102933 January 2016 · Number 11 Guinea-Bissau and the Cashew Economy Marek Hanusch1 Guinea-Bissau is a West African country with a The cashew sector forms the core of Guinea- population of 1.7 million. Growth has been Bissau’s economy. Data from 2010 household anemic and poverty is high. Following a long survey (ILAP II) show that cashew accounts for and brutal liberation war, Guinea-Bissau gained 26% of income (net of remittances) for female independence from Portugal in 1974. Since then, headed households and for 35% for male headed GDP per capita growth has been low, partly households. As such, cashew is the most interrupted by a brief civil war in 1998/99 and a important source of monetary income, and this is history of frequent government turnover and especially true for poor households. Although military coups. Guinea-Bissau is a fragile other crops are grown to an extent, they tend not country and the IMF estimates the country’s to be exported. Rice is another important GDP per capita could have been 65-90% higher commodity in Guinea-Bissau, largely grown on had it not been for fragility.2 In the years of 2001- a subsistence basis and increasingly imported. 2009, a period of heightened political instability, Cashew is traded for rice, with considerable GDP per capita growth averaged 0.5% per reliance on a barter system. The cashew sector is annum. During a relative period of calm, the thus at the core of both economic performance economy picked up, growing 2.3% in 2010 and and poverty reduction. This note lays out some 7.1% in 2011, only to be plunged into recession in of the ways in which cashew matters for the 2012 as the army toppled the government yet Bissau-Guinean economy. again. The economy has been slow to recover since—partly as a consequence of the suspension Cashew—production, prices, and the economy of donor programs after the coup. Yet the restoration to democracy in mid-2014 has somewhat brightened the prospects for growth Raw cashew nuts are Guinea-Bissau’s main again. The low growth, marked by a stop-and-go export. Cashew exports have been increasing over the past decade, especially when character due to frequent political tensions has accounting for smuggling. Harvesting cashew is translated into high poverty. Poverty at the the most dominant economic activity among national poverty line of US$ 2 per day stands at Bissau-Guinean households. A limited amount 70 percent. Inequality is high too, with a Gini of the harvested cashew is processed, mostly for coefficient of 0.49. The challenge to improve the domestic consumption: the cashew apple is lives of the poor is formidable. turned into wine and the cashew nut is roasted 1This note was cleared by Seynabou Sakho, Practice Baez, Paolo Zacchia, Romao Lopes Varela, Tanya Manager (GMFDR). This research supports the Yudelman, Sona Varma, and Francisco Campos for many preparation of a Systematic Country Diagnostic for insightful comments. Excellent research assistance was Guinea-Bissau. I would like to thank Sebastien Dessus, provided by Niamh O’Sullivan. All errors are mine. 2 Philip English, Alfredo Torrez, Marina Temudo, Javier IMF, Article IV for Guinea-Bissau, July 2015. and de-shelled. Yet the vast majority of cashew exporters, mostly foreign nationals, who ship production is geared to the export of raw cashew raw cashew kernel to other countries, India most kernel. Between 2000 and 2014, official exports notably, for processing and onward sale mainly increased from about 80 thousand to about 140 to developed countries. Both traders and thousand metric tons (Figure 1). However, exporters are relatively concentrated, meaning official cashew exports are believed to be that competition is distorted to the disadvantage underreported due to smuggling. For example, of farmers. This means that most of the cashew trade data reveal that the Gambia exports cashew rents are collected by traders and exporters. 3 The nuts although it only marginally produces them. government estimates farm-gate prices at the This is suggestive of smuggling. Although beginning of each cashew season (April 17 in neighboring Senegal also grows cashew nuts, 2015), in an attempt to protect farmers from such incentives to smuggle cashew are particularly competitive pressures. These estimated prices strong in Guinea-Bissau which taxes cashew tend to lie between 40 and 60% of the exports at 11% of the government-determined international price although they are not easily reference price—while the other countries do enforced. World Bank estimates suggest that the not. Accounting for cashew likely smuggled brunt of taxes on cashew exports are borne by through the port of Banjul, Guinea-Bissau’s farmers.4 In the case of a surcharge of originally cashew exports are closer to 190 thousand metric 50CFAF/kg to finance a fund for agribusiness tons. This is close to the government estimate of development (known by its Portuguese acronym annual cashew production in the range of 200 FUNPI), actual farm-gate prices are estimated to thousand metric tons, depending on weather have fallen by 20% in response to the FUNPI tax. conditions. There is some evidence from the years 2010- Figure 1: Cashew exports from