Chapter 4


Box 4.5: Effects of maize price policies in Zambia

The maize subsidy issue provides an excellent example of the macro-micro linkages which need to be analysed
to gain a fuller understanding of the impact of adjustment policies on the agricultural sector. In the Zambian
case, several policy problems connect at the point of the maize subsidy, and it has become a Gordian knot, the
cutting of which could relieve multiple constraints on the progress of the economy.

The maize subsidy is at the root of massive inefficiency within the food system. One major distortion is the
bias it creates against on-farm storage and localised trade (i.e. localised storage and circulation). This certainly
leads to a considerable amount of unnecessary haulage (over poor roads with scarce fuel and even more scarce
vehicles).

The haulage distortion works as follows. Small farmers can gain access to the subsidy only on that proportion
of their maize harvest which is sold into a marketing chain which is able to collect the subsidy. In the past, this
has meant selling to a parastatal or co-operative agency, but, with the liberalisation of the past two years [this
refers to the period prior to 1989], it is now only necessary to sell into a chain of intermediaries (public or
private) which is eventually going to deliver to a large-scale milling operation, because this is the point at
which the majority of the subsidy is applied. Some milled flour is then transported back into rural centres,
where it is sold to the official retail price (thereby attracting the additional component of the subsidy, namely,
the cost of back-haulage to the rural centres, for which co-operatives are recompensed directly by the
government). Some flour is then marketed into villages at a mark-up on the official price, which, over
distances which take in substantial populations, is less than the cost of locally stored and milled flour.
Although it is cheaper to the consumer because of the subsidy element, nevertheless, taking into account the
full resource costs, this system is socially and economically inefficient.

Another distortion is excessive production of maize as against other grains and tubers, which may be better
adapted to specific agro-climatic conditions. That this may be an important source of inefficiency in the
agricultural sector is suggested by the fact that, in the recent past, rising subsidies have coincided with the rapid
advance of maize production in certain areas...where maize previously had a minor role. In places where maize
has recently been a 'colonising crop', it has normally been cultivated with the use of chemical fertilizer, which
has received an explicit subsidy and a plethora of implicit subsidies. As the competing grains and tubers (i.e.
millet, sorghum, cassava) are generally cultivated with little or no chemical fertilizer, it is likely that a sizeable
part of the 'excessive maize' distortion is represented by excessive use of fertilizer.

What of the urban beneficiaries of the subsidy? That the benefits are substantial is demonstrated by the potency
of political action in defence of the subsidy, notably the riots which, in December 1986, caused the government
to backtrack on a fairly mild measure, designed merely to contain the subsidy bill, not to reduce it. The
government's inability to make this measure stick cost it dearly. The additional bank credit required to keep the
marketing system supplying adequate quantities at 'politically tolerable' consumer prices violated the credit
ceiling agreed with the IMF.

There is now broad agreement that rapid phasing out of the subsidy would cause widespread distress in urban
areas, jeopardising the nutrition of families in the informal sector and in the lower paid part of the formal
sector.

In summary, the food subsidy question is an extreme case of the classic policy dilemma. Substantial progress
in reducing the subsidy may induce the gains indicated, i.e., enhance fiscal and monetary control, the
possibility of some increases in other categories of government spending, and potentially large gains in the
efficiency of the food system. In the longer run, the efficiency of the food system is probably the most
important of these considerations because, if the food system is able to make progress, real food prices will
fall, and cheap unsubsidised food, available across the country-side as well as in the towns, can provide a more
promising and stable framework within which Zambia's nutrition problems can be tackled.

Source: Kydd, J., Zambia in the 1980s, The Political Economy ofAdjustment, in Commander, S. (ed),
 Structural Adjustment and Agriculture, ODI, London 1989.