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Grain Marketing Policies and Institutions in Africa: Open, competitive markets spur farm productivity

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1987
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Peter Hopcraft

Africa has long traditions of open, competitive marketing, with flexible prices that vary predictably with the scarcity of the commodity, its quality, and with transport and storage costs. These marketing systems are efficient, responsive, and self-financing, and are ideally suited to dispersed smallholder economies with variable rainfall and changing market conditions. In smallholder economies in Africa, as elsewhere, marketing activities involve large numbers of transactions dispersed over wide areas in diverse and changing circumstances. They require rapid decisions and decentralized responsibility. Entrepreneurial and trading skills in this area are legendary and are typically acquired in the market place rather than by formal education. There are large numbers of firms and agents, many of them quite small, often involving only one person or family. While market information is at a premium, and family, ethnic, and other personal links may be used to advantage, marketing margins tend to be low and barriers to entry into the trade are generally not tolerated.

Instead of building on these market institutions and improving their competitive performance with information, legal support, communication facilities, and infrastructure, colonial and post-colonial regimes often introduced restrictive controls, fixed prices, and large monopolistic agencies. The stated objectives of these interventions have variously been to stabilize prices, improve the welfare of the poorest groups, improve market efficiency, generate government revenue, and sometimes to reduce the market role of unpopular ethnic minorities. The effects have frequently diverged from these objectives. Market prices have been destabilized as rigid official prices have stimulated extensive parallel markets with enormously accentuated price fluctuations. Poorer and less influential people are seldom the ones who have access to the more favorable prices in dualized markets so they have often been hurt rather than helped. The official agencies that have been superimposed on the markets have typically become overstaffed and inefficient, a costly drain on government revenues. Above all, they have not been capable of timely adjustment to changing market conditions.

In Zimbabwe, Kenya, and Malawi in 1986, for example, the grain marketing parastatals faced massive oversupply and severe budgetary losses resulting from bumper harvests and official prices that were substantially above market-clearing prices. (In all three countries the wealthier farmers have far more political leverage than they do in most African states.) In Ethiopia, conversely, despite severe and chronic grain deficits and very high parallel market prices, the marketing agency with official monopoly powers continued to pay producer prices that were a small fraction of urban market prices and were inadequate to stimulate an expansion of farm production. Despite considerable pressure from both local and international sources, official grain prices have remained constant—a major decline in real terms—for more than seven years, and extreme measures have been introduced to clamp down on the right of peasant traders to carry grain to deficit areas.

Government intervention

The origin of the official marketing agencies has varied. In many countries dominated by European settler communities, they were installed to protect the markets and stabilize the product prices of the large farmers, and to manage the food supply of the growing urban populations. In other countries they were introduced as part of the colonial administrative ideology, enthusiastically picked up by dirigiste post-colonial regimes. This ideology held that commercial processes, unrestricted by government, were inherently unreliable, inefficient, or unfair; that traders were exploitative; and that government authorities were better able to detect and serve the public good, protecting the producer, the consumer, or both, by controlling or even monopolizing trade.

Whatever their initial rationale, the introduction of state controls and agencies inevitably subjected grain policies, and particularly prices, to political pressures and internal power struggles, including the bureaucratic power of the marketing agencies themselves. In low-income countries food commodities, especially staples, command a far greater share of consumer expenditure than they do in higher-income countries. Staple food prices therefore have a more direct bearing on real wages. Changes in these prices also have far wider political repercussions in these countries, especially if they are seen as resulting from government policy decisions rather than from such impersonal forces as the weather, world market conditions, or transport costs.

Unlike the disproportionate political power of farmers in industrial countries, African smallholders, despite their large numbers, are unorganized and relatively voiceless. They are unable to compete in the political arena with powerful consumer groups seeking low food prices. These groups include unionized industrial workers; the large, educated, and well-placed body of public sector employees; well-connected and visible manufacturing firms; and, of particular importance in some countries, the army and its dependents. The combined power of these groups to shift prices in their favor has generally resulted in both consumer and producer grain prices being lower than they would otherwise have been. The result has been large and sustained transfers of income out of the rural sector.

Suppressed domestic prices and subsidized imports (either through concessional programs or implicitly via overvalued currencies) have often created an unhealthy dependence on external resources. They have impaired production incentives, undermined the adoption of appropriate technological innovations, denied farming areas the income necessary for investment and growth, and generated food scarcities.

