This document has been made available in electronic format by the International Co-operative Alliance (ICA)

March, 1998
(Source: ICA Review, Vol. 91 No. 1, 1998, pp.25-31)

Co-ops & Agricultural Marketing: Liberalisation in Eastern and Southern Africa by John Launder*

Introduction --------------- This paper starts from the hypothesis that the virtual collapse of some of the co-operative movements in Eastern and Southern Africa (ESA) following a combination of structural adjustment and market liberalisation has left many farmers struggling with new market relations that are uncertain and incomplete, and that this is a serious threat to smallholder agricultural development. This seems to be particularly true in Zambia and Tanzania, and the paper includes a case study of Tanzania for which some recent data on farm prices is available.

A particular concern is that while market liberalisation has been heavily "advocated", and degrees of success have been claimed for it, there appears to be a lack of empirical studies of the actual effects on farm prices and production. There has been a debate in the literature (N.B. "Food Policy") about suitable forms of liberalisation, but the advocacy and debate rarely address the actual effects on smallholders. An exception is Jayne and Jones who surveyed food market reforms in ESA to try and find why farmer supply responses to liberalisation were less than expected. They found that "In spite of tangible benefits to urban consumers and farmers close to urban markets, food market reform has not successfully addressed the problem of sustainably raising farm productivity growth for the millions of low-input semi-subsistence rural households in the region." (Jayne and Jones 1997, p1520)

Another issue lacking in the literature on market reform regards the role of co-operatives, or of some form of farmer organisations. While earlier "statist" patterns of co-operative development are clearly unsustainable, this paper concludes that farmers now more than ever need some form of organisation to defend their interests and co-ordinate market relations and access to resources. The New Institutional Economics, with its emphasis on reducing uncertainties and costs in human and organisational transactions, can make a significant contribution to this debate.

Historical Background --------------------------- Co-operative development in Africa has been dominated by the state. This followed the classic Indian model whereby the state should guide and assist co-operatives until they had the strength in terms of business and democracy to be autonomous. The "model" co-operative law was adopted in most of the then British colonies and gave extensive powers to the Registrar regarding the management and business practices of each society. This top down blueprint approach continues to this day.

A second major development following independence was that in most countries of ESA co-operatives were adopted as one of the government's main instruments of agricultural development, usually as adjuncts to para-statal marketing boards. In terms of marketing this usually meant that only by joining the local society could farmers sell major export and food crops, and obtain cheap credit and subsidised inputs. Although the system was often inefficient it guaranteed to buy all farmers' outputs of major crops, so farmers market relations were largely certain. And, because of the co-operatives' supposed capability to deduct any loan repayments from crop proceeds, they could issue credit for inputs according to an assessment of ability to pay rather than by demanding security; important when most farmers did not own their land.

Because of the perceived importance of co-operatives to agriculture development, and perhaps more importantly as major channels for export crops, high rates of loan default and inefficiency were tolerated. Yet because the co-operatives did not demand significant capital from members, and profits were restricted by strict marketing margins, the co-operatives became massively indebted to the state banks. The prevailing view among co-operative members and government officials was that the co-operatives were state institutions rather than private business enterprises, and that the state would always find the money to maintain them as going concerns.

In the 1980's the sustainability of these institutionalised marketing systems became harder and harder to maintain in terms of the rising debts of the co-operatives and associated para-statals, and of the subsidy costs to government budgets. Governments had structural adjustment imposed by circumstances and by pressure from the World Bank and IMF. This adjustment put severe constraints on government budgets, and led to both rising interest rates and shortages of bank finance. Some governments also started to pursue market liberalisation at the same time which put a second set of pressures on the co-operatives and para-statals by removing their monopolies and subsidies. It can be argued that co-operatives could have survived adjustment and then liberalisation, but not both occurring together.

Many co-operatives, especially in Tanzania and Zambia, were technically bankrupt and as such were unable to maintain operations. While Tanzania is trying to reform its co-operatives, many in Zambia had to be liquidated. This meant that most farmers no longer had a guaranteed market through a buyer of last resort, which is particularly important in remote areas. Credit and inputs became more difficult to obtain as farmers no longer had to sell crops to the co-operatives, who anyway had borrowing problems of their own. Private traders tended to be small operators with inadequate access to finance and storage, which limited their capacity or willingness to take on input distribution or lending.

