Africa Five: Research Findings

• The Nature and Extent of Marketing Policy Reforms
• Operation of the Emerging Private Sector
• The Investment Response of Private Traders to Marketing Reforms
• Marketing Reforms, Price Behavior, and the Performance of Local Markets
• Marketing Reforms and Market Performance
• Preliminary Findings on the Adjustment Process in the Farming Sector

The Nature and Extent of Marketing Policy Reforms

The review of the policy environment in the five selected countries suggest that in most cases market liberalization has been partial and the transition to a private-sector based marketing system is not yet complete. The government still intervenes in many aspects of agricultural marketing, and in areas where the government has withdrawn its activities, the private sector has not always been able to effectively replace the role of the state due to various constraints which are discussed below. Further progress in market reform will require not only further liberalization, but a more concerted effort to go beyond the withdrawal of the public sector from agricultural marketing. While previous reform efforts led to government savings and a reduction in the budgetary burden of the state, progress in market reform will require both more costly investment and a partnership between the government and the private sector to promote the development of markets and the institutions that support them.

The analysis of output markets in the five African countries included in the study suggest that the extent of government involvement in agricultural output marketing varies from country to country. In Ghana and Benin, for example, marketing boards for cereals still exist, but their share of the market is very minimal and the private sector has taken over most of the marketing activities of cereals. The marketing boards in these countries have reduced their activities to holding buffer stocks or strategic reserves and insuring food security in periods of shortage. In contrast, in Malawi, although a lot of informal trading does occur, the marketing board, ADMARC still absorbs a lion share of the official maize market. Therefore, private sector traders find themselves competing with a giant that dominates in terms of distribution networks, storage and transportation infrastructure and financial facilities. In Senegal, on the other hand, the trade marketing board for rice has been completely dismantled and the country has witnessed far reaching economic reforms in just a couple of years. The rice market in Senegal (whether imported or domestic) is now operating fully and successfully in the hands of the private sector, without any need for government intervention.

The survey of the input sectors in the selected countries shows that the presence of the government is much more pronounced than in the food crop sector. Historically, fertilizers, seeds and agro-chemicals were more heavily controlled by government parastatals than cereal trading and distribution. In all five countries, small-scale cereal trading always co-existed with official trading activities by marketing boards and parastatals. Moreover, in most cases, input markets were liberalized after output markets and until recently were heavily subsidized by the state. In Benin, the marketing board, SONAPRA still regulates the entry and activities of private fertilizer companies. Although multi-nationals have penetrated the fertilizer market, a few national companies still dominate fertilizer marketing activities. For example, in Malawi, the SFFRFM is the main importer of fertilizer into the country and in Senegal, SENCHIM is the major player in fertilizer production and distribution. In Ghana, the government has removed itself from the procurement and distribution of fertilizer and taken on the role of facilitator of a competitive, private fertilizer marketing system. The system is functioning fairly well, although the government must continue to be vigilant to check the creation of private monopolies.

In Madagascar, Malawi, and Senegal, official seed distribution is also heavily controlled by SOE's. A parallel private sector seed market has emerged along the official channels, however, many farmers complain about the low quality of these seeds and the legal framework for producing and distributing certified seeds is not well controlled by the government. Although the extent of liberalization may vary from one country to another, we can distill a few common trends and problems that all these countries face and that need to be addressed in further reform efforts.

Operation of the Emerging Private Sector

Although liberalization has led to the emergence of a fairly competitive private trading sector, in a few countries, trading in certain markets is monopolized or restricted through local trader associations or an informal network of traders which create barriers to entry in the market. In Benin, for example, an established network of traders regulates the entry and the activities of new traders in their markets. In Ghana, transporters' unions regulate the transport industry and have a noticeable influence on transportation charges for maize. The government should make sure that pockets of monopoly or oligopoly power do not develop in certain areas and that access to markets follows a set of clear and transparent rules which do not impede free entry and exit.

A common feature in all countries, is that although a lot of private traders have entered agricultural markets, expansion of area coverage and quantity traded has been very limited. Traders are not able to go much beyond entry into large-scale trading either in terms of geographical or volume expansion. Traders are often limited by unavailability of credit, limited storage and transportation facilities, and various restrictions by existing organizations or parastatals.