Guinea-Bissau have increased, 2014 that suggests that smuggling especially especially when accounting for likely smuggling. (thousand metric tons of exported cashew) increases when the rents captured by producers are relatively low. Figure 2 demonstrates that 200 Guinea-Bissau the difference between cashew exports from Thousands 180 The Gambia Guinea-Bissau and from the Gambia (an inverse 160 Total proxy of smuggling) is smaller when 140 international prices relative to farm-gate prices 120 (an inverse proxy for producer rents) are high— 100 in other words, smuggling is high when producer rents are low. A plausible reason is that 80 smuggling increases competition along the 60 supply chain, now also covering the Senegalese 40 or Gambian market. This in turn increases the 20 relative bargaining power of farmers, allowing 0 them to extract a higher price. It suggests that 2000 2004 2008 2012 when rents for exporters and traders are too high Source: Bissau-Guinean cashew exports: IMF; Gambian cashew exports: COMTRADE. in Guinea-Bissau, competition enters from neighboring countries, although likely illegally. Although this is bad news for the government Smuggling appears to increase in particular since smuggling means foregone revenue, it is when farmers only receive a small share of the good news for the farmers who receive higher international cashew price in Guinea-Bissau. incomes, and thus for poverty reduction. Cashew traders in Guinea-Bissau buy cashew from producers (farmers) and sell it on to 3 See also G. Porto and W. Cont, “Measuring the Impact Guinea-Bissau,” World Bank Policy Research Working of a Change in the Price of Cashew Received by Paper (2014). 4 Exporters on Farm-Gate Prices and on Poverty in Ibid. January 2016 · Number 11 · 2 Figure 2: Smuggling of cashew increases when producer increased dust particles in the air—and wind prices are low compared to international prices. (thousand metric tons (LHS), price ratio, RHS)) cause damage to blossoms. Indeed, Figure 3 demonstrates the destructive consequences of 160 Low relative rents 3 high temperatures in January and February, Thousands Less smuggling for producers 140 reducing raw cashew exports per worker. 2.5 Between 2000 and 2012, the temperature in these 120 two months alone explained 25% of the variation 2 100 in cashew exports per worker. 80 1.5 More smuggling High relative rents Figure 3: Cashew production—and thus exports—are highly 60 for producers dependent on climatic conditions. 1 (cashew exports per worker and average temperature in 40 Difference in cashew exports (Guinea-Bissau - Gambia) Celsius, natural logarithms) Int'l price : producer price (incl. FUNPI), RHS 0.5 20 5.9 Int'l price : producer price (w/o FUNPI), RHS 0 0 2010 2011 2012 2013 2014 5.8 y = -4.1x + 18.8 R² = 0.24 LN(Cashew exports peworker) Source: IMF and COMTRADE. 5.7 5.6 Including estimated smuggling, Guinea-Bissau is the second largest exporter of raw cashew 5.5 nuts, making the country an important player in the global cashew market. In 2013, only Cote 5.4 d’Ivoire exported higher volumes of raw cashew 5.3 than Guinea-Bissau. Overall, Guinea-Bissau accounts for about 20% of global raw cashew 5.2 exports, when taking into account smuggling. 3.22 3.24 3.26 3.28 3.3 LN(average temperature, January/February) 3.32 This number may in fact be substantially higher Source: World Bank Climate Change Knowledge Portal, IMF, if potential smuggling through Senegal is taken and World Bank staff calculations. into account in addition. It is important to bear in mind that exports do not equal cashew Given the country’s weight in the global production. Apart from the weight of the shells cashew market, production shocks in Guinea- that is lost during processing, part of this Bissau affect international cashew prices. So difference is also explained by the fact that many long as cashew demand is not perfectly elastic, a large cashew producers have sizeable domestic positive shock to supply will result in lower markets for cashew consumption (e.g. India’s prices and vice versa. This can be observed in exports of processed cashew only correspond to Guinea-Bissau. High temperatures adversely a third of its imports of raw cashew, partly a affect the cashew harvest and accordingly consequence of domestic consumption). production is lower and cashew prices are higher However, Guinea-Bissau’s weight in the global (Figure 4). This relationship is noticeable, with cashew value chain cannot be disputed. the exception of 2011 when it temporarily breaks down. This is likely due to the global food price As in all agricultural sectors, the climate plays crisis of that year when commodities, including an important role for production in Guinea- food products, increased sharply across the Bissau. Following the rainy season which begins world in response to multiple factors, such as in late May and ends in early November, the structural shifts to supply, climatic shocks, and cashew trees absorb the soil’s nutrients. In speculation in financial markets. Overall, January and February, the trees bloom after however, the relationship between temperature, which the blossoms turn into the cashew fruit production, and prices, suggests