77646 Liberalization, Endogenous Institutions, and Growth: A Comparative Analysis of Agricultural Reforms in Africa, Asia, and Europe Johan F.M. Swinnen, Anneleen Vandeplas, and Miet Maertens Thirty years ago, a vast share of low- and middle-income countries was heavily state controlled. The liberalizations of the 1980s and 1990s had greatly different effects on growth in countries in Africa, Asia, and Europe. A comparative framework is used to document these differences, and a model is developed to formally analyze how liberal- ization affects production and income distribution when the institutions that govern production and exchange are also affected. Hypotheses are derived for how endogen- ous institutional adjustments affect the growth response to liberalization. These insights motivate a series of explanations for the differences in performance across regions and commodities following liberalization. JEL codes: O13, O43, O57, Q12 Thirty years ago, many low- and middle-income countries were heavily state controlled. Although most extreme in the Communist world from Central Europe to East Asia, state economic intervention was also common in many African, Latin American, and South Asian countries. Indonesia was the �rst country to embark on major liberalization, beginning in 1968. Other Asian countries, such as China, Sri Lanka, and Vietnam, followed. The impact was dramatic. The reforms in China and Vietnam lifted Johan F.M. Swinnen (corresponding author; jo.swinnen@econ.kuleuven.be) is a professor of development economics and director of the LICOS–Centre for Institutions and Economic Performance at the University of Leuven (KUL). Anneleen Vandeplas is a doctoral fellow of the Research Foundation-Flanders at LICOS– Centre for Institutions and Economic Performance (anneleen.vandeplas@econ.kuleuven.be). Miet Maertens is professor of agricultural and development economics in the Division of Agriculture and Food Economics, Department of Earth and Environmental Sciences at the KUL (miet.maertens@ees.kuleuven.be). The authors thank the journal editor; three referees; Chris Barrett, Paul Collier, Csaba Csaki, Stefan Dercon, Patrick Legros, Rocco Macchiavello, Will Masters, Michel Petit, Colin Poulton, Marie Ruel, Alexander Sarris, Manohar Sharma, and Peter Timmer; and participants at workshops at the International Food Policy Research Institute, the Food and Agriculture Organization, Leibniz Institute of Agricultural Development in Central and Eastern Europe, Brunel University, Oxford University, and the KUL for excellent comments on earlier versions of the article. The research for this study received �nancial support from the KUL Research Fund (EF and Methusalem), the Research Foundation–Flanders, and IUAP. THE WORLD BANK ECONOMIC REVIEW, VOL. 24, NO. 3, pp. 412– 445 doi:10.1093/wber/lhq017 Advance Access Publication December 23, 2010 # The Author 2010. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com. 412 Swinnen, Vandeplas, and Maertens 413 hundreds of millions of people out of poverty. Countries in Sub-Saharan Africa, Central and Eastern Europe, and the former Soviet Union introduced reforms in the 1980s and 1990s. Trade, prices, exchange rates, and state control of commodity chains were liberalized to improve incentives to farmers and to boost growth, thereby raising incomes and reducing poverty (Timmer 1986; Krueger, Schiff, and Valde ´ s 1988; Commander 1989). However, the reforms had very different effects in these regions than in Asia. In Central and Eastern Europe and the former Soviet Union, output and incomes declined dramatically (Rozelle and Swinnen 2004). In Sub-Saharan Africa, the effects of liberalizations—often imbedded in structural adjustment programs—were also disappointing. While there has been some progress, the consensus is that market reforms have not met expectations (Kherallah and others 2002). Despite these differences, there have been almost no comparisons of liberali- zations across regions.1 In addition, the analyses of the unexpectedly poor effects of liberalization in Sub-Saharan Africa on the one hand and Central and Eastern Europe and the former Soviet Union on the other have evolved as different strands in the literature, with little cross-fertilization. Most analyses of the impact of liberalization in Africa are empirical studies (for example, Barrett 1997; Jayne and others 2003; Kherallah and others 2002) of how various factors helped explain the (lack of ) supply response to market reforms.2 In contrast, the poor performance of the Eastern European and Soviet reforms has sparked an extensive theoretical literature on the role of institutions in reform (for example, Blanchard 1997; Blanchard and Kremer 1997; Dries and Swinnen 2002; Gow, Streeter, and Swinnen 2000; Roland 2000; Roland and Verdier 1999; Swinnen, Dries, and Macours 2005; Swinnen and Rozelle 2006) in addition to empirical studies on the causes of decline. Insights from this theoretical literature appear highly relevant for understand- ing the effects of liberalization and reform processes in Sub-Saharan Africa as well, especially for understanding change in institutions for governing exchange in the postreform economy. Empirical studies that have considered the role of the institutional organization of the African economy have not formally modeled this interaction and drawn implications from it. This article seeks to address this gap in the literature. It compares reform performance across Africa, Asia, and Europe using indicators of output and productivity. Then it develops a model of liberalization that integrates key 1. Reforms have been compared within Asia (Green and Vokes 1998), Africa (Kherallah and others 2002), and Europe (Lerman, Csaki, and Feder 2004; Macours and Swinnen 2000) and between Europe and Asia (de Melo and Gelb 1996; de Melo and others 2001; Macours and Swinnen 2002; Rozelle and Swinnen 2004). A large number of studies have compared China and the Russian Federation and Eastern Europe (such as Dewatripont and Roland 1995; Fischer 1994; Qian, Roland, and Xu 1999; Sachs and Woo 1994; and Swinnen and Rozelle 2006). Ravallion (2008) appears to be the only one to include Africa in such comparisons. 2. A notable exception is de Janvry, Fafchamps, and Sadoulet (1991). 414 THE WORLD BANK ECONOMIC REVIEW institutional and structural characteristics of developing and transition econom- ies, using the model insights to develop hypotheses and explain empirical observations on postreform performance. The article is organized as follows. Sections I and II compare postreform agri- cultural performance and the institutional characteristics of the preliberalization economy and the liberalization process. Despite differences among countries and regions, there are important commonalities in initial conditions and in the liber- alization processes. Section III develops a model of liberalization and explains how supply responses may be affected by several factors. The theoretical model integrates common institutional characteristics of both the preliberalization economy and the liberalization process. In particular, it analyzes how factor market constraints and imperfect contract enforcement affect the impact of price and market liberalization—and how these outcomes are conditional on several factors, including the change in relative taxation with the reforms, the required inputs in the production process, and the value of the commodity. Section IV relates these theoretical predictions to empirical observations on institutional and commodity characteristics in various countries, and section V uses this fra- mework to interpret the observed differences in postreform performance. Section VI discusses the limitations of the approach and identi�es areas for further research and data collection to re�ne the empirical analysis. I. R E G I O N A L TR E N D S IN PO ST R E FO R M A G R I C U LT U R A L PERFORMANCE Although there are important differences within each region, the focus is on the conditions and reform choices that are characteristic of these regions; the limits of this approach and the importance of taking the approach further at the country level are discussed later. (The countries included in the analysis are listed in table A1 in the appendix and in the �gures.) Figures 1 and 2 summarize the performance of agriculture in four transition and developing regions in the years after implementation of agricultural reforms and structural adjustment programs. The analysis considers several performance indicators, including output indicators (gross agricultural output and gross agricultural output per capita), and partial productivity indicators (land yields and labor productivity) for a 16-year period after the start of reforms.3 As explained, the focus is on comparing the relative reform perform- ances of countries across Africa, Europe, and Asia, in particular the differences 3. Partial productivity measures are used because data and methodological problems limit the availability of comparative and reliable estimates of total factor productivity (TFP), the most comprehensive indicator of productivity. The literature shows that TFP trends move largely in the same direction as partial productivity measures; see, for example, Huang and Rozelle (1996), Fan (1997), and Jin and others (2002) for China; Benjamin and Brandt (2001) and Pingali and Xuan (1992) for Vietnam; Macours and Swinnen (2000) for Central and Eastern Europe; and Nin Pratt and Yu (2008) for Sub-Saharan Africa. Swinnen, Vandeplas, and Maertens 415 F I G U R E 1. Postreform Performance of Agriculture, RSSAP Indicator Note: Overall yields are calculated as simple averages of yields of cereals, �bers, fruits, milk, nuts, pulses, roots and tubers, rubber, spices, sugar crops, tobacco, and vegetables. See table A1 in the appendix for the starting year of the reform and for countries in each region for the RSSAP indicator. Source: Authors’ calculations based on Food and Agriculture Organization data and RSSAP indicator from Rozelle and Swinnen (2004). in reform experiences between Sub-Saharan Africa and Central and Eastern Europe, the former Soviet Union, and East Asia. Two indicators are used to identify the start of reform (year 0): the Sachs and Warner (1995) indicator, as updated by Wacziarg and Welch (2008) (SWWW) and a new indicator (RSSAP), which combines Rozelle and Swinnen’s (2004) indicator for countries in Central and Eastern Europe, the former Soviet Union, and East Asia and the start of structural adjustment programs (SAP) for countries in Sub-Saharan Africa.4 The use of the �rst year of a structural adjust- ment program as the start of reforms is consistent with the Rozelle and Swinnen approach. The RSSAP indicator does not always reflect lasting reforms and con- tinuous openness—countries sometimes did not implement promised reforms or reversed liberalization policies after some years. There were cases of reversal and gradual reform in all regions. However, most countries that received structural adjustment loans did implement basic reforms, including macroeconomic, market, and agricultural reforms. Macroeconomic reforms, such as interest rate liberalization and exchange rate devaluation, were very important in reducing 4. The year the country �rst received a structural adjustment loan from the World Bank is used to establish the start of structural adjustment programs; see table A1 in appendix for details. 416 THE WORLD BANK ECONOMIC REVIEW F I G U R E 2. Postreform Performance of Agriculture, SWWW Indicator Note: Overall yields are calculated as simple averages of yields of cereals, �bers, fruits, milk, nuts, pulses, roots and tubers, rubber, spices, sugar crops, tobacco, and vegetables. See table A1 in the appendix for the starting year of the reform and for countries in each region for the SWWW indicator. Source: Authors’ calculations based on Food and Agriculture Organization data and SWWW indicator from Sachs and Warner (1995) and Wacziarg and Welch (2008). indirect taxation of agriculture, the main component of agricultural taxation in developing countries, according to Schiff and Valde ´ s (1991). In addition, reforms in domestic agricultural markets were an important component of early structural adjustment programs. Gross agricultural output rose rapidly after the start of reform and liberaliza- tion programs in East Asian transition economies, especially in China and Vietnam. In Central and Eastern Europe and the former Soviet Union, however, agricultural output fell sharply in the initial years of transition, before stagnating and then recovering slightly in later years.5 On average in countries in Central and Eastern Europe and the former Soviet Union, agricul- tural output was 20 percent lower after a decade of reform than at the start of transition; over the same time span, countries in East Asia increased agricul- tural output by almost 60 percent over its prereform level. In per capita terms, output fell sharply in Central and Eastern Europe and especially in the former Soviet Union and increased sharply in East Asia. 5. While the general trend of output decline is the same for Central and Eastern European and former Soviet Union countries, there are differences in the time from the start of reform to the bottom of the time trend and in the extent of output recovery across subregions and countries (see Rozelle and Swinnen 2004). Swinnen, Vandeplas, and Maertens 417 The performance of Sub-Saharan African countries that embarked on struc- tural adjustment and agricultural liberalization falls between that of reformers in East Asia and Europe. On average, output grew in Sub-Saharan African countries but slower than in East Asia: Sub-Saharan African output was 35 percent above its prereform level after a decade of reform. However, in per capita terms, output growth in Sub-Saharan Africa disappears. Its flat time trend contrasts sharply with the positive trend in East Asia (�gure 1b).6 It is still much better than the negative trend in Central and Eastern European and former Soviet Union countries, however. Comparing productivity indicators further nuances the story. In line with East Asian countries’ sharp output growth were their strong increases in agri- cultural labor productivity and land productivity (yields). In Central and Eastern European countries, after an initial period of decline averaging three years, labor productivity and yields rose strongly. The productivity decline (and stagnation) persisted longer for former Soviet Union countries (averaging 5 –7 years), and the decline was deeper than in Central and Eastern Europe. These countries seemed to follow the same path of productivity growth as in East Asia and Central and Eastern Europe, but with a lag. Average productivity has increased in Sub-Saharan Africa since the start of the reforms, but much more slowly than in East Asia. Although productivity growth in Africa initially outperformed that in Central and Eastern Europe and the former Soviet Union, once agriculture rebounded in those two regions, pro- ductivity growth outpaced that in Sub-Saharan Africa. Agricultural output growth in Sub-Saharan Africa can be attributed mainly to acreage expansion (about 30 percent over 12 years), with only moderate improvements in labor and land productivity. In contrast, East Asia’s sharp growth in agricultural output was due largely to strong productivity growth and only modest increases (around 15 percent) in agricultural area. A second indicator for the start of reforms is the Sachs and Warner (1995) indicator, as updated by Wacziarg and Welch (2008). The SWWW is is an indi- cator of uninterrupted openness that uses tariffs, nontariff barriers, the exchange rate black market premium, and the existence of state monopolies and socialist economic systems to determine whether a country is open and lib- eralized. The SWWW focuses focuses on openness to external trade. While acknowledged as a good overall indicator of economic reforms (Hausman, Pritchett, and Rodrik 2006), it is much more restrictive than the RSSAP indi- cator. By its standards, China, Estonia (one of the most liberal economies in Central and Eastern Europe in the 1990s), and Vietnam had not yet started their reforms by 2004—the year Estonia entered the European Union and three years after China concluded entry negotiations to the World Trade Organization (see table A1 in appendix A). 6. Differences in time trends between output and per capita output growth are explained by differences in population growth, which have been much higher in Sub-Saharan Africa than elsewhere. 418 THE WORLD BANK ECONOMIC REVIEW The SWWW indicator has a maximum of 12 years of postreform data because the indicator shows reforms starting later than the RSSAP does. For that reason, the results for the two performance indicators cannot be compared for East Asia because reforms in China and Vietnam had not yet started in 2004 according to the SWWW indicator. A comparison for the other regions shows that all indices perform somewhat better for Sub-Saharan Africa using the SWWW indicator (see �gure 2) than the RSSAP indicator (see �gure 1). This is because the SWWW indicator includes only the most advanced refor- mers, which perform better than slower reformers. The same is true for countries of the former Soviet Union. And because the SWWW indicator puts the start of the reforms 3 –4 years later than the RSSAP does, the period of initial decline is shorter, at 3 –5 years postreform with the SWWW compared with 6–8 years with the RSSAP. For Central and Eastern Europe, there is not much difference in performance between the two indicators because there is not much difference in the number of countries included and in starting year of reform (see table A1). Despite the differences, the most important patterns of performance are con- sistent with both indicators, in particular for productivity indicators: an initial decline and then a recovery in Central and Eastern Europe and the former Soviet Union, a shorter decline and faster recovery in Central and Eastern Europe than in the former Soviet Union, no average decline in Sub-Saharan Africa, and once the recovery starts considerably higher growth rates in Central and Eastern Europe and the former Soviet Union than in Sub-Saharan Africa. These observations and stylized facts are robust across the indicators and are the focus of the rest of this article. II. INSTITUTI ONAL CHARACTERIST ICS The four regions had some common institutional characteristics in the preliber- alization economy and during the liberalization process, along with some key differences. The Preliberalization Economy Countries in the four regions engaged in similar governance of commodity chains before liberalization.7 Government institutions were monopoly buyers of agricultural products. This was most extreme in Communist countries, where the entire agri-food system was under state control. Governments in most Sub-Saharan African countries also regulated production, marketing, and processing in the decades after independence through marketing boards, government-controlled cooperatives, and government-owned companies. 