Most countries, especially those in Southern Africa, suffer from very poorly developed transportation and communication infrastructure which limits long-distance trading, movement of information, and overall market efficiency. Many remote areas and regions remain isolated from the rest of the country and become almost self-sustaining entities. Transport costs in most of these countries constitute up to 50 percent of total operating costs and need to be reduced to promote inter and intra-regional trade and better integration of markets. More investments in roads, rail, port infrastructure, and telecommunications networks (telephone and fax networks, internet access, etc.) are needed between and within countries to facilitate trade and access to market information.

Use of storage facilities is not very common and traders store very small quantities. The limited propensity to store stems from the uncertainties regarding movement of prices and government interference, unavailability of storage infrastructure, lack of access to credit, inefficient knowledge about storage technologies, limited area coverage, etc. Beyond the commitment to policies that provide an incentive to store, the government and the private sector need to invest in storage and market infrastructure and provide extension services to teach farmers and traders about storage technology.

Access to formal credit is very limited. This problem is pervasive in all five countries. Not many rural credit and financial organizations have emerged to replace previously subsidized credit from the government. Credit availability is biased to large export producers and trading companies and is not readily available to small-scale farmers or traders. Access to credit is limited due to high interest rates, lack of collateral, complex administrative procedures, and the short term nature of the loans. Most traders that use credit obtain it from relatives, friends or money-lenders. The government and the private sector should devise a strategy to promote the development of rural financial organizations that work and that are sustainable.

In countries where pricing policies still exist such as fixed fertilizer prices in Benin and the maize price band in Malawi, complete removal of these price interference mechanisms would promote more efficient participation of the private sector. For example, the price band in Malawi is a disincentive for private traders to conduct trading over longer distances or to store maize for later sale in leaner periods. Similarly, the banning of trade should be eliminated to allow countries to adjust more quickly to changes in prices and supply and demand conditions within and between countries.

The development of market information services that traders can use for their business is still in its infancy and not well targeted to the business sector. It is currently mainly used by donor organizations and government statistical offices. More needs to be invested to develop market information networks that are accessible to the business community. Market information networks should include not only information on local prices and supply and demand conditions, but also information on trade and prices in neighboring countries and international markets. This information will help reduce uncertainty about price movements and accelerate the response to changes in supply and demand conditions.

The Investment Response of Private Traders to Marketing Reforms

Private traders have responded to the changes in marketing policies through higher investment in trading activities. There are, however, quite important differences across countries in terms of the value, composition, and the distribution of asset ownership among private traders. The average value of assets per trader range from US$150 in Madagascar to US$3,500 in Ghana. Furthermore, equipment represents the largest category of assets, making up between 60 and 90 percent of the average value of assets per trader. As expected from the limited storage activities in most countries, the average values of accumulated investments in buildings and storage facilities are quite low. The ownership of this category of assets is also less broadly distributed than that of equipment. More specifically, private traders appear to be responding to policy changes with higher investments. For instance, the share of assets acquired within the first 2 and 5 years after the reforms reaches 30 percent in Senegal and Benin, respectively. In Benin, about one third of traders made investments during the first 5 years following the reforms. The corresponding figure for Senegal is 15 percent for 2 years.

The quantitative analysis of the relationship between investment by private traders on the one hand, and on the other, several factors that, next to the direct changes in policy, are expected to influence investments, such as market location, area coverage, profitability, and managerial skills, confirms the strong response of traders to the liberalization of marketing policies. Among the above variables, only the profitability variable appears to have a higher impact on the decision of traders to invest in marketing activities than the change in policy. The comparison of the results across countries and regional markets within individual countries reveals that the extent to which private traders respond to market reforms with higher investment is affected by factors such as the quality of infrastructure, the level of integration across local markets, and the thinness of these markets. Trader investment response also seems to depend on whether the private sector is predominantly in the entry or expansion phase. The response tend to be higher at the beginning (entry phase) of the reform process than at later stages, when most expansion-minded traders tend to be at the limit of the financially and technically manageable size of their businesses.

