Boughton, Duncan

Poulton, Colin

Tschirley, David L.

English

Research Papers in Economics

 
  
 
POLICY SYNTHESIS 
for Cooperating USAID Offices and Country Missions 
(http://www.aec.msu.edu/agecon/fs2/psynindx.htm) 
 
 Number 80                                                                              November 2006 
 
Office of 
Sustainable 
Development 
 
THE MANY PATHS OF COTTON SECTOR REFORM IN EASTERN AND SOUTHERN 
AFRICA:  LESSONS FROM A DECADE OF EXPERIENCE 
By 
David Tschirley, Colin Poulton, and Duncan Boughton** 
 
Food Security III Cooperative Agreement between US. Agency for International Development, Global Bureau, 
Economic Growth and Agricultural Development Center, Office of Agriculture and Food Security and 
Department of Agricultural Economics, Michigan State University 
 
Key Policy Messages 
•  While African cotton sectors face common technical challenges, the structure of the market 
for seed cotton strongly influences which of these challenges are most difficult to meet and 
which types of institutions need to emerge if the system is to be sustainable. 
•  Institutional innovation is the key to improving performance in cash crop sectors; large 
injections of public capital are not needed. 
•  Direct state management of funds from industry levies is problematical. Vesting regulatory 
and coordination functions within multi-stakeholder bodies – where government is one 
actor among many -- may be the most promising approach for many sectors. 
•  Regular “deliberative fora” are invaluable for building trust between stakeholders and 
seeking innovative solutions to tackling sector-wide problems. 
 
BACKGROUND:  Cotton is a rare economic 
success story in Sub-Saharan Africa (SSA), 
generating cash incomes for millions of 
smallholder households and allowing the 
continent to capture a rising share of world 
trade in the crop. Characteristics of the crop, 
especially its need for purchased inputs and the 
typical inability of smallholders to access these 
on a cash basis, have fueled concern that the 
economic reforms sweeping the continent since 
the early 1990s, by under-cutting the basis for 
effective “interlocking” of transactions and 
also complicating collective decisions on long-
term investment, may derail this remarkable 
success story. At the same time, technology has 
driven sharp declines in real prices since the 
late 1990s, putting pressure on inefficient 
systems; the massive subsidies provided to 
cotton farmers in developed economies have 
added to the difficulties for African producers. 
 
OBJECTIVES:  With cotton sector reform in 
much of SSA at least a decade old, it is now 
possible to begin learning from experience.   
 
This brief summarizes a larger assessment of 
the record of five countries in southern and 
eastern Africa: Tanzania, Uganda, Zimbabwe, 
Zambia, and Mozambique
1. The focus is on the 
course of reform in each and on lessons for 
policy makers, donors, and researchers. 
 
APPROACH:  Our conceptual approach 
suggests a trade-off between competition and 
coordination in cotton systems. More precisely, 
it suggests that the structure of the market for 
seed cotton may strongly influence which 
challenges are most difficult to meet and which 
types of institutions need to emerge if the 
system is to be sustainable.  
 
FINDINGS:  The review of reform experience 
highlights three points. First, initial conditions 
(prior institutional set-up and performance), 
and thus the motivation for reform, varied 
widely across the countries. Second, each 
                                                 
1   The full report is downloadable at 
http://www.aec.msu.edu/agecon/fs2/papers/idwp88.pdf    2
country shows strong path dependency: 
historical and pre-reform institutional set-ups 
re-emerge or strongly condition the choice of 
post reform institutions.  Finally, there has 
been a great deal of institutional “churning” in 
most countries, centered primarily on the need 
to ensure input provision and credit recovery.  
 
The cooperative-based cotton systems in 
Tanzania and Uganda lead after reform to 
highly competitive markets for seed cotton. 
Price competition was intense and farm prices 
improved, but input systems collapsed and lint 
quality declined. As a result, the two countries 
that most closely approached the competitive 
ideal in market structure saw the most 
persistent state involvement in input provision 
to farmers.  Zimbabwe and Zambia, each with 
single channel systems prior to reform, 
maintained concentrated sectors. Through the 
early 2000s, each performed much better than 
Tanzania and Uganda on input provision and 
lint quality.  Perhaps surprisingly, each also 
paid attractive prices to farmers. Recent 
developments in Zimbabwe, however, may be 
undermining this success. In reforming its 
cotton sector, Mozambique  returned to the 
concession model of the colonial era.  Key post 
reform themes have been the absence of 
systematic evaluation and re-awarding of 
concessions, widely divergent performance 
between early investors and new entrants, and 
the government’s openness to new investment.  
The country continues to lag its neighbors in 
productivity and quality, but new entrants since 
2000 have begun to change this. 
 
