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Agricultural pricing and public procurement in Sub-Saharan Africa

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Agriculture plays a major role in the economies of most Sub-Saharan …

Agriculture plays a major role in the economies of most Sub-Saharan
African countries – creating employment, boosting GDP and supporting
the livelihoods of many of the region’s poorest households. Yet
the region has gone from being a net food exporter to a net food
importer over the last four decades. Ensuring an adequate supply
of food is a major challenge and governments have employed a range
of pricing and procurement measures in an effort to achieve this,
with varying degrees of success.

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  • 1. Briefing Paper Number 5 | 2012 GDN Agriculture Policy Series Agricultural pricing T. Ademola Oyejide Olumuyiwa Alaba and public procurement Abiola Abidemi in Sub-Saharan Africa Uttara Balakrishnan Agriculture plays a major role in the economies of most Sub-Saharan Harvesting barley in the African countries – creating employment, boosting GDP and supporting Delanta Plateau, Central Highlands, Ethiopia. the livelihoods of many of the region’s poorest households. Yet crispin hughes | panos pictures the region has gone from being a net food exporter to a net food importer over the last four decades. Ensuring an adequate supply of food is a major challenge and governments have employed a range of pricing and procurement measures in an effort to achieve this, with varying degrees of success. This briefing paper is one of Key messages the 10-part Global Development Network (GDN) Agriculture Government interventions aimed p Pricing and procurement policies p Policy Series for its project, at stabilizing food prices are more likely constitute only part of an integrated ‘Supporting Policy Research to Inform Agricultural Policy in to succeed in an environment where mix of government policies, which Sub-Saharan Africa and South private and public trading activities contribute to food security and Asia’. It is based on a longer co-exist. Public interventions should be economic stability. Governments synthesis paper, Agricultural pricing and public procurement constrained by pre-established rules and should focus on a range of policy in Sub-Saharan Africa, which they will be most successful if they are instruments and services, including draws on extensive published targeted towards vulnerable regions and providing information and research and unpublished research. The full paper can be downloaded at: households, rather than applied across and development. www.agripolicyoutreach.org the board. Governments in Sub-Saharan Africa p will be of value to policymakers, It The food pricing and procurement aiming to meet a country’s food experts and civil society working p to improve agriculture in environment should be consistent, security objectives need to take into Sub-Saharan Africa. transparent and predictable. account the deficiencies in production This project is supported by the and trade infrastructures when Bill & Melinda Gates Foundation. designing or implementing food pricing and procurement policies. Similarly the macroeconomic conditions of a particular economy need to be taken into consideration. Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa 1
  • 2. Overview Sub-Saharan Africa has gone from being a net food exporter to a net food A thorough understanding importer over the last four decades. As a result the rising cost of food imports of how markets work is has become an increasing concern. needed before interventions The global food crisis of 2007–08 further are designed. However, this heightened this concern, as the Food knowledge is lacking in many and Agricultural Organization (FAO) food price index rose by 61 per cent. Sub-Saharan African countries. The impact of the crisis was particularly severe in Sub-Saharan Africa because: As a net food importer, higher food p Nearly all Sub-Saharan African countries prices generate trade imbalances. regard food security as the main reason for government interventions in the pricing A large percentage of this region’s p and public procurement of staple food households are net buyers of staple crops. The agricultural sector plays a major food crops. role in the economy in these countries Food accounts for 50–70 per cent p in terms of GDP, employment and as of household budgets. a primary source of livelihoods for many of the region’s poorest households. Background to the research Government policies have focused on either making the price of staple foods affordable A systematic review addressed two primary concerns. The first for consumers, ensuring attractive prices was to explore whether and the extent to which various price and for producers or a combination of both. procurement policies implemented in Sub-Saharan African countries The availability of food at affordable prices achieved the goals set for them by the relevant governments. is a key political tool in all regions. The The second was to determine whether current conditions in various consequences of a high price and high food countries warrant further continuation, or adaptation, of existing cost scenario for poor consumers could be pricing and procurement policies. just as serious as that of a low price and The review focused on maize, rice and wheat because they low income scenario for poor producers, are important staple food products in Sub-Saharan Africa’s in terms of poverty. agricultural sector. The focus was on eight countries: two from Broad generalization is difficult across each of four sub-regions. diverse countries, but essentially: Central Africa – Cameroon, Gabon The eight countries examined in the review p East Africa – Ethiopia, Kenya were not able to achieve self-sufficiency. Southern Africa – Malawi, Zambia In particular Cameroon, Nigeria and Senegal, which have concentrated on West Africa – Nigeria, Senegal rice as a critical food security crop, have not been very successful. If maintaining moderate and stable food p prices is a measure of success, the pricing and procurement policies implemented by several countries may have worsened rather than improved chances. Neither complete market liberalization p nor complete state control has evolved an efficient system that fosters food security and guarantees the right market conditions to encourage an increase in production. A thorough understanding of how markets work is needed before interventions are designed. However, this knowledge is lacking in many Sub-Saharan African countries. 2 Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa
