Markets, Institutions andAgricultural Performancein Africa

Julius Mangisoni

ATPS SPECIAL PAPER SERIES No. 27

Published by the African Technology Policy Studies Network, P.O. Box 10081, 00100
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ABOUT THE AFRICAN TECHNOLOGY POLICY STUDIES NETWORKThe African Technology Policy Studies Network (ATPS) is a multi-disciplinary network of researchers,
policy makers, actors in the private sector and other end users interested in generating, promoting
and strengthening innovative science and technology policies in Africa. With a regional secretariat in
Nairobi, the network operates through national chapters in 23 countries, with an expansion plan tocover the entire sub-Saharan Africa.
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Acronyms

AU
COMESAECOWAS
EU
GDP
IFPRI
IMF
NEPAD
ODA
SADC
WTO

African Union
Common Market for Eastern and Southern Africa
Economic Community of West Africa States
European Union
Gross Domestic ProductInternational Food Policy Research InstituteInternational Monetary Fund
New Partnership for Africa’s Development
Official Development AssistanceSouthern Africa Development Community
World Trade Organization

Table of Contents

Abstract
1.

Introduction

1

2.

Markets and Institutions in Africa

2

3.

Response to African Problems

84Important Lessons

105

The Way Forward

12

6

Conclusion

17

References

13

Introduction

Poverty is a pervasive and growing problem in the world. The total number of individuals living in
absolute poverty i.e. surviving on less than US$1 per day in Africa, Asia and Latin America has been
estimated at 1.2 billion. In Africa alone, the problem is increasing fast. Current estimates indicate thatabout 300 million people on the continent are living on less than $0.65 per day. The continent is also
plagued with deep inequalities in income distribution with a Gini coefficient of 0.459 that is surpassed
only by 0.51 Gini coefficient of Latin America. Linked to poverty is growing food insecurity amonghouseholds. It is estimated that food insecurity rose tremendously from 1960 to 1990 and by 2020
Africa will have a food shortage of 250 million tons (Mule, undated).
Due to poverty and food insecurity, Africa is facing problems of poor nutrition, and widespreadincidences of diseases that are stretching already tight health budgets of African countries. Poor
health, in turn, leads to physical impairment and poor school performance. In addition to the above
problems, it is estimated that about one-fifth of Africa’s population resides in areas ravaged by civil
conflicts and one-third had had a taste of civil strife in the past 40 years. This has increased theinsecurity of an already insecure population (Mule, undated).
Although poverty is spread across the entire geography of individual countries in Africa, the rural
population is the most affected. On average, 70% of Africa’s population resides in rural areas as
smallholder farmers and depends on agriculture for its livelihood. Thus, the poor performance ofagriculture in the past years has increased and reinforced poverty in Africa. If the war on poverty is tobe won, African countries need to place more emphasis on the agricultural sector.
The causes of the poor performance of agriculture include low and declining investments and low
efficiency rates of capital-output ratios that have led to poor infrastructure including markets, illconceived policies, weak institutions and poor governance (Mule, undated). The purpose of thispaper is to explore markets and institutions and their effects on agricultural performance in Africa.

12. Markets and Institutions in Africa

In Africa, markets can be grouped into local, regional and international. Local markets embrace
unregulated transactions between farmers, from farmers directly to consumers or from farmers to
private traders and marketing boards. Regional markets have come in the wake of increased
recognition of the importance of regional integration to override the problem of small market size inindividual countries and to achieve economies of scale and efficiency in production and marketing.
These markets are regulated with clearly defined grades and quality standards. International oroverseas markets are much more complicated with exacting marketing regulations including grades
and standards, quality manufacturing processes and safety regulations. Such markets are much
more difficult to penetrate.
In Africa, agricultural marketing is constrained by high transaction costs, high risks, missing markets
and lack of social capital or collective action. Transaction costs are linked to problems of licensing;absence of grades and standards; lack of marketing information; poor access to markets; weakentrepreneurial skills and high marketing margins. High risks, on the other hand, embrace weakpolicy environment, lack of legal frameworks and high price volatility, while missing markets includes
lack of value adding or agro-processing, weak infrastructure and lack of credit. Lack of social capital
relates to weak farmer organization. These marketing problems are discussed individually and in
more detail below.

Transaction costs
Marketing of agricultural products has over the years been the monopoly and monopsony of marketingboards. From the advent of agricultural market liberalization, private traders have been allowed toengage in marketing of both inputs and agricultural products. However, unlike marketing boards,
private traders are required to acquire licenses to engage in buying and selling of the smallholder
products. The licenses are often issued by the Ministry of Agriculture or Trade and Industry and theprocess often takes weeks or months, especially when the private traders aspire to export agricultural
products or to import agricultural inputs. This adversely increases the transaction costs to prospective
traders. In other words, the complex regulatory system acts to exclude any new entrepreneurs,
discourage innovations and increase prices paid by consumers. This is contrary to the argumentthat regulations should be introduced to augment markets other than replacing them (Cadwell,2002). The issue of licenses is not relevant because of lack of organized markets for horticultural
products in Africa. Horticultural products are typically traded without much regulation from thegovernment.

