Trade Pessimism and Regionalism in African Countries: The Case of Groundnut Exporters

Agricultural exports, which have traditionally been the mainstay of African economies, have weakened since the 1970s, giving rise to pessimism among policymakers about the prospects for long-term development of overseas export markets. As a result, policies aimed at encouraging trade between African countries have proliferated. In Trade Pessimism and Regionalism in African Countries: The Case of Groundnut Exporters, Research Report 97, Ousmane Badiane and Sambouh Kinteh look at groundnut trade and its effects on production and marketing in the countries that are members of the African Groundnut Council (AGC): The Gambia, Mali, Niger, Nigeria, Senegal, and Sudan. They investigate related developments on international vegetable oil markets and the potential of regional markets to contribute to the rehabilitation of the groundnut industry in AGC countries.

Until the mid-1970s, the groundnut sector contributed 15-40 percent of gross domestic product in AGC countries. With the exception of Nigeria and Sudan, groundnut exports provided 40-90 percent of export revenues during the 1960s and the early 1970s. The share of the rural labor force employed in the groundnut sector varied from 30 to 80 percent in AGC countries other than Nigeria. Between 1961 and 1965, the AGC countries produced 23 percent of the world's groundnuts and had a 62 percent share of world exports of groundnut oil, with the two main exporters, Nigeria and Senegal, accounting for 26 and 23 percent of world exports, respectively.

The Changing Role of Groundnuts

Collectively, the AGC countries are still major exporters, but the role of groundnuts in international markets has changed dramatically, as has their role in the economy of each of the member countries. These changes were reflected in a 3 percent annual average decline of AGC-wide groundnut production over the entire period of the study, 1961-87. Aggregate exports of unshelled groundnuts dropped by 10 percent, shelled groundnuts by 15 percent, and groundnut oil by 4 percent annually.

Adverse developments on international oilseed markets, such as falling demand and declining world market prices, are the most commonly cited reasons for the problems plaguing the groundnut sector in AGC countries. In response to growing pessimism, the member countries adopted the Banjul Plan of Action for Groundnuts, a series of recommendations that emerged from a meeting of AGC officials in Banjul, The Gambia, in June 1984. The Plan strongly emphasizes the promotion of intra-African trade and the recapturing of regional import markets as a major component of a rehabilitation strategy for the groundnut sector.

In global oilseed production, the most dramatic changes occurred in the palm oil, soybean, and sunflower sectors, with annual growth rates of 4-5 percent. World groundnut production, however, rose only slightly more than 1 percent. The expansion of groundnut production varied significantly among regions, with most of the increase occurring in only three countries--China, India, and the United States. In contrast, groundnut production declined in all AGC countries except Sudan, while production of competing crops, such as cottonseed and sesame seed, grew by double-digit rates in some member countries.

On the global trade side, two different types of changes occurred. For oilseeds as a whole, exports of soybean, sunflower, and palm products increased significantly in all categories (seeds and fruits, oils, and cakes). For individual commodities, the general tendency was to export smaller quantities of seeds and fruits and more oils and cakes. This shifted the burden of competition from farm production to the processing industries. This evolution inevitably affected the importance of different oilseeds and therefore of different exporters on world markets. The share of groundnut products in world oilseed trade decreased, and the importance of AGC countries in world groundnut trade has progressively declined (Figure 1). The share of AGC countries in world exports of groundnut products fell from 62 to 20 percent. At the same time, the combined market share of Asian and South American exports increased by nearly 400 percent, rising from slightly more than 10 percent in 1961-65 to 50 percent of world exports in 1986-88.

Domestic Policy Factors

Contrary to the argument that external demand has been constrained, this report finds that domestic policies contributed more than changes in global markets to export performance. In analyzing the role of domestic policy factors in the decline of groundnut production and exports in AGC countries, the report uses data from The Gambia, Senegal, and Sudan--the AGC members that have consistently exported groundnuts. The report estimates the direct and indirect effects of country policies on incentives in the groundnut sector, derives the effects on groundnut production and exports for individual countries and the AGC as a whole, and compares changes during the last three decades.