  • 3. Pricing policies Government interventions in pricing Maize production Production and public procurement are motivated and consumption (Period Average in ‘000MT) Consumption by food security considerations, defined as a guaranteed adequate Kenya Zambia food supply for the population with a reasonable degree of certainty in 3500 2500 3000 2000 the future. 2500 2000 1500 Concerns about food security have 1500 1000 constituted a major and often explicitly 1000 500 500 expressed motivation for government 0 0 intervention in African food markets. 2006–2011 2006–2011 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 A sharp rise in the price of staple foods is known to have a serious effect on consuming households. Therefore ensuring the availability of food at affordable prices can become an acute Malawi Ethiopia political issue. 3500 5000 3000 4000 In Sub-Saharan Africa maize, rice, wheat p 2500 and cassava constitute the four main 2000 3000 food staples. In Eastern and Southern 1500 2000 1000 Africa food security is determined 500 1000 by maize sufficiency; plus wheat and 0 0 2006–2011 2006–2011 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 teff in the case of Ethiopia. In Central and West Africa, diets are p more diverse but rice remains very important to achieving food security. Rice and wheat production Production and consumption Ensuring the availability (Period Average in ‘000MT) Consumption of food at affordable prices Cameroon Senegal can become an acute 400 1200 political issue. 350 1000 300 250 800 200 600 150 400 100 50 200 0 0 2006–2011 2006–2011 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 Nigeria Ethiopia: wheat 5000 4000 3500 4000 3000 3000 2500 2000 2000 1500 1000 1000 500 0 0 2006–2011 2006–2011 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 1981–1985 1986–1990 1991–1995 1996–2000 2001–2005 Source: United States Department of Agriculture (2012) Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa 3
  • 4. The challenges in more detail Stabilization policies: an overview Stabilization policy objectives vary depending on whether directed towards In Sub-Saharan African countries, staple foods or export crops. With governments typically try to minimize staple foods, national policies seek or eliminate risks associated with volatile to strike a balance between the interests markets through stabilization policies. of domestic producers and consumers. Agricultural markets in low-income With export crops, national stabilization countries tend to be volatile. Prices tend schemes are concerned with the to fluctuate significantly over short interests of producers. The government’s periods of time. When prices are high, agricultural price stabilization policy markets are particularly volatile. may have to incorporate minimum and maximum prices as a means This volatility increases risks for of protecting both poor consumers consumers and producers. Stabilization and producers. policy debates revolve around issues such as: Price support mechanisms Governments try to stabilize Whether and the extent to which p markets through a number of One policy instrument available to producers or consumers or both could stabilization policies, but often a government seeking to expand these policies are based on achieve higher welfare with or without its domestic food production is to create inadequate knowledge of the an agricultural price stabilization scheme. markets. In this picture farmers a price support mechanism. This means weigh their surplus goods in Whether it is produce price or producers’ p governments can set guaranteed produce Chiringa village market, Malawi. income that should be stabilized. prices that are higher than market levels. sven torfinn | panos pictures As farmers respond to price incentives, output tends to increase and surplus production is likely to be generated. This policy is criticized for several reasons: It leads to a rise in food prices so p supports domestic producers at the expense of domestic consumers. Poorer consumers spend a higher p proportion of their income on food, so the policy imposes a regressive tax. Only a small proportion of the benefits p go to farmers; many of the gains are made within the processing and distribution system. Reducing the volatility of food prices Several domestic market policy instruments can be used to reduce or eliminate the impact of food price volatility. Price control: governments prescribe Until the 1990s the Zambian government guaranteed farmers the maximum or minimum prices for a minimum price for their maize crops. This secured a market for specific food products. smallholder farmers and improved food security but it imposed a heavy fiscal burden on the government. Following liberalization Administered prices: governments the government abandoned attempts to set minimum prices. set administered prices that are indicative Competitively priced imported food pushed down prices for rather than being legally binding. consumers. As a result fewer farmers planted maize, threatening Neither form is likely to be effective without food self-sufficiency and in effect food security. The government has government control of the quantities of since resumed buying maize at 40–60 per cent above open market affected products. prices, which indirectly provides income support to maize farmers but has pushed up prices for consumers. 4 Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa
  • 5. Stockholding agricultural produce Other factors influence the viability and effectiveness of trade policy measures. Private economic agents stock produce A trade-based food price stabilization p The private sector when the price is low. When prices are scheme requires adequate financial high and are expected to fall, they release is more likely the stock. If governments decide that (especially foreign exchange) resources to play its role private stocks might not adequately that may not be available to low-income effectively when stabilize food prices, they create public and food-import dependent countries. public interventions stocks. Stocks fall into two categories: Trade policy also tends to be less effective p strategic stocks that are used to stabilize if imports are required to fill gaps in are consistent, prices and emergency reserves that are domestic food supply when world food transparent used to protect food security during prices are high. and predictable. periods of extreme food price increases. Trade measures are more likely to fail if p Stockholding tends to work better in they change frequently. Government trade dampening downward price movements. measures should therefore be constant. But this has its limitations, as when stocks Unreliable world market supplies limit are exhausted, they can no longer dampen p the extent to which trade policy can serve prices. Public stocks may also be susceptible as an important component of a food price to mismanagement and corruption. stabilization arrangement. Furthermore, their discretionary use may generate market uncertainties, which Successful interventions can increase the problem of price volatility. Given these shortcomings, it is important Government interventions to stabilize to make the rules of a stockholding scheme food prices are more likely to succeed in explicit before embarking on it as a price an environment where private and public stabilization measure. trading activities coexist. Public interventions constrained by pre-established rules Trade policy measures should be consistently and transparently implemented. A mixture of policy measures Trade policy measures can be used in is often required for effective food price price stabilization schemes. Under normal stabilization schemes. conditions, international trade provides general access to agricultural products In most practical cases, governments use regardless of where they are produced or a combination of several policy instruments: consumed. A range of factors influences A mix of trade and stocks to sustain p the viability and effectiveness of trade food consumption when production is policy measures. These measures affect volatile. Some countries use import duty both consumers and producers. reductions and export tax increases to National-level fluctuations in food stabilize domestic prices when world food prices can be moderated by adjusting prices are rising. the quantities of produce imported Stocks and trade are adjusted accordingly p or exported. But trade policy measures when both are used to control prices. affect both sides of the market. When Adjusting stocks works better in the short trade policy keeps domestic food prices term, and using trade is a better long-term low through export tax or restrictions strategy, especially when the domestic market to protect consumers, the producers are is fully integrated into the world market. affected. They do not have as much Building these schemes requires a incentive to produce. When import tax combination of public and private functions. or other forms of import restriction are The private sector is more likely to play its used to keep domestic food prices high role effectively when public interventions to boost producers’ incentives, consumers are consistent, transparent and predictable. are penalized through high food prices. This kind of environment is largely absent in many low-income countries. The government often has the flexibility to intervene in food markets. Even if private trade coexists alongside state pricing and procurement activities, private–public interactions suffer from a lack of coordination. The private sector then faces significant risks and such a system might fail to achieve its food price stabilization goal. Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa 5
  • 6. Procurement State-controlled food marketing systems In African countries over the past 60 years, two broad types of food marketing In some African countries, governments systems have evolved and in some believe that food security cannot be cases now coexist. These are private ensured in the context of private food and state-controlled (parastatal) food marketing systems. This is because marketing systems. of the alleged parasitic nature of traders and private companies. In African cereal The private system is further subdivided markets, governments use parastatal into two components: institutions to perform a range of roles Trader-based marketing system p in food marketing. Large-scale commercial marketing system p Three ways in which governments use Trader-based food marketing system: parastatal institutions: Small traders, often single-person 1 businesses, operate at different levels To directly intervene in food markets and of the marketing chain. They mainly source act as private agents. supplies of small quantities, and trade in 2 several food crops in limited geographical To work alongside private traders and large areas. In its immature state, this trader- commercial firms. based market system is typically fluid. As it matures, it becomes more robust 3 and has more stable structures. Supportive To completely replace private traders and institutional arrangements can help legally establish themselves as monopolies to address these problems and lead to or monopsonists. a more mature market. This might include When this happens, governments usually brokers or commissioned agents, traders’ regulate monopoly controls in export associations, producers’ organizations and import trade, restrict the movement and periodic markets. of food grains by private traders or limit Large-scale commercial firms: private storage. They might also