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Chapter 2
Market Liberalisation

As the economies of developing countries continued to deteriorate in the wake of both external and internal shocks, LDCs experienced increasing difficulties in obtaining external loans and became more dependent upon the International Monetary Fund and the World Bank for financial support. The World Bank observed that stabilisation measures implemented by LDCs had often fuelled inflation, e.g. increased borrowing, foreign exchange controls, the extension of price controls, increased import tariffs and control of imports through licensing. It was soon apparent that these remedies were ineffective and alternative solutions had to be found. International funding agencies began to insist that borrowing governments implement an economic structural adjustment programme (ESAP). The reform or liberalisation of markets including agricultural and food markets, has been a central element of ESAPs. In agrarian based economies, which would include almost all developing countries, reform of the agricultural and food markets has been the single most important component of ESAP.

Chapter Objectives

Having read this chapter the reader should be able to:

Structure Of The Chapter

This chapter firstly outlines the nature of economic structural adjustment programmes. Secondly, there is a review of the alternative course of action which could be pursued with respect to the role of agricultural marketing parastatals within liberalised markets. The third component is the issues relating to the encouragement of the private sector to participate in markets from which they were either excluded or at least encountered many hindrances.

Economic structural adjustment programmes

The prolonged economic recession which began in the late 1970's accelerated the rapid deterioration in the economic condition of many developing nations in the form of an ever widening gap in their balance of payment accounts. Many LDC governments reacted by implementing ‘curative’ measures that actually fuelled inflation. These included increased borrowing, restricting access to foreign exchange, the extension of price controls, increased import tariffs and control of imports through licensing requirements. On occassion, such measures were pursued independently but on others they were part of IMF sponsored economic stabilisation programmes. By the early 1980's it was apparent that stabilisation measures on their own would not solve the problem and alternative approaches were sought. The World Bank was first to conceive an economic structural adjustment programme (ESAP). Soon most international funding agencies were insisting that borrowing governments implement ESAPs. A key element of all structural adjustment programmes has been the reform or liberalisation of markets, including agricultural and food markets.

The World Bank first applied the term structural adjustment to describe its programme of policy-based lending which began in the early 1980s. (The usual business of the World Bank is project-based lending). The objectives of structural adjustment programmes are not confined to restoring macro-economic balance but are also intended to stimulate economic growth. Structural adjustment involves improving the structure of production by allocating resources in accordance with their opportunity cost rather than on any other basis. The argument in support of this approach is that resource allocation efficiency is maximised, increasing the value of current output and improving the prospects for the rate of growth over time and avoiding the need for subsidies and taxes in support of the production structure.

In addition to increased allocational efficiency, structural adjustment is concerned with improvements in both operational and economic efficiency. Operational efficiency is increased when unit costs of production are minimised through efficient management and the adoption of the appropriate technology. Economic efficiency is the consequence of a high level of allocational efficiency plus a high level of operational efficiency and ensures that consumers' needs are satisfied at prices which reflect the minimum sustainable cost of production.

Whilst and improved structure of production, through increased allocational and operational efficiencies, is the central platform of structural adjustment, structural improvements in practice have also included diversification of the economy. That is, by broadening the base of economic activity the flexibility of the structure can be improved and so the economy is better able to withstand external shocks such as a fall in the world prices of certain commodities, adverse weather conditions that impact on particular crops or substantive changes to trading conditions applied by economic blocs like the European Union. The in-built inflexibility of LDC economies meant that the external shocks of the 1970s (e.g. quantum increases in oil prices, world wide recession and the collapse of prices for a wide-range of agricultural commodities traded on world markets) had a far greater impact than they would have had if these economies had a broader base.

The challenge for those charged with developing structural adjustment programmes is to find designs capable of simultaneously stimulating economic growth whilst protecting the population from excessive levels of hardship during the course of the programme. In addition, ESAPs endeavour to make the domestic economy more flexible so that it is better able to cope with changes in the world economy. Overall the objectives of ESAP are to:

In order to achieve these objectives policy makers must:

The objectives themselves are at the macro-economic level. In most instances they are attempted through policies designed to manipulate supply rather than demand. These policies are directed towards reducing spending overall and redirecting demand towards domestically produced goods.

The World Bank, as was stated at the beginning of this chapter, began its structural adjustment programme in the early 1980s and viewed this as a short term divergence from the business of lending for projects. The expectation was that most countries that instigated structural adjustment programmes would have completed them within three years. Both the duration of individual programmes and the extent to which the Bank would be involved in policy-based lending were woefully miscalculated. Some structural adjustment programmes have extended over eight years or more, and many are in their second and third phases. Moreover, the World Bank's involvement in funding these programmes has continued to increase, rather than diminish, and the Bank has publicly conceded that structural adjustment is:

“…not a one-shot effort…but reflects the need for macro-economic and sector policies to be continuously appraised and modified.”2

All of this points to the fact that a knowledgeable and respected institution like the World Bank is still learning from experience about the processes of structural adjustment. It should not therefore be surprising that other lending institutions, the international donor community, government ministers, policy makers and others involved in the development, implementation or administration of structural adjustment programmes are on a learning curve and as yet have no firm understanding of what constitutes ‘best practice’ with respect to ESAPs. This is hardly surprising since, as Scarborough and Kydd1 state:

“In countries which have embarked on structural adjustment programmes the breadth of policy reforms, the pace of their implementation and the lack of data has been such that the possibilities for detailed analysis of policy options has been very limited.”

Macro-economic stabilisation

Whereas the World Bank has been the principal sponsor of ESAPs, which focus on the supply side of economies and impact indirectly on the demand side, the IMF has been the champion of economic stabilisation programmes. These operate to stimulate the demand side of the economy and have an indirect effect on the supply side of the economy. Stabilisation policies work to reduce a country's expenditure levels to match its current resources. They do not directly lead to higher growth rates but rather provide the economic stability necessary before increased growth can be a real prospect. Attwood3 explains the objectives of macro-economic reform, thus:

“Macro-economic reform involves creating a conducive climate for investment, addressing the imbalances in public expenditure, reducing the fiscal deficit, increasing parastatal efficiency and appropriate debt management.”

