The Situation of Co-operatives in Africa (1994) - Part 1

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    This document has been made available in electronic format
         by the International Co-operative Alliance ICA 
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                         September, 1994


          (Source:  Report of a Study Commissioned by ICA
          Europe - Co-operative Adjustment in a Changing
          Environment in Sub-Saharan Africa - p.17-41)

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          The Situation of Co-operatives in Africa 
        ********************************************


For more than a decade most African countries have been plunged
into an economic crisis which has seriously affected the
well-being of large sections of their populations, weakened
nation states and increased social and political tensions. The
crisis has also resulted in far-reaching dependence upon and
interference from external forces, notably multilateral and
bilateral donors.

The crisis has necessitated adjustment responses and triggered
a reconsideration of development strategies and economic policies
of the past. Most African countries are presently undergoing
managed adjustment processes with profound implications for the
co-operative movements.

In the following sections we will review and discuss those
aspects of the adjustment process which are of particular
relevance for the co-operative movements. This means that we do
not claim to make an exhaustive analysis of the adjustment
programmes. As an introduction to this discussion it may however
be useful to briefly summarize the origin and the main features
of what has been termed the African crisis.


1.1  The evolution of the crisis
********************************

Africa entered its Post-Independent era with a leadership
determined to relieve their countries and their peoples from the
yokes of the colonial period and to transform their economies
into modern and prosperous welfare states in shortest possible
time.

This was to be achieved through a transformation of the economy
largely following the pattern of development of the
industrialized countries i.e. an emphasis on the secondary
(manufacturing) sector and trade and a decline in the
significance of the primary (agricultural) sector with a tertiary
(service) sector which would grow slightly in significance during
the early stages of development and then grow faster at later
stages.

In line with this broad development strategy efforts were
concentrated on developing a modern manufacturing sector with
supporting infrastructure and services. The role of the
agricultural sector was considered important but secondary.
Beside providing livelihood for a major but decreasing share of
the population, the main role of the agricultural sector was to
produce an economic surplus which could finance the modernization
project outside the sector. The capacity of the agricultural
sector to generate foreign exchange was of particular
significance.

Severe negligence of educational and health services during the
colonial period prompted the newly established governments to
embark on ambitious and badly needed programmes in these fields
as part of their development strategy.

The suppression of incomes and consumption levels for the African
population during the colonial era turned into a strong pressure
for increased consumption after independence, and notably
consumption of imported commodities. The role of the State in
designing and implementing this strategy was far-reaching, partly
for ideological reasons and partly as a consequence of the very
limited number of indigenous entrepreneurs. The State took wide
responsibilities not only in providing public goods and services
but also as a producer and a trader in almost all fields of the
economy. 

Initially this ambitious modernization project seemed to be
successful. Economic growth in Sub- Saharan Africa was close to
6% per annum in the period 1965-73. Export revenue increased by
some 6% in the same period and a substantial inflow of overseas
development assistance funds and to some extent private capital
sustained a steady growth.

In 1973-74 the world was hit by the first oil price shock. This
external shock gave the first signal of the vulnerability of the
African economies. Current account deficits increased sharply and
could only be covered through additional international borrowing.
Low interest rates made this a tempting option and did not
initially seem to involve particular risks as the recession in
the world economy was expected to be of short duration. This did
not prove to be the case, however.

Deflationary policies in industrialized countries in the late
1970s and early 1980s following the second oil price shock in
1979 weakened their growth performance and slowed down growth of
international trade. After a very short-lived commodity price
boom in mid-1970s, the trend in the terms of trade for Africa
took a downward turn which persisted throughout the 1980s. The
widening current account deficits demanded accelerated external
borrowing. Encouraged by the donor community most African
countries increased international borrowing and marched
into what turned out to be a debt trap. 

In the aftermath of the second oil price shock international
interest rates rose sharply and the dollar appreciated. Servicing
old debts became very costly and so did contracting of new loans
which further aggravated the precarious external situation of
Africa.

Parallel to the development of these serious external imbalances,
disturbing internal imbalances emerged as well. In an effort to
maintain investment and consumption levels, many countries
resorted to highly inflationary policies. Ambitious and in
retrospect often unwise government spending programmes were
financed by printing money. 