The recurrent food deficits and the chronic rural stagnation in a number of African countries in recent years have contributed to both the abysmal performance of their economies and the tragic levels of human suffering they have experienced. The causes of this agricultural stagnation and decline are many. They include land tenure problems in some areas, deficiencies in available farm technology, improved inputs, extension, commercial and trading support for farmers, and physical infrastructure both on and off the farms. All these deficiencies can readily be addressed by commercial and public sector investments. The lesson of the past decade in Africa, however, is that the returns to these investments depend on large numbers of farmers increasing their farm productivity, investment, and commercialization, and that this whole process does not happen without appropriate incentives.

African farmers are not paid employees who respond to official directives. They are independent agents seeking to maximize the welfare of themselves and their families. They respond in the short term, and even more decisively in the longer term, to the prices that they observe or anticipate. It is only as they make money in their farming operations that they can afford to invest and improve their productivity. For these reasons a number of African governments and international agencies concerned with agricultural development are now focusing on issues of policy as well as the more conventional agricultural development investments. It has become evident that policies that generate adequate economic incentives are at least as important as good investment projects, and that the latter without the former can be a prescription for indebtedness rather than development.

Price fixing, market dualism

Inherent in the operations of public marketing agencies are fixed official prices. The difficulty of monitoring the transactions of many different employees within these agencies, and the pressures to standardize and to preserve the appearance of “fairness,” virtually preclude the price flexibility that is the normal response to varying market conditions. Even price differences between locations to take account of transport costs, or, between seasons, to take account of weather cycles or storage costs are rarely permitted. There may be a procedural cycle for the periodic (e.g., annual) adjustment of official prices, but it is not unusual for an official price to remain fixed for many years despite large swings in the scarcity or abundance of the commodity involved. The process of adjusting official prices may involve background economic work within government, but pricing decisions, especially for sensitive commodities such as grain, are finally political. It is not uncommon for professional staff working on the issue to be preempted by a surprise presidential announcement which they hear about from the mass media.

The predictable problem is that the resulting prices are arbitrary and do not “clear” markets, so that shortages or surpluses inevitably remain. As a result, the excess demand or supply spills over into a parallel or informal (sometimes illegal) market where prices depend on the supplies available and the unsatisfied market demand.

In African countries, despite official rhetoric and regulations, much of the grain is typically traded on the private market. The official share of the market, albeit the share consumed by the politically powerful groups, is often only 5-10 percent and is seldom above 25 percent.

The incentive to deliver grain to the parastatal depends on the relationship between the official and the market price at a particular time and place. If the official price is higher and the weather permits good harvests (as occurred in Kenya in 1978, Zimbabwe in 1982, and in a number of African countries in 1986), large numbers of producers and traders, many of whom would not normally do so, seek to sell to the parastatal. The larger harvest, and the far larger share of the harvest, imply that this agency finds itself accumulating costly surpluses, facing inadequate demand, and experiencing a budgetary hemorrhage. If the parastatal fails to buy all the grain offered (which occurred in Kenya, for example, and has in some countries, such as Côte d’Ivoire, led to the collapse of a marketing agency), farmers are forced to sell off their harvest for what they can get, or see it deteriorate. The parallel market price may then sink below the official price to the export parity price and, if exports are not permitted, lower still. In the Kenya case, despite an official maize producer price of KShs 80 per bag, the parallel price fell as low as KShs 27 per bag in some areas, substantially below the export parity price. Inevitably, in such cases, it is the larger, more influential, and richer producers, not the poorest ones, who tend to benefit from the higher official prices. For those who cannot sell at the prices they had anticipated, disillusionment and financial loss can seriously impair future production. As was demonstrated in Kenya, a poorly managed surplus can thus lead, in cyclical fashion, to a fresh round of deficits.

More typically, official producer and consumer prices are set below, often substantially below, market prices. The result is that supplies are inadequate to meet the demand at that price so that excess demand creates a parallel market at a higher price. In Tanzania, for example, parallel market prices for maize in the capital have typically been four or five times, and even up to ten times, the official price.

Official systems, despite their rhetoric, seldom meet the needs of the poorest people. Patronage systems tend to develop in which favored and powerful groups and individuals are the prime recipients of the scarce and underpriced supplies. Much of this grain typically ‘leaks’ into the high-priced parallel market, generating substantial rents. The poorer and more marginal urban groups must generally buy on this parallel market. The poorest people typically live in rural areas and do not benefit at all from the official systems.