The policy instruments typically employed in the pursuit of economic stabilisation are:

Thus, for example, export performance (demand) might be improved because the reforms could result in a devaluation of the local currency (exchange rate policy), and/or higher levels of investor confidence due to inflation being contained as government brings its own spending under control (fiscal policy) and interest rates are allowed to rise to their economic level (monetary policy).

During the earliest round of ESAPs there was a degree of specialisation between the IMF, which handled demand management measures, and the World Bank, which focused on supply management measures. However, during the 1980s the IMF and World Bank began to develop programmes for an

“…orderly adjustment of both macro-economic and structural imbalances so as to foster economic growth while bringing about a balance of payments position that is sustainable in the medium term.”4

This move was initiated by the World Bank in 1980 when it introduced its Structural Adjustment Loan (SAL) programme. In the mid-1980s, the IMF launched its Structural Adjustment Facility and its Enhanced Structural Adjustment Facility (SAF and ESAF). These are longer term concessional lending instruments which closely resemble the policy-based lending facility of the World Bank. Countries wishing to take advantage of SAF or ESAF must first develop a Policy Framework Paper, covering the short to medium term and the government has to jointly agree this with the IMF and the World Bank.

Figure 2.1 illustrates the interrelationships between stabilisation and structural adjustment programmes which now exist. Thus, for example, market liberalisation is not only a supply side or structural adjustment instrument, it also has the capacity to contribute towards macro-economic stabilisation since if it is successful in increasing efficiency it becomes possible to reduce subsidies without necessarily having a detrimental effect on the welfare of subsidy recipients.

Figure 2.1 The nature of stabilisation and structural adjustment policies

Figure 2.1

There is much debate about the sequencing of reform measures. Discussion tends to centre around the ordering of structural adjustment vis stabilisation, liberalisation of domestic vis international markets, and the sequencing of measures intended to liberalise specific markets. There appears to be a widespread consensus that the liberalisation of domestic markets particularly those in the agricultural sector should precede attempts to liberalise international trade. It is argued that success in liberalising domestic markets would help establish a more robust and flexible economy, one better able to compete in international markets5.

A central objective of structural adjustment has been to remove distortions in the economy resulting from government intervention and central control over markets. A secondary objective has been to improve the management of those activities that remain the responsibility of the state in the post-market liberalisation period. Figure 2.1 provides some typical examples of market liberalisation measures which have been applied to agricultural and food sectors of economies.

The role of the state in liberalised markets

Countries undertaking market reforms have had to face the vexing question of what to do about government agricultural marketing institutions. Most of these parastatals have accumulated very large debts and deficits, and have, therefore, been an enormous drain on their treasuries. In some cases, the poor financial performance has been due to mismanagement and operational inefficiencies, but in others government has placed on the parastatal social responsibilities such as the management of the strategic grain reserve and developmental roles involving promoting the interests of smallholder farmers. In general, these social and developmental responsibilities cannot, by their nature, be profitable activities.

Hence, the dilemma of governments seeking to reduce public expenditure, a large part of which has in the past been spent on financing agricultural marketing parastatals, but who cannot afford to allow social and developmental objectives to be abandoned in blind pursuit of liberalised markets. In some cases, governments have disbanded their agricultural marketing parastatals (as in Zambia and Nigeria) whilst others are seeking to restructure these marketing institutions.

The efficient allocation of resources is central to all structural adjustment programmes. This does not preclude the participation of the state in agricultural production and marketing activities. Historically, however, government involvement in many areas of economic activity has proved to be allocationally and operationally inefficient. It has been argued that government structures are not flexible enough to react to changing opportunity costs. Moreover, resources are often allocated on the basis of political considerations and operational inefficiencies arise from the absence of incentives. As a result, structural adjustment has also involved reducing the direct role of the state in marketing.

Strategies for reforming agricultural marketing parastatalsa

In broad terms, there are four alternative courses of action which can be taken with respect to the restructuring of agricultural marketing parastatals, these being:

a. This section on commercialisation of parastatals draws heavily on E. Attwood, The Restructuring Of The Agricultural Marketing Parastatals Of Zimbabwe Under The Public Enterprise Reform Programme 1991–1995, Food And Agriculture Organisation. (Project GCP/RAF/238/JPN). 1994.

b. It is possible to implement policies which result in a public loss-making monopoly becoming a private profit-making monopoly.

The issue of privatisation is not a single option, but a policy direction which itself involves a range of possible options3. These include:

Privatisation of managementThat is, ownership of state assets to be retained by the state but management privatised by way of contract.
Privatisation of non-core assets and functionsAnother limited form of privatisation is the separation and privatisation of non-core assets and functions. This can involve the sale or lease of some manufacturing and distribution activities (e.g. collection, testing/grading, delivery to low density/rural markets), engaging in joint-ventures with private enterprise, etc.
Partial sale of equityIt may be possible to sell part of the equity of a state owned company. Equity may be sold privately to particular groups, e.g. producers of the raw material, staff members of the enterprise, indigenous people etc. However, such a method of disposal is likely to be costly to the government since the equity would probably have to be sold at less than full market value. The government could opt to sell part of the equity through a stock exchange flotation.
Full privatisationThis is the most difficult to achieve in the case of most agricultural marketing parastatals because they generally have social objectives that have overshadowed any commercial objectives. Potential investors may have little interest in being saddled with the residual social objectives, where these exist. Furthermore, their poor financial position makes them a high risk investment and their acquisition would immediately and adversely affect the share values and financial standing of their purchaser. Moreover, to fully privatise a parastatal would give a strong signal on future government policy with respect to public ownership generally.

The options discussed here need not be considered as being mutually exclusive. It is conceivable that several elements could be combined within a single reform programme. For instance, once the relevant market(s) have been liberalised, it would be possible to contract out the management of a parastatal and at the same time privatise non-core assest and/or functions whilst retaining public ownership of the parastatal. Other combinations are equally possible. The parastatal could be divided into several strategic business units (SBUs). For example, a Livestock & Meat Marketing Board could be divided into the following business units:

In many senses each of these business units operates in different, although related, markets, as SBUs could each be a cost and profit centre. Once organised in this way they can be treated independently of one another. Thereafter, a number of opportunities arise due to the flexibility which such a major reorganisation would create. Depending upon circumstances, some could be privatised, some might be the object of joint ventures, other could remain in public ownership but their management be privatised in an attempt to increase efficiencies whilst reducing government expenditure and others might remain as government owned and managed public enterprises.

