WORLD BANK TECHNICAL PAPER NO. 444 WTP444 Work in progress A 1999 for public discussion UgUStI 7 Agricultural Incentives in Sub-Saharan Africa Policy Challenges RobetETown t -s Ro er Fl Townsend Recent World Bank Technical Papers No. 368 Pohl, Anderson, Claessens, and Djankov, Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options No. 369 Costa-Pierce, From Farmers to Fishers: Developing Reservoir Aquaculturefor People Displaced by Dams No. 370 Dejene, Shishira, Yanda, and Johnsen, Land Degradation in Tanzania: Perception from the Village No. 371 Essama-Nssah, Analyse d'une repartition du niveau de vie No. 372 Cleaver and Schreiber, Inverser la spriale: Les interactions entre la population, l'agriculture et l'environnement en Afrique subsaharienne No. 373 Onursal and Gautam, Vehicular Air Pollution: Experiencesfrom Seven Latin American Urban Centers No. 374 Jones, Sector Investment Programs in Africa: Issues and Experiences No. 375 Francis, Milimo, Njobvo, and Tembo, Listening to Farmers: Participatory Assessment of Policy Reform in Zambia's Agriculture Sector No. 376 Tsunokawa and Hoban, Roads and the Environment: A Handbook No. 377 Walsh and Shah, Clean Fuelsfor Asia: Technical Optionsfor Moving tozward Unleaded Gasoline and Low-Sulfur Diesel No. 378 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Kathmandut Valley Report No. 379 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Jakarta Report No. 380 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Metro Manila Report No. 381 Shah and Nagpal, eds., Urban Air Quality Management Strategy in Asia: Greater Mumbai Report No. 382 Barker, Tenenbaum, and Woolf, Governance and Regulation of Pozver Pools and System Operators: An International Comparison No. 383 Goldman, Ergas, Ralph, and Felker, Technology Institutions and Policies: Their Role in Developing Technological Capability in Industry No. 384 Kojima and Okada, Catching Up to Leadership: The Role of Technology Support Institutions in Japan's Casting Sector No. 385 Rowat, Lubrano, and Porrata, Competition Policy and MERCOSUR No. 386 Dinar and Subramanian, Water Pricing Experiences: An International Perspective No. 387 Oskarsson, Berglund, Seling, Snellman, Stenback, and Fritz, A Planner's Guidefor Selecting Clean-Coal Technologiesfor Power Plants No. 388 Sanjayan, Shen, and Jansen, Experiences with Integrated-Conservation Development Projects in Asia No. 389 International Cornmission on Irrigation and Drainage (ICID), Planning the Management, Operation, and Maintenance of Irrigation and Drainage Systems: A Guidefor the Preparation of Strategies and Manuals No. 390 Foster, Lawrence, and Morris, Groundwater in Urban Development: Assessing Management Needs and Formulating Policy Strategies No. 391 Lovei and Weiss, Jr., Environmental Management and Institutions in OECD Countries" Lessonsfrom Experience No. 392 Felker, Chaudhuri, Gyorgy, and Goldman, The Pharmaceutical Industry in India and Hungary: Policies, Institutions, and Technological Development No. 393 Mohan, ed., Bibliography of Publications: Africa Region, 1990-97 No. 394 Hill and Shields, Incentivesfor Joint Forest Management in India: Analytical Methods and Case Studies No. 395 Saleth and Dinar, Satisfying Urban Thirst: Water Supply Augmentation and Pricing Policy in Hyderabad City, India No. 396 Kikeri, Privatization and Labor: What Happens to Workers When Governments Divest? No. 397 Lovei, Phasing Out Leadfrom Gasoline: Worldwide Experience and Policy Implications No. 398 Ayres, Anderson, and Hanrahan, Setting Prioritiesfor Environmental MAnagement: An Application to the Mining Sector in Bolivia No. 399 Kerf, Gray, Irwin, Levesque, Taylor, and Klein, Concessions for Infrastructure: A Guide to Their Design and Award No. 401 Benson and Clay, The Impact of Drought on Sub-Saharan African Economies: A Preliminary Examination No. 402 Dinar, Mendelsohn, Evenson, Parikh, Sanghi, Kumar, McKinsey, and Lonergan, Measuring the Impact of Climate Change on Indian Agriculture (List continues on the inside back cover) WORLD BANK TECHNICAL PAPER NO. 444 Agricultural Incentives in Sub-Saharan Africa Policy Challenges Robert E Townsend The World Bank Washington, D.C. Copyright ©D 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. 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Townsend is a young professional in the Eastern and Southern African Rural Development Technical Family in the Africa Region of the World Bank. 111 LZ SN0ISfYI1N0D ONV A)IYMAJSS ..................................................................... . . ......... .. - -S066 ql a spuadj a j og . - - - - - - - - - - ~~~~~~~~~spuaq, jvoiipAj 017 .......................................................... ..... spuaql po-lloda 61-...................................... --------'---------------------------------- SS333V 1331,Vw (NV S33Dld U1HOM *Z .)I)IOA\ S vK N X SIHJL :II 3NYI d 71 .SMO1YDV 3a)1)d-0ND (INV 3JDfd N3nNMaa S311fl1V1N31S1dA0D Z. I ----................................ sa... u..... llnlflno FV puz UOc.tUvwqj ai.zd 'sapqoyod z......... ......................................L 03.1dd puv U0O1ipUfpd-OD LI............................ O V NI 30tVHD AlIAIIJfKIO)0d (NV SSaI90-Id 1VC)NHJ3 'AJN3I3Iddg .--.---------------- ----- -- ------------HIMO?19 1V o inefficiency suggests different policies than a slowdown due to a S.Asia MENA LAC EAP SSA lack of technical change. An example is that slow productivity growth due to inefficiency may be due to institutional barriers Source: See Box Al for calculation constraining the diffusion of innovation. In this case, policies to methodology. remove these barriers may be more effective in improving productivity than policies directed at innovation. While several African countries appear to be on the efficiency frontier, a xvi Agricultural Incentives in Sub-Saharan Africa: Policy Challenges comparison with other developing regions suggests that Africa is lagging behind. These results suggest that significant agricultural productivity gains can be realised by improving efficiency, an improvement which can be induced by policy change. This study takes stock of current policies, as well as their recent evolution, to update knowledge and to generate discussion to help develop a stronger consensus on an appropriate policy stance that will improve agricultural incentives and raise average agricultural growth rates and farm incomes. Several price (agricultural, trade and macroeconomic policy) and non-price (transportation infrastructure) factors are examined. Following this analysis, several policy challenges to improve these incentives in Africa are highlighted. A Stock-Take Of Current Policies In Sixteen African Countries Suggests Many Have Significant Space To Improve Agricultural Incentives And Efficiency. Over the past two decades, policy reform in SSA has been widespread with significant impacts on agricultural incentives. An attempt was made in the study to determine the extent of individual country progress by developing policy diamonds. The construction of the (pricing) diamond is based on a and removing policies that distort blend of price ratios and qualitative assessments with each apex agricultural incentives could representing an indicator of macroeconomic, export crop, food agrocelturaincyntivestcoul .. . . q . J~~~~~~~~mprove efficency and investment crop and fertilizer policy respectively. The macroeconomic to facilitate this growth. policy scores are developed from an aggregate of monetary, fiscal and exchange rate policies, as in the Adjustment in Africa study (World Bank, 1994). The export crop policy indicator is the ratio of the producer price to the border price. The food crop policy is the ratio of the producer price to the world price, supplemented with qualitative assessments, and the fertilizer policy score is an aggregate score of trade and pricing policies. Two diamonds are constructed, an outer diamond, which is taken to represent the perceived policy frontier (along the apex) and an inner diamond, taken to be the current policy stance of each individual country. In many countries, the distance between these two diamonds is significant, suggesting room for further improvements in agricultural incentives. Indeed, one of the questions the study addresses is what are the constraining economic factors that are preventing countries (inner diamond) from moving towards the frontier (outer diamond) ? xvii Agricultural Incentives in Sub-Saharan Africa: Policy Challenges While these four indicators only represent a partial measure of the overall agricultural policy stance (credit, labor, etc., are not included), they nevertheless provide some useful measures of four key incentive policy areas (macroeconomic, export crop, food crop and fertilizer). To supplement this static picture, a more dynamic overview is provided by examining the recent evolution of these policies, highlighting the changes in the external and internal environment in which agriculture operates. Indeed, there has been much progress in improving agricultural incentives in Africa. The Improvements In Price Incentives During The 1990s Were Due To More Favorable World Prices, Continuing Improvements In Macroeconomic Policies And, In Some Countries, Due To An Increase In The Producer Share Of The Border Price. The decomposition of agricultural prices into these three elements provides useful insights into the dominant causes of changing price incentives. The trends in each of these components are examined. Favorable World Prices In The 1990s Provided A Welcomed Reprieve From The Long-Term Downward Trends. The international prices of the major agricultural exports Favorable real world commodity from Africa have been declining over the past several decades. prices since 1990 have reversed The importance of these declining trends on African economies the declining external terms of is exacerbated by agriculture's dominance which accounts for tradefor agriculture in Sub- about 40 percent of exports. Even within agriculture, several Saharan Africa. primary crops dominate. This high export concentration exposes many African economies to severe terms of trade fluctuations from commodity price shocks. The commodity boom from 1990 to 1996/97 resulted in Despite these recentfavorable a 20 percent increase in the real aggregate world price of Sub- prices... Saharan Africa's agricultural exports. Real world grain crop prices increased by 14 percent while fertilizer prices increased by 8 percent. These favorable price trends improved agriculture's external terms of trade position in many African ... their long-term downward trend countries. The external barter terms of trade for agriculture in seems to be firmly in place. SSA, measured as the ratio of the price of agricultural exports to the price of food imports and to the manufacturing unit value, improved at a rate of 1.6 and 0.9 percent per annum respectively between 1990 and 1996. The corresponding external net income xviii Agricultural Incentives in Sub-Saharan Africa: Policy Challenges terms of trade improved at an annual (growth) rate of 4.2 and 3.7 percent respectively. This upward movement in world prices was temporary with a continuation of the downward secular trend in the late African countries will have to 1990s. The long-term world price trends towards lower real produce agricultural commodities commodity prices looks firmly set in place. These trends suggest at lower cost or their position on that Africa must produce agricultural commodities at lower cost world markets will continue to (adopt new technologies) or its position in world markets will erode. continue to erode. Macroeconomic Policies Have Continued To Improve. Distorted macroeconomic policies have had a significant impact on African agriculture and in some cases these effects have exceeded the effects of sectoral policy (Schiff and Valdes, 1992). Faced with falling export earnings, worsening balance of payments, mounting debts and declining economic growth, many countries in Sub-Saharan Africa adopted a wide range of policy reforms. Initial reforms sought to correct for macroeconomic imbalances. Significant improvements were made during the 1980s but fiscal balances were still fragile, inflation was above international levels and the parallel market premium for foreign exchange remained high. Using the same criteria as the Adjustment in Africa study (World Bank, 1994), the macroeconomic policy stance of African countries was assessed. Fiscal policies have shown a significant improvement Macroeconomic policies have since 1990-91. The CFA countries appear to have made greater continued to improve in the 1990s... improvements than the non-CFA countries. A contributing factor to this may be the 50 percent devaluation of the CFA franc in 1994 which provided higher domestic currency export revenues. Monetary policy in Sub-Saharan Africa has focused 20- primarily on maintaining low rates of inflation and adequate 15- levels of real interest rates. Countries appear to have been more successful in the past at achieving these monetary policy 0 10 objectives than their fiscal policy goals. There was a limited 5 improvement in monetary policy between 1990 and 1996/1997. g | [ [* This may be due to the inflationary pressure from significant r po p fai g or cuffency devaluations. very poor poor fair good or Exchange rate policy has improved substantially 3 1990-91 * 1996-97 between 1990-91 and 1996-97 with most of African countries Source: World Bank (1994) and World reducing their parallel market exchange rate premiums. The Bank and IMF data. fiscal, monetary and exchange rate policy stance were combined xix Agricultural Incentives in Sub-Saharan Africa: Policy Challenges to create a measure of the overall macroeconomic policy environment which has improved significantly between 1990/91 and 1996/97. Some countries, however, continued to have poor macroeconomic policies which has led to high levels of macroeconomic instability. The reliability of the institutional framework (credibility of rules) also defines the macroeconomic environment and in Africa, this is lower than in most of the other developing regions (Brunetti, et al 1998). Exchange Rate Pass-Through To Producer Prices Has Improved In Countries With Open Trade Policies. Between 1990 and 1997, the upward trend in real world commodity prices and improved macroeconomic policies resulted in significant increases in real producer prices of ... but currency devaluations have African export crops. However, the currency devaluations have only been fully transmitted to farmers only been fully passed through to farmers as higher prices in in countries with open trade policies. countries with open trade policies. The pass-through has been inhibited in countries with highly regulated and controlled markets. The low level of pass-through in many African countries suggests that market inefficiencies exist which have prevented farmers from receiving the full benefits of both favorable world price trends and macroeconomic adjustments. As already highlighted, these inefficiencies become particularly important when analyzing agricultural growth in African countries. The Current State Of The Producer's Share Of The World Price For Export Crops, Food Crops And Fertilizer Can Be Explained By A Number Of Price And Non-Price Factors. Export Crop Policies, Markets and Prices. Producer's Share of the Border Price:'The distribution There are large cross-country of the producer's share of the f.o.b. price in Sub-Saharan Africa differences in the producer's share shows a large variation. Most of the farmers receive shares of the borderpricefor export between 40 and 70 percent of the f.o.b. price. This contrast crops... indicates large cross-country differences in the cost of moving the product from the farm gate to the port (taxes, transportation, ... which can largely be explained marketing margins, etc.). In many countries, these high costs are by differences in created by policy distortions. agricultural policies, macroeconomic policies, Econometric evidence in this study suggests that the rural infrastructure, cross-country differences in the producer's share of the f.o.b. volumes of crops traded price can largely be explained by differences in agricultural and and crop type. xx Agricultural Incentives in Sub-Saharan Africa: Policy Challenges macroeconomic policies, the density and quality of rural roads, volumes of crops traded and crop type. Market Interventions: Controlled marketing systems continue to distort market price signals in many countries. Four existing marketing systems can be identified in Sub-Saharan Africa, i) the free market systems; ii) the Caisse de Stabilisation (e.g. cocoa in CBte d'Ivoire until 1998/99); iii) Marketing Boards (e.g. cocoa in Ghana) and iv) Parastatals (e.g. cotton in State controlled agricultural West Africa). Farmers under the latter three receive a low share marketing systems continue to of the border price with interventions in physical handling, price distort price signals in many setting, taxation and marketing costs and margins. Exchange rate countries. pass-through to producer prices have subsequently been inhibited in these two systems. The free market system has resulted in substantially higher prices for farmers and lower fiscal costs in the absence of financing the marketing boards or stabilization funds. Price Stabilization: Many of the current market While prices have been more interventions focus on stabilizing prices, and indeed this stable with interventions, the argument has been used to justify the existence of many risk benefits of the more stable marketing boards and stabilization funds. While prices have prices do not appear to have been more stable with these interventions, the risk benefits of the outweighed the costs of the more stable prices do not appear to have outweighed the costs of lower prices offered under the the lower prices offered under the stabilization programs. stabilization programs. Macroeconomic Policies: These have a direct effect on producer prices through exchange rates and money supply and an indirect effect through real interest rates. High real interest rates were found to have a significant negative impact on the producer share of the border price. This result could be explained by the higher cost of borrowing for the private trader who passed-on these higher costs to farmers as lower prices. However, it must be stressed that simple access to credit (which relates to the depth and breadth of the banking system, the rule governing recovery and bankruptcy etc) has also been highlighted as and inhibiting factor. Infrastructure: Evidence suggests that it is not only the lack of roads that decreases the producer price-border price ratio, but also the quality of these roads. Feeder roads in rural areas remain scarce and are in poor condition in most Sub-Saharan African countries. Transportation is a particular problem for landlocked countries with large differences between coastal prices and border prices. High road tolls in neighboring countries have raised transports costs significantly in many landlocked xxi Agricultural Incentives in Sub-Saharan Africa: Policy Challenges countries. Unofficial road blocks erected by local authorities to collect money have also been common. Volumes Supplied: Development of efficient markets requires volume and consistency in supply and demand. Indeed, private sector entry into storage, transportation and marketing of agricultural products requires some assurance of supply to induce investment. Where high volumes are traded, farmers receive a higher share of the border price and economies of scale reduce transaction costs. Crop Type: Coffee seems to be a special case, with the producer's share of the border price of this crop being consistently lower than for other African export crops. These prices appear to be consistently lower across all producing countries. Food Crop Policies, Markets And Prices. Food markets in Sub-Saharan Africa have been Liberalization has improvedfood extensively deregulated, induced by the rising costs incurred by market integration in many state marketing boards. This financial burden was worsened by countries... the operational inefficiencies inherent in these state systems. Unreliable input deliveries and crop payment, the existence of parallel markets and instability of purchases and sales also ... but many markets in SSA remain played a role. An increasing pessimism about the motives and isolated and large transaction results of state intervention in agricultural markets had costs erode incentives. developed while there was an optimism in the ability of the private sector to efficiently organize these markets (Lipton, 1991; Jones, 1994). Private Trader Emergence: In some African countries, the private sector has been slow to respond to market Grain market reforms have liberalization. This investment response by private traders is inducedprivate trader largely determined by market location, area covered by traders, investments... liberalization of marketing policies, favorable exchange rate policies (devaluation increased incentives to invest in the domestic marketing activities at the expense of importers), the profitability of trading activity and the education level and experience of the traders (Badiane et al, 1997). Price Response: Removal of policies which set grain, particularly maize, prices in Africa at levels well above world prices has resulted in real producer price declines in many countries, particularly in Southern -Africa (e.g. South Africa, Malawi and Zimbabwe). Consumer prices of grain and grain xxii Agricultural Incentives in Sub-Saharan Africa: Policy Challenges meal have also declined (e.g. Mali, Ghana, Ethiopia and Kenya) with the better transmission of declining real world food prices to domestic markets with the removal of trade restrictions. Particularly in Eastern and Southern Africa, the opening up of markets to private traders has mitigated some of the adverse effects of the declining subsidies. Lower grain processing costs have reduced the wedge between producer and consumer prices (Jayne and Jones, 1997). Mobility barriers continue to inhibit widespread private ... but mobility barriers continue to sector entry into food markets. These barriers vary at different inhibit widespread private sector stages of the marketing chain. Capital access can be a serious entry into all marketing niches. barrier to entry into subgroups of the marketing chain requiring substantial start-up costs or inventories. The result is relatively closed niches (ie: long-haul transport and interseasonal storage). Political risk is also a barrier for private entrepreneur entry into activities with large political uncertainty. Access to spare parts and energy supplier networks also provide a significant barrier. The lack of availability of electricity in many rural areas prevents development of rural enterprises such as grain mills. These mills are usually positioned near large municipalities where these services are available. In many countries the natural economies of scale in long-haul motorized transport are accentuated by poor road conditions and limited spare parts and fuel availability. Road blocks have also added to these mobility constraints. (Barrett, 1997). Transportation: High transportation costs have been the source of high food prices in many African countries. In some Transport costs remain countries, investmnent in transportation and storage has been particularly high inusome inhibited by the continuation of policies such as pan-territorial inhibit incentives. pricing structures. Unofficial road blocks erected by local authorities to collect money are also common (e.g. Niger and Madagascar). Road and transportation infrastructure tends to be better and more developed in the West African countries with lower transportation costs. Removing these barriers to entry into these marketing niches may improve market integration and efficiency, thus reducing food prices. There is some evidence that market liberalization has reduced price instability and improved market integration in some countries (e.g. Benin, Ghana, Ethiopia and Malawi) [Dercon, 1995, Badiane et al 1997]. Trade Regimes: In several African countries licenses for grain trade are required which has impeded private imports and xxiii Agricultural Incentives in Sub-Saharan Africa: Policy Challenges exports, reducing their potential to stabilize food supplies and prices (e.g. Burkina Faso, Kenya and Nigeria). Fertilizer Policies, Prices And Markets. Fertilizer Prices: Real farm-gate fertilizer prices have Currency devaluations have not increased in most of the countries analyzed. In several countries been consistently passed on to these prices have increased by more than 100 percent. The farmers as corresponding higher increase in the real world fertilizer price, domestic currency prices in many countries. devaluation and the removal of subsidies have been the main contributors to this effect. Exchange Rate Pass-Through: In contrast to export crops, if fertilizer prices have not increased as much as the currency devaluation, then farmers benefit. This lack of pass- through could be the result of increased efficiency in the domestic market. Indeed, in several African countries, currency devaluations do not appear to have resulted in proportional price increases (e.g. Zimbabwe, Kenya and Cote d'lvoire). Econometric evidence in this study suggests that the Cross-country variation in the cross-country differences in the farm-gate fertilizer price relative fertilizer farm-gate to world price to the world price can largely be explained by differences in the ratio can largely be explained by distance to international fertilizer markets, trade and differences in... macroeconomic policies and the volume of fertilizer traded. Transportation and Trade Volumes: Sub-Saharan African countries face high internal and external transport costs exacerbated by the small fertilizer volumes most of these ... distances to international countries import. These small trading shares also weaken fertilizer markets, negotiating power. Transport costs can sometimes constitute 50 transportation infrastructure, percent of the operating costs of traders. The poor quality of trade policy roads further raises fertilizer costs. Local fertilizer traders tend to macroeconomic policy buy and sell fertilizer within the same season or within a few and volumes offertilizer traded. months with limited investment in storage. Volumes and consistency of demand play a large role in their decisions. Trade Restrictions and Regulations: Tariffs remain high in several countries which are reflected in higher domestic fertilizer prices. Non-tariff barriers and trade controls restrict fertilizer market entry and competition, contributing to high margins and prices in many countries. Several countries have a restrictive list of fertilizers that can be imported which denies farmers the opportunity of using nutrient-wise, more cost effective fertilizers (e.g. Benin and Ghana). Fertilizer regulations have also been restrictive. Farmers have been cut off from xxiv Agricultural Incentives in Sub-Saharan Africa: Policy Challenges fertilizer markets in neighboring countries, forcing importers to consider countries as a separate and small market (Gisselquist, 1998). Private traders in many countries are not able to bring in fertilizers without prior government approval involving time consuming and costly procedures to satisfy multiple agencies. Emergence of Private Traders: In most countries, many multi-national companies entered the fertilizer markets after liberalization. Despite this entry, parastatals continue to operate and dominate the fertilizer industry in many countries. Fertilizer trading differs from grain trading in that the former is characterized by higher levels of working capital, more bulkiness in purchases, and more involvement of multi-national institutions and large companies. Higher skills may be required for this activity. The large financial requirements and the seasonal nature of the market remains a limiting factor to competition and a barrier to the expansion of small-holder companies and new entrants (Badiane et al, 1997). Fertilizer Aid: Sub-Saharan Africa receives extensive Fertilizer aid to Africa has fertilizer aid which has had an inhibiting effect on the caused significant market development of sustainable domestic markets. In many distortions and in many countries, fettilizer aid programs are usually characterized by a countries allfertilizer imported lack of competition in procurement and distribution resulting in is in the form of aid. higher costs of fertilizers. Delivery is slow and the system is vulnerable to mismatching of inputs with needs. Countries reliant on fertilizer aid are also exposed to supply uncertainties. Fertilizer Use: Increasing fertilizer use in Africa would require improving not only the profitability of fertilizer use but also the quantity and quality of human resources, financial liquidity, market access, household assets and extension services. Removing Barriers To Improve Agricultural Incentives. The study has shown that the external environment and policy regimes have improved in many African countries. However, agricultural incentives in a significant number of countries continue to be inhibited. Transportation costs remain African countries continue to face high, traded volumes remain low, private agents have not signif cant policy challenges to entered sufficiently into input and output market and the degree improve agricultural incentives; of market development and competition remains low. Tariff and these relate to: non-tariff barriers to agricultural trade continue to be high inside Africa, and in global markets, with improving access to OECD xxv Agricultural Incentives in Sub-Saharan Af ica: Policy Challenges markets being a major challenge. Thus, evidence suggests that there continues to be significant room to improve agricultural incentives. This improvement will require focused attention on the macroeconomic environment, trade and market access and on domestic agricultural and rural policies. The Macroeconomic Environment. ... the macroeconomic environment Stabilizing Macroeconomic Policy: While macroeconomic polices have improved significantly in African countries, macroeconomic instability has recently been high in many countries (Nigeria, Ghana and Zimbabwe). Subsequent improvements of poor macroeconomic policies (e.g. Ghana and Nigeria) remains fragile and uncertain. This instability and fragility has an adverse effect on investor confidence and growth. Enhancing the Institutional Framework and the Credibility of Rules. Evidence suggests that the credibility of reforms in Sub-Saharan Africa is poor with unpredictable changes in rules and policies (Brunetti et al, 1998). Improving credibility or the reliability of the institutional framework within a country is a critical requirement to encourage private sector activity and investment. Trade And Market Access. ... trade and market access Improving Access to Foreign Markets: African countries need to play a greater role in future international trade negotiations to put its concerns on the table and prevent international agreements which unduly disadvantage Africa. To enhance bargaining power in these negotiations, one approach may be to empower the regions (SADC and UEMOA) to put forward Africa's case. Africa will also have to meet the international sanitary and phytosanitary standards, which will become more important to gaining market access. Removing Domestic Trade Barriers: African countries also need to re-examine their internal trade policies. Import tariffs are higher in Africa than in any other region of the world. Large import tariffs on transportation equipment, machinery and agricultural materials impose higher costs on exporters who use these imports as intermediate inputs in production. This cost disadvantage erodes competitiveness and inhibits growth. Non- tariff barriers in fertilizer markets continue to be widespread which inhibits private sector entry and competition in these xxvi Agricultural Incentives in Sub-Saharan Africa: Policy Challenges markets. High average import duties create a general anti-export bias for the economy discouraging gains in efficiency and diversification. Coping with World Commodity Price Decline and Fluctuations: The real world agricultural commodity price decline seems firmly in place with high price volatility (booms and busts). Useful strategies to cope with the cyclical trends include adopting prudent monetary and fiscal policies, avoiding higher export taxes, avoiding cartels, using hedging instruments and prudent financial management in times of commodity price booms (Varangis et al, 1995). Useful strategies to cope with secular trends include export diversification and more rapid adoption of new technologies. Fostering Regional Integration: Sufficient volumes and consistency in supply and demand are a requirement for widespread private sector development. In Africa, these volumes, particularly for fertilizer and grain trade, are typically small. Regional integration may provide an avenue to ensure these conditions of supply and demand. This pooling of the rather small markets will enabling more bulk production and purchase of raw materials and facilitate the realization of economies of scale. Domestic Price And Non-Price Factors. ... the domestic policy environment Removing Remnants of Marketing Boards: Market interventions such as marketing boards and the caisse system are maintained in many African countries. These interventions continue to constrain producer prices by inhibiting the pass- through of currency devaluations to producer prices. These inhibiting effects need to be removed to allow markets to become more competitive. Taxation and Public Rural Investment: High levels of agricultural taxation needs to be reduced and taxation instruments, such as marketing boards, have generated little government revenue and have led to high deadweight losses. It is, however, obvious that agriculture, as a major sector in many African economies, will have to continue to contribute to government revenues. The key principles that need to be applied to future taxation are nondiscrimination, minimization of negative efficiency impacts, effectiveness of fiscal capture and capacity to implement (Binswanger at al, 1999). Consumption taxes may be considered as an alternative revenue-generating xxvii Agricultural Incentives in Sub-Saharan Africa: Policy Challenges mechanism, where administrative capacity is adequate. Where export taxes are justified as substitutes for income tax, the excessively high rates in many countries need to be reduced. Even though African agriculture was highly taxed in the past, public investment in agriculture and rural development was limited. These investment levels and allocations need to be significantly improved for the much needed capital accumulation in rural areas. One way to improve the effectiveness of public investments would be through fiscal decentralization. Africa has a record of having the one of the most highly centralized political, fiscal and institutional systems for rural development in the world (McLean et al, 1999). While these investments are important they must be supported with continual governments spending (i.e. a recurrent budget) to maintain the investments (e.g. road maintenance). Africa does not appear to have done particular well on maintaining its rural investments. Improving Transport Infrastructure: High transportation costs are one of the key contributors to low producer crop prices and high agricultural inputs prices. Alleviating these transport costs could be achieved directly through investment in roads or indirectly through the reduction of local monopolies, removal of road tolls and lowering of taxes on spare parts. Fostering Public and Private Sector Partnerships: Greater collaboration and understanding needs to be developed between the public and private sector with clearly defined roles for each. Governments can improve private sector activity by providing a range of public goods. These include investments in infrastructure (roads and electricity), ensuring rule of law and defending open entry and competition. Also in collaboration with the private sector, Governments should make sure market information is as widely disseminated as possible. Areas For Further Work. The complexities and inter-linkages within agriculture make it extremely difficult to cover all aspects of agricultural incentives in one study. While providing some insight into the macroeconomic environment, trade and market access and several domestic price and non-price factors, these are by no means the only issues. Further work on agricultural incentives should examine issues of agricultural labor and gender inequality (Blackden and Bhanu, 1999), rural finance, tenure security, agricultural technology and public rural investment. xxviii PART I INTRODUCTION 1. AGRICULTURAL GROWTH Since the early recognition that agriculture can play a central role in generating overall economic development, much attention has been given to identifying ways to accelerate its growth. The common notion in the economic literature is that agriculture plays a pivotal role in the early stages of structural transformation. This perception has induced economists to systemize the process of economic growth into a framework of sequential stages (Rostow, 1990) with agricultural growth viewed as essential to induce the industrialization process (Mellor, 1995). Indeed, there have been very few low-income countries that have achieved rapid nonagricultural growth without corresponding rapid growth in agriculture. Agriculture's role in economic development was highlighted, most noticeably by Johnston and Mellor (1961), to include agriculture as a source of food supply and raw materials, a supplier of foreign exchange, a supplier of labor for industrial employment, a market for non-agricultural output and a source of surplus for investment. Within these roles, one often underplayed contribution is the strength of the backward and forward linkages' agriculture has with itself and other sectors of the economy. These linkages generally become stronger with development (Vogel, 1994) and play a key role in agricultural led industrialization (Adelman, 1984). In Sub-Saharan Africa, agriculture is central to economic growth and the reduction of poverty. The sector accounts for about 35 percent of the continents GDP, 40 percent of its exports and about 70 percent of employment (World Bank, 1997). Recent evidence also suggests that growth stemming from the linkage effects, resulting from increases in African farm incomes, has been underestimated by many previous studies (Delgado et al, 1998). Poverty continues to be widespread in the rural areas with 59 percent of the rural population living below the poverty line2 (Ali and Thorbecke, 1997), thus stimulating agricultural growth will be a key to poverty reduction strategies in Africa. Food needs are also expected to double in the next 20-30 years. TRENDS IN AGRICULTURAL OUTPUT AND PRODUCTiVITY GROWTH An historical view of overall economic growth is provided by Maddison (1996) who presents striking evidence of Africa's poor performance. His cross-regional study suggests that Africa grew at 0.6 percent per annum between 1820 and 1992, which was half the rate of world growth. Five time periods were examined and the strongest growth in Africa was achieved between 1950 and 1970, a period of late colonial rule and early independence. In the post independence era, overall economic growth seems to have slowed and as agriculture is the dominant sector in most African countries, this slow growth is a reflection of agricultural performance. Indeed, over the last 40 years, the fortunes of African agriculture have varied significantly (Figure 1.1). During the 1960s, agriculture grew at about 3 percent per annum, which exceeded population growth at the time. In the following decade, growth declined substantially to about one percent per annum. During this era, the variability of growth across African countries also declined suggesting that the slowdown was widespread across the continent. The I As an example - as agricultural production uses inputs from other sectors, such as machinery and fertilizer, an expansion of the agricultural sector should result in an expansion of the industries supplying these inputs to agriculture (backward linkage). As sectors use agricultural output as an input, such as cereals for processed foods, the increase in supply of cereals may induce an expansion in the production of processed foods that use cereal as an input (forward linkage). 2 $26 per month per person using 1993 survey data. 3 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges performance of agriculture seems to have improved over the recent decades, with growth accelerating over the 1980s and 1990s. 4.0- 3.5- 23.0- 2.5 2.0- 01.5- 0.0 1961-65 1965-70 1970-75 1975-80 1980-85 1985-90 1990-95 Year Figure 1.1: Trends in Sub-Saharan African Agricultural Growth, 1961-1995. Source: FAO data. The diversity of geography across Sub-Saharan Africa has induced some researchers to group countries into several geographic regions, namely West, Sahelian, Central, East and Southern Africa (FAO, 1986; Bromely, 1995, Block, 1995, See Table Al in the appendix for the countries included in the regional grouping). These cluster groups have experienced significant differences in growth (Table 1.1). Agriculture in West, Sahelian and Southern Africa grew slowly during the 1970s while accelerating through the 1980s and 1990s. Central Africa experienced strong growth in the 1970s followed by a slow- down in the 1980s and renewed growth in the 1990s. East Africa's growth was relatively slow in the 1970s but doubled during the 1980s, an increase which was largely maintained through the 1990s. Table 1.1: Regional Differences in Agricultural Growth. Growth Indicators Year West Sahelian Central East Southern Sub-Saharan I Africa Afiica Africa Africa Africa Africa Real Annual 1970-80 0.6 0.4 2.4 1.0 1.3 1.1 Agricultural GDP 1980-90 2.3 2.6 2.2 2.2 2.1 2.3 Growth (%) 1990-97 2.7 3.1 3.1 2.0 2.5 2.5 Source: World Bank data. Using similar country groupings, Block (1995) examines trends in total factor productivity for agriculture, finding the strongest growth for West Africa during the 1980s. The emerging pattern from Table 1.1 seems to suggest a hint of regional growth convergence over the last 40 years with similar regional growth rates in the 1990s. When comparing these regions one must bear in mind that even within a region there are large country variations with at least one country in each region (excluding East Africa) having an agricultural growth rate exceeding 4 percent per annum between 1990 and 1997 (Table Al in the appendix). Encouraging signs are evident from the improving growth in the in the 1990s. Between 1990 and 1997, 25 countries had real agricultural GDP growth rates over 2 percent, with 12 of these countries 4 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges having growth rates of over 4 percent (Benin, Cameroon, Chad, Guinea, Guinea-Bissau, Equatorial Guinea, Lesotho, Malawi, Mauritania, Mozambique, Namibia and Togo) 3. Over the last five years (1993-97) six more countries joined this group (Angola, C6te d'Ivoire, Ethiopia, Mali, South Africa, Zimbabwe). These recent trends are a significant improvement from the 1980s when only three countries had annual growth rates exceeding 4 percent (Benin, Guinea-Bissau and Togo). (Appendix Table Al). Productivity growth has been less impressive. Between 1980 and 1997, cereal yields increased in 24 countries and seven of these had growth rates of more than 2 percent (Benin, Ghana, Guinea, Guinea Bissau, Mauritania, Cameroon, Central African Republic and Mauritius). Most growth in cereal production was due to area expansion, which increased at 3.4 percent per annum for the same period. Seventeen out of 31 countries examined, show that agricultural value added per worker increased from 1979-81 to 1992-94. Measures of multi-factor productivity show a growth pattern similar to that of yields. Between 1980 and 1996, only four countries of the thirty five examined experienced a multi-factor productivity growth of more than 2 percent (Ghana, Nigeria, Gabon, Uganda) (Appendix 1, Box Al, Table Al). While aggregate agricultural growth in s Sub-Saharan Africa has improved in the 1990s, it 0.4 is still lagging behind other developing regions. 0 4 - While having the lowest growth rates of the five 3 - regions depicted in Figure 1.2, Latin America m and the Caribbean (LAC) and Sub-Saharan Africa (SSA) are the only two regions to have * exceeded their 1980 growth rates in the 1990s. 0 0 a - _ IIY Explaining differences in growth among > 5 EAP MENA S.Asia LAC SSA countries, geographical regions and continents has been the challenge of many studies of 3 1980-90 0 1990-97 economic growth. A brief review of some of the Figure 1.2: Comparisons of Agricultural explanations, and more specifically of those Growth by Region. provided for Africa, will be highlighted in the Source: World Development Indicators, 1998. next section. EXPLANATIONS OF AGRICULTURAL GROWTH Many models have been forrnulated to quantify the alternative sources of agricultural growth. Typically, early efforts included only the traditional (land and labour) and modern fertilizer and machinery) inputs as in the Hayami and Ruttan (1971) formulation. More recently, this list of explanatory 3 Some of these growth rates may be overestimated due to the extensive drought in 1992 which had a significant impact on output, especially in Southern Africa. Agricultural output was thus increasing from a low base. 5 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges variables has been expanded to include general and technical education, agricultural research and infrastructure (transport and communications). Apart from these explanations, Africa's adverse resource endowments have been highlighted as a major constraint to both agricultural and overall growth. Many studies comparing growth rates between Africa and Asia highlight this as one of the primary inhibiting factors for Africa. These include poor land quality (Voortman et al, 1998, Donovan and Casey, 1998), endemic livestock diseases (Coetzer et al, 1994), human diseases (Bloom and Sachs, 1998), landlockedness (Bloom and Sachs, 1998; Collier and Gunning, 1997) and low population density (Hayami and Platteau, 1997). Voortman et al (1998), highlight the realities of Africa's land ecology. Their study focuses on comparisons with Asia, noting that in Africa there is a prevalence of soils derived from a particular geological formation (metamorphic Basement Complex rock) which is different from the alluvial and volcanic soils (younger and richer in micro-nutrients) prevalent in Asia. They suggest that this difference is one of the primary causes for the lack of replication of the Green Revolution in Africa4. Sub-Saharan Africa also has a considerably wider spectrum of infectious animal diseases than any other region of the world (Coetzer et al, 1994). Earlier outbreaks of epizootic diseases5 on the continent were contained, and in some cases eradicated, but their prevalence and distribution in recent years has increased (Thomson, 1997)6. In the past, Africa has been extraordinarily vulnerable to many infectious human diseases7 (malaria, yellow fever, river blindness to name a few) which has been attributed to the natural environment prevalent on the continent (Bloom and Sachs, 1998). Africa also has an inordinate number of landlocked countries. This situation results in high external transport costs which limits the profitability of many agricultural activities. Bloom and Sachs (1998) highlight the poor access to coasts, also stressing the limited number of navigable rivers in Africa. Their cross-country regressions show these factors to be significant variables influencing growth. Hayami and Platteau (1997) also argue that Africa's poor resource endowment, in particular the abundance of land and low population density, have delayed agricultural growth by increasing transportation costs, suppressing competitive products, factors and credit markets, inhibiting technology adoption and raising the costs of agricultural and social services. Their argument is that the adverse 4 Green Revolution technology requires using high yielding varieties with reliable water supply, in combination with macro-nutrient fertilizer applications to which these varieties are responsive (Nitrogen, Phosphorous and Potassium). 5 The impact of livestock diseases can typically been separated into two broad groups: erosive diseases and epizootic or transboundary diseases. Of these two groups, the epizootic or transboundary diseases are by far the most important in terms of having the ability to threaten large numbers of livestock and thereby the livelihoods of people over wide geographic areas. An outbreak of these diseases result in huge losses. The erosive diseases have less severe results but are a continuous problem and the direct losses to the farmer can be substantial. 6 A recent example of the impact of an epizootic disease is in Botswana. In 1995, an outbreak of cattle lung disease (Contagious Bovine Pleuropneumonia) occurred in the Northern part of the country. The spread of the disease throughout Botswana would have resulted in an appreciable loss of beef exports due to the non-compliance with international food safety regulations. A decision was taken to eradicate the disease through a slaughter policy as a result of which over 300,000 cattle were killed. This event had a tremendous impact on the livelihoods of rural communities in the infected area and can largely explain the negative growth of Botswana's agriculture between 1990- 97 (Table Al in the appendix). 7 The spread of HIV/AIDS in Africa has been particularly severe and projections suggest that the disease will cause life expectancy to return to 1950 levels wiping out 40 years of development. 6 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges resource endowments bear much of the responsibility for the failures of agriculture and rural development. Many agricultural growth studies use these factors to explain the poor economic performance of Africa. Models of agricultural production have included land development costs (Haley and Abbott, 1986), life expectancy and road density (Craig, Pardey and Roseboom, 1994), demographic pressure, expansion of arable land (Frisvold and Lomax, 1991), irrigation, rainfall, and disasters (Ghura and Just, 1992) and infrastructure (Thirtle at al, 1995), as explanatory variables. More recently, civil strife and political unrest have also been included and have been shown to be a significant explanatory variable of the poor overall growth performance of Africa (Easterly and Levine, 1995). Gender inequality in education and employment has also been shown to reduce per capita growth in Sub-Saharan Africa (Blackden and Bhanu, 1998). In a study of overall growth, Sachs and Warner (1998), like Hayami and Platteau (1997), find that resource endowments are a significant variable in explaining cross-country variations of economic growth. However, their findings also suggest that poor economic policies have played an especially important role in causing the poor growth performance in Africa, the most important of these being Africa's lack of openness to international markets8. Despite the climatic, geographic and demographic trends, all of which were estimated to hinder growth, Sachs and Warner (1998) estimate that Africa could have achieved per capita growth of 4.3 percent per annum between 1965 and 1990, as opposes to 0.8 percent, if fast-growth policies had been adopted, particularly if it had improved its openness to international markets. In the context of agriculture, policy has long been highlighted as a key component to enhancing (inhibiting) growth (World Bank 1981), and, since the early 1980s, it has been widely used as an explanatory variable. Several studies have examined the effects of macro policy reforms on agricultural incentives (Jaeger and Humphreys, 1988), on the output of export crops (Jaeger, 1992) and on food crop production (Lamb and Donovan, 1992)9. The increased focus on policies was a consequence of the economic crisis and the indebtedness of African countries. Many adopted structural adjustment programs that included policy measures such as elimination of overvalued currencies, price adjustments in the direction of import and export parity, reduction in industrial protection and direct government intervention in the market through a process of liberalization, a decrease of the expenditure burden of governments and redressing fiscal policy (World Bank, 1994). The improved price incentives which were deemed to result from these programs, primarily for export crops, were expected to induce supply and improve efficiency (allocative efficiency and comparative advantage). There has subsequently been a plethora of literature evaluating these adjustment policies. Some of the literature has focused on the adverse price incentives and excessive government interventions as being the primary constraints to growth (ie: the main explanatory variables for poor performance). C.onversely, this emphasis on 'getting prices right' has been criticized as excessive (price fundamentalism) [Lipton, 1987; Krishna, 1990] with arguments that lack of adequate technology and 8 Sachs and Warner (1998) deem an economy to be open to trade if it satisfies five tests (1) average tariff rates below 40%; (2) average quota and licensing coverage of imports of less than 40%; (3) a black market exchange rate premium of less than 20%; (4) no extreme controls (taxes, quotas and state monopolies) on exports and (5) not considered a socialist country by the standard in Kornai (1992). 9 This is by no means and exhaustive list. 7 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges not prices are the most binding elements (Mellor, 1984). Others have stressed the inadequate institutional, human, capital and physical infrastructural environment. Indeed Binswanger and Pingali (1989), in their analysis of agricultural performance in Sub-Saharan Africa find all of these to be important. They attribute agriculture's poor performance to 'faulty pricing policies, inadequate infrastructure and poor institutional development" (p. 48), as well as the wrong technology priorities. While it is recognized that both agricultural price policy and technology are critical to increasing agricultural growth, the emphasis placed on each differs. The price and non-price factor debate was eloquently summarized by Krishna (1990) who called for a balanced view of the role of these factors in promoting growth. This balance has indeed been stressed extensively in the literature (Eicher, 1989, Rukuni and Anandajayasekeram, 1994, World Bank, 1997). A recent World Bank agricultural sector strategy paper, Rural Development: From Vision to Action, highlights many of these issues along with the objective of targeting a real agricultural growth rate of at least 4 percent annually through improved technology and increased productivity (World Bank, 1997). Within this broad goal, the World Bank identifies more specific objectives aimed at promoting the development impact to: i) increase food production and farm income; ii) make households food, water and energy secure; and iii) restore and maintain the natural resource base. To achieve these objectives the World Bank's agricultural strategy in Africa has identified five key elements largely corresponding to the variables discussed above. These include: * Improvement of the policy regime: creating an enabling policy environment for entrepreneurship and agribusiness development. * Technology development and adoption: promoting technical progress at the firm level and strengthening researcher-extension-farmer linkages. * Rural infrastructure: establishing rural roads, water supply and sanitation, electrification, social services, and improving urban-rural linkages. . Empowerment of rural people: increasing farmer participation in the agricultural and rural development process through political, administrative and fiscal decentralization, participatory project and program development and execution, and by strengthening farmer organizations. * Natural resource management: improving the sustainability of production systems through better management of soils, water, pasture and forests (World Bank, 1997). This rural economy oriented strategy emphasizes complementarity of decentralized public sector interventions, market-oriented approaches, and popular participation (World Bank, 1997). While many of the growth inducing variables discussed (price and non-price factors) have had an impact on agricultural growth, the mechanisms through which they effect growth sometimes differs. An understanding of these mechanisms will provide a better insight into the growth potential resulting form changes in these variables. These growth principles have been extensively discussed in the economic growth literature (Barro and Sala-i-Martin, 1995; Durlauf and Quah, 1998). Fafchamps (1998) discusses them in the context of Africa and separates the explanation of growth into a number of functional headings which include elementary, static, dynamic and agglomerate engines (Figure 1.3). This section will briefly summarise these different growth engines in the context of agriculture. A recent text by Eicher and Staatz (1998), includes a detailed discussion on some of these issues. 8 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges -Putting Idle Resources to Work -Area expansion Elementary Engines of Growth ' - - - - - - - Improving Allocative Efficiency Commodity Prices -Removing price distortions: Commodity booms taxes, price controls and busts -Realizing Comparative Advantage -Removing trade restrictions: tariffs, subsidies, foreign exchange controls, quotas A ITN Aomerate Engines of Growth o Fi egure 1.3:tin lumi Engines of Ariulurlwroth Source: Adapted from Fafchampsulaionof,Podu 199810.rce Elementarypenginal ters of g tE me -e - m e w inu edychangesin agricutrlcmoiyprcsvuigcmoityprhyicel boom h many countrie expeiencd widfal loses.Gain wee paticuarlyevi ent hnothegical Candgte and-1tmosawith c Fommoity booesmyears MotcutisiJfiahv nepr tutr ihydpneto ml attuemp has bEegnmaes tof A reducera Gothes.lcutosadriewrdarclua rcsfrsm Sucmmodipties using Fneationalps Comdt1Areet99Cs8cco,cfe, t)"s,hwvr Slmetatic engines of growth: Staticar engines of arclua growth relate to growth idcdb hnei ecnomicdb efciency.i Theseincultudel putodtin pid esuess towrkumpoing aomdiyprcocativ effcincy aondre pnArodctio topegenerat grwthdal ginces.ieswFichse 1998) cmoiny pu-Shrane Afrlicad, thefist cofnthiese eplainteocerewndals lofs34serceGant pereanu sarincu1980. Thisen wi cotine to be and imothet avenue90 forh grmowith omyas Msonre in Africa,oee,tioreorwhais finie Onexpr allresurcesure fulhly demployedt and theal pubrodcton posibilitiespfrntier Thas bihevenlechd ofnethrato hsourcesulofi grothemuse found. omrlosseing aoativempefficibenc offer anoreuethersore oflustuaticgowth Itd rise welldkow agiuthratpolicies have dstorted 10 Satatis (198,gisses ofgothe applicabiliyiofeurren growth teriesat toth Agricanhcontuext.hagei econoiceficiecy.Tesencludputingidleresourcesto , all prdcto ossibilti nxes frnirhsbe ece,ohrsusof growth ms efud mrvn aloatv efiiec ofrantesoreosticgwh.Iisell knowxnthat poliie hav distrth IOFfhmp*G98)icsesogreapphicabiliyo clurrnsrwhtheoris tothAfia cotet * . * *Physicai and human capital I9 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges agricultural prices (Schiff and Valdes, 1992) and allocative efficiency can only be improved if these distortions are removed. Although it is clear that allocative efficiency can improve social welfare, it is hard to see it as a long term engine of growth. Comparative advantage in production has also not been realised due to distorted policies such as tariffs, subsidies, foreign exchange controls and quotas. These elements of growth have played a large role in the current situation in Africa; indeed significant measures have been taken to remove these inhibiting distortions through structural adjustment programs(World Bank 1994, 1996). The removal of price distortions has usually been associated with a one time improvement in output through increases in variable factors and has thus been referred to as generating 'static' growth (i.e. after the one off improvement then alternative sources of growth need to be found). This view, however, implicitly assumes that private investment is not responsive to price. Indeed, this is not the case, and there will be some spill-over effects which cause dynamic growth through improved incentives for private sector investment. This investment will be an ongoing economic process stimulating growth. Dynamic growth will also occur through induced innovation effects (Hayami and Ruttan, 1985). Dynamic engines of growth: Growth induced by an accumulation of productive resources (human, physical and biological) is usually referred to as dynamic growth. As more of these productive resources become available and are used, the production possibilities frontier shifts outwards and output increases. Accumulation theories are implicitly based on the idea that growth is due to more of the same, a process which has limitations for accelerated growth. Further output increases will only be realised with technological change. This was clearly evident in the evolution of mechanised grain harvesting in the United States, evolving from the sickle to the harvester in the mid-i 800s. Once the sickle has been adopted (and as a farmer can only use a limited number of sickles), further gains in output (labor productivity) could only be achieved with innovation (development of mechanised harvesting). Similarly, once hybrid seeds have been adopted, further gains will require the development of new varieties 1. Human capital (education and skills) levels are complementary to capital accumulation as these are required by workers to make effective use of new machinery and new seed varieties (Schultz, 1961). Agglomerate engines of growth: Agglomeration effects have become increasingly more recognised as a source of additional growth. Regional integration provides a good example of this effect, with several convincing arguments presented in its favour for Africa (Sachs, 1998). The reasoning is that infrastructure is intrinsically a regional affair with market size in individual countries usually being too small to sustain growth and far too small to sustain modem infrastructure by itself. Regional bargaining power is more powerful than that of any single country and a good regional reputation can attract larger amounts of foreign investment. Technology spillovers are also an important element to stimulate regional as well as country specific output and productivity growth. Agricultural productivity has largely been associated with the dynamic engines of growth, and more especially with the result of technological progress. Improved human capital (health and education) and new technologies (mechanical and biological) are seen to raise land and labour productivity thus stimulating overall agricultural growth. General prescriptions to raising productivity have therefore focused almost exclusively on increasing investment levels in these two areas. 