More importantly, the analysis of the determinants of trader investment behavior indicates that the effective transition to a viable private marketing sector depends, beyond key sector specific factors, on a variety of other factors that often are specific to a given country or even region. A factor that seems to be specific to the emerging marketing sector is the apparent inability of private traders, after the initial entry phase, to continuously and significantly expand their business activities to cover wider areas. It might therefore be necessary for reforming countries to encourage broad-based entry into local markets by private traders, not only in the remote regions, as has been emphasized so far. The apparent constraints to business expansion means that a situation with few market entrants would not lead to oligopoly situations as often feared, but rather to a breakdown in the marketing system for certain regions.

Some of the factors that may be country or region specific and that may interfere with the transition to a comprehensive private marketing system are market segmentation and thinness. The results above indicate that, even though traders may feel good about the reforms and may have adequate access to credit, they may still lack the incentives to invest in expanding marketing activities ,due to segmentation and thinness of the local markets. In other words, the local characteristics of the marketing system itself may end up being a obstacle to the transition process. It would seem, therefore, that reforming countries would raise the ability of the emerging private sector to satisfactorily fill the gap left by the dismantling of marketing parastatals by adopting measures to alleviate localized market segmentation and thinness.

Marketing Reforms, Price Behavior, and the Performance of Local Markets

Local markets in the study countries have adjusted to the changes in marketing policies, albeit at greatly varying degrees. In most cases, changes have occurred as expected and are observable quite early in the reform process. One finding that seems to cut across all study countries is the continuous decline of real local prices over the study period. It is unlikely that the downward trend in prices is the direct impact of the changes in the countries' marketing sectors, at least in the post reform period. It is true that direct price control may have prevented food prices to rise as fast as the general price levels in most of these countries. For the post-reform period, on the other hand, it is probable that prices have fallen in real terms, due to the strong inflation pressures that have been associated with overall economic reforms, which most of the study countries have implemented along with the liberalization of agricultural markets. For instance, all of the study countries have had to repeatedly or at least significantly devalue their currencies.

Local markets have also adjusted in terms of price seasonality. With the transition from a centrally controlled marketing and pricing system to a decentralized private sector based system of distribution, prices in local markets are more likely to reflect local supply and demand conditions. They should be expected to exhibit temporal patterns that are more in line with the cost of carrying supply quantities over time. In Benin, for instance, local prices exhibit distinctly less seasonal variability, with the seasonality patterns converging between groups of markets. The convergence of price patterns across certain sub-sets of markets suggest that the change in seasonality patterns is, at least in part, due to greater interdependence between local prices. In Malawi, on the other hand, local prices display little seasonal variability during the pre-reform period. This has changed slightly during the post-reform period, where one notices greater seasonal price variability in individual markets and greater dissimilarity in patterns across markets.

Price instability has also decreased quite significantly across local markets after the introduction of reforms. A key motivation behind the adoption of market reform programs is that the decentralized mode of operation of a private-sector based marketing system is more flexible and therefore responds better to changes in market conditions than under the usually centralized system of marketing boards. The expected improved response by private traders to changes in supply and demand conditions across local markets would lead to less instability as a more responsive flow of commodities would spread local price shocks to other markets more efficiently. Again here, the results for Malawi appear to be different. Price instability in local markets signals an upward trend after the introduction of reforms. It seems, however, that the higher levels of price instability in the post-reform era in Malawi are due to the series of droughts that occurred in that country during the first half of the nineties. If only the period between the introduction of reforms and the onset of the droughts is considered, one indeed observes a decline in market price variability. The temporary decline in price instability between the onset of reforms and the drought years can hardly be directly attributed to the entry of private traders into the marketing system, knowing their activities cover on average a distance of merely 15 km. It is, however, possible that the changes in ADMARC's operations due to the increasing competition with private traders following the liberalization of markets have had a stabilizing effect on local prices.

