metadata: authors: 0: author: Balat,Jorge Francisco
1: author: Brambilla,Maria Irene
2: author: Porto,Guido
count: Africa
docna: 0: docna: Realizing the gains from trade : export
            crops, marketing costs, and poverty
docty: Policy Research Working Paper
subtopic: Climate Change and Agriculture,Crops and Crop Management Systems,International Trade and Trade Rules,Food Security,Inequality,Transport Services
teratopic: Agriculture,Macroeconomics and Economic Growth,Poverty Reduction,Transport
abstracts: cdata!: This paper explores the role of export
            costs in the process of poverty reduction in rural Africa.
            The authors claim that the marketing costs that emerge when
            the commercialization of export crops requires
            intermediaries can lead to lower participation into export
            cropping and, thus, to higher poverty. They test the model
            using data from the Uganda National Household Survey. The
            findings show that: i) farmers living in villages with fewer
            outlets for sales of agricultural exports are likely to be
            poorer than farmers residing in marketendowed villages; ii)
            market availability leads to increased household
            participation in export cropping (coffee, tea, cotton,
            fruits); and iii) households engaged in export cropping are
            less likely to be poor than subsistence-based households.
            The authors conclude that the availability of markets for
            agricultural export crops helps realize the gains from
            trade. This result uncovers the role of complementary
            factors that provide market access and reduce marketing
            costs as key building blocks in the link between the gains
            from export opportunities and the poor.
repnme: repnme: Realizing the gains from trade : export
            crops, marketing costs, and poverty
display_title: Realizing the gains from trade :
            export crops, marketing costs, and poverty
listing_relative_url: /research/2008/01/8965606/realizing-gains-trade-export-crops-marketing-costs-poverty
topicv3: Agriculture and Food Security m1326205 435,Crop Production m1326627 174,Transport m1326661 135,Poverty m1326687 695,Trade m1326924 698
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Agriculture,Macroeconomics and Economic Growth,Poverty Reduction,Transport
no_of_pages: 43
author_keys: 0: author_key: 715131
1: author_key: 1009083
2: author_key: 658883
model_extractions: WPS4488 Policy ReseaRch WoRking PaPeR 4488 Realizing the Gains from Trade: Export Crops, Marketing Costs, and Poverty _Jorge Balat Irene Brambilla Guido Porto_ The World Bank Development Research Group Trade Team January 2008
Policy ReseaRch WoRking PaPeR 4488

# **Abstract**

This paper explores the role of export costs in the process of poverty reduction in rural Africa. The authors claim that the marketing costs that emerge when the commercialization of export crops requires intermediaries can lead to lower participation into export cropping and, thus, to higher poverty. They test the model using data from the Uganda National Household Survey. The findings show that: i) farmers living in villages with fewer outlets for sales of agricultural exports are likely to be poorer than farmers residing in marketendowed villages; ii) market availability leads to increased household participation in export cropping (coffee, tea, cotton, fruits); and iii) households engaged in export cropping are less likely to be poor than subsistence-based households. The authors conclude that the availability of markets for agricultural export crops helps realize the gains from trade. This result uncovers the role of complementary factors that provide market access and reduce marketing costs as key building blocks in the link between the gains from export opportunities and the poor.

This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the department to is part of a larger effort in the department to understand the impacts of trade on poverty and the responses of households to trade shocks. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at gporto@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
Realizing the Gains from Trade: Export Crops, Marketing Costs, and Poverty<sup>_∗_</sup> Jorge Balat<sup>_†_</sup> Irene Brambilla<sup>_‡_</sup> Guido Porto<sup>_§_</sup> Yale University Yale University Dev. Research Group and NBER The World Bank January 2008

> _∗_ We thank J. Muwonge at the Uganda Bureau Of Statistics (UBOS) for assistance with the data and D. Merotto and H. Tang at the World Bank for encouragement and support. We thank H. Ennis, P. Goldberg, A. Harrison and M. McMillan for detailed comments, and seminar participants at Duke, NBER, Penn State, and University of Connecticut. This paper was supported by a DECRG Research Support Budget grant and two Dfid projects on trade and services and on trade facilitation. All errors are our responsibility.

> _†_ Yale University, New Haven, CT. email: jorge.balat@yale.edu

> _‡_ 37 Hillhouse, New Haven, Connecticut, 06511. email: irene.brambilla@yale.edu

> _§_ The World Bank, MailStop MC3-303, 1818 H St., Washington DC 20433. email: gporto@worldbank.org
# **1 Introduction**

Trade costs, which include international transportation costs, transaction costs, and distribution costs in countries of origin, destination, and transit, are an important barrier to trade. Estimates from Anderson and van Wincoop (2004) and Hummels (1998) indicate that these costs can in fact be much larger than tariffs and other trade policy barriers. Even in places where formal trade barriers are almost fully eliminated, trade costs still remain as strong barriers to exports and imports.

Trade costs prevent the full realization of the gains from trade. In developing countries, these costs can also wither the poverty alleviation role of export opportunities.<sup>1</sup> In addition, some of the costs associated with exports, and thus the impacts of trade on incomes and poverty, depend to a large extent on complementary domestic factors like improved infrastructure, adequate competition policies and, especially in Africa, enhanced access to credit, better education and health, and low marketing or intermediation costs.

In this paper, we explore the costs of trade for domestic producers when exporting requires intermediaries, a widespread phenomenon in many developing countries. The need for intermediaries in export activities can generate wide marketing costs in agriculture.<sup>2</sup> The focus of our investigation is intermediation costs in export crops, like coffee, tea and cotton, in rural Uganda. Specifically, we claim here that, in rural Uganda, the lack of local outlets for export crops (coffee, tea, cotton) raises their marketing costs, prevents the adoption of high-return crops in favor of subsistence crops (maize, matooke), and impedes farmers to take full advantage of high export prices and enhanced market access opportunities abroad.<sup>3</sup> We begin by developing a model of agricultural production with marketing costs. The

> 1See the reviews in Winters, McCulloch and Mckay (2004) and Goldberg and Pavcnic (2004, 2006).

> 2These marketing costs are non-traditional trade costs like those in Limao and Venables (2001), who analyze trade costs beyond transportation costs. They show that the total cost of transportation depends on the level of infrastructure of trading partners.

> 3There is an increasing interest in these complementarities between trade and domestic factors. Three recent edited volumes on trade and poverty, Harrison (2007), Hertel and Winters (2006), and Hoekman and Olarreaga (2007), testifies to this. A few more specific examples include Porto (2005), who shows that informal barriers to trade have significant effects on poverty in Moldova; Welch, McMillan, and Rodrik (2003), who argue that the negative impacts of the liberalization of the cashew sector in Mozambique was mainly due to the structure of the internal markets; and Nicita (2006), who studies policies that facilitate the transmission of international prices to the household in Mexico.

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model shows how farmers may be prevented from engaging in exporting activities, and thus from earning higher income, when local marketing costs are too high. We then test this hypothesis using farming data from Uganda (the Uganda National Household Survey). We combine household-level information on income, poverty and exporting activities with village-level measures of availability of local agricultural export markets. These markets include a variety of outlets: standard district markets and road stalls; export intermediaries (truck services and farmgate buyers); and foreign direct investment in the form of coffee or tea plantations.

Our empirical analysis establishes a negative relationship between local availability of export markets and poverty: controlling for all the relevant household and district determinants and taking account of endogeneity issues, we find that the presence of export markets leads to lower poverty in rural Uganda. We explore the exports mechanism behind this link: we find that export markets acts as a facilitator of export agriculture cropping (households may be prevented from entering export cash cropping if trading costs are too high) and that poverty among producers of export crops is lower than poverty among subsistence farmers (major export crops have higher returns than food crops). Overall, we establish that lower export marketing costs induce export crop participation, which raises household income and decreases the likelihood of poverty. This indicates the presence of a poverty-reducing market access effect.

It is not surprising that domestic factors affect poverty and agricultural earnings. The merit of our investigation is the finding of complementarities between those domestic factors and the export opportunities: without domestic factors, the gains from trade may not be realizable but, without exports, some domestic factors may become less relevant for poverty alleviation. In addition, we identify one specific, and potentially important, factor among these complementarities, namely the marketing costs of export crops.<sup>4</sup> Hence, the Uganda case is an instance where the standard prescriptions of education and health policies could be combined with more specific measures to encourage the development of local export markets in a successful attempt towards poverty reduction.

> 4See Collier and Gunning (1999) for a thorough description of several major constraints to development in Africa.

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The paper is organized as follows. In section 2, we develop a model of export choice and marketing costs. In section 3, we describe the Uganda household survey and we introduce our marketing costs hypothesis. In section 4, we explain the empirical strategy and discuss results. In Section 5, we provide robustness checks and sensitivity analysis. Section 6 concludes.