7. For details, see Kherallah and others (2002); Rozelle and Swinnen (2004); and Swinnen and Maertens (2007). Swinnen, Vandeplas, and Maertens 419 T A B L E 1 . Regional Comparison of Reforms and Initial Conditions Central and Former Soviet East Sub-Saharan Characteristic Eastern Europe Union Asia Africa Initial conditions Collectivized agriculture Yes Yes Yes No Income per capita (purchasing 10,069 4,364 674 1,429 power parity in 2000 US dollars) Agricultural price distortions Subsidized Subsidized Taxed Taxed Reform approach Big bang Big bang Gradual Mixed Source: World Bank 2006. Interlinked contracting was widespread. Again, this practice was most extreme in the Communist system, which had fully integrated and completely state-controlled agricultural supply chains. Production, processing, marketing, input and credit provision, retailing, and other links in the supply chain were all government controlled. Government control and interlinked food supply chains were also widespread in Sub-Saharan Africa. Many state-controlled organizations provided inputs to farmers (often as the only source) and pur- chased their outputs (Bauman 2000; Poulton and others 1998). The dominant pattern was seasonal input and credit provision by state-controlled organiz- ations to small farmers in return for supplies of primary produce. These systems did manage to provide inputs and credit to farms—an impor- tant achievement. The monopoly control contributed to enforcement of the interlinked contracts, but costs were high and there were sometimes problems with buyers paying late and farmers not repaying credit or inputs.8 Control of the supply chains also enabled governments to set prices. Price setting was motivated by political objectives, such as providing cheap food for urban markets. While price distortions were present everywhere, the distortions differed. Indicators of agricultural protection show that farmers in Central and Eastern Europe and the former Soviet Union were highly subsidized before the reforms (40–80 percent, depending on the indicator), while farmers in China and Sub-Saharan Africa were heavily taxed (averaging 30 percent in Africa and 50 percent or more in China). There were also important differences between regions, especially in pro- duction structure and income level at the time of liberalization (table 1). Collective farms prevailed in East Asia, the former Soviet Union, and Central and Eastern Europe but not in Sub-Saharan Africa, where land cultivation was individual and based on private user rights (in most cases without individual land rights).9 Per capita incomes were much higher in Central and Eastern 8. Several studies conclude that state-controlled outgrower schemes were inef�cient and poorly managed, while others point to the successes of these systems (Bauman 2000; Johnson and Brooks 1983; Poulton and others 1998; Warning and Key 2002). 9. The exception in Sub-Saharan Africa was Ethiopia, which had a Chinese-style communal agricultural production system from 1975 to 1987. 420 THE WORLD BANK ECONOMIC REVIEW Europe ($10,069) and the former Soviet Union ($4,364) than in Sub-Saharan Africa ($1,429) and China ($674). These income differences are correlated with commodity value chains. With higher incomes, consumers shift from staple foods to higher value foods (such as fruits, vegetables, �sh, and meat) and demand higher quality and safety standards. In Central and Eastern Europe and the former Soviet Union, more than 70 percent of the value of agricultural production on average consisted of higher value food products; in Sub-Saharan Africa and East Asia, less than 50 percent did. Moreover, in Sub-Saharan Africa and East Asia an average of 10–20 percent of agricultural production was in very low-value staple crops such as roots, tubers, and pulses, a much larger share than in the former Soviet Union or Central and Eastern Europe.10 The Liberalization Process During liberalization, governments across the four regions reduced their inter- ventions in price setting, thereby reducing price distortions caused by taxes and subsidies. Private traders were allowed to engage in trade, and the monopoly position of government marketing boards and government-owned processing companies ended. There were differences in the timing and extent of reforms across regions. Countries in Central and Eastern Europe and the former Soviet Union took a “big-bang� approach to reform, liberalizing prices and markets simultaneously, allowing private competition, and privatizing land rights and farms.11 In con- trast, China sequenced its reforms, reducing control over farm prices while maintaining control over the institutions that supplied farm inputs and pur- chased outputs (mostly rice).12 China �rst transferred land rights to farmers and later administratively increased prices to reduce taxation on farmers. Only afterwards, and only gradually, did it allow competition in food markets. Reform strategies were mixed in Sub-Saharan Africa.13 In most countries, the lifting of state control was not as sequenced as in China, but few countries took a big-bang approach.14 Reforms often started in basic food sectors, moving on only later to export sectors (such as coffee, cocoa, and cotton). 10. Authors’ calculations based on Food and Agriculture Organization data. 11. There was considerable variation among countries; see Swinnen and Rozelle (2006) for details. 12. Implementation of reforms was more nuanced than the usual summaries of a “gradual process.� China’s initial approach did not differ much from that of countries in Eastern European and the former Soviet Union as it liberalized markets and allowed private traders. However, the resulting market turmoil and the threat of reduced rice supplies for cities induced Chinese leaders to reestablish control over supply chains. See Rozelle (1996) for a review of these policy changes and their effects. 13. For details, see Akiyama and others (2003); Kherralah and others (2002); World Bank (1994). 14. For example, Nigeria launched a big bang reform approach in 1987, simultaneously removing price controls, trade restrictions, and state crop procurement and input provision. Cameroon and Tanzania took a sequential approach similar to China’s in �rst liberalizing prices and only subsequently did they gradually end the state monopoly in the coffee sector; Cameroon did the same in the cocoa sector, as did several Eastern African countries in the cotton sector. Swinnen, Vandeplas, and Maertens 421 F I G U R E 3. Agricultural Protection by Region (%), RSSAP Indicator Note: See table A1 in the appendix for the starting year of the reform. Because of gaps in the data, two measures are used. The producer subsidy equivalent (PSE) and the nominal rate of assistance (NRA) are calculated differently but are comparable as general indicators of government support to agriculture. PSE measures how much of gross farm income is due to government measures. NRA measures distortions in farm prices and revenues due to government interventions. See OECD (2008) and Anderson (2009) for details. Central and Eastern Europe includes Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slovak Republic. East Asia includes China and Vietnam, the former Soviet Union includes the Russian Federation and Ukraine; Sub-Saharan Africa includes Cameroon, Co ˆ te d’Ivoire, Ethiopia, Ghana, Kenya, Madagascar, Mozambique, Nigeria, Senegal, Sudan, Uganda, Zambia, and Zimbabwe. Source: Authors’ analysis based on data from OECD (2008) and Anderson (2009) and RSSAP indicator from Rozelle and Swinnen (2004). Basic food sectors were often completely liberalized, while many export sectors remained under some state control.15 Despite these differences, the liberalization process in the four regions shared two crucial, interrelated aspects: price and market liberalization. As governments stopped setting prices, price distortions decreased, as shown in �gure 3 by the movement of the assistance indicators toward zero (no distortions) across all regions. Markets were liberalized as state control over the structure of commod- ity chains was lifted; governments began to allow competition in the chain and no longer dictated trade. In all four regions, the share of the private sector increased strongly in the two decades following reform, with some variation. The theoretical model described in the next section integrates these common institutional characteristics of the preliberalization economy and the liberaliza- tion process.16 Later, in interpreting the empirical observations, additional variations (as discussed above) are integrated to complement the hypotheses 15. State monopolies still exist, especially in the cotton sector in Western Africa. 16. The effects of privatization are not discussed independently but are implicit in the model. If privatization leads to more ef�cient management, and thus to a reduction in excess marketing costs (tm), farm prices will rise, with effects similar to those for a decrease in taxes. This effect should lead to higher output and farm incomes. However, privatization may not lead to lower marketing costs if it induces monopolistic/monopsonistic pricing. The key element is competition, which is analyzed explicitly. 