11 This is a fairly simplistic argument, as there are many factors involved with the adoption and use of new machines and seed varieties, but it is used simply to illustrate the difference between static and dynamic growth. 10 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges EFFICIENCY, TECHNICAL PROGRESS AND PRODUCTIVITY CHANGE IN AFRICA Recent methodologies allow us to examine this hypothesis by decomposing productivity measures into changes in efficiency and technological progress (Fried et al, 1993). Thus productivity growth can be defined as the net change in output due to the change in efficiency and technical change, where the former is understood to be the change in how far an observation is from the frontier of technology and the latter is understood to be shifts in the production frontier(Grosskopf, 1993). In a world in which inefficiency exists, as is suggested in Africa (and other regions), if this decomposition is ignored, productivity growth no longer, necessarily tells us about technical change. The decomposition is also important from a policy perspective, as a slowdown in productivity growth due to increased inefficiency suggests different policy recommendations to those suggested when the slowdown is due to a lack of technical change. An example is that slow productivity growth due to inefficiency may be due to institutional barriers constraining the diffusion of innovation. In this case, policies to remove these barriers may be more effective in improving productivity than policies directed at innovation. Several studies have estimated cross- 1.2 country agricultural efficiency measures (Amade, Regional Efficiency Frontier 1994; Thirtle et al, 1995, Millan and Aldaz, 1998, O Fulginiti and Perrin, 1998), which have all been o - * - based on data envelopment analysis, employing .6 the Farrell (1957) concept of efficiency (Box Al). U 0.6 Using this same methodology, technical efficiency ; 04 frontiers were calculated for five regions for .2 1996/97 and average technical efficiency scores of all countries in each region were calculated l 0 (Figure 1.4). The results suggest that Africa is S.Asia MENA LAC EAP SSA lagging behind other regions in terms of technical Regions efficiency in production. On average, the countries Figure 1.4: Comparison of Technical Efficiency in other regions are closer to their efficiency by Region. frontier than countries in Africa, thus reducing Source: Derived using FAO data. this distance could provide a significant future source of agricultural growth. Using a similar methodology, Thirtle et al (1995) decompose African agricultural productivity growth into efficiency change and technical progress. They attempt to explain changes in technical progress with agricultural research and development expenditures (R&D), secondary education and machinery (tractors) which all have significant effects. Since R&D is supposed to generate new technology and is complementary to education, these results are not surprising, and tractors do embody new technology. Thirtle et al (1995) also find evidence supporting the Boserup/Hayami and Ruttan view of population pressure being causally prior to intensification and land-saving technical change. Changes in efficiency were explained by variables on infrastructure (irrigation and transportation), extension, primary education, the weather and agricultural policies. 11 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Improving efficiency has indeed been an objective of structural adjustment programs. The common philosophy is that more efficient input and output markets, enhanced access to more adequate technology, and more proficient public services together with direct price adjustments improve the output-input price ratio which spurs growth and development (Meerman, 1996). ...'In other words - markets (financial, foreign exchange, factor, and goods), should operate without distortions. Pricing of tradable goods should be at border-parity values and taxes should be neutral. Thus, production is reallocated to higher value output. Hence, the value of output may be expected to expand in the short to medium run because of more efficient allocation of resources, and in the long run because of higher and more efficient investments' (Meerman, 1996, pg. 29). Indeed, this brings us back to the concepts of static and dynamic growth. GROWTH AND MARKETS The state of the market has an impact on all the engines of growth highlighted in the previous section (Stiglitz, 1989). Markets can contribute to the development process in two general ways. Firstly, they can provide a way to allocate resources ensuring the highest value production and maximum consumer satisfaction. Secondly, they may stimulate growth by promoting technological innovation and increased supply and demand (dynamic growth) [Scarborough and Kydd, 1992]. Co-ordination and Price Transmission Following the static and dynamic concepts defined in the previous section, two important ways to achieve higher resource productivity are to increase specialisation in production (an exploitation of absolute and comparative advantage) and technological innovation. The corollary of specialisation is the separation of producers and consumers of particular products into distinct groups. For example, farmers specialising in the production of a certain mix of crops may become dependent on exchange for agricultural inputs, consumer goods, and other agricultural products not produced on their farms possibly including foodstuffs (Timmer, 1997). Specialisation in production therefore requires co- ordination between producers, distributors and consumers or between supply and demand. Markets can provide an important means for this co-ordination. Growth in the size and spatial spread of the market allows for greater specialisation in production which can lead to increased output from each unit of resource employed. Therefore, a two- way relationship exists between increasing resource productivity and developing adequate systems of exchange. The detailed way in which prices are generated and transmitted through these markets is crucial in determining producer incentives and whether resource allocation leads to maximum production and optimum consumer satisfaction. Policies, Price Formation and Agricultural Incentives Prices signals through these markets have often been controlled by governments who defend their interventions as measures required to correct market imperfections/failures. Indeed, another debated topic is the appropriate balance between the state and the market (Williams, 1992). Several authors highlight the impact of these past government interventions focusing on the extent of agricultural taxation and its implication on agricultural incentives (Schiff and Vald6s, 1992, 12 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Herrmann, 1997). The emerging evidence is that past policies have tended to tax agriculture heavily with farmers receiving producer prices significantly lower than the world price equivalent"2. Indeed, taxation of export commodities by the state, by parastatal bodies, by monopolies or via corruption or holdups such as police barricades has been a common form of extraction from agriculture (Binswanger and Deininger, 1997). These means of extraction undermined the incentives to produce and invest, and tend to have a much higher deadweight loss than the more modem forms of taxation. Nevertheless, the taxation would not have been as crippling to agricultural growth if some of the surplus was invested into public services and infrastructure (Newbery, 1992). Indeed East Asia provides some 20th century examples of high extraction from rural areas combined with significant public investment and growth (Karshens, 1998). The increase in the flow of public funds to agriculture significantly enhances agricultural income. Government spending on agricultural research and education raises the productivity of factors (dynamic engines). Investments in transportation reduces internal marketing costs, increases the net income accruing to agriculture, and opens up new areas for production. These high levels of taxation were quantified by Schiff and Valdes (1992) using data from eighteen developing countries. They show that Sub-Saharan African countries (Cote d'Ivoire, Ghana and Zambia) imposed the most severe taxation (both explicit and implicit) on agriculture, ranging from 46-59 percent. The direct tax on agriculture in these African countries was similar to the level of the indirect tax, implying that agricultural pricing policies taxed agriculture about as much as the implicit tax resulting from industrial protection and macroeconomic policies. This differs markedly from their findings in the other developing countries where the implicit tax was nearly three times that of the direct tax. Herrmann (1997) conducted a similar study which focuses on individual crops (coffee, wheat and rice). He also finds significant policy biases against agriculture, these being more excessive for the export crops (coffee) than the food crops (rice and wheat). The favorable agricultural policies for food crops were often shown to be offset by distorted macroeconomic policies with a resulting decline in the real producer price. Both of these studies use pre-1985 data, which limits their use in identifying the current distortions facing farmers in Africa. Progress in reducing these high level of taxation was made by the end of the 1980s. Structural adjustment programs with macroeconomic, trade and sector reforms, had been widely adopted. The intended impact on the agricultural sector was to increase the payoffs to small-holder farmers, primarily from an expansion in the production of export crops, thereby accelerating rural growth and poverty reduction. Price incentives improved in many countries as shown in the 1994 World Bank study - Adjustment in Africa Of the twenty seven countries analyzed, ten experienced an increase in the real producer price of export crops, while seventeen experienced a decline. The explanation provided for the large declines was the fall in world prices, together with the countrys' inability to reduce both explicit and implicit taxation simultaneously. Consequently, the benefits from the reduction in one were normally eroded by the losses from the increase in the other. 12 Much of the focus on price relationships in the literature has been on the trends in the ratio of primary prices to manufacturing prices. The argument is that, in the long run, this ratio moves downwards (Prebisch, 1950 and Singer, 1950). This, together with the perception that agriculture was impervious to price incentives and that there were significant benefits from reducing the reliance on the importation of manufactured goods led to a belief that industrialization was the key to rapid growth. Following these perceptions, the conventional wisdom was to tax the primary sectors, such as agriculture, to provide resources to build a modem industrial sector. 13 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges A more recent study (World Bank, 1996) which examined the change in real producer prices over the decade 1985 to 1995 for several major export crops (coffee, cotton, cocoa, cashew) in five countries (Benin, Burkina Faso, C6te d'Ivoire, Mali, Mozambique and Uganda) suggests a similar result. Despite macroeconomic and agricultural reforms, several countries experienced stagnant real producer prices. The study revealed a lack of pass-through of international prices to domestic prices suggesting that there are some remaining impediments preventing farmers from enjoying the full benefits of these recent policy changes. These impediments can be explained by both price and non- price factors and the linkages between the two. COMPLEMENTARITIES BETWEEN PRICE AND NON-PRICE FACTORS Indeed, there are large complementarities between price and non-price factors. This was clearly illustrated empirically by Schiff and Montenegro (1997), using data from eighteen developing countries. As mentioned in the previous section, these non-price factors include investments in new technologies, rural infrastructure and human capital. The complementarities suggest that the removal of price distortions through macroeconomic and sector reforms will only have limited impact on farmer response if market infrastructure, institutions and support services are undeveloped (Binswanger, 1989, Tshibaka, 1997). In these cases transaction costs will be high resulting in high input costs and low output prices, thus some of these non-price factors implicitly effect prices. Conversely, the removal of structural and institutional constraints alone will only have a limited impact on the farmer's response if price distortions continue to be significant. This study will highlight some of the complementarities, in particular between prices and rural infrastructure with a brief discussion on the institutional framework in African countries. Some aspects of technology will be discussed but they will not be the primary focus of this particular study. Indeed the challenge of improving agricultural incentives is highlighted by the complex nexus among the structures of the broader agricultural economy (marketing systems, transportation costs, infrastructure), the macroeconomic environment (trade, exchange rates, institutional framework) and the political arena in which agriculture operates. This study will take stock of current policies as well as their recent evolution to update knowledge and to generate discussion to help develop a stronger consensus on an appropriate policy stance that will improve agricultural incentives and raise average agricultural growth rates and farm incomes. OUTLINE OF THIS WORK The next section examines the external market environment focusing on the recent world price trends and volatility in commodity markets. The external terms of trade for African countries are calculated. Access of African countries to OECD markets is also discussed. The remainder of the study examines the internal market environment. Chapter three assesses the current macroeconomic policy stance of African countries and discusses the evolution of fiscal, monetary and exchange rate policies since 1990. The linkages between these macroeconomic policies and agricultural prices and income are highlighted through country case studies. Chapter four focuses on export crop market reforms and price trends. The current state of the market and the recent evolution of marketing policies are reviewed. Exchange rate pass-through to producer prices are examined together with complementarities between prices and rural infrastructure. 14 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Food crop prices and markets are examined in chapter five. Maize producer and consumer price trends are reviewed. Private trader emergence into liberalized food markets is examined, identifying some of the barriers to entry. The study only examines one strategic agricultural input in chapter five, namely fertilizer which is the largest purchased input in Africa agriculture. The chapter examines the fertilizer market with a focus on fertilizer price trends, exchange rate pass-through, transport infrastructure, private sector participation, trade restrictions and fertilizer aid. Chapter seven draws up several policy challenges facing Africa, elaborating on a strategy to remove market and price barriers to improve agriculture incentives. Country profiles of price policies for sixteen Sub-Saharan African countries are presented in chapter eight. 15 PART II THE EXTERNAL MARKET ENVIRONMENT 2. WORLD PRICES AND MARKET ACCESS The real world price of the major agricultural exports from Africa has declined over the past several decades. These declining trends have had a significant impact on African economies as agriculture is the dominant sector in most of these countries, accounting for 40 percent of total exports from the continent. Within agriculture, nine crops account for about 70 percent of total exports and this share has remained relatively constant since the 1970s. Table 2.1: Sub-Saharan Africa's Commodity Export Earnings as a Percentage of Total Agricultural Exports. Crop 1970-79 1980-89 1990-97 Growth Rate (1970-97) Bananas 0.7 0.5 1.3 2.4 Cocoa 20.6 22.1 18.5 -0.2 Coffee 24.7 25.9 14.7 -2.1 Cotton 9.2 8.6 11.9 0.9 Groundnuts 2.4 0.6 0.3 -8.5 Rubber 1.7 2.1 2.4 1.7 Sugar 5.6 6.8 8.5 0.7 Tea 2.5 3.6 4.8 3.3 Tobacco 3.1 4.8 8.8 4.7 % of Total Agric. Exports 70.4 74.9 71.2 Source: FAO Trade statistics. These calculation exclude South Africa. Including South Africa reduces the last row percentages to 62, 66 and 60 for the consecutive periods. Although the aggregate share has been fairly stagnant, the shares of several individual crops have changed significantly. Cocoa and coffee are the dominant crops and accounted for over 40 percent of the continents agricultural exports between 1970 and 1990. Since 1970, these two crops have experienced a declining share with an annual decline of -0.2 and -2.1 percent for cocoa and coffee respectively. Cotton has grown in importance, its export share increased from 8.6 percent between 1980-89 to 11.9 percent between 1990-97. Conversely, the export share of groundnuts declined from 2.4 percent in 1970-79 to 0.6 percent in 1980-89. This decline was largely caused by aflotoxins, which reduced external demand for African groundnuts on international markets. The continual commodity dependence observed in Table 2.1 makes many African economies susceptible to serve terms of trade fluctuation from commodity price shocks. The impact of these shocks can be widespread, affecting exchange rates, the cost of debt, government revenue, and private producers, processors, traders and consumers. Table 2.2: Sub-Saharan Africa's Share of World Trade. Levels Averages Annual Growth Rates Country 1970 1997 1970-79 1980-89 1990-97 1970-1997 (%) Bananas 7 4 6 3 4 -3.3 Cocoa 68 41 59 45 40 -2.0 Coffee 26 12 27 22 14 -3.1 Cotton 17 14 13 11 12 -0.2 Groundnuts 68 7 44 11 5 -10.2 Rubber 8 7 6 6 5 -0.5 Sugar 9 7 8 7 8 -0.2 Tea 13 21 15 15 19 1.3 Tobacco 8 12 8 9 12 1.7 Source: FAO data. 19 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Although SSA has experienced a loss in its international market share of agricultural exports, with a decline of 27, 14 and 61 percent for cocoa, coffee and groundnuts respectively since 1970, the most recent trends have been more favorable for many crops (Table 2.2). The export share for five of the nine crops (bananas, cotton, sugar, tea and tobacco) has increased since the 1 990s. WORLD COMMODITY MARKETS AND PRICE TRENDS Recent studies (Cuddington et al, 1993; Bleaney and Greenaway, 1993; Reinhart and Wickham, 1994) have highlighted the long-term downward trends in the international terms of trade for primary commodity exports relative to manufactured goods13. Reinhart and Wickham (1994) and Sapsford and Singer (1998) suggest that prices are not only declining but their variance (volatility) is increasing. They find that the major part of the recent weakness of commodity prices is associated with secular (permanent) as opposed to the cyclical (temporary) trends. Secular Trends Secular trends are permanent (irreversible) trends in nature whose importance varies considerably across commodity groupings. Reinhart and Wickham (1994) suggest that about 85 percent of the variance of world beverage prices is due to permanent shocks, while for metals, these permanent shocks only account for 30 percent of the price variance. They go on to highlight the factors affecting these secular (permanent) price declines which include agricultural policies in industrial countries, technological innovation and to some extent, the breakdown of international commodity agreements. Subsidies afforded to agriculture by industrial countries have induced a large expansion in supply, particularly evident in the 1980s, thus contributing to world price declines. The development and adoption of new technology has significantly increased average yields, raising world output and reducing world prices. The breakdown of the ICAs for sugar (1984), cocoa (1988), coffee (1989) caused a surge in supply and a large 'temporary' downward price spike. Reinhart and Wickham (1994) suggest that the ICA breakdowns are also likely to have had 'permanent effects', as exporters' behavior adjusts to the more competitive regimes. Cyclical Trends Cyclical price trends are temporary in nature. Typical causes of these price fluctuations include the effect of weather (drought, frosts and floods), as well as recessions in industrial countries. For example, slower demand in recent years from Russia and the effects of the Asian crisis have all caused a temporary decline in the world price of a number of agricultural commodities. The nature of the cyclical trends determines the differing degrees of trend persistence. World Price Volatility In more recent years, the volatility of world prices has also received increasing attention. Reinhart and Wickham (1994) show that between 1957 and 1993, commodity price volatility increased around the declining price trends. Using a similar methodology, with a longer time period (1960 to 13 The Prebisch-Singer hypothesis. 20 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 1998), with more focus on crops produced by Sub-Saharan Africa, Table 2.3 compares the means and variance of commodity prices over time. There are several notable features. First, the average prices in the latter periods are lower, consistent with the negative trend. Second, although there is a sustained and sharp increase in the variance of several world commodity prices between the 1960s and 1980s, this variance declines in the 1990s for all commodities except bananas and tobacco. (see Figure Al in the appendix). Table 2.3: Mean and Variance of World Commodity Prices. Commodity Statistic 1960-70 1970-80 1980-90 1990-98 Bananas Mean 6.547 6.275 6.273 6.106 Variance 0.006 0.009 0.008 0.017 CV 1.191 1.546 1.466 2.157 Cocoa Mean 5.541 5.902 5.474 4.829 Variance 0.046 0.165 0.142 0.021 CV 3.877 6.890 6.886 3.012 Coffee Mean 5.713 6.087 5.687 4.980 Variance 0.037 0.134 0.185 0.125 CV 3.358 6.019 7.557 7.086 Cotton Mean 5.670 5.694 5.317 5.023 Variance 0.006 0.026 0.066 0.024 CV 1.375 2.823 4.824 3.066 Groundnuts Mean 6.030 5.994 5.505 5.056 Variance 0.003 0.066 0.057 0.033 CV 0.974 4.271 4.328 3.592 Rubber Mean 5.534 5.226 4.962 4.694 Variance 0.054 0.032 0.052 0.037 CV 4.202 3.428 4.606 4.116 Sugar Mean 3.437 3.995 3.260 3.095 Variance 0.239 0.302 0.304 0.019 CV 14.222 13.750 16.914 4.413 Tea Mean 6.095 5.687 5.463 5.122 Variance 0.025 0.028 0.067 0.034 CV 2.578 2.940 4.733 3.616 Tobacco Mean 8.722 8.263 8.125 7.970 Variance 0.040 0.015 0.016 0.028 CV 2.282 1.480 1.541 2.089 Source: World Bank data, Price were in logarithms. CV is the coefficient of variation. The sharpest rise in volatility appears to have taken place during the early 1970s following the breakdown of the Bretton Woods exchange system after the fist oil shock. Volatility peaked during the 1980s and has since declined in seven of the nine commodities presented in Table 2.3. The decline in volatility is apparent when international commodity agreements have largely collapsed and where the trade regimes across countries have become less distorted with the implementation of the Uruguay commitments. Over the last several decades, African countries have adopted a number of mechanisms to deal with price risk. However, the design and feasibility of these mechanisms (such stabilization and hedging 21 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges strategies) depend very much on the nature of the shock. The response to cyclical volatility in commodity prices, raises issues different from those emanating from secular changes. Income stabilization policies and hedging are useful in dealing only with temporary and, preferably, short-lived shocks. The ability to stabilize prices depends on the persistence of the shock and the duration of the cycles. Permanent shocks may require adjustment (export diversification, [Sapsford and Singer, 1998]). In Africa, although many marketing boards and stabilization schemes were set up, their record of effectively stabilizing prices and incomes has been mixed (this will be discussed in more details in chapter 5). A number of commodity exchanges have developed in Africa (Zimbabwe and South Africa) to manage price risk in the more open markets. What has become apparent is that developing countries, in general, have faced certain problems in accessing market-based risk management instruments. Larson et at (1998) highlight some of these problems and offer several solutions. They suggest that the problems associated with government entities center on the capacity and incentives to develop and execute risk management strategies while for private entities, lack of knowledge and understanding, inadequate legal, regulatory and institutional environments limit access to current markets. Diversification strategies to cope with permanent price shocks have included producing more non-traditional export crops such as citrus fruits, cut flowers, spices and animal products (e.g. Kenya and Zimbabwe). A comparison of the price trends of these commodities with the traditional agricultural exports (Table 2.4) shows that between 1961 and 1997 the world price of traditional exports declined at a rate over three times faster than that of the non-traditional exports. However, from 1990-1997, with the boom in traditional export crops, particularly in coffee, the trends between these two groups have been reversed. The large decline in the world vanilla price in the 1990s can largely be attributed to the introduction of vanilla substitutes on world markets. Table 2.4: World Price Trends of Traditional and Non-Traditional Exports. Growth Rate Growth Rate Commodity 1961-97 1990-97 Commodity 1961-97 1990-97 Non-Traditional Exports Traditional Exports Citrus Fruit 0.8 3.2 Bananas -1.4 -3.6 Pineapples -0.3 3.2 Cocoa -2.2 2.7 Pulses -2.3 -2.2 Coffee -1.8 11.2 Live Animals -1.9 -2.4 Cotton -2.4 0.5 Beef and Veal -0.6 -3.3 Groundnuts -3.3 0.8 Hides and Skins -1.6 -0.5 Rubber -2.7 5.0 Cashew Nuts 0.5 -1.9 Sugar -2.0 0.8 Vanilla -0.3 -11.2 Tobacco -2.5 -3.2 Tea -3.3 -2.0 Mean -0.7 Mean -2.4 Source: World Bank, FAO. Note: To derive a world price for the non-traditional exports, the value of world exports was divided by the quantity of world exports. Data were derived from the FAO trade statistics. Price Trends During the 1990s The recent commodity boom, which reached its peak in 1995-96, has provided temporary relief to the long-terrn downward movement in commodity prices. Although temporary (cyclical), this boom provided welcomed benefits to farmers (Table 2.5 and Figure 2.1 to 2.4). Between 1990-91 and 1996- 22 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 97, the price of export crops increased at a greater rate than that of both the price of grains and the price of fertilizer. However, this positive trend is unmikely to continue as shown by the forecasts in Table 2.5. Table 2.5: World Commodity Price Trends. Percentage Change in the Real World Price (Deflated by the MWJ) 1990-91 to 1996-97 1996-97 to 2010 (Forecast) SSA Export Crops Food Crops Fertilizer SSA Export Crops Food Crops Fertilizer Bananas -19 Wheat +18 Phosphate -12 Bananas -17 Wheat -26 Phosphate -16 Cocoa +14 Rice +4 Urea -3 Cocoa +8 Rice -12 Urea -17 Coffee +43 Maize +19 TSP +20 Coffee -18 Maize -25 TSP -32 Cotton -8 DAP +9 Cotton -15 DAP -26 Groundnuts +18 Groundnuts -13 Rubber +30 Rubber -17 Sugar -1 Sugar -3 Tea -8 Tea -18 Tobacco -13 Tobacco -21 SSA Export +20 Grains +14 Fertilizer +8 SSA Export -7 Grains -20 Fertilizer -27 Crops Crops Source: World Bank. African Export Crops 500 Several export crops, such as coffee, 400- rubber, cocoa and groundnuts experienced large 300 price increases between 1990 and 1995-96. The 200 low coffee prices in the early 1990s were caused 'D l _ 99100 by the weak demand from traditional markets (Soviet Union). The large world stocks created 0 _______- by high prices in the mid-1980s led to the 1985 1987 1989 1991 1993 1995 1997 collapse of the world coffee organization's buffer Year stock and price support scheme. Between 1990 - Cotton Coffee ------Cocoa and 1994 coffee prices increased by over 150 Figure 2.1: Trends in the World Price of Cotton, percent. The 20 percent aggregate increase in the Coffee and Cocoa, 1990 Constant Prices, US cents/kg. real price of SSA export crops is unlikely to Source: World Bank data. continue as the effects of the Asian crisis are felt on the world markets. 400 300 Grain Crops C 200 A key indicator of the world grain prices -- -x -x is the stock levels in the five largest grain- l exporting countries (USA, EU, Canada, Australia and Argentina). Low world grain stocks coupled 1985 1987 1989 1991 1993 1995 1997 and Argentma). Low world gram stocks couplea Year with the poor US harvest resulted in large real world price increases in 1995-96. The subsequent -x_ Maize Wheat ,Rice decline in 1997 was the result of the large supply Figure 2.2: Trends in the World Price of Maize, response to the higher 1995/96 prices and weak Wheat and Rice, 1990 Constant Prices, $US/mt. world demand. Source: World Bank data. 23 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Fertilizers 300 250 The low fertilizer prices in the early 200 1990s were due to a glut in the fertilizer market 150 0 x . which caused several fertilizer plants to close. -D The subsequent price increases are mostly due to the tight supply that fertilizer manufacturers have 0 E been enjoying throughout the past several year, 1985 1987 1989 1991 1993 1995 1997 as well as the sharp increase in fertilizer Year consumption in China, Vietnam and Pakistan Urea -x_TSP DAP (Gerner et al, 1996). Fertilizer prices are forecast I to decline by more than the declines predicted in Figure 2.3: Trends in the World Price of Urea, DAP export crops and grain crops (Table 2.5). and TSP, 1990 Constant Prices, $US/mt. Source: World Bank data. 250 250 -200 ~~~~~~~~~~~~~~~~~~~~~~200 150 ~~~~~~~~~~~~~~~~~~~~~~~~150 I oo - -x. 100 o ~~~~ -x 50 ~~~~~~~~~~~~~~~~~~~~~~~50 1985 1987 1989 1991 1993 1995 1997 Year - - - - Grain Price Index -x - Fertilizer Price Index SSA Export Crop -Price Index Figure 2.4: World Commodity Price Trends, 1985-1997. Source: World Bank. EXTERNAL TERMS OF TRADE The favorable world price trends in recent years have improved the external terms of trade for agriculture (Table 2.6). External barter terms of trade for agriculture'4 have improved at a greater rate than the external barter terms of trade for the economy'5 of many African countries. The improved external terms of trade for agriculture suggest that the purchasing power from exporting agricultural commodities is increasing relative to food imports. Similar trends are derived if the manufacturing unit value (MUV) is used as the denominator. 14 Measured as the ratio of the price of agricultural exports to the price of food imports (Table A2). 15 Measured as the ratio of the unit value of total exports to the unit value of total imports for the economy 24 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges In most African countries examined, the external net income terms of trade have increased at a greater rate than that of the barter termns of trade (see Appendix for calculation, Table A2). In three of the 16 countries analyzed (Zimbabwe, Mozambique, and Mali) the external barter terms of trade have deteriorated while the external net income terms of trade have improved because of the larger percentage increase in the volume of agricultural commodities exported. The reverse is true in other cases (Madagascar) where the increase in the external barter termns of trade has been eroded by the decline in volumes exported. In some cases, the terms of trade improvement have been phenomenal (Uganda for instance had a growth rate of 8 percent and 22 recent per annum in its barter and net income term of trade respectively). The last column in Table 2.6, showing the change (growth rate) of the crop export price to the world fertilizer price, indicates large contrasts across countries for the 1990s. The growth rate in ten countries (Burkina Faso, Cameroon, C6te d'Ivoire, Nigeria, South Africa, Tanzania, Madagascar, Ethiopia, Kenya and Uganda) is positive, with high growth rates in Uganda, while it is negative in six countries (Mali, Niger, Ghana, Malawi, Mozambique and Zimbabwe), with large negative values for Niger, Malawi and Zimbabwe. This indicates that the contrasts in prices result from differing compositions of export commodities across countries with some countries experiencing a greater decline in world prices of their agricultural commodity exports. The sign on this ratio is the same as that in the external barter terms of trade for agriculture, and in some cases, the variations are larger. Table 2.6: External Terms of Trade in Sub-Saharan Africa, 1989/90-1996. Country Barter Terms of Net Income Terms of Barter Terms of Agricultural Export Trade (Agriculture) Trade (Agriculture) Trade (Economy) Price/World Growth Rate p.a. Growth Rate p.a. Growth Rate p.a. Fertilizer Price Growth Rate p.a. SSA 1.63 4.21 -0.87 - CFA countries Burkina Faso 4.2 0.9 1.4 4.1 Cameroon 11.9 12.9 -4.4 3.4 C6te d'lvoire 3.9 6.8 3.2 3.9 Mali -1.4 1.4 -1.8 -3.1 Niger -5.1 -10.2 -4.1 -8.2 Non-CFA countries Ghana -5.9 -2.7 0.13 -1.3 Nigeria 7.0 10.5 -4.5 9.0 Malawi -2.3 -0.8 -3.1 -5.6 Mozambique -0.8 6.6 -1.2 South Africa 4.6 0.7 0.6 4.5 Tanzania 1.9 8.7 -0.8 3.1 Zimbabwe -1.9 9.6 -1.5 -3.8 Madagascar 7.4 3.4 1.6 5.3 Ethiopia 0.7 10.9 -1.7 5.1 Kenya 1.4 3.4 7.2 1.7 Uganda 8.3 22.2 5.3 10.9 Source: FAO, World Bank and IMF data. The exports and imports used to calculate the terms of trade are shown in the appendix. The largest countries in the region based on agricultural value added (with data available) were used for this analysis. 25 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The improved external terms of trade for agriculture in the 1990s has been facilitated by real effective exchange rate depreciations. CFA countries' terms of trade improved more than those of the non-CFA countries due to the more favorable world prices for crops such as coffee and cocoa, which are largely produced by the CFA countries. The trend in net income terms of trade shows a much larger improvement for the non-CFA countries, a phenomenon which will be analyzed later. ACCESS TO OECD MARKETS Another component of the external market environment is Africa's access to OECD markets. Several external factors have had an influence, namely high external transportation costs, import barriers and phytosanitary requirements. External transportation costs: Several African countries receive preferential trade agreements from the OECD (ie: sugar in Mauritius, beef in Botswana) which were received under the OECD's Generalized System of Preferences (GSP) schemes, and through the European Union Lome Convention. Amjadi and Yeats (1995), however, show that these preferential tariffs were often offset by the higher than average nominal freight costs on Africa's exports. Import barriers: In recent years, import tariffs do not appear to have been especially limiting to African export. Ng and Yeats (1996), in fact, show that African countries faced average tariffs below those paid by other exporters. Their analysis concludes that there is no evidence "that OECD tariffs caused the general loss of competitive position reflected in Africa's declining market shares" (pg. 20). Their analysis focused on all traded goods and not just agriculture. They argue that non-tariff barriers have 30 - not been significantly biased against African 25 2 countries when all trade items are considered. I 20 - The coverage ratio for SSA countries was lower l 15 - than that of other developing countries but higher 10- -F* than for intra-OECD trade. However, Sub- Saharan Africa faced a higher incidence of NTBs | z (Non-tariff barriers) on 'all food items' than Developed Sub-Saharan Developing other developing countries (Figure 2.5). Coffee Countries Africa Countries exports are subject to quantitative controls *AII Foods OAlI Items imposed under the International Coffee Figure 2.5: Non-Tariff Measure Coverage Ratio for Agreement and special taxes are also applied to OECD Imports from Developed, Developing and Sub- coffee imports in several European markets (Ng Saharan African Countries. and Yeats, 1996). Source: Ng and Yeats, 1996. Under the Uruguay Round Agreements, defined NTBs are being converted into tariff equivalents. These NTBs include quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing and non-tariff measures maintained through state trading enterprises (Ingco and Townsend, 1998). A special treatment clause (food safety and environmental protection) was introduced to allow certain countries to postpone application oftariffication to sensitive commodities (such as staple products from Africa). Under certain conditions this clause allows the maintenance of import restrictions up to end of the implementation period (Tshibaka et al, 1998). There 26 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges were some concerns that the Uruguay Round may result in market losses for Africa due to the erosion in the value of preferences in its export markets as overall cuts in tariffs reduce the value of the preferences (Davenport et al, 1994). Currently, further studies are being conducted to assess constraints to OECD market access (Ingco et al, 1999). Sanitary and phytosanitary requirements: Sanitary and phytosanitary standards remain a barrier to expand trade into foreign markets, but they are conditions that African countries must satisfy. As trade participation grows with reduced trade barriers and development, a country's ability to meet and apply sanitary and phytosanitary standards will become more important for markets access. Applying such standards means building effective system to control or eradicate plant and animal diseases and to ensure the safety of exports. However, the abuse of these conditions by OECD countries as market barriers needs to be closely monitored by the international community and the WTO. Several domestic factors also limit market access. These include low comparative advantage and efficiency in farm production and high transportation and transaction costs. Some of these issues will be examined in the following chapters. SUMMARY AND CONCLUSIONS The long-term (secular) world price trends towards lower real commodity prices looks firmly set in place. These trends suggest that Africa must produce agricultural commodities at lower cost (adopt new technologies) or else its position in world markets will continue to erode. The short-term (cyclical) price variations remain high, although some commodities show a decline since 1990 (sugar, cocoa, cotton and rubber). In order to cope with these price variations, African countries need to improve their access to market based risk management instruments. From 1990 through 1997, real world commodity prices increased, improving the external market environment for African agriculture. * Between 1990 and 1997, the real world price of SSA's agricultural exports increased by 20 percent, grain crop prices increased by 14 percent and fertilizer prices increased by 8 percent. * These trends resulted in a 1.6 percent annual improvement (growth) in the external barter terms of trade and a 4.2 percent annual improvement (growth) in the external net income terms of trade. The recovery of real world commodity prices for traditional African exports was temporary with a significant price downturn in 1998/99. The long term downward trend in world prices for the non- traditional exports such as cut flowers, citrus fruit, deciduous fruit, live animals and animal products appears to be less severe than the trends in the price of traditional export crops. * Recent events in the world economy, particularly the economic slow-down of Russia and Asia, are likely to have a considerable temporary negative effect on agricultural commodity prices. * African countries access to OECD markets varies significantly across crops. High external transportation costs and sanitary and phytosanitary standards remain barriers to expand trade into foreign markets. Unit transport costs could be reduced with larger product shipments. This could be achieved if African countries shared cargo space on ships. This closer collaboration needs to be encouraged through greater regional integration. In order to meet the sanitary and phytosanitary 27 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges requirements, African countries will need to build an effective system to control or eradicate plant and animal diseases and to ensure the safety of exports. 28 PART III THE INTERNAL MARKET ENVIRONMENT 3. THE MACROECONOMIC POLICY ENVIRONMENT Since Schuh's (1974) seminal work on macroeconomic policy effects on agriculture, the importance that the macroeconomy can play in generating (depressing) agricultural growth is increasingly recognized. A considerable literature exists and shows that macroeconomic variables do have an important impact on agricultural incentives. Recent work by Schiff and Valdes (1998) provides an excellent summary of these effects. The focus of many African studies on the linkages of the macroeconomy to agriculture has been on the impact of exchange rates (Ishibaka, 1993; Jaeger and Humphreys, 1988, Elbadawi, 1992, Oyejide, 1996, Cleaver, 1985), interest rates and the money supply (Hassan, 1996, Dercon, 1993). In some countries, macroeconomic policy has been shown to have a larger effect on agriculture than sectoral policy (Schiff and Valdes, 1992). The policies pursued by many African countries in the 1970s and early 1980s were consistent with their inward-looking industrialization policy, with the state having a prominent role in regulating economic activity. Public enterprises were created, regulations enacted to control prices, restrict trade and allocate foreign exchange in pursuit of social goals. Overvalued exchange rates and large and prolonged budget deficits undermined the macroeconomic stability needed for long-term growth(World Bank, 1994)16. In Africa, this macroeconomic instability was more influenced by domestic than external shocks (Hoffmaister et al, 1997). Faced with severe macroeconomic problems, such as falling export earnings, worsening balance of payments, mounting debts, and declining economic growth, many countries in Sub-Saharan Africa adopted structural adjustment programs. The programs encompassed a wide range of policy reforms starting with macroeconomic stabilization to correct macroeconomic imbalances. During the 1980s many SSA countries managed to improve their macroeconomic policies and increase their international competitiveness. In a recent study of twenty-six African countries, fifteen made advances in macroeconomic policy during the 1980s, while eleven suffered a deterioration (World Bank 1994). Even though these policies had significantly improved between 1980 and 1990-91, fiscal balances were still fragile, inflation was above international levels, and the parallel market premium for foreign exchange had not been eliminated. This section will describe the macro-economic environment in Africa and establish the current macro-economic policy stance for a sample of African countries. A set of African countries similar to those used in the Adjustment in Africa study will be examined and will provide a useful comparative analysis. Trade policy will not be included in the explicit assessment of overall macroeconomic policy but will be included in the assessment of export crop, food crop and fertilizer policy in chapters four, five and six respectively. While the measures of the macroeconomic policy stance used in the Adjustment in Africa study (World Bank, 1994) are open to debate, they provide a useful approximation. The same measures for the fiscal, monetary and exchange rate policy stance will be used in this study (Table A3). 16 There is extensive evidence that improved macroeconomic and sectoral policies are associated with higher growth in Africa (Easterly, 1995, World Bank, 1994, Sachs and Warner, 1998, Jaeger, 1992, Tshibaka, 1993, Valdes, 1992, Binswanger, 1992 and Cleaver, 1985 - this is by no means an exhaustive list). 31 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges FISCAL POLICY 20- l 4 15 0 u 10 5 -- z O- I _ ~~ ~~~~~~~~I I _ I _ i very poor poor fair good or adequate 031990-91 * 1996-97 Figure 3.1: Comparison of the Fiscal Policy Stance in Sub-Saharan Africa between 1990-91 and 1996-97. Source: Table 3.1. Table 3.1: Fiscal Policy Stance. Policy Stance* 1990-91 1996-97 Fiscal policies have improved significantly The Gambia Benin since 1990-91. In 1996-97, eight countries had a Good or Ghana Cameroon good or adequate' policy stance (a budget Adequate Mauritania Congo, Rep Senegal Gabon deficit, mcluding grants, of less than 1.5 percent Tanzania Mauritania of GDP); this represented an improvement Niger compared with five countries in 1990-91 (Table Nigeria 3.1, Figure 3.1). The number of countries with Burnd BrkSenegal avery poor' policies was also reduced from eight Burundi Burkina Faso Fair Burkina Faso Central African in 1990-91 to three (Ghana, The Gambia and Gabon Republic Zimbabwe) in 1996-97 (a 'very poor' fiscal Malawi Cote d'lvoire policy means a deficit greater than 7 percent of Togo Kenya GDP). While a low fiscal deficit is not a Tanzania sufficient condition of good policy, it is certainly Uganda a necessary component, and high budget Benin Burundi deficits, if sustained, are likely to be inflationary Central African Madagascar in the longer term (World Bank, 1994). Poor Republic Malawi Although fiscal policies have improved, a high Kenya Mozambique l Madagascar Rwanda level of instability remains. For example, Ghana Mali Sierra Leone declined from a 'good or adequate' fiscal policy Nigeria Togo in 1990-91 to a very poor policy in 1996-97. A Rwanda Zarnbia regional comparison suggests that the CFA CgameroondGhaa countries appear to have improved their fiscal Carneroon Ghanarrr Congo, Rep The Gambia policy stance more than the non-CFA countries Very poor C6te d'lvoire Zimbabwe since 1990-91. A contributing factor to this may Mozambique be the 50 percent devaluation of the CFA franc Niger in 1994 that provided higher domestic export Zambia revenues. Although there has been a general Zimbabwe improvement in the fiscal policy stance since * See Appendix for definitions 1990, eleven countries still had a 'poor' or 'very Source: Adjustment in Africa and Table A3. poor' stance in 1996-97. 32 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges MONETARY POLICY 20- 15 0 u 4X 105- 0 very poor poor fair good or adequate 01990-91 01996-97 Figure 3.2: Comparison of the Monetary Policy Stance in Sub-Saharan Africa between 1990-91 and 1996-97. Source: Table 3.2. Table 3.2: Monetary Policy Stance. Policy Stance' 1990-91 1996-97 Monetary policy in Sub-Saharan Africa has BurkinaFaso Benin focused primarily on maintaining low rates of Good Central African Central African inflation and adequate levels of real interest orAdequate Republic Republic rates. These objectives were used as the basis C&te d'lvoire Cote d'Ivoire for assessing the monetary policy stance in SSA. Gabon Gabon In this context, measures of the monetary policy Mali Mali Mauritania stance, based on revenue from printing money Niger (seigniorage), the rate of inflation, and the real Senegal interest rate (World Bank, 1994) were used in Uganda the analysis. Based on these indicators there has Benin Burkina Faso been an increase in the number of countries with Fair Cameroon Burundi Congo,Rep Congo,Rep good or adequate' policy (Table 3.2, Figure The Gambia Mozambique 3.2). There was also an increase in the number Ghana Rwanda of countries with 'poor' and 'very poor' Kenya Sierra Leone monetary policy by 1996-97. This may have Madagascar TZagbia been due to the inflationary pressure from Mauritania Zimbabwe significant currency devaluations. Although Niger monetary policy appears to be more stable than Nigeria the fiscal policies, instability remains fairly high. Rwanda Ghana, Kenya and Malawi moved from a 'fair Senegal policy' stance in 1990-91 to a 'very poor' policy Uganda stance in 1996/97. The variability of policies Zimbabwe among countries also remains high with nine Poor Mozambique The Gambia countries having inflation rates over 20 percent. Tanzania Madagascar Seigniorage was above 2 percent in eight Nigeria countries, while real interest rate varied between Very poor Sierra Leone Ghana Zambia Kenya positive 10 percent in The Gambia and negative Malawi 10 percent in Nigeria (Table A3). Tanzania * see Appendix for definitions Source: Adjustment in Africa and Table A3. 33 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 3.1: Monetary Policy Effects on South African Agriculture. Several studies have examined the effects of monetary policy on agriculture in South Africa, a country which has undertaken significant economic reform (Dushmanitch and Darroch, 1990 and Townsend, 1998). South Africa adopted a macroeconomic policy stance in the 1980s that was more market determined. This change was accompanied by agricultural sector reforms in the early 1990s. Dushmanitch and Darroch (1990), using a general equilibrium simultaneous equation model, found that an expansionary monetary policy caused real interest rates to fall, exchange rates to depreciate and the general price level to rise in the short run. They summarize their findings as "...depreciation of the exchange rate and higher domestic inflation raised input prices. Increased cost effects of higher input prices outweighed the reduced cost effects of lower real interest rates causing real field crop and horticultural supply to decrease.... The resulting decrease in agricultural supply caused commodity prices to rise, which lowered real demand for agricultural products. The net effect was a decline in real agricultural income for the crop, horticultural and livestock sectors" (Dushmanitch and Darroch, 1990). A possible explanation for this outcome is that marketing boards inhibited the pass-through of currency devaluation to higher domestic producer prices. Thus, macroeconomic policy effects worked primarily through the price of inputs. At the aggregate level, these results are largely corroborated by Townsend (1998) using an impulse response function model (see Box 3.3 for a brief description of the model). The result of a positive shock to money supply is an asymmetric increase in the real price of agricultural inputs and outputs, with input prices increasing more than output prices. These effects have a corresponding negative impact on farm income (see below). This effect may be the result of relatively high levels of concentration in the input industry and the output price setting policies used by the marketing boards. The result of a positive shock on the real interest rate is a rise in real input prices as the input industries pass on the higher costs to farmers through higher prices. Similarly for output prices, marketing board costs may have been passed on to farmers as lower output prices. These changes have a significant effect on real net farm income (net of interest payments), which was exacerbated by the extremely high debt position held by most South African farmers at the time. The Response of Agriculture to a Positive Shock in Monetary Policy Variables (percentage deviation from the base line) Response of: Real Price ofAgric. Inputs Real Price ofAgric. Outputs Real Net Farm Income Shock 0.05 F 0.05 0.05 _ Money 0.03 0.03 0.03 Supply 0.01 0.01 0.01 _ -0.01 L0,01 -0.01 -0.0 l 0.03 100 -0.03 -0.05 -0.05 _ -0.05 ___ __ 0 2 4 6 8 10 L 0 2 4 6 8 1 0 2 4 6 8 10 0.9 -~__________ _ _ 0.9_ _ - *~090.9 Real 0.4 1 0.4. 0.41 Interest -0.1 G - -0.1 -0.1 Rate _0.6 -0.6 -0.6 T -1.1 -1.1 -1.1 I 0 2 4 6 8 10 0 2 4 6 8 io 0 2 4 6 8 10 Year Year Year 34 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges EXCHANGE RATE POLICY The structural adjustment programs adopted by most countries in Sub-Saharan Africa recognized that the tradable sector would be central to restoring economic growth. The corresponding policy prescriptions strongly emphasized the adoption of outward-oriented development strategies - especially export expansion. In Sub-Saharan Africa the policies pursued to achieve this objective included currency devaluations. The overvaluation of domestic currencies was a common trait to almost all African economies during the 1970s and early 1980s. A combination of fixed nominal exchange rates and rapidly expanding aggregate demand resulted in large parallel market premiums. Excess demand for foreign exchange was controlled by imposing foreign exchange restrictions instead of devaluing the domestic currency. The result was a reduction in exports with an increasing scarcity of imports (Sahn et al, 1996). The aims of the subsequent reform programs were to promote exports and open up the economy to the benefits of international competition. Significant progress has been made in correcting overvalued exchange rates since the 1980s. Countries with flexible exchange rate regimes were able to devalue their currencies by reducing the large parallel market premiums, thus improving international competitiveness. The francophone countries in Africa also devalued the CFA franc by 50 percent. 20 - 18- 16- 14- 12 1 0 10 Z 6- 4- 2- very poor poor fair good or adequate 01990-91 * 1996-97 Figure 3.3: Comparison of the Exchange Rate Policy Stance in Sub-Saharan Africa between 1990-91 and 1996-97. Source: World Bank (1994) with additional World Bank and IMF data for 1996-97.Table 3.3. 35 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table 3.3: Exchange Rate Policy Stance. Policy 1990-91 1995-97 The improvement of the exchange rate Stance policy between 1990-91 and 1996-97 has been Ghana Burkina Faso substantial (Figure 3.3, Table 3.3). Of the Kenya Cameroon Madagascar Central African twenty-six countries analyzed, the number of Good or Republic countries with 'good or adequate' exchange rate Adequate Gabon policies increased from five to nineteen. Ghana Likewise, the number of countries with very Madagascar poor exchange rate policies declined from nine Malawi to one. Nigeria was the only country with a Mali 'very poor' exchange rate policy stance in 1996- Mauritania 97, caused largely by the collapse of the Mozambique Nigerian financial system (Lewis and Stein, Niger Rwanda 1997). Senegal Sierra Leone Most of the countries analyzed had low Tanzania parallel market exchange premiums (less than Uganda 10 percent) except for Burundi and Nigeria Zamnbia Zimbabwe (Table A3). The countries with fixed exchange Burundi Benin rates adjusted more slowly than countries with Fair The Gambia Burundi flexible exchange rates due to the difficulty of Malawi C6te d'Ivoire devaluing the domestic currency, which is Nigeria Congo, Rep Niger The Gambia pegged to the French franc. A comparison of Uganda Togo francophone countries with a reference group of Zimbabwe developing countries outside Africa, which Poor Rwanda exported primary products and did not have high BurkinaFaso parallel market premiums, suggested that these Central African African countries needed to devalue their Republic currency to remain competitive (World Bank, Gabon 1994). In 1994 the CFA was devalued by 50 Mali percent against the French franc, a policy Togo Ngr measure which has improved the export Very poor Mauritania Nigeria Mozambique competitiveness of these countries. Sierra Leone Tanzania Exchange rates are perceived to have Zambia the largest direct impact on agriculture than any Carneroon other macroeconomic variable. Indeed, most Congo C6te d'Ivoire studies examining the macroeconomic impacts Senegal on agriculture focus on this variable. Source: Adjustment in Africa and Table A3. Studies have generally examined the impact on supply response (Jaeger, 1992) or focus directly on the impact of exchange rates on agricultural prices (Valdes, 1996, Box 3.2). Mamingi (1996) reviews the inclusion of an exchange rate variable in supply response models highlighting some of the estimation problems that have occurred (simultaneity bias and omitted variable bias). 36 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 3.2: The Structure of Agricultural Prices. Agricultural prices have been frequently decomposed into changes in the international price, changes in the nominal protection rate and changes in the real exchange rate (Valdes, 1996). Most of these studies focus on the evolution of the real producer price Pit =pit (1) where Pit is the nominal price of agricultural good i at time t, measured in domestic currency and CPIt is the consumer price index at time t. Pit can be further expressed as Pit= P itEt(l+Yit)(1+tit) (2) where P *it is the corresponding border price the country faces (c.i.f. for importables and fo.b. for exportables) measured in foreign currency (US dollars). Et is the nominal exchange rate (measured in units of domestic currency per US$) at time t. Yit is meant to be a 'mark-up' factor including transport costs and competitive profit margins to make the border price comparable with the domestic price. tit is the residual after the mark-up and is meant to be the nominal protection rate. Alternatively from equation (1) pit can be expressed as it P it CPI*tEt Pi iE Ct = NPC * RWP * RER (3) CI i crit it it it where CPI, is the general level of the foreign prices at time t (US CPI). NPC is the nominal protection coefficient, RWP is the real world price and RER is the real exchange rate. Using equation (2) and (3) this can be expressed as Pi,= (l+Yit)(l+tit)P itRERt (4) where RER denotes the real exchange rate, defined as the ratio of international domestic prices. Equation (4) can be rearranged as * itR(R = (lrt)(l+tit) (5) P it RERt The right hand side of this expression corresponds to a hypothetical transport cost and competitive profit margin, explicit export and import tariffs and implicit import and export tariffs. This methodology has been commonly used to decompose real domestic prices into changes in external and domestic factors. The external factors are reflected in the world price while the domestic factors are reflected in the change in the real effective exchange rate and the nominal protection coefficient. 