In the early 1980s the situation had become unsustainable for
many countries. The development strategy which had been followed
collapsed. A closer look at the structure of the economies at the
time of collapse shows that the collapse came before any notable
structural transformation, aimed for by the strategy of the 1960s
and 1970s, had taken place. The manufacturing sector share of the
GDP had remained unchanged from 1965 to 1980. Worse than that,
under heavy protection most industries were inefficient and had
failed to enter the international market.

Of particular importance for the co-operative movements was the
performance of the agricultural sector. This sector suffered from
the subordinate role it was assigned in the development strategy.
While governments taxed the sector heavily, altogether inadequate
resources were invested to expand and sustain production.
Typically no more than 10-15% of government budgets were
allocated for agricultural development. Yet, more than 2/3 of the
populations depended for their survival on agricultural
activities and often more than 90% of the export earnings were
derived from agriculture. The emphasis on production of tradeable
tended to favour a minority of larger producers at the expense
of the masses of subsistence and semi-subsistence farmers.

As a consequence of this policy, it was hardly surprising that
agricultural production grew only slowly and was eventually
superseded by the population growth with declining per capita
output as a result. Also, the favoured export sector fared badly.
Whereas the world trade in agricultural products doubled from
early the 1960s to mid-1980s, the volume of agricultural export
from Africa declined in the same period. In other words, Africa
lost market shares. Paired with unfavourable terms of trade this
development was a serious failure of the strategy.


1.2  The causes of the crisis
*****************************

The discussion in the preceding section has rather described the
evolution of the crisis than explained its causes. The
explanations of the African crisis may be categorized in three
major schools. Several international donor institutions,
including the World Bank and the IMF, tend to stress the
significance of factors under the control of governments in
Africa. These factors include an over-valued exchange rate,
over-protection of domestic industrial production, distortion of
prices - notably in the agricultural sector, and on financial
markets - unrealistic commitments to large government recurrent
spending programmes, far too many low-yielding prestige
investments, notorious inefficiency in government bureaucracies
and their uncontrolled expansion, government involvement in
direct production, political interference and corruption, etc.

While accepting the importance of internal factors as causes to
the crisis, the second school, which finds its adepts mostly in
the South, tends to stress the significance of factors external
to the African economies. Prominent among these are the oil price
shocks in 1973-74 and in 1979 causing a recession in the
industrialized countries and a concomitant slow- down in
international trade as well as and a deterioration in the terms
of trade. The appreciation of the dollar and rising international
interest rates, as well as the stagnating development assistance,
are also external factors of importance in explaining the crisis,
it is argued. 

The third school gives merit to both preceding schools by arguing
that both external and internal factors were at play and that it
is hardly possible to conclude which of them were more important.
There is no need to elaborate these arguments further. Suffice
it to make three observations. 

Firstly, it should&be noted that the development strategy that
preceded the crisis was based on very optimistic assumptions
about the developments in the external, international,
environment. The strategy also seriously underestimated the
constraints to transformation and growth in the African
economies. In retrospect the strategy was unrealistic from the
outset.

Secondly, in the debate on the solution to the crisis little
mention is made of the need for adjustments in the international
context in order to address the factors which constrain recovery
at that level. The apparent unwillingness to discuss decisive
ways to resolve the debt crisis, which all agree is an absolute
obstacle to sustained recovery, is symptomatic. 

Thirdly, the memory is strikingly short at times. Many of the
institutions and individuals, who now vigorously criticize
strategies and policies of the past, forget that they were more
or less strongly supporting them at the time. Clearly one has
to conclude that, by and large, the donor community endorsed
these strategies and policies as they chose to finance their
implementation! 


1.3  The co-operative movements and the mounting crisis
******************************************************

Before discussing for the responses of the  governments to the
crisis and the implications of these responses to the co-
operative movements, it may be useful to make some observations
in passing on how the crisis itself affected the movements.

Needless to say co-operative movements fared differently during
the pre-adjustment period. Yet, some generalizations can be made.