Obstacles to be overcome in commercialisation and privatisation of agricultural marketing parastatals

An agricultural marketing board, or any other form of parastatal marketing organisation, can be commercialised and/or privatised. The process of commercialising an agricultural marketing parastatal involves management in establishing return-on-investment, turnover and profit targets. In order to achieve these targets the parastatal is expected to adopt a market orientation. In addition, the commercialised parastatal would be expected to raise funds on the financial markets of the private sector and pay interest at the market rate rather than rely upon public funding. Privatisation takes the additional step of transferring ownership of the parastatal out of the public sector and into the custody of private investors. The transfer of ownership can be effected in a number of ways. Shares in the enterprise can be floated on the stock exchange or can be sold to special interest groups such as management, employees or suppliers (e.g. a Dairy Marketing Board could be sold off to milk producers). The restructuring of a public enterprise involves two key preliminary steps:

An initial step might be to appoint a Board of Directors as Zimbabwe did with its four agricultural marketing boards. (i.e. the Dairy Marketing Board, Cotton Marketing Board, Grain Marketing Board and Cold Storage Commission). These independent directors can then be asked to exercise their collective judgement as to how the enterprise can be made more efficient and better meet customer needs. There then has to be a significant degree of deregulation of the markets which these enterprises serve, with more autonomy for the marketing boards, especially in pricing. Another priority is to deal with the accumulated debts of parastatals, where these exist.

Before the processes of commercialisation or privatisation can commence there are usually a series of obstacles to be overcome.

Accumulated deficits: Boards which are in a relatively strong financial position are far better placed to undertake restructuring than those carrying large, accumulated deficits. The dilemma faced by policy makers is to decide how to handle these deficits. If they are simply written off by the government then this provides the parastatal with ‘free’ capital, an unfair advantage over potential competitors and provides no evidences of the organisation's future viability to prospective investors. Even where there is no intention to privatise the parastatal, the provision of free capital runs contrary to the spirit of transforming an organisation into a fully commercialised enterprise.

Source of finance: Many marketing boards carry large deficits and need fresh injections of cash. However, the magnitude of there deficits usually discourages commercial lending institutions from supporting them. International donor agencies are a possible alternative source of funds but their rules of operation often prevent them from providing concessionary loans to the private sector, even recently privatised parastatals; these could however be available to a commercialised parastatal.

Tax liabilities: Potential investors would be concerned about the liability of a restructured marketing board to corporation tax. A commercial company which makes losses over a period of time can usually offset these against profits made in other years, for the purposes of assessing its tax liabilities. How governments treat the losses made by marketing boards prior to privatisation will have a significant bearing on how they are perceived by potential investors. The magnitude of the losses are such that if the accumulated losses were written off against future profits, it might be a very long time before the enterprise paid any tax. On the other hand, if no allowance is made for these losses then the marketing board constitutes a most unattractive investment.

Developmental roles: Marketing boards, and other types of parastatals, frequently have development roles, that is, activities and projects whose aim is to lead to the long term development of a sector of agriculture, a section of the population and/or a region of the country. For instance, a parastatal may be charged with helping convert subsistence farmers into cash crop farmers, or helping small scale farmers penetrate a dairy market dominated by large, commercial farms. Problems arise when the board has development responsibilities but no provision has been made for an adequate system of financing. In principle, the problem is easily solved in the case of commercialised, but not privatised, parastatals. That is, non-viable development activities should be separately identified and financed by government. The difficulty is that the accounting systems used by many parastatals are simply not capable of accurately separating out commercial from non-commercial activities or their attendant costs. Where the intention is to privatise the parastatal it is unlikely that prospective stakeholders would accept a development role unless the particular activities could be carried out at a profit. Even then, private investors would usually want to reserve the right to withdraw from an activity, if they identify alternative opportunities which offer a higher return on investment.

Another complication is the fact that governments tend to have wide-ranging political, social and economic objectives, many of which are likely to transend some of the aims of parastatals restructuring (e.g. indigenisation of an economy, drought recovery, etc.). This makes it difficult to deal with the restructuring or reform of an agricultural marketing parastatal in isolation from an array of confounding development issues.

Legislation: The restructuring or reform of marketing boards and other parastatals will invariably involve the amendment or repeal of a substantial body of legislation relating to a board and the products for which it has been responsible. Rarely is this a simple matter of withdrawing the prevailing legislation. In the case of agricultural products, legislation relates to a number of different issues economic, public health, research funding, etc. Whilst the processes of deregulation may focus on the economic and marketing issues, the public health measures cannot be swept away along with defunct rules and practices which related to controlled markets. Rather, it is likely that public health aspects will have to be reinforced and strengthened since deregulation often means that the number of market participants will increase in number. Similarly, the need for industry-wide funding of research and the provision of industry-wide services remains unaltered.

It is therefore necessary to review the whole corpus of legislation which directly or indirectly relates to the marketing board concerned, to decide the parts which can be repealed, those which should be retained and those which need to be amended. This process might involve the Ministry, the Office of the Attorney General, Parliament, a Cabinet Committee and then, perhaps, the Head of State. Each of these participants is likely to have a wide-ranging portfolio and agriculture is but one of them. Not surprisingly, therefore, effecting the necessary regulatory changes can take a considerable time, even when the government and the management of the parastatals are wholly committed to change. All too often, the time scale for legislative changes is underestimated by those who develop restructuring programmes.

The legislative issue is not of itself a major constraint, but the volume of work involved takes time. As in all aspects of government business, the passage of new legislation through the system will have to take its place with other new legislation before it can be passed into the law of the land. This inevitably affects the rate of progress of the restructuring of any government parastatal.

Dealing with accumulated deficits

Government capital investment in agricultural marketing parastatals often takes the form of irredeemable interest-bearing loans. The interest rate is usually highly favourable to the parastatal, compared to the rates prevailing on the open money markets. In most instances the government does not actually receive the interest due on parastatal deficits. Converting debt to equity improves the look of the balance sheet since debts must be repaid and at a specific point in time whilst equity belongs to the owners (i.e. shareholders) of the business and they only receive payment whenever the enterprise makes sufficient profits to pay out a dividend. A highly geared enterprise (i.e. one whose capital is largely comprised of debt borrowing) is generally perceived to be more of a financial risk for investors than one which largely depends on shareholder funds and retained earnings to finance its operations.

