How market price is not a major determinant of profit in agribusiness

A keen interest by African farmers to know the price of commodities on the market is understandable. However, tracking activities in informal agricultural markets by eMKambo over the past few years has proved that price is not a major determinant of profit-making in agribusiness. Profit-making is a result of creatively managing production costs, quality, losses and aggregating commodities.  The market is always available, usually with set prices.  It is about how a farmer’s commodity becomes competitive per given price. As an ecosystem, the market is a collection of many factors including ideas and experiences.

Converting resources into dollars and cents

Profitability is about converting water, soil and labour into commodities that give you dollars and cents.  Farmers should figure out best ways of converting their knowledge into products. Indigenous knowledge has to be embedded in competitive commodities not just price on the market. Price is just an expectation guide. A good price may mean nothing if a farmer has already incurred losses. Approaching agriculture from the market’s big picture provides a growth pattern that can enable farmers to make choices within available resources. Informed by the big picture, farmers can choose to diversify into high value crops.

 

The market also shows who else is producing what a farmer is trying to produce and the number of players involved. Such intelligence will avoid the band wagon effect where farmers get into the same commodity irrespective of competitive advantage. Unless farmers track their commodities, it is difficult to intelligently plan and project outcomes on the market. Trends surrounding a farmer’s particular commodities can provide an idea on how the farmer can adjust costs and quality in line with his/her resources. The market provides a general map and guidance that empowers a farmer to make intelligent choices.

 

The power of understanding competition dynamics

Where the market segments commodities into 1st price, 2nd price and 3rd price, farmers have to fit their commodities in those price parameters. While lack of organized production in the whole agricultural sector can be beyond an individual farmer’s influence, commercially-minded farmers should make an effort to understand supply levels and competition dynamics in the market. It is also important for farmers to know other competitive forces outside their commodities. For any given commodity volume, price might fall or increase not due to gluts or shortages but due to new entrants and exits in the market that either stretch or release the market budget.  For instance, if U$500 000 is circulating for given volumes of commodities in the market and one commodity, accounting for 5% cash in circulation, moves out of the market, it means the same budget begins to cover fewer commodities.  On the other hand, if for the same amount of cash in circulation, a new commodity enters the market, the budget in circulation is stretched in ways that translate to less demand for other commodities.

 

Buying power is determined by the influx and withdrawal of various commodities. Unlike the situation with mono crops like tobacco which do not have substitutes and whose price is determined by demand and supply only, in informal markets more than 70 commodities can substitute each other. For instance, following a good rainfall season, besides maize, other commodities like sweet potatoes and groundnuts start competing with maize. An increase in sweet potatoes means people will eat less porridge which is a derivative of maize.  Sweet potatoes, pumpkins and cow peas all compete with maize.

 

Matching standards with market expectations

Farmers can also reduce losses through market-oriented production calendars that inform them when to produce. Understanding market standards and expectations also reduces losses. It is usually through a mismatch between market standards and expectations that farmers lose out.  Another key issue is grading. If farmers do not understand commodity grades and how to aggregate their commodities, they end up depending on the market’s umbrella decisions about quality and other critical factors. When well-informed, farmers can be able to grade appropriately and push medium to high quality commodities to the market while low quality commodities can be re-purposed for livestock and other uses.

 

Consistency in production and supply is also a very important factor. It is not possible for a commodity to perform well throughout the season. Farmers should specialize on at least three commodities in order to spread their risk.  That way there are 60% chances of getting better prices.  A strong relationship with the market can also be cultivated as farmers become famous for being consistent suppliers. Traders do not often want to waste time and resources looking for new suppliers. Commodities destined for the market face competition, based on factors like price, buyers, standards and specifications. When producing for the market, farmers should make sure the best resources are devoted in order to satisfy customers’ value for money. It is unlike when farmers are producing for satisfying their own household tastes. Consumers have competing forces on their budgets.  Why should a consumer buy your sweet potatoes instead of bread?

 

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

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How the market can inform better farmer characterization

In a rapidly changing knowledge economy, it no longer makes sense to continue characterizing farmers in developing countries by the size of land on which they produce agricultural commodities. Informal agriculture markets provide various ways through which African farmers can be characterized beyond the smallholder, communal, commercial and other forms which are becoming inadequate. For instance, a farmer’s participation in the market can better suggest the extent to which s/he is business-oriented than can be expressed through the size of land s/he owns.

