World Development, Vol. 17, No. 5. pp. 73-7-10, 1989. 0305-750x/89 %3.00 + 0.

00
Printed in Great Britain. 0 1989 Pergamon Press plc

The Privatization of Agricultural

Trading in Malawi

ROBERT E. CHRISTIANSEN
The World Bank, Washington, DC
and
LEE ANN STACKHOUSE*
Consultant

Summary. -This paper examines the privatization of smallholder agricultural output marketing
in Malawi. Despite problems with implementing the privatization program. including serious
disruptions in the supply of maize, the staple food, the move toward greater private sector
involvement in agricultural marketing has been successful. Nonetheless, several medium-term
development issues, e.g., food security and buyer and seller of last resort functions, need to be
addressed in the context of relations between the marketing parastatal (ADMARC) and the
private sector before the policy change can be regarded as fully successful.

1. INTRODUCTION several years, of-stand-by agreements (IMF) and

structural adjustment loans (World Bank).’
During the 1970s Malawi enjoyed substantial One of the primary goals of the structurai
growth based largely on agricultural exports adjustment program has been to increase the
produced in the privately-owned estate sector. efficiency of the parastatal responsible for input
As a result of this performance, Malawi was and output marketing for the smallholder subsec-
frequently cited not only as one of the success tor - the Agricultural Development and Mar-
stories in sub-Saharan Africa, but also as one of keting Corporation (ADMARC). As one means
the more market-oriented economies in the of achieving this increased efficiency, the World
region (Acharya, 1981). In reality, however, the Bank and the Government of Malawi agreed that
government’s intervention in and direction of ADMARC should privatize part of its crop
the economy has been extensive. Although this purchasing operations, i.e., provide smallholders
intervention led to some private sector expansion with marketing channels that could serve as an
in agriculture and, in turn, contributed to the alternative to ADMARC’s monopsony position.
economy’s impressive growth during the 197Os, This privatization effort is the subject of this case
it cannot be argued that market forces have study.
directed the allocation of resources in the pursuit Malawi’s experience with privatization is im-
of the country’s development strategy (Kydd and portant as it involves one of the government’s
Christiansen, 1982). Partly as a consequence of central economic functions - purchasing small-
the estate sector bias in its development policies holder crops - in an economy dominated by
and partly due to external shocks, the Malawi small-scale agriculture. Further, Malawi’s priva-
economy began to display structural imbalances tization experience contains lessons for other
in the late 1970s e.g., increased balance- countries, both in the form of its successes and
of-payments deficits, larger public sector deficits its shortcomings. Among the successes must be
- 12.4% of GDP in 1980 (Lele, 1988, p. 5) - numbered the fact that a significant change in
higher external debt and debt-servicing obliga- agricultural marketing policy occurred at a time
tions, and lower levels of income growth. The
government applied to the International Mone- ‘The views expressed herein are those of the authors
tary Fund (IMF) and the World Bank for as- and should not be attributed to any of the institutions
sistance that came in the form, over the next with which they are affiliated.

729
730 WORLD DEVELOPMENT

of food shortages without resulting in a break- from the IMF and the World Bank.6 The first
down in the purchasing network. Foremost structural adjustment loan (SAL) was made in
among the shortcomings was the inadequate 1981, a second SAL signed in early 1984, and a
planning for the transition from a government third SAL was agreed on in late 1985. The
operated crop purchasing program to a program conditions attached to these loans sought, among
in which the private sector plays a major role. other things, higher producer prices for small-
Although several factors contributed to these holders and reforms in the structure and opera-
planning problems (e.g., the government’s initial tions of ADMARC (Kydd and Hewitt, 1986;
reluctance to agree to the plan and questions Christiansen and Kydd, 1987).
about which marketing functions the program As is the case with many parastatal organiza-
would include), the most apparent planning tions, ADMARC had experienced problems in
weaknesses stemmed from the speed with which controlling its operating costs, especially during
the program was designed and implemented. the early 1980s. Inefficiency led to financial
Exacerbating the planning problems was the un- losses on ADMARC’s operations in some years
fortunate coincidence of a maize shortage in the and was, in the view of the World Bank, due
first year of the program’s operation. mainly to: (i) increased marketing costs attribut-
The present analysis of the privatization effort able to excessive staffing and buying points
in Malawi begins with some background informa- (ADMARC’s staff increased 17% between 1983
tion on ADMARC and continues with a discus- and 1984, and an additional 16% between 1984
sion of the motives for privatization. This is and 1985); (ii) increasingly difficult and costly
followed by a description and an analysis of the external transport; (iii) the weak performance of
implementation of the program. The final section its loans and investments portfolio; (iv) a lack of
offers conclusions. adequate storage facilities in the Northern region
that resulted in maize being transported long
distances early in the season to be stored, and
2. BACKGROUND then being transported back later in the season;
and (v) inefficient transport operations because
In March 1971, the colonial era Farmer’s ADMARC did not take advantage of bulk
Marketing Board - which was primarily transport and was constrained by government
concerned with stabilizing agricultural prices - regulation in the commercial rates it could offer
was officially reconstituted as the Agricul- for lorries.’
tural Development and Marketing Corpora- Data on ADMARC’s total expenses, i.e.,
tion (ADMARC). Malawi’s political leadership buying, selling, and administrative expenses as a
hoped that ADMARC would function as an share of total sales and purchases are presented
organization “where questions of development in Table 1. Although it is difficult to judge what
and profit are paramount and the question of constitutes reasonable expenses, it seems exces-
stabilizing farm prices secondary.“’ ADMARC’s sive when expenses account for 60-70% of the
profit potential was the result of its monopsony amount paid to smallholders. Although a portion
position with regard to smallholder marketed of ADMARC’s inefficiency may have been
production.3 Although estate production - beyond ADMARC’s control, e.g., the number of
which consists of burley and flue-cured tobacco
- could be sold at auction, thereby allowing the
Table 1. ADMARC's expenses as a percentage of
estate owner to receive export parity prices, purchases and sales
smallholder production - primarily maize,
groundnuts, pulses, and tobacco varieties other Total
than those grown on estates - had to be sold to expenses Percentage of Percentage of
ADMARC.’ By investing the difference between Year (K’C’OQ total sales total purchases
the price received in international markets and
the price paid to producers in estates, ADMARC 1986-87 32.3% 59.2%
52,366
was seen as making a contribution to the coun- 1985-86 51,549 46.9% 58.2%
try’s broader development strategy.’ 1984-85 52,383 42.5% 70.5%
1983-84 34,893 36.6% 75.8%
1982-83 28,072 45.6% 66.9%
3. MOTIVES FOR PRIVATIZATION 1981-82 28,936 47.3% 100.3%
1980-81 29,572 46.7% 98.9%
Despite its impressive growth during the 197Os, 1979-80 26,056 46.3% 92.3%
Malawi’s economy encountered a number of
problems in the late 1970s and sought assistance Source: ADMARC Annual Reports, various years.
 AGRICULTURAL TRADING IN hlALAW1 731

