MARKET OPPORUNITIES FOR AFRICAN AGRICULTURE: AN EXAMINATION OF DEMAND-SIDE CONSTRAINTS ON AGRICULTURAL GROWTH

Rapid growth in the agricultural sector is central to any strategy for slashing poverty and hunger on the African continent. Yet investments aimed at increasing agricultural productivity need to be linked to market opportunities if they are not to depress commodity prices and farm incomes. It is widely perceived that high market transaction costs, weak domestic consumer demand, and lack of export possibilities are major constraints on agricultural growth prospects for Africa. But just how severe are these constraints, and what can be done to enhance market opportunities to enable agriculture to become a more powerful engine of growth for the continent? This study addresses these questions. It concludes that non-traditional exports have the fewest constraints and remain the most profitable option for increasing export earnings. However, because of their relatively small base (averaging $7 billion/year in 1996-2000) they have only limited potential to raise incomes on the scale required to affect overall economic growth and poverty reduction over the next 10-15 years. Even with an optimistic growth rate of 14 percent per year for non-traditional exports, economy wide simulations show that per capita agricultural income for Africa would only grow by 0.2 percent per year more than in a baseline (business as usual) scenario. Prices for traditional export crops will continue to decline, but there is scope for African countries to recuperate greater value if they could raise their quality standards and capture growing niche markets for specialized varieties. But again the amount of income that could be generated is small compared to the need if rural poverty is to be slashed in the next 10-15 years. Niche markets also tend to be highly competitive and specialized, with rigorous quality standards, which will be hard for many African countries to meet. Africa's own demand for various food products is already large (more than $50 billion/year) and is expected to double by 2015. Only part of this output is actually marketed (the rest is consumed on farm) but it still represents a large and growing market that ought to offer some real agricultural growth opportunities. Since Africa currently imports 25 percent of its food grains such as maize, rice, and wheat (for wheat alone the total is 64 percent), there is even potential to displace some imports with domestic production. But even here African farmers must increasingly compete with low cost (often subsidized) food imports from elsewhere, particularly Europe and North America. Yet despite this promise, economy-wide simulations suggest that even modest growth in grains productivity could depress domestic grain prices given prevailing agricultural trade policies around the world. This would benefit consumers and poor people in Africa, but it would slow growth in agricultural income. A more promising scenario arises if the productivity of the livestock and grain sectors could be increased in tandem. In this case, there would be an increase in the consumption of livestock products as well as grains, and an increase in the derived demand for feed grains. Agricultural income would then grow even while grain and livestock prices fell, leading to gains for both farmers and consumers. For example, if grains and livestock productivity were to grow by 1.5 and 4 percent per year, respectively, then for all Africa, per capita agricultural income would grow by 0.2 percent per year more than in a baseline scenario and per capita food consumption would increase by 1.2 percent per year. These results assume continuation of current agricultural policy regimes in the OECD countries, which constrain Africa's ability to compete in many international and regional markets. One way for Africa to increase its competitiveness is to invest in infrastructure and market development to reduce transport and marketing costs. This would help reduce costs for a broad range of commodities, promoting trade and reducing domestic prices with follow on demand effects. A model simulation of the combined impact of improving productivity in the transport sectors and in the export agricultural, grain, and livestock sub-sectors appears to have the most promise for growth in income and food consumption. It could potentially raise annual per capita income growth in the agricultural sector to 1.5 percent and per capita food consumption growth to 2.3 percent, well above the impact of growth in the agricultural sub-sectors alone. Finally, agricultural growth links with growth in non-agriculture. Increased income generated from the non-agricultural economy could create additional markets for agricultural goods. Without growth in the non-agricultural economy, gains in agricultural income and calorie consumption for SSA as a whole will be severely limited. Thus, investments in agriculture and other efforts to promote higher agricultural productivity growth need to be complemented with policies and investments to spur non-agricultural growth. More generally, investments in rural infrastructure can help to maximize positive linkage effects of agricultural growth. Agricultural growth can play a major role in increasing food supply, but sustained increases in incomes and reductions in poverty are likely to require a combination of labor-intensive growth in both agricultural and nonagricultural activities