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Sub-Saharan Africa: importance of institutions for developing food and agriculture value chains

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  • Sub-Saharan Africa’s widening food and agriculture trade deficit is a huge challenge in view of population growth
  • Developing the region’s role in food and agriculture value chains offers opportunities for growth
  • The enabling environment for developing food and agriculture value chains differs widely across the continent and is strongly linked to broader institutional development

Co-authors: Sierk Plaat and Dragos Aftoni

Despite its huge food and agricultural potential, Sub-Saharan Africa’s agricultural production has barely kept up with population growth as productivity growth has lagged behind. Over the past decades the region has become a net food importer. Food and agricultural trade deficits are on the rise, posing risks to food security. Meeting this challenge requires the region to develop its role in food and agricultural value chains. It should move from predominantly smallholder production for informal markets and export of (agricultural) commodities to adding more value at different stages in the value chain. Possibilities for doing so depend crucially on climatological and soil circumstances and on the presence of enabling factors. The degree to which countries provide an enabling environment differs largely across the region, and is strongly linked to countries’ overall institutional development, as is shown by investigating a set of relevant indicators. 

Sub-Saharan Africa’s widening food and agricultural trade deficit is a huge policy challenge

 ‘Africa remains a predominantly rural continent’ (Africa Economic Outlook 2015).[1] For Sub-Saharan Africa as a whole, agriculture contributes 14% of GDP. But for many countries in the region, agriculture is one of the larger or the largest sector in the economy (Figure 1). Much of the region’s agricultural activity takes place in the informal economy. This has important negative implications for the completeness and reliability of data.[2]

Figure 1: Agricultural value added
Figure 1: Agricultural value addedSource: World Bank, World Development Indicators

Over time, Africa has become a net food importer. The main reasons for this are population growth, low and stagnating agricultural productivity, policy distortions, weak institutions and poor infrastructure (Rakotoarisoa et al., 2011). Figure 2 (yield gap) and 3 (total factor productivity growth[3]) illustrate that African agricultural production falls short of potential to a much higher degree than is the case in other continents.

At the same time, the agricultural potential of the region is huge. Importantly, the potential supply of land for agricultural purposes holds enormous promise, but at the same time, sufficient circumstances for developing such land, such as adequate infrastructure and arrangements for landownership rights, are often not yet in place (Figure 4). 

Figure 2: Actual yield versus yield gap – Africa compared to other regions
Figure 2: Actual yield versus yield gap – Africa compared to other regionsSource: FAOSTAT
Figure 3: Total factor productivity growth in agriculture
Figure 3: Total factor productivity growth in agricultureSource: USDA, Economic Research Service, derived from Food and Agriculture Organization of the United Nations and other agricultural data using methods described in Fuglie et al. (2012).

Not only has sub-Saharan Africa become a net food importer, but the food and agricultural trade deficit continues to widen too. Rakotoarisoa et al. (2011) point out that between 1980 and 2007 domestic food production increased by only 2.7 per cent per year, just barely above the population growth rate over this period. This implies that any increase in per capita consumption had to be met by an increase in imports. More recent data suggest that this trend is continuing: Figure 5 shows a rapidly growing trade imbalance. 

Figure 4: Potential supply of new land for rain-fed agriculture
Figure 4: Potential supply of new land for rain-fed agricultureSource: World Bank
Figure 5: Trade balance in crop and livestock
Figure 5: Trade balance in crop and livestockSource: FAOSTAT

Developing Sub-Saharan Africa’s role in (global) food and agricultural value chains offers opportunities for growth

Meeting Sub-Saharan Africa’s food and agricultural challenge requires that the region integrates in and develops food and agricultural value chains[4]. In global value chains, value is added at each stage of the supply chain before crossing the border to be passed onto the next stage.[5] The IMF has found that the emergence of global value chains has allowed countries to better exploit their comparative advantages. Enhanced participation in global value chains has also been associated with more inclusive growth. But, according to the IMF, Sub-Saharan African countries generally find themselves at the start of the integration process into global value chains. Their exports tend to enter at the very beginning of global value chains, reflecting the still-predominant role of commodities in many countries’ exports, and neither the complexity of Sub-Saharan African exports nor the quality of exported goods have been improving over the last two decades.Zooming in on food and agricultural value chains, these consist of the following universal main elements: input, production, processing, distribution and retailing (Figure 6). 