seasonal employees, the perception of general over time AD,MARC should provide a price
inefficiency made ADMARC a candidate for support system by being the buyer of last resort
reform. at prices announced before planting, but the pri-
In addition to revising ADMARC’s agricul- vate sector should be allowed to operate in
tural pricing policies as part of the structural marketing, both locally and for export, with
adjustment process, the parastatal’s Board of minimal restraints. Further, it was felt the new
Directors was reconstituted, a new general mana- role for ADMARC should be phased in over
ger was appointed, some staff positions were time, as the private sector gained experience in
upgraded through training and recruitment, and marketing. This would allow ADMARC to re-
some assets were sold. A number of problems duce significantly its staffing and the number of
still remained, however, and a 1986 World Bank rural markets it operates.
study of ADMARC described the situation in Privatization was seen as operating in the
the early 1980s as a fiscal time bomb waiting to context of a redefined policy environment for
explode (World Bank, 1986). During 1983 and smallholder agriculture and ADMARC. As a
1984, pressure for reform abated somewhat as first step, farmers clubs. traders, or other private
ADMARC earned a large profit on tobacco sector operators were to be encouraged to
sales, modest profits on most other export crops, perform secondary marketing operations by
and exported large quantities of maize to those offering differential prices between ADMARC’s
neighboring countries that had suffered from primary marketing facilities and smaller, more
drought. isolated buying points. The margin available
In 1985, however, conditions changed for the between prices at bulk, permanent markets and
worse: the prices Malawi received at its tobacco small volume, seasonal markets was to provide a
auction fell by about a third, other export crops commercial opportunity for alternative oper-
also faced lower prices, and neighboring coun- ators. This was to be a first step toward the long-
tries had better maize harvests, thereby eliminat- term goal of establishing ADMARC’s role as
ing Malawi’s export markets for maize. As a providing price supports by acting as a buyer of
result, ADMARC experienced a severe liquidity last resort while the private sector handled an
crisis, and had to borrow K70 million (US$45 increasing share of the physical marketing activ-
million) in order to finance crop purchases.* vity. It was hoped that there would be no
In response to the liquidity crisis and longer- geographical restrictions on private traders, or
term concerns about the consequences of AD- restrictions on the crops to be purchased or the
MARC’s operations for the ongoing structural prices offered. Farmers would always know that
adjustment program, the World Bank proposed they could receive at least the pre-announced
a series of reforms (World Bank, 1986). The price from ADMARC and would not need to
message contained in this proposal was that accept less, but could accept a higher price if it
further reform of ADMARC was essential in were available. It was also hoped that the private
order for the structural adjustment program to be sector would be allowed to export without having
successful. Although the Bank along with some to obtain ADMARC’s permission for an export
other donors took the initiative with regard to license (World Bank. 1986).
reforms for ADMARC, the government does not As part of the agreement to implement the
seem to have disagreed.’ privatization program, Malawi received a supple-
The recommendations concentrated on ways ment to the previously issued Third Structural
to improve: (i) ADMARC’s short-term liquidity Adjustment Loan in the amount of 40 million
problems; (ii) ADMARC’s operations and effi- SDRs. The loan was made on the conditions: (i)
ciency over the medium and long term; and (iii) that the government announce that private indi-
the policy environment (World Bank, 1986). The viduals could participate in crop trading; (ii) that
liberalization scheme that was eventually agreed all markets in which ADMARC purchased less
to by the government and the Bank addressed than 60 tons per annum be closed;” (iii) that
two issues in particular: the need to regularize ADMARC institute differential crop prices be-
the role of private traders in the marketing tween its regional depots and the traditional
system for smallholder crops,” and ways for seasonal buying points; (iv) that ADMARC
ADMARC to divest several of its subsidiaries in eliminate the losses on the maize account by the
order to strengthen its investment portfolio. end of fiscal 1988 by instituting differential
With regard to privatization of ADMARC’s prices, cutting consumer subsidies, and im-
crop purchasing activities, the report recom- proving efficiency;12 and (v) that the government
mended that the private sector be allowed to agree to a liberalization scheme for ADMARC.
enter into marketing at its discretion. With re- Throughout the period in which the privatiza-
spect to ADMARC’s role, it was argued that tion policy was formulated, there was close
732 WORLD DEVELOPMENT