37 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 3.3: Examples of Exchange Rate Effects on Agriculture in Sub-Saharan Africa. Inelast.c supply elasticities The exchange rate is central to the macroeconomic effects on agriculture and several authors have estimated its effect on agricultural production in SSA. One often cited study by Jaeger (1992), uses data from 1970-87 to estimates supply functions for several crops. Real exchange rates were included as an explanatory variable and its elasticity was estimated as -0.10 for all countries and all crops, suggesting that a 10 percent real exchange rate depreciation results in a 1 percent increase in output. This elasticity was calculated as - 0.35 for cocoa, -0.68 for cotton and -0.25 for all tree crops. Past policy distortions and exchange rate pass-through to agricultural producer prices in South Africa Like many African countries the agricultural output markets in South Africa were dominated by marketing boards. Producer prices were controlled and farmers were insulated from the external market. Townsend (1998) analyzed the effects of currency devaluations on the agricultural sector in view of these interventions. A VAR model was used in the analysis, which included variables of money supply, real interest rates, the real exchange rate, real agricultural input and output prices, real net farm income and agricultural exports. Data from 1947-1995 were used and the statistical properties of all the time series variables included in the analysis were examined (all variables were integrated of order one). Cointegration tests also suggested that there was a valid long-run relationship between the macroeconomic variables and the agricultural variables included in the model (this is the same model used for the results presented in Box 3.1 - for brevity, only the shock of the exchange rate on real agricultural input and output prices and real net farm income are reported below). Using the VAR model an impulse response function was applied to examine effects of an exchange rate shock on the real price of agricultural inputs, outputs and real net farm income. A positive shock on the exchange rate (a devaluation of the Rand) had a significant impact on increasing the real input price while its effect on the output price tended to be muted. Thus the corresponding effect on real net farm incomes was through the input price rather than the output price, an effect exacerbated by concentration in the agricultural input industries. This clearly shows that the exchange rate shocks were not passed though to output prices and export producers were faced with distorted incentives. The lack of pass-through of the currency devaluation to output prices was largely due to the fact that marketing boards insulated producers from external demand. The response of agricultural prices and incomes to devaluations of the Rand (percentage deviation from the base line) Response of: Real Price ofAgric. Real Price ofAgric. Real Net Farm Income Shock Input Output .~~ ~ ~~ '_ __ _____ 0064 004- 004 Exchange Rate 00 0.02 002 i Depreciation o 0 0 -0.C2t -0.02 -0.02 -0.04- -0.04 -0.04 -0.06 L _0__-0.066__ _ -0.06_._l 0 2 4 6 8 10 L_° 1 2 3 4 5 6 7 8 9 IC 0 1 2 3 4 5 6 7 8 91 Years Years Years 38 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges OVERALL MACROECONOMIC POLICY STANCE r, 20 15- 0 10 10 0- very poor poor fair good or adequate 011990-91 * 1996-97 Figure 3.4: Comparisons of the Overall Macroeconomic Policy Stance between 1990-91 and 1996-97. Source: Table 3.4. Table 3.4. Macroeconomic Policy Stance. The fiscal, monetary and exchange rate Policy Stance 1990-91 1996-97 Adequate Ghana Gabon policy stances were combined to create a Mauritania measure of the overall macroeconomic policy Cameroon stance. Although this index is imperfect, it does Senegal provide a summary of macroeconomic policies Niger Benin (World Bank, 1994). Since 1990-91, there has Burundi Central African been a significant improvement in the overall Fair The Gambia Republic macroeconomic policy stance of countries in Madagascar Mali Sub-Saharan Africa (Table 3.4). Six countries Malawi Uganda had an 'adequate' policy stance in 1996-97, Burkina Faso Burkina Faso . r Kenya C6te d'Ivoire which represents an Improvement from one i Gabon Congo, Rep 1990-91 (Table 3.4). There was no country with Mauritania Zambia 'very poor' macroeconomic policies and only Nigeria Kenya four countries (Burundi, The Gambia, Nigeria Senegal Madagascar and Ghana) showed 'poor' policies. Although Togo Mozambique Mali Rwanda there has been a general improvement, several Uganda Tanzania countries experienced a high level of instability Sierra Leone in their policies (Ghana, Nigeria). The CFA Zimbabwe countries have significantly improved their TMoaglawi overall policy stance, which can be largely Poor Central African Burundi attributed to the devaluation of the CFA franc Republic The Gambia in 1994. Of the twenty-six countries analyzed, Niger Nigeria nineteen made advances since 1990-91, while Benin Ghana the macroeconomic policies deteriorated in Rwanda Tanzania four countries (Ghana, Burundi, Nigeria, The Zimbabwe Gambia) (Table A3). As the Adjustment in Very poor C6te d'Ivoire Africa study shows, there was significant Cameroon improvements in macroeconomic policy during Congo, Rep the 1980s and as seen here, the improvement Mozambique Sierra Leone has continued in the 1990s. Zambia Source: Adjustment in Africa and Table A3. 39 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges As mentioned earlier, trade policy was not explicitly included in the overall macroeconomic policy score as it will be examined and included in the policy scores developed for export crops, food crops and fertilizer in later sections of the study. However, several key issues need to be raised in this macroeconomic policy section. TRADE POLICY Africa has made significant progress in reducing overvalued exchange rates while improving the overall macroeconomic policy stance. Foreign exchange rationing has been removed and balance of payments have become more sustainable. These improved policies have allowed significant import restrictions to be removed. Despite these improvements, many countries continue to inhibit trade via high import tariffs, a policy consistent with past inward-looking industrialization strategies where domestic industries were protected from external competition. Sub-Saharan Africa's trade barriers (non-tariff barrier [NTB] coverage ratio and tariff levels) are several times higher than fast growing exporters (Figure 3.5). Tariffs on all imports average almost 27 percent for SSA, while, for the fast growing exporters and high income non-OECD countries the corresponding tariff levels were 9 and 3 percent respectively (Ng and Yeats, 1996). 40 Transport 9 20 - f M TEquipment O 0 - t . - 1 _ , All Sub-Saharan Fast Growing High Income Machinery Africa Exporters Non-OECD and Equipment * Non-Tariff Barrier Coverage Ratio * All Import Charges Manufactured 0 Tariff Level, % Fertilizer Figure 3.5: African Trade Barriers. Source: Ng and Yeats (1996). Crude Fertilizer and The tariff levels on imports used as inputs Ores in agricultural production are also much higher than in the fast growing exporters (Figure 3.6). . These tariffs represent an additional direct cost Materials to exporters, who use these imports as intermediate inputs in production. The high costs of importing machinery and spare parts 0 5 10 15 20 25 raise transport costs, which are extremely high Percent in African countries. These high import tariffs C3Fast Growing Exporters place domestic producers at a cost disadvantage *Sub-Saharan Africa relative to competing countries. Figure 3.6: Tariffs on Factors of Agricultural Production. Source: Ng and Yeats (1996). 40 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The fast-growing exporters included in the 15 comparison were Bahrain, China, Hong Kong, Indonesia, Jordan, Kuwait, Malaysia, Mexico, 10 Qatar, Papua New Guinea, Republic of Korea, 0 5 * Saudi Arabia, Singapore, Taiwan and Thailand 0 - - _ (Ng and Yeats, 1996).. c AC12 C'2 cl~ cl~ c I I ~ I I I A Pledges for SSA countries to reduce these Z 2 C high tariff have been fairly weak as shown by Percent the Uruguay Round commitments. Most tariffs Figure 3.7: Sub-Saharan Africa Tariff Bounds from are bound between 50-100 percent (Figure 3.7). the Uruguay Round. Source: Ingco and Townsend (1998). INSTITUTIONAL FRAMEWORK AND THE CREDIBILITY OF RULES Apart from monetary, fiscal, exchange and trade policies there is an expanding literature which emphasizes the reliability of policies (stability and uncertainties surrounding their implementation) as a factor affecting growth (Barro, 1991, Cukierman et al, 1996 and Brunetti et al, 1998). An environment characterized by unclear property rights, constant policy changes and policy reversals, uncertain contract enforcement and high corruption translates into lower investment and growth (Brunetti, et al, 1998). In these environments, the private sector is usually reluctant to commit resources especially in projects that require large sunk costs. The 1997 World Development Report (WDR) constructs a credibility index based on a survey of local entrepreneurs in sixty-nine countries. The survey contained questions on the predictability of laws and policies, the subjective evaluation of political instability, the security of property and persons, the reliability of judicial enforcement and uncertainty stemming from corruption and bureaucratic discretion (see Brunetti et al, 1998 for its construction). The credibility index is thus based on investor's perceptions. Figure 3.8 shows regional averages of the credibility indicator, which ranges in value from one (no credibility) to six (perfect credibility). Results of the survey show that the Commonwealth of Independent States has the lowest credibility index followed by Sub-Saharan Africa. Twenty-two African countries were included in the survey. Their credibility rankings are presented in Figure 3.9. The levels of credibility significantly affects growth and investment in particular countries. Regression results from the WDR, 1997, show that the credibility variable had a highly significant and positive effect on growth in GDP per capita and the investment/GDP ratio. Thus, while correct macroeconomic policies are a necessary condition to generate sustained economic growth, credibility (or the reliability of the countries institutional framework) is also critical, particularly in African countries. Thus, approaches aimed at improving traditional macroeconomic policy instruments should also include strategies to improving credibility. 41 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges High-income Mauritius OECD Ghana Sout Afirica South and South-East Malawi Asia Mali Middle East Uganda and North Zimbabw Africa 'm b Zambia Central, and Senegal Eastem Europe Nigeria Kenya Latin America and Carribean Mozambique Togo Sub-Saharan C6te d'Ivoire Africa Benin Tanzania Commonwealth of Independent Cameroon States_. States . . . , . . Congo, Rep 0 1 2 3 4 5 6 0 1 2 3 4 5 6 Credibility Index Credibility Index Figure 3.8: Regional Credibility Ratings, 1996. Figure 3.9: Sub-Saharan Africa Country Source: Brunetti et al, 1998. Credibility Ratings, 1996. Source Brunetti et al, 1998. SUMMARY AND CONCLUSIONS The linkage between macroeconomic policy and agricultural performance has been increasingly recognized in the 1990s. Overvalued exchange rates and industrial protection excessively taxed agriculture (Schiff and Valdes, 1992) distorting invectives and inhibiting growth. Agricultural policy has also impacted on the macroeconomy with heavy state intervention through marketing boards and price subsidies placed unmanageable pressure on fiscal balances. The macroeconomic environment has improved significantly in the 1980s which has continued through the 1990s although, for some countries, instability remains high. * Fiscal policy stance scores showed that in 1996/97 eight countries had a 'good or adequate' stance which is an improvements from five countries in 1990-91. Only three countries (Ghana, The 42 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Gambia and Zimbabwe) had a budget deficit of over 7 percent of GDP, which is a reduction from eight countries in 1990-91. A high level of instability remains in several countries. * The monetary policy stance has also improved since 1990-91 when sixteen countries were classified as having 'fair' policies and six countries were classified as having 'good or adequate policies'. The corresponding numbers for 1996-97 were nine and ten. The number of countries with 'very poor' policies increased from two to four. This slight decline could be due to inflationary pressures from currency devaluation. * The exchange rate policy stance has undergone an impressive improvement. In 1996-97 nineteen countries were classified as having a 'good or adequate' exchange rate regime. The corresponding number in 1990-91 was five. Nigeria was the only country in the sample with a 'very-poor' exchange rate policy stance due to the large parallel market exchange rate premiums in 1996/97. * The overall macroeconomic policy stance has improved significantly. In 1996-97 eight countries were classified as having an adequate macroeconomic policy stance. This is an improvement from one in 1990-91. No countries were classified as having a 'very poor' policy stance which is an improvement from six countries in 1990-91. Again, in several countries, a fairly high level of instability remains. * Import tariffs on inputs used in agricultural production (transport equipment, manufactured and crude fertilizer and agricultural materials) remain several times higher in SSA than in the fast growing exporting countries. * The reliability of the institutional framework (credibility) in Sub-Saharan Africa in among the lowest in the world (second only to the CIS), varying significantly across the continent. As a result, growth has been stifled. While macroeconomic policies have continued to improve, there needs to be a continued focus on maintaining macroeconomic stability in many countries. There also needs to be an increased focus on improving the credibility of rules and the reliability of the institutional framework. In many African countries, low credibility has inhibited private sector investment and stifled growth. If the private sector is to be encouraged to enter the market and take over some of the activities in agriculture previously performed by the state, then this fundamental issue should be high on the policy agenda. The improvement in macroeconomic policies also needs to be passed-through to farmers for them to fully benefit from these reforms. These issues will be examined more closely in the next section. 43 4. EXPORT CROP POLICIES, PRICES AND MARKETS Since the early 1980s, the widespread adoption of structural adjustment programs by African countries resulted in significant policy reforms in the export crop sector. Common elements of these reforns included removing distortions that prevented markets from functioning efficiently. The emphasis was placed on: i) eliminating price controls; ii) developing competitive local markets; iii) reducing state intervention in international trade to enhance integration into world markets; and iv) improving aspects of the regulatory system and privatizing inefficient public enterprises (Meerman, 1996). As discussed in the first chapter, the theory behind these programs was to improve market efficiency and the output-input price ratio in order to induce an increase in agricultural output. PRICE RESPONSE TO REFORMS Evidence suggests that there has been a significant price response to these reforms. In the 1980s, however, this positive response was eroded by the decline in real world commodity prices making it difficult for African governments to improve producer price incentives. TheAdjustment in Africa Report (World Bank, 1994) shows that ten of the twenty-seven countries analyzed managed to increase real producer prices from 1981-83 to 1989-91 (Figure 4.1), the achievement of which was attributed to the adoption by these countries of better policies. Some of these ten countries gave producers a larger share of border prices by lowering export taxes, raising administered producer prices, reducing marketing costs, or liberalizing marketing (World Bank, 1994). In several countries that experienced declining real producer prices (Burundi, the Central African Republic, Republic of Congo, Gabon, Kenya, Malawi, Sierra Leone, Uganda and Zimbabwe), governments had taken measures to help their farmers. However, these were not sufficient to offset the decline in world prices. In other countries, (Cameroon, Chad, C6te d'Ivoire, The Gambia, Guinea- Bissau, Rwanda, Senegal and Zambia), the combined effect of macroeconomic and sectoral policies worked against agriculture and compounded the decline in export prices. About two thirds of these countries reduced the overall tax burden on agriculture. However, these countries either reduced the explicit taxation or the implicit taxation, but not both (World Bank, 1994). Figure 4.2 provides a comparison, showing the change in the real producer price of export crops in the 1990s. There has been a large improvement in the number of countries experiencing real domestic producer price increases. This favorable trend can largely be attributed to both the increase in world commodity prices (Table 2.5) and the improvement of both agricultural and macroeconomic policies. Some of these policy improvements will be further discussed in this chapter. Fifteen of the nineteen countries included in the comparison experienced an increase in the real domestic producer price of agricultural export crops (Benin, Burkina Faso, Cameroon, C6te d'Ivoire, Ghana, Nigeria, Madagascar, Malawi, Mali, Mozambique, Senegal, Tanzania, Togo, Uganda, Zimbabwe,). Only four countries (Burundi, Chad, The Gambia, Kenya) experienced price declines. 45 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Ghana Uganda Nigeria Tanzania Burkina Faso Mozambique Benin Nigeria Mozambique .* Cameroon Togo Senegal Tanzania Madagascar Madagascar Zimbabwe Mali Togo Zimbabwe Cote d'lvoire Malawi Benin Chad Malawi Senegal Mali Burundi Burkina Faso The Gambia Ghana Uganda Kenya Kenya The Gambia Cameroon Burundi Cote d'lvoire Chad -50 0 50 100 150 -50 0 50 100 150 Percent Percent Figure 4.1: Change in the Real Producer Price of Figure 4.2: Change in the Real Producer Price of Agricultural Exports, 1981-83 to 1989-91. Agricultural Exports, 1989-91 to 1995-97. Source: World Bank (1994). Source: IMF and World Bank data. Data for each country are based on the percentage change in the real producer price of export crops. The aggregate price changes were derived as a weighted average of the major export crops. The Adjustment in Africa Report (World Bank, 1994) included other countries in its analysis, but reliable price data for these other countries were not readily available for 1990-91 to 1995-97. If these prices are examined over the 1981-97 period, twelve out of the nineteen countries experienced real producer price increases. The countries in which prices declined over this longer period were Burundi, Cameroon, Chad, Cote d'Ivoire, Malawi, The Gambia and Kenya. Nine countries experienced an improvement in the real producer price of exports in both time periods [during the 1980s and 1990s] (Ghana, Nigeria, Tanzania, Mozambique, Burkina Faso, Benin, Togo, Madagascar, Mali); three countries had an improvement in the 1990s, which offset the price declines they experienced in the 1980s (Uganda, Senegal, Zimbabwe). Cameroon, C6te d'Ivoire and Malawi experienced an increase in domestic prices between 1989-91 and 1995-97, but these increases were not large enough to offset 46 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges the price declines in the 1980s. The Gambia, Burundi, Chad and Kenya experienced price declines in both periods (Table 4.1). Table 4.1: Real Export Producer Price Performance in Sub-Saharan Africa. 'Advancing' (9) 'Caught up' (3) 'Catching up' (3) 'Lagging' (4) Ghana Benin Uganda Cameroon The Gambia Nigeria Togo Senegal C6te d'Ivoire Kenya Tanzania Madagascar Zimbabwe Malawi Burundi Mozambique Mali Chad Burkina Faso Source: Data from Figure 4.1 and 4.2. 'Advancing' - countries that experienced and increase in the real export producer price for both time periods (1981-83 to 1989-91 and 1989-91 to 1995-97), 'Caught up' - increases in the real export producer prices between 1989-91 and 1995-97 exceeded the decline between 1981-83 and 1989-91, resulting in a net improvement. 'Catching up' - means that the increase in the real export producer prices between 1990-91 to 1995-97 have not yet exceeded the decline from 1981-83 to 1989-91, resulting in a net decline, 'Lagging' countries mean that these countries experienced a decline in the real producer price for both periods. The structure of these price incentives can be examined by decomposing the change in real producer prices into three elements: the change in the real world price; the change in the real exchange rate and the change in the nominal protection coefficient (NPC) which, in this case, is simply the change in the producer's share of the world price (Box 3.2). The nominal protection coefficient is the ratio the farmer gate price to the domestic currency border price adjusted for transportation and marketing costs. Thus, the NPC should reflect the extent of direct taxation or subsidy (Box 3.2). NPCs have typically been poorly calculated with many studies simply using the producer's share of the border price. The common assumption is that overtime transportation and marketing costs remain relatively fixed and thus the movements in the producer's share of the border price is due to the extent of taxation or subsidy. In Africa, data on transportation and marketing costs overtime are particularly difficult to obtain, and the quality of these data, when available, are very poor. The share of each component in equation 3 in Box 3.2 can be derived using a log transformation. The change in the real producer price resulting from a change in these components can be computed as p, = R WIP, + RER, + NPC, . The hats represent percentage changes and are calculated as differences of the natural logarithms of the variables. RWP is the real world price which is usually attributable to external factors, RER is the real effective exchange rate, which is affected by government macroeconomic policy and by external shocks while NPC is determined by domestic price, marketing and trade policy. This decomposition for the period 1981-83 to 1989-91 is shown in Figure A3 in the appendix and for the period 1990-91 to 1995-97 in Figure A4 in the appendix (see Table A8). During the 1980s African countries were faced with significant downward trends in real world prices (RWP). The decline had a significant negative impact on producer prices (Figure 4.3) but despite these adverse effects, nine countries managed to increase price incentives for export crops. This was largely achieved through significant depreciation of the real exchange rate (particularly in Ghana, Nigeria, Tanzania and Uganda) and an improvement in agricultural marketing, price and trade policy. Macroeconomic policy changes had a large positive effect on prices but at the aggregate, the producer's share of the border price (NPC) 47 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges barely changed which lets us conclude that in many countries sectoral policy did little to improve farm level export crop prices. During the 1990s the situation changed somewhat, real world prices became more favorable and improvements in sectoral policy contributed more to price increases. Between 1989-91 and 1995- 97, macroeconomic policies continued to improve but these changes were less dramatic than in the 1980s as the space for further policy improvement had been reduced (Figure 4.4). Five countries experienced an appreciation of their real exchange rate (Nigeria, Madagascar, Kenya, Burundi and Tanzania [Figure A4]) which placed downward pressure of domestic export prices. Of these countries, the improved agricultural policies in Madagascar, Nigeria and Tanzania were sufficient enough to offset these negative price pressures. Nine countries improved their agricultural policies with significant improvements in Uganda, Tanzania, Madagascar, Mozambique, Nigeria, Malawi, Zimbabwe and The Gambia. In Benin, Togo, Burkina Faso, Burundi and Chad the producer's share of the border price declined. This trend suggests that in these countries, the more favorable macroeconomic policies have not been fully transmitted to producers as higher prices. Indeed in some countries agricultural policies have eroded the price benefits from more favorable world prices and have inhibited the pass-through of exchange-rate depreciations to producer prices. 80 80 - 60 60- 40 40- 20 n 20 - 0 o J~LET X-20 C -20 - -40 -40 -60 -60 -80 -80 RPP RWP RER NPC RPP RWP RER NPC o Countries experiencing RPP increases 0 Countries experiencing RPP increases * Countries experiencing RPP decreases iE Countries experiencing RPP decreases * All countries * All countries Figure 4.3: The Structure of Price Incentives, 1981-83 Figure 4.4: The Structure of Price Incentives, 1989-91 to 1989-91. to 1995-97. Source: Table A8. Source: Table A8. RPP real producer price for export crops, RWP = the real world price, RER = the real exchange rate and NPC = nominal protection coefficient (in this case, the producer's share of the border price). SUPPLY RESPONSE TO PRICES The perceptions behind the reform programs were that farmers were price responsive and that the removal of distortions affecting producer price incentives would induce higher production levels. Studies on the supply response of African farmers have expanded tremendously over the past several years (Binswanger, 1987, 1992; Jaeger, 1992; Maminigi, 1998 provide some examples). The general consensus is that African farmers are price responsive and that policy reforms have resulted in 48 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges that in the short run, price elasticities range between 0.1 and 0.8 (Table AIO) for individual crops. However, the responsiveness of aggregate agricultural production to price changes is still very low in Africa (Bond, 1983; Chhibber, 1989; Binswanger, 1989). Bond (1983) estimated the average price elasticity of total agricultural production for nine African countries to be only 0.18 in the short run and 0.21 in the long run. Chhibber's (1989) review of empirical studies concluded that in low-income developing countries with poor infrastructure, the aggregate long-run price elasticity of supply was within the 0.3-0.5 range. Binswanger (1989) estimates a short run elasticity of 0.06. While 'getting prices right' is a necessary condition it is by no means sufficient to induce supply response. In the absence of other supporting non-price policies, it is alone seldom sufficient to bring about the desired changes in the agricultural sector (as discussed in chapter 1). This is not to deny evidence that African farmers, both small and large-scale, are price-responsive. In a recent assessment of supply response, Meerman, (1996, pg. 2), summarizes his findings as "...Supply response was found to be... * Symmetrical - The removal of heavy agricultural protection leads to contraction of production with an accelerated movement of resources away from the previously protected crops [ie: maize production in South Africa] to more profitable crops. * Synergistic - The level of supply response from economic reform depends on the degree to which the agricultural economy is developed. Adequate rural infrastructure (irrigation, roads and transport, power and telecommunications), input availability, research, credit and farmer education and health are conducive to agricultural development. Where these are seriously deficient, even getting the prices right in an ideal enabling environment will not suffice to get agriculture moving. [Price responsiveness also depends on the agro-ecological zone and the labor economy (household labor capacity, gender composition and labor organization)]. * Dependent on the credibility of reforms - The private sector does not invest if the continuity of the reforms is in doubt. Reform programs have frequently been reversed or halted. This has allowed public enterprises to dominate the marketing system and control the export of important crops. Government policy has frequently been unpredictable. Thus establishing the credibility of policy measures is at least as important as choosing the efficient policy solution". With these factors in mind, there is some evidence of improved export crop supply. Since 140 1990, agricultural exports from SSA have x 130 increased by about 30 percent. However, large fluctuations have occurred in export volumes 120 (Figure 4.5) due to the effects of the weather 110 with drought years in 1983, 1991 and 1995. t 100 These export trends over time show a very 0 similar pattern to overall agricultural growth X (Figure 1.1 in Chapter 1) suggesting that overall growth is strongly influenced by the 80 ,,,,,,,...... ..... ....., performance of agricultural exports. Indeed, it 1961 1966 1971 1976 1981 1986 1991 1996 is very difficult to improve agricultural growth if producers are confined to local or domestic Figure 4.5: Sub-Saharan African Agricultural markets. Export Volume. Source: FAO data. 49 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges As seen from the analysis so far, more favorable world prices and continuing improvements in macroeconomic policies have contributed significantly to improving producer price incentives. Although the space for further improvements in these macroeconomic policies has been reduced, there appears to be room for improving domestic agricultural and broader rural development policies. During the 1980s the contribution of these domestic policies (factors) was limited (Figure 4.3 and 4.4). This, however, improved in the 1990s but the contrasts of these factors among African countries remains large. Improving the producer's share of the border price will require not only an improvement in policy (agricultural, trade and regulatory) but will also require a reduction in transportation and transaction costs to improve market efficiency and price transmissions. This again highlights the complementarities between price and non-price factors. These issues will be examined this the next section. ENHANCING MARKET EFFICIENCY AND PRICE TRANSMISSIONS A key component of structural adjustment programs was to improve market efficiency through policy (trade, agricultural and regulatory) reform. The objective was to reduce government interventions that distorted prices and tied up markets (World Bank, 1994). The theoretical notion of efficient markets is that: i) if there are enough markets; ii) if all consumers and producers behave competitively; and iii) if an equilibrium exists, then the allocation of resources in that equilibriurn will be Pareto17 optimal (Ledyard, 1987). The proposal is that if input and output markets are complete, so that no transactions are missed, and if there are so many buyers and sellers that none can alone influence prices, then the market outcome will be efficient. In this static framework, efficiency means that all three conditions will be met simultaneously (Ward, Deren and d'Silva, 1990). These are: i) resources will be fully employed; ii) they will be correctly allocated to productive enterprises so that each output will be efficiently produced; and iii) the correct combination of outputs will be produced, meaning the combination that will maximize the welfare of consumers, given the initial distribution of resource ownership, and hence incomes. In Africa, these conditions rarely exist with missing markets, imperfect information and high transaction costs. While difficult to measure, it is important to provide a characterization of the market environment in African countries. Proxy indicators could provide some useful information. One possible proxy is the exchange rate pass-through to producer prices with cross-country differences in this variable providing some indication of the difference in market structure, product characteristics, competition and trade barriers (Menon, 1995). EXCHANGE RATE PASS-THROUGH TO PRODUCER PRICES The preceding analysis on prices clearly showed that between 1990 and 1997 many farmers have experienced an increase in their real price of agricultural exports. Part of these price increases were shown to be the result of domestic currency devaluations and in some countries improved domestic agricultural policies. This section will analyze these domestic policy issues more closely focusing on the factors that have inhibited the exchange rate pass-through to producer prices. In some countries, the pass-through of currency devaluations to producers has been limited (Figure 4.6 Table 4.2) with a contrasting success of pass-through between crops and countries within the region. 17 Pareto optimality means that social welfare is maximized in the limited sense that nobody can be made better off without making someone else worse off. 50 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 120%/o MAD.vanilla ENHANCING PASS-THROUGH , 00° ~~~ZIM.cotton 100 CAM.coffec Perfect Exchange e ,. TAN.tob80%o. Rate Pass-through - INHIBITING r u 60% MOZ.cashew* , PASS-THROUGH i * , # ' + CAM.cotton o e 40% MAL.tobacco. UGA.coffee , *CAM.cocoa i NIG.cocoa TAN.cashew SEN.cotton NIG.cocoa ZIM.tobacco MAD.coffee ' * MOZ.colton 20% NIG.rubber \ BFA.Cottonf. MALI.cotton TAN.cotton c,~ENotn TAN.coffee ottoCIV.cnttoG.Co0c-Dcotton 0% II So mIKEN.te;,-' SAF.oranges SEN.grd a ~~~~~~MAL.tea *IVcofe d ¢ KEN.coffee , *SAF.maize CIV.coffee 2 -20% TAN.tea I c AMd IA.grd vI, < / * BUR.coffee -40% ,, ' GHA.cocoa ,,' MAU.sugar -60% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% Percentage Change in the Real Effective Exchange Rate APPRECIATION DEPRECIATON Figure 4.6: Pass-Through of Real Effective Exchange Rate Depreciations to Real Agricultural Export Prices, 1990-1995/97. Source: IMF and World Bank data. See Table 4.2 for full country names. Table 4.2 summarizes these findings. In some cases exchange rate pass-through has been enhanced, while in other cases it has been inhibited. Exchange rate pass-through refers to the degree to which exchange rate changes are reflected in the domestic currency prices of traded goods. The literature on exchange rate pass-through has expanded significantly over the last two decades but much of the focus has been on developed countries (see Menon, 1995 for a summary). Many of these earlier studies have focused on the impact of currency devaluation on domestic import prices. Figure 4.6 and Table 4.2, shows that exchange rate pass-through has been enhanced for many crops in several countries. Vanilla farmers in Madagascar received the greatest pass-through of exchange rates (120 percent), this is due to the significant increase in the farmer's share of the f.o.b. price, which was only 8 percent in 1990. Similarly, cotton fartners in Zimbabwe, tobacco and cashew farmers in Tanzania, cocoa and rubber farmers in Nigeria and tobacco farmers in Malawi experienced greatly enhancing pass-through. At the other extreme, the exchange rate pass-through was greatly inhibited for cotton farmers in Chad, coffee farmers in Burundi and Cote d'Ivoire and groundnut 51 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges farmers in Senegal. As wili become evident, the extent of exchange rate pass-through is highly correlated with market interventions. Table 4.2: Exchange Rate Pass-Through to Producer Prices, 1990 to 1995-97. Enhancing Pass-through Inhibiting Pass-through Greatly enhancing Greatly inhibiting Madagascar - vanilla 120% Burundi - coffee -46% Zimbabwe - cotton 111% Chad - cotton -44% Tanzania - tobacco 99% Senegal - groundnuts -42% Nigeria - cocoa 73%, C6te d'Ivoire - coffee -42% Nigeria - rubber 69% Malawi - tobacco 54% Inhibiting Tanzania - cashew 43% Cameroon - cocoa -37% Mali - cotton -34% Enhancing Cameroon - cotton -32% Tanzania - cotton 20% C6te d'Ivoire - cocoa -30% Zimbabwe - tobacco 19% Burkina Faso - coffee -30% Uganda - coffee 19% Togo - cotton -27% Tanzania - coffee 17% South Africa - maize -24% Cameroon - coffee 14% C6te d'Ivoire - cotton -24% Mozambique - cashew 11% Mozambique - cotton -22% Benin - cotton -18% Near congruence South Africa - oranges -15% Malawi - tea 5% Senegal - cotton -12% Madagascar - coffee 3% The Gambia - grd -11% Kenya - tea 1% Near congruence Ghana- cocoa -9% Tanzania - tea -9% Kenya - coffee -8% Mauritius - sugar -7% The percentages represent the difference between the percentage change in the real producer price (adjusted for the world price) and the percentage change in the real effective exchange rate. Source: Calculated from IMF and World Bank data, Figure 4.6. A general observation from Table 4.2 is that where producers have experienced (greatly) enhancing pass-through, domestic markets have opened up to increased competition, while producers experiencing (greatly) inhibiting pass-through have been faced with markets tied up via marketing boards, marketing parastatals and Caisse de Stabilization schemes. There are of course exceptions: South Africa has liberalized its markets but appears to have inhibited the exchange rate pass-through. The perceived inhibiting effect occurred because for many crops, especially maize, prices were maintained above those on world market and liberalization resulted in a decline in prices to lower border parity levels. In several countries (Mozambique and Cameroon) the pass-through of one crop has been enhanced while for the other it has been inhibited. Mozambique appears to have enhanced the pass-through to cashew nut producer prices and inhibited the pass-through to cotton prices. The improved pass-though to cashew prices is the result of the removal of the raw cashew nut export ban and the reduction in the export tax. The inhibited pass-through to cotton prices is due to the continued rigidities of the administrative price controls set by the government through the Cotton Institute of 52 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Mozambique. Likewise in Cameroon, the pass-through was enhanced for coffee producers while inhibited for cocoa and cotton producers. In 1994, Cameroon removed all quantitative restrictions on coffee exports and all coffee price controls were abolished. However, for cotton, SODECOTON continued to control cotton prices and marketing. The pass-through to cocoa prices in Cameroon is an interesting case. While cocoa marketing underwent significant reforms in 1994 the pass-though of currency devaluations to producer prices seems to have been inhibited during the 1990s. This could be explained by price interventions in the cocoa market, which maintained relatively high cocoa prices in 1990, even after the world price decline from the mid-1980s. Thus, changes in prices between 1990 and 1997 do not match the currency devaluation over the same period. If the period from 1993/94 is examine, then the pass-through has been more complete. Cotton farmers seem to have experienced the lowest pass-through of currency devaluation to producer prices. Exceptions to this are Zimbabwe and Tanzania where cotton farmers experienced an improvement in the efficiency of the market with greater competition. The structure of these and other markets will be elaborated upon in the next section. OBSERVATIONS FROM MARKETS AND PRICES OF EXPORT CROPS IN SUB-SAHARAN AFRICA The state of the market and agricultural policies for the main export crops in Africa will receive more attention in this section. The analysis will examine the differences in producer incentives, focusing on the producer's share of the border price that farmers receive. Comparisons will be made among African countries as well as with other developing countries. Cocoa The recovery of world commodity prices, in the early 1990s, yielded a 14 percent increase in the real world price of cocoa between 1990 and 1995-97. The pass-through of this favorable price trend to cocoa farmers in Africa has shown mixed results and will be further examined in this section. The production of cocoa in SSA is highly concentrated with four West African countries producing 98 percent of the cocoa exports (Cote d'Ivoire [62 percent], Ghana [20 percent], Nigeria [10 percent] and Cameroon [6 percent]). An increase in the real domestic producer price was experienced by farmers in Nigeria, Cote d'Ivoire and Cameroon with average annual price increases of 6.8, 2.5 and 3.2 percent respectively, while in Ghana real producer prices were virtually stagnant (Table A6). In Nigeria and Cameroon, the producer's share of the f.o.b. price is greater than 75 percent which is comparable to the shares derived by cocoa farmers in other developing countries such as Malaysia, Indonesia and Brazil. In contrast, the shares enjoyed by cocoa farmers in Ghana and C6te d'Ivoire were marginally greater than 40 percent. These changing shares, as mentioned previously, are highly linked to the structure of cocoa marketing in these respective countries. Thus an analysis of these structures will provide some explanation on the sources of the differing market shares, as well as indication as to the constraints still faced by these farmers. The marketing systems in Africa fall into three main categories: free market systems, marketing boards systems and price stabilization fund systems (Caisses de Stabilisation) (Schreiber and Varangis, 1999). The Marketing Board System is characterized by the existence of a parastatal with a monopoly on internal and external marketing. Pan-territorial and pan-seasonal prices are set by the boards or a higher governmental authority. The Caisse de Stabilisation is similar, with prices being administratively 53 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges determined. The physical handling of the crop is conducted by private agents licensed by the Caisse and whose remuneration for these services is also determined by the Caisse. The purchasing and selling prices at each stage of internal commercialization and exports is fixed for the crop year. These systems attempt to stabilize prices with administrative price setting to insulate farmers from excessive fluctuations in international prices. Cocoa prices are set in relation to a long-run trend. In theory, export revenues derived when international prices are above the trend are supposed to finance a stabilization fund to cover losses when world prices fall below the trend. In practice this has not happened due to poor management of the stabilization funds by governments, increased difficulty in establishing the appropriate long-term price trends and political pressure on setting producer prices. Examples of this political pressure are evident in C6te d'Ivoire and Cameroon, following the financial difficulties experienced by the stabilization funds after the mid- I 980s. World prices fell significantly lower than the mid-1970s and early 1980s levels, and governments were unable or unwilling to adjust purchasing prices to these lower levels, thus exacerbating the financial burden on these stabilization funds. Free market system: Cameroon, Nigeria, Indonesia, Malaysia, Brazil. Caisse de Stabilisation System: C6te d'Ivoire, (Cameroon until 1993/94). Marketing Board System: Ghana, (Nigeria until 1986). Table 4.3: Marketing Systems for Cocoa in Sub-Saharan Africa, 1997. Functions Free Market System Caisse de Stabilisation Marketing Board System Legal Ownership of Crop Trader, Exporters Traders, Exporters Marketing Board Physical Handling of Crop Traders, Exporters Licensed Private Agents Marketing Board Domestic Price Determination Market Forces Caisse de Stabilisation Marketing Boards (Government) (Government) Taxation Absent or Explicit Explicit Implicit Marketing Costs & Margin Low Medium to high High Marketing Costs and Taxation % of export price, 1995 % of export price, 1995 % of export price, 1995 Indonesia - 22 Co6te d'lvoire- 53 Ghana- 49 Malaysia - 9 Brazil- 28 Cameroon - 25 Nigeria- 13 Producer Prices High Medium to low Low Source: Adapted from Schreiber and Varangis (1999). Countries under the free market system have enjoyed a higher share of the f.o.b. price (Figure 4.7). Prices are determined by market forces and there is no direct government involvement in the internal and external marketing of the crop. The pass-through of international prices to domestic prices is high but any volatility in international cocoa prices is, of course, also transmitted to farmers. In these systems, governments may retain the right to intervene if there is a perceived need to co-ordinate or regulate the actions in the system. However, this intervention is usually limited to quality control, taxation and a general system of monitoring and supervision. 54 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 120- 100 80 -____________ - - - - -_-_-_ - -_-__ 60 - 40- -20- -40 Malaysia Indonesia Brazil Nigeria Cameroon Ghana C6te d'Ivoire 4 Non-SSA Developing Countries p 4 SSA Countries > ~1 Producers Share of fo.b. Price % Change in the Producers Share since 1990 --- Average Producers Share, Non-SSA countries Figure 4.7: Cocoa Producer's Share of f.o.b. Price, 1995. Source. Schreiber and Varangis, 1999, World Bank and IMF data. The cost of marketing and taxation of the controlled systems is almost twice that of the free market system (Table 4.3). These costs are also strikingly evident in the substantially lower share of the f.o.b. price that cocoa growers receive in countries operating under the Caisse and Marketing board systems (C6te d'Ivoire and Ghana, Figure 4.7). In C6te d'Ivoire, prices are administratively determined by CAISTAB (Caisse de Stabilisation et de Soutien des Prix des Produits Agricoles) with the objective of stabilizing inter- and intra-annual prices and returns and reducing the price risks of market participants. A rigid system of controls and regulations is also managed by CAISTAB. It covers the entire marketing chain from the purchase of cocoa from farmers to actual export. This monopoly power essentially allows CAISTAB to determine the revenues of all participants in the cocoa marketing chain. A similar situation occurs in Ghana, with the Cocoa Marketing Board (COCOBOD) controlling all stages of cocoa marketing, from purchases at the farm-gate through exports and sale to domestic processors. COCOBOD's cocoa marketing activities are handled by separate subsidiaries: the Produce Buying Company (PBC) and the Cocoa Marketing Company (CMC). PBC is responsible for domestic procurement, storage and transport, while CMC manages all exports and sales to domestic processorsl8. Producer prices are fixed for the entire crop year. The set prices account for expected export prices, operating costs of COCOBOD and its various subsidiaries, the explicit tax and the farmers production costs. Nigeria and Cameroon also have a history of state intervention in the cocoa sector. Prior to 1986, Nigeria experienced extensive government intervention. The Nigeria Cocoa Board (NCB), a national parastatal, set the producer price and held a monopoly on domestic procurement sales and exports. The deteriorating macro-economic environment, marked by rising domestic inflation, an increasingly overvalued exchange rate, and steadily worsening terms-of-trade for agricultural producers made cocoa production increasingly less profitable for farmers. In real terms, official producer prices halved between 1978/79 and 1984/85, and by 1986/87 farmers received less than 20 percent of the world price. In 1986 the government undertook widespread reforms. These included the adoption of a 18 This system has been repeatedly changed between competitive private marketing and state-controlled monopsony. 55 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges more appropriate exchange rate and the abolition of the NCB. Price controls were abolished so were the licensing required by NCB. A subsequent surge in the number of buyers (400 after the abolition of NCB) created increased competition resulting in a significant increase in the farm-gate price for cocoa. In Cameroon the parastatal Office National de Commercialisation des Produit de Base (ONCPB) controlled the marketing of cocoa until 1990. This system was similar to theCaisse 's. Due to financial difficulties resulting from declining world prices and an increasingly overvalued exchange rate, substantial reforms were undertaken in the early 1990s with the elimination of ONCPB. Internal and external marketing were still partly controlled by a smaller parastatal company, Office National du Cafe et du Cacao (ONCC), continuing a stabilization fund. By 1994, again, financial pressure led to the adoption of an almost completely free marketing and export system. Producer prices are now market- determined and internal and external trade are open to everyone. At present there are about 200 registered buyers/exporters of cocoa (Schreiber and Varangis, 1999). The liberalization of the marketing system had a tremendous impact on farm-gate prices which increased from about 40 percent of world prices in 1994 to over 70 percent in 1995. This description suggests a high correlation between the share of the f.o.b. price that cocoa producers receive and the extent of governments intervention in the industry. International experience suggests similar outcomes. The free market system is pursued by other developing countries such as Indonesia where the competitive cocoa marketing and distribution system has greatly improved the share of the f.o.b. price that cocoa farmers receive (Akiyama and Nishio, 1996). This, together with the availability of suitable land, low production costs, relatively good transport infrastructure, favorable macroeconomic policies and the smallholders' entrepreneurship have contributed to a phenomenal growth of Indonesia's cocoa output (26 percent a year between 1980 and 1994). Coffee Coffee production is less concentrated than the cocoa industry in SSA. Seven countries produce over 80 percent of SSA's coffee exports with no single country accounting for more than 20 percent of the export share. Of all the traditional export crops from Africa, coffee experienced the largest increase in the real world price between 1990 and 1995 with an annual (increase) growth rate of almost 10 percent. As a result of this favorable price trend, all main coffee producing nations in Africa experienced, on average, an increase in the real producer price of coffee (Table A6). Most of these countries also experienced an increase in the producers share of the f.o.b. price (Figure 4.8). This suggests that the pass-through of currency devaluations undertaken by these countries have been fully transmitted to coffee producers, particularly in Tanzania, Cameroon and Uganda. On average, the producer's share of the border price is higher for coffee producers than for cocoa and cotton producers. In some countries, these shares are comparable to those experienced by coffee producer's in other developing countries. Again, a brief description of marketing systems in these countries can provide an indication as to the constraints inhibiting the pass-through of border prices to producers. Both free market systems and marketing boards are present in the coffee industry in Africa. 56 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Free market system: Uganda, Tanzania, Brazil, Indonesia, Kenya, Madagascar. Marketing Boards: C6te d'Ivoire (until 1998/99). 120 100 80 - U 60- 40- 20 0 -20 Brazil Indonesia Colombia Tanzania Uganda Cameroon Madagascar Kenya Cote d'lvoire Non-SSA _ ___ SSA countries__ Developing Countries __ Producers Share of f.o.b. Price % Change in the Producers Share since 1990 - - - Average Producer's Share, Non-SSA countries Figure 4.8: Coffee Producer's Share of f.o.b. Price, 1995. Source: World Bank and IMF data. Until 1993, the coffee sector in Tanzania was largely run by the Tanzania Coffee Marketing Board (TCMB), which controlled prices, marketing and exports. Restructuring of the TCMB began in 1993 with its functions confined to policies and regulation of the sub-sector. The internal purchasing of coffee was liberalized; this allowed the private sector to participate, thus improving competition in internal marketing. The ownership and management of coffee curing companies have also been liberalized by permitting private sector ownership. This opening up of the market has increased competition and improved efficiency, which has resulted in higher real producer domestic prices and enhanced pass-through of the currency devaluation to these prices. In Uganda the coffee market has been liberalized with the encouragement of private sector participation in exports. The Coffee t 80 - 0 Marketing Board was replaced by a parastatal, 07 r.' 60- CMBL, which does not have monopoly powers. The export tax on coffee was removed after 4O 40- o 1991/92 but was reintroduced in 1994/5 and vX 1995/96 in the form of a stabilization tax. The 0 20 - intention was to curtail possible inflation owing et 0 _ to the rapid increase in the international price of 1990/91 1991/92 1992/93 1993/94 1994/95 coffee. In more liberalized markets, the number o Private sector of private traders increased from zero in 2 Co-operatives 1990/91 to 82 in 1994/95. These traders have 0 Coffee Marketing Board (CMBL) taken over some of the export responsibilities Figure 4.9: Changes in the Market Shares of from the coffee marketing board. The result has Coffee Exporters. been a substantial increase in the real producer Source: UCDA. price and the producer's share of the f.o.b. price. 57 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges In Cameroon, the state marketing board, ONCPB, controlled coffee processors, marketing and export licenses. Following the currency devaluation in 1994, all quantitative restrictions on imports were removed and all price controls were abolished. A number of structural and regulatory reforms were implemented, which included eliminating the parapublic monopoly and control over coffee. There was some policy backsliding to reassert government controls with the reintroduction of coffee taxes (25 percent). In the mid-1980s, Madagascar implemented a broad range of reforms in the coffee sector; taxes were removed and the state export monopoly was liberalized. During the early 1980s coffee producers received about 40 percent of the border price. By the early 1990s, farmers were typically receiving over 70 percent of the border price. In Kenya, the Coffee Board was responsible for selling coffee to private dealers and exporters. In October 1992, the sector was reformed and the Coffee Board ceased its involvement in coffee marketing, confining itself to regulating the industry. Regulation included licensing coffee growers, processors, and other marketing agents. The Kenya Planters Co- operative (KPCU) took over the export auction from the Coffee Board; however, farmers were also free to sell coffee by private treaty (outside the auction) as long as the price was higher than the auction price. The coffee auction is conducted in foreign currency with 50 percent of the foreign currency earned accruing to the seller of coffee. In C6te d'Ivoire, coffee farmers have experienced significant fluctuations in producer prices. The share of the f.o.b. price received by farmers reached the lowest point in 1984/85 before rising sharply throughout the rest of the 1980s to 80 percent in 1992/93. It declined dramatically in 1994 as producer prices were not adjusted to reflect the exchange rate realignment and the increase in the international market price. The share then rose to around 60 percent in 1995/96 (Figure 4.8). These changing incentives have resulted in fluctuating production levels. The sluggish pass-through of world prices to producer prices is largely the result of both internal and external marketing. CAISTAB, a statutory monopoly (also responsible for cocoa marketing described in the previous section) played a dominant role in the marketing of coffee in Cote d'Ivoire. Its involvement inhibited private sector development, thus inhibiting efficiency in the marketing chain. Cotton Cotton exports from SSA have expanded significantly in the past decade resulting in an increasing share in total agricultural export earnings. Production of cotton is even less concentrated than that of coffee with ten countries (Mali, C6te d'Ivoire, Benin, Tanzania, Burkina Faso, Chad, Cameroon, Togo, Zimbabwe and Senegal) producing over 80 percent of the exports. Africa's share of the world cotton market has increased over the 1990s and currently accounts for about 15 percent of world exports. Most of this cotton is grown in West African countries. The real world price of cotton lint (US$) has been more favorable over the 1990s than in the 1980s, increasing at 0.5 percent per annum between 1990 and 1997. All of the ten counties analyzed, except Chad, experienced an increase in the real domestic producer price of cotton with the largest increases enjoyed by cotton farmers in Zimbabwe and Tanzania. A closer examination of the share of the f.o.b. price that cotton farmers receive shows that all of these countries, except Zimbabwe and Tanzania, have experienced a declining share. This suggests that the devaluations of the domestic 58 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges currencies have not been fully passed on to cotton farmers as higher prices. A closer examination of the marketing structures provides some explanation of these contrasts. Free Market System: Zimbabwe, Tanzania, India, Pakistan. Parastatal System: Togo, Cote d'Ivoire, Cameroon, Chad, Benin, Mali, Burkina Faso. Marketing Board: Zimbabwe until 1993. The organization of the cotton industries in each of the francophone countries is very similar, with a dominant parastatal controlling cotton production. A recent study reviews the cotton policies in francophone Africa highlighting the functions of the parastatals, which are jointly managed by foreign shareholders (Pursell and Diop, 1998). Table 4.4: Cotton Parastatals in Francophone Africa. Functions CIDTI SOFITEX CMDT SONAPRA SOTOCO Coton Tchad SODECOTON (C6te (Burkina (Mali) (Benin) (Togo) (Chad) (Cameroon) d'lvoire, Faso) Input supply Parastatal is the sole supplier; quantities and types of inputs are set to optimize processing capacity of cotton companies gins. Marketing Parastatal is the buyer of seed cotton from farmers. Ginning All cotton gins are owned and operated by parastatal. Transportation Parastatal provides all transport for inputs from ports to farms, seed cotton from farms to gins, & distribution cotton seed from gins to mills or other markets. Producer prices Pan-seasonal and pan-territorial seed cotton price announced before planting. Extension Provide extension services, together with free new seed varieties. Credit Supply input credits which are attached to the cotton price. Source: Adapted from Pursell and Diop (1998). This system in francophone Africa (Table 4.4) has achieved a number of successes including significant growth in cotton production, high quality standards, good credit recovery, effective research and extension with a resulting increase in yields. This cotton success story in West Africa can be illustrated by way of a country example. Benin has experienced the greatest increase in cotton production (20 percent per annum since 1980 and 2 percent of this annual increase was from increased yields while 18 percent was from an expansion of area planted). This significant growth has been attributed to the impact of policies (Brtintrup, 1997). These have included both price and non-price factors combined in an integrated structure which links research, input supply, credit, organization of cotton commercialization and export, farmers cooperation and extension. Aside from the cotton price policy and the cotton package itself, Briintrup (1997) also found that stagnating or declining food crop prices since the mid-1980s had an important influence on the cotton boom. Widespread adoption of animal traction, encouraged with access to credit, extension and commercialization services, has had a significant impact on labor productivity and cotton production. Indeed, after an extensive review of the literature, Kelly et al (1999) suggest that input and output markets have served farmers best when there has been some degree of vertical co-ordination among input distribution, output marketing and credit functions, which lowers costs and improves loan repayment rates. The most successful examples of vertical co-ordination have been in sub-sectors producing industrial or export crops (as in the case of cotton in West Africa). In such cases, increased 59 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges access to improved inputs and more reliable output markets stimulate productivity in food as well as in cash crops. The key feature for the sustainability of these cropping systems is that they need to provide the appropriate incentives that make it profitable for farmers to sell their products through the scheme (assured largely by the private sector, with some government involvement to facilitate efficient and transparent markets). This in turn makes it profitable for the scheme to extend credit, inputs and other services that support small-holder productivity growth to the mutual benefit of the farmer and the scheme (Kelly et al, 1999). Where this has not been the case, the system often breaks down. Currently, price incentives provided to cotton farmers in west Africa are very low (Figure 4.10) in the range of 30 to 40 percent (in 1994/95 these prices were about half of those received by cotton farmers in Zimbabwe, Pakistan and India [these comparisons are for cotton of about the same quality]). These prices are offered by the cotton parastatals who manage stabilization funds with the idea of providing farmers with stable prices (in a similar manner to the Caisse system for cocoa). However, world cotton price fluctuations placed financial pressure on some of these funds and in some years many have needed financial assistance from aid donors. 100 80 60- t 40 0 1- 20 0. -20 -40 8/ ae tZ / tts0 + so6 5N40 v v Non-SSA - Developing > SSA Countries _ Countries ~1 Producer's Share of f.o.b Price l % Change in the Producers Share since 1990 - -Average Producer's Share, Non-SSA countries Figure 4.10: Cotton Producer's Share of f.o.b. Price, 1997. Source: Purcell and Diop (1998). The subsequent reorganization of many of these companies include a greater participation of private firms in transportation, input supply and ginning (ie: Benin and Togo). In the past, farmers were paid a pre-announced price minus the price charged to them for the inputs that had been supplied. The recent pricing arrangements for seed cotton include two payments to farmers: an initial price paid, supplemented by a second payment representing a share of the profits made by the cotton company during the season, or directly linked, by a formula, to the world price of lint (Pursell and Diop, 1998). 