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I would like to draw attention to one way of addressing risk and vulnerability which is connected to market structures, and the recent changes in them, particularly in Sub Saharan Africa. First, I must confess I do not see the difference between risk and vulnerability. While 'risk is the likelihood of being affected by shocks or stresses' as John Farrington wrote, being vulnerable is being 'at risk' from shocks - i.e. having a high likelihood of being affected, that is, facing large risks. I will treat them as one. Many of the risk policies or strategies discussed in this theme relate to either the macro level (inflation, trade policies, world market prices) or micro levels (ethnicity, gender, asset base). On the intermediate level, there is market structure - which I take to be the number of buyers and sellers in a market, and the nature of the relations between them. This connects to both micro and macro levels. Market structure determines to what extent macro shocks are transmitted into household incomes; for instance, a firm or parastatal organisation buying cotton may or may not follow world market price fluctuations. Market structure also determines how well households can use the market to protect themselves against risk. A wide network of rural banks or a well-functioning market for cattle both allow households to store wealth and smooth consumption; whereas 'thin' or absent markets force them to build up buffers themselves, usually at higher costs in terms of consumption; many will not be able to do this, and suffer higher risk exposure. A topical question for agriculture in Sub Saharan Africa is how market structure affects households' ability to cope with risk. This is particularly pertinent in view of the recent liberalization programs, which have altered market structures dramatically. Again, there are two channels to consider: smallholders' ability to access inputs and sell outputs, and to insure themselves via the market; and "the market's" increased transmission of (international) price volatility into household incomes. There is fairly broad consensus that this latter effect has occurred, and is detrimental particularly to poor households who cannot cope well with price volatility. As to the functioning of the first channel, a priori domestic and trade liberalisation might have improved it by removing restrictions to trade and transacting. Smallholders would then find themselves in an environment of more volatility, but also more opportunity; and the net effect could have been more investment and growth. This was the liberalisation rationale. However, these benefits have often not materialised - and not just because the very poorest did not have sufficient assets to respond to the new opportunities. Also better-off smallholders have suffered. Co-ordination of transactions is a key ingredient to rural economic systems, and one that was lost in many liberalisation drives. The logic of co-ordination is simple. A farmers needs to know that she can sell her maize, before she is able to take on a loan. Else, if there will be no revenues, how can the loan can be repaid? Conversely, she cannot sell maize on a (forward) contract unless she knows she will have the means to produce, and the credit to buy the inputs with. There is a problem of interdependence between output buyer and input seller, which is beyond the farmer. It is a problem not on the micro level, but on the 'meso' level of market structures. Under many of the pre-liberalization rural economic systems, this problem was solved because buyer and seller were one - typically, a parastatal organisation providing credit and expertise, and guaranteeing purchase of output. The system had its inefficiencies and rent-seeking problems. However, in some cases it has been replaced with an institutional vacuum - a situation where the state has withdrawn, and no private firms have filled the gap. This may be so because private firms are not large enough to carry the costs of co-ordination, or because they do not want to engage in credit provision as well as output purchase. The result is that farmers cannot produce for the commercial market. In terms of risk, the risk that they do not find a buyer or a seller who matches their existing transaction options is too large. They cannot afford to run the risk; but nor, typically, can they set up systems that co-ordinate these transactions, and remove the risk. Liberalisation may thus lead to falling market volumes and, sometimes, a (part) retreat into subsistence. This is not just theory. Poulton et al. (2003) document how cotton market liberalization in Ghana, Mozambique, Tanzania, Uganda, Zambia and Zimbabwe led in some cases to a decrease in volume traded, and in household incomes. Beyond agriculture, Greenaway et al. (2002) show for 73 developing countries over the past 2 decades that trade liberalization is often followed by an initially falling per capita growth rate in GDP, which may or may not subsequently pick up. (Greenaway, D., W. Morgan and P. Wright (2002) Trade Liberalisation and Growth in Developing Countries. Journal of Development Economics, vol. 67, pp. 229-244; Poulton, C., P. Gibbon, B. Hanyani-Mlambo, J. Kydd, W. Maro, M. Nylandsted Larsen, A. Osorio, D. Tschirley and B. Zulu (2003) Competition and Coordination in Liberalized African Cotton Market Systems. World Development 32(3), pp 519-536) I conclude with a question. In agriculture in Sub Saharan Africa, how can the virtues of the old parastatal system (co-ordination of transactions) be re-introduced, without its drawbacks (insensitivity to relative prices; rent seeking opportunities)? Options may include increasing farm size, so that farmers themselves can take on the co-ordination role; or farmer organizations achieving the necessary scale; or large private investors, such as domestic firms or multinationals stepping in, investing in co-ordination systems in their own (enlightened?) interest; or, again, some form of government intervention, either temporary (helping to build capacity to co-ordinate transactions) or permanent (acting as buyers and sellers). The answer will need to take into account that farmers in Sub Saharan Africa are mostly smallholders. It will also need to accommodate the natural and political conditions in the region, which generally make the copying of successful post-liberalization performances in Asian countries infeasible. Dirk Bezemer Overseas Development Institute 111 Westminster Bridge Road, London SE1 7JD, UK phone/fax: (0044) (020) 79220313/399 e-mail: <address removed> http://www.odi.org.uk/rpeg/staff.html#dirk Imperial College, Wye campus, Kent TN25 5AH, UK Phone/fax: (0044) (020) 75942913/838 e-mail: <address removed> http://www.wye.ic.ac.uk/staff/biogs/bezemerd.html ============================================================= To send a reply to this message that goes to all list members, make sure that you send your reply to <address removed> To unsubscribe from this list, send an email to "<address removed>", with the message body: unsubscribe risk-and-vulnerability <your-email-address>
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