A particular problem was that the co-operative movements to such
an extent were seen as interchangeable with the governments and
in the eyes of farmers they represented the exploitation
exercised by governments and their inefficiency. It was
the co-operative monopoly buying agents that paid what farmers
knew were depressed producer prices. It was the co-operatives
that farmers felt cheated them when payments were delayed and
inflation depreciated the real value of these payments. It was
the co-operatives that failed to deliver the right kind of
fertilizers and to deliver it in time, that failed to provide the
gunny bags and let stocks of produce rot away for want of
collection and transport.

It is hardly farfetched to think that such experiences, which
unfortunately are rules rather than exceptions, tore the image
of the co-operatives and made a mockery of the claim in
gatherings under the village tree that the co-operatives are
"member
owned, member controlled and member managed". 

The mounting pressure on government finances as the crisis
developed was passed on to the co-operative movements in
different ways. We have already noted delays in produce payments
as one such consequence. In addition to inadequate crop finance,
the co-operative movements were more generally undercapitalized.
Furthermore, trading margins were often so small that even
extremely efficient organizations would have failed to break-even
on them. The implications were that the ability and the capacity
of the co-operatives to provide their members with relevant and
efficient services were undermined. It could be argued that these
problems were primarily a result of the relationship between the
government and the co-operatives. This may well be true. The
point here is that the problems were exacerbated by the crisis.


1.4  The early response to the crisis
*************************************

The most immediate response to the crisis was a severe cut in
imports. This response was an unplanned and inescapable
necessity. When the foreign exchange coffer was empty, and the
import shopping list was not exhausted, there was nothing else
to do then to cut the list. The effects were immediate resulting
in shortages of consumer goods, spare parts, fuel, equipment,
farm implements, medicines etc. hitting all engaged in the
monetary economy as a result. Economic activities slowed down and
standards of living were negatively affected. One can say that
the economies responded through contraction.

Early efforts were made to counter these trends but they were too
limited and came too late. The volume of overseas development
assistance was increased substantially from the mid-70s as
current account deficits soared. As a single statistic the
increase may look impressive. Yet, the donor response in relation
to the needs was highly inadequate. From 1979-81 to 1985-87 the
external financial position of Sub-Saharan Africa (excluding
Nigeria with major oil export revenue) deteriorated with 6.5
billion dollar annually. The two main factors contributing to
this worsening situation were the growing debt burden amounting
to $ 4.0-4.5 billion annually, and a continued deterioration in
the terms of trade adding another loss of $ 2.9 billion. This was
only marginally countered by an average annual increase in
overseas development assistance of $ 0.6 billion (1979-1986).

The IMF entered the scene early and extended short-term credit
facilities in the expectation that the situation would be
transitional. It was soon realized that these measures were
inadequate and that more profound and lasting efforts were
needed. This recognition brought us into the decade of structural
adjustment programmes from the early 1980s.


1.5  The structural adjustment programmes
*****************************************

The structural adjustment programmes in Africa have become
closely associated with the programmes designed, promoted and
financed by the IMF and the World Bank with the support of the
rest of the donor community. Presently some 30 countries in
Africa are undertaking programmes of structural adjustment.

The structural adjustment programmes have been subject to
intensive debate and controversy. In the context of this study
there are no reasons to enter into this debate. Neither are there
reasons to elaborate the different roles of the IMF and the World
Bank, how these roles partly conflict with one another and how
the policies of the two institutions have changed and to some
extent converged over time. Therefore, in the discussion below,
structural adjustment programmes refer to the combined activities
of these institutions unless otherwise stated.

1.5.1     The major elements of the structural adjustment
          programmes:

The structural adjustment programmes have two broad objectives
namely to achieve stabilization of an economy and to improve
resource allocation and efficiency in resource use in order to
promote economic growth.

Stabilization means to bring inflation under control and reducing
current account deficits. Monetary and fiscal policies are
applied to achieve these goals. Credit ceilings are introduced
in order to push up interest rates thereby reducing investment
and consumption and increasing savings. Government spending is
cut in
order to reduce inflationary budget deficits. Taxes can also be
increased in order to reduce consumption.