2

MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

3

With the exception of crops such as tobacco, cotton, tea and coffee that are auctioned, mostsmallholder crops have no clearly defined grades and standards. Horticultural crops in rural andeven in urban areas are mostly sold using bunch or heap method, while cereals are sold using either
the heap method or plateful method without adhering to any weights and measures. However, forthose smallholder crops, such as maize and grain legumes, which may be sold through marketingboards, some form of rudimentary grades and standards are instituted but no regulatory body exists
to ensure that the grades and standards available for some of the commodities are adhered to. The
absence of well-defined grades and standards mean that smallholder farmers just like consumers
do not get a fair value for the commodities they trade in.
Labelling is virtually not done for raw agricultural products sold in rural markets in Africa. Some formof labelling is done for processed agricultural products but even for such processed products, there
is not much information on the nutritional content or the means to verify any claims made on the
product packaging.
Acquisition of marketing information is a serious handicap to smallholder agricultural developmentin Africa. Farmers rely on friends, relatives and extension agents for market information. Becausesuch individuals may not have up to date and reliable market information, the usefulness of theinformation is doubtful. Market information needs to be accurate and timely to benefit all theparticipants in the market. As part of the market liberalization programme, the Ministry of Agriculture
in Malawi in the early 1990s instituted a mechanism under a World Bank-supported AgriculturalMarketing and Estate Development Project to collect and disseminate market information for the
farmers and traders consumption. This initiative was limited to the collection and dissemination ofagricultural commodity prices.
The mechanics of implementation involved extension planning area personnel, who were mandated
to collect weekly price data on selected agricultural commodities including maize, cassava, sweet
potatoes, beans, sorghum, rice and groundnuts. The prices were then transmitted to the Ministry ofAgriculture Headquarters in Planning Division. The Marketing Section of the Planning Division inturn summarized all the price information from all the markets throughout the country. The information
was then passed on to the Malawi Broadcasting Corporation and Daily News Papers forannouncement/dissemination to the whole country. It was hoped that the price differentials would
assist traders to go where prices were lower to effect arbitrage to high cost areas. The impact of thisinitiative was limited because it not only relied on limited channels of information dissemination but
it also had limited focus. It appears that no attempt was made in the planning stages to assess thetype of information that would be useful to farmers, traders and consumers and also the best ways todisseminate such market information for it to have maximum effect.
Education levels are quite low in Africa such that assimilation of technical and market information is
impaired. Farmers, for example, lack entrepreneurial or business management skills especially inareas of financial, marketing and production management. Such information requires that anindividual attains a critical mass of education, has requisite knowledge of market opportunities, has

4ATPS SPECIAL PAPER SERIES NO. 27

greater work experience and has good management capabilities. The supply of individuals withsuch calibre is limited in the rural areas of Africa. Furthermore, access to services is poorly distributed
within communities and the massive poor infrastructure and low effective demand make theintroduction of institutions a necessity for risk sharing and for achievement of economies of scale in
the provision of the agricultural services in the rural areas.
Good roads, transportation and communication are prerequisites to market access particularly tothose potential market participants who reside in rural areas. In Africa, lack of good rural infrastructure
constrains farmers’ supply response to any incentives in both agricultural production and marketing.
Poor market access is compounded by deterioration of rural roads and the collapse or lack oftelecommunication networks in the rural areas. This has also increased because of the budgetary
cuts and the steep reduction in public investment in infrastructure necessitated by the market
liberalization and related structural adjustment programmes that most Governments of Africa havepursued since the 1980s. This development has made traders to operate over short distances,
thereby restricting inter-regional arbitrage of commodities. As a result, transportation costs are toohigh for farmers and traders to get any meaningful benefits from their trading activities (Kherallah
and Minot, 2001).
High margins are a serious marketing problem in African countries. Average producer prices
expressed as a percentage of the consumer price are as high as 75-90% in Asia while in Africa, therange is from 30-60%. The high marketing margins in Africa are blamed on transport costs,
government restrictions and poor communication network. The low marketing margins in Asia are
due to the fact that the marketing margins are close to regional price spreads; thereby implying thatthe markets in Asia are more integrated than the markets in Africa (Harrigan et al., 1992).

