liberalization and agricultural marketing: recent causes and effects in third world economies

From merely being the dream of some economists a few years ago, the liberalization of national marketing systems has suddenly taken a tangible form on a worldwide scale. Why have governments, hitherto clinging to state participation and controls, especially in their agricultural and currency trading systems, changed their policies so swiftly? Are market structures, entrepreneurial and private-sector financing potentials capable of filling the gaps? Will the liberalization move lead to the envisaged competitive market and price mechanism with its resource- mobilizing effects, or will this move, lacking efficient implementation, get stuck somewhere in-between, inviting resurrection of interventionist policies? This article provides both evidence and analysis on these questions, in an introductory assessment of the dynamic process of radical policy changes faced by the food and agricultural marketing systems in most developing countries today.

The author is Senior Marketing Adviser, Agricultural Services Division, FAO, Via delle Termi di Caracalla, Rome 00100, Italy.

The views expressed here are those of the author and do not necessarily reflect those of the FAO. The observations reported reflect the author’s viewpoint at the begin- ning of 1987.

Liberalization and agricultural marketing

Recent causes and effects in Third World economies

E. Reuse

The conceptual basis and political will for a decisive change in monetary, pricing and marketing policies in developing countries took a generation to form. An integral part of this change was a reevaluation of traditional small-scale private sector activities. Early independence development policies favoured large-scale state farm and cooperatively organized production systems, and belittled the small farmer. The small independent operator in the post-harvest system - be it as trader. transporter, or processor-was considered unable to play anything but a disturbing, wasteful and exploitative role in the wishful model of ‘organized’ marketing systems. Both biases have now faded. The importance of independent operators in sustaining vitality in the production and post-production process in developing economies is today universally accepted. It took much longer, though, for the small-scale post-harvest entrepreneur’s image to change. While the small farmer was always looked at with, at least, sympathy, the post-harvest entrepreneur had to suffer decades of public distrust. defamation and discrimination.

The term ‘liberalization’ conveys a positive concept: freeing, or unchaining a vital force which had been prevented from playing its due role in the overall system. Using this term for the decontrol and divestment policies commonly supported in today’s Third World development concepts implies confidence in the existence of this vital force, that is, an actually or potentially capable private entrepreneurial sector responsive to the challenge posed by liberalization.

A major risk of the present liberalization drive, therefore, could arise from government’s frequent lack of knowledge of and working liaison with, the private sector at a time when major decisions about decontrol are being taken. If the private sector is undynamic or incapacitated by decades of neglect of the physical and institutional infrastructure, liberalization may result in a precarious vacuum inviting anticompetitive behaviour by the few who have the means to step in.

A major contribution this article attempts to make, therefore, is to

0306-9192/87/040299-l 9$3.00 0 1987 Butterworth & Co (Publishers) Ltd 299

clarify the need for governments to evaluate the private-sector capacity in commodity marketing sectors. secure private-sector cooperation in planning and executing liberalization measures, monitor private-sector performance after these measures have been implemented and continue to liaise over the removal of obstacles and provision of support for the system in transition.

Magnitude of the liberalization wave

While in the 1950s and 1960s thcrc were few governments who did not contemplate on further expansion of marketing interventions and controls and parastatal participation. today there are few which do not contemplate contraction of these activities.

In the macro-marketing sense, the terms ‘interventions’ and ‘control’ include the fixing of exchange rates, that is. the internal price for foreign currency and the control (restriction) of the currency trade. As the prices of most locally produced agricultural commodities are influenced by their border parity prices, exchange rates have a crucial and potentially distorting effect on internal prices, trade flows and resource allocation.

The three components of liberalization - the adjustment and/or floating of hitherto fixed exchange rates. the decontrol of internal price systems as well as external and internal trade flows, and the devestment of hitherto statal or parastatal marketing operations - are mostly and logically introduced simultaneously, but with varying degrees of perfection regarding timing. thoroughness and comprehensiveness of action.

In Africa, for decades the continent of public-sector marketing and exchange-ram intervention, until recently the majority of countries maintained inflexible exchange rates, export monopoly boards and parastatal participation in domestic trade. Now the wind of change blows practically everywhere. Hardly a country is left which has not seen or considered a drastic devaluation or realignment with convertible monetary systems, removal of price control and price subsidies, removal of trade flow restrictions, abolition of monopoly trading or processing rights, and desubsidization or cessation of parastatal marketing operations. To mention just a few of the more striking features:’

0 ‘Much of the information in the following list and later is extracted from a recent desk study, Liberalization of Agricultural Marketing (Case Studies), prepared for the World B%k by the Service Group Inc, . Arlinaton. VA, October 1986. ‘lFP?tI, ‘Administering Food Producer Prices in Africa: Lessons from lntemational Exp&ience (Ojetunji Aboyade), Interna- . tional Food Policv Research Institute, Washington, DC, december 1985. 3/hid.

The unweighted average devaluation rate in 24 African countries between mid-1984 and mid-1986 was 39%;’ Zambia, Uganda and Somalia devalued by between 270% and 370% during this period;3 Guinea (1985) and Mali (1981) returned to, and Equatorial Guinea (1985) entered, the CFA (Cooperations Financier-e en Afrique Central) monetary regime; Foreign exchange auctioning was introduced in Ghana, Nigeria, Somalia, Zaire and Zambia, and parallel currency markets acknow- ledged officially in other countries still using artificial exchange rates, eg Port Said in Egypt; Nigeria’s seven marketing boards (cocoa. cotton, groundnut, palm oil, rubber, grain, roots and tubers) ceased trading operations by mid-1986: Tanzania announced comprehensive trade liberalization and currency devaluation as part of its Economic Recovery Programme (1986);

300 FOOD POLICY November 1987

The government of Ghana has announced plans to privatize those functions of parastatal organizations which are non-viable under their existing management: Morocco announced privatization of most of its numerous parastat-

al organizations (December 1986); Senegal’s parastatal organizations for groundnut export and cereals

(ONCTAD, 1981) and for input supplies (SANAR, 1YXS) were liquidated; Zaire abolished parastatal trading in cotton. maize, sugar, livestock, edible oils, coffee, cocoa. rubber and other products; Kenya commenced deregulation of the meat and dairy sector and divestment of parastatal involvement in the sector; Parastatal rice marketing was abolished in Ivory Coast and Sierra Leone: The parastatal export monopolies for fruits and vegetables were abolished in Morocco and Ivory Coast; Grain markets were deregulated in Burkina Faso, Kenya. Madagas- car, Malawi, Senegal and Zimbabwe (wheat); Egypt (in 1986) deregulated all hitherto controlled food and export crops with the exception of cotton, rice and sugar; Abolishment or drastic reduction of price subsidies occurred in many countries, whether relating to input (notably fertilizer - eg Egypt, Ghana. Senegal), producer or consumer prices.