Marketing Reforms and Market Performance

Unit costs of marketing per ton/km are within the 45 to 60 US Cents, except in Benin, where they are about two-thirds lower. The comparison of the costs in Benin and the other study countries indicate the existence of cost savings in the marketing sector related to area coverage. For instance, private traders in the Senegal sample have marketed one-third less quantities and have traveled on average about one-third of the distance covered by traders in Benin. Their unit costs per ton/km is, however, about three times as high as that of traders in Benin. It is true that fuel and vehicle prices are all lower in Benin, but they can not explain the large difference in marketing costs, especially given the much better infrastructure in Senegal. Similarly, traders in Malawi market on average quantities that are comparable to that of their counterparts in Benin, but have average costs that are four times higher, because, they cover on average only about one-tenth of the distance covered by traders in Benin. Furthermore, traders in Madagascar market about 50 percent less quantities and for 50 percent of the distance covered by traders in Benin. But, their average unit costs are three times higher than in the former country. In regard to the last two countries, it should be noted that both Malawi and Madagascar have poor infrastructure compared to Benin, and this plays a role partly in explaining the differences in costs. The disparities in the performance of the transport sector in the study countries is reflected in the unit costs of transport, which are 3 and 14 times higher in Madagascar and Malawi, respectively, compared to Benin.

No data were available to compare the level of marketing costs in the study countries before and after the introduction of reforms. The approach chosen is therefore to use the changes in spatial and temporal price spreads as indicators of changes in the performance of local marketing systems in moving goods across space and over time. Although an analysis of price spreads before and after reforms could not be carried out for Madagascar and Senegal, the analysis of price data from the other 3 countries indicates that effective market liberalization has been associated with lower spatial price spreads across local markets. Both absolute and relative price margins between local markets have declined considerably in the two countries, Benin and Ghana, where effective reforms have been carried out. In contrast, no significant change has been observed among markets in Malawi.

Furthermore, market liberalization is expected to lower the cost of carrying supplies over time and thereby reduce the temporal spread of prices in local markets. Greater movement of commodities between markets also contribute to lowering temporal price gaps, as periodic price pressures are spread across a larger number of markets. Here again, the data show a significant decline in temporal price spreads, particularly in Benin and to a lesser extent in Ghana. Temporal price spreads seem to have increased in Malawi in the later years of the study period, most likely due the several droughts that have occurred in that period. But even if this period is excluded, temporal price spreads in Malawi, if not constant, exhibit an upward trend.

The last aspect of market performance that was examined is the extent of market integration in the cereal sector of the study countries. The data did not allow for an effective comparison of the situation before and after the introduction of reforms in order to document eventual changes that have been associated with the latter. Instead, the analysis has focused on a comparison of the behavior of local markets in the study countries during the last few years. The case of Benin stands out one more time, where markets seem to be much better integrated than in the comparator countries. The lowest level of market interdependence amongst the maize countries was observed in Malawi. The analysis of daily price data involving a limited number of markets in the two rice countries, Madagascar and Senegal, suggest that local markets in these countries were not that well integrated. The higher degree of market interdependence in Benin and Ghana, which also have liberalized their markets more completely, suggest that the reforms have resulted in improved integration amongst local markets.

The preceding discussion indicates that there is clear evidence of adjustment, in the expected direction, of local markets and private traders to the changes in policies. Market reforms, where effective, have been associated with desired changes in terms of price seasonality and instability patterns. Similarly, reforms have lead to lower unit costs of marketing and a reduction of price margins between markets and seasons. There is, however, considerable variation in terms of adjustment and changes in individual countries. For instance, the level of integration among local markets is much higher in Benin and fairly limited in the other countries, especially in Malawi and the two rice countries, Madagascar and Senegal. Similarly, area coverage by private traders is still limited in the late-reforming countries, such as Senegal and to some extent Madagascar, as far as the main supply and marketing region of Lac Alaotra is concerned. Marketing costs are also still relatively high in countries with poor infrastructure (Madagascar) or with still significant state involvement in trading sector (Malawi), both of which limit area coverage and raise unit costs of operations. Generally, the response in terms of improved market performance seems to be more positive in countries where i) there has been a sizable private trading sector before the reforms; ii) market reforms have been introduced earlier; and ii) partial liberalization in terms of continued presence of marketing parastatals or continued intervention in certain market segments or regional markets has been avoided.