Where governments of developing countries have considered exchanging their outstanding loans to parastatals for equity, it is often solely with an eye to reducing or eliminating the interest payments of a beleaguered marketing board. This, however, is unsatisfactory where the enterprise is supposed to be of a commercial character. If little or not return is paid on the capital sums outstanding to government then this treats capital as a ‘free good’, which it is not. This is neither good in the campaign to engender ‘commercial attitudes’ within a former parastatal nor in the context of creating a ‘level playing field’ for emerging competitors (where these exist) who do not have access to free capital. Where governments provide ‘free capital’ to privatised parastatals it is an admission of failure to run the business as a commercial concern. Since equity capital carries higher risks than loan funds, over several years shares should earn a higher return, otherwise no equity investment would be made.

There may however be a case for writing off capital investments which were based on wrong assumptions or wrong policies in earlier years. For instance, investments may have been made in establishing poultry enterprises in rural years areas in anticipation of the electrification of those districts or villages. If for whatever reasons, that electrification has not taken place, those production units will be unviable and it would be best to write them off. A debt-equity swap would, at best, be self-delusion and at worst, would be concealment of a futile kind.

Encouraging private sector involvement in agricultural marketingc

In many cases the donors or lending institutions have made market liberalisation and encouragement for increased private sector participation part of the conditions attached to their structural adjustment loans. In some instances, the reform or abolition of a loss-making agricultural marketing parastatal has also been part of the agreement between the lender and the loan recipient.

Experience of implementing these reforms has been varied. In some cases, private sector participation has developed very quickly whilst in others, the process has been extremely slow. Much depends upon the stage of development of the private sector at the time market liberalisation measures are launched. In some countries, strong ‘informal’ or parallel marketing channels have co-existed with the formal channel throughout the period of administered pricing and “controlled” marketing of agricultural products. When these markets are deregulated the process of transferring ‘informal’ marketing functionaries into the formal sector tends to occur quickly. The entrepreneurs already exist and they have accumulated a certain amount of capital from their past marketing activities. On the other hand, where governments have been successful in suppressing informal marketing activities, the experience and culture of entrepreneurship and risk-taking may have been lost, or at least significantly diminished. In these cases, private sector participation in deregulated markets is a much slower process.

To illustrate the radical changes which market liberalisation can bring to a marketing system, consider figures 2.2 and 2.3 overleaf. Figure 2.2 depicts the formal grain marketing channels which served Zimbabwe prior to market liberalisation. The Grain Market Board (GMB) held both a monopsony and a monopoly with respect to the staple food of the country, white maize. The GMB supplied large-scale millers located in the urban centres of Zimbabwe. A parallel channel did exist with unlicensed traders buying and selling grain and small-scale millers, using hammer mill technology, providing a service to customers. However, this illegal trade was conducted on a very small scale and the bulk of the grain passed through the formal single channel comprising the GMB and urban millers who used industrial roller milling technology.

The Zimbabwean Government paid subsidies to the GMB both in order to keep consumer prices down and to ensure a steady supply of the country's staple food. Prices to the farmers for maize were determined by the government rather than by market forces. Whilst in years of normal rains Zimbabwe can grow enough grain to feed itself and can even export white maize, the total amount of grain handled by the GMB was showing a discernible fall as the large-scale commercial farmers began to grow alternative and more profitable crops.

c. The section on private sector involvement in agricultural marketing draws extensively on A.Thomson and N. Terpend, Promoting Private Sector Involvement In Agricultural Marketing In Africa, FAO Agricultural Services Bulletin 106, Rome, 1993.

Figure 2.2 Zimbabwe's formal grain marketing channel prior to market reform

Figure 2.2

As trade in maize was deregulated, the number of custom millers increased substantially. (Custom millers mill grain which the customer brings to them. They do not provide the grain). A number of production millers also came into being. Production millers buy, mill, bag and brand maize grain using hammer mill technology. Market liberalisation brought many more players into the marketing system, giving growers a choice of market for their product. There is now more competition for the farmers' maize. Consumers have also benefited. They now have a wider range of products from which to choose. Price sensitive consumers can now buy grain direct from growers, or the GMB, and take it to a custom miller. The straight-milled maize is the cheapest of the options, available. Alternatively the consumer can buy the more refined product of the production miller who dehulls the grain before milling. This is more expensive than straight-run meal but not so expensive as the highly refined meal produced by roller mill technology.

The increase in the level of competition has also manifested itself in the form of marketing promotions. Prior to market liberalisation the active promotion of maize meal was virtually unheard of in Zimbabwe. The large-scale millers were assured of a sizeable demand for their product. After all, it is the staple food of the country and they were the sole suppliers. In the post-liberalisation period advertising expenditure on roller meal brands has increased substantially and in-store promotions are increasingly common.

Figure 2.3 Zimbabwe's liberalised grain marketing system

Figure 2.3

Impediments to private sector participation in agricultural markets

Initially, the World Bank attached great importance to increasing the efficiency of parastatals as a means of bringing about market reforms. After all, agricultural marketing parastatals typically represented a sizeable burden upon the governments of LDCs and were characteristically inefficient.

However, in due course the Bank began to see greater potential in the liberalisation of markets and the privatisation of marketing institutions. Marketing reforms have tended to follow a pattern. In most cases, the first step has been to enfranchise private traders and actively encourage them to participate in markets from which they were previously excluded. The next step has been the removal of price controls. Marketing subsidies and parastatal subventions are then removed before the final act of market reform, i.e. the lifting of controls on international trade in agricultural products.

Scarborough & Kydd suggest that the following are necessary in order to promote an efficient private sector:

Prior to liberalisation government actions were perhaps the most significant impediments to private sector trade development. Although market liberalisation has, in most instances, changed government policy towards the private sector, the relationship between the state and commercial enterprises remains critical in determining the likelihood of success of any privatisation initiatives. The state effectively sets the rules of the game within which the private sector operates, and if these rules are too restrictive, or if they change too frequently, then private sector participation may well be inhibited. Here, consideration is given to some of the potential impediments to private sector participation in agricultural markets. As shall be seen, many, but not all, of these impediments are within the direct control of government.

