Research Report No. 154In today's more integrated world economy, agricultural growth in the countries of East and Southern Africa depends crucially on increasing their competitiveness in the world agricultural market and expanding their market opportunities. This report focuses on demand-side constraints on agricultural growth and their implications for three broad alternative agricultural development strategies: promoting traditional exports, developing nontraditional exports, and increasing food staple growth. We address three major questions. First, how constraining will demand be for future agricultural growth in East and Southern Africa and, in particular, is there sufficient demand to permit agriculture to grow at a rate that can significantly reduce poverty and hunger? Second, if technological change and increase in supply are achieved, which agricultural subsectors offer the greatest potential and can become the most powerful engine for raising real incomes and increasing food consumption? Finally, what are the implications of reductions in marketing costs and growth linkages with nonagricultural sectors for achieving increased market demand for agricultural products?
The report applies a general equilibrium framework for the analysis, focusing on seven East and Southern African countries—Madagascar, Malawi, Mozambique, Tanzania, Uganda, Zambia, and Zimbabwe—and finds that an export-led agricultural growth strategy is unlikely to generate substantial overall income growth in these countries. Despite significant market reform initiatives, future growth prospects for traditional agricultural exports in many countries in the two regions do not appear promising, even if lost market shares are recovered through improvements in productivity, product quality and variety, and marketing conditions. Simulation of a recovery of traditional exports to their historical high levels results in only an additional 0.08-0.15 percent annual growth in per capita real GDP for the seven countries studied. The limited impact of an increase in traditional exports is due primarily to the fact that they now account for only a small portion of the GDP and production of these commodities has relatively weak economic linkages with other sectors in the domestic economy. Moreover, world prices for these commodities are currently rather low and their recovery in real terms to the levels of the early 1970s is unlikely.
The report suggests that demand need not constrain rapid growth in nontraditional exports. Given the current minimal levels of production and their minute share of world trade, nontraditional agricultural exports offer perhaps the most promising opportunities for growth. To a large extent, nontraditional exports consist of numerous products that are targeted to niche markets and the model simulation analysis shows that even under optimistic assumptions (for example, 10-24 percent annual export growth in the sample countries), acceleration of growth in this sector alone will have only a very limited effect on real GDP growth.
Increasing production of staple foods would seem to offer a promising avenue for agricultural growth, given that Africa's own demand is already large ($18 billion/year for East African and $12 billion/year for Southern African developing countries) and that the supply of many staple commodities is not sufficient to meet the current demand. Moreover, the total demand for food in Africa is projected to increase in the next 10-20 years (for example, cereal demand will be 60 percent higher than the current level by 2015). However, an economywide model simulation analysis shows that increasing productivity in the grain sector alone would cause a shift in domestic terms of trade that would have a negative impact on agriculture as domestic market prices fall, which would cancel out most benefits accruing to the farmers from the improvement in productivity. Increased substitution of domestic agricultural products for imported commodities through government intervention in grain markets could mitigate these adverse trends in terms of trade for farmers. Simultaneous increase in livestock productivity might also increase farmers' incomes and spur demand for food and feed, which would make it more effective for boosting farm incomes than an increase in crop productivity alone.
Nonetheless, the model simulations suggest that changes outside the farm sector itself—reduced marketing costs and more rapid growth in the nonfarm economy—are required to provide sufficient market demand to support rapid agricultural growth. Model simulations suggest that a sharp reduction in marketing costs through investments in marketing infrastructure (for example, roads and bridges, ports, storage facilities, electricity) and development of market institutions (see, for example, Kherallah et al. 2002) combined with agricultural productivity growth would raise per capita GDP growth by approximately 2 percent per year in the sample countries. Simulation results also suggest that, combined with nonagricultural productivity growth, productivity growth in agriculture results in per capita annual agricultural real income growth of 3.0-4.4 percent.
Thus, agriculture, particularly productivity increases in food crops and livestock, can serve as one engine of growth, but without economywide growth, total demand for crops and livestock will be insufficient to prevent terms-of-trade declines. A second major engine of growth—increased productivity growth outside the agricultural sector—is a necessary condition for rapid economywide growth and poverty reduction.