When grain prices are kept chronically depressed, as happened in a number of African countries over the 1970s, domestic production typically declines, worsening local scarcities and raising the parallel market premium. As parallel prices rise relative to the official price, producers and traders are even more motivated to avoid the official agency, braving the restrictions and official harassment in search of the higher price. The more the harassment, of course, the higher the parallel price, so that in Addis Ababa the price of tef, the preferred local grain, rose to Birr 280 per quintal, while the producers were being paid a net price of Birr 38 per quintal through the official agency.

Parastatals have responded to the resulting procurement difficulties in a variety of ways. Some governments have tried enforced extraction from farmers, complete with the banning of farm storage, and even raids on farms. Where this has been successful, it has led to nutritional deprivation among farmers and has destroyed production incentives.

A more typical official response has been to try to prevent unofficial trade and enforce the parastatal monopoly, at least between the major producing and consuming areas. Barriers to private trade have the effect of reducing prices in the producing areas, making the official producer price appear relatively attractive, and also of raising open market prices in the consuming areas. They have often been introduced merely to protect the market share and the budgetary position of the parastatal from the more efficient and lower-cost traders.

Since the private trader is generally the basis for the local food distribution system and cannot be done away with, the result is often a complex and arbitrary series of licenses and regulations that may specify volume limits, administrative boundaries (within which trade is permitted and across which it is not), who may or may not conduct the trade, and even the type of vehicle that may or may not be used. In some countries, such as Guinea under Sekou Touré, or Ethiopia at the time of writing, traders are persistently harassed by the authorities. They have approximately the status of illegal narcotics dealers in most countries. Roadblocks and traps are set up for them and they are subject to confiscations, fines, imprisonment, or worse. The two areas of trade—food and narcotics—share a further characteristic in that the enforcers of the regulations frequently become significant beneficiaries of the trade. They may then be reluctant to see it, or the regulations that perpetuate it, come to an end.

Food aid and trade

Food imports are a sure concomitant of low official prices and inadequate domestic deliveries. Such imports are typically the exclusive domain of the official agency, and both the prices at which they are marketed and the designation of the marketing agent are, again, determined on political grounds. A number of African countries have severely overvalued domestic currencies. The under-pricing of foreign exchange implies the domestic underpricing not only of exports, but also of imports. The inevitable consequence is inadequate foreign exchange earning and excess demand for imports. The result for the grain market is scarce but underpriced supplies, with the excess demand again generating a margin of rent between the official and the parallel market prices. Such sources of income have diverted the attention and energies of both government officials and private entrepreneurs away from productive activity and into the political and bureaucratic games of rent-seeking.

Low-priced imports have had a predictable effect on both producers and consumers. In Madagascar before the 1982 liberalization of the internal market and the restraint on imports, political pressures to hold down consumer prices led to massive imports, a maze of official distribution schemes and market controls, and to per capita levels of rice consumption that were the highest in the world. Madagascar, which had earlier been an exporter of rice, ended up spending a quarter of its total foreign expenditure on importing it. The country is currently adjusting its policies and incentives, and rehabilitating its commercial marketing and production systems.

Concessional grain imports from donor countries with excess supplies can ease the foreign exchange constraint facing countries with import requirements, especially in emergencies. During the recent African drought, and at various other times of disaster, a great deal of human suffering was alleviated with food aid. The problem is that concessional food imports, precisely because they are cheap or free, provide an easy alternative to the development of the local farm economy. They are also attractive in that food aid sales can generate substantial revenue for parastatal or national budgets.

Since the generosity of food donors might be related to the burdens of their own surpluses, and since the current period of grain surplus and export drive in richer countries may not be a permanent phenomenon, there could be long-term costs to a policy that creates dependence on food aid. These problems are widely recognized and in some cases food aid is being skillfully used to support infrastructural investments that increase local production capacity. Food aid distributed at import parity prices through commercial marketing channels also avoids the problem of disrupting marketing systems and depressing prices. If it is well targeted toward the poorest groups in times of need, it also has a clear welfare benefit. Nevertheless, it is clearly important that the search for outlets for the food surpluses of donor countries not undermine appropriate production incentives in poor countries.

None of the foregoing should be taken as a plea for food self-sufficiency in African countries. Devoting resources that could be more productively used elsewhere to the production of food reduces incomes, welfare, and thereby food security. The essence of a good food import policy (or any trade policy) is an appropriate equilibrium exchange rate uniformly applied, so that tradable goods are neither taxed nor subsidized. Since imports offer an elastic supply, they provide an economically appropriate price ceiling in the event of shortage, and exports provide an adequate market to sustain a price floor in the event of a local surplus.