Policy implementation: Even when government is committed to encouraging private sector participation in agricultural marketing, the bureaucracy which implements policy changes may be less committed. Years of market controls and licensing may have created large vested interests in an underpaid civil service, which may see the spectre of retrenchment in deregulation measures. It is therefore not impossible that government policy is undermined at the implementation stage.

In the past, many LDC governments have been openly hostile to the private sector and so any trust established between the two parties is likely to be fragile. On the side of the private sector, bureaucratic delays will almost certainly be interpreted as an absence of real commitment, on the part of government, to free market economics and a suspicion that market liberalisation measures might be reversed at any time.

Licensing: A common post-liberalisation regulation is the requirement for traders to be licensed. This has been a feature in Malawi, Mali, Senegal, Uganda, Zambia and Zimbabwe, among others. Licences allow some residual control over the private sector; licences can be refused to traders suspected of unfair trading practices and can enable the state to collect marketing information. In some cases, the administration of trader licensing has presented prospective traders with few difficulties. In Malawi, for example, merely have to pay a registration fee and provide evidence of ownership of a seized weighing scale. In contrast, Uganda has used licence fees as an overt tax on traders; and in Senegal, traders dealing in more than 200 kg of grain have to obtain a licence, and an authorisation to collect a specific product. Authorisation is only given after the trader has shown proof of a minimum balance in his/her bank account.

The administration of licences has been inconsistent. Sometimes the bureaucracy involved in applying for licences imposes substantial costs on traders in time, bribes and fees. At the beginning of a liberalisation process, licensing regulations may not be well publicised, or may change, leading to uncertainty among traders.

Quantitative restrictions: Traders are sometimes limited to transporting loads of a specified amount. This can impose costs on traders, as there may be economies of scale, which increase the efficiency of the marketing system. Quantitative restrictions can be imposed in a variety of ways. For example in Zimbabwe, even though a maize marketing liberalisation programme had been implemented, the Grain Marketing Board (GMB) refused to sell maize in quantities less than 50 kgs. This effectively prevented very small traders, without transport, from participating in the maize marketing system. Even if the prospective Zimbabwean trader can afford to hire a truck, he/she probably will not be able to purchase enough grain to make up an economic load. Chisvo et al6 put the problem into perspective when they state:

“Buying enough maize from the GMB to fill a 5-tonne truck requires almost twice the annual income of the average Zimbabwean…Those actually involved in grain trading, with few exceptions, reported that their only source of working capital was their own savings…Those who can capture scale economies using their own cash are relatively wealthy traders.”

Rigid and uncertain regulations: Regulations, rather than direct intervention measures, can be the principal instrument of government policy. If regulations are too rigid then parallel or ‘informal’ markets may re-emerge. This has happened in both Senegal and Uganda. Moreover, access to the legal system, where this becomes necessary, has to be both quick and inexpensive.

The uncertainty surrounding the regulations which are to apply to the private sector can also prove an impediment to private sector participation in agricultural marketing. During the early stages of market liberalisation, changes to regulations may occur fairly frequently and this unsettles would-be investors in the agricultural marketing system. This can happen because the impact of liberalisation is difficult to predict, and as government monitors the process it may feel it necessary to tighten or relax the regulations surrounding the private sector as time passes.

Price regulation: In order to retain a measure of control over food prices some governments have continued to impose price regulations in the post-market liberalisation era. These frequently take the form of floor and ceiling prices. These can have a substantial impact upon private trade. Private traders require a return on the resources which they invest in the marketing process. They will concentrate on those areas where marketing activities are most profitable, usually collection of grain near urban consuming centres, and ignore more distant markets where the information is poorer. This is certainly what happened in Malawi and Tanzania. Where government set narrow price bands within which the private sector must operate, these patterns are reinforced.

Smith8 recommends that government seeks to reduce the number and breadth of regulations to a minimum consistent with orderly production and marketing. He cites the example of the frequent requirement to obtain licences to trade and the need for separate permits for each commodity or groups of commodities in which traders wish to deal. Very often it is necessary to register the premises within which trade is to take place, and there may be restrictions on the quantities which can be traded and the times and forms of trading (e.g. wholesaling or retailing). Very often the reasons for many of these regulations have long since forgotten but traders remain on the statutes of the country. There are thus many instances where a simplification and reduction of regulations, and their consistent application, would remove a deterrent to private sector activities.

Case 2.1 Tanzania - Policy Transparency And Implementation
Effective liberalisation requires that prospective traders know what activities can be legally undertaken. In Tanzania, there was confusion at the local and village level as to the degree of liberalisation which had been implemented. Policy was primarily communicated through ministerial statements and answers to parliamentary questions. These channels of communication were neither reliable nor consistent in reaching the target audiences. Changes in regulations were not formally incorporated in legislation. In consequence, the enforcement of regulations varied from district to district.
    Some of the confusion appeared to be the result of changes in regulations. Deregulation of the wholesale trade in 1988 resulted in the private sector being able to transport grain to the main urban areas at a lower cost than the public sector through more efficient use of resources. This cost differential was reinforced by the absence of storage costs in the private sector (little storage was undertaken by the private sector), but with considerable storage costs being covered in the public sector. Open market prices fell below official prices, and made it difficult for the grain marketing parastatal NMC to sell grain, a necessary element for the effective management of the Strategic Grain Reserve.
    Government responded, in 1989–90, by forbidding private traders from buying grain direct from farmers. Instead, they had to buy from NMC or the co-ops. This policy was reversed just a few months later when NMC became insolvent and was removed from the grain markets. Frequent policy changes of this kind add to the private sector's costs in the form of risks and information collection with respect to current government regulations and disruption to their planning activities. If traders cannot rely upon a stable regulatory environment then they may be discouraged. The costs of operating in a formal economy with changing regulations may be greater than those of operating on parallel markets.
    Differing interpretations of policy, at local and central levels, due to conflicts of interest, can add further to the confusion. Local government has been partly financed through taxes on crop sales which have been collected through the primary co-operatives. Present legislation enables traders to buy direct from farmers, with the permission of the local authorities, and on payment of the crop tax. However, some local authorities prefer purchases to go through the primary co-ops because it is easier to collect the crop tax.
    Local authorities cannot forbid movement of grain out of a district, if taxes are paid. However, in a bad harvest year they may try to prevent movements out of areas normally in surplus, though they have no right to do so. Officially, only imports and exports are controlled. However, local authorities may feel that they can protect their own areas from the effects of drought by introducing movement controls.
    There appear to be considerable problems in communicating policy from central to local government, which is compounded by frequent re-interpretations of policy. Some experts believe that uncertainty over regulations is a major impediment to private sector entry into grain marketing in Tanzania. In practice, those who have good political connections seem to fare best.7

Public and private sector competition: In many countries, liberalisation has allowed for the co-existence of public sector agricultural marketing institutions (i.e. parastatals and/or government supported co-ops). The public sector institutions may perform a market stabilising function, as say a buyer-of-last-resort, they may be the conduit through which food aid is released on to the market or they may manage the Strategic Grain Reserve.