that Guinea- that is harvested between April and June. High Bissau has an effect on prices in the global temperatures—resulting in dry earth and cashew market. January 2016 · Number 11 · 3 Figure 4: Through its effect on production, the climate also Figure 6: Cashew receipts determine private domestic affects international cashew prices. consumption… (cashew prices in constant LCU and average temperatures in (inflation, growth in private consumption and cashew Celsius (RHS)). receipts per worker) Global 7000 food price 27.5 16 100 shock 14 80 6000 27 12 10 60 5000 26.5 8 40 6 4000 26 20 4 2 0 3000 25.5 0 -20 2000 25 -2 -40 Real cashew price (in LCU) -4 1000 24.5 -6 -60 Average temperature (January/February, RHS) 2008 2009 2010 2011 2012 2013 0 24 Inflation (GDP) 2000 2003 2006 2009 2012 Growth in (private consumption - imports) Source: World Bank Climate Change Knowledge Portal, IMF, Growth in real cashew receipts per worker (RHS) and World Bank staff calculations. Source: World Bank staff calculations. Figure 5: Prices mitigate the effect of production shocks on Figure 7: … and are strongly correlated with GDP growth. export receipts in Guinea-Bissau. (growth real cashew receipts and GDP per capita) (growth in real exports per worker in local currency terms 4 y = 0.1x decomposed into growth in real prices and volumes per worker) R² = 0.33 0.8 3 Volume effect Global food price 0.6 shock 2 Growth in real GDP per capita Price effect 0.4 1 0.2 0 -20 -15 -10 -5 0 5 10 15 0 -1 -0.2 -2 -0.4 2012 -3 -0.6 military coup -4 -0.8 Growth in real cashew receipts per worker 2002 2006 2010 2014 Source: World Bank staff calculations. Source: COMTRADE, IMF and World Bank staff calculations. Note: Excludes outliers of 2011 and 2012. Note: Cashew prices are deflated by the Manufacturing Unit Value (MUV). On the one hand, responsive cashew prices supply and demand factors. In 2012, a military mitigate production shocks on incomes. On the coup derailed the cashew campaign both with other, they somewhat reduce the return on respect to volumes and prices. In all other years cashew during bumper harvests. Figure 6 depicted, however, the strong relationship disaggregates the value of cashew export per between countering price and volume effects is worker into independent price (in constant local evident. During a poor cashew campaign, prices currency terms) and volume effects. In 2011, both rise. This means that real export receipts (and in volumes and prices increased—this is likely due response the incomes of the poor) do not fall by to the fact that the global food price crisis as much—or may even remain stable, as they did overshadowed food markets, muting the usual in 2010. In a good year, on the other hand, prices January 2016 · Number 11 · 4 fall, and receipts do not increase by as much as rice harvest in the following year. Poor harvests they would if Guinea-Bissau was just a price then require the import of rice. Yet given falling taker in the international market. For example, in real cashew prices and somewhat increasing rice 2013 real export receipts barely increased prices, the ratio of cashew to rice prices—the although export volumes were high. The net most meaningful interpretation of the terms of effect of prices and volumes tends to be positive, trade in Guinea-Bissau—has fallen. albeit small: excluding the years 2011 and 2012 which were anomalies, real cashew receipts per Domestic rice production has not picked up worker grew by 0.1 percent on average. significantly to meet domestic demand. The weaker terms of trade and the limited supply Cashew receipts drive domestic consumption response in domestic rice are likely to have and inflation—as well as GDP per capita. reduced household welfare. Although rice Cashew is the most important economic activity prices have risen relative to cashew prices, in Guinea-Bissau and as the proceeds from import data suggest that domestic rice higher cashew receipts trickle down to cultivation may have stagnated or even fallen households their domestic consumption rises. As over the past decade. Stakeholders in Guinea- supply does not fully respond to higher demand, Bissau have indeed expressed concern with the prices increase, limiting overall purchasing lack of rice production in the country. Although power of households. Although inflation the World Bank’s 2015 Country Economic reduces purchasing power, there is a clear link Memorandum (CEM) argues that Guinea-Bissau between cashew receipts per worker and has a comparative advantage in rice, market domestic private consumption (Figure 6). It is failures are likely at the root of an imperfect noteworthy that cashew receipts affect supply response. Overall, given that farmers do investment and public consumption less not grow more rice, including for auto- strongly. Private consumption accounts for 86% consumption when rice prices have increased of GDP. It is thus not surprising that cashew relative to cashew prices suggest that household receipts are a key driver of the country’s annual welfare has fallen in turn. production per capita (Figure 7). Cashew prices have a strong effect on the Global cashew exports have increased current account—and on domestic