# **2 A Model of Marketing Costs and Exports**

We begin by laying out a simple model of export crop participation with marketing costs. Farmers, who are endowed with one unit of land, must decide whether to specialize in the production of food crops or export crops. Specialization in export crops delivers a physical output of _A_ per unit of land. Farmers are heterogeneous in land quality, ability in crop husbandry, fixed assets and labor endowment. To capture this exogenous heterogeneity across farmers, we let output _A_ follow a density function _f_ with support [0 _, ∞_ ) _._ In contrast, specialization in food crops has a homogeneous return of _R_ per unit of land.<sup>5</sup> The relative price of export crops to food crops is denoted by _p_ .

Food crops and export crops differ in their marketability. Food crops are used for own consumption or can be marketed at no cost. To simplify the analysis, we assume that there is a fringe of food producers that supply food crops at a constant marginal cost. These food producers are arbitrage food traders, landless individuals working on public land or farmers who cannot meet the fixed costs of export participation (in scale, know-how, etc.). This assumption allows us to pin down the price of food, which we thereby set to one.<sup>6</sup> Marketing export crops is costly. We assume that export activities are carried out by

> 5This is a simplifying assumption. If _R_ depends on household characteristics, all the results remain qualitatively unchanged but the model becomes less tractable.

> 6The assumptions of complete specialization in production and of the existence of a fringe of food production at constant marginal cost simplify the model. In a different technological environment, with decreasing returns for instance, some farmers will end up in an interior solution with positive production of both food and export crops. This just complicates the computation of the expected export output without adding further insights. On the other hand, in the absence of the fringe food production, the expansion of export cropping may cause food supply to decline and food price to increase. This will prevent some farmers at the margin from specializing in exports. While these dynamics seem interesting to explore, our qualitative conclusion from the model—that lower trading costs lead to more export participation and lower poverty—are not affected by them.

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intermediaries that purchase the export crop locally and sell it internationally. Farmers who choose to produce export crops need to transport and market their output to the local intermediaries, who are in turn in charge of shipping output to international markets.

The economy is composed of many districts. For simplicity, we assume that farmers need to sell their export crop output to an intermediary in their own district. A district is represented by a unit circle. Farmers are uniformly distributed along the circle with a measure of _L_ farmers at each point in the circle. There is a finite number of intermediaries, _n_ , who are located symmetrically along the same circle, at a distance of 1 _/n_ from each other. The distance between farmers and intermediaries determines the marketing (transport) costs. A farmer that is located at a distance _x_ from a given intermediary incurs a marketing cost of _δx_ per unit of output.

Intermediaries have market power and compete in prices. Farmers are small and take prices from the different intermediaries as given. Once farmers get a draw _A_ from _f_ , they make two decisions: (1) whether to produce food or export crops; (2) to which intermediary to sell the output of the export crop. The decision sequence is solved backwards. First, each farmer finds the intermediary _i_ that offers him the best “price-distance” combination, i.e., the maximum net price ( _pi − δxi_ ). Let ( _p, x_ ) denote the best price-distance combination for a given farmer. Given ( _p, x_ ) and the output level _A_ , the farmer chooses to produce export crops or food crops. Farmers with ( _p − δx_ ) _A ≥ R_ specialize in export crops, while farmers with ( _p − δx_ ) _A < R_ specialize in food crops. We can thus define an export specialization cutoff _A_<sup>�</sup> , the level of output that leaves a farmer indifferent between cropping activities, given by ( _p − δx_ ) _A_<sup>�</sup> ( _p, x_ ) = _R_ .

Expected supply of export crops at a price-distance combination ( _p, x_ ) is obtained by integrating over the potential returns above the cutoff _A_<sup>�</sup> , Intermediaries buy export crops from farmers at the price _p_ , and sell the crops in international markets at the exogenous international price, _P_<sup>_∗_</sup> . The cost of transporting crops from a 4
district to the international market is given by where _D_ is a fixed cost of intermediation, _Q_ is the total quantity of export crops that an intermediary buys from all farmers, and _d_ is the unitary transport cost to ship output from the center of the district (given by the center of the circle) to international markets. Surplus is given by ( _P_<sup>_∗_</sup> _− d − p_ ) _Q − D_ . There is free entry until profits from the intermediation activity are zero. The location choice is exogenous.

A given intermediary _i_ chooses a price _pi_ taking competition as given. Since intermediaries are symmetric, they charge the same price in equilibrium. We can thus summarize the competition faced by intermediary _i_ by the price charged by his competitors, _p_ 0, and by the total number of competitors in a district, _n_ . The problem of intermediary _i_ is To solve the maximization problem, we need to construct the total supply faced by intermediary _i_ , _Q_ ( _pi, p_ 0 _, n_ ). Because of the symmetry in prices, we only need to consider the two contiguous competitors, which are located at a distance of 1 _/n_ to the left and to the right of _i_ . Let _x_ denote the distance between intermediary _i_ and a farmer located to his right. This farmer is located at a distance 1 _/n − x_ from the right competitor. Given the prices charged by _i_ and by the right competitor, _pi_ and _p_ 0, we can define a cutoff distance � � _x_ so that the farmer located at _x_ is indifferent between the two intermediaries. The cutoff distance is defined by _pi − δx_ �( _pi, p_ 0 _, n_ ) = _p_ 0 _− δ_ � _n_ <u>1</u><sup>_−x_�(</sup><sup>_pi, p_0</sup><sup>_, n_)</sup> �; with Farmers at a distance _x ≤ x_ �( _pi, p_ 0 _, n_ ) sell to intermediary _i_ and farmers at a distance � _x > x_ ( _pi, p_ 0 _, n_ ) sell to the right competitor.

Total supply faced by an intermediary _i_ from farmers located to the right and to the 5
left is obtained by integrating the expected supply defined in (1) over farmers at distances � between zero and _x_ . This yields The situation is depicted in Figure 1. The base and height of the rectangle represent the two dimensions of heterogeneity among farmers: location and potential output from export crops. Distance to intermediary _i_ is measured in the horizontal axis, with the largest possible distance being 1 _/n_ , and output on the vertical axis. Prices are given. Farmers to the right of _x_ � choose the competitor’s price-distance combination (although some of them might end up choosing to specialize in food crops). Farmers to the left of _x_ � choose the price-distance combination offered by intermediary _i_ . Among the latter, those farmers with lower potential output from export crops ( _A < A_<sup>�</sup> ) specialize in food crops, and those with higher potential output ( _A ≥ A_<sup>�</sup> ) specialize in export crops and constitute the supply faced by intermediary _i_ . The cutoff output level _A_<sup>�</sup> depends on distance. Farmers that are closer to the intermediary need to cover lower transportation costs, therefore, they require a lower level of output to find export crops more profitable than food crops.

Intermediaries choose prices to maximize profits defined in (3) taking the prices of the competitors as given and subject to the supply function defined in (5). In equilibrium all intermediaries charge the same price. For a given number of intermediaries _n_ , the profit maximizing first order condition evaluated at equilibrium prices _p_ is (dropping subindex _i_ ) The number of intermediaries _n_ is determined endogenously by the free-entry, zero-profit condition. This is Equations (6) and (7), subject to the supply function in (5), define the equilibrium prices _p_ 6
and number of competitors _n_ .

To characterize the equilibrium, we need to impose some structure on the density function of export crop yields. In Figure 2, we explore the case of an exponential distribution of _A_ . The combinations of prices and number of intermediaries that satisfy the profit maximization condition (6) are positively sloped. More intermediaries _n_ means more competition so that the profit maximizing price offered to farmers is higher. The combination of prices and intermediaries that satisfy the zero profit condition (7) is negatively sloped. Lower prices offered to farmers mean higher profits so that more intermediaries can afford to pay the fixed costs and enter the market. The equilibrium prices and number of competitors are given by the intersection point _E_ .<sup>7</sup> The model delivers several predictions that we test in sections 4 and 5. Our main hypothesis is that households residing in districts with a larger number of intermediaries, and thus with lower marketing costs for export crops, are less likely to be poor; that the choice to produce export crops is in part explained by the presence of intermediaries; and that the choice to produce export crops in part explains the lower likelihood of poverty. In the model, we can establish these results by comparing two districts with different number of intermediaries.<sup>8</sup> Given the equilibrium symmetric price offered by all intermediaries and the number of intermediaries, the probability that a farmer located at _x_ specializes in export � crops is 1 _−F A_ ( _x, p_ ) ; hence, the probability that a random farmer, anywhere in the circle, � � produce export crops can be derived after integration over _x_ In Appendix A, we show that, conditional on the price _p_ , this probability is increasing in the number of intermediaries _n_ . This is because the presence of more intermediaries reduces the average distance from farmers to intermediaries and thus decreases average marketing costs.

> 7Similar equilibria can be found for other functions _f_ such as the Pareto distribution (which is often used in productivity analysis). Notice that an equilibrium with entry may not exist (for example in the case of a low international price _P_<sup>_∗_</sup> and large costs of access to international markets _D_ and _d_ ). See below.

