Smallholder Market Participation: Concepts and Evidence from Eastern and Southern Africa

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Smallholder Market ParticipationConcepts and
Evidence from Eastern and Southern Africa

• Christopher B. Barrett, Cornell University
• FAO workshop on
• Staple Food Trade and Market Policy Options for
  Promoting Development in Eastern and Southern
  Africa
• Rome, March 1-2, 2007

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Motivation for paper

• Market participation necessary for structural
  transformation from subsistence agriculture to an
  economy based on specialization, exchange and
  technological innovation.
• A market-led paradigm of development replaced
  state-driven modernization from late-1970s but
  transformation has been slow, especially in
  Africa.
• Apparent existence of semi-subsistence poverty
  traps in rural Africa rudimentary production
  technologies, minimal gains from trade, meager
  asset endowments and poorly functioning market
  and supporting institutions a self-reinforcing
  low-level equilibrium. But higher-level
  equilibria also exist and are perhaps attainable
  with appropriate interventions.

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Conceptual Foundations

• Nonseparable household model with (i)
  household-level transactions costs to access
  market, and (ii) market-specific costs of
  integration with border.
• Core result market supply response and welfare
  effects price/trade policy depend heavily on
  initial endowments on transactions costs at both
  household- and market-level on competition and
  price transmission. As a result, price/trade
  policy is ineffective instrument for many rural
  Africans.

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Market Equilibria In A Remote, Low-Potential
Rural Area
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Market Equilibria In An Accesible, High-Potential
Rural Area
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Empirical evidence

• Finding 1 Relatively few smallholders sell
  staple foodgrains. Especially true with respect
  to net sales.

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Foodgrains Market Participation in Eastern and
Southern Africa
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Empirical evidence

• Finding 2 Smallholder market participation and
  net sales are strongly increasing in wealth and
  its correlates (e.g., credit access, use of
  improved production technologies) as well as
  residence in a high-potential zone with good
  market access.

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Rice market participation by land holdings,
Madagascar 1990
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Maize market participation by land holdings,
Mozambique 2001-2
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Net rice sales and marketable surplus by land
holdings, Madagascar 1990
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Empirical evidence

• Finding 3 Transactions costs associated with
  weak institutional and physical infrastructure
  are substantial and distort production and
  marketing behaviors.
• the costs of transacting are the key to the
  performance of economies. There have always been
  gains from trade, but so too have there been
  obstacles to realizing these gains The costs of
  transacting are the key obstacles that prevent
  economies and societies from realizing
  well-being.
• - Douglass North (1989, pp. 1319-20)

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Empirical evidence

• At household level
• Access to transport and farmer organization
  membership positively associated w/participation
• Fixed transactions costs equivalent to 15 ad
  valorem tax
• Subsistence orientation yields 30-40 lower
  income
• At market level
• Transport costs from local market nearest city
  often gt15
• Considerable price volatility in poorly
  integrated markets
• Imperfect competition (6-29 of farmers face only
  1 buyer)

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Empirical evidence

• Finding 4 No clear effect of food aid on
  smallholder market participation.

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Empirical evidence

• Impact of food aid via 4 channels
• 1) Price effects of imported food aid variable
  and depend heavily on quality of targeting of
  food aid distribution
• 2) Price and marketing channel effects of local
  and regional purchases 1/3 of food aid now
  bought in Africa (gt20 Ugandan market supply)
  no clear evidence
• 3) Productivity effects dependency or obviated
  seasonal liquidity constraints? If anything,
  evidence favors latter claim
• 4) Backhaul capacity and induced changes in
  transport costs no direct evidence

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Conclusions and Policy Implications

• In areas reasonably well-integrated into the
  international market, conventional price and
  trade policies can work, subject to standard
  caveats associated with the food price dilemma.
  
• Because there appear to exist significant
  barriers to smallholder entry into commercial
  staple foodgrains markets in many regions,
  macro-level instruments have a limited place in
  efforts to improve rural welfare and stimulate
  increased crop supply.

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Conclusions and Policy Implications

• Conventional wisdom is that lack of market
  participation in Africa is primarily due to lack
  of investment in institutional and physical
  infrastructure that drive transactions costs up.
  Meso-level policy responses then become
  appropriate.
• Empirical evidence points strongly toward private
  asset endowments and credit/technology
  correlates as key determinants of market
  participation, even controlling for public goods.
  Micro-level emphasis then appropriate.
• The appropriate blend of macro/meso/micro
  interventions will vary by place, crop and time.
  But the limited evidence we have suggests that
  micro interventions likely have the biggest
  payoff.

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Thank you for your time, attention and comments