PIM Webinar/Book Launch, December 9, 2021. At first glance, African smallholder farmers might seem unproductive, as their crops yield much less than potential and are often of variable quality. A new PIM-supported book “African Farmers, Value Chains, and Agricultural Development” argues that in fact they are largely producing following rational economic decisions, and that this situation is a consequence of the economic and institutional environment in which they produce. The authors Alan de Brauw and Erwin Bulte discuss ways that different types of transaction costs limit their market opportunities in general, including transport costs but also costs related to different sources of risks, trust, market power, liquidity, and even storage. More information and full webinar recording: https://bit.ly/3rMpdTi

2. African Farmers, Value Chains, and African
Development
Motivating Facts behind this book
1. The majority of land in Africa is farmed by smallholders
2. While these farmers depend upon the ability to sell food on markets,
markets do not always function well for these farmers (or other value chain
actors)
3. How, then, to catalyze a structural transformation in Africa? (e.g., a
structural transformation 2.0 as we call it)

3. Four major concepts we introduce in
Chapter 1 and follow throughout
• Transaction Costs
• Relational
Contracting
• Trust
• Market Power and
Value Chains

4. What transaction
costs?
Lots of different potential transaction costs in
agricultural value chains
Transaction costs related to…
• Trust in selling (or buying) goods
• Liquidity for Investments (short or long term)
• Dealing with Risk
• Storage to Obtain Better Prices
• Scale (aggregation issues)
• Transporting to market

5. Relational contracting
Most “contracting” is done through
relational contracting
• Information about product not
completely codified
• Lack of third-party enforcement
• Self-enforcing agreements, incentive-
compatible
More formal contracting requires
more complete information and
potential enforcement

6. Trust in selling products or buying
inputs
Key to complex markets- be able to control quality (many definitions)
• May require farmers to use specific inputs, handling procedures
• Possibly: move from relational contracting to more formal contracts
• Immediate payments to invoicing
Smallholders may be (or feel) cheated by middlemen through:
• Low prices offered (if they don’t know them);
• Scales that mismeasure weight of crops;
• Disagreements about quality of crop;
• Whether invoices will actually be paid or not.
Smallholders can cheat too (mix rocks or stones in crops for sale, etc.)
These concepts all relate back to transaction costs

7. Market power in value chains
When buyer has market power, they have more
control over margins
• Farmers invariably receive lower prices for crops
than under competitive equilibrium
Three ways market power can arise
• Search costs: might be costly to find another
buyer, so buyer ends up with local monopoly
• Specialized products: Products that require
specific handling for the market (sustainability
standards, quality standards, special products with
niche markets)
• Exports: “Natural” monopoly to take care of costs
related to export
Market power here can be an advantage… improved
input provision in relational contracting

8. What we do not do in the book
Food systems are lightly discussed
We focus on domestic rather than
international markets
• Note imports can be particularly cheap in
coastal cities of West Africa
Policy preferences may be
heterogeneous within countries
• Political economy issues
We do not pay enough attention to
heterogeneity
• And our observations are likely colored by
our research (and other) experience in
Africa
We do not pay enough attention to
gender in the book
• Women often face even more difficulties
with transaction costs, and gender
relations are also heterogeneous

9. Outline of chapters
1. African Smallholders and their Market Environment
2. African Agricultural Value Chains: A Brief Historical Overview
3. Economic Theory and Value Chain Governance
4. The Evolution of Value Chains in Africa
5. Smallholders and Markets
6. Product Quality and Certification
7. Storage and Post-Harvest Losses
8. Silver Bullets?
9. Structural Transformation 2.0: The Rocky Road Ahead…

10. Silver bullets?
1. (FDI and) Farm Consolidation
2. Input Subsidy Programs
3. Innovation Platforms
4. Producer Organizations
5. ICT and Mobile Phones
Good ideas: yes
Panaceas: not really

11. Silver bullets?
Megafarms
How do we envision African farming in 2050?
Further splintered farms into smaller and
smaller plots?
• Unlikely to be good for productivity or
value chains…
• Vertical integration and economies of
scale
Customary systems of land tenure: political
rent-seeking in land deals?
Monopsony power on (factor) markets?
Monitoring issues
Many “deals” do not materialize
Input Subsidies
Ten African Countries run Subsidy
Programs for inputs
• If successful, close yield gap and
catalyze value chain development
• Anecdotal evidence of success
(Malawi)
But: public finance, targeting, effects
for private sector?
Evaluations show unclear income
effects
Political economy, elite capture