Agricultural risks
Issues of high risks in the marketing of maize, legumes, oilseeds and horticultural products arelinked closely to the weak policy environment, lack of legal framework and high price volatility, whichconspire to weaken agricultural markets and in turn agricultural production in Africa. Studies indicatethat government trade restrictions, rules and regulations including licensing that private traders face,
help to increase transaction costs as much as 20% of the marketing margin.
Faced with these constraints, private traders are unable to benefit much from economies of scalebecause they use trains or trucks individually to transport their produce instead of collectively hired
trucks. In addition, licensing requirements increase the risk of investing in capital such as trucks andstorage facilities. This is particularly the case if the traders feel that there are high chances that thelicense can easily be revoked.
Under such circumstances, privatization with suffocating regulations may not yield benefits that are
significantly different from the public system it is expected to overthrow. Related to risk are theproblems of property theft, poor quality, payment problems, and disagreements over measures andex post renegotiation with suppliers. Furthermore, many elements of market transactions that African

MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

5

farmers engage in are hard to enforce and sometimes out rightly not known. In Kenya, for example,
an attempt to commercialize the Kenyan farmer tended to reduce over time the allocative efficiencyof resources (Goetz, 1993).
High price volatility is linked to the nature of agricultural commodities. The agricultural commodities
are seasonal but consumption is all year round. Farmers, due to immediate cash needs and lack ofstorage facilities, often sell their produce soon after harvest. This practice floods the market withproducts leading to unwelcome further reductions in prices, much to the detriment of the farmers’
profitability position.
Lack of regular output markets every year can be traced from subsistence requirements and thegeographical isolation of the farmers. In Africa, supply and demand functions often move in opposite
directions in years of plenty and years of scarcity, increasing the variability of food prices compared
to a situation where only one of the functions shifts (Goetz, 1993). This makes African markets not
only highly unreliable but also highly unpredictable and provides very little information useful for
coordination and to provide incentive signals to entrepreneurs. The research question, therefore, is
how regulations can be fine-tuned to enhance marketing activities? Another question is, what
incentives should there be for farmers to engage in storage and agro-processing to reduce market
risk?

Missing markets
Lack of agro-processing is part and parcel of missing markets. Other components of missing markets
include lack of credit/financial services and weak infrastructure.
Although cereals, grain legumes, root crops, oil seeds and horticultural products are important andwidely grown in Africa, their potential has not been fully realized because of the rudimentary technology
used, especially in production and agro-processing at the rural/farm level. This state of affairs leads
to significant product losses during traditional harvesting, drying, storage, processing and marketing.
If the technology was improved and the farmers were better organized, most of the post-harvest
losses could be significantly reduced and in the process enhance the quality of the products.
The need for transforming the current smallholder agriculture from its current status of being a
subsistence way of life into smallholder farm enterprises has not been aggressively pursued. Thereis also lack of emphasis on adding value to primary products in a local resource based industrialization
approach. The development of agriculture as a provider of raw materials for the food processing
industry has also not been fully exploited.
When confronted with situations of missing markets, African farmers have tended to rely on extended
family and labourers for the entire duration of the growing season or longer periods. Due to unreliabilityof the markets, the extended family relationship acts as an important insurance policy for the farmers
to both spread the non-covariant risk and to allow some form of specialization in the different agricultural
tasks that are performed on the farms.

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ATPS SPECIAL PAPER SERIES NO. 27

Farmers are able to get cash crop inputs in several ways: purchase from the market; carryover seed
and borrowing from marketing boards. Parastatal marketing boards have historically been used as
the key conduit for introduction of new crop varieties to farmers as well as for the thorough distributionof inputs either on cash or credit basis to the farmers. The credit that was channelled through theparastatals greatly helped to reduce liquidity constraints among farmers.
The credit was most important because it was provided just before planting. If the credit was provided
immediately after harvest, when rural cash balances were quite high, it would have been of muchless consequence to farmers. Although parastatals have often been accused of opportunistic
behaviour, they assured farmers of crop buying points and a guaranteed price for each crop.
Despite parastatals being involved in credit disbursement, the majority of the smallholders in Africa
do not have access to credit. It is estimated that less than 20% of input purchases in Africa are on
credit. The most common form of borrowing in Africa is from friends or relatives and usually this is forhandling short-term emergencies. Credit is mostly available to cash crop farmers. Thus, available
credit institutions have only managed to service a small segment of the population (Kherallah andMinot, 2001).
There is still the problem in Africa on how to service the large majority of the poor rural people whohave no collateral. Studies to critically examine how credit can effectively be made available for firm
expansion and for securing economies of scale in trading activities of farmers and traders arelacking. For instance, it is useful to study how contract farming and out-growers’ schemes caneffectively help to link the supply of input credit and the purchase of both export and non-tradable
domestic crops. It is also useful to assess how the private and public sectors can be used to increase
supply of rural credit to farmers on a sustainable basis.
On the input side, no market exists for wage labour and credit, and no regular market exists for output
every year. Under the prevailing situations of low technology, the implication of this is that theemployer and the employee’s marginal product are equal to each other to the extent that the employer
gets no remuneration for supervising his/her labourers. Private credit markets do not exist because
land is owned by the community and not by individuals. As such, the land can neither be sold nor beused as collateral to get a loan (Goetz, 1993).
In the face of missing markets, particularly food and labour markets, when cash crops are introduced
into the farming community, intra-household specialization takes place where transactions takeplace within a household as opposed to across markets. Consequently, dominant relationships
develop between factor and labor markets.
Introduction of cash crops helps to reduce cash constraints at planting time because such crops
usually come with a credit input package. In addition, the price risk as opposed to yield risk isremoved because cash crops come with a regular marketing system.

MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

7

Cash crops are often accompanied by modern technology that may help to improve yields on limited
amount of land. With the emergence of cash crops and equipment, such as treadle pumps, ploughs
and seeders, access to private credit may be possible since such equipment may be used ascollateral. However, private credit continues to be an extreme constraint both from the demand andthe supply often due to the absence of land market and the yield uncertainty associated with rain-fed
agriculture.
Food crops grown locally do not have reliable or regular markets. Insurance markets in the smallholder
sector are often non- existent. Under such situations, households are forced to store their own food.
High transaction costs between uncertain food crop production and households, often makes it
imperative for farmers to produce a large variety of crops as opposed to specialization. Specialization
only occurs internally in terms of labour, other inputs and food.

Institutional constraints
Lack of social capital often has the underlying problem of weak farmer organizations. Farmerorganizations empower farmers to effectively manage their own businesses, including processing.
On production side, the organizations would work out cost-effective ways of procuring inputs in bulk
to enjoy economies of scale in procurement and transportation. On the marketing side, farmers in an
organization have a stronger bargaining position that minimizes chances of exploitative tendencies
from unscrupulous traders. This also allows farmers to get better prices at the market leading tohigher profits and better standards of living.
Africa suffers due to a significant lack of social capital or collective action. Consequently, farmers
lack marketing power and are much more vulnerable to exploitation by unscrupulous businesspersons. Problems of access to capital and markets and high transaction costs are intimately linked
to lack of social capital or collective action. About 10% of markets in Malawi, for example, have
traders’ associations (Kherallah and Minot, 2001).
The high transaction costs and the expenses for organizing and affecting the exchange of goods
and services increase the cost of marketing agricultural products. This creates artificial barriers tosmallholder participation in a number of agricultural ventures, such as dairy production. In Africa,
apart from high marketing costs, markets are often scattered and there is a definite risk of engaging
in marketing of time constrained perishable agricultural products such as milk, fruits and vegetables(Holloway et al., 2000). For such commodities, farmer cooperatives would reduce the marketingcosts.

3.

Response to African Problems

A number of initiatives have been pursued to respond to the problems outlined above. One of them isthe development of regional economic groupings, such as the Common Market for Eastern andSouthern Africa (COMESA), Southern Africa Development Community (SADC), and Economic
Community of West Africa States (ECOWAS). The aim was to increase the market size and capitalize
on economies of scale.
Other initiatives have focused on resolving the numerous conflicts in the continent by the African
Union (AU), and the commencement of NEPAD. In addition, under the tutelage of the International
Monetary Fund (IMF) and the World Bank, most African countries undertook massive economic
reforms in the last twenty or more years. The reforms were to bring macroeconomic balance or
stability, improve economic efficiency, eliminate price distortions and bolster economic growth.
Results of these effects are mixed.
Countries that have gained from reforms are few and far between. Examples include Botswana,
Mozambique and Uganda. In agriculture, Mozambique and Uganda have often been cited as successstories, where the growth rate of the agricultural sector was 9% for several years in Mozambique and
14% in Uganda (Mule, undated).

