Transforming Productive Sectors in Africa: Markets Versus Firms?

Market systems that inhibit productivity growth and depress livelihoods are familiar enough across the developing world. Barriers to improvement that turn out to be fundamentally political are two-a-penny. More often than not, this is a matter of monopolists with political backing limiting market entry by potentially more efficient competitors.

Sometimes, however, the opposite is the case: there is too much market access, for too many kinds of business. As a result, too little is done to tackle problems of stagnant productivity and declining incomes for poor producers.

This is the situation with the cotton market in Tanzania, the subject of a new case study of the Cotton Sector Development Programme (CSDP) supported by Gatsby Africa.

Tanzania’s cotton impasse

In brief, cotton buying and ginning has been extremely competitive since the market liberalization of the early 1990s, but cotton growing badly needs investment. The bigger ginning (processing) firms might provide this, but only if they get the guaranteed access to the crop provided by some form of contract farming.

The smaller ginners, often linked to politicians, are in the business chiefly as traders. They tend to oppose any restrictions on their rights to buy across the cotton zone and are usually uninterested in farmer productivity.

The CSDP and its partners have been striving to transform Tanzania’ cotton sector by overcoming this central problem. They have not yet cracked it. But both their partial successes and regular setbacks are – the case study shows – extraordinarily illuminating. Much has been learned already and there is more to play for. The report concludes by addressing other practitioners and funders of reform efforts in productive sectors across Africa.

Gatsby and ODI

This cotton study is the first published output of a new learning partnership between Gatsby Africa and the UK’s Overseas Development Institute (ODI). The two organisations share a commitment to exploring the conditions under which economic transformation can occur at the sector level. They want to work together on integrating technical economic analysis with practical ways of identifying and addressing sector-wide political economy constraints.

Gatsby Africa brings to this partnership its freedom as a private foundation to invest for the long haul, taking calculated risks and testing new solutions to stubborn problems. With its regional partners, it is now operating in eleven sectors, across agriculture, industry and services, in four East African countries.

ODI, an independent think tank based in London, brings to the table data and analysis on processes of sector transformation around the world. Through Supporting Economic Transformation (SET) and other programmes, it has been part of the global rethink about the limitations of mere growth and the need to refocus policy addition on within-sector and between-sector productivity gains. It has a multidisciplinary approach, aiming to marry up the best insights from economics, political science and development management.

From an ODI perspective, the Gatsby cotton study adds usefully to the growing literature on two things in particular.

Getting smarter about economic development

One is the conditions under which external development agencies can be effective in supporting economic transformation. In previous work with different partners, we have contributed:

• A survey of project experience pointing to greater effectiveness where initiatives are both politically smart and in some genuine sense locally led

• A joint engagement with The Asia Foundation on the innovative approach that has had success in the Philippines, with lessons from business start-ups being applied to building policy reform campaigns

• An edited set of reflections by economists from the UK Department for International Development (DFID) on their best efforts at politically smart support to economic development

• An initial report on the most promising DFID-funded example – perhaps the closest in ambition and approach to Gatsby’s work in East Africa: the Economic Policy Incubator in Nepal.

Firms versus markets

The other theme in the literature that seems relevant is the relatively neglected role of firms -- their capabilities and the nature of their political connections – in successful economic transformation.

While much of the policy attention of earlier decades was devoted to freeing up markets and then to reforming states, firms – capitalist enterprises – are now getting more of the attention they deserve. Firm-learning is central to recent studies of industrial policy in Africa, such as the book by Newman and others. Missing firm capabilities are the key to the paradox of limited uptake of technology in developing countries according to current research at the World Bank.

What remains to be fully explored is the matter of political economy.  Over the coming months, the ODI-Gatsby partnership will be doing more on these lines – marrying up the political economy of sector transformation and the practicalities of delivering effective support in sectors that matter across East Africa.