A. Introduction

This chapter reviews the distributional impact of agricultural sector reforms in Africa. African governments have intervened in the agricultural sector for decades, but generous pricing policies and operational inefficiencies have often necessitated large budgetary transfers to parastatals. Over the past 20 years many African countries attempted to liberalize their agricultural sector, with mixed success. This chapter describes the forms of government intervention in agricultural markets, the liberalizing reforms undertaken in the past 20 years, the channels by which these reforms affected stakeholders, and the outcomes of the reforms on poor households.¹⁰⁰

Four main lessons emerge from past experience. First, past reforms have not lived up to expectations, reflecting erratic policy implementation, low levels of public goods, and weak market institutions. In particular, price liberalization alone has proven insufficient to spur agricultural growth in the presence of structural weaknesses in rural markets. Second, postreform price changes have not significantly harmed the poor in the aggregate. The feared increase in the consumer price of food, which would have reduced the purchasing power of the majority of the rural poor who are net food consumers, never materialized. Instead, liberalizing procurement markets increased competition among traders and processors, which reduced marketing margins and benefited both producers and consumers. Third, reforms that removed input subsidies and devalued the currency did not markedly increase agriculture yields, as private credit and input markets functioned poorly after reforms. In many cases, however, the poor were not major beneficiaries of input subsidies and were therefore less affected by their withdrawal. Finally, farmers in more remote locations were disproportionately harmed by the removal of both direct input subsidies and cross-subsidies from uniform national pricing.

Therefore, reforms of input market reforms should proceed carefully, and compensation should be considered for farmers in more remote areas. This compensation should, if possible, build on existing social safety net programs. It could consist of targeted transfers to poor remote households, or conditional targeted transfers that promote human capital investment (including agricultural extension services), or investments in physical infrastructure, such as irrigation, roads, or utilities.

For most households, the primary effects of agricultural sector reforms are changes in producer or consumer prices. In principle, the best way to measure the distributional impact of price changes is to use a household survey to examine the relationship between households’ economic welfare and their net consumption of the goods in question. This chapter does not discuss this kind of price-incidence analysis, which is described in Chapter III above. Instead, it reviews the contextual background and lessons from past reforms. Section B describes the historical background of marketing boards and the need for reform. Section C lays out the channels by which producers, consumers, and private traders were affected by the reforms. Section D presents four case studies of reforms, and Section E concludes by reviewing the effects of the reforms.

B. Rationale for Intervention and Reform

Public intervention in agricultural markets is common throughout the world because of the importance and volatility of these markets. In most developing countries, agricultural markets are the main source of livelihood for the majority of households in rural areas, where poverty is concentrated, and they provide staple foods for urban consumers. Subsidizing rural farmers and domestic consumers, sometimes at the same time, was perceived politically both as an obligation of postcolonial governments and as an effective strategy to reduce poverty. In most developing countries, these attitudes matched many leaders’ general distrust of the free market and specific concerns about the market power of traders and farmers’ access to credit for inputs. Furthermore, in many African countries, the economic importance of agriculture made it a natural source of tax revenue, which was collected by setting producer prices substantially below world prices and channeling output through publicly run marketing boards.

Price volatility in international and domestic agricultural markets encouraged state intervention. For export crops, price volatility stems from weather or other supply shocks that affect competing exporters. For domestically consumed food crops, farm households often sell only the portion of their harvest that remains after self-consumption, so that weather shocks can lead to large relative changes in supply and prices. Underdeveloped credit and insurance markets also exacerbate price volatility. In theory, policies that reduce price volatility in food and export crops can increase investment and benefit producers, to the extent that farmers currently sacrifice higher returns to mitigate risk.

In Africa, a desire to smooth volatility, support the poor, and capture rents led governments to establish state marketing boards. Appendix Table A5.1 lists 14 sectors in 12 African countries where state marketing boards maintained fixed prices, price ceilings, floors, or bands. Fixed prices were constant throughout the year (pan-seasonal) and throughout the country (pan-territorial). To enforce state-set prices, marketing boards were granted monopsony and sometimes monopoly power. As an additional incentive to accept below-market producer prices, marketing boards also offered input subsidies. Seeds, pesticides, and especially fertilizer were tightly controlled and heavily subsidized. Input subsidies also took the form of exemptions from indirect taxes, concessionary credit, insurance, subsidized extension services, and transport services. In cases where the state did not set prices by law, marketing boards maintained a price band by setting aside a fund and conducting open-market

operations. Quantity rationing was less common, although production quotas were imposed in formerly socialist countries such as Ethiopia, Madagascar, and Guinea.