collaboration between the Malawian government restrict private traders and offset some of the
and various donors in developing a strategy to positive effects of market liberalization. The
meet the conditions contained in the loan agree- African Businessmen’s Association (ABA), a
ment. The government held several donor meet- group of businessmen from medium to large
ings that resulted in a division of labor in terms of enterprises, held a view that was similar, but not
donor support. For instance, the US Agency for identical to that of the Bank on the issue of
International Development became the lead restrictions. Further, the ABA urged additional
donor organization for assisting with the develop- government support of traders. For example, the
ment of an investment finance scheme and ABA urged support in the form of credit for
monitoring the impact of the liberalization on working capital, the right to export crops the
production, storage, trading, and prices. The UN traders purchased, and licenses that would last
Development Program agreed to finance a man- 3-5 years with a presumption of renewal. The
agement study. The European Economic Com- inclusion of the ABA in the discussion of the
munity (EEC), however, chose not to become legislation and guidelines for traders. however,
involved in the liberalization effort. The coopera- seems to have done little to affect the outcome.
tion among donors does not necessarily mean Not only was the ABA brought into the debate at
there was agreement among the various donors a late date, at the urging of the Ministry of
and the government, only that there was com- Agriculture, but its views did not have appreci-
munication among the parties. It was in this able influence on the legislation enacted by
context that the World Bank had a leadership Parliament. The government insisted on retain-
role in the privatization program. ing some level of regulatory authority in order to
assure, in its view, sufficient production incen-
tives, reasonable consumer prices, adequate mar-
4. THE PRIVATIZATION PROGRAM ket information and a mechanism to achieve
certain development goals such as minimum
The government’s objectives were mainly to income levels to producers.”
improve ADMARC’s financial position by allow- Since there are no documents available on how
ing private traders, to encourage private traders the government envisioned the private trader
to provide more of the transport and marketing system would work, it is necessary to rely on
function, and hopefully to avoid a situation interviews with government officials. Presumably
where ADMARC was unable to purchase crops it was clear, as it was stipulated in the loan
because of its liquidity problems.‘3 In order to agreement, that some of ADMARC’s seasonal
facilitate the transition and to comply with the markets would be closed, that eventually much of
loan requirements, the government issued a set its crop purchasing function would be transferred
of guidelines for private traders in the official to private traders, and that a two-tier pricing
Government Gazette and in local newspapers. system would operate. A minimum producer
price would be imposed that was intended to
(a) Agricultural Act No. I I of 1987 apply in the catchment areas formerly served by
ADMARC’s seasonal or bush markets and in
Agricultural Act No. 11 of 1987 states that “no those seasonal markets still operating. A higher
person shall for gain or profit, engage in the price would be offered for maize delivered to
business of buying any smallholder agricultural ADMARC’s regional depots. In the first year
produce from producers except in cash at the (1987-88). traders were to purchase maize from
specified markets and from 0600 hours to 1800 smallholders in bush markets for Kl5 per 90
hours on any day of the week except Sunday; and kilogram bag and would receive K18 for each bag
unless he is the holder of a valid license under delivered to a regional depot. In this way, it was
these regulations. The regulations do not apply hoped that ADMARC would avoid incurring the
to the buying of smallholder produce at any cost of managing and staffing so many small
market operated by a District, Town, Municipal seasonal depots, and transporting the produce
or City Council, or to the buying of perishable to regional depots. Further, it was hoped that
smallholder agricultural produce, and fresh veg- ADMARC would be able to achieve its dual
etables.” Finally, only Malawian nationals are mandate of improving efficiency and assuring
allowed to obtain licenses.‘J national food security.
The donors involved took the view that the
restrictions contained in the legislation, e.g.,
the requirement that trade take place within (b) Administrative problems
ADMARC markets, and that minimum price
levels be set by the government, would unduly The privatization program encountered several
 AGRICULTURAL TRADING IN MALAWI 733