A smallholder farmer who consistently participates in the market is more commercial than one who owns a large commercial farm but does not regularly participate in the market. Factors that can be used in categorizing farmers include: seasonality of production practices; frequency of market participation as well as commodities and volumes supplied to the market.  Additional elements include market outreach (in which other market does the farmer participate, e.g., food chain stores, local markets and others? Payment method is also another important attribute. For instance, some farmers pay their labour using commodities.

 Characterizing through collective surplus at community level

At community level the best characterization is around collective surplus – how much surplus does the community produce for the market? In a community, it can be a mistake to characterize individual smallholder farmers through their individual production because high volumes of commodities by an individual farmer may not translate to surplus for the market. For example, if a family is large, subsistence consumption can exceed 80% due to the presence of more mouths to be fed.  On the other hand, a small family can produce three tons and consume one ton with the rest going to the market.

An ideal characterization approach can begin with identifying major commodities produced in a particular community. A quick survey can reveal how much of each commodity is produced and how much exists for the market, especially when aiming to set up a warehousing facility at community level.  Defining farmers by size of land excludes important factors like passion, experience, knowledge, household size, taste, household income and others. No farmer can produce every commodity and become a champion. One farmer can be good with groundnuts while another can be good with livestock. Consolidating diverse characteristics at community level can reveal investment opportunities in particular farming communities.  While climatic conditions can be given by nature, a good climate does not make farmers in a favorable climate commercial producers.

 

Characterization around value chains and networks

When characterizing from the market vantage point critical steps include identifying varieties and volumes of commodities that leave from a particular farming community straight to the urban farmer’s market where breaking bulk happens.  What is the proportion that goes into the wholesale market for eventual distribution to other markets in bulk?  If, for instance, 60% of butternuts travel from Harare to Bulawayo, there is justification for setting up a reliable commodity exchange to support this movement. In most informal markets, the wholesale market fulfils the role of aggregation, handling and rationalization with other markets. In all value chain nodes and networks, there is need for consolidating knowledge. Tracking volumes flowing into markets provides a framework for building consumption patterns, connected with prices.  A key question can be: For the past six months, which 10 commodities were moving together and competing in the market and which commodity, upon its entrance into the market, disturbed a necessity like a tomato?

In most informal food markets, vendors tend to be the biggest group that buys from farmers for onward selling to end-users. On the other hand traders with permanent stalls purchase commodities in bulk and often deal directly with communities. Farmers bring bulk produce into the farmers’ market where bulk is broken. Where buyers bring commodities straight from production areas, this volume is stocked in the wholesale market for other informal or formal markets like processors.  Bulk purchasing does not happen from the farmers market for commodities destined for high density areas.

On the other hand, individual consumer choices comprise food baskets. The market pulls together a food basket from bulk commodities coming from diverse farming areas. As it breaks bulk it mixes and matches commodities according to diverse consumer needs including nutritional factors.  This mixing and matching role needs to be understood as it influences consumption patterns. For instance when the consumer budget gets strained, some commodities are sacrificed. This is how commodities are given weight in terms of whether they are necessities or luxuries. Many farmers have learnt to stop producing commodities like lettuce, carrots, peas and fine beans in large quantities because they are sometimes considered luxuries not necessities.  However, necessities like tomatoes are rarely substituted fully because they participate in the preparation of many relishes.

 

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

Making sense of differences between communicating evidence and facilitating its use

Besides promoting linear ways of communicating information, most efforts by policy makers and development agencies in Africa continue to confuse dissemination of evidence with facilitating its use. Instead of speeding up the adoption of new knowledge, social media is also generating noise which gets in the way of adoption. If they were facilitating adoption and use of evidence, organizations would direct more resources to engaged reflection activities, mentoring evidence users and walking together with people in need of new ideas.

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The difficulty of removing information from public discourse

Among those working with farmers and rural communities, there is an emerging realization that practices that have taken decades to solidify will not be changed overnight. That is why falsehoods and myths continue to compete with objective facts. While a lot of money still goes into producing documents, published information is not changing practices. Supporting the adoption and use of evidence requires thoughtful interventions.  For instance, you cannot change nutrition practices through advertisements because there are many reasons why people are not adopting new nutrition practices. One of the reasons may be that people cannot afford nutritional food due to various constraints.  Agricultural production manuals are not changing practices.

Examining factors that enable the use of evidence

Effective communication of evidence is important but incomplete. Given an increase in information and diverse sources, most people no longer have the time or energy to sift through the ocean of available information in order to identify what is critical for decision-making. The situation is worse among  policy makers like Members of Parliament who are exposed to disparate forms and sources of evidence such that they end up choosing what appeals to them although that may not be the most useful evidence for policy making.