The absence of partial liberalization as defined above improves market performance in the post-reform period for two reasons. The first one is that such an environment present private traders with greater opportunity and reinforce their confidence in the change in policy direction. The second is that the survival of parts of the pre-reform marketing parastatals is more often than not a sign of insufficient commitment on the side of policy makers to the reform process. The process in such cases does not only lack consistency and credibility, it also carries some of the same obstacles from the pre-reform period and often breeds new types of restriction to accompany the adopted policy changes. The examples of partial liberalization in the study countries include the continued dominance of ADMARC in maize marketing in Malawi, the exclusion of the main production and marketing region of the Lac Alaotra for years from the reform process in Madagascar, and the control of rice import activities as well as the attempt to dictate rice prices in Senegal long after the liberalization of domestic markets. In spite of the changes described above and which point to improving market conditions following the adoption of effective marketing reforms, the study data also show falling real prices throughout the sample. Although the focus of the study has been on the process of adjustment of the marketing system, due to resource and time limitations, a quick review of the marketing and input demand conditions of farm households has been carried out to gain preliminary insights as to the impact of reforms on the smallholder farming sector.

Preliminary Findings on the Adjustment Process in the Farming Sector

The preliminary analysis of the effects and reactions on the side of farmers with respect to market reforms indicates that they have only modestly improved the access of smallholder farmers to agricultural input markets. Although market reforms have been associated with improvements in the local input and output distribution systems, it appears that they have not raised the effective demand for modern inputs to levels that could lead to substantial increases in production and productivity. The partial approach to reforms in the input sector, which is reflected in continued government control, as well as the cut in subsidies and extension services that have accompanied the reform programs are the main factors behind the lack of significant and positive impact on the production side. In fact, there is a great risk that smallholder farmers would lose in the reform process, unless market reforms are carried out consistently. It will also be necessary to complement the reforms in the input and output marketing sectors by institutional reforms in the rural finance and extension systems, and by improvement in the quality of local infrastructure for production and productivity to increase considerably. More specifically, the following main conclusions can be drawn from the country studies: i) modern input use throughout the five countries in the study remains low in spite of increasing efficiency in marketing system for inputs. Farmers have found some improvement in the efficiency of input and output distribution system, mostly resulting from the increasing competition within emerging private sector and between the latter and the still active but less powerful state agencies; ii) there is no conclusive support that reforms have either benefitted or negatively affected farmers. The increased cost of inputs after market reform has not resulted in lower profits in all cases. The simultaneous increase in output prices and the improvement in input distribution system have partly compensated for higher costs of modern inputs. The overall impact on profit is difficult to evaluate, however, on the basis of our limited farm-level data; iii) the main constraint from the point of view of smallholder farmers seems to be access to credit. The elimination of subsidies and inefficient financial institutions has not been accompanied by increased availability of credit to farmers. As a consequence, many smallholder farmers still face tremendous financial constraints to accessing modern inputs.

The preliminary analysis conducted under the present study indicate that reforms are still incomplete, less so in the case of output than input markets. Furthermore, further complementary measures are require in order to ensure the creation of efficient and effective distribution systems that are conducive to growth and welfare improvement for smallholder farmers. First, the development of an effective rural financial system is critical to the success of market reforms. Deregulation of the financial system is ongoing, associated with the emergence of private institutions and associations. The latter, however, are still at their infancy stage and have not yet lead to the full participation of smallholder farmers in financial markets. The successful development of such financial systems is a necessary condition for improving farmers' access to modern inputs. Second, extension services, which should be provided not only by state agencies but by the private sector as well, are necessary for the diffusion of technology and the improvement of management practices by farmers. The problem associated with extension services is usually related to the lack of financial commitment and organizational efficiency that ensure high-quality delivery services. The continued necessity for the state to provide effective and efficient extension services requires not only increased efficiency in the management of these services but an adequate and sustained funding of the same services.

Finally, rural infrastructure development remains critical. Infrastructure development should reflect the priorities indicated by farmers. For instance, in the case of Madagascar, irrigation development and maintenance are essential to the development of a productive rice system. Similarly, in Senegal farmers stress the need for pumping stations and other water related technologies. The priorities in Ghana from the point of view of farmers is the access to efficient storage facilities. Farmers in Malawi, on the other hand, stress the need for improved of road infrastructure.

For further information please contact: Markets and Structural Studies Division, IFPRI, 2033 K Street, N.W., Washington, D.C., 20006, U.S.A.