Smallholder Market Participation: Concepts and Evidence from Eastern and Southern Africa Christopher B. Barrett, Cornell University FAO workshop on Staple Food Trade and Market Policy Options for Promoting Development in Eastern and Southern Africa Rome, March 1-2, 2007

2 Motivation for paper…  Market participation necessary for structural transformation from subsistence agriculture to an economy based on specialization, exchange and technological innovation.  A market-led paradigm of development replaced state-driven modernization from late-1970s but transformation has been slow, especially in Africa.  Apparent existence of semi-subsistence poverty traps in rural Africa: rudimentary production technologies, minimal gains from trade, meager asset endowments and poorly functioning market and supporting institutions … a self-reinforcing low- level equilibrium. But higher-level equilibria also exist and are perhaps attainable with appropriate interventions.

3 Conceptual Foundations  Nonseparable household model with (i) household- level transactions costs to access market, and (ii) market-specific costs of integration with border.  Core result: market supply response and welfare effects price/trade policy depend heavily on initial endowments; on transactions costs at both household- and market-level; on competition and price transmission. As a result, price/trade policy is ineffective instrument for many rural Africans.

4 Market Equilibria In A Remote, Low-Potential Rural Area

5 Market Equilibria In An Accesible, High-Potential Rural Area

6  Finding #1: Relatively few smallholders sell staple foodgrains. Especially true with respect to net sales. Empirical evidence

Foodgrains Market Participation in Eastern and Southern Africa 7

8 Empirical evidence  Finding #2: Smallholder market participation and net sales are strongly increasing in wealth and its correlates (e.g., credit access, use of improved production technologies) as well as residence in a high-potential zone with good market access.

Rice market participation by land holdings, Madagascar

Maize market participation by land holdings, Mozambique

Net rice sales and marketable surplus by land holdings, Madagascar

12  Finding #3: Transactions costs associated with weak institutional and physical infrastructure are substantial and distort production and marketing behaviors. “… the costs of transacting are the key to the performance of economies. There have always been gains from trade…, but so too have there been obstacles to realizing these gains … The costs of transacting … are the key obstacles that prevent economies and societies from realizing well-being.” - Douglass North (1989, pp ) Empirical evidence

13 Empirical evidence At household level: - Access to transport and farmer organization membership positively associated w/participation - Fixed transactions costs equivalent to ~15% ad valorem tax - Subsistence orientation yields ~30-40% lower income At market level: - Transport costs from local market – nearest city often >15% - Considerable price volatility in poorly integrated markets - Imperfect competition (6-29% of farmers face only 1 buyer)

14  Finding #4: No clear effect of food aid on smallholder market participation. Empirical evidence

15 Impact of food aid via 4 channels: 1) Price effects of imported food aid – variable and depend heavily on quality of targeting of food aid distribution 2) Price and marketing channel effects of local and regional purchases: 1/3 of food aid now bought in Africa (>20% Ugandan market supply) – no clear evidence 3) Productivity effects – dependency or obviated seasonal liquidity constraints? If anything, evidence favors latter claim 4) Backhaul capacity and induced changes in transport costs – no direct evidence Empirical evidence

16 Conclusions and Policy Implications  In areas reasonably well-integrated into the international market, conventional price and trade policies can work, subject to standard caveats associated with the “food price dilemma”. Because there appear to exist significant barriers to smallholder entry into commercial staple foodgrains markets in many regions, macro-level instruments have a limited place in efforts to improve rural welfare and stimulate increased crop supply.

17 Conclusions and Policy Implications  Conventional wisdom is that lack of market participation in Africa is primarily due to lack of investment in institutional and physical infrastructure that drive transactions costs up. Meso- level policy responses then become appropriate.  Empirical evidence points strongly toward private asset endowments – and credit/technology correlates – as key determinants of market participation, even controlling for public goods. Micro-level emphasis then appropriate.  The appropriate blend of macro/meso/micro interventions will vary by place, crop and time. But the limited evidence we have suggests that micro interventions likely have the biggest payoff.

18 Thank you for your time, attention and comments