Not all evidence has to be standardized

Contrary to efforts by organizations to turn all available evidence into documents and publications, more than 70 percent of knowledge in African communities may not need to be documented into lifeless publications but baked into best practices and rituals.  Not everyone wants to read a manual or standard operating procedures on how to produce all kinds of agricultural commodities. Many farmers are satisfied with following procedures and rituals into which evidence has been embedded.  This makes sense because it does not over-load memory. It leaves people with some cognitive space necessary for human well-being.  Rather than foisting evidence on communities, it is important to ensure it is demand-driven.  When evidence is demand-driven, it is put to use quickly and in its richest form unlike when it is not demand-driven. Cognitive bias is also minimized when people use evidence for specific purposes.

 Navigating the interconnected nature of opportunities and risks

Given the complexity and interconnected nature of opportunities and risks in African agriculture and socio-economic development, disseminating information is no longer enough. Building sustainable value chains requires facilitating the use of evidence. Numerous knowledge gaps cannot be solved through information over-load.  Instead, value chain actors have to be assisted in aligning their values and resources in ways that ensure business innovation and socio-economic impact. It means development partners and policy makers have to be better at communicating not just the moral imperative of positive change but also the market incentive which can be understood by the private sector. All this is not just about communicating evidence but availing appropriate evidence and facilitating its uptake by all actors.

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

Key elements of market – informed agribusiness Models

Like all businesses, agribusinesses should be built around a product/service and a niche market. Ideally, more products and services spawn more business models with some models eventually becoming separate business units.  When that happens, it becomes easy to assess the viability of each business model. Contrary to some beliefs, in a business model, money is just like salt. Without meat or vegetables, salt is useless.  The salt owner should be interested in those with meat, potatoes, tomatoes and other products. On the other hand, while some commodities need salt, some consumers don’t need much salt.

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Confusing a business plan with a business model

Most agribusinesses lack models.  They confuse a business plan with a business model yet a plan assists in executing a model.  A model is an attempt to turn your innovation into profit or economic value.  The following pillars help to characterize a business model without over-simplifying the complexity in agricultural value chains

    1. The owner -who will provide the product or service.
    1. Value proposition – What need or solution do you want to address?  Have you addressed a need?  Absence of a value proposition is the main reason why we end up with copycats who just watch what another person is doing and try to imitate rather than focusing on the customer.  A need is a value proposition.  What loans are needed from the customer’s perspective?  To what extent is a reasonable interest rate a solution to farmers?  What if loan amount is the real need?  What if the main issue is unfavorable conditions that insist on collateral not in line with the agribusiness?
    1. Market segmentation – Who are you targeting?  Are you targeting farmers, traders, transporters or individual consumers?  A clear target will enable you to model in line with business behavior.  Most models, especially financial ones, are locked in systems.  It is important to create your own market niche that can inform what products to provide.
    1. Distribution channel – What is your distribution channel?  How are you going to reach your customers cost-effectively?  Most banks ended up setting up brick and mortar structure to establish presence. However, the entire value chain may be better supported by ICT-inspired channels.  Where Point of Sale (POS) machines are missing at other value chain nodes, clients get stuck.  For instance, loan disbursement will not be useful if traders cannot transact from rural agro-dealers where they stay.  Neither can loan repayment be smooth.  When clients get money, they want to use it somewhere.  It is important to understand destinations where money will end up being used.  That will enable building of other networks like between farmers and agro-dealers who also know what farmers need.  Concentrating on the immediate client is a big mistake, particularly in the network economy.
    1. Identify niche markets – Invest in building relationships or ride on partners who have already built networks. That is how you can build more models and networks.
    1. Best use of resources – resource configuration.  Should you go and rent a building or work through agents?
    1. Identify core competencies – What are the skills, knowledge, abilities, expertise and attitude available for supporting all other pillars?
    1. Networks – You cannot work in isolation.  Which partners are you going to collaborate with?  Trying to dominate the whole value chain speaks to unjustified enrichment at the expense of other actors.

Some of the fundamental considerations in agribusiness models

It should be about capturing everyone.  Start with early adopters who can assist you in refining as you go.  Do not dream of creating wealth if you are not creating wealth for others. Starting with others builds a sustainable base for your wealth.  From early adopters you are able to refine your financial strategy. Most business models have too many messages which end up confusing potential clients. Concentrate on a core message and few benefits.