This overview is not exhaustive and may in fact cover less than half of the recent liberalization measures affecting African food and agricultural marketing systems. The following random examples of liberalization measures in other continents are even less exhaustive:’

0

0

4Much of the information in the following list and later is extracted from a recent l desk study produced for the World Bank, op cit. Ref 1.

FOOD POLICY November 1987

Iraq abolished parastatal fruit and vegetable marketing; Barbados liquidated domestic trading operations of its Agricultural Marketing Corporation; Jamaica started a liquidation programme for parastatal organizations involving sugar, coffee, banana, tobacco and rubber; The Guyana Marketing Board lost its trading functions and is strengthening its regulatory and advisory role; Portugal and Equador both announced a five-year phased liquidation of parastatal grain marketing; Export monopolies were abolished in many countries, for example: Turkey (wheat), Philippines (rice and coconut), Jamaica (Highland ‘Blue mountain’ coffee and bananas) and Belize (bananas); Government import monopolies also were abolished in an increasing number of countries, notably in fertilizer: eg Philippines, Sri Lanka and Turkey (which also liberalized wheat imports); Grain (notably rice and wheat) markets were fully or partly deregulated, cg in Chile, China, Ecuador. Mexico, Philippines, Sri Lanka and Turkey, often accompanied by full or partial liquidation of price subsidies; cg Turkey (wheat: output/input/consumer prices), Chile and Equador (fertilizer prices); Apart from its grain marketing system, China expanded its liberalization policy to the meat and livestock and fruit and vegetable marketing systems and established popular free-price ‘Agricultural Trading Markets’; Foreign exchange rate and currency-exchange liberalization accompanied or preceded most of the more comprehensive deregulation

301

measures (Chile, 1974; Sri Lanka. 1977: Turkey, 19X1; China, 1986).

Various economists, particularly those in international financing institutions, are promoting the liberalization drive. To quote two recent statements by senior World Bank economists:

0 Out of ‘20 IDA-eligible’ African ‘countries identified as having’ (needing) ‘major programmes of structural or sectoral reform’ ‘only two have been unable to formulate such programmes to date. Each of these reform programmes strikes at the heart of the protected, centrally administered. interventionist culture on which political power and patronage and the support of the forceful urban elites have been based’..i

0 ‘Today, removing the restrictions on market entry is probably the single most contentious point in the Bank’s discussions with governments on needed reforms in the agricultural sector.‘”

Clearly, liberalization is ‘in’; the wind of change is there. However, many governments have entered the process under internal (budgetary) or external (aid) pressure. Many still believe in administered commodity and currency systems, which they may be tempted to resurrect to full strength if liberalization fails to bear fruit.

Government motivations

The conceptual weaknesses of administered marketing and exchange rate systems had begun to be substantially recognized in developing countries, especially among young, academically trained cadres. and the practical shortcomings had become evident to the civil service and the educated population as a whole. However. government decisions for liberalization have mostly been taken under pressure of events rather than as elements in an evolutionary programme. The following are some of the situations motivating such decisions.

The encouragement of agriculture-based developing countries to continue subsidy programmes for their food systems, and simultaneously to support farm-gate and consumer prices, was one of the major errors in post-independence development policy. Even among de- vcloped countries, those based heavily on agriculture (such x Austra- lia) can hardly afford such programmes. The error has gradually been realized in all countries concerned and subsidy programmes almost everywhere are being phased out or cut off abruptly under budget constraints. Subsidization of procurement or distribution price regimes have been a major justification for public trading and price control. Desubsidization makes deregulation and divestment possible and eventually unavoidable. Since it makes fiscal control unnecessary, it abolishes an important competitive advantage of the hitherto franchised buying/distributing agencies which tend to collapse under the ensuing

‘Ernest Stern, ‘Adjustment efforts in developing countries’, Banks World, Vol 5,

unlimited competition.

No 12, December 1986. ‘Martin Staab, ‘Agricultural institutions and Incapacity to cope with successiw bumper crops privatization’, World Bank Agricultural Sec- tor Symposium on Sustainability Issues in

The weakness of parastatal commercial management is best demons-

Agricultural Development, Washington, trated by the chronic paralysis of such systems in the face of successive DC, January 1987. bumper crops. Slow in adjusting procurement and selling prices, the


Liberalization and agriculturnl rnarketirzg

parastatal organization meets the successive bumper crop with full stores and empty funds. The old stocks will still not move, as the saturated market prefers grain of the new crop. High stock and price depreciations, in addition to a full season’s uncovered operational and overhead costs, lead to financial and confidence crises which result in either suspension or liquidation of the intervention agency. This has happened, for example, to Ghana’s Grain Board (1974), Kenya’s Produce Marketing Board (1977), India’s Food Corporation (1977) and China’s Food Company with regard to livestock and meat (1980s). In each of these cases the events resulted in a lasting contraction of public trade intervention. In Ghana, the Grain Board was relieved of its trading commitment; in India, the Food Corporation’s interstate trading monopoly was dissolved and, in China, the Food Company’s monopoly trading role was reduced to that of an optional market outlet, and free-price Agricultural Trade Markets, open to anybody, were established.

7E. Reusse, ‘The role of cocoa in the development of socio-economic structures in Ghana’, IDEP Seminar on the Emerg- ence of Agrarian Capitalism South of the Sahara, Accra/Dakar, December 1973; and Third Cocoa Project Preparation Mis- sion Report, Ghana, FAOIWorld Bank Cooperaiive Programme, Rome, 1987. *Food and Agriculture Organization, Re- port to the Government of Grenada, Marketing Improvement Policies, FAO, TA 2833, Rome, 1970.

tncupacity to cope with inefficiency and corruption

Inefficiency is promoted in operations where the funds spent are owned by neither the direct nor the indirect operators (controllers) and rewards for performance are lacking. Where inefficiency is being allowed, respect is diminished for the funds and service commitment, and misuse, embezzlement and corruption have easy entrance. Payrolls with ‘ghost’ positions, overstaffing to accommodate protegees, upgrading of produce from friendly suppliers, underrecording of sales results, misuse of transport equipment: these are only a few of the more typical syndromes uncovered by investigations into the performance of public or parastatal commercial operations.