administrative problems in the early stages. The in the cost of purchased inputs, especially ferti-
interministerial committee overseeing the priva- lizer, resulted in a disincentive to grow maize as a
tization was under pressure to institute the cash crop as compared to other crops, most
liberalization by early 1987, in time for traders to notably groundnuts. Second, a large quantity of
purchase the 1986-87 crop.16 Several govern- maize from Mozambique had, in previous years,
ment officials noted that the committee under- made its way into Malawi in response to better
estimated the time necessary to carry out the prices. This flow of maize declined when many of
appropriate legislative and planning procedures. the Mozambican farmers in the border areas
The legislative process for a bill such as the one (especially to the west of Malawi) were forced off
that became Agricultural Act No. 11 generally their land by the expanding military conflict in
requires about one year to complete. In this case, that country. In addition to the decrease in the
however, the committee rushed the bill through supply of Mozambican maize, the demand for
Parliament in three months. Also in keeping with maize in Malawi increased substantially because
the agreement, General Notice No. 152 appeared of the increase in the Mozambican refugee
in the Malawi Government Gazette of February population in Malawi. As of October 1987, there
27, 1987, and the Doily Times of March 11, 1987, were an estimated 357,000 Mozambican refugees
and served to notify the public that any Malawi in Malawi and by early 1988 - when seasonal
national could engage in the buying and market- food shortages occur - the number was close to
ing of smallholder agricultural produce beginning 500,000.
April 15, 1987, if licensed and registered. This combination of supply and demand condi-
The private trader licenses, however, were not tions caused a substantial rise in the consumer
printed by April 15. As the buying season in the price of maize and provided an additional incen-
southern part of the country begins in mid-April, tive for the private traders to concentrate on
many traders started trading before the licenses maize trading. This incentive, along with prob-
were issued, which led to obvious enforcement lems of enforcing the requirement that traders
problems. Although some traders acquired file monthly reports and traders’ suspicions that
licenses later, many remained unlicensed the information gathered would be used to levy
throughout the trading season.” Officials also income taxes on the traders, meant that the
complained that adequate monitoring and en- private traders had little incentive to comply with
forcement of the regulations were hampered by a the government reporting regulations. The gov-
lack of money and manpower. Further, officials ernment, recognizing that ADMARC nas unable
in the agricultural development districts (ADDS) to obtain the amount of maize anticipated,
noted that since the program was implemented so needed the private traders’ monthly reports to
quickly, traders that were caught violating the ascertain the probability of a maize shortage. The
regulations were only required to purchase a lack of maize purchases by ADMARC combined
license; no penalty was imposed. Among the with the lack of accurate information has caused
other problems that characterized the implemen- many government officials to become concerned
tation of the private trader scheme were: (i) the about food security and the impact of liberaliza-
failure of private traders to confine their pur- tion.
chases to designated ADMARC markets; (ii) the
failure of traders to file monthly reports; and (iii)
ADMARC’s inability to purchase enough maize (d) Public sector reaction to privatized trading
to insure food security. Although the first and
second problems can be attributed to planning As of this writing, the privatization of agricul-
and implementation problems, the third is due to tural output marketing has been in effect for the
the prevailing supply and demand conditions. better part of two seasons. Given that the most
immediate problems associated with the privati-
zation stem from the speed of implementation, it
(c) Market conditions is not surprising that the strongest reaction to the
changes came during the first season, 1986-87,
The 1986-87 crop year was an unusual one however, many of these complaints are still being
in Malawi. In order to be able to distinguish voiced.
between the effects of the privatization program Among government officials, most of the
and the unusual market conditions, it is necessary complaints about the privatization program are
to understand the two factors that explain the concerned with those private traders who have
level of supply and demand in that year. First, allegedly violated the terms of the Act. In
constant producer maize prices over the previous particular, two types of violations were widely
three years combined with substantial increases acknowledged.
73-l WORLD DEVELOPMENT

First, traders have been buying and selling services, its costs have not decreased and may
crops outside the designated ADMARC mar- have increased because without trading in maize,
kets. The exception is in the remote areas of the it is not realizing scale economies in terms of the
Northern region where private trading has not utilization of staff and transport facilities.”
been significant because the roads are poor and Third, there is concern about the quality of
the price incentives unattractive. In addition, maize and beans being exported.” The govern-
traders have bought from smallholders and trans- ment fears that the country will lose its export
ported the crop to markets in the two principal market share if the exported produce does not
urban markets of Lilongwe and Blantyre, bypas- meet quality standards. The export licenses are
sing ADMARC’s regional depots. As a result, granted through the Ministry of Trade and
price discrepancies have occurred. For example, Industry. Traders are required to present a
in April, the official ADMARC purchasing price statement to the Ministry of Trade and Industry
for unmilled maize was Kll per 90 kilogram bag; from the Ministry of Agriculture saying that they
by August the official price had increased to K15 are licensed buyers. The Ministry of Agriculture
per bag, a 36% increase. Private traders, how- contends that it is the responsibility of the
ever, were paying between K17 and K20 per bag Ministry of Trade and Industry to monitor
of maize. Many traders were able to sell that quality before issuing the export licenses. The
maize for approximately K26-K28 per bag to Ministry of Trade and Industry staff, however,
donors involved with the relief work for the ref- are not trained to evaluate the quality of agricul-
ugees, urban consumers, and/or processors. By tural produce. In the past, ADMARC provided
the end of October 1987, the consumer price for the trained staff to do this. In fact, at the begin-
a 90 kilogram bag of maize had risen to K30 ning of the season, ADMARC urged private
in Mzuzu, K35 in Lilongwe, and K35-K42 in traders to attend the pre-marketing meetings
Blantyre. ‘s Some government officials even where ADMARC buyers were instructed in
noted cases of private traders buying from quality control. ADMARC also offered to or-
ADMARC at K22 per 90 kilogram bag and ganize a meeting specifically for private traders
selling to these other groups at higher prices. on this topic. As one official noted, however,
Second, compliance with the reporting re- ADMARC’s efforts were not effective because
quirements of the Act has been poor. Govern- the timing was incorrect.
ment officials believe that the reports that have Fourth, many government officials expressed
been filed underestimate the amount of private concern about the possibility of significant stor-
trading and the level of profits. The under- age losses due to improper storage by the traders.
reporting appears to stem from a widespread Those traders interviewed admitted knowing a
belief among traders that the government will use few people who were storing maize in abandoned
the reports to levy income taxes on the traders.” buildings and makeshift warehouses. IMost trad-
In addition to problems of compliance with the ers, however, are unable to store the crops for
legislation, ADMARC and ministry officials more than a week or two because .of a lack
expressed four other concerns. First, although of working capital. ” It seems, therefore, that
private traders have entered the market in the concerns about excessive storage losses are
Central and Southern regions, the amount of exaggerated.
private trade in the North has remained small.20 The remaining issue of concern for govem-
This is due to the high cost of transporting ment officials has been the implications of priva-
produce over poor roads in the remote Northern tization for national food security, as can be seen
region. As a result, ADMARC has been left to from the decline in ADMARC’s maize purchases
provide marketing services to those high cost between 1985-86 and 1987-88 (see Table 2). For
areas, while those areas that are less costly the current agricultural season, 1988-89, it is
to service have been taken over by private estimated that ADMARC’s purchases will be
traders.2’ 120 000 tonnes.25 Given the unreliable external
Second, purchased inputs, primarily fertilizer, transport routes with which Malawi must con-
have traditionally been distributed to small- tend, it is not surprising that food security is an
holders through ADMARC markets. Even issue of considerable sensitivity among policy
though many of these markets were closed as makers. Even though it can be argued that the
buying points for agricultural commodities, they decline in volume of maize purchased by
are still being used as fertilizer distribution ADMARC was not entirely due to the privatiza-
points. This requires ADMARC to transport in- tion, the program tends to be assigned the blame
puts to these markets and maintain a staff there for maize shortages.
for at least part of the year. ADMARC claims Despite these problems, there seemed to be
that as long as it is required to provide these support from officials at the Ministry of Agricul-
 AGRICULTURAL TRADING IN MALAWI 735