If tobacco farmers who come to the market once a year get preference for cash from banks, what about traders who are in the market throughout the year and drive food markets?  That ignorance is counter-productive because it lures many farmers into tobacco, leaving other potentially lucrative commodities.  Why don’t banks enable traders to also get cash when they need it?  That is why traders end up locking their money in the market with their relationships with farmers.  They know that once they bank it, the money will be given to external value chain actors who are not interested in agricultural markets.

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

If acronyms were a solution, poverty would be history in many African communities

Almost all development interventions into Africa are framed into acronyms. eMKambo will not give examples because there are far too many acronyms to mention and you know what we mean. Although they are designed to make programmes easy to remember, most acronyms turn development interventions into slogans. As if that is not enough, acronyms have not become embedded into African idioms or metaphors through which Africans have traditionally filtered ordinary ideas into knowledge routines.

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Failure to gauge readiness levels

Condensing programmes and projects into acronyms has masked the need to gauge a community’s readiness for a new intervention. The underlying assumption in every new community project is that communities are always ready for what comes from outside.  Yet in reality, readiness may take much longer than three years, at which point some programmes will be phasing out. African communities are not always waiting for new projects but continue innovating and coping with challenges whether new programmes come or not. Sometimes old knowledge prevents new knowledge from coming into the community.  It takes keen interest to make sense of that situation. A lot of resources have been wasted and continue to be wasted due to unwillingness or inability to figure out whether communities are ready for new projects/ideas/concepts/knowledge and practices.

Toward knowledge readiness indices

eMKambo is more than three years into identifying and codifying contextual readiness indices for agricultural communities. A critical question in this process is: What is the minimum level of readiness for farmers and specific value chain actors to understand principles and potential outcomes of an agricultural intervention? Without thorough understanding of readiness levels, it is easy to waste resources since adoption may not be achieved. Gauging readiness also implies understanding what people are currently engaged in, sources of knowledge, capacity to unlearn and accommodate new knowledge.

African communities have been exposed to too many ideas, mindsets and approaches from diverse sources including NGOs and politicians such that it is a mistake to assume that they will simply jump for any new idea immediately. It may take more than two years for readiness to seriously kick in. A related question is: How do we figure out the market’s readiness for new commodities or new finance? Acronyms cannot answer such a question, neither are they effective in creating awareness about a development programme’s principles and potential outcomes. They are not vehicles for skills or knowledge acquisition because that requires experiential learning.  That is why a readiness assessment index becomes very important.

Filtering community knowledge into engagement

Knowledge is most useful when it can be translated into meaningful community engagement and that goes beyond acronyms. It means communities have to be adequately informed in order to take part in a much longer and meandering path for increasing the quality, impact, and effectiveness of knowledge-driven community engagement. People may have all the information but that does not translate to community engagement without intentional efforts at brokering relationships.

A fundamental part of developing a community’s readiness index is building local people’s skills and tools in identifying the most relevant and credible evidence for their context. Whether communicating among themselves or making their case to policymakers and prospective funders, it is crucial that communities are confident in assessing and using relevant sources of evidence. Generating high-quality evidence is a community effort and is the result of everyone’s willingness to ensure members are fully equipped with the information they need. Rather than be passive recipients of what comes from outside, community members have to actively engage in the production and sharing of evidence.

Farmers and communities are not mere recipients of information

A community’s ability to evaluate the quality and credibility of information is becoming more important today as information sources are continuing to increase. It means they have to continuously update their evidence using their own individual and collective learning skills. Very few development agencies focus on strengthening communities’ ability to critically assess the information they receive. Instead, they continue pushing information to communities irrespective of readiness to receive and absorb such information. As a result, acronyms are forgotten as soon as the programme ends and communities go back to their routines and knowledge rituals.

When high quality evidence is available, farmers and communities can develop stronger awareness of the implications and risks associated with their potential choices. In this regard, the key imperative identifying and understanding what constitutes appropriate evidence and how to put that into practice.  In an era in which the availability of information is no longer a problem, African communities should be assisted to use credible sources of evidence.  Every time information is provided to farmers, it needs to be logical in structure and clearly communicate objectives and outcomes rather than be too general.

When farmers and communities are appropriately engaged in information generation and dissemination, they can facilitate professionals and researchers’ understanding of their needs.  In most cases, acronyms hide more than they should reveal in empowering communities. On the other hand, local knowledge sharing routines and rituals in most African communities are designed to enable heart to heart communication among all community members. That is how trust is built and community solidarity is enhanced. Rather than sticking with acronyms, developments actors can use these community approaches to reach more formal results faster, with less resistance to change. Each farmer or community member has a unique way of combining wisdom from diverse sources.  That is why an individual farmer absorbs knowledge from an agronomist, animal scientist, nutritionist, engineer, economist, environmentalist and many other professions and still continue to remain sane.

