Trade Adjustment Costs in Developing Countries: - World Bank ...

Trade Reforms in Natural-Resource-Abundant Economies 753. MARKET CHARACTERISTICS AND REFORMS IN THECASHEW AND VANILLA MARKETS 63.1 Characteristics and market structureBoth crops share many common characteristics. These are described in Table 5.1and include: (i) production by small (and poor) farmers and their family on plotsof land they own, with production taking place under competitive conditions 7 ;(ii) few intermediary buyers who either process the raw cashews or cure the greenvanilla; (iii) a regulatory environment in which purchase prices and margins byprocessor-traders were controlled by the government; and (iv) export taxation ofprocessed vanilla or of raw cashews. I start with the internal market structureand then turn to the external market structure.Cashews: McMillan et al. Figure 5 show three layers of intermediation betweencashew farmers and world markets: (i) local buyers and small traders; (ii) largerwholesale traders; and (iii) exporters and the domestic processing factories. Entrybarriers at each level as a result of set-up costs and regulatory restrictions combineto explain the monopsonistic power along the value chain. These barriers toentry contribute to explain the resulting low share of the world price received byproducers (see Figure 2b). McMillan et al. (2003) note that there were eight to 10exporters of raw and processed cashews at the time of the reforms.Labor is the most important input in cashew with 50 percent of costs associatedwith curing the trees prior to harvesting, the remainder taking place at harvesting.Processing could take place either in large factories using one of twohighly mechanized technologies that depend on a constant flow of calibratednuts (to yield a high proportion of whole rather than broken kernels which fetcha higher price), or on semi-mechanized more labor-intensive technologies closerto the hand shelling done by Indians at home. 8 There is disagreement about thecauses of the failure of the processing industry following its privatization, somearguing that a more labor-intensive technology would have been appropriate.Vanilla: Cadot et al. (2009) Figure 1 shows the three phases in vanilla production:(i) vanilla growing, which produces the ‘green’ beans; (ii) curing, the stageat which it develops its quality (flavor profile and natural vanillin content); and(iii) packing (sorting, grading, and tying in small homogenous bunches). Eachstage requires specific skills.Growing is highly labor-intensive, as crop husbandry requires 260 man-daysper hectare during the first year, and about 460 during the four to eight years6 Much of what follows is a summary of McMillan et al. (2003) and Cadot et al. (2009).7 Vanilla is a cash crop with all production sold. According to the household survey in Madagascarin which around 500 families in each survey listed vanilla production as their main activity, theshare of vanilla in full income was around 30 percent. For cashews, McMillan et al. report that farmersonly sell about half of their crop, the remainder being kept for on-farm consumption. These characteristicsimply that the income effects of trade reforms will be muted.8 The manual technology yields a higher proportion of whole kernels but is hazardous for the workers,because they come into contact with a corrosive and toxic liquid called cashew nut shell liquid.