The resulting  contraction of demand will reduce imports and help
to cut current account deficits. However, monetary and fiscal
policies may not be sufficient to establish external balance.
Therefore, these policies are generally complemented with a
devaluation of the currency which is expected to shift
consumption from tradeable to non-tradeable and production from
non- tradeable to tradeable. Devaluation is normally a
cornerstone in structural adjustment programmes.

The structural adjustment programmes also focus on policies aimed
at resource mobilization and resource switching in the economies.
The common denominator for these policy reforms is to promote the
development of a market economy.

Crucial aspects of the structural adjustment programmes are
policies aimed at market liberalization. Prices are to be formed
by the market and aligned to international prices (which
presupposes trade policy reforms). Price distortions caused by
subsidies are removed. Price reforms coupled with currency
devaluations are expected to stimulate production of tradeable.
(State) monopolies are dissolved and barriers to entry reduced
in order to promote competition. 

Trade policy reform through abolishment of administrative
allocation of foreign exchange, reductions in customs duties and
a reduction in the spread of duty tariffs is expected to
contribute to efficient resource allocation.

Interest rate policies are reformed (generally removing subsidies
and liberalization of interest rate regulations) in order to
mobilize resources and improve efficiency in resource allocation.

Institutional reforms involve a reconsideration of the role of
the state, meaning a substantial reduction, and efforts to
strengthen the capacity and improving the efficiency of
government structures to fulfil their tasks.

This list of elements of structural adjustment programmes is not
complete and could be extended with a number of policy
instruments used under the different headings. For our purpose
the present review will suffice. 

It is true that structural adjustment programmes show
considerable differences in detail. However, as far as the
important components are concerned, they are strikingly similar
in design permitting generalized comments.

Let us now come closer to our concern by discussing those aspects
of the structural adjustment programmes which are of particular
importance for the co-operative movements in Africa.


1.6  Implications of structural adjustment for the co-operative
     movements in Africa
***************************************************************

By way of introduction it may be useful to recall that more than
90% of the co-operatives in Africa are related to the
agricultural sector. The implications of structural adjustment
for the agricultural sector are therefore of particular
importance. Of the different policy reforms in structural
adjustment programmes,
devaluations, monetary policies related to interest rates and
credit ceilings, and by far most important, market liberalization
and retrenchment of the state have most far reaching implications
for the co-operative movements.

1.6.1     Market liberalization:

Market liberalization is the structural adjustment reform with
the most far-reaching and decisive implications for the co-
operative movements in Africa. Of particular importance are
liberalization measures in the agricultural sector. Market
liberalization means competition, and competition is something
many co-operative movements have not been exposed to.

With the exception for markets for minor crops, governments in
Africa have exercised a nearly complete control of the
agricultural markets. Prices were determined administratively at
all levels. Marketing monopolies were established and the co-
operatives were often assigned to serve as implementing
agents. Movement of produce were strictly regulated and transport
charges were fixed administratively. It is beyond dispute that
these arrangements often resulted in inefficient resource
allocation in the agricultural sector as well as inefficiencies
in the monopoly organizations. Producer prices which were not
related to the cost of production and the cost of transport
resulted in production of the wrong commodities and production
in the wrong places.

The monopolistic structures for agricultural produce marketing
and processing were hardly conducive to businesslike operations.
These organizations tended to more resemble government
bureaucracies than business enterprises. This was the fate of
many co-operative organizations.

Market liberalization aims at sweeping a clean house in these
regards. Prices (on input and output) are to be set by the market
in order to increase efficiency in resource allocation. Transport
costs are to be reflected in prices paid to farmers. State
monopolies are dismantled which means that co-operatives
granted monopoly positions for specified activities loose these
positions. In principle freedom of entry at different levels in
the marketing/processing chain should apply. International
capital is invited to invest in marketing and processing
facilities. The rule of the game is market determined prices and
competition.

The pace of reform varies from country to country. In some
countries the process is already at }n advanced stage, while
other countries lag behind. However, the trend is clear and
irreversible: changes will decisively go in the direction of
liberalized agricultural markets. 

There is no co-operative movement in Africa that can lean back
and say that these changes may occur elsewhere but they will not
reach us.