Table 2. ADMARC’s maize tion of the privatization of crop trading in Malawi

purchases, 1980-81 rhrough was the effort to quickly create alternative
198647 marketing channels. Although the report recom-
mending reforms in marketing arrangements was
Purchases Sales completed in March 1986, the government guide-
Year (‘ooo tons) lines for the program were not issued until March
1987. Given these delays, it should have been
1980-81 91.9 108.1 clear by early 1987 that the program would not be
1981-82 136.6 63.1 ready in time. Further, the evidence that 1987
1982-83 246.1 72.7 was an unusual year for maize markets was
1983-84 241.9 189.7 certainly available in late 1986. At that time, the
1984-85 296.3 85.7 Ministry of Agriculture had production estimates
1985-86 271.6 163.9
showing that the volume of marketed maize was
1986-87 112.6 318.4
likely to be even lower than in the previous year.
1987-88 59.5
Also, in late 1986 there were already approxi-
mately 150,000 refugees in Malawi. with evi-
dence that more would arrive in 19S7.
ture and ADMARC for the privatization move- In addition to the need for planning and
ment. The predominant sentiment among those communication, there is a need to conduct an
officials who were interviewed was that the objective analysis of the program in its formative
liberalization had taken place too quickly. It is stages. Although it is difficult to collect evidence
commonly believed that many of the current on this aspect of the privatization plan. there is
problems could have been avoided if the legisla- little to suggest that either the donors or the
tion had not been forced through Parliament so government conducted any serious analysis of
quickly and if more analysis had been done to how the plan could be expected to operate.
determine ADMARC’s role in providing food Many of the difficulties cited by the partici-
security, inputs, and market stabilization to pants and observers of the privatization plan can
sma11h01ders.z6 be attributed to the lack of time for planning and
implementation. For example, the problem with
the availability of the licenses meant that the
5. LESSONS FROM MALAWI’S government’s ability to require licenses of many
EXPERIENCE WITH PRIVATE TRADING traders, especially in the Southern region, was
undermined. This appears to have contributed to
Any analysis of Malawi’s experience with the government’s enforcement problems.
privatization is preliminary since, as of this Another factor that contributed to the enforce-
writing, private traders operating under the new ment problems was the evident confusion about
legislation have been in place for less than two the role donors were to play in aiding the
years. Further, both 1987-88 and 198~-89 have government to monitor the progress of, and
been unusual years with both the supply and problems with, the private trading activity.
demand conditions for maize deviating from Again, the problems of poor communication are
long-term trends. Given the unusual environ- evident.“’
ment in which the privatization program was Related to the problems of planning was the
initiated, it is important to distinguish between lack of funding for the Ministry of Agriculture to
those events that are the result of privatization monitor the operations of the private traders.
and those that stem from the aberrant supply and Despite the initial enforcement problems associ-
demand conditions for maize. Despite the fact ated with the licenses, it seems likely that a
that the privatization program is new, there are credible enforcement effort could have been
two types of lessons that can be derived from mounted had the funding been available for staff
Malawi’s experience. and training. If the government had been able to
monitor traders, it would have been possible to
enforce the regulation requiring traders to file
(a) Planning lessons reports.”
The issues of the accuracy of the scales being
The most obvious lesson to emerge from the used by traders and the quality of agricultural
experience in Malawi is the need to carefully exports are legitimate concerns that stem from
evaluate the design and implementation propo- the lack of preparation for the privatization
sals. Careful design and coordination, however, program. Fortunately, both issues can be ad-
require time. One of the flaws in the implementa- dressed easily. Scales can be calibrated and certi-
736 WORLD DEVELOPXIENT

