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How to make the most of agricultural commodities

26 May 2013

Following the UNCTAD report on commodities and development which criticised governments that had failed to “make the most of commodities” by overlooking policies to maximise sectoral linkages (see Agritrade article ‘Changes to commodity markets will have lasting price effects’, forthcoming 2013), the UN Economic Commission for Africa (ECA) has devoted its 2013 Annual Economic Report to articulating its view of the way forward. This sees a strong role for government and for interventionist policies. The chapter on agricultural commodities, for example, argues that “interventionist state policies are crucial to make the most of soft commodities”. Citing examples from Indonesia, Malaysia and Brazil, it argues that intervention such as “export restrictions [are] important to increase the value-added content of exports”.

The report incorporates evidence from seven sub-Saharan African case studies: Cameroon, Ethiopia, Ghana, Kenya, Nigeria, South Africa and Zambia, with agricultural case studies that include cocoa, coffee, tea and ‘agro-products’ (essentially fresh horticulture).

The report recognises fully the developmental potential of agriculture, arguing for example that “agro-processing is one of the most developed manufacturing sectors in Africa.” While recognising that “there is no ‘one size fits all’ policy approach for commodity-based industrialisation”, in both its policy recommendations and case study analysis the report emphasises the role that governments should play to maximise the developmental impact of commodity production and export. These include several uncontroversial roles, such as creating “inclusive and transparent institutional industrial-policy mechanisms”, “boosting local skills and technological capabilities” and addressing “infrastructure constraints and bottlenecks”. However, some recommendations are more controversial, such as developing “an appropriately directed local content policy” (for which the report argues that WTO “rules provide some legal leeway... and [that] many countries anyway find real-world mechanisms to push through and sustain local content policies”).

The report argues that governments should “adopt strategic interventions to insert indigenous firms in supply chains”. This last recommendation flows from a core element of the research methodology for the report, which has focused on the place of African firms in global value chains (GVCs). It shows, for example by reference to the Kenya horticulture and Ghanaian cocoa industries, how a relationship of trust within a GVC can help African firms upgrade and retain a higher share of the final value of the goods made from their raw materials. However, it notes that this takes considerable time and requires appropriate government support.

The report compares favourably, for example, the experience of Ghana’s cocoa sector with that of Cameroon. It points out that “unlike many other producing countries, Ghana in the 1990s did not dismantle its cocoa marketing body.... [and] while allowing private, registered buyers to control domestic marketing, Ghana retains government control over exports and, critically, over grading and quality assurance.” It attributes the recent growth of the sector and its price premium partly to these features. By contrast, it sees the absence of these features in the “dismal” experience of Cameroon’s efforts to “to promote local processing” and a more beneficial basis for integration into global agricultural value chains. 

Editorial comment

The ECA’s use of the GVC methodology provides a helpful way to identify how best Africa could capitalise on natural resource endowments to avoid “the resource curse” and, instead, use the gains from trade to support sustainable development. The GVC approach focuses on the factors that determine the distribution of the final value of a good between the many elements in the chain “from farm to plate”. Key words are “power relationships”, “trust”, “hierarchies” and “lead firms”. In essence, the approach argues that the return to primary producers is determined by “what they can negotiate” with lead firms in a GVC which, in turn, is heavily influenced by what they can offer. There is much that governments can do to increase their firms’ negotiating power. Potentially some useful lessons could be learnt from the EU’s evolving policy on strengthening the functioning of supply chains. 

However, of critical importance is the way that policies are implemented. As the ECA report identifies, there have been examples of successful highly interventionist policies – but there have also been many failures.

The ECA report shows clearly the possibilities and dangers in relation to regional trade. It notes the difficulty that many producers have in breaking productively into GVCs, given the high quality and delivery standards demanded by OECD buyers. It suggests that regional markets could provide a first “learning by doing” experience on the road to global exporting. However, it notes growing extra-regional competition on regional markets. The report also notes the pioneering role of South African supermarkets in local sourcing as they spread across the continent, and expresses the hope that this may encourage European supermarkets (with their own established supply chains) to follow suit and move towards greater local sourcing. Here again government policy could play a role by requiring new retail investors, as an integral part of licensing agreements, to open up dialogues with local producers on product standards and requirements (see Agritrade article ‘Better information on retailer plans sought to boost sector development’, forthcoming 2013). 


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