Structural adjustment programmes and ill-conceived marketing policies
The dismal performance of agriculture in Africa can be traced to ill-conceived agricultural policies.
In sharp contrast to agriculture in developed countries that enjoys tremendous government protection
and huge support in the form of subsidies, African agriculture has since independence been heavily
taxed by government through export taxes, commodity cesses and has experienced dwindling
government support thanks to World Bank structural adjustment conditionalities. It is estimated thatthe subsidy to agriculture in developed countries is about $300 billion annually. This is just about the
combined gross domestic product (GDP) of all African countries (Mule, undated).
On average, public expenditure on agriculture is estimated at less than 10% in Africa, yet more than
70% of African people depend on agriculture for their livelihood. In addition, for most African countries,
agriculture accounts for more than one third of GDP. All this is happening against a backdrop of
declining terms of trade and declining official development assistance (ODA). Although net percapita ODA transfer to Africa, for example, was $32 in 1990, it had declined to $19 in 1998, a8

MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

9

reduction of more than 40%. This state of affairs has led to capital flight and growing external debt
estimated at almost 80 percent of combined GDP of African economies (Mule, undated).
It has been argued that in Africa, particularly in sub-Saharan Africa (SSA), there is absence ofinterlinked market arrangement that would combine markets for labour, land, credit and insurance
within a single contract or transaction. This has led to the emergence of traditional institutions todeal with the apparent market failures (Goetz, 1993).
The market failures are apparent in the absence of land markets due to the lack of the capitalist
concept of property rights over land and credit markets. It is important to examine feasibility andefficacy of the traditional institutions in dealing with the market failures. There is need to assess thecost-effectiveness of supporting the functioning of the traditional institutions than to rectify the market
failure. It is also important when attempting to rectify the market failure to assess the compatibility
and consistence of separate policies aimed at addressing the failures of one or more markets. Thisis particularly important considering that if markets are interlinked, the outcome of the various policies
may not be so clear-cut to visualize.
Under such circumstances, unanticipated results may be experienced which in some cases may
be costly to overcome (Goetz, 1993). For instance, in many African countries, such as Malawi,
Tanzania and Ghana, structural adjustment programmes of the 1980s and 1990s encouraged
governments to liberalize the marketing of agricultural inputs and outputs. The aim was to raisesmallholder incomes because it was hoped that liberalization would increase competition, thereby,
benefiting farmers. Another objective was to let marketing boards withdraw from uneconomic ruralmarkets. This move would, in turn, reduce government subvention to the marketing boards. It was
hoped that this would allow private traders to move in those markets where the marketing boards had
withdrawn.
Experience on the ground was far from what was anticipated. When the marketing boards withdrew
from the uneconomic markets that predominantly were in remote rural areas, private traders never
moved in to fill the vacuum created by the withdrawal of the marketing boards. Instead, the private
traders operated in the peri-urban areas leaving smallholder farmers in remote areas with limited
marketing options. This had two repercussions. First, farmers resorted to subsistence ways of life.
Second, inputs particularly fertilizer and improved seeds became very costly to farmers. Because of
distance, the private traders who attempted to purchase crops from smallholder farmers offered thefarmers very low prices arguing that they had to meet the cost of transporting the crop or product tothe market (Goetz, 2003).

4.

Important Lessons

First, successful countries, such as Uganda have shown that to reduce poverty there is need for a
substantial and sustained increase in per capita GDP and that its distribution should be widespreadin the population to reduce inequality. Since the majority of the poor people in Africa are in the rural
areas, there is need to put smallholder agriculture at the top of the development agenda to reducepoverty.
Second, the many conflicts that are plaguing Africa should be resolved because they are responsible
for reduction in per capita GDP of Africa. The International Food Policy Research Institute (IFPRI)
estimates that civil strife is responsible for 12.4% reduction in food production in countries involvedin conflicts. In the absence of conflicts, IFPRI estimates that food production in Africa would increaseby 2 to 5% (Mule, undated).
Third, the reforms instituted by the World Bank and IMF have not achieved the intended results ofcorrecting marketing problems. Macroeconomic reform policies are not a panacea for sustainablegrowth and equity. Despite majority of countries in Africa pursuing economic reforms in the past 20
or more years, per capita incomes have worsened and reform measures aimed at reducing
government deficit have led to massive cuts in agriculture, health, rural development and education
as well as massive retrenchment of personnel in government ministries. This prevalence has further
aggravated poverty contrary to the expectation of the designers of the reform programmes.
It is imperative, therefore, that in future Africans should take responsibility for the design of their own
programmes and reform measures. Such designs should consider social, economic and politicalangles of development. Since it is imperative that resource mobilization, promotion of economic
efficiency, and attracting external resources are panacea for leveraging the African economies,emphasis should be placed on measures that would ensure sustained growth of the smallholder
agriculture. This would help reduce poverty and turn around African economies, much in the directionof the New Partnership for Africa’s Development (NEPAD). There is need to increase public
expenditure on agriculture in rural infrastructure and put in place better incentives to farmers, soundeconomic policies and increased private investment in agriculture.
Fourth, Africans should focus on technological change to shift the agricultural production function
outward. Technological change can be achieved through meaningful research.

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MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

11

Fifth, market development should be a priority so that farmers can sell surplus produce to both
domestic and international consumers.
Finally, there is need to develop, strengthen or create institutions and organizations that would
render appropriate services to farmers (Mule, undated).

