25356 X. K; z L17 \ _ tJune1999 4 / 9,, eL . .. | 5f - .j;Fii - I i3'! lIn yIra 'f i-l'itfiI Ith 0ll,_ iL Js j m li-rllA' X The cotton sector in West and Central Africa is currently undergoing a process of reform that will have a significant impact on its long-term growth. As individual countries are designing and implementing these reforms, the World Bank, through the current publication, is seeking to provide a forum to (i) exchange views among interested stakeholders, and (ii) dis- seminate experiences and lessons across countries. The views expressed here are those of the author(s) and do not nec- essarily reflect the views of the World Bank Group, its member countries, or the other groups mentioned. The Cotton Sector in . broad application of technical packages that include ef- fective measures for soil nutrient replenishment, pest W est" and Central Africa' management, and seed varieties well adapted to local conditions; SECTOR OVERVIEW AND FUTURE PROSPECTS * the provision, by governments and/or the cotton com The modern cotton industxy in West and Central Africa was pi- panies, of good support services and infrastructure; oneered by 'the Compagnie Francaise pour le Developpement des Fibres Textiles (CFDT), a French parastatal. As each of * guaranteed output markets at stable prices; these countries achieved independence, CFDT retained minor- high input-credit recovery rates; and ity shareholdings in most of the national cotton companies. It has also maintained partial or controlling interest in cotton pro- * well organized village-level farmer associations. cessing firrns (cotton seed oil, oilseed cakes and pellets, soap in certain cases, and lint rmarketing) in most of these countries. In Tremendous potential exists for regional integration turn, CFDT provides services such as extension, credit, and througlh the West African Economic and Monetary input supply to the parastatals. Union (UEMOA) and the Central African Economic Cottorj has proved to be an economically efficient crop and Monetary Cornmunity (CEMAC). Effective regional that has had a significarnt impact on export and economic integration, would not only allow West and Central growth, and on the development of African countries to enlarge rural areas. Cotton production in their internal markets, but Figure 1. Seed Cotton and Lint Production the region 'has increased five-fold West and Central Africa, 1971-1998 could also turn the region into a over thie last thirty years, from 2500 world cotton powerhouse. The -around 445,000 tons in the early resulting competitive environ- 1970s, to nearly 2.3 million tons melt would, in turn, attract ad- currently (see Figure 1), thereby in- o 150 ditional investments by multi- creasing income for over 2 rnillion 1000l national agro-industrial firms, farmers. In 1996/97, the region 5 --- and lead to new export markets. produced nearly 900,000 tons of . cottonl lint, 'equivalent to 5 percent 1971-75 1979-99 1981-85 1986-90 1991-95 1996 1997 1998 THE STRATEGIC of the world's production. The -0-seed Cotton a Lint IssuEs AHEAD combined exports of the West and Sou,ce: FAOSTAT 1999 While the development of the Central African countries, ac- sector has resulted in consistent counting for almost 15% of world cotton trade in 1996/97, are good-quality cotton, high average crop yields (by interna- exceeded only by those of the US and Uzbekistan. tional standards), and high average ginning ratios, it has Several factors have contributed to making cotton produc- also led to numerous inefficiencies and considerable scope tion a success: for improvement. The lack of transparency creates oppor- 'The cotton-producing countries in West and Central Africa are Benin, Burkina Faso, Cameroon, Central African Republic, Chad, Cote d'voire, Mali, Senegal, and logo. tunitics for rent seekiing and misimianiageirierit of resources, gen- and India. For the sake of comparability, domestic prices of seed erally at the cost of thc farimers, the nationial budget, and the na- cotton are converte(d to tint-equivalent prices The figuies show tional economry as a whole. The sector's contribution to pover- that, before the devaluation of the CFA Franc in 1994, produc- ty alleviation and to the establishment of a modern, highly er prices were a little over orne-half of their interinatiornal levels, airticulated, and rapidly growing agricultural sector could be similar to the observed levels in Zimbabwe before the reform of greatly increased, provided that a iiumber of critical issues are the cotton sector in that counrtry. In contrast, in lndlia, wh ere addressed the system has been rnore competitive, dornestic prices were less thani 10 percent below internatiornal price levels Despite I heir The administered pricingIsystem low starting base, domestic prices in West and Cential African The admtoiniparastereds pricld aing sostem oi tte provisiori of pio countries fell dramatically after the devaluation of the CFA Franc, due to the parastatals reluctan-ice to transmit the effects duction inputs to farmers, giving farmers limitecd control over of the change in parity to producer prices. In contrast, the ratio the types and quantities of the seeds and other inputs they use of domestic to international prices rose by niore than one-third Downstreami, the parastatals control puburchases of seed cotton-i in Zimbabwe, following that country's decision to open the sec- and, for the most part, girnning, marketinig, andi exports of lint toi to greater