In most countries, state marketing boards proved financially unsustainable. The oil price shocks in the 1970s dramatically increased the price of fertilizer in dollar terms and governments increased subsidies rather than prices. Because of pan-territorial and pan-seasonal pricing, rising oil prices also increased transport and storage costs, which were absorbed by marketing boards. In some countries, pan-seasonal and pan-territorial pricing led to high marketing costs in remote areas because of the circuitous transport of food to urban areas for storage and back to rural areas for consumption (Seshamani, 1998). Predictably, subsidizing both producers and consumers proved expensive, particularly in years when harvests were good. Finally, in general the parastatals themselves were corrupt and/or poorly managed. Many governments responded to increasingly large revenue shortfalls by cutting producer prices further, which led to the emergence of parallel markets and further depressed production. Figure 5.1 shows examples of the substantial losses incurred by state marketing boards in four countries, which ranged from 1 to 6 percent of GDP.

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Agricultural Sector Losses in Selected Countries

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Parastatals’ fiscal difficulties, falling export commodity prices, and donor pressure led most countries in sub-Saharan Africa to implement structural adjustment programs during the 1980s. Agricultural reforms were a major part of these programs, which followed three major paradigms. First, input and output prices were liberalized, by removing input subsidies, setting domestic prices in line with world prices, eliminating pan-territorial and pan-seasonal pricing, and in some cases devaluing the currency. Second, regulatory controls were lifted in the transport, procurement, marketing, and, occasionally, the production sectors. Third, public enterprises were restructured to focus on support activities such as maintaining buffer stocks and providing information instead of pricing and marketing activities. Because of the importance of the agricultural sector in these countries, these reforms had far-reaching effects.

C. Stakeholders and Channels of Impact

Consumers, producers, and traders are generally the groups most widely affected by reforms, though processors and parastatal employees are also affected. Of course, reforms have heterogeneous effects within groups. These effects are primarily felt through changes in consumer and producer prices, input prices and subsidies, and the structure of the market.

For producers, the effect of changes in producer prices on welfare depends on the household’s net production of the good. Many reforms eliminate producer price or input subsidies. These harm net producers, who tend to be wealthier farm households. However, the patterns of net production vary by crop and by country. Therefore, if possible, the incidence of producer price changes should be assessed using a household survey with production and consumption data. However, such analyses should be treated with proper caution, because they typically ignore crop substitution effects on both the intensive and extensive margins. In particular, wealthier and better-educated households are likely to adapt to price changes more effectively (Schultz, 1975), in which case first-order incidence likely overstates the loss of wealthier households relative to poorer households.

The removal of input subsidies will harm farmers to the extent that they purchase subsidized inputs. Prereform input subsidies were often poorly targeted, as large farmers generally used more inputs and in some cases captured the subsidies. However, the effect of removing input subsidies for the poor can still be substantial, because the increased cost may significantly reduce their income and the fall in input use may have a larger effect on the yield of poor farms. Again, information on poor households’ use of inputs and input subsidies may be available in a household survey or agricultural census. Finally, reforms that improve competition in procurement and transport markets reduce marketing margins, which can be passed through at least partially to producers in the form of higher producer prices.

For consumers, the effect of a price change in a food crop, because of the withdrawal of subsidies, will depend on household net consumption of the good. Urban consumers have higher net consumption on average. Price increases in food crops tend to hit poor households harder because food budget shares fall as income rises. In most countries, large-scale household data can be used to examine the correlation between household budget shares and household economic well-being. Because demand is generally more elastic for poor households, such first-order incidence analysis may overestimate the impact of a price increase on the poor relative to the nonpoor, especially for nonstaple goods.¹⁰¹ This is particularly true when close substitutes are available. Also, consumer prices typically fall after restrictions in transport markets are removed, which reduces marketing margins and benefits consumers across the board.

Liberalizing transport and procurement markets has in most cases led to the entry of private traders, who benefit from the opportunity to compete away the monopsony rents earned by marketing boards. The removal of interregional trade restrictions and taxes benefits these new traders. Of course, employees of parastatals typically suffer from the loss of rents. Market liberalization and/or privatization of parastatals lead to layoffs following reforms; the distributional effects of these layoffs depend on the negotiated severance agreements as well as the state of the labor market in the country.

