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Small Can Be Beautiful – Overcoming Market Failures for Smallholders in Africa South of the Sahara

The unique challenges faced by smallholder farmers call for an innovative, integrated approach to spur investment, productivity, and technology adoption.

Despite recurring predictions that small farms in Africa south of the Sahara (SSA) will soon disappear, they have proved remarkably resilient. Smallholder farms in sub-Saharan Africa (two ha or less) represent 80 percent of all farms andaccount for up to 90 percent of production in some sub-Saharan African countries. More than two thirds of the region’s farm holdings have an average size of less than one hectare. Most of these smallholders either practice subsistence farming or operate largely in local markets due to inadequate links to more lucrative markets at provincial, national, or global levels. As a result, investment, agricultural productivity, and technology adoption all remain low, resulting in a poverty trap.

In the 1960s, the Green Revolution helped transform Asia from a continent of hunger and despair into a regional success story under a similar structure of land ownership. So why can’t such atransformation happen in sub-Saharan Africa?

Clearly, the current situation is different than that of Asia in the 1960s. Changes in production methods are not scale-neutral as they were during the Green Revolution. Today, economies of scale are crucial for inputs markets, production and processing technology, and transportation. The modern food value chain has also imposed new restrictions such as auditing and certification requirements and food safety standards; these new restrictions often prevent smallholders from linking to more dynamic markets.

If the question is whether Africa’s land ownership structure can be changed in the short or medium term to achieve the needed economies of scale, the answer is clearly no. The real question is how smallholders can escape this poverty trap. Two instruments appear critical to breaking the deadlock. Firstly, improved physical infrastructure, such as roads, ports, and information technologies thateffectively connect smallholders to markets and secondly, accompanying institutions that increase vertical and horizontal coordination among smallholders to allow them to achieve the needed economies of scale.

Infrastructure plays a key role in increasing local and regional productivity, both on and off the farm. It reduces transaction costs, connects smallholder farmers to markets, and increases the level and efficiency of trade. It also generates non-farm jobs, providing labor options for small farmers who lack access to productive land. Local and regional governmentsneed to work together to improve access, especially for rural populations. An integrated regional approach is particularly important. For example, improved roads and ports in Tanzania can help landlocked countries such as Uganda and Malawi engage more effectively in regional and global trade.

While subsidies may be justified to promote investment in infrastructure, governments should also seek to improve the functioning of their markets so that subsidies provide the maximum benefit. Successful practices would incorporate both market mechanisms and public-private partnerships, as unilateral public or private initiatives have less of a chance of succeeding.

Breaking Africas’s poverty trap will also require a variety of institutions to connect farmers to each other and to lucrative markets. Farmer associations and other types of collective action can help smallholders work together to address challengesin production and marketing, contracting, and quality assurance

Similarly, marketing arrangements such as contract farmingcan help small farmerssurmount barriers to market entry (access to credit, access to fertilizers at market prices, credible information, etc.). However, while evidence has shown contract farming to be an effective way of integrating farmers into domestic and international markets,it has been to the exclusion of,small, less-educated farmers due tosize limitations and fixed costs, significant monitoring costs, and their limited power to engage in contract enforcement. Thus, it is important for innovative contract farming arrangements to incorporate both technological improvements and incentives for small farmers to engage in such arrangements and to identify mechanisms to reduce the costs faced by the contracting party. For these institutions to succeed, governments also need to provide the appropriate enabling environment to bring together farmers, private sector actors, and government agencies.

Smallholder farmers face daunting barriers when it comes to accessing markets and improving their livelihoods. But with smallholders accounting for 80 percent of all farms in Africa south of the Sahara, it is clear that this population is crucial to the region’s overall economic growth. The unique challenges faced by smallholder farmers in SSA call for an innovative, integrated approach to spur investment, productivity, and technology adoption.

Maximo Torero is division director of the markets, trade and institutions division of the International Food Policy Research Institute.

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