Risks of unpredictable trade policy to Malawi’s economic growth

Soya drying Credit:STARS/Kristian Buus, 2010

Soya drying Credit:STARS/Kristian Buus, 2010

For two years, Malawi has promoted a policy environment conducive to the free trade of soya. This commitment is in line with its strategy to increase the scale of production of oilseed so that processors can count on a stable supply of raw inputs for value addition. Predictable policies help actors along the value chain—from farmers and aggregators to processors and exporters—better plan their activities and investments and help stabilize commodity prices. However, there appears to be increasing pressure to reverse this trend and implement barriers to free trade, which could depress prices and create uncertainty, both of which would discourage soya production. A recommitment to a stable policy environment governing oilseed production and trade serves Malawi’s vision to further develop its productive base for exports and thus achieve sustainable, pro-poor economic growth. In 2013, the Government of Malawi developed and began implementation of the Malawi National Export Strategy (NES) and, in doing so, took a major step towards promoting a more stable and vibrant economy by committing to diversify away from tobacco and broaden its export base. The NES identifies oilseeds and oilseed-related products as one of the sectors of the economy with high potential to drive Malawi’s medium- to long-term economic growth. Within the oilseed sector, soya is identified further as a commodity that has strong domestic and regional demand, has high potential for improved incomes for farmers, and is a sub-sector of the economy in which Malawi already has a comparative advantage. Moreover, increased soya cultivation by smallholders, who already produce 93 percent of the crop, can improve soil fertility due to its nitrogen fixing properties, and could address common dietary deficiencies if consumed by more Malawians.

The Malawi soya sector faces challenges as well. High and rising production in South America and limitations regarding the suitability of growing soya in certain parts of the country are threats that, while real, are beyond Malawi’s control. Others are not. The NES identifies export bans and lack of reliable market linkages as two factors that create uncertainty regarding market opportunities for farmers and thus depress production of soya. In June 2013, Malawi directly addressed these challenges by repealing the need for a license to export soya, a requirement that generated significant time delays and uncertainty for exporters and enabled government to ban exports without notice, according to a recent IFPRI study. Throughout 2014, Malawi continued to promote the free trade of soya by issuing press releases and official interviews in the media to reassure producers and traders that the government would not interfere with soya exports.

In recent weeks, the option of placing an export levy on soya or possibly reinstating the export ban altogether appears to have reemerged in policy discussions. The crop is used, among other things, for the production of cooking oil and poultry feed, thus protection of investments in local processing facilities and increased domestic value addition are cited as justification. While the idea of promoting domestic value addition is commendable, and an export ban or levy may well raise the domestic supply of inputs and suppress prices in the current season, to the benefit of local value addition, it is likely to be counterproductive in the long-run as reduced farmer profits will ultimately create a disincentive to produce the crop in future seasons. Arguably, an even bigger risk is the uncertainty that an ad hoc export levy or ban would bring about in the sector. Highly discretionary and uncertain policy environments are known to contribute to price instability (see, for instance, this study by Thom Jayne, MSU), which in turn may ultimately harm prospects for agricultural growth and transformation in Malawi since risk averse, resource-poor farmers tend to revert to subsistence-oriented agriculture when markets are unstable (a study by Marcel Fafchamps at Stanford Univ. describes this further). Before making hasty and potentially damaging policy decisions, alternative options for promoting domestic value addition, such as domestic processing subsidies, reductions in consumption taxes on locally produced products, or import duties, should be considered. Success of the NES hinges critically on the emergence of a vibrant and robust agricultural sector, which in turn requires stable markets and predictable policies; without these elements support for Malawi’s budding processing sector will be meaningless in the long run. Policymakers need to seek and adopt those policies that are beneficial to both farmers and processors, and avoid short-term fixes that benefit some players in the value chain at the expense of others.