422 THE WORLD BANK ECONOMIC REVIEW based on the theoretical model and to better understand the overall reform effects and economic performances.17 III. A MODEL OF LI BERALIZATION WITH ENDOGENOUS INSTITUTIONS Consider the situation in which a local household or farming company (“the farmer�) can choose to produce a crop with low value added for the local market or a crop with high value added that the farmer can sell to a trader or a retailing or processing company (“the buyer�). The buyer sells the product ( possibly after processing) to consumers either domestically or internationally. De�ne pl and ph as the unit consumer price of the low- and high-value pro- ducts. Let m be the unit “ef�cient� processing and marketing costs (the extra costs involved in producing the high-value product and delivering it to consu- mers through an ef�cient market system). Let tm be the excess processing and marketing costs due to inef�ciencies in the marketing chain, and let tx be the applicable government taxes or subsidies (tax for tx . 0 and subsidy for tx , 0).18 Producing high-value commodities requires some (speci�c) input use (such as fertilizers, credit, seeds, and technology). Assume that to produce one unit of high-value output, the farmer requires speci�c inputs with a value of I in addition to basic production cost C (labor and land) to produce the low-value good. Assume further that these speci�c inputs are not available to the farmer because of factor market imperfections. The buyer can act as an intermediary in the input market and provide (sell or lend) the inputs to the farmer. The buyer considers offering a contract to the farmer promising to provide inputs and laying out the conditions (time, amount, and price) for purchasing the farmer’s product. The buyer either provides the farmer with the full amount of inputs I per unit of production or provides no inputs.19 If the buyer and the farmer decide to contract, they can realize a joint surplus G, with G ¼ ph – m – I – C – t and t ¼ tx þ tm. The farmer’s disagreement payoff (income when the contract does not mate- rialize) is Yl ¼ pa – C, with pa ! 0 an indicator of alternative opportunities. If the farmer’s only ex ante outside option is to produce low-value products for the local market, pa ¼ pl. Hence pa ! pl and pa increases if the farmer has 17. Parts of the model are related to the approach of Kranton and Swamy (2008). The model extends the approach of Swinnen and Vandeplas (2009) to capture liberalization effects. 18. It is assumed that the government does not impose taxes on low-value products. This is a realistic assumption since such taxation may not be possible if low-value products are important for household or local village consumption. It is also consistent with evidence that distortions are much more important in tradable commodities than in nontradable commodities and that government policy ´ s 1988). has an antitrade bias (Anderson 2009; Krueger, Schiff, and Valde 19. This implies that using any amount of inputs below the optimal amount I results in a lack of marketable surplus. Swinnen, Vandeplas, and Maertens 423 other opportunities.20 The buyer’s payoff under disagreement is Pl,21 where Pl ! 0 is an indicator that reflects the buyer’s alternative investment options. The achievable net surplus is St ¼ G – Yl – Pl, where St ¼ u – I – t, with u an indicator of the value of the product (relative to alternative activities): u ¼ ph À pa À Pl À m: ð1Þ In a setting of perfect enforcement, joint pro�ts can be divided according to a simple Nash bargaining process with sharing rule b, such that the respective incomes of the supplier and the buyer under perfect enforcement are Ypf ¼ Yl þ bSt and Ppf ¼ Pl þ (1 – b)St.22 More relevant here is when enforcement is costly. Consider the extreme situation of no external enforcement—equival- ent to assuming that external enforcement is prohibitively costly. First, the farmer can divert the inputs received to other uses, selling them or applying them to other production activities (such as subsistence crops). This way, the farmer can always earn at least an income Yd ¼ pa – C þ I – wf, where pa – C represents the farmer’s income from producing the low-value product, I the revenue from reselling the inputs, and wf the reputation cost.23 In this case, the buyer earns a payoff Pd ¼ – I (assuming that the buyer cannot �nd alternative suppliers ex post). Second, the farmer can apply the inputs, as agreed in the contract, but then sell the high-value output to another buyer. The competing buyer may not value the product as much as the contract buyer does. De�ne ps as the price offered by competing buyers.24 The farmer’s payoff is now Ys ¼ ps – C – wf, and the buyer’s payoff is Ps ¼ –I. The contract (Y, P) that satis�es the farmer’s participation and incentive compatibility constraints25 can then be written as: Y ¼ pa À C þ max ½bðu À I À tÞ; I À wf ; ps À pa À wf ފ ð2Þ P ¼ ph À m À I À C À t À Y : ð3Þ For the buyer to agree on the contract, condition P ! Pl must be ful�lled. This implies that contracts can be enforced only for a range of parameter values, 20. More generally, pa increases with supplier concentration, decreases with buyer concentration (Inderst and Mazzarotto 2008), and increases if the supplier’s bargaining partner is not the “gatekeeper� to the high-value market (Mazzarotto 2004). 21. Pl . 0 decreases with supplier concentration and increases with buyer concentration (see Inderst and Mazzarotto 2008). 22. Nash (1953) proposes that the sharing rule be �fty-�fty, but this article takes a more general view. 23. This can be interpreted in a broad sense not only as a pure loss of reputation, but also as a social capital cost, a moral loss, or loss of future trade opportunities. 24. The price ps reflects the degree of buyer speci�city of production standards (the higher the speci�city of the product or quality standards or the higher the transaction costs of switching, the lower ps is). If quality characteristics are more observable (or cheaper to observe), then ps will increase. 25. The relevant incentive compatibility constraints are Y ! Yd and Y ! Ys. 424 THE WORLD BANK ECONOMIC REVIEW which is summarized in the following restriction on u: u ! umin ¼ maxðI þ t; 2I þ t À wf ; I þ t þ ps À pa À wf Þ: ð4Þ This condition captures several reasons for potential contract failure. if u is smaller than I þ t, the net surplus of the transaction will be negative and there is no incentive for contract formation. This can arise for two reasons. If u I, there is no surplus to be created. This situation is referred to as ef�cient separ- ation. If I , u , I þ t, there would be a surplus under nondistorted conditions, but either taxation or inef�ciencies in the chain prevent an effective surplus; this situation is referred to as distorted separation. If u ! I þ t but smaller than 2I þ t – w, or than I þ t þ ps – pa – wf, no price offered by the buyer can make the supplier comply with the contract. In other words, the premium26 that the buyer has to pay the supplier not to breach the contract is larger than the buyer’s gross revenues: the buyer cannot afford this. Under these con- ditions, the contract will not be realized, even if it would be socially ef�cient to do so. This is referred to as inef�cient separation. Figure 4 illustrates these separation effects. Line S* represents the surplus that could be created without distortions (t ¼ 0) and with perfect enforcement. Line St represents surplus with distortions (St ¼ S* – t), and the kink in the St function reflects the hold-up effect—the inability to enforce the contract for I þ t u , umin. Condition (4) implies that several factors are crucial for contracting to be sus- tainable. The relative value in the chain (u) needs to be high enough to realize a net surplus and to overcome enforcement problems. From equation (1) it follows that u will be higher when the consumer price ( ph) is higher, when processing and marketing costs (m) are lower, and when there are fewer alternatives for suppliers and buyers ( pa and Pl low). Higher speci�c input costs (I) also reduce contract feasibility by reducing the surplus and increasing incentives for breach- ing the contract. Government taxes or subsidies (tx) will affect contracting, as a higher u will be required for contract formation when farmers are taxed (tx . 0), and a lower u will be required when farmers are subsidized (tx , 0). Inef�ciencies in processing and marketing (tm) also reduce the likelihood of con- tracting. If the buyer-speci�city of the product is high (low ps), contracts are sus- tainable for a wider range of u, as umin will be lower. Finally, a higher reputation cost of the farmer (wf ) makes contract breach less likely. In summary, if the relative value in the chain (u) is suf�ciently high, oppor- tunistic behavior can be overcome by paying a higher price to the supplier. Inef�cient separation is thus more likely to occur if the value of u is low, if the value of required inputs I is high, if farm reputation costs wf are low, and if there are more alternative buyers for high-value products ( ps high).27 26. This premium (1) can be derived as 1 ¼ max [b(u – I – t), I – wf, ps – pa – wf )] – b(u – I – t). 