Cotton is an important crop for many sub-Saharan African countries. In west Africa the cotton sectors were, until recently, managed as state monopolies, while in southern and eastern Africa they were liberalised around a decade ago. Finding a balance between competition and coordination is central to the success of cotton liberalisation.

Researchers from Imperial College London, UK, Michigan State University, USA, Danish Institute of International Studies, Copenhagen, and four African countries, studied the liberalised cotton sectors of six African countries. They argue that the investment associated with liberalisation has, in most countries, helped to increase cotton production.

Three types of cotton sector exist: the concentrated, market-based systems of Zambia and Zimbabwe; the local monopoly systems of Ghana and Mozambique; and markets with numerous small companies in Uganda and Tanzania. Of these Zimbabwe was for most of the past decade, regarded as the best performer, due to its increases in smallholder production and high quality standards.

The degree of competition varied significantly by sectoral type. Sectors with the largest numbers of ginning companies have struggled most, whilst concentrated sectors have performed well. But all sectors face common challenges, including how to maintain high-quality standards and provide input credit to smallholder cotton producers.

The research shows that:

• Sectors dominated by a couple of big producers in a market-based system have been the most successful in meeting coordination challenges while keeping prices reasonable.
• While local monopoly systems in Ghana and Mozambique offer a solution to some coordination problems, the benefits can be undermined by the absence of competition.
• Countries with many small operators have been highly competitive, but at the expense of effective coordination.
• Coordination through formal rules and enforcement, and state involvement in the provision of goods and services normally regarded as ‘private’, may be the only option when there a number of companies in the sector.
• Coordination based on informal agreements through consensus or private sanctions although efficient, can only work when competition levels are low (as private coordination across large numbers of firms rarely works).

All six countries must overcome challenges if the intensification of smallholder production, essential for poverty reduction, is to be achieved.  The researchers argue that countries that achieve effective coordination will perform better, and suggest:

• Companies should be responsible for coordination where the industry is market-based and concentrated in a few large producers, as in Zimbabwe and Zambia. The state may develop a competition policy for this, but there are no clear models so far and the costs of regulation could easily outweigh the benefits.
• In local monopoly systems, the state must play an impartial role in the allocation of cotton concessions and set up time-scales and procedures for evaluating the concessions, so as to introduce an element of competition into the system. Clear ‘rules of the game’ for this do not yet exist in either Mozambique or Ghana.
• In markets with many small players, as in Uganda and Tanzania, the state may need to take an active role in ensuring that both public goods (such as quality control) and private goods (such as input supply) are provided.
• Irrespective of the structure of the sector, multi-stakeholder consultation, decision-making and accountability processes are the key to devising institutional solutions to common challenges that work in the local context.

Source(s):
‘Competition and Coordination in Liberalized African Cotton Market Systems’, World Development Vol. 32, No. 3, pp. 519–536, by Colin Poulton et al, 2004, Full document.
‘Competition and Coordination in Liberalized African Cotton Market Systems’ by Colin Poulton et al, 2005 (PDF) Full document.
Competition and Coordination in Cotton Market Systems of Southern and Eastern Africa, Research report for DFID Project R80801, by Colin Poulton et al, 2005 (PDF) Full document.

Funded by: UK Department for International Development

id21 Research Highlight: 30 May 2006

Further Information:
Colin Poulton
Centre for Environmental Policy
Imperial College London
Wye Campus
Ashford
Kent TN25 5AH
UK

Tel: +44 (0)20 7594 2968
Fax: +44 (0)20 7594 2838
Contact the contributor: C.Poulton@imperial.ac.uk

Imperial College, London, UK

Other related links:
Further details about this research project 'Competition and co-ordination in cotton market systems'

Harnessing trade for development, id21 insights # 59

'EU cotton subsidies damage West and Central Africa'

'Which factors can make agriculture in sub-Saharan Africa successful?'

'Input credit for smallholder farmers: can the private sector help?'

Economic And Social Importance Of Cotton Production And Trade In West Africa, OECD document (DOC)

Organic Cotton:A New Development Path For African Smallholders, IIED Gatekeeper Series, No. 120 (PDF)