60 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The extent of reforms varies greatly among countries, but the monopolistic structures have been maintained. Reform efforts are being discussed to raise competition at all levels and to harmonize cotton marketing and taxation policies within each union (UEMOA and CEMAC) to create a unified market who's size would be attractive to international agro-industrial investors. In Zimbabwe, the cotton market has recently been liberalized. In addition, new traders are permitted, and the buying monopoly, the Cotton marketing board, has been downsized to become the CCZ (Cotton Company of Zimbabwe) and will eventually be privatized. Subsequently producer prices have gone up (Figure 4.10) significantly with increased competition in buying cotton which started in the 1993/94 season. In Pakistan, farmers receive 85 of the export price of cotton (lint). This high share is largely attributable to the effective role of traders in providing inputs and credit to small scale cotton farmers, and to the low costs of the competitive ginning, marketing and transportation activities. The large increases in production resulted from both increases in yields as well as from bringing new land under cultivation. In India, a large number of competitive seed cotton auction markets throughout the cotton growing regions ensure a market determined price. Other Traditional Exports Crops Other important traditional export crops are tobacco, sugar, groundnuts and tea, each accounting for over 5 percent of agricultural crop exports from SSA. A brief description will be provided on the price trends of the these crops across producing countries. Tobacco accounts for about 9 percent of crop export earnings from SSA with a high level of concentration. Only two countries, Zimbabwe and Malawi, account for over 90 percent of these exports. Despite the decline in the real world price for tobacco, most producers in SSA have experienced real domestic price increases. This trend is a result of currency devaluations and an increase in the share of the world price received by farmers. The Zimbabwe tobacco industry has been largely free from interventions and prices reflect world price trends. 'Orderly marketing' is enforced through the auction floors (houses) with rules for bailing and grading. In general, production of flue-cured tobacco (commercial farmners) is expanding while the pattern for the other types of tobacco (varied types of producers) is more varied. International marketing of tobacco leaf is conducted by multinationals and there have been some concerns that these companies collude to form a buyers cartel thus creating distortions in transmitting the world price to farmers. The tobacco industry in Malawi, notably burley and flue-cured tobacco, was characterized by various production and marketing quotas at national and farm levels. National production quotas are set by a small number of international buyers and processors and, although all marketing takes place through auctions, they are characterized by a low degree of price competition. Production quotas were historically only allocated to estates until 1991/92. In 1994/95 smaliholders were allocated about 10% of the quota which almost doubled in 1995/96. These production quotas are being phased out and replaced by production registration. Sugar accounts for about 9 percent of SSA's agricultural exports. Three producers, Mauritius, Swaziland and South Africa, account for over 80 percent of sugar production. Mauritius supplies almost 40 percent of these exports. Farmers in South Africa and Mauritius enjoy about 90 percent of the f.o.b. price and the industry in these countries is largely free from government intervention. In Mauritius, sugar output is marketed through a central organization, the Mauritius Sugar Syndicate, responsible for the export and domestic sales of the country's production. Net proceeds are distributed 61 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges to the large estates as well as to small farmers on the basis of the average realization price per ton. Mauritius sugar exports are shielded from the price fluctuations in the world sugar market by preferential access agreements with the European Union and the US, which secures a guaranteed price for sugar exports. These preferential trade agreements provide Mauritius with sugar prices much higher than the world price. In Swaziland the marketing of sugar is controlled by the Swaziland Sugar Association. Millers buy the sugar cane from farmers who in turn sell their output to the Association which then exports most of this sugar to the European Union and the US. Although farmers in Swaziland received a lower share of the f.o.b. price, this share increased in the 1990s. In Mauritius, Swaziland and South Africa the producer's share of the world price has increased. Four countries (South Africa, The Gambia, Senegal and Zimbabwe) account for over 80 percent of SSA's groundnut exports with South Africa accounting for almost 50 percent of these exports. Prior to 1995, groundnuts in South Africa were marketed through a one-channel pooling system by the Oilseeds Board governed under the marketing act of 1968. This entailed strict government regulation over the production and marketing of groundnuts with the oilseeds board acting as a monopolist. The scheme was applicable to all groundnut products produced and marketed in South Africa. In 1995/96, the Oilseeds Board established a surplus removal scheme with a subsequent movement to a free market system. The board lost control over the production and marketing of oilseeds, and the one-channel marketing scheme was dissolved, resulting in increased competition among groundnut producers. The groundnut market in Senegal was totally government controlled for several decades. In 1985 a set of reforms were implemented by the government that allowed greater private sector participation in the industry. The groundnut processing sector was, however, excluded from the reforms. In 1994, further reforms were implemented to remove import controls on vegetable oil and Government controls on consumer prices. Competition has subsequently increased due to growth in the informal oil processing sector and the production of confectionary groundnuts. However, these account for a small component of the total market for groundnuts and groundnut oil. Despite reforms, import protection was structured in a way to make competition with SONACOS (National Groundnut Oil Company) very difficult. As of 1998, tariffs of 26 percent and 48 percent were imposed in raw oil and refined oil respectively, thus protecting the domestic industry (SONACOS) for refined oil. As a result, competition in this sector continues to be inhibited. Non-Traditional Export Crops The previous analysis has centered on the 'traditional' export crops from SSA which has been the focus of many studies on African agriculture. A more recent study (Jaffee and Morton, 1995) attempts to complement this broader literature by focusing on high-value food products and raw materials. These include fresh and processed fish products, live animals, fresh and processed meat products, milk and other dairy products, fresh fruit and vegetables, processed fruit and vegetable products, tree nuts, oilseed and vegetable oils and spices and flavoring. High-value foods are produced by several African countries, particularly in Southern Africa. 62 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Cut Flowers: Kenya, Zimbabwe, Mauritius, South Africa, Zambia, Malawi Cit.us Fruit: Swaziland, South Africa, Zimbabwe Deciduous Fruit (Pineapples): Swaziland, C6te d'Ivoire, South Africa Pulses: Ethiopia, Malawi Live Animals: Burkina Faso, Namibia, Lesotho, Niger, Somalia Animal Products: Ethiopia, Botswana, Niger, Namibia, Lesotho, Burundi, Somalia Cashews Guinea Bissau, Mozambique, Uganda Vanilla: Madagascar These products have certain market characteristics and other properties that provide prospects for favorable expansion of future trade. Several of these have been highlighted by Jaffee and Morton (1995) as: high income elasticities of demand, greater potential for the development of domestic markets, intra-regional trade and more favorable international markets. These commodities also offer a wide scope for new product development and value adding activities. An examination of the price trends of these products reveals a long-term downward trend similar to the traditional exports. However, the downward trend has been less severe than the decline experienced by the traditional exports. The world price of citrus fruit, cashew nuts and vanilla have increased at 0.9, 0.7 and 0.6 percent per annum since 1961 (Table 2.4). As with the traditional export crops, there has been government intervention in the marketing and price setting of these non-traditional exports. This again has undoubtedly eroded the producer's share of the border price. Rates of export concentration (Table 4.5) have also been high. Table 4.5: African Examples of Export Concentration Among Private Firms. Industry/Country Share of Trade (%) Number of Leading Firms Horticulture Kenya Fruit/Vegetable 67 6 Senegal Fruit/Vegetable 81 5 Ghana Pineapple 63 6 Fish/Animals Nigeria Shrimp 74 3 C6te d'lvoire Fish >75 3 Somalia Cattle 70 3 Spices/Nuts Tanzania Cashew 64 3 Madagascar Vanilla 75 3 Source: Jaffee and Morton, 1995. Examples of intervention include beef in Botswana, vanilla in Madagascar and cashew nuts in Tanzania. Beef in Botswana is marketed by the Botswana Meat Commission (BMC), a parastatal created by an Act of Parliament to provide a sales outlet for livestock farmers. This parastatal enjoys a monopoly over beef, lamb and mutton exports. However, on the domestic market, private butcheries, municipal abattoirs and livestock agents can compete. Although Botswana exports most of its beef to the European market through the Lome Convention at a preferential price (about 40 percent above the world price) the export monopoly has eroded the producer's share of the f.o.b. price. By law the BMC has to make a profit and its gross revenues are taxed, this must surely be passed on to farmers as lower prices. 63 Agricultural Incentives in Sub-Saharan Aftica: Policy Challenges The vanilla sector in Madagascar provides another interesting case. Madagascar embarked on a program of structural reforms liberalizing its domestic and external trade, lowering its import tariffs, and gradually lowering and eventually abolishing all export taxes in 1992. The vanilla sector, however, was not included in the reform program. A Vanilla Stabilization fund was set up to protect domestic producers from excessive price fluctuations. However, the government continues to set all domestic and export prices as well as to allocate and set export quotas. Export taxes are persistently high. In 1990, vanilla growers received only about 8 percent of the actual export price. The stabilization fund collapsed in 1990 and now no longer provides a minimum price and a market outlet for their vanilla production. The producer's share of the border price has increased from about 8 percent in 1990 to 60 percent in 1995. In recent years, however, vanilla farmers have to complete with substitutes which have enjoyed an increased share of the world vanilla market. The Cashew nut market in Tanzania was liberalized in 1991 and private firms were permitted to undertake trade. The liberalization process was impeded but there were poor communications on new rules regarding trade. However, this move to a more market based system has resulted in a large increase in the producer's share of the f.o.b. price. ENHANCING THE PRODUCER'S SHARE OF THE BORDER PRICE Clearly, interventions in the market have distorted the pass-through of world prices to domestic producers. Analytically, the transmission of world agricultural prices to producers has been extensively analyzed. Mundlak and Larson (1992) using data for both developed and developing countries show congruence between world and domestic prices for agricultural exports. They also suggest that even though there are large cross-country variations in prices caused by policy biases, these do not prevent domestic prices from moving with world prices. A more recent study by Morisset (1998) comes to a slightly different conclusion. His study examines the spread between the world and domestic price for seven commodities (beef, coffee, crude oil (fuel and gasoline), rice, sugar and wheat) in several OECD countries (Canada, France, Germany, Italy, Japan and the United States). He shows that the spreads have significantly increased over time thus inhibiting final demand. In the countries examined, commodity price transmissions have been asymmetric and price declines were not (or imperfectly) transmitted to domestic consumer prices. Upward movements, however, were fully transmitted and the spread between world commodity prices and domestic prices have almost doubled, on average, for the seven commodities between 1975 and 1994. As trade and tax policies or transport, processing and marketing costs only explained a small part of these trends, the study suggests that a large part of this explanation may lie with the role of international trading companies. A recent African country case study (Lloyd et al, 1997) shows that in Cate d'Ivoire, domestic prices are insulated from world price shocks, with a large proportion of the shock being absorbed by the marketing agencies whose role was to primarily stabilize prices. In the case of coffee and cocoa in Cate d'Ivoire, Lloyd et al, (1997) show that the cost of stable prices for domestic producers is high.McIntire and Varangis (1998) derive a similar result; their findings show that in the absence of stabilization, farmers in Cate d'Ivoire would have received on average 29 percent higher producer prices throughout 1993-1997. This phenomenon does not seem to occur exclusively in Cate d'Ivoire but in most countries embarking on export price stabilization programs. While prices have been more stable with interventions, the risk benefits of the more stable prices do not appear to have outweighed the costs of the lower prices offered under the stabilization programs (Box 4.1). 64 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The low share of the world price that farmers receive has been the focus of much work on international comparisons of agricultural policies. While this share has been eroded by heavy taxation of African farmers (Schiff and Valdes, 1992), other non-price policies such as those on transportation, marketing, distribution, storage and legislation have also influenced these prices. Isolating these individual effects has proved difficult and even calculations of nominal protection coefficients have their practical shortcomings (Gardner, 1995). In this section, comparisons will be made between the producer's share of the f.o.b. price with an attempt to explain cross-country variation in African countries in a more formal manner. The distribution of the producer's share of the f.o.b. price in SSA shows a mode in the 101 70-79 percent class (Figure 4.11). However, u most of the farmers receive shares between 40 5 - and 69 percent of the f.o.b. price. This contrast indicates large differences in the cost of o 0 moving the product from the farm gate to the <30 30-9 40-9 50-9 60-9 70-9 80-9 >90 port. The question remains as to whether these Producer's Share of the Border Price (%) high costs are justified or whether they can be reduced by reoigdsoFigure 4.11: Distribution of Producer's Share of reduced by removig distorionary poles and f.o.b. Price for Export Crops in Sub-Saharan improving market efficiency.ArcnCutis African Countries. Source: Table A7 in the Appendix. An econometric analysis was used to explain the cross-country variation in the producer's share of the f.o.b. price. Cross-section data from 1996 was used in the analysis. The results in Table 4.6 suggest that differences in infrastructure, isolation from markets, economic policies, volumes of crops traded and the type of crops grown have a significant impact on the producer's share of f.o.b. price, suggesting complementarity between price and non-price factors. Transport Infrastructure: Access to transportation infrastructure and the cost of transportation are significant constraints on African agriculture. Markets remain isolated, while poor road conditions and limited transport availability raise the costs of moving products to distant markets. The infrastructure variables used in the regression include the percentage of paved roads and road density, to differentiate between the extent of the road network and the quality of these roads (Table 4.6). The quality of roads appears to have a greater effect on the producer price/border price ratio than road density. These two variables did, however, appear to be collinear and thus road density was dropped from the later regressions (Model 2a and 2b). The positive sign on the variable suggests that a greater percentage of paved roads and a higher road density will increase the producer's share of the border price, reflecting lower transportation (transaction) costs. Isolation: Similarly, the cost of moving crops from isolated areas to larger markets significantly reduces the producer's price share. Rural population density was used in the regression as a proxy for the extent of market isolation. The hypothesis being that in more isolated areas, market integration is weak and transaction costs for farmers are much higher than in areas or countries with higher rural population densities. The positive sign on these variables (Table 4.6) meets a priori expectations in that higher population densities (or lower levels of isolation) result in a higher producer's share of the f.o.b. price. Although positive, this variable was non-significant at the 5 percent level; this may simply reflect the inability, of the proxy variable used, to capture the isolation effects. 65 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 4.1: Export Crop Price Stabilization. The stabilization of commodity prices has been a common policy followed by many African governments. The critical question that is often posed when reviewing these programs is do the benefits from stable, but lower, prices exceed those from variable, but higher, prices ? One approach to examining this question has been provided by Newbery and Stiglitz (1981), which will be used in this evaluation. The Newbery-Stiglitz approach calculates the producer income effects of price stabilization policies by decomposing the effects it two components. The first is the risk premium, or stabilization benefit, indicating the monetary gain from more stable incomes where the risk benefit of perfectly stable prices is given by the equation. RB=1/2*RAo2 where R is the coefficient of relative risk aversion, and Ac2y is the fall in the squared coefficient of variation in income (Newbery and Stiglitz, 1981). The second component is the transfer benefit of perfectly stabilize prices and they represent this as: TB = - y y is the mean farm income before stabilization and Al' is the change in income due to stabilization. Newbery and Stiglitz (1981) estimate what stabilization is worth to the farmer, that is, what sum of money, B, the farmer would be willing to pay for the stabilization scheme as B A AY RA NTB = B= _ I -R A a 2 NTB-= 2 y The first term in the equation is the transfer benefit. The second term is the efficiency or risk benefit, the benefit of reducing costly risk to the farmer. By applying the Newbery-Stiglitz formula to export crop data from 1975-1997 for individual African countries, the stabilization benefits were derived. Several assumptions were made for the analysis. The first was regarding the coefficient of relative risk aversion. Several studies have shown farmers to be only moderately risk averse (Binswanger, 1980,1981), however in African a more recent study (Bruntrup's (1997) analysis of cotton producer's in Benin) suggest farmers are highly risk averse. A range of values for R are used in the calculation of the risk premium, from 0.5 showing limited risk aversion to 1.5 showing higher risk aversion (R is the Arrow- Pratt measure of risk aversion). The second assumption is that in the absence of price stabilization, producer prices would experience volatility at similar levels to that of international commodity prices. Thus, the producer price volatility increases from zero (perfect price stabilization) to the level of the international prices. For the calculation of the transfer benefits, it is assumed that in the absence of. price stabilization, producer prices will rise to a share of the f.o.b. price similar to that in countries with open-market economies. The first three columns in the table below show the risk benefits (RB) of price stabilization. Taking the first row as an example, cotton producers in Mali, on average, would be willing to give up 2.5 percent of the average price for perfect price stabilization (assuming R=1). However without a stabilization scheme (government intervention) the average price that Mali cotton producers receive (46 percent of the border price) would likely increase to levels obtained in other developing countries that have no government intervention (ie: 85 percent of the border price). Transfer benefits are estimated to be -46 percent. In other words, in the absence of stabilization, farmers in Mali would have received 46% higher producer prices. Even if R, the coefficient of risk aversion is increase to 1.5 or even 2, suggesting that farmers are highly risk averse, the net transfer benefits of price stabilization are still negative. 66 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 4.1: Export Crop Price Stabilization (continued). Producer benefit of complete price stabilization, 1975-1997 Perfect Price Stabilization Crop Country Risk Benefit Transfer Benefit Net Transfer Benefit R=0.5 R=1.0 R=1.5 (TB) (NTB using R=1) Cotton Mali 1.3 2.5 3.8 -46 -43 Senegal 1.2 2.4 3.6 -45 -43 Togo 1.5 3.0 4.4 -41 -38 C6ted'Ivoire 1.0 2.1 3.1 -39 -37 Burkina Faso 2.6 5.3 7.9 -37 -31 Benin 1.7 3.3 5.0 -36 -33 Tanzania 2.5 5.0 7.5 -33 -28 Cameroon 1.3 2.7 4.0 -29 -26 Chad 1.2 2.3 3.5 -26 -24 Zimbabwe 0.7 1.4 2.1 -2 -I Cocoa Ghana 3.7 7.4 11.2 -57 -50 C6te d'lvoire 1.8 3.7 5.5 -32 -29 Cameroon 1.7 3.4 5.2 -25 -21 Nigeria 3.5 7.0 10.4 5 12 Coffee Tanzania 4.4 8.7 13.1 -49 -40 Madagascar 3.2 6.4 9.6 -45 -39 Cameroon 2.0 4.1 6.1 -41 -37 C6te d'Ivoire 3.0 5.9 8.9 -35 -29 Uganda 3.8 7.6 11.4 -6 -2 Kenya 3.8 2.6 11.4 9 11 Groundnuts Zimbabwe 1.9 3.8 5.7 -58 -54 Senegal 1.2 2.4 3.6 -53 -50 The Gambia 1.6 3.2 4.9 -44 -41 South Africa 0.7 1.3 2.0 -8 -6 Sugar Swaziland 1.3 2.6 4.0 -35 -32 South Africa 2.4 4.9 7.3 18 23 Mauritius 0.8 1.6 2.5 34 36 Tea Tanzania 2.8 5.6 8.4 -47 -41 Malawi 2.1 4.2 6.3 -21 -17 Kenya 1.3 2.6 3.8 -6 -3 The table shows several interesting results which deserve comment. Over the period examined the benefits from stable, but lower, prices which were offered by various stabilization schemes do not appear to have exceeded the benefits from variable, but higher, prices. Thus, the net transfer benefit has been negative. This result is particularly evident in counties and for crops were stabilization schemes have been put in place. The positive transfer benefit shown for some countries simply indicates that producer are receiving a higher share of the producer price than the average that was used in the calculations (85 percent of the border price), in many of these countries there has been an extended period of time with no-market interventions. In the case of South Africa and Mauritius, the received preferential trade agreements for sugar ensure exports price much higher than world prices. The model used in this brief overview is very simplistic and general equilibrium effects are not taken into account. Further work is need to refine some of these ideas. In Africa, while there are certainly benefits from stable prices as the data suggest, these seem to have been outweighed by the costs imposed on farmers (lower prices) through the schemes implemented to achieve this stability. 67 Table 4.6: Explaining the Cross-Country Variation in the Producer's Share of the Border Price for Export Crops in Sub-Saharan Africa. Dependent variable: Producer share of the border price for export crops Market Efficiency Issues Explanatory Variables Model I a Model lb Model 2a Model 2b Coeff. t-stat Coeff. t-stat. Coeff. t-stat Coeff. t-stat. Constant 49.806 8.645 66.780 6.403 48.236 8.557 65.608 6.338 Infrastrueture & Percentage of Paved Roads 0.187 1.084 0.271 1.747 0.308 2.685 0.382 3.583 Isolation Road density 10.021 0.949 9.134 0.977 Rural population density 0.001 0.003 0.002 0.187 0.004 0.293 0.005 0.462 Econonie Polices Agricultural Market Interventions 0.582 3.759 0.508 3.597 0.601 3.920 0.526 3.761 Real Interest Rate -0.316 -1.474 -0.330 -1.652 -0.209 -1.147 -0.228 -1.341 Volunes supplied Volume of crop produced 0.004 2.822 0.004 3.348 0.004 2.745 0.004 3.265 Crop specifics Cotton -0.772 -0.150 -0.542 -0.105 Coffee -18.516 -3.093 -18.533 -3.099 Cocoa -4.005 -0.577 -4.364 -0.630 0.62 0.74 0.61 0.73 F-statistic 7.97 8.08 9.41 8.98 Number of observations 36 36 36 36 Dependent variable: Producer share of the border price for export crops (in logarithms) Market Efficiency Issues Explanatory Variables Model la Model lb Model 2a Model 2b (in logarithms) Coeff. t-stat Coeff. t-stat. Coeff. t-stat Coeff. t-stat. Constant 3.336 5.718 3.347 6.285 3.019 5.769 3.178 6.529 Infrastructure & Percentage of Paved Roads 0.035 0.712 0.058 1.269 0.067 1.571 0.076 1.873 Isolation Road density 0.066 1.195 0.042 0.808 Rural population density 0.052 0.660 0.040 0.530 0.061 0.770 0.039 0.523 Economic Polices Agricultural Market Interventions 0.011 3.901 0.010 3.783 0.012 4.344 0.010 4.200 Real Interest Rate -0.005 -1.756 -0.006 -2.195 -0.005 -1.624 -0.006 -2.098 Volumes supplied Volume of crop produced 0.085 2.892 0.094 3.524 0.093 3.239 0.098 3.843 Crop spec ics Cotton 0.073 0.782 0.095 1.064 Coffee -0.256 -2.479 -0.254 -2.479 Cocoa 0.068 0.563 0.063 0.518 R 0.59 0.71 0.57 0.70 F-statistic 7.03 6.98 8.03 7.88 Number of observations 36 36 36 36 Table 4.6: Explaining the Cross-Country Variation in the Producer's Share of the Border Price for Export Crops in Sub-Saharan Africa (continued). Dependent variable: Producer share of the border price for export crops Market Efficiency Issues Explanatory Variables Model la Model lb Model 2a Model 2b Coeff. t-stat Coeff. t-stat. Coeff. t-stat Coeff. t-stat. Constant 58.060 8.920 80.228 7.190 57.907 9.097 80.275 7.326 Infrastruclure & Percentage of Paved Roads 0.337 1.935 0.425 2.697 0.366 3.305 0.451 4.426 Isolation Road density 2.272 0.212 2.074 0.218 Rural population density 0.002 0.176 0.008 0.675 0.002 0.239 0.008 0.767 Economic Polices Agricultural Market Interventions -21.585 -4.045 -20.049 -3.897 -21.922 4.372 -20.398 4.247 Real Interest Rate -0.091 -0.398 -0.113 -0.521 -0.063 -0.342 -0.085 -0.492 Volumes supplied Voiume ofcrop produced 0.002 1.580 0.003 2.315 0.002 1.593 0.003 2.355 Crop specifics Cotton -5.682 -1.096 -5.722 -1.125 Coffee -19.243 -3.324 -19.227 -3.381 _Cocoa -7.919 -1.138 -8.102 -1.193 0.64 0.75 0.64 0.75 F-statistic 8.6 8.7 10.7 10.2 Number of observations 36 36 36 36 Dependent variable: Producer share of the border price for export crops (in logarithms) Market Efficiency Issues Explanatory Variables Model la Model lb Model 2a Model 2b (in logarithms) Coeff. t-stat Coeff. t-stat. Coeff. t-stat Coeff. t-stat. Constant 3.550 6.170 3.586 6.540 3.294 6.296 3.385 6.631 Infrastructure & Percentage of Paved Roads 0.057 1.158 0.085 1.795 0.085 2.077 0.108 2.651 Isolation Road density 0.058 1.058 0.053 1.004 Rural population density 0.061 0.816 0.083 1.130 0.070 0.924 0.086 1.168 Economic Polices Agricultural Market Interventions -0,364 -i.i68 -0.328 -3.971 -0.391 4.668 -0.349 -4.018 Real Interest Rate -0.003 -1.124 -0.005 -1.526 -0.003 -0.975 -0.004 -1.361 Volumes supplied Volume of crop produced 0.048 1.734 0.055 2.079 0.052 1.911 0.058 2.237 Crop specifics Cotton -0.052 -0.529 -0.033 -0.340 Coffee -0.285 -2.754 -0.285 -2.758 Cocoa -0.027 -0.211 -0.040 -0.3 13 Rl 0.61 0.71 0.60 0.69 F-statistic 7.61 6.06 8.87 7.50 Number of observations 36 36 36 36 Percentage of paved roads measures the percentage of roads in a country that are paved; road density is measured in km of road per sq. km area; rural population density is measured as the number of rural people per square kilometer; agricultural market intervention is measured as the recent change (1990-1995/97) in the producer's share of the fo.b. price in a particular country - an increase signifies an improvement in the country specific crop policy; volume of crop produced is measured in millions of tons. The source of these data are World Bank Development Indicators, 1998, IMF, and FAO. The repeated regressions (in the second set of tables) used a different variable as the proxy for agricultural market intervention. A dummy variable was used having the value of I in markets with government intervention and 0 in markets with no-government intervention. Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Economic policies: Both sectoral and macroeconomic policy variables were used in the regression. Two proxy variables were used for agricultural market interventions, the first was the recent change in the producer's share of the f.o.b. price, the second a dummy variable (1 for government market intervention and 0 for no government intervention). For the first proxy, an increase in this share was taken to represent an improvement in economic policy while a decline was taken to represent regress. While this may be a generalization, there appears to be a strong correlation between the two (see description in previous sections). These variables both had the most significant effect in the regressions (Table 4.6), suggesting that in markets where governments intervene producers receive a lower share of the border price. When the dummy variable is used, the results suggest that, on average, producers receive a share of the border price which is over 20 percent lower than farmers receive in markets where governments do not intervene. Macroeconomic policy can have a direct effect on producer prices through exchange rates and money supply and an indirect effect through real interest rates. Private sector entry into markets and their subsequent investments (storage and transportation) is influenced by, among other things, the real interest rate. Excessively high rates of borrowing may prevent investment and thus inhibit competition. The real interest rate was included in the regression as an explanatory variable having a negative coefficient, thus suggesting that an increase in real interest rates reduces the producer's share of the border price (possibly through a reduction in private sector investment). Volumes supplied: In many African countries the volumes of export crops produced are small and economies of scale in trade are not realized. A consistency in volume supplied is required so that the private sector can enter the market and, if this is not achieved, competition will not develop and the prices that the farmers receive will remain low. A variable for the volume of crops produced was included in the regression and proved to be highly significant and positive suggesting that an increase in the volumes produced by a country will result in a larger share of the f.o.b. price for producers. Crop specifics: Finally, dummy variables were included for three specific crops - cotton, coffee and cocoa (these crops account for over 50 percent of agricultural exports from Sub-Saharan Africa). Coffee seems to be the only crop where producers receive a significantly lower producer's share of the f.o.b. price, estimated to be about 19 percent lower than the average. This, however, may simply reflect a failure to fully account for the transformation of coffee from the farm gate to the port (raw beans vs. washed beans). The results suggest that only a small portion of the cross-country variations can be explained by the difference in crops grown. 70 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges ENHANCING THE COUNTRY'S SHARE OF THE WORLD PRICE A comparison between the border price of a country and the world price reflects the extent to which the world price has been transmitted to the border price. A higher border price/world price ratio could be due to factors such as lower international transportation costs or a greater external bargaining power. The distribution of these shares is shown in Figure 4.12. Most of the crops analyzed had border prices in excess of 80 percent of the world price. Again, an econometric approach is used to explain the cross-country variation in the 25 border price/world price. Cross-country data 20- from 1996 were used in the analysis. The regression results in Table 4.7 suggest that u 15- differences in volume of exports traded, Io distances from markets and type of crop exported all impact on the country's share of the world z - price. Agricultural market interventions did not appear to have influenced the countries share of world price. 40-49 50-59 60-69 70-79 80-89 >90 Border Price/World Price Ratio (°/) Volume of exports: The export share of world trade was included in the regression to Figure 4.12: Distribution of the Percentage of the reflect a countries bargaining power on world Border Price to the World Prices for Export Crops in reflet a cuntis barainin powr on orld Sub-Saharan Africa. markets. The larger the share, the greater Source: World Bank and IMF data. bargaining power a country is likely to have. Indeed, the variable had a significant effect on explaining the variation in a country's share of the world price. The greater the share of world trade, the higher the price share a country received for its exports. Table 4.7: Explaining the Cross-Country Variation in the Border to World Price Ratio for Export Crops in Sub-Saharan Africa. _Dependent variable: Border - World Price Ratio for Export Crops Market Efficiency Explanatory Variables Model la Model lb Model 2a Model 2b Issues Coeff. t-stat Coeff. t-stat. Coeff. t-stat Coeff. t-stat. Constant 83.37 15.82 84.78 4.13 4.116 26.814 4.285 11.980 Volume supplied Value exported 0.02 1.39 0.04 1.84 0.072 2.155 0.055 1.362 Quality Export share of world trade 0.56 1.35 0.75 1.66 0.031 0.943 0.088 2.007 Distancefrom Landlocked countries -5.60 -0.70 -9.67 -1.16 -0.101 -1.242 -0.165 -1.988 markets Policy Agricultural Market -2.35 -0.34 -8.23 -1.02 0.033 0.4i5 -0.056 -0.677 Interventions Crop specifics Cotton -13.51 -1.44 -0.224 -1.914 Coffee 2.55 0.26 0.015 0.144 Cocoa __ 6.48 0.52 0.076 0.613 0.21 0.33 0.29 0.42 F-statistic 2.88 2.35 3.12 2.85 Number of observations 36 36 36 36 In models 2a and 2b, the dependant and explanatory variables are in logarithms. 71 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Distance from markets: A dummy variable (1 = landlocked, 0 = not landlocked) was included in the regression to represent cross-country variation in costs (transportation). The variable had a negative coefficient in the regression, suggesting that landlocked countries receive a lower share of the world price. Type of crops exported: Dummy variables for the three dominant crops: cotton, coffee, and cocoa, were included in the regressions. The only significant dummy variable was for cotton suggesting that cotton receives a lower share of the world price than other crops exported from Sub-Saharan Africa. Again, caution should be used in interpretation as this could simply reflect different product comparisons at the border and on the world market. The same dummy variable for government intervention used in the previous regression was included. The variable was non-significant suggesting that in markets where governments intervene higher prices on world markets for domestic product have not been realized. The argument that greater government intervention (low producer's share of the border price) allows higher border prices to be realized 150 . by a country due to the improved market 100 :;O *_ (bargaining) power with centralized exporting o s - agent, does not seem to have much weight at an ____o_-_,_, _. 0 u aggregate level (Figure 4.13). As discussed in m 5 7 previous sections, a lower producer's share of 30 50 70 90 the border price reflects high government Producer's Share of Border Price (%) intervention, but this intervention does not Figure 4.13: Relationship Between the Producer/ assure producers a higher price on world Border Price Ratio and the Border/World Price markets (the best fit line in Figure 4.13 is Ratio. Source: Table A7 (all crops and countries). almost horizontal). At a more disaggregate level, interventions in cocoa and coffee markets yields higher prices on world markets. However, this benefit is eroded by the lower share of the f.o.b. price that these farmers receive as a result of the intervention (Table A6). AGRICULTURAL TAXATION AND PUBLIC RURAL INVESTMENT As discussed, African agriculture has been subject to high taxation (both explicit and implicit) and many of the instruments used to extract resources from agriculture, such as the marketing boards, have generated little govermnent revenue and have led to high deadweight losses. As this excess taxation is dismantled, the question arises as to how should the sector be taxed in the future ? It is obvious that agriculture, as the major sector in most African economies (accounting for 35 percent of the continents GDP), will have to continue to contribute to government revenues, ie: it will have to be taxed. In answering this question the key principles to be applied to future agricultural taxation are non- discrimination, minimization of negative efficiency impacts, effectiveness of fiscal capture, and capacity to implement (Binswanger, Townsend and Tishbaka, 1999). Agricultural taxation, where possible should be integrated into general value added, profits, income and wealth taxation. Efficiency losses must be minimized via the minimization of output and input taxes. Consumption taxes (such as sales and value added taxes) have the advantage in that they don't effect the efficiency of production. Although consumption taxes have become a more popular form of taxation in Africa, administrative capacity to implement seems to remain limited in many Sub- 72 Agricultural Incentives in Sub-Saharan Aftica: Policy Challenges Saharan African countries. The capacity to implement these tax systems needs to be strengthened and, in many cases, will have to be built up over many years during which little revenue will be generated. In this context, export taxes may be justified until the administrative capacity is developed. It appears that where export taxes are justified as substitutes for income tax in Africa, rates should be reduced substantially. The same its true for input taxation. As mentioned earlier, the high levels of Jiangxi (China) taxation have had a crippling effect on agricultural Colombia growth. These effects would not have been as extreme if more of the revenues were reinvested Philippines into public services and rural infrastructure (which was shown in this chapter to have a significant Poland effect on agricultural incentives). Indeed countries NlT (Indonesia) in East Asia provide examples of high extraction from rural areas combined with significant public Bahia (Brazil) investment and growth (Karshens, 1998). Chile In Africa public rural investment has been inhibited by the highly centralized political, fiscal Zambia and institutional systems for rural development that the post-colonial regimes have established. This | Kamataka (India) focus on centralization occurred for many reasons, V Tunisia including the desire for political integration of Tun,s.a fragile nations and the dominance of the state led Hidalgo (Mexico) development and planning ideologies of the time _ (Manor, 1999). In a recent research program of the Punjab (Pakistan) World Bank on decentralization and rural Tanzania development (McLean et al, 1999), scores were developed from a detailed analysis of the Egypt institutional arrangements for decision making and .g _ resource allocation in six important sectors of rural Bangladesh development (rural primary education, rural Senegal primary health care, rural roads maintenance, agricultural extension, rural water supply and Burkina Faso forestry management which allow for the characterization of rural development institutions). Cote d'lvoire (Since these scores are based on an analysis of the Imo (Nigeria) decision making powers at different administrative .___, _. _. _. levels [e.g school, district, administrative region, o 2 4 6 8 1 state, central government], they are free of biases Decentralization Scores associated with country size). Figure 4.14: Rural Service Decentralization in Nineteen Countries in the 1990s. Source: McLean et al, 1998. It is clear from Figure 4.14 that the African countries included in the sample had the most extreme centralized institutions for rural development during the first half of the 1990s. These high levels of centralization inhibited the local level development of institutional capacity, limited local 73 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges resource mobilization, undermined accountability of development programs to local populations and inhibited their participation (McLean et al, 1998, Parker 1995). The inhibition of local initiatives was further aggravated by the lack of democracy in most of the countries, and the discouragement or even suppression of voluntary private associations. The effectiveness and allocation of rural public investment will require a more decentralized approach. There has indeed been some progress in Africa of decentralized rural service delivery and public investment. Deconcentration of administrative and implementation responsibilities have become features of many sector investment programs for these services. Moreover, many countries have re- introduced political bodies at local levels (e.g. Tanzania, Guinea, Uganda, Ethiopia, Ghana, Zimbabwe). Progress in decentralization and devolution of resources and responsibilities however, remains limited to a few countries such as Ethiopia, Uganda and Ghana. SUMMARY AND CONCLUSION African countries have adopted and implemented widespread reforms in their export crop sectors. State control on pricing and exporting has been reduced particularly in eastern and southern African countries. In West Africa, the marketing systems of cotton and cocoa receive continued intervention. In some of these countries the markets are gradually opening up to increased competition. * Between 1990 and 1995/97, there has been an increase in the real domestic prices for export crops in fifteen of the nineteen African countries analyzed. This improvement is the result of favorable world commodity prices, devaluation of domestic currencies and, in some countries, an improvement in sectoral policy. * Since 1990 there have been large contrasts in the extent of exchange rate pass-through to producer prices. Many countries in Sub-Saharan Africa continue to inhibit this pass-through, particularly evident for cotton, cocoa and to a lesser extent coffee in West African countries. The exchange rate pass-through to farmers has been enhanced policies (real domestic price increase exceeding those suggested by the currency devaluation) in markets with open trade due to increased competition and market efficiency. * Similarly the producer's share of the f.o.b. price remains low and in some African countries this share declined during the 1990s. The cross-country variation in the producer's share can largely be explained by differences in infrastructure (quality and quantity of roads), economic policies (both macroeconomic and agricultural) and the volumes of crops traded. * One justification used for continued state price control is to stabilize domestic export crop prices. Observations from African export markets suggest that these more stable prices are achieve at great cost to the farmer. The risk benefits of more stable prices do not appear to have outweighed the costs of the lower price offered to farmers under the stabilization programs. * Another argument in favor of continued or even greater government intervention is that countries are able to realize higher border prices when exports are centralized due to the improved bargaining power on world markets. Evidence suggests that export prices received in countries that opened up the export channels to greater competition are not significantly different from those with centralized marketing systems. However, one benefit from these centralized systems is that it provides provide a platform to monitor export quality. Several government actions (related to price and non-price factors) can help to improve the income of export crop farmers in Africa. There seems to be significant scope to improve the exchange 74 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges rate pass-through to domestic producer prices. Raising the producers' share of the border price could be achieved by improving the quality and quantity of the road network in individual countries (reducing transport and transaction costs), enhancing economic policies (removing high taxation), fostering production to ensure consistency and volume of crops traded. Many of these improvements will encourage private traders to enter into these markets, thus increasing competition and market efficiency. Past taxation instruments, such as marketing boards, have generated little government revenue and have led to high deadweight losses. It is, however, obvious that agriculture, as a major sector in many African economies, will have to contribute to government revenues. Even though African agriculture was highly taxed there has been no extended period of active public investment in agriculture and rural development, a trend which needs to be reversed if Africa is to realize is agricultural growth potential. In the future, the key principles that need to be applied to agriculture taxation are nondiscrimination, minimization of negative efficiency impacts, effectiveness of fiscal capture and capacity to implement. This taxation needs to be accompanied by higher levels and more effective allocations of agricultural and public rural investment. 75 5. FOOD CROP POLICIES, PRICES AND MARKETS LIBERALIZATION OF GRAIN MARKETS IN AFRICA Intervention in the marketing of food crops, like export crops, has been widespread in Africa. Under the Maithusian view held by many African governments, food self-sufficiency strategies were extensively adopted. Marketing boards for most crops were developed and food production was subsidized by policies consisting of cheap credits and input subsidies. Governments purchased grain crops at higher prices than those prevailing on world markets while selling them to consumers at subsidized prices. These subsidies, together with little effort at cost recovery, caused marketing board costs to escalate. Operational inefficiencies also exacerbated the financial burden of these interventions. These rising costs, unreliable input deliveries and crop payment, the existence of parallel markets resulting from pricing policies, and instability of purchases and sales increased pressure for reform (Box 5.1). These factors were fueled by an increasing pessimism about the motives and results of state intervention in agricultural markets and the optimism of the private sector to efficiently organize these markets (Lipton, 1991; Jones, 1994). Following the initial failed attempts to improve the performance of these state marketing boards, the liberalization of parastatal food marketing systems became central to economic adjustments in Sub- Saharan Africa. A recent World Bank study (World Bank, 1994) shows that governments in fifteen of the twenty eight countries analyzed imposed major restrictions on purchases and sales of food crops. In an additional five countries there was limited intervention by government buying agencies. The remaining countries had no intervention except in food security stocks. The extent of the interventions has varied across crops. Markets for roots and tubers, predominantly grown in West African countries, have experienced less government interference than that imposed on maize and rice. The World Bank (1994) report shows that by 1991-92, after widespread adoption of adjustment programs, only two countries, Kenya and Zimbabwe, had major restrictions on maize purchases and sales. During the 1990s there has been backsliding on a number of these policy reforms. The common reform package for maize marketing, the dominant staple crop grown in Africa, has included moving farm gate prices towards export or import parity; announcing administered prices in a more timely fashion in relation to the planting times of crops on farms; speeding up payments to farmers; eventually liberalizing prices altogether; relaxing maize movement controls and other restrictions on trade; and restructuring parastatal maize marketing companies (Donovan, 1996). In many countries the reform process has been slowed by the social and political sensitivity of food prices together with the recurrent droughts, particularly in Southern Africa. Concerns about food insecurity in the region has induced many governments to retain grain parastatals, managing strategic grain reserves and to continue to intervene in grain trade both on domestic and international markets. A summary of the stages of reforms in several African countries is summarized in Table 5.1. 77 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 5.1: Assessment of Grain Market Reforms in Eastern and Southern Africa. Factors Leading to the Reform of Grain Assessment of Market Liberalization Marketing Systems in Eastern and Southern Africa * Reduction in the cost of marketing food to grain-deficit rural areas. Inflated costs of controlled marketing, rent seeking Some of the major factors driving marketing behavior and the controlled flow of grain raised consumer boards to move towards reform have been prices. The legalization of inter-district grain movement has summarized by Jayne and Jones (1997). reduced the difference between prices realized by producers These factors include high marketing board and those paid by consumers. The reduction in marketing costs costs, unreliable state systems for input has been achieved primarily by expanding the role of small- delivery and crop payment, pan-territorial scale trading and milling networks in fulfilling the residual pricing, which encouraged parallel markets, grain needs of rural households. instability in marketing board purchases and * Changes in urban consumption patterns and improved access sales and limited market access to small- to food by low income consumers. Urban maize milling in each holders. country was dominated by several large registered firms using * Costs of the marketing boards escalated roller mill technology. After reforms were put in place, the These costs were manifest at two levels: first, large scale millers swiftly lost a major part of their markets to the government enforcement on the board to small informal hammer mills whose number rapidly expanded. carry out activities without allowing it to Widely viewed during the control period as a product having fully recover costs (ie: pan-territorial pricing negligible demand, whole maize meal now accounts for 40- increased the share of grain delivered to the 55% of total urban meal consumption in Zimbabwe, Kenya board by small-holders in remote areas) and and Zambia. Liberalization led to widespread reduction in food second, the costs of operational inefficiency. costs by removing some of the barriers on private trade. * An increasingly unreliable state system of * Limited supply response to food market liberalization. input delivery and crop payments. Small- Throughout the 1980s and up to the initial reforms, official holder credit repayment also became producer prices exceeded export parity prices in the major problematic in many cases. production regions of Southern Africa. As these producer * Increased switching to parallel markets. prices were reduced grain production has declined. In almost Farmers near urban demand centers who all countries, a large proportion of small-holders benefited were implicitly taxed through pan-territorial from the transport subsidies inherent to the boards pan- pricing increasingly resorted to parallel territorial pricing structure. The removal of government markets and/or switched to other, controls on grain trading, however, has to some extent uncontrolled crops. mitigated the adverse effects of declining state marketing . Increased instability of marketing board subsidies associated with structural adjustment. Lower grain purchases and sales increased the fiscal processing costs made possible through liberalization have demands made by the marketing system. This reduced the wedge between producers and consumer prices. In resulted from the increasing proportion of some cases, price spreads between surplus and deficit regions maize sales by small-holders generally on have declined. poorer land with less reliable rainfall. * Gradual movement of region to structuralfood deficits. Even * Inhibiting small-holder market access. in a normal year, a large proportion of rural households are Controls on private grain movement actually net buyers of grain. This indicates that the effects of restricted small-holders direct access to the reforms on food security will depend on the ability of the urban markets. These also inhibited the flow emerging private sector to reduce costs of food to the grain of grain from surplus to deficit areas. deficit and generally poor areas. . Suppressed or imposed additional costs on . Impact of liberalization of marketing board deficits. To date, parallel trading and processing channels. there has been limited progress towards establishing more These channels often served the interests of flexible pricing strategies that allow the state to respond to, or both producers and consumers more influence at the margin, prevailing prices in private trading effectively than those of the official state channels. apparatus. Source: Jayne and Jones (1997) 78 Table 5.1: Summary of Maize Marketing Policies in Sub-Saharan Africa. Country Pre-reforms Post-reforms Tanzania Pre 1984 - Maize producer prices determined as residual after deduction 1984 - Maize flour price decontrolled, controls on grain movements relaxed. of cooperative and National Agricultural Products Board 1985 - Maize grain price decontrolled. costs. 1986 - Maize flour subsidies removed. - Pan-territorial and pan-seasonal price setting. 1987 - Official producer prices to be regarded as minimum cooperatives prices, movement restrictions 1981 - Regional price setting introduced. abolished. 1990 - All restrictions on purchase of grain by traders eliminated. Zimbabwe 1970s (late) - Consumer and producer subsidies increased. Expansion of 1987 - Producer price allowed to decline in real terms, then rise after 1992 drought. pan-territorial pricing, taxing commercial maize producers. 1991/2 - Phased elimination of controls on trade between smallholder areas. 1985 - Consumer subsidies phased out, but reintroduced from 1991- 1993 - GMB monopoly-seller status restricted to large mills, then eliminated (1994). External trade 93. still controlled by GMB. Maize meal subsidies abolished, consumer prices decontrolled. Malawi Pre 1987 - Pan-territorial pricing encourage production in Northem 1987 - Premiums set for maize delivered to main depots. Target of zero loss on ADMARC maize Districts. ADMARC subsidized maize producer prices and account. fertilizer. 1995 - Removal of price setting but maize price bands were established. Kenya Pre 1988 - Increase in the National Cereals and Produce Board (NPCB) 1988 - NCPB price margin narrows, limited unlicensed trade allowed. purchase price. NCPB margins squeezed as imported maize 1991 - Further relaxation of district trade limits. sold at subsidized prices. 1992 - NCPB unable to defend ceiling price, movement restrictions tightened. 1993 - Unable to defend floor price. 1994 - Liberalization of internal trade; continued restrictions on external trade. South Africa Pre 1987 - Single channel fixed price scheme, prices set on a cost plus 1987 - Fixed producer price replaced with advanced price and supplementary payment to ensure maize basis. account breaks even ('pool pricing scheme'). 1993 - Direct farmer-to-miller trade permitted, subject to levy payment and approval. 1995 - Maize price controls removed, restrictions on private maize purchases and sales removed, l________________________________________________________________ _ imports liberalized with zero tariff. Mozambique 1981- Parastatal set up - Agricultural Marketing Enterprise (AGRICOM) 1994 - AGRICOM abolished, debts written off- Instituto de Cereais de Mozambique (ICM) created and to provide markcting services. acted as buyer of last resort, farmers paid pan-territorial minimum price, manage strategies - Prices administered on a pan-territorial basis, maize production stocks. Concerns on operations efficiency increase by 165% between 1986 and 1991. Lesotho 1980/81 - Food self-sufficiency program initiated. Producer price set well 1996/97 - Initiation of policy reform - deregulation of domestic and international grain trade. above world prices - even substantially higher than prices set - More recently, real producer price declined in line with the declining real price of maize grain in South Africa. imports from South Africa used as a reference for domestic price setting. - Pan-territorial pricing used. Botswana - Producers prices set on cost plus basis. - Move to border parity pricing. - Pan-territorial & pan-seasonal pricing. I Sources: Donovan (1996), Jayne and Jones (1997), Makenete et al (1997), Ministry of Finance and Development Planning, Bostwana, 1997, World Bank, (1997). Agricultural Incentives in Sub-Saharan Africa: Policy Challenges PRICE RESPONSE TO LIBERALIZATION Data collected on food producer and consumer prices in African countries has become a more formidable task in the 1990s than in the pre-reform period. The earlier food channels established by the marketing boards provided an effective avenue for recording prices and volumes of crops sold. The removal of these boards has made data collection more challenging. Much of the food produced in Africa is sold through informal markets and information on prices and volumes from these outlets is fairly scarce. Data available may not be truly representative of the respective average country prices. This caveat needs to be taken into consideration when interpreting some of the data provided in this section. Trends in maize producer prices will be reviewed by examining changes in the real producer price of maize (maize price/cpi ratio) [see Table Al l and A12 for the relative importance of maize in each country]. Producer's Prices The evolution of real domestic maize producer prices is presented in Table 5.2. Three periods are examined. The first is pre-reform, 1980-84, the second represents a time when many African countries adopted widespread economic reforms, while by 1990 most of these reforms were complete. Table 5.2: Real Producer Maize Price Trends. Real Producer Price index of Maize Coefficient of variation Country 1980-84 1985-89 1990-95/97 1980-84 1985-89 1990-95/97 Nigeria 100 168 198 15 37 32 Benin 100 120 103 38 17 26 Ghana 100 106 86 32 22 18 Togo 100 112 82 4 18 24 Mozambique 100 110 107 18 14 10 Uganda 100 129 115 66 25 31 Tanzania 100 105 152 15 13 33 Swaziland 100 118 81 4 7 18 Kenya 100 108 103 12 4 14 Botswana 100 101 71 11 14 9 Malawi 100 76 77 16 15 13 Lesotho 100 91 78 12 8 6 South Africa 100 89 68 11 15 13 Zimbabwe 100 85 87 14 12 27 The data on maize prices is only complete up to 1997 for Benin. For Botswana, Ghana, Malawi, Mozambique, Nigeria, South Africa, Swaziland, Tanzania, Zimbabwe the end date was 1996 and for Kenya, Lesotho, Togo, Uganda the end date was 1995. All prices are in local currencies. Source: FAO, World Bank, IMF. The evolution of these prices is highly linked to policy change. In the early 1980s, maize prices in many Southern Africa countries were set by the state at levels well above the world price in pursuit of their goal of food self-sufficiency. The phasing out of these controls began in the late 1980's through the early 1990's. The price declines in Malawi, Lesotho, South Africa and Zimbabwe resulted from early reform efforts bringing domestic producers in line with lower border parity prices. The variability in real prices has also changed over time. Between 1980-84 and 1990-1995/97, the maize price variation in seven of the fourteen countries was reduced. In several countries the cause of large price fluctuations, particularly in Southern African countries, is the effects of the weather. 