> 8Notice that these are not comparative static results because _n_ is an endogenous variable (see below for a discussion of some exogenous variables that determine _p_ and _n_ in equilibrium). In fact, this analysis highlights the endogeneity issues that we tackle in our empirical work.

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In consequence, a larger number of farmers will find it profitable to specialize in export crops. Further, this implies that the expected income of the farmer increases in _n_ and thus that � poverty declines with _n_ . The expected income of a farmer at _x_ is _F A_ ( _x, p_ ) _R_ + _p_<sup>_<u>q</u>_</sup><sup><u>(</u></sup><sup>_x_</sup> _L_<sup>_<u>,p</u>_</sup><sup><u>)</u>,</sup> � � where _q_ ( _x, p_ ) _/L_ is the expected output of export crops by a typical farmers (equation (1)). Integrating over _x_ , the expected income of a random farmer is We prove in Appendix A that _Y_ ( _·_ ) is indeed increasing in _n_ . For our purposes, these results establish a relationship between lower marketing costs in export cropping and lower poverty in rural areas.

In our empirical work, we will exploit regional variation in the number of intermediaries to explore the relationship between export marketing costs, export adoption, and poverty. The model can be used to think about exogenous determinants of the equilibrium number of intermediaries. Both _p_ and _n_ depend on parameters that are common to all districts, like the international price ( _P_<sup>_∗_</sup> ), and parameters that can vary across districts, like the out-of-district cost of access to international markets ( _D_ and _d_ ), district size ( _L_ ), and the distribution of returns to export cropping. Therefore, differences in the primitive parameters across districts will generate differences in prices and in the number of intermediaries. For practical purposes, this implies that we can use some of these exogenous parameters, such as the out-of-district cost of transportation to international markets,<sup>9</sup> as valid instruments in the instrumental variables specifications of the model (sections 4 and 5).

One last feature of the model that deserves emphasis is the interrelation between marketing costs and export opportunities in poverty reduction. The claims in this paper are that exports matter for poverty alleviation provided marketing costs are low enough, and that low marketing costs are not necessarily conducive to poverty alleviation in the absence of export opportunities. It is the combination of export opportunities (for example, through a high international price) and domestic conditions (through low marketing costs) that works.

> 9This is an out-of-district cost and must not be confused with marketing costs _within_ a district.

8
To see this, notice that, for given intermediation costs, a sufficiently low international price can make the Profit Maximization and the Zero Profit loci not to cross in the positive orthant. Similarly, even if the international price is high, prohibitive marketing costs can lead to an autarky equilibrium with farmers specialized in low-return food crops. In this situation, high marketing costs prevent farmers from realizing the gains from exports.

# **3 The Uganda National Household Survey**

To test the relationship between marketing costs, export cropping, and poverty, we work with the 1999/2000 Uganda National Household Survey (UNHS). The data are a large-scale household survey conducted by the Uganda Bureau of Statistics that covers the entire country, rural and urban areas. The sampling design is a stratified two-stage sampling. The first stage units are the Enumerator Areas of the 1991 Population Census and the second stage units are the households.

There are two sets of data in the UNHS: household data and community data. From the household data we construct measures of poverty and export participation at the household level. With the community data, we construct a measure of marketing costs at the district level.

The household-level data include socio-economic and enterprise modules. There are modules related to household characteristics (household composition, demographics), activity status, health, education, and housing amenities. There are also questions on consumption expenditure and sources of income (farm and non-farm activities, employment, remittances), and a crop module with questions on land allocation, production, sales, home-consumption, etc. Samples statistics are reported in Table 1.

To determine the poverty status of each household, we use the expenditure module and compare household expenditures with poverty lines. We use the head count as a measure of poverty whereby a household with a per capita expenditure below the poverty line is considered poor. Average per capita expenditure in rural Uganda was 16.48 U.S. dollars per month (23,022 Uganda Shillings). Rural poverty lines for each province were constructed by 9
Appleton (1999). The average poverty line for rural areas was 15.6 U.S. dollars per month (21,790 Ugandan Shillings), or 0.52 cents per day. The national poverty rate in 1999 was 35 percent.

In Africa, poverty is widespread and it is important to understand its determinants and ways to eradicate it. Looking at poverty is more revealing than looking at household expenditure or income. While it is possible to test whether trade affects the income of rich Ugandan households, our analysis is tailored to explore impacts among the most vulnerable group of the population.

Households do not export directly but we can infer their export-related activities from the crops they grow. We divide crops into two groups, export crops and food crops. The division is based on aggregate data on Ugandan exports, reported in Table 2. Major export commodities are coffee, cotton, tea, and tobacco, and other non-traditional products such as fish, fruits, and flowers. In the crop questionnaire of the Uganda National Household Survey, prevailing export crops are coffee, tea, cotton, pineapples, and passion fruits.<sup>10</sup> Food crops include matooke (banana), maize, sweet potatoes, sorghum. Food crops are mostly destined to home consumption.

In our analysis, we aggregate all the export crops into one export crop activity. While there may be differences across crops that can be worth exploring, our data are not rich enough to conduct a detailed disaggregated analysis. In the empirical work, we exploit regional disparities in export adoption, poverty, and marketing costs as identifying variation. Figure 3 gives an overview of regional disparities in export crops in Uganda based on information from the UNHS and FAO. The figure includes four panels, each one of them depicting the prevalence of different crops in different regions. The top-left map reveals that coffee is mostly produced in the center of the country and in mountainous regions in the Southwest, West, Northwest, and East. Tea (top-right map) is produced in the South, the Center, and in some Northern regions. Cotton (bottom-left panel) is the major crop of the Northern provinces; there is some cotton production in the Southwest and Southeast as well. Finally, fruits, like passion fruits and pineapples, are grown in the Center, the Northwest

> 10Other export products, like vanilla, fish or flowers, are not significant in the 1999/2000 data.

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and the Southwest.

To quantify export participation at the household level, we use two definitions, the share of land allocated to export crops and the share of income derived from export crops. The average plot size in the data was 2.57 acres (Table 1). Around 7 percent of household land is allocated to export crops; around 8 percent of household income is derived from the sale of these crops. Participation in export agriculture is in fact limited in Uganda. It is our aim to explore to what extent this is due to high export marketing costs.

Our measure of marketing costs in export agriculture comes from the community module. The community module collects information on community characteristics at the level of enumerator areas (the first stage sampling units). In our regression analysis, we use this information aggregated at the district level, excluding urban areas.

As suggested by the model of section 2, marketing costs are closely related to the extent of intermediation activity, given by the presence of outlets where farmers can sell their export crops. There are three different types of such markets in rural Uganda.<sup>11</sup> First, the most widespread way of marketing export crops is through export intermediaries. These are agents that purchase output from farmers, store the production and then transport the agricultural produce with pick-ups or small trucks to Kampala, the capital of Uganda. Second, typical outlets for cash crop are district markets or stalls along the road to Kampala. Third, an additional channel to sell agricultural produce is through large commercial plantations, particularly of coffee and tea. These plantations often purchase the output of neighbor farmers thereby constituting additional channels of market availability. Most plantations are run by foreign firms.

The community module provides information on whether there is at least one of the three types of outlets available in each community.<sup>12</sup> Since communities are very small and farmers can in principle easily commercialize their products in neighboring communities, we construct a measure of market density at the district level. There are several communities (enumerator areas) in each district, and in each community the availability of markets is a

> 11The survey asks separate questions on availability of food markets where farmers can sell the production surplus of food crops. This means that the availability of agricultural produce markets refers to commodity markets and cash crops like coffee, tea, and cotton.

> 12There is no information on the specific type of outlet or on the number of outlets

11
dichotomous variable. We define export market density as the fraction of communities in a given district in which there is at least one market for export crops available. Market density captures the extent of intermediation activity in a district (including intermediaries in the strict sense, road markets, and plantations). In districts were market density is higher, it is easier for farmers to commercialize their export crops and marketing costs are lower.

At the national level, the average market density is 0.37 (Table 3). This means that, on average, in 37 percent of the communities there is at least one outlet for agricultural produce, namely intermediaries, export crop stalls, or local large plantations. Instead, the prevalence of surplus food markets (sweet potatoes, bananas, tomatoes) is much higher: average food market density reaches 0.76.

Table 3 reports other important measures of community infrastructure that we use in our regression analysis. In the community module, there are questions on distance to paved roads; dichotomous access to infrastructure variables such as access to credit, improved seeds, oxen use and rental, tractors, extension services; major village constraints in terms of input markets, roads, disease, security, land, credit, land fertility; and indicators of access to veterinary services, existence of land conflict, availability of communal land, primary school, free medicine, water services, public hospital, and private hospitals. We use all these control variables in the regression estimation.

# **4 Estimation and Results**

Our testing hypothesis is that a farmer faced with the decision to adopt a higher-return export crop is more likely to participate, therefore being less likely to be poor, when access to export markets is less costly. This is because better access to export markets facilitates trade and lowers marketing costs. In our analysis, we use market density as a measure of access to export markets at the district level.