Figure 6: The food and agriculture value chain
Figure 6: The food and agriculture value chainSource: Rabobank

Adding value throughout the value chain demands a holistic approach in which efficiency is improved at each step, and where the different elements in the value chain are linked and adapted to each other. In practice, this means that production can only be located where input is readily available or accessible; that the processor must have the end-consumer in mind; and that distribution and retailing must meet the challenges of the physical environment and of consumer preferences. For instance, when producing for local markets, formal companies must find ways to compete with informal suppliers. This is especially the case in countries with a weak regulatory environment. They can do this by adding value to the end product through offering supply reliability or hygienic and quality controls for fresh produce. Box 1 provides an example of how regional differences – in this case between West and East Africa – influence opportunities for dairy value chain development. Producing for export markets poses yet further challenges: one must take account of export market developments, such as the increasing demand for sustainably produced products and transparency about origin. Box 2 gives an impression of how such external developments challenge the organisation of the Ethiopian Arabica coffee value chain. 

Box I: The sub-Saharan Africa Dairy value chain – a case study

As competition in the dairy sectors in Asia and Latin America continues to increase, and milk quotas in Europe have been abolished, growth in Africa is seen as the next big opportunity for the dairy sector.

1: Regional differences…

Consumer preferences, production possibilities and degrees of (in)formality throughout the dairy value chain differ widely across countries and regions. These differences are determined by such fundamental factors as natural endowments, degree of economic development and government intervention: 

<br>

2. … mean different challenges in developing dairy business

As fundamental determinants of the value chain differ between countries and regions, so do investment needs, success factors and main challenges: 

<br>Source: Rabobank

Box II: Ethiopian Coffee
Ethiopia is the number one coffee exporter in Africa. Its highlands provide good climatological and soil conditions for producing one of the finest Arabicas in the world. The country has much potential as a low-cost producer catering to the global speciality coffee market. Unfortunately, this potential is largely lost due to downstream hurdles in the coffee value chain. For instance, 80 per cent of the coffee exported by Ethiopia must pass through the Ethiopia Commodity Exchange (ECX) and cannot be traced to its origin, while demand for sustainability and origin continues to grow in Europe and the US. Sustainable and certified coffees command up to 30 per cent higher price levels and have experienced lower price volatility over the years. A revised regulatory framework which enables tracking and tracing upstream for speciality coffees and more efficient logistical processes could unlock new export growth.

Source: Rabobank

The enabling environment for developing food and agricultural value chains differs largely across the region

What can be done to further Sub-Saharan Africa’s integration into global value chains and to develop regional value chains? Possibilities for doing so depend crucially on geography and the presence of an enabling environment.

Starting at the beginning of the value chain, the first determinant for food and agriculture production is climate and soil. Figure 7 presents the main agro-ecological zones for Africa with typical products that can be grown in each zone. 

Figure 7: Sub-Saharan Africa’s agro-ecological zones
Figure 7: Sub-Saharan Africa’s agro-ecological zonesSource: FAO, Rabobank

Next, conditions need to be in place to build on the climatological circumstances and to produce (or import) a crop, process it, and bring it to end-users. These enabling conditions for developing food and agriculture value chains have been identified to be as follows:

Figure 8: Enabling factors for developing food and agriculture value chains
Figure 8: Enabling factors for developing food and agriculture value chainsSource: FAO, Rabobank

Each ‘enabling factor’ can be linked to one or more indicators so as to find a quantitative measure for countries’ levels of development in these areas.  Annex I shows which indicators were used. Some indicators are illustrative of a country’s overall institutional development. Where possible, indicators specific for agriculture were used, such as in the case of agricultural loans, R&D and policy. Each country’s relative score on these indicators is used to calculate a composite Z-score for every individual country, which indicates the country’s readiness for food and agricultural value chain development[6].