80 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Indeed in 1983 there was a severe drought resulting in higher variability in the 1980-84 period. Again, in the 1 990s the effects of the drought were particularly apparent in Zimbabwe. Observations from Maize Markets in Africa A more detailed description of several individual country maize markets will be presented in this section to complement the discussion on price trends. Maize production in Nigeria is small relative to cassava, yams and sorghum but still accounts for about 7 percent of food production. The government has maintained a high level of intervention in the pricing, marketing and importing of food. Between 1986 and 1989, nominal food prices increased by between 200 and 500 percent (Donovan, 1996). This increase was largely the result of a decline in production and a ban on food imports. There has also been massive public sector involvement in schemes such as the National Strategic Grain Reserve and the National Buffer Stock Program. The exchange rate has had a tremendous impact on the domestic price of food. Currently maize is the most important crop grown in South Africa. It represents both the major feed grain and the staple food for the majority of the population. Maize accounts for about 40 percent of the value of crop production and about 15 percent of total agricultural production. It is also a major agricultural export. In the past, maize was marketed through a control board established under the marketing act of 1968. This required strict government regulation. Maize was sold under a single channel fixed price scheme, with the Maize Board functioning as a monopolist. In 1987 maize pricing transferred to a pool-type pricing scheme with a gradual move towards a more market based approach. In the past, prices were often set above market clearing levels and recent changes in the grain industry from a cost-plus pricing policy to a market based system led to substantial declines in the real producer price of maize. The 1990s witnessed the abolishment of the maize board with free trade in maize. Recent market developments have included the sale of a number of agricultural commodities, including maize, through SAFEX (South Africa Futures Exchange). In Kenya maize is the dominant food crop, followed by cassava. Like most African countries the Kenya maize market has a long experience of government intervention, dominated by a Maize Marketing Board. After independence, this Board and the Wheat Board formed the National Cereal Producers Board (NCPB). Five hundred new NCPB buying centers were subsequently created (Donovan, 1996). However, as of 1988, financial pressures led to the restructuring of NCPB with a phased closure of NCPB collection depots and debts were written off. In 1994, NCPB was established as a buyer of last resort. The record of reforms in the 1990s has shown inconsistent commitment in allowing free movement of maize in the country and also on price liberalization and restructuring of the state marketing board. Progress in these areas was reversed in the early 1990s. Since 1994, there has been a renewed commitment towards liberalization with agreements for complete liberalization on maize movements and price controls (Donovan, 1996). In Tanzania, the process of maize market liberalization progressed more rapidly than in other countries. In the early 1980s, state support to smallholders largely collapsed and parallel marketing had come to dominate food marketing. Pan-territorial prices were removed together with the statutory monopoly in the procurement and distribution of maize. At the same time private sector participation in maize marketing was encouraged. 81 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges In Malawi, maize was always traded privately with the Agricultural and Marketing Development Corporation (ADMARC) commonly using private traders as buying agents. ADMARC's functions were to subsidize inputs, stabilize prices and market the maize collected. In 1985-86, as a result of a financial crisis, ADMARC was unable to ensure these functions. The crisis compelled the government to undertake substantial reforms to improve the efficiency of agricultural marketing. Pan-seasonal and pan-territorial prices were removed resulting in a significant expansion of private maize trade. In 1992, additional restrictions were removed allowing a free movement of maize within the country. Licenses for trade are, however, still required. This move to a more liberalized system further resulted in substantial private sector development and private traders paid producers more than the ADMARC price. The Government still sets a floor price for maize. Zimbabwe, after many years of state control in the maize market, implemented widespread market reform in the late 1980s and early 1990s. The government removed price controls, reduced expenditures on subsidies, relaxed import licensing and foreign exchange controls. There was also a move towards a market-determined exchange rate, elimination of the maize market parastatal deficit, and a new price stabilization role for the marketing board. Even though 17 additional permanent buying stations were established during 1985-92, the number of seasonal rural buying stations declined from 135 in 1985 to 42 in 1989 to nine in 1991 (Jayne et al, 1994). This decline suggests that the rapid and extensive investment in rural areas after independence proved to be unsustainable. Government continues to intervene in the maize market particularly in drought years. After the 1992-93 drought, the Grain Marketing Board announced substantially higher official producer prices fixed well in advance of planting. These improved incentives resulted in a bumper crop, while the GMB accumulated unsalable stocks and the trading deficit rose to 2.8 percent of GNP in eight months (Jayne and Jones, 1997). In 1995-96, the Board set a producer price too low relative to market prices and lost market share to private traders and millers. The government continues to set ceiling prices on maize meal. Maize is the dominant food crop in Lesotho accounting for 77 percent of all food produced in the country. Other important food crops are sorghum and wheat. There has been continued government support for the maize producer price with strong intervention in the marketing system. Producer prices were set by the Ministry of Agriculture. Moreover under the Food Self-Sufficiency Program initiated in 1980/8 1, these prices were set well above world prices and were substantially higher than the prices set in South Africa. Imports, including food aid, constitute over 50 percent of total annual consumption. Most households in Lesotho are deficit producers and formal maize marketing is very limited with only three mills in Lesotho (Lesotho Flour Mills, Maputsoe and Maseru Roller Mills with the later two being owned by Lesotho milling company)[Makente et al, 1997]. Most of the maize processed by these mills is from commercial imports. Additionally, due to the high transaction costs, relatively high local prices and inconsistent quality compared to that of maize from South Africa, these companies are reluctant to expand purchases of domestic maize. Import permits for commercial and non-commercial uses of maize are only legally issued by the Lesotho Government, through the Department of Economics and Marketing. Uniform or pan-territorial pricing strategies have been used for the whole country and over the last ten years real domestic producer prices in Lesotho have declined steadily. This decline is due to the falling real prices of maize grain imports from South Africa, which was used as a reference for domestic price setting. 82 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The analysis suggests that the reforms have not resulted in real producer price increases for maize which have consequently had a negative impact of production. While maize producer's do not seem to have benefited much from these market reforms, consumers have received substantial benefits (Box 5.2 as an example). Box 5.2: Producer Price Declines and Consumer Price Benefits in South Africa. Agricultural policies in South Africa have long been characterized by pronounced biases towards large-scale farmers. As a consequence, income and wealth distribution, especially in the rural areas, have been skewed in favor of large-scale, overwhelmingly white farmers, most noticeably through land ownership rights (Kirsten and van Zyl, 1996, Deininger and Binswanger, 1995). These policies have included interventions in input and output markets, income transfers and legal restrictions on land ownership. The input policies included subsidies on inputs, tax concessions and cheap credit, while a system of marketing boards provided producer prices that where higher than the corresponding border parity prices for most agricultural products. According to Kirsten and van Zyl (Table 9.10, p 225, 1996) price support instruments were equivalent to approximately 6 per cent of agricultural revenue while non-price support transfers to agriculture were equivalent to approximately 10 per cent of the value of agricultural production. These estimates are based on the levels of market price support and non- price support between 1988 and 1993. In recent years most input subsidies have been removed, and as of 1987 price controls on commodities have been reduced as part of a progressive move to more market-based prices. Townsend and McDonald (1998) used a social accounting based model derived from the price dual (Roland- Hoist and Sancho, 1995) to explore the effects of changes in South African economic policies from those in place in 1988. These experiments include examining the income distribution effects of a 6 per cent reduction in agricultural price support. The results below, show the consumer price effects of the decline in producer price support. As income increases within racial groups, (income quintiles) the effect, in terms of the reduction in consumer prices, appears to decline. Hence, as would be expected, the poorer groups in South Africa will tend to benefit most from agricultural price liberalization. It is also apparent that Coloured and Black households benefit most and White households least. The clear exception is the lowest income Black households. These households seem to benefit less than the next quintile; this may be a reflection of their relative lack of involvement in market activities due to very low incomes. Household Effects of a 6 per cent Reduction in Price Support (% change in consumer prices/costs) Income Quintiles* Whites Coloureds Asians Blacks' Lowest Ql -1.23 -1.77 -1.54 -1.40 Q2 -1.07 -1.75 -1.44 -1.67 Q3 -0.98 -1.68 -1.31 -1.57 Q4 -0.93 -1.42 -1.16 -1.46 Q51 - (ninth decile) -0.84 -1.30 -1.07 -1.29 Highest Q52 - (upper most decile) -0.78 -1.14 -0.96 -1.18 * These are the groupings used in the national accounts Source: Townsend and McDonald (1998) 83 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Consumer's Prices In a recent study, Jayne et al (1995) examined the impact of reforms on the real food price trends in several African countries (Table 5.3). Their report shows that grain and grain meal prices have declined since the adoption of maize market reforms in five of six countries examined. The exception was Zimbabwe where prices increased with the removal of maize meal subsidies keeping consumer prices low. Jayne et al (1995) identify the main factors influencing the decline in prices as being: i) better transmission of declining real world prices into the domestic economies by removal of trade barriers (Mali, Ghana); ii) increased food aid in the reform. period (Mali and Ethiopia); and iii) increased competition and lower costs in food marketing and processing which reduces marketing margins (Zambia, Zimbabwe, Mali and Kenya). As the major aspects of reform were initiated, miller-to -retail marketing margins appear to have fallen. Table 5.3: Changes in Retail Food Prices since Pre-Reform Periods. Pre-reform % change since pre-reform Country Crop Phase I Phase 2 Phase 3 Mali Sorghum, Bamako retail 100 +16 -21 Rice, Bamako retail 100 -I -16 Ghana Maize, wholesale, average of 3 markets 100 -16 -29 Sorghum, wholesale, average of 3 markets 100 -18 -38 Millet, wholesale, average of 3 markets 100 +3 -21 Yams, wholesale, average of 3 markets 100 +26 +4 Cassava, wholesale, average of 3 markets 100 +33 -7 Ethiopia Teff white, Addis Ababa, retail 100 - -17 Maize, Addis Ababa 100 - -II Wheat white, Addis Ababa, retail 100 - -3 Barley white, Addis Ababa, retail 100 - -6 Kenya Official ex-depot maize grain, Nairobi 100 -20 -17 Official producer price, Kakamega 100 -5 -7 Refined meal, official retail, Nairobi 100 -5 -2 Refined Meal (retail plus subsidies), Nairobi 100 -14 Maize grain, retail, Nairobi markets 100 -12 -29 Zambia Official ex-depot maize grain, Lusaka 100 -30 Official producer price 100 -26 Roller meal, official retail, Lusaka 100 -21 -4 Roller meal (retail plus consumer subsidy), Lusaka 100 -10 -31 Zimbabwe Official ex-depot maize grain 100 -29 . +21 Official producer price 100 -16 +24 Roller meal, official retail 100 + 16 +54 Roller meal, official retail plus subsidies 100 +24 +26 Data based of the following periods. Pre-reform Phase I Phase 2 Phase 3 Mali 1970.10 - 1981.09 10/1981 - 09/1985 10/1985 - 12/1994 Ghana 1980.01 - 1983.09 10/1983 - 08/1985 09/1985 - 1211990 Ethiopia 1980.01 - 1990.05 06/1990 - 12/1994 Kenya 1980.01- 1988.06 07/1988 - 12/1993 01/1994 - 09/1995 Zambia 1980.04- 1986.03 04/1986- 03/1993 04/1993 - 08/1995 Zimbabwe 1980.04- 1991.05 06/1991 - 05/1993 06/1993 - 09/1995 Source: Jayne et al, 1995. 84 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Jayne et al (1995) conclude that "The weight of the evidence indicates that consumers, especially urban consumers, have in most cases benefited from the food marketing and pricing reforms initiated in the countries examined (pg.2)". The opening up of the market to private traders has mitigated some of the adverse effects of declining subsidies (transportation, pricing) while lower grain processing costs have reduced the wedge between producer prices and consumer prices (Jayne and Jones, 1997). Market Integration The aggregate price trends presented in the previous sections conceal the price variation across grain crop markets within a particular country. In many African countries these price variations can be extreme. In some areas, markets are isolated and food prices tend to only reflect supply and demand conditions in that particular area. The price elasticity of market demand is usually lower in these isolated markets than in highly integrated markets as the confined geographic coverage and lack of sectoral diversity offer limited substitution possibilities (Fafchamps, 1992). As food markets become more integrated, the variance in prices is likely to decline and the yield variability over large geographic markets is likely to smooth out local price disturbances. Benefits not only come from geographic or horizontal integration but also from vertical integration (Table 5.4). Table 5.4: The Advantages of Market Integration. Market Integration Vertical Integration Horizontal Integration * Production/logistical economies * Higher price elasticity of market demand * Transaction cost economies * Lower variance of prices * Risk-bearing advantages * Reduces correlation between crop revenues * Advantages in the presence of market * Decreases small farmer need to rely on their own food imperfections production Source: Adapted from Jaffee (1995) and Fafchamps (1992). There is evidence that market integration has improved with the recent changes in marketing policies (see also Box 5.1) (Goletti and Babu, 1994, Dercon, 1995 and Badiane, 1997). Goletti and Babu (1994), in their study of the effects of maize market liberalization on market integration in Malawi, find that the transmission of price signals among various regions of the country has improved as the process of price formation was progressively transferred into the hands of the private sector. The simple idea is that increased spatial price arbitrage would smooth prices between markets and improve market integration. In many African countries, continued investments in marketing infrastructure are required to enhance this effect and Malawi is no exception (Golletti and Babu, 1994). Badiane et al (1997) corroborate these results, in a recent study on maize market integration in five African countries. They find that in three of these countries (Benin, Ghana and Malawi) markets have become more integrated. Again in Ethiopia, a similar result was found in the teff markets. Liberalization, and to a lesser extent peace, improved the functioning of the markets and increased the prices paid for teff in the main producing areas (Dercon, 1995). The past teff quota system in Ethiopia suppressed private trade resulting in high spatial margins which have subsequently been reduced. The re-emergence of an effective number of grain traders in African markets is indeed a critical issue. As a large proportion of rural households are actually net buyers of grain, even in normal years, there needs to be a continual encouragement of the emerging private sector as food security will depend on their ability to reduce the costs of food to the grain deficit and generally poor areas. 85 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges ENHANCING PRIVATE TRADER EMERGENCE In a recent study of food markets in Benin, Senegal, Ghana, Malawi and Madagascar, Badiane et al (1997) find that the investment response by private traders is largely determined by market location, area covered by traders, liberalization of marketing policies, favorable exchange rate policies, the profitability of trading activity and the education level and experience of the traders. Accelerating the speed of investment response in these markets would require an increase in the supply of infrastructure in the immediate marketing area. This should allow greater opportunities to expand trading activities to cover wider areas and provide a stimulus for higher investment levels. Mobility Barriers Many studies on private trader's response and activity (Beynon et al, 1992; Duncan and Jones, 1993) indicate a fairly high level of competition and show limited evidence of barriers to entry into primary grain marketing activities. However, when the full spectrum of marketing activities is examined (both primary and secondary), several studies have shown mobility barriers to be a significant constraint to market entry into several marketing niches. Mobility barriers continue to inhibit widespread private sector entry into all niches Millers across the marketing chain. The extent of these barriers varies at different stages of the chain. Sub-collectors Several of them have been identified in a recent study on trader entry into food markets in Casual retailers Madagascar (Barrett, 1997). Subgroups of the >> marketing chain which require substantial start-up .> Shot-haul transport costs or inventories, including activities like W wholesale collecting, long-haul transport and Mr inter-seasonal storage, result in relatively closed Wholesale collectors niches (Figure 5.1). Limited capital access can be a serious barriers to entry. Political risk or Inter-seasonal stockers credibility of reforms also hinders private entrepreneur's entry into activities with large Long-haul transport political uncertainty (ie: storage activities in l l l l l Madagascar food markets). Access to spare parts 0 20 40 60 80 100 and energy supplier networks also provide a Percentage of the market significant barrier. In many countries the natural economies of scale in long-haul motorized Figure 5.1: Post Liberalization Market Entry transport are accentuated by poor road conditions into Madagascar Food Markets. and limited spare parts and fuel availability. Source: Adapted from Barrett (1997). Typically, motorized transporters own more than one vehicle in order to realize economies of scale in spare parts inventories and to redirect vehicles so as to ensure cargoes do not perish and important pickup and delivery dates are not missed. The need for a reliable power source seems to have concentrated grain mills near large towns where electricity and fuel stations are available. Mills in the smaller towns uniformly rely on diesel, but electricity is the cheapest and normally preferred source of power in many countries. 86 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 5.3: Trader Entry and Mobility Constraints in Liberalized Food Markets in Madagascar. Barrrett (1997) examines trader entry into different niches of the marketing chain in the Vakinankaratra food markets in Madagascar. Liberalization of markets was initiated in the early 1980 and as of 1985 there has been: . Large private sector entry into markets (52% of sample in Barrett, 1997). * A significant increase in food prices (60% for rice). There has been striking intersectoral variation in the proportion of intermediaries who entered since liberalization. Ranking of the five most important determinants of success by market activity. Collectors Transporters Inter- Retailers Sub Wholesale Short- Long- Millers seasonal Casual Wholesale haul haul stockers Personal rep & relationships *'*** ** ***** ** ** *** **** **** Access to credit **** ***** ***** ** * Price paid *** * *** * ***** ***** Ability to evacuate crop ** Willingness to extend credit * **** * ** Communications link * * Capacity ** *** *** Network breadth * **** ** Access to spare parts ***** ***** Technology used *** * Supplier network *** Post-liberalization market 71% 33% 50% 28% 75% 30% 58% 41% entry Mean equipment sunk costs 0.4 10.5 0.5 197.1 34.3 56.6 0.02 1.9 (FMG mn) Source: Adapted from Barrett (1997). Five stars means most important. Barrett (1997) identifies five main interrelated barriers to intergroup movement within the marketing channel, interlinked contracts, capital access, sunk costs, political risk, access to spare parts and energy supplier networks. Interlinked contracts - Traders, especially sub-traders (crop collectors) depend on personal relationships for success, a factor which impedes a prospective entrants' ability to separate contracts according to comparative advantage. Capital access - This can be a serious barrier to entry into subgroups which require substantial start-up costs or inventories. Barrett's (1997) survey results show that 47 percent of the intermediaries in relatively closed niches (wholesale collecting, longhaul transport, interseasonal storage) used bank credit, while for the other sub- groups only 7 percent did. Sunk costs - The Table above shows the different sunk costs in the market niches, these are negatively correlated with trader entry. Political risk - Memories of government expropriation of private marketing intermediaries such as silos, vehicles, and warehouses discourages private entrepreneurs from investing in these assets given the continued political uncertainty. Access to spare parts - natural economies of scale in long-haul, motorized transport are accentuated by poor road conditions and limited spare parts and access to fuel. Most motorized transporters own more than one truck in order to realize economies of scale in spare parts inventory and to be able to redirect vehicles so as to ensure that cargoes do not perish and important pickup and delivery dates are not missed. Access to energy supplies -Mills are located near large towns as they need a reliable source of power. Moreover, electricity and fuel stations are only available in or near these centres. Mills in ihe smaller towns uniformly rely on diesel, but electricity is the cheapest and preferred source of power. Price - An interesting observation from the above table is that price is only viewed as an important determinant for success in the markets with more participants - ie: the more competitive markets. In the case of long-haul transport and storage, price does not seem to be an important issue. Removing these barriers to entry and increasing competition in these niches may improve market efficiency and reduce food prices. Source: Barrett (1997). 87 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Removing barriers to entry into these marketing niches may improve market integration and efficiency . The government can play a role in removing some of these barriers and in stimulating the confidence and growth of the private sector through the provision of a number of public goods and services. These include stable and transparent policies to improve its credibility, an effective legal system to guarantee property rights and contract enforcement and the development of transportation and communications infrastructure. The latter of these measures is critical. Even though traders may be in favor of reforms and have access to credit, they may still lack incentives to invest in expanding marketing activities due to the high transaction costs created by the segmentation and thinness of the local markets. Transportation Costs As highlighted in the previous sections, improving the efficiency of marketing and transport systems can contribute to enhancing producer price incentives and ultimately complement and strengthen price liberalization. An important source of data is provided in an early comparative study by Ahmed and Rustagi (1987), which contrasts marketing costs and price incentives in African and Asian countries. Their study found that average producer prices expressed as a percentage of final consumer prices in the African countries ranged from 30-60 percent, while for Asian countries they ranged from 75-90 percent. Taxes and trade profits justified roughly a third of the differences in price spreads between the selected countries of Africa and Asia, while over two-thirds of the difference was explained by trangport and transaction costs. Hence, the level of infrastructure development has suppressed producer prices and inflated consumer prices in African countries compared to their Asian counterparts. In the African countries analyzed by Ahmed and Rutsagi (1987), transport costs alone accounted for 3 5-40 percent of the total marketing costs of food grains. The pursuit of policies, such as pan- territorial pricing, has continued to inhibit private sector investment in transportation and storage. In several African countries, other 12 barriers include trade regimes which require 10 - licenses for grain trade, and whose effect has g 8- been to hinder private imports and exports thus i reducing the potential to stabilize food supplies. r Unofficial road blocks erected by local authorities to collect money are also common 2- (Niger and Madagascar). Transportation costs 0 vary significantly across African countries with Benin Madagascar Malawi Senegal road and transportation infrastructure tending to (maize) (rice) (maize) (rice) be better and more developed in the West African countries. Badiane et al (1997) show Figure 5.2: Transportation Costs in Four African transport costs in Malawi to be about ten times Countries. higher than those of some West African Source: Badiane et al, 1997. countries (Figure 5.2). While a reduction in transportation costs is likely to raise spatial arbitrage and market integration, higher storage activity is required to increase temporal arbitrage (to smooth out seasonal price fluctuations). Many traders in African countries tend to share storage facilities and, with the uncertainty 88 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges of the maize market (many substitutes), traders do not store large quantities of cereals for long periods of time. Moreover, lack of familiarity with storage techniques aimed at reducing losses plays against such an activity. Access to credit is also a problem due to high interest rates, lack of collateral, short period of loan term and complicated administrative procedures (Badiane et al, 1997). INCENTIVE POLICIES AND FOOD SECURITY The challenge of food security is complex due to the plurality of elements that come into play such as supply and demand issues and technology and policy, all of which interact with the three main food security components, namely food availability, food access and food utilization (McCalla, 1998). As there has been recognition that food security is no longer synonymous with food self sufficiency there has been a gradual shift from focusing of food production towards a focus on trade and income generation, issues which will become increasingly important. Although far from exhaustive, this section will briefly elaborate on several policy issues related to food security. Food security remains high on the agenda of African governments and, as a result, there has been continued interventions in food markets. As a consequence of the need to get food into markets for sale at prices that consumers can afford, governments have been reluctant to divest public storage and processing. However, in many Sub-Saharan African countries, consumer prices have been successfully stabilized through the development of informal marketing channels for low cost commodities. As a large proportion of the rural households are made up, in normal years, of net buyers of grain, the costs of food supplied to the grain deficit and generally poorer areas are critically important to food security. In these circumstances, emerging private trader's ability to reduce these costs will determine the effect of market reforms on these households. Concerns over these food delivery systems were illustrated by the difficulties encountered in marketing and delivering grain from domestic strategic grain reserves and from emergency donor supplies in many of the Eastern and Southern African countries during the severe 199 1/92 drought. Policy linkages with food security are extensive and include employment policy, land distribution, macro-economic growth, distribution of the gains from growth, population growth and income stabilization. A more direct impact on the ability of low-income households to acquire entitlements to adequate food include policies on food production, marketed food supplies, food trade, and food price stabilization. Shifts in domestic food production, for example, directly affect the factor income of household members working in the agricultural sector, whilst changes in food import prices affect the real incomes of households who are net food purchasers. Some of these policy interactions are illustrated in the Mozambique example (Box 5.4). One often overlooked and critical issues in the policy dialogue on food security is related to gender. Blackden and Bhanu (1998) show through an extensive survey of micro-level studies, that women account for far more of the agricultural labor force than men and they occupy a central position in economic production. Their survey also suggests that women account for more of the time spent on food production than men. However, due to the multitude of tasks women perform in the household (collecting fuel wood and water, preparing meals, etc.) labor constraints severely restrict their response to economic incentives. The labor time allocated to agricultural production is thus primarily spent on ensuring food security. Policies focused on reducing food insecurity in rural households must thus focus on reducing the time burden for women farmers. This includes developing appropriate labor saving technologies explicitly accessible to women covering the full range of their domestic and economic tasks (Blackden and Bhanu, 1998). 89 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 5.4: Food Security in Mozambique. Characteristics Progress towards improved and sustainable food security in Mozambique has been characterized by: . increasing per capita calorie availability in the face of dramatic reductions in food aid; * further lowering and stabilizing prices for the principal domestically produced staple, white maize. An example of this is the average real price of white maize in Moputo which declined by 40%, while the standard deviation declined by 44% between March 1990 and March 1992, and March 1993 to January 1996, pre- and post-drought periods; . developing a food system now providing consumers with a broader range of low-cost staples from which to choose (Tschirley and Weber, 1996). Determinants * the ending of the war * monetization of yellow maize food aid * key policy changes: > removal of movement restrictions across districts and provincial boundaries; => elimination of the system of official geographic monopolies for registered private traders, which created a surge of private traders; , market-oriented means of distributing monetized food aid where grain was sold by donors directly to private wholesalers - fueled growth in trading sector and the small-scale maize milling sector. Mechanisms . Rural and urban areas have been linked through trade flows - Integration of maize markets between southern, central and northern maize markets has improved dramatically and incentives to producers have increased. As a result, production has increased greatly. * Maize has been channeled through the small-scale milling sector - over one thousand hammer mills have spread throughout the country. * Cross-border trade in food products has greatly facilitated changing money in the infonnal foreign exchange markets. Future Challenges Continuing progress towards sustainable food security will depend on: * consolidating reforms in the trading sector. Food security in the drought-prone southem areas and production incentives in the more productive northern areas will both depend on trade. Simplifying international trade policy and clarifying the national regulatory environment are both important steps of ensuring and strengthening regional and internal trade links. * investing in cost-reducing marketing infrastructure. * investing in the country's ability to identify and disseminate improved production technologies as increasing agricultural productivity is essential for long term growth. This will require investnents into the research and extension system and private sector input distribution. * continuing investment to improve the information base on food production, marketing, prices and consumption, as well as on socio-economic characteristics of smallholder households. Source: Tschirley and Weber (1996). SUMMARY AND CONCLUSIONS Market liberalization has been widespread across food markets in Africa. Interventions in these markets tend to have been more extreme in Eastern and Southern African countries. * Throughout the 1980s, official maize producer prices exceeded export parity prices in the major production regions (Kenya, South Africa, Zimbabwe - typically exporters). These prices have declined to lower border parity levels with market liberalization. In some African countries the decline in real producer prices has been partially offset by improved market efficiency with 90 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges increased private sector entry into these markets. Between 1985-89 and 1990-95/97, 10 countries of the 14 countries analyzed experienced a decline in the real producer price of maize. * Lower grain processing costs, made possible through liberalization, have reduced the wedge between producer and consumer prices in many countries. There are several examples where consumer prices have been successfully stabilized in the Eastern and Southern African region through the development of informal marketing channels. Consumers have been the major beneficiaries of the reforms with market liberalization reducing marketing and processing costs. * In the period since food market reforms, food prices, including maize, have generally declined. Five of the six countries reviewed experienced a decline in real food prices since pre-reforms. Many of these countries have witnessed an increase in competition and lower costs in food marketing and processing thus reducing marketing margins. * There is some evidence that market integration has improved in many African countries (Ethiopia, Malawi, Ghana and Benin). However, many markets remain isolated with prices reflecting only local supply and demand conditions. * As a large proportion of rural households are net buyers of grain in normal years, the effects of reform on these households will depend on the ability of emerging private traders to reduce the costs of food to the grain deficit and generally poorer areas. - Women account for a larger proportion of the time spent on food production than men. Given the multitude of tasks women undertake in the household (collecting firewood and water, cooking, etc.) and the significant labor constraint they face, policies to ensure food security will require the development of appropriate labor saving technologies which cover the full range of their domestic and economic tasks. 3 Private traders have emerged to take over the marketing responsibilities in many liberalized food markets in Africa. However, their investment response has been limited where markets are isolated and where there have been backsliding of marketing policies, unfavorable exchange rate policies and low profitability of trading activities. Mobility barriers continue to restrict widespread market entry into several marketing niches across the marketing chain. There has been lower market entry into subgroups of the marketing chain which requires substantial start-up costs. i High transportation costs in Africa have inflated consumer prices and suppressed producer prices and account for a large share of marketing costs. These costs vary significantly across African countries with road and market infrastructure tending to be better and more developed in West African countries. The pan-pricing structures pursued by many African governments in the past have depressed private investment in transportation and storage. * Trade restrictions on private imports and exports of grain have impeded the potential to stabilize food supplies and prices. In many African countries, the private sector has performed relatively well in the liberalized markets with the reduction in the wedge between producer and consumer prices. However, governments have been reluctant to divest public storage and processing due to the food security concerns in many countries. Policy reforms have also been reversed in several African countries with the reintroduction of fixed pricing. If the private sector is to be encouraged to enter these markets, then government commitment to reforms is essential. Other complementary activities again include investing in rural infrastructure, removing trader mobility barriers (political uncertainties, adequate energy supply network and improving access to credit) and removing trade restriction on private grain imports and exports. 91 6. FERTILIZER POLICIES, PRICES AND MARKETS FERTILIZER CONSUMPTION TRENDS The low fertilizer consumption in Sub-Saharan Africa continues to raise concerns about the continent's ability to overcome its food production problems, which are exacerbated by high population growth rates across the continent19. In 1994, fertilizer application rates in SSA were, on average, one fifth of the rates used by other developing countries (Table A16). A large part of this difference is due to the dominance of rainfed agriculture in Africa, compared to irrigated agriculture in regions such as Asia, as well as to the land ecology which dominates in Africa (Voortmnanet al, 1998). Although these averages mask the great contrasts in fertilizer use across countries, with some (Mauritius and Swaziland) applying fertilizer at the same rate as other developing regions, the fact remains that fertilizer use in Africa is disproportionately low. These low application rates have severe consequences on the fertility of the soil and the sustainability of agricultural production. Evidence suggests that most farmers are not adequately compensating for soil nutrient loss caused by intensive cultivation practices (Donovan and Casey, 1998). Indeed, the declining soil fertility has been highlighted as a major reason for slow growth in food production in Sub-Saharan Africa (Sinchez et al, 1995). In other developing countries the 'fertilizer revolution' (ie: in Indonesia, Brazil and China fertilizer consumption has doubled since 1980) has been an integral part of the 'green revolution', without which, the recent progress in achieving food security worldwide would not have been possible (World Bank, 1996). Green Revolution technology requires using high yielding crop varieties with reliable water supply in combination with macro-nutrient fertilizer application to which these varieties are responsive. A recent study by Voortman et al (1998), compares the land ecology of Africa and Asia, noting that the soils in Africa (derived largely from metamorphic Basement Complex rock, which are different from the alluvial and volcanic soils,20 prevalent in Asia) is one of the primary causes for the lack of replication of the Green Revolution in Africa. While macronutrients (nitrogen, phosphorous and potassium) are important at replacing nutrients most used by crops21, they suggest that more attention in Africa be paid to correcting chemical imbalances and deficiencies of essential micro-nutrients. 19 Since 1970, cereal production has increased by 2.5 percent per annum which has been exceeded by the 2.9 percent annual population growth. 20 These soils are relatively young and have a large mineral reserve. The parent material often consists of layers of different materials (tuff, volcanic ash and lava) that differ in both origin and chemical composition and are likely to provide a broad spectrum of plant micro-nutrients. The essential micro-nutrients are less prevalent in the soils in Africa. 21 Estimates for 38 countries in SSA suggest that annual loss of nutrients per hectare during the 1980s was 22kg of N, 2.5kg of P, and 15kg of K (Weight and Kelly, 1998). 93 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Between 1950 and 1989, about 50 percent of the increase in world food production was due to increased fertilizer use (World Bank, 1989). In Sub-Saharan Africa most of the growth in agricultural output has been the result of area expansion as opposed to gains in yield. Therefore, yield increases will become more important as land becomes scarce. 800 60 - Q 40-3- 20 Ii2u 1965 1970 1975 1980 1985 1990 1995 v 0- Year ¢ -I Latin America & Carribean MENA EAP S.Asia SSA LAC - Middle East & North Africa 3 Annual % Change in Yields + South Asia Sub-Saharan Africa * Annual % Change in Area Planted Figure 6.1: Regional Differences in Fertilizer Figure 6.2: Regional Differences in Cereal Application Rates. Production, Area Planted and Yields, 1975-1995. Source: World Development Indicators, 1998. Source: World Development Indicators, 1998. THE EVOLUTION OF FERTILIZER POLICIES AND MARKETS The fertilizer policy environment has had a significant effect on fertilizer markets in SSA. In the late 1970s and the early 1980s, fertilizer subsidies were adopted by almost all countries in the region. This intervention distorted prices and led to an unreliable, high cost marketing and distribution system with a limited choice of basic fertilizers. Explicit fertilizer subsidies were widespread, in 1982/83 prices were subsidized by 25 percent in Malawi, 60 percent in Tanzania, 50 percent in Cameroon, 46 percent in Senegal and 85 percent in Nigeria (Lele et al, 1989). Implicit subsidies were also prevalent across almost all countries with an overvaluation of most currencies. It is clear that these subsidies placed a huge direct pressure on government budgets with economy-wide implications. Obviously, removing these interventions clearly goes beyond agriculture22. It is apparent that while causing significant budget costs, these subsidies did not significantly effect aggregate fertilizer consumption in Sub-Saharan Africa (Figure 6.1) and thus did not appear to be the most efficient use of public resources to stimulate agricultural production and reduced poverty. 22 Arguments commonly used to justify fertilizer subsidies include: i) compensating farmers for taxes levied through low output prices; ii) trying to overcome farmer risk aversion and help overcome credit constraints; iii) speeding up adoption of agricultural innovations in the early phases of uptake and iii) alleviating the problem of declining soil fertility (fallow systems and other means used to sustain soil productivity in the past breakdown under population pressure). Arguments against fertilizer subsidies include: i) larger farmers being the main beneficiaries; ii) inefficient allocation of resources and iii) public funds devoted to subsidies would be better spent improving infrastructure and investing in other measures aimed at developing an efficient private sector importing and marketing fertilizer. Alternatively expenditures on research and extension would help to spread the availability of more fertilizer- responsive crop technologies and communicate to farmers the best fertilizer recommendations (Donovan, 1996; Lele etal, 1989). 94 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Since the late 1980's, with the adoption of structural adjustment programs, many African countries implemented widespread fertilizer sector reforms. Elements of these early reforms were: i) the removal of fertilizer subsidies that reduced the price of fertilizer below border parity levels; ii) public marketing monopolies for import and distribution of fertilizers were retained as they were often seen as more efficient than competitive marketing due to bulk purchasing; iii) the public fertilizer monopoly exclusively handled procurement while attempts were made to liberalize fertilizer marketing at the wholesale level and iv) a large part of the reform effort included privatizing fertilizer retailing. Recent thinking on fertilizer marketing include: i) encouraging competition and autonomous price formation by supporting appropriate policy and institutions (regulations, commercial and contract law, standard weights and measures, good price information and liberal trade licensing); ii) tariff and non-tariff barriers on all fertilizer imports should be removed and farmers should be given unrestricted access to the full range of fertilizer available on world markets at near world market prices and iii) the private rather than the public sector should be supported by aid-supported fertilizer imports (Gisselquist 1994, Meerman 1996). By the early 1990s, most countries in SSA had removed their fertilizer subsidies and liberalized their distribution system with the encouragement of private sector participation. In a recent World Bank study of 29 countries, 22 of them had extensive fertilizer market controls and price subsidies in the past. By 1992, 14 of these 22 countries had removed these controls completely (World Bank, 1994). Only two countries, Nigeria and Malawi, retained extensive intervention. In recent years, both countries have liberalized their fertilizer markets. However, there are some concerns about backsliding on previous policy reforms in many countries. Although subsidies have been removed and internal distribution has been liberalized, non-tariff barriers in many countries (Benin and Ghana) continue to inhibit fertilizer trade. Several countries in SSA produce fertilizers (Burkina Faso, C6te d'Ivoire, Mauritius, Nigeria, Senegal, South Africa, Tanzania and Zimbabwe) but the bulk of the continent's fertilizer requirements are imported. Many African countries continue to rely almost exclusively on fertilizer aid. The removal of fertilizer subsidies has clearly had a beneficial effect on the fiscal balance. In many countries, the subsidy removal and devaluations of the domestic currency have increased fertilizer prices significantly. A general argument is that with the reduction of export taxes and liberalization of agricultural commodity markets, higher fertilizer prices would be offset by higher export crop prices. A common concern in SSA is that export crops are grown by a small number of usually better off farmers while most of the poorer households rely on grain production. Maize accounts for about 25 percent of fertilizer consumption in Sub-Saharan Africa while export crops such as tea and coffee account for less than one percent (Kelly et al, 1998). Grain farmers thus carry the full burden of higher fertilizer prices while not enjoying the benefits of higher export crop prices. This 'cost squeeze' has a significant effect on farm income and fertilizer use. There have also been concerns that farmer access to fertilizers has been reduced by removing parastatals that distribute and supply credit for fertilizer purchases. Past experience suggests that input markets serve farmers best when there is some degree of vertical co- ordination among input distribution, output marketing and credit functions, which lowers costs and improves loan repayment rates. The most successful examples of vertical co-ordination have been in sub-sectors producing industrial or export crops (cotton, for example). In such cases, increased access to improved inputs and more reliable output markets stimulate productivity in food as well as in cash crops (Kelly et al, 1998). 95 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges PRICES AND FERTILIZER CONSUMPTION Several price and non-price factors have been used to explain fertilizer use in Africa. These are summarized in Table 6.1 and include profitability of fertilizer use, human resources availability, financial liquidity, household assets, market access and extension services. Some of the non-price explanatory variables implicitly impact on price variables eg: the distance from the fertilizer market affects the fertilizer price, highlighting the complementarity between the two. Table 6.1: Summary of Fertilizer Adoption and Use Intensity Studies in Africa. Dependent variable Variable Explanatory variables Adoption of fertilizer Fertilizer use Intensity Groupings Included in the studies Sign Study/Authors Sign Study/Authors Fertilizer price Kimuyu et al (1991) Profitability Crop price + Kimuyu et al (1991) Crop-fertilizer response + Adugna (1997) Improved variety + Green and Ng'ong'ola (1993) Age Jha and Hojjati (1994) Dependency ratio Adugna (1997) Human > 5 yrs of schooling + Jha and Hojati (1994) Resources Literate household head + Demeke et al (1998) Female headed households + Demeke et al (1998) Farm labor + Mbata (1997), Green et al (1993) Hired labor used + Adugna (1997) + Adugna (1997) Farm income + Mbata (1997) Financial Off-farm income + Adugna (1997) + Adugna (1997) Liquidity Total farm sales + Jha and Hojjati (1994) Cash crop grown + Green et al, Demeke et al 1998 Credit + Mbata, Adugna (1997), Green et al + Kimuyu et al (1991), Adugna Use oxen + Jha&Hojjati (1994) Household Number of oxen owned + Adugna (1997) + Adugna, Demeke et al (1998) Assets Farm size + Mbata (1997) + (-) Demeke et al, (Adugna) Maize area + Mbata (1997) Distance to fertilizer market Jha & Hoijati; Demeke et al 1998 .Mfarket Fertilizer transport costs Mbata (1997) Access Member of Co-operative + Jha - Hojati (1994), Mbata (1997) Extension Extension + Mbata, Adugna, Demeke et al Source: Green and Ng'ong'ola (1993), Kimuyu et al (1990), Jha and Hojjati (1994), Demeke et al (1998), Mbata (1997), Adugna (1997). In Africa, many of these non-price factors are critical. Market access is a key constraint to many farmers who have to travel long distances to reach markets. Access seems to improve with co- operatives which can enhance economies of scale in purchasing. Lack of financial liquidity is also a key constraint to fertilizer adoption and the intensity of fertilizer use. In the past, grain farmers had greater access to credit through some of the marketing boards. Farmers, lacking resources and assets with differing attitude towards risk, are less likely to adopt fertilizer. Human resources and extension services are positively correlated to fertilizer adoption. Increased knowledge of improved farming techniques along with availability of resources to apply this knowledge are likely to increase fertilizer use (Demeke et al, 1998). Figures 6.3 and 6.4 show the range of values (minimum to maximum) for two incentive ratios that have been observed in Africa. Although non-price factors are important, prices remain an key determinant of the incentives provided to use fertilizer. There has been very little documented work on estimating demand elasticities for fertilizer in Africa. Most studies remain descriptive and lack empirical content due to insufficient 96 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges data to allow quantitative analysis. Several studies have attempted to estimate these elasticities for African countries showing that farmers are price responsive. Price elasticities of -0.82 to -1.08 were derived for Malawi smallholders (Chembezi, 1989) and -0.47 for South Africa (Khatri et al, 1996). Profitability remains one of the key factors determining the quantity of fertilizer used. Farmers will not use fertilizer if it is not profitable. Profitability is determined by the price of the crop grown, the price of the fertilizer used and the output response to the fertilizer application. Profit incentives are usually measured by the value/cost ratio23, with a general consensus that a ratio of greater than two is required for farmners to adopt fertilizer. It has been suggested that in high-risk production environments, the minimum ratio for adoption is three or four (Kelly et al, 1998). W. Af. Groundnuts W. Af Groundnuts W. A£ Millet W. Af Sorghum ' W. Af. Sorghum , E/S Af Sorghum' E/S. Af. Sorghum m W. Af. Rice (irr) W. Af Rice (irr) W. Af. Cotton W.Af.Cotton E/S. Af. Cotton E/S Af Cotton W. Af. Maize . W. Af Maize t E/S. Af. Maize E/S. Af. Maize 0 1 2 3 4 5 6 7 8 0 3 6 9 12 15 W. Af - East Africa Value/Cost Ratio Input/Output Price Ratio lW. At - East Africa W. Af. - East Africa E/S. At - Easter and Souther Africa E/S. Af. - Eastern and Southern Africa Figure 6.3: Fertilizer Profit Incentives. Figure 6.4: Fertilizer Price Incentives. Source: Kelly et al (1998). Source: Kelly et al (1998). Estimates of the value cost ratio suggest that the profitability of several crops in Sub-Saharan Africa are favorable to fertilizer use (Figure 6.3). The output/nutrient ratio is also commonly used to analyze fertilizer incentives. It shows how many kg's of additional output a farmer can obtain from a kg of fertilizer nutrient. This agronomic response varies widely among countries and regions, and although 23 The value cost ratio is the product value attributed to fertilizer use divided by the cost of fertilizer. Alternatively it can be defined as the product unit price to fertilizer unit price multiplied by the fertilizer response rate. 97 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges useful, it may be quite limiting unless additional information on how it was derived is given.Donovan and Casey (1998) provide a critical review of these technical considerations highlighting constraints to improving soil fertility and recommend actions to address them. The output/input price ratio is also frequently discussed as there is evidence that farmers use it in making their decisions (Kelly et al, 1996). These price incentives for several crops are highlighted in Figure 6.4. THE EVOLUTION OF FERTILIZER PRICES Enhancing these fertilizer adoption incentives will require improving crop prices relative to fertilizer prices, reducing fertilizer prices relative to crop prices or improving the agronomic response of fertilizer application. This section will focus on explaining the evolution of fertilizer prices and will examine the domestic price - world price ratio, identifying some of the key factors influencing price differentials across countries. World Fertilizer Prices Since 1980, real world fertilizer prices have declined by about 40 percent while the 200 _200 fertilizer price/grain price ratio has remained 150 - 150 relatively constant. The fertilizer price/export 100 1oo crop price ratio has been fairly unstable but the 50 50 1997 ratio was similar to the 1980 ratio (Figure s5 6.5). The fluctuations have been largely caused 0 0 , 0 by large export crop price changes. The trends 1980 1984 1988 1992 1996 in the world prices since 1980 suggest that the --Fertilizer price/grain crop price ratio price of fertilizers have not significantly -xFertilizer price/export crop price ratio price of frtilizers ave not sinificantlyFertilizer price/MUV ratio increased relative to the world price of exports and grain crops. Figure 6.5: World Fertilizer Price Ratios. Source: World Bank data. Domestic Prices In the post liberalization period, real farm-gate fertilizer prices have increased in most countries (Figure 6.6) largely due to the removal of subsidies, the increase in the world fertilizer price and the devaluation of domestic currencies. Urea provides an interesting example24; most countries experienced an increase in the real price of urea with more than a 50 percent rise in four countries (Cameroon, Ghana, The Gambia and Malawi [Figure 6.6]). The results suggest that in most cases, where a comparison can be made between an earlier period and a later period, the price ratio is higher in the later period (Figure 6.7). The changing ratio is 24 Cross-country price data on urea was readily available and was therefore used as an example. 98 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges likely to significantly influence fertilizer consumption. These relationships will be examined more closely in the case studies presented in later sections. World Price l Malawi 1977-87 World Price ~~~~~~~~~~~~~~1988-94 1982-87 Cameroon Ghana 1991-9 The Gambia Mali 1993 1994 Ghana 1980-85 Tanzania 1995 Malawi Nigeria 1985-92 Togo Post sdy C6te d'lvoire 1983 Ethiopia 1992 South Africa Zambia 1971-89 Zimbabwe 1990-94 Kenya Asia 1980-92 Burkina Faso Latin 1980-92 Nigeria America ._ . 0% 50% 100% 150% 0 5 10 15 1 t / > l *^ Ratio Figure 6.6: Change in Real Fertilizer Prices, Figure 6.7: Nitrogen/Maize Price Ratios. 1990-1995197. Source: Heisey and Mwangi (1996),Gerner et al (1996). Source: World Bank data. EXCHANGE RATE PASS-THROUGH TO FARMERS Currency devaluations appear to have been passed onto higher fertilizer prices more effectively than the pass-through to higher export crop prices (examined previously). Table 6.2 summarizes the information contained in Figure 6.8. In Malawi, The Gambia, Nigeria and Cameroon (the countries above the forty five degree line) the price increases are in excess of the devaluations and world price increases. This suggests that in these markets the pass-through of fertilizer costs to farmers has been in excess of the currency devaluation, thus eroding the incentives to use fertilizer25. After removing the effects of devaluation and world price increases from the domestic urea price, six of the eleven countries analyzed (the countries below the forty five degree line) have reduced 25 For fertilizers, the countries above the 45 degree line were labeled as having inhibiting pass-through while for crops, countries with inhibiting pass-through appear below the 45 degree line. This analysis focuses on the pass-through to farmers. If there is a real currency devaluation of 50 percent and fertilizer prices increase by 70 percent then farmers loose; which was considered as inhibiting. This is converse to export crop pass-through discussed in chapter four. 99 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges in Figure 6.8 do not take into account annual price variations. This is clear in the case on Malawi, which experienced huge fertilizer price increases in 1996. An analysis of this annual change would show Malawi way above the line (Figure 6.8). Table 6.2: Difference 150% between the Percentage ° <) i INHIBITING , Change in Real Urea Prices e) Q | PASS-tTHROUGH - ' -and the Percentage Change in Cameroon ,* the Real Effective Exchange 7eo 100% -]Rate. 0 ao N , Perfect Exchange Country Exchange Rate T i 4 ,/ ' Rate Pass-through Pass-Through Malai. NITheNGTheaambai5 , 50% ENHANCING Malawi 53 7. a ,,'+ Togo PASS-THROUGH Ghana 47 u ;F --Nigeria 35 ¢s ¢ * Ghana ,S. Afric0C6te d'Ivoire Cameroon 27 0% -*Ngeria,,' South Africa -5 . 0% *Nigeria,,N Burkina Faso Togo -8 v ,Kenav~ * Zimbabwe Burkina Faso -13 -~~~~~~~~ I ~~~~~~~~~~Kenya -17 - ,0% l -I C6te dIvoire -34 j -50% , Zimbabwe -36 -50% 0% 50% 100% 150% Source: FAO and World Percentage Change in the Real Effective Exchange Rate Bank data. Figure 6.8: Exchange Rate Pass-Through to Fertilizer Prices, 1990-1995/96. Transportation: Most Sub-Saharan African countries import their fertilizer as local production proves less profitable due to the small size of the local markets (Heisey and Mwangi, 1996). Nonetheless, the costs of fertilizer imports are high and the difference between landed costs and the world f.o.b. price tends to be twice as high in many Sub-Saharan countries as they are in Asian countries (Shephard and Coster, 1987). These large differences have been attributed to high transportation costs of the small fertilizer volumes most African countries import (Bumb, 1988) [see also Box 6.1]. A small trading share also weakens the nation's position in negotiating for lower prices. Internal distribution costs also tend to be considerably higher than in other developing countries; this is largely due to poor development and maintenance of the domestic infrastructure (Heisey and Mwangi, 1996). Most fertilizer trading companies and their representative agents rent the services of private transport companies and do not own their own transportation vehicles. Transport costs can sometimes constitute 50 percent of the operating costs of traders. The transportation problems experienced by input traders and highlighted by Badiane et al (1997) were due to excessive costs (Benin), transport restrictions (Ghana), frequent road tolls (Madagascar) and poor quality of roads (Malawi). Late delivery is also common resulting from credit requirements throughout the fertilizer marketing channel. These costs persisted in the past as governments were typically slow to relinquish their involvement in fertilizer importing and marketing, as fertilizer was considered a strategic input. 