27. Another way to enforce contracts is to invest in supervision (or engage third-party enforcement), if it is not prohibitively costly. Swinnen, Vandeplas, and Maertens 425 F I G U R E 4. Contracting and Surplus Creation Source: Authors’ analysis. Aggregate Output Consider next what happens if there is more than one supplier (N suppliers) and each can at most produce one unit of high-value product. The transaction costs of dealing with suppliers differ, because of differences in landholdings, experience or skill level, distance from the contracted processor, and other reasons. More speci�cally, assume that a processor faces transaction cost ti in dealing with supplier i. This transaction cost is assumed to be borne by the 426 THE WORLD BANK ECONOMIC REVIEW processor on conclusion of the agreement or at delivery of the inputs. The sup- plier associated with the lowest transaction cost has ti ¼ 0, the supplier with the highest transaction cost has ti ¼ T. In between, transaction costs ti are dis- tributed according to a uniform distribution: ti U(0, T ). In all other charac- teristics, suppliers are assumed to be identical. This derivation applies for the supplier with the lowest transaction cost. For suppliers with higher transaction costs, conditions (2), (3), and (4) will translate into the following conditions: Yi ¼ pa À C þ max ½bðu À I À tÞ; I À wf ; ps À pa À wf Š ð5Þ X P¼ ð ph À m À I À C À t À ti À Yi Þ ð6Þ i u ! umin;i ¼ umin þ ti ¼ maxðI þ t þ ti ; 2I þ t À wf þ ti ; ps À pa À wf þ t þ ti Þ: ð7Þ Total supply, Q(u), can now be derived at each level of value u. If t *(u) is de�ned as the value of t for which condition (7) is binding (hence t *(u) ¼ u – umin), suppliers with ti . t *(u) will not be able to produce high-value products, while suppliers with ti t *(u) will. The total supply of high-value products can then be calculated as:28 tà ðuÞ u À umin QðuÞ ¼ N¼ N: ð8Þ T T The same factors identi�ed above will now determine the supply of high-value products: total output is expected to increase if the value u increases or t decreases, if the value of required inputs I is lower, if farm reputation costs wf are higher, and if there are fewer alternative buyers for high-value products ( ps low). Contract enforcement differs under state control and under a market system. Monopolistic state control makes contract enforcement more likely because of the absence of competition (hence low pa as well as low ps) and high reputation costs for farmers (high wf ).29 Excess marketing costs tm . 0 make enforcement more dif�cult, while the impact of price distortions depends on the tax regime. As previously explained, the focus is on two crucial, interrelated aspects of liberalization: price liberalization (an end to government determination of prices) and market liberalization (an end to state control over the structure of commodity chains by allowing private trade and competition). De�ne T as the governments’ price policy and Z as the market policy. Price liberalization 28. Assume that t * T, implying that u will never increase suf�ciently to enable the supplier with the highest transaction cost to produce. 29. An alternative argument is that centrally imposed conditions to source from all farmers (for political objectives) may imply lower reputation costs for farmers. Swinnen, Vandeplas, and Maertens 427 is represented by DT . 0, with @ tx / @ T . 0 for tx , 0 and @ tx / @ T , 0 for tx . 0. Market liberalization is represented by DZ . 0. Price Liberalization In the model, price liberalization (DT) will affect farms through the effect on output prices. Equation (4) implies that @ umin / @ tx . 0. Hence, it follows that price liberalization will improve contract feasibility by reducing umin where farmers were previously taxed. There will be less distorted separation, and con- tracting will be possible over a larger domain of u. Output would therefore be expected to increase for the high-value production activities. However, when price liberalization involves a cut in agricultural subsidies, the reduced subsi- dies can make contracting no longer feasible. In that case, the model predicts an output decline. In summary, @ Q / @ T , 0 for tx , 0 and @ Q / @ T . 0 for tx . 0. Market Liberalization Market liberalization (DZ) is implemented by allowing private traders and buyers to enter the market and by privatizing and removing the monopoly status of state companies. As long as contracting is enforced, competition enlarges the farmer’s alternative income opportunities (through pa and ps) and share of the contract value. However, with (increasing) competition between buyers, contracting might break down, although that would be socially inef�- cient. Several subeffects of increased (ex ante as well as ex post) competition (DZ . 0) on high quality output can be derived:   @ QðuÞ N @ ½u À umin Š @ u @ umin @ pa @ umin @ ps ¼ ¼ À : À : @Z T @Z @ pa @ pa @ Z @ ps @ Z ð9Þ @ umin @ tm @ umin @ wf À : À : @ tm @ Z @ wf @ Z where @ u/@ pa , 0, @ umin/@ pa 0, @ umin/@ ps ! 0, @ umin/@ tm . 0, @ umin/@ wf 0 (in each case the effect is zero when the constraint is not binding and either positive or negative when the constraint is binding). The �rst effect of competition between private buyers is to increase the ex ante outside option farmers face at the time of contract negotiation. In the model, this implies an increase in pa (@ pa /@ Z . 0), which bene�ts farmers. To assess the effect of pa on contract enforcement, the impact of pa on both u and on umin must be considered. The �rst term of equation (9) will be zero if the last term of equation (4) is binding on umin; otherwise, it will be negative. Second, competition also increases the ex post outside option of the farmer, ps (@ ps /@ Z . 0). With a higher ps, farm pro�ts rise, but contracting is more dif�cult. 428 THE WORLD BANK ECONOMIC REVIEW Third, competition improves company management. There is an extensive literature on how competition (and privatization) changed manager and �rm behavior in transition economies (Roland 2000; Konings and Walsh 1999). A manager’s incentive for innovation and pro�t maximization will be stronger in a competitive environment without soft budget constraints. Improved manage- ment reduces excess processing and marketing costs tm (@ tm/@ Z , 0), enhan- cing both farmer pro�ts and contract enforcement. Fourth, competition reduces the farmer’s reputation cost wf from breach of contract (@ wf/@ Z , 0) because the availability of alternative buyers is expected to negatively affect the penalty for contract breach (Eswaran and Kotwal 1985; Hoff and Stiglitz 1998) and because coordination and information sharing are less likely with a greater number of agents (Zanardi 2004). This effect also enhances farmer pro�ts but makes contracting more dif�cult. In summary, from equation (9) it follows that market liberalization implies several subeffects, some that make contracting more feasible and some that make it less feasible. Three of the four effects on the right side of equation (9) are negative.30 Only the reduction in excess processing and marketing costs (term 3) will improve contract feasibility, ceteris paribus. While the net effect is an empirical question that depends on the size of the various components, the theoretical results suggest that important constraints on output growth may be expected with market liberalization if the endogenous impact on the emergence and enforcement of contracting is taken into account. Finally, the analysis has assumed perfect information and focuses only on output. In reality, there is likely to be considerable uncertainty, and the reforms themselves may affect this uncertainty.31 That will affect the behavior of agents, depending on their expectations and risk aversion. These effects may reinforce or mitigate some of the �ndings here.32 However, as shown above, even with the assumption of perfect information, important contract failures may occur. Implications The theoretical results have major implications for understanding the effects of liberalization. The output effects of price liberalization may be positive or negative. If liberalization increases prices, the provision of speci�c inputs will improve as private enforcement grows; the opposite occurs for price declines. 30. More speci�cally, each term is strictly negative or zero depending on whether the respective constraints are binding. 31. Both Krueger, Schiff, and Valde ´ s (1991) for developing countries and Rozelle and Swinnen (2004) for transition economies have explained that the liberalization process increased price volatility. Barrett (1998) analyzes output responses (and welfare) effects under uncertainty; Fafchamps (2004) and Gow, Streeter, and Swinnen (2000) show how volatility may lead to more frequent contracting failures. 