Figure 4 takes a first look at the data to establish descriptive correlations between the three variables of interest: market density, exports and poverty. The first panel plots the estimates of a non-parametric regression between poverty and market density (using Fan 12
locally kernel weighted linear regressions with a Gaussian kernel and a bandwidth of 0.15). We see that the relationship is negative, with lower poverty associated with higher market density. Notice that the relationship is quite strong when there are few markets available but debilitates at high market density.

The second panel displays the non-parametric correlation between export market density and export crop participation. The solid line corresponds to the share of land allocated to export crops and the broken line, to the share of export crops in income. As our hypothesis suggests, the graph reveals that the availability of markets for agriculture produce is positively linked to export cropping. Finally, the third panel displays the relationship between poverty and export crop participation. As argued, the graph reveals that a higher participation in export agriculture is associated with a lower likelihood of poverty.

The graphical representation of the relationship between market density, export cropping, and poverty is a descriptive tool. In what follows, we approach the issue from a formal regression analysis of each of the three correlations illustrated in Figure 4. The econometric model takes other controls and reverse causality issues into account.

# **4.1 An Econometric Model of Market Density and Poverty**

We begin by investigating the relationship between poverty and export marketing costs, which are inversely related to export market density. We set up the following regression model where _Phc_ is a dichotomous variable that indicates the poverty status of household _h_ in district _c_ , _Mc_ is export market density in district _c_ , _prc_ is an export price index in district _c_ , and **x** _hc_ and **z** _c_ are household and district characteristics. Market density captures the three marketing channels described in the previous section: i) intermediaries; ii) export crop market stalls; iii) large scale plantations. Estimates of _α_ 1 will reveal how poverty is affected by marketing costs in exports.

13
The model includes a large set of controls. The vector **x** _hc_ includes household characteristics: size, demographic composition, age and gender of the household head, the level of education and literacy of the head, and his/her health status. We also include a full set of district variables, **z** _c_ , that measure social and economic infrastructure. The district controls are the variables described in Table 3. They include access to credit, roads, equipment (oxen, tractors), inputs, and extension services, indicators of major agricultural constraints (land quality, land availability, input availability, diseases), educational, medical, sanitary and veterinary infrastructure, and prevalence of security and conflicts. This extensive set of district controls is important to purge the regression from district effects that may confound the effects of export market density. For instance, the district controls account for differences in district economic (roads, equipment, credit) and social (health) infrastructure that can simultaneously affect the level of poverty, export crop adoption and market density. Similarly, these variables will control for social conflict and security, which might be conducive to lower poverty and lower export participation. This is especially important in some parts of Northern Uganda.<sup>13</sup> Further, they account for potential bio-climatic differences in the country by controlling for differences in input availability (land, variable inputs) and the average quality of land.

An important control in our regression is the export price index, which serves several purposes. As described in the model of section 2, differences in intermediation activity across districts (i.e., differences in market density) are associated with differences in export marketing costs and with differences in the prices offered to the farmers. Market density is an imperfect measure of marketing costs in exports and could include traces of price effects. It is thus important to control for prices to isolate the true effects of marketing costs on poverty.

To construct the price index, we proceed as follows. Households that produce export crops report unit values for their sales, which approximate the producer prices net of marketing costs ( _p − δx_ in the model of Section 2). Given the price _p_ offered by the intermediaries, differences in unit values across households within a district are explained

> 13Other Northern districts, where conflict is more widespread, are excluded from the regressions.

14
mostly by marketing costs, _δx_ . Since we want to separate the effect of prices from the effects of export marketing costs, we need to control for the price offered by the intermediaries in a district, _p_ (and not for the reported _p − δx_ , which varies at the household level). To do this, we approximate the price _p_ with the price faced by the farmer with the lowest possible marketing cost ( _x_ = 0 in the model), that is, the farmer with the highest observed unit value. For robustness against outliers, we use the 75th percentile of the distribution of household unit values in each district as a measure of _p_ . Finally, since we are pooling together different export crops (coffee, cotton, tea, passion fruits and pineapples), the export price index is a weighted average of the 75th percentile log unit values of each of these crops, with weights given by the average share of land allocated to each crop in the district.

Notice that export prices and the weights attached to them play another important function. As shown in Figure 3, farmers in different regions tend to specialize in different export crops. Since these crops sell at different prices, specialization in different export crops can lead to different poverty impacts. These regional differences in profitability across export crops can be controlled for with the weights used in the construction of the export price, that is, the shares of each export crop.

Even after controlling for all these confounding factors, the major econometric concern with regression (10) is the reverse causality between poverty and market density. Poverty is lower when marking costs are lower, and markets may develop in richer districts. We need instruments that are exogenous determinants of market density and that vary by district. The model of section 2 suggests that good candidates are the costs of intermediation activity, such as the out-of-district transportation cost from each district to international markets, represented in the model by _d_ and _D_ . Out-of-district transportation costs indicate how difficult it is for intermediaries to reach export destinations. It is a fundamental determinant of the profitability of intermediation activities in export crops, either in the form of intermediaries in the strict sense, market stalls, or plantations, and thus a determinant of market density, our endogenous variable.

In Uganda, a landlocked country, most international shipments must go through the capital, Kampala. We proxy the out-of-district transportation costs with district level data 15
on transportation costs from the center of each district to Kampala. These costs are reported in the community questionnaire of the Uganda National Household Survey as the monetary cost of reaching Kampala by car/truck.<sup>14</sup> This strategy requires a careful control of the regression so as to make sure that out-of-district transportation costs do not have a direct effect on the left-hand side variable (poverty). In our regression model, there are two sets of such controls. A major control is the export price index. Under imperfect competition among intermediaries, out-of-district transportation costs are borne both by intermediaries (directly) and by farmers (via lower prices). In districts where out-of-district transportation costs are lower, the profits of intermediation are higher, more intermediaries enter, and farmers enjoy higher prices and are less likely to be poor. For the instrument to satisfy the exclusion restriction, we need to control for the fraction of the out-of-district transportation costs that are borne by farmers. We achieve this by including the export price index, which summarizes farmer prices and includes the pass-through of out-of-district transportation costs. After including the price index, there is no direct effect of out-of-district transportation costs on poverty via cost pass-through.

The other set of controls comprises all district characteristics that could be affected by out-of-district transport costs and that could have an effect on poverty. Districts with lower out-of-district transport costs to Kampala could be less poor due to improved infrastructure, higher local development, and better institutional quality. This effect is also already controlled for in regression (10) with the extensive set of districts characteristics included in **z** .<sup>15</sup> After including producer prices and district characteristics in the model, all the channels through which out-of-district transport costs could affect poverty are accounted for.

As a robustness check, we also include an additional district control, the density of food markets, defined analogously to export market density. These markets are less sophisticated than agriculture produce markets (coffee stalls, intermediaries and plantations) and are thus

> 14In this section, we estimate the model using one instrumental variable for our endogenous regressor. In section 5, we provide a sensitivity analysis by estimating the model with an additional instrument.

> 15These include access variables (to credit, roads, equipment, inputs, and extension services), agricultural constraints (land quality, land availability), social infrastructure (education, health), security and conflicts.

16
more ordinary. This variable controls for the thickness of food markets (and thus accounts for food risk). In fact, in Uganda, food markets are fairly common whenever there are paved or tarred roads. Food market density is a good aggregate indicator of district infrastructure and development and could capture additional unobserved district characteristics.

The main results are shown in Table 4. In the first panel, we report estimates from linear IV regressions. The first column corresponds to a simple linear model that only includes households characteristics **x** _hc_ as controls. We find that market density, _Mc_ , is negatively � and significantly associated with poverty ( _α_ 1 = _−_ 0 _._ 56).<sup>16</sup> In column (2) of Table 4, we add district characteristics and infrastructure variables, **z** _c_ , and the export crop price index, _prc_ (Table A1 in Appendix B reports these estimates). The negative association between export market density and poverty is robust to the inclusion of these variables. Notice, however, that the addition of district variables has a sizeable impact on the coefficient of market density, which drops to _−_ 0 _._ 27. Export prices do not seem to have a significant impact on poverty (conditional on all the other controls).<sup>17</sup> In column (3), we include food market density as an additional district variable to control for further unobserved district effects. We find that poverty is negatively associated with the presence of food markets, although the relationship is not as strong as expected. For our purposes, however, the critical finding is that the negative association between export market density and poverty still shows up strongly in the regressions; further, the magnitude of the coefficient, _−_ 0 _._ 28, does not change much with respect to Model 2 (which suggests that there are no additional unobserved district effects in the model). Our findings support the hypothesis that households residing in districts endowed with more agriculture export markets are, on average, less likely to be poor: increasing the density of export markets by 10 percentage points (from an average market density of 0 _._ 37—see Table 3) would cause poverty to decline by 2.8 percentage points.

The validity of these results depends to a larger extent on the quality of the instrument. We can assess how good our instrument is by looking at the first stage regression, whereby we regress the endogenous variable, market density, on the out-of-district transportation

> 16Since _Mc_ varies at the district level, the estimation of the variance is corrected for clustering effects.

