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# 3.2 Poor market functioning

<mark>A second recurring theme in the academic and policy debates on African agriculture and rural development is the poor functioning of input, factor and product markets (Barrett et al., 2017). Land, labor and credit markets are considered largely absent, even 20 years after the structural adjustment era of the 1980‐1990s, impeding modernization and commercialization of agriculture. Most recently, it has among others given rise to the (re)‐introduction of fertilizer programs in the mid‐2000s (see Jayne et al. 2013 for an assessment). The lack of smallholder market participation is considered to be holding back progress in the fight against malnutrition (von Braun and Kennedy, 1994), with 38 percent of African children under the age of five still suffering from growth retardation (Beegle et al., 2016). A related manifestation of market failures is the presence of food price seasonality, a widely acknowledged, but little systematically documented and increasingly neglected phenomenon (Devereux, Sabates‐Wheeler and Longhurst, 2011).</mark> <mark>The following five papers in the special issue query the prevailing notions of continuing factor market imperfection (Dillon and Barrett, 2017; Deininger, Savastano and Xia, 2017; Adjognon, Liverpool‐Tasie, and Reardon, 2017), limited commercialization and its effect on nutrition (Carletto, Corral and Guelfi, 2017), and food price seasonality (Gilbert, Christiaensen and Kaminski, 2017).</mark> _Factor markets in general do not function well ._ The conventional wisdom sees African agriculture trading in missing or imperfectly functioning factor markets. Dillon and Barrett (2017) conclude that this is largely true. At the heart of this finding is the simple observation that the number of working age people in the household should not affect the amount of labor used on the farm if factor markets function well. If the size of the household does affect the amount of labor used on the farm, clearly factor markets (not only labor markets) are either absent or functioning poorly. This test goes back to Benjamin (1992) and has been applied in a number of settings (Udry, 1999; LaFave and Thomas, 2014). The authors apply it systematically across five LSMS‐ISA countries.

Dillon and Barrett (2017) find a significant link between labor input and household size, across all countries. The link is further robust to the gender of the household head, the distance from markets and the agro‐ climatic environment, suggesting that rural factor market failure is pervasive and structural. Yet, they also find that rural factor markets are not generally missing in an absolute sense. On average across countries, 29.4 percent of agricultural households rent/borrow land, 38.9 percent hire labor and 23.7 percent take out a loan (Table 3). Market existence thus appears less of a problem than market function. Further work is needed to unpack the sources (e.g. labor, land or financial markets) and causes of the underlying market failures to help target the necessary interventions.

Table 3: While generally incomplete, factor markets are not generally missing.

|% agricultural households|Ethiopia|Malawi|Niger|Tanzania|Uganda|Average|
|---|---|---|---|---|---|---|
|Rent/borrow land|32.7|24.9|30.9|19.6|38.7|29.4|
|Hiring labor|30.2|40.1|48.7|30.1|45.2|38.9|
|Take loan/access credit|27.5|13.3|‐|13.3|40.8|23.7|

Source: Dillon and Barrett, 2017.

_But land markets already perform a useful role._ Deininger, Savastano, and Xia (2017) explore in greater depth and more directly the extent to which farmers are engaged in land markets, and the nature of that