Chapter 4: Upgrading through processing

Processing of cashew kernels for domestic and international consumption has only just begun to emerge in Senegal over the last two years. Neighbouring Guinea Bissau has already begun to export kernels in bulk to Portugal since 2002. The literature does not provide a consensus as to how Senegal can (or should) pursue this avenue of development. This chapter reviews this literature (Section 4.1) and then discusses how the Casamance fits into this debate (Section 4.2).

The debate on processing

For sub-Saharan Africa the theoretical debate focuses largely on examples taken from Mozambique and Tanzania , the former once being the world’s number one producer of raw nuts and the second most important processor of kernels. There is none on Senegal , which is a newcomer to the industry and not as important to the worldwide cashew market in relative terms. The recent global value chain debate has been greatly concerned with the possibilities of local enterprises to move up the chain and undertake activities that add more value to the product. In the GVC approach this has been called “functional upgrading” (Humphrey and Schmitz, 2001). Moving from the production of raw cashew nuts to processing would be an example of functional upgrading. However, this is not the term that has been used in the debate on processing cashew. In fact, much of this literature lies outside of the theoretical framework provided by value chain analysis. This section reviews this debate on processing cashew nuts as a way to upgrade vertically along the value chain. What does the literature say on how the Casamance can upgrade in an industry that has been witness to so many disappointments in Africa ?

The work of Cramer (1999), Martin (1997) and Mayer (1997) provide a clear framework from which to discuss the possibilities for Senegal to advance into cashew nut processing. These theorists can be broadly divided into optimists, who see commodity processing as a real opportunity for economic development and capturing higher value added, and pessimists who based on the structure of international markets and past experiences with failed processing industries, discourage vertical upgrading. Best represented by Mayer (1997) within UNCTAD, pessimists point to dismal failures by large parastatal processing companies across the continent, not just in cashew nut processing but in other foodstuffs as well. They point out that few developing countries have been able to diversify their export structure vertically successfully. The exceptions were in Asia , but those countries diversified vertically not in food processing but in textiles and garments. They argue that for successful vertical diversification, countries need to be competitive, enjoy unrestricted market access, good technical infrastructure, human capital and sound macroeconomic policy. They claim that in most sub-Saharan African countries these prerequisites are not satisfied. Mayer points out that industrial processing of primary commodities is both land- and skill-intensive, and both these endowments are lacking in much of sub-Saharan Africa . Further, the technological and infrastructure demands of a processing industry (e.g. roads, power, capital inputs) ascribe an urban nature that removes the industry from rural heartlands, impeding supply, communication and coordination between producers and processors. This has been cited as one reason for the inefficiencies of supply and variability in its quality that plague African processors (see Cramer, 1999). One could also note that all of the major processing countries – India , Vietnam and Brazil – enjoy large domestic or nearby markets. India markets 40% of its kernels and other products such as cashew nut shell liquid (CNSL) domestically, and African processors have tailored their production mostly for export. Therefore, according to these arguments, rather than diversifying vertically by processing cashew nuts, countries like Senegal should expand horizontally to foster other commodities corresponding to their natural endowments and export raw.

Box 4 : A Failure of Industrial Processing in Guinea Bissau

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This is the failed GETA factory in Bissau , which used high-end Italian machinery and closed down shortly after opening. The machines broke too many nuts, and operating below capacity, the machinery made the factory uncompetitive. In 1998 the factory was damaged by the civil war as it was unhappily located along a front line of combat, and no efforts have been made since to restore it.

The evidence supplied by the few attempts in West Africa to implement large processing factories that failed due to constraints outlined above lends limited support credence to this pessimism, but does not justify it on a broader scale. Typical examples cited include the GETA factory in Guinea Bissau, or a similar attempt in Senegal to establish a large-scale processing factory in the Fatick region using high-end, Italian machinery able to process 2,500 tonnes of kernels yearly for export. In the latter case, processors complained of inadequate supply of nuts which meant the factory operated mostly below capacity. In both cases the expensive Italian-designed machinery, which has since been proven obsolete by manual technology applied in India , caused high breakage of kernels, which are not easily marketed abroad. More importantly, the factories were poorly planned to context and suffered from a lack of administrative support from their governments. Operating at below capacity, these factories would have provided negative value added for the economy (Djassi, 2002; Sarr, 2002). For Senegal , this situation would be exacerbated by the fact that the market for raw nuts is completely liberalised, and Indian exporters would be able to compete with the factories in the absence of protective export tariffs on raw nuts, driving up processing costs.