In spite of successive attempts at reorganization, the syndromes described above tend to grow in the medium to long run. The share of the price paid by the domestic consumer or the foreign importer which is absorbed by the cost structure of the intervention agency keeps growing at either farmers’, consumers’ or the government’s expense. The Ghana Cocoa Board (198.5/86 budget) shared the national cocoa income, net of government tax, with producers at the ratio Il:9, while this ratio averaged 2:8 in the competitive cocoa marketing system prior to the establishment of the Board.7 A comparison between the banana marketing systems in two Caribbean island states (in 1968) showed the banana farmer’s share in the fob price to be 68% in Jamaica, where exports were in the hands of a Banana Marketing Board, while without parastatal involvement in Grenada, his share was 85’S,’

When increasing trade margins continuously reduce farm prices,

farmers’ supplies decline and the rising weight of overhead cost per trade unit accentuates the imbalance, eventually preparing the ground for a government decision to invite the private sector back into the system.

Inefficiency has been among the major reasons stated in connection with government decisions to close or phase out a public or parastatal commercial operation.

Drastic decline of export industries

In addition to inefficient commercial management of parastatal export monopolies and excessive export taxation, overvalued exchange rates can destroy or gravely debilitate an export industry, as demonstrated,


for example, in Guinea (coffee), Nigeria (cocoa, oil crops), Ghana (cocoa), Equatorial Guinea (cocoa/coffee) and Zaire (coffee/oil crops). With generally far too much delay and often overly compromising. governments rectify their exchange rates in order to revive the domestic price climate for the export crop(s). The drastic devaluations involved make import restrictions superfluous and eliminate the competitive advantage of parastatal enterprise to import essential production inputs and operational requirements at artificially low prices. Private sector competition, therefore, if permitted to enter, may offer farmers a better deal and become a serious threat to the parastatal organization’s market position. As governments, after years of severe export deterioration and domestic inflation, are facing budget constraints demanding drastic cuts in the subsidization of parastatal organizations, the decision to expose them to private competition, and abolish them if they fail to cover costs in the process, lies close at hand.

Abolition of parastatal export monopolies is one of the more frequent liberalization measures reported during 1985/86, for example in Morocco, Turkey, Jamaica, Senegal, Nigeria and the Philippines.

Insurmountable budgetary and balance-of-paymerzt problems

A vicious cycle characterizes the interrelation of direct government involvement in economic activity and the process that leads to the type of economic crisis many developing countries are facing today:

0 low productivity of government activities l rapidly growing subsidy burdens 0 budget deficits 0 inflation 0 exchange-rate distortion 0 economic stagnation/regression 0 budgetary and balance-of-payment crisis.

And, as government expansion into non-classical commitments lies at the root of this process, its final reversal tends to lead to divestment of these commitments:

l l a l l

l l

l l

a

debt crisis drastic devaluation budget contraction desubsidization drastic variations in urban food prices (hitherto depressed by imports at artificial exchange rates) collapse of price control pressure for long overdue salary and wage increases in public

employment financial collapse of parastatal organizations slump of farm-gate prices (outputs) or collapse of input supplies where parastatal organizations acted as monopoly buyer or seller invitation for reentry of the private sector.

Empirical and ideological factors

These are the genuine motivations for liberalization. However, in most cases their weight in actual government decisions is small compared to the other motivations discussed above.

Empirical insight and breakdown of ideological dogma are usually


interrelated processes, as demonstrated by the recent developments in party doctrine vis-ci-vis private-sector participation and use of market mechanisms in China and the USSR. Similar developments take place in

any developing country where ideological or otherwise discriminatory principles had prompted interventionism. Though the group of persons involved in this process is relatively small in developing countries, their influence is important and constitutes a favourable background to the needed policy changes and reforms once these become inevitable.

Externul persuasion

In most cases of liberalization, external persuasion has been involved, be it as a strictly advisory input in the form of project aid (eg the USAID-supported ‘Bolsa’ grain exchange project in Ecuador), or as a precondition for further external capital inflow and monetary support (World Bank/IMF, bilateral/multilateral finance consortiums and donor groups). In some countries, liberalization has been facilitated by ‘structural adjustment’ loans, a favoured recent element in World Bank lending programmes. Such loans may aim at the comprehensive support of compelling structural reforms emerging from devaluation/ desubsidization/divestment (eg Kenya, Turkey, Senegal, Tanzania), or at the successful implementation of liberalization policy in a selected economic activity (eg the World Bank’s trade policy investment loan to Morocco and export promotion loan to Jamaica - both of which included cessation of parastatal export monopolies).

As with any aided development process, substainability is the critical question. External persuasion carries the risk of a diminished acceptance of responsibility by the recipient government.

Implementation

Various alternatives are being followed by governments in the implementation of liberalization. Often implementation is far short of the promise. Sometimes it is obstructed by unresolved issues in vertically or horizontally related sectors. Frequently the decision is not sufficiently publicized and implementation at lower levels of authority does not follow. Overall, there is much to be desired with regard to implementation of recent liberalization measures in developing countries, largely because of the weakened financial and administrative government capacities at the time and the lack of lead time given for planning a coordinated adjustment programme for public and private participants.

A few essential criteria regarding the mode of implementation are discussed below.

Scope

The general trend is towards comprehensive liberalization of exchange rates, domestic and export marketing systems and abolition of subsidies. In nearly all developing countries, including the oil exporters, the phasing out of subsidy programmes and the ban on any new subsidies has become a declared policy principle. Parastatal organizations have been warned to work without deficit or have their functions taken over by the private sector. Controlled price regimes have been questioned at high government levels and their abolition, sector by sector, envisaged. Parastatal organizations, individually or wholesale, have been stripped

FOOD POLICY November 1987 305

of franchise trading rights, denied overdraft guarantees, limited to non-commercial activities, or liquidated.