The combined effects of domestic policies have resulted in heavy taxation of the groundnut sector (Figure 2). The direct price and incentive effects induced by production and marketing policies were small but positive during most of the 1960s. But their impact increased steeply in the late 1960s and the 1970s, especially in Senegal and The Gambia, where government marketing entities replaced private traders. Toward the middle of the 1980s, direct taxation increased further in The Gambia, while Senegal joined Sudan in protecting domestic sectors and raising producer prices significantly above border levels, hence subsidizing exports.

In contrast, overall macroeconomic policies and trade regimes--the indirect effects--had a detrimental impact on AGC groundnut sectors by raising real exchange rates well above their equilibrium levels. During the entire period, the level of real exchange rate disequilibrium in the three countries ranged from 20 to 45 percent. Even during the 1960s, the implicit taxation resulting from the continuous overvaluation of country exchange rates consistently exceeded the positive effects of sector policies, resulting in net taxation levels of 10-20 percent in the three countries and decreases in groundnut output and exports, particularly in Senegal and The Gambia.

At the prevailing export prices, the reduction in export quantities led to export revenue losses of 20-70 percent on average for Senegal and The Gambia. For Sudan, losses ranged from 10 to 20 percent. Translated into changes in aggregate AGC groundnut exports, these losses correspond to a decline of up to 31 percent in export quantity and 54 percent in export revenue (Figure 3).

Potential Role of Regional Markets

To pinpoint the potential role of regional markets in the future of AGC exports, the report analyzes the demand outlook for global oilseed markets. Although Europe still constitutes the most significant import market for oilseeds, with import shares ranging from 50 to 90 percent for most products, European demand has been shifting heavily toward other oilseeds and away from groundnuts. However, imports of groundnut products are expanding strongly in the historically less important markets of Africa and Asia (for groundnut oil) and Latin America (for unprocessed groundnuts). Vegetable oil consumption in these countries is still relatively low (less than 10 kilograms per capita, compared with more than 20 kilograms per capita in industrial countries), leaving room for future expansion of demand (Figure 4. In fact, during 1972-85, per capita consumption of oils and fats in developing countries increased by nearly 30 percent, compared with 5 percent in developed countries. Strong growth in demand is also expected to take place in formerly nonmarket economies.

To determine the potential of regional markets to contribute to AGC groundnut exports, the report looks at whether AGC member countries have been able to take advantage of the geographic proximity of West African markets and examines the driving forces behind the regional import demand for vegetable oils. It finds that exports to regional markets from the AGC countries fell faster (or grew slower) than non-AGC exports to the same markets. For example, West Africa's share in the exports of the AGC's largest exporting country, Senegal, was only 3 percent, although demand in these markets expanded at a rate two-and-a-half times faster than demand in world markets.

The analysis of regional import demand, based on imports of groundnut, palm, and soybean oils by Côte d'Ivoire and Nigeria, focuses primarily on the importance of price competitiveness for recapturing regional oilseed markets and on the potential for future growth as the economies of West Africa recover from the economic stagnation of the 1980s. The report finds that regional imports of individual oilseed products are very sensitive to changes in import prices and income levels. The estimated income elasticities are high for all three oilseeds, suggesting a rapid increase in regional import demand as the economies of the region expand. In contrast, price elasticities show strong differences across individual oilseeds. Imports of palm oil and to a lesser extent soybean oil are more responsive to price changes than groundnut oil, suggesting that groundnut exporters will face increased competition on regional markets if countries producing palm and soybean oils keep or expand their technological advantages.

Policy Conclusions

Even with stagnant import demand, this report finds that AGC countries could increase both the quantity and value of their exports to regional markets and raise their market shares by cutting their domestic costs of production and distribution. The expected growth in demand for oilseeds on regional markets, the sharp response of groundnut import demand to changes in prices and income, and the relatively high expenditure elasticity of demand for AGC groundnuts all indicate that regional markets could indeed play an important role in the future of AGC exports. However, in devising strategies to revitalize their groundnut sectors, AGC countries should not look at regional markets as alternatives to traditional export markets. In order to profit from regional markets AGC member countries would have to cut costs in production, marketing, and other export-related activities to contain the competition from non-AGC exporters. This is exactly what they would need to do to raise their competitiveness and regain their shares in traditional export markets. If AGC countries pay more attention to their domestic policy environments and their implications for prices and incentives in the groundnut sector, they should be able to take advantage of export demand in both regional and traditional export markets.