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Making Markets Work in Malawi
Reducing poverty and getting food to the people who need it
July 2002
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Malawi is facing the prospect of famine. Because of drought, production of corn, its main staple crop, has fallen ten percent since last year.
Unlike wealthier nations, Malawi has been unable to make up for the food shortage through trade with other countries. To discover the roots of this problem, the International Food Policy Research Institute (IFPRI) recently investigated the impact of agricultural market reforms on small-scale farmers and the private trading community in Malawi. Functioning markets are crucial for poor people, especially small-scale farmers who constitute much of the population of Malawi. Small-scale farmers need access to markets to purchase agricultural inputs, such as seeds and fertilizers, and to sell their crops. They also rely on markets to ensure that they have enough food. The government of Malawi initiated market reforms in the 1980s and early 1990s by removing the government's monopoly role in buying and selling food grains. It also began allowing the private sector to operate freely, without price controls. Beginning in 1998, IFPRI researchers spent two years surveying 1400 Malawian farmers and traders to address the question: Are food markets working for the poor?
Impact of market reforms
Here are the main findings of IFPRI's research on the impact of Malawi's reforms on small-scale farmers:
Seeds and fertilizer are more available, but credit is still mostly inaccessible to small-scale farmers. While the majority of farmers feel seed availability has improved, only 10 percent of input purchases are on credit. Rural roads and telecommunications have deteriorated . Farmers complain that rural road infrastructure has deteriorated in recent years and that transportation costs are very high. Public telephone networks are still absent in many rural areas. Small-scale farmers' market orientation is limited. More than half of farm households sell less than 20 percent of their output in the market. Many farmers feel worse-off. The majority of farmers feel worse-off since the reforms of 1995, when input subsidies were totally removed. However, market reforms have provided opportunities for a minority of market-oriented farmers.
Performance of Private Trade
IFPRI's research also reveals important lessons on the performance of private sector trade following the market reforms in Malawi.
The number of traders increased. The reforms led initially to significant market entry by private traders. The number of agricultural traders in nearly all the agricultural market centers in Malawi has increased since the reforms in 1995. Private trade enterprises remain small-scale operations. With average annual sales valued at US$5,300, trading firms are limited in their scale and scope of operations. They employ less than five employees and are typically owner-operated. Trading firms have virtually no assets. The overwhelming majority of trading firms operate with few business assets. Less than one third of businesses own basic weighing equipment. Only one-tenth own storage facilities, and only 6 percent own a transport vehicle. There is not enough competition. Profits amount to nearly 60 percent of the price difference between purchase and sale price. Since firms have limited assets, these results suggest a lack of competition among traders to bring down profits. Trade operations are limited by lack of finance. For most traders, friends and relatives provide the only source of loans. Less than one-fourth of trading firms have access to a bank loan. Access to credit has improved little in the post-reform period. Transport costs are prohibitively high. Traders face very high transport-related expenses, equal to two-thirds of total marketing costs. Because of limited capital, traders make mostly small trips, averaging just 53 kilometers. This practice increases expenses, because it costs more per kilometer to transport food over short distances than long distances. Trading practices are rudimentary. The use of overdraft banking facilities is virtually non-existent; less than 5 percent of all firms have a telephone; payment is made only in cash; supplier credit is rare; and the use of intermediaries, such as brokers, is limited. Grading, quality certification, and brand-recognition are non-existent . In the absence of underlying grades and standards systems, trading firms rely on their own inspection of goods, which adds to the costs and risks of marketing and slows down the frequency of transactions, ultimately resulting in higher consumer prices. Market information is weak. Without a public market information system, 84 percent of trading firms rely on personal contacts networks to share market information and to discourage breach of contract. Legal enforcement of contracts and of property is rare . Trading firms operate in a risky environment. Nearly half of trading firms frequently encounter payment problems and one-third are victims of theft every year. Of these cases, very few are resolved through legal recourse
The Road Ahead: Policy Implications
Private sector trade in Malawi operates at second best, under the constraints that it faces: high costs and high risk, limited trade finance, the lack of product grades and standards, the absence of public market information, and weak legal enforcement. The end result is a costly system that provides a limited service to consumers and producers.
To make markets work for the poor, the government must put the following policies in place:
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