There appeared to be a lack of attention to processes of liberalisation, and it seems many officials and politicians were still hostile to the private sector. While there were national policies for liberalisation, many local restrictions and regulations stayed in place. There were few support programmes to assist traders, particularly their needs for loan finance, or to assist farmers to adjust to the ending of a guaranteed market with pan-seasonal and pan territorial prices. The new marketing relations were often confusing to farmers and extension officers. (AFMESA,1994)

Liberalised Maize Marketing ---------------------------------- By 1992, the World Bank and others were claiming that liberalisation of maize marketing had been successful in terms of the effective transfer of a US$50 million market in grains from inefficient and heavily subsidised para-statal and co-operative organisations to the private sector. (World Bank 1994, Coulter and Golob 1992, Santorum and Tibaijuka 1992).

The supply of grains to urban centres is now being effectively handled by large numbers of small traders, with minimal access to formal finance, and with little positive support from the state. It can be described as an "atomised" market. Most traders are small scale, buying directly from farmers and trading single loads from the countryside into urban wholesale and retail markets. There is limited integration with other traders to facilitate economies of scale in storage and transport. Also, traders specialise in single crops, and do not have the finance or resources to trade in farm inputs.

During 1989 to 1992 current consumer and producer prices rose, but margins contracted. (World Bank 1994, p146). Since there was significant inflation during the period real consumer prices fell, but real producer prices also fell.

However similar data for the period after 1992 and up to 1994 shows a changing picture. There was a continuing upward trend in current consumer prices but current producer prices fell slightly, hence margins were now widening(MDB 1994). Again, the continuing inflation meant real producer prices fell.

In Tanzania the main harvest is in August to September, and most grain is sold by farmers soon after harvest because they lack cash and storage facilities. When prices during the main harvest season are compared, the gap between producer and consumer prices is even wider. Also farm prices are at similar levels regardless of distance from the main consumer market. This appears to be an indication that traders can push farm prices down to some sort of minimum which does not reflect marketing costs.

Part of the argument for liberalisation is that it should also encourage a competitive market at the primary (farm gate) level, so that part of the gains from liberalisation would accrue to producers because of competition between crop buyers .

However it appears that, with the collapse of the co-operatives, in many local areas farmers face only a single buyer. It is contended, largely by government officials and the press, that such traders are using their local market power to buy maize at lower and lower prices. Since lack of finance, or access to loan finance, limits the number of traders able to enter the market, then this sort of un-competitive behaviour is unchecked.

Liberalisation has also included the marketing of farm inputs such as fertilisers and storage insecticides, and the removal of fertiliser subsidies. However the predominantly small traders have not taken on input supply operations. Farmers are faced with higher prices, higher costs of obtaining inputs due to lack of local supplies, and a lack of access to seasonal loans following the collapse of the co-operatives' credit operations.

The effect on farm production and storage capacity of lower input use and the combined price effects on net farm returns and incentives are a cause for concern. There are reports that in some areas the heavy use of fertiliser in the past has reduced natural fertility and that the current lack of fertilisers is severely reducing yields, and that this combined with the double price effects means that farmers are now turning away from maize production ("The Guardian" Dar Es Salaam, April 1996). This appears to be especially the case in the former "surplus" areas, many of which are far from the main urban centres. While the previous marketing system with its pan-territorial pricing encouraged some inefficient allocation of resources, a liberalised system cannot correct this if the market is not operating effectively at the farmer level.

Since the maize market is now highly atomised the collection of comprehensive information on marketed production is problematic. The only national "production" information available are the annual forecasts of total (marketed and subsistence) production produced by the Food Security Authority. A recent forecast indicated that production in 1994 was 12% lower than in 1990 (MDB 1994). That real consumer prices for maize fell in real terms during 1991-94 implies that there was no shortage of supply. However Tanzania has moved from being a net exporter of maize to being a net importer.

Liberalisation in Tanzania has had beneficial effects in terms of consumer prices and of removing the high cost to the nation of marketing subsidies and inefficient state supported marketing organisations. The downside is the effect on producer prices and farm incomes which has reduced incentives for marketed production. The problems can be seen to have come from the ways in which Tanzania reluctantly liberalised markets, the lack of active policies to promote the private trade, and the collapse of the co-operatives as active players in marketing, input supply and credit. The result is that the market relations now faced by farmers do not work to promote incentives or the access to farm resources needed for developing productivity.

Tanzania: Co-op Reform ----------------------------- By the late 1980's most co-operatives and para-statals were effectively bankrupt, and their indebtedness threatened not only their survival but also that of the banks. As the liberalisation proceeded, the co-operatives were financially powerless to be effective players and to provide primary level competition with the emerging traders.

In 1990 government and co-operative institutions made a review of the movement to consider whether to liquidate the societies and start again or to reform them. They opted for reform. Since then a new Co-operative Act 1991 was passed which aims to replace the statist co-operative ethos with a real member-based movement according to the ICA's principles of voluntary association and trading and democratic management, with economic feasibility as a requirement for continued registration, and with reduced powers for the Commissioner of Co-operatives. If this reform process is successful, the Co-operatives may begin to perform their proper function of promoting and defending farmer interests in the market. Their countervailing power would be one force in improving the competitiveness and efficiency of the primary markets and in the supply and financing of farm inputs.

