Reckonings: A Real Nut Case
By Paul Krugman, The New York Times April 19 2000
Below are both Krugman’s original op-ed from the Times , and Naiman’s response. The excerpt from the Times is posted here for purposes of commentary and criticism.
When Seattle Man went to Washington, his activities were coordinated in large part by a Web site, http://www.a16.org. Browsing the site, I was struck by the critique of the World Bank, written by Robert Naiman — the activist who threw a pie in the face of Michel Camdessus, the former International Monetary Fund chief, a few months ago. Mr. Naiman’s favorite — indeed only — example of how bank-imposed policies inflict economic damage is the way the bank “destroyed Mozambique’s cashew nut processing industry, by forcing Mozambique to remove export tariffs on raw cashew nuts.”
Cashew nuts? It turns out that this is one of those stories that anti-globalists tell over and over, part of the canon that supposedly proves the righteousness of their cause. Such tales rarely get fact-checked; nobody asks whether the moral of the story is really as clear-cut as it seems. So let’s look at the truth behind this particular legend.
Mozambique’s cashews are grown overwhelmingly by small farmers. The great majority of the country’s 19 million people live on the land; at least a quarter of them grow cashews. Until 1995 farmers were forced to sell those nuts to a state monopoly at artificially low prices; the state company then processed the nuts, employing about 10,000 workers. In 1995 the processing plants were privatized, bought mainly by foreigners, and the state monopoly was eliminated. But it was replaced by a stiff export tax levied on raw, but not processed, nuts. This in effect prevented the farmers from selling their product on the world market, and forced them to continue selling cheaply to domestic processers.
The World Bank demanded, as a condition for new loans, that this export tax be reduced.
The reason for this demand is familiar to anyone who knows something about the political economy of the third world. In poor countries organized urban workers (and factory owners) typically have far more political clout than much more numerous but illiterate and unorganized farmers; the result is an often extreme policy bias against the countryside. Governments frequently tax the rural poor to subsidize urban industries — industries whose workers are very badly paid by Western standards, but nonetheless receive much higher wages than most of their compatriots. This case — in which peasants were forced to sell their crops cheaply in order to protect the jobs of 10,000 processing workers — fits right into the pattern.
You might try to justify the cashew tax on the grounds that it promotes industrial development, and will eventually make everyone better off. (Did someone say “trickle-down economics”?) But — again characteristically in such cases — while processed nuts do command higher prices than raw nuts, Mozambique’s nut-processing industry requires imported machinery and other inputs, and the tax on exports discourages raw-nut production. On balance the export tax almost certainly subtracts from, rather than adds to, the country’s miserably low income.
The World Bank is evil, then, because it tried to end a policy that not only made Mozambique as a whole poorer, but directly hurt millions of impoverished small farmers. Its high-minded critics want to keep the prices those farmers receive low, on behalf of 10,000 politically influential workers and a handful of foreign factory owners. No doubt the faithful will say it ain’t so, that farmers aren’t hurt by the export tax because the burden falls on a mysteriously invisible class of rich middlemen. But why should so morally dubious a case — one in which the bank was defending the interests not of multinational corporations but of starving peasants — be a touchstone for the opponents of globalization?
The answer, I believe, is that anti-globalists, though they are quite sure that international trade hurts poor countries, have an annoying problem: Most people in those countries want to export more, not less. So the anti-globalists trumpet one of the few cases in which a third-world group actually advocates export restrictions. Somehow nobody notices that this group actually represents a small, relatively privileged minority, and that its demands would directly harm a much larger group of even poorer people. And thus Seattle Man maintains his comfortable sense of moral superiority.
Full, unedited text of Robert Naiman’s original letter to the New York Times (the Times published a shortened version ):
Krugman’s Sloppy Economics
April 20, 2000
Paul Krugman (“A Real Nut Case”) is right about one thing: the destruction of Mozambique’s cashew nut processing industry by the World Bank and the International Monetary Fund is my favorite example showing why the destructive power of these institutions must be dramatically reduced. It illustrates that the IMF and the Bank exercise colonial power over developing countries; that, like Krugman, they are sloppy economists; that dogmatic trade liberalization also hurts developing countries; and that the “Heavily Indebted Poor Countries Initiative” of the IMF and the World Bank is unworthy of U.S. funding since it preserves the destructive power of the IMF and the Bank over poor countries like Mozambique.
On the paramount question of democracy, Krugman doesn’t contest that the IMFand the World Bank imposed their policies on Mozambique– contrary to their claims about “negotiation” and “dialogue.”
As to whether the World Bank’s diktat was good economic policy for Mozambique, it is Krugman who needs to do his homework. Krugman ignores the 1997 Deloitte & Touche study commissioned by the World Bank, which found that Mozambique’s peasants did not gain anything from liberalized exports of raw cashews. This single fact demolishes Krugman’s entire defense of the Bank’s policy. The study also found that Indian subsidies to its cashew nut processing industry made competition unfair, and that Mozambique earns an extra $130 per ton processing its own cashews, “sufficient reason to support the processing industry against competition from India.”
Mr. Krugman’s arrogance in defending such errors on the basis of abstract principles, without knowledge of crucial facts, illustrates why it is not only immoral, but also unwise, to allow foreign economists to make such crucial decisions for developing countries.
Center for Economic and Policy Research
Robert Naiman’s letter as edited and printed by the The New York Times , April 26, 2000:
World Bank’s Power
April 26, 2000
To the Editor:
Paul Krugman (column, April 19) is right that World Bank policy with respect to Mozambique’s cashew nut processing industry is my favorite example of why the World Bank’s power must be reduced.
Mr. Krugman suggests that the World Bank’s policy was in the interest of Mozambican peasants, ignoring a 1997 study commissioned by the bank that found that Mozambican peasants did not gain anything from the liberalized exports of raw cashews. This fact undermines Mr. Krugman’s argument.
It is not only immoral but also unwise to allow the World Bank to make crucial decisions for developing countries.
Washington, April 20, 2000
The writer is a senior policy analyst, Center for Economic and Policy Research.