fied at the times that reports are due. Com- the volume measure in the future before taking a
pliance can be monitored by the police in the decision to close the market. More generally, this
same way that it was recommended above that demonstrates the potential conflict between pri-
licenses and reporting requirements be verified. vatization programs that emphasize the need to
As for maintaining the quality of exports, proce- reduce costs and the need of parastatals to
dures for inspecting and grading agricultural perform development functions that are loss-
produce are well established. Although a system making.
of government inspectors can be abused, it works The issue of ADMARC’s ability to function as
well when the incentives are structured in such a a buyer of last resort is not just on2 of insuring
way that producers are subject to penalties for the competitiveness of markets for agricultural
misgrading. production. One of the critical issues of agricul-
tural development is the need to move from
(b) Development lessons subsistence production to commercial agricul-
ture. An important element in facilitating this
In addition to the planning lessons that can be transition is the need for minimum and stable
gleaned from the privatization experience in prices for smallholders in order to encourage
Malawi, there are several broader issues that farmers to undertake the risks associated with
stem from the experience with privatization that new technology, e.g., hybrid varieties. The
affect development prospects within the agricul- abilitv to insure that the announced price will be
tural sector. In particular, the central issues are the minimum that a farmer will receive reduces
what role should ADMARC have in the post- the variability of expected earnings and the risk
privatization era and if, as part of the reform associated with cash cropping. In order to stabi-
program, ADMARC is to be held to commercial lize prices, it is necessary to hold a buffer stock -
standards of operation, i.e., shed its loss-making which Malawi has in the form of its Strategic
functions, what agency will perform development Grain Reserve. The cost of operating this reserve
functions? These functions, at a minimum, in- needs to be kept separate from commercial crop
clude providing: an effective buyer and seller of trading activities.
last resort, stabilizing agricultural prices, and In addition to the development implications of
insuring food security. ADbl.I\RC’s ability to function as a buyer and
One of the implicit assumptions behind seller of last resort, there is a need, beyond
the privatization program was that competition simple humanitarian concern, for ADMARC to
among private traders would insure that small- guarantee food security for smallholders engaged
holders receive the market price for their pro- in cash cropping. As was the case with the need
duce. In order to reduce the possibility of to function as a buyer of last resort, the need for
collusion among traders and insure smallholders food security hinges on encouraging and facilitat-
access to markets, however, ADMARC was to ing the transition from subsistence agriculture to
function as the buyer of last resort. The ability of commercial agriculture. Before smallholders will
ADMARC to guarantee a minimum price and to engage in production of crops other than those
function as the buyer of last resort is seriously required for subsistence, there must be an effec-
hampered by the location and, therefore, the tive guarantee that supplies of staple grains will
coverage of its markets. At present, about 75% be available at reasonable prices. Without this
of smallholders are within eight kilometers of an guarantee, the risk for a smallholder who pro-
ADMARC market. Although the privatization duces non-edible, albeit high value, cash crops is
program addressed the issue of markets, its focus simply too great to accept. Although not entirely
was on the elimination of what it regarded as due to the privatization program, ADMARC’s
redundant markets - using the criterion of inability to fulfill its food security mandate will
volume of output purchased - with the result certainly result in some erosion of confidence in
that about 125 markets were closed. This focus AD&NRC and may hinder further commerciali-
was necessary because of the need to reduce zation of agriculture.
ADMARC’s cost of operations. From a develop- In the interviews with private traders, a fre-
ment point of view, this is an incomplete set of quent complaint was the lack of capital for crop
standards by which to evaluate markets, as it is purchases and equipment. The shortage of credit
possible that a low volume market is in an area is a problem that pervades many areas of
that is developing its potential to produce cash Malawi’s agricultural economy. For example,
crops. Therefore, in addition to the volume credit shortages were identified as the chief
criterion, it is necessary to consider whether the constraint to increased fertilizer usage in the
market is within the catchment area of another smallholder sector (Christiansen et al., 1987).
market and what potential there is for meeting The problem of inadequate supplies of credit
 AGRICULTURAL TRADING IN MALAWI 737

faced by Malawi is a problem shared by many transition from a state dominated system to one
developing countries. Given the widespread lack in which markets perform these functions is not
of capital, consideration should be given to easy. There is a considerable need for training for
providing a temporary facility for private traders. those involved in the privatization program. This
Such a facility can be justified on the grounds training, especially of government officials,
that there are imperfections in Malawi’s credit should not be viewed simply as a lesson in free
markets and that the start-up costs for a private market economics. Instead, it must be a realistic
trader can be high. assessment of the advantages and disadvantages
A final, but critical, point that emerges from of a market-oriented system in a particular set of
the early experience with privatization in Malawi circumstances. An opportunity must be made
concerns the government’s attempts to regulate available to participants to express reservations
and control trading activity. It must be remem- about the operation of the program.
bered that the government’s primary considera- Second, the planning stage of the privatization
tion with respect to crop trading has been food program is critical to its success in the short and
security, a concern that is heightened by Mala- medium term. It was in this area that Malawi’s
wi’s insecure external transport routes. The privatization effort suffered its greatest short-
transition from a system in which the markets coming. The weaknesses in the planning stages
were defined and operated by the government are especially unfortunate as they could have
parastatal to one in which the government has been prevented by allowing more time for de-
little effective control is difficult to make, despite signing the program. More generally. the plan-
the best assurances of donors. In Malawi, the ning horizon of many of the loan conditions
government tried to control trade in some areas, imposed by donors tends to be short term and is
e.g., stipulating that private traders purchase not adequate to achieve necessary development
only crops within the confines of ADMARC goals.
markets between certain hours. These measures Third, in the case of privatized crop trading, a
proved unenforceable. At the same time, there provision must be made for insuring that small-
were some areas of trader activity that should holders have access to an effective buyer and
have been more forcefully regulated, e.g., seller of last resort. Not only is this critical to
licenses, report filing. and monitoring the accu- insuring food security. but it plays an important
racy of scales. These lessons, obviously, are ones development function as well.
that come with experience. They do suggest, Fourth, the regulation and monitoring func-
however, the need for training government tions of the privatization program must be clearly
officials on the operation and regulation of laid out in advance. Not only does this help to
markets and incentives. The most useful way to insure the smooth operation of the program, but,
proceed is likely to be with a series of seminars perhaps more importantly, it provides the gov-
and/or workshops on markets, incentives, and ernment with a sense of security about the
the privatization experience of other countries. transition and the outcome. In many privatiza-
tion programs, especially one as cntical as crop
6. CONCLUSIONS purchasing. the government has a political and
economic stake in its success. Further, the
It is clear that ADMARC’s role in the agricul- government has a legitimate role in supervision
tural sector is evolving. At one time it may have and regulation of markets. If the government is
been true that ADMARC’s extensive involve- able to effectively monitor the program and
ment in crop trading was necessary because the regulate potential abuses, it will be more likely to
private sector was not sufficiently well developed accept and retain the program even after the time
to manage the task. A strong case can now be when donors’ influence wanes.
made, based on the early experience of privatiz- In conclusion, privatization of crop trading in
ing crop trading, that the private sector can Malawi appears to have been successful. Despite
perform most of the crop purchasing activities unusual circumstances and some problems with
previously conducted by ADMARC. It is neces- implementation, the program works and pro-
sary, however, that both donors and govern- vides valuable lessons for other attempts at
ments be mindful of certain caveats. First, the privatization.