> 17See the discussion at the end of the section.

17
costs, household characteristics **x** _hc_ , district level controls **z** _c_ , the export price index, and food markets (explanatory variables vary across columns as described above). We report the main coefficients at the bottom of the first row panel in Table 4. Notice that our instrument has good explanatory power in the first stage regression: districts with lower transportation costs to Kampala are endowed with more export markets. Further, the _F_ -statistic is greater than 10 in the three specifications, thus passing the test of weak instruments proposed by Stock and Staiger (1997). Finally, the abrupt changes in the model when adding the district controls and its stability when moving from Model 2 to Model 3 suggest that the district effects are accounted for, a requirement for consistency of the IV estimator. Notice, however, that in these regressions exogeneity of the instruments has to be maintained and cannot be tested. In section 5, we expand the set of instruments as part of our robustness checks and we perform overidentification tests of the model.

Since the poverty indicator _P_ is a dichotomous variable, we set up Probit models of poverty with endogenous regressors in addition to the linear models described above. We work with a control function approach, which requires the inclusion of the residuals from the first stage regression, together with the endogenous variable, in the second stage regression (Newey, 1987; Blundell and Powell, 2004). Results are reported in the second panel of Table 4. Our finding, that export market density is conducive to poverty reduction, is robust to the Probit specification. The magnitudes of the marginal effects, equal to _−_ 0 _._ 35 in Model 3, are slightly higher, but comparable, to the linear case.

These major findings reveal how, conditional on offered prices _p_ , the prevalence of export markets allows farmers to obtain a higher net price for their export output by enjoying lower marketing costs. As more markets are available, doing export businesses becomes cheaper and, consequently, poverty is lower. If prices are not included in the regression, we can redefine marketing costs to also include the cost of low competition among intermediaries (in terms of lower offered prices _p_ ). There are indications that this may be a plausible definition in the case in Uganda. Figure 5, for instance, uncovers the strong positive association between the export market density and the export price index. In this interpretation, lower marketing costs could also lead to lower poverty via a price mechanism. We have explored 18
this model by estimating Model 3 in Table 4 without the price index as regressor (thus assuming _Mc_ embeds both marketing costs, _δx_ , and offered prices _p_ ). Our findings remain quantitatively and qualitatively unchanged and this suggests that the impacts of market density that we find in the data may comprise both transaction costs and price effects.

# **4.2 The Exports Channel**

We have established a causal relationship between marketing costs, as measured by market density, and poverty. In this section we show that the adoption of export crops is an important channel that explains this relationship: when marketing costs are lower, households find it profitable to reallocate some resources from the production of home consumption crops to higher-yield export crops. We first show that export crops become more prevalent when market density is higher; and later show that growing export crops does indeed substantially help reduce poverty at the household level.

We begin by estimating the following regression model where _shc_ is the measure of export participation, defined as the share of land allocated to export crops and, alternatively, as the share of income derived from export crops, _Mc_ is market density, _prc_ is the export crop price index, **x**<sup>_s_</sup> _hc_<sup>arehouseholdcontrols,and</sup><sup>**z**</sup><sup>_c_are</sup> district controls.<sup>18</sup> As in the poverty model (10), market density may be endogenous to participation in export markets. That is, more markets may develop in those districts where farmers are more likely to grow export crops. To account for this, we use the out-of-district transportation cost

> 18It is important to look at both dependent variables—share of land and share of income—since they reveal different aspects of the decision to produce for exports. Land allocation is the most straightforward indicator of participation because it measures the allocation of household capital to alternative uses. A problem with measures of land allocation is that, depending on the crop, it may respond slowly to changes in the independent variables. This is the case, for example, with tree crops like coffee or tea. In these instances, it may be difficult for farmers to switch from tree crops to food crops (or vice versa) after a change in contemporaneous variables. However, farmers can adjust other inputs, like effort or fertilizer. If coffee prices are low, for instance, farmers may prefer to keep the trees but put less effort or apply less fertilizer. A better measure to account for these effects is thus the share of income generated by the export crops.

19
to international markets, measured as the cost of transportation to Kampala, as instrument for _Mc_ .<sup>19</sup> We adopt the same three specifications as in (10) and report results in Table 5. Column (1) corresponds to the simple model with only household controls. In column (2), we add the measures of district infrastructure and other observed characteristics, as well as the export price index, to control for confounding community effects; in column (3) we add food market density as a control. We find very strong evidence that a higher export market density induces farmers to participate more in export agriculture. This result holds for all specifications. It also holds for our alternative measure of export cropping, namely the share of income derived from them—see Table 6. This is an important result: improved trade facilitation and lower export marketing costs matter for export crop participation. The � point estimate is _α_ 2 = 0 _._ 18; an increase in export market density of 10 percentage points would cause the average land share devoted to export crops to increase by 1.8 percentage points, equivalent to 25 percent (one fourth) of the average export participation (around 7 percent in Table 1).

Since our two measures of export participation are shares that are left censored at 0 and right censored at 1, we estimate Tobit models with a control function approach (to account for the endogeneity of export market availability). As before, this requires that we include the estimated residuals from the first stage regression along with the endogenous variable and the other exogenous regressors in a standard Tobit model. In the second panel of Table 5, we show that our findings are robust to censoring of the export participation variables. The coefficients on market density are positive and highly significant. Furthermore, the marginal effects of the Tobit estimates (the change in the unconditional average land share) is 0 _._ 18, the same as the IV estimate in the first panel.

Table 6 reproduces the structure of Table 5 but uses the alternative definition of export crop participation, the share of income derived from cotton, tea, coffee, pineapples and passion fruit. Our findings are robust to this definition.

We turn now to the last link in our hypothesis: whether, at the household level, the

> 19See Section 5 for results with an additional instrument.

20
adoption of export crops is associated with lower probability of poverty. The regression model is where _Phc_ is a dichotomous variable indicating poverty and _shc_ is participation in export activities (measured by share of land or share of income). Both variables are defined at the household level. We are mostly interested in estimates of _α_ 3, the coefficient of export participation. Notice that participation in export cropping may be endogenous to the poverty status if, for instance, richer households are able to finance any start-up investments needed to enter export markets. Also, richer households may have more educated heads, who may be more productive in export crops. Our previous results suggest possible instruments for export cropping, namely the out-of-district cost of transportation to Kampala.<sup>20</sup> Table 7 shows the results from instrumental variable regressions for the two definitions of export participation, the share of land and the share of income. The first three columns correspond to models of land shares, and the last three, to models of income shares. In the first row, we report results from linear IV models. In the second row, we report Probit models with endogenous regressors (using the control function method).

Overall, the relationship between these variables is negative: households involved in the production of export crops (like cotton, tea, coffee, fruits) are less likely to be poor than households that are not involved in export markets. We find that, indeed, lower marketing costs encourage export participation and leads to lower poverty. For instance, doubling export participation (from 7 percent land shares to 14 percent land shares) would reduce poverty by 13 percentage points (using the point estimates of the Probit marginal effects in Model 3 of the land shares).

> 20It may be argued that this is not a good instrument because by using it as an instrument in equation (11) it satisfies the exclusion restriction and is thus not correlated with the shares _shc_ . This is not correct. The instrument is, indeed, the predictions of _M_ from the first stage regression. In practice, in the linear model, this is the same as using out-of-district transportation costs directly in the IV estimation.

21
# **5 Robustness and Sensitivity**

In this section, we provide robustness checks and sensitivity analysis. Our main concern is that the instrumental variables estimator has relied on the use of one instrument only. In order to perform specification tests, we redo the whole analysis using two instruments.

We add export market density in 1995 to our main instrument, that is, the out-of-district cost of transportation to Kampala. This lag captures the fact that markets are sometimes focal points that tend to perpetuate. Although it is fairly common to use lagged variables as instruments, there are some concerns to address. First, it is important to ask if the same correlation between market availability and poverty in _t_ may be present between market availability in _t − T_ and poverty in _t_ (where _T_ is the number of year between household surveys, 1999 and 1995 in this case). For instance, if there is autocorrelation in the residuals in (10), then the endogeneity argument that invalidates the results from OLS may also invalidate the results from the use of lagged instruments. Similarly, lagged instruments will not work if there are persistent omitted variables. Here, we claim that the autocorrelation in the errors becomes a second order problem. We are actually merging data from the 1999 UNHS with an instrument taken from the 1995 UNHS. Since there are four years between these surveys, there is good reason to believe that the correlation will be practically absent. Another problem is that, since our instrument varies across districts, the instrument is required to be uncorrelated with all lags of the residuals, a requirement that might fail in the presence of district fixed effects. Since we are accounting for district effects by including a comprehensive set of district controls **z** _c_ , we argue that this requirement is met.

Results are reported in Table 8. The instruments work well, both according to the predictive power in the first stage regression and to the Hansen specification test of overidentifying restrictions. The magnitudes of the impacts are similar to those in previous sections.