The paper shows that each country brought a 
different history into its reform process, and 
each has used very different approaches to 
solve common problems of input distribution, 
credit recovery, and quality control. Table 1 
shows selected institutional mechanisms used 
for input delivery in our five countries, 
highlighting the diversity of approaches over 
countries over time.  Overall, the picture is 
relatively positive. Fears that reform would 
undercut the basis for effective interlocking of 
transactions and also complicate collective 
decisions on long-term investment have often 
proved well founded. Yet predictable benefits 
of reform, such as higher prices, more timely 
payment, and reduced pressure on state 
budgets, have also been realized. It also seems 
clear that analysts underestimated the 
persistence and ability of sector participants –
public and private – to innovate in pursuit of 
workable solutions to the problems unleashed 
by reform in their countries.  Table 2 assesses 
the status of each sector as of mid-2005, and 
highlights how the key challenges each sector 
faces depends to a great degree on the structure 
of its market for seed cotton. 
 
LESSONS:  We draw several lessons from this 
experience.  First, though cotton sectors face 
common technical challenges, workable 
solutions must be responsive to local 
conditions. The recent experience of Tanzania 
should encourage policy makers to work with 
sectors as they are, rather than to try to 
radically influence sector structure or to impose 
a “textbook” solution to a particular problem.  
Second, institutional innovation is the key to 
improving performance in cash crop sectors; 
large injections of public funds are not needed.  
 
Third, direct state management of funds from 
industry levies is problematical. Vesting 
regulatory and coordination functions in multi-
stakeholder bodies may be the best approach 
for many sectors.  Fourth, the principal 
objective for institutional innovation, and the 
appropriate public role in promoting it, varies 
with the structure of the market for seed cotton.  
Where many firms compete, the main objective 
should be to ensure effective coordination for 
the provision of collective goods and to 
provide assurance for asset specific investment. 
In sectors with less competition, the emphasis 
should be on incentives for strong performance 
in pricing and service provision.  Finally, 
regular “deliberative fora” are crucial to build 
trust between stakeholders and seek innovative 
solutions to sector-wide problems. 
 
** Tschirley and Boughton are respectively, professor, 
International Development and associate professor, 
International Development, Michigan State University Dept. of 
Agricultural Economics; Poulton is research fellow, Imperial 
College, London.  This report is published by the Department 
of Agricultural Economics, Michigan State University (MSU).  
Funding was provided by UK Department for International 
Development (DFID) and by the American people, via the 
Food Security III Cooperative Agreement (GDG-A-00-02-
00021-00) between the United States Agency for International 
Development and the Department of Agricultural Economics at 
Michigan State University.  Additional funding came from 
USAID missions in Mozambique and Zambia.         3
Table 1.  Selected Institutional Mechanisms for Input Delivery to Smallholder Cotton Farmers in Five Countries of SEA 
  Mechanism  Year Initiated  Synopsis 
Concession 
System 
1989  Legal geographical monopsonies for seed cotton purchase.  Ginning companies responsible for distributing inputs.  Wide coverage but low quality 
seed and insecticides, no fertilizer.  Yields 350 kg/ha.  Periodic loan default crises spurred by new entrants.  To date, crises resolved by providing 
new concessions to largest entrants. 
M 
O 
Z 
A 
M 
B. 
“Open” 
Concession 
system 
2001 
(abandoned 
2002) 
Allowed new entrants to compete for groups of farmers within existing concession areas.  Strong opposition from established concession holders.  
Lack of transparency in mediating claims of new operators. 
Distributor 
System 
1999  Private (Dunavant).  Operates within a liberalized but concentrated cotton sector. “Distributors” contract with company to receive inputs on credit; 
package includes treated delinted seed, insecticides, foliar spray (micro-nutrient); Distributors choose which and how many farmers to work with; 
earnings a function of credit recovery.  Credit repayment rates rose from about 60% to 85% by 2001.  Yields rose from 450 kg/ha to 600 kg/ha. 
Cotton Outgrower 
Fund 
2002  Public/Private.  Government credit at low interest to ginning companies to finance input provision.  Allocations across companies favored small 
players in relative sense.  High repayment allowed creation of revolving fund. 
 