savings. substantially over the past decade, reducing Higher cashew prices tend to improve the Terms prices. Between 2000 and 2013 global raw of Trade, in particular with respect to rice, the cashew exports rose six-fold. As supply country’s main import next to fuel (Figure 8). expanded, the price has been falling. This is This is reflected in a strengthening current likely the consequence of supply growing at a account balance (Figure 9). When the current faster rate than demand. Indeed, compared to account improves the need for foreign financing food prices more broadly, cashew has not kept falls translating into higher domestic savings. up with price developments. With the exception of the food price shock of 2011, cashew prices Yet savings tend to be small, explaining the have been trailing general global food prices. country’s low investment levels. When cashew prices were exceptionally high in 2011, savings Weaker cashew prices have been worsening the barely reached 7% of GDP, one of the lowest in terms of trade, especially given the country’s the world (Figure 10). In most years, savings high reliance on rice imports. Rice is Guinea- were lower. Low savings translate into weak Bissau’s main staple food and families barter it investment—further hampered by an for cashew. Although Guinea-Bissau cultivated undeveloped banking sector reducing the scope rice for export in the distant past, it is now mostly for financial intermediation. Both savings and grown on a subsistence basis. Climate data investments in Guinea-Bissau are exceptionally suggest that heavy and variable rains affect the low by international standards. Investment in January 2016 · Number 11 · 5 Figure 8: Cashew nuts dominate exports while food and petroleum Figure 10: Both savings and investments are low in Guinea- are Guinea-Bissau’s most important imports. Bissau. (local currency units) (savings and investment in percent of GDP, 2004-2013 average) FCFA billions % of GDP 140 30 Guinea Bissau West Africa 120 Imports 25 Sub-Saharan Africa World 100 Exports Petroleum Net 80 transfers 20 Other Transfers and income 60 Other 15 40 Remittances Current Cashew account 20 Food balance Official 10 0 Net factor -20 income 5 -40 0 -60 Net exports Savings Investment Source: IMF, and World Bank. Source: IMF, World Economic Outlook, April 2015. Figure 9: The cashew prices is an important determinant of the Figure 11: The capital and financial accounts are dominated by current account balance, savings, and investment. government borrowing, strengthening the reserve position… (savings, Investment, Current Account Balance and Cashew Prices (local currency units) in local currency (RHS)) FCFA billions FCFA FCFA billions thousands 40 40 700 30 30 600 20 20 500 10 10 400 0 0 -10 300 -10 -20 200 -20 -30 Savings Investment 100 -40 -30 Current Account Balance 2011 2012 2013 2014 Capital account Project loans -40 Cashew prices LCU 0 Other* Overall balance 2007 2008 2009 2010 2011 2012 2013 CAB Source: INEC, IMF, and World Bank. Source: IMF and World Bank. (CAB: Current Account Balance) Guinea-Bissau is mostly financed through public While public investment is an important source external borrowing which supports the country’s of investment for the country, it is highly international reserve position and helps finance dependent on donor support—which hinges on the current account (Figure 11). About 40% of political stability. Most of Bissau-Guinean investment in Guinea-Bissau is financed by the public investment is financed by donors. government, underlining weakness of financial Domestic revenue tends to hover around 10% of intermediation in support of private sector GDP, one of the lowest in the world and barely investment (Figure 12). enough to cover current expenditures. International aid has thus been crucial. However, aid tends to be pro-cyclical: military coups result in the suspension of donor programs and public January 2016 · Number 11 · 6 Figure 12: …financing the current account, and supporting Figure 13: Guinea-Bissau is one of the least productive public investment. countries in the world. (local currency units) (GDP (in US dollars) relative to working age population) US$ constant 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Source: INEC, IMF and World Bank. Source: World Bank. investment grinds to a halt in turn. Indeed, the Guinea-Bissau’s labor force is among the least drop in donor support in times of political crisis productive in Africa (Figure 13) and, indeed, the is a major reason for economic downturns in world. Guinea-Bissau (see 2015 CEM), adding to the stop-and-go character of the country’s Cashew, labor markets, productivity, and development marked by political fragility, poverty including military coups. In this sense, the volatility of international aid is a major source of vulnerability for Guinea-Bissau. Low labor productivity also is an obstacle to poverty reduction. Guinea-Bissau’s poverty rate is commensurate with its GDP per capita level. It is no surprise that against adverse trends in This relationship is robust to the exclusion of cashew prices, low savings, and low resource rents from GDP. Thus, for Guinea- investment, productivity growth is