under enormous pressures to move towards redistribution and more egalitarian structures by state decree. The removal of regulations on marketing, trading, land size, etc, would in most cases lead to greater social justice, but deregulation does not have the same political impact as direct transfers. The new government will need to be seen to be meeting the aspirations of its various ethnic groups. Deregulation also reduces the opportunity for the nepotism and corruption which is often considered a reward after years of struggle. Although the SADCC country structural adjustment programmes emphasize the reduction of all tariffs (eg Zimbabwe is supposed to reduce all tariffs to between 0% and 30% by 1994) it is uncertain whether these tariff reductions will, or indeed should be, achieved. Given the very high income disparities which exist in Southern Africa, opening access to foreign currency would result in very strong demand for luxury commodities not produced in Zimbabwe or even South Africa. There is a very high marginal propensity to import luxury commodities in the region - particularly where the main initial beneficiaries of devaluation (the first step in the Economic Structural Adjustment Programme - ESAP) are in the highest income brackets. “I There are currently very high rents earned on luxury commodities. It would seem sensible for the government to remove quantitative restrictions but place very high tariffs on these commodities, earn the rents and reduce the demand for foreign currency which would normally follow reducing such restrictions. This is one of the major constraints faced by countries in the region wanting to free access to foreign currency. Restricting demand for luxuries would assist in moving away from controls and licences for foreign currency and encourage more expenditure on production inputs. Tariffs on videos, microwaves, etc, in Zimbabwe would need to be over 1000% if they were to have any impact on reducing demand! To the extent that tariffs are not reduced on products which are, or could be, produced within the SADCC region, the regional ‘pie’ is reduced. However, a much slower phasing out of tariff barriers on luxury goods would seem a small sacrifice if it enables governments to reduce, with confidence, the controls and licences which have stifled investment and development in the region for so long. Whilst it is true that successful macroeconomic policy helps to make sectoral competitive problems easier, relatively low factor productivity and lack of competitiveness are among the underlying microeconomic causes of the macroeconomic malaise. The main problem with most of the Southern African economies is that they do not produce enough goods and services to meet demand. They are not addressing the problem of relative scarcity. In South Africa the ratio of capital to labour has increased steadily but capital productivity has declined since 1970, thus reducing both employment and growth.” Truu goes on to point out that in South Africa this reduced efficiency has not been balanced by more equity since the economy ‘has not been so concerned with distributing the
Liberalization
and regional agricultural
trade
desirable things in scarce supply as with actually reducing their availability’. Whilst this statement was made with respect to the effect of sanctions, it is equally true of all the countries in the region, including South Africa, that the heavily regulated economies have in fact resulted in inefficiencies which have reduced growth, equity and employment.
Conclusion
“An example of changes to crop price and wage policy in Zimbabwe which would increase equity, employment and efficiencv is given in Muir-Leresche. OD cit. Ref 4. “F. horande and K. Schmidt-Hebbel, Macroeconomics of Public Sector Deficits: The Case of Zimbabwe, WPS 688, World Bank, Washington, DC, 1991.
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The Southern African economies have been operating so far within the welfare frontier that there are many measures which could be taken which would not necessarily result in the classic efficiency/equity trade-off. l2 A reduction of the large rents accruing to those with access to foreign currency, licences, etc, in the region would go a long way to increasing growth and equity. The progress in Zimbabwe’s structural adjustment programme, whilst severely restricting the supply of money, is lagging seriously behind in any measures to reduce government spending or to reduce rents by deregulation. Unless government deficits are reduced the only means of reducing inflation is to severely restrict the money supply, resulting in very high interest rates which in turn reduce investment. Morande and Schmidt-Hebbel show that there is a significant Correlation between fiscal policy and private investment in Zimbabwe.” Unless the barriers to competition can be removed, the recent devaluations will not achieve the desired impact on growth and could simply act as fuel for inflation. The devaluation will encourage exports and import-substitution but the multiplier effects which are such an important part of the strategy will not be achieved until the barriers to entry have been removed and access to inputs (foreign currency), competition and the investment environment are improved. The inflationary impact of devaluation depends on institutional factors and is particularly likely in monopoly situations with barriers to entry. With respect to employment, agricultural exports tend to have higher labour intensities than the non-traded commodities, and to the extent that the devaluation encourages these exports there will be positive effects on employment. As unskilled labour has a high propensity to consume locally produced goods, if the supply constraints have been lifted this could have very strong multiplier effects throughout the economy. The problem arises when the supply constraints have not been lifted and the increased employment simply results in higher inflation. These problems must be addressed or the programmes will fail entirely and the devaluations could result in an uncontrolled devaluation/inflation spiral. The devaluations are certainly an essential condition for growth, but they are not a sufficient condition. In conclusi&, most of the countries, including South Africa, have very distorted economies with prices rarely reflecting opportunity costs. Until domestic markets are freed, barriers to trade have been lifted and the region becomes more attractive to investors, a politically acceptable South Africa will have only a limited impact on agricultural trade and development within the region.
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