Abstract:
The cashew industry has a long history in Mozambique and was once the mainstay of this African country's economy. The industry, which was born in the early 20th century, was cultivated during the period of Portuguese colonization. During this time, Mozambique produced half of the world's raw (unprocessed) cashew nuts and export earnings from processed cashews exceeded $30 million per year. However, the industry suffered a precipitous decline after its zenith in the 1960s and early 1970s. Following independence in 1975 and a civil war from 1976-1992, the Mozambican economy and cashew industry laid in ruins. President Joaquim Chissano relied on the World Bank and International Monetary Fund for financial support in rebuilding Mozambique, which was one of the poorest, most indebted countries in the world. In 1995, the World Bank required the Mozambican government to liberalize its raw cashew nut export market in order to qualify for additional loan assistance. The liberalization policy involved privatizing cashew processing factories and subsequently gradually eliminating the export tax on raw cashew nuts. Based on economic theory, the World Bank expected that eliminating the export tax would increase the price the farmers received for their raw cashews and alleviate poverty. However, the industrialists who had who had purchased the processing factories under a regime of protection, were unable to afford raw cashew nuts at the higher prices that prevailed following the tax reduction. When World Bank president James Wolfensohn visited Mozambique in 1997, he was faced with fierce opposition from the Mozambican processing industry. He was forced to determine whether the World Bank should enforce the agreement that additional loan assistance was dependent on Mozambique fully liberalizing its cashew market or whether it should change course and allow the government full responsibility in determining its own cashew policy.
Learning Objective:
The case is designed for use in discussions of international development issues, including the confluence of foreign and domestic policy, trade and markets.