5.

The Way Forward

Low incomes restrict greatly the scale of the African market. To make matters worse, Africans havea tendency to prefer foreign goods to locally produced ones. To develop African markets and African
agriculture, there is need for a campaign to reorient the tastes and preferences of the African consumer
to the locally produced goods, especially agricultural products and their derivatives. The South
African Development Communities (SADC), the Common Market for East and Southern Africa(COMESA) and the Economic Community of West African States (ECOWAS) should work toward
influencing this perspective.
Issues of agricultural subsidies are controversial. In Africa, money is limited to support suchprogrammes because the African agricultural sector is proportionately much larger than that ofdeveloped countries. Subsidies may be a good strategy for agriculture but may not work in the African
context.
Arguments have been advanced that if developed countries removed subsidies then African countries
would compete favourably. This argument is partly true because one reason why Africa may notcompete is its reliance on traditional production technologies that limits its competitive position. In
addition, international marketing requires grades and quality standards. These are not well-developedin African countries to enhance penetration of developed country markets.
The search for solutions to the problems thus revolves around five broad areas of African-based
structural adjustment, infrastructural development, collective action, agro-processing andstrengthening market information system.
Failure of the structural adjustment programmes has demonstrated that outsiders cannot prescribe
the curative measures for the economic and technological problems of Africa. The people of Africa
need to take charge of their own destiny by designing policies that suit African realities. Donors
should provide support to initiatives, such as NEPAD, to ensure wide acceptance of programmes
within Africa. There is need to move from the project cycle to a more participatory system of projectand programme development where the local communities who are to be affected by the programmes
have an input.
The infrastructure in Africa is in poor state, and this limits participation of the private sector insmallholder crop marketing. If infrastructure was good, private traders would easily move into the12MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

13

remote areas where the marketing boards withdrew. African governments should, therefore, seriously
think about investing in infrastructural development to ensure that the smallholder farmers have easy
access to the market. In the absence of infrastructure, there can be no smallholder development.
Collective action would allow farmers to strengthen their position in the market, have access tocredit and greatly reduce transaction costs. In Africa, there is evidence that credit institutions aremuch more willing to lend to farmer groups and clubs, for example, than to individuals. Credit
recovery is ensured because of group pressure. As a form of collective action, smallholder farmer
associations would allow reduction of transaction costs because the farmers would be able tobenefit from economies of scale in marketing their crops as well as in the purchase of inputs andacquisition of information related to both production and marketing. This would in the end ensurethat the regional price spreads are, close to the marketing margin. Smallholder associations would
increase farmers bargaining power on government taxes and would be an effective countervailingforce to super-normal profits accruing to parastatals and private traders that are responsible for mostof the observed wider consumer price spread in the range of 48-55% (Harrigan et. al., 1992).
Cooperatives, therefore, increase market access for farmers through bulking and bargaining services
and reduce the risk on farmers of holding a time constrained perishable commodity with no rural
demand. In short, participatory cooperatives reduce problems of access barriers to assets, information,
services and the market where the smallholder farmers are able sell their products (Delgado, 1999;
Holloway et al., 2000).
Participatory cooperatives are in some cases similar to contract farming. They provide a processor/
marketer with an assured supply of the commodity in definite quantities, known time intervals, priceand quality. In Africa, producer cooperatives have not been successful because of difficulty in holding
management accountable to members. This culminates into financial escapades involving people
in management. The African experience is that single purpose as opposed to general purpose
cooperatives tend to be very successful (Akwabi-Ameyaw, 1997).
Smallholder farmers’ association would also help to reduce transaction risks. This would be ensured
through guaranteeing good business conduct to all members. Such associations would, for instance,
ensure grading and quality certification for products of its members in ways that inhibit falsification of
documentations. This would have downstream effect of enhancing consumer confidence in theactivities and products of the association.
When such is the case, collective action in the form of farmer cooperatives or associations would
help reduce transaction costs and bolster participation. In this situation, it is up to the government todecide what it can support and how it can encourage alternative institutions that would equallyprovide favourable marketing environment to farmers. Farmers in Africa face differential transaction
costs due to asymmetries in access to information, assets, services and profitable markets (Delgado,1999).

