Challenges to ProPoor Market Development for African Agriculture

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Challenges to Pro-Poor Market Development for
African Agriculture
Chris Barrett (Cornell University) Presented at
AGRA/ILRI Conference Towards Priority Actions
for Market Development for African
Farmers Nairobi, Kenya May 13, 2009
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Motivation

• Why Worry About Markets? The Positive View
• The extent of market defines the reach and impact
  of policy instruments used by the state.
• Markets aggregate demand and supply greater
  price elasticity reduces price volatility,
  encourages uptake of improved technologies,
  specialization according to comparative
  advantage, firm expansion, etc.
• Well-functioning markets generate price signals
  that induce socially desirable institutional and
  technological innovations.

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Motivation

• Why Worry About Markets? The Negative View
• Market-based approach from mid-1980s not wholly
  successful to date. Private sector has not
  always stepped up the state has not always
  stepped out.
• Poverty traps in rural Africa low-yield
  technologies, minimal gains from trade, meager
  asset endowments and poorly functioning
  institutions. Marginal changes dont disrupt
  the resulting low-level equilibrium.
• Global food price crisis of 2008-9 underscored
  the poors vulnerability to food and agricultural
  input price spikes. Market risk a major
  concern.

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Approach

• The challenges to pro-poor market development in
  African agriculture are many. Where to begin?
• Need to work from
• what we know based on rigorous analysis. Act
  based on this evidence. Here I outline 9 key
  points we know.
• and
• (2) what we dont yet know with great confidence.
  Must build evidence before gambling scarce
  resources. Hard empirical evidence from within
  the black box of markets is distressingly thin.
  Here I outline 6 key points on which we need to
  learn more.

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What We Know

• Progress in facing challenges requires clear
  identification of what we do and do not know.
• What We Know
• Africas 2/day poverty gap 225 bn/year, 10
  times record ODA inflows into Africa. Need a
  private sector engine for investment, employment,
  innovation.
• Yet , no free market expensive to build/keep
  supporting infrastructure. State is a key
  partner.
• Implication Ideology and theory w/o solid
  empirical evidence has done damage. Need to
  identify what works and focus on evidence-based
  approaches.

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What We Know

• What We Know
• (2) The overwhelming majority of poor Africans
  live in rural areas and are at least partly
  engaged in farming for a livelihood.
• Implication Returns to agricultural labor and
  land are crucial to reducing poverty. Improve
  returns through improved technologies but also
  via increasing producer prices by reducing high
  (search, transaction, enforcement, etc.) costs of
  commercial exchange. Squeezing marketing costs
  avoids food price dilemma.

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What We Know

• What We Know
• (3) Marketing costs in African agriculture are
  very high sharply reduce producers and traders
  returns and induce self-selection out of
  high-return crops (tea, horticulture, coffee,
  cotton, etc.), especially by the poor.
• Household-level fixed marketing costs commonly
  15 or more of gross revenues, variable costs
  another 10-25. Access to transport and farmer
  organizations increase participation by reducing
  costs significantly.

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What We Know

• What We Know
• (3 continued)
• At market level, transport costs from local
  market nearest city often gt25-75, which often
  creates market segmentation/isolation as well as
  considerable price volatility in poorly
  integrated markets
• Implication Poverty-reducing impacts of reduced
  marketing costs for high-return crops equivalent
  to 2-4 times proportional increases in world
  market prices (Balat et al. 2009) need much
  more focus on internal market function not just
  trade policy, especially given OECD intransigence
  on WTO/farm policy reforms.

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What We Know

• What We Know
• (4) Marketing costs have three main components
  information, transport and capital.
• Market information problems rapidly being
  resolved by private sector (especially mobile
  telecoms and commodity exchanges).
• Private information networks used extensively
  and at relatively low marginal cost.
• But not all have equal access to networks or
  equally good networks. Asymmetric market
  information problems are common in dyadic
  exchange systems.
• Where market information is public auctions,
  media, etc. producer prices typically higher
  and more stable.

