The neglected oil of economic development

In 1960, Nigeria was the world’s biggest exporter of oil palm products, accounting for over 40 per cent of the world market. Today, it hardly registers at all, ranking just 24th among global producers. African countries as a whole only account for a modest fraction of world output. By contrast, Malaysia along with Indonesia now account for around 90 per cent of the world’s oil palm exports by value (see figure).

How can this shift be explained? It would appear that the oil palm sector is yet another example of economic development in Africa being hindered by ill-conceived state intervention.

Annual palm oil production (million tonnes)

In the 1960s and 1970s, the Nigerian government adopted command-and-control policies to try to boost agricultural output. Prices were regulated by government marketing boards and thereby detached from the price signals of world markets. Moreover, for long periods agricultural prices were kept artificially low in an attempt to favour urban interests and the manufacturing sector. These interventions deterred private investment and led to the misallocation of resources on a grand scale.

A policy of ‘picking winners’ made the situation even worse. The government attempted to establish large-scale plantations. Mired in corruption, riddled with perverse incentives and denied the guidance of market prices, the projects ended in miserable failure.

More generally, the agricultural sector has been inhibited by government mismanagement of the infrastructure sector. Road networks are crumbling (literally); there is a lack of reliable power; and an absence of storage facilities.

Fortunately the policy framework now appears to be improving. Attempts to revive agriculture, such as the Agricultural Transformation initiative being driven by the reform-minded minister, Akinwumi Adesina, embrace the private sector, use market mechanisms, and involve the government stepping back from direct intervention in the market. For example, the government has removed restrictions on areas of investment and maximum equity ownership by foreign investors. Currency exchange controls have been lifted, tax holidays have been established for pioneer agricultural investments and new constitutional protections have been introduced which offer a range of guarantees against nationalisation or expropriation (although the history of Africa suggests that such guarantees may be ignored by future administrations).

The government has also discontinued its former role in the procurement and distribution of inputs such as fertiliser. Adesina observes: ‘We were subsidising corruption; we were not subsidising farmers.’ After a major shift, it is the private sector which now sells seed and fertiliser directly to farmers. The Federal government is, however, setting up marketing corporations to co-ordinate production, investment programmes and agricultural standards, though these will be run as private-sector-led organisations. While there is still an emphasis on government subsidies to the farming community as opposed to letting free markets function, the agricultural sector appears to be heading in the right direction.

These reforms, in Nigeria and other African countries such as Gabon, have opened the door to commercial agricultural enterprises. We are now witnessing a new wave of capital investment: in West Africa in the oil palm sector alone these pledges are reckoned to be worth more than $6 billion – although no doubt there will be some hiccups in the process.

The key reasons for this strategic decision are Chinese demand for commodities from Africa coupled with a shortage of land in Indonesia and Malaysia for palm oil plantations. The challenge is now to establish the right infrastructure – ports, airports, roads, rail, temperature-controlled warehousing, drainage and reliable power sources – for these agricultural concerns to prosper.

The experience in Malaysia demonstrates the potential for commercial agriculture to improve the day-to-day lives of local populations. Land titles are of course a controversial issue and certain NGOs have sought to depict investment in commercial crops, notably oil palm, as responsible for the wholesale devastation of primary rainforest. Case studies suggest, however, that while companies have not always acted like saints, these claims are exaggerated.

A crucial point made to me by the Director of Forestry in Sabah, Malaysia, is that ‘oil palm has been the crop that allows us to multiply our forestry conservation programmes as indirectly, it subsidises our efforts.’ He also points out that ‘The one billion ringitts (generated) in oil palm revenue means that we can avoid logging a staggering 200,000 hectares of virgin forests a year in Sabah.’ The key point to stress is that because oil palm is so profitable and generates such high yields compared with other crops, more virgin rain forest can be preserved and resources channelled into maintaining habitat for wildlife.

Keith Boyfield is the author of Commercial Agriculture: Cure or Curse? Malaysian and African Experience Contrasted.

IEA Regulation Fellow

Keith is an IEA Fellow and economist, the author of over one hundred publications on public policy and planning issues, economic development and regulatory policy. Keith has contributed to publications including The Financial Times, The Wall Street Journal, The Times, The Daily Telegraph, City AM, and is the Africa Editor of The Journal of World Economics. An alumnus of the London School of Economic (LSE), Keith is the founder of Keith Boyfield Associates Limited, a consulting firm bringing together specialist Associates based across the globe.

1 thought on “The neglected oil of economic development”

  1. Posted 12/02/2014 at 13:44 | Permalink

    The last part seems counter intuitive ie ‘ its so profitable ..more rain forest can be preserved’
    If its very profitable why would there not be an even greater incentive to burn more forest and plant more palm trees ?

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