competitiorn. antd seed. Typically, a single producer price for secd cotton is es- Only a small portion of the noted difference in price ratios cai tablished arnually before plarnting, anct supplemented by a sec- be explained by factors such as read irfrastructure or the cost of ond payment (ristourne) based on the difference in weight at support services that are provided by the parastatals to the fari- purchiase and factory, and on primary inarketing activities per- leg communities in most counltries in West and Central Africa form-ned by farmers' organ-iizationis. In recent years, additional The gap between the dornestic proclucer price and export lint- paymentLs have been mnade in some countries, based oni the ac- etejuivalent price of the seed cotton is explainedl primarily by (i) tLual lint export priCe, or, if the par-astatal's profit-s werec higher SLisubsidies to other areas of tl-he sector such as ginrieries. and the than expected for the seasoni The guaranteed producer pr-ice domestic oil and meal processing companies, (ii) excessive op- applies throughout the year arid in all growing areas, and reflects eratitg costs of irefficient parastatals, ard (iii) implicit taxes the relative bargaininig power of farmers. governments, cottoln and payments parastatals, and CFDT Credit for the acquisition of rnoderin irn- puts is deducted directly by the cotton parastatals from the price that it pays to farmers for seed cotton. Monopolistic/monopsonistic nature The curr-eit pricing systerri provides some stability to farmers, of the cotton sector but at a fairly high cost in terms of incoine forgone and long- The highly monopolistic and rnonopsonistic nature of the cot- term growth potential. Th ese costs are to be expected, howev- ton sector is impeding broader ecoriornic developmicrit i sever- er, given that governrnerts have every inceintive to lkeep guar- al ways. anteed prices low in order to avoid thc possibility of haLving to The low prices that are paid to cotton farmers reduce their in- sLibsidize producers during falling worcl plrices, and that farmers comc levels and hence their ability to irivest in prodluctivity- have no effective influence or clecisioni maikinig in the sector. iiicreasirig technologies. Table I illustrates the impact of the curreiti system on cotton pricing in individual couLntries in West and Cential Africa. It * The lost income leads to forgone multiplier effects that would coiripares prices in individual countries to internationial prices generate additional income and employment in other parts of aiid to prices in other exporting countlies such as Zimbabwe the rural economy and the country as a whole. Table 1 - Ratio of Domestic (*) to International Prices (%) Benin Burkina Cameroon Chad C6te Mali Togo Average 7 Zimbabwe India Faso d'lvoire countries 1990-1993 58 59 48 59 54 52 56 55 58 91 1994-1997 36 35 40 35 37 35 39 37 79 93 Source: "Cotton Policies in Francophone Africa". World Bank. Background paper prepared for the meeting on the cotton sector, held in Dakar, June 4-6, 1998, (-) Domestic prices are lint-equivalent of seed cotton producer prices * The potential of cotton production to support investment in * increasing the extent to which activities such as iniput supply other rural economic activities is underutilizeCl, since seed cot- and transport arc subcontracted to private firms, andl ton can only be tised as collateral to borrow for cotton inputs. *eliminating subsidies of the sale of cotton lint and coitoin * Entrepreneurial opportunities are denied to potential in- seed to domestic textile firms and oil mills. vestors who could build on the momentum generated by such a successful sector to provide a wide range of agricultural sup- One of the main advantages of limited reforim is that it re- port services. dluces the risk that more far-reaciiing refornis iriigit lead tn tine * The nionopsonies and export monopolies are incornmpatible tdeterioration or breakdown of sorne of the strengths of the pre- with the establishment of the customs uniionis in West and sent systern. Those strengths include the coImpulsory contract Central Africa. farming that ensures researchi and extension cost recovery, and the high recovery rates of input credit. Another advantage of THE ENSUING DEBATE AND OPTIONS FOR REFORM this approach is that seed cotton prices would be aligned moie In 1998, intensive discussions took place arnorig the stakehold- closely with world cotton-lirit prices. But this is precisely why e's in the cotton sector in West and Central Africa. These dis- there is some resistance to reform, since such large shares of na- ctissioris included government representatives, the cotton paras- tional inCome are at stake. The base purchase price would re- tatals, CFDT, representatives of cotton farmers, representatives main inherently political and negotiated amorig the various in- of thie French Ministry of Cooperationi and Agence Francaise de terest groups. Developpement, and the World Bank. The objective of these With limited reform, parastatals would comitinIuC to have consultationis was to evaluate the options available to reformn greater access to political power and patronage as compared to the sector and improve and suistain its perform-nanice. In the farmers. This would, in turn, assure them a higher share of the couirse of these discussions, two alternative approaches emerged. profits. Governrnents would be likely to continue holding guar- The West and Central