stagnating. Bissau to reduce poverty, increasing its labor Real cashew exports have only increased productivity will be key. moderately and given its centrality in the economy, GDP per capita growth has been small. Growth in labor productivity closely traces GDP Raising productivity, not only in the cashew per capita growth. Both have been very small, sector, will be important to accommodate about 0.2% and 0.7% respectively between 2000 increasing numbers of Bissau-Guinean job and 2014. Unfavorable developments in the seekers. Demographic projections suggest that cashew market, including lower prices for the pressure on the labor market will result from country’s most important export mean that real more young Bissau-Guineans becoming of GDP per worker has barely been increasing. In working age. While this is an opportunity and addition, low investment rates—partly a could result in a ‘demographic dividend’ for the consequence of weak savings and limited country, it also entails risks. The demographic financial intermediation—have not sufficiently dividend will only occur if young labor market raised yields in cashew or resulted into shifts in entrants find jobs. Given the absence of activities with higher value added (be it cashew investments, limited land and no access to processing or diversification away from cashew). financing, more workers may share the same Overall, low productivity growth means that assets. In this case, labor productivity would January 2016 · Number 11 · 7 decline, resulting in lower incomes for international aid which is volatile and households and raising poverty. aggravates the effect of military coups through plummeting public investment—especially given the low levels of domestic revenue. Both Diversifying into activities other than cashew will be key. Real cashew prices have been falling Terms of Trade shocks and political shocks are and are now trailing other food prices. This thus amongst the most important sources of vulnerability for Guinea-Bissau’s economy. suggests that supply has grown faster than demand. Welfare gains from increasing cashew thus have decreasing marginal returns. The 2015 Investments to make the cashew sector more CEM suggests that there is considerable room for productive, but especially to diversify the Guinea-Bissau to compete in the processed economy, will be crucial for Guinea-Bissau. cashew market. Thus, the export of processed The country requires both more jobs and more cashew (rather than raw cashew) is likely to be productive jobs. This is especially true given productivity-enhancing. On the other hand, it expected pressures on the labor market from will be crucial to create an environment for new demographic change. Whilst there is room to jobs. Some of these may be in rice, which, as the improve the productivity of the cashew sector, 2015 CEM argues, the country has a comparative for example by moving into processing rather advantage in. There may also be scope to than raw exports (see 2015 CEM), many of these enhance cashew production. This would also new jobs will have to be located in other allow Guinea-Bissau to diversify incomes, activities. The 2015 CEM and the latest national further reducing vulnerability to terms-of-trade development plan identify rice, fisheries, shocks (especially against the backdrop of the tourism, and even mining as potential areas to relative increase in rice prices). add productive jobs. The production of groundnuts or sesame are other alternatives. Conclusion Switching into these areas can not only raise productivity but also diversify the economy, From a macroeconomic perspective, Guinea- Bissau faces two major challenges: low reducing its vulnerability to the cashew price. productivity and high vulnerability. Apart Attracting FDI by improving the business from a history of fragility which has been climate can reduce the country’s dependence on underlying Guinea-Bissau’s stop-and-go donors for investment and generate knowledge character of development, structural economic spillovers that can help with the country’s challenges keep the country from growing at a economic transformation. faster pace that would enable progress toward reducing the high levels of poverty. The dominant cashew sector at least partly lies at the About the author: heart of the structural challenges. Whilst export volumes have increased, deteriorating Terms of Marek Hanusch, Senior Economist, World Bank’s Macroeconomics & Fiscal Trade—especially with respect to rice for which Management Global Practice (GMFDR), cashew is bartered—have been undermining mhanusch@worldbank.org incomes, domestic savings, and in turn investment. This at least partly explains low productivity levels and the structural slack in the economy. It leaves the country dependent on ______________________________________________________________________________________ This note series is intended to summarize good practices and key policy findings on MFM-related topics. The views expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank, its board or its member countries. Copies of these notes series are available on the MFM Web site (http://worldbank.org/macroeconomics) January 2016 · Number 11 · 8