32. In an extension of the model used in this article integrating risk and uncertainty, Swinnen, Vandemoortele, and Vandeplas (2009) show that these effects are conditional on the nature of the price volatility and the distribution of expectations and risk aversion across agents in the chain. Swinnen, Vandeplas, and Maertens 429 With competition, direct and indirect effects may counteract each other. Increased competition will stimulate output by increasing bene�ts for farmers but may constrain or reduce growth by making enforcement more dif�cult. Hence the two effects may be opposite, but this depends on the nature of the commodity and the supply chain. The next section relates these theoretical �ndings to country and commodity characteristics, focusing on three key indicators: the change in relative subsidies/ taxes during transition, required inputs in the production process, and the value of the commodity. From the model, it follows that these factors will affect con- tracting and output. For example, in sectors and countries where price liberaliza- tion led to a decrease in relative prices (tx), contracting will be more dif�cult. In addition, input requirements (I) and value (u) play an important role. Consider three types of commodities: low-value products that require no external inputs and medium- and high-value products that require external inputs. Low-value products will not face contract enforcement problems, since there is no interlinked contracting, but they will face the direct effects of price and com- petition reforms. When production requires external inputs, the theory predicts that following liberalization, interlinked contracting by the private sector will be easier to sustain in higher value commodity chains. Therefore, for commodities that require substantive inputs, the supply response would be expected to be positively related to commodity value. These arguments have important impli- cations for the regional comparisons since the value and input requirements of the key commodities are likely to vary considerably with a country’s income level and trade structure. Both input requirements and value will typically be higher in richer countries than in poorer countries. However, for speci�c com- modities, poor countries may reach rich country consumers through exports, which typically implies higher value and higher input requirements for speci�c sectors. In the next section, these insights are used to interpret performance. I V. A N E X P L A N A T I O N O F D I F F E R E N T L I B E R A L I Z A T I O N PERFORMANCES This section combines insights from the theoretical model and from the analy- sis of differences in initial conditions and reform choices to develop a set of hypotheses explaining the differences in reform performances across regions. Central and Eastern Europe and the Former Soviet Union In Central and Eastern Europe and the former Soviet Union, where farmers were subsidized under the state-controlled system, price liberalization involved a dramatic reduction in farm support and led to a strong decline in the terms of trade for farmers. Together with privatization of farms and industry, this caused a complete collapse of the state-controlled contracting system and, with it, the provision of inputs to farmers (Gow and Swinnen 1998; Cungu and others 2008). The effect was strong because farms used (external) inputs 430 THE WORLD BANK ECONOMIC REVIEW intensively, making them dependent on exchange with companies for their inputs. Agricultural output and productivity declined sharply, as reflected in the performance indicators in �gures 1 and 2. This initial effect was reinforced by the land reforms, as gains from improved incentives in individual farms were initially more than offset by losses in scale economies because of the capital-intensive production structure.33 However, consistent reforms in a region with relatively high incomes also induced large inflows of investments in the food chain. These investments, in turn, stimulated rapid expansion of privately organized contracting, with major farm spillovers (Gow, Streeter, and Swinnen 2000; Dries and Swinnen 2004; World Bank 2005). Observed contracting varies. It can be formal or informal, written or oral, and simple interlinked provision of basic inputs and trade credit or sophisticated investment loans and triangular contracting structures, with written contracts between farms and processors serving as collateral for farm loans from banks.34 While indicators of contracting are not available on a representative basis across sectors or regions, there are a few cases where survey data have been col- lected that are comparable across several countries. Figure 5 documents the extent of endogenous private sector contracting between farms and dairy processors in several European transition economies. The �gure clearly shows a positive correlation between the share of dairy pro- cessors that provide interlinked contracts with farm assistance programs35 to their suppliers and both the income level of the countries ( panel a) and pro- gress in the reform process ( panel b). Several studies have shown that these investments and contracts, together with stabilization of real prices in the mid-1990s, caused a flow of inputs, capital, and technology to the farm sector—as explained by the model—and contributed to strong productivity increases in later years of reform (Dries and Swinnen 2004, 2010). This process started earlier and more intensively in Central and Eastern European countries, where incomes and commodity chain values were higher and where liberalization progressed faster, and later and slower in former Soviet Union countries, which were poorer and where liberali- zation progressed more slowly.36 33. See Macours and Swinnen (2000) for estimations of the contributions of the various reform elements to the decline in agricultural output in Central and Eastern Europe. 34. For case studies and reviews of evidence, see World Bank (2005) and Swinnen (2006, 2007). 35. These are programs that provide inputs, credit, advisory services, and sometimes investment support and bank loan guarantees. 36. Indicators of foreign direct investment are available only at the aggregate level for all regions discussed here. Only for Central and Eastern Europe are there data series on foreign direct investment speci�c to agri-food sectors. The aggregate indicators show that the inflows of foreign direct investment after the reforms were much higher in Central and Eastern Europe than in other regions. Swinnen, Vandeplas, and Maertens 431 F I G U R E 5. Contracting, Income Levels, and Reform Progress in Central and Eastern Europe Note: Correlation (R2) is 0.77 in �gure 5a and 0.95 in �gure 5b. Source: For incidence of interlinking, authors’ analysis based on data from Dries and others (2009); GDP per capita from IMF (2010); for European Bank for Reconstruction and Development (EBRD) reform index, authors’ calculation of simple averages of 14 EBRD transition indicators. East Asia In East Asia, growth during the �rst �ve years sprang from giving land rights to rural households. Unlike farms in Central and Eastern Europe and the former Soviet Union, farms in East Asia were labor intensive, with few external inputs, 432 THE WORLD BANK ECONOMIC REVIEW and hence output and productivity responded strongly to the enhanced incen- tives effect.37 In a second phase, governments in East Asia gradually adjusted prices toward market levels, thereby reducing taxes and bene�ting farmers. In addition, there was much less disruption in exchange since the government remained �rmly in control of the agencies providing inputs and buying com- modities. In line with the analytically derived results in the model, this reduction in taxes combined with the initial retention of state-controlled inter- linking and input provision caused a positive supply response. The subsequent gradual introduction of competition in the food chain (by allowing trader competition at the margin) led to a further positive supply response. It removed inef�ciencies and improved farmers’ bargaining power and income in the chains without leading to contract breaches. In summary, the success of East Asian liberalization is due to a combination of initial conditions (labor intensive and low input farming) and carefully sequenced reforms, which together contributed to strong growth during the �rst 15 years of the reform era. Sub-Saharan Africa There are several possible explanations for why growth has been lower in Sub-Saharan Africa than in East Asia and why growth was higher in Sub-Saharan Africa than in Central and Eastern Europe and the former Soviet Union in the initial reform years and slower in the later stages. Growth was slower, in aggregate, in Sub-Saharan Africa than in East Asia for three reasons. First, Sub-Saharan Africa did not bene�t from an initial boost from property rights reform within a labor-intensive farming system because farming was never collectivized in Sub-Saharan Africa. Second, liberal- ization resulted in more market disruptions in Sub-Saharan Africa than in East Asia. African reform strategies included simultaneously ending state mon- opolies and liberalizing prices. Introducing competition led to break-downs in some supply chains, reducing access to inputs for farmers and impeding output and productivity growth. Third, the average reduction in farm taxation in Sub-Saharan Africa was only a third that in East Asia: from around –30 percent to around –10 percent in Africa compared with from more than –50 percent to above zero in East Asia (see �gure 3). There are also three reasons why growth was initially stronger in Sub-Saharan Africa than in Central and Eastern Europe and the former Soviet Union. First, Sub-Saharan Africa did not have a capital-intensive farming system before reform, so it did not experience the decline in output and pro- ductivity that accompanied land reform and privatization in Central and Eastern Europe and the former Soviet Union. Second, price incentives for farmers improved with liberalization in Sub-Saharan Africa and worsened in 37. See Lin (1992), deBrauw, Huang, and Rozelle (2000, 2004), and Pingali and Xuan (1992) for estimates of the growth contributions of the various reform components. Swinnen, Vandeplas, and Maertens 433 Central and Eastern Europe and the former Soviet Union (see �gure 3). Third, on