12. Innovation platforms, of course!
From linear technology push model (research – extension – farming) to network approach:
agricultural inovation system.
Farmers as co-creators of knowledge, development through simultaneous change in behavior
Multiple actors work together, feedback loops, …
Innovation platforms as institutional innovation associated with specific VC: space for
communication, learning and negotiation (diagnosis & discovery)
Weak evidence, heterogeneous impacts… and relatively high cost…
Are IPs hi-jacked by special interests? (including researchers?)
Legitimate leadership?
Coordination failure, limits to relational contracting…

13. Okay, producer organizations?
Okay, so it’s harder to buy crops from 100 small farms than
1 big one. Can’t the 100 small farms organize and act like
one big one?
Input provision, storage, extension, marketing,
representation, …
YES, and (net) gains are often real, but…
• There are (transaction) costs to participation;
• Management ability varies…
• Coordination challenges, e.g. side-selling?
• They may exclude poorer farmers;
• More successful ones must be endogenously formed–
they cannot be imposed

14. Then ICT is a panacea, right?
ICT has the potential to reduce transaction costs by improving
information flows, and improve access to financial services
Yet, impacts of introducing ICT are negligible or mildly positive…
Why? Mobile money networks not well spread in many places;
farmers turn off phones to preserve charge; smartphone penetration
(for video extension) low; (price and weather) information not useful if
there are other constraints; public good nature of information
undermines growth of market demand (hence: subsidies for e-
extension)
Blockchain to improve trust?
Maybe since all information is public
BUT requires internet everywhere; AND fact that it is open is both a feature and a bug- e.g., everyone can
check the blockchain but incentives to do so are poor

15. Structural Transformation 2.0: What
can work?
Structural transformation 1.0 for Africa?
Per unit production cost in industry are
high…
Exploit comparative advantage in
agriculture and agriculture-based
industrialization
Maybe initially for domestic / regional
markets (for some crops/products)
Needed for sustained productivity gains
All silver bullets, and more…
1. Bundled Interventions
2. Farm Consolidation
3. Infrastructure Investments
4. Boosting Regional Trade

16. Structural Transformation 2.0
Bundled Interventions
Due to high TC, smallholders face
multiple constraints (e.g., liquidity and
information barriers, transport)
• But development projects (and
researchers!) often target one-constraint-
at-a-time…
• (“The silver bullet approach”)
• Overcome multiple constraints  increase
productivity
• Several positive examples (not just ultra-
poor graduation models)
• Subsidies?
(Smart) Farm Consolidation
Something between smallholders and megafarms
“pampering smallholders = perpetuating poverty” (?)
Inverse relationship between size and productivity?
One plausible model: “hub and spoke” system
• Large farm connected to processing that provides
bundlers of services to local smallholders and acts as
a crop buyer
• Market power? Regulate entry in processing?

17. Infrastructure Interventions
More and better rural roads, electricity,
cell towers lower transaction costs, and
increase market participation
Surprisingly robust evidence (even if road
placement is non-random…)
(Could also lead to more migration and
off-farm employment, since transport
costs are lowered for people and goods
with improved roads)
Regional Trade Blocs
“Kicking away the ladder“
Regional Trade blocks exist but are not
necessarily functioning well
• When not functioning, leads to higher
transaction costs
We think African governments should be
creative about working with neighboring
countries to boost agriculture and ag-
based industry
Structural Transformation 2.0

18. Final words
Agricultural Productivity Gains remain necessary but not sufficient to kickstart
Structural Transformation 2.0
• Well-functioning markets or value chains are needed too
• And for that to happen, lower transaction costs are necessary
• Governments have a role to play in this process…
• We are moderately optimistic that these processes can occur in the future, but process might
be slow
Development will have winners and losers…
• 50 million people left Europe for the Americas during its Industrial Revolution
• Perhaps countries in Africa should be given a similar chance to use a “release valve” for its
growing population through (temporary, regulated) out-migration?
• Benefits for sending and receiving countries?

19. Q&A
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