The precise legal situation, however, and the degree of law enforcement and implementation of divcstmentldercgulationidecontrol decrees, is normally hard to ascertain. Neither public nor private participants in the system are able to define the situation precisely. Often the approach was meant to be comprehensive. In implementation, however, resistance from various departments and institutions, the lack of a well thought-through implementation programme, and unexpected obstacles have resulted in a piecemeal process with unnecessarily high costs.

A selective approach might be safer, in which only one or two commodities at a time are subjected to deregulation and perhaps only certain functions of existing parastatal organizations (such as processing, transport, rural assembly or wholesale/retail distribution) arc initially considered for privatization. An advantage of the selective approach is the opportunity to avoid mistakes experienced in the first liberalization wave, when programming successive ones. This approach has also been followed in exchange-rate liberalization when, for example, exporters were given the right to utilize directly foreign exchange inflows from certain commodity exports for the importation of raw material, production inputs, machines and containers required by the particular export industries. That is. they did not have to make the generally obligatory conversion into overvalued domestic currency or depend on the uncertain granting of an import licence (eg Egypt, Tanzania).

Selective approaches have been followed, for example, by China, Egypt and India. while a rather comprehensive approach was chosen, for example, in Chile, Nigeria. Somalia and Zaire. A classical demonstration of successful comprehensive liberalization was the postwar shattered and totally regulated West Germany (in 194X), when deregulation combined with drastic currency reform revitalized economic activity and growth, literally overnight.

Timing

Two questions are relevant regarding timing:

0 Which conjunctural economic and crop-specific situation is conducive and which is adverse to successful implementation of liberalization measures?

0 What is the appropriate speed of implementation‘?

It appears that most countries chose a favourable conjunctural period. Their desubsidization, deregulation and exchange-rate adjustment measures fell into the very recent period (1%5-X7), characterized by declining dollar and interest rates, falling petroleum prices and low international price levels for staple foods, especially grains and livestock products, together with good domestic crop results. The combination of these factors kept the immediate effect on urban consumer prices moderate. While there were price increases in the imported food sector, greater variety, more competitive services an d, most importantly, maintained or even reduced domestic staple food price levels made the changes politically acceptable (such as in Ghana, 1984). Many of these countries, furthermore, had just passed through a period of natural, financial and/or political calamities which had prepared for popular


Liherulizution and agriculturd tnarkdtzg

acceptance of even drastic measures if promising change, especially when this would involve reduced government interference and more direct linkage with the world economy.

With regard to the speed of implementation, this has been and is at great variance. The resilience of legal systems, institutions, bureaucracy and vested interests have slowed or crippled implementation in many cases. Instead of running into unprogrammed delays and compromises potentially endangering the outcome of the liberalization exercise, some governments have introduced a phased implementation programme. Two examples of very clearly designed programmes of this kind, both supported by external assistance, are Ecuador (a five-year phased liquidation of parastatal grain marketing, with USAID assistance) and Portugal (the same, assisted by the EEC). Precise schedules and uncompromising control over implementation (that is, meeting of target reduction levels phase-by-phase) are essential requirements.

Commitment

Government commitment to the new policy direction must be clear and credible. Market participants, including the multitude of small farmers, have a sharpened sense for genuine as compared to slogan promises. Delays in the hoped-for response by the private-sector participants, who may not hasten to adapt their behaviour to the newly established opportunities due to distrust in the stability of the new government policy, may cause critical market developments endangering the liberalization programme. Fertilizer dealers and farmers may not buy the desubsidized fertilizer at greatly increased prices, if they expect the government to yield to complaints and reintroduce subsidies; the same will apply to millers, and bread shortage will be the result. Grain traders may buy only hand-to-mouth, as long as the announced decontrol of price regimes and discontinuation of subsidized parastatal distribution operations have not become tangible fact. Cocoa and coffee farmers may not invest labour and money in rehabilitation of neglected plantations, if they doubt government’s long-term commitment to the alignment of crop prices with world market price levels undistorted by artificial exchange rates.

Monitoring and adjustment support

Close monitoring of the implementation and adjustment process is crucial. Delays, obstacles, sabotage and planning errors can thus be detected and remedial measures applied expediently. Need for adjustment support can be identified in order to secure the fullest participation by all parties.

Problems in monitoring early results

Evaluation of early results by statistically based economic indicators has proved hardly possible in most countries. Statistics become available with considerable time lag, are often based on unreliable data and show meaningful trends only over periods of two to three seasons at least. Activities such as a black-market and smuggler trade, economically significant in most countries before market and exchange rate liberalization, have normally not been statistically covered. Weather and other factors affecting yields and planted area can still blunt all other effects, as the recent post-drought bumper harvests in many African countries


and their clash with accumulated relief supplies have demonstrated. In addition, adjustment proceeds on the basis of a multitude of persona1 decisions and their implementation, a process harbouring considerable time lags and deviations from what was rationally expected.

It is therefore not surprising that a number of studies on the effect of recent liberalization measures have yielded very little conclusive evidence. An indispensable adjunct to desk analysis is direct contact with the market place, sounding out the principal actors (traders from assembly to urban retail level, farmers, processors, transporters, consumers) as to what effect the liberalization measures had on their market behaviour and investment/production/consumption pattern.

Budgetary and trade balance effect

External trade is expected to grow after liberalization. Market- conforming exchange rates, transmitted to the farm-gate via dcmon- opolized domestic trade channels, will boost traditional export crops. At the same time, in spite of the drastic rise in cif prices expressed in local currency, overall imports will not fall, because of the replacement of severely restrictive controls by open general licence. Tight budgetary and credit policies will help to control a potential import drive. Good food crop yields combined with the fact that higher income and better products to buy will be an incentive for farmers to produce and market more, may reduce the need for staple food imports. Export crops requiring medium- to long-term investment for adjustment may not show large immediate output increase. However, the previous disincen- tive may have been so detrimental as to discourage maintenance of plantations or groves and even harvesting and proper post-harvest handling operations. If so, a rather surprising immediate boost in quantity and quality of export output may be observed. More impressive still would be the export recovery, in official trade-balance terms, if previous farm price distortions had led to a large smuggling trade which then reverted into regular commercial channels.