The most obvious and important implication of market
liberalization is the emergence of competition. One point of
discussion on the structural adjustment programmes has been to
what extent there will be private entrepreneurs to fill the
void after a dismantling of government marketing monopolies and
a withdrawal of the state from direct market operations.
Situations certainly vary from country to country and within
countries but some general conclusions seem to emerge from the
experience so far.

Agricultural marketing is a major operation in all African
countries with a very high turnover, relatively speaking.
Generally, no other trading opportunity compares with
trading in agricultural produce in terms of money involved.
Furthermore, trading is almost always easier than manufacturing.
Taken together one would therefore expect a considerable entrance
of new actors on liberalized agricultural markets.

Barriers to entry vary for different products and for different
levels in the marketing/-processing chain. However, almost all
agricultural products are divisible which reduces barriers to
entry. Cereals, coffee, cotton, beans etc. can be traded in
very small lots of a bag or a few and they can be traded in
thousands of tons.

Capital demanding processing and technical know-how constitute
barriers to entry in varying degree. There is a lower barrier to
entry in coffee processing than in cotton ginning in terms of
capital requirements and a higher barrier to entry in terms of
know-how for tea processing than for coffee, for instance.

Given that barriers to entry vary, the influx of new actors on
markets for different products at different levels of the
marketing/processing chain will differ. Presently there is
insufficient evidence on the effects of liberalization in terms
of market entries. Still, some tentative generalizations of what
is to be expected can be made.

If there is a profit potential in trading and/or processing,
liberalization tends to attract a quick response with many new
entrants on the market. For obvious reasons the number of
entrants is particularly large in primary marketing. New entrants
try to skim the cream of the market by entering into areas close
to consumer markets, areas with substantial surpluses and areas
with good transport infrastructure.

For obvious reasons new entrants show interest in products with
a high profit potential and shun away from products with low
profit potential. Market liberalization attracts many with
limited potential and limited future as traders. Therefore, there
will be a period of rapid structural change and a high
"turn-over" of actors until the less serious and less skilful
ones are weeded out. 

Accumulation will eventually lead to further structural change
with successful actors growing in size and significance. For
obvious reason this process has not come very far in Africa yet.

Exportable products with profit potential attract international
interest. Transnational corporations preferably establish
themselves at the last step in the chain and may or may not
integrate backwards into processing and purchasing of raw
material.

One argument against a rapid liberalization of agricultural
markets has been the assumption that there will be too few
private actors to replace the network of purchasing agents under
a government monopoly. In pursuing this argument it is generally
not recognized that many crops have not been subject to
government monopoly but handled by private entrepreneurs all
along. For instance, a very substantial share of staple food
crops has been handled by private entrepreneurs on the
black/parallel markets in most African countries.

Experience so far seems to largely reject the presumption that
dismantling of government monopolies would leave most farmers
without market outlets. It is true that market entrance has been
limited in remote areas disfavoured by poor transport
infrastructure and often low levels of output. However,
competition has developed in more favourable areas. Furthermore,
when the private sector has shown little interest in a particular
commodity, the reason primarily seems to have been that there is
little money to make on it.

This means that the co-operatives are confronted with competition
which may increase rapidly over a few agricultural seasons in
areas and crops on which there is money to be made.

This competition can also be unfair. An incomplete regulatory
framework and weak enforcement opens the door for cheating and
abuse which may reduce costs for unscrupulous market actors.

These developments profoundly alter the situation of many
co-operatives. Unless the co-operatives can meet this competition
they will end up in down-turn spirals of decreasing volumes of
business, deteriorating profitability of their operations,
reduced capacity to pay remunerable and competitive prices and
provide useful services to members, continued flight of members,
still further decline in volumes and business, etc. 

Irrespective of at what level in the chain competition is felt,
the implications will be the same; a primary society that is
caught in the spiral will loose its membership; an intermediary
organization which fails to meet competition will fail to provide
primary societies with competitive prices and reliable and useful
services which in turn will make the primary societies look as
poor alternatives to farmers who, for good reasons, turn their
backs on them. The very base will be eroded and disintegrate.
This is the threat which has to be averted.