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What We Know

• What We Know
• (4 continued)
• Transport and capital problems bigger and more
  persistent than market information barriers.
• - retard firm- and farm-level investment
• - impede spatial and intertemporal arbitrage to
  stabilize prices
• - increase intra-national regional inequality
• Marginal returns to transport improvement16 in
  rural Ethiopia (Dercon et al. 2008), 50 in
  rural Madagascar (Jacoby and Minten 2009).
• Marginal returns to capital in agriculture gt60
  in Ghana (Udry and Anagol 2006)

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What We Know

• What We Know
• (4 continued)
• Financial illiquidity generates behavioral
  distortions that distort marketing and production
  systems
• - non-adoption of high return innovations that
  can stimulate increased marketable surplus
• - mobility barriers, with firms not expanding
  scale of employment and operations
• - interrupted deliveries of time-sensitive
  inputs (seed, fertilizers, pesticides, feed
  supplements, etc.)
• - sell low, buy high phenomenon poor farmers
  use commodity markets for seasonal quasi-credit

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What We Know

• What We Know
• (4 continued)
• Implication Need to focus on the major marketing
  cost categories that can be reduced
  significantly, with very high returns, especially
  for the poor.
• Finance and transport appear the key bottleneck
  areas, especially because the poors relative
  access to transport and finance is far weaker
  than is their access to market information.

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What We Know

• What We Know
• (5) Asset poverty limits market participation.
  Focus typically is on macro (e.g., trade) and
  meso (e.g., roads, farmer groups) policies for
  promoting market participation. But the empirical
  evidence points strongly to private asset
  endowments as key determinants of market
  participation, even controlling for public goods
  (Boughton et al. 2008, Barrett 2008).
• Implication Need more micro level focus
  promote asset accumulation to endogenously induce
  market development.

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What We Know

• What We Know
• (6) The overwhelming majority of Africas poor
  are net food buyers. This share is growing due
  to urbanization, higher fertility rates among
  poorer women, and intergenerational farm
  splitting.
• Implication Need to focus more on the
  downstream impacts of market development in order
  to establish the poverty reduction effects.
  (Analogy to agricultural technologies ... main
  gains come as consumer surplus, not producer
  surplus.)

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What We Know

• What We Know
• (7) Uninsured risk is a major problem. Price
  risk is a problem for producers but even for most
  consumers WTP for price stabilization 35 in
  Ethiopia (Bellemare et al. 2009).
• Asset risk an even bigger problem, especially
  where poverty traps exist. Collapses into
  poverty traps overwhelmingly traceable to asset
  shocks (incl. health).
• Risk impedes access to credit for farmers,
  traders, millers, etc. Due to adverse
  selection, moral hazard, correlated default risk
  and risk rationing.
• Implication Need to develop new mechanisms for
  risk reduction and risk transfer.

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What We Know

• What We Know
• (8) Agricultural spot markets generally well
  integrated, when marketing costs allow for
  arbitrage.
• - Market-oriented reforms have tended to enhance
  the speed and extent of price transmission across
  space, with mixed results on price stabilization.
• - Still functional and spatial pockets of high
  trading profits (capital-intense long-haul
  transport, interseasonal bulk storage, high risk
  areas), especially where credit scarcity and
  state intervention or absence have discouraged
  private investment.
• Implication Private intermediaries willing and
  able to respond to profit opportunities. But
  need facilitating public investments
  (infrastructure, security, etc.)

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What We Know

• What We Know
• (9) Agricultural marketing systems changing
  rapidly.
• - Supermarket and restaurant chains and vertical
  coordination and integration through contracts
  rather than spot markets. Market power shifting
  downstream, with frequent hold-up problems.
• - Increased harmonization of grades and
  standards (EurepGap, HACCP, SPS, etc.) increase
  the returns to coordination and the risk of
  quality control failures.
• Implication Increased need for world-class
  management skills, for clear/reliable public
  enforcement of grades/measures/standards/contracts
  . Insufficient degree/non-degree training of
  quality.