The coincidence of conducive situations and processes described above may be the model, in particular with regard to the trade-balance effects of a comprehensive liberalization policy. Close monitoring of the actual implementation and adjustment process, however, will reveal imbalances requiring the removal of obstacles. Harvests may fall short of expectations, requiring cautiously tailored supplementary external supplies under special external grant or credit terms but priced equivalent to commercial imports so as not to endanger the newly established incentive climate for domestic production. Slow recovery of export crops, in a climate of continued high imports. may necessitate market-conforming devices to moderate the import drive and facilitate exports. This may be achieved via temporary import surcharges on less essential goods, tightening of credit terms, and raising of interest rates and bank charges for import finance - while applying the opposite tax and credit policy to the export sector. Severe road deterioration may have put such strain on export harvesting and crop evacuation operations that a crash rehabilitation and expansion programme, including strong community self-help components, may yield almost immediate booster effects on export supplies.

Emphasis on sustainability being a major component in the new development policy, balanced fiscal budgets are an essential target in order to solidify economic revival. Monitoring of the effects of the


liberalization process in this regard is a priority. There are potential budget gains (credits) as well as losses (debits) to be expected immediately. Debits will result because of: elimination of profits hitherto derived from state import trade at artificial exchange rates; higher local currency cost of imported material and equipment for government use as well as of external public debt servicing; and increases in government payroll costs because of salary and wage rises under pressure from the rising consumer price index, especially in urban areas hitherto profiting from low-cost food imports. Credits will arise from reduction of subsidies and from duty and tax revenue accruing from increased external trade activity and tax-base unit value in local

currency. Should trends towards serious imbalance be detected following

liberalization, remedial measures may include, with immediate effect: increased import taxation; increase in or introduction of export duty, as long as this will not jeopardize the liberalization effect on farm-gate price; and cuts in the daily-paid public labour force. In the medium-term measures may include phasing-out of subsidies; reduction in permanent payroll numbers in overstaffed offices, facilitated by early retirement and reestablishment incentives; and reduction or liquidation of government offices/institutions/corporations whose functions have become largely redundant as a result of the transformation.

Institutional resilience

Liberalization does not unfortunately mean automatic liquidation of redundant cost structures. While liquidation of a private-sector activity may proceed rapidly to escape mounting financial losses, governmental institutions may live on for years after their commercial or essential administrative functions have ceased. Not only does their continuing overhead cost fall fully on government budgets, but often even operational staff and equipment are maintained at high cost due to bureaucratic delays. Hesitation to lay off staff with loyal service records, vested interests in maintaining board and management positions and idle transport and storage capacities, desire to delay store clearance which would reveal unaccounted-for stock disappearances: these are some possible motivations.

Quite often, after an organization has been officially abolished, it is to be seen in action again under a new name, with its mandate and management changed somewhat, but in practice continuing its old activities and adding to the old problems. Politically motivated staff changes in those cases weaken the experience base and sense of responsibility for what has been achieved over the years. New mistakes tend to be debited to the past, accounts conveniently get lost in the transformation, and performance rarely improves. Liquidation may finally come with a change of government.

Donor agencies sometimes unwittingly help prolong the life of essentially defunct or unviable structures.

Divestment monitoring, with a sharp sense of the costs involved, can substantially accelerate the needed release of resources.


Private-sector response

Supporters of government control over, and participation in, economic activity tend to exaggerate the malice and underestimate the competi-

309

‘Marketing and Storage Project Identifica- tion Report, Egypt (Marketing Annex), FAONVorld Bank Cooperative Program- me, Rome, 1986. “Observations on FAO/BDA Investment Project Identification Mission to Sierra Leone, Rome, 1974; and FAO/Mano River Union, Investment Project identification Mission to Sierra Leone/Liberia/Guinea, 1982. “E. Reusse, ‘Somalia’s nomadic livestock economy - its response to profitable export opportunity’, World Animal Review, No 43, 1982. “E. Reusse, ‘Economic and marketing aspects of post-harvest systems in small- farmer economies’, FAO Monthly Bulletin of Agricultural Economics and Statistics, Vol 25, Nos 9 and IO, September/October 1976. 13World Bank, Draft Project Identification Report Annex: Marketing infrastructure Im- provement in Communal Land Areas of Zimbabwe, World Bank, East Africa Pro- jects Department, Washington, DC, 1984. 14Rowena M. Lawson and Eric Kwei, African Entrepreneurship and Economic Growth: A Case Study of the Fishing Industry of Ghana, Ghana University Press, Legon, 1974, pp l-262 (now only available from senior author).


tive vigour and adaptability of the private sector. Especially overlooked is the combined importance of the thousands of small-scale, owner- operator trading and processing activities. which in most countries move and transform the largest share of farm produce, including livestock and its products, for domestic markets.

Also grossly underestimated is the financing potential within the traditional, informal trade systems liaising the small farmer or pastoral sector with domestic consumer and export markets. Finance, here, is passed both down and up the marketing channel between trade partners with a longstanding satisfactory relationship. The concentration of financing strength may lie with the producer as well as with the rural or urban wholesaler. An influential market position may be expressed in a powerful creditor role. The wholesale agents in Egypt’s city markets, for example, finance the seasonal inputs of their horticultural producer clients.” It may also be shown through chronic indebtedness, such as that of the wholesale butchers in Freetown whose long-distance supplying agents share the extended waiting periods for final settlement with assembly traders and producers in the interior.“’

It has been estimated that Somalian sheep exports, during peak export years, have been financed to the tune of $40 million, ie twice the involvement of institutional export credit. via up to six months’ supplier’s credit extended by the nomadic pastoralists within a trading system of informal trust relationships among tribesmen. The system reaches as far as wholesale transactions through resident Somali agents in foreign markets.” Quite the o pposite is observed in the flourishing fishing industry on the coast of West Africa, where the fishermen are financed not only for operational but also for investment needs by their wealthy wholesale partners. Right from the moment of landing, the partners take over the risk of marketing and distribution to nearby fresh-fish markets or process for smoked-fish markets up to 1000 km distant.

By managing well-stocked on-farm granaries, farmers in semi-arid grain-producing areas finance the gradual release of their surplus into the marketing system, thereby moderating seasonal price rises, market congestion and shortages. Their reserves constitute part of the effective national buffer stock against drastic market effects in drought years.”

