Agricultural donor funding without institutional reform is a fruitless exercise in Africa

Although donor funds have assisted with training farmers, providing inputs such as seeds and machinery, and building agriculture-related infrastructure, the sector has experienced limited growth. Ultimately, institutional reform lies at the heart of sustainable agriculture development in southern Africa.

If we zoom into Malawi, about half of its population lives below the poverty line, and as a result it has become a hot spot for donor-funded projects. Although 85% of Malawi’s population is employed in the agriculture sector and agriculture contributes one-third of total gross domestic product, the country’s total value production is relatively small: R12-billion, compared to South Africa’s R268-billion.

Lower production has also prevented Malawi from becoming an important player in global agricultural markets. Data from Trade Map shows that Malawi accounted for a mere 0.05% of global agricultural exports in 2018. For perspective, South Africa accounted for 20 times that, with 1% of global agricultural exports in the same year.

A cross-country analysis by agricultural economists Antony Chapoto and Thomas Jayne found that of the seven countries studied in southern and eastern Africa, Malawi has one of the highest degrees of maize price unpredictability and volatility. This partly stemmed from discretionary government policy interventions that have left farmers and agribusinesses uncertain of whether there would be a buyer for their produce, and if there was, whether they would receive a fair value.

The Malawian government typically uses non-tariff barriers on maize and soybeans. In the recent past, maize export bans were used to address food security, while soybean export bans have been used to satisfy a local manufacturing lobby, which has advocated for it to ensure they are the sole procurer of farmers’ produce. This mitigates regional competition and depresses prices. These measures have contributed to production fluctuation, as farmers have scaled back production amid uncertainty.

This market failure has given way to a vibrant informal sector and increased smuggling to neighbouring countries. We recently visited the informal market in Lilongwe’s Area 25 and observed that for many smallholder farmers, the non-tariff barriers on soybean and maize to the formal market have been an immense burden.

In addition, extensive paperwork, a withholding tax, and impending rejection if crops fail to meet a narrow set of quality criteria have disincentivised participation in the formal market. Often, these smallholder farmers are selling one or two bags and need immediate payment. It is unsurprising, then, that estimates place the informal market at upwards of 70% of the market share for grains.

There is now a dualistic agricultural sector in Malawi – commercial (formal) and informal sector. The informal market prices are lower than the depressed commercial (formal) market, and farmers are severely affected by these non-tariff barriers. For example, a 2013 USAID simulation found that a soybean export ban could reduce farmers’ net revenue by 56% in a given year. Thus, discretionary policy interventions have forced many farmers to operate at margins below national poverty thresholds, maintaining high levels of poverty.

Although donors have played a key role in supporting the provision of seed varieties and fertilisers, the co-existence of a vibrant agriculture sector and severe poverty have made Malawians realise that institutional reform is crucial. There is frustration that a few agricultural companies continue to exert substantial influence over government, at the expense of smallholder farmers. In some ways, it feels like an insurmountable lobby.

Since the recent election, thousands of protesters have taken to the streets of Lilongwe to protest the re-election of President Peter Mutharika, which they believe was fixed. Although he made some progress in boosting the economy during his first term, he attracted substantial criticism for failing to address corruption. The protests have become violent at times, and the cry for transparency and institutional reform has been clear.

A few lessons on institutional reform in the agricultural sector can be learned from neighbouring South Africa. Since the deregulation of agricultural markets in 1997/98, South Africa has had an open market, encouraging competition and promoting a stable regulatory environment. This has created a strong sense of confidence – South African farmers and agribusinesses are almost certain that the government will not abruptly close borders for exports, even when commodity prices are rising, as we witnessed during the 2015/16 drought.

The confidence and stability have served as a catalyst for investments, which has contributed to the notable growth over the past two decades, with output nearly doubled in the commercial sector. In 2018, South Africa’s agricultural exports were almost half of the value of agricultural production. It is clear that potential growth in the coming years will be export-dependent, making favourable trade policy key to boosting South Africa’s agricultural fortunes.

Though there is still work to be done on supporting smallholder farmers who have been producing in the margins since the years of oppression, there is an institutional will to support their inclusion into the markets. The new Economic Transformation, Inclusive Growth and Competitiveness strategy document recently released by National Treasury highlighted priorities: improving access to financing for farmers, improving extension services for smallholder and emerging farmers, investing in establishing innovative market linkages for smallholders, and improving market access. These interventions are also relevant to other markets such as Malawi.

Another important factor is that South Africa has avoided the price distortions that have become commonplace in the region. Price caps have often been used to support food security during production shortfalls. This practice is done not only in Malawi but other African countries such as Zambia, where government recently placed a price cap of $199 per tonne on maize (approximately R3,023) and has justified its actions by noting its concerns over rising maize prices, amid the need for food security. However, distorted agricultural prices will disadvantage Zambian farmers, and in the long run weaken agricultural investment.

Billions of dollars of donor funding have not sustainably improved southern Africa’s agriculture sector. Our sense is that intervention requires more than what donors alone can do – institutional reform and good governance are central to ensuring that farmers can receive a fair value for their harvest and are able to make long-term business plans, that governments can regulate the market efficiently and earn a stable tax revenue stream and that consumers can benefit from lower prices through increased production competition.

Ultimately, food security can also be improved as regional markets start to function efficiently. Improving a harvest without favourable market policies is like pouring water in a bottomless bucket, and wondering why the bucket isn’t filling up. BM

Gracelin Baskaran is a development economics PhD candidate at the University of Cambridge. Wandile Sihlobo is a South African agricultural economist.




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