African cotton market doesn't benefit from too much competition

03/12/04

An international team of researchers are challenging conventional wisdom that the more competitive a market is, the more successful it will be, in the current edition of World Development.

The study led by Imperial College London concludes that greater competition in African cotton market systems is not always linked to better performance. Rather, in situations where the regulatory framework within the sector is weak, a balance must be struck between the degree of competition and coordination between operators.

With African cotton exports in 2002-03 accounting for 20 per cent of total world output and worth an estimated US $1.56 billion, the researchers sought to discover what type of market system works best.

By analysing cotton marketing, processing and export in six African countries where the sector has been privatised, the international team of researchers argue that unbridled competition can have negative consequences. The researchers say that while some competition in the cotton sector is desirable to keep producer prices up and to encourage innovation, the quality of cotton has to be managed and poor producers need access to production inputs and technical advice.

The team of researchers from the UK, USA, Denmark, Zimbabwe, Zambia, Tanzania and Mozambique, argue that achieving this balance requires a degree of coordination between stakeholders in the sector. Where capacity for formal regulation is weak, this is most readily achieved when major operators in the sector work together.

Economist and Research Fellow, Colin Poulton in Imperial's Department of Agricultural Sciences and lead author of the study explains:

"Trade liberalisation in the cotton market is high on the political agenda following the collapse of the World Trade talks last autumn. Much attention has been focused on the need to abolish the huge subsidies that countries like the United States and EU give to their farmers.

"Cotton is one of the major exports for almost a third of African countries and it is one of very few commodities in which Africa's share of world exports has increased over the past 20 years. Millions of poor households are heavily dependent on cotton for their livelihoods. What we've done is look at how liberalised African cotton sectors can best be organised, so as to continue to compete effectively on the international market and to respond to any new opportunities that arise."

By examining the recent experience of cotton production in Ghana, Mozambique, Tanzania, Uganda, Zambia and Zimbabwe, the researchers highlight the influence of liberalisation on southern and eastern African cotton market systems.

"Under liberalisation there's been an influx of private capital, management expertise and entrepreneurship, which has in most cases contributed to a resurgence in production," says Mr Poulton. "Producers have benefited from prompter payment and now receive a higher financial share of the final price for cotton lint.

"But there are many challenges too. Producers have to maintain the high quality standard of cotton lint; they require efficient delivery of inputs; access to credit and technical advice; and research into improved seed varieties and pest control - which all require some form of coordination."

The researchers identified three distinct types of market structure that have evolved in response to the challenges of privatisation:

  • concentrated, market-based system
  • local monopoly system
  • numerous small players system

They conclude that the concentrated, market-based system found in Zambia and Zimbabwe has been most successful in meeting common coordination challenges while still maintaining reasonable prices to consumers.

"Concentrated, market-based systems are dominated by two or three large operators, who show the way in terms of service provision. Even if these operators don't work together, the market share of an individual firm can give sufficient security to invest in input credit or improved quality control," says Mr Poulton.

"In local monopoly systems, each firm is given exclusive rights by the state to provide services to, and buy seed cotton from, a particular geographic area. The performance of these systems has been somewhat disappointing, arguably due to the nature of the incentives provided by the concession contracts. Finally, systems with numerous small operators have struggled most with issues of quality control, input credit and extension provision.

"There is more than one way to achieve coordination. A strong regulatory agency can force operators to act within given rules or operators can agree to follow certain codes of practice set up by themselves. A big issue is how to curb opportunistic behaviour, which ignores these codes. Sometimes the only way to do this is by limiting the number of players competing in a given area - hence the local monopolies. But the concentrated market-based system achieves a balance between some competition and the ability to control the behaviour of operators in the market.

"Having analysed the experience of privatisation in these six African countries we now believe that this framework could be applied to the analysis of any market system, and provides insights into the appropriate role of the state in supporting and regulating private economic activity," he added.

Source: Eurekalert & others

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