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ATPS SPECIAL PAPER SERIES NO. 27

With regard to agro-processing, the globalization of food marketing systems and the increased
importance of processed food in all markets have created a new environment for food industry
development to harness the new potential. Agro-processing allows smallholder farmers to participate
in regional markets and overseas markets as well. In addition, processing and marketing of highvalue products such as dairy allow fast reduction of rural poverty since dairying ensures that farmers
have regular incomes.
The integration of agricultural markets on a global basis and the growing influence of regional andglobal trade agreements have proven to be a powerful combination for change in world food markets.
The Uruguay Round of the GATT set a new path for trade in agricultural products but as the agreements
went into effect under the WTO, most African countries lacked the expertise to improve their policies
and strengthen their institutions to capitalize on the opportunities for market access afforded under
the agreements.
To remain competitive, African exporting countries will have to meet international grades, quality
and safety standards set under the auspices of the WTO Agreement on Sanitary and Phytosanitary
Measures by the designated standard-setting bodies (Codex Alimentarius Commission and others).
Moreover, Africa will need to be able to certify its production systems according to internationallyrecognized standards of quality assurance (including Good Manufacturing Practices, Good
Agricultural Practices, and Quality Management Systems of the International Standards OrganizationISO) and process control.
Although international standards are likely to influence trade in food products for the long term,
meeting the grades, safety and quality standards of major markets for imported foods is also an
immediate concern for Africa which is intent on accessing those markets with its food and otheragricultural products. For example, under the African Growth and Opportunities Act (AGOA), Africancountries are granted duty free access to the United States market. However, in both the UnitedStates and the EU, heightened consumer concern about food safety is changing the regulation andinspection of food products. These changes must be taken into account when developing a plan toexport food products into these markets.
Evidence from many countries confirm that as development occurs, the composition of agribusinesschanges, and a higher percentage of agricultural commodities are processed rather than consumed
directly. Consequently, the post-harvest component of food production becomes increasingly importantand can serve as a source of additional income. Post harvest activities, such as post-harvest handling,storage, processing, preservation, marketing, distribution and utilization are rarely a serious part ofagricultural development programmes in Africa, in spite of their potential economic and healthbenefits. Both off and on the farm, post-production activities play a critical role in the food chain byassuring consumers access and availability of an adequate and diverse supply of high quality, lowcost, and safe food throughout the year. Moreover, the industry communities that operate in thisagribusiness marketing chain-notably the packers, transporters, processors and packaging

MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

15

manufacturers, and the food marketers/wholesalers/retailers, are increasingly seeing their individualand collective mission as both national and global.
In Africa, adopting and applying agro-processing and marketing systems to create value-added
products or improve the safety and quality of processed products for domestic and global markets is
a definite need. This is particularly urgent because global trade, now more than ever, looms as apotential choke point for economic growth and market expansion in Africa. Under the World Trade
Organization Agreement on Sanitary and Phytosanitary Measures (SPS Agreement), countries will
have to adhere to the “rules of the road”, including science-based food safety and quality standards
to compete in international markets.
Currently, the discussions, which determine these standards, are dominated by consuming countries,
setting long-term trade parameters without the optimum, fully informed participation of developing
countries that account for much of the raw materials and fresh food exports. Food trade issues arearguably the single most controversial topics in current global trade negotiations. It is therefore in theinterest of Africa to reorient its development goals so that value-adding practices are enshrined in all
smallholder agricultural development initiatives.
Value adding can be achieved in two ways. First, there is need for concerted development inprocessing, packing, storage and transporting to processors. Processing and packaging of fruits,
vegetables, cassava and oilseeds, meats, fish, dairy products, specialty foods and beverage products
can be done using a variety of technologies, including canning, freezing, refrigeration, dehydration
and aseptic manufacturing. Second, there is need for agribusiness development, including both
retail and wholesale marketing. The purpose of this area of excellence would be to adopt andtransfer the various technologies and processes that assure cheaper, higher quality, and safer foods
are leaving the farm, getting processed into higher valued products, and being shipped to their retaildestinations with minimum damage, transit time, and loss. It is necessary to draw upon thecomplementary strengths of farmer associations and individual farmers and demonstrate that allthese partners have a clearly defined vision of how they can cooperate for their mutual benefit, andto the benefit of the continent as a whole.
Market information failures in Africa compound high transaction costs and poor synchronization of
production and supply. Absence of information makes it difficult for producers to know what products
are needed at the market, when such products are needed, in what quantities and quality they areneeded and at what price.
Producers also in the absence of information lack the ability to make rational comparison between
market options. Similarly, consumers are not well informed about products they need. Reliance on
friends and relatives or any unorganised method of information acquisition and dissemination
increases search costs and ends with sub-optimal decisions. Research is, therefore, needed in
Africa focusing on best-information gathering and dissemination techniques. This involves looking
at what information should be gathered for what target group of farmers, how should the information

16

ATPS SPECIAL PAPER SERIES NO. 27

be packaged and how should it be disseminated in order to have the maximum effect. This should
also involve analysis of institutions, the policy environment and governance structures that would
ensure smooth flow of information.

6.