Problems arise when public sector bodies benefit from support which is not extended to the private sector. For example, subsidies on inputs, such as fuel, may only be available through public sector agents. Similarly, public and private organisations may not have equal access to credit and finance. Many state bodies have historically had easy access to finance, often at subsidised terms, and without regard to the profitability of their operations. This has two negative effects on the private sector: it reduces the public sector's costs of operations, giving it an unfair competitive advantage, and it reduces the capital available for investment in private sector agricultural marketing operations. Tanzania's private sector became the dominant grain marketing force in 1990 when it was decided that parastatals and co-ops should only have access to credit on commercial terms. Neither of these parties was considered a commercially viable agency so they could not obtain the funds they needed to carry on their marketing activities at the same level as in the past.

Public sector marketing organisations have often enjoyed preferential access to foreign exchange. Input and output markets are often interlinked through credit arrangements. Where farmers rely on credit from marketing agents to buy imported inputs, private traders who have difficulty in acquiring these imports, may be disadvantaged in dealings over output trading. They may also have difficulty in obtaining access to fuel and transport, spare parts in particular, if they cannot compete for foreign exchange. In many countries, exporters are prohibited from retaining foreign exchange earnings but must convert it to local currency at official exchange rates. This has sometimes led to flourishing cross-border parallel markets. This caused the Ghanaian government to institute a foreign exchange retention system, in the post-liberalisation period, whereby cocoa exporters could keep a proportion of the foreign exchange they earned, thereby reducing the incentive for smuggling. A similar scheme operates in Tanzania where 35% of export earnings can be retained to purchase production inputs.

Inadequate infrastructure: A major problem for traders in many countries is the low investment in infrastructure. In Africa, poor roads and inadequate storage facilities contribute to high marketing costs and commodity losses. In Uganda, some traders claim that the number of trips they can make have decreased to a fifth of what they could make ten years ago because of large increases in transport times and costs. Most small traders rely on public transport, or hiring space on trucks. Access to transport and ownership of trucks is often the basis for local monopolies in the transport sector, which increase traders' costs. The problem is all the more acute where foreign exchange shortages compel government to restrict the import of trucks and spare parts.

Adequate storage facilities can reduce crop losses and thereby food marketing costs. These often tend to be lacking in local markets, where a high proportion of grain trading takes place. Local market organisation is often the responsibility of local government. In some instances, market fees may be inadequate to maintain the market structure, or may be diverted to other areas of government expenditure. The absence of storage facilities also discourages traders from holding grain over time. This in turn prevents the development of private sector arbitrage which can moderate seasonal price fluctuations.

Credit constraints: Most small traders have restricted access to formal credit markets, and tend to borrow from informal sources. These can be extremely expensive sources of funds and often lock the borrower into a never-ending cycle of debt. Commercial lending institutions are neither used to, nor motivated to lend to small-scale marketing enterprises. Financial institutions prefer to lend in large amounts to large, established enterprises operating in high profit markets. Complete liberalisation of financial markets can actually lead to a shortage of capital for investment in agriculture since it tends to be a low profit sector of the economy.

Lack of access to credit and finance prevents small traders from expanding. The quantities of commodities bought and sold, the amounts stored and transported and the ability to exploit economies of scale are all restricted by poor access to credit.

Problems are bound to arise in the agricultural marketing systems of countries which have implemented market liberalisation programmes if the financial system cannot be reoriented to service a large number of small private sector marketing agents as opposed to a few very large public sector organisations.

Marketing information: With long established private sector marketing systems, informal networks usually exist to provide traders with information on market conditions, prices and the credit-worthiness of other parties. Conversely, where suppression of the private sector has been effective, in the past, the marketing information system tends to be underdeveloped. This was the case in Malawi where traders remained unaware of price differentials between markets and were unable to exploit opportunities for profitable market arbitrage which would also have increased market efficiency. Where there have in the past been strong parallel markets, information systems may exist but access to them may not be extended to post-liberalisation market entrants.

The impact of the macro-economic environment on private traders

So far in this chapter consideration has only been given to impediments to private sector investment in newly liberalised markets that operate at the micro-economic level but there are also macro-economic aspects of the problem. In particular, private sector participation is affected by exchange rate policy, economic stabilisation measures and the level and nature of economic aid.

Exchange rate policy: To improve the balance of payments, exchange rate devaluation is usually implemented. Devaluation increases the cost of imports, and with it many agricultural marketing costs are increased e.g. packaging/bags, fuel and transport costs, agricultural inputs and imported foods. Where the private sector is involved in the marketing of imports, government needs to acknowledge where price increases are due to devaluation rather than the result of privatisation. Equally, where the private sector is operating under controlled prices, the allowance for marketing margins accommodates increases in cost due to devaluation.

Domestic stabilisation policy: Stabilisation programmes usually mean improved budgetary control through stricter monetary control, reductions in expenditures and tax increases. Each of these is likely to impact on both traders' costs and revenues. Austerity measures invariably reduce demand for most products and at the same time traders can find that they result in substantial increases in interest rates, licence fees, market fees, sales taxes, etc. The danger is that traders can be driven back into informal markets where some of these costs can be avoided.

Economic aid: Structural adjustment programmes normally attract an increased inflow of aid from donors wishing to support the reforms. Much of the additional aid will be in the form of foreign exchange but some will be food aid or fertilizer aid. The way in which this aid is distributed can impact seriously on the development of the private sector. For instance, the private sector needs access to foreign exchange on the same basis as the public sector and co-operative agencies. Food and fertilizer aid distribution can have a more disruptive effect on private trade if it is not carefully timed. An influx of cheap food can reduce prices and cause considerable losses for private traders who have stored food grains. A system of distributing aid through auctions has worked well in Somalia and could work elsewhere.

