Strategic Commodity Value - Chains - Private Sector Investment to Transform Agribusiness

from All Africa

Africa Journal (Washington, DC)

By Josué Dioné
Washington, DC

The central importance of agricultural development for broad-based economic growth, poverty reduction, food security, and sustainable development in Africa cannot be overemphasized.

With some 46% of its people living on less than a dollar a day, the continent is among the poorest regions of the world. About 70% of these poor people live in rural areas, and their income and livelihoods depend primarily on agriculture and agriculture-related non-farm activities.

To a large extent, the overall economy of the majority of African countries is determined by agriculture, not only because agriculture employs nearly 60% of the total African labor force, but also because of the strong backward and forward linkages between agriculture and other sectors. As depicted in Table 1, a significant part of non-farm rural and urban employment is linked to agricultural commodity value chains, through many formal and informal enterprises engaging in activities such as agricultural input, equipment manufacturing and distribution, agricultural commodity processing, transport, trade and marketing, as well as food preparation and retailing.


A Neglected Sector

Despite the strong evidence of the central role of agriculture for overall economic growth and poverty reduction in Africa, the sector has been considerably neglected over the last four decades, suffering from a lack of consistency in the degree of priority and the course of policy for its development, both from African governments and development partners. This neglect resulted from the shift in donor priorities mainly to macroeconomic stabilization and structural adjustment programs. The programs contributed to the erosion of investment in basic infrastructure and productive sectors. For instance, against the 25-30% contribution of agriculture to total Gross Domestic Product (GDP), the proportion of public spending on the sector decreased from a low 6.4% in 1980 to 4.5% in 2002, while global development assistance to agriculture in the late 1990s also fell to only 35% of its level in the late 1980s.

As a result, African agriculture is one of the most under-capitalized in the world, on technological, infrastructural, and institutional grounds.

Only 6% of arable land on the Continent is irrigated, compared to 40% in Asia. Road densities are more than six times higher in Asia than in Africa, a major handicap to effective transportation of various commodities and equipment to rural communities. Likewise, access to other basic infrastructure such as electricity and telephone lines in rural areas is limited. With regard to innovations, African agricultural institutions of higher education, research, and extension are poorly staffed, ill equipped, and under-funded. Adequate financial structures, and enabling policy and institutional environments that meet the needs for private investment in farming, agribusiness, and market chains, are yet to be developed.

The combined effects of these drawbacks include stagnating agricultural productivity, weak backward and forward linkages between agriculture and other sectors, a widening gap between domestic supply and demand, loss of competitiveness in world markets, increased food insecurity, and natural resource and environmental degradation. Today, Africa faces a paradox: most of its countries' economies are still predominantly agrarian, yet, despite average annual food and agricultural imports of $25 billion and food aid upwards of $2 billion, nearly one-third of the total population suffer from hunger and poverty.

Increasing Public Sector Investment

In response to this challenge, the New Partnership for Africa's Development (NEPAD) has conceived and is striving to implement the Comprehensive Africa Agriculture Development Program (CAADP), with the goal to achieve a 6% sustained annual growth of agricultural GDP, developing dynamic domestic and regional agricultural markets and making Africa a key player and net exporter in global agricultural markets.

With an estimated investment portfolio of $251 billion for 2002-2015, the CAADP priorities are articulated around four pillars (described on p.14 &15).

Since its official adoption in 2003 by African heads of state and government at their Summit in Maputo, the CAADP has received repeated top-level political commitments from subsequent Summits on agriculture and water, fertilizers, and food security. Chief among these is the allocation of at least 10% of national budgets to agriculture and rural development by 2008. Obviously, delivering on commitments to increase public-sector investment is crucial for removing impediments of poor infrastructure and support services, and to unleash Africa's agricultural potential for growth and competitiveness.

The Need for Increased Private Sector Investment

In addition to the need for considerable public investment, is the equally important challenge to mobilize private investment to develop the agribusiness sector of the Continent. No doubt, difficulties in this regard are in part associated with major external factors such as commodity price trends and market volatility, as well as protectionist measures, domestic agricultural support, and export subsidies given to Africa's trading partners. However, these external constraints are compounded by domestic policy and institutional factors, which must be addressed by transforming the current $25 billion agricultural import talley of the Continent into an investment endowment for agricultural transformation.