Marketing and financing systems which developed naturally have been weakened where public agencies, unknowingly or deliberately, interrupted the linkages. A livestock marketing agency, introducing

cash purchases, for example, may leave pastoralists vulnerable to shortage of flock regeneration funds in post-drought periods. A grain authority paying a year-round fixed-incentive price may tempt farmers to release marketable surplus at once and even to over-sell if the authority simultaneously guarantees stable grain distribution prices in rural markets.” While among traders it is common practice to respect existing financing ties by not buying from indebted producers, the same is not normally practised by intervention agencies unless the creditor is a formal-sector institution. Thus a newly established fish marketing organization offering cash payment may detract fishermen from their traditional relationships and make them default on their supply commitments towards these. A subsidized state fishing corporation under-selling in the wholesale market may create artificial middlemen positions and corrupt sales practices, with corporation staff participating in the profits reaped by these privileged clients.”

Privufe-sector resilience. In most situations of direct government intervention, a viable private trading sector has remained in operation. It has taken several forms: as buying or distribution agents for the intervention agency; as trade channels for quality grades and preferred varieties to serve market segments not covered by the intervention agency; as standby speculators stepping in whenever an agency ran out of purchasing funds or storage space; or as organized smuggler systems where antiquated official crop procurement prices eroded by inflation provoked the establishment of direct uncontrolled links with more remunerative cross-border markets. Classical examples of smuggler systems operating during the late 1970s and early 1980s were Ghana/ Ivory Coast (cocoa), Gambia/Senegal (groundnut) Guinea/Sierra Leone/Liberia” and Burma/Thailand (cattle).‘”

Few, if any intervention agencies dealing with local produce for domestic markets have occupied a really dominant share in the market. While some have maintained an up to 50% presence in large urban areas, in small towns and rural settlements the marketing system has tended to remain almost entirely private. The share of total marketed production traded through the intervention agency, therefore, has rarely exceeded 20%. Even the probably largest and most renowned agency of this kind, the Indian Food Corporation, does not normally handle more than 15% of India’s grain crops, that is, 20-25% of marketed production.

Similar observations apply to government price-control regimes which, in many cases, due to lack of flexibility and incapacity of governments to guarantee adequate supplies, have become obsolete official facades for camouflaged inflation.

Old trading houses. Two intervention areas where the private sector may sometimes have been replaced completely are the import and export trade, if smuggling is ignored. Where most of the external trade flows through one or two ports, it has been relatively easy for governments to etablish and protect import or export monopoly rights for their intervention agencies. However, although private activity in those protected domains may have been actually zero for years or decades, in most of the countries old established export/import houses from pre-invention times still maintain a legal and operational frame with a latent ability to return to action. Their proprietary links with foreign merchant houses permit most of them to draw on external resources for the financing of import or export transactions, a reason for governments under severe budget and balance-of-payments constraint to welcome their reentry on the market.”

These houses generally still maintain storage/distribution depots in regional and district administrative centres. Their link with producers and consumers is either direct, for those who come to the depots, or (dominantly) through the local trade system, consisting of wholesale distributors, produce assembly buyers, market traders and store-

“See Ref 8. ‘6FAO/UNDP, Livestock and Livestock

keepers. The generally observed accounting discipline of these old firms

Products Marketing in Burma, FAO/UNDP makes it possible to inject farmer or consumer price subsidies, on ci’or

Project Report, Rangoon/Rome, Decem- fob invoice basis, where the government still wishes to maintain such ber 1979. 17World Bank, Agricultural Sector Review

subsidies. Anticompetitive behaviour is not likely to develop, since

(Ghana), Annex: Marketing and input normally at least a handful of such trading houses are competing for the

Supply, World Bank, Washington, DC, market, having been rivals for decades and each with a different profile 1984. based on enterprise history and overseas affiliation. In Ghana, for


instance, such proprietory linkages of trading houses historically involved in food and agricultural commodity trade cover at least six

European countries. Nevertheless, liberalization for the benefit of a limited number of

firms would be self-defeating. An increasing number of enterprises which are owned by nationals should be admitted to the import/export trade, and credit as well as training assistance should be extended to build up the capacity of small- to medium-size enterprises to enter the

sector.

Adjustmen~proh1em.s. From the above, it may be concluded that in both the domestic and the external trade system private-sector response to liberalization measures will likely be positive and effective. However, close monitoring is crucial in order to detect obstacles and bottlenecks which may hamper this essential response. Past and/or continued price interventions via price control and subsidies (the latter either extended from budgetary sources or effected through artificial exchange rates) can prove to be a major cause of adjustment problems.

A conspicuous example is the itzput s~~ppl~~ .sector. High fertilizer and other input subsidies, in addition to overvalued exchange rates, have created an artificial input demand which collapses with a return to market currency rates and budget-dictated subsidy reductions upon liberalization. Farmers in many countries had to face huge rises of fertilizer prices while the market prices for their crops hardly changed, with the exception of those grown for export. Invited to take over fertilizer importation and/or distribution from government at this junction, the private sector will rightly hesitate, especially when government insists on narrow trade margins which do not include adequate risk allowances. In many countries where input distribution had been handled or assisted by government departments. important cost elements had never been included in official price calculations, which makes it the more difficult to convince government of the need for adequate trade margins in commercial channels. It is therefore not surprising to see the input trade in the foreground of unresolved issues in the liberalization/privatization process.

Less critical is the question of private-sector response in the staple food import sector, another area conspicuously affected by exchange- rate liberalization and/or dcsubsidization measures. Unlike imports of production inputs, due to a comparatively lower demand elasticity than that faced by the input supply sector, this sector will not risk a complete collapse. However, there are economic and political imponderablcs involved which call for a cautious, low-involvement reentry of private participation. Those imponderables are:

:

consumer reaction to drastic price increase; capacity of the domestic food crop sector to supply produce which, at the newly established favourable price relationship with imported produce, may become a widely accepted substitute for the latter; and

0 government’s capacity to endure a period of consumer agitation over the cost-of-living rises involved, without reverting to direct supply and price interventions which would potentially inflict high losses on the importer.

There is, furthermore, the uncertain schedule of food aid arrivals and


government’s uncertain pricing and distribution policies in their release. For the first post-liberalization season, importers may therefore opt for short-term supply arrangements with importers in neighbouring coun-

tries where normalized markets and stock levels prevail instead of entering overseas supply contracts requiring substantial lead time. financing and volume commitments.