Governments have to be careful in accepting aid projects which compete with potential private sector initiatives. These might be, for example, projects to build processing plants or storage facilities. Government has to be clear where it wants to encourage private sector investment. Governments can seek assistance from international donors on behalf of the private sector. Help can be sought to improve transport facilities or access to credit, or to fund training in technology, technical competence or business skills.

Government action to improve private sector performance

There are a number of areas in which government can lend support to the development and expansion of the private sector.

Clear policy statements: The state has to make clear its view of the role of the private sector in agricultural marketing system, i.e. it must have clear objectives with the respect to the marketing system. It is not enough to simply lift existing restrictions on the functions of the private sector. A positive role should be developed for it. The government's policy has to be announced in unambiguous public statements, which make clear the extent of market deregulation.

It is equally important that the extent of the future involvement of the public sector in the agricultural marketing system be clearly articulated. If the public sector is allowed to enter the market, it must be known under what conditions, at what prices, and for what purpose this will occur. If a Strategic Grain Reserve is held then the trigger for grain release must be known to the private sector. Otherwise, uncertainty about the likely effect of government policy on market conditions will prevail.

Regulatory framework: All to often in structural adjustment programmes the need for supporting legislation is either under-estimated or neglected altogether. Government can provide a set of stable regulations which would:

Case 2.2 Uncertainty Over Government Policy With Respect To Public Versus Private Sector Marketing Of Agricultural Products
    In Malawi, one of the problems which has been identified in the process of liberalisation is the very seasonal nature of private sector trade. Traders are also unwilling to become involved in the distribution of inputs, and, perhaps more importantly, sell grain in the rural areas in the pre-harvest period. There are a number of possible reasons for this.
    ADMARC, the state marketing agency, operates on a pan-seasonal price basis, which may give insufficient profit to the private sector to operate outside of the harvest period. Much of the private sector trade appears to take place before the ADMARC buying stations open for the season. There appears to be a lack of storage in the private sector. There may be insufficient information about the need for urban-rural grain flows in the pre-harvest “hungry” season. Survey evidence suggests a substantial demand for grain in rural areas but most private trade moves grain from the rural areas to the towns.
    In the case of fertilizer distribution, lack of private sector distribution is undoubtedly related to the operation of the government subsidy programme. Overall development of medium to large firms, specialised in grain trading, will be hindered unless the obstacles to building up a year-round business dealing in both inputs and outputs are identified. There may be problems both of uncertainty and transitional adaptation, and of government policy, with respect to pricing and the activities of ADMARC.7

Training: Many of the entrepreneurs who come into a liberalised market will lack the basic knowledge and skills to ensure that their businesses can survive the periodic adverse economic conditions. Some may be technically proficient but know little about financial management or marketing; others may possess the basic entrepreneurial skills but have very limited levels of technical know-how. If government wishes to establish a private sector capable of growth and development then training programmes will be required. This does not necessarily mean that government has to provide or even fund the training. It may mean, instead, that government facilitates the training.

Infrastructure: Investment in roads, market places and storage facilities can reduce marketing costs and thereby increase levels of commercialisation. This might involve investing in new facilities and/or rehabilitating existing facilities. Where public sector marketing boards have under-utilised capacity, particularly in storage, this should be made available to the private sector, either through divestiture or through leasing arrangements.

Information systems: The provision of market intelligence removes a barrier to market entry. Larger and longer established organisations, including marketing parastatals, have usually developed intelligence gathering systems over time. They have little motivation to share their information with smaller enterprises. In fact, to do so would lose them an important competitive advantage. This being the case, a government sponsored marketing information system would improve market transparency and help small-scale enterprises compete more effectively with larger organisations.

Case 2.3 Providing Appropriate Market Infrastructure
In Dar Es Salaam and the regional capitals in Tanzania, wholesale marketing takes place in cramped conditions with few facilities for shelter or storage. Traders move their produce on as quickly as possible, to reduce losses from rain and theft. In most of these locations there are few facilities for weighing grain, and sometimes water and sanitation are also missing.
    In some markets, traders have organised in small groups to build crude shelters, but provision of more elaborate facilities are clearly beyond their capacity. Care has to be taken that these are built in appropriate locations. In Dodoma, the council has built a new wholesale market which is currently being used to about 10% of capacity. This is partly because of its location, and partly because it has been built as an auction market, which is not the basis on which wholesale grain trade takes place in Tanzania. Consultation with traders would help avoid this waste of resources. However, there are indications that other local authorities have been impressed by the appearance of the Dodoma market, and are contemplating building similar markets.7

Transport: Transport shortages are a common complaint among private sector agribusinesses. This is especially true of small-scale businesses located in rural areas. Perhaps the best government can do is to give transportation a high priority within its foreign exchange allocation so that more vehicles, spares and fuel can be brought into the country. Emphasis should be placed on increasing the number of vehicles in the possession of the private sector.

Credit: Since poor access to credit and other forms of finance are a major obstacle to the private sector, especially the small-scale operator, government may have no choice but to get involved in establishing appropriate lending schemes. These may be financed from the Treasury, through special funds provided by international donors or through savings and credit schemes initiated by the private sector itself. Alternatively, government can encourage commercial banks to set special loan schemes targeted at various sub-sectors of agriculture and agribusiness. Due to the inherent risks in agriculture, and in dealing with small businesses with very limited resources, lending institutions will probably require some form of government underwriting of these schemes.