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

Formulae for valuating intangible assets long overdue in Africa

Capitalism may be accused of misleading many African countries into limiting the valuation of their resources to tangible assets such as buildings, minerals, land and wildlife. However, failure to account for intangible assets like local experiential knowledge, wisdom, trust, relationships and emotional richness cannot be blamed on capitalism or modernization. While they are ambitious to become knowledge economies, African countries have not yet developed formulae for valuating their intangible resources in ways that can get these assets recognized as collateral in the modernizing global economy.  It doesn’t help to measure knowledge and human capital in academic qualifications excluding abundant unspoken and undocumented knowledge among ordinary people. Continuous over-rating of academic and documented knowledge is preventing African countries from realizing their authentic socio-economic value.

Accounting for intangible agricultural assets

A majority of African smallholder farmers have depleted their livestock, soil nutrients, water, wood, fish and other resources in sending their children to school. However, the promise of formal education has disappointed them and their children who, after graduating, cannot find employment that would enable them replenish resources that have been depleted over decades. There should be appropriate formulae for valuating resources that have been sucked from farming communities by formal education. Due to the absence of reliable markets, graduates from agricultural colleges who have ventured into agriculture cannot earn enough from agricultural activities to repay investments into their knowledge.

Agriculture is a combination of tangible assets (seed, equipment, livestock, cash, etc.,.) and intangible assets such as experience, knowledge, relationships, passion, ambitions, emotional depth, mental strengths, negotiation skills, relationships, trust and many others.  On the other hand, agricultural markets are more about intangible collateral such as knowledge, experience, relationships, trust and less about tangible assets.  While market experience is not a tangible asset, it has more value than tangible assets because the value of agricultural commodities is added in the market.  It is through intangible assets that farmers and traders are able to earn returns on their investment. Without these factors, sustainability of the whole agricultural sector is compromised. Intangible assets held by farmers and traders at individual level can be worth more than a tractor or a house in the city. However, because there is no way of valuing and recognizing such assets, knowledgeable farmers and traders remain in the economic fringes.

How the financial sector continues to looks at these issues

Since they have not invested in understanding intangible assets, financial institutions in Africa still consider tangible assets the only worthwhile forms of collateral. In a knowledge economy where intangible assets like innovation can build something out of nothing, one assumes financial institutions should rapidly be revisiting their notions of collateral to start with intangible collateral towards tangible collateral. Agribusiness models should be built from intangible assets to inform tangible assets required for effective production such as tractors, ploughs, water, technology, crop varieties, livestock breeds and others. Where agricultural financing is informed entirely by tangible assets, it constrains possibilities for innovation and emergence of new sources of value. Innovative youths armed with intangible assets are denied opportunities because they do not have tangible collateral.

The same people with tangible assets continue to benefit from financial institutions while innovative young people languish in poverty and unemployment. As if that is not enough, Africa has an over-supply of the same value chain models due to the financial sector’s preference for similar models that have reached their ceiling.  This practice promotes a copycat syndrome where several youths end up getting into tomato and eggs value chains because they are the ones financed by banks at the expense of potentially viable models considered green field. A dire need for new valuation models is also visible in how African companies which close down are assessed. Main considerations when valuating such companies takes into account equipment and infrastructure without considering investment in knowledge and experience built during the time the company was functioning.

 Why not convert the size of a market into collateral?

There is no longer any doubt that informal markets are a critical component of Africa’s invisible economy that has to be accurately measured and included in GDP metrics. With the right formulae, policy makers should be able to convert the size of informal agricultural markets into collateral. The collective experience in many informal African markets of large African cities like Harare, Lusaka, Accra, Nairobi, Cairo and Lagos can be more than 100 years. Very few corporate companies, who are considered bankable by financial institutions, have such knowledge and experience. In informal markets, knowledge and trends are continuously adapted and perfected in ways that increase credibility and legitimacy.

