Food prices must drop in Africa: How can this be achieved?

By Thomas Allen, Sahel and West Africa Club Secretariat (SWAC/OECD)

After the 2007-08 crisis, we got into the bad habit when discussing food prices of focusing almost exclusively on volatility and overlooking the question of the level of prices. Of course, reasons were good for this; between February 2007 and February 2008, world food prices jumped 60%. These increases combined with local factors had dramatic effects, particularly in West Africa, where millions of households already had insufficient income to cover their basic nutritional needs. Today, according to OECD and FAO projections, food prices are expected to remain stable in the medium-term. This is a good time to re-examine some important questions.

Are food products cheap in sub-Saharan Africa?

The question may seem surprising, as food is no doubt cheaper in the poorest countries. This is the first thing that any tourist would tell you, and it is confirmed by statistics. Sub-Saharan countries do indeed have the lowest prices in absolute terms (see figure). African food products are therefore much more affordable…for the European consumer. What about for the African consumer?

FIG_4_Regression_Price_GDPpc_ENG
Relationship between food prices and GDP per capita (2011)

Economists know households in rich countries pay more (per unit) for food but also benefit from better incomes. Any measure of affordability must therefore relate prices to income levels. Only then is it possible to assess whether sub-Saharan consumers are really better off than European consumers.

Again, we know the answer to this question. It is indicated by the shape and slope of the curve in the graph, and above all by common sense; they are worse off, and the proof is that they are forced to spend a large proportion of their income on food. In West Africa, households spend an average of 55% of their budget on food. But what may come as a surprise is that they are particularly badly off. In fact, they are worse off than expected when looking at the experiences in other countries.

30% to 40% higher than prices in the rest of the world at comparable GDP levels per capita

When differences in income are taken into account, our econometric estimates reveal that food prices in sub-Saharan Africa are 30% to 40% higher than prices in the rest of the world at comparable levels of GDP per capita. In other words, food is particularly expensive for sub-Saharan households relative to their income. This can also be seen from the figure: for the same level of per capita income, sub-Saharan countries are higher up in the graph than Asian countries (and, for that matter, much of the rest of the world).

If you are not yet struck by the figures, try a comparison with India. Although very different in demographic terms, India and West Africa have a similar GDP per capita. If West African households bought their food at Indian prices, they would save between 19% and 33% of their income, depending on the country. This loss in purchasing power is automatically reflected in the composition of the food basket and in non-food expenditures, with consequences for nutrition and access to basic services such as health or education.

Is this really a problem?

But is this really a problem? After all, aren’t Africans primarily producers? The effect of prices on household welfare varies; they represent income for producers, but costs for consumers. The overall net effect depends on the structure of the economy. In subsistence economies, the majority of households benefit from high food prices, in that they consume what they produce and sell their surplus. However, because of the dynamics of urbanisation and the diversification of the rural economy, fewer and fewer households depend just on their own food production. In West Africa, our estimates show that markets provide at least two-thirds of household food supply. Producers themselves are dependent on the markets for their food, due to both seasonal effects and the ongoing transformations in agricultural systems. These structural changes suggest that it is time to revise perceptions of the net impact of food prices and revisit agricultural policy. However, this should not be done indiscriminately.

We know that lowering consumer prices must not be achieved at the expense of producers’ incomes, as the majority struggle to meet their basic requirements at a time when investment needs are immense. It must not be achieved by resorting to large quantities of aid or cheap imported products. We know from Théodore Schultz[1] that this would penalise the primary income-generating force in developing economies, namely agriculture and the food sector as a whole. The solution to the high cost of food in Africa is endogenous, and will involve a transformation of the food economy.

Transforming the food economy is key to lowering prices

First, productivity gains are needed to drive down prices. For example, Africa is the region with the lowest share of irrigated land in the world (5% compared to more than 40% in Asia). Irrigated agricultural land, particularly in Southeast Asia, produces several crops per year and enables farmers to work all year round. Good quality seeds, agricultural extension services, and the use of fertilisers and modern equipment have also played an important role in increasing productivity. The most effective mix of investments is of course specific to each context, but improving labour productivity in the food sector is a prerequisite for a sustainable fall in prices.

Second, food prices reflect the sum of a series of activities throughout a value chain. Their levels are determined by the costs and constraints encountered at each step. What is now important is to address the challenges in the downstream segments of food value chains, i.e. in food processing, logistics and marketing. These activities also offer an opportunity to move upmarket to meet consumers’ new expectations. Processed foods have become an important part of food consumption in all income classes, even the poorest, and are expected to grow the fastest in the coming years. We therefore need to reconsider the value chains on which policy makers and investors should focus their attention. For example, our simulations show that, in some countries, interventions in emerging value chains such as fruits and vegetables rather than cereals result in greater decreases in the consumer food price index.

Third, strengthening and facilitating regional trade will also help reduce transaction costs and achieve economies of scale. In West Africa, the high price differential – from -28% in Mauritania to +14% in Ghana relative to the regional average – reflects the inefficiencies of the regional food market.

Finally, reinvesting in price monitoring systems is needed. Non-cereal commodities are not adequately covered by the systems in place in many countries. More than three-quarters of the price series in existing monitoring systems focus on cereals, which prevents comprehensive monitoring of consumer prices and food affordability. The lack of recognition of the relative unaffordability of food in Africa is also due to a lack of data. It is time to tackle this problem.[2]

The original article was published in French on the Fondation Farm blog: http://bit.ly/2HSppH3

[1] See Allen, T. (2017), ‘The Cost of High Food Prices in West Africa’, West African Papers, No 08, OECD Publishing, Paris. Link to the study: http://dx.doi.org/10.1787/c2db143f-en 

[2] A specialist in development and agricultural economics and winner of the Nobel Prize in Economics in 1979.