Agricultural Factor Markets in Sub-Saharan Africa: An Updated View

COMMON WISDOM #2: In Africa, land, labor, and capital markets remain largely incomplete and imperfect

SCORE: 4 - Fact

FINDINGS:

• Factor markets, which include labor, capital and credit, regularly fail African farmers
• The pattern of market failures is general and structural, not related to the head-of-household’s gender, or to geographic characteristics such as distance to roads or to large population centers
• In some countries, the degree of market failure varies between agro-ecological zones, suggesting that market performance may depend in part on agro-climatic factors outside households’ control

POLICY MESSAGES:

The research supports the current beliefs and discussion on African agricultural and rural development, showing that there is a pressing need to address widespread, systemic market failures that impede productivity growth and poverty reduction.

SUMMARY

Agricultural factor markets in Sub-Saharan Africa are widely believed to be failing or incomplete because of bad roads, unreliable electricity and telecommunications services, insufficient credit and insurance, tenure systems that do not ensure secure property rights, corrupt officials, crowded ports, slow technological development, labor supervision problems, and so forth. This belief pervades the development community’s policy briefs and strategic plans for Africa.

However, priority setting in this area is based largely on longstanding assumptions about markets rather than on rigorous research using current data. Using data from the recent and ongoing Living Standard Measurement Study-Integrated Survey’s on Agriculture (LSMS-ISA), a careful empirical study of the common belief that factor market failures are widespread in rural Africa was completed in Ethiopia, Malawi, Niger, Tanzania, and Uganda.

First, the study provides a comprehensive overview of farmers’ factor market participation. In contrast to prevailing wisdom, it shows that a large share of farmers transact in agricultural labor or land markets. Second, it tests for failures in markets serving agrarian households. It predicts that when markets are complete and competitive, households decide about production and consumption separately. If this hypothesis holds, households allocate resources to maximize farm profits first and condition their consumption choices on the resulting budget. The paper hypothesizes that household size does not affect the amount of farm labor used. If a farmer can transact freely and at market determined prices, it should not matter whether his or her household consists of one person or 10.

For the five countries studied, the research notes a general and structural pattern of market failures that does not vary meaningfully with the gender of the household head or geographic characteristics such as distance to roads or to large population centers. In some countries, the degree of market failure varies between agro-ecological zones, suggesting that market performance may depend in part on agro-climatic factors outside households’ control. However, the overall message concerns a pressing need to address widespread, systemic market failures that impede productivity growth and poverty reduction.

Policy and Research Implications

Researchers must locate the sources and causes of factor market failures more precisely. Programming and policymaking should take into account that factor markets in major Sub-Saharan African countries are not fully integrated, and interventions that treat the rural farm economy as a unified, well-functioning whole are unlikely to achieve the desired objective.