If properly captured and understood, knowledge and experience in African farming communities and agricultural markets can inform investment opportunities along several value chains. Investing in particular farming districts should start from market experiences of commodities and farmers from those districts. At the moment, most surveys focus on whether respondents have gone through formal education as opposed to deep inquiry about other forms of local knowledge that keep communities resilient. Each farming community and market has its own capacity to absorb knowledge and that capacity is determined by participants’ income levels, geographical location, demography and other factors.  If you take fruits like grapes to a remote rural market, they may not find buyers because of low income levels. Some  markets can determine the levels of imports into the country based on consumer tastes, demand and other factors.

The role of evidence

Limited attention to evidence is the main reason why African countries are failing to utilize their resources optimally. For instance, market evidence should inform capability building. At the moment, most production practices follow dead data in the form of previous year’s prices and production figures. There are no formulae for supporting predictive capacity.  As a result, intangible knowledge from farmers and informal markets is not being used to inform curricular development. Relevant valuation methodologies will also prevent the current under-utilization of local knowledge and create strong conduits for harnessing such knowledge for socio-economic development. Meanwhile the whole of Africa is importing more than $40 billion of food annually in cash.  That shows Africans have money but lack the right knowledge models for putting that money into more productive uses. This situation may only change through revisiting priorities, informed by evidence generated by appropriate valuation mechanisms.

 

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

How the informal economy tackles the middle class trap

In African countries where agriculture is a major socio-economic activity, policy makers and development agencies seem determined to move economic activities from agriculture to manufacturing. The whole discourse around value addition suggests a strong desire to get rid of informal marketing of agricultural commodities and convert all commodities into manufactured products which can be bought and sold in supermarkets or exported as finished goods. While that sounds logical and sensible, there is evidence showing that such a transition will not by-pass the informal economy.

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Lessons from South Africa’s middle class trap

What the South African economy is going through is an important indicator of the fact that a distinct development approach unique to African contexts should not ignore the informal economy. By embracing the Western model of economic development, South Africa has become locked into a middle class trap without realizing it. The country is now being forced to develop agriculture as a second economy because the current industrial system has no room the majority of people to participate as economic actors. Inequality, poverty and unemployment are increasing due to deep structural challenges imposed by the Western model of economic development. The domestic market is too small for the level of industrialization that has been provoked in South Africa.

You cannot be a successful manufacturing country when the domestic market cannot afford what you are producing. Due to insufficient local buying power, South Africa has reached the limits of its industrialization. It is now trying to use the supermarket model to break out of structural economic challenges. That is why South African super market chains are spreading their wings into neighboring African countries and as far as East Africa.  In an aggressive effort to broaden demand for products from its sprawling industrial sector, South African supermarkets are getting into countries such as Zimbabwe, Mozambique, Malawi, Zambia and other countries where local companies cannot compete due to poor supply chains.

Besides triggering resentment in the business circles of neighboring countries, the super market model is not sustainable because the middle class in those countries is too small to sustain levels of production in South Africa. The supermarket model focuses on meeting the needs of the middle class who earn more than $4/day. On the other hand, the majority of African consumers earn less than $1/day.  That class does not go to supermarkets but resort to the informal market. No wonder the informal market is expanding in many African countries. Manufacturing is a good idea but once it puts finished products beyond the reach of the majority of consumers, it stops contributing to economic growth.  It becomes big business without growth or employment creation and that is not sustainable at all.

The importance of fully understanding domestic markets

Assuming developing countries are determined to move completely from raw commodities to manufactured agricultural products, it is critical to fully understand the domestic market before exploring foreign markets which tend to be highly competitive and antagonistic. You cannot talk of value addition without an accurate sense of how much stocks are available in domestic markets per given period.  Every country should strive to know the local demand for each of its commodities ranging from horticulture, field crops and livestock. Such intelligence should be disaggregated according to population, buying power, class, age, gender, consumer taste, consumption patterns and other important factors. Where   consumption of particular commodities is going up or down or remaining stagnant, reasons should be teased out in order to inform socio-economic decisions.

Diversifying sources of evidence

While much of the practical socio-economic wisdom is now within the informal economy, economists and financial advisors in developing countries are still reluctant or unable to learn from this important sector. They prefer sticking to text book knowledge which, unfortunately, is being borrowed from the West where the context is different.  Like all truth, knowledge from the informal economy is likely to be ridiculed first, violently opposed and then finally accepted as self-evident. One of the reasons this knowledge is being ignored is because it flies in the face of what is considered common sense in academic and policy circles.  Having invested a lot of resources into what they think is knowledge, it is difficult for formal knowledge systems to accept that reliable knowledge can be found in unexpected places like informal markets. However, developing countries do not have the luxury of letting such important knowledge languish in obscurity when it can provide the much-needed solutions.

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6