Figure 9 ranks Sub-Saharan African countries on their Z-score for providing an enabling environment for food and agricultural value chain development. It is worth noting that out of the top ten performers, Botswana, South Africa, Mauritius, Seychelles, Namibia and Cape Verde also belong to the top ten of countries with the lowest agricultural value added as a percentage of GDP (see Figure 1 above), in other words: agriculture is not their core business. This suggests that as the economy develops and institutional quality improves, the economy moves away from agriculture, a hypothesis tested in Figure 10. At the same time, some countries which are known for attractive climatological conditions for agriculture (Zimbabwe) or large potential through undeveloped but fertile land (DRC) score low in terms of the enabling factors present for developing food and agriculture value chains.

Figure 9: Enabling environment F&A value chain development – relative performance
Figure 9: Enabling environment F&A value chain development – relative performanceSource: Rabobank
Figure 10: Importance of agriculture to the economy and F&A Z-scores
Figure 10: Importance of agriculture to the economy and F&A Z-scoresSource: World Bank (World Development Indicators), Rabobank

 Footnotes

[1] AfDB and OECD, Africa Economic Outlook 2015, p.19

[2] When for individual countries data was only available for previous years, the latest data point available was taken. When the latest data point was more than five years old, we considered data to be not available.

[3] Total factor productivity is a measure of how efficiently inputs are utilised in production.

[4] Rabobank, ‘Looking for Delta. How global companies can help Sub-Saharan Africa reach its F&A potential’, 2012

[5] IMF, Regional Economic Outlook for Sub-Saharan Africa, 2015

[6] Annex II provides an overview of every country’s Z-score on each individual indicator. The Z-score measures the number of standard deviations from the average and as such is a measure for relative performance compared to other countries. 

Annex

Annex I: List of indicators for enablers of food and agriculture value chain development
Annex I: List of indicators for enablers of food and agriculture value chain development
Annex II: Z-scores
Annex II: Z-scores

Literature

AfDB and OECD, Africa Economic Outlook, 2015

Rabobank, Looking for Delta. How global companies can help Sub-Saharan Africa reach its F&A potential, 2012

Rakotoarisoa, Manitra A., Massimo Iafrate and Marianna Paschali, Why Africa has become a net food importer? Explaining Africa agricultural and food trade deficits, Food and Agriculture Organization of the United Nations Rome 2011

IMF, Sub-Saharan Africa Regional Economic Outlook, 2015 

To the Sub Saharan Africa overview page 

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This study is a publication of Economic Research (KEO) of Rabobank.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond. The economic growth forecasts are generated from the NiGEM global econometric structure models.

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Abbreviations for sources: FAO: Food and Agriculture Organization of de United Nations, FAOstat: The statistics division of the FAO  USDA: US Department of Agriculture

Abbreviations used for countries: Angola: AO, Benin: BJ, Burkina Faso: BF, Botswana: BW, Burundi: BI, Cameroon: CM, Cape Verde: CV, Central African Republic: CF, Chad: TD, Comoros: KM, Congo (Democratic Republic): CD, Congo: CG, Djibouti DJ, Equatorial Guinea: GQ, Eritrea: ER, Ethiopia: ET, Gabon: GA, Gambia: GM, Ghana: GH, Guinea: GN, Guinea-Bissau: GW, Ivory Coast: CI, Kenya: KE, Lesotho: LS, Liberia: LR, Madagascar: MG, Malawi: MW, Mali: ML, Mauritania: MR, Mauritius: MU, Mozambique: MZ, Namibia: NA, Niger: NE, Nigeria: NG, Rwanda: RW, Sao Tome & Principe: ST, Senegal: SN, Sierra Leone: SL, Seychelles: SC, South Africa: ZA, South Sudan: SS, Swaziland: SZ, Tanzania: TZ, Togo: TG, Uganda: UG, Zambia: ZM, Zimbabwe: ZW

Abbreviations used for currencies: AOA: Angolan kwanza, ETB: Ethiopian birr, KES:  shilling, MZN: Mozambican Metical, RWF: Rwandan franc TZS: Tan shilling UGX: Ugandan shilling, ZAR: South African Rand, ZMW: Zambian kwacha

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Editors-in-chief: 
Allard Bruinshoofd, head of International Research, Economic Research

Graphics: Selma Heijnekamp and Reinier Meijer

Production coordinator: Ester Barendregt and Christel Frentz

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Ester Barendregt
RaboResearch Global Economics & Markets Rabobank KEO
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