African countries COuld retain, bUt . - anteed prices low, to avoid having to subsidize cotton market- form, the current system, or th-iey could establish fiee entry and irig. Consequently, seed cotton prices would remain well below increasecl competition in the sector. world levels. Finally, this option would be incompatible with the recent decision to liberalize trade in the member countries of UEMOA and CEMAC. Retaining but reforming the seed cotton monopolies/monopsonies Free entry and competitive markets The key componierits of reforn would incilude: Th-e key components of market liberalization include * setting the purchase price for seed cotton at levels closer to * competitive free entry at all levels of the cotton sector, world prices; * higher producer prices, more closely aligned with world * giving cotton farmers more influence over key cdecisions, es- prices, pecially the pricing of seed cotton, the organization of credit ancl input supply, ancl ti-ie design and implemeintation of * mwore efficient pricing of inputs arid agricultural support ser- price-stabilization schemes; vices; The Cotton Policy Brief can be |Letters and comments should be addressed to: accessed via the World Bank Group's web site at Cotton Policy Brief http://www.worldbank.org/ Rural Development 2 Click on Publications, then Periodicals. Africa Region, World Bank 1818 H St., N.W., J6-174 Alternatively, click on Countries and Washingto, D.C. 20433 Washington, D.C. 20433 Regions, then Africa. E-mail: jfarah@worldbank.org * strengthening of relatecl public activities, cspecially research, agreement, or a "cocle cle conduit", that woulcd cnstire that con- extension, aric phytosanitary controls; tracts are enforceable, and that would link credit repaymciit to seed cotton mariketing. The Bank does not believe that it would * strenigthleninig farmer groups and facilitating their participa- b rdciet rvrz h otnprsaasuls h un tioniri otuitaryconractfariningarriigerierts; tidbe pro(luctive to privatize th-e cottoni parastatals unless LI-c rmiill tion irn volunltary contract-farminlg arrangemrenlts; and iu odtosfrcmeiineit imumI conditions for cormpetition exist. * a reduction in the implicit taxation of the cotton indtistry The World Bank's view is that thc discipline and responsibili- (except in certain cases of temporary fiscal clifliculty, in ty that a fre-elntry comirpetitive systerii imyiposes oni market pai- which case a small excise tax on ginned cotton might be em- ticipants will make for a more resilient, flexible, self-reliant, and ployed for a iilimted time) innovative national cotton sector in the long iun. Improved competition through market liberalization offers important op- With liberalization, seed cotton prices in the regioni would portunities for regional tradc and cooperation, the latter in areas rapidly approach equivalent world prices. Higher seecl cotton suchi as research, phytosanitary controls, and seeti cievelopiyeit prices woulcl generate extra government revenue inclirectly and certification. Most importantly, an improvecl sect)r perfor- through the resulting increase in cotton proCluctioni antI ex- mance will contribute to alleviating poverty, by raising farm cot- ports. In some countries, free entry inay be sultficient to gener- ton revenues to levels enjoyed by farmers elsewhei e in the world ate a competitive system, but in most others, restrtIcturing and Where governments cannot be convinced to rnove quickly to privatization of existing public corripanies would be required in a competitive model, a reformed arid regulated moiiupoly is ain ordter to signal the government's comimlitment to free entry. acceptable option. In such cases, the Bank would seek to help en- Thc cornpetitive model would eliminate the negative aspects sure that (i) the regulated moniopoly is functionin1g properly. (ii) of a monopoly system (low prices and incomes, barricrs to cntry, thc parastatal is under strong pressure to perforni adequately, (iii) constrainits to growth in marketing, transport, processing, and the cotton company generates fiscal resources and transfers themil the export sector, and the negative fiscal effects of world market to the treasury, and (iv) the producer price is set by a formula downturnis). Measures would have to be taken. however, to en- which is less taxing and much more favorable to producers tilail sure that input clistribtitioni and credit provision systems funic- in the past. Moreover, producer organizationis ncec to be t.ion adequately and equitably. strengthened so that they acquire improved negotiating capacity. The responsibility for cotton policy reforrn and impleimierita- THE WORLD BANK'S POSITION tion rests with the national governmeints and the othcr stake- Both the competitive and reformed-monopoly niodels can work, holders in the sector. The Bank stands ready to assist all inter- and both would requiie specific conditions arid safeguards. Frorn ested parties in ensuring that the policies chosen- cOlntlribute to the point of view of the Bank, the best option would be a model the welfare of the rural populat.ions in the region, and in maxi- of comipetitive contract farming. Sucih a model would allow mizing the economic development potenitial of the egion's col- coriipetition among several firms based on an inter-professional ton sector. Cotton- Policy Brief US Postage Rural Developrrienit 2 Paid Africa Region, World Bank xxxxxxx 1818 H St, N.W, J6-174 Permit No Washington, D.C. 20433 xxxx