Learning from the Economics of networks - Cirad

Learning from the Economics of networks - Cirad

Learning from the Economics of networks …to enhance poverty alleviation in African cotton zones Michel Fok CIRAD,Montpellier, France 1 Context | ...

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Learning from the Economics of networks …to enhance poverty alleviation in African cotton zones

Michel Fok CIRAD,Montpellier, France

1

Context |

Cotton is economically important to Africa z

|

Cotton sectors are under reform z

|

But its fate is under threat But outcomes are far from being satisfactory

Scientists can help z

Through better understanding on how cotton sectors have evolved

2

Something original |

An attempt to mobilize a theory seldom used in agriculture z

|

Economics of network : theory from the industry world

Of interest? z z

Analysis only specific to African cotton development? or valid also to preserve the effectiveness of agricultural activities in other contexts?

3

Clarification | |

Network of services: what's Observable characteristics of network of services z z z

|

Public monopoles for a long time and in most countries But submitted to reform or "deregulation" …with questionable outcomes (air transport, train, telephone)

African cotton sectors have got the same characteristics!

4

Economic and organizational features of service networks 3-layer Morphology | 5 functional criteria |

Club effects z Production synergies z Crossed subsidies z Border conflict between monopole and competition in service supply z Strong State regulation z

5

3-layer morphology of networks of services High layer for supply of final and diversified services to clients

Intermediate layer = make connection (physical or information)

Low layer = infrastructures for production (with great economies of scale)

6

Major characteristics of cotton promotion in Africa Production before colonization…by cotton trees! | Promotion since mid-19th century | "success" since 1921-1952 according to countries |

7

Major facts about cotton production in Africa |

Production by smallholding farmers z

|

2-3 ha/farm, today

Farms grouped in villages z

Various sizes, ten to hundreds of "families"

Villages scattered | Insufficient and bad tracks to reach villages |

8

View of the basic organisation, around 1950s

seedcotton

Cotton company inputs

9

Evolution and diversification of the services offered to farmers |

Service externalisation z z

|

Seedcotton marketing by farmers' groups …along with the management of input credit

Diversification of services z z z z z z

Adult literacy program for practical purpose Training and equipment of village blacksmiths Assistance to food crop production Wells and drillings for water supply in villages Assistance to village women in production …assistance to pest control according to threshold program

10

Organisation shift with service externalisation

Cotton company

seedcotton

Farmers' groups

11

3-layer morphology of cotton organisation from the 1960s High layer = seedcotton marketing and input supply on credit, then many other services

Intermediate layer = extension staff to provide technical information to and from farmers

Low layer = gins, park of trucks, energy central

12

Club effects |

General case z

More and better services at lower prices as the Club grows

|

Cotton case z

z z

Decrease of transaction costs in marketing up to negative cost Lower price for inputs Indirect effects • Extension of rural tracks • …

13

Production Synergies |

General case z

Synergies deriving from using the same infrastructures to achieve more types of products/services

|

Cotton case z

z

The truck park has enabled to market more agricultural commodities from farmers Advantage deriving mainly from the infostructure • The same extension staff has been mobilized to provide more types of technical assistance to villagers

14

Crossed Subsidies |

General case z z

Subsidies between clients Subsidies between types of services • The launch of a new product is subsidized by the financial resources generated by older ones

|

Cotton case z

Subsidies between farmers • Same price eveywhere in the country

z

Between services • Seedcotton marketing and input supply • Same prices for differentiated inputs…

15

Dynamics of networks |

Through rather simple models z z

Based on the network functioning cost at a given size and on the analysis of the utility resulting from being member to the "club", with nevertheless two possible options • Maximisation of the individual utility of each member • Or maximisation of the collective utility of the whole membership • Leading to distinct optimal size of the club

16

c’(n) c(n)/n

u(n)+nu’(n) u(n)

n

1

n

2

n

3

n

4

size

17

Dynamics with 4 stages |

|

|

|

Initial phase to overpass a critical size n1; Phase of auto-sustained growth, members can afford alone the club's growth ; Phase of monitored growth so as to reach the collective optima beyond the "private" optima, A phase of growth to ensure universal service to prevent the exclusion of a few clients

| |

Intervention is needed from the State Intervention of the State not necessary, but it can help to grow faster

|

Public intervention is compulsory

|

Public intervention is needed

18

state's role in network construction |

|

Compulsory role because of the requirement to overpass quickly the critical size Role generally through regulation z

|

By allocation of monopoly

The Role often has lasted and enabled the set up of powerful networks

19

Lessons on the state's role on deregulation | | |

"deregulation" of networks in developed countries always has called upon regulation Ineffectiveness of deregulation experiences has resulted from naive modalities Regulation needed to preserve the club effects z

|

By maintaining the inter-dependence of the 3-layer morphology

Regulation needed z z

to mitigate the exclusion phenomenon or its effects to prevent the wastage of the infrastructures investment

20

Conclusion | |

A first attempt to apply industrial economics to agriculture The reform of cotton sectors in Africa must take their sizes into account z

|

Hence must be reasoned…but not the case so far

Deregulation still needs regulation z z z

Important role to the State… …finally acknowledged? To preserves advantages resulting from the network functioning (club effects, production synergies)

21