100 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Trade restrictions and regulation: Continuing trade controls restrict private sector entry and competition in fertilizer markets, contributing to high margins and prices in many countries. Several countries have a restrictive list of fertilizers that can be imported (Ghana) which denies farmers the opportunity to use nutrient-wise, more cost effective fertilizers. The lack of competition in fertilizer distribution systems and trade, often a result of public sector operations, can also contribute to inefficiencies and higher marketing margins (Pinstrup-Andersen, 1993, Gisselquist, 1994). Fertilizer regulations have also been restrictive. Farmers have been cut off from fertilizer markets in neighboring countries, forcing importers to consider countries as a separate and small market (Gisselquist, 1998). Private traders in many countries are not able to import fertilizers without prior government approval involving time consuming and costly procedures to satisfy multiple agencies. Packaging regulations also need to be relaxed. Truth-in-labeling needs to be enforced to control fraud and prevent the sale of substances that are harmful to the soil. This involves making rules for sampling and setting ranges of allowed variance around stated compositions for various nutrients (Visker et al, 1995). In many countries, an avenue for reducing these high prices without substantial cost may be through the elimination of trade restrictions. In some instances, as international experience suggests, the negative impact of higher fertilizer prices can be offset to some degree by trade liberalization. As an example, Turkey in the 1980s protected domestic fertilizer producers with import duties and then subsidized fertilizers to farmers, the net impact of these interventions left farmers with near world- market prices, so that cutting import barriers and removing subsidies at the same time could have been expected to leave domestic fertilizer prices essentially the same (Gisselquist, 1996). Macroeconomic policy: Macroeconomic policies have a significant impact on fertilizer prices. These have included currency overvaluation, budgetary constraints and foreign exchange restrictions all of which have been prevalent in African countries. Overvalued exchange rates reduce fertilizer prices while both budgetary and foreign exchange restrictions raise prices. Fertilizer aid: Sub-Saharan Africa receives extensive fertilizer aid, which has had an inhibiting effect on domestic fertilizer markets. These aid programs are characterized by lack of competition in procurement and distribution, higher fertilizers costs and slow delivery of inputs. Moreover, many of the programs are vulnerable to mismatching of inputs with needs. These aid programs need to be radically changes or abolished (see later section on fertilizer aid). In the meantime, the beneficiary countries can improve the usefulness of this aid in a number of ways. They can create greater transparency and consistency in preparing the list of aid requirements (fertilizer, chemicals and machinery) that they submit to the donor country. They can also enhance the speed at which relevant documentation is completed so as to ensure that assistance is provided in a timely manner. Recipient countries must ensure that the sale of the aid (fertilizers) is at market prices and that government subsidies on distribution and storage must be eliminated. In some cases, a counter-part fund is required to be set up in the recipient country. The use of the counter part fund needs to be clearly identified and should be consistent with the overall agricultural strategy. The uncertainty of government actions needs to be removed as it could undermine the development of private sector activity in these input markets. 101 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box 6.1: Explaining the Differences in Producer Price/World Price Ratios of Urea Across African Countries. The high fertilizer prices in Sub-Saharan Africa have raised concerns about the subsequent fertilizer adoption rates (determinants of which included the profit incentive [the value cost ratio], the price incentive [the input-price ratio] and intensity of usage). Awareness and understanding of the factors that cause differences in the domestic price/world price ratio for fertilizer among African countries may provide useful policy information for addressing distortions in these markets. An econometric analysis may provide some insights. The difference in the domestic price/world price ratio across countries was expressed as D e a +± A DISTANCE + f22TA RIFFS + 133ROA DS + /64 VOLUME + /35FECH + u where PD is the domestic price of fertilizer, PW is the world price, e is the nominal exchange rate, a is a constant, DISTANCE, the distance from international fertilizer markets, TARIFFS, the fertilizer import tariff, ROADS, the percentage of paved roads, VOLUME, the volume of fertilizer consumed and EXCH, the exchange rate policy stance (parallel market premium). Ordinary least squares were used for the estimation and the results are presented in the table below. OLS OLS with White's Variable Heteroscedasticity Adjusted ___________ ~ ~ ~~~S.E .'s Coeff. t-stat t-stat. CONSTANT 2.4483 2.4 3.4 Location DISTANCE 0.0003 3.8 3.8 Transport infrastructure ROADS -0.0309 -1.9 -1.8 Trade policy TARIFFS 0.0713 2.3 2.0 Macroeconomic policy EXCH -0.4106 -0.7 -2.4 Volume consumed VOLUME -0.00002 -0.9 -2.6 R2 ~ ~ 0.53 Observations 31 F-stat (5, 26) 5.69 (0.001) The variables included in the model explain only about 50 percent of the cross-country variation in the domestic price/world price fertilizer ratio. The relatively poor fit may be due to omitted variables or simply to the poor nature of fertilizer price data in Africa. The best model in termns of goodness of fit, data coherence, parsimony in parameters and consistency with theory (Hendry and Richard, 1982), is presented in the table. Although the R2 is low, the t-statistics shows some significant variables. A common phenomenon with regressions using cross-section data is heteroscedastic error terms. Diagnostic test on the error suggests possible heteroscedasticity and this was corrected using White's adjusted variance-covariance matrix (White, 1980). The distance from international fertilizer markets and the fertilizer import tariff have positive coefficients while the other variables have negative coefficients. The distance variable has the most significant effect on the price ratio and suggests that the fertilizer price ratio increases with an increase in distance from international markets. Similarly, the higher the import tariff the higher the domestic price. These obvious explanatory variables are consistent with a priori expectations. The higher the percentage of paved roads in a country, the lower the price ratio, suggesting lower domestic transportation costs. If large volumes offertilizer are consumed by a particular African country, economies of scale in fertilizer trade can be realized, resulting in a lower price ratio. The larger demand will also attract more private traders. The final variable is the exchange rate where overvalued exchange rates, subsidize fertilizer prices resulting in a lower price ratio. 102 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The emergence of private traders: Since liberalization of the fertilizer markets in the countries studied, many multi-national companies have entered the market. However, parastatals continue to operate and dominate these markets in many countries. In certain countries, only a few private companies have penetrated these input markets creating an undesirable oligopolistic situation which has had negative effects on prices. The results from a recent IFPRI study suggest that liberalization of input markets in most of the countries studied has been partial. Thus, it has restricted the opportunities for private traders to enter the market and created uncertainty about the change in policy direction26. The IFPRI study identifies several factors that continue to inhibit the industry: these include supply problems, lack of effective distribution, timely delivery and transportation. The manufactured products, particularly the compound fertilizers, are of relatively low analysis which increases the cost of handling, transportation and storage per unit of nutrient. OBSERVATIONS FROM FERTILIZER MARKETS IN SEVERAL SELECTED AFRICAN COUNTRIES Policy reforms have played an integral part in the changing fertilizer markets in SSA countries. The previous analysis clearly illustrated this and continuing impediments on fertilizer prices were identified in several countries. This section will attempt to expand on some of these constraints by focusing on individual issues through country case studies. Four countries will be examined: Malawi, Zimbabwe, Ghana and Ethiopia. Addressing the Fertilizer Aid Issue in Africa Agricultural fertilizer markets in Africa are not performing well. Only seven countries in Sub- Saharan Africa produce fertilizer (Burkina Faso, Mauritius, Nigeria, Senegal, Zambia, Zimbabwe and South Africa). Only four of these (Nigeria, Senegal, Zimbabwe and South Africa) export it. Many African countries rely almost exclusively on foreign aid (Figure 6.9). In 1987, twenty African countries relied almost exclusively on fertilizer aid to meet their domestic requirements (Bumb, 1988). Such dependence has caused uncertainties in planning, procurement and distribution of fertilizer products. Bumb et al (1994) and Ndayisenga and Schuh (1995) have underlined these uncertainties. 26 The International Food and Policy Research Institute have recently completed a major study on agricultural input markets in Africa (Badiane et al, 1997). Market surveys were conducted in five countries (Benin, Ghana, Madagascar, Malawi and Senegal) to raise the understanding of conditions for the successful reform of agricultural inputs markets in African countries and to identify strategies to complete the transition to competitive and efficient output distribution and input delivery systems. Several of their key findings are highlighted above. 103 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges * Supply uncertainties are created as long- term commitments from donors to provide 25- fertilizer are infrequent. Recipient countries 2 - are left to depend on the annual decisions of donors. o15- * Product choice is limited with donors U 0 offering countries a list of fertilizers from 10 l which to select. This list usually reflects the fertilizers in excess supply in the donor z 5- country as opposed to those which are needed by the recipient country. This results in a disconnect between aid fertilizer 0 1-20 20-50 50-80 80-99 100 given and the needs of the recipient Ratio (%/.) country. i 1985 0 1986 * 1987 * Domestic fertilizer markets in the recipients Figure 6.9: Distribution of Sub-Saharan African countries are disrupted. In some cases, the Countries by the Ratio of Fertilizer Aid to Fertilizer price of aid fertilizer is higher than that of Imports, 1985-87. domestic market prices while in other cases Souce: Adapted from Bumb et al (1988) citing the price is highly subsidized. These FERTECON 1989. uncertainties inhibit the development of the private sector. * In some cases, fertilizer aid may have adverse long-term macroeconomic implications. In many cases 'free fertilizer' (which is provided by some aid programs) provides significant macroeconomic benefits to recipient countries through savings of foreign currency that would have been used to import fertilizer. If these aid inflows are significant, the domestic currency may strengthen, shifting domestic terms of trade against the tradable sectors - like for agriculture which is counter-productive in terms of providing adequate incentives to agricultural producers. An Example of Fertilizer Aid: The 2KR Japanese Aid Program to Sub-Saharan Africa27 Japan's Grant Aid for the Increase of Food Production is supplied to all regions in the world. The annual budget amounts to US$200-300 million and is allocated to 48 countries (JICA). In 1996, Sub-Saharan Africa received the largest amount of this aid worldwide and accounted for 41% of the total 2KR grant aid. The remaining aid was distributed to Asia (28%), Central and South America (15%), the Middle East (8%) and East Europe (8%). The magnitude of Japan's generous contributions suggests that it can play a major role in helping improve the fertilizer distribution networks in many Sub-Saharan African countries. Unfortunately, the 2KR program in SSA often works counter the goals of free and sustainable markets for fertilizer. Efforts to encourage the emergence of strong private sector networks are often undermined by the market distortions created by the 2KR process. 27 This is a brief summary a longer paper titled 'An Overview of the Japanese 2KR Aid Program' prepared by Tatushi Adachi and Robert Townsend. The program is known as 2KR, after the Second Kennedy Round of trade negotiations in 1977. Under a special budgetary provision, fertilizer, chemicals and machinery were supplied by Japan through a new network 'Aid for the Increase of Food Production' which is known as 2KR aid. 104 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 120 Kenya 100 o 80 , 4 . Tanzania > 60 A Ethiopia Zambia 20 ~ Senegal Africa Asia Central East Middle Mozambique and Europe East Angola South America Zimbabwe Figure 6.10:Regional Distribution of 2KR Aid, 1996. Madagascar Source: JICA. C6te d'lvoire In 1996, Africa received more 2KR aid Burkina Faso than any other region (Figure 6.10) with 26 countries receiving this aid (Figure 6.12). The Togo distribution of aid varies greatly among and Mauritania within regions. In 1993, SSA received significantly more pesticides than any other Malawi region in the world (Figure 6.11). Moreover, Ghana the volume of fertilizer aid was second to Asia. Central African Republic 140 Mali 120 l 100 Guinea > 6°0- 11 El Swaziland 60 > 4°0- 1>1 | Namibia 20 0 Lesotho Sub- Asia Latin Middle Saharan America East Entrea Africa Guinea-Bissau Fertilizer ED Pesticides 0Machinety Benin Figure 6.11: Regional Distribution of 2KR Aid, 1993. Cape Verde Source: Tobin (1996). Comoros The largest African recipients of 2KR . . . . include Kenya, Tanzania, Ethiopia and Zambia. 0 2 4 6 8 10 Kenya receives one billion Yen worth of US$ Million agricultural inputs from the 2KR program, Figure 6.12: Distribution of 2KR Aid by African which makes it the fourth largest 2KR recipient Country, 1996. in the world, after the Philippines (Y 1 .7Mil), Sri Source: JICA. Lanka (Y 1.4Mil) and Indonesia (Y 1.3Mil). 105 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The process of supplying fertilizers under the 2KR program is not dissimilar to the programs of other donors. Formal requests are made to the government of the donor country, discussions are held to assess the merits of the request and ability of the donor country to supply the goods, the donor opens a restricted tender for the requested goods, an award is made to the lowest bidder and counterpart funds are deposited by the recipient country into a designated domestic account upon sale of the goods. From the recipient country perspective, fertilizer supplied under the 2KR program has a particularly serious negative impact on private sector participation in fertilizer markets in Sub-Saharan Africa. This is due to the characteristics of the aid program. * Lack of competition: The most apparent trait of the 2KR program is the lack of competition in several stages of the program cycle, most notable in procurement and in the agricultural input markets of the recipient countries. Procurement: Restrictions on the number of traders who can participate in the program creates significant rent seeking activity. This appears to have been more prevalent in the 1980s when aid was tied exclusively to Japanese fertilizer and procured through Japanese trading companies. The tendering process appears to be almost un-contested which results in a high f.o.b. (Japan) and c.i.f. price (recipient country) of inputs relative to competitive market costs. Japanese traders who shipped the inputs to Africa appear to have received unprecedented profits. Domestic markets: Recipient country governments usually distort the domestic markets of inputs received under the program. Fertilizers are usually sold by the government on local markets at subsided prices (or provided free) which inhibited the development of private sector involvement in fertilizer distribution and storage. The current mechanisms of procurement and distribution has resulted in leakages from the system in terms of exorbitant intermediary profits. The lack of competition has resulted in a high price of inputs acquired under this scheme. In the 1980s it appeared that many countries experienced difficulties in generating counter part funds which are required under the program because of these high costs. * Lack of integration: The lack of integration of 2KR fertilizers into the domestic fertilizer market discourages private sector investment in fertilizer importation and marketing. The 2KR fertilizers are typically channeled through either a government-owned/controlled entity or through a firm linked to the Japanese supplier of 2KR fertilizer. In several countries, attempts have been made by governments to negotiate with the private sector to distribute the 2KR fertilizer. However, in some cases, the government was unable to recover the price 'paid' which prevented further negotiations with private traders who claimed to be able to acquire fertilizers form other suppliers at a price lower than the price paid under the 2KR scheme. In this case, the private sector was able to import the inputs at lower cost. In some countries, the recent untying of aid has lowered the price of fertilizer and pesticides significantly. * Slow delivery: The delivery of 2KR aid to the recipient countries is notorious for its delay which has a significant impact on the effectiveness of the program. Late deliveries of fertilizer prove ineffective for farmers and create additional costs through storage until the next cropping season. The primary source of delay is the complicated diplomatic and bureaucratic process that is involved in 2KR procurement. * Vulnerable to mismatching of inputs with needs: There also seems to be a disconnect between the inputs acquired under the 2KR program and the inputs needed by the recipient countries. It is clearly evident that the commodities procured under the 2KR scheme in Africa have been biased 106 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges towards pesticides (Tobin, 1996). In some countries, large machinery has been included on the list of items required when clearly there is no need for them (15 combine harvesters for Lesotho). In other countries, the items acquired on the list are not correlated with what the agricultural research institutes, in the particular country, recommend (ie: Guinea). Inconsistencies in the use of the counterpart fund: The current mechanisms of procurement and distribution, with lack of clear parameters on the use of the counter fund ('economic and social development'), has resulted in counterproductive uses. These characteristics suggest that the aid program is not compatible with development efforts to achieve a market-oriented agro-input supply system. What can be done to improve the effectiveness of the aid program ? One way to improve this aid would be to provide funds to the recipient government for direct procurement on commercial terms. This would be to establish a credit fund for providing loans to commercial firms to import fertilizers. Care would need to be taken to ensure the funds are used for their intended purpose. This approach would make the private sector responsible for the import transactions and thus have control over the technical specifications of the fertilizers procured, time of delivery, etc. Moreover, this approach will facilitate the development of a sustainable agro-inputs supply system in the recipient country by enabling emerging entrepreneurs to gain the knowledge and skills needed to handle fertilizer imports directly. If this or a similar change in approach to 2KR aid is not possible then it should be abolished. In the meantime, the question then becomes how can recipient countries improve the effectiveness of the aid ? This can be done in a number of ways: * Create greater transparency and consistency in the preparation of the requirement list (request letter). Governments needs to maintain consistency between the items to include on the request list (fertilizer, machinery and chemicals) and the agricultural development strategy of the country. All too often this has not been the case and items have been acquired that are not compatible with the agricultural strategy. ie: :> The acquisition of a large quantity of machinery has, in some African countries, had a negative impact on employment creation with a substitution effect away from labor intensive technologies. => The acquisition of important quantities of chemicals has had negative environmental impacts and undermined the efforts to adopt an integrated pest management approach as an alternative to the improper and indiscriminate use of pesticides (Tobin, 1996, p.213). > Fertilizers acquired under the scheme need to be compatible with soil deficiencies and this should be considered in the development of the list. * Enhance the speed of completing relevant documentation (Request letters, Exchange of Notes, Banking Agreement and Authorization to pay). To ensure that the inputs ordered under the scheme arrive in a timely manner, delays in completing the relevant documentation must be minimized to enhance the effectiveness of the aid. Receiving the fertilizer when it is needed (during the cropping season) reduces storage costs. Delays can also create pressure from interest groups who stand to gain from this program (fertilizer traders) to influence the choice of items on the list. * Ensure the sale of the 2KR aid (fertilizers) in the recipient country is at market prices. Private traders in the recipient countries need incentives to participate in the market. Fertilizer sold at subsidized prices will inhibit private sector development. To minimize these distortions, fertilizer must be sold at the market price so that private traders can compete. This has been done successfully in Swaziland where 2KR fertilizers were well integrated into the domestic market. A 107 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges parastatal organization was selling 2KR fertilizers and South African fertilizers at the same depots, at the same time at competitive prices. One possible avenue for a market determined price is to auction 2KR fertilizer. * Eliminate subsidies on transportation and storage. Subsidies on transportation and storage inhibit private sector development in these activities. If these subsidies continue, traders will have no incentives to store fertilizer or transport fertilizer to distant farmers. * Identify clearly defined uses of the counter part_fund. Like many aid programs, 2KR aid requires the development of a counterpart fund. While there has been some stipulation on how the counter part funds should be used (for 'economic and social development'), the use of this fund needs to be consistent with the overall agricultural development strategy and should be used in a transparent way. In some countries the use of this fund has been inconsistent with the progress of the agricultural strategy. * Uncertainty on government actions needs to be removed. If the government is not consistent in its action with regard to 2KR aid in terms of selling inputs at market prices; reducing subsidies on transportation and storage; transparency and consistency in the preparation of the list then the uncertainty that is created could undermine the development of private sector activity in these input markets. Coping with High Transportation Costs in Malawi Prior to 1993, Malawi's fertilizer industry received extensive government intervention in pricing, importation and distribution. All fertilizers for small-holder farmers were procured and imported by the Small-holder Farmer Revolving Fund of Malawi (SFFRFM) and distributed by ADMARC which were both controlled by the government. The private sector's role was confined to serving the estate sector. Under this system, fertilizer use by small-holders tripled between 1980 and 1993, growing from 49 000 metric tons to 150 000 metric tons. This growth was, however, confined to the wealthiest third of small-holder households, typically those with access to agricultural credit, above average incomes and above average holding sizes (Conroy, 1996)28. Fertilizer consumption declined in 1993/94 following the collapse of the Small-holder credit system (SACA), the Supplementary Inputs Program then ensued, which distributed 32 000 tons of free fertilizer to drought affected households (Figure 6.13). Removing fertilizer subsidies: Several measures were taken in 1993 following the Government announcements to phase out fertilizer subsidies and encourage private sector participation in fertilizer importation and distribution. The relationship between ADMARC and SFFRFM was terminated, with SFFRFM becoming an independent market participant. As a result of this more liberal stance, several private companies have emerged as importers/distributors. The market, once dominated by two parastatal organizations, now has at least eight major importer/distributions (dominated by Optichem, Norsk Hydro, Farmers World and Agora) and hundreds of private wholesalers/retailers (Chakravarti, 1997). In 1995/96 all fiscal and economic subsidies on fertilizer were completely removed leading to an increase in fertilizer prices varying between 200 and 300 percent. Consumption fell again to 71 000 tons, of which 23 000 was distributed for free by Government under the Supplementary Inputs Program (Chakravarti, 1997). 28 The fertilizer sold in the late 1980s and early 1990s was largely financed by the Government as 60 to 70 percent of fertilizer was financed by credit which was not repaid. 108 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 160 8 140 7 1240 ]SFFRFM established m \ x Collapse of the small- holder credit system 3 0 7 XSharp currency devaluation and 4 E fertilizer subsidies removed -60 3 40 Partial liberalisation of the maize market, Government introduced a 2 . 20 price band for maize and encouraged private sector participation in maize trade, this resulted in a significant increase in the price of maize I > O , _ , I , ,0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Year - Total Fertilizer Consumption -Fertilizer - Maize Price Ratio Figure 6.13: Fertilizer Consumption and Prices in Malawi. The offsetting effects on the price Table 6.3: Market Share of Fertilizer increase of a more efficient low cost private Distribution Agencies in Malawi. sector have been slow to develop, although there are encouraging signs with efforts to Market 1994/95 1995/96 1996/97 minimize risks faced by traders. The participation (est.) distribution system of fertilizer has changed dramatically since 1994/95 when ADMARC's ADMARC 82 26 14 monopoly over fertilizer distribution was SFFRFM 0 18 14 relinquished to an expanding private sector Private Sector 18 42 63 (Table 6.3). The major private companies have Free Distribution 0 104 established a country wide network of branches and depots. As more companies enter the Total 100 100 100 market, fertilizer mark-ups and profits should TAMA - the Tobacco Association of Malawi launched a fall. The private trading companies continue to fertilizer credit scheme. implement pan-territorial pricing, a system that Source: Chakravarti (1997). was used by the government. Despite this change, fertilizer prices in Malawi have been viewed as being extraordinarily high (Conroy, 1997; Gisselquist, 1998). A recent study (Westlake, 1999) examining this phenomenon attributes these high costs to: the small size of the domestic fertilizer market; the country's landlocked position; inefficient transport systems in neighboring countries; the cost of distributing to a large number of rural outlets and the risks to importers and distributors, which stem from the uncertain level of effective demand. Within these factors, transportation costs play a dominant role. However, it appears that external land transport costs (port to Lilongwe) are extremely high and efforts to lower them could substantially reduce fertilizer prices in Malawi. 109 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table 6.4: Estimated Price Structure for Urea in 100 Malawi Imported through Beira, March 1999. 80 Components of the Retail Price % of Retail = 60 Price 40n 11 FOB NW Europe ports, bulk 23.8§ 20 Ocean transport and insurance 7.0 0 _ _ I Port charges, bagging an handling 9.2 Durban Beira Nacala Road transport Beira-Lilongwe 14.5 Ports Inspection, bank, customs and clearing 1.8 U Total landed fertilizer costs relative to costs Local transportation 0.9 of fertilizer shipped from Durban (%) Financing 7.0 Extemal transport cost as a share of total Fmancmg 7.0 ~~~~~~~~~~~~~~landed costs (%) Trading company share 25.1 Rural distributors margins 10.6 Figure 6.14: Fertilizer Transport Costs from Retail price 100 -- Ports to Malawi. Source: Westlake (1999, pg.9). Source: Conroy (1994). Two ports in Mozambique, Nacala and Beira can be used by Malawi to import fertilizer. However, transport fees in Mozambique are particularly high and have been identified as one of the causes of the high costs shown in Table 6.4 (Westlake, 1999). Nacala is the closest port to Malawi but the lack of port capacity and outward freight results in exceptionally high shipping costs. Improving facilities at the Nacala port, namely, loading and storage facilities could indeed reduce costs. In earlier studies, Conroy (1994), using simulations of alternative costs from different ports, shows that external transportation costs can be significantly reduced if Mozambique ports are used (Figure 6.14). Although Westlake (1999) suggests that internal transport costs are fairly low, these can be extremely variable and past studies have shown these costs to be high (Badiane, 1997, Conroy, 1994). These high internal transport costs may be reflected in the high share of the retail price taken by trading company's (Table 6.4). As other regional countries deregulate fertilizer trade, larger multi-country markets may develop, bringing larger bulk orders, more competition and lower prices to farmers. Indeed transportation is intrinsically a regional affair and market size in individual countries is usually too small to sustain modern infrastructure. Apart from developing regional transport services, another obvious means of reducing transport costs per nutrient is to use high analysis fertilizer. Removing Price Controls and Trade Barriers in Zimbabwe Zimbabwe's dualistic agricultural system, similar to Malawi's, has resulted in varying fertilizer application rates across farms. Fertilizer applications on large commercial farms are similar to those in developed countries. However, application rates on small-scale farms are relatively low and comparable with those in other African countries. Small-scale farmers account for 30 percent of total fertilizer consumption. Large regional differences in the use of fertilizer exist with variation across natural regions. Only 20 percent of small-holder farmers across the whole country apply fertilizer (Blackie, 1994). The application of fertilizers also varies significantly across crops within these two sectors. Smallholder farmers use 88 percent of the fertilizer on maize, while the commercial sector distributes it as follows: 33 percent on maize, 16 percent on tobacco and 14 percent on wheat. 110 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 3500 II Price controls for all fertilizers Iifted except fI All price controls ended 250 3000 ammonium nitrate and CompoundD Dmid-1995 c 2500 200 2000 - -150 Z 1500- 0 0 = 00 Large inr ease in maize 10 1000 price due to the 1992 drougt 5 500 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Year - 4 - Real Fertilizer Price - -x Fertilizer/Maize Price Ratio +a-- Fertilizer Consumption Figure 6.15: Real Fertilizer Price Trends in Zimbabwe, 1987-1996. Source: Ministry of Agriculture, Zimbabwe. As a result of policy measures adopted in the 1980s to expand rural infrastructure and introduce new small-holder credit schemes, fertilizer to smallholder farmers increased from 24 000 tons in 1974/75 to 90 000 tons in 1980/81 and reached a peak of 130 000 tons in 1986/87. This increase in fertilizer demand was heavily dependent on availability of credit and cash from crop sales, fertilizer prices, transport, timing of delivery and the distribution network (Takavarasha, 1995). For several decades, the fertilizer Table 6.5: Market Share of Fertilizer industry has been dominated, in production and Distribution Agencies in Zimbabwe. trade, by only a few companies (Sable, Zimphos, the Zimbabwe fertilizer company Agency 1985 1990 1994 [ZFC] and Windmill) (Gisselquist and Rusike, Co-ops 52 15 1 1998). As of 1990, the market opened up to AFC large lending groups 21 13 9 increased competition (Table 6.5) but by AFC small lending groups 0 0 5 1996/97, the Ministry of Agriculture still Traders 12 29 35 maintained controls on fertilizer trade Manufacturers _ _ 43 _ _ (stipulating which fertilizers can be traded) Total 100 100 100 which continues to restrict competition. Source: Ministry of Agriculture Zimbabwe, 1997. Domestic production provides more than half of all fertilizers used in the country. Fertilizer producers were protected by fertilizer import taxes with rates ranging from 0 to 5 percent and with a 10 percent surcharge on the finished products. Fertilizer Policy Changes In Zimbabwe real fertilizer prices reached their peak in 1992 after which all price controls, except on ammonium nitrate and compound D (subsequently removed in 1995), were lifted (Figure 6.15). Even though fertilizer prices declined from their 1992 value, urea sold in 1995 for US$300 against an international f.o.b. price of US$ 200 (Gisselquist, 1998). The higher fertilizer prices in 111 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Zimbabwe reflect not only high transport costs for a landlocked country but protectionist taxes and relatively large margins in markets that are just starting to become competitive (Table 6.6). The experience of the Zimbabwe fertilizer industry is represented in Table 6.6. The industry was highly regulated by the Ministry of Agriculture and trade was allowed according to nutrient composition. Arguments in favor of these trade controls is that restricting choices saves farmers from making wrong decisions, discounting their ability to manage. In 1992/3, the Government of Zimbabwe lifted price controls on all but two fertilizers, ammonium nitrate and compound D (recommended for maize), which were important to communal farmers; subsequently all price controls have ended. As of mid- 1997, officials in the Ministry of Agriculture continue to manage fertilizer imports through permits, a non-tariff barrier. Table 6.6: Summary of Impact of Reforms on the Zimbabwe Fertilizer Industry. Pre-Reform Controls, Obstacles before Situation Early 1996 1990 * access to foreign exchange, * removed, * import permits required, * no change, * mandatory government approval of * no change, fertilizer compositions, • price controlled, * removed, * parastatals offer subsidized fertilizer. * removed. Effects Effects • limited access to farmers technology, * Change in industry structure; formerly a protected public/private duopoly; * few dealers, so that fertilizer not always with reform, ten new companies entered in 1995 and 1996, conveniently available, particularly for * Technology transfer; new entrants offer soil tests, made to order fertilizers, small farmers, high analysis fertilizers, old companies respond with similar services, 260 * limited choice of nutrients, fanners not new fertilizer products were registered between 1991-96. able to match nutrients with soil * Prices; competition is building; trading margin still high, deficiencies. * Quantity; no significant change; fluctuations in use dominated by austerity, , drought and free fertilizer programs. Source: Gisselquist (1998). Several constraints facing the fertilizer industry have been highlighted by the Ministry of Agriculture (1997). These include: i) the industry is small, most of the machinery is old and generally not based on state-of-the-art technology; this means that it is not as efficient as technologies available in modem large-scale processing plants; ii) the products manufactured, particularly the compound fertilizers, are of relatively low analysis; which increases the cost of handling, transportation and storage per unit of nutrient and iii) for a long time the industry has been operating in a situation of oligopoly and is now in the process of adjusting to compete externally; marketing strategies of the fertilizer industry have been biased towards the commercial farming sector and have yet to develop facilities in the small-scale areas. The Ministry of Agriculture's future strategies for the fertilizer industry consists of: i) encouraging more direct selling to farmers by manufacturers; ii) facilitating competition through tariffication, caution against export subsidies or any other unfair trading practice; iii) convincing small- holder farmers to set up their own fertilizer warehouses at strategic distribution points and iv) reviewing the legislation on fertilizer (Ministry of Agriculture, 1997, pg: 68). 112 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Alleviating Inhibiting Regulations in Ghana The use of fertilizer in Ghana remains low and has declined since 1990. This usage needs to increase if Ghana is to significantly improve agricultural growth. Past increases in agricultural production have been achieved mainly through area expansion which cannot be sustained in the long run. As with the other countries analyzed, most of the fertilizer in Ghana is consumed by cereal producers. Sixty-four percent is used for maize, 10 percent for rice, 11 percent for vegetables and less than I percent for cocoa and coffee. The procurement and distribution of inputs in Ghana was liberalized in 1992. Subsidies, which used to be about 65 percent in 1985, were gradually reduced to zero (Figure 6.16). In this liberalized market, fertilizer prices have increased at a much faster rate than output prices at the farm level. Comparison of import prices (cost and freight) of related fertilizers in Cote d'Ivoire in 1993 was US$ 200/mt while in Ghana it was US$260/mt (Gisslequist, 1996). The removal of fertilizer subsidies and the depreciation of the Cedi resulted in significant fertilizer price increases after 1993. Fertilizer consumption in Ghana peaked in 1981, declined in 1984 and has since remained relatively constant (The decline may have been provoked by the severe drought in 1983). The reduction in fertilizer use can also be attributed to the problems with supply of fertilizers to farmers, and until this problem is dealt with, fertilizer consumption is not likely to recover (Donovan, 1996). 35000 70 30000 - 60 X 25000 - 50 E- 20000 - 40 , 15000 - 30 9 N §10000 / Widespread reduction in overvalued exchange rates with a movement towards equilibrium levels. Current parallel market exchange rate premiums in most countries are low. Francophone Africa maintains a fixed exchange rate, pegged against the French franc. The CFA franc devalued by 50 percent in 1994. > Fiscal policies have improved with lower fiscal deficits in most countries. Fifteen countries (out of 26 analyzed in the study) have fiscal deficits of less than 4 percent of GDP. > Monetary policy has shown mixed results with limited improvement since 1990. Nine countries have inflation rates of 20 percent or greater and seigniorage remains high in many countries. > Financial regulation remains weak in many countries (e.g. Zimbabwe and Nigeria)30 and this is a key area for improvement. > The credibility of economic reforms in Sub-Saharan Africa is low relative to other regions of the World (World Bank, 1997) and Brunetti et al (1998) have shown that this lack of credibility has had a negative impact on investor confidence with corresponding negative externalities on growth. 30 Lessons from the Asian crisis suggest that the weak financial sector was the main contributor to macro-instability (IMF, 1998). In some cases extensive freeing up of financial markets could contribute to increased macroeconomic instability. 119 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The export crop sector: Favorable world prices and the devaluation of domestic currencies have contributed to an increase in real domestic export crop prices across almost all African countries. In several cases, an improvement in the efficiency (price transmission) of the market has resulted in further price gains (e.g. Uganda, Nigeria, Tanzania, Togo, Madagascar, Zimbabwe and Malawi). Exchange rate deprecations have been fully passed-through to farmers in markets where countries have adopted open trade policies (e.g. vanilla in Madagascar, cotton in Zimbabwe, tobacco in Tanzania and Malawi and cocoa in Nigeria). In markets where there has been continued state interventions (pricing, distribution and marketing) this pass-through has been inhibited. Nine traditional crops continue to dominate exports from the continent and Sub-Saharan Africa's world export share for five of these crops (bananas, cotton, sugar, tobacco and tea) has increased in the 1990s. Non-traditional export crop production has become more widespread with an increase in the production of cut flowers, citrus and deciduous fruit, pulses, live animals and cashew. The recent evolution of policies, prices and markets, particularly since the 1980s, has resulted in a general improvement in the export crop production incentives faced by many farmers in Sub-Saharan Africa. > There has been widespread adoption of market liberalization policies in many countries (eg: Uganda, Tanzania, Mozambique, Nigeria and Zimbabwe), particularly in Eastern and Southern Africa. > With the removal of marketing boards, the private sector has actively taken over the marketing responsibilities in several countries (eg: coffee in Uganda and cotton in Zimbabwe). 7 Marketing boards (eg: cocoa in Ghana), Caisse de Stabilization systems (eg: cocoa and coffee in Cote d'Ivoire) and parastatals (cotton in West Africa) exist in many countries. Marketing boards and parstatals typically set pan-territorial and pan-seasonal prices and control the physical handling of the crop. Under the Caisse system prices are administratively determined with purchasing and selling prices set at each stage of internal commercialization in an attempt to stabilize prices. t Although the export crop sector was heavily taxed, there was limited public investment back into rural areas (this is different from other developing regions such as East Asia where agriculture was heavily taxed, but this was combined with significant public investments). The explicit taxation from overvalued exchange rates in Africa has been significantly reduced, and in many countries has been eliminated. > Access to foreign markets varies greatly between countries in Africa. Although OECD import tariffs on African products are generally low, there are significant non-tariff barriers such as strict sanitary and phytosanitary requirements. Many countries continue to receive preferential trade treatment under the Lome Convention and the Generalized System of Preferences, receiving export prices higher than world market prices (Botswana beef, Mauritius sugar). High external transport costs have often eroded the benefits of these higher prices. For some crops, however, special taxes are applied to imports in several European markets (ie: coffee). > Real world commodity prices are characterized by a long-term downward trend. Fluctuations around this declining trend remain substantial (booms and busts). 120 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges The food crop sector: Liberalization of food markets has been widespread in Sub-Saharan Africa. Marketing boards have been dismantled and prices have been liberalized in most countries. The impacts of these reforms have been greatest for consumers as food costs have been lowered. A general overview of the current policy landscape for the food crop sector in Africa can be broadly summarized as: ) Over the last several decades, Governments of West African countries have intervened less in food markets than their Southern African counterparts. > Despite liberalization efforts in Eastern and Southern Africa, many countries continue to intervene in grain markets. Back-sliding of reforms has been a common trend in many countries (Malawi, Zimbabwe and Tanzania). Food security issues are high on Government agendas in African countries, which together will recurrent droughts, has increased pressure for state intervention in these markets. > Several countries continue to set prices such as administer floor prices (Malawi) and ceiling prices on foods (maize meal in Zimbabwe). > Strategic grain (both as grain and cash) reserves have been developed in many countries. > In several African countries, licenses for grain trade are required which have impeded private imports and exports, reducing their potential to stabilize food supplies and prices. Other key issues in the sector include: l Women account for a much larger proportion of the time spent on food production than men. Given the multitude of tasks women undertake in the household (collecting firewood and water, cooking, etc.) and the significant labor constraint they face, policies to ensure food security will require the development of appropriate labor saving technologies which cover the full range of their domestic and economic tasks. > Private sector response to reforms has been mixed. There has been large market entry into marketing niches with low entry costs. However, mobility barriers continue to restrict private sector entry into all niches along the marketing chain. > High transportation costs have been a source of high food prices in many African countries. Private investment in transportation and storage has been inhibited by the continuation of policies such as pan-territorial pricing structures. Fertilizers: Fertilizer application rates in Sub-Saharan are the lowest in the world and have stagnated since 1975. Increasing their use is critical to reverse the decline in soil fertility. This declining trend has been highlighted as a major reason for slow growth in food production in Sub-Saharan Africa (Sanchez et al, 1995). Government interventions in the fertilizer markets have been reduced significantly over the last decade. 121 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges > Fertilizer subsidies have been removed in nearly all Sub-Saharan African countries. > This, together with currency devaluations, have caused real fertilizer prices to rise significantly, in some cases by 100 percent. With these high costs, several countries face internal pressure to backslide on previous reforms with a reintroduction of fertilizer subsidies. > Many African countries rely almost exclusively on fertilizer aid to meet their domestic requirements. This aid dependence has caused uncertainties in supply, product choice is limited and domestic fertilizer markets are disrupted. > The private sector response to fertilizer market liberalization has been weak. Generally a few large private firms dominate the market in SSA countries. > One contributing factor to this limited emergence is that trade restrictions are still widespread with high tariff and non-tariff barriers. In some countries these non-tariff barriers take the form of restrictions on the types of fertilizer that can be imported, stringent clearance requirements for imports and specifications on who can import. > Fertilizers volumes traded remain extremely small which has reduce bargaining power and raised unit transport costs. Ranking of the Agricultural Policy StanceforAfrican Countries, 1996-97: The rankings provided below show countries which are deemed to have better price policies first. While rankings by definition always require a first and a last, it would be more sensible to refer to an upper, middle and a lower group. This approach should be used in the interpretation of the results. Price and non-price factors: Both price and non-price factors affect these policy scores. For example, the producer's share of the border price, as seen in chapter 5, is not only affected by agricultural policy, but also by variables such as the development of rural infrastructure which is determined by infrastructure policy. Several non-price factors were also used to develop the fertilizer policy scores. These include non-tariff barriers such as the extent of government controls and regulations through import permits and restrictions on types of fertilizer to be imported, etc. (see Table A9). All of these factors have an effect on farmers and private sector incentives to produce and invest. 122 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Producer's Share of the Macroeconomic Policy Border Price for Export Scores Crops Food Crop Policy Scores Fertilizer Policy Scores South Cameroon l_ Nigeria Ghana Africa Senegal Kenya Senegal Uganda South South Zimbabwe Benin Africa Africa Mali Malawi Cameroon Malawi Uganda Uganda Benin dCvtoire Burkina Zimbabwe Togo Kenya Faso Cote Cameroon Uganda GmThe d'IvoiGabi The The Mali Tanzania Gambia Gambia Kenya Tanzania Mali Tanzania South Cote Tanzania Cameroon Africa d'lvoire Togo Senegal Malawi Ghana Malawi Mali C6te Burkina Malawi _ Mali - d'Ivoire Faso TheGb Togo Kenya Nigeria Garnbia ____ Nigeria Ghana Zimbabwe Senegal Ghana Benin Burkina Togo Faso Zimbabwe Burkina Nigeria Benin Faso Nigeria 0 50 100 0 50 100 0 50 100 0 50 100 Figure 7.1: Ranking of Price Policy Indicators for African Countries, 1996-97 For a brief description of the state of policies in each of these African countries, see the county profiles in chapter 8. 123 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges REMOVING MARKET AND PRICE BARRIERS TO IMPROVE AGRICULTURAL INCENTIVES The study has shown that the external environment and policy regimes have improved in a many African countries. However, agricultural incentives in a significant number of countries continue to be inhibited. Transportation costs remain high, traded volumes remain low, private agents have not entered sufficiently into input and output markets and the degree of market development and competition remains low. Tariff and non-tariff barriers to agricultural trade continue to be high inside Africa and in global markets, with improving access to OECD markets being a major challenge. Thus, evidence suggests that there continues to be significant room to improve agricultural incentives. This improvement will require focused attention on the macroeconomic environment, trade and market access and on domestic agricultural and rural policies. THE MACROECONOMIC ENVIRONMENT Stabilizing Macroeconomic Policies Macroeconomic instability remains high in several African countries which has had an adverse effect on investor confidence and growth. To maintain stability, countries need to maintain realistic exchanges rate, low inflation and low budgets deficits. While these are first generation requirements, they need to be supplemented with prudent financial market rules and a high level of reform credibility. Enhancing the Institutional Framework and Credibility of Rules Based on the credibility index from the 1997 World Development Report, which reflects an overall indicator of the reliability of the institutional framework as perceived by entrepreneurs (WDR, 1997, pg. 5), Sub-Saharan Africa has the second lowest ranking (after the Commonwealth of Independent States) when compared to other regions of the world. Encouraging private sector entry into liberalized markets (and maintaining their participation) will require a significant improvement in the credibility of reforms. About 60 percent of entrepreneurs in Sub-Saharan Africa reported that unpredictable changes in rules and policies seriously affected their business. This is critically important, as this has surely inhibited private sector development in African economies. As stressed by the report, 'countries need markets to grow, but they need capable institutions to grow markets' (WDR 1997, p. 38). Institutional arrangements that foster responsiveness, accountability and the rule of law need to be developed. TRADE AND MARKET ACCESS Removing Domestic Trade Barriers Trade barriers are still high in African countries. African import tariffs average about 25 percent which is three time higher than those of the fast growing exporters and more than four times the non-OECD average (Ng and Yeats, 1996). In agriculture, while tariffs on manufactured fertilizers have been reduced and are relatively low, large tariffs on transport equipment, machinery and agricultural materials and high taxes on petroleum products and lubricants still exist. These tariffs are an additional direct cost to exporters who use these imports for intermediate inputs in production and act as a cost 124 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges disadvantage, eroding competitiveness and inhibiting growth. Tariff barriers need to be significantly reduced to enhance growth and reduce the price of inputs to farmers. In the case where countries have both fertilizer subsidies and trade barriers, appropriate reform sequencing may be a useful tool to off-set the large fertilizer price increases that result from subsidy removal, ie: removing these import barriers and subsidies at the same time could leave domestic fertilizer prices essentially the same. While these trade barriers are high, commitments by African countries to reduce agricultural import tariffs remains low. Under the Uruguay Round Commitments, most African country tariffs are bound between 50-100 percent (Ingco and Townsend, 1998). Non-tariff barriers are also widespread across Africa, restricting market entry and competition. Several countries have a restrictive list of fertilizers that can be imported which, in some cases, has inhibited market determination of fertilizer composition (Gisselquist, 1998). Private traders in many countries are not able to import fertilizers without prior government approval involving time consuming and costly procedures to satisfy multiple agencies. These non-tariff barriers need to be removed to allow increased private sector activity in these markets. Improving Access to Foreign Markets Agricultural and agro-industrial growth cannot occur if producers are confined to local markets, thus improving Africa's access to foreign markets will be essential to stimulate growth. There are concerns that this access, particularly to OECD markets has been inhibited (World Bank, 1997). Three principle concerns raised include high external transportation costs, import barriers and strict sanitary and phytosanitary requirements. External transport barriers could be reduced with regional cooperation on maritime transport, ensuring that the African shipper councils adhere to the goal of promoting foreign trade and ensure active monitoring of costs along the transport chain to identify and take action where transport costs are excessive (World Bank, 1997a). OECD import tariffs have not caused severed market access restrictions for Africa. In fact, many African countries continue to receive Preferential Trade Agreements. Non-tariff barriers, such as strict sanitary and phytosanitary requirements, remain a potential barrier to expand trade into foreign markets. African countries need to build up capacities in the public and private sector to apply these increasingly rigorous standards. These will include building effective systems to control or eradicate plant and animal diseases and to ensure the safety of exports. As world agricultural trade becomes increasingly influenced by international trade agreements under the WTO, Africa will need to develop stronger bargaining power in these international negotiations. Historically, African countries have played a small role in this arena. During the recent Uruguay Round negotiations on agricultural trade, the major players continued to consist of the developed countries, however, a number of African countries, such as Nigeria, Senegal and Tanzania managed to actively participate in the Round. The motivation of these countries during the negotiations was mainly to safeguard old preferences or obtain compensation for potential adverse effects from higher world food prices on their import bills. As of May 1995, 38 countries in Sub-Saharan Africa (including 24 least-developed countries) had signed the World Trade Organization (WTO) Agreements and had submitted their schedules of Uruguay Round commitments in agriculture, industry and services. The WTO trade negotiations in November 1999 provide an ideal platform for African countries to voice their concerns about market access restrictions. An effective approach may be to empower larger 125 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges customs unions or free trade zones to put forward Africa's case (SADC and UEMOA) (Ingco et al, 1999). Fostering Regional Integration Consistency in the supply and demand of agricultural products and inputs is a requirement for the development of these markets. The private sector will only enter markets where they are confident that products will be available to trade. Due to the small trade volumes of crops and agricultural inputs (particularly fertilizer) in African countries, economies of scale are not realized (annual fertilizer requirements for many African countries are not large enough to fill a ship, thus increasing unit transport costs). These higher transaction costs will lower producer prices and raise inputs (fertilizers) prices for farmers. Regional integration may provide an avenue to ensure both consistency and larger volumes of supply and demand in product and factor markets, especially for fertilizer. The pooling effect of the rather small markets should enabling more bulk production and purchase of raw materials. Similarly, larger volumes allow stronger bargaining powers on world markets. However, the pooling of these markets is difficult due to the fragmented policy regimes among African countries. For countries to benefit from region trade and pooled markets the rules of the game (norms and procedures etc) must be standardized. This will indeed be important for fertilizers and for certified seeds. These larger input and output markets would be able to attract major multinational agro-business firms to invest in both production and processing. Coping with International Commodity Price Decline and Fluctuations Most African countries continue to depend on a few agricultural export crops. Over the last century, real world agricultural commodity prices have shown a declining trend, with some concerns that price volatility has increased. African development strategies need to recognize this 'stylized fact' and include coping mechanisms in their development plan. Diversification is often suggested to deal with declining prices and is a strategy more suited to cope with the secular price trends as opposed to cyclical trends. Diversifying the export base away from the traditional export crops requires significant investments to gather information on new markets and products. Although real world prices for non-traditional export crops have declined, their rate of decline has been slower than the corresponding decline for traditional exports. Nevertheless, the downward trend in world commodity prices is likely to continue in the future, which suggests that Africa must produce agricultural commodities at lower cost to prevent further erosion of its share on world markets. This is only possible via continuous technological innovation and adoption. In this regard, biotechnology will inevitably become more important globally. If African countries are to maximize the benefits of this new technology they will need to build their own national capacities to identify opportunities, gain access to appropriate technologies and evaluate the risks associated with their use (Byerlee and Gregory, 1999). In Africa, the common coping mechanisms have been variable export taxes and internal and external price stabilization mechanisms (Caisse d'Stabilization and Marketing Boards) with many countries being members of the International Commodity Agreements. Experience suggests that export 126 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges taxes have been set too high and that revenues generated have not been effectively utilized. Price stabilization policies, under the caisse systems, have been difficult to maintain due to economic and political pressures and international commodity agreements have proved to be unsuccessful over the longer term. When suggesting coping strategies cyclical trends need to be differentiated from secular trends. Common prescriptions to cope with income and foreign exchange