Reforms in Africa

Far-reaching institutional and policy reforms in the area of grain marketing are currently being undertaken in a number of African countries. In part this process has arisen from the perception that agricultural production has been impaired by market policies and institutions. Perhaps more fundamentally, it has emerged of necessity from the financial and institutional breakdown of the official marketing agencies as they have been overtaken by management problems and debt, and as they have been bypassed by independent producers, traders, and consumers, trading at market-clearing prices.

Though the specifics of reform vary with the circumstances and problems in each country, the general pattern is that governments are shifting the focus of their efforts from the management and protection of the official segment of the market, to the efficient performance and competitive operation of the market as a whole. The most important first step, taken by a large number of countries, is the removal of restrictions on traders. The result of this liberalization has been the integration of markets, permitting prices to reflect widely agreed perceptions of quality differences, current and future scarcity, and the costs of transport and storage. A further result is the stimulation of efficient and self-financing transport and storage activities, rationalizing price differentials between locations and over time.

Inherent in the reform and liberalization of trade is also the removal (or non-enforcement) of price controls. In some countries, such as Mali, major progress has been made with liberalization and reform after years of parastatal control and dual grain markets. Despite these measures, official prices, at which all private transactions are supposed to take place, are still promulgated on the grounds that they are needed to protect consumers. While these price announcements are ignored by traders, and even the officials recognize that any attempt to enforce them would cause grain to disappear from the market, it may be that they serve to divert the political opposition of consumer groups.

Another vital component of the reform effort is the removal of marketing subsidies. Such subsidies can become major budgetary burdens, often dwarfing more productive expenditures in agriculture. Typically they go neither to producers nor consumers. Instead, they fund the logistical and economic inefficiencies of parastatal agencies, and they pick up the transport, storage, and other losses associated with such inappropriate policies as fixed prices between locations and time periods. Without the budgetary subsidies and without the restrictions, such policies, and the high-cost institutions that embody them, are not sustainable.

The final element of the reform process is the lifting of controls on international trade in food. Import prices inclusive of marketing costs provide a ceiling above which local prices will not rise in the absence of trade restrictions, and export prices net of marketing costs provide a floor. Reducing the ceiling price in the interests of consumers implies a subsidy to imports, and raising the floor price to producers implies accumulating surpluses above normal storage requirements or a subsidy to exports. (Vice versa in the case of a tax.) Such interventions generate income transfers between producers and consumers and distort prices away from economic opportunity costs. If budgets are inadequate to allow the clearing of markets, furthermore, dualism is again the result.

To stabilize markets, trade offers a more flexible, sustainable, and generally lower-cost alternative to buffer stock schemes. Such schemes tend to use arbitrary (and inevitably politicized) floor and ceiling prices and to incur inordinate storage costs. When they collapse, furthermore, as they almost inevitably do in situations of chronic surplus or deficit, they can be extremely destabilizing.

Conclusion

Parastatal monopoly and official control over grain marketing does not have a good record in Africa. African grain marketing policies and institutions are now turning, sometimes deliberately, sometimes by default, to more indigenous and open systems. The institutions involved are flexible, self-financing and self-managing. They are also low-cost, responsive to economic opportunities, often quite small, and frequently run by women.

The new task of government in this changed institutional environment is to improve the competitiveness, transparency, and performance of the market. This typically involves ensuring the removal of subsidies and market restrictions, improving the availability of information on crop forecasts and price movements, and also providing legal support, security, and improved infrastructure both for domestic and international trade, and for the financial transactions that support trade.

A further vital role of government on the marketing and distribution side addressed in this article, is improving the lives and welfare of the very poorest and nutritionally deprived segments of the population. This task certainly includes timely famine relief and other well-targeted nutritional emergency measures. It also includes the longer-term and more complex issues of expanding employment and incomes, particularly in Africa’s rural areas.

An International Monetary Fund Publication…

Fiscal Policy in the Smaller Industrial Countries, 1972-82

by Gísli Blöndal

Price:

US$12.50 (paper);

US$24.00 (hardback)

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The 1972-82 period was a turbulent one for the world economy, particularly for small, open economies that were highly vulnerable to external shocks. Fiscal policy was used extensively by these countries to protect their domestic economies against the oil price increases, rising interest rates, the debt crisis, and other such adverse movements in the international economic system. This book examines the fiscal measures undertaken by thirteen smaller industrial countries, and identifies differences by reviewing the institutional arrangements, public finances, and sociopolitical attitudes that determined fiscal practices during the decade.

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