Challenges to Pro-Poor Market Development for African Agriculture

1. 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

2. 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.

3. 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 don’t disrupt the resulting low-level equilibrium. • Global food price crisis of 2008-9 underscored the poor’s vulnerability to food and agricultural input price spikes. Market risk a major concern.

4. 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 don’t 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.

5. What We Know Progress in facing challenges requires clear identification of what we do and do not know. What We Know: • Africa’s $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.

6. 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.

7. 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-levelfixed marketing costs commonly ≈15% or more of gross revenues, variable costsanother 10-25%. Access to transport and farmer organizations increase participation by reducing costs significantly.

8. What We Know What We Know: (3 continued) At market level, transport costs from local market – nearest city often >25-75%, 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.

9. 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.

10. 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 improvement:16% in rural Ethiopia (Dercon et al. 2008), ~50% in rural Madagascar (Jacoby and Minten 2009). Marginal returns to capital in agriculture: >60% in Ghana (Udry and Anagol 2006)

11. 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

12. 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 poor’s relative access to transport and finance is far weaker than is their access to market information.

13. 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.

14. What We Know What We Know: (6) The overwhelming majority of Africa’s 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.)

15. 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.

16. 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.)

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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?

23. 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.

24. 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?

25. 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 Africa’s 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.

26. 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.

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