regulate Large-scale commercial firms generally concessional credit, preferential access to engage in wholesaling, transportation, transport and subsidies on trading activities. milling and inter-seasonal storage. A small Countries in Central and West Africa number of large firms tend to dominate have generally relied on trader-based food the market. marketing systems. They are increasingly maturing and large-scale commercial food marketing systems are now evident. Senegal’s experience Many countries in East and Southern After the liberalization of domestic trade from 1990 the private sector Africa in the 1960s–80s were under took over the production, processing, transportation and marketing state-controlled food marketing systems. of rice. However, the complete commercialization of rice production In the 1990s, attempts were made and marketing was unsuccessful. to liberalize the parastatal marketing The government reintroduced state marketing and procurement policy systems and legalize private alternative interventions in the domestic market. Subsidies since 2007 substantially arrangements. The general result has reduced production costs and increased producers’ profit margins. been an uneasy coexistence between The direct benefit of subsidy to the private sector increased private parastatal and private systems. sector participation. Self-sufficiency in rice grew from 20 per cent in 2007 to 40 per cent in 2011. However, government participation in the rice market accounted for 16 per cent of the trade deficit in 2007, a heavy fiscal burden on the country. 6 Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa
  • 7. Recommendations Ensuring food security is the major Public–private cooperation driving force for government-led p pricing and procurement Agricultural pricing and procurement policies. Here a boy in Oromiya, systems require a structure where both Ethiopia, holds a plate of a maize-based staple food. the private sector and government mikkel ostergaard | panos pictures can work together within the same system rather than trying to displace each other. Transparency p Governments should ensure better coordination and transparent and consistent policies in the food system. Targeted policy instruments p Governments should focus on providing a range of policy instruments and services. These might include market infrastructure, dissemination of market information, and research and development towards strengthening private sector participation in the food marketing system. Macroeconomic policies p Pricing and procurement policies constitute only part of an integrated mix of policies, all of which impact upon the key issues identified above. Governments should also take into account deficiencies in production and trade infrastructures (and other macroeconomic policies) in the design, and packaging and implementation of food pricing and procurement systems aimed at meeting each country’s food security objectives.Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa 7
  • 8. Key references The full paper Agricultural pricing and public Paul Dorosh, S Dradri and procurement in Sub-Saharan Africa is available for S Haggblade (2010) download at www.agripolicyoutreach.org ‘ egional trade and food security: recent R It was written by: evidence from Zambia’ in Food Security Prof. T. Ademola Oyejide in Africa: Market and Trade Policy for Foundation for Economics Education, Nairobi Staple Foods in Eastern and Southern Africa, eds A Sarris and J Morrison, Dr. Olumuyiwa Alaba Cheltenham, UK and Northampton, Lead City University, Nigeria Mass., USA: Edward Elgar Abiola Abidemi Crowther University, Nigeria N M Mason and R J Myers (2011) ‘ he Effect of the Food Reserve Agency T Uttara Balakrishnan on Maize Market Prices in Zambia’, Yale University, USA Working Paper No 60, Food Security and reviewed by Research Project, Lusaka, Zambia Prof. Alexandros Sarris N Minot (2011) University of Athens, Greece ‘ ransmission of World Food Price Changes T P roject Steering Committee to Markets in Sub-Saharan Africa’, IFPRI Discussion Paper 01059, Markets, Senior Advisors Trade and Institutions Division, Prof. Per Pinstrup-Andersen International Food Policy Research Cornell University, USA Institute (IFPRI) Prof. T. S. Jayne S Rashid and A Negassa (2011) Michigan State University, USA ‘ olicies and Performance of Ethiopian P Prof. William A. Masters Cereal Markets’, ESSP II Working Paper Tufts University, USA No 21, International Food Policy Research Prof. Alexandros Sarris Institute (IFPRI) / Ethiopia Strategy University of Athens, Greece Support Program (ESSP) II Prof. David Zilberman A Sarris and J Morrison (eds) (2010) University of California, Berkeley, USA Food Security in Africa: Market and Trade Policy for Staple Foods in Eastern and Project Management Team Southern Africa, Cheltenham, UK and Principal Advisor Northampton, Mass., USA: Edward Elgar Prof. Douglas Gollin Williams College, USA Q Wodon and H Zaman (2010) ‘ olicies for the Effective Management P Project Director of Food Price Swings in Africa: Managing Dr. George Mavrotas Food Markets Through Stocks During Chief Economist, GDN the 2007–2008 Price Episode, Evidence Deputy Project Director and Recommendations’, Policy Brief 1, Tuhin Sen Trade and Markets Division, Economic Lead Strategist, GDN and Social Development Department, tsen@gdn.int Food and Agriculture Organization Project Consultant of the United Nations (FAO) Nupur Suri Policy Outreach Analyst Vinaina Suri you wish to reproduce or build upon this work, If please contact Global Development Network (GDN). © Global Development Network Designed and produced for GDN by Panos London, panos.org.uk All photographs © Panos Pictures, panos.co.uk All rights reserved. Further information more information on the ‘Supporting For Policy Research to Inform Agricultural Policy in Sub-Saharan Africa and South Asia’ project visit: www.agripolicyoutreach.org Supported by the Bill & Melinda Gates Foundation ew Delhi | Cairo | Washington DC N www.gdn.int 8 Briefing Paper Number 5 Agricultural pricing and public procurement in Sub-Saharan Africa