Policy and Price Stability: Evidence From Southern and Eastern Africa

Indaba Agricultural Policy Research InstituteINDABA AGRICULTURAL POLICY RESEARCH INSTITUTE

by

Antony Chapoto, PhD

Symposium on Making Maize Markets Work For All Malawians

Bingu International Conference Centre

Lilongwe, Malawi, October 1, 2015

POLICY AND PRICE STABILITY: EVIDENCE FROM

SOUTHERN AND EASTERN AFRICA

Indaba Agricultural Policy Research Institute

Food Price Dilemma1

Farmers lobby for higher maize prices + lower

fertilizer prices

Lower consumer prices, usually culminating into

consumer subsidies

A never ending Government struggle!!!

Floor Prices

above market

price at

harvest time

Treasury


Food Price Dilemma

Good intentions by government

have had negative effects on the

maize market:

Zambia: Food Reserve

Agency market participation

has been increasing over time

Buying beyond budgeted target

Delayed payments

Government ad hoc policies

reducing private sector

participation

High mealie meal prices despite

bumper harvests

2

0

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ZM

W M

etr

ic T

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Maize grain Prices

2001-02

2002-032005-06

2008-09


Government budget

•Long-term productive investments: R&D, infrastructure, education, etc.

• High social payoffs • But payoffs come 5-20 years later• Critical for sustained poverty reduction

• input subsidy programs • marketing board price supports

• Immediate political payoffs;• Visible support to constituencies• contribution to sustained growth /

poverty reduction is unclear

Political economy of public resource allocation


Motivation

Food production fluctuations lead to price instability

Food price instability is a major problem

For farmers

For consumers

For governments

In response to food price instability, some governments implement “ad hoc” policies to control trade flows and/or price levels


Discretionary (“ad hoc”) trade policies

If government actions in markets are unpredictable, this tends to deter private sector from participating in the market Examples:

timing of export/import bans

o timing of change in import tariff rates

o when, where and at what price will marketing boards enter the market?

o when will the Board stop buying, and what will the price be after that?


Questions motivating our study 6

1. Do trade restrictions help to keep grain prices within reasonable bounds for consumers and producers?

2. Can trade restrictions support medium-term objectives of increased grain productivity, agricultural-led poverty reduction, and improved food security?


Results from East and Southern Africa

Chapoto & Jayne (2009), Minot (2013) finds that:

Maize price volatility is significantly higher in countries that actively intervene in their maize markets than it is in countries that make little or no effort to manage prices

Minot (2013)

Prices in Malawi, Zambia, and Zimbabwe, experience food price movements that are more than 50 percent more volatile than in countries that do not have entities engaged in maize trade


Do Trade Restrictions Promote

More Stable Prices?

0

5

10

15

20

25

30

35

40

45

50

55

60

Zambia Malawi Mozambique South Africa Kenya Tanzania Uganda

Un

co

nd

itio

na

l C

oe

ffic

ien

t o

f va

ria

tio

n (

%)

1994/95-2013/14 1994/95-2003/04 2005/06-2013/14

Source: Chapoto and Jayne 2009, 2015


0.00

3.00

6.00

9.00

12.00

15.00

18.00

Zambia Malawi Mozambique South Africa Kenya Tanzania Uganda

Co

nd

itio

na

l C

V

(%)

1994/95-2013/14 1994/95-2003/04 2005/06-2013/14

Do Trade Restrictions Promote

Price Predictability?

Source: Chapoto and Jayne 2009, 2015


010

20

30

40

50

60

70

80

90

Co

nd

itio

na

l CV

(%)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Year/Month

Lilongwe, Malawi Maputo, Mozambique

Maize grain price unpredictability : Lilongwe, Malawi Vs. Maputo, Mozambique


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When grain prices spike above import

parity, consumers are being unnecessarily

taxed by an inefficient market

Import ban/ restriction

When grain prices fall below export parity,

producers are denied income opportunities

from crop sales

[Export Ban]

Import and export bans

Please Note !!!


Export bans and trade restrictions

Generally doesn’t

stop trade from

occurring but raises

smuggling costs,

which depress

prices for farmers

and raise costs for

consumers


Zambia: Maize Market + Ad-hoc Policies

0

50

100

150

200

250

300

350

400

450

500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Nom

inal U

S$ p

er

metr

ic ton

CIF from South Africa Lusaka wholesale price

World Food Crises

Deficit years

Bumper harvest


0

100

200

300

400

500

600

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Nom

inal U

S$ p

er

metr

ic ton

CIF from South Africa Lilongwe wholesale price

Malawi: Maize Prices vs. Import parity


Reduced Government Participation increases private sector participation

Zambia 2013/14 bumper harvest experience Government committed:

to buy less

charge commercial mills economic prices for maize from the FRA

Resulted in increased trader activity, higher spot prices for farmers, and increased production the following season.

0

20

40

60

80

100

120

Perc

ent

% purchases by FRA % purchases by Private Sector


4

5

6

7

Conditional CV

Pe

rce

nt

1994-2014 1994-2004 2005-2008 2008-2014

Maize grain price unpredictability : Nairobi, Kenya

The more stable trade policy

environment in Kenya between

2005 and 2008.

o Joined East African Commission

trading agreement in January

2005.

o Removal of variable maize

import tariffs from Uganda and

Tanzania (except for a 2.75%

inspection fee).


Model 1 Model 2 Model 3

Rely on markets, government role limited to:

• Public goods investment

• Regulatory framework

• Strengthening of institutions / defense of property rights

• Policies supportive of private sector entry and competition

Primary reliance on marketsbut role for rules-basedgovernment operations

• e.g., buffer stock release in response to defend stated ceiling price

• Marketing board purchases at stated floor price announced in advance

• Transparent rules for initiating state imports

Role for markets and discretionary government intervention

• Based on premise that private sector cannot ensure adequate food supplies in response to production shortfalls

• Justification for unconstrained role for state interventions in markets to correct for market failures

Conclusion & Recommendations

3 competing models of roles of government and private sector in food markets:



Government operations in markets are costly. Not clear improvements in price stability and food security

Government actions should be predictable. set clearly defined and transparent rules for triggering

government intervention with regard to changes: in parastatal purchase and sale prices ,

import and export decisions,

tariff changes and stock release triggers

Government actions should facilitate regional trade, because of its potential to: raise farm-gate prices in areas of surplus reduce consumer prices in areas of deficit


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Unpredictable policies

Mistrust between

Private sector and

Government

Limited private sector

investment and market participation



Zikomo Kwambili20


Bonus Slides

21


3 recurrent processes

Examples from Zambia

Strategic interactions between public and private sector in food markets


National food production shortfall

anticipated

Who’s going to import?

And how much?

State announces plan to import

X tons

Private traders sit on

sidelines

State incurs delays in

contracting for imports

Supplies dwindle;prices skyrocket

“EVIDENCE THAT MARKETS FAIL!”

Process # 1

Zambia- 2001/02, 2002/03


National food production shortfall

anticipated

Trader arranges

to import;

asks for waiver

on import duty

Government

delays in

waiving import

duty rate



Private sectordelays

importation;intrigue over

timing ofwaiver

Process # 2

Zambia: 2005/06


National food production /

balance sheetsindicate adequate

harvest

Prices rise as actual supplies

dwindle

Charges of hoarding and

trader manipulation

of market



Import licensesapplied for but

not granted

Process # 3

Zambia: 2008/09


Government Failure or Market Failure?

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Policy and Price Stability: Evidence From Southern and Eastern Africa

Presentations & Public Speaking

Transcript of Policy and Price Stability: Evidence From Southern and Eastern Africa