Case 2.4 Malawi's Attempt At Directing Credit Towards Private Traders
The difficulties which can arise in developing and implementing credit schemes for private traders are immense, and not always easy to anticipate. An agreement was reached between the Government of Malawi and the World Bank, in the mid-80s, that 1.5 million Kwacha was to be made available for lending to private traders. The money was lodged with the Reserve Bank of Malawi (RBM) which would lend it on to a disbursing institution. After much discussion, the government decided that SEDOM, (Small Enterprise Development Organisation of Malawi), an organisation set up with EEC funds to lend to small-scale industry, should be the disbursing institution. SEDOM appears to have been reluctant to handle this programme and negotiations with RBM over who would cover the running costs of the programme were protracted. Eventually an agreement was signed between RBM and SEDOM in 1990. The announcement of the programme excited considerable interest among Malawian businessmen. However, there was confusion as to the precise process for the loan disbursement from RBM, SEDOM expected a tranche of money to be transferred up front, whereas RBM operates a system of reimbursing organisations after the loans have been made. Up Until August 1991, no loans had been made under the programme.
    This may be a rather extreme example of poor communications between organisations, but it is also indicative of a general unwillingness to get involved in extending credit to private traders, who are seen as having little collateral to offer and therefore are very poor risks. It is not enough for donor agencies such as the World Bank, or governments, to allocate funds for credit programmes. They have to be prepared to invest time and money in developing new and flexible lending procedures.7


Market liberalisation, including the reform of agricultural and food markets, is a key element of economic structural adjustment programmes. The origins of the term structural adjustment rest with the entry of the World Bank into policy-based lending, in the early 1980s. It refers to restructuring production so that the allocation of resources is based upon opportunity cost and in this way optimises the outputs of those resources. Thus structural adjustment is intended to lead to economic growth. Originally the supply side policies of the World Bank were pursued independently of the economic stabilisation programmes of the IMF, which deal more with the demand side of an economy. However, since the mid-1980s the two organisations have worked together to ensure that structural adjustment and stabilisation programmes have complemented one another.

Before the benefits of ESAP can be realised, policy makers must arrive at an agenda of policy and institutional reforms and design a sequence of measures which is technically consistent and politically sustainable. Unfortunately, there is little informed guidance available to them in their task, because there is no substantive empirical understanding of best practice in structural adjustment. It is likely to be a considerable time yet before enough data has been collected and analysed to provide a basis for guiding policy makers.

A major question for most LDCs that seek to implement ESAPs is what role, if any, to assign to agricultural marketing parastatals after markets have been liberalised. The options range from disbanding them altogether to privatising either the organisations themselves or their functions. These are not easy decisions. If these parastatales are abolished then there has to be solid evidence that there are other organisations both able and willing to perform their functions. Some of these functions may prove wholly unattractive to commercial enterprises but must be performed by one agency or another (e.g. management of the strategic food reserve and developmental projects). If, alternatively, the decisions is to privatise an agricultural marketing parastatal then, in most cases, difficulties such as accumulated deficits, credibility with lending institutions and future tax liabilities first need to be overcome.

More often than not encouraging the private sector to invest in liberalised markets is an integral component of ESAPs. It is reasoned that a competitive private sector can greatly improve the efficiency of a marketing system. There are, however, a number of impediments to the participation of the private sector when markets are opened up to competition for the first time. These include a lack of trust, on the part of prospective entrepreneurs, that market liberalisation measures will not be reversed, trade licensing and regulatory arrangements that are perceived to be too restrictive, the continuance of any form of price control and uncertainty that surviving marketing parastatales will not be given unfair advantages over them. Other common impediments are inadequacies in marketing infrastructure, access to credit and access to marketing information.

Private sector participation in liberalised agricultural markets is also influenced by macro-economic as well as micro-economic policies. Exchange rate policy, economic stabilisation measures and the inflow of economic aid to the country all influence the incentive to private entrepreneurs to enter the liberalised market.

Governments that sincerely wish to encourage private sector participation in the marketing system should ensure that policy statements are widely communicated and unambiguous in the intent to promote private sector involvement; should develop a supportive regulatory framework; need to provide technical and entrepreneurial training; have to initiate improvements in the marketing infrastructure; promote the establishment of a marketing information system to guarantee market transparency and help prospective participants to gain access to formal sources of credit.

Key Terms

CommercialisationMarketing boardsPrivatisation
Economic efficiencyMonetary policyStabilisation
Exchange rate policyNGOsStrategic Food Reserve
Fiscal policyParastatalsStructural adjustment

Review Questions

From your recall of the material presented in this chapter, give brief answers to the following questions:

  1. What are the fundamental distinctions between structural adjustment and stabilisation programmes?

  2. What would be the purposes of any regulatory framework designed to support market liberalisation measures?

  3. List the main obstacles to the entry of the private sector into deregulated agricultural marketing systems.

  4. What are the alternative ways in which a marketing parastatal might be restructured?

  5. Distinguish between commercialisation and privatisation.

  6. What are the alternatives to the full privatisation of agricultural marketing parastatal?

  7. Name the 3 policy instruments used in IMF sponsored economic stabilisation programmes?

  8. Briefly outline the main issues to be addressed before privatising or commercialising an agricultural marketing parastatal.

  9. Why is the new wholesale market in Dodoma under-utilised?

  10. Specify 3 major objectives of Economic Structural Adjustment programmes.


1. Scarborough, V. and Kydd, J. (1992), Economic Analysis Of Agricultural Markets: A Manual. Chatham, UK, Natural Resource Institute, p. 140.

2. World Bank (1989), “Sub-Saharan Africa, From Crisis To Sustainable Growth”, A Long-Term Perspective Study. World Bank, Washington D.C., USA.

3. Attwood, E. (1994), The Restructuring Of The Agricultural Marketing Parastatals Of Zimbabwe Under The Public Enterprise Reform Programme (1991–1995), Food And Agriculture Organization. (Project GCP/RAF/238/JPN).

4. IMF (1987), IMF Survey, February 9.

5. Spooner, N. and Smith, L. (1989), Structural Adjustment Policy Sequencing in Sub-Saharan Africa, Rome: Economic and Social Policy Division, Food and Agriculture Organization.

6. Chisvo, M., Jayne, T.S., Telft, J., Weber, M., and Shaffer, J. (1991), “Traders Perceptions Of Constraints On Informal Grain Trading in Zimbabwe: Implications For Household Food Securing And Needs Research.” In: Market Reforms, Research Policies And SADCC Food Security UZ/MSU Food Security Research in Southern Africa Project, Rukuni, M. and Wyckoff, J.B. (eds), Department of Agricultural Economics and Extension, University of Zimbabwe.

7. Thomson, A. and Terpend, N. (1993), Promoting Private Sector Involvement In Agricultural Marketing In Africa, FAO Agricultural Services Bulletin 106, Rome.

8. Smith, L. (1992), Agricultural Sector Performance And Policy And The National Economy. Network And Centre For Agricultural Marketing Training In Eastern And Southern Africa, p. 74–80.

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