The ability to make complex policy decisions that reflect good value for money in terms of cost effectiveness, cost efficiency, feasibility, scale of impact, relevance, and sustainability while placing countries firmly on a path to meeting their medium and long term development goals, is arguably the most important role of government.
The Collaborative Africa Budget Reform Initiative (CABRI) organises “sector dialogues” on value for money to assist senior government officials improve on this process using a case-study approach.
The purpose of the case studies is to present a real life problem to the officials, which they work through, using the information presented in the case study, the knowledge from the seminar presentations and their own experience.
CABRI’s recent sector dialogue on Value for Money in Agriculture brought together senior officials from finance and agriculture ministries from 10 African countries. The dialogue was held in Dakar, Senegal on 29-30 July 2013. Four country case-studies were prepared for the seminar (available on CABRI’s website). This blog provides an essence of the practical exercise and demonstrates the complexity of policy making drawing from two of the four country case-studies that were prepared for the dialogue.
Key Dialogue Question: Should Ghana invest more in the processing of raw cocoa beans?
The rhetoric of increased value addition resonates within the continent. Why should Africa remain producers of raw materials and not manufacturers of processed goods? Ghana is the second largest producer of cocoa beans in the world after its neighbour Ivory Coast. However, less than 25% of Ghana’s cocoa beans are locally processed - limiting Ghana to capture only 5% of the estimated $28 billion of the global intermediate products market, and only an insignificant share of the global final consumer market of $87 billion. With these statistics, the answer would seem obvious: process, process, process! But, let’s look at the other side of the coin which explains the difficulty in making this policy change. To begin with, raw bean cocoa production contributes 10% of Ghana’s GDP and generates 25% of export revenues. Therefore, it’s a valuable commodity for the economy and an important source of rural employment.
Here is the trap: Ghana’s main cocoa crop is considered to be among the finest in the world with its bigger size beans and higher butter yield and therefore fetches an additional 4 to 6 percent premium on the international market. Not only would the premium be lost if Ghana processed its beans, but would then have to face higher freight costs and high tariff walls. For example, the EU levies no duties on the import of raw cocoa beans, but levies a 7.7% and 15% - ad valorem duty on cocoa powder and cocoa cake, respectively. It’s interesting how international trade agreements are designed to keep developing countries producers of raw materials!
In addition to trade barriers and losing the premium, there are valid concerns about losing Ghana’s firm footing in the market as a leading cocoa producer and venturing into the unknown in terms of competing internationally on processed goods and with no history in the market. Venturing into processing in the short and medium term will also mean supporting foreign owned businesses who dominate the processing industry in Ghana.
The question of “to process or not to process” created an interesting debate at the dialogue, especially in light of the context. With a heavy deck of cards stacked up against processing, it was interesting that no one at the dialogue suggested that Ghana maintains the status quo. It was agreed that more incentives for processing is needed but at the same time, it’s important to maintain the quality of raw beans at source. Ghana cannot neglect the long term potential benefits of processing.
In the short and medium term, cocoa beans revenue may decline and foreign companies, who dominate in the processing industry, may stand to gain a large share of profits. However, there are potential long term benefits that could transform the economy including an untapped regional market. Kenya offers some examples whereby a lot of local companies are now processing coffee and selling profitably in the East African region.
Key Dialogue Questions: (a) Agriculture or Industry? Which should be the leading sector for economic development? (b) Smallholder or Commercial Farms? Which should be prioritised?
In answering these two questions, context is important. Agriculture is the backbone of the Ethiopian economy; it’s the main livelihood for more than 85% of the population; it accounts for about 45 % of GDP; almost 90 % of exports/foreign exchange earnings originate from agriculture sector; and it’s the main source of industrial raw materials for agro-industries. At the same time, there are some arguments to support the move from agriculture towards industrial development. For example, industries could potentially create more employment and even absorb excess labour in agriculture.
Furthermore, public investment in industries would not encounter the sorts of challenges that are inherent in agriculture and render it a risky investment e.g. climate change.
The difficulty in making a decision on the policy choice for Ethiopia is compounded by the fact that agriculture is mainly in a form of a small-holder structure (the topic of the second question but also relevant here). The discussions acknowledged that there is no precedent for high levels of growth and development stemming from small-holder farming structures. This makes an agriculture-led strategy for Ethiopia rather stifling. At the same time, a leap to industry appears to be unrealistic. The group consensus was that the pillar of growth should be one of an agriculture-led industrialisation, involving the development of an agro-industry sector.
On the second question: smallholder versus commercial farmers, it was important to appreciate that the smallholder sector accounts currently for 83% - 95% of all cultivated land and of agricultural production. The group felt that in the context of high poverty levels and food security concerns, support to smallholder farmers was a good policy decision. There was a thought that smallholder farming could also be innovative and this should be explored while continuing the support for commercial farmers. The Ethiopian government, in its Plan for Accelerated and Sustainable Development to End Poverty (PASDEP) is however, very clear on this policy dilemma. A commercialisation of agriculture with an emphasis on private sector led growth and a shift to high value export crops will be the overall agriculture strategy going forward. This probably means a phasing out of support for small holder farmers. It will be interesting to see how this policy transforms the economy while avoiding an exacerbation of poverty and income inequality.
The blog draws from background papers commissioned for the CABRI dialogue and the dialogue deliberations. For additional information, contact the sector dialogues coordinator, Dr. Nana Adowaa Boateng, firstname.lastname@example.org