However, the optimists’ arguments in favour of cashew producers pursuing strategies to diversify vertically along the value chain offset many of the pessimists’ conjectures. Further, the pessimists descriptions of political and macroeconomic instability are not as applicable to the Senegalese context. First, the optimists’ primary argument is that one wants to capture higher value added locally (Cramer, 1999). As with other commodities such as cocoa and coffee, there is a gulf in value between processed kernels and raw nuts on international markets. The international FOB price for processed cashew typically exceeds the price for raw nuts several times over. Indeed, with international prices for raw nuts falling by nearly 50% since their 2000 peak and with demand for processed nuts increasing in the U.S. and European markets, that gulf has widened. The structure of the market is such that African producers are at the mercy of Indian primary processing industry, the demands of which contribute to fluctuations in prices at the local level. In 1999-2000, Indian demand for African nuts hit a peak owing to a bad cashew harvest in India . In subsequent years, Indian industry has been increasingly more reliant on booming local orchards, pushing down demand for nuts on the international market (A.I.M, 2003). Therefore, those in favour of vertically upgrading the African cashew sector point to relatively higher or at least stable farmgate prices for farmers with the presence of a domestic processing industry that should shield them from the whims of Indian demand. In the end, much depends on the competence of that industry and if processors are able to offer farmers prices exceeding or matching what Indian exporters can offer.

Second, processing creates employment and wages, and if processing is geared for export, it brings much-needed foreign exchange. In disputing pessimists’ claims, Cramer (1999) points out that cashew processing is not nearly as skill intensive as other commodity processing. As India has shown, the more successful processors employ manual processing techniques that produce higher quality nut than more capital- and skill-intensive processing techniques. One of the many different and often contrasting internal reasons given by analysts for the non-competitiveness of African processors in Mozambique and Tanzania – and by extension in Guinea Bissau and Senegal – was their employment of more capital-intensive machinery, which produced lower-grade nuts at a higher price than India’s manual shellers are able to offer (Cramer, 1999; McMillan and Rodrik, 2002; Sijaona, 2002). This was in part a reflection of what policymakers viewed as these countries’ low labour endowments, but others readily acknowledge that this might have been poor government planning during the era of import substitution. On a more sobering note, Indian processors also have less stringent labour-health standards than Mozambique and Tanzania ‘s formerly government-owned industries: manual cashew nut shelling is caustic and can cause lesions, rashes and dermatitis. However, one could argue this constraint is less inhibitive when looking at the manual shellers in Senegal ‘s emerging small-scale processing industry who are able to cope with this factor.

Third, For Cramer, who uses Mozambique ‘s cashew nut industry as a case study, African cashew processors face less external constraints in important northern markets than other exporters of processed commodities. One reason is that as there is no significant northern-based cultivation or primary processing, the north is less likely to impose protectionist barriers. Another is the reality that African commodity producers already enjoy restriction-free access to U.S. (AGOA) and E.U. (MFN status, etc.) markets. The only major international constraint is conforming to fairly accessible international quality specifications and achieving international price competitiveness with India for white kernels. Indeed, processors in Guinea Bissau have already taken advantage of these protocols and are exporting to Portugal through their own distribution networks.

In analysing commodity chains, Gibbon (2001) points out that primary processing, i.e. producing white kernels for bulk export, has been much more prevalent in developing countries than secondary processing owing to importing countries’ marketing restrictions on the latter. George Varguez complains that northern-based distributors like RJRNabiscoT discourage Indian primary processors from secondary processing, claiming the “Made in India ” logo is a liability.

Cautious proponents of primary processing such as Martin (1997) and Cramer (1999) agree that certain prerequisites do need to be in place before a country can pursue the development of a processing industry. These prerequisites include active public-private partnerships in the form of research and development, farmer organisation and incentives, as well as skills and awareness extension. Others include sound macroeconomic and exchange-rate policies favouring exporters. Policy should be planned to ensure strong forward and backward linkages between producers and processors. A key element is the provision of credit to processors to ensure procurement of raw nuts from producers. One of the most inhibiting factors in failed African processing plants has been the variability of quality and quantity of supply from producers. With stronger linkages in place between producers and processors these problems can be alleviated. Where there is effective public-private coordination, such as in Vietnam , Brazil and India , successful processing industries have indeed emerged. An example for sub-Saharan Africa is Tanzania , which has started to reinvest in its moribund processing industry after nearly a decade of developing its cashew sector horizontally. Through public-private partnerships, raw nut production there has soared to levels not seen since the 1970s, and two of its long-idling processing factories have been privatised and refurbished. In other cases, either a well-organised industry or intervention by NGOs or international organisations can fulfil certain public roles in these otherwise public-private partnerships: in Senegal ‘s case, it is Enterprise Works, a USAID-funded NGO, that is fostering the industry. By now Asia’s second largest exporter of processed nuts after India , the Vietnamese government and industry actively promoted in-country processing in favour of traditionally exporting raw nuts to India . This the government achieves through aggressive protectionism (a 20% export tax on raw nuts), growing domestic demand in one of Asia’s faster-growing economies, and a huge market in nearby China . Not only have farmgate prices in Vietnam stabilised, the government is actively pursuing diversification in secondary processing by promoting non-traditional by-products for domestic and international consumption such as cakes, cashew butter, CNSL and jams. The development of new consumer products can sometimes add value to lower grade cashew: broken or inferior-grade nuts processed into butter or cakes recover much of that potential value.