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What We Know

• What We Know
• Although researchers neglected this area for a
  long time, we now know a fair amount about
  pro-poor market development in and for African
  agriculture.
• There is enough evidence to inform useful
  government, donor, NGO and firm strategies.

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What We Need to Learn

• What We Need to Learn
• Who gains from new marketing arrangements and how
  much? Should governments, donors, NGOs promote
  contract farming schemes or not?
• Very little solid evidence on
• (i) the distribution of the gains from these
  arrangements and the welfare effects of
  participation.
• (ii) the spillover effects on non-participant
  producers, on farm workers, on food safety and
  consumers, etc.

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What We Need to Learn

• What We Need to Learn
• (2) Competitive behavior of firms within
  agricultural marketing channels. How large and
  widespread are efficiency losses and inequities
  due to market power?
• Remoteness and working capital constraints often
  lead to imperfect competition. 6-29 of farmers
  face only 1 buyer and real profits to long-haul
  sub-national spatial arbitrage (but not at local,
  short-haul or national levels) in rural
  Madagascar (Moser et al. 2009).
• Very little solid evidence on Firm entry, exit
  and competitive behavior, thus little to guide
  anti-trust policy for African agricultural market
  development.

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What We Need to Learn

• What We Need to Learn
• (3) What most effectively and sustainably
  stimulates firm and farm access to credit and
  insurance needed to expand operations and enhance
  productivity? Index insurance? Credit guarantees?
  Credit reporting and identity-based
  credentialing? Venture capital/angel investing?
• Very little solid evidence on Absolute or
  comparative performance of different product
  designs and variation across settings, in terms
  of ROI, distribution of gains, and
  complementarities.

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What We Need to Learn

• What We Need to Learn
• (4) There are lots of small-scale interventions
  to improve farmer organization, market
  information flow (kiosks, price points, SMS,
  etc.), access to financial services and
  transport. But funding is too scarce to waste on
  relatively low-return or place-specific
  investments.
• Very little solid evidence on the comparative
  benefit/cost ratios on different interventions to
  reduce marketing costs. Rigorously identify how
  returns especially to the poor vary across
  interventions and how orderings vary across
  spatial and other attributes?

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What We Need to Learn

• What We Need to Learn
• (5) How do returns to different public and
  private goods investments in asset-building or
  public services provision vary across sites?
  What is highest return intervention in a given
  site and where is the highest returns expected
  for a given intervention?
• Very little solid evidence on optimal
  geographic targeting or sub-sectoral
  prioritization of agricultural and rural
  development investments, and too little testing
  of the external validity of existing findings.

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What We Need to Learn

• What We Need to Learn
• (6) How do returns to market development compare
  to returns to technology development, especially
  in terms of poverty reduction, impacts on
  employment and sharing with more politically
  influential urban poor?
• Very little solid evidence on research
  prioritization for the global, regional and
  national agricultural research communities.
  Rates of return in agricultural development
  investment are high, but in what specific areas
  are they highest and for whom?

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Conclusions

• Conclusions
• Still need to counter populist demonization of
  market intermediaries. Commerce is essential to
  unlock the potential of African agriculture and
  to open up opportunities for Africas poor,
  especially in rural areas.
• Recent growth of interest and investment in
  improving markets for pro-poor agricultural
  development is overdue and welcome.
• Growing body of evidence to guide policy,
  program and project investments at broad scale.

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Conclusions

• But we still know little about lots of
  important issues comparative returns to
  alternative interventions/ investments, about how
  returns vary across sites, etc.
• Need more rigor in design, fewer case studies.
  Use of clever techniques for controlling for
  placement and selection effects (randomized
  roll-out or encouragement designs, careful
  matching using discontinuities, etc.).
• Insufficient capacity for rigorous and
  independent policy and program analysis on the
  continent. Should not have to rely on northern
  universities and research institutes. Need to
  invest heavily in developing and sustaining this
  capacity.

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Thank you!
Thank you for your time, attention and comments