The role of transaction costs in strengthening agricultural market linkages to achieve higher welfare in Tanzania

Abstract

Small-scale farmers (SSFs) have high levels of food insecurity and poor nutrition that are reflections of the still high prevalent poverty rates. Semi-subsistence smallholder farming is still predominant in many parts of the developing world and is characterized by severe transaction costs that thwart market access and hinder the improvement of livelihoods. The stark differences in living standards between least developed countries (LDCs) and richer countries are explained by productivity differentials at the frontier, which are pronounced in the agricultural sector. The conceptual framework of this dissertation focused on the role played by high transaction costs in keeping agricultural productivity low and how participation in more sophisticated forms of market access can address this developmental issue. This framework was empirically studied in three analytical chapters exploring different ways whereby improved market access cut transaction costs. The second chapter considered two main groups of vertical market linkages (VMLs) and found positive effects of maize SSFs integration into VMLs on household welfare. Using representative panel data from Tanzania it was found that VMLs centered on agro-processing (AP) firms had larger and more robust effect magnitudes than VMLs centered on cooperatives and informal markets. The third chapter used cross-sectional data collected during fieldwork in Tanzania to explore the connections between SSFs and the AP sector in the form of contract farming (CF): farmers’ output and food security increased by 0.13 and 0.4 standard deviations, respectively. Additionally, CF schemes in the cashew nuts sector improve the supply of raw materials to processors thus stimulating an AP-based industrialization. The last analytical chapter shifted the focus from the rural economy to an analysis using cross-country panel data. It studied how the digitalization of customs and border procedures reduces transaction costs, therefore increasing bilateral agrifood trade by at least 9%, particularly in Sub-Saharan Africa and Asia. The main contribution of this dissertation to the fields of agricultural and developmental economics is to bridge the gap of empirical studies analyzing the key role that persistently high transaction costs have on thwarting improved market access and, consequently, slowing down rural development. Based on the empirical results, we conclude by providing targeted policy recommendations.