average, supply chain disruptions were less important in Sub-Saharan Africa than in Central and Eastern Europe and the former Soviet Union because a smaller share of production depended on external inputs and because market liberalization was more gradual and mixed. A substantial share of Sub-Saharan African production, especially of staple foods, did not rely on such formal input (and output) markets and hence suffered less from the disruptions. These same three factors also help to explain why growth resumed at a faster pace after a few years in Central and Eastern Europe (and later in the former Soviet Union) than in Sub-Saharan Africa. Once the initial disruptions of land reforms and the one-off drop in output with the subsidy cuts were absorbed in Central and Eastern Europe, growth in supply chains was stimu- lated by a massive inflow of investment—often foreign direct investment—in agribusiness and the food industry, with strong spillover effects on farms through vertical coordination. These effects emerged much more slowly and less extensively in poorer countries with greater macroeconomic (and insti- tutional) instability, explaining the slower recovery in the former Soviet Union than in Central and Eastern Europe and the even slower recovery in Sub-Saharan Africa. In the former Soviet Union and Sub-Saharan Africa, unlike in Central and Eastern Europe, private vertical coordination did not take over (or not to the same extent) after the collapse of state-controlled supply chains as foreign direct investment and private investment was much more limited in the early years after reforms (see �gure 5). In addition to factors such as underdeveloped infrastructure and political and economic instability, low incomes and the low value in Sub-Saharan African food chains constrained the emergence of private sector vertical coordination and market interlinking and thereby growth in the entire chain. V. A N E X P L A N A T I O N O F V A R I A T I O N S I N C O M M O D I T Y S E C T O R PERFORMANCE IN AFRICA In further support of these arguments, average growth in Sub-Saharan Africa was disaggregated into four subgroups:38 industrial crops (including coffee, cocoa, tea, rubber, oil crops, cotton, and tobacco), fruits and veg- etables, and among staple food crops, roots, tubers, and pulses on the one hand and cereals on the other.39 While these groups still include a mix of 38. The disaggregation is based on the commodity classi�cation by Poulton, Kydd, and Dorward (2006), with a further disaggregation of staple crops. 39. The focus here is on Sub-Saharan Africa, because the difference between the commodities in input requirements and value is the most differentiated. In East Asia, for example, most initial production was in low-value staples since there was very little exporting; in Central and Eastern Europe, there was much less production of low-value commodities because of higher income levels. From this perspective, Sub-Saharan Africa is the most interesting case because of its large diversity of commodity characteristics. 434 THE WORLD BANK ECONOMIC REVIEW products, the model predicts that performance will differ across the groups. Industrial crops include mostly commodities produced for export, which were strongly dependent on interlinked input arrangements both before and after the liberalizations. In many cases, these production systems rely on extensive outgrower contracting schemes, with processors or traders provid- ing inputs to smallholders in return for their crop output later (see Kherallah and others 2002; Poulton, Kydd, and Dorward 2006). However, contract enforcement is problematic in these markets because these are typically medium-value commodities (limiting the amount of surplus to be shared in the system) and because side-selling is relatively easy (compared to the case with high-value export crops), with many traders involved and with exten- sive trading systems and because at least some commodities are less perish- able. In addition, the use of inputs provided under interlinked contracts is often widespread. The fruits and vegetables group includes both low-value products for the local market and high-value products for export. The data do not allow dis- tinguishing between the two groups, but the impact of the reforms is likely to be quite different. Low-value fruits and vegetables for the local market are pro- duced with little or no external inputs, and the main input is often labor. Hence there is very little need of contracting, and production systems are affected mainly by price changes. In contrast, high-value fruits and vegetables for export typically require important external inputs (including pesticides and fertilizer) and are grown in vertically integrated production systems or through extensive contracting with smallholders, including the provision of technical assistance and inputs. These high-value products typically allow for adequate surplus to reward the producers suf�ciently to refrain from breaching contracts or to allow for investment by processors and exporters in extensive supervision systems, which enhance contract enforcement. Hence, contracting is more likely to be successful in these commodities. Third, the need for speci�c inputs is typically much lower in the production of staple crops such as roots, tubers, and pulses than of industrial crops or high-value fruits and vegetables, which makes contracting less necessary for increasing output if prices increase. Hence, staple crops would be expected to be less susceptible to market and contract disruptions as they are less depen- dent on external inputs. Fourth, interlinked contracts in cereal production are typically dif�cult to enforce because cereals are low-value commodities, with relatively easy sales opportunities to multiple buyers (and thus high competition). Moreover, cereals are typically more easy to store than are more perishable commod- ities such as fruits and vegetables or some of the roots and tubers. This increases the options for opportunistic behavior by cereal farmers. Hence, one would expect contracting to be more dif�cult and more susceptible to disruptions. Swinnen, Vandeplas, and Maertens 435 There are substantial differences in performance among these groups, especially in the evolution of productivity (�gure 6). Fruits and vegetables and roots, tubers, and pulses have performed better than industrial crops and cereals. After 16 years of reform, output was 70 percent higher for fruits and vegetables and roots, tubers, and pulses than before the reform. It was just 55 percent higher for cereals and 40 percent higher for industrial crops. The differ- ences are even more striking on a per capita basis: per capita output rose 12 percent for fruits and vegetables and roots, tubers, and pulses, while it stag- nated for cereals and even declined 5 percent for industrial crops. Hence, the F I G U R E 6. Postreform Performance of Commodity Types in Sub-Saharan Africa, RSSAP Indicator Note: See table A1 in the appendix for the starting year of the reform and for countries in each region for the RSSAP indicator. Industrial crops include cocoa, coffee, gum, oil crops, rubber, tea, and tobacco. Source: Authors’ analysis based on data from Food and Agriculture Organization statistics and RSSAP indicator from Rozelle and Swinnen (2004). 436 THE WORLD BANK ECONOMIC REVIEW lagging performance in cereals and industrial crops reduced average growth in Sub-Saharan African agriculture. The lack of output growth and productivity in industrial crops in Sub-Saharan Africa is often attributed to falling world prices for these com- modities. Indeed, during the 1980s—when most Sub-Saharan Africa countries embarked on economic and agricultural reforms—prices for these commodities deteriorated sharply. However, according to a World Bank (1994) study, real producer prices for export crops rose during the 1980s in some Sub-Saharan African countries because the effects of price liberalization offset the effects of decreasing world market prices. This argument is supported by new estimates of nominal rates of assistance (Anderson and Masters 2009) indicating that the effect of the liberalization on prices was most positive for industrial crops (�gure 7). Taxation of industrial crops actually fell by around 30 percentage points (from –40 percent to –10 percent) over the decade and a half after the start of the reforms. The reduction in taxation—and hence the enhanced price incentive—was substantially lower for the other commodity groups: around 20 percentage points for fruits and vegetables and 5–10 percentage points for cereals and roots, tubers, and pulses. Hence, these price effects cannot explain the variation across commod- ity groups in Sub-Saharan Africa. If anything, they would predict the opposite in terms of relative performance. These differences in performance are, however, consistent with the contract- ing model described above and support the hypotheses on postreform perform- ance. Output and productivity increases for roots, tubers, and pulses were F I G U R E 7. Nominal Rates of Assistance per Commodity Group for Sub-Saharan Africa, RSSAP Indicator Note: See table A1 in the appendix for the starting year of the reform. Sub-Saharan Africa includes Benin, Burkina Faso, Cameroon, Chad, Co ˆ te d’Ivoire, Ethiopia, Ghana, Kenya, Madagascar, Mali, Mozambique, Nigeria, Senegal, Sudan, Tanzania, Togo, Uganda, Zambia, and Zimbabwe. Fruits and vegetables