Lacking traditions of regular consultation with private-sector repre- sentatives, many governments are only guessing what the market supplies and price developments will be after liberalization. Warnings were being voiced, for example in Sierra Leone (late 1986) after the Produce Marketing Board stopped importing rice, that no private import contracts appeared to have been entered so far and stocks held by the Board were covering only a fraction of normal prc-liberalization import needs. Ix It seems that no access had been established to indicators of importers’ plans and commitments, and the fear of severe shortage of this dominant staple food commodity in urban markets was growing. What probably was left unconsidered by the observers, but not by the importers, was the propensity of the rice-growing and the rural population in genera1 to substitute other local staples for rice in their consumption, because of its sudden rise in market value, making larger supplies available to urban markets; and further, the redirection of former clandestine rice trade flows into neighbouring hard-currency economies towards the newly remunerative domestic markets. Until these adaptation processes show their quantitative impact in the market and the demand-reducing effect of the rice price increase (to import parity) can be assessed, importers may opt to keep the market balanced by drawing weekly supplementary requirements from ncighbouring territories before entering overseas import commitments.“’

The fastest response can be expected in the exporf sector. Here, only incentives and no disincentives arise from the liberalization measures. Foreign buyers pay world market prices as before, the government gains higher export revenue in local currency, and farmers enjoy the very substantial increase in farm-gate prices resulting from exchange-rate correction and return to competitive demand structure. Only a few months after the abolition of export marketing boards in Nigeria (19X6), farm prices of the crops involved were reported to have risen by around lOO%, without major exchange-rate liberalization measures. Though speculation on near-future devaluation measures was probably involved, excessive trade margins absorbed in the former system and the competitive verve of private-sector response arc clearly indicated.

However, notwithstanding private-sector response, export recovery can be strangled by a failure of the national credit system to expand with the greatly increased financing needs, considering the quantitative output response multiplied by the exchange rate induced fob value increase (in local currency terms). This dilemma was painfully experienced in the coffee export industry of continental Equatorial Guinea after the country abandoned its eroded national currency regime and

“P, Bowbrick, Scenario for a Famine: The entered the CFA monetary system with too tight an initial credit line.

Implications of World Bank Policy on Rice Externally affiliated trading houses existed, who might have been able

Prices, unpublished discussion paper, to employ external financing inputs provided the political climate could Freetown, 1986. ‘gEventually these processes were cros-

support third-party confidence in the continuation of the new liberal

sed by the government’s decision to re- trade and monetary policy, and provided nothing but financial

introduce price control and instruct the limitations impeded profitable participation in export activities. Neither Board to import. of these conditions, however, prevailed at the time. The announcement


“FAO/UNDP, Coffee and Cocoa Market- ing in Equatorial Guinea (Region Con- tinental), FAO/UNDP Project Report, Bata/ Rome, January 1986. *‘World Bank, op tit, Ref 1. “/bid. ?bid. 241bid.

of official farm-gate prices harbouring inadequate margins for trade and processing functions and quality-raising incentives accentu- ated the problem, and crop procurement operations came to a halt in mid-season.2”

Administrutive and infrastructure bottlerlecks. Lack of circumspect and coordinative accompanying measures which would facilitate the desired private-sector response to major liberalization acts is a common constraint:

0

0

0

0

When, for example, the parastatal wheat export monopoly was abolished in Turkey, private export initiative remained handicap- ped, since the parastatal, as owner of the only bulk handling port facility, had not been instructed to hire out the facility for the handling of private exports.” The liberalization of highland (‘Blue Mountain’) coffee export in Jamaica (1986) was of limited relevance to the generally small number of potential private exporters, since a regulation requiring minimum export sales of 50 tons effectively barred access for all but very few of them.2’ Trade in livestock and livestock products has been liberalized in China and the attractiveness of the free-price Agricultural Trade Markets has become well appreciated by producers. However, in 1986, the commercial ones among them still supplied the government-owned Food Company in order to receive in return subsidized feedgrain and other controlled commodities and services through the Company.‘3 Slow private-sector response after rice market deregulation in Mali (1985) has been traced back to information gaps. Neither producers and consumers, nor wholesalers and millers were sufficiently aware of the basic government decisions involved and their implementation to make or demand an outright change of the controlled marketing pattern.24

As already demonstrated in the example of Turkey above, essential servicing facilities owned or operated by the formerly dominant trading parastatal organization, such as warehouses, transport fleets. quality control and bagging stations, should be made accessible through sale, lease or hire to private operators in order to avoid critical shortage of these facilities with the sudden expansion of private-sector activity in the marketing system.

The same holds for credit facilities granted to parastatal crop marketing organizations. If governments used to guarantee large seasonal bank overdraft allowances for financing their seasonal purchasing commitments, some support in this direction may have to be considered for private produce dealers.

Finally, potential infrastructure bottlenecks have to be kept under surveillance. Exchange-rate adjustments favour increased domestic crop and livestock production for export and local markets. Especially for export crops, the effect is even felt ahead of time (viz the Nigerian example). Infrastructure constraints, especially with regard to rural roads, are being felt more painfully when yield and acreage increases (including expansion of cultivation into interior areas not already reached by road) put rising demands on the transport system. With regard to exports, this may include the need for rehabilitation (or


adaptation to private sector requirements) of commodity-relevant port facilities and/or quality inspection services. The latter, for instance, was the immediate concern of British chocolate industry buyers of Nigerian cocoa, after its export was privatized.

=FAO/UNDP, op tit, Ref 19. 26World Bank, op tit, Ref 17. 27Polly Hill, Studies in Rural Capitalism in Wesf Africa, United Press, Cambridge, 1972.


Measures to enhance competition. While there may be general agrec- ment that many economic activities are more efficiently performed by private than by public-sector operators. the tendency of either category to exploit opportunities for monopolistic or oligopolistic market behaviour is a latent risk, especially after liberalization when private marketing systems are in the process of rehabilitation. It is therefore particularly important during this period to monitor market devclop- ments with a view to:

facilitating market entry for medium- and small-scale operators; removing physical and institutional obstacles to the establishment of a fully competitive system; extending producer and consumer education on the seasonality of price developments; establishing a continuous up-to-date, unbiased information flow to government in order to avoid interventions based on wrong or exaggerated reports; and calling for trade sector consultation before any intervention decision is taken.