NOTES

1. Since 1980, the World Bank has made three 2. This statement was reported in The Malawi News
structural adjustment loans and one structural adjust- of March 12, 1971, as part of the Parliamentary
ment supplemental loan. discussion of the bill to create ADMARC.
738 WORLD DEVELOPMENT

3. In the first years after its creation, ADMARC 9. In response to the World Bank report, the
faced competition from private traders, however, this government’ sponsored a study to identify’ areas of
private trading activity waned as ADMARC increased weakness in ADMARC and develop a plan for reform.
its. geographical coverage. This extended coverage The report, unfortunately, was not available to the
occurred partly at the urging of donors who wanted to present authors. The results of the study. however, are
insure that the farmers participating in the integrated said to be similar to those proposed in the World Bank
rural development projects had access to markets for study.
their output. Although private trading activity never
disappeared entirely, throughout the later half of the 10. Throughout the discussions on the privatization
1970s and early 1980s it was insignificant compared to scheme, donors referred to the notion of regularizing
the scale of ADMARC’s operations. trade, since it was never illegal for private individuals to
trade in these crops.
4. In Malawi, the criterion for distinguishing be-
tween estates and smallholders is land tenure arrange- 11. This amounted to 2@25% of the total markets,
ment rather than size. A smallholder is anyone farming which accounted for 8-9X of ADMARC’s total pur-
land under customary tenure and an estate is land held chases. For a more complete discussion of the market
under freehold or leasehold. ADMARC is allowed to closings, see Lele (1988).
deal only with those farming customary land.
12. This requirement was later abandoned as being
5. The core of that strategy was a rapid expansion unrealistic.
of agricultural exports (primarily tobacco) produced
mainly on estates. Although the development strategy 13. An interministerial committee with representa-
was ostensibly based on increases in large-scale and tives from the Ministry of Economic Planning and
smallholder agricultural production, in reality the Development, the Ministry of Agriculture. the Ministry
design of the strategy precluded the smallholder of Finance, the Department of Statutory Bodies, the
subsector from recei&g- significant benefits from Ministry of Trade and Industry and ADMARC was
erowth. Between 1972 and 1979. the value of estate responsible for drafting the guidelines that eventually
&oduction of tobacco, tea and sugar increased at an became Agricultural Act No. 11 of 19S7.
average annual rate of 16.1%. 6.7%. and 18.0%, Prior to January 1987, the Ministry of Economic
respectively. Over the same period, the value of Planning and Development and the Muustry of Finance
smallholder marketed production of tobacco, ground- were the main coordinators of the liberalization initia-
nuts, cotton, rice, and maize changed at an annual rate tive. In January, there were several high level manage-
of 1.4%. -6.6%. 0.4%, 2.2%. and 3.1%. respectively. ment changes in ADMARC and the Ministry of
For a more detailed account of the role that ADMARC Agriculture. These positions were filled by people who
played in Malawi’s development strategy see Kydd and were pro-privatization and hence, the major responsi-
Christiansen (1982). Christiansen (1985), and Chris- bility for reform was shifted to the IMinistry of
tiansen and Kydd (1987). Agriculture.

6. The causes of Malawi’s economic difficulties are 14. “The licenses are valid from the time of purchase
beyond the scope of this paper, but can be said to to the following March 31 and are subject to the
include the weak financial condition of most of the following conditions:
country’s estates. A detailed explanation of the crisis 1) That in respect of any smallholder agricultural
that began in the late 1970s can be found in Christian- produce, the price payable to the licensee shall not
sen and Kydd (1987). be below the price specified in respect of that
produce in the Third Schedule which lists the crops
7. The sources of inefficiency in ADMARC are a that are in the category of smallholder agricultural
point that deserves careful examination as it can be produce;
argued that a part of this inefficiency has been due to 2) That the licensee shall buy the agricultural
donors’ restrictions on ADMARC. As this point is not produce by approved instruments of weights or
germane to the present discussion, it is not pursued measures made available at his own expense and
here, however, a more detailed examination of the shall ensure that such instruments are at all times
issue can be found in Lele and Christiansen (1988). properly assize;
3) That the licensee shall at all reasonable times
8. ADMARC borrowed from commercial banks at allow duly authorized officers free access to exam-
high interest rates. A consultant to ADMARC noted ine the instruments of weights and measures used by
that the corporation is now the largest borrower in the him;
country with KS5 million currently outstanding (as of 4) That the licensee shall not export any crop
early 1988) at an interest rate of 18%. In addition, produce bought by him except upon an -export
ADMARC was unable to repay funds owed to the license issued to him under the Control of Goods
smallholder fertilizer revolving fund. This limited the Act or any other written law;
ability of the revolving fund to purchase fertilizer for 5) That the licensee shall within fourteen days after
the subsequent season. See Christiansen er al. (1987). the end of every month of the period of the license,
and Christiansen and Southworth (1988). submit returns to the licensing officer specifying the
 AGRICULTURAL TRADING IN MALAWI 739