Finally, it was the pessimists’ ideology of preferring raw commodity exports at the expense of vertical diversification that led to the well-known collapse in Mozambique ‘s processing industry in 2000. Once the world’s largest producer and processor of cashew nuts, Mozambique ‘s cultivation and processing industry went into a steady decline. In an effort to revitalise the processing industry by attracting private investment, it began privatising old, inefficient state processing factories based on capital-intensive, mechanical shelling technology in the early 1990s. As this was taking place, the World Bank advised Mozambique to liberalise its cashew industry at the expense of its recently privatised processing enterprises, which were exploring ways to convert their technology to manual processing. Based on textbook economics, the Bank’s prescriptions involved lowering export tariffs imposed on traders and exporters of raw nuts and allowing them full access to producers and local sellers. The expected outcome was a net benefit to producers who could get a higher share of the export price. Instead, farmers were exposed to the slump in raw nut prices as they were forced to sell to Indian exporters who are paying less for Mozambican nuts than ever before. On top of this, MacMillan and Rodrik (2002) have found that more than 11,000 urban wage earners lost their jobs as a result of the rapid closure of the processing factories, which had been at the heart of the second largest source of foreign currency revenue to the economy. Contrary to the World Bank’s expectations, international traders have not competed with each other to pay Mozambican farmers more than what local processors had been offering. Any increase in farmgate prices in Mozambique as a result of reducing the export levy was offset by the collapse in raw nut prices on the international market and the social cost of urban unemployment. Recently the Mozambican government has angrily re-instituted the ban on exports of raw nuts in the hope of reactivating the idle processing factories (MacMillan and Rodrik, 2002; A.I.M, 2003). There is also private investment seeping in, and even Enterprise Works plans to open a comprehensive processing programme there.

Box 5 : Enterprise Works develops new processing technology locally

Above: Enterprise Works technicians work with local smiths to develop machinery for semi-industrial processing in Ziguinchor

Below: training new processors in Ziguinchor (left) and in Guinea Bissau (right)

Processing based on manual shelling technology was overlooked by African governments in their bids to industrialise. Now, many former processing countries like Tanzania and Mozambique are trying to reignite their processing industries using small-scale, manual technology similar to that being introduced by Enterprise Works in the Casamance. However, in Senegal , the technology is manufactured locally, whereas in Tanzania and Mozambique investors are importing machines from India .

How the Casamance fits into the debate

The basic arguments set out by optimists such as Cramer could be used by policymakers and investors to foster the development of a successful processing industry. Empirical evidence from the research conducted for this paper supports some of Cramer’s (1999) and Martin’s (1997) cautious prescriptions: sound macroeconomic policy, relative political stability, horizontal development at the producer level, the provision of credit to processors and liberal access to lucrative northern markets within AGOA and MFN agreements. As will be shown in the following chapter, most of these are in place in Senegal to varying degrees. One notable exception is the lack of direct government support for the industry, but many of the functions normally ascribed to the public sector within these partnerships are taken up by NGOs and international organisations.

Locally-processed cashews for sale in a Ziguinchor epicerie

The empirical evidence from Senegal adds new bases for optimism that are largely overlooked by pessimists and optimists alike. The development of a processing industry need not be based on large-scale urban industry, which provides the framework upon which arguments for and against are structured. In the Casamance, the processing industry introduced and fostered by Enterprise Works is small-scale, semi-industrial and largely based in more rural areas, with close linkages between producers and processors that were absent in the traditional, urban-based processing industries of both East and West Africa. Further, the nature of this industry provides evidence that the introduction of these small-scale units fosters the horizontal development of the cashew nut sector at the producer level in terms of qualitative upgrading. The linkages that local processors in Senghalene and other units have in place with producers has already changed the way farmers are planting and harvesting their crops, introducing a sense of awareness for improved techniques such as grafting and seed selection that were largely overlooked previously. In other words, local processing of this type is stimulating farmers to improve production quantities and quality, which has a spillover effect on the market for raw nuts for export, especially since at least for the foreseeable future, the majority of nuts from the Casamance will continue to be exported raw to India even as the processing industry grows. The basis for the emergence of this industry has been the domestic Senegalese market, and evidence indicates that domestic demand is growing as the nuts are being marketed. There are efforts underway to begin exporting to small markets in other African countries and Europe . Finally, this processing industry has emerged within the context of a liberalised trading market, whereas traditional industries in Mozambique and Tanzania were (supposedly) protected by government policy discouraging exports of raw nuts via the imposition of export taxes.

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