Conclusion

The purpose of this paper was to discuss markets and institutions and their impact on agricultural
performance in Africa. The paper has shown that poverty is a serious problem in Africa that is leading
to food insecurity and poor nutrition. At the same time, smallholder farmers have limited access tomarkets for their various agricultural products due to transaction costs, poor infrastructure, agriculturalrisk, missing markets and institutional constraints. Some of the problems, such as missing markets
have been aggravated by the withdrawal of marketing boards from remote areas, a move necessitatedby market liberalization.
Since the structural adjustment programmes have not succeeded in Africa, the paper recommends
that the direction taken by NEPAD to let Africans take the lead in designing their own programmes
needs to be supported. The paper further recommends that regional initiatives such as SADC,
COMEASA and ECOWAS should launch a campaign to persuade African governments to substitute
African products for foreign products.
Finally, for market development, collective action among farmers, agro-processing to add value,development of grades and standards, infrastructural development, and market information should
be top priority in every African country.

17

References
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Braverman A., J.L. Guasch, M. Huppi and L. Pohlmeir. 1991. Promoting Rural Cooperatives in
Developing Countries: The Case of Sub-Saharan Africa. World Bank Discussion Paper #121.
Cadwell C. 2002. Institutions and Democratization of Markets, Including Credit Markets. Paper
presented at the Financial Sector Workshop of the National Economic Development and Labor
Council (NEDLAC), Johannesburg, South Africa.
Delgado, C. 1999. Sources of growth in Smallholder Agriculture in Sub-Saharan Africa: The Role ofVertical Integration of Smallholders with Processors and Marketers of High-Value Items. Agrekon, J.
Agric. Econ. Assoc. South Africa 38, 165-189.
Goetz, S.J. 1993. Interlinked Markets, and the Cash Crop-Food Crop Debate in Land-AbundantTropical Agriculture. Economic development and Cultural Change. 1993. 41(2). 343-361.
Harrigan J., R. Loader and C.Thirtle. 1992. Agricultural Price Policy: Government and the Markets.
Training Material for Agricultural Planning, Rome, FAO.
Holloway, G., C. Nicholson, C. Delgado, S. Staal, S. Ehui. 2000. Agroindustrialization throughInstitutional Innovation, Transaction Costs, Cooperatives and Milk Market Development in EastAfrican Highlands. Agricultural Economics 23 (2000) 279-288.
Kherallah M. and N. Minot. 2001. Impact of Agricultural Market Reforms on Smallholder Farmers in
Benin and Malawi: Final Report Executive Summary. IFPRI Collaborative Research Project.
Mule, H.M. Undated. Institutions and their Impact on Addressing Rural Poverty in Africa.

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MARKETS, INSTITUTIONS AND AGRICULTURAL PERFORMANCE

Julius Mangisoni is a lecturer at Bunda College of Agriculture, University of Malawi

19

Other Publications in the ATPS Special Paper SeriesSpecial Paper Series 1
Globalization and Technology: Africa’s Participation and Perspectives: Concept Paper and Research Agenda by
Melvin Ayogu &Osita Ogbu (2002)
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Globalization, Markets for Technology and the Relevance of Innovation Policies in Developing Economies by Sunil
Mani (2002)
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The Impact of Globalization in sub-Saharan Africa Countries by Mwindaace N. Siamwiza (2002)
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A Blueprint for Developing National ICT Policy in Africa by Clement Dzidonu2002
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Impact of Foreign Direct Investment (FDI) on Technology Transfer in Africa by Moses M. Ikiara (2002)
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Foreign Direct Investment (FDI), technology Transfer and Poverty Alleviation: Africa’s Hopes and Dilemma by
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Special Paper Series 17
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Science and Technology and Poverty Reduction Strategy in Sub-Saharan Africa byO. Akin Adubifa
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An Assessment of Science and Technology Capacity Building in sub-Saharan Africa byO. Akin Adubifa
Special Paper Series 20
Network as Determinants of Manufacturing SME Cluster Growth in Nigeria Networking Technical Change andIndustrialization: The Case of Small and Medium Firm in Nigeria by Banji Oyelaran-Oyeyinka
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Technology Transfer in a Globalizing World: Many Promises, Lack of Responsibility, and Challenges for Africa by
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Special Paper Series 22
Integrated Value Mapping for Sustainable River Basin Management by Kevin UramaSpecial Paper Series 23
Wastewater and Irrigated Agriculture Lessons Learned and Possible Applications in Africa by Frans Huibers, Lucas
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Special Paper Series 24
Survey of Indigenous Water Management and Coping Mechanisms in Africa: Implications for Knowledge andTechnology Policy by Femi Olokesusi
Special Paper Series 25
Imbalance in Water Allocation Stability and Collaboration within the Nile Basin by Kinfe Abraham

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