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# **6 Conclusions**

The main claim of this paper is that the way in which trade affects poverty is shaped by complementarities between export opportunities and domestic factors. In the presence of export opportunities, such as high international prices for major export crops like coffee, tea, cotton and fruits, the potential gains from exports may not be realizable if complementary domestic factors are unavailable. In turn, some domestic factors, like infrastructure, may become relatively ineffective in the absence of international markets. We have explored this hypothesis by investigating the case of intermediation activities, marketing costs, export crop adoption, and poverty in Uganda.

Our findings make two contributions to the related literature. We generate direct evidence that exports matter for poverty reduction: farmers that are able to adopt high-yield export crops are on average less poor than farmers more oriented towards subsistence activities. Further, we provide direct evidence of the importance of complementary policies to the realization of the gains from trade: trade costs matter for poverty reduction because high trade costs prevent farmers from adopting major export crops. This is mostly a transaction costs argument whereby the presence of export markets facilitates the marketing of export crops and allows farmers to fetch a higher net price for their output. The analysis reveals traces of a price effect as well—when export markets develop, competition among intermediaries may benefit farmers with higher offered prices.

Policies that reduce trade costs and encourage marketing activities in rural areas may be useful to facilitate exports and reduce poverty. Examples include roads, marketing information, and measures that promote the development of market arrangements such as FDI (in, for instance, coffee and tea plantations) or outgrower schemes (like the coffee alliance initiative in Uganda). To boost these potential benefits, it is important that these measures be accompanied by enhanced access to international markets. These findings support the recent emphasis on the “aid for trade” approach to development policy.

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# **Appendix A: Two Theoretical Results**

We want to show that both the probability of specializing in export crops and expected income are increasing in the number of intermediaries in a district. That is, that _π_ ( _p, n_ ) and _Y_ ( _p, n_ ) from equations (8) and (9) are increasing in _n_ when keeping _p_ constant. Both equations can be generically written as an integral of the form The derivative of the generic integral with respect to the number of intermediaries is which is strictly positive for any function _g_ strictly increasing in _x_ .

In the case of the probability of specializing in export crops, _π_ ( _p, n_ ), _g_ is equal to the probability of specializing in export crops at a given distance _x_ , This function is strictly increasing in _x_ . In the case of expected income _Y_ ( _p, n_ ) which is also strictly increasing in _x_ . Thus, both _π_ ( _p, n_ ) and _Y_ ( _p, n_ ) are strictly increasing in _x_ , the result we wanted to show.

# **Appendix B: Household and District Controls**

Table A1 shows the results of the IV linear model of poverty on market density.

# **References**

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Blundell, R. and J. Powell (2004). “Endogeneity in Semiparametric Binary Response Models,” _Review of Economic Studies_ , vol. 71, pp. 655-679.

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Edmonds, E. and N. Pavcnik (2005). “The Effect of Trade Liberalization on Child Labor,” _Journal of International Economics_ Vol. 65, pp. 401-419.

Edmonds, E. and N. Pavcnik (2006). “Trade Liberalization and the Allocation of Labor between Households and Markets in a Poor Country,” _Journal of International Economics_ 69 (2), pp. 257-295.

Goldberg, P. and N. Pavcnik (2004). “Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries,” Brookings Trade Forum 2004, 223-269.

Goldberg, P. and N. Pavcnik (2006). “Distributional Effects of Trade Liberalization in Developing Countries,” forthcoming, _Journal of Economic Literature_ .

Harrison, A. (Ed.), (2006). _Globalization and Poverty_ , forthcoming University of Chicago Press for the National Bureau of Economic Research, Boston, Massachusetts.

Hertel, T. and A.L. Winters (Eds.), (2006). _Poverty Impacts of the Doha Development Agenda_ , Palgrave-McMillan for the World Bank, Washington DC.

Hoekman, B. and M. Olarreaga (Eds.), (2006). _Global Trade Liberalization and Poor Countries: Poverty Impacts and Policy Implications_ , forthcoming Science Po, Paris.

Newey, W. (1987). “Efficient Estimation of Limited Dependent Variable Models with Endogenous Explanatory Variables,” _Journal of Econometrics_ 36, pp. 231-250.

Nicita, A. (2006). “The Price Effect of Trade Liberalization: Measuring the Impacts on Household welfare,” Policy Research Working Paper Series, the World Bank.

Porto, G. (2005). “Informal Export Barriers and Poverty,” _Journal of international Economics_ , 66, pp. 447-470.

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Stock, J. and D. Staiger (1997). “Instrumental Variables Regression with Weak Instruments,” _Econometrica_ 65, No 3, pp. 557-586.

Welch, K., M. McMillan and D. Rodrik (2003). “When Economic Reform Goes Wrong: Cashews in Mozambique,” Brookings Trade Forum 2003.

Winters, A., N. McCulloch, and A. McKay (2004). “Trade Liberalization and Poverty: The Evidence So Far,” _Journal of Economic Literature_ , XLII, pp. 72-115.

26
<!-- Start of picture text --> ‘at Zero Profit |<br>10.5} i |<br>E<br>10} 4<br>95r 4<br>a<br>9+ 4<br>85> 1<br>8 1<br>xt Nash Equilibrium |<br>712<br>2375678<br>n<br><!-- End of picture text -->
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# Figure 4 Agriculture Produce Markets, Exports and Poverty

<!-- Start of picture text --> 0 .2 .4 .6 .8 1<br>Export Market Density<br>0 .2 Export Market Density.4 .6 .8 1 share of land share of income<br>0 .1 .2 .3 .4 .5<br>Export Participation<br>share of land share of income<br>0.6 0.15<br>0.10<br>0.4<br>Poverty<br>Export Participation 0.05<br>0.2<br>0.00<br>0.0<br>0.40<br>0.30<br>Poverty<br>0.20<br><!-- End of picture text --> The graphs report non-parametric regressions. The estimates are obtained with a Fan locally weighted linear regression. We use a Gaussian kernel and bandwidths of 0.15, 0.15, and 0.05.

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Figure 5 Export Prices and Export Market Density <!-- Start of picture text --> 0 .2 .4 .6 .8 1<br>Export Market Density<br>6.0<br>5.0<br>4.0<br>Export Price Index<br>3.0<br>2.0<br><!-- End of picture text --> The graph reports a non-parametric regression of the export price index on export market density. The estimates are obtained with a Fan locally weighted linear regression. We use a Gaussian kernel and bandwidths of 0.15.

30
Table 1 Summary Statistics. Uganda National Household Survey

||Average|Std. Dev|
|---|---|---|
|HOUSEHOLD CHARACTERISTICS|||
|Household size|5.67|3.05|
|Male heads|0.74|0.44|
|Married heads|0.71|0.45|
|Males|0.49|0.22|
|Age 18-45|0.30|0.23|
|Age 46-|0.16|0.26|
|Age 0-5|0.19|0.18|
|Age 6-12|0.22|0.18|
|Age 12-18|0.13|0.16|
|POVERTY|||
|Monthly per capita expenditure (US$)|16.5|19.2|
|Urban poverty line (US$)<sup>1</sup>|18.9||
|Rural poverty line (US$)<sup>2</sup>|15.6||
|Poverty rate|35.2||
|EXPORT PARTICIPATION|||
|Cultivated land (in acres)|2.57|3.52|
|Share of land in export crops|0.07|0.17|
|Share of income from export crops|0.08|0.17|
|HEALTH|||
|Proportion of sick members|0.31|0.30|
|Proportion of sick children|0.25|0.34|
|Sick mother|0.22|0.42|
|Number of children|2.63|1.97|
|Sick mother * number of children|0.63|1.61|
|INCOME & ASSETS<sup>3</sup>|||
|Remittances|0.48|0.50|
|Non-farm income|0.35|0.48|
|Animal assets|0.71|0.45|
|Equipment assets|0.99|0.08|

Note: own calculations from the Uganda National Household Survey (UNHS) 1999/2000. 1. The urban poverty line is equivalent to 0.63 US dollars per day. 2. The rural poverty line is equivalent to 0.52 US dollars per day. 3. National averages are constructed from dichotomous variables at the household level that indicate whether a household received remittances or not, etc.

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Table 2 Major Exports in Uganda (1999-2000)

|Main Products|Export <br>1999|Shares<br>2000|
|---|---|---|
|Cofee|60.2|31.2|
|Cotton|3.64|5.5|
|Tea|4.48|9.22|
|Tobacco|3.06|6.69|
|Fish|5.19|7.67|
|Fruits|0.14|0.18|
|Flowers|1.53|2.47|
|Total|77.94|62.93|

Note: Uganda Bureau of Statistics. Compiled by the Uganda Export Promotion Board.