Z 
A 
M 
B 
I 
A  Cotton Board  2005  Public/Private. Statutory body only.  Not yet approved. Substantial policing powers to control “poaching” and practices which reduce cotton 
quality. 
Agricultural 
Inputs Trust Fund 
1995 (abolished 
1997) 
Public/private.  Operated in system with many seed cotton buyers.  Subsidized credit to input dealers.  Low uptake, poor credit repayment 
Cotton Dev. Fund  1998 (abolished 
2002) 
Public/private.  Operated by public sector in system with many cotton buyers. Privately financed by levy on ginning activities.  Fund imported 
chemicals and distributed them to local governments for cash sale at below market price.  Increased insecticide availability 10x over two years.  
95% of cotton inputs purchased through system.    Imported unfamiliar chemicals 2001/02, low uptake. Some chemicals diverted to market. 
T 
A 
N 
Z 
A 
N 
I 
A  Passbook System  2002  Public/Private.  Cotton sellers receive stamp in official passbook entitling them to pesticides sufficient for approximately one spray the following 
year. Broadens access, may leave more room for private sector and create more accountability in system.  
Cottco outgrower 
scheme 
1992 (Aban-
doned  2002) 
Private (Cottco).  Began prior to reform with soft loan from World Bank; subsequently operated within a liberalized but concentrated sector.   
Borrowers organized into groups. Each farmer must produce >= 800 kg seed cotton.  Available inputs include treated seed of proper variety 
Cottco “Gold 
Club”  
1992 
(Abandoned in 
2002) 
Private (Cottco).  .  Upper tier within company’s outgrower scheme for loyal (and generally larger) producers.  Members can receive larger loans 
Z 
I 
M 
B 
A 
B 
W 
E 
Input voucher 
program 
1995  Private (Cargill).  Inputs for next year’s crop delivered at time of this year’s seed cotton purchase 
UCGEA/CDO 
Input Credit 
Scheme 
1997 (abolished 
1999) 
Public/private.  Operates in system with many seed cotton buyers. Uganda Ginners and Exporters Association in conjunction with Cotton 
Development Organization (CDO).  Supported with loan from World Bank.  Inputs distributed on credit to 200-300,000 farmers.  Companies 
competed to purchase seed cotton.  Fund replenished by levy on lint exports.  Dramatically improved input availability, but suffered from 
“leakage” to market, required large subsidy.  Abandoned after two years.  Insecticide use collapsed.  No fertilizer use.   
 
U 
G 
A 
N 
D 
A 
CDO Seed 
Scheme 
1999  Public/private.  Operates in system with many seed cotton buyers. All seed legally belongs to CDO until it has sufficient to meet anticipated 
demand.  Ginners deliver quota to CDO, which treats and dresses seed, returns to ginners for distribution.  Competition from oilseed processors 
diminishes availability for planting.   4
Table 2.  Status of Cotton Sectors in Southern and Eastern Africa as of mid-2005 
Country  Market Structure and Firm 
Behavior 
Input Provision and Credit 
Recovery 
Lint Quality  Production & 
Productivity Trends 
Future Challenges 
Tanzania  - Many firms compete heavily 
in output market 
- High seed cotton prices 
despite high burden of taxes 
and levies. 
- Little progress on seed qual. 
- Partial provision of 
chemicals through Passbook 
system.   
- Leaves room for 
development of independent 
private input system 
- Declining prior to 
reform; decline has 
continued since  
- Auction system offers 
hope for improvement, but 
still awaiting pilot phase 
- Record production in 
2004 after slump of several 
years 
- Limited input provision 
on credit makes production 
more price responsive than 
in neighboring countries 
- Maintain (and expand?) 
passbook system   
- Develop auction system for 
quality control 
- Increase farm productivity 
Uganda  - Many very small firms 
compete heavily in output 
market 
- Cottco left sector in 2005 
- Little or no provision by 
cotton buyers  as of 2003. 
Some progress since that 
time. 
- Declined since reform  - Rose to 45,000 mt in 2005 
from 20,000 mt 
- Individual farmers 
produce very small 
quantities (100-200 kg) 
- Public/private cooperation to 
improve input provision 
- Increase scale of production 
at farm level 
Zimbabwe  - Concentration declining, with 
heavy competition from new 
firms 
- Cottco’s market share < 60% 
- Prices rival Tanzania after 
brief decline 
- Share of farmers receiving 
input credit steady at 35-38% 
- Quality of assistance has 
declined and sustainability 
open to question 
- Indications that it is 
declining, as farm level 
quality control has 
diminished 
- Yields probably falling, 
based on Cottco ending its 
input schemes 
- Production remains > 
200,000 mt, near record 
levels 
- Develop sector coordination 
strategies in a more 
competitive environment to 
reinvigorate input and 
extension assistance and stem 
decline in quality 
Zambia  - Highly concentrated, 
CR2>85% 
- High prices, rivaling Tanzania 
- Effective among top two 
players, though indications in 
2005 of more credit default 
- More provision by smaller 
players due to Cotton 
Outgrower Fund 
- Polypropylene 
contamination controlled 
since 2003; lint now 
receives small premium on 
world markets 
- Production booming 
- Yields appear to be rising 
steadily 
- Strengthen effective 
competition while avoiding 
credit default crises 
- Rework Cotton Act to stress 
coordination over policing 
- Introduce new germplasm 
Mozambique  - At least 10 companies, each 
with geographic concession 
- Prices to farmers remain the 
lowest in region 
- Proposals on table for 
evaluation and re-awarding of 
concessions 
- Both effective outside 
Nampula 
- New seed available in most 
of country, including 
Nampula 
- Credit default a recurring 
problem in Nampula 
- Remains generally poor, 
with 3% discount on world 
markets; exceptions for 
some companies 
- Prod’n rising since 2000, 
but well below 1999 peak  
- Nampula losing share  
- Yields outside Nampula 
rival best in region; among 
lowest in region w/in 
Nampula 
- Extend performance seen 
outside Nampula into the 
province 
- Operationalize plan to 
regularly evaluate and re-
award concessions 
 

The Many Paths of Cotton Sector Reform in Eastern and Southern Africa: Lessons from a Decade of Experience

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