Key message: inadequate infrastructure, low productivity, untapped economies of scale and lack of support services are the main supply-side constraints facing commodity producers in developing countries.
Geneva, 27 April 2007 - Inadequate infrastructure, low productivity, untapped economies of scale and lack of support services are among the most important so-called "supply side" constraints that limit the competitiveness of commodity producers and exporters in developing countries.
The absence of adequate infrastructure increases transaction costs and introduces risks, particularly with respect to producers´ ability to meet delivery commitments. Mining and oil production usually carry their own infrastructure costs and, indeed, infrastructure often accounts for the major share of total investment in these industries. Agriculture has a completely different structure for financing and production, with limited possibilities for attracting loans. Because production is spread over large areas and many producers, it is very difficult to finance infrastructure investment against the proceeds of future production.
High transportation costs affect competitiveness in many developing countries, especially landlocked countries. It is not unusual in Africa for as much as 40% of national export earnings to be diverted into international transport services. In the United Republic of Tanzania, transport costs account for 60% of the total marketing cost for maize, and losses due to inadequate storage facilities are estimated to be 30-40% of production. Lack of storage facilities is a major source of loss in developing country agriculture and a major impediment to competitiveness. After-harvest losses could be easily reduced in many countries through better storage facilities.
Low productivity limits the cost advantages otherwise enjoyed by developing country farmers. In Africa, agricultural productivity has stagnated for the past ten years at an estimated US$375 per worker (constant 1995 US$). This is 12% lower than in 1980, when value-added per worker was US$424. Yields have also stagnated or fallen for a wide range of crops in many countries. Yields of the most important food grains, tubers and legumes (maize, millet, sorghum, yams, cassava, and groundnuts) in most African countries are no higher than in 1980. This has made the challenge of attaining food security even more difficult.
Low productivity has effects beyond the agricultural sector. In addition to providing a competitive edge, enhanced productivity helps to fuel economic growth by generating surpluses that can be used for investment. Historically, agricultural surpluses have been a critical element in development and industrialization.
Inadequate inputs and low capital investment explain much of the difference between potential and actual productivity. For example, despite variable rainfall and frequent droughts in large parts of Africa, only about 7% of land under cultivation there is irrigated, compared to 13% in the Latin American and Caribbean region, which has similar population densities and resource endowments. Fertilizer application in Africa did not increase between 1980 and the late 1990s, and the number of tractors per worker is lower than in any other region.
Another important limit on productivity growth is the difficulty of realizing economies of scale. Buying a tractor can make a farmer much more efficient and can greatly increase his harvests -- but he has to be able to afford the tractor and to be able to obtain fuel and spare parts.
The scaling up of production entails several types of risk, which have been summarized in terms of rent seeking, coordination and opportunism. Coordination risks are the risk of an investment failing because of the absence of complementary investments by other players in a supply chain. Such investments, for instance, in providing logistic support services to agriculture, are unlikely to materialize automatically under the prevailing conditions in many developing countries, with their small and unorganized markets, and may require the coordinating efforts of either a private sector agent or the government. Opportunism and rent seeking risks are both associated with the monopolistic control by other parties over a complementary investment or service, for instance, irrigation facilities, where these agents can remove or threaten to remove it from the supply chain after a player has made an investment that depends upon it, thereby expropriating income or assets from the investor. Where these risks are high compared to the potential returns, investors in a supply chain may find investments too risky and the supply chain may not develop even if it is otherwise profitable. Uncertain land tenure, sometimes resulting from a conflict between traditional land tenure and new systems of individual ownership, may also undermine farmers´ incentives to invest in economies of scale. In addition, insufficient scale also affects producers´ possibilities of meeting product standards, particularly since this may require investments that cannot be borne by a small production volume. The possibility of meeting other market requirements, such as the ability to commit to regular deliveries of a certain size, is also related to scale.
Competitiveness requires access to a number of support services, such as provision of seeds, fertilizer and other inputs, advice and extension services, logistical services and quality control. Many of these were in the past provided by State or parastatal institutions, including marketing boards. The dismantling of such institutions, which took place during the 1980s and 1990s in many developing countries, was carried out in the expectation that the private sector would fill in the resulting gaps and do so more efficiently. However, in most cases the private sector has proved unable to fulfil this role for a variety of reasons, including the absence of a suitable investment environment and the fact that national markets are often too small or insufficiently organized for private sector service providers to realize economies of scale. Accordingly, transaction costs increase and producers encounter difficulties in integrating themselves into supply chains.
Buyers of agricultural commodities may be suppliers of support services, as is often the case in contract farming, where the buyer provides seeds and other inputs. Contract farming tends to promote productivity and reduce farmers´ exposure to risk, and has been successful in many African countries, particularly for labour-intensive export crops such as vegetables. However, this approach is not necessarily the best one for all crops and farmers.
Governments are in many cases the most effective providers of support services, not least because they are in a position to establish national networks for service delivery. Allocating the necessary resources for the (re)establishment of networks for delivery of extension services and necessary inputs is therefore a matter of high priority. Such networks can also serve as transmission mechanisms for improved technologies -- and it is clear that there is a related need to invest more in agricultural research so that such technologies can be developed.