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Table 3 Summary Statistics: Uganda National Household Survey Market Density and Village Controls

||Average|Std. Dev.|
|---|---|---|
|MARKET DENSITY|||
|Export crops|0.37|0.31|
|Food|0.76|0.24|
|DISTRICT CONTROLS<sup>1</sup>|||
|Distance to paved road|25.90|21.28|
|Access to credit|0.68|0.30|
|Access to improved seeds|0.58|0.28|
|Access to oxen|0.26|0.36|
|Access to oxen rental|0.21|0.31|
|Access to tractors|0.12|0.18|
|Access to extension services|0.38|0.24|
|Output market constraints|0.15|0.14|
|Input market constraints|0.16|0.12|
|Road constraints|0.05|0.08|
|Disease constraints|0.22|0.18|
|Security constraints|0.01|0.03|
|Land constraints|0.15|0.20|
|Credit constraints|0.04|0.08|
|Land fertility constraints|0.08|0.09|
|Access to veterinary services|0.28|0.26|
|Land confict|0.13|0.12|
|Land community|0.08|0.23|
|Access to primary school|0.49|0.21|
|Free medicine|0.43|0.32|
|Election|0.11|0.18|
|Access to water|0.53|0.21|
|Public hospital|0.27|0.20|
|Private hospital|0.32|0.23|

Note: own calculations from the Uganda National Household Survey (UNHS) 1999/2000. 1. All district variables except distance to paved roads are constructed from dichotomous variables at the community level.

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# Table 4

# Poverty and Market Density Instrumental Variables

||Model 1|Model 2|Model 3|
|---|---|---|---|
|IV - Linear Model||||
|Export Market Density|_−_0_._56|_−_0_._27|_−_0_._28|
||(0_._11)<sup>_∗∗∗_</sup>|(0_._13)<sup>_∗∗_</sup>|(0_._13)<sup>_∗∗_</sup>|
|Export Price Index|–|_−_0_._01|_−_0_._01|
|||(0_._009)|(0_._009)|
|Food Market Density|–|–|_−_0_._011<br>(0_._02)|
|Household characteristics|Yes|Yes|Yes|
|District characteristics|No|Yes|Yes|
|_R_<sup>2</sup>|0.11|0.21|0.21|
|First stage coefcient|_−_0_._038|_−_0_._027|_−_0_._028|
|Standard error|(0_._006)<sup>_∗∗∗_</sup>|(0_._008)<sup>_∗∗∗_</sup>|(0_._008)<sup>_∗∗∗_</sup>|
|_R_<sup>2</sup>|0.37|0.76|0.77|
|IV - Probit||||
|Export Market Density|_−_1_._71|_−_0_._97|_−_0_._98|
|Marginal efect|_−_0_._62|_−_0_._35|_−_0_._35|
|Standard error (marg. efects)|(0_._12)<sup>_∗∗∗_</sup>|(0_._15)<sup>_∗∗∗_</sup>|(0_._15)<sup>_∗∗∗_</sup>|
|_R_<sup>2</sup>|0.18|0.18|0.18|
|Observations|6734|6743|6743|

Note: The dependent variables is a dichotomous indicator of whether the household is poor or not. The main independent variable is export market density, which measures market availability for export agriculture produce. The first panel reports results from 2SLS of poverty on market density. We report the coefficient, the cluster-corrected standard errors, the _R_<sup>2</sup> , and results from the first stage regression. The second panel report estimates from a probit model with endogenous regressor (using the control function approach). We report the coefficient, the marginal effects with their cluster-corrected standard errors, and the pseudo _R_<sup>2</sup> _._ Based on the Uganda National Household Survey 1999/2000.

34
Table 5 Export Participation and Market Density Share of Land

||Model 1|Model 2|Model 3|
|---|---|---|---|
|IV – Linear Model||||
|Coefcient|0.30|0.18|0.18|
|Standard error<br>|(0_._052)<sup>_∗∗∗_</sup>|(0_._07)<sup>_∗∗∗_</sup>|(0_._07)<sup>_∗∗∗_</sup>|
|_R_<sup>2</sup>|0.13|0.21|0.21|
|IV – Tobit||||
|Marginal efect|0_._31|0_._18|0_._18|
|Standard error|(0_._040)<sup>_∗∗∗_</sup>|(0_._052)<sup>_∗∗∗_</sup>|(0_._050)<sup>_∗∗∗_</sup>|
|Observations|6554|6554|6554|
|Export Price Index|No|Yes|Yes|
|Food Markets|No|No|Yes|
|Household characteristics|Yes|Yes|Yes|
|District characteristics|No|Yes|Yes|

Note: Export participation is measured with the share of land devoted to export crops (coffee, tea, cotton, pineapples, passion fruit). The first panel shows results from 2SLS regressions of export participation on export market density. The second panel shows MLE results from a Tobit specification with endogenous variables (using the control function approach). Standard errors (within parenthesis) are cluster-corrected. Based on the Uganda National Household Survey 1999/2000.

35
Table 6 Export Participation and Market Density Share of Income

||Model 1|Model 2|Model 3|
|---|---|---|---|
|IV – Linear Model||||
|Coefcient|0.29|0.14|0.14|
|Standard error<br>|(0_._05)<sup>_∗∗∗_</sup>|(0_._06)<sup>_∗∗_</sup>|(0_._06)<sup>_∗∗_</sup>|
|_R_<sup>2</sup>|0.14|0.14|0.14|
|IV – Tobit||||
|Marginal efect|0_._35|0_._29|0_._29|
|Standard error|(0_._057)<sup>_∗∗∗_</sup>|(0_._049)<sup>_∗∗∗_</sup>|(0_._049)<sup>_∗∗∗_</sup>|
|Observations|6606|6606|6606|
|Export Price Index|No|Yes|Yes|
|Food Markets|No|No|Yes|
|Household characteristics|Yes|Yes|Yes|
|District characteristics|No|Yes|Yes|

Note: Export participation is measured with the share of income generated by export crops (coffee, tea, cotton, pineapples, passion fruit). The first panel shows results from 2SLS regressions of export participation on export market density. The second panel shows MLE results from a Tobit specification with endogenous variables (using the control function approach). Standard errors (within parenthesis) are cluster-corrected. Based on the Uganda National Household Survey 1999/2000.

36
Table 7 Poverty and Export Participation Instrumental Variables

||L|and Share|s|In|come Shar|es|
|---|---|---|---|---|---|---|
||Model 1|Model 2|Model 3|Model 1|Model 2|Model 3|
|IV – Linear Model|||||||
|Coefcient|_−_1_._89|_−_1_._50|_−_1_._51|_−_1_._68|_−_1_._78|_−_1_._79|
|Standard error|(0_._45)<sup>_∗∗∗_</sup>|(0_._91)<sup>_∗_</sup>|(0_._90)<sup>_∗_</sup>|(0_._35)<sup>_∗∗∗_</sup>|(1_._20)|(1_._20)|
|_R_<sup>2</sup>|0.15|0.21|0.21|0.15|0.21|0.21|
|IV – Probit|||||||
|Coefcient|_−_5_._75|_−_5_._28|_−_5_._33|_−_5_._11|_−_6_._04|_−_6_._10|
|Marginal efect|_−_2_._08|_−_1_._91|_−_1_._93|_−_1_._81|_−_2_._12|_−_2_._14|
|Standard error|(0_._40)<sup>_∗∗∗_</sup>|(0_._89)<sup>_∗∗_</sup>|(0_._88)<sup>_∗∗_</sup>|(0_._33)<sup>_∗∗∗_</sup>|(1_._03)<sup>_∗∗_</sup>|(1_._02)<sup>_∗∗_</sup>|
|_R_<sup>2</sup>|0.13|0.18|0.18|0.11|0.15|0.15|
|Observations|6734|6734|6734|6734|6734|6734|
|Export Price Index|No|Yes|Yes|No|Yes|Yes|
|Food Markets|No|No|Yes|No|No|Yes|
|Household characteristics|Yes|Yes|Yes|Yes|Yes|Yes|
|District characteristics|No|Yes|Yes|No|Yes|Yes|

Note: Instrumental variable estimates of poverty on export participation. Poverty is defined as a dichotomous variable of whether the household is poor or not. Export participation is measured with the share of land devoted to export crops (coffee, tea, cotton, pineapples, passion fruit) and with the share of income generated by sales of these crops. The linear model is estimated with IV and the IV-Probit model is estimated with control function methods. Standard errors (within parenthesis) are cluster-corrected. Based on the Uganda National Household Survey 1999/2000.