Improvement in market transparency is probably the most important single support which can be given to the establishment and protection of a competitive marketing system. FAO recommendations for Equatorial Guinea’s coffee export development policy (1986) therefore included: country-wide dissemination of weekly coffee market news during the eight-month marketing season, including price notations at the London Terminal Market as well as of the latest ex-Bata f~h contracts and in

assembly markets in the interior; quality premiums and discounts observed in current transactions; stock positions and cumulative export development in comparison with the previous year’s performance.” World Bank recommendations for Ghana’s agricultural market information unit (1985) included a suggestion to monitor and disseminate on-farm, in-trade and public-channel (including aid) grain stock developments on a regular basis.‘”

Market news relays may include discussion of the reasons for low farm-gate prices after harvest and of tentative projections of market developments in the months ahead. This will facilitate farmers’ decisions on the optimal timing for release of surplus stock into the markets. While many of them cannot hold back long for liquidity reasons, others are able to buy from these and add to their stocks, thereby relieving the present market glut.” Further release can be expected from a multitude of non-farming rural buyers (village shopkeepers, teachers, money lenders, etc) who exploit the opportunity for speculative holding of storable produce, within the limits of their uncommitted funds. These market-balancing rural storage activities. however, will be constrained as long as lack of public information about changes in government intervention policy leaves traders and producers in the expectation of continued government control over seasonal price developments, which made storage generally unremunerative in the past.

315

Of equal importance is the dissemination of marketing intelligence about consumer market developments. Once they are made aware that a price hike is due to belated maturity of the local crop, temporary evacuation problems or late arrival of an import shipment. consumers will buy hand-to-mouth or substitute with other staple foods for the moment, thereby helping to calm a price climate of scarcity.

Market transparency also accelerates horizontal supply or demand adjustment by calling increased numbers of sellers or buyers to markets where price development is out of step, thereby making it difficult for the mono- or oligopolistically-inclined market participant to protect his/her domain.

Bridgirzg interventiom

Such interventions, principally tailored only for a limited effective period, may be required to:

0 buffer extreme hardship for consumers, producers or enterprises as an immediate result of liberalization measures; or

0 accelerate the rehabilitation of private-sector commodity marketing systems.

Bridging intervention may be needed, for example, if exchange rate correction and subsidy cuts double the consumer price for an important staple food commodity, the local production of which is expected to reach self-sufficiency over a two- to three-year period under the incentive of the favourable price climate. Urban consumer households below the poverty line might face starvation. Government. while wanting to maintain the incentive price level in order to reduce the import dependency, at the same time has a responsibility to protect those marginal popultion segments. In countries with well managed household registration systems, the problem can be solved by the issue of food stamps, as successfully demonstrated in Sri Lanka.‘” In other countries, governments tend to revert to moderate import subsidization, or injection of public food reserves or aid supply stocks at intervention price levels. The latter may be justified as long as it prevents market prices from rising beyond normal trade levels in times of shortage. However. as a means of further lowering prices it becomes destructive to the aims of the liberalization policy, apart from being wasteful in terms of the limited target group under consideration. The establishment of welfare kitchens in major towns would be a low-cost solution with effective system-specific limitation to the really needy.‘” There could be a nominal charge for the meal, which would be raised over a period of, say, three years until reaching cost-price level.

Certain commercial investments dependent on large through-put of imported produce or raw material might become totally unprofitable with the changes in their cost structure because of exchange rate correction and other liberalization measures. A special credit scheme at preferential terms may be considered, for structural and technological adjustments of investments to accommodate higher shares of local

“FAO Draft Case Studies (by national produce.

authors, 1985/86) on The Impact of Bridging intervention may also be required to break private-

Marketing and Price Policy Reforms on enterprise hesitation to establish an infrastructure to store and distribute Grain P&uction %@J’ and Pfoducer fertilczer, after the devaluationidesubsidization effects have curtailed Incomes: China, Ecuador, Ma/i, Sri Lanka, Rome, 1985 and 1986. effective short-term demand and left medium- to long-term develop- 29World Bank, op tit, Ref 17. ment unpredictable. Granting of a stock financing and overhead cost


subsidy may be considered for an introductory (eg three-year) period. Simultaneously, rural banks maybe encouraged to soften their lending criteria temporarily under seasonal crop loan schemes, with the government underwriting part of the default risk for the critical first

season. Special attention may have to be given to problems arising in remote

areas hitherto served by official crop purchasing channels at prices not reflecting real transport costs. Some form of transport assistance for the crops concerned to reach major regional product markets may have to be considered for a limited period, during which increased research and extension services should be provided for the expansion/introduction of suitable high-value, low-bulk commodity production, ie of relatively low transport-cost intensity, such as cotton, coffee, cocoa, cola, crude vegetable oils, pulses and livestock.

Follow-up mecharlism

Many governments, some assisted by multilateral or bilateral advisers, have set up an institutional mechanism responsible for monitoring the implementation of liberalization. The importance of such a mechanism and of its capacity to direct or prevent government intervention in critical areas, to establish and maintain constructive monitoring liaison with the private sector and to identify cases for adjustment and bridging support cannot be overemphasized.

As a prototype mechanism, a high-level ‘Follow-up Committee’ may be recommended, chaired by the economic development and finance minister or, if these roles are held by separate ministries, with the two ministers as alternate chairmen. Other members should include the ministers of industry and commerce, agriculture and natural resources, and transport. Though members may be represented by deputies or permanent secretaries, they would hold full responsibility for the committee’s efficiency in carrying out its mandate. The Committee may be assisted by subcommittees covering the sectors mentioned above as well as special areas such as ‘consumer affairs’, ‘devestment and redundancy’ (liquidation, alternative revenue earning, use for facilities, retraining and retirement incentives) and others as needed. Such a committee should be supported by a secretariat to which national and technical assistance personnel could be assigned. Agricultural marketing would be a crucially needed expertise in the secretariat. Apart from a senior marketing economist under medium-term contract, funds for consultant services as required should be at the secretariat’s disposal. The FAO has designed a prototype assistance project along this line, for adaptation to individual country requirements.


liberalization and agricultural marketing: recent causes and effects in third world economies

Documents