changes due to cyclical price booms include (Varangis et al 1995): i) Don't overspend or over-commit. Some of the revenues should be used to build up international reserves or to reduce debt (Botswana has done this fairly successfully with its diamond revenues). ii) Adopt prudent monetary and fiscal policies. A typical problem is that fiscal spending plans get based on high revenues (boom years), and when these fall, the plans are maintained through distortionary borrowing. External debt could also be reduced with the extra revenues generated. iii) Hedge. Market-based hedging instruments should reduce price uncertainty (McIntire and Varangis, 1998). A commodity exchange has been developed in Zimbabwe and South Africa with a fairly effective use of forward contracting; iv)Avoid high export tax6e. Stabilization taxes are often imposed in commodity boom years (ie: coffee in Uganda) and v) Avoid cartels. International commodity agreements have not been successful at raising prices and they have fail to constrain supply effectively. In recognition of the importance of these cyclical trends to developing countries an International Task Force (ITF) for Commodity Risk Management in Developing Countries (led by the World Bank), has been set up to explore sustainable and effective ways to assist developing countries to better manage their vulnerability to risks associated with commodity price fluctuations. The task force will investigate critical issues, and propose new market-based approaches to manage commodity risks. DOMESTIC AGRICULTURAL PRICE AND NON-PRICE FACTORS Removing Remnants of Marketing Boards While policy reforms in many African countries have resulted in increases in the producer's share of the border price, interventions in several export crop markets continue to constrain producer prices. Caisse de Stabilization and marketing boards intervene in physical handling, price setting, taxation and marketing costs and margins. Producers in these markets are typified by a low producer's share of the f.o.b. price. There are some concerns that removal of these structures will result in a loss in bargaining power on export markets and quality standards will be reduced, all leading to lower prices on world markets. As yet, there does not seem to be any clear evidence that corroborates this hypothesis. Apart from cocoa, market shares are not significant enough to allow marketing boards to exercise any market power on world markets. The domestic price increases from the removal of marketing boards appears to mitigate any world price declines resulting from the loss in bargaining power, should there be any. Quality standards, however, need to be maintained in these more open markets. There is a need to encourage producers to establish professional organizations which could help in increasing their bargaining power and quality standards, governments can play a role in recognizing and legitimizing the quality norms. X27 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Removing Excessive Agricultural Taxation and Enhancing Public Rural Investment As extreme taxation (via, for example, marketing boards) is dismantled, the question arises as to how the sector should be taxed in the future. As the major sector in many African economies, agriculture will have to contribute to government revenues. The key principles that must be applied to future agricultural taxation are nondiscrimination, minimization of negative efficiency impacts, effectiveness of fiscal capture and capacity to implement (Binswanger et al, 1999). Agricultural taxation, where possible should be integrated into general value added, profits, income and wealth taxation. Efficiency losses must be minimized via the minimization of output and input taxes. Consumption taxes (such as sales and value added taxes) have the advantage that they don't effect the efficiency of production. Although consumption taxes have become a more popular form of taxation in Africa, administrative capacity to implement seems to remain limited in many Sub-Saharan African countries. The capacity to implement these tax systems needs to be strengthened and, in many cases, will have to be built up over many years during which little revenue will be generated. In this context, export taxes may be justified until the administrative capacity is developed. It appears that where export taxes are justified as substitutes for income tax in Africa, rates should be reduced substantially. The same its true for input taxation. Despite these high levels of past taxation, public investment (public services and infrastructure) in rural areas was poor. If indeed these high taxation levels were complemented with significant public investment (as in Asia) then agricultural growth would not have faired so poorly in Africa. Fiscal decentralization will improve the level and efficiency of these public investments but the progress of decentralization and devolution of resources and responsibility in Africa remains slow. Improving Transportation Infrastructure One area of high priority for public investment in rural areas is developing rural infrastructure. High transportation costs in Africa are one of the key contributors to low producer prices for export crops and inflated import prices for agricultural inputs. These costs are exacerbated for landlocked countries which are separated from ports by long distances. Road density and the quality of roads in Africa are also lower and poorer than any other region of the world. Alleviating high transportation costs can be achieved by indirect policy interventions and by investment in roads. Indirect policy interventions include market liberalization to reduce local monopolies, removal of road taxes31 and removing high import tariffs on transportation equipment on spare parts. Improving the quantity and quality of rural infrastructure will require substantial investments. One effective way of doing this, as discussed above, could be the decentralization of fiscal revenues. Fostering Public and Private Sector Partnerships Greater collaboration and understanding needs to be developed between the public and private sector. The roles of each sector need to be clearly defined. Governments can improve private sector 31 Not to be confiised with user fees. 128 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges activity by providing a range of public goods. These include investments in infrastructure (roads and electricity), ensuring rule of law and defending open entry and competition. Investments in infrastructure such as roads (both in terms of quantity and quality) could improve market access and reduce transaction costs, providing electricity to rural areas may encourage private activity such as private millers and processors, as a common constraint has been the lack of access to energy sources. Subsidies on electricity may be needed, and if they are provided they should be explicitly included in the budget and not hidden in losses of the distribution authority. Providing key market information (prices, volumes produced, etc.), and ensuring its widespread dissemination will encourage a more rapid response from the private sector. Assuring quality control is also another critical role that requires public-private partnership. Aid and Input Markets This study has only addressed one strategic agricultural input, namely fertilizer. In this market across Africa, private sector entry has been limited and volumes traded are small. As previously highlighted non-tariff barriers continue to restrict trade and private sector activity. More significantly, fertilizer aid, in its present form, has caused significant disruptions to fertilizer markets in Africa. A widely recommended strategy is that fertilizer aid should be untied from the purchase of particular types of fertilizer from specific sources and should be provided in cash rather than kind (Donovan and Casey, 1996; Ndayisenga and Schuh, 1995), if this cannot be done, fertilizer aid should be abolished. As these corrective actions are yet to fully take place, an immediate strategy for African countries should be to improve the effectiveness of the aid and in the specific case of 2KR: there needs to be greater transparency and consistency in the preparation of the requirement list (request letter); an increase in the speed of completing relevant documentation (requests letters, exchange of notes, banking agreement and authorization to pay); the sale of the 2KR aid (fertilizers) in the recipient country at market prices; an elimination of subsidies on transportation and storage; identification of clearly defined uses of the counter part fund; and removal of uncertainty on government actions. AREAS FOR FURTHER WORK The complexities and inter-linkages within agriculture make it extremely difficult to cover all aspects of agricultural incentives in one study. While providing some insight into the macroeconomic environment, trade and market access and several domestic price and non-price factors these are by no means the only issues. Further work on incentives needs to examine issues of agricultural labor and gender inequality (Blackden and Bhanu, 1999), rural finance, tenure security, agricultural technology and public rural investment. Agricultural labor and gender inequality: Where rural food markets are non-existent or at early stages of development, rural households allocate their household labor to ensure domestic food security. In Africa, women account for a larger proportion of the time spent on food production than men. Given the multitude of tasks women undertake in the household (collecting firewood and water, cooking, etc.) and the significant labor constraint they face, more work needs to be done on identifying and developing appropriate labor saving technologies which cover the full range of their domestic and 129 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges economic tasks. It is only when their labor constraint is reduced will they be more responsive to economic incentives. Tenure security: Different types of land tenure system have differing impacts on the investment incentives of farmers. In Africa, these systems range from communal tenure through community tenure to individual private tenure. Rural finance: Lack of access to credit has been highlighted as a key constraint to farmer investments. However, credit alone will not finance the constant and prolonged stream of investments required to capitalize African farms. It is likely that the bulk of farmers in Africa will have to finance most of their investments out of savings in cash or kind. Nevertheless, well functioning financial systems could play a very useful role in the management of savings and in alleviating liquidity constraints. More work is required to develop innovative ways to establish these well functioning financial system. Agricultural technology: As briefly mentioned in the study the development of new technologies is a key to improving the profitability and agricultural production incentives of African agriculture and maintaining competitiveness on world markets. There has been a significant amount of work and investment into agricultural research and extension, yet land productivity remains virtually stagnant with some improvements in labor productivity. There needs to be further work on developing appropriate technologies and identifying and developing the institutions which need to be in place to ensure adoption of these technologies. Africa will also face the challenge of dealing with biotechnology and intellectual property rights. More work is certainly required to identify the actions needed by African countries in this regard. Public expenditure: As argued in this study, agriculture has been heavily taxed, yet there has not been a continual period of significant public investment in rural areas. Poor rural infrastructure has raised transaction costs for farmers and inhibited incentives. The range of investment options in rural areas are huge, public investments usually include transportation infrastructure, water supply and irrigation, electrification and communication, agricultural research and extension and investment in human capital. More work is needed to analyze the appropriate levels of public investment in rural areas, the allocation of these investments, their effectiveness and to identify innovative ways of financing these investments. 130 PART V COUNTRY PROFILES g r . 4 \ ~~~~~~~~~~~~~~~~~~Central Sierra Leone Somalia Cote d'lvoire Ghana Togo og DemrDocriatic The Gambia ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~- Q~~echle Guineau Bissatua uie / og 1l l C_ uud Guineaiclp Conohippiaw Maaw Policy profiles and policy diamonds were developed for these countries. 'A l - : ' ,Cors West Africa Ghana, Mal, Nigeria, Senegal,I Eastern & Malawi, Kenya, South Africa, Tanzania, ,Nmba . { Madagascar SouthernAfrica U Uganda,Zimbabwe Uga Z f Only macroeconomic policy profiles were developed for these countries of Botswana, Burundi, Central African Republic, Chad, Congo, Ethiopia, b |Gabon, Madagascar, Mauritania, Niger, Rwanda, Sierra Leone, Zambia |_\ Mozamnbique __________________________________Principe _____Malwaawin No policy profiles were develped for these countries Como Figure 8.1: Extent of Sub-Saharan African Country Profiles. Agricultural Incentives in Sub-Saharan Africa: Policy Challenges DEFINING THE POLICY DIAMONDS This section attempts to develop pricing policy diamonds for individual African countries (Figure 8.1) Two diamonds are developed, the outer diamond (along the axis) represents the frontier, while the inner diamond represents the current policy stance of the country, measured by some proximate policy indicators. Four policy scores are developed (macroeconomic, export crop, food crop and fertilizer policy) which are represented along each axis of the diamond and are constructed using a blend of price ratios and qualitative assessments. The distance between the two diamonds, along the axis, gives an indication of the distance a particular country's policies are from the perceived frontier. Macroeconomic Policy Frontier diamond Country Policy Fertilizer / ,' 'T\ Diamond Policy > ^ ,' >2\ Export Crop \ t ~~~~~Policy Food Crop Policy Macroeconomic Policy: The overall macroeconomic policy stance is calculated in the same way as the macroeconomic policy scores in Adjustment in Africa, 1994 (Table A3 in the appendix). An aggregate score of the fiscal, monetary and exchange rate policy stance is derived using data from 1996-97. These were converted into an index ranging from 0 to 100, where a value of 100 represents the point on the outer diamond. This would be a budget deficit of less that 1.5 percent of GDP, Seigniorage of less that 0.5 percent, Real interest rates of between -3 and 3 and a parallel market premium of less that 10 percent. Export Crops Policy: The producer's share of the f.o.b. price was calculated for the major export crops in the respective countries. A weighted average (by export value) was used to aggregate these shares to form a single share per country. This value was used as the export crop policy score. This indicator not only measures domestic export crop policies (pricing, marketing etc.), but also transportation and transaction costs. However, as the earlier analysis suggested (chapter 5), policy differences explain much of the difference in producer's share of the f.o.b. price. All of the factors which this indicator measures (policy, transaction costs etc) affect agricultural incentives. Food Crops Policy: This is based on the producer's share of the world price for the major food crop/s in the particular country. In many countries, particularly Southern Africa, this was maize. While it is possible to have a price ratio of greater than one, suggesting a subsidy, all scores were constrained to lie within the frontier (outer diamond). If the ratio was greater than one, the ratio minus one was subtracted from one ie: a 20 percent subsidy would effect the score in the same way as a 20 percent tax. In this sense the analysis focuses both on the farmer and fiscal balance (farmers would nearly always prefer a subsidy to no subsidy), this was only the case for two countries. Qualitative assessments were used to supplement this measure to prevent mis-specification ie: a subsidy, suggesting a ratio of greater than one, may be offset by other policy distortions that decreases the producer price, thus the final score may lie on the frontier. Fertilizer Policy: An aggregate score of trade and pricing policy was constructed using both quantitative data and a qualitative assessment (tariff rates, other trade barriers, pricing policy - Table A9 in the appendix). 135 Agricultural Incentives in Sub-Saharan Africa.- Policy Challenges AN ANALYSIS OF PRICE POLICIES OF 16 AFRICAN COUNTRIES Macroeconomic Policy Macroeconomic Policy Benin The Gambia Fertilizer Export Crop Frize 7Export Crop Policy + Policy poli Policy Food Crop Policy Food Crop Policy Macroeconomic Policy Macroeconomic Policy Burkina Faso Ghana Fertilizer / ExportCrop Fertilizer /' i -, Export Crop Policy , Policy Policy Policy Food Crop Policy Food Crop Policy Macroeconomic Policy Macroeconomic Policy Cameroon . Kenya Fertilizer / . Export Crop Fertilizer Export Crop Policy Policy Policy < Policy Food Crop Policy Food Crop Policy Macroeconomic Policy Macroeconomic Policy /Cte d'Ivoire Malawi Fertilizer / Export Crop Fertilizer - ' ' Export Crop Policy . Policy Policy '. Policy Food Crop Policy Food Crop Policy 136 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges POLICY DIAMONDS (continued) Macroeconomic Policy Macroeconomic Policy /4'\ Mali X Tanzania Fertilizer - - Export Crop Fertilizer -, Export Crop Policy t~~ t ~;7 Policy Policy - X Policy Food Crop Policy Food Crop Policy Macroeconomic Policy Macroeconomic Policy Nigeria Togo Fertilizer Export Crop Fertilizer /. - Export Crop Fertilizer X - xorCo Policy -7<1 , Policy Policy ' Policy Crop Policy Food Crop Policy Food Crop Policy Macroeconomic Policy Macroeconomic Policy Senegal - - -Uganda / .' '. \ Fertilizer / Export Crop Fertilizer ' Export Crop Policy - Policy Policy 70 T Policy Food Craop Policy Food Crop Policy Macroeconomic Policy Macroeconomic Policy -, - X ~, South Africa Zimbabwe Fertilizer /, - ', Export Crop Fertilizer - . Policy t t Policy Policy ExpotPolicy Food Crop Policy Food Crop Policy 137 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges 16 African Countries 10 West African Countries 6 Eastern and Southern African Countries 100 100~ 100 0 80 801 8 0 60 60 - 40 60 0 4 8 40 - 40 _40 _ 0 20 - 20 - ___20___; S o- I e -° --0 ,_ ~~~~ 0 ~~~~~~~~~0 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Policy score quintiles Policyuintiles intiles Policy score quintiles Improvement in policies Improvement in policies J Improvement in policies Macroeconomic Policy Macroeconomic Policy Macroeconomic Policy c¢ 100 - 100 - 100 80 80 80 0~~~~~~~~~~~~~~~~~~~~6 08 60~ 60-6_ 40 -40 -402 o 20 - 20 -_20 s o-_'e' °0 -- ° I ' ' 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Policy score quintiles , Policy score quintiles Policy score quintiles Improvement in policies Improvement in policies Improvement in policies Export Crop Policy Export Crop Policy Export Crop Policy o 100 -100 100 0 '1 * 0 80 6 0 = 60 -_60 -_6 0 40- 40 _ 40 20- 20 4J 20 S o- ' ' O I I11 _0 O I 2 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Policy score quintiles Policy score quintiles Policy score quintiles Improvement in policies Improvement in policies Improvement in policies Food Crop Policy Food Crop Policy Food Crop Policy 100 100 1002 80 -80 80 8 60 - 60- 60- 8 40 - 40 40_ o 20 - 20 20 00 O 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Policy score quintiles Policy score quintiles Policy score quintiles Improvement in policies Improvement in policies Improvement in policies Fertilizer Policy Fertilizer Policy Fertilizer Policy Figure 8.2: Frequency Distribution of Policy Scores 138 COUNTRY SUMMARIES Agricultural Incentives in Sub-Saharan Africa: Policy Challenges GUIDE TO THE SUMMARY STATISTICS Macroeconomic indicators: Data for the macroeconomic indicators are from the World Bank and the IMF. See Table A3. The real interest rate was calculated as Real Interest Rate = +r -1 *100 lI+p where r is the nominal interest rate on deposits and p is the inflation rate. Agricultural Growth: Data used for the agricultural growth indices are from the World Bank and the FAO. The agricultural value added per worker values are from the World Development Indicators, 1998 (see Table Al). Multi-factor productivity: See Calculating Agricultural Productivity on the first page of the appendix and Box Al. Terms of Trade: see Calculating the External Trade for Agriculture in the appendix. Barter terms of trade: The external barter terms of trade was simply calculated as the ratio of a price index of agricultural commodity exports to a price index of agricultural (food) imports. The indices were constructed using Fischer's ideal index as an aggregate of the major export crops and import crops in the respective countries. The data were obtained from the FAO trade statistics from which a price index was derived as a ratio of value to quantity. Net income terms of trade: The net income terms of trade was calculated as PX net income terms of trade = -PMQx rm where Px is the agricultural export price index, Pm is the agricultural import price index (in this case food crop imports) and Qx is the quantity exported. Tsakok, (1990) provides a more extensive definition and highlights some of the limitations of these measures. Agricultural Exports, Food Crops and Fertilizers: Export and production shares are calculated on the basis of FAO data (See Table A4, A5, A6, A7 in the appendix). Exchange Rate Pass Through: The exchange rate pass-through was calculated as the percentage change in the real export crop price (adjusted for the trends in the world price) minus the change in the real effective exchange rate. The period over which the change was estimated was 1990 to 1996-97 for export crops. A positive value suggests an enhanced exchange rate pass-through while a negative value suggests that the pass-through has been inhibited (see Table 4.2). 140 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges BENIN General Trends: Benin has enjoyed rapid growth in real agricultural GDP since 1990, increasing at 5.2 percent per annum. Agricultural productivity has also improved with an increase in cereal yields, agricultural value added per worker and multi- factor productivity. Cotton is the dominant export crop accounting for over 90 percent of agricultural exports. Although real cotton producer prices have increased since 1990, with the favorable trends in world prices, extensive intervention in the domestic market has resulted in limited pass-through of the currency devaluation to producer prices, with producers only receiving about 40 percent of the border price. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/9 7 Fiscal balance including grants (% GDP) -0.1 Seigniorage (%) 0.2 / 'tx . , \Inflation (/) 6.0 Fertilizer __.___ Export Crop Real interest rates (Y) 1.5 Policy 7 Policy Change in REER since 1990 (/) 31 \ '. { 0 , / Agriculture's share of GDP (J) 38 Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (% p. a) 5.2 Food Crop Policy Cereal yields growth (%p.a. since 1980) 3.0 Macroeconomic Policy: The overall macroeconomic Multifactor productivity (%"p.a.) 1.8 MacrecoomicPolcy:The verll acroconmic Agric. v.a per worker (1987 $) 1979-81 374 policy stance has been significantly improved. The Agric. v.a. per worker (1987$) 1994-96 563 overall fiscal deficit (including grants) has been reduced and seigniorage and inflation are low. External Terms of Tradefor Agriculture, 1990-1996/9 7 Exchange rate policy has improved with the 1994 Barter terms of trade (% p.a.) devaluation of the CFA franc. Net income terms of trade (% pa.) Export price/world fertilizer price(% p.a) Export Crop Policy: SONAPRA, a government parastatal, dominates the marketing of cotton. Pan- Agricultural Exports, 1996/97 Cotton seasonal and pan-territorial prices are announced Share of total agricultural exports (%) 94 before planting, Marketing, ginning, transportation and Share of SSA exports (%) 11 distribution of seed cotton are all controlled by the Annual change in real producer prices(/) 2.0 parastatal. Producers share of f.o.b. price (%) 37 Border price! world price ratio (/) 95 Food Crop Policy: Since liberalization of maize Exchange rate pass-through (/)* -18 marketing, the marketing system is completely managed by the private sector. ONASA (Office Foods Crops, 1996/97 Cassava Yams National d'Appuri a la Securite Altimentaire) is Share of food crops (/) 41 39 responsible for supporting food security in the country Share of SSA food crop production (/) 2 4 and controls only 0.2 percent of the volume of maize in Annual change in real producer prices(%) - - the market. Fertilizer Prices, 1990-1 996/9 7 Fertilizer Policy: Six companies and their RealiUr Prices (99change)94 representative distributors served the fertilizer market Real Urea prices (s change) 47 in 1996/97. The market is heavily regulated by Exchange rate pass-through (a)si SONAPRA and the Ministry of Rural Development, *Prce changes and exchange rate pass-through are estimated controlling who can import fertilizer and how much from 1990 to 1996/97 can be imported . The distribution of each company's fertilizer quota is also controlled by designating delivery to specific regions. The government continues to fix the price of fertilizer pan-territorially. Some remaining policy constraints on prices: * Pricing policy intervention in the cotton industry continues to provide farmers with a low share of the border price. The pass-though of the currency devaluations to producer prices has been inhibited. * Fertilizer market regulation and price setting has stifled private sector activity in this market. 141 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges BURKINA FASO General Trends: Since 1990, real agricultural GDP has grown at 3.6 percent per annum. Growth has been particularly strong since 1995, being fueled by the favorable trends in real world commodity prices. Agricultural productivity has shown some improvements with an increase in cereal yields and agricultural value added per worker. Multi-factor productivity, however, has declined. With the increase in the world price of cotton since 1990, the external terms of trade for agriculture have been positive. Real agricultural producer prices have correspondingly increased but the producer's share of the border price remains low and exchange rate pass-through to producer prices has been inhibited. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/9 7 Fiscal balance including grants (% GDP) -1.9 Seigniorage (%/) 2.5 Inflation (%/) 4.2 Fertilizer - Export Crop Real interest rates (°/) 0.4 Policy \ Policy Change in REER since 1990 (%/6) 49 Agriculture's share of GDP (%) 35 \ - / Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (%op.a.) 3.6 Food Crop Policy Cereal yields growth (% p.a. since 1980) 2.0 Multifactor productivity (% p. a.) -1.4 Macroeconomic Policy: Overall improvement since Agric. v.a. per worker (1987 $) 1979-81 155 1990/91. Monetary policy deteriorated slightly with an Agric. v.a. per worker (1987 $) 1994-96 182 increase in seigniorage. Fiscal and exchange rate policy Exernal Terms of TradeforAgriculture, 1990-1996/97 has improved significantly with the 50 percent Barter terms of trade (%orp.a) 4-2 devaluation of the CFA franc in 1994 4.2 Net income terms of trade (% p.a.) 0.9 Export Crop Policy: SOFITEX continues to dominate Export price/world fertilizer price (Yp.a) 4.1 the cotton industry. This parastatal controls exports, producer prices, transportation and distribution. The AgriculturlExports, 1996/9e7 Cotton price interventions have resulted in farmers receiving a Share of total agricultural exports (Y) 69 small share of the border price (35 percent) which has Share of SSA exports (nir ) 7 declined in recent years. Annual chanlge in real producer price (Y) I1.5 Producers share of fo.b. price (%) 35 Food Crop Policy: While there has been progress in Border price/ world price ratio (Y) 96 liberalization of many food markets, trade restrictions Exchange rate pass-through (%) -30 and controls have continued to distort rice and sugar Foods Crops, 1996/97 Sorghum Millet prices. Share of food crops (Y) 52 32 Fertilizer Policy: Tariff rates on fertilizer remains at 10 Share of SSA food crop production (Y) 7 6 percent. SOFITEX dominates the fertilizer market in Annual change in real producer price(%.) -10 -8 the cotton growing areas. DIMA distributes aid funded fertilizer to non-cotton regions. Food crop farmers Fertilizer Prices, 1990-1996/97 outside the cotton areas have access to fertilizer only Urea price (% change) 9 when fertilizer aid is available. Exchange rate pass-through (Y) -13 *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Some remalning policy constraints on prices: * Pricing policy intervention in the cotton industry continues to provide farmers with a low share of the border price. The pass-through of currency devaluation to producer prices has been inhibited. * Price signals in the rice and sugar markets continue to be distorted by trade restrictions and price controls. * The dominance of SOFITEX in the fertilizer market inhibits the expansion of local private traders who acquire the DIMA supervised fertilizer. 142 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges CAMEROON General Trends: Real agricultural GDP has grown at 4.5 percent per annum since 1990. Favorable world prices for coffee and cotton have improved the external terms of trade for agriculture with a large improvement in the net income and barter terms of trade. Cereal yields have improved but agricultural value added per worker has declined together with multi-factor productivity. Both coffee and cocoa producers have enjoyed a large share of the border price but the exchange rate pass- through to producer prices for cocoa has been inhibited. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/9 7 Fiscal balance including grants (% GDP) -1.4 Seigniorage (/) -0.9 Inflation (%) 5.9 Fertilizer - Export Crop Real interest rates (/) -0.9 Policy t Policy Change in REER since 1990 (%) 78 Agriculture's share of GDP (%l) 40 X . */ Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (%lp. a.) 4.5 Food Crop Policy Cereal yields growth (% p.a. since 1980) 2.2 Multi-factor productivity (% p. a.) -1.1 Macroeconomic Policy: Since 1990-91, the overall Agric. v.a. per worker (1987 $) 1979-81 861 macroeconomic policy stance has improved significantly Agric. v.a. per worker (1987 $) 1994-96 827 with a reduction in the overall fiscal deficit, lower real interest rates and a significant currency devaluation in External Terms of Trade for Agriculture, 1990-1996/97 1994. Barter terms of trade (% p.a.) 11.9 Net income terms of trade (% p. a.) 12.9 Export Crop Policy: ONCPB (similar to the caisse de Export price/world fertilizer price(% p.a) 3.4 stabilisation) controlled the marketing of cocoa until 1990. By 1993/94 a more competitive free market and AgriculturalExports, 1996/97 Cocoa Coffee export system had been adopted. Coffee marketing was Share of total agricultural exports (/) 25 26 also controlled by the ONCPB but there has also been a Share of SSA exports (%) 6 7 subsequent move to a more competitive market. The Annual change in real producer prices(/) 2.5 9.8 cotton sector is gradually being opened up to allow more Producers share of f.o.b. price (/) 76 73 competition, SODECOTON currently dominates this Border price/ world price ratio (/) 86 87 market. Exchange rate pass-through (%/)* -37 14 Food Crop Policy: Ninety five percent of food being Foods Crops, 1996/97 Cassava Maize marketed is by local private traders, the remainder is Share of food crops (°) 53 23 marketed by Government institutions and parastatals. Share of SSA food crop production (/) 2 2 The volumes traded are small and the transportation Annual change in real producer prices(%) - -1.3 system is poor which has an adverse effect on food distribution efforts. Fertilizer Prices, 1990-1996/9 7 Real Urea prices (% change) 141 Fertilizer Policy: All fertilizer subsidies have been Exchange rate pass-through (/) 27 removed. Fertilizer import tariffs remain at about 6 *Price changes and exchange rate pass-through are estimated percent. from 1990 to 1996/97 Some remainingpolicy constraints on prices: * Interventions continue in the cotton and palm oil sector. SODECOTON and SOCAPALM control cotton and palm oil exports, respectively. * The inadequacy of transport infrastructure is a significant impediment on development of the food distribution system (inhibiting market integration), for export crops this increases the wedge between the fo.b. price and the producer price, inhibiting producer incentives. * High export taxes are still applied to commodity exports. 143 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges COTE D'IVOIRE General Trends: Real agricultural GDP has grown at 2.6 percent per annum since 1990. While cereal yields have increased at 1.3 percent per annum, agricultural value added per worker has declined and multi-factor productivity has remained fairly stagnant. The favorable world prices for cocoa and coffee have resulted in favorable external terms of trade. The net income terms of trade have been more favorable than the barter terms of trade reflecting the increase in the volume of agricultural commodities exported. Coffee producer prices have increased significantly but the exchange rate pass-through of the currency devaluation to these prices has been inhibited. The same effect is observed for cotton where the producers share of the border price remains at about 50 percent. Pricing Policy Diamond Summary Statistics Macroeconomic Policy I. Macroeconomic Environment, 1996/97 / T, ' t '. \ Fiscal balance including grants (% GDP) -2.0 / # T . \ Seigniorage (/) 1.1 Fertilizer -. Export Crop Inflation (%) 4.4 Policy Policy Real interest rates (/) 1.4 *j" ! .' / Change in REER since 1980 (%) 33 Agriculture's share of GDP (%/) 28 Agricultural Growth, 1990-1996/97 Food Crop Policy Real agricultural GDP growth (% p.a.) 2.6 Cereal yields growth (%lp.a. since 1980) 1.3 Macroecononuc Policy: Since 1990 there has been a Multifactor productivity (%p.a.) 0.3 significant improvement in the overall macroeconomic Agric. v.a. per worker (1987 $) 1979-81 1527 policy stance. The CFA franc was devalued by 50 Agric. v.a. per worker (1987 $) 1994-96 1354 percent in 1994 which has increased the competitiveness of exports. Inflation and real interest rates are lower and External Terms of TradeforAgriculture, 1990-1996/97 the fiscal deficit has been reduced. Barter terms of trade (% p.a.) 3.9 Export Crop Policy: Cocoa and coffee was marketed Net income terms of trade (%pa) 6.8 under a Caisse de Stabilisation system. CAISTAB Export price/world fertilizer price (% p. a.) 3.9 ensured a rigid system of controls and regulations covering the entire marketing chain. Prices were agricultural Exports 1996/97 Cocoa Coffee administratively determined and cocoa farmers received Share of total agricultral exports (l) 56 16 50-55 percent of the f.o.b. price during the 1990s. The Share of SSA exports (ni ) 62 18 cocoa and coffee markets have subsequently (in 1998/99) Annual change in real producer price (% ) 3.2 9.7 cocoa ' ~~~~~~~~~~~~~~Producers share of f.o.b. price (%0) 46 72 been liberalized. Border price/ world price ratio (/) 96 92 Food Crop Policy: Food markets have been liberalized. Exchange rate pass-through (%/)* -30 -42 There has been a recent elimination of transport subsidies and a liberalization of the price controls on all classes of Foods Crops, 1996/97 Yams Cassava imported rice. Share of food crops (°/) 44 29 Share of SSA food crop production (%) 8 2 Fertilizer Policy: Fertilizer subsidies have been removed Annual change in real producer price (/) - - and fertilizer import tariffs were not applied until 1997. Since 1998, the applied rates are 22.6% for mixed FertilizerPrices, 1990-1996/97 fertilizer and 12.5% for simple fertilizer. Exceptions are Urea prices (% change) 23 made for farmers upon request to the Government, in this Exchange rate pass-through (%) -34 case the rate is 7.6 %. In the context of UMEOA, new *Price changes and exchange rate pass-through are estimated tariffs will apply at a uniform rate of 5%, effective from from 1990 to 1996/97 July 1999. Some remaining policy constraints on prices: * Continuing interventions in the cotton market restricts the producers share of the border price and inhibits the pass-through of currency devaluation to producer prices. 144 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges THE GAMBIA General Trends: Although real agricultural GDP has grown at 0.6 percent per annum since 1990, cereal yields, agricultural value added per worker and multi-factor productivity have declined. The dominant export crop is groundnuts with millet and rice being the dominant food crops. The real producer price of groundnuts has decline by -0.1 percent per annum since 1990 and producer's receive about 65 percent of the border price. The real price of rice has increased significantly together with the real fertilizer price. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroecononic Environment, 1996/97 Fiscal balance including grants (% GDP) -8.2 Seigniorage (°/) 2.1 Inflation (%) 2.5 Fertilizer - ' Export Crop Real interest rates (C) 10.2 Policy Policy Parallel mkt exchange rate premium (%/0) 10.4 X. . XAgriculture's share of GDP (/) 28 '-V ;./ Agricultural Growth, 1990-1996/97 Food Crop Policy Real agricultural GDP growth (% p.a.) 0.6 Cereal yields growth (% p. a. since 1980) -1.4 Multifactor productivity (% p.a.) -2.6 Macroeconomic Policy: The overall macroeconomic Agric. v.a. per worker (1987 $) 1979-81 215 policy stance has deteriorated since 1990. The overall Agric. v.a. per worker (1987 $) 1994-96 167 fiscal surplus has been eroded with a large current deficit of about 8 percent of GDP. Real interest rates External Terms of TradeforAgriculture, 1990-1996/97 remain high. Exchange rate policy has improved with Barter terms of trade (% p. a.) a reduction of the parallel market exchange rate Net income terms of trade (% pa.) premium. Export price/World fertilizer price(% p.a) Export Crop Policy: Groundnut marketing and Agricultural Exports, 1996/97 G'nuts exporting have been liberalized and private traders Share of total agricultural exports (%) 52 can buy directly from farmers and export groundnuts. Share of SSA exports (/) 18 Annual change in real producer prices(%) -0.1 Food Crop Policy: There are no direct controls on Producers share of f o.b. price (lo) 65 producer and consumer prices for sorghum, rice and Border price/ world price ratio (%) 52 millet. The government maintains the management of Exchange rate pass-through (%) * -11 national security stocks. Foods Crops, 1996/97 Millet Rice Fertilizer Policy: Despite liberalized fertilizer Share of food crops (%) 55 17 markets only a few registered private entrepreneurs Share of SSA food crop production (%) 0.5 0.2 have entered the market. Uncertainties in fertilizer Annual change in real producer prices(%0) - 5.9 demand and in the future role of government and international donors in the fertilizer market have Fertilizer Prices, 1990-1996/97 inhibited widespread private sector entry. Real Urea prices (% change) 76 Exchange rate pass-through (%) 52 *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Sone remaining policy constraints on prices: * The deterioration of the fiscal balance needs to be reversed - there was some evidence of this in 1997. * The removal of the uncertainty of government policy is required to encourage private sector entry into product and factor markets. * Subsidized capital to the current participants in the fertilizer market (the GCU and the NGOs) has inhibited private sector entry. Private traders have limited access to capital to finance private sector fertilizer operations. 145 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges GHANA General Trends: Real agricultural GDP has grown at 2.7 percent per annum since 1990. Multi-factor productivity has also increased together with cereal yields. Although world cocoa prices have increased, the external terms of trade for agriculture have declined as import prices (wheat, rice and sugar) increased at a greater rate than export prices (cocoa). The increased exports of cocoa had some impact at off-setting the decline in net income terms of trade. Cocoa producers share of the border price remains low at about 40 percent Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 / 4.2 \ Fiscal balance including grants(/ GDP) -9.4 Fertilizer . i Export Seigniorage (°/) 2.1 Export Crop Inflation (/) 37.3 Policy . Policy Real interest rates (/) -7.6 Parallel mkt exchange rate premium (%) 1.6 Agriculture's share of GDP (/) 44 Food Crop Policy Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (% p.a.) 2.7 Cereal yields growth (% p.a .since 1980) 4.5 Macroecononic Policy: Between 1990 and Multifactor productivity (%/p.a.) 3.0 1996/97 the overall macroeconomic environment Agric. v.a. per worker (1987 $) 1979-81 813 deteriorated significantly. The fiscal deficit Agric. v.a. per worker (1987 $) 1994-96 684 increased to about 10 percent of GDP and the inflation rate increased to about 40 percent. External Terms of TradeforAgriculture, 1990-1996/97 Barter terms of trade (% p. a.) -5.9 Export Crop Policy: COCOBOD, the cocoa Net income terms of trade (% p.a) -2.7 marketing board, controls all stages of cocoa Export price/world fertilizer price (/p.a) -1.3 marketing from purchases at the farm-gate through to exports and the sale to domestic processors. A Agricultural Exports, 1996/97 Cocoa fixed cocoa price is set for the crop year which is Share of total agricultural exports (/) 92 less that half of the border price. Share of SSA exports (/o) 20 Annual change in real producer price(%/) 0.7 Food Crop Policy: Taxes and subsidies have been Producers share of f.o.b. price (°/) 39 removed and food crops are traded on open Border price! world price ratio (%) 96 markets. The government abolished the guaranteed Exchange rate pass-through (%) * -9 minimum price for both maize and rice in 1990. Deteriorating transportation systems have had a Foods Crops, 1996/97 Yams Cassava negative impact on trade in roots and tubers. Share of food crops (SO) 21 63 Share of SSA food crop production (%) 7 8 Fertilizer Policy: Although fertilizer subsidies Annual change in real producer price (%) - - have been removed continuing trade controls (type restrictions and import approval requirements) Fertilizer Prices, 1990-1996/9 7 restrict market entry and competition, contributing Ammonium sulphate prices (% change) 46 to high margins and prices. Exchange rate pass-through (r%) 47 *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Sone remaining policy constraints on prices: * Intervention in cocoa marketing have resulted in a low producers share of the border price. * The existence of continuing non-tariff barriers increases fertilizer prices. These controls are in the form of limits on the types of fertilizers that can be imported and strict requirements for government approvals on imports. 146 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges KENYA General Trends: Since 1990, real agricultural GDP has grown at 1.0 percent per annum, cereal yields have increased at 0.3 percent together with an increase in multi-factor productivity. Agricultural value added per worker has also shown a marginal decline in the 1990s. The external terms of trade for agriculture has improved significantly, with the net income terms of trade being more favorable than the barter terms of trade. Real producer prices for coffee have been more favorable than for tea, following the trends in world prices. Tea and coffee producers receive about 80 percent of the border price. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 Fiscal balance including grants (% GDP) -1.6 Seigniorage (%) 3.9 /, Export Crop Inflation (%o) 10.1 Fertilizer Export Crop Real interest rates (°/) 7.9 Policy - Policy Parallel mkt exchange rate premium (Y) 4.2 - - W , ',/ Agriculture's share of GDP (%) 29 Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (% p.a.) 1.0 Food Crop Policy Cereal yields growth (% p.a. since 1980) 0.3 Macroeconomic Policy: The overall fiscal deficit has Multifactor productivity (% p.a.) 1.5 been significantly reduced from almost 6 percent in Agric. v.a. per worker (1987 $) 1979-81 268 1990 to less than 2 percent in 1996-97. Seigniorage Agric. v.a. per worker (1987 $) 1994-96 240 remains high at almost 4 percent. Good exchange rate policy has been maintained with a low parallel External Terms of TradeforAgriculture, 1990-1996/97 market exchange rate premium. The overall Barter terms of trade (% p.a) 1.4 macroeconomic policy stance has remained fairly Net income terms of trade (%p.a.) 3.4 stable since 1990. Export price/world fertilizer price(%p.a) 1.7 Export Crop Policy: Coffee and tea farners receive Agricultural Exports, 1996/9 7 Tea Coffee over 80 percent of the border price. Small-holder Share of total agricultural exports (%) 33 22 coffee farmers receive lower prices essentially Share of SSA exports (%o) 74 16 because of deductions made by inefficient co- Annual change in real producer prices(/o) -6.3 8.2 operatives. Producers share of f.o.b. price (%) 89 81 Border price/ world price ratio (%) 77 95 Food Crop Policy: Despite several attempts to Exchange rate pass-through (%) * 1 -8 reform the maize market, the government continues to intervene. Internal trade has been liberalized but Foods Crops, 1996/97 Cassava Maize there are continued restrictions on external trade. Share of food crops (°/) 22 64 Share of SSA food crop production (/) 1 8 Fertilizer Policy: The commercial import of Annual change in real producer prices(/o) - 2.2 fertilizers has been de-licensed and fertilizer prices throughout the distribution chain decontrolled. Aid- FertilizerPrices, 1990-1996/97 financed fertilizers continue to be allocated in non- Real Urea prices (% change) 2 transparent ways. Donor financed imports accounted Exchange rate pass-through (°/) -17 for about 60 percent of annual fertilizer imports. *Price changes and exchange rate pass-through are estimated from Government owned distributors continue to dominate 1990 to 1996/97 the market. Some remaining policy constraints on prices: * Government continues to intervene in the maize markets imposing restrictions on external trade. * Heavy reliance on fertilizer aid has inhibited the development of private fertilizer traders. * Deductions made by inefficient co-operatives have resulted in lower prices for small-holder coffee farmers. 147 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges MALAWI General Trends: Since 1990, real agricultural GDP has grown at 6.5 percent per annum. Cereal yields, on average, have declined, together with agricultural value added per worker. Multi-factor productivity growth has remained fairly stagnant. The external barter terms of trade have declined as the export price of tobacco has not increased as much as the price of food imports. However, this decline was almost off-set by the increase in volumes exported. Tobacco producers receive a large share of the export price. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 Fiscal balance including grants (% GDP) -5.0 Fertilizer , - - Export Crop Seigniorage (°/ 5.0 / ,, ' ., \ ~~~~~~~~Inflation (/l) 23.4 Fertilizer / .\ Export Crop Real interest rates (%) -8.1 Policy ' ' Policy Parallel mkt exchange rate premium (%) 7.8 Agriculture's share of GDP (/) 40 Agricultural Growth, 1990-1996/9 7 Real agricultural GDP growth (% p. a.) 6.5 Food Crop Policy Cereal yields growth (%lp. a. since 1980) -0.9 Multifactor productivity (% p.a.) -0.1 Macroeconomic Policy: Between 1990 and 1996/97, Agric. v.a. per worker (1987 $) 1979-81 162 the fiscal deficit increased to 5 percent of GDP. Agric. v.a. per worker (1987 $) 1994-96 156 Monetary policy deteriorated with a seigniorage of 5 percent which fueled a 23 percent inflation rate. External Terms of TradeforAgriculture, 1990-1996/97 Exchange rate policy improved with a low parallel Barter terms of trade (% p.a.) -2.3 market exchange rate premium. Net income terms of trade (% p.a.) -0.8 Export Crop Policy: Tobacco production is no longer Export price/world fertilizer price (%p.a) -5.6 restricted by quotas, although all marketing takes place Agricultural Exports, 1996/9 7 Tobacco through the (privately-run) auctions. The auction sale Share of total agricultural exports (%) 75 has been characterized by a low degree of price Share of SSA exports (°/) 32 competition. Marketing restrictions on secondary Annual change in real producer prices(%) 4.2 export crops (legumes, groundnuts and cotton) were Producers share of f.o.b. price (%) 82 removed in the early 1 990s. Small-holder tea and Border price/ world price ratio (%) 86 coffee producers are no longer required to sell Exchange rate pass-through (%) * 54 exclusively through crop authorities. F+oods Crops, 1996/9 7 Maize Food Crop Policy: ADMARC continues to sets price Share of food crops (%) 83 bands on maize production although its operations Share of SSAfood crop production () 5 account for less than 15 percent of total Annual change in real producer prices(%) -3.7 production/consumption. Some of ADMARCs holdings have been privatized and maize movement Fertilizer Prices, 1990-1996/97 restrictions have been removed. Real Urea prices (% change) 60 Fertilizer Policies: Fertilizer subsidies have been Exchange rate pass-through (%) 53 removed, and together with the currency devaluation, *Price changes and exchange rate pass-through are estimated fertilizer prices have increased significantly. The from 1990 to 1996/97 Small-holder Farmer Fertilizer Revolving Fund of Malawi (SFFRFM) continues to import fertilizer. The commercial market is dominated by a few private sector importer/wholesalers and an expanding network of small stockists. Some remaining policy constraints on prices: * Interventions in the fertilizer market continue to affect commercial prices and the willingness of the private sector to engage in formal import operations and longer term storage. * There has been some backsliding on earlier reforms in the maize market. * Internal and external transportation have been identified as causing high fertilizer prices, even after taking into account higher freight and other transportation costs on imported fertilizer. 148 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges MALI General Trends: Since 1990, real agricultural GDP has grown at 3.4 percent per annum. Productivity growth has also shown an improvement with an increase in cereal yields and value added per worker. The external barter terms of trade for agriculture have declined, but an increase in cotton production has resulted in a favorable net income terms of trade since 1990. Currency devaluation has not been fully pass-through to higher producer prices for cotton with producer's receiving about 40 percent of the border price. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/9 7 /- X Fiscal balance including grants (% GDP) -1.5 Seigniorage (Y) 1.0 Inflation ("o) 2.9 Fertilizer /, X 4 \ Export Crop Real interest rates (%) 0.0 Change in REER since 1990 (/) 53 Policy . Policy Agriculture's share of GDP f%) 48 \ . . / Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (% p. a.) 3.4 Food Cro Fp Policy Cereal yields growth (% p.a. since 1980) 0.8 Multifactor productivity (% p.a.) -1.0 Agric. v.a. per worker (1987 $) 1979-81 251 Macroeconomic Policy: Overall macroeconomic policy Agric. v.a. per worker (1987 $) 1994-96 259 improved significantly between 1990 and 1996/97. The overall fiscal deficit (including grants) declined from External Terms of TradeforAgriculture, 1990-1996/97 about 5 percent to less than 2 percent. Inflation remains Barter terms of trade (% p.a.) -1.4 low and the CFA franc has been significantly devalued. Net income terms of trade (% p.a.) 1.4 This significantly improved the competitiveness of Mali Export price/world fertilizer price(% p. a) -3.1 exports on international markets. Agricultural Exports, 1996/97 Cotton Export Crop Policy: CMDT continues to control the Share of total agricultural exports (/) 57 cotton market. Producer prices are set pan-seasonal and Share of SSA exports (/) 14 pan-territorial, announced before planting. CMDT is the Annual change in real producer prices(%) 0.8 sole buyer of seed cotton controlling transportation of Producers share of f.o.b. price (°/) 44 cotton and inputs required for its production. All cotton Border price/ world price ratio (Y) 82 gins are owned and operated by the parastatal. Exchange rate pass-through (/) * -34 Food Crop Policy: In 1987, there was full consumer and Foods Crops, 1996/97 Sorghum Millet producer market liberalization of coarse grains. Share of food crops (/o) 31 34 Livestock feed is sold under a quota system leading to Share of SSA food crops production (/) 4 6 inefficient distribution. The government maintains Annual change in real producer prices(%) - - strategic stocks of crops for food security reasons. Fertilizer Prices, 1990-1996/9 7 Fertilizer Policy: CMDT supplies all fertilizer to cotton Real Urea prices (% change) producers, determining the quantity and type of fertilizer Exchange rate pass-through (f) supplied. *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Some remaining policy constraints on prices: * Pricing policy interventions in the cotton industry continues to provide farmers with a low share of the border price and inhibit the pass-through of currency devaluations to the producer prices. * The dominance of CMDT in the fertilizer market inhibits the expansion of local private traders * The quota system for livestock feed leads to inefficient margins. * Freight transportation is high (from monopolistic tendencies from airlines companies) which impedes the growth in exports of fruit and vegetables. 149 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges NIGERIA General Trends: Between 1990 and 1997, real agricultural GDP has grown at 2.9 percent per annum, aided by the favorable trends in real world commodity prices, particularly for rubber. Although cereal yields have declined, agricultural value added per worker, together with multi-factor productivity, increased. The external terms of trade for agriculture have improved and producer prices for cocoa and rubber have increased significantly. Producers receive a large share of the border price with a complete pass-through of currency devaluations to producer prices. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 Fiscal balance including grants (% GDP) 3.3 Seigniorage (%) 1.0 Inflation (%) 19.9 Fertilizer / ' Export Crop Real interest rates (%/) -12.2 Policy { " Policy Parallel mkt exchange rate premium (°o) 274.8 \ . , / Agriculture's share of GDP (%) 43 Agricultural Growth, 1990-1996/9 7 Real agricultural GDP growth (%p. a) 2.9 Food Crop Policy Cereal yields growth (% p a. since 1980) -1.5 Multifactor productivity (% p. a.) 3.6 Agric. v.a. per worker (1987 $) 1979-81 479 Macroeconomic Policy: Between 1990 and 1997, the Agric. v.a per worker (1987$) 1994-96 684 overall macroeconomic policy stance deteriorated. While the overall fiscal deficit was small, inflation was External Terms of Trade forAgriculture, 1990-1996/97 high, real interest rates were negative and the parallel Barter terms of trade (%./ p.a.) 7.0 market exchange rate premium was large. This decline Net income terms of trade (9/s p.a.) 10.5 was largely the result of the collapse of the financial Export price/world fertilizer price(%p.a.) 9.0 system. Agricultural Exports, 1996/9 7 Cocoa Rubber Export Crop Policy: Price controls have been Share of total agricultural exports (/) 51 24 abolished for export crops and marketing boards have Share of SSA exports (/) 10 32 been removed (cocoa board). A subsequent surge of Annual change in real producer prices(o%) 6.8 15.2 private sector activity in the marketing of these crops Producers share of f.o.b. price (/) 98 100 has resulted in an increase in the producers share of the Border price/ world price ratio (%q) 92 93 border price. Exchange rate pass-through (%/) * 73 69 Food Crop Policy: A strategic grain reserve and Foods Crops, 1996/97 Yams Cassava national buffer stock are managed by the government. Share of food crops (/) 30 42 Import restrictions are imposed on grains such as rice, Share of SSA food crop production (/) 72 37 wheat and maize. Annual change in real producer prices(%) - Fertilizer Policy: Subsidies on fertilizers have been Fertilizer Prices, 1990-1996/97 significantly reduced. The large differential between Urea prices (% change) 8 the border price and the official price created by past Exchange rate pass-through (/) 35 subsidies has induced distributors to smuggle the fertilizer out of Nigeria to be sold on other markets at *Price changes and exchange rate pass-through are estimated from large profits. 1990 to 1996/97 Some remaining policy constraints on prices: * Despite announced policies, the private sector has not been encouraged to participate in the supply of agricultural inputs. * Government involvement in the food sector inhibits the development of private sector activity in grain markets. * Import restrictions on grains such as rice, wheat and maize resulted in high domestic food prices. 150 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges SENEGAL General Trends: Real agricultural GDP grew at 2.5 percent per annum between 1990 and 1997. Cereal yields and agricultural value added per worker increased slightly but multifactor productivity has remained fairly stagnant. Real producer prices for cotton and groundnuts have increased but the currency devaluations have not been fully passed-through to these prices. These producers receive about 50 percent of the border price. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 Fiscal balance including grants (% GDP) -0.2 Seigniorage (%l) 0.3 Inflation (94) 2.3 Fertilizer / Export Crop Real interest rates (%) 3.6 Policy T Policy Change in REER since 1990 (%/) 43 Agriculture's share of GDP (%/) 18 Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (%lp.a.) 2.5 Food Crop Policy Cereal yields growth (%lp.a. since 1980) 1.0 Multifactor productivity (% p. a.) -0.1 Macroeconomic Policy: The fiscal deficit remains low. Agric. v.a. per worker (1987 $) 1979-81 328 Monetary policy has improved with lower real interest Agric. v.a. per worker (1987 $) 1994-96 357 rates and low inflation and seigniorage. The CFA franc was devalued by 50 percent in 1994. External Terms of TradeforAgriculture, 1990-1996/97 Barter terms of trade (% p.a) Export Crop Policy: The groundntt market has Net income terms of trade (%"pa.) undergone partial reforms. The state, through the Export price/world fertilizer price(% p.a) parastatals SONACOS and SONAGRAINES, still control a large part of the marketing and processing Agricultural Exports, 1996/9 7 G'nuts Cotton system. Pan-territorial and pan-seasonal prices are set. Share of total agricultural exports (°/) 4 23 Movement controls on commodities have not been Share of SSA exports (°/) 9 3 totally removed. SODEFITEX continues to control all Annual change in real producer prices(%) 4.0 3.2 aspects of the cotton industry. Producers share of fo.b. price (%) 62 47 Border price/ world price ratio (/) 75 97 Food Crop Policy: Domestic food markets have been Exchange rate pass-through (/)* -42 -12 recently liberalized. Private wholesalers and retailers have taken over the marketing of rice previously Foods Crops, 1996/97 Millet Rice controlled by SAED. Controls on rice imports have Share of food crops (%) 60 14 also been removed with the dismantling of CPSP. Share of SSA food cropw production (%) 5 1 Annual change in real producer prices(/%) -- Fertilizer Policy: Fertilizer subsidies have been eliminated and the private sector has been allowed to Fertilizer Prices, 1990-1996/9 7 enter the market. Although there are a number of Real Urea prices (% change) private independent traders, SENCHIM continues to Exchange rate pass-through (9/a) dominates the distribution of fertilizer. *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Some remaining policy constraints on prices: * High import tariffs continue to be imposed on raw and refined oil. This import structure has made competition between SONACOS and the private groundnut oil processing sector very difficult. SONACOS continues to dominate the market. * Cotton farmers continue to receive a low share of the border price and exchange rate devaluations have not been fully transmitted to farmers as higher prices. SODEFITEX has been partly restructured to a more commercial entity but continues to control all aspects of the market. 151 Agricultural Incentives in Sub-Saharan Africa. Policy Challenges SOUTH AFRICA General Trends: Real agricultural GDP has grown at 2.5 percent per annum since 1990. Agricultural value added per worker and cereal yields has improved which contributed to the increase in multifactor productivity. The external terms of trade have been more favorable with the upward trends in real world commodity prices. Although positive, the net income terms of trade was not as favorable as the barter terms of trade. Maize accounts for a large share of agricultural exports, but despite favorable world price trends, the removal of the marketing board and price subsidy have resulted in real maize price declines to lower border parity levels. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/9 7 Fiscal balance including grants (% GDP) -5.7 Seigniorage (%) 1.2 Fertilizer / Export Crop Inflation (l) 8.0 Policy Policy Real interest rates (%) 7.0 Parallel mkt exchange rate premium (°/O) 3.3 Agriculture's share of GDP (/) 5 Agricultural Growth, 1990-1996/97 Food Crop Policy Real agricultural GDP growth (%p.a) 2.5 Cereal yields growth (% pa. since 1980) 0.4 Macroeconomic Policy: Overall macroeconomic Multifactor productivity (%/p. a.) 1.1 policy has been fairly stable since 1990. A fiscal deficit Agric. v.a. per worker (1987 $) 1979-81 2361 of over 5 percent has been maintained. Inflation has Agric. v.a. per worker (1987 $) 1994-96 2870 been reduced from double digit to single digit levels. The financial rand has been abolished and the parallel External Terms of Tradefor Agriculture, 1990-1996/97 exchange rate market premium is less than 5 percent. Barter terms of trade (% p. a.) 4.6 Net income terms of trade (% p.a.) 0.7 Export Crop Policy: All the marketing boards (dealing Export price/world fertilizer price(% p.a) 4.5 with maize, sorghum, oilseeds, wool, meat, cotton, mohair, lucerne, citrus, deciduous fruit, dried fruit, Agricultural Exports, 1996/97 Oranges Maize milk and canned fruit) have been closed and producer Share of total agricultural exports (/) 7 10 prices are market determined. Since 1995, a futures Share of SSA exports (/) 92 64 market for agricultural commodities has developed. Annual change in real producer prices(Y%) -4.9 -1.5 Deciduous and citrus fruit account for almost 30 Producers share of f.o.b. price (/) 70 93 percent of agricultural exports while sugar and maize Border price/ world price ratio (%) 75 86 account for about 5 and 10 percent respectively. Exchange rate pass-through (%) * -15 -24 Food Crop Policy: Wheat and maize are the major Foods Crops, 1996/97 Maize Wheat food crops. Both of these markets have been liberalized Share of food crops (%) 74 22 with the removal of marketing boards. Prices are Share of SSA food crop production (°/) 24 42 market determined. Annual change in real producer prices(/) -1.5 Fertilizer Policy: The industry has a high degree of Fertilizer Prices, 1990-1996/97 concentration and even though import tariffs are low, Real Urea prices (% change) 6 domestic prices are much higher than border parity Exchange rate pass-through (%) -5 levels. *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Some remaining policy constraints on prices * Monopolistic tendencies in the fertilizer market needs to be monitored closely. . Past policy biases isolated small-scale black farmers from large domestic markets. This isolation and lack of infrastructure afforded to them has created high transaction costs. As a result, price transmissions to these farmers are weak and agricultural incentives have been distorted. Continued efforts are needed to integrate these farmers into the domestic economy. 152 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges TANZANIA General Trends: Real agricultural GDP grew at 3.7 percent per year between 1990 and 1996/97. Agricultural productivity growth has been less impressive with stagnant cereal yields and multi-factor productivity. Favorable commodity world prices have improved the external terms of trade for agriculture with the net income terms of trade exceeding the barter terms of trade. The real domestic producer's price of coffee and cotton have increased significantly since 1990, aided by an improvement in the exchange rate pass-through of the currency devaluation. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/9 7 Fiscal balance including grants (% GDP) -2.1 Seigniorage (%l) 3.9 .. Export'Crop Inflation 'lo) 21.4 Fertilzerg, t . % Export Crop Real interest rate (%) -9.6 Policy \ + Policy Parallel mkt exchange rate premium (%) 4.7 X T / Agriculture's share of GDP (%) 48 Agricultural Growth, 1990-1996/97 Food Crop Policy Real agricultural GDP growth (% p. a.) 3.7 Cereal yields growth (% p.a. since 1980) 0.0 Macroeconomic Policy: Between 1990 and 1996/97 Multi-factor productivity (% p.a.) -1.2 seigniorage and inflation remained high and negative real Agric. v.a. per worker (1987 $) 1979-81 - interest rates in 1996/97 inhibited improvements in Agric. v.a. per worker (1987 $) 1994-96 - monetary policy. Exchange rate policy improved with significant currency devaluation lowering the parallel External Terms of Tradefor Agriculture, 1990-1996/97 market exchange rate premium. Barter terms of trade (% p. a) 1.9 Net income terms of trade (% p. a.) 8.7 Export Crop Policy: The marketing, processing and Export price/world fertilizer price(% p.a) 3.1 pricing of coffee was liberalized in 1990/91. The Tanzanian Coffee Marketing Board (TCMB) has been Agricultural Exports, 1996/97 Coffee Cotton transformed into the Tanzania Coffee Board which is Share of total agricultural exports (/o) 30 29 responsible for policy and regulation of the industry. The Share of SSA exports (%) 7 10 role of the cotton marketing board has also been Annual change in real producer prices(/) 14.1 5.9 diminished in the processing and sale of this crop. The Producers share of f.o.b. price (%) 77 64 private sector has entered these markets and has been Border price/ world price ratio (/) 98 83 fairly effective in improving market efficiency. Currency Exchange rate pass-through (°/)* 17 20 devaluations have been fully transmitted to farmers. Foods Crops, 1996/97 Cassava Maize Food Crop Policy: The maize market had been totally Share of food crops (%) 60 24 liberalized by 1990. Private grain traders handle virtually Share of SSA food crop production (/) 7 7 all of the traded food grains in the country. The Annual change in real producer prices(%) - -0.1 government manages a strategic grain reserve to maintain its food security objectives. Fertilizer Prices, 1990-1996/97 Fertilizer Policy: The Tanzania Fertilizer Company Real Urea prices (% change) (TFC), a government parastatal, continues to import and Exchange rate pass-through (/) distribute fertilizer. However, it's market share has been *Price changes and exchange rate pass-through are estimated reduced with an increase in private sector activity in from 1990 to 1996/97 fertilizer distribution. Some remaining policy constraints on prices: * Numerous local taxes charged by Local Authorities and levies related to crop purchases need to be harmonized. * Macroeconomic policies need to be stabilized with the reduction in the level of inflation. * Although tariff levels are relatively low, quality controls of fertilizer imports are virtually absent. 153 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges TOGO General Trends: Real agricultural GDP showed modest growth between 1990 and 1995, but increased significantly in 1996- 97. Agricultural value added per worker and cereal yields have increased but multi-factor productivity has remained relatively stagnant. Favorable world cotton prices and the currency devaluation have resulted in an increase in the real domestic producer price of cotton. However, the exchange rate pass-though to producer prices has been inhibited and the producer's share of the border price remains low at about 40 percent. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 Fiscal balance including grants (% GDP) -3.5 Seigniorage (%l) 2.9 I . '. \ Inflation (lo) 6.4 Fertilizer / .. Export Crop Real interest rates (/) 1.8 Policy . Policy Change in REER since 1990 (/) 34 Agriculture's share of GDP (%) 35 Agricultural Growth, 1990-1996/97 Real agricultural GDP growth (%lpa.) 4.6 Food Crop Policy Cereal yields growth (%p.a. since 1980) 0.7 Multifactor productivity (% p. a.) -0.4 Agric. v.a. per worker (1987 $) 1979-81 404 Macroeconomic Policy: Between 1990 and 1997, the Agric. v.a. per worker (1987 $) 1994-96 461 overall macroeconomic policy stance improved. The fiscal deficit remains at about 4 percent of GDP and External Tersn of TradeforAgriculture, 1990-1996/97 seigniorage is high. The exchange rate policy stance Barter terms of trade (%opa.) has improved significantly with the 50 percent Net income terms of trade (%p.a.) devaluation of the CFA franc in 1994. Export price/world fertilizer price (/p. a) Export Crop Policy: SOTOCO controls the marketing Agricultural Exports, 1996/9 7 Cotton of cotton and sets pan-seasonal and pan-territorial Share of total agricultural exports (%) 60 producer prices. Due to financial difficulties, SOTOCO Share of SSA exports (%/6) 6 is being reorganized with greater participation of Annual change in real producer prices(%) 1.4 private firms in the cotton industry. Cotton producers Producers share of fo.b. price (%) 39 continue to receive a small share (40 percent) of the Border price/ world price ratio (/) 100 border price and the pass-through of the currency Exchange rate pass-through (%) * -27 devaluation to farmer prices has been inhibited. Foods Crops, 1996/97 Yams Cassava Food Crop Policy: Food production represents about Share of food crops (/) 32 32 70 percent of agricultural GDP. In 1990, all taxes on Share of SSA food crop production (/) 2 1 food crop exports were eliminated. Togograin, the state Annual change in real producer prices(/) - - marketing agency which purchased and distributed crops to smooth out inter-seasonal and inter-regional Fertilizer Prices, 1990-1996/9 7 variation, has been liquidated. Real Urea prices (% change) 47 Fertilizer Policy: SOTOCO dominates the distribution Exchange rate pass-through (%) of fertilizer to both cotton and maize produces. *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Some remaining policy constraints on prices: * In principle, the fertilizer market is open to private traders, but government-subsidized prices have made it difficult for the private sector to develop. * Interventions in the marketing of cotton continue to inhibit the pass-through of currency devaluation to producer prices. The result is that producers continue to receive a small share (40 percent) of the producer price. 154 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges UGANDA General Trends: Favorable trends in the real world coffee price have resulted in more favorable external terms of trade for agriculture in Uganda. The improvement in the net income terms of trade have exceeded that of the barter terms of trade. The real producer price of coffee has increased significantly with a full pass-through of the currency devaluation to higher producer prices. The producer's share of the border price has also increased to about 70 percent. These positive trends resulted in an annual growth in real agricultural GDP of 3.8 percent between 1990 and 1997. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 Fiscal balance including grants (°/ GDP) -1.9 /* X Seigniorage (°%) 0.7 Inflation (/) 7.0 Fertilizer /. . Export Crop Real interest rates (°/) 2.9 Policy t - Policy Parallel mkt exchange rate premium (/) 8.5 - -- . /Agriculture's share of GDP (%) 46 4 t .-3/ Agricultural Growth, 1990-1996/9 7 Real agricultural GDP growth (% p. a.) 3.8 Food Crop Policy Cereal yields growth (/ p.a. since 1980) -0.2 Multifactor productivity (%lp.a) 2.0 Agric. v.a. per worker (1987 $) 1979-81 - Macroeconomic Policy: The overall macroeconomic Agric. v.a. per worker (1987 $) 1994-96 592 policy improved between 1990 and 1996/97 with a lower fiscal deficit, lower inflation and a lower parallel External Terms of TradeforAgriculture, 1990-1996/9 7 market exchange rate premium. The fiscal deficit Barter terms of trade (% p.a.) 8.3 remains at about 2 percent of GDP and the inflation Net income terms of trade %op.a.) 22.2 rate is about 7 percent. Export price/world fertilizer price(% p. a) 10.9 Export Crop Policy: The Coffee Marketing Board Agricultural Exports, 1996/9 7 Coffee (CMB), a public monopoly, was replaced by the Coffee Share of total agricultural exports (%) 77 Marketing Board Limited (CMBL), a parastatal Share of SSA exports (/) 16 without monopoly powers. The government began Annual change in real producer prices(/) 8.8 issuing export licenses to private firms in 1993, and by Producers share of f.o.b. price (/) 72 mid-1996, the CMBL was handling less than 16 Border price/ world price ratio (/lo) 78 percent of total coffee exports. Cotton marketing and Exchange rate pass-through (%)* 19 processing has also been liberalized. Foods Crops, 1996/97 Cassava Maize Food Crop Policy: Food crops markets have been Share of food crops (%) 56 20 liberalized and producer prices are market determined. Share of SSA food crop production (%l) 3 2 In recent years, maize has become a net export crop. Annual change in real producer prices(/) - - Fertilizer Policy: The fertilizer markets have been Fertilizer Prices, 1990-1996/9 7 liberalized with a removal of subsidies and government Real Urea prices (% change) withdrawal from direct procurement and distribution. Exchange rate pass-through (%) *Price changes and exchange rate pass-through are estimated from 1990 to 1996/97 Some remaining policy constraints on prices: * Given the importance of coffee production in Uganda and the recent outbreak of coffee wilt disease (tracheomycosis), extreme vigilance is required to prevent further infection. Movement restrictions and tree destruction, required to prevent the disease from spreading, disrupt markets and have imposed significant economic shocks on rural households. * Reliance on fertilizer aid has inhibited private sector development in the fertilizer market. It must be noted that fertilizer use in Uganda is very low. 155 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges ZIMBABWE General Trends: Between 1990 and 1996/97, real agricultural GDP grew at 3.2 percent per annum. Agricultural productivity has been less impressive with a decline in cereal yields, agricultural value added per worker and multi-factor productivity. The barter terms of trade have also been less favorable, however, the net income terms of trade have off-set this decline with an increase in agricultural exports. Real domestic tobacco prices have declined but real cotton prices have increased significantly. Farners typically receive a large share of the border price with a complete pass-through of the currency devaluation to producer prices. Pricing Policy Diamond Summary Statistics Macroeconomic Policy Macroeconomic Environment, 1996/97 Fiscal balance including grants (/ GDP) -7.6 - , . . \ Seigniorage (/) 0.2 Fertilizer . t' \ Inflation (%) 20.4 Policy -1' l -t _ Export Crop Real interest rates (%) -1.2 Policy R ,, Policy Parallel mkt exchange rate premium (/o) 7.9 . Agriculture's share of GDP (°/) 14 Agricultural Growth, 1990-1996/97 Food Crop Policy Real agricultural GDP growth (% p. a) 3.2 Food Crop Policy :Cereal yields growth (% p. a. since 1980) -2.5 Macroeconomic Policy: Overall macroeconomic policy Multifactor productivity (% p.a.) -2.2 improved between 1990 and 1996/97. Fiscal deficits, Agric. v.a. per worker (1987$) 1979-81 294 however, remained at close to 10 percent of GDP and Agric. v.a. per worker (1987 $) 1994-96 266 the inflation rate was 20 percent. The situation changed dramatically in 1998. The macroeconomic policy stance External Terms of Trade forAgriculture, 1990-1996/97 deteriorated significantly with soaring inflation (>40 Barter terms of trade (%lpa.) -1.9 percent) and highly volatile exchange rates. Net income terms of trade (% p. a.) 9.6 Export Crop Policy: The cotton market has been Export price/world fertilizer price(% p. a) -3.8 extensively liberalized, new entrants are permitted and Agricultural Exports, 1996/97 Tobacco Cotton the Cotton Marketing Board has been downsized to Share of total agricultural exports (%) 60 5 become the CCZ (Cotton Company of Zimbabwe) which Share of SSA exports (/) 60 4 was privatized in 1998. Producer prices have increased Annual change in real producer prices(lo) -2.5 13.8 with competition in cotton purchasing. Tobacco is Producers share of f.o.b. price (%) 79 88 marketed through private auctions and government levies Border price/ world price ratio (%) 93 99 an explicit 5 percent tobacco tax on growers and traders. Exchange rate pass-through (%) * 19 111 Food Crop Policy: Producer price controls, import licensing and foreign exchange controls have been Foods Crops, 1996/97 Maize removed. The Grain Marketing Board is a buyer of last Share of food crops (%) 78 resort and has intervened heavily in the market during Share of SSA food crop production (%) 6 drought years. There is currently a ceiling price on maize Annual change in real producer prices(/) 0.6 meal. Fertilizer Prices, 1990-1996/97 Fertilizer Policy: Fertilizer producers are protected by a Real Urea prices (% change) 22 fertilizer import tax which ranges from 0 to 5 percent, Exchange rate pass-through (/) -36 and a 10 percent surcharge on the finished product which * Price changes and exchange rate pass-through are estimated competes with domestic production. These duties, taxes from 1990 to 1996/97 and tariffs still act as a disincentive to the competitive importation of fertilizer. 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(1998) Ghana - Statistical Annex. IMF Staff Country Reports No. 98/02. International Monetary Fund (1991-8). International Financial Statistics. 169 Agricultural Incentives in Sub-Saharan Aftica: Policy Challenges APPENDIX Calculating Agricultural Productivity The techniques applied to calculate productivity indices for countries in SSA have been limited by the lack of input price data. This precludes the cost and profit function approaches and prevents share weighted aggregation which is necessary for an index number approach to constructing multifactor productivity indices. Thus, most existing studies of SSA use production functions with output as the dependent variable (Ghura and Just, 1992; Craig, Pardey and Roseboom, 1994). The Malmquist index provides a solution to some of the data problems. Moreover, it does not require price information for its construction and can provide multilateral comparisons of productivity among countries and over time. The Malmquist has been extensively applied to production data and has several desirable features relative to ideal indices, such as the Tornqvist-Theil and Fisher indices. Rather than assuming that the units of observation are efficient, estimates of efficiency are combined with measures of technical progress. The index is easy to compute, does not require prices and does not rest on behavioral assumptions which is useful if producer's objectives differ, are unknown or not achieved. These properties are particularly advantageous in applications to agriculture in SSA. The index is based on defining an efficiency frontier which can be expressed in terms of minimising the input requirements per unit of output, following Farrell (1957). The efficient observations define the frontier and the efficiency of all other observations are measured relative to the frontier. Then, the time series dimension of the data allows for estimation of technical progress (the movement of the frontier) and changes in efficiency over time (the distance of the inefficient units from the best practice frontier). This method (see Box Al) has been used to calculate productivity indices for Sub-Saharan African countries (Table Al, MFP [multi-factor productivity column]). The output used was aggregate agricultural output expressed in 1979/81 'international dollars' (derived using purchasing power parity conversion rates) from the FAO. The inputs used were arable agricultural land, in thousands of hectares; labor, (economically active population in agriculture), in thousands; fertilizer, tons used and machinery, the number of tractors currently used. 170 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Box Al: The Malmquist Productivity Index. The non-parametric approach, introduced by Farrell (1957), is used here largely because it does not require prices and leads directly to the Malmquist index. The Farrell technical efficiency measure is defined so that the isoquant, which is the locus of the efficient points that form the boundary of the input requirements set, Lt(y'), designates the minimal set of inputs, xt, resulting in the unit level of output of yt. In this example, the efficiency of the other countries is measured radially relative to this isoquant (Figure 1.3). The figure below explains the Malmquist index, which is based on the Farrell efficiency measure. These measures have been used to calculate indices for firms (Fare et al 1992), regions (Millan and Aldaz, 1998) and countries (Fare et al, 1994, Bureau et al, 1995) X2 Lt+' (Y,+,) xt+1 x~~~~x For year t, the efficiency frontier is It and for the inefficient country Ct, the Farrell efficiency measure is OF/OCt. The Malmquist index is defined in terms of Shephard's (1953) distance fuinction, which is simply the inverse of the Farrell measure. The analysis so far is based on cross-sectional estimation of efficiency measures relative to the best-practice frontier for each year. The time series dimension is used to estimate the shifting of the frontier over time, giving a measure of pure technical progress. Thus, inter-temporal and inter-country distance functions form the Malmquist MFP index. Following Fare et al. (1992), the Malmquist MFP index is defined, for country i and year t+lI, in terms of distance functions as Mj1 ( ,X ,yi D' L(y' X') D'(y,X') D'+y'(,,X,) j The first ratio on the right hand side is the efficiency measure for year t+1 relative to that for year t. These distance functions compare observations for year t+1 with the year t reference technology (isoquant). The other four distance functions define the shift of the technical progress frontier. Two of these terms are identical to the efficiency measures just described. The other two compare year t observations with the (t+1) reference technology, or vice versa. The base-year frontier, It, is defined by two hypothetical efficient agricultural sectors (countries), with observations At and B', and the efficiency of a third country, at ce, is calculated relative to this frontier. Thus, D10(yt,xt) is equal to OCt/OF, on the initial vector xt. In the next year, the frontier has moved to It+ and country C now has an input ratio x'+l and is at Ct±l. The efficiency measure is now OCt+l/OG and the efficiency term in the above equation is measured by these ratios. M1 (y0 ,xx,y OC'/OF iOFOf; The first technical progress term is already defined above and is divided by Dti'(yt,xt), which is equal to OCt/OH, giving the ratio OH/OF. The Figure shows that this is the shift of the frontier measured at the factor ratio xt. Following the same reasoning, the last term in the first equation is measured by OG/OE in the Figure and this is the shift of the frontier measured at the factor ratio of the second period, xt+'. The technical progress element of the Malmquist MFP index is, very reasonably, the geometric mean of the two altenMative measures. The methodology of Fare et al. (1992), which is described above, is soundly based on index number theory and suits the current problem. 171 Table Al: Agricultural Output and Productivity Growth Rates for Sub-Saharan African Countries, 1989/90-1996/97. Region Country Share of Real Agricultural GDP Popn. Cereal Yields Agricultural Value Agricultural Value MFP Agric. in Growth Average Annual Added Per Worker Added Per Hectare of (% of total Region % Growth Agricultural Land production % Growth Kg's per ha. Growth 1987 US$ 1987 US$ Growth in SSA) Rate . Rates Rate 1997 1970- 1980- 1990- 1990- 1979- 1995- 1980- 1979- 1994- 1979- 1992- 1980- 1980 1990 1997 1997 1981 1997 1997 1981 1996 1981 1994 1996 West Benin 4 1.8 5.5 5.2 2.9 698 1067 3.0 374 563 188 321 1.8 Africa C6te d'lvoire 18 2.7 0.3 2.6 3.0 869 1100 1.3 1527 1354 195 212 0.3 Ghana 15 -0.3 1.0 2.7 2.7 807 1383 4.5 813 684 215 227 3.0 (28%) Guinea 3 1.6 1.5 4.4 2.7 958 1251 2.2 - 225 - 54 - Guinea- Bissau 1 -1.2 4.7 5.5 2.2 711 1422 4.6 186 292 54 78 Nigeria 55 -0.1 3.3 2.9 3.0 1269 1191 -1.5 479 684 III 150 3.6 Sierra Leone 2 5.9 3.1 1.6 2.5 1249 1223 -0.6 365 344 - - 0.8 Togo 2 1.9 5.6 4.6 3.1 729 830 0.7 404 461 119 189 -0.4 All countries 100 0.6 2.3 2.7 2.9 1096 1184 0.1 - - Sahelian Burkina Faso 5 1.0 3.1 3.6 2.8 575 754 2.0 155 182 64 93 -1.4 Africa Chad 3 -0.4 2.3 5.4 2.6 587 627 0.7 148 198 6 10 1.2 The Gambia 0.3 4.8 0.9 0.6 3.6 1284 1035 -1.4 215 167 162 199 -2.6 (27%) Mali 6 5.0 3.3 3.4 2.8 804 909 0.8 251 259 24 33 -1.0 Mauritania 2 -1.0 1.7 4.8 2.6 384 744 4.0 301 439 5 7 1.1 Niger 5 -3.7 1.7 2.2 3.4 440 325 -1.7 292 256 57 63 1.8 Senegal 5 1.3 2.8 1.6 2.6 690 779 1.0 328 375 92 116 -0.1 Sudan 75 - - - 2.1 645 523 0.0 889 - 42 - -0.1 All countries 100 0.4 2.6 3.1 2.6 562 584 0.10 - - - - - Central Cameroon 46 3.7 2.1 4.5 2.9 849 1313 2.2 861 827 252 313 -1.1 Africa Central Afr. Rep 8 1.9 1.6 3.2 2.2 529 971 3.2 456 516 96 119 0.3 Congo, DRP 4 1.4 2.5 3.1 3.2 807 780 -0.4 218 219 83 113 -1.1 (10%) Congo, Rep 37 2.5 3.4 0.9 2.9 825 818 0.5 544 629 21 28 0.4 Gabon 4 1.0 1.2 -2.3 2.6 1718 1754 0.0 1412 1516 67 74 3.3 All countries 2.4 2.2 3.1 3.1 804 951 0.7 - - I Sources: Real agricultural GDP growth and cereal yields are from the 1999 World Development Indicators; population growth and yield growth are calculated from World Bank data, agricultural value added per worker and agricultural value added per hectare of agricultural land are from the 1998 World Development Indicators. Multi-factor productivity (MFP) is calculated from FAO and World Bank Data (see Box Al). Table Al: Agricultural Output and Productivity Growth Rates for Sub-Saharan African Countries, 1989/90-1996/97 (continued). Region Share of Real Agricultural GDP Popn. Cereal Yields Agricultural Value Agricultural Value MFP Country Agric. In Growth Added Per Worker Added Per Hectare of (% of total Region Average Annual % growth Agricultural Land production % Growth Kg's per ha. Growth 1987 US$ 1987 US$ Growth in SSA) rate. rates Rate 1997 1970- 1980- 1990- 1990- 1979- 1995- 1985- 1979- 1994- 1979- 1992- 1980- 1980 1990 1997 1997 1981 1997 1995 1991 1996 1991 1994 1996 East Burundi 4 2.2 3.1 -3.0 2.6 1081 1378 1.7 218 177 212 270 1.1 Africa Ethiopia 30 1.2 0.6 3.0 2.1 . 1229 - - 181 - 116 0.0 Kenya 18 4.8 3.3 1.0 2.6 1364 1634 0.3 268 240 68 90 1.5 (18%) Madagascar 7 0.4 2.5 1.6 2.8 1664 1992 1.2 190 178 26 34 -0.1 Mauritius 2 -3.3 2.9 0.4 1.2 2536 4664 3.3 1764 3762 1607 1902 1.3 Rwanda 4 8.0 0.5 -7.4 0.0 1134 1365 0.6 306 206 445 378 -1.6 Uganda 36 -2.0 2.1 3.8 3.2 1555 1331 -0.2 - 592 - 515 2.0 All countries 100 1.0 2.2 2.0 2.3 1313 1384 0.6 - - - Southern Angola 5 -5.3 0.5 -6.8 3.1 526 542 0.1 - 149 - 9 1.1 Africa Botswana 1 8.3 2.2 -0.8 2.4 203 290 0.9 392 483 4 5 -1.3 Namibia 3 -1.2 1.8 4.0 2.7 377 311 -2.5 1295 1458 8 9 - (16%) Lesotho 1 0.3 2.2 4.0 2.1 977 976 1.2 291 194 35 24 -1.5 Mozambique 10 -1.7 2.1 5.5 4.3 603 765 1.4 - 92 - 12 0.7 Malawi 6 4.4 2.0 4.7 2.7 1161 1216 - 162 156 145 153 0.1 South Africa 46 3.2 2.9 2.5 1.7 1845 1839 0.4 2361 2870 45 49 1.1 Tanzania 17 3.9 2.1 3.7 3.0 1911 1317 0.0 - - - - -1.2 Zambia 2 2.1 3.6 0.7 2.8 1676 1574 -0.6 116 100 6 7 0.4 Zimbabwe 10 0.6 3.1 3.2 2.4 1359 1095 -2.5 294 266 34 41 0.1 All countries 100 1.3 2.1 2.5 2.7 1392 1457 0.0 - - - - - SSA All regions 1.1 2.3 2.5 2.7 1089 1050 - 458 392 53 68 Sources: Real agricultural GDP growth and cereal yields are from the 1999 World Development Indicators; population growth and yield growth are calculated from World Bank data, agricultural value added per worker and agricultural value added per hectare of agricultural land are from the 1998 World Development Indicators. Multifactor productivity (MFP) is calculated from FAO and World Bank Data (see Boa Al). Sub-Saharan African countries not included in the table include: Comoros, Equatorial Guinea, Sao Tome, Seychelles, Swaziland, Liberia, Somalia and Cape Verde. Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Calculating the External Terms of Trade for Agriculture The barter terms of trade were simply calculated as the ratios of a price index of agricultural commodity exports to a price index of agricultural inputs. The indices were constructed using Fischer's ideal index as an aggregate of the exports and imports shown in the table for the respective countries. The data were from the FAO trade statistics from where a price index was derived as a ratio of value to quantity. Table A2: Agricultural Commodity Exports and Imports Used to Calculate the External Terms of Trade for Agriculture. Country Exports Imports SSA Bananas, cocoa, coffee, cotton, groundnuts, rubber, sugar, tea, Wheat, rice, maize, sugar, palm oil, tobacco. milk. Burkina Faso Cotton (69), Cattle. Wheat, rice. Cameroon Cocoa (25), coffee (26), cotton (15), bananas (13), rubber (11). Wheat, rice, barley. C6te d'lvoire Cocoa (56), coffee (16), cotton (8), rubber (4). Wheat, rice, cattle, milk. Mali Cotton (57), sheep. Wheat, rice, sugar, milk. Niger Cattle. Wheat, rice, sugar, palm oil, kolanuts. Ghana Cocoa (92). Wheat, rice, sugar. Nigeria Cocoa (51), rubber (24). Wheat, rice, sugar, palm oil, cattle. Malawi Tobacco (75), tea (9), coffee (4). Wheat, maize. Mozambique Sugar (27), cotton (26), cashew. Wheat, maize, sugar, palm oil. South Africa Maize, oranges, wool, apples, grapes, sugar, beef. Wheat, rice. Tanzania Coffee (30), cotton (29), tea (9), tobacco (7), cashew. Wheat, rice, palm oil. Zimbabwe Tobacco (60), sugar (6), cotton (5). Wheat, maize, rice. Madagascar Coffee (34), vanilla. Wheat, maize, palm oil. Ethiopia Coffee (67). Wheat, sorghum, maize. Kenya Coffee (22), tea (33). Wheat, rice, sugar, palm oil. Uganda Coffee (77), beans. Wheat, rice, sugar, palm oil. Source: FAO Trade Statistics. (Figures in parenthesis are the percentages of the crop in total agricultural exports. A more detailed composition of exports is provided in Tables A4 and A5). The net income terms of trade was calculated as PM net income terms of trade = -Qx where Px is the agricultural export price index, Pm is the agricultural import price index (in this case food crop imports) and Qx is the quantity exported. Tsakok, (1990) provides a more extensive definition and highlights some of the limitations of these measures. 174 Table A3: Components of the Macroeconomic Policy Stance, 1996-97 (updatedfrom Adjustment in Africa, 1994). Exchange Rate Policy Fiscal Policy Change Overall Parallel in the Real fiscal balance Market Effective Overall Including Fiscal Monetary Policy Monetary Exchange Rate Exchange Rate Exchange Macroeconomic Grants Policy Seigniorage Inflation Real Interest Rate Policy Premium 1990 to 1996/97 Rate Policy Policies Country (% of GDP) (score) % Score 0%. Score % Score (score) (%) (score) (%) (score) (score) (score) Benin -0.1 1 0.2 1 6.0 1 1.5 1 1.0 31.3 2 2 1.3 Burkina Faso -1.9 2 2.5 3 4.2 1 0.4 1 1.7 49.2 1 1 1.6 Burundi -6.1 3 -0.1 1 28.7 3 -8.0 3 2.3 22.1 2 2 2.4 Cameroon -1.4 1 -0.9 1 5.9 1 -0.9 1 1.0 77.7 1 1 1.0 Central African Republic -2.9 2 0.8 2 2.5 1 1.1 1 1.3 58.2 1 1 1.4 Congo, Republic of -1.1 1 0.7 2 6.8 1 -4.3 2 1.7 28.9 2 2 1.6 C6te d'Ivoire -2.0 2 1.1 2 4.4 1 1.4 1 1.3 33.0 2 2 1.8 Gabon 4.4 1 -0.2 1 4.1 1 1.0 1 1.0 104.7 1 1 1.0 Gamnbia, The -8.2 3 2.1 3 2.5 1 10.2 4 2.7 10.4 2 2 2.6 Ghana -9.4 4 2.1 3 37.3 3 -7.6 3 3.0 1.6 1 1 2.7 Kenya -1.6 2 3.9 4 10.1 2 7.9 3 3.0 4.2 1 1 2.0 Madagascar -3.7 3 1.9 3 12.2 2 -7.9 3 2.7 7.6 1 1 2.2 Malawi -5.0 3 5.0 4 23.4 2 -8.1 3 3.0 7.8 1 1 2.3 Mali -1.5 2 1.0 2 2.9 1 0.0 1 1.3 53.1 1 1 1.4 Mauritania 6.3 1 -0.9 1 4.6 1 - - 1.0 4.9 1 I 1.0 Mozambique -4.0 3 - - 25.5 3 0.0 1 2.0 7.8 1 1 2,0 Niger -1.5 1 0.8 2 5.4 1 1.1 1 1.3 55.9 1 1 1.1 Nigeria 3.3 1 1.0 2 19.9 2 -12.2 4 2.7 273.8 4 4 2.6 Rwanda -4.2 3 2.3 3 10.5 2 -2.6 1 2.0 8.1 1 1 2.0 Senegal -0.2 1 0.3 1 2.3 1 3.6 2 1.3 42.7 1 1 1.1 Sierra Leone -6.9 3 0.6 2 19.0 2 7.1 3 2.3 2.3 1 1 2.3 South Africa -5.6 3 1.2 2 8.0 1 7.0 3 2.0 3.3 1 1 2.0 Tanzania -2.1 2 3.9 4 21.4 2 -9.6 3 3.0 4.7 1 1 2.0 Togo -3.5 3 2.9 3 6.4 1 1.8 1 1.7 34.1 2 2 2.2 Uganda -1.9 2 0.7 2 7.0 1 2.9 1 1.3 8.5 1 1 1.4 Zambia -3.9 3 -0.9 1 35.6 3 -0.7 1 1.7 6.5 1 1 1.9 Zimbabwe -7.6 4 0.8 2 20.4 2 -1.2 1 1.7 7.9 1 1 2.1 Scoring Criteria (as used in Adjustment in Africa, 1994) Good or adequate I > -1.5 < 0.5 > 10 < 3 <1.4 < 10 > 40 I to 1.3 Fair 2 -1.5 to -3.5 0.6 to 1.5 11 to 25 4 to 6 >1.4<2.4 11 to 30 21 to 40 1.4 to 2.3 Poor 3 -3.6 to -7.0 1.6 to 3 26 to 50 7 to 10 >2.4<3.0 31 to 50 6 to 20 2.4 to 3.0 VeryPoor 4 < -7.1 > 3 > 50 > 10 Ž3.0 > 50 < 6 > 3.0 Source: World Bank and IMF data. Agricultural Incentives in Sub-Saharan Africa: Policy Challenges World Cocoa Prices (constant 1990 prices) 60 World Cocoa Price Volatility 800 6 A 1 50 ___ 0__ 50- 600 * 40- ° 400 -' 30- 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~u2 0 1960 1965 1970 1975 1980 19B5 1990 1995 Year 1974 1978 1982 1986 1990 1994 19 -Constant 1990 Prices - Trend Year World Coffee Prices (constant 1990 prices) 7 World Coffee Price Volatility 1200 7-______0 -____. tv 6°°0 /ts 60- 50- 600 OZ40- U ~ ~ ~ ~ ~~~~~~ ~~30- 4 400 - 20- 10- 0 [; I, ,,, i,,,,,, ,,, F 0 , - , - rr--- -r-v r--r- 1- | 1960 1965 1970 1975 1980 1985 1990 1995 1974 1978 1982 1986 1990 1994 1998 Year -Constant 1990 Prices - Trend Year World Cotton Price (constant 1990 prices) 30 World Cotton Price Volatility 500 25 ~a400 300 _ 20 200 ci10- 0D 100 1960 1965 1970 1975 1980 1985 1990 1995 0 _ -. T Year 1974 1978 1982 1986 1990 1994 1998 -Contant 1990 Prices -Trend | Year World Sugar Prices (constant 1990 prices) World Sugar Price Volatility 200 100 ____ 150 - 80- "~Z60 : 100 6 u >~~~~~~~~~~c 50 20- 0~~~~~~~~~~~~~~~~ 1960 1965 1970 1975 1980 1985 1990 1995 0 Year 1974 1978 1982 1986 1990 1994 1998 -Constant 1990 Prices - Trend Year Figure Al: Trends in the Level and Volatility of Real World Agricultural Commodity Prices. 176 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges World Tea Prices (constant 1990 prices) World Tea Price Volatility 600 40 __ .____ .__ I 4 _ _ _______I 5000- 30- 400- 300 -200- ~,200i 100 - .nm r lr-rt|,,rn mrr _ 0- 1960 1965 1970 1975 1980 1985 1990 19950 Year 1974 1978 1982 1986 1990 1994 1998 -Constant 1990 Prices - Trend Year World Tobacco Price (constant 1990 prices) 30World Tobber Pnce Volatility 8o 000 25 -\ E 300 F t S ~~~~~~~~~~~~~~~20 -\ 6000 "~4000 1 D~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r 100 -J 2000 U1 1960 1965 1970 1975 1980 1985 1990 1995 0 _ I , ,,I - . , I, ,- l - ' , , T T Year 1974 1978 1982 1986 1990 1994 1998 -Constant 1990 Price -Trend Year World Rubber Price (constant 1990 prices) 35 World Bber Price Volatility 1 400 25 300 2 o200 ~ ~ ~ ~ ~~~~~ is~~2 2600 10 1960 1965 1970 1975 1980 1985 1990 19950 Year 1974 1978 1982 1986 1990 1994 1998 -Constant 1990 Prices - Trend Year World Banana Prices (constant 1990 prices) 20 World Banana Price Volatility -d) 800 -15 600 400 -1 1960 1965 1970 1975 1980 1985 1990 1995 0 , Year 1974 1978 1982 1986 1990 1994 1998~ -Constant 1990 Prices - Trend (constant prices) ____________ ___ Year Figure Al: Trends in the Level and Volatility of Real World Agricultural Commodity Prices (continued). The coefficient of variation (C.V.) plots show a 15 year rolling window, e.g. 1974 in the graphs represent the C.V. from 1960 to 1974, 1975 represents the C.V. from 1961 to 1975 etc. World Bank data are used. 177 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A4: Sub-Saharan African Country Exports by Commodity, 1993-95. Country Bananas Cocoa Coffee Cotton G'nuts Rubber Sugar Tea Tobacco Other Angola - - 71.3 - 28.7 Benin - - - 93.5 6.5 Botswana - - - 0.4 - 3.1 - - 96.3 Burkina Faso - - - 69.2 0.2 - - 0.1 30.5 Burundi - - 79.3 2.6 - - 1.2 10.3 1.1 5.4 Cameroon 12.7 25.4 25.6 15.0 - 11.3 0.3 - 0.3 9.4 Cape Verde 82.4 - 0.8 - - - - - - 16.7 Central African Republic - - 30.7 28.9 0.3 0.1 - 1.6 38.5 Chad - - - 63.3 - - - - - 36.7 Congo, Dem R - 3.4 72.6 0.7 - 6.0 - 1.3 - 16.0 Congo, Rep - 1.0 3.3 - - 0.1 90.8 - - 4.7 Cote d'Ivoire 3.8 56.3 15.5 7.6 4.2 0.8 - - 11.8 Equatorial Guinea 0.9 97.1 2.0 - - - - - - 0.0 Ethiopia - - 67.1 1.6 - 0.6 0.1 - 30.7 Ethiopia PDR - - 66.6 0.2 - - 1.0 - - 32.2 Gabon - 24.2 5.1 - - 38.5 10.6 - - 21.6 The Gambia - - - 8.7 51.7 - 0.2 0.1 0.4 39.0 Ghana 0.1 91.7 0.6 1.2 - 1.9 - - 0.1 4.3 Guinea - 5.0 29.1 25.3 - - 40.6 Guinea-Bissau - - - 4.5 0.5 - 95.0 Kenya - - 22.4 0.7 - 0.1 2.8 33.2 0.8 40.0 Lesotho - - - - - - - - - 100.0 Liberia - 1.3 - 0.1 - 91.9 - - - 6.7 Madagascar - 1.8 34.3 0.5 0.1 - 5.6 0.1 0.1 57.4 Malawi - - 3.5 0.8 0.1 0.6 7.4 9.1 75.2 3.3 Mali - - - 57.0 0.9 - - - - 42.1 Mauritius - - 0.1 - - 89.0 1.3 - 9.6 Mozambique - - 26.3 0.3 - 28.6 0.3 0.1 44.3 Namibia - - - - - - - - 100.0 Niger - - 1.9 - - - - 98.1 Nigeria - 51.0 0.3 2.3 24.4 - - 0.3 21.7 Reunion - - - - - 89.4 - - 10.5 Rwanda - - 56.4 - - 34.2 - 9.4 Sao Tome PDR - 98.2 0.3 - - - - 1.5 Senegal - - - 22.9 3.4 - 0.2 - 0.3 73.3 Sierra Leone - 26.9 33.8 - - - 0.7 - 5.4 33.2 Somalia 6.4 - - - - - - - - 93.6 South Africa - - 0.3 0.1 1.0 - 4.8 0.2 1.0 92.7 Sudan - - - 26.4 0.9 - 8.0 - - 64.8 Swaziland - - - 2.2 - - 47.5 - - 50.2 Tanzania - 0.7 29.9 28.9 0.1 - 1.4 8.8 6.6 23.5 Togo - 6.5 15.8 59.8 - - 0.1 - - 17.8 Uganda 0.1 0.2 77.0 2.2 0.1 - - 3.3 2.2 14.9 Zambia - - 7.5 4.7 0.4 - 47.2 0.1 16.2 23.8 Zimbabwe - - 1.7 5.1 0.3 6.0 1.2 59.5 26.2 Source: FAO Trade Statistics. 178 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A5: Sub-Saharan African Commodity Exports by Country, 1993-95. Country Bananas Cocoa Coffee Cotton G'nts Rubber Sugar Tea Tobacco Other Angola - - 0.2 - - Benin - - - 11.3 0.2 Botswana - - - - - 0.4 2.3 Burkina Faso - - - 6.8 0.5 - 0.7 Burundi - - 5.0 0.2 - - 0.1 2.1 0.1 0.1 Cameroon 41.3 6.3 7.0 5.8 0.2 19.3 0.1 - 0.2 0.8 Cape Verde 0.5 - - - - - - - - - Central African Republic - - 0.8 1.1 0.3 - - 0.1 0.3 Chad - - - 7.4 - - - - - 1.0 Congo, Dem R - 0.3 4.7 0.1 - 2.4 - 0.3 0.3 Congo,Rep - - - - - - 1.1 - - Cote d'Ivoire 53.6 61.7 18.7 12.8 0.1 31.7 1.5 - 4.6 Equatorial Guinea - 0.3 - - - - - - - Eritrea - - - - - - 0.1 Ethiopia - - 11.4 0.4 0.2 - 1.7 Ethiopia PDR - - 2.1 - - 0.1 - 0.3 Gabon - 0.1 - - - 1.0 0.1 - - The Gambia - - - 0.1 17.6 - - - 0.1 Ghana 0.4 20.1 0.2 0.4 - 2.9 - - 0.1 0.3 Guinea - 0.1 0.9 1.1 - - - - - 0.4 Guinea-Bissau - - - 0.1 0.2 - - - - 0.4 Kenya 0.1 15.6 0.6 0.7 0.4 3.1 73.9 1.0 9.0 Lesotho - - - - - - - - 0.3 Liberia - - - - 9.2 - - 0.1 Madagascar - 0.2 4.3 0.1 0.2 - 1.1 - - 2.3 Malawi - - 0.9 0.3 0.9 1.0 2.9 7.2 32.2 0.3 Mali - - - 14.4 5.7 - - - - 2.4 Mauritania - - - - - - - - - 0.9 Mauritius - - - - - - 38.1 1.1 - 0.8 Mozambique - - - 1.4 0.4 - 1.7 - - 0.5 Namibia - - - - - - - - - 4.4 Niger - - - 0.1 - - - - - 1.1 Nigeria - 9.8 0.1 0.7 0.2 32.1 - - 0.1 1.5 Reunion - - - - - - 13.5 - - 0.3 Rwanda - - 1.7 3.3 0.1 Sao Tome PDR - 0.2 - - - Senegal - - - 2.6 9.4 1.9 Sierra Leone - 0.2 0.3 - - 0.1 0.1 Somalia 3.5 - - - - - 1.4 South Africa 0.1 0.4 0.2 46.2 0.1 10.2 0.7 2.4 40.7 Sudan - - 10.9 9.0 - 3.7 - - 6.2 Swaziland - - 0.6 - - 15.0 - - 3.3 Tanzania - 0.2 7.3 9.9 1.1 - 0.2 6.9 2.8 1.9 Tcgo - 0.4 1.1 5.9 - - . - - 0.4 Uganda 0.3 - 16.3 0.7 0.6 - - 2.2 0.8 1.0 Zambia - - 0.1 0.1 0.3 - 1.4 - 0.6 0.1 Zimbabwe 0.1 - 1.0 4.1 6.5 - 5.4 2.2 59.5 4.8 Total 100 100 100 100 1010000 100 100 100 100 Source: FAO Trade Statistics. 179 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A6: Producer Price Trends for Sub-Saharan Africa's Major Export Crops. Commodity Country %32 Annual 0/0l3 Producer's % Change in f.o.b. Price % Change in Change in Real Share of Producer's Share as a Share of f.o.b Share of Producer Price f.o.b. Price of f.o.b. Price world Price World Price (1990-96/97) (% 1996-97) (1990-96/97) (% 1996-97) (1990-96/97) Cocoa World34 2.8 - - - - (98%)35 C6te d'lvoire 62 3.2 46 -23 96 2 Ghana 20 0.7 39 -5 96 -10 Nigeria 10 6.8 98 9 92 8 Cameroon 6 2.5 76 8 86 -5 Coffee World 9.9 - - - - (82%) COte d'lvoire 19 9.7 72 2 92 1 Uganda 17 8.8 72 29 78 9 Kenya 16 8.2 81 5 95 0 Ethiopia 12 - - - - - Cameroon 7 9.8 73 12 87 -1 Tanzania 7 14.1 77 18 98 1 Madagascar 4 12.9 70 -9 81 15 Cotton World 0.5 - - - - (82%) Mali 15 0.8 44 -3 82 -5 Cote d'Ivoire 13 0.4 47 -5 88 -5 Benin 11 2.0 37 -15 95 5 Tanzania 10 5.9 64 21 83 -10 Burkina Faso 7 1.5 35 -28 96 20 Chad 7 -0.6 36 -19 92 2 Cameroon 6 4.5 51 -2 82 -6 Togo 6 1.4 39 -12 100 5 Zimbabwe 4 13.8 88 32 99 1 Senegal 3 3.2 47 -15 97 -1 Groundnuts World 0.8 - - - - (81 /) South Africa 46 -0.6 82 12 88 -3 The Gambia 18 -0.1 65 18 52 -21 Senegal 10 4.0 62 -1 75 -5 Zimbabwe 7 -1.0 68 -I 105 11 Sugar World 0.8 - - - (82%) Mauritius 38 -1.5 94 13 162 19 Swaziland 15 -1.8 65 -15 143 24 South Africa 10 4.5 92 9 75 -3 Tea World -2.0 - - - (88/.) Kenya 74 -6.3 89 1 77 -8 Malawi 7 -0.8 92 8 84 -7 Tanzania 7 -7.3 40 0 66 7 Tobacco World -3.1 - - - - (95%) Zimbabwe 60 -2.5 79 1 93 -1 Malawi 32 4.2 82 7 86 -2 Tanzania 3 9.3 57 19 61 1 Source: World Bank and IMF data. 32 This is the percentage of the individual countries exports in total Sub-Saharan Africa exports. 33 These are usually referred to as growth rates but in the case of prices they will be referred to as annual percentage changes. 34 World prices are in $US, other prices are in local currency. 35 This represents the percentage of total Sub-Saharan exports of this commodity that is accounted for by countries listed. In the case of cocoa, Cote d'lvoire, Ghana, Nigeria and Cameroon account for 98 percent of all cocoa exported from Sub- Saharan Africa. 180 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A7: Producer Price Trends for Export Crops by Country in Sub-Saharan Africa. Country Commodity Annual % Producer's % Change in f.o.b. Price as % Change in Change in Real Share of f.o.b. Producer's Share a Share of f.o.b Share of Producer Price Price % of fo.b. Price world Price % World Price (1990-96/97) (1996-97) (1990-96/97) (1996-97) (1990-96/97) Benin Cotton 2.0 37 -15 95 5 Botswana Cattle -7.6 - - - - Burkina Faso Cotton 1.5 35 -28 96 20 Burundi Coffee -2.8 32 -27 98 9 Cameroon Cocoa 5.6 76 8 86 -5 Coffee 9.8 73 12 87 -1 Cotton 4.5 51 -2 82 -6 Chad Cotton -0.6 36 -19 92 2 Cote d'lvoire Cocoa 3.2 46 -23 96 2 Coffee 9.7 72 2 92 1 Cotton 0.4 47 -5 88 -5 Ethiopia Coffee -0.1 - - - - The Gambia Groundnuts -0.1 65 18 52 -21 Ghana Cocoa 0.7 39 -5 96 -10 Kenya Coffee 8.2 81 5 95 0 Tea -6.3 89 1 77 -8 Madagascar Coffee 12.9 70 -9 81 15 Vanilla 2.1 62 7 114 -7 Malawi Tobacco 4.2 82 7 86 -2 Tea -0.8 92 8 84 -7 Mali Cotton 0.8 44 -3 82 -5 Mauritius Sugar -1.5 94 13 162 19 Mozambique Cotton 3.8 64 6 73 -16 Cashew 5.9 55 1 85 9 Niger Cattle 22.3 - - - - Nigeria Cocoa 6.8 98 9 92 8 Rubber 15.2 100 16 93 2 Senegal Cotton 3.2 47 -15 97 -I1 Groundnuts 4.0 62 -1 75 -5 South Africa Maize -1.5 93 -6 86 -7 Oranges -4.9 70 -12 75 -5 Apples -0.2 93 16 87 -1 Sugar 4.5 92 9 75 -3 Wool -5.8 89 -4 101 23 Beef -2.1 75 5 110 -9 Swaziland Sugar -1.8 65 -15 143 24 Tanzania Coffee 14.1 77 18 98 1 Cotton 5.9 64 21 83 -10 Tea -7.3 40 0 66 7 Tobacco 9.3 57 19 61 1 Cashew 1.7 71 19 102 -1 Togo Cotton 1.4 39 -12 100 5 Uganda Coffee 8.8 72 29 78 9 Zimbabwe Tobacco -2.5 79 1 93 -1 Cotton 13.8 88 32 99 1 Source: World Bank and IMF data. 181 Real Producer Price Real World Price Real Exchange Rate Producer's Share of the Border Price Ghana | Ghana Ghana Ghanaj Nigeria Nigeria Nigeria Nigena Burkina Faso Burkina Faso Burkina Faso BurkinaFaso Benin Benin Benin Benin ! Mozambique Mozambique l Mozambique Mozanbique Togo Togo Togo Togo Tanzania Tanzania Tanzania Tanzania Madagascar Madagascar Madagasr Madaascar Mali Mali Mali Mali Zimbabwe Zimbabwe Zimbabwe ZmibabweA Malawi Malawi Malawi Malawi Chad Chad Chad I Chad Senegal Seneg Senegal Seeg Burundi Burundi Burundi Bwundi The Gambia The Gambia The Gambia The Ganbia Uganda Uganda Uganda Uganda l Kenya Kenya Kenya Kenya Cameroon Cameroon Cameroon Camroon C6te d'lvoire Cote d'Ivoire C,te d'lvoire Coted'lvoire -150 -50 50 150 250 -150 -50 50 150 250 -150 -50 50 150 250 -150 -50 50 150 250 Percent Percent Percent Percent Figure A2: The Structure of Agricultural Export Price Incentives, 1981-89 to 1989-91. Source: Table A8. Real Producer Price Real World Price Real Exchange Rate Producer's Share of the Border Price Ugnda Unda UndaUgada T anzania [ P l T anzania 1 3 j Tanzania Tanzania Mozambique Mozambique - Mozambique Mozambique Nigeria Nigeria Nigeria Nigeria Cameroon Cameroon Cameroon Cameroon Seneg1 Senegl Senegl Senegal Madagascar Madagascar Madagascar Madagscar Zimbabwe Zimbabwe Zimbabwe! Zimbabwe Togo Togo Togo T ogo C6ted'1voire CBted'lvoire C6ted'lvoire C6te d'lvoire Benin Berin Benin Benin . Malawi j Malawi Malawi Malawi Mali Mali Mali Mali Burkina urkinaFaso BurkinaFaso Bu*inaFaso Ghana Ghana~ Ghana Ghana Kery a Kery a Kery a Kenya The Gambia i " l The Gambia The Gambia The Ganbia Burundi Bururdi Burundi Burundi Chad nChad Chadi Clad -150 -50 50 150 -150 -50 50 150 -150 -50 50 150 -150 -50 50 150 Percent Percent Percent Percent Figure A3: The Structure of Agricultural Export Price Incentives, 1989-91 to 1995-97. Source: Table A8. Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A8: Real Producer Price Decomposition. Real Producer External Factors Domestic Policy Factors Country Period Price Real World Price Aggregate Effect RER NPC (% Change) (% Change) (% Changes) (% Change) (% Change) 1 22 515 2 Benin 2 8 2 6 40 -34 .3 30 7 23 55 -32 1 28 -34 62 59 Burkina Faso 2 6 29 -23 39 -62 3 34 -5 39 42 -3 1 -18 -83 64 46 18 Burundi 2 -10 60 -70 -5 -65 3 -28 -22 -5 42 -47 1 -48 -56 -33 41 Cameroon 2 36 0 36 33 3 3 -12 -56 44 0 44 1 -63 -71 8 -8 C6te d'Ivoire 2 15 13 2 2 0 3 -47 -58 1 18 -7 1 -12 -29 17 -IS 32 Chad 2 -18 9 -27 23 -50 3 -30 -20 -10 8 -18 1 -21 -49 28 17 11 The Gambia 2 -9 -13 4 I 3 3 -30 -61 32 1 8 14 1 102 -75 I77 227 -50 Ghana 2 3 -11 13 21 -8 3 105 -86 191 249 -58 1 -47 -60 13 -16 Kenya 2 -3 14 -17 -13 -4 3 -50 -46 -4 16 -20 1 6 -93 100 77 23 Madagascar 2 16 12 4 -16 20 3 22 -81 103 60 43 1 -9 -33 24 2 22 Malawi 2 7 -39 46 31 15 3 -2 -72 71 33 38 1 4 -12 16 4 12 Mali 2 7 -12 19 21 -2 3 11 -24 35 25 10 l 14 -16 29 39 -10 Mozainbique 2 41 -22 63 45 18 3 54 -38 92 84 8 184 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A8: Real Producer Price Decomposition (continued). Real Producer External Factors Domestic Policy Factors Country Period Price Real World Price Aggregate effect RER NPC (% Change) (% Change) (% Changes) (% Change) (% Change) 1 31 -111 142 151 -9 Nigeria 2 41 14 27 -58 85 l _____________ 3 72 -97 169 93 76 1 -13 -81 68 9 59 Senegal 2 22 -21 43 44 -1 3 9 -102 111 53 58 1 9 -90 99 106 -7 Tanzania 2 49 34 15 -5 20 l _____________ 3 58 -56 114 101 13 1 13 -9 22 18 4 Togo 2 15 6 9 28 -19 l _____________ 3 29 -3 32 46 -14 1 -33 -88 55 109 -54 Uganda 2 77 11 67 9 58 3 45 -77 123 118 5 1 -6 -18 12 44 -32 Zimbabwe 2 16 -16 33 13 20 3 10 -34 44 57 -13 Period I is 1981-83 to 1989-91; Period 2 is 1989-91 to 1995-97 and Period 3 is 1981-83 to 1995-97. Source: Calculated from World Bank, IMF data and FAO data. 185 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A9: Fertilizer Policy Scores. Country Import Score Non-tariff Barriers Score Pricing Arrangements Score Av. Score Tariff Score Conversion (%) (O to 100) Benin 6.00 4 Government controls the type of 2 The government 3 3.00 60 fertilizer that can be imported, continues to fix the price specifying a list of fertilizers that can of fertilizer pan- be sold. Government also controls territorially based on a who imports the fertilizer and formula using the c.i.f. specifies the distribution of each international price plus a companies fertilizer quota to specific marketing and profit regions. margin. I Burkina 10.31 3 The dualistic nature of the fertilizer 4 Prices of fertilizer aid 4 3.67 73 Faso market restricts private traders to the have been set below non-cotton areas. SOFITEX procures market levels, fertilizer on international markets and particularly after 1994 provides fertilizer to cotton farmers, devaluation. Most of this SOFITEX is responsible for the whole fertilizer was sold distribution system. DIMA distributes domestically and traded aid-funded fertilizer to non-cotton to neighboring countries. regions using private traders. I I The Low 5 Uncertainty of the future role of 3 Fertilizer prices at the 5 4.33 87 Gambia governmental and international donors wholesale and retail has inhibited the response by private levels are based on entrepreneurs in the fertilizer market. world market prices. l Cameroon 5.85 4 3 Fertilizer prices are 5 4.00 80 market determined. C6te 0.37 5 3 Fertilizer prices are 5 4.33 87 d'Ivoire market determined. Ghana 0.00 5 Government controls the types of 2 Fertilizer prices are 5 4.00 80 fertilizer the can be imported, market determined. specifying a list of fertilizers that can be sold. Private traders need prior government approval before importing fertilizers. Kenya Low 5 Licensing of importers and 3 Fertilizer prices are 5 4.33 87 distributors have been removed. Large market determined. - volumes of fertilizer aid distort market prices. Government owned distributors continue to dominate the market. Malawi 0.04 5 The fertilizer market (both imports 4 Fertilizer prices are 5 4.67 93 and distribution) has been liberalized. market determined. The Small-holder Farmer Fertilizer There is some concern Revolving Fund of Malawi (SFFRFM) that fertilizer subsidies remains the main importer of fertilizer. will be re-introduced. 186 Agricultural Incentives in Sub-Saharan Africa. Policy Challenges Table A9: Fertilizer Policy Scores (continued). Country Import Score Non-tariff Barriers Score Pricing Arrangements Score Av. Score Tariff Score Conversion (%) (Oto 100) Mali 5.00 4 The same fertilizers have been 3 Fertilizer prices are 5 4.00 80 continuously imported for a long market determined. period of time and the input delivery system is largely government controlled or semi-government controlled (cotton organizations). , Nigeria Low 4 Fertilizer is sold to neighboring 4 Fertilizer subsidies are 3 3.67 73 countries due to continuing fertilizer still prevalent. subsidies. Senegal 20.82 1 SENCHIM, the main commercial 4 Fertilizer prices are 5 3.33 67 distributing branch of Industrie market determined. Chimique du Senegal (ICS), dominates the fertilizer market. South Low 5 The fertilizer market is concentrated 4 Fertilizer prices are 5 4.67 93 Africa with a few large producers and market determined. distributors. I Tanzania 5.00 4 Absence of control on the quality of 3 Fertilizer prices are 5 4.00 80 fertilizer. Deterioration and fake market determined. _____ packaging frequently occurs. Togo 14.00 3 SOTOCO dominates the fertilizer 3 Fertilizer prices are 4 3.33 67 market for both cotton and maize. largely market Food crop fertilizers are available determined. Since 1995 from SOTOCO or through DRDR large private purchases agents, however, they can only be have been sold at _ bought on credit by cotton growers. unsubsidized prices. i Uganda 0.00 5 The fertilizer market has been 4 Fertilizer prices are 4 4.33 87 liberalized. market determined. Subsidies on donor fertilizers distorts the l_______ market. Zimbabwe 3.50 5 Government continues to manage 3 Fertilizer prices are 5 4.33 87 fertilizer imports through permits. A market determined. mandatory government approval of imported fertilizer compositions is required. Tariff: A score of I reflects an import tariff rate greater than 20%; 2, 15%/o 20%; 3, 10%-15%; 4, 5%/o-10%; 5, 0%/o-5%; Non- tariff barriers: qualitative evaluation, I excessive non-tariff barriers...5 no barriers, Pricing arrangements: qualitative evaluation, 1 excessive intervention... 5 no intervention. Source: World Bank Country Reports and World Bank Staff. 187 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table AIO: Price Elasticities of Supply for Selected Export Crops in Sub-Saharan Africa. Price Elasticity Crop Year Author Short Run Long Run Coffee 0.64 1.48 Kenya (smallholders) 1947-64 Behrman 0.64 1.48 Cotton 0.26-0.83 0.38-0.86 11 countries in SSA 1970-87 Jaeger 0.67 Nigeria 1950-64 Diejomaoh 0.67 0..67 Sudan 1951-65 Medani 0.39 0.50 Uganda 1945-66 Alibaruho 0.50 0.63 Zimbabwe (smallholders) 1975-89 Townsend et al 0.83 0.86 Nigeria 1970-86 Kwanashiwe et al 1.35 Tanzania 1965-84 Mshomba 0.26 0.38 Ghana 1968-81 Senei 0.55 1.32 Cocoa 0.04-0.68 0.71-1.81 14 countries in SSA 1970-87 Jaeger 0.23 Ghana 1947-64 Behrman 0.39 0.77 Nigeria 1947-64 Behrman 0.71 C6te d'lvoire 1947-64 Behrman 0.81 Cameroon 1947-64 Behrman 0.68 1.81 Nigeria 1970-86 Kwanashiwe et al 0.04 Groundnuts 0.24-0.79 0.24-0.79 Nigeria 1948-67 Olayide 0.24-0.79 0.24-0.79 Rubber 0.04 1.75 Nigeria 1952-72 Olayemi et al 0.04 1.75 Nigeria 1970-86 Kwanashiwe et al 0.07 Tea 4 countries in SSA 1970-87 Jaeger -0.04 Tanzania 1964-84 Mshomba 0.35 Tobacco 0.28-0.60 0.82-1.36 Nigeria 1945-64 Adesimi 0.60 0.82 Malawi 1946-64 Dean 0.48 0.48 Zimbabwe 1970-89 Townsend et al 0.28 1.36 Malawi 1964-89 Chembezi 0.33 0.95 Source: Adapted from Mamingi (1996), Townsend and Thirtle (1997) and Oyejide (1990). 188 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table All: Production Distribution of Food Crops Across Sub-Saharan African Countries, 1995-1997 (percent). Country Yams Sorghum Maize Wheat Cassava Millet Rice Angola - - 1.0 0.1 2.8 - 0.2 Benin 4.3 0.6 1.5 - 1.6 0.2 0.2 Botswana - 0.2 - - - - Burkina Faso 0.1 6.7 0.7 - - 6.3 0.9 Burundi - 0.4 0.5 0.2 0.6 0.1 0.3 Cameroon 0.4 2.4 2.0 - 1.8 0.6 0.5 Cape Verde - - - - - - Central African Republic 1.1 0.1 0.2 - 0.6 0.1 0.1 Chad 0.8 2.4 0.2 - 0.3 2.0 0.8 Comoros - - - - 0.1 - 0.2 Congo, DEM R 1.0 0.3 3.3 0.2 20.9 0.3 4.0 C6te d'lvoire 8.4 0.1 1.7 - 2.0 0.5 8.7 Djibouti - - - - - Equatorial Guinea - - 0.1 - Eritrea - 0.4 - 0.2 - 0.2 Ethiopia 0.9 10.0 8.8 33.6 - 2.6 Gabon 0.5 - 0.1 - 0.3 The Gambia - 0.1 - - - 0.5 0.2 Ghana 7.3 1.9 3.0 - 8.1 1.6 2.0 Guinea 0.3 - 0.2 - 0.8 0.1 6.2 Guinea-Bissau - 0.1 - - 0.2 1.2 Kenya 0.6 7.6 6.1 1.0 0.4 0.5 Lesotho - 0.1 0.3 0.3 - - - Liberia 0.1 - - - 0.3 0.8 Madagascar - - 0.5 0.1 2.8 - 23.5 Malawi 0.2 4.6 - 0.2 0.1 0.6 Mali 3.7 0.8 0.1 - 6,2 4.7 Mauritania 0.6 - - 0.6 Mauritius - - - - - Mozambique 1.3 2.7 - 5.6 0.3 1.4 Namibia - 0.1 0.1 - 0.5 - Niger - 2.0 - 0.1 0.3 14.3 0.6 Nigeria 72.3 36.8 15.5 0.9 36.8 44.5 29.1 Rwanda - 0.5 0.2 0.1 0.3 - - Sao Tome - - - - - - Senegal - 0.7 0.3 0.1 5.2 1.4 Seychelles - - - - - - Sierra Leone - 0.1 - 0.3 0.2 3.6 Somalia - 0.8 0.4 - 0.1 - - South Africa - 2.1 23.5 41.9 - 0.1 Sudan 0.4 17.9 0.2 9.7 3.9 Swaziland - - 0.3 - - - - Tanzania - 3.5 7.3 1.1 7.3 2.9 6.2 Togo 1.9 0.9 1.1 - 0.7 0.5 0.5 Uganda - 1.8 2.4 0.2 2.7 4.2 0.7 Zambia 0.2 3.1 1.0 0.6 0.5 0.1 Zimbabwe 0.4 5.6 4.0 0.2 0.7 - Total 100 lO0 100 100 100 100 100 Source: FAO Production Statistics. 189 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A12: Production Distribution of Food Crops within Sub-Saharan African Countries, 1995-1997 (percent). Country Yams Sorghum Maize Wheat Cassava Millet Rice Total Angola - - 11.9 0.2 87.0 - 0.9 100 Benin 39.0 3.2 15.5 - 40.8 0.8 0.6 100 Botswana - 71.1 21.9 1.7 - 5.3 - 100 Burkina Faso 1.7 51.9 10.0 - 0.1 32.3 4.1 100 Burundi 1.0 8.7 18.5 1.1 64.8 1.5 4.3 100 Cameroon 4.3 15.5 23.0 0.0 52.9 2.4 2.0 100 Cape Verde - - 76.0 - 24.0 - - t00 Central African Republic 33.7 2.5 7.7 - 53.7 1.1 1.4 100 Chad 18.1 33.1 4.7 0.1 19.2 18.5 6.3 100 Comoros - - 5.4 - 70.4 - 24.2 100 Congo, DEMR 1.5 0.3 5.7 0.0 90.1 0.2 2.2 100 C6te d'Ivoire 43.9 0.4 9,8 - 28.8 1.0 16.1 100 Djibouti - - 100.0 - - - 100 Equatorial Guinea - - - 100.0 - - 100 Eritrea - 58.0 6.6 9.0 - 26.4 - 100 Ethiopia 3.6 25.5 40.7 25.6 - 4.5 - 100 Gabon 35.9 - 7.9 - 56.0 - 0.2 100 The Gambia - 12.2 10.5 - 5.5 54.9 16.8 100 Ghana 20.5 3.3 9.4 - 63.1 1.8 2.0 100 Guinea 6.2 0.3 5.3 - 43.3 0.5 44.4 100 Guinea-Bissau - 9.5 6.4 - 5.8 13.5 64.8 100 Kenya 3.0 64.4 8.5 21.5 1.3 1.4 100 Lesotho - 12.6 77.2 10.2 - - - 100 Liberia 6.2 - - - 68.6 25.2 100 Madagascar - 0.0 3.5 0.2 47.1 - 49.3 100 Malawi - 2.5 82.8 0.1 10.3 1.0 3.4 100 Mali 0.5 30.5 12.2 0.1 0.1 34.3 22.3 100 Mauritania 1.3 59.9 3.7 0.2 0.1 3.1 31.8 100 Mauritius - - 98.8 - - - 1.2 100 Mozambique - 4.1 14.9 0.0 77.9 0.7 2.4 100 Nramibia - 6.8 25.5 4.0 - 63.7 - 100 Niger - 15.3 0.2 0.2 9.2 72.2 2.8 100 Nigeria 29.7 9.3 7.1 0.1 42.2 7.5 4.2 100 Rwanda 1.0 25.2 17.7 1.5 53.4 0.2 1.0 100 Sao Tome 16.7 - 47.4 - 35.8 - - 100 Senegal - 12.3 9.3 - 4.0 60.1 14.3 100 Seychelles - - - - 100.0 - - 100 Sierra Leone - 3.0 1.2 - 37.5 3.1 55.1 100 Somalia - 43.2 41.6 0.3 14.3 - 0.6 100 South Africa - 3.7 74.2 21.9 - 0.1 0.0 100 Sudan 2.8 73.2 1.2 11.8 0.2 10.7 0.0 100 Swaziland - 1.4 97.3 0.3 - - 0.9 100 Tanzania 0.1 6.3 23.7 0.6 59.4 3.5 6.4 100 Togo 32.3 9.0 20.7 - 31.5 3.4 3.1 100 Uganda - 8.3 20.1 0.2 56.3 13.1 2.0 100 Zambia 1.8 60.1 3.3 30.7 3.3 0.7 100 Zimbabwe 3.3 77.7 9.1 6.3 3.5 0.0 100 Source: FAO Production Statistics. 190 Agricultural Incentives in Sub-Saharan Africa: Policy Challenges Table A13: Fertilizer Consumption (100 grams) per Hectare of Arable Land. Country Name 1980 1985 1990 | 1994 % of Other % Developing Change Country Average 1990-94 China 1530 1724 2798 3087 10 India 855 611 602 933 55 Indonesia 328 503 742 796 7 Brazil 451 717 746 847 14 Simple Average 545 610 697 859 23 Mauritius 2492 2615 2616 2754 320.7 5 Swaziland 1075 536 661 696 81.1 5 South Africa 803 667 601 631 73.5 5 Zimbabwe 676 605 622 593 69.1 -5 Kenya 144 243 258 305 35.5 18 Malawi 250 231 287 214 24.9 -25 Mauritania 67 100 190 192 22.4 1 Lesotho 154 115 145 188 21.9 30 C6te d'lvoire .172 116 97 170 19.8 75 Nigeria 57 94 125 120 14.0 -4 Tanzania 125 134 146 114 13.3 -22 Zambia 154 155 113 112 13.0 -1 Congo 35 290 94 112 13.0 19 Benin 5 63 59 91 10.6 54 Senegal 83 87 51 85 9.9 67 Mali 69 95 73 84 9.8 15 Burkina Faso 15 40 59 65 7.6 10 Sudan 65 74 69 56 6.5 -19 Sierra Leone 36 68 24 56 6.5 133 Gambia, The 127 231 32 47 5.5 47 Togo 11 42 48 46 5.4 -4 Cameroon 46 81 24 43 5.0 79 Madagascar 29 32 35 36 4.2 3 Burundi 9 20 18 26 3.0 44 Botswana 35 11 21 24 2.8 14 Ghana 34 31 33 23 2.7 -30 Mozambique 90 12 8 22 2.6 175 Chad 3 23 18 21 2.4 17 Guinea-Bissau 7 17 18 2.1 6 Guinea 4 5 16 15 1.7 -6 Gabon 2 62 25 9 1.0 -64 Rwanda 1 13 26 9 1.0 -65 Central African Republic 7 15 4 6 0.7 50 Zaire 10 9 8 5 0.6 -38 Uganda I 0 0 4 0.5 - Niger 8 10 6 3 0.3 -50 Simple Average 192 198 184 194 23 15 Sources: World Development Indicators, 1997. 191 Distributors of World Bank Group Publications Prices and credn terms vary ranm CZECH REPUBLIC INDIA Eulyoo Publishing Co. 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Engomi Euro loIno Service Internationoal Divisian Asiz Chambers 21, Queen's Reed Mawatha RO.cexsia D Margitszgeti Europa Haz 783-20, Paegba Bon-Dong, Lahore Colombo 2 Tel:si (725-30H-1 138 Budapest Secho-hu Tel: (92 421 636 3222: 636 0899 Tel: (94 1) 32105 Pax., (357 2( 66-2051 Tel: (36 11 350 60 24, 353 80 25 Seoul Fax: (92 421 638 2328 Pax: (94 1) 432164 Fan: (361~) 350 90 32 Tel: (8221 536-9555 E-mail: pbc@brain.net.pk C-mall: LHL*sri.lenka.net E-mail: eureirilofmall.matav.hu Fan: (82 2) 536-0025 E-mail: seamap@chollean.net I Recent World Bank Technical Papers (continued) No. 403 Welch and Fremond, The Case-by-Case Approach to Privatization: Techniques and Examples No. 404 Stephenson, Donnay, Frolova, Melnick, and Worzala, Improving Women's Health Services in the Russian Federation: Results of a Pilot Project No. 405 Onorato, Fox, and Strongman, World Bank Group Assistancefor Minerals Sector Development and Reform in Member Countries No. 406 Milazzo, Subsidies in World Fisheries: A Reexamination No. 407 Wiens and Guadagni, Designing Rulesfor Demand-Driven Rural Investment Funds: The Latin American Experience No. 408 Donovan and Frank, Soil Fertility Management in Sub-Saharan Africa No. 409 Heggie and Vickers, Commercial Management and Financing of Roads No. 410 Sayeg, Successful Conversion to Unleaded Gasoline in Thailand No. 411 Calvo, Optionsfor Managing and Financing Rural Transport Infrastructure No. 413 Langford, Forster, and Malcolm, Toward a Financially Sustainable Irrigation System: Lessonsfrom the State of Victoria, Australia, 1984-1994 No. 414 Salman and Boisson de Chazoumes, International Watercourses: Enhancing Cooperation and Managing Conflict, Proceedings of a World Bank Seminar No. 415 Feitelson and Haddad, Identification of Joint Management Structuresfor Shared Aquifers: A Cooperative Palestinian-Israeli Effort No. 416 Miller and Reidinger, eds., Comprehensive River Basin Development: The Tennessee Valley Authority No. 417 Rutkowski, Welfare and the Labor Market in Poland: Social Policy during Economic Transition No. 418 Okidegbe and Associates, Agriculture Sector Programs: Sourcebook No. 420 Francis and others, Hard Lessons: Primary Schools, Community, and Social Capital in Nigeria No. 421 Gert Jan Bom, Robert Foster, Ebel Dijkstra, and Marja Tummers, Evaporative Air-Conditioning: Applications for Environmentally Friendly Cooling No. 422 Peter Quaak, harrie Knoef, and Huber Stassen, Energyfrom Biomass: A Review of Combusion and Gasification Technologies No. 423 Energy Sector Unit, Europe and Central Asia Region, World Bank, Non-Payment in the Electricity Sector in Eastern Europe and the Former Soviet Union No. 424 Jaffee, ed., Southern African Agribusiness: Gaining through Regional Collaboration No. 425 Mohan, ed., Bibliography of Publications: Africa Region, 1993-98 No. 426 Rushbrook and Pugh, Solid Waste Landfills in Middle- and Lower-Income Countries: A Technical Guide to Planning, Design, and Operation No. 427 Marifio and Kemper, Institutional Frameworks in Successful Water Markets: Brazil, Spain, and Colorado, USA No. 428 C. 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Maria Saleth and Ariel Dinar, Evaluating Water Institutions and Water Sector Performance THE WORLD BANK 1818 H Street, N.W Washington, D.C. 20433 USA Telephone: 202-477-1234 Facsimile: 202-477-6391 Telex: MCI 64145 WORLDBANK MCI 248423 WORLDBANK World Wide Web: http://ww-v.vorldbank.org/ E-mail: books@aworldbank.org _I; S2lE ISBN 0-8213-4528-1