37
Table 8

# Robustness to Set of Instruments Two Instruments

||Poverty|Exports|& Markets|Poverty|& Exports|
|---|---|---|---|---|---|
||& markets<br>(Model 3)|Share land<br>(Model 3)|Share income<br>(Model 3)|Share land<br>(Model 3)|Share income<br>(Model3)|
|IV – Linear Model|_−_0_._26|0.15|0.13|_−_1_._45|_−_1_._80|
||(0_._11)<sup>_∗∗_</sup>|(0_._06)<sup>_∗∗_</sup>|(0_._05)<sup>_∗∗_</sup>|(0_._89)<sup>_∗_</sup>|(1_._19)|
||0.21|0.19|0.15|0.21|0.21|
|IV – Probit/Tobit|_−_0_._32|0.13|0.24|_−_1_._86|_−_2_._15|
||(0_._013)<sup>_∗∗_</sup>|(0_._024)<sup>_∗∗∗_</sup>|(0_._047)<sup>_∗∗∗_</sup>|(0_._90)<sup>_∗∗_</sup>|(1_._02)<sup>_∗∗_</sup>|
||0.18|0.28|0.26|0.18|0.15|
|Test of Instruments||||||
|F-test (frst stage)|11.49|11.19|9.61|8.43|6.84|
|p-value|0.00|0.00|0.00|0.00|0.00|
|_R_<sup>2 </sup>(frst stage)|0.71|0.71|0.71|0.21|0.16|
|Test of Overidentifcation||||||
|_χ_<sup>2</sup>|0.178|0.773|0.765|0.290|0.029|
|P-value|0.673|0.379|0.382|0.591|0.865|
|Observations|6734|6554|6606|6554|6606|

Note: Instrumental variable estimates using two instruments, the out-of-district cost of transportation to Kampala and the lagged export market density in 1995. Poverty is defined as a dichotomous variable of whether the household is poor or not. Export participation is measured with the share of land devoted to export crops (coffee, tea, cotton, pineapples, passion fruit) and with the share of income generated by sales of these crops. The linear model is estimated with IV and the IV-Probit model is estimated with control function methods. Standard errors (within parenthesis) are cluster-corrected. Based on the Uganda National Household Survey 1995/96 and 1999/2000.

38
Table A1

# Poverty and Market Density Household and District Controls Instrumental Variables Linear Model

||Model 1|Model 2|Model 3|
|---|---|---|---|
|Household size|0_._02|0_._02|0_._02|
||(0_._003)<sup>_∗∗∗_</sup>|(0_._003)<sup>_∗∗∗_</sup>|(0_._003)<sup>_∗∗∗_</sup>|
|Male head|0_._008<br>|0_._035<br>|0_._035<br>|
||(0_._026)|(0_._022)|(0_._022)|
|Male married|_−_0_._0004|0_._008|0_._008|
||(0_._009)|(0_._009)|(0_._009)|
|Number of males|0_._096|0_._096|0_._095|
||(0_._029)<sup>_∗∗∗_</sup>|(0_._027)<sup>_∗∗∗_</sup>|(0_._027)<sup>_∗∗∗_</sup>|
|Age 12-18|0_._295|0_._289|0_._288|
||(0_._055)<sup>_∗∗∗_</sup>|(0_._051)<sup>_∗∗∗_</sup>|(0_._051)<sup>_∗∗∗_</sup>|
|Age 46+|0_._039|0_._044|0_._044|
||(0_._033)|(0_._028)|(0_._028)|
|Age 0-5|0_._251|0_._233|0_._233|
||(0_._050)<sup>_∗∗∗_</sup>|(0_._049)<sup>_∗∗∗_</sup>|(0_._049)<sup>_∗∗∗_</sup>|
|Age 6-12|0_._434|0_._415|0_._415|
||(0_._054)<sup>_∗∗∗_</sup>|(0_._054)<sup>_∗∗∗_</sup>|(0_._054)<sup>_∗∗∗_</sup>|
|Literacy of head|_−_0_._089|_−_0_._065|_−_0_._065|
||(0_._028)<sup>_∗∗∗_</sup>|(0_._026)<sup>_∗∗_</sup>|(0_._026)<sup>_∗∗_</sup>|
|Education (no schooling)|_−_0_._006|_−_0_._004|_−_0_._004|
||(0_._074)|(0_._077)|(0_._077)|
|Education (primary incomplete)|_−_0_._016<br>|_−_0_._014<br>|_−_0_._014<br>|
||(0_._075)|(0_._076)|(0_._076)|
|Education (primary complete)|_−_0_._109<br>|_−_0_._1<br>|_−_0_._099<br>|
||(0_._079)|(0_._079)|(0_._078)|
|Education (junior incomplete)|_−_0_._186|_−_0_._181|_−_0_._181|
||(0_._079)<sup>_∗∗_</sup>|(0_._079)<sup>_∗∗_</sup>|(0_._079)<sup>_∗∗_</sup>|
|Education (junior complete)|_−_0_._156|_−_0_._15|_−_0_._15|
||(0_._083)<sup>_∗_</sup>|(0_._092)|(0_._092)|
|Education (seniorr incomplete)|_−_0_._169|_−_0_._159|_−_0_._159|
||(0_._071)<sup>_∗∗_</sup>|(0_._071)<sup>_∗∗_</sup>|(0_._070)<sup>_∗∗_</sup>|
|Education (junior complete)|_−_0_._325|_−_0_._299|_−_0_._298|
||(0_._080)<sup>_∗∗∗_</sup>|(0_._079)<sup>_∗∗∗_</sup>|(0_._078)<sup>_∗∗∗_</sup>|
|Education (superior)|0_._333|_−_0_._257|_−_0_._256|
||(0_._109)<sup>_∗∗∗_</sup>|(0_._095)<sup>_∗∗∗_</sup>|(0_._095)<sup>_∗∗∗_</sup>|
|Health status (head)|0_._026|_−_0_._04|_−_0_._04|
||(0_._018)|(0_._013)<sup>_∗∗∗_</sup>|(0_._013)<sup>_∗∗∗_</sup>|

Note: Estimates of household and district controls from the model of poverty on export market density. Instrumental variables. Standard errors within parenthesis ( _∗_ : significant at 10% level; _∗∗_ : significant at 5% level; _∗∗∗_ : significant at 1% level).

39
Table A1 (continuation) Poverty and Market Density: Household and District Controls

||Model 1|Model 2|Model 3|
|---|---|---|---|
|Access to credit||0_._005|0_._004|
|||(0_._07)|(0_._07)|
|Access to improved seeds||_−_0_._05|_−_0_._048|
|||(0_._058)|(0_._058)|
|Access to oxen||0_._518|0_._517|
|||(0_._122)<sup>_∗∗∗_</sup>|(0_._122)<sup>_∗∗∗_</sup>|
|Access to oxen rental||_−_0_._319|_−_0_._32|
|||(0_._105)<sup>_∗∗∗_</sup>|(0_._105)<sup>_∗∗∗_</sup>|
|Access to tractors||_−_0_._036|_−_0_._035|
|||(0_._068)|(0_._068)|
|Input market constraints||_−_0_._161|_−_0_._159|
|||(0_._106)|(0_._106)|
|Road constraints||_−_0_._391|_−_0_._385|
|||(0_._161)<sup>_∗∗_</sup>|(0_._160)<sup>_∗∗_</sup>|
|Disease constraints||_−_0_._178|_−_0_._18|
|||(0_._083)<sup>_∗∗_</sup>|(0_._084)<sup>_∗∗_</sup>|
|Security constraints||_−_0_._007|_−_0_._016|
|||(0_._308)|(0_._308)|
|Land constraints||_−_0_._193|_−_0_._196|
|||(0_._083)<sup>_∗∗_</sup>|(0_._083)<sup>_∗∗_</sup>|
|Credit constraints||_−_0_._014|_−_0_._017|
|||(0_._197)|(0_._196)|
|Land fertility constraints||_−_0_._384|_−_0_._382|
|||(0_._127)<sup>_∗∗∗_</sup>|(0_._128)<sup>_∗∗∗_</sup>|
|Access to veterinary services||0_._164|0_._164|
|||(0_._055)<sup>_∗∗∗_</sup>|(0_._055)<sup>_∗∗∗_</sup>|
|Land confict||0_._182|0_._183|
|||(0_._084)<sup>_∗∗_</sup>|(0_._084)<sup>_∗∗_</sup>|
|Land community||_−_0_._116|_−_0_._121|
|||(0_._063)<sup>_∗_</sup>|(0_._064)<sup>_∗_</sup>|
|Access to primary school||0_._004|0_._007|
|||(0_._061)|(0_._061)|
|Free medicine||_−_0_._116|_−_0_._115|
|||(0_._045)<sup>_∗∗_</sup>|(0_._044)<sup>_∗∗_</sup>|
|Election||_−_0_._144|_−_0_._141|
|||(0_._076)<sup>_∗_</sup>|(0_._075)<sup>_∗_</sup>|
|Access to water||0_._059|0_._058|
|||(0_._055)|(0_._055)|
|Public hospital||_−_0_._069|_−_0_._07|
|||(0_._092)|(0_._092)|
|Private hospital||_−_0_._124|_−_0_._125|
|||(0_._069)<sup>_∗_</sup>|(0_._069)<sup>_∗_</sup>|
|Observations|6734|6734|6734|
|R-squared|0_._11|0_._21|0_._21|

Note: Estimates of household and district controls from the model of poverty on export market density. Instrumental variables. Standard errors within parenthesis ( _∗_ : significant at 10% level; _∗∗_ : significant at 5% level; _∗∗∗_ : significant at 1% level).

40