type of produce. and the quantity thereof he has ADMARC to purchase maize in the Northern region
bought during that month and the amount of money and move it to the Central region for storage. Later in
paid in respect therefore; and the year, the grain is moved back to the Northern
6) That the licensee shall comply with any general region for distribution. Recently. funding \\as obtained
or specific instructions issued to him by the licensing to build a 60.000 ton silo in the Northern region that
officer. should eliminate much of the need for this redundant
Trading without a valid license issued under these movement of grain.
regulations. engaging in the buying of agricultural
produce from smallholder producers, not paying in 22. At present there are plans to privatize fertilizer
cash or paying a price below the price prescribed in the distribution. The proposed system tvould \\ork in the
Fourth Schedule. or willfully obstructing a duly autho- following way. ADMARC would pay the c.i.f. cost of
rized officer in the performance of his duties shall be fertilizer and transport it to three major depots in the
considered a violation of the act and is punishable by a North. South and Central regions. Private traders
fine of Kl.500 and imprisonment for up to six months” would buy at these depots at wholesale. rebag the
(Agricultural Act No. II of 1987). fertilizer into more manageable quantities (such as
IO kg or 20 kg rather than 50 kg) and sell it to retail
15. Although the government expected private distributors. This system has not yet been adopted and
traders to trade in a wide range of crops. the majority ADhlARC still is acting as the primary distributor of
of trade seems to have occurred in maize. This, pre- fertilizer.
sumably. is due to the unusual market conditions that In an effort to facilitate the distribution of fertilizer
allowed higher profit margins to be made on maize. and avoid shortages. the EEC has provided a buffer
Given the volume of trade in maize in the 1986-87 stock of fertilizer cquivalcnt to one !ear’s supply
market year and its importance to national food (70.000 tons) for smallholders. This \vas made available
security. this paper concentrates on the private trade in because of fears that either Zimbabive or South Africa
maize. would close its borders, thereby cutting off supplies of
fertilizer. The EEC also is supplying three uarrhouses.
16. The 1986-87 crop would be harvested and pur- one in each region. with fertilizer packaging and
chased from mid-April to June 1987. blending equipment.

17. For instance. as of late October 1987. the Blan- 23. These are the only crops in which pri\ ate traders
tyre Agricultural Development District had issued have shown appreciable interest. Few pri:-ate traders
approximately I20 licenses. but officials estimated that are exporting groundnuts because AD.\lARC is offer-
as many as I20 additional traders were operating ing a price above export parity and because groundnuts
without licenses. to be exported must be inspected bx XDMARC
officials. Private traders are not allowed to trade cotton
IS. Mzuzu is in the Northern region which has the or tobacco.
fewest refugees. while Blantyre (Southern region) and
Lilongwe (Central region) are near high concentrations 24. The problem of insufficient workins capital is
of refugees. unlikely to be solved by the country’s commercial
banks. Many traders reported that applications to
19. In addition to these violations, government offi- commercial banks to finance trading activities and
cials expressed concern over two alleged problems: the storage facilities were turned down on the basis of
failure of some traders to adhere to ADMARC’s insufficient collateral. Consequently. the lack of work-
minimum price guidelines. and the use of inaccurate ing capital has served as a constraint on the amount of
scales. It is difficult to ascertain whether private traders produce bought and economies of scale in transport.
are paying the minimum ADMARC price in rural Most traders said that more capital would allow more
areas. Similarly, there has been virtually no monitor- maize to be bought at one time and larger trucks to be
ing to determine whether traders’ scales are correctly rented to transport the maize to market.
calibrated.
25. One consequence of the concern about inade-
20. Malawi is divided into three administrative areas. quate food supplies is that many smallholders have
the Southern, Central and Northern regions. The been permitted to sell directly to ADMARC’s regional
Southern and Central regions are the most populous, markets rather than to the traders or AD.Ll;\RC’s bush
with approximately 87% of population. The former markets. Unlicensed trading by smallholders is. of
contains the commercial center (Blantyre), while the course, contrary to scheme’s intent. Nonetheless, many
political capital (Lilongwe) is located in the Central farmers have been able to rent a truck, transport their
region. own maize, and capture the profits that would have
gone to a trader. ADMARC was so concerned about its
21. A factor that contributes to the high cost of low maize stocks that it purchased the maize from
purchasing agricultural commodities ir. the Northern smallholders. which effectively undermined part of the
region is the dearth of storage facilities. (The Northern privatization program.
region has storage facilities for only 12.100 tons as
compared to 210,180 tons in the Central region and 26. As an aside. it is worth noting that the reaction of
145,200 in the Southern region.) This has required the country’s largest grain processor. the Grain and
740 W’ORLD DEVELOPblENT

Milling Company (GRXMIL). to privatization has 27. Similarly. the problems experienced by GRX-
been mixed. On the one hand. companv officials MIL. which is wholly-owned by ADMARC. are ob-
believe GRAMIL will be able to operate efficiently in viously related to the shortcomings of the planning
the private markets. On the other hand. officials argue process. GRAMIL was an established part of the
that the company has been hurt in two ways: it was not marketing chain with. at least. an implicit understand-
given enough notice of privatization to contract with ing that ADlMARC would supply maize for GRAMIL.
suppliers other than ADMARC: and that at one point It is clear that there was insufficient time for the firm to
producer prices rose to a level higher than official prepare for the significant change in its input supply
consumer prices. arrangements.
Traditionally, GRAMIL bought most of its maize
from ADMARC. In 1987-88. however, GRAMIL was 28. The easiest way to ensure that the reports are filed
unable to procure enough maize from ADMARC to is to issue a license for one year, but require that it be
keep its mills running. When the supply shortage revalidated on the dates that reports are due. In this
became apparent, GRAMIL began to buy maize from way, the police, who routinely inspect road traffic to
private traders and directly from smallholders. In a ensure that driver and vehicle licenses are current.
further attempt to obtain supplies, GRAMIL in- could also check to see that a trader has a valid trading
structed its agents to offer the consumer price for maize permit.
instead of the producer price, thereby adding to
upward pressure on prices. In preparation for future
years, GRAMIL has contracted with estates and
smallholders to grow maize for the next season.

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