"New" Farmer Organisations ----------------------------------- "Co-operatives" in ESA do not have a good reputation but this is more to do with past policies of co-operative development rather than the co-operative principles. Some co-operative movements and governments, such as in Tanzania, want to learn from the experience of the past and pursue reform of the existing movement. A quite different option is the development of a variety of forms of "self help groups" or "associations" which are rooted in their own circumstances rather than the result of a single institutional model, and are developed from the bottom-up.

For the first option, the ICA commissioned a survey "Co-operative Adjustment in a Changing Environment in Africa" which considered a "modified strategy for co-operative development" (Birgegaard and Genberg 1994). The recommendations included:

- in the short to medium term addressing business efficiency and core activities; - recognising that a free market gives scope for a variety of trading links, not just with other co-operatives; - major attention to human resource development in business operations; - where co-operatives became indebted as result of government policy, debt relief may be appropriate; - recognition that successful self help groups are dominated by women's groups; - recognising that bottom-up development is more effectively managed by NGO's.

Another survey, for the UK's Overseas Development Administration, made case studies of a total of 18 "Farmer Centred Enterprises" in 6 African states (Stringfellow et al 1996).

They found that the more successful have the following features: - are small in scale but with good business viability; - operate simple single activity businesses such as bulking produce or negotiating with marketers on behalf of farmers; - have small memberships with high internal cohesion, a member driven agenda, and strong financial accountability; - women's groups work better than men's; - problems usually arise with subsidies and grants; - NGO's are usually more successful at developing self help projects; - a key feature in liberalised markets is "promoting links between farmer groups and the private sector" (ibid p.24).

Concluding Remarks ------------------------- The effects of liberalisation in much of ESA has been positive for consumers and larger traders, but has been a negative experience for many farmers and may have harmed agricultural development. The lack of support services for small traders, particularly for finance, has delayed the establishment of an efficient marketing system. It appears that the implementation of liberalisation has been poorly managed and was introduced too quickly after structural adjustment started.

Adjustment and liberalisation have had dramatic effects on co-operatives and many have not survived. There may be possibilities for reform for those which have survived, which would hopefully see a return to basic principles. There are examples of good practice for small self-help groups which may or may not be co-operatives. However larger farmer organisations may find co-operative forms more appropriate. A key issue is the integration of co-operatives and other marketers to produce an effective market base for agricultural development. As Jayne and Jones (1997) noted from their survey, "The challenge is to develop co-ordinated and sustainable systems of input delivery, farm finance and reliable output markets to reduce the costs and risks.... in smallholder agriculture".

If the 1970's was the decade of state sponsored development, and the 1980's that of market based development, then the 1990's has seen more emphasis on institutional development. The New Institutional Economics considers the relations between people, markets and the state as being characterised by incomplete information, transaction costs and different mental models, and that "...institutions are formed to reduce uncertainties in human exchange" (North D C, in Harriss et al 1995). Co-operatives would seem a natural way to address these uncertainties.

Sources ---------- AFMESA (1995), Report of a Workshop on Food Market Liberalisation, A Critical Review of Experiences to Date, Association of Food Marketing Enterprises in Eastern and Southern Africa, Lusaka, Zambia; FAO Rome.

Birgegaard L-E and Genberg B, 1994, "Co-operative Adjustment in a Changing Environment in Sub-Saharan Africa, International Co-operative Alliance, Geneva.

Harriss J, Hunter J and Lewis C, (Eds) 1995, "The New Institutional Economics and Third World Development", Routledge, London.

Stringfellow R, Coulter J, McKone C, Lucey T, Hussain A (1996) "The Provision of Agricultural Services Through Self-Help in Sub-Saharan Africa", Natural Resources Institute, University of Greenwich, London

Coulter J and Golob P, 1992. "Cereal Marketing Liberalisation in Tanzania" Food Policy Dec. 1992.

Coulter J, 1994. "Liberalisation of Cereals Marketing in Sub-Saharan Africa: Lessons from Experience". Natural Resources Institute, Chatham.

MDB 1994, "1993/94 Industry Review of Maize, Rice and Wheat". Marketing Development Bureau, Ministry of Agriculture, Dar Es Salaam.

Santorum A and Tibaijuka A,1992. "Trading Responses to Food Market Liberalisation in Tanzania" Food Policy Dec. 1992.

World Bank, 1994. "Tanzania Agriculture" Washington.

----------------- * Mr. Launder is Lecturer in Agricultural Economics, Development and Project Planning Centre, University of Bradford, England.