include fruits, nuts, spices, and vegetables; industrial crops include �ber crops, gum, oil crops, rubber, stimulants, sugar crops, and tobacco. Source data do not distinguish between fruit and vegetable crops. Source: Authors’ calculations based on data from Anderson and Masters (2009) and RSSAP indicator from Rozelle and Swinnen (2004). Swinnen, Vandeplas, and Maertens 437 better than average. Input requirements in this sector are generally low, and therefore output growth has not been very dependent on contracting. Instead, the sector bene�ted from liberalized prices and enhanced competition in spot markets. The same forces hold for the cereal sector, but because input require- ments are generally higher, the sector depends more on contracting for access to inputs. Growth in the cereal sector has been more limited since the reforms, as new forms of private interlinked contracting did not emerge in this sector because value in the staple food chains is generally too low and competition too high to sustain it. Marketing activities have been taken over by many small private traders and are based on spot market transactions (Coulter and Poulton 2001; Fafchamps and Minten 2001). In contrast, in the Sub-Saharan African industrial crop sectors, the simul- taneous lifting of price controls, introduction of competition, and associated collapse in state-controlled vertical coordination have caused major disrup- tions in input provision to farmers and led to below average output and pro- ductivity growth, despite a much stronger reduction in taxation than in other commodity groups. Input requirements are generally much higher in traditional export commodities than in staple food crops, and therefore the collapse of public input provision affected output and productivity much more—as in Central and Eastern Europe. Unlike in Central and Eastern Europe, however, massive private investments with contracting and input provision did not occur in the �rst decade of reform in African industrial crops, impeding a rapid recovery. There was also strong growth in the Sub-Saharan Africa fruits and vegetables sector—much higher than in industrial crops. The model suggests that this sector grew because of two, quite different, mechanisms. First, production of low-value fruits and vegetables for the local market depended largely on labor inputs and thus bene�ted from the same effects as staple crops. Second, an important—and rising—part of the growth came from high-value fruits and vegetable chains for exports. This sector grew very rapidly after the reforms (�gure 8). The high value in these chains sustained postreform private investments in the sector and encour- aged private vertical coordination with quality upgrading, interlinking (with both large and small farms), and input provision to farmers. Several recent studies show how the vertical coordination mechanisms and their spillovers and pro- ductivity growth effects are similar to the growth mechanisms in Central and Eastern Europe (Maertens and Swinnen 2009; Minten, Randrianarison, and Swinnen 2009; Maertens, Colen, and Swinnen 2010). In summary, the different experiences of these four subsectors in Sub-Saharan Africa—which are masked by the average growth rates—are con- sistent with the general arguments presented here that reliance on external inputs and value in the supply chains—which affect the endogenous emergence of exchange institutions in a liberalized environment—are crucially important for understanding performance in Sub-Saharan Africa and comparing it with performance in other regions. 438 THE WORLD BANK ECONOMIC REVIEW F I G U R E 8. Growth in Fruit and Vegetable Exports in Sub-Saharan Africa, 1961–2005 Source: Authors’ analysis based on data from Food and Agriculture Organization statistics. VI. CONCLUSION This paper compares the performance of reforms in countries in Africa, Asia and Europe. Post-reform growth in Sub-Saharan Africa was lower than in East Asia, but initially stronger than in Central and Eastern Europe and the Former Soviet Union. However, after �ve (Central and Eastern Europe) and ten (Former Soviet Union) years of transition, growth in Europe and the Former Soviet Union has surpassed that in Sub-Saharan Africa. Within Sub-Saharan Africa, growth has been relatively strong in RTP and in F&V, while much slower in industrial crops and cereals. To explain these relative performances, we have developed a model to for- mally analyze how liberalization affects production explicitly integrating the impact of liberalization on the institutions that govern production and exchange. Our analysis shows how these institutional characteristics have been affected by the liberalization process. Using the model, we derive hypotheses on how these characteristics affect the supply response to liberalization, and, consequently, on how to explain the poor performance of some countries after liberalization. In the last part of the paper, we use these hypotheses to relate initial con- ditions and reform choices to performances. We offer a series of hypotheses to explain differences among commodities, and to explain that the supply effects and the governance of exchange in the post-liberalization economy also differ between commodities; and more particularly that there is a positive correlation Swinnen, Vandeplas, and Maertens 439 between supply response, contracting in vertically coordinated market organiz- ations, and the value in the chain. In particular, regarding the Sub-Saharan Africa reform performance, we offer several hypotheses to explain (a) why Sub-Saharan Africa growth is lower than that of East Asia (China and Vietnam); (b) why Sub-Saharan Africa growth was higher than that of Central and Eastern Europe and the Former Soviet Union in the initial reform years; (c) why growth in Sub-Saharan Africa was slower than in Central and Eastern Europe (and the Former Soviet Union) after the initial stage; and (d) why there are substantial differences across sectors in Sub-Saharan Africa. Clearly, the analysis in this article is an imperfect attempt at applying empirical observations to a theoretical framework. The empirical analysis could be improved by more quantitative approaches if representative data or good indicator variables were available on the key parameters discussed here, including the need for speci�c inputs, the value of commodities, contract speci- �cations, and breakdown of contracts. While some data are available on some of these variables, data on contracting remain especially scarce, not only for developing and emerging market economies but also for developed countries.40 Using country-speci�c indicators in a statistical analysis would also improve the analysis. The article focused primarily on average differences across regions, while largely ignoring important variations across countries in these regions. Further work should try to remedy this by integrating country vari- ations within this broader framework. APPENDIX T A B L E A 1 . Date of Start of Agricultural Reform Start of reform Region Country RSSAP indicatora SWWW indicatorb Central and Eastern Europe Bulgaria 1989 1990 Czech Republic 1989 1990 Estonia 1991 Hungary 1989 1989 Latvia 1991 1992 Lithuania 1991 1992 Poland 1989 1989 Romania 1989 1991 Slovakia 1989 1990 Slovenia 1989 1990 East Asia China 1978 (Continued ) 40. More speci�cally, at least 30 –40 percent of the total value of agricultural production in the United States and Western Europe is under various types of contracts. Yet there is very little systematic evidence on this. The U.S. and the Canadian governments recently began initiatives to collect systematic information on these issues (World Bank 2005). 440 THE WORLD BANK ECONOMIC REVIEW TABLE A1. Continued Start of reform Region Country RSSAP indicatora SWWW indicatorb Vietnam 1985 Former Soviet Union Armenia 1991 1994 Azerbaijan 1991 1994 Belarus 1991 Georgia 1991 1995 Kazakhstan 1991 Kyrgyzstan 1991 1993 Moldova 1991 1993 Mongolia 1991 Russian Federation 1991 Tajikistan 1991 1995 Turkmenistan 1991 Ukraine 1991 Uzbekistan 1991 Sub-Saharan Africa Benin 1989 1989 Burkina Faso 1991 1997 Burundi 1986 1998 Cameroon 1989 1992 Central African Republic 1986 Chad 1987 Congo, Rep. 1987 Congo, Dem. Rep. 1987 Coˆ te d’Ivoire 1981 1993 Equatorial Guinea 1988 Ethiopia 1992 1995 Gabon 1988 Gambia 1986 1984 Ghana 1983 1984 Guinea 1986 1985 Guinea-Bissau 1987 1986 Kenya 1980 1992 Lesotho 1988 Madagascar 1986 1995 Malawi 1981 Mali 1988 1987 Mauretania 1985 1994 Mauritius 1981 1967 Mozambique 1987 1994 Niger 1986 1993 Nigeria 1986 Rwanda 1991 ˜ o Tome Sa ´ and Principe 1987 Senegal 1980 Sierra Leone 1984 2000 Somalia 1986 Sudan 1980 (Continued ) Swinnen, Vandeplas, and Maertens 441 TABLE A1. Continued Start of reform Region Country RSSAP indicatora SWWW indicatorb Tanzania 1981 1994 Togo 1983 Uganda 1982 1987 Zambia 1984 1992 Zimbabwe 1992 a. Start date is based on the indicator used by Rozelle and Swinnen (2004) for countries in Central and Eastern Europe, East Asia, and the former Soviet Union and on the �rst year of struc- tural adjustment for countries in Sub-Saharan Africa (the year the country received its �rst struc- tural adjustment loan from the World Bank). b. Start date is based on the reform indicator developed by Sachs and Warner (1995) and updated by Wacziarg and Welch (2008). Start date is the year preceding continuous and uninter- rupted openness of a country. 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