Many past reforms harmed poor urban consumers and remote rural farmers. Reforms create winners and losers through their effects on prices and rents. Policies that remove output subsidies and lower producer prices harm net producers, who tend to be wealthier. Policies that lead to consumer price increases in food items harm consumers in proportion to the percentage of their budget devoted to that item. Typically, poor urban consumers bear the brunt of food price increases, especially for staples. Liberalizing procurement and transport markets benefits consumers and producers by reducing marketing margins. However, rural producers in remote areas, who tend to be poor, are disproportionately harmed by the removal of both direct input subsidies and the implicit subsidies deriving from pan-territorial pricing. Farmers in remote areas may also be constrained by poorly functioning collection markets because of the difficulties in obtaining information and credit.

D. Case Studies

E. The Impact of the Reforms

Reforms failed to generate a large supply response. Donors and policymakers expected that liberalizing the sector would raise producer prices and generate a supply response that would spur growth in the sector. Over time, it became clearer that insufficient implementation, poorly functioning institutions, and insufficient public goods hampered the expansion of the sector.

In many countries, reforms were not fully implemented. Appendix Table A5.2 describes these reforms in more detail for the sample of countries and sectors listed in Appendix Table A5.1, and illustrates the incomplete progress of reforms as of 2002. Of the 14 sectors listed, private trading was liberalized in 11, but parastatal companies or marketing boards remained active in 11 cases. Price intervention of some sort still occurs in 9 of the 14 countries, though in some countries, such as Kenya and Uganda, the price regulations are relatively mild. Concerns about food security led governments in southern and eastern Africa to continue intervention in the maize market, as in Zambia. Marketing boards still conduct a large share of crop marketing in some countries, such as Malawi. State-owned enterprises or multinational firms continue to dominate input markets in many countries. Reforms also have been reversed, particularly in Eastern and Southern Africa. For example, Malawi has revoked and reinstated fertilizer subsidies twice in the past 20 years, and Zambia reinstated pan-territorial maize pricing. Zimbabwe, after liberalizing its internal trading and milling markets for maize in 1993, subsequently increased the role of its grain marketing board and reintroduced price controls in 1998. Kenya reintroduced maize price supports in 1998 after eliminating them in 1994.

Lasting and effective implementation of reforms was hampered by several factors. Liberalizing reforms impinged on rents earned from state intervention. Donor-led reform efforts failed to generate ownership and enthusiasm from either the bureaucracy charged with implementing reforms or stakeholders in civil society. The rationale for reforms was rarely explained publicly. Loan disbursements were conditional on a wide package of economy-wide reforms, and donors were reluctant to delay disbursements owing to noncompliance in the agricultural sector. Donor coordination in policies was lacking in some instances. Finally, African government officials are often undertrained and underpaid, and state capacity for monitoring and implementation is weak.

Despite inconsistent implementation in some countries, the liberalizing reforms have overall had a positive effect on export crops and a mildly positive effect on the sector as a whole. The liberalization of internal procurement and transport markets induced large-scale entry of private traders, which reduced marketing margins and more closely integrated agricultural markets, increasing producer prices for farmers and decreasing consumer prices. In addition, the reforms engendered a limited supply response, which was stronger for export crops than for food crops. In some countries, devaluations raised the producer price of export crops relative to food crops. Also, fertilizer is used more intensively for export crops, partly because their markets tend to be more vertically integrated and public stabilization policies reduce price volatility.

Several factors moderated the effect of the reforms on poor households, although the effect on poor households was mixed. In grain markets, most poor rural households are net consumers, but grain prices did not generally increase after reforms because of the decline in marketing margins. Food and fertilizer subsidies often did not reach the poor or were distributed inefficiently, which attenuated the negative effects of the withdrawal of these subsidies. However, private rural credit markets did not function well, and reforms reduced overall fertilizer use.

The reforms were particularly beneficial for export crop farmers and farmers in more accessible areas with marketable surpluses. Declining marketing margins and exchange rate depreciation increased the income of small export growers by roughly 20 percent. Meanwhile, net producers in remote areas suffered from the elimination of pan-territorial and pan-seasonal pricing and from the withdrawal of input subsidies. This highlights the need for consideration for farmers in remote areas who may be hurt by reforms.

Overall, the outcomes of the reforms were mixed. Liberalizing reforms in the agricultural sector were precipitated by inefficient and unsustainable state involvement in price-setting, transport, and marketing. Reforms generally scaled back the role of state marketing boards, liberalized internal trade, and removed subsidies or restrictions on inputs, outputs, and price. Liberalizing transport and procurement markets reduced marketing margins. However, the hoped-for supply response did not materialize, largely because of weak implementation, institutions, and public goods provision. State involvement in input markets was not replaced by well-functioning private markets. Finally, reforms that ended input subsidies and pan-territorial pricing disproportionately harmed farmers in more remote areas.