First, African food and agricultural systems are characterized by extreme fragmentation along national and sub-regional borders. While being largely closed to each other, these fragmented markets are increasingly open to trade with the world outside the Continent. Within the context of an increasingly global economy, this landscape does not provide economies of scale (to maximize efficiency at the different stages of commodity value chains), economies of vertical coordination (to minimize transaction costs among the different stages of the value chains), and economies of complementary diversification and specialization (among countries and sub-regional groupings) that would allow the realization of full competitive gains for intra-regional and global trade. As a result, the gap between aggregate domestic production and increasing regional demand tends to be filled by imports from non-African countries, while the fragmented national agricultural systems strive to compete in exports aimed primarily at international markets outside the Continent.

Second, in this fragmented regional market landscape, African farmers are increasingly disconnected, both from input markets (backward) and product markets (forward), primarily because of failure to develop stages of food and agricultural value chains - namely the agribusiness industry and service stages - that are critical in linking them to the market. To risk investing in productivity-increasing technologies, not only should the information and inputs be accessible and affordable to farmers, but reliable and accessible markets should exist for any surplus output resulting from technology-based productivity gains. In terms of inputs, industrial production of seeds, fertilizers, and other chemical inputs, machinery and other equipment are negligible. Moreover, the demise of public-sector enterprises that previously carried out agricultural input and credit delivery functions, has resulted in a vacuum yet to be filled by the private sector. This is in part due to a lack of adequate capacity, conducive policy, and the inability of the institutional environment to help the private business community operate in such knowledge/skill-intensive and risky fields of business. On the output side, only 10-15% of total agricultural production is marketed in processed products. This contrasts with the increasing effective demand for imported processed food and agricultural products from outside of the Continent, which is fuelled by rapid urbanization and the related urban consumption patterns.

The Development of Regional Value Chains

A strategic approach to building regional value chains of strategic food and agricultural commodities would help address the double challenge of creating an optimal regional space for private agribusiness development, and bridging farmers' disconnection from the market. Such an integrated strategy must include a coherent and integrated regional approach to the development of the value chains of selected food and agricultural commodities. These commodities must be strategic in terms of their unexploited production potential with regard to their relative weight in the African food basket and domestic economies, and/or their importance in the interface (trade relations) between African economies and the global economy.

For such strategic commodities, building a common African market that transcends national and sub-regional borders would offer an appropriate economic space for profitable private investments with regional-level economies of scale. Public-private partnerships to create an environment that is conducive to ensuring both profitability and security of regional private investment would further facilitate the development of vertically coordinated regional value chains for such commodities. For instance, the creation of such an environment could proceed from the opening of Preferential Regional Investment Zones in those areas where the greatest unexploited production potential for selected commodities lies. In such zones, the creation of a favorable investment climate through appropriate policy, institutional, and legal frameworks for the development and management of land and water resources, and the provision of the necessary infrastructure and support services, would grant adequate incentives and security to stimulate regional-scale private investment in agribusiness. It would allow for the emergence of trans-national agribusiness joint ventures capable of mobilizing pooled investment with a view to developing, in a vertically coordinated manner, the different stages of the strategic commodity value chains within legal (contractual) frameworks to safeguard the interests of smallholder farmers.

Some elements of such a strategy are reflected in the CAADP implementation process and related commitments. Chief among these are the commitments to create a common African food market and to accelerate the development of an explicit a list of strategic commodities: rice, maize, legumes, cotton, oil palm, beef, dairy, poultry, and fisheries products at the continental level, and cassava, sorghum, and millet at sub-regional level. However, there is still a need to articulate these elements in an integrated and comprehensive strategy. As suggested above, such a strategy calls for an understanding of agricultural development that goes beyond the narrow confines of farming to encompass the vital agribusiness industries and services required for an integrated development of all stages of the value chains of the selected strategic commodities.

Josué Dioné, Ph.D. is the Director of the Food Security and Sustainable Development Division at the United Nations Economic Commission for Africa (UNECA). Dioné has extensive experience in development policies, strategies, programs, and projects, with a special focus on agricultural and rural development and food security in Africa. He has held several senior professional positions, including Principal Policy Economist at the African Development Bank, Senior Research Specialist and Associate Professor of Agricultural Economics at Michigan State University; and Regional Program Coordinator for Institutional Capacity Building in policy research on agricultural development and food security at the Institute of the Sahel of the Interstate Committee of the Sahelian Countries (CILSS).